Project Feasibility Studies – Technical, Economic & Financial Feasibility

A Feasibility Study is a comprehensive analysis to determine whether a project is viable and worth pursuing. It answers the critical question: "Should we do this project?"

Three Pillars of Feasibility

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All three must be positive for the project to proceed.

1. Technical Feasibility

Objective

Determine if the project can be physically built and technically operated.

Key Questions

1. Is the technology proven and reliable?
2. Are the site conditions suitable?
3. Can we get the required equipment and materials?
4. Do we have access to skilled manpower?
5. Are there any insurmountable technical challenges?

Components

A. Site Assessment

For Highway Projects:

• Topography (flat, hilly, mountainous)
• Soil investigation (bearing capacity)
• Water table level
• Existing infrastructure (utilities, railways)
• Environmental sensitivities (forests, wildlife sanctuaries)

For Power Projects:

• Solar: Solar irradiation levels (kWh/m²/day)
• Hydro: Water availability, dam site suitability
• Thermal: Water availability for cooling, fuel logistics
• Wind: Wind speed data (2 years minimum)

B. Technology Selection

Criteria:

• Proven track record (at least 3-5 similar projects globally)
• Efficiency and reliability
• Availability of spare parts
• Local service support
• Cost competitiveness

Example - Solar Plant:

• Module technology: Monocrystalline vs Polycrystalline vs Thin-film
• Tracking: Fixed tilt vs Single-axis vs Dual-axis
• Inverters: String vs Central

C. Input-Output Analysis

Inputs Required:

• Land (acres)
• Water (kiloliters/day)
• Power connection (MW)
• Raw materials (tons/day)

Outputs Expected:

• Production capacity (MW, km, passengers/day)
• Quality specifications
• By-products/waste

D. Design & Engineering

• Preliminary designs by expert consultants
• Compliance with codes and standards (IS, IRC, IEEE, etc.)
• Safety considerations
• Disaster resilience (earthquake, flood)

E. Implementation Plan

• Estimated construction duration
• Critical path activities
• Resource requirements (manpower, equipment)
• Logistics and mobilization

Deliverable

Technical Feasibility Report covering:

• Site details
• Technology description
• Design drawings (preliminary)
• Construction methodology
• O&M plan
• Risk identification

Prepared by: Independent Engineering Consultant

2. Economic Feasibility

Objective

Determine if the project creates net benefit to society - not just the sponsors.

Key Difference: Economic vs Financial

Cost-Benefit Analysis (CBA)

Steps

1. Identify all costs:

   • Capital costs
   • Operating costs
   • Maintenance costs
   • Environmental costs

2. Identify all benefits:

   • Time savings (for roads)
   • Accident reduction
   • Fuel savings
   • Reduced pollution
   • Employment generation
   • Improved connectivity

3. Monetize costs and benefits

4. Calculate NPV:

   Economic NPV = PV of Benefits - PV of Costs
   

5. Calculate BCR (Benefit-Cost Ratio):

   BCR = PV of Benefits / PV of Costs
   

Decision Rule:

• BCR > 1.0: Economically viable
• BCR < 1.0: Not economically viable

Example - Highway Project

Costs:

• Construction: ₹5,000 crore
• Annual O&M: ₹50 crore for 30 years

Benefits (annual):

• Time savings for users: ₹200 crore/year
• Fuel savings: ₹80 crore/year
• Accident cost reduction: ₹20 crore/year
• Total annual benefit: ₹300 crore

Calculation (at 10% discount rate):

PV of Costs = 5,000 + (50 × PVAF at 10%, 30 years)
            = 5,000 + (50 × 9.427) = 5,471 crore

PV of Benefits = 300 × 9.427 = 2,828 crore

Economic NPV = 2,828 - 5,471 = -2,643 crore ❌

BCR = 2,828 / 5,471 = 0.52 ❌

Result: NOT economically viable (BCR < 1.0)

However: Government may still build it for strategic reasons (connectivity to remote areas, defense, equity).

Multi-Criteria Analysis

For projects with intangible benefits, use scoring:

Decision: Accept if total score > threshold (e.g., 6.0)

3. Financial Feasibility

Objective

Determine if the project is financially viable and bankable from sponsor and lender perspectives.

Key Questions

1. Can the project generate sufficient cash flows to service debt?
2. What return will sponsors earn on equity?
3. Is the project bankable (lenders willing to finance)?
4. What are the key risks and sensitivities?

Components

A. Financial Model

A detailed Excel model covering 20-25 years with:

Inputs:

• Capital cost
• Debt-equity ratio
• Interest rate
• Debt tenure
• Revenue assumptions (traffic, tariff)
• Operating cost assumptions
• Tax rates

Outputs:

• Annual cash flows
• Project IRR (Unlever ed)
• Equity IRR (Levered)
• DSCR (year-wise)
• Loan Life Coverage Ratio (LLCR)
• Payback period

B. Base Case Scenario

Typical Benchmarks:

If base case meets these, proceed to sensitivity analysis.

C. Sensitivity Analysis

Test impact of changes in key variables:

Variables to Test:

1. Traffic/Demand: ±10%, ±20%
2. Capital Cost: +10%, +20%
3. Operating Cost: ±10%
4. Tariff: ±5%, ±10%
5. Debt Cost: ±100 bps, ±200 bps
6. Construction Delay: +6 months, +12 months

Example Result:

Analysis:

• Project is viable in base and pessimistic cases
• Not bankable in stress case (DSCR < 1.0)
• Lenders may require additional risk mitigation (e.g., partial government guarantee)

D. Scenario Analysis

Create 3-5 comprehensive scenarios:

1. Best Case: All favorable assumptions
2. Base Case: Most likely assumptions
3. Downside Case: Moderately unfavorable
4. Stress Case: Severely unfavorable

E. Sources and Uses of Funds

Uses (Where money goes):

• Land acquisition: ₹100 crore
• Civil works: ₹500 crore
• Equipment: ₹300 crore
• Pre-operative expenses: ₹50 crore
• Interest during construction: ₹30 crore
• Contingency: ₹20 crore
• Total: ₹1,000 crore

Sources (Where money comes from):

• Equity: ₹300 crore (30%)
• Senior Debt: ₹600 crore (60%)
• Subordinated Debt: ₹100 crore (10%)
• Total: ₹1,000 crore

Bankability Assessment

A project is bankable if:

1. ✅ Minimum DSCR > 1.20 in all realistic scenarios
2. ✅ Equity IRR > 16% (attractive to sponsors)
3. ✅ All permits and clearances obtainable
4. ✅ Proven technology
5. ✅ Strong sponsors with track record
6. ✅ Robust contracts (EPC, O&M, Off-take)
7. ✅ Adequate risk mitigation

Detailed Project Report (DPR)

The DPR is the final output of the feasibility study.

Contents

Volume 1: Executive Summary (20-30 pages)

• Project overview
• Key assumptions
• Financial highlights
• Recommendation

Volume 2: Technical Details (100-200 pages)

• Site details
• Design and drawings
• Technology description
• Implementation plan
• O&M plan

Volume 3: Financial Analysis (50-100 pages)

• Financial model
• Sources and uses
• Sensitivity analysis
• Bankability assessment

Volume 4: Appendices (100-300 pages)

• Market study
• Traffic study
• EIA report
• Legal due diligence
• Insurance plan

Total DPR: 500-1,000 pages!

DPR Approval Process

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Common Pitfalls

1. Over-optimistic traffic projections: Leading to revenue shortfalls
2. Underestimating construction costs: 15-20% cost overruns common
3. Ignoring regulatory delays: 12-24 month delays for clearances
4. Assuming zero risk: Markets change, technology fails
5. Poor market research: Demand may not materialize
6. Inadequate contingency: 5-10% contingency is a must

Summary

• Feasibility study has three components: Technical, Economic, Financial
• Technical feasibility confirms the project can be built with proven technology
• Economic feasibility uses Cost-Benefit Analysis (BCR > 1.0)
• Financial feasibility determines bankability (Equity IRR > 16%, Min DSCR > 1.2)
• Sensitivity analysis is critical - test ±20% on traffic/demand
• DPR (Detailed Project Report) is 500-1,000 pages covering all aspects
• Common pitfall: Over-optimistic assumptions leading to project failure
• Lenders appoint Independent Engineers to validate DPR

Quiz Time! 🎯

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Unit I Complete! 🎉

Next Chapter: Unit II - Commercial Risks in Project Finance! ⚠️