CHAPTER 4

PROJECT PREPARATION
4.1. INTRODUCTION

The pre-investment phase involves four identifiable
stages (UNIDO Model):
Opportunity Studies
Preliminary Project Identification
Project preparation
Appraisal and Selection

Project preparation involves assessment of key
aspects of a project (pre-feasibility & feasibility
studies).
Major dimensions of feasibility studies:
Commercial Dimension: Market & Demand
Analysis
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 PROJECT PREPARATION . CONTD
Technical Dimension comprising:
 Production Program and Plant Capacity
 Input (Raw Materials & Supplies) Study
 Location & Site Studies and Environmental
Impact Assessment
 Engineering & Technology Study
Institutional & Managerial Dimension
Financial Cost-Benefit Analysis
Social Cost-Benefit Analysis (Economic Analysis)
Chandra (2002) identifies 5 major facets of project
analysis/preparation. Facets of Project Analysis.docx
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 FACETS OF PROJECT ANALYSIS (Chandra, 2002:12)

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Pre-Investment Phase: Strategic Orientations

Search for the Right Investment
An investment that can economically achieve its
objectives over its life.

Cope with the Dynamism/Change
Consider environmental changes & effects of
dynamism.
Find mechanisms to cope with likely changes.
Foresee the magnitude & extent of environmental
changes & find the means/solutions in advance.

Seek Competitive Advantage
Identify projects that create competitive
advantage to the firm.
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Astutely develop competitive strategies
responsive to changes.

Develop Functional Objectives
Set challenging, yet realistic, functional
objectives.
Develop functional objectives in the areas of
Marketing, Production, Supplies, R&D, Finance,
Personnel, and Organization & Management.

Consider Alternatives (especially for industrial
projects).
There are alternative ways of transforming an
idea into a concrete project.

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The alternatives may differ with respect to the
nature of project, production process,
product quality, scale of operations & timing,
or location.
Nature of Project:
Project:
The project may envisage the manufacture of all
the parts & components in a vertically integrated
unit, or
It may consist of an assembly type unit which
obtains the bulk of the parts & components from
outside suppliers.
The project may consist of processing up to the
finished stage, or stop at a semi-finished stage.

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Production Process
Process::
There may be several alternatives with respect to
the production process.
Production process decision influenced by factors
like the: availability & characteristics of raw
materials, cost structure, and nature of markets
served.
Product Quality
Quality::
The choice with respect to quality is fairly wide
(especially for consumer products like textiles,
footwear, etc).
Some products (e.g. clinical thermometers) may
require maintaining a certain quality standard.
The quality and product range decisions would
depend on the characteristics of the market, the
elasticity of demand, consumer preferences, and
the nature of competition.
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Scale of Operations and Time Phasing
Phasing::
In many cases several scales of operations are
feasible technically and financially.
The choice of a particular scale would depend on
the financial resources available, the nature of
competition, the nature of demand, and the
economies of scale.
A given capacity may be installed in one stage or
in phases.
 The capital cost of capacity installed is usually
lower when it is done in one stage.
 The cost of idle capacity, however, is higher
when it is built in a single stage.
The trade-off between these costs would
determine the optimal pattern of time phasing.

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Location:
Location:
Location and size are closely interrelated.
The same demand could be satisfied by:
 a single plant for the entire market; or
 one large plant for the bulk of the market
with a few smaller plants for the remaining
market; or
 several plants of a similar size spread over
the market areas.
The choice would depend mainly on the trade-
off between economies of scale in
manufacturing and economies of distribution.

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 4.2. FEASIBILITY STUDIES

Two stages: Pre-feasibility and Feasibility studies.
4.2.1. PRE-
PRE-FEASIBILITY STUDY

A prelude to a full blown feasibility study, this
exercise is meant to assess:
Whether the project is prima facie worthwhile to
justify a feasibility study
study, and
What aspects of the project are critical to its
viability and hence warrant an in-depth
investigation.

A general assessment (or examination) of the basic
components of the industrial project.

Meant to save cost, time and effort.
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 FESEABILITY STUDIES CONTD
4.2.2. FEASIBILITY STUDY

Detailed analysis of aspects of a project
undertaken if the preliminary screening
suggests it is prima facie worthwhile.
Objective of the study:
To define, in a more tangible form, the
viability, quality, and dependability of the
project.

Involves detailed (thorough analysis) of the
major aspects of a project.

Provides a basis for the final investment
decision..
decision

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 FEASIBILITY STUDY: A SCHEMATIC VIEW

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Responsibility of the analyst: keep questioning all
technical specialists contributing to the project plan
so as to ensure all relevant aspects have been
explicitly considered and allowed for.

Link all planning activities as early as the pre-
feasibility study, and even at the identification, stage
with all parties involving in the project preparation.
Feasibility Study: Considerations

Requires involvement of professionals in an
interdisciplinary team process
process..
Project planning basically is an interdisciplinary
and team based activity.
Involves engineers, economists, financial analysts,
and specialists in the areas of agronomy,
environmental health, sociology, soil science,
geology, hydrology, marketing, management, etc.

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Should arrive at definitive conclusions regarding
projects aspects after considering alternatives.

Should define all project features as precisely as
possible..
possible
Define the scope of the project unequivocally
not to omit important aspects and associated
costs.
No uniform approach for all projects level of
detail and emphasis on the aspects varies from
project to project.
Carefully estimate or evaluate sensitive
parameters like sales (market size & quantity
sales), production program & capacity,
technology, machinery, and equipment.
Make sure that funds will be obtained upon
favorable outcomes before conducting the study.
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Outcomes in the study should be detailed enough to
provide the basis for subsequent decisions
decisions, for
instance, financing/sponsoring decisions.

Description of the project components should be
well refined to permit executing agencies to use
the study as a guide for project implementation.
Feasibility studies are not always free from vested
interests.

Those commissioning studies often face the
problem of receiving objective and neutral expertise
reports..
reports
Consulting Firms, Industrial Enterprises, Turnkey
Contractors, Equipment Suppliers, etc rather have
more strong self-interest sometimes.
Cause for white elephant projects - that are
completely unprofitable and wasting away scarce
resources.
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We should have a sharp eye on the aspects of a
feasibility study, question the objectivity of the
feasibility report and integrity of the participants.
4.2.3. FLAWS IN PROJECT PREPARATION

When project analysis has failed to anticipate the
outcome of a project investment, a common reason
appears to have been simply poor preparation of the
analysis in the pre-investment phase.

Consequences of poor project preparation:
Low capacity utilization
Heavy costs overruns
Deteriorated financial profitability
Lingering illness or the sudden death syndrome

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 FESEABILITY STUDIES CONTD
Common mistakes in preparation of projects:
Overestimating Returns failure to consider likely
adverse effects
Optimistic Projections (for instance, estimates of
yield rates, rate of increase/decrease in production,
etc)
Failure to Consider the Variability of Climate
(Environmental Changes)
Underestimating Costs (may be deliberately, being
optimist about costs, or due to poor estimation)
Omission of a Necessary Component (often resulting
from less precisely defining the Projects Scope)
Optimistic Calendar for Implementation failure to
consider cost of delay

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Implications:
Survival aid grant to sick industries pose heavy
budgetary burdens in the form of subsidies.
Misallocation (or poor allocation of) scarce
resources from the macro-economic view point.

The analyst must consider and reconsider the
aspects altogether at each stage in the project
planning and implementation cycle
cycle..
Each of the aspects touches on the rest and a
judgment about one aspect affects judgments about
all others.

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 KEY PROJECT INTER-
INTER-LINKAGES

Source:: Chandra (2002

Source 2002::113
113))

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 4.2.4. REPORTING FORMAT

The report: Executive Summary (summary of the
findings) and the Body (detail).
A. Executive Summary
Summary::

Summary of the findings in the feasibility study.

It outlines:
project background,
critical data & information used,
major outcomes,
relevant conclusions & recommendations

Short & Precise: focuses on core findings.

Prepared in line with the structure of the body of
the feasibility study.

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 REPORTING FORMAT CONTD
B. Content
Content::
Project Background & History
Market and Demand Analysis
Raw Materials & Supplies Aspects
Location, Site, and Environmental Impacts
Engineering and Technology Aspects
Organization and Management Issues
Human Resource Aspects & Requirements
Financial Analysis and Appraisal (total investment
cost, COGS, operating & financial costs, and financial
benefits)
Economic Impacts/Appraisal (SCBA)
Project Financing
Project Implementation Schedule

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Project Background and Basic Idea - deliberates how
well the project fits into the overall development
framework and objectives.

Description of the Project Idea
Idea::
Project Objectives
Project Location and Site
Product and Product Mix
Plant Capacity & Implementation
Project Consistency with Development Priorities
Policies Supporting the Project (Economic, Industrial,
Sectoral, Social, etc)
Geographic Spread of Sale of Products
Project Coverage (Sectoral & Sub-Sectoral)

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Project Promoter/Initiators
Promoter/Initiators::
Who are the promoters?
What is the role of the promoters in the project?

Project History
History::
Historical developments of the project (major
milestones).
Opportunities conducted (opportunity & feasibility
Studies).
Conclusions of the feasibility study (summary of the
findings and conclusions in the study).

Feasibility Study:
Study:
Who undertook the feasibility study?
Who sponsored the feasibility study?

Costs of the Studies
Studies::
Costs of the opportunity and feasibility studies.

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Note:
Key assumptions, schedules, worksheets,
computations, etc should be included at the
end of the report.
The Feasibility Report should be detailed
enough to provide all relevant information,
fact, and/or data about the project to users
of the report.
Pre Feasibility Study Sample Document.pdf

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