Feasibility Study Chapter 3

The legal & investment environmental

Feasibility studyChapter 3

Feasibility Study

Econ 4315

Prepared by: Abd ElRahman J. AlFar

Introduction

• This study is considered the first step in the detailed feasibility study,conducted by experts and specialists in the field of law and legislationconcerning investment and employment, insurance, taxes... etc,


Legal and environmental feasibility study contains four elements:• Analysis of investment environment.

• Study of investment laws.

• Enhancing and controlling investments.

• Specifying the legal personality.


1. Analysis of investment environment

this analysis intend to study all the variables affecting investment in all project’s aspects such as:

• Customs, traditions and social values (habits and social values): these formsa limits or encouraging demand on the product, there are consumption ofcertain products associated with habits at certain times, such as Ramadan,and some other religious and national events.

• Economic and political system for example, does the economic system inwhich investment is to be lunched in a socialist economic system orcapitalist economic system investment in each of the two systems areviewed differently. E.g. rights and obligations of individuals and institutions,relations and procedures vary from one system to another.


1. Analysis of investment environment (cont.)

• Grants and subsidies: you may be requested or granted by the Stateof various legal forms investors. thereof subsidies productivity (Statesupport for producers to continue producing or to sell goods forcustomers at low prices even when there is a high cost of productionthis happen in case that the State will subsidies the differencebetween prices and cost).

• Income distribution mechanism: Any investor should identify ways inwhich State or society distributes the return of production inputs andlearn about the laws and regulations that specify minimum wages orearnings ceiling and precedes from leases property rights ... etc.)


2. Study of investment laws.

The investor should consider public laws and regulations that affect costsand revenues of the project i.e. civil, commercial, and economic laws suchas:

• Incentives and mechanisms to encourage investment.

• Customs and tax laws.

• Commercial and economic laws.

• Pricing policies and production subsidies: examples of price-fixing: o Essential pricing for sale of goods and services.o Establish minimum sales quantities of goods and services. o Initiating a ceiling for the sale of goods and services. o Specify and limiting the maximum profit rate.


3. Enhancing and controlling investments

There are many decrees and laws that come from the local authorities may contain advantages or obligations must be studied and analyzed to know its impact on project statement i.e.

A. Investment restrictions: which is imposed certain conditions forpracticing business such as health and educational projects andengineering ... etc or restrictions on the participation of citizens inforeign investment projects, or special legal restrictions on foreigncurrencies or limits to prevent foreign investment in the country


Enhancing and controlling investments (cont.)

B. Incentives/advantages:-such as tax exemptions, whether temporaryor permanent exemptions and laws governing customs protectionfacing of foreign products and customs exemptions on inputs (factorsof productions) ... etc

investment incentives of classified into types:

1- Direct investment incentives: related to financial aids, tax andcustoms exemptions.

2- Indirect investment incentives: developing and creating indirect aidsuch as to provide State public utility asphalting of roads, water andelectricity to facilitate the project functions.


4. Specifying the legal personality

• Sole ProprietorshipA Sole Proprietorship is one individual or married couple in business alone.Sole proprietorships are the most common form of business structure. Thistype of business is simple to form and operate, and may enjoy greaterflexibility of management, fewer legal controls, and fewer taxes. However,the business owner is personally liable for all debts incurred by the business.• General PartnershipA General Partnership is composed of 2 or more persons (usually not amarried couple) who agree to contribute money, labor, or skill to a business.Each partner shares the profits, losses, and management of the business,and each partner is personally and equally liable for debts of the partnership.Formal terms of the partnership are usually contained in a writtenpartnership agreement.


Specifying the legal personality (cont.)

• Limited Partnership

A Limited Partnership is composed of one or more general partners and oneor more limited partners. The general partners manage the business andshare fully in its profits and losses. Limited partners share in the profits ofthe business, but their losses are limited to the extent of their investment.Limited partners are usually not involved in the day-to-day operations of thebusiness.

• Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is similar to a General Partnership exceptthat normally a partner doesn’t have personal liability for the negligence ofanother partner. This business structure is used most by professionals, suchas accountants and lawyers.



• Corporation

A Corporation is a more complex business structure. A corporation hascertain rights, privileges, and liabilities beyond those of an individual.Doing business as a corporation may yield tax or financial benefits, butthese can be offset by other considerations, such as increased licensingfees or decreased personal control. Corporations may be formed forprofit or nonprofit purposes.



• nonprofit Corporation

A Nonprofit Corporation is a legal entity and is typically run to furtheran ideal or goal rather than in the interests of profit. Many nonprofitsserve the public interest, but some engage in private sector activities.

• A Limited Liability Company (LLC)

Is formed by 1 or more individuals or entities through a special writtenagreement. The agreement details the organization of the LLC,including provisions for management, assignability of interests, anddistribution of profits and losses. LLCs are permitted to engage in anylawful, for-profit business or activity.


Considerations for selection of the project legal status:The legal form should be determined in the light of several considerations,including:-• Type of activities, there is a specific legal form imposes by the nature of

economic activities itself.• Capital structure distributions (capital shares distributions) for different

shareholders.• The size of the project required performed (project capacity and scale of

production): the larger is the business, the greater is the funding requiredto one or several persons requiring equalization’s provided.

Note: Laws and provisions regulating investment projects in the country:from the outset should study the laws regulating legal forms of projects anddetermine the rights and duties of share holders in the project and theselaws should be attached with the legal documents for the project.


The most important needed legal documents required• Feasibility study (name, objective, studies ... of the project).

• Documentation for project financing partners (safeguards offeredfrom the size of their contributions in the total capital and shouldinsure this capital).

• Sharing investments guarantees: it must not be fictitious made onlyto benefit from the exemptions and privileges facilitated by the govt...

• Any guarantees required by the State to fulfill obligations may occurat any moment, such as taxes.

• Contributing documents and property (real estate, rental ... ..)


• Statute of the project.

• Construction decisions of joint ventures for private or the public.

• Any documents allow the transfer of technology, and skills from or tothe project as needed.

• It is advisable to add copy of all existing laws and provisions incountry belonging to the project with these documents to facilitatethe licensing procedures.


Simple Project mechanisms to deal with others in the society:• Letter of intent: letter from your project to others expressing your

desire to work with other project whether others is desire to workwith you are not it could be Government or another project orsuppliers or agents or … ... etc.

• Protocol:-an agreement signed by the parties concerned initialed andspecifying the areas of activity in the document, containing the mostimportant areas of cooperation and includes some details of the legalform of the project.

• The final contract:-the most important legal documents in therelation between cooperators include rights and obligations of itssignatories.


Summary

Who preparers the Feasibility study should identify some environmentalcomponents of social, political, and economic study which require certainelements such as:

• Political environment elements: political environment such as Governmentpolicies in dealing with domestic and foreign investment in the extent ofinternal political stability of the country.

• Economic environment:-any items related to the country's economicphilosophy wither a socialist system, or capitalist or mixed economicsystem.

• Social environment elements: the social customs and traditions and socialtestes ... etc inhabited in the society.


Summary (cont.)

• Elements of the environment: legal and legislative institutionsintended to revise the conventions and legal contracts and legaldisputes arbitration efforts as well as the courts ... ... etc.

• Technical environment means technical aspects that might beavailable in the production items available in the community.

• Other elements such as the availability of public facilities such asroads, lighting, water and infrastructure projects in the investmentenvironment of the society.


Economy & Finance

Feasibility Study Chapter 3