The document discusses various aspects of conducting feasibility studies for sound industrial development projects in underdeveloped countries. It addresses (1) identifying potential investment opportunities through studying imports, local materials, available skills etc., (2) criteria for evaluating projects based on factors like employment generation, foreign exchange benefits, and commercial viability, and (3) key considerations in technical, economic, and market feasibility studies like availability of inputs, production technology, demand forecasting and market analysis.

1. The Basis for Sound Industrial Development
Industrial Development of the underdeveloped countries has become
one of the great world crusades of our times. It is a compaign in which
the advanced countries compete with each other to meet the rising
claims of the non-industrial countries for help in becoming
industrialised. It is an effort in which the underdeveloped countries
place a major hope of finding a solution to their problems of poverty,
insecurity and overpopulation and ending their newly realised
backwardness in the modern world.
The reason for this industrialisation is not hard to discover. The
underdeveloped countries are mainly producers of raw materials and
they have observed that there is a strong and positive connection
between the wealth and standard of living of a country and the extent
of its industrialisation.
Those who jump to the conclusion thst industrialisation is the answer
to their problems are partly right and partly wrong.
The are right in the general assumption that: -
• Manufacturing usually pays better than extraction of raw materials,
• Diversified and a self sufficient economy is better than one-crop
economy,
• Industrial development can add to the levels of national income and
help overcome unemployment problem.
They are wrong in the sense that: -
• Any kind of industrialisation will help achieve their goals,
• Benefits if industrialisation flows more or less automatically from
investment in industrial projects,
• Even small country can afford to go very far in achieving self-
sufficiency.
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2. Sound motives for Industrialisation
• Increase in National Income
• Solving of Unemployment problem
• Use of little capital
• Foreign Exchange benefits
• Or even, commercial profitability.
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3. The Characteristics of Sound Projects
• They have a market , either home or abroad
• They have a prospective advantage in production costs compared to
foreign or domestic competitors
• Because of above, they have a prospect of high commercial
profitability to attract private lenders or investors.(and therefore
financing problem is solved)
Such projects are not easy to find, but they can be found in any
underdeveloped country if enough initiative is shown in seeking them,
and if people wishing to promote industrial development are not
distracted along the way by the more numerous projects of doubtful
merit.
The Identification of White-elephant Projects
White-elephant projects usually have some glamorous appeal, which
passes for real worth, thus blinding those involved as to their inherent
unsoundness. Often they are overambitious schemes which are too
grandiose for the situation, projects which are too large for the market
to they can realistically hope to serve, projects which are too fancy in
their housing, their equipment, or their organisation. Often they are too
demanding of technical and managerial skills for their operation or
maintenance, or having products too unusual for wide market appeal.
Fortunately, the seriously unsound projects are not usually disguised.
The characteristics which make them fail generally are plainly visible
even in the informative stage viz.
• Unnecessarily risky
• Weak /Unreliable financing
• Rash / Inexperienced Management
• Inadequate size
• Uncertain market
• Requiring consumers be induced to make a great change in their
buying habits or tastes
• Lack prospective cost-advantages.
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4. PROJECT DEVELOPMENT CYCLE
A. PRE-INVESTMENT PHASE
(a) Identification of Investment Opportunities
(b) Pre-feasibility study
(c) Feasibility Study
(d) Decision-making
B. IMPLEMENTATION PHASE
(a) Project Engineering
(b) Negotiations and Contracting
(c) Construction
(d) Training
(e) Plant Commissioning
C. OPERATIONAL PHASE
Performance Review
Covers the longest part of the life of the project
Provides basis for further capital budgeting decisions
Identification of Industrial Investment Opportunities
Promising industrial development projects often have to be discovered
by development agencies and then offered to businessmen who may
undertake them.
How can the problem of screening the economy for industrial
opportunities be approached?
There are several good ways of identifying new opportunities and they
can be used simultaneously since they supplement reach other as well:
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5. 1. Study Imports. Considered along with any domestic production,
imports indicate an existing market and suggest opportunities for
new projects to satisfy a proven demand.
2. Investigate Local materials. The quality or price in the region of
certain raw materials or other production elements, such as power,
may lead to opportunities to produce competitively for exports and
also for the export and domestic markets.
3. Study Available Skills. Labour and Management skills which have
already been developed in the area, such as in making handicraft
items or industrially manufactured goods, may suggest the
possibility of producing other things requiring similar know-how.
4. Make Industry Studies. Many good opportunities are to be fund in
expanding or diversifying industries already established. A thorough
analysis of existing industries may lead to identifying logical new
projects.
5. Apply Technology. Changing technology continually creates new
industrial investment opportunities, which can be identifying by
reexamining local raw materials and existing products in the light of
current scientific and technological advances.
6. Examine Interindustry Relationships. The Growth of one industry
almost always creates opportunities to establish others. The
identification of these possibilities can be done by analysing how the
inputs and outputs of industries fit together.
7. Evaluate Development Plans. Major Developmental plans create
surrounding opportunities for manufacturing goods not previously
marketable in the region. The plans should be studied to discover
how they would change the market.
8. Review Old Projects. Projects previously developed but not
implemented often become feasible when markets or related
industries have changed. It is often possible to new opportunities in
the old ideas for which the economic circumstances have improved.
9. Observe Experience Elsewhere. Familiarity with current industrial
developments in other countries or regions having somewhat similar
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6. conditions will often suggest the possibility of projects, which have
been successful elsewhere.
10.Use Industry Lists. Industry lists such as Industrial Policy
Resolutions, Industry Manuals etc. provide systematic checklists of
opportunities.
Apart from above, the potential investor must acquaint himself with the
legal and regulatory framework: -
a. Industrial Policy
b. IDRA
c. FEMA
d. EXIM Policy
e. MRTP
f. Incentives for EOUs
g. Incentives and reservations for SSIs
h. Foreign Investment Policy
i. Environment Protection and Pollution Control Laws
j. 5-year Plans
k. Guidelines and notifications of concerned ministries.
CRITERIA FOR JUDGING THE VALUE OF INDUSTRIAL PROJECTS TO
THE ECONOMY
There are two main ways to approach judging the value of Industrial
projects to the economy. The first is focus on one or more important
characteristics, such as foreign exchange benefits, or the maximum use
of Labour and minimum use of Capital. The other is to concentrate on
the over-all expected results in an attempt to find the approximate net
value of the project to the economy, all measurable factors considered.
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7. The two general criteria, commercial profitability have a great value to
the project analyst seeking to judge the overall value of the project.
1. Factor Intensity Criterion: The intensity of Factors of production
especially Labour and capital. Since the capital is a scarce resource
for underdeveloped countries, the correct criterion for allocating
investment in the words of Galenson and Leibenstein is the one
which give each worker greater productive power than any other
alternative.
2. Plant Size and Complexity Criterion: Based upon stepping stone
theory, for it stresses that non-industrial areas should progress
from small simple industrial operations to larger and more involved
operations as skills, capital and experience are acquired.
3. Foreign Exchange Benefits Criterion: The net saving or earning of the
foreign exchange by/of the project. However projects selected on the
basis of this criterion in the time of exchange crisis may prove
worthless in long run when such problems are over.
4. Commercial Profitability Criterion: The estimated commercial
profitability (PAT) usually expressed as percentage of return to the
capital employed (ROI).
5. National Economic Profitability Criterion: Project's net measurable
value/ a measure of the approximate rate of return to the national
economy on an investment in a project.
PRE-FEASIBILITY STUDY
• Compatibility with promoter
# Fits into the attributes of promoter
# Offers rapid growth and expansion opportunities
• Governmental regulations
# Consistency with government plans and policies
# Fits into national economic feasibility criterion
• Availability of inputs
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8. # Basic technical requirements are fulfilled
# Raw materials domestically available or to be imported?(+ease of
procurement)
# Power Supply, Water Supply reasonably obtainable from external
sources or captive power sources.
• Adequacy of market
# Domestic and export markets
# Competitors and their market shares
# Channels of distribution
# USPs
# Barriers
• Cost Considerations
# Economies of scale
# Industry Standards
# Cost of various elements
# Cost advantages and disadvantages
• Risk level
# Business Cycles
# Sensitivity Analysis
# Competition from substitutes and imports
# PDS
# Technological obsolescence
TECHNICAL FEASIBILITY STUDY
The technical feasibility analysis is an attempt to determine how well
the technical requirements of the industry could be met, which location
would be more advantageous, and what the size of the plant should be.
In making the technical feasibility investigation, every requirement of
the proposed project should be studied individually for every potential
location, and comparative analysis should be prepared showing the
availability, quality, and cost of each item for each place. The important
considerations in technical feasibility are right size of the plant
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9. commensurating with market and the suitability of the technology
involved. Both experimental and obsolescent technologies are to be
avoided. The hazards of both the obsolescent and the experimental
processes are particularly likely to occur in an industry in which the
technology is changing rapidly.
Areas of concern
 Materials & Inputs
• Raw Materials
• Processed materials
• Utilities
 Production technology
The choice of technology depends upon
• Plant Capacity
 Technological requirement
 Input Constraints
 Investment Cost
 Market Conditions
 Resources of the firm
 Governmental policy
• Principal Inputs
• Investment outlay and production costs
• Use by other units
• Product-mix
• Latest development
• Ease of absorption
 Plant location
• Proximity to raw materials and markets
• Availability of infrastructure
• Government policies
• Site selection
 Machinery & Equipment
• Processes
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10. • Spare parts
• Repairing facilities
 Structure & Civil works
• Site development
• Buildings and structures
• Outdoor works
 Project charts and layouts
 Work schedule
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11. ECONOMIC FEASIBILITY STUDY
The economic study should begin with a thorough analysis of the
market for the product to be made. Clearly, no project can be a success
unless there is a market for its product. However, too often industrial
projects are built when there is insufficient market for the product at
any price which will cover their production costs, and when there is a
little basis for expecting a market of adequate size to develop in near
future. There are three important questions to be answered: -
How big is the market?
How much it is likely to grow?
How much of it can the project capture?
Market & demand analysis can be broken into the following five
sections:
 Information required for market and demand analysis.
 Secondary sources of information.
 Market survey.
 Demand forecasting.
 Uncertainties in demand forecasting.
 Information required for market and demand analysis: The principal
information required for market and demand analysis are effective
demand in past & present, the breakdown of demand which
includes factors like nature of product, consumer group,
geographical division and prices. Another important issue is the
method of distribution & sales promotion in which the distribution
may vary with nature of product and the method of distribution and
sales promotion employed presently & their rationale must be
studied carefully. Other aspects include demographic & sociological
information, the government policy, Supply & competition etc.
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12.  Secondary sources of information: The information required for
demand and market analysis is usually obtained partly from
secondary sources and partly through a market survey.
Primary information refers to information, which is collected for the
first time to meet specific purpose, but secondary information in
contrast is information, which is already in existence and has been
collected on some other context.
Secondary information provides the base and starting point for
market and demand analysis.
Various general secondary sources of information can be like census
of India, economic survey, statistical yearbook, industrial potential
survey, and guidelines to industries, publications of advertising
agency and other publications.
 Market survey: Although secondary information does not provide a
comprehensive basis for demand and market analysis but it needs
to be supplemented with primary information gathered through
market survey and specific for project being appraised. The market
survey may be a census or a sample survey wherein a census survey
includes the entire population which is difficult to survey and proves
to be expensive also that is why a sample survey is observed and
relevant information is gathered. The information sought in market
survey may include factors like total demand and rate of growth of
demand, demand in different segments of the market, purchasing
plans and intentions, attitudes towards different products, socio-
economic characteristics of buyers.
Various steps in a sample survey can be: -
 Definition of target population
 Selection of sampling scheme and sample size: with techniques
like simple random sampling, cluster sampling, sequential
sampling, non-probabilistic sampling etc.
 Preparation of questionnaire.
 Recruiting &training of field investigators
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13.  Obtaining information as per the questionnaire from the sample
of respondents.
 Scrutiny of information gathered.
 Analysis & interpretation of data.
 Demand forecasting:- After gathering information from primary and
secondary sources future demand can be estimated and various
methods of demand forecasting are:
Trend projection method: where the factors, which influenced the
behavior of consumption in the past, would continue to influence
the behavior of consumption in future.
Consumption level method: wherein this method estimates
consumption level on basis of elasticity coefficients like the income
elasticity of demand and price elasticity of demand.
End use method: which is suitable for estimating the demand for
intermediate goods.
Leading indicator method: are those variables, which change ahead
of other variables i.e. The lagging variables hence, observed changes
in leading indicators may be used to predict the changes in lagging
variables.
Econometric method: is a mathematical representation of economic
relationships derived from economic theory, the main objective of
econometric analysis is to forecast the future behavior of the
economic variables.
 Uncertainties in demand forecasting: The demand forecasts are
subject to error and uncertainty, which arise from the following
sources.
 Data about past and present market in which there can be lack of
standardization regarding market features like price, cost,
income etc., the observations may not be enough to conduct
meaningful analysis and influence of abnormal factors like war or
a natural calamity.
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14.  Methods of forecasting like inability to handle unquantifiable
factors or unrealistic assumptions like uncertainty in
assumptions underlying the chosen method tend to be
unrealistic.
 Environmental changes:
• Technological change in which a technological advancement
may create a new product which performs the same function
more efficiently and effectively thus cutting into market for
existing product.
• Shift in government policy.
• Development on international scene.
• Vagaries of monsoon.
Finally following points are worth noting: -
1. The right market area is being studied.
2. Projections must be made as to what the market will be in future.
3. For a developing economy the most attractive market situation
exists when substantial and growing imports are brought into the
country. Another market picture couple be when the demand is
growing steadily and rapidly but existing domestic producers though
operating profitably and to capacity, are unable to keep up with
demand. Third situation can be when the existing domestic capacity
is adequate to supply the market, but much of present capacity is
obsolete and could be displaced by the proposed plant, which would
be capable of producing a product of better quality or lower cost.
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