REPUBLIC OF NAMIBIA OFFICE OF THE PRESIDENT NATIONAL PLANNING COMMISSION Inter-Office Memo TO
REPUBLIC OF NAMIBIA
OFFICE OF THE PRESIDENT
NATIONAL PLANNING COMMISSION
TO: Ms. E. Julius
Acting Chief-National Development Advice- RSPC
THROUGH: Mr. S. Kamwi
Chief National Development Advisor
National Development Advisor
DATE:18 May 2018
SUBJECT: BACK TO OFFICE REPORT EGYPT ON “ECONOMIC FEASIBILITY STUDY, PLANNING, FINANCIAL ANALYSIS AND MONITORING PROJECT IMPLEMENTATION IN CAIRO FROM 06 MAY 2018 TO 10 MAY 2018
The internal administrative arrangement states clearly that upon return to office after attending a training, a staff member should prepare a back to office report within seven (7) working days. First and foremost, I would like to extend my gratitude to the Egyptian Embassy in Namibia for considering and supporting myself to participate in the training in Economic Feasibility Studies and Financial Analysis, Planning and Project Implementation Follow-up. Secondly I would like to thank the NPC management, particularly the Acting Chief National Development Advice and the Permanent Secretary for nominating myself to attend the training. The training was organized by Administrative Control Authority (ACA) in conjunction with the Egyptian Agency of Partnership for Development (EAPD) of the Republic Egypt from 6th to 13th May 2018 at the International ACA Training Centre in Cairo. I am delighted that most of the knowledge gained and skills learned will be directly useful in undertaking functions and responsibilities of the Institution as well as development of viable projects.
The training was attended by 23 representatives from 22 African countries namely Namibia, South Sudan, Benin, Burkina Faso, Tanzania, Somalia, Uganda, Tjibouti, Guinne, Malawi and many others.
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The main Objective of the training
The overall objective of the training was to equip participants with knowledge and skills in Economic Feasibility Studies and Financial Analysis, Planning and Project Implementation Follow-up: At the end of the training, participants were expected to be able to:
Define and understand concepts of investment projects, pre-feasibility study and economic feasibility study
Understand steps for undertaking a feasibility study
Environmental need study
Understand types of investment decisions
Understand how to conduct a Financial/Economic feasibility study
Understand how to calculate project cash flows (cash inflows and cash outflows)
Understand overview of legal framework of United Nations Convention Against Corruption (UNCAC)
Explain and understand concepts of feasibility studies
Explain and understand the difference between a pre-feasibility study and a feasibility study
Explain and understand steps for undertaking a feasibility study
Explain and understand levels of investment decisions
Explain and conduct a financial/economic feasibility study
Demonstrate and calculate project cash flows using twelve-tables method
The instructors deployed a full range of dynamic and interactive training methods. This comprised of a carefully balanced programme of conventional teaching, supported by real examples and case experience of individual businesses or projects. This enhanced learning through practical examples. Furthermore, the instructors illustrated the main learning points with examples of real-life decisions on economic feasibility analysis in which they have been involved.
HE Ahmed Mansour, Director of the Anti-Corruption Academy, welcomed the trainees and wished them health stay in Cairo. He also briefed the audience on the role of the Anti-Corruption Authority, the laws regulating it and its role in combating and preventing corruption, referring to the national strategy for preventing and combating corruption for the year 2014/2018. He further highlighted the International cooperation in preventing and combating corruption and the role of the Egyptian Agency for Partnership for Development in the Ministry of Foreign Affairs in holding the programs. Then, he reviewed the topics and the schedule of the session and concluded with a modern opportunity for trainees to get acquainted.
NB: See the attached schedule for reference
Introduction to Administrative Control: Authority and Its Approach in Combating Corruption
In the first lecture, HE Ahmed Abdul-Sattar from the Petroleum Sector spoke about the Egyptian national strategy to combat corruption during 2014-2018 period. He discussed the problem of corruption in the Arab Republic of Egypt, the definition of corruption and its types, the phenomenon of corruption, methods of measuring corruption and reasons leading to corruption in Egypt and the principles on which the strategy was based and the time frame for the implementation of the strategy, pointing to the results of analysis of the internal and external environment of corruption, and then identified the Administrative Control Authority in the Arab Republic of Egypt and the organization structure of the Authority and the scope of the jurisdiction of the Commission and the crimes that authority shall be seized as the powers of the Commission and to consider candidates for the positions of general state. The professor also presented the most important body and its role in preventing and combating corruption in the Arab Republic of Egypt.
Lesson Learned on this Topic
Economic situation (Income levels, Wages & Salaries) would lead to corruption especially when the above economic variables are relatively low.
Funds that are not included in the state fund can be exploited through corruption
Government’s over-expenditure could easily lead to corruption in many ways.
Having complicated administrative procedures is likely to promote corruption.
Corruption have several negative effects to the economy such as discouragement of investment, it also encourages monopoly and tax invasion- no payments of customs and tax
There are several social implication of corruption highlighted such as high unemployment, terrorism and money laundering.
NB: For Detailed information on this lecture I have attached the Egyptian national strategy to combat corruption.
Day 1 Continues: Defining Investment Projects and Concept of Economic Feasibility Study
In the second lecture, Dr. Sherif Al-Sokkary, lecturer at Ain Shams University and financial advisor to a number of public and private sector institutions, conducted feasibility studies on the practical side and indicated how to prepare them (development of the feasibility studies), noting the importance of carrying out the feasibility study in the test of the suitability of the investment idea for the environment. He further highlighted on the four studies (Marketing, Technical, Legal and Financial study) that makes the full economic feasibility study and explained the significance of these studies. The marketing study predicts the revenue to be generated from the project, the expected selling price of a product and it determines the volume of the sales.
The technical study determines the size of land, the building architectural work, it also looks at the number and the type of machines needed to start with the operation of the project. This study further predicts the number of employees needed, it also determines the raw materials to be used (whether local or foreign materials). The Lecturer used examples of successful practices and wrong practices to deepen the understanding of participants when preparing the technical study.
Legal study outlines legal framework and legal procedure of the project. This study examines the approval process of the projects from different relevant stakeholders. It looks at legal implication of establishing that specific project or company and conflict of interest.
Finally, he spoke about the financial study/Economic Study as a translation of the financial aspect of all the study (Economic feasibility of the project) and make some calculations in figures. The financial study determines the prices or translate everything in money. In this regard, he discussed the elements of investment costs, current and operational costs, comparing the current costs of the project with its current revenues, and then determining the feasibility of the project in terms of profit / loss. Below are factors to be considered in a financial/economic feasibility/study:
Productive Life of the project
This refers to time/period in which production lines will be operating and producing benefits/products.
Economic Life of the project
This refers to capability of the project to produce revenues enough to cover the costs of the project.
Investment Costs of the project
This includes all costs incurred since the project idea was conceived and the first cycle of operation of the project. These may include: fixed assets costs; intangible assets costs, working capital during the first operation of the project.
Investment funding structure of the project
This is all about identification of the funding/financing sources of the project. The project can be financed either from personal funds or loans from banks/other institutions (usually called borrowed capital).
Personal funding- can be from people who crafted the project idea and in such a case it is usually called Owned Capital or it can be a partnership between the people who crafted the idea and others who are interested with idea and in such a case it is usually called Equity Capital.
At this point, it must be noted that investment costs should be equal to investment funding.
When project would be funded from both equity and borrowed funding, it is important to note that borrowed capital should not be more than the equity capital.
Financial analysis of project costs
This involves comparing the expected project revenues and the expected project costs to determine the real /actual project profit or loss. Therefore, it is important to differentiate between the project expenses and costs.
The second day (Day 2): Steps for feasibility study
Dr. Gamal Awad, Professor of Accounting, Cairo University, gave a lecture on the feasibility study. The lecture started with a modernity about the reason behind the feasibility study and its important role in administrative decision-making and then defined the administrative decision and the role of the feasibility study in moving the decision maker from the case of uncertainty to the case of a close to make sure the case is risk and the number of investment decisions and preparation of the feasibility study. And he presented the elements of the preliminary study and the components of the feasibility study and the stages of administrative decision and the behavioral side to study the investment decision. And then presented how to prepare the feasibility study covering two main components marketing and technical feasibility study.
Steps for undertaking a Feasibility Study
Conduct environmental need study (Primary study)
This is the first step of a feasibility study. It is all about understanding and unpacking a project idea/concept
Conduct legal study
This study looks at legal factors and focuses on (a) legal nature of the project i.e ownership, organization structure etc and (b) legal frameworks (procedures/laws/regulations) to be followed by the investment or project.
Conduct market study
This study looks at marketing factors that may affect or influence project implementation. Marketing factors may include understanding of demand and supply of project products/services, customer base, prices of similar products/services to the project, geographical area where the project would be based etc.
Conduct technical study
This study looks at factors relating to technical requirements of the project in line with the nature of the project. This may include structural designs, type of machines/plants/equipment, human expertise required, location, size and rate of production, security, quality of production etc.
Conduct financial/economic study
This is the last step and involves costing all the issues involved in the previous four steps/studies. This study will differentiate the expected investment cost and the expected revenue from the investment that is either the investment will be a profitable or loss venture or viable or not viable.
Levels of Investment Decisions
New Project- investment decisions would be made in the processing of establishing a new project and this will require a feasibility study for proper decision making.
Extension /Expansion of the project- investment decisions here will be based on a feasibility study of extension/expansion of project processes.
Replacement/Renovation of the project- investment decisions here will be based on a feasibility of operational renovations/replacement of project processes.
This sums up that each huge or critical investment should undertake a feasibility study in order to make an informed investment decision.
7.1 Lesson learned on this topic
Feasibility study is formulated to direct investment decision by enabling the investor to turn their decision from uncertainty to certainty. The accuracy of the feasibility study is really crucial in making the investment decision. Lack of available information and data leads to inaccuracy of the feasibility study and ultimately to poor investment decision.
The feasibility study can be undertaken on a new project, expanding of the ongoing project and renovation depending on the nature of the project.
It is important for new project to undertake a pre-feasibility study to test the idea of the project before the full feasibility study is undertaken. The cost of pre-feasibility study is much lower compared to the detailed feasibility study because it is the micro study of the full feasibility study.
A full feasibility study should actually have these four components legal study, marketing study, financial study and the technical study. Meaning a full feasibility study includes multidiscipline actions, various expertise are required to undertake a feasibility study.
The investment decision trails the following logical model; 1) investment opportunity arises; 2) Investment Idea is developed; 3) Pre- Feasibility study is required; 4) Full Feasibility Study is undertaken; 5) Evaluating the Investment; 6) investment decision is undertaken; 7) Establishing the Operation of the Project; 8) Operation of the Project. Decision making can be taken at all levels and at high risk
Investment decision is the process of dumping or forsaking of money hoping to achieve profit or revenue in the future. Cash inflow, Cash outflow and current cost are financial aspects of determining the investment decision.
Investment Environment Analysis (IEA) is an important aspect to consider when making investment decision because it examines the environment in which the project takes place by examining several aspects such as currency stabilization, policy of distribution, the cultures, values, customs and etc. The professor gave a very good example on this e.g. Egyptian people value more consumable goods than capital goods because of the risk involved on capital goods.
Undertaking market research or marketing analysis significantly contributes to well informed investment decision. Market research examines the following aspects; consumer preferences (name and brand of product); strategic location of the project; quality of the product; identifying market approaches using the international trademark and expected demand.
Technical Feasibility studies includes location/topography of the project; raw materials; labour; size of production; technological progressing and degree of security.
On the third day (Day 3): Financial Feasibility
Prof. Gamal Awad continued to complete the feasibility studies and started preparing and analyzing estimates of expenditure and investment financing in terms of the economic project life. The investment costs of the project and its components were discussed, noting the importance of calculating the reserves and the rise in prices as well as offering the investment financing structure with the two capital and the financing structure of the project through practical examples and detailed tables for each case possible in the capital structure of the project. This explains how to achieve the optimal ratio of the capital structure in both (borrower and owner). The lecturer concluded by wishing the trainees a good stay.
Presentation on successful practice for participating states
In the second section, His Excellency Brigadier / Ahmed Mansour divided the trainees into groups so that each trainee will present an assessment of his country’s role in combating corruption. The staff member spoke for five minutes about general information on Namibia and Strategies in place to fight corruption.
On the fourth day (Day 4): Calculate Project Cash Flows
Dr. Sherif El-Sokkary reviewed the elements of costs and revenues and the difference between the concept of expense, cost and loss. Cost was then divided into two, namely; current costs and capital costs of the project. The lecture continued by explaining the elements of costs involved in the feasibility study and the importance of each element of cost. He then identified the sources of funding available and their respective roles in the success of the project by using a number of real examples of the failure of some projects by financing investment costs with short-term loans.
A practical discussion was then opened to discuss the issue of cost financing and the best ways to do so. Then the practical discussion concluded with a table of project funding structure from capital equity and bank loans. Furthermore, several tables were also computered to determine the annual cost of the project such as a table to calculate the cost of materials, a table to calculate wages, a table to calculate and monitor other costs, an amortization table, and a table of total annual costs; a table to calculate the total variable and fixed costs;
Below are steps and tools used in calculating project cash flows. These was done in practical method by the professor.
Identify/calculate investment costs.
A table of all project fixed capital alongside a table of the working capital needed to start operations should be provided.
Therefore, the investment costs will be determined by adding the fixed capital cost and the required working capital.
Identify/calculate financing structure
Financing has two parts either internal financing (owned equity/capital) or external financing (loans/borrowed capital)
Therefore, a table that encompasses the Equity Capital Section, Loans Section and Loan & Interests Payment Section would be used to provide information on financing structure of the project in terms of equity capital required, borrowed capital required and modes and periods of paying pack the borrowed capital and its interest.
Identify/calculate cost of material
Here a table of project materials required specifying; type, quantity, unit price of each material will be used to determine the total material costs of the project.
Identify/calculate project wages
Here a table of project wages specifying; job position; number of employees, monthly wages, total monthly wages and total annual wages will be used to determine the total costs of project wages.
Identify/calculate other project costs/expenses
Here a table of all other project costs/expenses or variable costs such as utilities, rents, maintenances etc will be used to determine total costs of other project costs.
Here a table of depreciation values of all project assets that depreciates over time will be used to determine total depreciation value for each year. The depreciation table will specify: asset type, value of asset, depreciation rate, annual value of depreciation, period of depreciation.
Identify/calculate total annual costs for each year
Here a table that groups all the total costs of tables discussed above will be used to determine the annual costs of the project for each year in question.
Identify/calculate net cash flows (profit or loss) of the project
Here a table that compares annual costs required against the expected project revenues will be used to determine the net cash flows of the project over the project life. The table will specify; period in years, expected revenues, total costs and expected net value (profit or loss). Therefore, net profit or loss will be determined by the difference between expected revenue and total cost.
Average net profit of the project will be (net profit over the years of the project/number of years of the project)
Identify/calculate net present value for net cash flows using discounting tables
Once the net cash flows have been determined as indicated in the step above, there is need to also determine their present values before making any investment decision.
A discounting tables or net present value tables will be used to determine the net present values of the net cash flow values.
The fifth day (Day 5): Legal Framework of UNCAC on combating corruption
Mr. Khalid Al-Saeed, Head of Administrative Reform and Corruption Prevention, reviewed the general framework of the United Nations Convention on the Suppression of Corruption and defined corruption and preventive measures to prevent and combat corruption. He reviewed both Articles 8, 7, 6 of Chapter Two and Chapter IV of the Law and then explained the importance of international cooperation frameworks. Finally, he concluded with the most prominent and successful practices of the Anti-Corruption Authority.
Introduction to EAPD
Chancellor Najla gave a speech on the role of the Agency for Partnership for Development and the Egyptian Foreign Ministry in spreading the anti-corruption culture in Africa. At the end of the training program, Mr. Ahmed Mansour and Counselor Najla Najib handed over certificates to the trainees.
NB: attached the UNCAC legal Framework
Challenges during the training
The training materials covered two aspect of the training which is feasibility study and fighting corruption whereas other parts as per the title of the training such as Planning and Implementation of projects were not zoomed out as stand-alone session (please refer to the attached Schedule). Participants were informed that, to fully cover the course content participants need a month and two weeks. Furthermore, the language barrier was also a challenge as all the lectures and materials were delivered in Arabic. The participants had to fully rely more to interpreters, who interpreted in English and French language.
The sixth and seventh days included entertainment programs where the delegation visited the pyramids, the religious complex and an evening in the Nile River.
The participant has acquired skills and knowledge to conduct an economic feasibility study and analyze the four main component of the feasibility study such as technical, financial, market and legal study. The participant has also deepened the understanding of best practices in fighting corruption. The objectives of the course were fully met.
There is strong need to relook at the current feasibility studies conducted in private and public sectors to include missing critical components such as market, technical, financial and legal analysis of the project.
Huge projects such as Oil storage facility, Narkatel Dam and Ramatex should have gone through a detailed economic feasibility study covering the four components of a full feasibility study to analyze their viability and cost. This could have minimized the challenges faced on the implementation of these projects.
Feasibility studies should strongly be used when monitoring the implementation of projects.