Chapter 4

Technical Analysis of Project

4.1 The Role of Feasibility Study

4.2 Market Demand Analysis

4.2.1 Objectives of the Study
The study of market and demand analysis, being the first step in project preparation, has the
following main objectives:

 To systematically assess the market and the market environment to generate pertinent data;
 To collect, analyze, and report data about a specific market situation;
 To obtain insights about the target market structure;
 To identify customers, their needs, and behaviors in the market;
 To design the marketing mix that fit in the context;
 To identify available distribution channels;
 To identify competitors and their characteristics in the target market;
 To determine the socio-economic aspects relevant to the preparation and evaluation of the
project’s market strategy;
 To identify the existing strengths and weaknesses in the internal environment of the firm;
 To project the level of demand expected;
 To delineate marketing opportunities and risks;
 To decide on subsequent aspects of a project; and
 To develop sales program of the firm.
4.2.2 Rationales for conducting it first
Engineers, Financial Analysts, as well as Economists, who have to calculate the socio-economic
costs and benefits of a project, can only start their job if the market analyst has finished his/her
part and has delivered a sales forecast and market strategy to his colleagues. In other words,
every part of the project preparation process and/or all the other dimensions of the feasibility
study depend on the information provided by the market and demand analyst, [i.e. on the sales
forecast and marketing strategy selected].

They all depend on this information, which has strong implications, for instance, on:
 Production program and capacity planning,
 Input and location selection,
 Technology selection,
  Staffing the sales unit (marketing section),
 Promotion and service department,
 Working capital needs, and
 Financial planning.

They also rely on the quality of the market analysis, since their calculations can easily turn out to
be waste of time if the demand and sales forecast has to be revised. Moreover, market analysis is
obviously more ambitious and risky in comparison to the other parts of a feasibility study, as it
has to fight with the future. The projection of future demand and the level of expected sales
require by far deeper “Look in to the Crystal Ball”. Market research needs imagination,
creativity, and feeling.
 It requires sound and intuitive judgment in addition to relaying on quantitative grounds.
 It has to fight with the future, i.e. with great uncertainties in the market.
 It deals with the fundamental source of income, revenues, with which stream of returns
would be obtained to compensate the promoters and attain objectives.

The marketing aspect and the demand and sales forecast are necessarily subjective and vague,
since, in the final end, the analyst has to:
 Deal with the behavior of human beings;
 Assume how customers respond to the taste, smell, and to all the properties of the
product, i.e. to the design, packaging, labeling, and, not to forget, to the price.

The market research cannot provide forecasts in certainty, particularly, if we take into account a
project’s total life span of 10 – 15 years notwithstanding its broad based significance. However,
the analyst can still forecast sales, with a good approximation, based on the outcomes in the
systematic assessment of the market and its environment, referred to as the market research.

4.2.3 Implications for Project Analysis

In most cases, 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. Put differently, market and demand analysis is
concerned with determining the:

 Likely aggregate demand for the product, and

 Possible market share expected for the product.

The first stage in preparing the feasibility study comprises the estimation of size, composition,
and development trends of demand for the product or products, careful analysis of determining
variables and their market environment, demand forecast and the ultimate goal of the procedure:
sales volume and revenue projections. The extensive and careful analysis of past, present, and
future demand for the product to be produced, together with market, institutional, and political
forces influencing demand and sales of the product in question, is of crucial importance to the
success of the entire project.
Estimates of sales revenue, at a later stage of feasibility study, will be the basis for evaluation of
alternatives and final decisions regarding:
 Production program,
 Plant capacity,
 Material and inputs choice,
 Location,
 Financial evaluation, and
 Ultimate marketing strategy.

In this regard, once the sales projections are available, a detailed production program should be
prepared showing the various production activities and their timing. The production program is
primarily dependent on projected sales. In addition to this, we need to determine the plant
capacity taking into account alternative levels of production, investment outlays, and sales
revenue. It is also obvious that expected sales would form one of the important determinants of
plant capacity decision. The same is true for decisions on materials and inputs, being the
consequence of production program. Proximity to the main markets and existing transportation
facilities, among other considerations, will affect the choice of plant location, particularly for
bulky and/or perishable products.

All measures of financial evaluation of project’s feasibility are based on estimates of costs and
revenues. Thus, an inaccurate or wrong demand and sales projection, being the result of careless
and lighthearted attitude towards demand and market analysis, may lead to ultimate project
failure despite all the financial analysis showing the project to be perfectly viable on paper.
Market and Demand Analysis is, therefore, the first “screening” stage in the feasibility study, at
which projects that cannot expect satisfactory market acceptance shall be rejected. It is much
easier and cheaper to screen out a project at this stage than to have it rejected by the market.

The practice of feasibility study in project preparation is largely an iterative procedure and,
therefore, involves a number of back – and - forth steps. The final sales projection cannot be
made without a decision on specific price level and this, in turn, cannot be made prior to
determination of production costs and break-even analysis, which will be conducted at the later
stage.

Given the importance of market and demand analysis, it should be carried out in an orderly and
systematic manner, which once again emphasizes on the necessity of a market research. In
general, the key steps in market & demand analysis (or market research) logically comprise the
following:

 Situational analysis and specification of objectives,

 Collection of secondary information,
 Conducting market survey (primary information),
 Characterization of the market,
 Demand forecasting, and
 Market planning.

4.2.4. Market and Marketing Concepts

1. Market: A Market is an institution set up by society as an important means to allocate scarce
resources in the economy. It is a locus of all potential customers involving in exchange of values
to satisfy their needs. It channels/transfers resources from one unit to another unit (entity) in a
given context.

2. Market Participants: The following entities are among the market participants:

 Producers of inputs/outputs: Input suppliers (raw materials and manufactured inputs) and
Output suppliers (finished goods and services for consumption or use);
 Sales agents, distributors (wholesalers and retailers), and commission brokers;
 Transportation agents (distribution channels);
 Competitors and partners;
 Consumers;
 Regulators and so on.

3. Marketing: Marketing is the process by which solicit members in the society obtain what
they need through creating and exchanging goods and services with others for identifiable
economic return. Nowadays, the definition of marketing is broadened to include even the
exchange of ideas between social and political entities, (for example, election campaigns).

4. Marketing Mix: The Marketing Mix (often referred to as the 4P’s) is mixture of controllable
marketing variables that could be used by a marketer to achieve the desired sales level (or
marketing objectives) in the target market. These 4 P’s are Product, Price, Promotion, and Place.

Product:

 Quality
 Design
 Brand
 Features
 Packaging
 Warranty
 After sales service

Price:

 List price (cost-plus approach, marginal cost approach)

 Discounts policy (cash, quantity, and trade discounts)
 Payment terms and delivery agreement (credit terms)
Promotional Mix:

 Advertising
 Public relation
 Personal selling
 Sales promotion
 Publicity

Place:

 Distribution channels (wholesalers, retailers, direct sale to customers)

 Storage (or stocking): warehouses and standard requirements
 Transport (railways, vehicles, water, air, etc.)

5. Marketing Strategy: Marketing Strategy is a specific weapon, tool, or approach that the firm
chooses to follow, which comprises the basic variables in the marketing process. It is a broader
plan that the company uses in order to achieve its marketing objectives. It encompasses:

 Marketing Expenditures: [Amount, Frequency, Significance to be obtained, Ability to

provide Competitive Advantage];
 Marketing Mix: The degree of combination (proportion) of the controllable and
measurable marketing variables in order to give the firm unique competitive posture in
the market; and
 Competitive Strategy: [such as low cost leadership, high quality and differentiation,
delivery performance (fast delivery and reliability in delivery), and flexibility & customer
service].

6. Elements of Marketing: Elements of the Commercial Dimension in project preparation:

 Market Research: The first & basic task in any market and demand analysis is to generate
relevant information useful for doing the subsequent tasks.
 Marketing Plan and Budget: A plan of action and budget prepared on the basis of the
results of the market research.

4.2.5. Demand Forecasting (Projection) Methods

[Adapted from Chandra (2002); Projects: Planning, Analysis, Financing, Implementation, and
Review; 5th Ed.; page 77-87]

Techniques of Demand Forecasting

After gathering information about various aspects of the market and the marketing environment
in general and data obtained from primary and secondary sources in particular, attempt may be
made to estimate future demand. In this regard, the projection of future demand for a given
product or service, apart from requiring critical analysis of raw market data, needs to be made
using appropriate forecasting model and/or techniques.

Generally speaking, the chosen model should allow the analyst in order to incorporate both
qualitative and quantitative data in formulating the forecast equation. With regard to model
alternatives, there are different forecasting methods and/or techniques available to the market
analyst. However, for the purpose of this material as well as the sake of clarity, the various
forecasting methods may be classified in to three major categories as Qualitative Techniques,
Time Series Techniques, and Causal Methods.

A. Qualitative Methods:
These methods rely essentially on the judgment of experts to translate qualitative information in
to quantitative estimates. The important qualitative methods are:
 Jury of Executives Opinion technique, and
 Delphi Method.
B. Time Series Projection Techniques:
These methods generate forecasts based on an analysis of data over the historical time series.The
main time series methods of projection are:

 Trend Projection Method,

 Exponential Smoothing Method, and
 Moving Average Method.
C. Causal Methods:
With more analysis than the preceding methods, causal methods seek to develop forecasts based
on cause-effect relationships specified in an explicit, quantitative manner. The following are the
major causal methods:
 Consumption Level Method,
 End use [or Consumption Coefficient] Method,
 Leading Indicator Method,
 Chain Ratio Method, and
 Regression Model
4.2.5.1 Qualitative Techniques for Demand Forecasting
A. Jury of Executives Opinion Method:
This method, which is very popular in practice, involves eliciting the opinions of a group of
managers with respect to the level of future sales expected for a given product and then
combining the estimates to determine sales for the period under forecast.

Advantages: The advantages of this method are the following:

 It is an expeditious method for developing a demand forecast.

  It permits a variety of factors, like economic climate, competitive environment, consumer
preferences, technological developments, and so on, to be included in the subjective
estimates provided by the experts.
 It has immense appeal to managers who tend to prefer their judgment to mechanistic
forecasting procedures.

Disadvantages:
The disadvantages of this method, however, are the following:

 The biases underlying subjective estimates cannot be easily eliminated.

 The reliability of this technique is questionable.
B. Delphi Method
This method adopts a technique for eliciting the opinions of a group of experts with the help of a
mail survey.

The steps (procedures) involved in this method are the following:

 A group of experts is sent a questionnaire by mail and asked to express their views,
 The responses received from the experts are summarized, without disclosing the identity
of the experts, and sent back to the experts, along with a questionnaire meant to probe
further the reasons for the extreme views expressed in the first round,
 The process may be continued for one or more rounds till a reasonable agreement
emerges in the views of the experts.

The Delphi demand projection technique appeals to many organizations for the following
reasons:

 It is intelligible to users, and

 It seems to be more accurate and less expensive than the traditional face-to-face group
meetings.

However, it may be time taking for reaching on common consensus and hence, the final estimate
under this technique.

4.2.5.2 Time Series Techniques for Demand Forecasting

A. Trend Projection Method:

The trend projection method involves the following two major activities:

 Determining the trend of consumption by analyzing past consumption statistics, and

 Projecting future consumption by extrapolating the trend.

When the trend projection method is used, the most commonly employed relationship is the
linear relationship, which is expressed by the following equation:
Yt = a + bT

where,

Yt = demand for year t,

T = time variable,

A = intercept of the relationship (constant), and

b = slope of the relationship.

To estimate the parameters “a” and “b” of the linear relationship, the least square method is used.
According to the least squares method, the linear relationship is chosen in such a manner that the
sum of the squared deviations of the observations from the line, [i.e. Σ(y – a – bT)2], is
minimized.

The equation for “a” and “b” is derived as follows:

 First, identify the equation showing the sum of the squared deviations. It is Σ(y – a – bT)2
 To minimize this equation with respect to “a” and “b”:
Differentiate the sum of the squared deviations with respect to “a” and “b” and set the
partial derivatives equal to zero.
This gives: ∂Σ/ ∂a (y-a-bT)2 = -2Σ(y – a –bT) = 0

= Σ(y – a –bT) = 0

= ΣY = Σ(a + bT) = 0 ………………………….(Equation 1)

∂Σ/∂b (y –a - bT)2 = - 2TΣ(y – a – bT) = 0

= Σ(Ty –Ta – bT2) = 0

= ΣTY = Σ(aT + bT2) = 0 ……………..………….….… (Equation 2)

 Solving these two equations, referred to as normal equations, we get the values of “a” and
“b” given in equations below:

b = ΣTY – nTY
ΣT2 – nT2

a = Y – bT

where, T= ΣT/n

Y= ΣY/n
 n = number of observations

Exercise:
Based on the historical data given below, which is pertaining to the annual demand for a given
product, try to develop the least square linear function to be used in order to forecasting demand
as per the trend technique as well as determine the level of demand expected in the year 2002.

4.3 Production Programing and Plant Capacity

4.3.1 Production Program: Basis and Aspects

Sales Program as a Basis

Sales program shows the level of sales forecast to be realized during the specified life of the
envisaged plant (showing local sales, export sales, total revenues over the project life, etc.)

1. Sales program is projected under market analysis

 Market requirements and market structure identified
 Marketing strategies will be defined & the implications, broadly, in terms of:
o Product pricing,
o Production program,
o Promotional efforts,
o Sales & distribution mechanisms, etc
 Marketing mix - combination of the controllable marketing variables
 Demand forecasting
2. Provides inputs for financial analysis

After projecting sales for different stages of production, a feasibility study should define and
come up with the detailed production program.

 A production program defines the level of output to be produced during specified period
and, from this viewpoint, we can say that it should be directly related to the specific sales
forecasts.

Aspects of Production Program

The demand and market analysis specify the sales program, which should be transformed into
the plant production program, taking into account losses of production within the production
plant, in storage, transportation, and by warranty service.

 It indicates the level of output and the timing for production.

Objectives:

 To determine the type and range of products to be produced over the life of the envisaged
plant
  To show the level of capacity utilization expected and the quantity of production

Considerations:

 Determining capacity utilization: The production program should indicate the quantity of
outputs to be produced each time in the planning horizon and hence, the associated level
of capacity utilization in terms of initial production period, intermediate production
period, and full production stages.
 Determining the type of products or range of products produced over the life of the
envisaged plant in terms of:
o main product,
o by-products and reworks, and
o associated wasted units & scraps
 It is related to the sales program (sales forecast)

The determinants of a production program during the initial production years vary considerably
from project to project.

 Thus, different approaches would be adapted for different industries.

Below are examples of manufacturing firms that produce a single product and multiple products:

Single Product Manufacturers Vs Multiple Product Manufacturers

Cement factory Electronics factory

Coal factory Machine tools

Tea factory Leather products factory

Sugar factory Food complex factory

Garment Factory Oil Refinery

Accordingly, the production process also varies among such manufacturing firms. Consider the
following four cases as an illustration:

Case 1: Single-product-continuous process manufacturing as in cement production;

Case 2: Multiple- products-continuous process production as in an oil refinery;

Case 3: Batch/job orders production such as in an engineering workshop; and

Case 4: Assembly/mass manufacturing as for the production of motor cars

 In the first case, the growth of sales may not be a great problem unless production
capacity is in excess of local demand.
 o However, production problems may be more critical.
 In the second case, both production and sales problems may arise.
 In the third case, though production aspects may present difficulties, obtaining
satisfactory orders would be critical.
 In the fourth case, the sales aspects in relation to price would be dominant. Exhibit 7.1
summarizes this.

Exhibit 7.1: Determinants of Production Program

Case Production Process Remark (Determinants of
production program)
Single product case Continuous production  Sales may not be a
(Ex. Cement) problem, unless
Local Supply > Demand
 Production Problems may
be critical
Multiple Products case Continuous production  Production and sales
(Ex. Oil refinery) problems may arise
Order-based Production Batch job orders Production  Obtaining satisfactory
(Ex. Engineering work shops) order will be critical
 Production difficulties
may also exist.
[Ability to reduce the
production cycle time and set
up time is important]
Assembly & Mass production Assembly Line and Mass  Sales would be critical
Production process
(Ex. Motor cars)

Furthermore, an important aspect that needs to be considered in developing production program

is capacity utilization.

 In this regard, the production program changes over time during the project’s life with
respect to capacity utilization.
 In general, the initial level of production may not be higher than 40 to 50% of the overall
design capacity, for instance, for the first one or two years of operation.
 This is because market may not be ready to acquire large amount of new product or
technological difficulties may obstruct the full-capacity operation of the equipment.

Apparently, full production capacity is being reached usually towards the third or fourth year and
stabilizes for about 10 to 15 years.

 In this regard, the growth of the demand and continuous improvement in technology
usually encourages modernization of a project by updating the production equipments,
 which helps to stabilize production and enables the firm compete for additional years in
the market.
 After certain period (probably 30 or more years), however, the project necessarily
terminates production due to the low market competitiveness, de-capitalization of the
equipment, and/or, sometimes, due to environmental reasons, as old plants often result
more environmental pollutions as compared to new ones.

Therefore, while planning a production program, the various production stages should be
considered in detail, both in terms of production activities and timing.

 Within the overall plant capacity, there can be various levels of production activities
during different stages that are determined by various factors in different projects as
discussed earlier.
 It would be prudent to recognize the fact that full production may not be practicable for
most projects during the initial production operations.

In general,

 Even if full production were to be achieved in the first year, marketing and sales might
prove a bottleneck.
 At the initial years, production may be programmed at well below the full capacity in
order to adjust a gradual growth of demand for a particular product.
 Growth of skills in operations can also be a limiting factor in a number of industries and
hence, production has to be tailored to the development of such skills and productivity.
Extraction rates and operating ratios should be effectively determined and adequately
planned.

Once a production program defines the levels of outputs in terms of end product, and possibly of
intermediate products, and the operating ratio between various production lines and processes,
the specific requirements of materials and labor should be qualified for each stage.

 The specific quantities needed for each stage of the production program and costs that
these entail should be determined.
 The input requirements and costs have to be assessed in terms of:
a) Basic materials such as raw materials, semi-processed items, bought-out items, etc
b) Auxiliary materials and factory supplies,
c) Major utilities, and
d) Direct labor requirements.

Detailed estimates, in this regard, should be prepared for the stages of initial production and full
production. The next section summarizes the above considerations (or factors) in setting
production program.
Factors Considered in setting the Production Program

1. Production Level (Capacity Utilization):

o Production may not be at full capacity during the initial period due to:
 Production and technological difficulties
 New technology,
 Design of the production process,
 Flow of operation, etc
 Skill and productivity to be learned
 Lack of marketing experience (commercial difficulties)
 Market forecast needs testing – to see the actual demand for the product
 Plant is new for competition - more time needed to cope up with the
competitive environment
o A level of 40 – 50% of overall capacity utilization in the first year may not be too
low.
o In later years, capacity utilization might increase due to learning and/or effects of
experience/improvements in skill.
2. Production Problems:
o Machine breakdowns and problems of line balancing in operations; raw material
shortages or materials may not be up to the standard; utilities shortage, etc.
 Wide range of production problems shall be anticipated while setting the
production program
 Contingency plan should be worked out to use alternative options or facilities
3. Wastage and Spoilage:
 Try to avoid abnormal spoilages & wastages, and only anticipate normal ones.
 Note that abnormal spoilages and wastages can be eliminated through efficiency in
operations and, thus, are controllable/avoidable.
 However, normal spoilages and wastages are not controllable or unavoidable.
 Anticipate/Allow for -Normal wastage
-Normal spoilage

4. Price Vs Quantity Sales:

 Sales might be affected by the price established. That is, the impact of higher prices may be
reflected in terms of lower sales volume/quantity.
 Lower sales volume, in turn, affects the production program
 The price charged for goods/services, therefore, affects the production program and
hence, should be taken in to account
4.3.2 Determination of Plant Capacity

The term “plant capacity” can generally be defined as the volume or number of units that can be
produced during a given period.
  This definition implies the output expectations from a production plant.
 The same definition holds for service capacities too.

Objectives:

 To identify factors affecting capacity decisions

 To examine alternative capacity levels in view of sales, profitability, technology, and so
on
 To determine the feasible normal level of plant capacity
 To provide a basis for determining capacity costs (investment costs in capacity)

Factors Affecting Capacity Decisions

1. Technological Requirements:
 Minimum economic size determined by the technological factor
 For many industrial projects, there is certain minimum economic size determined by the
technological factor.
 For example, a cement plant should have a capacity of at least 300 tones per day
in order to use the rotary kilos method, or else it has to employ the vertical shaft
method, which is suitable for lower capacity plants.
2. Input Constraints:
 In developing countries, there often are constraints on the availability of certain inputs.
 The following are, among others, mentionable:
 Power supply may be limited
 Basic raw materials may be scarce
 Foreign exchange available for imports may be inadequate
 These constraints should be borne in mind while choosing the plant capacity
3. Investment Cost:
 In general, investment cost per unit of capacity decreases as the plant capacity increases
(i.e. capacity cost increases at a decreasing rate).
 That is, some capacity costs remain the same regardless of the size of the plant
[for instance, installation costs, technicians charges, etc]; and the rest often
increase still at a lesser proportion.
 In other words, as capacity increases, the investment cost per unit of capacity
decreases.
 The capacity-cost relationship could be defined by the following equation:

C 2=C1 X +
{ }
Q2
Q1

Where:

C1= Known cost for Q1 units of capacity

C2-= Derived cost for Q 2 units of capacity

α= (Alpha), which is a factor reflecting capacity-cost relationship

Alpha is usually set in between 0.2 and 0.9.

 If α= 0, it means that there is no relationship between capacity and cost; and

 If α= 1, it means that capacity cost increases in the same proportion with the increase in
the level of capacity.
 Therefore, the specified range implies the fact that capacity costs increase at a decreasing
rate.

For example, assume that:

C1= Birr 1,000,000 that represents the investment cost in capacity level Q1,

Q1= 5,000 units per annum at the normal capacity level, and

α= 0.6, reflecting the capacity-cost relationship.

How much will be the investment cost in new capacity (C2) for a level of production (Q2) equal
to 10,000 units per annum?

Solution:

C 2=C1 X +
{ }
Q2
Q1

where C2= Derived cost for Q2units of capacity

C1= Known cost for Q1units of capacity

α= Capacity- cost relationship

C 2=Br 100,000 X + {10,000

5,000 }
0.6

= Birr 1,516,000

The implication here is that, although capacity level has doubled, the investment cost in capacity
has increased to a level that is less than the double cost of the earlier one.

4. Market Conditions:
 The anticipated market for the product has an important bearing on plant capacity.
 If the market for the product is likely to be very strong, a plant of higher capacity is
preferable.
  If the market is likely to be uncertain, it might be advantageous to start with a small
capacity.
 If the market starting from a small base, but is expected to grow rapidly, the initial
capacity may be set to be higher than the initial level of demand.
 Further addition to capacity may be effected with the growth of market.
5. Resources of the Firm:
 The following resources define a limit on a firm’s capacity decision:
 Managerial infrastructure,
 Finance, and
 Availability of skilled employees to a firm
6. Government Policy:
 Minimum Economic Capacity Policy in several industries
 Economic use of raw materials and other scarce resources such as land, capital,
etc
 Economies of scale and subsequent low prices to consumers
 Optimum investment in imported machinery & equipment (to save foreign
exchange)
 To minimize fragmented (small-scale) investments and encourage long-term
investments in large capacity plants
 Government policies and regulations with regard to working hours, pollution, etc

Feasible Normal Capacity (FNC)

Once the marketing concept and the corresponding sales volume are defined, other components
have to be assessed to determine the feasible normal plant capacity.

 This capacity should, in fact, represent the optimum level of production as may be
determined by the relative interactions of various components of the feasibility study
such as technology, availability of resources, investment and production costs, raw
materials and supplies (auxiliary & utilities), human resources, etc.

The FNC is achievable under normal working conditions taking into account the following
conditions:

 Installed equipment:
 Level of sophistication ( technical)
 Standard of operation (Rate of operation)
 Specific characteristics
 Technical plant conditions:
 Down time (a period where by the plant is not in operation or not running due to
technical requirements)
 Maintenance requirement
  Tool checks
 Organizational and management aspects:
 Normal working hours
 Holidays
 Normal labor strikes
 Ability to manage and coordinate diverse interactions
 Availability of inputs
 Skill of employees (i.e. employee skill should fit to the technological requirement)

The feasible normal capacity is the number of units produced during a given period under the
above conditions and that should correspond to the sales projections in the market and demand
analysis.

 Therefore, both Human Factor and System Engineering define Feasible Normal Capacity
(FNC), which is “Plant plus Human”.

Nominal Maximum Capacity (NMC)

This is the technically feasible capacity and frequently corresponds to the installed capacity as
guaranteed by the supplier of the plant.

 Nominal maximum capacity is defined by system engineering, that is, the equipment
installed capacity, which includes reserve and stand-by capacity.
 To reach the maximum output figures, overtime work may be needed as well as it might
result in excessive consumption of factory supplies, utilities, spare parts, and wear & tear
parts.
 This results in a disproportionate production cost increase, which is called diseconomies
of scale.
 In general, the FNC is less than the NMC under normal condition.

Determination of Feasible Normal Capacity (FNC)

In feasibility study, the determination of the appropriate plant capacity is critical.

 Forecasts of demand and market penetration strategies for a particular product are the
staring points.
 The limited availability of basic materials and inputs or resources may be constraints for
certain projects, requiring evaluation of various alternative possibilities of plant sizes and
capacity.
 These alternatives have to be related to various levels of production and different levels
of sales and profitability.

In short, the steps involved are the following:

  Identify alternative possibilities of plant size & capacity
 Determine various levels of production capacity utilization
 Examine the different level of sales & profitability expected

Plant Size Capacity Utilization Level of sales and Profit

Small scale Initial ______________

Medium size Vis-à-vis Intermediate ______________

Large size Full scale ______________

Once the overall constraints on demand and market forecasts are defined, other components of
the study have to be assessed to determine the feasible normal plant capacity.

 This capacity represents the optimum level of production.

 One of the aspects (components) can be critical for determining the feasible normal plant
capacity of a project, but the implications of all the above aspects should be taken into
account.

Finally, prior to capacity determination, the minimum economic size, availability of production
technologies, and equipment related to various production levels should be determined.

 Production capacities have tended to increase rapidly in a number of sectors in

industrialized countries to take greater advantage of economies of scales.
 Increased capacities give increased output resulting in lower unit production costs.
 Another important factor is that the available process technology and equipment are often
standardized at specific capacities in different production sectors.

4.4 Raw Materials and Supplies Study

I. General

An important aspect of technical analysis is concerned with defining the materials and supplies
required, specifying their properties in some detail, and setting up their supply program.

 There is a close relationship between the study of raw materials and supplies required and
other project formulation stages, such as definition of plant capacity, location, and
selection of technology and equipment, as these inevitably interact with each other.
 The main basis for the selection of materials and inputs is, however, the demand analysis,
the production program, and finally the plant capacity.

Therefore, we need to examine and/or assess issues pertaining to material and input requirements
of a particular project in the feasibility study.
 II. Objectives of Input Study
 To determine the:
 Types of raw materials and supplies required
 Availability of basic raw material suppliers
 Quantity of raw materials needed for the plant
 Quality of raw materials and supplies available and needed
 To estimate the cost of raw materials and supplies needed
 To develop supply programs and devise supply marketing schemes
III. UNIDO Approach in the Study

The approach followed by UNIDO in the study of raw materials and supplies is as follows:

Step 1: Classification of Raw Materials:

1. Raw materials (unprocessed and semi-processed)

A. Agricultural products,
B. Livestock and forest products,
C. Marine products, and
D. Mineral products
2. Processed Industrial Materials and Components
3. Factory Supplies: Auxiliary materials, utilities, and spare parts

Step 2: Specification of Requirements:

 Product characteristics and material inputs

 Requirements of raw materials and factory supplies

Step 3: Check Availability and Supply of Inputs

Step 4: Supply Marketing and Supply Program:

 Supply Marketing, with the objective of:

 Cost minimization
 Risk minimization (reliable supply sources)
 Cultivating relations with the suppliers
 Supply program

Step 5: Estimate Costs of Raw Materials and Supplies

 Unit costs, annual costs, and overhead costs

In this text, therefore, the approach followed by the UNIDO is adopted and each of the aspects
indicated in the above five steps is explained next.

4.4.1 Classification of Raw Materials and Supplies

Raw Materials (Unprocessed and Semi–processed)

A. Agricultural Products
 If the basic material is an agricultural product, first the quality of the product must be
identified.
 Assessment of the quantities currently and potentially available may be a cardinal and/or
fundamental feature in pre-investment studies involving the use of agricultural products.
 In food-processing industries, only the marketable surpluses of agricultural produce
should be viewed as raw materials, which are the residue remaining after the quantities
required for consumption and so wing by producers been subtracted from the total crop
production.
 In case of commercial crops, the marketing surplus is the total production minus sowing
(seeds) requirements.
 If the project involves large quantities, the production of agricultural input may have to
be increased.
 This may require the extension of the area under cultivation.
 For instance, for a Sugar Factory, we need to increase within the same region for
plantation of sugar cane because it cannot be transported over long distance without high
costs, loss of content, or both.
 In order to estimate the supply and availability of agricultural products, therefore, it may
be necessary to collect data on past crop production pattern, productivity, and their
distribution by market segment.
 In the meantime, storage and transport costs should be assessed.
B. Livestock and Forest Products

In most cases of livestock produce and forest resources, specific surveys are called for to
establish the viability of an industrial project.

 However, general data from official sources and local authorities that is only sufficient
for opportunity studies is required.
C. Marine Products

The major problem in marine-based raw materials is to assess the potential of availability, the
yields, and cost of collection.

 Availability of marine products may not only depend on ecological factors, but also on
national polices and bilateral or multilateral agreements, for instance, fishing quotas.
D. Mineral Products

For mineral products, detailed information on the proposed exploitable deposits is essential and
proven reserves are needed.
  The availability of open castor underground mining; the location, size, depth, and quality
of deposits; and the impurities and the need for beneficiation should be qualified.
 A detailed analysis of physical, chemical, and other properties of the minerals is required.

Processed Industrial Materials and Components

Processed industrial materials and components constitute an expanding category of basic inputs
for various industries in developing countries.

Such inputs can generally be classified under:

 Base metals,
 Semi-processed materials, and
 Manufactured parts: components for assembly type and engineering goods industry

It is necessary to define requirements, availability, and costs.

 The substitutability and prices of these materials depend, sometimes, on unstable

international markets.
 The substitutability of such metals should be examined, (e.g. replacement of copper by
aluminum in the case of electrical power lines).
 For chemicals and petrochemical industries, careful analysis is necessary with regard to
their availability from external sources, the costs, and the implications of domestic
manufacture of such inputs.

Factory Supplies

A. Auxiliary Materials:

All manufacturing projects require various auxiliary materials and utilities summed to be factory
supplies.

 It is not always easy to distinguish between

 Auxiliary Materials, such as Chemicals, Additives, Packaging Materials, Paints,
and Varnishes and
 Factory Supplies such as Maintenance Materials, Oils, Greases, and Cleaning
Materials, since these terms are used interchangeably.

Packaging Materials, Containers, and Crates:

All types of containers and packaging materials serve, in principle, two purposes.

 These are for physically holding as well as protecting a product (semi-product or

finished) stored by the producer, distributor, or consumer.
  The cost of the materials may be considerable in relation to the production costs of the
product sold.
B. Utilities:

A detailed assessment of the utilities required (electricity, water, steam, compressed air, fuel, and
their efficient disposals) could only be made after analysis and selection of location, technology,
and plant capacity.

 However, the general assessment of these is a necessary part of the input study.
 An estimate of utilities consumption is essential for identifying the existing sources of
supply, any bottlenecks, and shortages that exist or are likely to develop.
 This, in turn, helps to respond properly and take measures in advance, for instance, to
provide for either internal or external addition of supplies in good time.

The assessment of utilities includes, inter alia, the following:

1. Electricity:
 An analysis of the energy situation must specify the requirement, sources,
availability, and costs of supply of electric power.
 The maximum power demand, the connected load, peak-load, and possible stand-
by requirement as well as the daily and annual consumption, both by shift and in
total, must, therefore, be estimated in a feasibility study.
2. Fuel:
 When using large quantities of solid and liquid combustion materials, all the
relevant environment protection technologies will have to be integrated in the
planning and analysis of a project.
 Consequently, the price of energy inputs will have to be increased by the costs of
disposal measures (filters, desulphurization, etc).
3. Water:
 A general estimate should be made of water requirements for the production
process, auxiliary purpose, and general purpose so that these can be considered in
location decisions at which stage the cost can be specifically defined.
C. Spare Parts:

All machinery and equipment will finally break down after a certain lifetime.

 Various spare parts will be required to keep a plant in operation.

 The importance of correctly identifying essential spare parts, the quantities
required, and available suppliers cannot be overemphasized.
 Usually, the initial investment includes spare parts for the first one or two years of
plant operations under the heading of the initial net working capital requirement
(current assets).
  The consumption of spare parts during plant operation is a part of the annual
production costs, which is a manufacturing overhead cost.

Determination/Specification of Requirements

In order to estimate the materials and supplies to be used during the future operation of the plant,
the requirement should be identified, analyzed, and specified in feasibility study, both
quantitatively and qualitatively.

 In this regard, a number of factors such as socio-economic, financial, and technical

should be considered in specifying the requirement.
 The specification of raw materials and factory supplies, as required for the envisaged
production technologies, is the basis for the assessment and analysis of the availability of
the project inputs.
 Therefore, the determination of raw material inputs and factory supplies can be carried
out in later stages only, as they depend on the type of production technology to be used.

Project Characteristics and Material Inputs

In a given industry, the envisaged plant can be capital or labor intensive, computerized or
mechanized, complex or simple, and so on.

 The nominal and feasible plant capacity will have to be defined on the basis of varying
supply conditions.
 Any significant dependencies of the production mix and production target on raw
materials and factory supplies should be identified in view of market potential, expected
sales, transport facilities, and production capacity.
 Moreover, the feasible capacity and projected production level will depend not only on
engineering factors, but also on the number of shifts and products, the number and skills
of the labor force, marketing strategies, managerial infrastructure, and availability of
external infrastructures.
 In general, the characteristics of the project, therefore, have an important bearing on the
determination of the material inputs to be used.

Requirements of Raw Materials and Factory Supplies

The determination of requirements of raw materials and factory supplies forms the basis for the
supply program and the subsequent cost estimates.

 In this regard, the specifications of requirements should be made in view of (or include)
the following:
A. User Demand:
Users of the finished goods (or outputs of the project) have their own expectations and/or
demands that will have implications over not only on the choice of technology, machinery, and
equipment, but also on the type and quality of materials and inputs used.

B. Quantity Required:

The quantities required can be expressed in terms of units produced (i.e. items, tones, cubic
meters); section of the production process (for auxiliary materials, utilities, spare parts); machine
or labor hours (for factory supplies, spare parts); and number of employees (for medicine, social
costs, etc).

C. Qualitative Properties:

These include

 Physical properties (size, dimension, form, state, etc.);

 Mechanical properties(formability, elasticity, fatigue, and hardness);
 Chemical properties(form, composition policy, oxidizing, etc); and
 Electrical and Magnetic properties (for instance, magnetization resistance).

Availability and Supply

A number of projects are conceived either to exploit available raw materials or to utilize basic
materials that become available from other production process.

 A feasibility study should, therefore, show how the materials and inputs required will be
provided.
 General availability and data about materials, potential users, and supply sources &
supply programs are aspects that should be analyzed and described.
 At the initial stage of the study, the quantity of basic material inputs that may be required
should be assessed principally for determining availability, sources, and long-term needs.
 Final input requirement will be determined only after the plant capacity, technology, and
equipment to be used are defined.

If a basic input is available within country, its location and the area of supplies should be
determined.

 The issue of transportability and transport costs should be analyzed.

 The distance covered for transporting basic material inputs and the available & potential
means of transport should be defined together with possible bottlenecks.

When the basic material is imported, as a whole or in part,

 The implications of such imports, the sources, and the alternatives should be fully
assessed as well as determined.
  Along with this, the uncertainty that may relate to imported inputs should be stated as
well as the possibilities and implications of domestic production of a basic material that is
being imported should be analyzed.
 Input alternatives should be identified, as different varieties of raw materials can be used
for the production of the same output.
 In other words, assessment of opportunities for substitutions (or substitutability
analysis) should be made.

Supply Marketing and Supply Program

An enterprise acts as a buyer on supply markets when purchasing required raw materials and
factory supplies and as a seller in the markets for finished goods/services.

 Supplying marketing, therefore, is defined as the acts of an institution in the supply

market in order to acquire basic inputs through backward integration with suppliers.

Objectives of Supply Marketing

The basic objectives of supply marketing are cost minimization, risk minimization (by
identifying reliable suppliers), and creating better relationships with suppliers.

1. Cost Minimization:
 Input costs can be reduced by selecting appropriate suppliers and by choosing a
proper volume and frequency of orders.
 Economic Order Quantity/Size
2. Risk Minimization and Reliability of Suppliers:
 Reliability with regard to quantity, quality, deadlines (schedule), and prices is
significant for the entire manufacturing process.
 Late deliveries, lack of quality, or poor maintenance services negatively influence
the projects activities.
3. Cultivating Relations with Suppliers:
 Purchases should focus not only on acceptable prices, but also on establishing
smooth, productive, and long-term relations with the suppliers.
 Purchasing prices and conditions largely depend on the bargaining power of the
project and its management.
 Building up maximum bargaining power is needed.
 It is essential to identify possible supply alternatives (and/or suppliers) and the
quantities to be purchased from each should be determined in the study.

Supply Program

A supply program is an outline that shows how supplies of materials and inputs will be secured,
along with evidence presented to justify the assumptions and suggestions.
  The subsequent cost estimates, in this regard, should be based on the supply program
presented.
 A supply program should deal with:
o Identification of supplying sources and suppliers,
o Agreement and regulations,
o Quantities and qualities,
o Consignments,
o Means of transport,
o Storage, and
o Risk assessment

While identifying suppliers, considerations should be made with regard to

 Geographic location,
 Ownership,
 Main activities,
 Financial strength and profitability,
 Production capacity, and
 Business experience with the product.

The types of agreement, such as long-term contracts and license agreements, should be
presented.

 Letters of intent regarding supply contract & obligation and agreements such as period of
validity, payment terms, currency conditions, and guarantees should be outlined.

Cost of Raw Materials and Supplies

Unit Costs:

 Not only the availability but also the unit costs of basic materials and factory supplies
have to be analyzed in detail, as this is a critical factor for determining project economies.
 In the case of domestic materials, current prices have to be viewed in the context of past
trends and future projection of the elasticity of supply.
 The costs of alternative means of transport should be considered as well.

For imported material inputs, the following costs should be considered

 C.I.F prices (i.e. the sum of costs, insurances, and freight charges) should invariably be
adopted
 Clearing charges including loading & unloading charges and port charges,
 Tariffs and local insurance, and
 Cost of internal transport to the plant.
The prices of imported inputs generally fluctuate and depend on international market situations.

Annual Costs:

 Estimates of annual costs for materials and supplies are to be made.

 The price basis for the estimates, (price level, quotations from suppliers, world market
prices, comparisons with similar inputs in other projects, etc.), should be stated in order
to enable the reader to check their reliability.
 The price mechanism should be explored.
o In this regard, some prices may be fixed or may be related to an international
index for a certain period.
o Others, however, may be subject to a predetermined rate of escalation or
renegotiated every year.

The feasibility study should also

 Determine key factors affecting prices,

 State whether a monopolistic or oligopolistic market situation exist,
 Identify possibilities for obtaining preferential prices, and
 Specify government or other administrative price controls, if they exist.
 Cost estimates are to be divided into foreign and local currency components as per the
UNIDO procedures.
 The currencies most likely to be used and the exchange rates applied for the cost estimates
should be identified, as this will help in making sensitivity analysis.
 It must be made clear, in this regard, that whether the cost estimates refer to
 A hypothetical level of production at full capacity utilization during the operating phase
or
 The first year (or some other year) of operation according to the time schedule for project
implementation.
 In the latter case, possible price escalation should be considered and related to a realistic
judgment of feasible capacity utilization.
 Note that total fixed costs remain the same but unit fixed costs vary with changes in the level
of production.
 Some costs vary with the production level of the plant in question, while others are more or
less fixed.
 For example, the normal tariff for electricity is divided into an annual fixed fee and a
consumption fee per kilowatt/ hour.
 Costs should be divided into variable and fixed costs due to variations in the level of
production.
 In this regard, costs should be related to certain production level and, thus, cost
estimates for materials and inputs can be expressed either as the cost per unit
produced or in terms of a certain production level – (full capacity utilization).
 At whatever level, it is possible to carry out sensitivity analysis for different levels of
production and capacity utilization at the stage of financial appraisal.

In estimating costs, the following information should be presented:

 Type of material and input,

 Unit of measurement (barrels, cubic meters, etc),
 Number of input units consumed (used) per unit of output produced,
 Estimated cost per input unit,
 Estimated cost per unit of output produced,
 Estimated cost per unit produced divided into direct, (which are mostly variable costs),
and indirect, (predominately fixed and comprised of overheads), cost components.
 Direct cost per unit of output produced should be divided into foreign and local currency
components (expressed in one currency), often in local currency.
 Indirect costs per unit of output produced divided into foreign and local currency
components.

In order to arrive at the total operating cost by product as well as the total costs per year, the total
number of units to be produced should be multiplied by the estimated cost per unit.

 Costs are projected over the production period.

Overhead Costs of Supplies:

When estimating material and input requirements by project components, the project planner has
to plan not only at the level of production cost centers, but also at the level of service,
administration and finance, and sales cost centers. Thus, estimation of supplies and their costs
should be made.

4.5 Location and Site Selection and Environmental Impact Assessment

I. General

In the course of project preparation, following the assessment of demand and the definition of
basic project strategies with regard to sales & production program, plant capacity & input
requirements, in general, the concern of the analyst shifts towards the aspects of project location,
site, and environmental impacts.

In a feasibility study, to this effect, we need to consider the aspects of location, site, and
environmental impacts and be able to determine the location and site suitable for an industrial
project.

 The terms location and site are often used synonymously (and/or interchangeably) though
they must be distinguished to properly address the relevant issues requiring assessment.
  In this regard, location refers to a fairly broad area like a city, an industrial zone, or a
coastal area; whereas site refers to a specific place (or piece of land) where the project
would be set up.
II. Objective of Location and Site studies

The basic objective of location & site studies is to identify a location and site suitable to the
industrial project.

Dimensions for Location and Site Selection

Traditional Dimension:

 Accessibility to market
 Accessibility to raw material sources
 Availability of infrastructure services (like transportation) and Utilities

New Dimensions Added (Public Policies):

 Level of urbanization and implications to bring balanced development among localities;

 Regionalization and decentralization policy;
 Investment policy and incentives;
 Population concentration and impacts on migration;
 Environmental impacts and pollutions due to over concentration; etc
4.5.1 Location and Site Selection Aspects

In location and site selection, the following considerations should be made:

 The choice of location should be made from a fairly wide geographic area, within which
several alternative sites can be considered.
 An appropriate location could extend over a considerable area such as along a riverbank, or
15-kilometer radius around an urban area in a particular geographic district.
 Within a recommended location, one or more specific project sites should be identified and
assessed in detail.
 For each project alternative, the environmental impact of erecting and operating the industrial
plant should be assessed.

The main criteria or key requirements for selecting proper location and site should always be
identified at early stage of the study.

 Qualitative analysis of these key requirements would then allow the assessment of a
number of potential locations and sites, and the rejection of those not fulfilling the key
requirements.
  The remaining alternatives are then subject to a more in-depth qualitative and quantitative
analysis of technical, financial, social, environmental, and economic aspects of location
and site selection.

The most important or critical requirements for selection of a given location include, among
others:

1. The Natural Environment [climatic conditions and ecological requirements];

2. Environmental Impacts;
3. Socio-Economic policies [role of public policies and fiscal and legal aspects];
4. Infrastructural Conditions [infrastructure dependence, factory supplies, human resources,
infrastructural services, and effluent and waste disposal facilities]; and
5. Final choice of location [resource or market orientation]

In site selection, the requirements and relevant factors are:

1. Site requirements [cost of land, construction requirements, local condition, infrastructure,

effluent and waste disposal, human resources, etc]
2. Final site selection and Cost estimates
4.5.2 Location Analysis

Location analysis has to identify locations suitable for the industrial project under consideration.

 A project can potentially be located in a number of alternative regions, and the choice of
location should be made from a fairly wide geographical area within which several
alternative sites may have to be considered.
 The study should also indicate on what grounds alternative locations have been identified
and give reasons for leaving out other locations that were suitable but not selected.
 The impacts and requirements to be identified may be:
o Natural environment, geophysical conditions, and project’s requirements
o Ecological impact of the project and results of environmental impact assessment
o Socio-economic policies, incentives, and restriction, and government plans and
polices
o Infrastructure services, conditions, and requirements, such as the existing
industrial infrastructure, the economic and social infrastructure, the institutional
framework, urbanization, and literacy, etc.

The choice of a suitable location requires assessment of, among others, the following aspects:

 Market and marketing aspects

 The availability of critical project inputs, such as:
 Raw materials
 Factory supplies
  Technical requirements of the projects
 The type of industry
 Technology and processes
 Characteristics of products or outputs
 Size of the plant
 Organizational requirements and management structure

As key aspects vary from industry to industry, the project analysts will have to use their
professional skills to identify those key criteria, which are relevant for each specific project.

 The identification of key requirements helps to reduce the number of potential locations
and sites at an early stage.

The Natural Environment

A. Climatic Conditions

Climate can be an important factor for choice of location.

 Apart from the direct impact on project costs of such factors as dehumidification, air
conditioning, refrigeration, or special drainage, the environmental effects may be
significant.
 Thus, information should be collected on temperature, rainfall, flooding, dust, fume
(smoke), and other factors for different locations.

Climatic conditions are relevant in different ways depending on the type of project.

In this regard,

 Agro-industrial projects may experience fluctuating quantities and qualities of raw

material inputs owing to extreme weather conditions;
 Means of transport may become less reliable in the case of heavy snow and/or heavy
rainfall causing interruption of supplies of perishable products to distant markets; and
 Extreme climatic conditions may cause inefficiencies and lack of skilled laborers (due to
high employee turnover).
B. Ecological Requirements

Some projects may not have (or may not entail) negative environmental impacts by themselves,
but would rather be sensitive to such effects.

 Agro-industrial projects clearly depend on the use of raw materials that have not been
degraded by contaminated water and soil.
 A project using huge volume of process water with strict quality requirements will suffer
if nearby industries use the river as a recipient of wastewater.
  Management and labor may be reluctant to work in a factory located in a polluted area
with health risks and high potentials for losses of future earnings.

Environmental Impact Assessment

The feasibility study should include a thorough and realistic analysis of the environmental
impact of the industrial project.

 This impact is often of crucial importance for the socio-economic, financial, and
technical study of the project.

Objectives of Environmental Impact Assessment

General:

 To ensure the project under consideration is environmentally sound to pollution, flora,

and fauna

Specific:

 To examine environmental consequences of the project and its alternatives for the
affected natural habitat
 To incorporate in the project design any existing regulatory requirements, emission
standards, and guide lines
 To identify measures for mitigating adverse environmental impacts that land for
 To enhance the likely beneficial impacts of the project
 To determine environmental merits of alternative projects

The analysis is designed to develop an understanding of the consequences of a newly planned or

existing project.

 Environmental benefits or costs of a project are usually externalities or side effects that
affect the society as a whole or in part.
 In some countries, the analysis of environmental impact is already required by law and,
thus, should be submitted to the authorities for examination and clearance.
 Environmental impact assessment should be made in the interest of the investor,
particularly when the intention is to apply for international financing, since many of the
international development finance institutions already require assessment of the
environmental impact of industrial investment projects.

In principle, environmental impacts should be assessed on the basis of legal regulations and
emission standards and guidelines established in the country.

 In countries where no regulations and standards are defined, it may be advisable to

anticipate a future tightening of environmental impact control measures.
  If trends are properly considered during the project planning stage, unexpected costs for
later plant adaptations, conversions, rehabilitations, or even the shutdown of operations
may be avoided or minimized.

Socio-Economic Policies

A. The Role of Public Policies

Government regulations and restrictions may be critical for the location of a project.

 Projects with certain characteristics (particularly industries) may be allowed only in a

certain regions.
 In a number of developed and developing countries, there is a considerable pressure for
the decentralization of industries, the main objective of industrial decentralization being
to reduce the external diseconomies of urban industrial concentration.

Knowledge of public polices with regard to location aspects is necessary to enable the various
concessions and incentives that may be part of such policies to be adequately considered. Among
others,

1. Specific geographical zones often are setup in some countries and varying patterns of
financial incentives have been determined for them.
2. In some developing countries, direct subsidies are given to industries located in particular
areas or regions, for instance, in backward or marginalized areas.
3. Financial and other incentives are given for projects located in under developed regions.

Therefore, the impact of these incentives on the economies of a proposed project should be
analyzed.

 However, such incentives should not serve as the only justifications for the choice of a
location.
 Public policies may directly determine industrial locations when there is a substantial
involvement of public or institutional finance.
 The growth of public sector enterprises has been significant for industrial growth in many
developing countries, in which wider policies such as regional, industrial, and disposal
aspects tend to play a part in the location decisions.
B. The Fiscal and Legal Aspects

The fiscal and legal regulations and procedures applicable for alternative locations should be
defined.

 The various national or local authorities to be contacted in respect of power and water
supplies, building regulation, fiscal aspects, security needs, etc, should be listed.
  The corporate and individual incomes taxes, excise duties, purchase taxes, and other
national or local taxes should be ascertained for different locations, together with the
incentives and concessions available for new industries.

Infrastructural Conditions

The availability of a developed and diversified economic and social infrastructure is often of key
importance for a project.

 The feasibility study identifies such key infrastructural requirements because they are
vital to the operation of any project.
 For this purpose, it is necessary to have an understanding of the scope and socio-
economic characteristics of the project, the capacity to be installed, and the technology to
be applied.
 The size of a project could be a constraint regarding possible locations.
 Quantitative and qualitative requirements for energy, utilities, labor, land, etc, may be
met in only a few locations if the project is relatively big.
i. Technical Infrastructure

The analysis should cover not just the quantities required but also other characteristics (such as
reliability, quality, and physical aspects).

 It must distinguish between desirable and critical requirements and demands.

ii. Transport and Communications

Transport facilities (by rail, road, air, or water) may be available for the inflow of various inputs
and for the marketing of products.

 Availability and costs will have to be detailed for the total volume of inputs into the
proposed plant and the total outputs leaving the plant with comparison for alternative
locations.
 A project that is judged as critically dependent on access to certain means of transport
may have a limited number of possible locations.
 The availability of good communication facilities (telex, telephone, fax, internet, mobile
networks, etc) should also be ascertained for alternative locations.
iii. Factory Supplies
a. Water

The water supply and the water required for a project can be ascertained from the plant capacity
and technology.

 First, the availability of water and costs should be determined, including the condition of
supply price.
 Second, the quality of the water at various locations should be assessed.
 b. Electricity

The inadequate supply of electricity or its high unit cost may constitute a major constraint for a
project of particular technological process.

 Power requirement can be defined in relation to plant capacity and the supply and costs
for alternative locations should be studied.
c. Fuel

The availability and the various source of fuel should be assessed.

iv. Human Resources

The availability of managerial staff and skilled labor could be critical factor.

 When considering alternative locations, the availability of human resources, including

skilled and semi-skilled workers, should be taken into account.
v. Effluent and Waste Disposal Techniques

Waste disposal may be a critical factor, as many plants produce waste products and highly toxic
substances, or emissions that may have significant impacts on the environment.

 The disposal of the waste products and elimination of emissions can be critical factor for
the socio-economic and financial feasibility of a project.

Final Choice of Location

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.

 The optimal location is the one at which the total cost (i.e. the raw material transportation
cost plus production cost plus distribution cost of final products) is minimized.
 This generally implies that:
1. A resource-based project like a cement plant or a steel mill should be located close to the
source of basic material (limestone in the case of cement plant and iron-ore in the case of
a steel plant),
2. A project that much depends on the use of imported materials may be located near a port,
and
3. A project that manufactures a perishable product should be close to the center of
consumption or should be located at some intermediate point.

The identified alternative locations are assessed based on certain criteria and the financial
implication is considered for each.
  In this regard, if the transport costs of materials from the sources to the alternative
locations have significant impacts on the choice of location, then the possibilities for the
substitution of materials and inputs should be assessed.
 Moreover, the availability and costs of infrastructure facilities should be considered.
 A combination of these aspects enables the determination of production and marketing
costs at alternative locations.
 An allowance for socio-economic and environmental factors should be added to these
costs.

Thus, the location of best choice would be the one where the costs of products sold (production
costs and marketing costs) are the minimum.

In a nut shell, critical to location selection are the impacts on a particular project of factors such
as:

 The availability of raw materials and inputs,

 The proximity of centers of consumption, and
 The existence of basic infrastructure facilities
4.5.3 Site Selection

The study should analyze and assess alternative sites on the basis of key aspects and site-specific
requirements, and the analysis should result in a selection of a specific site.

 Once the location of a project is decided upon, a specific project site should be defined.
 This requires evaluation of the characteristics of the alternative sites identified within the
specified location, bearing in mind that it is worthwhile to consider at least two, or more,
alternative sites within a given location.

In this regard, for the sites identified within the selected area, various requirements and
conditions need to be assessed, inter alia, the following:

 Ecological conditions on site (soil, site hazards, climate)

 Environmental impacts (restrictions and standards)
 Socio-economic conditions (restrictions, incentives, requirements)
 Local infrastructure at the alternative sites (existing industrial infrastructure, economic
and social infrastructure, availability of critical project inputs such as labors and factory
supplies, etc)
 Strategic considerations (future expansion, supply, and marketing policies)
 Cost of land
 Site preparation and development requirements and costs

The selection of plant location and site does not have to be undertaken in two stages; rather it
should be made in an integrated manner.
Site Selection Main Considerations: The following factors determine the selection of the final
site:

1. Cost of land
2. Site preparation cost
3. Cost of utility lines extension
4. Environmental considerations
5. Size and shape of the available area
6. Suitability for future expansion
7. Nature of goods (products) produced (perishables or not)
8. Proximity of centers of consumption (market orientation)
9. Infrastructure facilities (transport network, houses, power supply, etc)
10. Availability of labor in the area (skilled and unskilled)
11. Socio-economic factors:
 Waste disposal
 Environmental factors
 Taxes and duties
 Public policies (fiscal and legal regulations)
12. Distance to seaport (for import and export)
4.5.4 Cost Estimate

The cost estimates at the site, among others, include the following:

 Acquisition of land,
 Taxes,
 Legal expenses,
 Site preparation and development, and so on

In this regard, site preparation and development by itself covers the following:

 Grading and leveling of the site;

 Demolishing and removal of existing structures;
 Relocation of existing pipelines, cables, roads, power lines, etc;
 Reclamation of swamps and draining and removal of standing water;
 Connections for utilities from the site to the public network, for instance, electric power
(high tension and low tension), water for drinking and other purposes, communications
(telephone, telex, internet, etc), roads, railway sidings; and
 Other site preparation and development work.
4.6 Technology And Engineering Study
4.6.1 Engineering Study

Objectives of Engineering Study:

 To design the functional and physical layouts in order to produce the defined outputs
  To determine the corresponding investment expenditures
 To determine the costs arising during the operational phase
 To accomplish necessary work on the plant site
 To provide necessary infrastructure investments

It is the task of engineering to

 Design the functional and physical layouts for the industrial plant that are necessary to
produce the defined output,
 Determine the corresponding investment expenditures, as well as
 Determine the costs arising during the operational phase.

The scope of engineering also includes the plant site and all activities required to deliver both
inputs and outputs and to provide the necessary infrastructure investments.

4.6.2 Technology Study

An integral part of engineering at the feasibility study stage is the study of technology, which
involves

 Selection of an appropriate technology, and

 Planning of the acquisition and absorption of technology& the corresponding know-how.

Objectives of Technology Study:

 To select the technological alternative most suitable to the

 Socio-economic conditions in the context,
 Investment strategy chosen, and
 Ecological conditions (natural environment)
 To acquire and absorb the necessary technology and the corresponding know-how

While the choice of technology defines the production processes to be utilized, the effective
management of technology transfer requires that the technology and know-how are acquired on
suitable terms and conditions, and the necessary skills are available or developed.

 The required machinery and equipment must be determined in relation to the technology
to be utilized, the local condition, and human capabilities.
 Skill development needs to be planned through training program.
 The analysis must include a survey of spare parts too.

After the determination of the marketing strategy, the production program, and capacity, a
preliminary project layout has to be prepared defining the physical features of the plant such as:

 Infrastructure
 Factory & other buildings and civil works
  Their interrelationship with utilities, material flows, and machinery installations
 Other aspects of plant construction and operations

It is necessary to identify the necessary technologies and the implications in terms of costs, use
of local raw materials, environmental impacts, and other factors.

4.6.3 Technology Choice

An important factor in determining the production program and plant capacity is the technology
and the people know-how to be utilized in the project. Therefore, the selection of appropriate
technology and know-how is a critical element in any feasibility study.

Definition

The word “technology” or “manufacturing technique” may be defined as the sum of patented and
unpatented knowledge, know-how, experience, and skills needed for the transformation of raw
materials into outputs.

In the course of feasibility study (or project preparation), thus, the project planner should define
and/or identify the technology required for a particular project through evaluating existing
alternatives and selecting the most appropriate one in the continuum.

The selection of technology should be based on a detailed consideration and evaluation of

technological alternatives in order to select the most suitable alternative in relation to

 The project or investment strategy chosen,

 The characteristics of the socio-economic environment, and
 Ecological conditions.

The choice of technology is influenced by a variety of considerations such as:

 Market and marketing concepts,
 Plant capacity,
 Characteristics of the principal inputs,
 Labor or skill (requirements, conditions, etc),
 Investment outlays and production costs,
 Environmental impacts,
 Use by other units,
 Product mix,
 Age of technology to be acquired (obsolescence issues),
 Recent (latest) developments & breakthroughs,
 Ease of absorption,
 Government policies, etc.
Appropriate technology choice should take the aforementioned variables in to account and
should directly be related

to the conditions of applications in particular situation.

10.3.2. Appropriateness of Technology

Appropriate technology refers to the methods of production,which are suitable to heal economic,
social, and cultural

conditions.

9 In this regard, the appropriateness of technology should be evaluated in terms of broad range
of variables,

the following being the major ones:

• Whether the technology utilizes local raw materials;

• Whether the technology utilizes local man power;

• Whether the goods and services produced cater the basic needs;