Chapter 3

Project context analysis (Project feasibility study)

Contents of the project
What is project context (PFS)
PESTLE
Economic analysis
Financial analysis
Technical
Social (or Sociological)
Environmental analysis
Commercial/Marketing analysis
External factors summarized as PESTEL
 What is Project Feasibility Study?
 A feasibility study is defined as an evaluation or analysis of the potential
impact of a proposed project or program.

 A feasibility study is conducted to assist decision-makers.

 In determining whether or not to implement a particular project or

program.

 The feasibility study is based on extensive research on both the current

practices and the proposed project /program and its impact on the
existing operation.

 The feasibility study will contain extensive data related to financial and
operational impact and will include advantages and disadvantages of
both the current situation and the proposed plan.
 The selection of a sound project to achieve the given target of
economic development in a particular sector is very important for
attainment of Plan objectives.

 Development projects, especially large and complex ones, often

meet with difficulties during their execution process. A feasibility
study is, therefore, a pre-requisite for preparation of a major
development project on sound lines, and is not ruled out even for a
minor one.

 It is basically an in-depth "three-in-one" study consisting of the

technical, financial and economic viability of a project. The study
arrives at a definite conclusion about the feasibility of a project after
considering the various options
Technical Analysis
 The analysis for determining the technical viability of the
project is based on the technical data.
The technical analysis covers the following areas:
 Impact Analysis:
 Location, land, suitability of location
 Utilities, roads, infrastructure,
 Raw material, Present and Future needs.
 Availability of machinery, plants and equipments, technology.
 Transportation facilities, commercial centers,
 Manpower, Local labor, technicians, unskilled workers.
 Climate, natural hazards,
 Demand and supply analysis.
 Government incentives and commissions.
 Commercial/ Marketing Analysis
The commercial aspects of a project include the
arrangements for marketing the output produced by
the project and the arrangement for the supply of
inputs needed to build and operate the project.

 Test marketing
 Market Planning process.
 Market Share determination.
 Pricing and Competition strategies (Skimming or Penetration)
 Distribution networks.
 Advertisement plans.
 Sales promotion strategies.
 Product Life Cycle studies.
Financial Analysis
 Financial analysis involves assessment of financial impact,
judgment of efficient resource use, assessment of incentives,
provision of a sound financing plan, coordination of financial
contribution and assessment of financial management
competence.
The following techniques are used.
 The overall resource requirements of the projects are
tabulated in three basic documents:
 Income/Expenditure Statement ( Profit & Loss Statement)
 Project Cash Flows ( Cash inflows and outflows)
 Project Balance Sheets ( Assets & Liabilities)
 Various tools of project Financial Analysis:
 Simple Rate of Return
 Break Even Analysis.
 Pay Back period
 Net present Value
 Internal Rate of Return ( IRR)
 Financial Ratio Analysis.
 Benefits Cost Ratio.
Financial Analysis of Project based on Social Cost
Benefit Profitability
 Contribution of the project to social welfare of a
society.
 Impact of the project on Foreign trade ( Exports and
Imports)
 Effect on trained Human Resource
 Direct and Indirect impact on environment.
 Techniques used for Social CBA.
 Net Value Added
 Distribution effect ( Poverty Alleviation)
 Foreign Exchange Effect
 Sensitivity analysis ( Impact of project in case of cost
and time overruns).
 Risk Analysis
Economic Feasibility
 Viability of a project over a period of time.
 Capital Costs
 Working Capital requirements.
 Estimates of operating Costs
 Depreciation/Taxes and Profits.

 Determine Tangible Costs

 Can easily be measured in PKR
 Determine Tangible One-Time Costs
 Associated with project startup, initiation and

development Includes
 System Development

 New hardware and software purchases

 User training

 Site preparation

 Data or system conversion

 Assessing Economic Feasibility

 Determine Tangible Recurring Costs

 Associated with on-going use of system
 Includes:
 Application software maintenance

 Incremental data storage expense

 New software and hardware releases

 Consumable supplies

 Determine Intangible Costs

 Cannot be easily measured in Birr
 Examples:
 Loss of customer goodwill

 Loss of employee morale

Assessing Economic Feasibility
 Determine Intangible Benefits
 Cannot be measured easily
 Examples

 Increased employee morale

 Competitive necessity
 More timely information
 Promotion of organizational learning and
understanding
 Environmental analysis

What is environment?
 The environment is the surroundings or conditions in which
a person, animal, or plant lives or operates.
 The environment is not only the physical condition but also
the social condition.
Human-
activity Land use

Landscape

Human , animals, projects

Air and plants Soil

Noise Traffic
Topography
Water
 project environment analysis
Projects are influenced by a multitude of factors which can
be external or internal to the organization responsible for
its management and execution.
The important thing for the project manager is to recognize
what these factors are and how they impact the project
during various phases from inception to final handover, or
even disposal.
These external or internal influences are known as the
project context or project environment.
 Project context
 The external factors making up this environment are the client or
customer,
 External influences;
consultants,
contractors,
suppliers,
competitors,
politicians,
national and local government agencies,
public utilities,
pressure groups,
the end users and even the general public.
 Internal influences
The organization’s management,
the project team, internal departments (technical and financial)
and
External environment factors
PESTEL Technique
External factors summarized as PESTEL
Political
Economic
Social
Technical
Legal
Environmental
 Politics
First politics is internal the internal politics;
They inevitably occurs in all organizations whether
governmental, commercial, industrial or academic,
Manifest from the opinions and attitudes of the different
stakeholders in these organizations.
These stakeholder’s relationships to the project can vary from
the very supportive to the downright antagonistic,
The fact that a project relies on clients, consultants,
contractors, suppliers, statutory authorities and, the end user, all
of which may have their own agenda and preferences, gives
some idea of the potential political problems that may occur.
Depending on their field of influence, they must be considered
and managed.
 Politics
Second, the external politics, over which neither the
sponsor nor the project manager may have much;
Any project that has international ramifications is potentially
subject to disruption due to the national or international
political situation.
In the middle of a project, the government may change and
impose additional import, export or exchange restrictions,
impose penal working conditions or even cancel the contracts
altogether
Example; For overseas construction contracts in countries
with inherently unstable economies or governments, sudden
coups or revolutions may require the whole construction
team to b evacuated at short notice
 Economic-two levels of influence
 Internal or micro-economic,
The internal economics relates to the viability of the project and the
soundness of the business case.
It is therefore vital that financial models and proven accountancy
techniques are applied during then evaluation phase to ensure the
economic viability of the project.
These tests must be applied at regular intervals throughout the life of
a project to check, the project is still worthwhile to proceed.
 External or macro-economic
Often related to the political climate, can have a serious influence on
the project.
 Bank interest rate change (example higher interest)
 Exchange rates, and additional taxes on labour, materials
 Tariff barriers, interstate taxes, temporary embargoes, shipping
restrictions such as only being
Social (or Sociological)
This is related to the impact of project on the surrounding
society
Many projects, and indeed most of the construction projects,
inevitably affect the community of the areas they are carried
out in.
It is therefore vital to inform the residents in the affected areas
as early as possible of the intent, purpose and benefits of the
project to the organization and community
It may require a public relations campaign to be initiated,
which includes meetings, exploratory discussions,
consultations at various levels and possible trade-offs.
 Example; A typical example of a trade-off is when a developer wishes
to build a shopping centre, the local authority may demand that it
includes a recreation area or leisure park for free use by the public.
Legal
One of the fundamental requirements of a contract, and by
implication a project, is that it should be legal.
The relationships between the contracting parties must be
confirmed by a legally binding contract that complies with the
laws (and preferably customs) of the participating
organizations.
In the event of disputes, the law under which the contract is
administered and adjudicated must be written into the contract
together with the location of the court for litigation.
Generally, project managers are strongly advised always to
take legal advice from specialists in contract law and
especially, where applicable, in international law.
Technical
 It goes without saying that, unless the project is technically sound, it
will end in failure.
 Whether the project involves rolling out a new financial service product
or building a power station, the technology must be in place or be
developed as the work proceeds.
 The mechanisms by which these technical requirements are
implemented have to be firmed up at a very early stage
 Each option may then be subjected to a separate feasibility study and
investment appraisal.
 Alternatives to be considered may include:
 Should in-house or external design, manufacture or installation be used?
 Should existing facilities be used or should new ones be acquired?
 Should one’s own management team be used or should specialist
project managers be appointed?
 Should existing components (or documents) be incorporated?

 Environmental
The location of the project clearly has an enormous influence
on the cost and completion time.
Therefore, environmental-impact assessments are highly
desirable
The following considerations must therefore be taken into
account when deciding to carry out a project in a particular area
of the world
 Temperature (daytime and night time) in different seasons
 Access by road, rail, water or air
 Ground conditions and earthquake zones.
 Nearby quarries for raw materials.
Environmental impact assessment should be made
 What is an environmental impact?
Economic development Effects Impacts
activities  Soil erosion and  Biodiversity loss
forest degradation,  Driving species into
[Agriculture,  Mineral
transportation, extinction
degradation
 Economic and
Industry,  Polluting the
Commercial, water
social
Mining, bodies and costs to the society
air,  Adverse impacts
Fishery, etc]
 Altering the on human health
landscaps, etc.
 Devalue
aesthetics,
An environmental impact is a phenomenon
etc. of changing the environment of physical,
human and/or animal lives.

• There are both negative and positive environmental impacts.

Reversible and Irreversible Impacts

Reversible

Irreversible

5
What is Environmental Impact Analysis?
 It is the process of identifying, predicting, evaluating, and mitigating the
bio-physical, social, and other relevant effects of development proposals
prior to major decisions being taken and commitments made.
 According to ISO 14001:2004, the main areas of consideration for the
analysis should be:
o Emissions to air
o Releases to water
o Releases to land
o Use of energy
o Energy emitted, for example: heat, radiation, vibration
o Noise (that can be heard off site)
o Waste in all forms and by-products
o Physical attributes of the organization, for example: size, shape, colors,
appearance, etc.
Overview and meanings of EIA
Objectives
Regardless of geographic location and type of project being evaluated, an EIA
has four general objectives.
o to ensure that environmental considerations are explicitly
addressed and incorporated into the development decision-
making process.
o to anticipate and avoid, minimize or offset (compensate) the
adverse significant bio-physical, social and other relevant
effects of the proposed project.
o to protect the productivity and capacity of natural systems
and
the ecological processes which maintain their functions.
o to promote development that is sustainable and optimize
resource use and management opportunities.
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Environmental Impact Statement (EIS)
 The EIA report or a “Statement” is a critical
document, which assembles the information to be
submitted to the decision-making body responsible
for project approval.

 It is prepared for ensuring that it meets the

requirements and guidelines established for this
purpose by a country or international agency.

 The EIA report is a public document, which describes

the findings on the impact of the proposed project to all
stakeholders (including individuals and communities
that are directly affected) prior to the approval of the
project.
Environmental Impact Statement (EIS)-
Cont’d
 Unlike other technical reports and studies, an EIA report is
subjected to public review and comments.
It should both be communicated effectively with non-experts and
meet appropriate technical standards

 The report:
o Should be reasonably concise,
o It should be objective, factual and internally consistent.
o Use of plain [clear and honest] language,
o minimizing technical terminology, avoiding jargons and
summarizing data in good quality maps, charts, diagrams and
other visual aids.
Environmental impact Statement (EIS)-Cont’d

Most of the time, there is a prescribed format for the report

by the regulating authority
The report provides the information necessary for decision
makers and stakeholders to understand:
 proposal and its rationale (need, objectives, alternatives,
project deliverables);
 environment and people affected (critical resources, key
stakeholders);
 views of those who have been consulted (responsible
agencies, people affected, experts).
 likely impacts and their significance (adverse and positive
effects of each alternative); and
 proposed mitigation and follow-up measures (the
environmental management plan).
1
Project category(case-Ethiopia}
The EPA (Ethiopia) has issued in July 2000 a “Guideline Document” for EIA.
Categorization of the programs
The guideline categorizes programs into three “schedules” according to
their potential impacts:
 Schedule 1 includes “sub-programs that may have adverse and significant
environmental impacts and may, therefore, require a full “EIA”, as well as “programs
in environmentally sensitive areas irrespective of their nature”;
e.g., Construction of dams that cause the resettlement of more than 100 families.

 Schedule 2 includes “sub-programs whose type, scale or other relevant

characteristics have potential to cause some significant environmental impacts,
but not likely to warrant an environmental impact study”;
e.g., Rural water supply and sanitation projects and sewerage system.
 Schedule 3 includes “sub-programs that would have no impacts and
don’t require an environmental impact assessment”.
e.g., Water and sanitation projects.
End of chapter 3