Project analysis & evaluation Chapter 4: Market/Commercial Analysis of Project

CHAPTER FOUR
MARKET/COMMERCIAL ANALYSIS OF PROJECT /FEASIBILITY STUDIES/
A feasibility study is an in depth investigation of the factors that affect the future success of a project or the
process of project preparation and analysis. The main areas of project feasibility study are;
• Commercial/market
• Technical
• Institutional & organizational
• Financial
• Economic
• Social soundness and
• Environmental
The project feasibility study generally involves two steps namely:
• Pre- feasibility study and
• Feasibility study
1. Pre-feasibility study
Pre-feasibility study is an initial assessment of key risks involved in the project, which if they occurred
could prevent the achievement of project objective. Pre-feasibility study is expected to identify broad areas
of risks such as Technical, social, environmental, institutional, financial, economic, political etc.
Prefeasibility study is undertaken if any one of the following is true.
a. When there is serious lack of information on the development problem,
b. When the project proposal is poorly defined
Some of the main components that should be examined during the pre-feasibility study include:
• Availability of adequate market
• Project growth potential
• Investment costs, operational cost and distribution costs
• Demand and supply sectors and
• Social and environmental considerations
A. Availability of adequate market
The subjective consideration of the market potential at the pre-feasibility stage includes
 Making judgment on the number of potential customers
 Needs of the customers
 Strength of the competitors
 Availability and access to sales and distribution network and export possibilities.
B. Project growth potential
The growth potential is examined by looking at a number of indicators. Some of the indicators include
 Projected increase in the number of customers
 Increase in the rate of acceptance of the products
 the general economic, social and political trends which might influence the growth potential of the
project.
C. Investment costs, operational costs and distribution costs
 Purchase and transportation costs of raw material and finished products
 labor costs, production costs

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 Project analysis & evaluation Chapter 4: Market/Commercial Analysis of Project
 Investment costs are usually considered and should influence the decision of whether or not one
should go ahead with the new project idea. If all these costs are very high, the sustainability of
the project will be highly doubtful.
D. Demand and supply factors
 Projection of both short term and long term requirements of the project‟s output and examining the
implications of these on the project‟s capacity.
 In industrial and commercial projects, capacity is an important consideration.
E. Social and environmental considerations:
 A new project should also be evaluated by considering the social and environmental factors.
 There are many important social factors which have been ignored and have led to the failure of
many projects.
2. Feasibility study
Detailed investigation of the proposed project and recommending whether the implementation is feasible is
on this stage. According to Gittinger Feasibility study is “a study of a proposed project to indicate whether
the proposal is attractive enough to justify more detailed preparation”.

However in most practical situation it is not uncommon to find a situation where only a few projects are
sufficiently analyzed, carefully prepared and optimally selected. This happens because of two major
reasons;
 Lack of skilled manpower to carry out a detail analysis and

 Unwillingness of the entity undertaking the project to spend money on this process.

Hence many projects are implemented without any extensive feasibility studies. In the obscene of detailed
feasibility studies, project implementing agencies usually use non- numeric project selection models.
They are;
1. The sacred cow model
In this model, a project is usually suggested by a senior and powerful individual in an organization and the
idea is then passed to the officers below. In many cases, other officers are required to assist the boss to
achieve what he/she wants. Although such projects may not pass through vigorous analysis, the boss may
persist until he/she is convinced that it can no longer work. Many projects in the public sector of
developing countries have been initiated using this approach. Usually, these projects are initiated by
powerful politicians such as ministers with the aim to give their home areas the so called „accelerated
development‟.
2. Operating necessity model
In this project selection model, projects are initiated because they are required to keep a system in the
operation. These are threatening situations such as floods which will simply call for projects to be started
without much evaluation. Funding of projects initiated in this manner is usually done without making
though and meticulous analysis that goes with projects preparation and identification.
3. Competitive necessity model
Projects are usually initiated and given a lot of support if they will help an organization maintain a
competitive edge over other organizations. Such projects are considered to be of survival importance to an
organization and may not necessarily be required to go through careful numerical analysis.
4. Product line extension model

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This model is used when a project is intended to develop and distribute a new product or products. Usually,
such project if intended to fill a gap or to strengthen a weak link or to take the organization to a new
direction, will be judged favorably without careful calculations of the profitability of the project.
5. Competitive benefit level
This model is used where a firm has several projects that must be considered and some ranking is given. In
actual practice, in this model, the projects are sorted out into three categories; good, fair and poor. This is
done according to some development merit list. Such a list may contain doctrine such as if the project is
labor intensive, and then it might be given more priority.
However scholars have indicated that the application of the aforementioned models to project selection
may be limited to projects which do not involve huge investment of resources. Yet it is believed that this
process is wasteful if many projects are appraised but is eventually abandoned. With a lot of care exercised,
especially at the feasibility stage the abandonment should seldom happen. Hence for projects which
involve huge resources, especially those involving governments and other institutions such as the World
Bank and the International Monetary Fund, feasibility studies must be usually carried out before a project
is selected for implementation.
4.2.1 Market and Demand Analysis
In most circumstances, the first step in project analysis is to estimate the potential size of the market for
the product proposed to be manufactured (or service planned to be offered) and get an idea about the
market share that is likely to be captured. The task demands an in – depth study and analysis of various
factors such as: existing pattern of consumption and growth, consumption of the market, nature of
competition, income levels of the society, availability of substitutes, system of distribution channels, etc.
The objectives of market and demand analysis in preparing a project are to:
 Identify potential consumers or buyers.
 Gathering secondary and/or primary data/ information
 Market survey
 Market classification/characterization of the market demand forecasting
 Uncertainties in demand fore casting
 Market planning
A. Situational Analysis and Specification of Objectives
The primary purpose of situational analysis is to generate enough data about the market without formal
study, which normally demands time and cost. Most often, of course, a formal study of the market and
demand is warranted. To conduct such a study, it is necessary to spell out its objective clearly and
comprehensively. Often this means that, the intuitive and informal goals that guide situational analysis
need to be expanded and articulated with greater clarity.
To get an idea about the proposed product or services and its market share, the project formulators,
therefore, need informally, to talk to consumers or customers, competitors, distributors preferences,
purchasing power, organizations, or other similar or different producers or services providers. It may be
also advantageous to look at experiences of the organizations in dealing with customers and their strategies.
Key steps in Market and Demand Analysis and their Inter – relationships

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Collection of secondary Demand

information Demand
Forecasting
Forecasting

Situational Analysis Characterization of

K2Specification of
and the Market
Objectives Characterization of
the Market

Conduct of Market Market

Survey Planning

Conduct of Market Market

Survey Planning

B. Collection of Secondary Information

To conduct market demand, study information may be collected from secondary and / or primary sources.
Secondary sources are information gathered in some other places or context and are already available.
Information for market and demand analysis may be obtained from central statistics office, sample survey
reports, planning reports, academic studies, etc. These sources may provide starting point for market and
demand analysis. However, their reliability, relevance, and accuracy for intended purpose should be
carefully examined. Moreover, it provides leads and clues for gathering primary information required for
further analysis.
C. Conduct Market Survey
A comprehensive basis for market and demand analysis may be difficult to obtain from secondary
information. As such, primary information through a market survey tailored to the specific needs of the
project under preparation is necessary. There are two types of survey for this purpose. These are a census
survey and a sample survey.
In a census survey, the whole population is included (covered). Generally they are employed for
investment goods and intermediate goods if they are principally used by small number of users or
consumers. These types of surveys often tend to be costly and infeasible.
In a sample survey, a sample of population may be drawn. This method is found to be cheaper and easier.
The information sought in a market survey may relate to one or more of the following:
 Total demand and rate of growth of demand,
 Demand in different segments of the market,
 Income and price elasticity of demand,
 Motives of seeking the product or service,

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 Unsatisfied needs or demand,
 Purchasing power of customers,
 Satisfaction with the existing product or service,
 Distribution patterns and preferences,
 Attitude towards the product or service,
 Socio – economic conditions of the consumers,
These information need to be collected and analyzed in the context of the proposed project.
D. Characterization of Market Survey
Based on the information collected through a sample survey or secondary sources it may be necessary to
classify the market for the product or service in the following manner:
 The past and present effective demand,
 Break down of demand
 Consumers or customers,
 Distribution and sales promotion,
 Supply and competition
 Price
 Government policy
Effective Demand in the Past and Present
To get the past and present effective demand, it is necessary to estimate apparent consumption (i.e
production plus imports less exports and change in stock). In competitive market effective demand and
apparent consumption are generally equal. In most developing countries, where competitive markets do
not exist for a variety of products due to exchange restrictions and controls on production and distribution,
the figure of apparent consumption may have to be adjusted for market imperfections. Moreover, to obtain
clear insight into the nature of aggregate market demand it may be necessary to break down demand for
different segments of the market. Segmental information is helpful to formulate market strategies that are
appropriate to different market segments.
Breakdown of Demand
To get an in depth insight to the nature of demand, the aggregate (total) market demand may be broken
down into demand for different segments of the market. Market segments may be defined by (i) Nature of
product, (ii) Consumer group, and (iii) Geographical division. Segmental information is helpful because
the nature of demand tends to vary from one segment to another. The demand from consumers in high
income brackets may not be sensitive to price variations and different marketing strategies may be
appropriate for different market segments.
Consumers or Customers
Customers may be classified based on demographic (age, sex), economic (income), sociological
(profession, residence, social background), attitude (preferences, intentions, habits, attitudes, and
responses). This is not an exhaustive classification and the formulators may be able to find meaningful
groupings or categories based on targeting processes.
Price
Along with statistics relating to physical quantities. It may be helpful to distinguish the following types of
prices:
(i) Manufacturer‟s price quoted as FOB (free on board price or CIF (cost, insurance, and freight) price, (ii)
Landed price for imported goods, (iii)Average whole sale price, and (IV) Average retail price.

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Methods of Distribution and Sales Promotion
The existing methods of distribution and sales promotion has been analyzed. This is essential to identify
patterns of consumption and problems encountered in making the proposed product/service.
Supply and Competition
It is necessary to know the existing sources of supply and whether they are foreign or domestic. For
domestic sources of supply, information along the following lines may be gathered: Location, present
production capacity, planned expansion, capacity utilization level, bottlenecks in production, and cost
structure.
Competition from substitutes and near – substitutes should be specified because almost any product may be
replaced by some other product as a result of relative changes in price, quality, availability, promotional
effort, and so on.
Government Policy
Government policy may influence the market and the demand for a product/service. Governmental plans,
policies, and legislations, which have an influence on the market and demand of the product under
examination, should be disclosed. These are reflected in: production targets in national plans, import and
export trade controls, import duties, export incentives, excise duties, sales tax, industrial licensing
preferential purchases, credit controls, financial regulations, and subsidies /Penalties of various kinds.
E. Demand Forecasting
After the completion of information gathering about various aspects of the market and demand from
primary and secondary sources, it may be possible to estimate future demand. There are several
forecasting methods which are made available to the market analyst. These methods may be classified in
three broad categories as shown below:
Methods of Demand Forecasting
I. Qualitative Methods. These methods depend on essentially on the judgment of experts to translate
qualitative information in to quantitative estimates.
II. II. Time Series Projection Methods. These methods generate forecasts on the basis of an analysis
of the historical time series.
III. Casual Methods. This method is more analytical than the preceding methods, casual methods seek to
develop forecasts on the basis of cause – effect relationships specified in an explicit, quantitative manner.
F. Market Planning
An appropriate marketing plan should be formulated to reach the proposed product/service to a desired
level of customers. The prime purpose of the marketing plan is meeting the customer needs better than
their competitors. The marketing plan should focus on customer needs, nature of product or service
offering, channel function and coverage. In planning the market the detailed information that has been
collected and analyzed should be targeted on the following:
 Customer, consider core needs and ancillary needs.
 Distribution, indicate role of distributors, whole sellers and retailers
 Promotion which includes advertising, branding, own sale efforts.
 Pricing, indicate final price to customers, trade margins, duties on the intended price.
 Services, state warranties, after – sale service, training, installation, etc
 Market segmentation, breakdown markets into meaningful groupings or segments giving emphasis
on distinguished characteristics, size of segment, accessibility, and degree of competition.

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4.2.2. Technical Analysis
Technical aspect of the project provides the basis for all other forms of project design and analysis because
a technically unfeasible project must be either revised or abandoned, regardless of its performance in other
areas.
Analysis of technical and engineering aspect is done continually when a project is being examined and
formulated. Other types of analysis are closely interwoven with technical analysis. Technical feasibility
must be conducted on the basis of the project‟s ability to meet its objectives using a technology and
standards, which are appropriate to the circumstances of the country in which the project will be located.

Project formulators or promoters must bear in mind the key word „appropriate‟ in formulating a project.
The project should have to be designed analyzed interms of its appropriateness and relevance with regard
to the project‟s objective. In line with this perspective, the project objective is the key to technical
analysis.
The broad purpose of technical analysis is (a) to ensure that the project is technically feasible in the sense
that the inputs required to set up the project are available, and (b) to facilitate the most optimal formulation
of the project in terms of technology, size, location, and so on. The following are basic issues pertaining to
technical analysis using common sense and economic logic.
 Manufacturing process /technology
 Technical arrangements
 Materials and Inputs
 Plan capacity
 Location and site
 Structures and civil works
 Environmental aspects
A. Manufacturing Process Technology
In manufacturing a product or service often two or more alternative technologies are available. For
instance, cement can be made either by the dry process or the wet process. Similarly, a soap can be
manufactured by the semi – boiled process or the fully – boiled process.
o Technology Choice
Selection of appropriate technology and know–how is a critical element in any feasibility study. Such
selection should be based on a detailed consideration and evaluation of technological alternatives and the
selection of the most suitable alternative in relation to the project to investment strategy chosen and to
socio – economic and ecological considerations. Appropriate technology choice is directly related to the
conditions of application in particular situations. What may be appropriate in industrialized economies
with high labor costs may not necessarily be the optimum for low – age developing countries, with severe
constraints on infrastructure and availability of inputs. On the other hand, a plant in a developing country
that produces primarily for export to industrialized countries may need to utilize the latest automated and
capital – intensive production processes in order to compete in such markets. Competitive production
capability in intended markets is one of the most crucial factors for technology choice, and the related plant
capacity can be a major determinant of such capability. Generally, technology choice must be directly
related to market, resource and environmental conditions and the corporate strategies recommended for a
particular project.

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It is also necessary to take into account new technological developments and applications and their impact
to plant capacity. The choice of technology is influenced by a variety of considerations:
 Plant capacity
 Principal inputs
 Investment outlay and production cost
 Use by other units
 Production mix
 Latest developments
 Ease of absorption
Plant Capacity. Often, there is a close relationship between plant capacity and production technology.
Perhaps, only a certain production technology may be viable so as to meet a given capacity requirement.

Principal Inputs: The chosen technology, in some cases, may be influenced by the raw materials available
– for instance, the quality of limestone determines whether the wet or dry process should be used for a
cement plant.

Investment Outlay and Production Cost. The effect of alternative technologies on investment outlay and
production cost over a period of time should be carefully assessed.
Use by Other Units: The technology adopted must be proven by successful use by other units.
Product Mix: The chosen technology must be judged in terms of the total product – mix generated by it,
including saleable by – products.
Latest Developments: The technology adopted must be based on the latest developments in order to ensure
that the likelihood of technological obsolescence in the near future, at least, is minimized.
Ease of Absorption: The ease with which a particular technology can be absorbed can influence the choice
of technology.
o Appropriateness of Technology
Appropriateness of technology refers to the methods of production which are suitable to local economic,
social, and cultural conditions. Nowadays, advocates of appropriate technology urge that the technology
should be evaluated in terms of the following points:
 Whether the technology utilizes local raw materials?
 Whether the technology utilizes local manpower?
 Whether the goods and services produced cater to the basic needs?
 Whether the technology protects ecological balance?
 Whether the technology is harmonious with social and cultural conditions?
B. Technical Arrangements
To obtain the technical know–how needed for the proposed manufacturing process, suitable arrangements
must be made. When collaboration is sought, among other things, the following aspects of the arrangement
must be worked out in detail:
 The nature of support to be provided by the collaborators during the designing of the project,
selections and procurement of equipment, installation and erection of the plant, operation and
maintenance of the plant, and training of the project personnel.
 Process and performance guarantees interms of plant capacity, product quality and consumption of
raw materials and utilities.

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 The price of technology in terms of one – time licensing fee and periodic royalty fee.
 The continuing benefit of research and development work being done by the collaborator.
 The period of the collaboration agreement.
 The assistance to be provided and the restrictions to be imposed by collaborator with respect to
exports.
 The level of equity participation and the manner of sharing management control, especially if the
technical collaboration is backed by financial collaboration.
 Assignment of the agreement by either side in case of change of ownership.
 Termination of the agreement or other remedies when either party fails to meet its obligation.
 Approach to be adopted in unexpected situations.
C. Material Inputs and Utilities
An important aspect of technical analysis is concerned with defining the materials and utilities required;
specifying their properties in is some detail, and setting up their supply programme.

There is a close relationship between the definition of input requirements and other aspects of project
formulation, such as the definition of plant capacity, location and selection of technology and equipment,
as these inevitably interact with one another.
Material inputs and utilities may be classified into four broad categories: (i) Raw materials, (ii) Processed
industrial materials and components, (iii) Auxiliary materials and factory supplies, and (iv) Utilities.
o Raw Materials
Raw materials (processed and/or semi – processed) may be classified into four types; (i) Agricultural
products, (ii) Mineral products, (iii) Livestock and forest products, and (iv) Marine products.
Agricultural products:
If the basic raw material is agricultural products, its quality, present and potential quantities should be
identified. In food processing industry, only the marketable surpluses of agricultural products should be
viewed as basic raw materials, after meeting the consumption and sowing requirements. If the project
requires large quantities the production of agricultural products should be increased by extending area of
cultivation (sugar cane) or adding one more crop to estimate availability, the data on the past crop to be
collected and also to study their distribution by market segment. Storage and transportation costs to be
considered. Future cultivation studies should be based under varied conditions and the quality and
suitability to be tested.
Livestock and forest product:
Specific surveys are conducted for viability of an industrial project to have a more dependable and precise
data base. To assess the potentials of availability, yield and cost of collection, other consideration are,
ecological factors, national policies, and bilateral and multilateral agreements, fishing quotas by quantity
related licenses and the danger of over fishing.
Mineral products:
Information about metallic, non-metallic and clays and their exploitable deposits, proven reserves,
viability, open cost or underground mining, location, size, depth, quality of deposits, impurities etc, should
be gathered. Deposit from different location may differ in chemical properties. Analysis and test results of
ores and mineral should be included in project reports.

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Processed industrial materials and components:
To defined requirement of base metals, semi processed material part and components and specifications are
to be detailed. Their availability and price may be unstable in international market. Substitutes and FOREX
constraints should be enquired into. Careful analysis should be conducted regarding source of chemicals
and petrochemicals, both on the domestic and foreign markets, their costs and backward linkages.
Factory Supplies:
These include auxiliary materials like chemicals, additives, packing materials, paints, varnishes,
maintenance materials, oils, grease, cleaning materials, wear and tear parts and tools etc, and estimate of
utilities consumption is essential for identifying the existing sources of supply and shortages. The utilities
include: Electricity: An analysis of energy situation, sources, cost, power demand, load aspect, stand by
arrangements, consumption level and rejection of thermal power plants for environmental reasons are
certain points to consider in the study. Fuels: while using large combustion materials, environmental
protection and technologies are to be integrated in the planning. Using of coal is resulting in worldwide
carbon dioxide pollution and increased global temperatures. Thus care has to be taken in the choice of use
of fuels. Water: the requirement of the water estimated should be by considering recycling arrangements,
for various purposes. Packing materials: packing materials are most important for the commodity; for
export markets, special protective packing may be required and in competitive markets attractive packing
may be helpful. Recycled waste: pollution! In developing countries, dumping of wastes is no longer
possible. Proper technology usage and sophisticated recycling methods should be suggested. Spare Parts:
to avoid break downs of machinery and equipments, essential spare parts and tools should be identified and
keep it in stock. They may comprise large number of small items.

Specification of requirements:
All requirements of material and supplies should be identified and specified in the study considering all
socio-economic, commercial, financial and technical factors. Project characteristics and envisaged
technology determines the requirement of materials and supplies. Flow sheets for materials and other
inputs indicating quantitative flows should be prepared. The quality of various inputs and their quantities
are estimated based on the user demand and market expectations about the products of the project. The
nominal and feasible plant capacity will have to be defined on the basis of varying supply conditions,
number of shifts and products, skill of the labor force and marketing strategies. To identify the
characteristics of materials and inputs, the analysis should cover physical properties, mechanical properties,
chemical properties and electrical and magnetic properties.
Availability and supply:
The source of materials availability, their users and price of inputs are to be analyzed. The
interdependencies between project, material and input requirements and supply of these items should be
considered. The machinery, equipment, production process, capacity etc. may have to be revised if inputs
with the specified characteristics and quantities are not available. Data regarding locations of availability,
area of supply, whether concentrated or dispersed, transportability, transport costs and alternate usage of
such materials need to be collected. If the material has to be imported, the implication of such imports
should be assessed. There may be lack of knowledge of alternative external source of inputs. The
implications of domestic production of materials that were being imported should be analyzed. If
alternative materials are used, the discussion should also include an assessment of the environmental
impact of each material.

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Supply program
Making use of the marketing research information, suppliers to be identified and input quantities should be
determined. The objectives of supply marketing are; 1. Cost minimization that will have significant impact
on profitability. The 80-20 rule should be followed. 2. Reliability of supplies, quality wise, quantity wise
and timing. Late deliveries and lack of quality may have serious consequences for the production process.
3. To cultivate good business relations with suppliers for smooth and mutual trusting transactions.
Purchasing prices and condition largely depend on the bargaining power of the project and its management.
The systematic observation and analysis of supply market is of central operations depending on the market
conditions.
Costs of raw materials and supplies:
The costs of materials and other supplies have to be analyzed in detail to determine project economies. In
case of domestic materials, current prices have to be viewed in the context of past trends and future
projections of the elasticity of supply. The costs of alternative means of transport should also be
considered. For imported martial CIF prices to be adopted together with loading and unloading, port
charges, tariffs, insurance and taxes, cost of internal transport and other cleaning costs.
Estimates of annual operating costs for materials and supplies are to be made explaining the price
mechanism and key factors affecting price including price controls by the government. Cost estimates are
to be divided in to foreign and local currency components are specified exchange rates. Some costs may
vary with capacity utilization and production levels and others may be fixed. It is advisable to divide cost
items to variable and fixed. Cost estimates may be expressed either as the cost per unit produced or in
terms of a contain production level to conduct sensitivity analysis. The amounts resulting from
environmental protection and pollution control measures should be included in indirect costs element in
addition to over head costs at the level of service, administration and sales centers.
D. Plant Capacity
The term production capacity can be defined as the volume or number of units that can be produced during
a given period. Plant capacity may be seen from two perspectives: Feasibility normal capacity (FNC) and
nominal maximum capacity (NMC). FNC refers to capacity achievable under normal working conditions,
taking into account not only the installed equipment and technical conditions of the plant, such as normal
stoppages, down time, holidays, maintenance, tool changes, desired shift patterns and indivisibilities of
major machines to be combined, but also the management system applied. Hence, the feasible normal
capacity is the number of units produced during one year under the above conditions.

Nominal Maximum Capacity (NMC) is the technically feasible capacity, which frequently corresponds to
the installed capacity as guaranteed by the supplier of the plant. A higher capacity – nominal maximum
capacity – may be achieved, but this would entail overtime, excessive consumption of factory supplies,
utilities, spare parts and wear – and tear parts, as well as disproportionate production cost increases.

E. Location and Site

The choice of location and site necessitates an assessment of demand, size, and input requirement.
Although most often the terms „location‟ and „site„ are used synonymously, they should be distinguished.
Location refers to a relatively broad area like a city, an industrial zone, or a costal area; site refers to a
specific piece of land where the project would be set up.

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The locational requirements and conditions that are significant for the selection of both location and site
should be judged against the defined corporate strategies and the financial and economic impacts.
Choice of Location
In a feasibility study, a good starting – point for the final selection of a suitable location is the location of
raw materials and factory supplies, or if the project is market oriented – the location of the principal
consumption centers in relation to the plant.

Generally, the choice of location is influenced by a variety of considerations: proximity to raw materials
and markets, availability of infrastructure, labor situation, governmental policies, and other factors.
Proximity to Raw Materials and Markets
Proximity to the sources of raw materials and nearness to the market for the final products are an important
considerations for location. In light of a basic location model, optional location is one where the total cost
(raw material transportation cost plus production cost plus distribution cost for the final product) is
minimized. Practically, it means that:
i) a resource – based project like a cement plant or a steel mill should be located close to the source of the
basic material (for example, limestone in the case of a cement plant and iron ore in the case of a steel plant;
(ii) a project based on imported material may be located near a port; and (iii) a project manufacturing a
perishable product should be close to the centre of consumption.
A great many industrial products, however, are not affected by any one particular factor. Petroleum
products and petrochemicals, for example, can be located at source, near consumption centers or even at
some intermediate point. A wide range of consumer goods and other industries can be located at various
distances from materials and markets without unduly distorting project economics.

Availability of Infrastructure
In a feasibility study, availability of power, transportation, water, and communications should be carefully
assessed before a location decision is made.
Inadequate supply of power or its high unit cost in a particular area can constitute a major constraint for a
project or for a particular technological process such as electrical smelting. The project has to provide its
own power source, where the location of resource – based project can not be changed. Power requirements
can be defined in relation to plant capacity, and the supply and cost at various locations should be studied.
In assessing power supply, the following should be looked into: the amount of power available, the stability
of the power supply, the structure of the power tariff, and the investment required by the project for a tie –
up in the network of the power supplying agency.
Transportation facilities (by rail, road, air, or water) may be available for the inflow of various inputs and
for the marketing of outputs. The availability, reliability, and cost of transportation for various alternative
locations should be assessed.
Water requirement for the project can be assessed based on the given plant capacity and technology. Once
the required quantity is estimated, the amount to be drawn from the public utility system and the amount to
be provided by the project from surface or sub – surface sources may be determined. Moreover, the
following factors may be examined i.e. its relative costs, relative dependability, and relative qualities.
In addition to power, transport, and water, the project should have good communication facilities, including
telex telephone, and internet should also be ascertained for alternative locations.

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 Project analysis & evaluation Chapter 4: Market/Commercial Analysis of Project
Labor Situation
In project where there is labor–intensive, the labor situation in a particular location becomes important.
The key considerations in evaluating the labor situation are:
 Availability of labor, skilled, semi – skilled and unskilled
 Existing labor rates
 Labor productivity
 State of industrial relations
 Labor legislation
 Other major factors
Governmental Policies
Policies and regulations of a government have a considerable influence on location. In most of the cases of
public sector projects, location is directly decided by the government.
In the case of private sector projects, location is influenced by certain governmental restrictions and
inducements. Most often the government may forbid the setting up of industrial projects in certain areas
which suffer from urban congestion. Particularly, the government may offer inducements for establishing
industries in back ward areas. These inducements consist of subsidies, concessional finance, sales tax
loans, power subsidy, income tax benefits, lower promoter contribution, and so on.
Other Factors
Before making final location selection decision, several other factors have to be assessed as well. These
are:
 Climatic conditions
 General living conditions
 Proximity to ancillary units
 Ease in coping with pollution / controlling pollution
Climatic Conditions: The climatic conditions like temperature, humidity, wind, sunshine, rainfall,
snowfall, dust, flooding, and earthquakes have an important influence on location decision.
General Living Conditions: the general living conditions, such as the cost of living , housing situation,
safety, and facilities for education, health care, transportation and recreation need to be assessed carefully.
Proximity to Ancillary Units: Most of the firms depend on ancillary units for components and parts.
Coordination becomes easy, transportation costs are lower, and inventory requirements become
considerably lower, if the ancillary units are located in a near by area.
Ease in Coping with Environmental Pollution: A project may eventually cause environmental pollution
in various ways: it may throw gaseous emissions; it may produce liquid and solid discharges; it may cause
noise, heat, and vibrations. The locaitonal study should analyze the cost of alleviating environmental
pollution to tolerable levels at alternative locations.
Site Selection
After the completion of final locational selection, a specific project site and, if available, site alternatives
should be defined in the feasibility study. This will require an evaluation of the characteristics of each site.
The structure of site analysis is basically the same as for location analysis and the key requirements,
identified for the project, may give guidance also for site selection. For sites available within the selected
area, the following requirements and conditions are to be assessed:
 Ecological conditions on site (soil, site hazards, climate etc.)
 Environmental impacts (restrictions, standards, guidelines)

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 Socio – economic conditions (restrictions, incentive, requirements)
 Local infrastructure at site location (existing industrial infrastructure, economic and social
infrastructure, availability of critical project inputs such as labour and factory supplies)
 Strategic aspects (corporate strategies regarding possible future extension, supply and marketing
policies)
 Cost of land
 Site preparations and development, requirements and costs
The cost of land tends to differ from one site to another in the same broad location. Sites close to a city
cost more whereas sites away from the city cost less.
The cost of site preparation and development depends on the physical features of the site, the need to
demolish and relocate existing structures, and the work involved in obtaining utility connections to the site.
Some sites may require substantial work on site preparation and development, or it may be exposed to site
hazards such as strong winds, fumes, and flue gases from nearby industries or to risks of floods. The
required land area should be specified on the basis of buildings, technical installations and facilities
included in the project. Moreover, topography, altitude and climate may be of importance for a project, as
well as access to water, electric power, roads and railways or water transport.
Construction Requirements
The choice of location and site may sometimes strongly affected by the construction and installation works
during the future project implementation. Among the relevant aspects of it, such as the existence of local
contractors, availability of building materials, means of transport for heavy machinery and equipment to be
bought to the site, a developed social infrastructure and a climate where construction workers accept to live
for certain years probably three to five years are important. Existing facilities of different kinds may for
instance reduce the construction cost and consequently the investment costs as well as financing required.
Hence, the feasibility study should therefore identify and describe requirements and demands during the
construction and installation phase.
F. Structures and Civil Works
Structures and civil works may be divided into three groups: (i) Site preparation and development, (ii)
Buildings and structures, and (iii) Outdoor works.
Site Preparation and Development
Site preparation and development includes the following: (i) grading and leveling of the site; (ii)
demolition and removal of existing structures; (iii) relocation of existing pipelines, cables, roads, power
lines, etc; (iv) reclamation of swamps and draining and removal of standing water; (v) connections for the
following utilities from the site to the public network: electric power (high tension and low tension), water,
for drinking and other purposes, communications (telephone, telex, internet, etc.) roads, railway sidings;
and (vi) other related works.
Buildings and Structures
Buildings and Structures may have divisions, such as (i) factory or process buildings; (ii) ancillary
buildings required for stores, warehouses, laboratories, utility supply centers, maintenance services, and
others; (iii) administrative buildings; (iv) staff welfare buildings, cafeteria, and medical service buildings;
and (v) residential buildings.
Outdoor Works
Outdoor works include (i) supply and distribution of utilities (water, electric power, communication,
Steam, and gas); (ii) handling and treatment of emission, wastages, and effluents; (iii) transportation and

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 Project analysis & evaluation Chapter 4: Market/Commercial Analysis of Project
traffic signals; (iv) outdoor lighting; (v) landscaping; and (vi) enclosure and supervision (boundary wall,
fencing, barriers, gates, doors, security posts, etc.)
G. Environmental Aspects
The feasibility study should include, a thorough and realistic analysis of the environmental aspects of the
projects. Underestimation of the environment has resulted in negative consequences such as poor human
health, social disruption, reduced productivity and ultimately, the undermining of development. When
considering environmental aspects a number of issues may be taken into considerations, these may include
the following:
 A clear understanding of the meaning of sustainability
 Assessment of the potential environmental impact of the project.
 Formulation of mitigation measure and a plan of action.
Environmental Sustainability
The world commission on Environment and Development (WGED) defined sustainable development as
“development that meets the needs of the present without compromising the ability of future generations to
meet their own needs”. This definition emphasizes the idea of maintaining the economic value of
environmental capital stock. Hence, the project formulators must seek to:
 Maintain if possible increase the value of man made capital.
 Avoid damage to critical natural capital at all costs.
 Limit exploitation of renewable natural capital to sustainable level.
 Internalize the cost of depleting non – renewable resources through some form of
compensation measures.
Environmental Impact Assessment
Environmental impact assessment is part of the project planning process. Practically it is an integral part
of feasibility analysis. Environmental benefits or costs of a project are usually externalities or side effects
that affect the society wholly or partially. In a broader socio – economic evaluation of the feasibility of a
project, environmental effects on the quality of life are considered along with other factors to determine if
the overall effect of the project is positive, or to determine what modifications may be necessary to achieve
a positive evaluation.
In principle, environmental impacts should be assessed on the basis of legal regulations and emission
standards and guidelines established in the country where the project is located. Whereas, in countries,
where no or only vague regulations and standards are defined, it may be advisable to anticipate a future
serious environmental control measures, especially in the case of long – term projects.

Generally, externalities or side effects may bound to create environmental conflicts that might ultimately
lead to compensation claims, substantial costs for purification and equipment, and possibly to the extent of
the closure of the plant.

The general objective of environmental impact assessment in project analysis is to ensure whether the
development projects are environmentally sound. This implies that the effects of the project over its
estimated life do not unacceptably degrade the environment, and that no residual effects are anticipated that
would contribute to long – term environmental deterioration. It is well known that the immediate and long
– term health and welfare of people are linked to their natural, cultural and socio – economic environment.
Because of this reason, and to promote the objective of incorporating the ideas and aspirations of the

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 Project analysis & evaluation Chapter 4: Market/Commercial Analysis of Project
affected population in the decision process, right from the earliest stages and through out the project
development cycle, public participation is desirable.
The specific objectives of environmental impact assessment are as follows:
 To promote a comprehensive, interdisciplinary investigation of environmental consequences of the
project and its alternatives for the affected natural and cultural human habitat.
 To develop an understanding of the scope and magnitude of incremental environmental impacts
(with and without the project) of the proposed project for each of the alternative project designs.
 To incorporate in the designs any existing regulatory requirements.
 To identify measures for mitigation of adverse environmental impacts and for possible
enhancement of beneficial impacts.
 To identify critical environmental problems requiring further investigation.
 To assess environmental impacts qualitatively and quantitatively, as required, for the purpose of
determining the overall environmental merit of each alternative.

End

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