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Foreword
1. Introduction to the Guidelines
2. User Instructions
3. Preparing and Appraising Investment Project
4. Financial Management of Executing Agencies
4.1. Financial Management Overview
4.2. Institutions and Systems
4.3. Financial Analysis
4.3.1. Introduction to Financial Analysis
4.3.2. Financial Analysis Objectives
4.3.3. Linkages with Cost Recovery and Tariffs
4.3.4. Preparing Financial Tables
>>4.3.5. Determining Fiscal Period Coverage
4.3.6. Forecasting and Financial Projections
4.3.7. Forecasting Assumptions
4.4. Measuring Performance
5. Reporting and Auditing
6. Financial Institutions
7. Knowledge Management
Financial Management and Analysis of Projects : 4. Financial Management of Executing Agencies : 4.3. Financial Analysis

4.3.5. Determining Fiscal Period Coverage

4.3.5.1. Introduction

4.3.5.1.1. Forecasting financial performance is frequently a hazardous task for the financial analyst. The records of past performances may not always be available, nor reliable, and a current less-than-satisfactory performance may be one of the reasons for proposing the project. Political, inadequate human resources, and natural disaster problems, among others, can influence future performance.

4.3.5.1.2. Despite these hazards, the financial analyst is required to develop financial information relating to a project and, where appropriate, the EA for a period of time that will allow ADB’s Management and the borrower to form judgments, at the least, as to past and current capabilities, and the most desirable, minimum financial performance that must be achieved to allow the project to be viable. It will not help the borrower or ADB for a financial analyst to forecast financial success in order to bring a project to the ADB Board, when all the sensible indications are that such success is unlikely. The latter has too often been the cause of unsuccessful projects.

4.3.5.2. Fiscal Period Coverage: Revenue-Earning Projects

4.3.5.2.1. For revenue-earning projects and their EAs, financial analysis needs to be based on a reasonable period of confirmed past financial status and operating performance of the EA. The current financial status and performance will be a useful guide to the capability and capacity of the Executing Agency to deliver the project.

4.3.5.2.2. With the information gained from the current and past performances, forecasts should be prepared of the financial status and performance likely to be achieved during implementation, and for a meaningful early period of operation following commissioning of the project. This applies particularly in cases where the EA will implement and operate the project as part of its ongoing operations, such as an existing electric power-generating utility or a water supply and sewerage utility.

4.3.5.2.3. There can be no definitive periods of performance measurement, and the chosen years for each project and EA must be selected on the basis of the financial analyst's judgment of the period(s) that are likely to be the most informative for an accurate and reliable justification for the project and use of the particular EA.

4.3.5.2.4. As a general rule, it is unlikely that a period of less than 2 years of actual confirmed (audited) performance immediately prior to implementation, together with the implementation period and not less than three years of full operation following final commissioning would provide a satisfactory, reliable sample.

4.3.5.2.5. Some projects include components that have protracted implementation periods, for example, dams and forestry. For some the implementation period often can only be defined by the success of the project; for example, oil and gas wells exploration. Other components are often commissioned within 1 or 2 years of the commencement of implementation. Usually it is necessary to provide a financial picture of the completed project, including at least 3 years of full operation and, therefore, in such a case, the period of detailed analysis may cover 12-15 years or more (2 years past, 2 years on existing operations, say 6 years for implementation and 3 years after project completion).

4.3.5.2.6. The word "detailed" has been emphasized here because, by comparison, for purposes of the FIRR the financial inflows and outflows for the full period of the life of the investment must be determined, but for FIRR purposes, the analytical requirements are not so complex.

4.3.5.3. Fiscal Period Coverage: Nonrevenue-Earning Projects

4.3.5.3.1. Normally for nonrevenue-earning projects, the financial analysis should address only the financial requirements of the project itself, in the form of the Financing Plan, and the operating costs for up to five years following completion.

4.3.5.3.2. Unless the EA is also to be the subject of some form of financial performance reform as part of the project, there is no requirement to provide past performance data, unless this is material to support project justification.

4.3.5.3.3. Similarly future performance should normally focus on project execution and include only those costs of the EA for which financing must be assured to ensure the successful implementation of the project.


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4.3.6. Forecasting and Financial Projections