Project Feasibility Study

Project Feasibility Study

• The basis for a project’s success is a comprehensive feasibility study and evaluation.

• The feasibility study involves detailed analysis and evaluation of the project concept from all the relevant angles.

Project identification

• Project must be a wealth creating or a goods producing or a services generating enterprise or facility.

• Every project that is identified for implementation must serve an economic and/or social need of the country in general.

Feasibility Report

• A project report has to pass through three stages of clearance:

a) Pre Feasibility Report (PFR)

b) Techno Economic Feasibility Report (TEFR)

c) Detailed Project Report (DPR)

Pre-feasibility Report (PFR)

• PFR is the document which elicits the preliminary sanction or the first stage clearance by Government , legal statutory bodies and/or the board of Directors of the said organisation.

The Pre-feasibility of a project can be evaluated from the following angles:

• Market demand for the project’s end product and plant capacity

• Materials and inputs• Location and site• Project engineering and investment costs• Plant organisation and overhead costs• Manpower• Implementation schedule• Financial and economic evaluation• Statutory clearance

Pre-Feasibility Cost Estimate

• A lot of guesswork goes into feasibility cost estimate.

• Attempts are always made to collect and update historical figures with additions for escalation/inflation and local factors, based on statistics and guesswork.

• The consultants often uses capacity cost curve method to estimate installed cost of plants when sufficient basic data are not available.

Information to be contained in a Pre- Feasibility Report

1. Project back ground and description

• Project enterprise’s name and profile, detailing its experience and performance in project implementation

• Project description

• Cost of study/investigation already carried out

2. Market demand and plant capacity

• Demand pattern, size and market1. Existing size and capacities of the industries2. Who are the market leaders3. Its past growth4. The projected size of future growth5. Its major problems and prospects6. The general quality of goods7. The product mix8. Past/present imports and future trend of volume and prices9. The role of the industry in the national economy and policies etc.

• Sales forecast and marketing plan

1. Anticipated competition for the project from existing and potential local and foreign producers

2. Local market share for the products and byproducts

3. Sales program and distribution arrangements4. Estimated annual sales revenue from products

and by products5. Estimated annual cost on marketing and sales

promotion

• Production program

1) Products

2) By products

3) Wastes

4) Estimated annual cost on wastes

• Determination of Plant Capacity

1) Feasible normal capacity

2) Quantitative relationship between sales, plant capacity and materials and other inputs.

3. Materials and Inputs

• Raw materials

• Processed industrial materials

• Bought out components

• Auxiliary materials

• Factory supplies

• Power , water and other utilities including transport services

4. Location and Site

• Alternative locations, description and area of lands pre selected

• Estimated cost of land including development

• Schedule and cost of soil investigation

• Factors influencing the selection of each of the alternatives proposed.

5. Project Engineering and Investment Costs

• Process /technology and equipment cost

• Civil engineering works

Process/Technology and Equipment Cost includes:

• Process technologies that can be adopted in relation to capacity/size

• Estimate of costs of local and foreign technologies

• Layout of the proposeda) Production equipments

b) Auxiliary equipment

c) Service equipment

d) Major spare parts, wear and tear parts and tools

• Estimate of investment cost of equipments.

Civil Engineering Works

• Layout of civil engineering works, arrangement of buildings and description of construction material to be used

• Site preparation and development• Buildings and special civil works• Outdoor works• Estimate of investment cost of civil

engineering works

6. Plant Organisation and Overheads

a) Organisation layout for :• Productions• Sales• Administration• Managementb) Name , Profile & Experience of the consultant appointed

or proposed for appointmentc) Estimated Overhead costs on• Factory• Administration• Financial items (interest, bank charges and depreciation

as per separate schedule)

7. Manpower

• Estimated man power requirements

• Estimated annual salaries and wages including allowances, fringe benefits and long term social & statutory provisions

• Labour housing plan and estimated cost

8. Financial and Economic Evaluation

1. Total investment cost (with estimates)• Estimated fixed assets• Estimated working capital requirements• Total working costs (Both fixed and variable costs)

2. Project financing arrangements proposed:• Proposed capital structure and finance plan• Loan/ borrowings planned• Interest rate/rates and estimate amounts during

construction

8. Financial and Economic Evaluation…contd.

3. Operating costs (Attach estimate)

4. Financial evaluation based on the estimates:

• Profitability

• Pay back of the interest

• Cash flow

9. Status of clearance and approvals from various Central and state Government Departments:

• Soil investigation report• Industrial license / Letter of intent• Automatic permission or specific approval , as the case

may be, for foreign technical collaboration• Automatic permission or specific approval , as the case

may be, for foreign investment• Approval for appointment of foreign consultant• Foreign exchange permission• Import license or automatic permission for import of

capital goods and raw materials• Vetting of the draft prospectus for capital issues by

securities and exchange board of India

9.Status of clearance and approvals from various Central and state Government Departments:…contd.

• Clearance from pollution control board• International airport authority's clearance• Clearance from the ministry of railways• Electricity board’s clearance• Clearance of chief controller of explosives• Clearance from the chief conservator of forests• Clearance from the state industries department

Project Cost percentage factor By a rule of thumb, the following are the

percentages of the project cost factors:

• Project development and DPR : 2 per cent

• Engineering and Design : 13 per cent

• Bought out materials and equipment: 55 per cent

• Fabrication and construction: 30 per cent

However, depending upon the project, sector and complexity, these can vary on either side.

PFR Clearance

• As per the practice, PFR for a public sector project costing up to Rs. 20 crore is generally cleared by the administrative Ministry concerned

• Above this ceiling limit, the proposal goes to a committee of public Investment board (CPIB)

Appraisal Agencies

• Project appraisal division of the planning commission

• Dept. of public enterprises

• Dept. of economic affairs.

• Dept. of environment and forest

• Dept. of Planned Finance

Role of Appraisal Agencies

• This appraisal agencies evaluate the PFR from their relevant angles.

• Either give individual clearance or record their objections or get rectification made before it goes for the first stage clearance by the Government.

Significance of PFR Clearances

The PFR clearance will authorize

the entrepreneur to incur the preliminary

expenditure on the project

and

Prepare the detailed Techno Economic

Feasibility Report (TEFR) for the more

stringent second stage clearance.

Preliminary Expenditures of this stage are:

• Market survey for product marketing• Initial infrastructure• Site investigation• Preliminaries connected with acquisition of land• Acquisition of process technology• Searching for sources and registration of suppliers• Preparation of TEFR• Consultant’s fee up to DPR approval

The End