Feasability studies for investment zones in Iraq

Feasibility Studies for Investment Zones in Iraq 29 April 2013Cairo

Eugene Brennan Head of International Consultancy Group Shannon Development, Ireland.

http://www.oecd.org/mena/investment

The Feasibility Study Process

Investment Zone Success

The Hatein Site

A Phased ApproachAdvantages and Disadvantages

Introduction

What is a Feasibility Study?

A Feasibility Study is an analysis of the viability of an idea:

❖ It focuses on helping answer the essential question of “should we proceed with the proposed project idea?”

❖ All activities of the study are directed toward helping answer this question.

Feasibility Study Goal

The Feasibility Study has one primary goal; to demonstrate that the project is

economically viable if it is designed, constructed and operated

in accordance with the concepts set forth in the Study

Laird (2001)

Feasibility Study

❖ A preliminary feasibility study allows you to assess if a project idea is really viable before it has even reached the drawing board.

❖ During the early stages of a project, the feasibility study also serves to test the project vision.

Set out specific scenarios so that they can be studied in-depth

During this process, the number of possible alternatives under consideration is usually reduced

“It is like an exploratory journey … you may take several paths before you reach your destination”

If the initial analysis is negative, it does not mean that the proposal is without merit.

Feasibility Study Methodology

Evaluate Alternatives:


Three phases in a Study process:

1. A Concept, or Scoping, Study• To define potential of the project• Eliminate options unlikely to be optimal• Determine if further studies are justified



2. Pre-Feasibility• Select preferred operating options from

those shortlisted in the Scoping Study• Determine whether or not to commit to the

expenditure requirement and effort of a subsequent full Feasibility Study

• If early findings show that the proposed idea is not feasible, it will save time and money



3. Full Feasibility Study:

• Used to refine the optimal operating scenario defined by the Pre-Feasibility Study

• Often used to Assist with 3rd party Financing Attraction

• Provides the basis for the decision on whether the project should be pursued…

Prefeasibility Study

Determine what it SHOULD be

Case A

Case B

Case C

Case D

Case E

Ass

ess

an

d r

an

k

Alt

ern

ati

ves

Is it the

best?

Feasibility Study and Funding

Determine what it WILL be

Detail

InvestorReview

Is it Viable

?

Scoping Study

Determine what it COULD be

DevelopConcepts

Does it

make sense

?

Public-Private Partnerships

Useful Risk-Sharing Instruments

OptionsLand

Development

FinancingOn-Site

DevelopmentOperation and Maintenance

Regulation

Option A:

Government led Model

Government Agency

Government Agency

Government Agency

Government Agency

Government Agency

Option B:

Operating and Managing

Outsourcing Model

Government Agency

Government Agency

Government Agency Private

Operator

Government Agency

Option C;

Concession PPP Model (BOT)

Government Agency

Government Agency

And Private Operator

Private Operator

Private Operator

Government Agency

Option D:

Private Ownership PPP

Model

Private Operator

Private Operator

Private Operator

Private Operator

Government Agency

Comparison of PPP Options

Special Economic ZonesFeatures of Success

Special Economic ZonesFeatures of Success

What does Investment Zone Success Look Like?

Clear legal, regulatory, and institutional structures regulating industrial parks and general investment.

Adequate investor safeguards to protect private property rights

Contemporary international arbitration/mediation mechanisms;

A modern construction code;

Availability of serviced land, facilities, and utilities;

Simple customs administration in exporting parks and zones;

Availability of a land-titling system and real property registration;

Efficient business formation and licensing process;

But is this enough?

Indicators on a country’s laws,

regulations, access to industrial land and dispute arbitration

are helpful.

Indicators on a country’s laws,

regulations, access to industrial land and dispute arbitration

are helpful.

They are essential conditions that need

to be accompanied by other competitive

advantages in order to achieve sustainable

development

They are essential conditions that need

to be accompanied by other competitive

advantages in order to achieve sustainable

development

Special Economic ZonesAdditional RequirementsSpecial Economic Zones

Additional Requirements

Other Elements in SEZ Success.

❖ Participation of Local Governments – Establishment of ‘one stop shop’ facilities.

❖ Economic size of the host country – domestic market and proximity to foreign markets

❖ Natural Resource Availability❖ Potential for Innovation❖ Skilled and Educated Workforce❖ The Quality and Flexibility of the SEZ

Outline the Various Scenarios Examined and the Implications, Strengths and Weaknesses of each

Project Leaders should Test and Challenge the Underlying Assumptions.

One Alternative may Not be Immediately Obvious as the Best Scenario

Feasibility Study Outcomes


❖ Making the decision to proceed is not always simple

❖ As investigation of alternatives advances, neither a positive nor negative outcome may emerge

❖ Major obstacles may emerge, making a positive recommendation difficult

❖ But, weaknesses can be overcome

❖ The Study will help us to understand the trade-off between risks and rewards


It is Not the Purpose of the Feasibility Study

to Decide Whether or Not to Proceed with a Project.

One of the most critical decisions in Business Development

The Point of No Return

Once the decision is taken, it is difficult to turn back

The Feasibility Study will be an important information source in making this decision

Go/No-Go Decision

Why undertake a Feasibility Study?

Conducting a feasibility study is a good business practice.

It is an opportunity to examine all of the issues and assessing the probability of

business success.

Why undertake a Feasibility Study?10 Reasons

1. Gives focus to the project

2. Examines and narrows business alternatives

3. Identifies new opportunities through the investigative process.

4. Identifies reasons not to proceed.

5. Enhances the probability of success by addressing risk factors and mitigating factors that could affect the project.

Why undertake a Feasibility Study?10 Reasons

6. Provides quality information for decision making.

7. Provides documentation that the business venture was thoroughly investigated.

8. Helps in securing funding from lending institutions and other monetary sources.

9. Helps to attract equity investment.

10. Helps to inspire confidence.

Feasibility Study

❖ The objective of the proposed feasibility study for Hatein in Iraq is to establish the basis for a world-class investment location, based on good international practice principles and reflecting Iraqi

priorities and conditions.

❖ Feasibility Study Rationale should ask and answer the following key questions:

• Do Iraq’s Strengths Outweigh its Weaknesses?

• Does the Opportunity Offset any Possible Risks?

Profile of theHatein Site

Profile of theHatein Site

The Hatein Site

Site Characteristics:❖ Location:

• In Babel Governorate, 50 Km south of Baghdad Governorate❖ Physical Area:

• 15m sq metres (1,500 hectares or 3,700 acres) enclosed by a concrete wall

❖ Nearest Port• Basra (500 Km)

❖ Road Connections:• To Baghdad-Hilla Main Road: 1.5 Km• To Interstate Highway: 6.5 Km

The Hatein Site

Site Characteristics (Cont’d):

❖ Railway:

• Baghdad – Basra Main line – only rail bed remains

• Approximately 2 Kms of track required to connect the zone to the main line

❖ Existing Buildings:

• Site contains 115 manufacturing and administration buildings – none are serviceable

• Demolition and repair – much rubble on site• Need to explore opportunity to build factory

shells

The Hatein Site

Site Characteristics (Cont’d):❖ Electricity:

• Primary supply from National Grid – connection must be restored

• Transformer close to site with 100 Mw capacity• Site internal grid damaged. Current supply capacity is 63 MVA,

extendable to 100 MVA • Substantial investment required• Gas supply?

❖ Water Network• Supply from 3 pumping stations; 2 on Euphrates;

1 on Iskanderiya River – all belong to Babel Governate• Excess Capacity• Damaged network on site

The Hatein Site


❖ Sewage and Drainage:

• No major issues – system generally intact

❖ Telecommunications:

• Regional Internet and Telecommunications networks (Fibre Optic) are good

• Connection to site from Telecom hub required

The Hatein Site


❖ Residential• Hatein company residential complex

convenient to site in town of Iskanderiya• A 43-acre site available for residential

development located 5 Kms south of the site

Terms of ReferenceFeasibility Study – Pilot Investment Zone - Hatein

❖ Legal Framework as set out in the 2006 Investment Law and subsequent Investment Zone Regulation

❖ Feasibility Study to address:• Commercial Considerations• Physical aspects

❖ The Study should also explore how to engage the Private Sector in managing Investment Zone:• As the key investor• As member of a PPP

Feasibility Study

Main Elements

Main Elements

Many Feasibility Studies are based on TELOS:

❖ T – Technology and System Feasibility❖ E – Economic Feasibility❖ L – Legal Feasibility❖ O – Operational Feasibility❖ S – Schedule Feasibility

Project Implementation

Project TeamProject Implementation

Project Team

Implementation of studies

The project team :❖ A feasibility study should be conducted by a team of experts. ❖ Team members should be selected to cover:

• Industrial economics (preferably covered by the team leader)

• Marketing (dealt with by a market analyst or marketing expert)

• Civil engineering • Environmental Assessment• Process engineering and technology (covered by a specialist in the related industry)

• Mechanical and industrial engineering• Industrial Management, • Industrial financing and accounting (including fiscal aspects)

❖ The team should be assisted by short-term experts such as land surveyors, soil experts, laboratory technicians and sociologists, as required.

Team Leader

❖ The team leader's responsibility, besides his or her role as a

specialist, is to plan ,organize, direct and supervise all activities of the team until the study is finalised.

❖ Ideally, the project promoters should actively participate in the preparation of the study.

❖ In many cases the project is initiated by the promoter,who frequently has also made earlier studies and can therefore be considered a major source of information on the background and history of the project.

❖ During the preparation of the study many decisions (for example, on marketing and production programmes and the selection of alternatives) are to be taken by the promoters.

Development CriteriaIndustrial Parks

Development CriteriaIndustrial Parks

Criteria in the Provision of Industrial Property

❖ Economic Development Criteria• Industrial property is provided as an incentive to

attract investors

❖ Commercial Criteria• The development of industrial

property is undertaken on a commercial basis (for profit)

❖ Clarity of Purpose is Essential

International Investor Requirements

International Investor Requirements

An Investor’s Point of View

What Investors Need

How to Introduce the Private Sector

Gradual process:❖ Outsourcing and contracting ❖ Service Provision ❖ Management contracts with performance fees❖ Concessions❖ Build-Operate-transfer

The Ultimate Objective:❖ Attract Zone Users

The Ultimate Winning quality:❖ Flexibility!

How to Evaluate a Feasibility Study

How to Evaluate a Feasibility Study

Evaluation of Investment Projects

Commercial ProfitabilityNational Profitability

Evaluation of Investment Projects

Commercial ProfitabilityNational Profitability

National Considerations

❖ An investment project undertaken by a country should contribute to the National Income.

❖ ‘Net Value Added’ is often used as a measure. It has two important elements:• Salaries and Wages• Social Surplus

❖ More salaries and wages mean higher employment, higher income per person employed, or both

❖ Higher wage bills mean higher purchasing power of the population and higher National Welfare

Evaluation of Investment Projects National Profitability

❖ While Commercial Profitability assessment is important, so too is the contribution made to the welfare of the society.

❖ National Profitability analysis considers the project’s contribution to national economic and non-economic development objectives.

❖ Important National Considerations include:• Employment• International competitiveness• Distribution and Logistics• Future development of Industry sectors• Foreign exchange Earnings

Full Detailed Feasibility StudiesCan be Expensive

Full Detailed Feasibility StudiesCan be Expensive

Advantages:❖Lower Initial Cost Outlay❖Evidence of a Process Underway❖Opportunity to Refine and Distil developing issues❖Decision Points at the End of Each Stage rather than One Final Outcome❖Master Plan as an Output to create Early Interest

Is it possible to take a staged approach?

Disadvantages:❖May take Longer to Arrive at Ultimate Decision❖Initial Project Champions may Change or Lose interest❖There may be Time Gap Delays between Stages❖Investors May Delay Commitment pending Full Information

❖Other ……?

Is it possible to take a staged approach?

Prefeasibility Study

Determine what it SHOULD be

Case A

Case B

Case C

Case D

Case E

Ass

ess

an

d r

an

k

Alt

ern

ati

ves

Is it the

best?

Feasibility Study and Funding

Determine what it WILL be

Detail

InvestorReview

Is it Viable

?

Scoping Study

Determine what it COULD be

DevelopConcepts

Does it

make sense

?

Consider an Initial Review ❖10 weeks – 6 in Iraq❖2 Professionals Engineer + Economist❖Estimated cost

Initial Review

Feasibility Studies for Investment Zones in Iraq End of Presentation

Eugene Brennan Head of International Consultancy Group Shannon Development, Ireland. Email: [email protected]

http://www.oecd.org/mena/investment