| Small enterprise development: in-service mining manual |
|Session 5: Importance of feasibility/viability analysis|
Every project has uncertainties. The nature of the uncertainties can be expressed in the form of assumptions which must be valid but which cannot be directly controlled. Assumptions can be the most critical factors in a development project. Many projects fail because planners make unrealistic assumptions or forget to define and examine the implicit assumptions they are making.
It is impossible for a project manager to control all the factors which can affect a project. There are always social, political, technical, economic, physical, and other factors beyond the project manager's control that are necessary for successful achievement of project objectives.
To have confidence in the design of a project, one must define, at each level, all the conditions necessary to reach the next level of objectives. These conditions include hypotheses (predictions), which are internal to the project, and assumptions (conditions), which are external to the project. After identifying the assumptions affecting the project, one can deal with them in a way that increases the probability of success.
Development projects involve important objectives and scarce resources, so we must examine whether our predictions in the project design are valid. Before we begin the project, we want to be confident that we can achieve our objectives. We must, therefore, carefully examine what we are assuming about factors outside our control that could be detrimental to achieving our objectives. We identify those factors in the "assumption column" of the Project Design Chart at the same level as the objective they influence.
After identifying as many critical assumptions as possible with the information at hand, they can be looked at more closely and defined more specifically.
In a rice production project, for example, "adequate rainfall" is obviously necessary. Project planners and managers need more guidance, however, if they are to assess the validity of this assumption. How much rainfall is adequate? We must know how much rain is required and when it should fall. If we find that the rains must begin in May and last through October, with a monthly average of 12 inches, the next step is to find out if it is reasonable to expect this level and pattern of rainfall. If review of the climate records in the region shows that for eight of the last twenty years rainfall was less than 8 inches for the months of June and July, our assumption of adequate rainfall would not be valid.
If our assumptions are likely to be invalid, we have several options to consider. First, we could continue with the project "as is" and accept the lower probability of success. Second, we could examine if there is some way to modify the project to overcome the weak assumption. In the rice production example, perhaps an irrigation system could be included in this (or another) project to bring a sufficient supply of water to the crops. Finally, if there are insufficient resources to develop an irrigation system, the project could be abandoned because it is unworkable - thus averting project failure before large amounts of time and resources are expended.
A MANAGEMENT APPROACH TO FEASIBILITY STUDY
In recent years, project feasibility study has become an increasingly detailed and technical set of procedures practiced by highly trained economists and engineers. And yet very often these procedures seem irrelevant to the practical people designing and managing projects. Why? Perhaps it is because these procedures ignore some of the most important questions.
What do practical project designers need to know in order to have confidence in potential projects? Essentially they need to know (1) if the proposed project will really achieve its objectives; (2) how they can improve the likelihood and level of its impact; (3) whether there is a less expensive way to achieve the same results; and (4) whether, all things considered, the benefits justify the costs.
I. WILL THE PROJECT SUCCEED? HOW C AN IT BE IMPROVED?
The most important question concerns the plausibility of the suggested project design. Managerially useful feasibility studies begin with this question. And the most effective of these studies treat project plausibility not merely as a question but as a challenge. In other words, such studies don't simply ask "Will it succeed?", they ask "How can we make it succeed?" They take an active, not a passive, role in project design.
Feasibility study, by itself, cannot increase a project's likelihood of success. What it can do is substitute risk (known probability of failure) for uncertainty (lack of information) and suggest practical measures for reducing the risk by modifications to the project design. In other words, it can provide us with information on how likely our project is to succeed and how we can increase that likelihood. As managers, we must learn to demand nothing less of feasibility analysts.
Projects are theories about the world. If we do certain things, we expect certain results will occur. And if these results do occur, we believe they will have certain impacts.
A. ANALYSIS OF ASSUMPTIONS
Potential feasibility questions exist wherever there are sources of uncertainty - i. e., wherever we are unsure of "facts" or "effects". These "facts" are the assumptions and the "effects" are the hypotheses.
How do we go about analyzing assumptions?
Most importantly, make sure all of the important assumptions are identified. To do this, ask yourself, skeptics, and as many others as possible, to describe the factors which could prevent the project from reaching its objectives. In essence, the question is "What, beyond my direct control, could cause this project to fail?" The answers to that question are the assumptions.
It may be helpful to group the assumptions by type:
- market factors
- cost factors
- financial factors
- political factors
- technical factors
- cultural and social factors
- geological/climatic factors
- managerial factors
To gain a clearer idea of what these factors include, consider how some of the following questions might come out of an investigation into these factors.
Market Factors - Do people have disposable income available at the time when the product is for sale? Is there a MARKET that can be reached and served profitably? What is the likely price (considering seasonal swings) ? What are the quality and quantity dimensions?
Cost Factors - What are all the major initial costs involved in production? What are the important recurring costs? How much is the labor cost likely to be?
Financial Factors - Are there sources of affordable credit in the community? Is there a plan for control of group money? Is the cash flow sufficient?
Political Factors - Does the mayor support the general idea? What are the licenses and inspections needed? Is the activity legal?
Technical Factors - Is the technology easy to maintain? Are spare parts available? Is the scale appropriate? Is the level of risk appropriate? Are the inputs readily available?
Cultural and Social Factors - Does it help one group by hurting another? Does the project "fit" the culture? Is the level of risk acceptable?
Climatic Factors - Does the project hurt the environment? Does it use already dwindling natural resources?
Managerial Factors - What are the training requirements? Is there a sufficient, available labor force?
The type of assumptions chosen for analysis will determine the type of feasibility study needed to investigate them.
Then, identify the assumptions most appropriate for analysis. Out of the long list of assumptions, how do you choose the correct ones to study? We suggest a simple two criteria basis for selection-importance and uncertainty.
To begin, ask of each assumption whether it seems truly essential for achieving project success. If its influence seems more or less incidental, forget about it. If the assumption is judged to have high potential influence, then ask yourself how uncertain project designers are about the likely performance of that assumption. Only where assumptions are important and insufficiently understood is detailed investigation worthwhile.
Arrange data collection efforts to provide the information you need. The data collected on assumptions should reduce the uncertainty of project designers about the following:
- whether key assumptions are likely to hold true or not;
- what the effects on project success would be if any of the key assumptions did not hold true;
- what means are available to managers to influence or avoid dangerous assumptions.
If assumptions are unimportant (i.e., low impact) or very probable, they should not affect project design or selection. When assumptions have high impact and low probability, we have a danger signal. If we can redesign the project to affect the assumption, we may wish to go ahead. Otherwise, we would be well advised to suggest that the project be abandoned in favor of something more promising.