Many business leaders rely heavily on future revenue forecasts and often remark in jest how, at the moment, it feels just like playing the Super 5 for 10 consecutive draws.

While it might feel that way, traditional investment analysis tools such as feasibility studies and cost-benefit analysis (CBA) should not be so easily discredited. It’s fair to say that projecting beyond this year and next year is an even more herculean task given COVID-19 and its still unknown after-effects, which is why so many are prioritising the immediate concerns, such as by working on monthly cash flow forecasts, for instance.

However, the role of tools such as feasibility studies and CBA’s should receive more attention during uncertain times, as the tools represent frameworks that allow project promoters and appraisers to ask better questions.

‘Can it be done differently? Why has it not been done to date? If it has been applied successfully abroad, does it necessarily mean the same success rate will be achieved locally? How do I deal with COVID-19 uncertainty in my projections? How is my loan repayment schedule impacted?’

Economist Chris Meilak. Photo: EY

Feasibility studies and CBAs are intended for the initial stages of any project - be it private sector investment or public projects such as infrastructure - and at pre-feasibility stage it is normal not to have all the answers in place. So, a “what if …” type of argumentation is actually warranted, with workings such as break-even analysis, sensitivity analysis, assessment of multiple scenarios and risk matrices taking a more central role.

Additionally, the current crisis response measures, including the loan guarantee schemes link to bank financing, tends to give the impression that there is excess liquidity which is being channelled to any project or company that needs short-term respite. Where there is excess liquidity, there is opportunity to channel savings into productive investments, but there is also the risk of missing on the opportunity cost. In other words, cash will remain limited, and will be further restricted as measures such as moratoria or interest rate subsidies expire, and we get to grips with the full extent of COVID-19. In this regard, feasibility studies and CBAs allow for the possibility to reassess existing projects, scrutinise options and to help prioritise.

Another key aspect that has been reinforced through COVID-19 is the understanding that we might need to go beyond GDP-type of metrics in our assessment of performance or success. While feasibility studies tend to take a financial or investor point of view, CBAs can come in handy in these circumstances because they balance the investor view with the economic rationale and wider society viewpoint. They allow projects, especially of an infrastructural nature, to be assessed through tangible and intangible benefits, considering impacts on the wider economy, society and even the environment.

For more information on the similarities, and differences, between feasibility studies and CBAs, and their wider application, as well as questions to ask when drafting or reviewing such documentation, join me during a webinar on November 19 titled A Primer in Feasibility Studies and Cost-Benefit Analysis. Email events@mt.ey.com for more details or register online. 

Chris Meilak is an economist and Associate Partner at EY Malta, leading the Valuation, Modelling and Economics sub-service line.