Feasibility Studies? … or Viability Studies?

Published in The Freeman (Philippine Star), Feb. 2, 2012

About our article last week, an online reader with the handle “@moneydown,” posted a comment at “www.philstar.com,” and said, “It should be called ‘Viability Study’. A project may be feasible but, not necessarily viable.” Very true! One of my colleagues at DOTC said, “don’t these terms mean the same?” Probably. But being “feasible” literally means it can be done … technically. Being viable is leaning more towards the business side of it. I agree that viability is the better term. Unfortunately, all the textbooks in project development, and the guidelines and procedures of NEDA, the World Bank, ADB, USAID, JICA, and the rest of the world use “feasibility studies” in referring to the need to justify projects. So we’re stuck with it!

What maybe more important, are the components of a feasibility study (we call them “aspects”), and their relative importance to one another. We have in an FS – the technical aspect, the social and environmental acceptability aspects, the institutional aspect (how it’s going to be implmented within the government framework), … among others. But as we said, the more important, usually placed at the end of the study, are the financial and economic viability aspects. These two make or break a project, and determines the go or no-go decision. “No-go” decisions are rare. If it doesn’t pass the tests, the project is usually either downscaled, or postponed (a project might not be viable NOW but it might be, LATER …).

What’s the difference, then between “financial” and “economic” viability? The “domain” or scope of the analysis. The financial aspect is “micro” – it looks at the monetary computations within the project itself, whether it makes money, earns a profit, or will lose in the end. All business propositions always look at the financial feasibility; no businessman will go into an investment that will surely lose money! Usually, private banks will also just look at these figures in deciding to approve a loan application. It’s also important for government projects, most especially for self-liquidating ones (markets, terminals, airports, ports, and the like).

But government is more concerned with economic viability, and this means the “macro” domain of the project. How does it relate to the entire economy or to the entire country? Does the economic benefits far exceed the economic costs? Projects like elementary schools, daycare centers, farm-to-market roads, and similar “social” projects do not earn money and are thus, financially not viable. But we build them for the simple reason that they are building blocks of the country. If you compute their economic benefits (which are not in terms of cash), these far-outweigh whatever cost we sink into them.

Projects like roads (usually) and lighthouses (always) are also NOT financially viable. People don’t pay for the use of both (except of the road users tax which are negligible compared to project costs), but they have high economic benefits. Lighthouses can never be privatized as there is no way of segregating who can use them or not, and collect payment accordingly. But in highly-urbanized areas, private firms may collect “toll” in the case of “expressways” in Manila, so these can already be “privatized.” In these cases, tollroad projects must also be financially viable besides being economically viable.

The question really is, do all projects undergo these studies? Foreign-funded projects, yes, these are non-negotiablel; also for projects P300 or above. But how about “other” agency projects, or projects of the LGUs? LGUs get 40% of the IRA, and at least 20% of that 40% must be set aside for their Annual Investment Program (AIP). It would be interesting to see how many of these projects are not feasible/viable at all. We can also ask all projects to submit FS’es – but this needs amendments of existing laws. … which might be too much to ask. (Email: streetlife@villarete.com)

http://www.philstar.com/Article.aspx?articleId=773667&publicationSubCategoryId=109

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