What Is Pre Feasibility Studies?
Pre feasibility studies represent an early, preliminary stage of evaluation within the broader field of Investment analysis and Project management. A pre feasibility study assesses the viability of a proposed project or investment opportunity before committing significant resources to a more detailed and expensive full Feasibility study. Its primary purpose is to quickly screen out projects that are unlikely to be successful or desirable, allowing decision-makers to focus their efforts and capital on more promising ventures. This initial assessment involves a high-level review of key factors such as potential markets, technical viability, preliminary cost estimates, and anticipated benefits, along with an initial Risk assessment. The goal is to determine if a project warrants further, more in-depth investigation.
History and Origin
The concept of systematic project evaluation, including initial screening stages like pre feasibility studies, gained prominence in the mid-20th century, particularly with the rise of large-scale industrial and infrastructure projects globally. International development organizations, recognizing the need for structured investment planning in developing nations, played a significant role in standardizing these processes. For instance, the United Nations Industrial Development Organization (UNIDO) published its "Manual for the Preparation of Industrial Feasibility Studies" in 1978, later revised in 1991, which detailed the phases of project evaluation from identification through detailed appraisal, including the crucial pre-investment phase encompassing pre feasibility studies. This manual aimed to improve the quality of investment proposals and standardize industrial feasibility studies, which were often found to be incomplete or poorly prepared, highlighting the growing recognition of structured preliminary analysis.9 Similarly, institutions like the World Bank developed robust project cycles that begin with identification and preparation stages, implicitly relying on preliminary assessments akin to pre feasibility studies to vet projects before extensive commitment.8
Key Takeaways
- Pre feasibility studies are preliminary evaluations to determine if a project warrants a more detailed feasibility study.
- They provide a high-level overview of a project's potential, identifying major opportunities and critical constraints.
- The studies involve initial estimates for costs, revenues, market potential, and technical requirements.
- They serve as a crucial filter, helping to avoid significant Capital expenditure on unviable projects.
- Outcomes inform Go/No-Go decisions and guide the scope of subsequent, more in-depth analyses.
Interpreting the Pre Feasibility Studies
Interpreting the findings of pre feasibility studies involves evaluating whether a project's potential benefits outweigh its preliminary estimated costs and risks, given the current information available. These studies are characterized by lower accuracy ranges compared to full feasibility studies, often ±20% to ±30% for cost estimates, but they provide enough insight to make an informed decision on whether to proceed. D7ecision-makers look for compelling evidence of market demand, achievable Technical feasibility, and a positive preliminary Return on investment.
The interpretation focuses on identifying any "fatal flaws" that would immediately render the project unviable, such as insurmountable regulatory hurdles, extreme Environmental impact, or a completely saturated market. If no such flaws are found and the preliminary outlook is favorable, the study typically recommends moving forward to a comprehensive feasibility study. Conversely, if significant uncertainties or negative indicators emerge, the project may be shelved, redesigned, or abandoned, preventing the misallocation of further Resource allocation.
Hypothetical Example
Consider a renewable energy company, "SolarNova," exploring the development of a large-scale solar farm in a new region. Before committing millions to detailed engineering and environmental assessments, SolarNova commissions a pre feasibility study.
Phase 1: Initial Data Collection
The study begins by collecting publicly available data and conducting high-level analyses. This includes:
- Market research: Preliminary assessment of local electricity demand, existing supply, and regulatory frameworks for renewable energy incentives. They find a growing demand and supportive government policies.
- Site assessment: Identifying potential land parcels using satellite imagery and GIS data, looking for flat terrain, minimal shade, and proximity to transmission lines. They identify three promising sites.
- Resource availability: Analyzing historical solar irradiance data for the region. The data suggests sufficient sunlight hours for a viable operation.
- Preliminary cost estimation: Estimating the rough costs for land acquisition, solar panels, inverters, cabling, and grid connection, based on industry averages and similar projects. They project an initial capital outlay of $150 million.
- Revenue projection: Estimating potential electricity sales based on projected output and prevailing energy prices, considering potential power purchase agreements.
- Regulatory overview: A quick scan of key permits and licenses required.
Phase 2: High-Level Analysis
The collected data is then used to perform a rapid Cost-benefit analysis. SolarNova's pre feasibility study indicates a potential Return on investment of 8% to 12% over the project's lifespan, with a payback period of 10-12 years. No immediate showstoppers are identified. While the numbers are broad estimates, they suggest the project has enough merit to warrant further investigation.
Outcome:
Based on the positive preliminary findings, SolarNova decides to proceed to a full feasibility study, which will involve detailed engineering, environmental impact assessments, precise financial modeling, and securing land options.
Practical Applications
Pre feasibility studies are widely applied across various sectors, especially where projects involve significant investment, long lead times, or complex multi-disciplinary considerations. In the mining industry, for example, a pre feasibility study (PFS) provides an early-stage analysis of a potential mining project, assessing its logistics, capital requirements, and key challenges to help stakeholders decide whether to "greenlight" the project for a more detailed feasibility study. S6imilarly, in real estate development, a pre feasibility study might evaluate zoning laws, market demand for a particular type of property, infrastructure availability, and preliminary construction costs before a developer invests in land acquisition and architectural design.
Governments and international organizations frequently utilize pre feasibility studies for large infrastructure projects, such as roads, dams, or power plants. These studies help in identifying, screening, and prioritizing projects for public-private partnerships (PPPs) and allocating resources effectively, especially where preparation resources are scarce. T5he World Bank's project cycle often begins with project identification and concept notes, which serve a similar purpose to pre feasibility studies, outlining objectives, risks, and potential timetables before moving into detailed preparation. T4he Australian Productivity Commission has highlighted the importance of robust project evaluation processes for major infrastructure, emphasizing that early, rigorous analysis is critical to ensure projects deliver economic and social benefits, underscoring the role of preliminary studies in public investment decisions.
3## Limitations and Criticisms
While invaluable as a preliminary screening tool, pre feasibility studies come with inherent limitations. Their high-level nature means they involve broad estimates and assumptions, leading to less precise outcomes compared to a full feasibility study. For instance, cost estimates in a pre feasibility study might have an accuracy range of -27% to +30%, which is significantly wider than the -20% to +27% typically aimed for in a full feasibility study. T2his inherent imprecision means that unforeseen issues or inaccuracies in initial data can lead to project challenges later on.
A key criticism often revolves around the risk of "optimism bias," where initial enthusiasm or incomplete data leads to an overly positive outlook, potentially pushing unviable projects forward. This can result in significant Project management issues like cost overruns and delays in later stages. Factors such as inadequate Resource allocation for the study itself, human factors, or insufficient attention to local variability in geology or market conditions can contribute to these failures. F1urthermore, pre feasibility studies may not fully capture complex external factors such as evolving regulatory landscapes, long-term Social impact, or unexpected technological disruptions, which can significantly alter a project's viability down the line. To mitigate these risks, conducting thorough Sensitivity analysis on key assumptions within the study is crucial.
Pre Feasibility Studies vs. Feasibility Study
The key distinction between a pre feasibility study and a Feasibility study lies in their scope, level of detail, and accuracy. A pre feasibility study serves as an initial filter, providing a rapid, high-level assessment to determine if a project warrants further, more significant investment in planning. It relies on readily available data, broad assumptions, and aims for a quick "go/no-go" decision, with cost estimates typically having an accuracy of ±20% to ±30%.
In contrast, a full feasibility study is a comprehensive, in-depth analysis conducted only after a positive pre feasibility outcome. It involves detailed engineering designs, exhaustive Market research, precise Financial modeling, and thorough Environmental impact assessments. The aim of a feasibility study is to provide highly accurate estimates, often within ±10% to ±20%, allowing for a definitive decision on whether to implement the project. While the pre feasibility study asks "Is this worth looking into?" the feasibility study answers "Can this project be done successfully, and should it be?"
FAQs
What is the main objective of a pre feasibility study?
The main objective is to determine if a proposed project is sufficiently promising to warrant a more detailed and costly full Feasibility study. It acts as an early screening tool to identify potential fatal flaws and assess the overall viability at a high level.
Who typically conducts pre feasibility studies?
Pre feasibility studies are often conducted by a small team of internal experts, consultants, or a combination thereof, possessing a broad understanding of the industry, project Risk assessment, and various relevant disciplines such as engineering, marketing, and finance.
How accurate are cost estimates in pre feasibility studies?
Cost estimates in pre feasibility studies are generally less accurate than those in a full feasibility study, typically ranging from ±20% to ±30%. They are based on conceptual designs and preliminary data rather than detailed engineering.
What happens if a project passes the pre feasibility study?
If a project successfully passes the pre feasibility study, it usually means there are no apparent fatal flaws, and the preliminary assessment indicates a reasonable chance of success. The next step is typically to proceed with a more detailed and rigorous full Feasibility study to refine the estimates and conduct more in-depth analyses.
Can a project be abandoned after a pre feasibility study?
Yes, a project can and often should be abandoned or significantly re-evaluated if the pre feasibility study reveals significant challenges, unviable costs, insufficient demand, or other critical issues that make its successful implementation unlikely. This early abandonment saves considerable Capital expenditure and resources that would otherwise be spent on a doomed project.