4T12 PROJECT FEASIBILITY STUDY GUIDELINE

This guideline is to be used in preparing a feasibility study for major projects. This is different
to the work carried out in the Infrastructure Planning examined in Module 2 because we are
now concerned with the details of a particular project as opposed to the overall planning of a
whole multi-year infrastructure programme.
The term feasibility study is used as a convenient description for the output for the work
done, users of this toolkit should not apply preconceived notions of what a feasibility study
consists of. Stated as simply as possible, the work done here must show that the project:
is in accordance with predetermined needs;
is the most suitable technical solution to the needs;
can be implemented within any capacity constraints of the Institution which operates;
has been subject to a due diligence that shows it is legally, physically and socially
compliant;
is fully costed over the whole life of the project;
has taken due cognisance of the risks associated with its whole life cycle; and
is affordable to the institution responsible for the project in the context of the available
budget;
The feasibility study guideline set out below is for a comprehensive document that, in many
instances simply uses information already collected and set out as part of the steps carried
out by the Institution. That said it is necessary to create a study that creates a holistic
justification for the project and serves as a living document against which project deliverables
are measured during procurement and even after implementation of the project.
A feasibility study needs to be authentic and thorough. It is the basis for government making
an important investment decision, not just a bureaucratic requirement. Regardless of the term
and scale of a project, there is a great deal at stake when the procurement choice is made,
and long-term implications.
It provides information about costs (explicit and hidden), and gives an indication of
whether costs can be met from within institutional budgets without disruptions to other
activities.
It allows for the identification, quantification, mitigation and allocation of risks.
It prompts institutions to consider how the project will be structured.
It identifies constraints, which may cause the project to be halted.
It ensures that the project is developed around a proper business plan.
A feasibility study is an evolving, dynamic process. While it is used to justify what is developed
and at what cost (the investment decision) it is also used throughout the procurement phase
to check that the project is being developed in accordance with the original assumptions and,
where change is necessary, it is also used to manage the change.

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Feasibility Study
Contents
1. THE NEEDS ANALYSIS ............................................................................................... 3
Part 1: Demonstrate that the project aligns with the institutions strategic objectives ......... 3
Part 2: Identify and analyse the available budget(s)........................................................... 3
Part 3: Demonstrate the institutions commitment and capacity ......................................... 3
Part 4: Specify the outputs................................................................................................. 4
Part 5: Define the scope of the project ............................................................................... 5
2.

THE OPTIONS ANALYSIS ............................................................................................ 5

3.

PROJECT DUE DILIGENCE ......................................................................................... 7

4.

FINANCIAL ASSESSMENT .......................................................................................... 8

Part 1: Construct the project cost model ............................................................................ 8

5.

SENSITIVITY ANALYSIS ............................................................................................ 14

6.

DEMONSTRATE AFFORDABILITY ............................................................................ 14

7.

VERIFY INFORMATION AND SIGN-OFF ................................................................... 14

8.

ECONOMIC VALUATION ........................................................................................... 15

9.

PROCUREMENT AND IMPLEMENTATION PLAN ..................................................... 15

10.

REVISITING THE FEASIBILITY STUDY ................................................................. 16

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1. THE NEEDS ANALYSIS

The needs analysis gives definition to the proposed project, preparing the way for the
solution options analysis in Stage 2, which explores the range of possible solutions to
meeting the identified needs.
The needs analysis will have been considered during the Infrastructure Planning Stage. During
this feasibility study phase it will be thoroughly interrogated and where necessary amended to
reflect the
Part 1: Demonstrate that the project aligns with the institutions strategic objectives
Part 2: Identify and analyse the available budget(s)
Part 3: Demonstrate the institutions commitment and capacity
Part 4: Specify the outputs
Part 5: Define the scope of the project
Part 1: Demonstrate that the project aligns with the institutions strategic objectives
To be in an institutions best interests, a project needs to align with the institutions
policy and priorities.
Step 1: Summarise the institutions mission and vision statements, its strategic objectives,
and the government policy that determines what the institutions deliverables are.
Step 2: Describe the functions that the institution performs in the public interest or on behalf
of the public service.
Step 3: Discuss the following aspects of the project:
How does the project contribute to the implementation of government and institutional
policy?
Does the institution have the ability and the capacity to provide the services?
What is the relative size of the project, in terms of its anticipated budget or capital
expenditure?
What are the potential cost savings for the institution?
How complex is the project?
What does the public require in relation to the services?
Given the proposed duration of the project, will it address the broad needs of the institution
over time?
Will the proposed project meet the institutions needs in the time required?
Part 2: Identify and analyse the available budget(s)
This analysis must include:
A discussion of any assumptions about future budgetary commitments required from
government: How much will be required over what period of time, escalating by the CPIX?
A discussion of any consolidation of budgets, namely drawing funds from various budgets
into a consolidated budget which will be ring-fenced for this project. These budgets may
be internal to the institution but may also involve identification of budgets in other
institutions, for example the Department of Public Works.
A list of the line items currently in the institutions budget for costs which may no longer be
incurred as a result of the proposed project. For example: If a government department is
housed in different buildings, there may be costs associated with delivering mail between
buildings. If the proposed project is to house the department in one building, the
department would no longer incur these costs, which then represent potential savings.
Refer to the relevant treasurys directives on budget preparation in terms of the PFMA.
Part 3: Demonstrate the institutions commitment and capacity
It needs to be clear that the institution can manage, process, evaluate, negotiate and
implement the project.
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Step 1: Provide an assessment of

lines of decision-making within the institution, particularly between project officer,
senior management and the accounting officer/authority
any areas where a lack of capacity exists, in the project team or in the transaction
advisor
a plan on how the lack of capacity will be addressed throughout the project process
the plans for skills transfer from the transaction advisor to the project team at various
stages of the project
how staff turnover will be managed.
Step 2: Provide information on key stakeholders
1. Possible key stakeholders include:
those within the institution
other government departments
other spheres of government
organised labour
third parties
the public.
2. Describe the nature of each relationship and the projects impact on each stakeholder
In particular, identify impacts on the funding, resources or processes of the key stakeholders.
This is important for establishing where the service will begin and end. For example in IT
related components, the State Information Technology Agency (SITA) could be a key
stakeholder and this would help to define where the IT services would begin and end.
3. Include a consultation plan
The plan should detail how and when consultation will take place during the project preparation
period of the project cycle and how the views and contributions of key stakeholders will be
incorporated into the project. Also include the results of any consultation the institution has
already undertaken, and any required concurrence obtained from government stakeholders,
such as permission from South African Heritage Resources Agency (SAHRA) to demolish a
building.
Step 3: Consult with the relevant treasury
Consult with the relevant treasury about the project, especially about budgetary and
affordability issues.
For national departments and public entities this will entail discussions with the Public Finance
division of National Treasury and with the institutions own accounting officers and chief
financial officers.
For provincial departments and public entities, there must be consultation with the
Intergovernmental Relations division of National Treasury and the provincial treasury.
Part 4: Specify the outputs
Once the institutions objectives and budget have been identified, and its commitment and
capacity demonstrated, the outputs of the proposed project need to be specified.
Step 1: Describe the service that the institution needs to deliver
Step 2 Specify the outputs required to deliver that service
Step 3: Specify the minimum standards for the outputs
This will ensure that the service delivered by the project meets the institutions expectations.
Step 4: Assess whether the output specifications can meet the institutions ongoing
service needs
It may be necessary to specify to what extent the project must provide a flexible solution that
can be expanded or enhanced over time.
Step 5: Specify key indicators that will measure performance
This will allow for more accurate costing of the output specifications.
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Step 6: Identify service interface expectations

This concerns the interface between the project and the institutions other services.
Step 7: List the BEE and socio-economic targets that the institution wishes to achieve
in the project.
Part 5: Define the scope of the project
In light of the institutions needs and strategic objectives, and the output specifications for
delivering the required service, give a brief definition of the proposed scope of the project. This
should be a concise outline of the institutions requirements, which will allow for the selection
of reasonable service delivery options.
Briefly set out:
a summary of how the project objectives will address the institutions strategic
objectives, as determined in Part 1
a summary of the output specifications, as determined in Part 4
a list of significant government assets which will be used for the project (such as land
and equipment)
2. THE OPTIONS ANALYSIS
Step 1: List all the solution options the institution has considered
The list must cover the range of the most viable solution options for providing the specified
outputs of the required service.
Step 2: Evaluate each solution option
The purpose of the evaluation is to:
identify the advantages and disadvantages of each solution option
examine the risks and benefits for, and potential impacts on, government of each
option
Use the following template to set out each option
Brief description
Briefly describe each solution option, including an outline of the alignment between each
option and the institutions strategic plan, the service it needs to deliver, and the output
specifications.
Financial impacts
For each option show the estimated initial capital expenditure, and the likely capital and
operational costs over the full project cycle. (This preliminary analysis of financial impacts
will provide a basis for the detailed work to come later in the feasibility study.)
Funding and affordability
How is each option to be funded? Which options are affordable?
Risk
Present a preliminary discussion about the risks to government in relation to each option.
BEE and other socio-economic aspects
Provide a preliminary view on the impact of each option on the BEE targets set out in the
outputs specifications, and other socio-economic targets on which the institution may wish
to deliver in the project.
Service delivery arrangements
Discuss the service delivery arrangements for each option, and analyse the implications of
each option for optimal interface between services. For example, if the institution is
assessing its options for accommodation services, how would each solution option deal with
the integration of IT and communications services?
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Transitional management issues

Discuss the issues that may arise in the transition from existing management arrangements
in each solution option. For example, each solution option for staff accommodation will have
implications for how a departments security, IT, delivery and despatch systems are
managed in the transition from the existing to the new.
Technical analysis
A comprehensive technical analysis must be presented for each solution option, including
a supply chain/interface analysis. Include an assessment of the proposed technology and
its appropriateness for each solution option.
Site issues
If a solution option involves a physical site, issues around the procurement of land must be
identified at this stage, such as: land use rights, zoning rights, geo-technical, environmental
issues, relevant national or provincial heritage legislation, and alignment with municipal
Integrated Development Plans. (These issues will be dealt with in detail in the due diligence
stage below, but must be identified for each solution option now.). The preference is for all
site issues to be resolved during the feasibility study.
Legislation and regulations
Does a particular option comply with the relevant legislation and regulations? Analyse firstly
procurement legislation and regulations, and secondly sector-specific legislation and
regulations, which may impact on the project, to establish a compliance list against which
each option can be measured.
Human resources

Establish the numbers and cost of existing institutional staff that will be affected in each
solution option, do a skills and experience audit, and establish the key human resources
issues for the project.
Design and implement a suitable communication strategy for the institution to keep staff
informed of the project investigations, as required by labour law.
Assess the following for each option, if relevant:
- organised labour agreements
- the cost of transferring staff, if applicable
- an actuarial study of accrued benefits that may be transferred
- an initial view on the potential willingness of both staff and private parties to implement
transfers.
Qualitative factors
There will be a number of qualitative benefits associated with a particular option, which may
not be quantifiable and may not be considered as offsetting costs. It is important that these
qualitative factors be identified early. For example: Cabinet has agreed that all departmental
head offices must be located in the inner city. So although there might be a suitable building
or site outside of the inner city, which may be cheaper or more appropriate for other reasons,
Cabinets decision will affect the choice of solution option.
Step 3: Choose the best solution option
Each solution option has now been be evaluated. A matrix approach can be used to weight
up the evaluation of each option against another to assist in the choice of the best one.
Category

Option 1

Option 2

Brief description
Application of Criteria

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Option 3

Category

Option 1

Option 2

Option 3

Construction Cost

45 000 000

42 000 000

58 000 000

Operations Cost

1 500 000 per annum

1 500 000 per annum

2 000 000 per annum

Funding and

Sufficient

Sufficient

Insufficient capital funds

Risk Rating

Low

Medium

Medium

Role for BEE

Low

Low/Medium

Low/Medium

Service Delivery

Low very difficult to

Medium

Medium

Arrangements

move large contract

Transitional

Low

Low

Low

Low

Medium

Medium

Site Issues Impact

Low

Medium

Medium

Legislation and

Low

Low

Nil

Impact on HR

High

Low

Nil

Qualitative

Good outcomes

Medium

Medium

Score

25

20

OPTION RATING

Affordability

Management Issues
Technical Analysis
Suitability
Innovation
etc

Regulation Issues

Assessment

In this last step of the solution options analysis stage, recommend which option(s) should be
pursued to the next stage.
It is preferable that only one solution option is chosen, and no more than three. If more than
one option is recommended, each must be separately assessed in the financial analysis stage
below.

3. PROJECT DUE DILIGENCE

The due diligence stage is an extension of the solution options analysis stage and aims to
uncover any issues in the preferred solution option that may significantly impact on the
proposed project.
Step 1: Legal issues
Although a preliminary legal analysis of each solution option was done in the options analysis
stage, a comprehensive legal due diligence of the preferred option(s) must now be done to
ensure that all foreseeable legal requirements are met for the development of the project.
Although it may be costly to undertake a comprehensive legal due diligence of all aspects of
the project in this early phase, it is ultimately worthwhile. Early legal certainty directly affects
project costing in Stage 4 (thus assisting in making the procurement choice).
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Common legal issues that arise are around use rights and regulatory matters. However, the
institutions legal advisors should conduct a thorough due diligence on all the legal issues
which have a bearing on the project.
If the project being explored is a greenfields project and the institution has never done this
kind of project before, then a regulatory due diligence will be required.
Investigate any regulatory matters that may impact on the Institutions ability to deliver as
expected. These may include:
tax legislation
labour legislation
environmental and heritage legislation
sector regulations such as airport licensing, health standards, building codes, etc.
Step 2: Site enablement issues
If the institution nominates a particular site, it will need to identify, compile and verify all related
approvals. The purpose is to uncover any problems that may impact on the projects
affordability or cause regulatory delays at implementation.
Establish the following:
land ownership
land availability and any title deed endorsements
Are there any land claims?
Are there any lease interests in the land?
Appoint experts to undertake surveys of:
environmental matters
geo-technical matters
heritage matters
zoning rights and town planning requirements
municipal Integrated Development Plans.
Step 3: BEE and other socio-economic issues
Identify sectoral BEE conditions (for example, the extent to which BEE charters have been
developed and implemented), black enterprise strength in the sector, and any factors that may
constrain the achievement of the projects intended BEE outputs. Also identify socio-economic
factors in the project location that will need to be directly addressed in the project design.
4. FINANCIAL ASSESSMENT
Part 1: Construct the project cost model
The project cost model represents the full costs to the institution of delivering the required
service according to the specified outputs via the preferred solution option using
conventional public sector procurement.
The project cost model costing includes all capital and operating costs associated with the
project and also includes a costing for all the risks associated with project.
The public sector does not usually cost these risks, but it is necessary to get this understanding
of the full costs to government of the proposed project.
Key characteristics of the project cost model
Expressed as the net present value (NPV) of a projected cash flow based on an
appropriate discount rate for the public sector
Based on the costs for the most recent, similar, public sector project, or a best estimate
Costs expressed as nominal costs
Depreciation not included, as it is a cash-flow model.
Example of a Project Cost Model

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Base PROJECT FINANCIAL MODEL: Nominal cash flow (R thousands)

Year
0

10

11

12

DIRECT COSTS
Capital costs
Land costs
Design and construction contract price

5,000
15,000 55,650 39,326 17,865

Payments to consultants

3,333

Plant and equipment

5,000 15,900 33,708

3,533

3,745

Capital upgrade

20,073

Life-cycle capital expenditure

17,665

Maintenance costs

21,039

25,058

4,764

5,050

5,353

5,674

6,015

6,375

6,758

7,163

7,593 8,049

Wages and salaries

5,955

6,312

6,691

7,093

7,518

7,969

8,447

8,954

9,491

Running costs

2,382

2,525

2,676

2,837

3,007

3,188

3,379

3,582

3,797 4,024

Management costs

1,191

1,262

1,338

1,419

1,504

1,594

1,689

1,791

1,898 2,012

Operating overhead costs

238

252

268

284

301

319

338

358

380

Administrative overhead costs

596

631

669

709

752

797

845

895

949 1,006

5,955

6,312

6,691

7,093

7,518

7,969

8,447

8,954

Operating costs
10,06
1

INDIRECT COSTS
Construction overhead costs

1,000

1,060

1,124
402

LESS

Third-party revenue

Subtotal: Base PROJECT

FINANCIAL MODEL

Discount factor: 10%

Discounted cash flow
NPV of base PROJECT FINANCIAL
MODEL

29,333 76,143 77,903 27,036

1.0

0.91

0.83

0.75

29,333 69,221 64,383 20,313

9,491

10,06
1

9,721 48,042 10,923 11,578 33,311 13,009 13,790 39,674

15,49
4

0.68

0.62

0.56

6,640 29,830

6,166

0.51

0.47

0.42

5,941 15,540

5,517

0.39

0.35

5,316 13,906 4,937

277,043

The central functions of the project cost model

promotes full cost pricing at an early stage

is a key management tool during the procurement process, assisting the institution to stay
focused on the output specifications, costs and risk allocation
is a reliable way of demonstrating the projects affordability
is a consistent benchmark and evaluation tool during procurement

Step 1: Provide a technical definition of the project

What norms and standards will be applied in the project? What maintenance cycles are
expected?
Step 2: Calculate direct costs
Direct costs are those that can be allocated to a particular service. These costs must be based
on the most recent public sector project to deliver similar infrastructure or services (including
any foreseeable efficiencies, for example regular life-cycle maintenance), or a best estimate
where there is no recent comparable public sector project. If there are no comparable projects
in South Africa, draw on the experience of projects in similar environments in other countries.

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0.32

1. Capital costs
Direct capital costs are specifically associated with the delivery of new services, including, but
not limited to, the costs of design, land and development, raw materials, construction, and
plant and equipment (including IT infrastructure). Direct capital costs should also account for
the projects labour, management and training costs, including financial, legal, procurement,
technical and project management services. It is also important to include the costs of
replacing assets over time.
2. Maintenance costs
Direct maintenance costs will include the costs over the full project cycle of maintaining the
assets in the condition required to deliver the specified outputs, and may include the costs of
raw materials, tools and equipment, and labour associated with maintenance. The level of
maintenance assumed must be consistent with the capital costs and the operating cost
forecasts.
3. Operating costs
Direct operating costs are associated with the daily functioning of the service and will include
full costs of staff (including wages and salaries, employee benefits, accruing pension liabilities,
contributions to insurance, training and development, annual leave, travel and any expected
redundancy costs), raw materials and consumables, direct management and insurance.
Step 3: Identify indirect costs
The projects indirect costs are a portion of the institutions overhead costs, and will include
the costs of: senior managements time and effort, personnel, accounting, billing, legal
services, rent, communications and other institutional resources used by the project. The
portion can be determined by using an appropriate method of allocation, including but not
limited to:
number of project employees to total institutional employees for personnel costs
project costs to total institutional costs for accounting costs
number of project customers to total institutional customers for billing costs.
Step 4: Identify any revenue
The total cost of delivering the service should be offset by any revenues that may be collected.
Project revenue may be generated where:
users pay for the service or a part thereof
the use of the institutions assets generates revenue
service capacity exists above the institutions requirement
the institution allows third parties to use the service.
Any revenue collected must reflect the institutions ability to invoice and collect revenue. (This
should have been identified during Stage 2.)
Step 5: Explain assumptions
Explain in detail all assumptions the model makes about the inflation rate, the discount rate,
depreciation, treatment of assets, available budget(s), and the governments Medium-Term
Expenditure Framework (MTEF).
Inflation
The model should be developed using nominal values. In other words, all costs should be
expressed with the effects of expected future inflation included. Nominal figures reflect the
true nature of costs, as not all costs are inflated at the same rates. This also allows for easy
comparison with the institutions budget, which is expressed using nominal values. Inflation
projections should be made with reference to the inflation targets set by the Reserve Bank.
The MTEF budget cycle which government uses is adjusted annually by CPIX.
The discount rate
For practical purposes the discount rate is assumed to be the same as the risk-adjusted cost
of capital to government.
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Depreciation
Since the PROJECT FINANCIAL MODEL is calculated on cash flow, not on accrual, non-cash
items such as depreciation should not be included.
Part 2: Construct the risk-adjusted PROJECT FINANCIAL MODEL
Part 2 Calculate the project Risk and include in the project cost model
In conventional public sector procurement, risk is the potential for additional costs above the
project cost model. Historically, conventional public sector procurement has tended not to take
risk into account adequately. Budgets for major procurement projects have been prone to
optimism bias a tendency to budget for the best possible (often lowest cost) outcome rather
than the most likely. This has led to frequent cost overruns. Optimism bias has also meant
that inaccurate prices have been used to assess options. Using biased price information early
in the budget process can result in real economic costs resulting from an inefficient allocation
of resources.
Much of the public sector does not use commercial insurers, nor does it self-insure (through a
captive insurance company). Commercial insurance would not provide value for money for
government, because the size and range of its business is so large that it does not need to
spread its risk, and the value of claims is unlikely to exceed its premium payments. However,
government still bears the costs arising from uninsured risks and there are many examples of
projects where the public sector has been poor at managing insurable (but uninsured) risk.
Step 1: Identify the risks
Explore each risk category in detail. It is important to identify and evaluate all material risks.
Even if a risk is unquantifiable, it should be included in the list. Do not forget to include any
sub-risks that may be associated with achieving the BEE targets set for the project.
When identifying risks by referring to an established list, there is the possibility that in the list
generated for the project, a risk not listed may have been left out by mistake (as opposed to
simply not being a risk for this specific project).
It may be difficult to compile a comprehensive and accurate list of all the types of risks. The
following can be helpful sources of information:
similar projects (information can be gathered from the original bid documents, risk
matrices, audits and project evaluation reports) both in South Africa and internationally
specialist advisors with particular expertise in particular sectors or disciplines.
Step 2: Identify the impacts of each risk
The impacts of a risk may be influenced by:
Effect: If a risk occurs, its effect on the project may result, for example, in an increase
in costs, a reduction in revenues, or in a delay, which in turn may also have cost
implications. The severity of the effect of the risk also plays a role in the financial
impact.
Timing: Different risks may affect the project at different times in the life of the project.
For example construction risk will generally affect the project in the early stages. The
effect of inflation must also be borne in mind.
It is essential to specify all the direct impacts for each category of risk. For example,
construction risk is a broad risk category, but there could be four direct impacts, or sub-risks:
cost of raw material is higher than assumed
cost of labour is higher than assumed
delay in construction results in increased construction costs
delay in construction results in increased costs as an interim solution needs to be found
while construction is not complete.
Each impact is thus a sub-risk, with its own cost and timing implications.
Step 3: Estimate the likelihood of the risks occurring
Estimating probabilities is not an exact science, and assumptions have to be made. Ensure
that assumptions are reasonable and fully documented, as they may be open to being
challenged in the procurement process or be subject to an audit. There are some risks whose
probability is low, but the risk cannot be dismissed as negligible because the impact will be
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high (for example the collapse of a bridge). In this case a small change in the assumed
probability can have a major effect on the expected value of the risks. If there is doubt about
making meaningful estimates of probability, it is best practice to itemise the risk using a
subjective estimate of probability rather than to ignore it. Institutions should also be prepared
to revisit initial estimates, if they learn something new that affects the initial estimate. Together
with estimating the probability of a risk occurring, it is also necessary to estimate whether the
probability is likely to change over the term of the project.
Step 4: Estimate the cost of each risk
Estimate the cost of each sub-risk individually by multiplying the cost and the likelihood.
Assess the timing of each sub-risk.
Cost the sub-risk for each period of the project term.
Construct a nominal cash flow for each risk to arrive at its net present value.
Example of nominal cash flow for each risk
Year

Risk
0

Design and construction risk

Cost overrun

3,061

10

11

12

7,570

8,024

3,645

1,613

3,763

3,763

1,613

825

1,925

1,925

1,925

Operating risk

1,498

1,588

1,684

1,785

1,892

2,005

2,126

2,253

2,388 2,532

Performance risk

1,787

1,894

2,007

2,128

2,255

2,391

2,534

2,686

2,847 3,018

581

616

653

692

734

778

824

874

Time overrun
Similar service provision
Upgrade cost

8,652

Maintenance risk
General maintenance risk
Patient area maintenance risk

- 3,061

Discount factor: 10%

1.0

Discounted cash flow

Present value of risk

0.91

- 2,783

817

513

543

576

610

647

686

727

1,326

1,405

1,182

1,253

1,328

1,408

1,492

1,582 1,677

18,659 19,312 15,269

9,830

6,363

6,744

7,149

7,578

8,033

8,515 9,026

0.68

0.62

0.56

0.51

0.47

0.42

0.39

15,421 14,510 10,429

6,104

3,592

3,461

3,335

3,214

3,097

0.83

0.75

71,805

Example of Risk Analysis and Mitigation Table

Description

Consequence

Mitigation
Risk
value (R
thousand)

1. Design and
construction risk

771

484

Step 5: Identify strategies for mitigating the risks

A risk can be mitigated either by changing the circumstance under which the risk can occur or
by providing insurance for it. Indicate what the risk mitigation strategy for dealing with each
particular risk will be, and the attendant cost of such mitigation. This is the most important
part of the risk assessment and should identify specific steps taken or to be taken to mitigate
risks.
Risk

982

1,251

Technology risk
Subtotal: Risk

926

The risk that the construction of the physical assets Cost & delay
is not completed on time, budget or to
specification.

1.1 Cost overruns 1.1.1 Increase in the construction costs assumed

in base PROJECT FINANCIAL MODEL model.

1.2 Time overruns 1.2.1 Increase in the construction costs assumed Delay resulting in
in base PROJECT FINANCIAL model as a result of additional cost
delay in the construction schedule

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43,200

Cost
19,250

10,750

0.35

0.32

2,984 2,876

1.2.2 Cost of interim solution. Results in additional

cost of maintaining existing building or providing a
temporary solution due to inability to deliver new
facility as planned.
1.3 Upgrade costs 1.3.1 Increase in construction costs if the planned
facility is not sufficient and additional capacity
needs to be added.
2. Operating risk
The risk that required inputs cost more than
anticipated; are inadequate quality or are
unavailable.
3. Performance risk Risk that services may not be delivered to
specification

Cost of interim solution

5,500
Cost of upgrades
7,700
Cost increases and may
impact on quality of
service. Cost p.a.
Service unavailability.
Inability of Institution to
deliver public service.
Alternate arrangements
may need to be made to
ensure service delivery,
with additional costs. Cost
p.a.

1,258

1,500

4. Maintenance risk Risk that design/ construction is inadequate and

results in higher than anticipated maintenance
costs. Higher maintenance costs generally.
4.1 General
maintenance risk

4.2 Patient area

maintenance risk

Cost increases. May

impact on Institution's
ability to deliver public
services.
Risk that design/ construction is inadequate and
Cost increases. May
results in higher than anticipated maintenance
impact on Institution's
costs in general area. Higher maintenance costs
ability to deliver public
generally.
services. Cost p.a.
Risk of higher than anticipated maintenance costs Cost increases. May
in patient area for which Institution is responsible. impact on Institution's
ability to deliver public
services. Cost p.a.

894

488

406

5. Technology risk Risk that technical inputs may fail to deliver

Cost increases.
required output specs or technological
improvements may render the technology inputs in
the project out-of-date.

10,500

Step 6: Construct the risk-adjusted project cost model

Once costs have been established for all identified risks, the base project cost model must be
risk-adjusted. This is done using the following simple formula:
Risk-adjusted cost = Base cost + Risk
Example of Risk Adjusted Project Financial Model
Year
0
Direct capital costs

Direct maintenance costs

Direct operating costs
Indirect costs
Less: Third-party revenue
Subtotal: Base PROJECT FINANCIAL MODEL

Risk value

Total cash flows

Discount rate: 10%

Discounted cash flows

Present value of risk-adjusted PROJECT
FINANCIAL MODEL

28,333 75,083 76,779 17,865

4,764

- 37,738
5,050

5,353

7
5,674

- 21,039
6,015

6,375

10
6,758

11

12

- 25,058
7,163

7,593

8,049

9,528 10,100 10,706 11,348 12,029 12,751 13,516 14,327 15,186 16,098

1,000

1,060

1,124

834

884

937

993

1,053

1,116

1,183

1,254

1,329

5,955

6,312

6,691

7,093

7,518

7,969

8,447

8,954

9,491 10,061

29,333 76,143 77,903 27,036

1,409

9,721 48,042 10,923 11,578 33,311 13,009 13,790 39,674 15,494

3,061 18,659 19,312 15,269

9,830

6,363

6,744

7,149

7,578

8,033

8,515

9,026

29,333 79,204 96,562 46,348 24,990 57,872 17,285 18,322 40,461 20,587 21,822 48,189 24,520

1.0

0.91

0.83

0.62

0.56

29,333 72,004 79,804 34,822 17,069 35,934

9,757

R348,847

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0.75

0.68

0.51

0.47

0.42

9,402 18,875

8,731

0.39

0.35

0.32

8,413 16,890

7,813

Step 7: Preliminary analysis to test affordability

As a preliminary assessment of the projects affordability, compare the risk-adjusted project
cost model with the institutions budget for the project as estimated during the solution options
analysis. If the project looks unaffordable by a wide margin, it may be necessary to revisit the
options analysis.
5. SENSITIVITY ANALYSIS
A sensitivity analysis determines the resilience of the base project cost model to changes in
the assumptions that the model has been based on.
The institution and its advisors should test the sensitivity of key variables to test their impact
on affordability, and risk, such as:
inflation rate
discount rate
construction costs
total operating costs
BEE costs
service demand
third-party revenue, if any
For example, an increase in the assumed capital cost may lower an associated risk. This will
allow the institution to view the potential spread of the total cost to government.
6. DEMONSTRATE AFFORDABILITY
The budget for the project has been identified at various stages prior to this. At this stage, it
must be scrutinised in detail and confirmed in order to demonstrate project affordability.
Step 1: Determine the institutional budget available for the project
Institutions should refer to the National Medium-Term Expenditure Estimates (NMTEE) and
their own detailed budgets. Include all the applicable available amounts, namely direct and
indirect costs, and any third-party revenues. Where necessary, include budgetary allocations
that would be available to the project from other institutional budgets (such as capital works
allocations on the Public Works vote).
7. VERIFY INFORMATION AND SIGN-OFF
Step 1: Verify the information used in the feasibility study
Constructing the project cost models and developing the risk costing are information-intensive
exercises. The conclusions which will be drawn from the models are highly dependent on the
quality and accuracy of the information they are based on. Because the models will need to
be referred to throughout the procurement phase, it is necessary to provide the following
information, as an annexure to the feasibility study:
A statement from the institution and its advisors on the reasonableness of the
information collected, assumptions made and costings carried out. All advisors
and technical consultants should sign off on their design and costings as professionals
using their best endeavours. For complex projects or projects where there is little
precedent, it is strongly recommended that an independent party checks that the
assumptions are reasonable and confirms that they have been correctly incorporated
into the model to produce an accurate result (arithmetic and logic). This may have cost
and time implications.
A record of the methodologies used for valuing various costs, including the costs
of key risks.
A statement on how an audit trail of all documentation has been established and
maintained to date, and how it will be managed throughout the project. This is an
essential requirement, especially for the purposes of the Auditor-General and in terms
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of the Promotion of Access to Information Act, 2000.Step 2: Draw up a checklist for

legal compliance
Legal advisors must draw up a checklist for legal compliance. (This may be a summary of
work undertaken during Stage 3.
Step 3: Sign off the feasibility study
All inputs into the feasibility study must be signed off as accurate and verifiable by each of the
transaction advisor specialists.
8. ECONOMIC VALUATION
An economic valuation is warranted in:
reenfield projects
capital projects of significant capital spend (say R100 Million)
projects that warrant an analysis of externalities (such as major rail, port, airport
projects).
NOTE : The National Treasury is of the opinion that on social sector projects the assumptions
of intangible externalities such as health, time, welfare, and education outcomes and so on
make economic appraisals secondary to through needs analyses and strategic planning. In
addition much of the benefits of such appraisals, for example risk identification, will be
achieved by following the methodology used in this toolkit.
Where used, a range of well-known micro-economic techniques exists for undertaking an
economic valuation, requiring the analysis to:
Give a clear economic rationale for the project.
Identify and quantify the economic consequences of all financial flows and other
impacts of the project.
Detail the calculation or shadow prices/opportunity costs for all inputs and outputs,
including:
- foreign exchange
- marginal cost of public funds
- opportunity cost of public funds (discount rate)
- high, medium and low skill labour
- tradable and non-tradable inputs
- tradable and non-tradable outputs (including consumer surplus, where relevant,
based on financial or other model quantities).
Identify an appropriate no-project scenario and calculate the associated economic
flows, treating them as opportunity costs to the project.
Identify the economic benefits to BEE, and the opportunity costs to BEE of a noproject scenario.
Provide a breakdown of the economic costs and benefits of the project into its financial
costs and benefits and various externalities.
Do a detailed stakeholder analysis, including the project entity, private sector entity,
government, and others.
9. PROCUREMENT AND IMPLEMENTATION PLAN
A procurement and implementation plan must contain at least the following:
a project timetable for the key milestones and all approvals which will be required to
take the project to completion
confirmation that sufficient funds in the institutions budget are available to take the
project to completion
the best procurement practice and procedures suited to the project type and structure
and that meet the requirements of equity, transparency, competitiveness and cost
effectiveness
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the governance processes to be used by the institution in its management of the

procurement, especially regarding decision-making
the project team with assigned functions
a list of required approvals from within and outside the institution
a GANTT chart of the procurement process, including all approvals and work items
necessary for obtaining these approvals (for procurement documentation as well as,
for example, the land acquisitions and environmental studies to be procured by the
institution)
contingency plans for dealing with deviations from the timetable and budgets
an appropriate quality assurance process for procurement documentation
the means of establishing and maintaining an appropriate audit trail for the
procurement
appropriate security and confidentiality systems, including confidentiality agreements,
anti-corruption mechanisms, and conflict of interest forms to be signed by all project
team members.
The feasibility study report must provide as much information as is necessary for the relevant
treasury to assess the merits of the project.
Submit as much information as possible, making use of annexures, which have been
referenced in the appropriate section of the main part of the report. All documents that have
informed the feasibility study and are of decision-making relevance to the project must be part
of the feasibility study report.
The report must not refer to any document that has not been submitted as part of the report
10. REVISITING THE FEASIBILITY STUDY
The feasibility study must become the reference point for the Institution during procurement.
When any assumptions change the feasibility study must be changed to see what impact the
change will have PRIOR TO IMPLEMENTING THE CHANGE

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