An industrial project passes through various, sometimes interlaced, phases: idea, opportunity selection, economic and project data gathering, official and investment bodies contacting to prepare feasibility study and obtain licenses required and, finally, project operation.
Full awareness of industrial investment phases, as well as time, effort and financial requirements, is crucial to avoid obstacles that may affect project cost and implementation period.
There are three phases for industrial projects:
- Investment idea and feasibility study
- Procedures, agreements and licenses
- Management of implementation contracts
The following is a summary of each phase:
Project Idea and Planning:
Industrial investment differs from commercial and service investments in terms of longer planning period and higher risks, yet returns are substantial and growth is higher. Moreover, the value added of the industrial investment on the national economy is greater than other investments given government incentives mentioned earlier. Accordingly, entering into industrial investment should be driven by tendency towards innovation and development to attain planned goals.
Industrial investment also requires sponsor to be financially strong to support project, particularly in first years, by satisfying work capital requirements during depletion of capital by costs and before profit yielding.
During this phase, two steps should be taken by investor:
Preliminary Study of Potential Opportunities:
Successful projects are usually based on good opportunities, God Willing. Realization of good opportunities requires some effort as ideas needs to be gathered and assessed. Preliminary ideas can be provided by commercial chambers' information centers, economic and industrial consultation offices and governmental and private industrial research centers. In addition, local and international exhibitions can help investors crystallize their ideas to manufacture products with good returns.
After selection of one opportunity or more, a brief preliminary study should be prepared for each opportunity to make comparison indicators and identify the most viable opportunity taking into consideration demand volume, local products and imports. Attraction of industrial opportunities is based on the following factors:
- Investment size and sponsor financial capabilities
- Potential risks in the targeted industrial sector
- Sufficient demand and minimum capacity to make profits
- Obtainment of production technology and the need for foreign partner or technology transfer
- Investor readiness and experience in selling products to facilitate marketing
In this phase, proposed products, uses and alternative products available should be fully descried.
Preparation of Feasibility Study:
After selection of the investment opportunity, a feasibility study is prepared to ensure viability of the project including introduction, location, available infrastructure, technology sourcing, financing, as well as costs of inputs, water, power, energy, wages, lands, buildings, machinery…etc. Feasibility study is divided into sections as shown below:
- Estimated local and imported demand volume for the proposed products, future demand and designed capacity as per the project share in the local and export markets.
- Fees and taxes on the proposed products and customs tariffs on the similar or alternative imports
- Estimated supply volume in targeted markets including local producers, installed capacities, historic sales and imports volume and sources for each market.
- Price structure analysis for local and imported rivals and pricing of the proposed products in the light of such prices and expected production cost.
- Existing rival alternatives and their effect on production continuity and demand in the future.
- Production and export plans and estimated future sales in the local and export markets.
- Local competition impact, distribution points and marketing strategy.
If the sponsor willing to approach SIDF for funding, he can refer to the required marketing information in Feasibility Study section for more details.
In addition to introduction of industry, scale economics, impacts and technology sources, the following should be covered in the technical study:
- Land area including the area for production facilities, warehouses, administration offices, car park, recreation centers and future expansion.
- Products quality and specifications and whether such specifications conform to local and international standards. Packing and packaging methods are also described in this section.
- Manufacturing process, raw materials processing, technology sources and know how required to realize targeted quality.
- Does the project need production management, quality control or technology licenses agreements with international companies?
- Requirements and costs of buildings, civil works, machinery and auxiliary equipment, and whether such machinery can be obtained locally.
- Requirements and costs of local and imported raw and packaging materials including quantities and sources, and whether such materials can be secured locally.
- Requirements of public utilities such as power, water, fuel and sewage including availability, sources and costs.
- Requirements of labor in terms of number, skills and classification (officers, technicians, operators, servers) including salaries, wages and incentives.
- Project implementation timetable including progress and duration.
Financial and Economic Study
This study includes estimation of investment and operational costs as well as financial viability as shown below:
- Capital costs: fixed assets, working capital, pre-operating expenses (studies-consultations-travel-legal foundation- commissioning)
- Available local and foreign financing sources and suggestion of suitable ones
- Capital structure (ratio of capital to loans) with estimated financing cost in light of alternative financing conditions
- Fixed and variable costs
- Financial statements including expected cash flows and gross and net income
- Viability indicators such as profit, IRR and redemption period
- Sensitivity analysis and project influence by any potential change in quantity or inputs and outputs costs ( selling price-raw material and production costs-capacity-investment costs-financing…etc)
Statutory Procedures and Agreements (Licenses)
After full satisfaction of the project viability and preparation of feasibility study, investor should complete some statutory procedures with governmental and private sectors to obtain licenses and technical and marketing agreements required, and negotiate with suppliers and contractors on a basis of a work plan and priorities timetable, as shown below:
- Project file procedures including industrial license, legal form, products and capacity, proprietorship commercial register and company articles of association
- Allocation of the project land in industrial cities and zones and availability of utilities and public facilities
- Coordination with power companies to avoid delay when requiring heavy electrical loads
- Obtainment of quarry concessions (whenever required)
- Obtainment of project designs, drawings, layouts and bills of quantities from certified engineering offices after coordination with machinery suppliers
- Final selection and negotiation with machinery suppliers
- Well arrangement of machinery delivery, installation, testing and commissioning, and determination of supplier role in such stages.
- Technology transfer negotiation and signing of technical letters of understanding (whenever required) with more than one party in order to reach ideal form for the final agreement
- Determination of suitable local contractors for project implementation, invite them for bidding, select offers and choose one to be the main contractor.
- Arrangement for financing from governmental and private institutions before project implementation as numerous funds are required.
- Obtainment of membership from a chamber of commerce and industry and joining to industrial specialized committees.
- Coordination with the Saudi Customs to get exemptions and permits for production inputs.
- Completion of the Labor Office procedures to provide the project with labor required.
- Ensuring the project is equipped with safety and environmental requirements from competent authorities
- Ensuring conformity of products and production technology with the specifications of the Saudi Standards, Metrology and Quality Organization, whenever available.
- Completion of Zakat return procedures with the Department of Zakat and Income Tax.
- Completion labor registration with the General Organization for Social Insurance.
Due to importance of the abovementioned procedures, Chapter II is dedicated for competent authorities' requirements and conditions as well as documents and forms required.
Management of Project Implementation:
After completion of statutory procedures, project implementation becomes the next stage as shown below:
- Form a project implementation team to be the first administrative core. The team mainly consists of a technical manager, project manager and secretaries and it aims at supervising implementation progress for buildings and machinery.
- Sign building and civil work final contracts with the selected contractor and ensure all common items are duly fulfilled.
- Complete orders and credits regarding supply and installation of production lines as per capacities approved in the feasibility study; and sign technology transfer and know how agreements, whenever required, in conformity with the feasibility study (see Technology Transfer & Acquisition – SIDF Publication).
- The project team should ensure parallelism between the above steps to make buildings and infrastructure ready for installation of machinery in accordance with the project layout.
- Train Saudi workers to operate machinery by suppliers which, as part of agreement, send technicians to the project to install machinery, perform commissioning and train labor
- Provide the project during commissioning with raw and packaging materials required whether from the local or export markets.
- Marketing plan should coincide with other implementation phases to be fully aware of targeted markets before actual production.
- Commissioning is the first post-implementation stage to ensure quality and faultless product, well trained labor and sufficient officers.
- Finally, ensure project viability, compare actual results with expected ones after gradual operation as planned and count costs and returns.
- Continuously develop products in accordance with latest technologies, react to market and client development and lay out strategies to control production inputs and outputs, promotion, pricing and distribution.