Pre feasibility study: Meaning, Criticisms & Real-World Uses

A pre-feasibility study is an initial assessment conducted early in the project lifecycle to determine the viability of a proposed project before significant resources are committed. It falls under the broad categories of project management and business planning, serving as a crucial preliminary step in the investment analysis process. The primary goal of a pre-feasibility study is to quickly filter out unpromising projects and identify those that warrant a more detailed and costly feasibility study. This initial examination considers various factors, including market potential, technical requirements, financial aspects, and potential socio-economic and environmental impacts.

History and Origin

The concept of structured project evaluation, including initial screenings like the pre-feasibility study, evolved as projects grew in complexity and capital intensity, particularly in the mid-20th century. As large-scale industrial, infrastructure, and development projects became more common globally, especially after World War II, the need for systematic appraisal methods became apparent. Organizations involved in international development, such as the United Nations Industrial Development Organization (UNIDO), began emphasizing and developing methodologies for pre-investment and feasibility studies to guide industrialization efforts in developing countries. UNIDO, for instance, established a Feasibility Studies Section in 1976 and published a comprehensive manual for industrial feasibility studies, underscoring the formal adoption of these evaluative stages in international development and capital expenditure planning.⁹, ¹⁰ The broader evolution of project management as a formal discipline, involving distinct phases for planning and execution, further solidified the role of preliminary assessments in minimizing financial and operational risks before full commitment.⁷, ⁸

Key Takeaways

A pre-feasibility study is an early, high-level assessment of a project's potential viability.
Its main purpose is to screen out unpromising projects before significant financial or human resources are committed.
It typically covers market, technical, financial, and environmental/social aspects at a preliminary level.
The findings of a pre-feasibility study determine whether a more detailed and expensive feasibility study is warranted.
It helps in early risk assessment and provides a basis for initial decision-making.

Interpreting the Pre feasibility study

Interpreting a pre-feasibility study involves evaluating its findings to make a go/no-go decision for further project development. A positive pre-feasibility study indicates that the proposed project appears viable enough to proceed to a more detailed feasibility study. This typically means that preliminary market research suggests sufficient demand, initial technical assessments don't reveal insurmountable challenges, and a rough financial projection hints at a potentially acceptable return on investment.

Conversely, a negative pre-feasibility study suggests that the project, as currently conceived, faces significant obstacles that make it unlikely to succeed. These obstacles could range from an insufficient market, insurmountable technical hurdles, or unfavorable financial indicators. In such cases, the project may be shelved, redesigned, or abandoned, preventing further allocation of capital expenditure to an ultimately unviable endeavor.

Hypothetical Example

Imagine a renewable energy company, "GreenVolt Inc.," considering building a large-scale solar farm in a new region. Before committing to an extensive and costly feasibility study, GreenVolt commissions a pre-feasibility study.

Scenario: GreenVolt wants to build a 100 MW solar farm.

Pre-Feasibility Study Steps:

Market Potential: Initial analysis confirms that the regional electricity demand is growing, and government incentives for renewable energy are favorable.
Resource Assessment: Preliminary data shows consistent high solar irradiance in the proposed location.
Technical Viability: A quick review indicates the terrain is suitable, and access to the grid appears manageable. No obvious major geological or technical analysis issues are found.
Environmental & Social: A desktop review reveals no immediate protected areas or major community opposition. Potential environmental impact and social impact are noted for deeper investigation later.
Financial Overview: Using rough estimates for construction costs, operational expenses, and projected electricity prices, a preliminary financial modeling suggests the project could generate a positive return.

Outcome: The pre-feasibility study provides enough confidence for GreenVolt to proceed to a full feasibility study, as no significant red flags emerged that would immediately halt the project.

Practical Applications

Pre-feasibility studies are widely applied across various sectors to minimize wasted resource allocation on unpromising ventures. In mining, they assess the economic viability of extracting mineral deposits before committing to extensive drilling and infrastructure. For real estate development, they analyze market demand, zoning regulations, and preliminary construction costs for new projects. Government agencies often use pre-feasibility studies for large public infrastructure projects, such as roads, railways, or dams, to ensure public funds are wisely spent and that projects align with strategic objectives. For example, government bodies provide guidelines for project development, where early assessment stages are critical for determining if a project should proceed to a more detailed evaluation.⁶ International development organizations like UNIDO also leverage these studies to identify and promote viable industrial investment opportunities in developing countries.⁵

Limitations and Criticisms

While valuable, a pre-feasibility study has inherent limitations due to its high-level nature. It relies on generalized data, assumptions, and preliminary estimations rather than detailed investigations. This can lead to inaccuracies, particularly concerning cost estimates and potential challenges. Over-optimism, a common cognitive bias in project planning, can lead to understating costs and overstating benefits in these early stages, potentially pushing a project forward that is not truly viable.³, ⁴ This "optimism bias" can result in planning fallacy, where predictions about task completion time or project costs are underestimated.¹, ²

The abbreviated nature of the analysis means that a pre-feasibility study may overlook critical issues or risks that only become apparent during a more comprehensive feasibility study. For instance, specific environmental regulations, unexpected geological conditions, or complex land acquisition issues might be missed in the initial screening. Therefore, its findings should not be considered definitive but rather as an indication of potential, warranting further rigorous investigation.

Pre feasibility study vs. Feasibility study

The distinction between a pre-feasibility study and a feasibility study lies primarily in their depth, scope, and purpose within the project development process. A pre-feasibility study is a quick, high-level assessment designed for initial screening. Its purpose is to rapidly identify whether a project concept has enough merit to justify the investment in a more detailed analysis. It uses generalized data, broad assumptions, and focuses on identifying fatal flaws or significant opportunities. The output is typically a preliminary "go/no-go" recommendation for the next stage.

In contrast, a feasibility study is a comprehensive, in-depth analysis conducted after a positive pre-feasibility assessment. Its purpose is to rigorously evaluate every aspect of a proposed project, including detailed market research, precise technical analysis, comprehensive financial modeling, and thorough cost-benefit analysis. It involves extensive data collection, site investigations, and detailed engineering, environmental, and legal assessments. The outcome of a feasibility study is a definitive recommendation on whether to proceed with the project, secure financing, and begin detailed planning and implementation. It provides the detailed information necessary for final investment decisions and serves as a blueprint for project execution.

FAQs

What is the primary objective of a pre-feasibility study?

The main objective of a pre-feasibility study is to quickly evaluate a proposed project's initial viability and determine if it warrants a more detailed and expensive feasibility study. It acts as a filter to screen out unpromising ideas early on.

Who conducts a pre-feasibility study?

Pre-feasibility studies are typically conducted by internal project teams, business analysts, or external consultants specializing in project management and early-stage project appraisal.

What factors are typically reviewed in a pre-feasibility study?

A pre-feasibility study generally reviews initial aspects related to market demand, preliminary technical requirements, rough financial projections, and potential environmental impact and social impact concerns.

Can a project be abandoned after a pre-feasibility study?

Yes, absolutely. If a pre-feasibility study reveals significant challenges, insufficient market potential, or unfavorable financial prospects, the project may be abandoned or significantly re-evaluated before further capital expenditure is committed.

Is a pre-feasibility study legally required?

While not always a legal requirement, conducting a pre-feasibility study is a prudent business planning practice for large projects. It helps mitigate risks and informs strategic decision-making by preventing resource waste on non-viable ventures.