Pre-investment phase of the project

During the pre-investment phase, studies are conducted to determine the investment opportunities of the project, analysis of alternative options and preliminary choice, as well as the preparation of the project - preliminary justification and detailed development, conclusions on the project and the decision to invest it.

The division of the pre-investment phase at the stage does not allow to act directly from the ideas of the project to the final feasibility study without phasing out ideas or presenting alternative solutions. Such a division allows us to exclude a large number of unnecessary feasibility studies of those projects for which the chance to achieve the investment phase is unlikely. Ultimately, it ensures that the conclusions on the project, which must be prepared by national or international financial institutions, are simplified if well-executed research is at its core.

Pre-identification is the stage of determining investment opportunities, which is usually associated with the receipt of information by potential investors about investment opportunities that arise at different levels - from the economy sector to the enterprise.

To study investment opportunities, it is necessary to analyze:

• natural resources suitable for processing;
• competitive forces and industry barriers;
• future demand for certain consumer or newly created goods;
• imports (to determine the areas of import substitution);
• environmental impact;
• development of manufacturing sectors that successfully operate in other countries with a similar economic base, similar conditions for the development and condition of financial, labor and natural resources;
•  possible mutual relations with other industries - local or transnational;
• it is possible to expand existing production facilities on the basis of integration;
• diversification opportunities;
• it is possible to expand the existing production capacity to obtain savings due to the increase in the scale of production;
• general investment climate;
• industrial policy;
• availability and cost of production factors;
• export opportunities.

All these studies are based mainly on overall estimates, rather than on a detailed analysis. Therefore, they can be carried out in three directions:

• Study of regions (identification of opportunities in this region).
• Production research (identification of opportunities in this industry).
• Research of natural resources, agricultural or industrial products (identification of opportunities based on the use of the above).

The purpose of these studies is to quickly and without significant costs to assess the most important points of investment opportunities.

At the stage of identification, the choice of goals of the project is carried out, the definition of its tasks that ensure the implementation of the most important plans. At this stage, a list of all possible ideas capable of ensuring the fulfillment of the goals of economic development is drawn up. Since the overall goal of any project is to obtain additional benefits, the selection of projects is carried out by comparing possible results from the implementation of various projects.

When selecting the ideas of the project, analysts come, on the one hand, to the need to reduce the number of ideas under consideration, and, on the other hand, the need for a detailed approach to selected ideas in order to study these options more thoroughly and select the most attractive. The responsibility assigned to the analyst in the process of choosing a project requires convincing motivation from him to choose or reject any version of the project. Quite common criteria for rejecting project ideas are:

•  insufficient demand for the proposed product obtained as a result of the project implementation, or the lack of significant benefits from this product;
• high cost of the project compared to the expected revenues;
• lack of obligations on the part of the organization or people who will benefit from the project;
• lack of political support;
• technology that is not suitable for the project;
• excessive scale of the project, which does not correspond to organizational and managerial capabilities;
• excessive risk of the project;
• high cost of raw materials and significant costs for the payment of skilled labor.

As a rule, when selecting project ideas, the number of options that deserve detailed study is reduced to two or three, which allows you to quickly and without large costs to assess the most important points of the project's investment opportunities at the macro and micro levels.

Macroeconomic analysis is carried out, as a rule, in three areas:

resource, which allows you to assess the opportunities associated with the use of resources or products;

sectoral, aimed at determining the potential of a certain sector of the economy;

regional, which assesses the capabilities of a particular region of the country, its potential, attractiveness for a particular project idea.

The purpose of macro-analysis is to develop an investment proposal and collect information for potential investors.

At the same stage, in addition to macro analysis, it is necessary to conduct micro analysis, the purpose of which is to diagnose individual entities that have potential and investment attractiveness, which will allow to formulate the previous goals of individual investment proposals.

The stage of project preparation is divided into two stages: preliminary assessment and additional research.

The idea of the project should be developed in detail at the stage of careful research. That is, before investing large funds in the detailed development of the project, it is necessary to evaluate its idea using a preliminary analysis, as a result of which the main provisions are formulated:

• all possible alternatives to the project are considered;
• the project can be aimed at detailed development;
• all aspects of the project are important in terms of its feasibility and there is a need for in-depth study through functional research;
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• the idea of the project on the basis of existing information can be defined as unviable or insufficiently attractive;
  

the environmental situation at the planned construction site and the potential impact on it of the envisaged production process meet national standards.

The purpose of the project preparation is the ranking and selection of existing project options that need to be transferred for detailed development and its formation. This can happen if: the main and alternative options for the project are identified, the main organizational and political problems are identified and opportunities for their solution are identified; there are results of an approximate estimate of expected costs and revenues; there is support from the political authorities that benefit from the project; there is reason and confidence that the project will receive reliable funding from internal sources.

Preparation of the project provides information on such areas of research as:

• project strategy or corporate strategies, project boundaries;
• project product market and marketing concept;
• location, site and environment;
• raw materials, basic and auxiliary production materials;
• design and technology;
• organizational and overhead costs;
• manpower, including management personnel, labor costs, professional training needs and costs;
• schedule of the project and budgeting.

Sometimes well-executed research on the preparation of the project can serve as a sufficient justification for it, but if the economic side of the project is in doubt, additional research on the project should certainly be carried out.

At the stage of development and expertise, all the information necessary to make a decision on investment is prepared. Since the preparation of the project is an iterative process, which involves returning to the already worked out stages, clarifying previously formulated ideas, it is worth choosing a rational version of the project by comparing selected alternatives according to their relative cost and profitability and analyzing the technical, environmental, financial, social and organizational aspects of the project with varying degrees of detail.

The result of the work of analysts at this stage is a project whose preconditions and goals are clearly defined, based on the main goal and possible options for marketing strategy, the desired and predictable market shares corresponding to production capacity, the location of the enterprise, available raw materials, materials, appropriate technology and equipment, assessment of the impact of production on the environment. The financial part of the study is to determine the amount of investment, including net working capital, production and marketing costs, sales revenues and profits on invested capital.

When developing the project, all accepted assumptions, the selected options should be described and explained, which will make the project more understandable for participants, especially investors. In case of rejection of the project due to its non-viability, it is necessary to carefully describe the reasons, and not only state this fact.

At this stage, the feasibility or sufficient validity of the project as a whole and its individual parameters are determined: technical feasibility, environmental impact, market efficiency, institutional acceptability, social aspects, financial and economic value. 

 

All these studies are carried out with maximum accuracy by selecting the optimal repetitive characteristics, taking into account feedback and mutual relationships, including the determination of all risk factors and uncertainty. Thus, the most acceptable package of technical solutions will depend on the demand for the products of the project, the administrative capabilities of the organization that implements the project, as well as on the cultural traditions and social behavior of end producers or consumers. The analysis is carried out on the following aspects:

• commercial, or marketing;
• technical;
• institutional;
• ecological;
• social;
• financially;
• Economic.

The purpose of this stage is to give a detailed assessment of existing projects, choose the most effective, develop proposals for financing.

The expertise of the project is understood as its assessment by interested or independent organizations according to formal and informal criteria. The task of the examination is to check the rationality of the project, determine the feasibility of its implementation. It is at this stage that the final decision on the adoption or rejection of the project is made. Of course, the examination is carried out according to individual components.

Commercial expertise is carried out to assess the acceptability, availability and price attractiveness of the resources involved in the project, market trends and prospects of the products being produced, as well as the pricing policy for the product being produced. Experts pay special attention to the assessment of measures for the purchase of raw materials and materials, as well as the sale of project products.

Technical expertise should first of all determine the advantages of technical proposals, their adequacy to the capabilities of local conditions and costs. Technical expertise is subject to the scale of the project, its location, availability of attracted raw materials and equipment, the level of development of production and social infrastructure, the amount of costs and the system of their regulation.

Environmental expertise is carried out in order to determine the impact of the project on the ecosystem, as well as to assess the impact of the project on air and water basins, the degree of environmental risk associated with its implementation.

Institutional expertise, that is, the assessment of the administrative and managerial aspects of the project, is carried out in order to determine the possibility of implementing the project in a given political, economic and legal environment, as well as to establish organizational conditions that allow successfully achieving the set project goals.

Financial expertise involves an assessment of the financial capacity of the object implementing the project, the validity of financial forecasts, the ability to cover loan payments in a timely manner, the financial consequences of the project for investors, customers and enterprises implementing the project.

Social expertise allows you to determine the extent of the project's impact on the social environment, the benefits that residents of the project implementation region receive, as well as the possible negative impact of the project on the population.

Economic expertise is designed to evaluate the project from the point of view of national interests, society as a whole, including answering the question whether it is appropriate for the project to use national resources, whether there are adequate incentives for different participants in the project, which provides for the promotion of national development.

At the stage of detailed design, the development of a functional scheme and a physical plan of an industrial enterprise, which are necessary for the production of a particular product, is carried out, as well as the volume of relevant investment costs, as well as costs arising at the stage of operation, are determined.

The main component of design is the choice of appropriate technology, as well as planning the acquisition and development of this technology and relevant know-how. At this stage, the main design work is carried out, which include a thorough layout of construction objects, equipment and production processes, as well as flows of materials and connections between different stages of production. This stage consists of:

• construction planning (start-up and debugging);
• calendar planning of construction works;
• calendar financing plan;
• preparation of construction documentation.

The composition and content of design and estimate documentation for the construction of structures is developed in accordance with state standards and is specified by customers and designers.