Feasibility and Evaluation of Investment Projects

The design of a project should be developed in depth through a series of studies that support the decision on whether or not to carry it out. A market study is advisable, examining demand and its forecast, current and future supply, and how both interact in the short, medium and long term. It also takes into account technical studies, legal and institutional studies, environmental impact analysis and the financial structure, and from all of this the business model is built. At this stage reliable information is essential, along with the participation of specialists in each area.

Market Study

Supply and demand analysis is fundamental to defining the project to be carried out, so this stage calls for a deeper analysis. The aim is to have robust information gathered directly through field surveys, considering:

Supply study, considering:

1. Geographic location or area of influence. This means defining precisely the geographic area in which the good or service is provided.
2. Design operating capacity. This shows the maximum capacity to provide the good or service under design and current conditions. It is essential when compared with demand, since it allows a proper sizing of any potential shortfall in the provision of the good or service.
3. Historical trend in the quantity of service produced.
4. Quality of the service produced.
5. Infrastructure components: identifying and describing the characteristics and condition of the different components that must operate for the good or service to be provided.
6. Production processes: identifying the problems that arise, and their causes, at each stage of production and/or provision of the good or service.

Physical characteristics of the infrastructure: documenting the features of the physical space used to provide the good or service, such as:

• Layout of its areas.
• Dimensions.
• Current service conditions.
• Design useful life of the infrastructure.
• Remaining useful life.
• Other relevant features.

Market studies must explain supply and demand at three points in time:

a) Their historical trend.
b) Their current situation.
c) Their future outlook.

For an investment project, however, the most relevant element is the estimate of future values.

Demand study

The demand study estimates, using official data and preferably information gathered in the field through a census or sample, the quantity of goods or services that consumers (target population / effective demand) have demanded, both historically and currently, in order to project future behavior and show whether launching a project is justified.

Market analysis

At this level of analysis, the information gathered yields a supply and demand matrix based on real data that clearly defines the size of the problem: whether there is a shortfall or whether costs are too high.

With the information described above, the final project is defined: its size, location, technology and the timing of the investment.

The size of the project depends on the gap between supply and demand, total investment and financing, the technology to be implemented, the availability of inputs, seasonality or temporary fluctuations, regulations governing the good or service, institutional capacity and future expectations, among other factors.

Location must take into account the concentration of the population (the beneficiaries), the location of raw materials and inputs, roads and means of transport, infrastructure and basic services, topography and soils, climate, land use plans and land prices, among other factors.

Given the importance of the technology used to carry out the investment and operation, elements such as financing, location, project size, the characteristics of the good or service, inputs, maintenance guarantees, obsolescence and environmental impact must be kept in mind.

Technical Studies

The studies required to prepare a project, and their cost, can be decisive in whether the project moves forward. Given the complexity of these projects, the studies carried out, depending on the type of project and the technology involved, become the basis for the detailed engineering.

Technical studies must ensure that the technology chosen to address the matter of public interest is the most efficient and effective in relation to the stated objectives. Reaching this technical solution requires an analysis of alternatives, investment and operating costs, production capacity, complementary projects and additional requirements, among other factors.

Depending on the type of project, technical studies may include specific studies of:

• Location and geographic setting (geological, geophysical and geotechnical).
• Project components.
• Technology to be used and processes to be developed.
• Engineering studies (facilities, machinery and equipment required).
• Soil mechanics studies.
• Land and water use studies.
• Land tenure studies.
• Electromechanical studies.
• Site selection studies.
• Hydraulic and stormwater studies.
• Telecommunications study.
• Environmental impact studies
• Materials studies.
• Social impact studies.
• Structural assessments.

Technical studies must include elements that address the potential risks of the project, both those related to the technology itself and those related to climate or disaster events.

With the information analyzed and the studies prepared, an executive report on the technical studies can be compiled.

Legal feasibility studies

In this phase we review the legal viability of the project based on the instruments reviewed in Phase 1, identifying the federal, state and municipal provisions that apply to its development in order to conclude whether or not the project is consistent with them. Conclusions should address the following elements:

• Operation and control of the service: technical standards governing the conditions under which the service is to be provided.
• Entities with authority.
• Land use analysis.
• Analysis of the property regime.
• Analysis of the affected properties.
• Land acquisition strategy.
• Clearance of encumbrances and rights of way.
• Permits and licenses.
• Legal framework of the unit that will manage the project.
• Design of the legal framework on which the operation of the system will be based.
• Contract templates.

Environmental impact study

In this phase we analyze the environmental impact of the project, the preservation and conservation of ecological balance and, where applicable, the effects on natural areas or protected zones, human settlements and urban development, as well as the project's viability in these respects.

Business model

The business model is tied to the institutional feasibility of the project. It must clearly set out the organizational and financial operating schemes the project needs to operate efficiently. The business model is decisive in meeting the stated objectives of reducing the shortfall or the high costs of the current situation, as well as the repayment and financial management objectives that support the project's long term sustainability.

Determining the financial feasibility of the project requires a defined business model under which it will operate.

Financial study

Financial studies are fundamental and closely linked to the selected technological alternative. That alternative determines the costs of execution and operation, and the project may generate some repayment from users. Depending on its size, the project may need financing mechanisms other than the public budget, such as debt or public-private partnership structures. Accordingly, a set of studies may be required to ensure the most efficient use of public resources.

Depending on the business model defined, certain financial studies must be carried out, some of which are common to any of the schemes defined.

Some studies or elements to consider when analyzing the financial feasibility of the project are:

• Financial model and structuring of the project.
• Rate study.
• Analysis and estimate of the overall project budget: construction and capital investment, supervision, and other items.
• Analysis of the impact on public finances.
• Estimate of unit costs for construction and maintenance.
• Upkeep, operation and maintenance.
• Costs of affected properties, right of way clearance, environmental mitigation and similar items.
• Sources of financing: federal, state and municipal support, public-private partnerships, domestic or foreign loans, and dedicated funds.
• Project repayment mechanisms: rates, subsidies, third party revenue and other sources.
• Revenue from operating the service.
• Risk analysis: financial, credit, exchange rate and other risks.
• Public-private comparator studies.
• Social feasibility and/or social impact study.

Investment projects require a detailed analysis in order to form a judgment on the suitability and feasibility of carrying out the project from different perspectives.

Contact the Tutor Negotia team for more information.