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p. 26 of 203 BACK | NEXT Foreword 1. Introduction to the Guidelines 2. User Instructions 3. Preparing and Appraising Investment Project 3.1. Investment Projects Overview 3.2. Possible Investment Projects 3.3. Appraisal Checklists 3.4. Forecasting 3.4.1. Introduction to Forecasting 3.4.2. Using the COSTAB Model 3.4.3. Preparing Project Cost Estimates 3.4.4. Determining Contingencies 3.4.5. Disbursement Profiles 3.4.6. Preparing Financing Plans 3.4.7. Computing Incremental Project Cash Flows 3.5. Preparing Financial Benefit-Cost Analyses 3.6. Loan Covenants 3.7. ADB Reports 4. Financial Management of Executing Agencies 5. Reporting and Auditing 6. Financial Institutions 7. Knowledge Management

Financial Management and Analysis of Projects : 3. Preparing and Appraising Investment Project

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3.4. Forecasting

3.4.1. Introduction to Forecasting

3.4.1.1. ADB needs reasonable forecasts of expenses, revenues, cash flows, and other financial items that are necessary to ensure that projects are delivered in a timely and effective manner. But as forecasting is not an exact science, ADB requires its staff to work alongside their counterparts in borrowers' agencies during project identification, preparation and appraisal to ensure that all reasonable efforts have been made to develop meaningful forecasts. These forecasts should, ideally, be prepared by the borrower's agencies. However, where forecasts are prepared by ADB staff, or PPTA consultants, it is essential that the borrower's agencies take ownership of these forecasts.

3.4.1.2. ADB requires EAs to provide updated forecasts after loan signing and the start of project implementation. These will be updated forecasts-to-completion or, in the case of revenue-earning projects, updated forecasts for a specified period. The updated forecasts provide early warnings of project problems so that timely corrective actions can be taken. In the case of a revenue-earning project, the financial analyst will determine the period during which EAs will be required to provide updated forecasts. This requirement will be specified in the loan agreement. The exact period is at the discretion of the financial analyst. This will normally be from between 3 and 5 years following project completion (i.e., normally a total period of 10 years).

3.4.1.3. During project preparation and appraisal, staff should carefully examine project cost, revenue and cash flow estimates. The project officer is responsible for ensuring that these base costs are realistic. The financial analyst and the project engineer are responsible for examining the cost estimates in general. They are particularly responsible for ensuring that: (i) the items included in the base cost are realistic; and (ii) where items have not been included, this has been for sound technical, financial or economic reasons.

3.4.1.4. The remainder of this section discusses: (i) the use of the COSTAB model; (ii) the principal components of cost estimates and how these should be developed; (iii) physical, price contingencies, and risk contingencies; and (iv) disbursement profiles. The section concludes with outline of a typical project Cost Estimates table and Financing Plan.

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