 |
Table of Contents |
 |
|
|
Financial Management and Analysis of Projects :
7. Knowledge Management
7.9. Appraisal Checklist: Private Sector Project
7.9.1.1. Preparation at Headquarters
7.9.1.1.1. Meet with Division Manager and Project Officer to receive briefing
on ADB's approach to funding private sector projects in the country,
the borrower, use of cofinanciers, the project objectives and those
of the appraisal mission.
7.9.1.1.2. Study and note all positive and negative attributes ascribed to
country, sector and similar projects in: (i) the Country Strategy
Paper to understand the role that the project is to be designed
to fulfill; (ii) relevant reports on the country profile, institutions
to be involved in, and responsible for the project, and where available,
the proposed private sector company; (iii) reports on project identification
and preparation, including forecasts of local and foreign inflation
for the country concerned; (iv) relevant reports on country and
sector project performance; and (v) relevant reports on current
projects in the sector in the country.
7.9.1.2. Initial Steps
7.9.1.2.1.Participate
in or, where necessary, arrange initial meetings with counterparts
in all concerned organizations in the government concerned with
the project, including the existing or a proposed company.
7.9.1.2.2. Ensure all managers and
staff to be involved in project planning and implementation have
copies of ADB's Handbook for Borrowers on Financial Management
and Financial Analysis of Investment Projects, ADB's Loan
Disbursement Handbook and ADB's Procurement Handbook.
7.9.1.2.3. Advise on the availability
of the web-based Financial Management Guidelines.
7.9.1.3. The Institutional Environment
7.9.1.3.1.
Confirm/modify information obtained
through readings and reviews in 7.9.1.1.2.
7.9.1.3.2. Determine current central
and state government and sector agencies that will need to be involved
in project design, implementation and operation, for example, Ministries
of Finance and Economy, Industrial Production, Planning and Development,
Agriculture, Export Guarantee Agency, etc.
7.9.1.3.3. Determine the likely capability
and capacity to deliver the project by the current organizational
and management structure of the company's central management units/departments
and operating units/departments that are/will be involved in project
design, implementation and operation.
7.9.1.3.4. Study and understand the
country's financial sector, the role of the central bank and the
banking system, and their probable contribution to/application to/impact
on, the project, with particular regard to provision of funds and
foreign exchange requirements.
7.9.1.3.5. Determine the capability,
capacity and current performance of the country's accounting and
auditing profession to meet ADB's requirements for use of International
Accounting Standards (IASs) for financial reporting by the EA, and
auditing using International Standards on Auditing (ISAs).27
7.9.1.3.6. Determine the quality of
accounting and bookkeeping training in the EA and their ability
to apply IAS when reporting to ADB.28
7.9.1.3.7. Determine the capability
and integrity of the financial managers designated to be responsible
for the financial management of the project, through due diligence.
7.9.1.3.8. Make judgments on required
modifications to organizational structures, financial management
positions, accounting, bookkeeping, and inventory maintenance staffs
and their training necessary to support the project-share with Project
Officer-Recommend any necessary upgrading, if necessary, recommending
an appraisal element to support funding for this purpose.
7.9.1.4. Financial Management Systems
7.9.1.4.1.
Taking into account section 7.9.1.3,
where there exists an ongoing financial management system, accounting
and bookkeeping systems, computer/data processing systems, and an
internal control environment and internal control systems to support
the project, form a judgment on the acceptability, or otherwise,
of these systems. Examine the following systems to the extent that
they are likely to be necessary to support the project:
Financial
clauses of the Articles of Incorporation (or
Association) of the company
Minutes of company meetings for the most recent 3
years (or such other period as may be reasonable)
in which financial policy, strategy, decisions
and issues were recorded
Planning and budgeting records
Payroll including HR records
Accounts payable
Accounts receivable
Taxes and duties
Inventories
Cost of manufactured goods and services
Project accounting records
Management and overhead
|
Ledgers
and journal systems
Bank accounts and reconciliations
Records of stock issues and repurchase
Investors/shareholders records
Equity records
Subsidies received
Grants/donations records
Loans received and repayments
Loans advanced with repayments
Cash management
Dividends records
Asset and depreciation records
Internal controls and internal audit
Periodic and annual financial statements
External auditors' reports and opinions for past 3 years |
7.9.1.4.2.
On the basis of examination in 7.9.1.4.1,
determine the nature and form of the accounting standards in use
and their likely acceptability to ADB. In the event that they would
not be acceptable, define ADB's requirements with respect to IASs
and the national GAAP to counterparts of the company and the borrower.29
7.9.1.4.3. On the basis of examination
in 7.9.1.4.1, determine the nature and
form of the auditing standards in use and their likely acceptability
to ADB. In the event that they would not be acceptable, define ADB's
requirements form use of ISAs to counterparts of the company and
the borrower.30
7.9.1.4.4.In
the absence of any of the system and documentation elements set
out in 7.9.1.4.1, define new or additional
system and documentation requirements necessary to support the project
and advise a timetable to counterparts for their introduction and
full operation, including necessary staff additions and training.
7.9.1.4.5 Review, and where necessary,
complete the FM Assessment Questionnaire (FMAQ). Discuss and agree
project steps and process with counterparts. Prepare a preliminary
Financial Management Internal Control and Risk Assessment (FMICRA).
Prepare a draft Financial Management Assessment Report or update
the existing Financial Management Assessment Report, if required.
7.9.1.5. Definition of Project Cost Requirements
7.9.1.5.1.
Review with counterparts and consultants
responsible for project design/preparation the project description
and specification documents to understand the cost of each project
component (new assets) and their likely foreign and local costs
for each year of implementation, the total cost of each asset for
depreciation purposes (including financial charges during development),
and the forecast date(s) of their commissioning.
7.9.1.5.2. Review with the Project
Officer the likely adequacy and suitability of the existing tariff
and charges or the new (proposed) tariff and charges developed as
part of project design, for products/outputs/sales, etc. ensuring
where necessary that the tariffs and charges reflect both cost savings
proposed as part of the project and impact of forecast inflationary
factors.
7.9.1.5.3. Where available, use COSTAB
software to compile all project costs and procurement documentation.
7.9.1.5.4. Review with counterparts
and consultants responsible for project design/preparation the project
cost table for comprehensiveness, adequacy of structure/descriptions
of base cost line items, and annual/periodic foreign and local expenditures
including financial charges during development, where applicable.
Ensure that taxes and duties are clearly defined and capable of
being easily defined for exclusion from ADB financing.
7.9.1.5.5.
Use a country/sector disbursement
profile to judge the likely accuracy of the forecasts of proposed
expenditures and ADB disbursements.
7.9.1.5.6. Examine the physical contingencies
and their legitimacy.
7.9.1.5.7. Examine the price contingencies
for accuracy with respect to local and foreign costs, including
application of appropriate rates of local and foreign inflation.
7.9.1.5.8. Subject to any recommendations
arising from section 7.9.1.8, with respect
to the determination of private sector funding, discuss with Project
Officer and, where appropriate, with counterparts, the financing
plan and disbursement profiles to determine the total financing
requirements, the amount and timing of receipt of each input of
funds requirements, the proposed amount of ADB's proposed total
loan/credit proceeds, of receipts from cofinanciers, from internal
sources, and government counterpart funds.
7.9.1.6. Preparing Projections for Ongoing Production Lending Operation
7.9.1.6.1.
Determine actual and forecast physical output statistics and losses
(industrial/agricultural products/ electricity/water/telecommunications,
etc.) for at least 2 completed fiscal years prior to the start of
project implementation, for the period of project implementation,
and for at least 3 years of operation.
7.9.1.6.2. In consultation with the Project
Officer and counterparts, as appropriate, apply the tariff and charges
and all relevant financial information from 7.9.1.5.2
to 7.9.1.6.1 to provide a revenue stream
during implementation and for at least 3 years following commissioning.
7.9.1.6.3. In consultation with the
Project Officer and counterparts, as appropriate, if it will be
necessary to revalue assets periodically through the implementation
period and thereafter to reflect the impact of severe inflation,
prepare a forecast depreciation schedule for all assets, and those
from 7.9.1.5.1, and (ii) without the assets
in 7.9.1.5.1.
7.9.1.6.4.In consultation with the
Project Officer and counterparts, as appropriate, forecast the company's
operating costs with and without the project for at least 2 completed
fiscal years prior to the start of project implementation, for the
period of project implementation, and for at least 3 years of operation
and incorporate the impact of inflation as forecast in 7.9.1.5.7.
7.9.1.6.5. Prepare schedules of interest
payments due to existing and proposed lenders for the new project
(including appropriate treatment of financial charges during development).
7.9.1.6.6. Prepare schedules of loan
repayments to existing and proposed lenders for the new project.
7.9.1.6.7. Using the projected annual
investments from 7.9.1.5.1, disbursements
from 7.9.1.5.8, and the results of 7.9.1.6.1-7.9.1.6.5,
compile an income statement for at least 2 completed fiscal years
prior to the start of project implementation, for the period of
project implementation, and for at least 3 years of operation.
7.9.1.6.8. On the basis of audited
annual financial statements for 2 fiscal years prior to implementation,
the schedules in 7.9.1.6.5-7.9.1.6.6,
and the results of the income statement in
7.9.1.6.7, prepare a cash flow statement for the period of implementation
and 3 years of operation.
7.9.1.6.9. On the basis of the Income
Statement in 7.9.1.6.7 and the Cash Flow
Statement in 7.9.1.6.8, prepare balance
sheets for the period of implementation and 3 years of operation.
7.9.1.7. Preparing Projections for a New Production Lending Operation
7.9.1.7.1.
Obtain from counterparts and consultants
the forecast physical output statistics and losses (industrial/agricultural
products/electricity/water/ telecommunications, etc.) from the start
of commissioning of assets to the conclusion of the period of project
implementation, and for at least five years of full operation.
7.9.1.7.2. In consultation with the
Project Officer and counterparts, as appropriate, apply the tariff
and charges in 7.9.1.5.2 to provide a
revenue stream (if any) during implementation and thereafter in
operation using 7.9.1.6.7.
7.9.1.7.3. In consultation with the
Project Officer and counterparts, as appropriate, if it will be
necessary to revalue assets periodically through the implementation
period and thereafter to reflect the impact of severe inflation,
prepare a forecast asset revaluation and depreciation schedule.
7.9.1.7.4. In consultation with the
Project Officer and counterparts, as appropriate, forecast the company's
operating costs for the period of project implementation, and for
at least 5 years of operation and incorporate inflation as forecast
in 7.9.1.5.7.
7.9.1.7.5. Prepare schedules of interest
payments due to lenders (including appropriate treatment of financial
charges during development).
7.9.1.7.6. Prepare schedules of loan
repayments to lenders.
7.9.1.7.7. Using the projected annual investments
from 7.9.1.5.1, disbursements from 7.9.1.5.8,
and the financial results of 7.9.1.7.1-7.9.1.7.5,
prepare an Income Statement for at least 2 completed fiscal years
prior to the start of project implementation, for the period of
project implementation, and for at least 5 years of operation.
7.9.1.7.8. Using the projected annual
investments from 7.9.1.5.1, disbursements
from 7.9.1.5.8, the schedules in 7.9.1.7.5-7.9.1.7.6,
and the results from the Income statements in 7.9.1.7.7-prepare
a cash flow statement for the period of project implementation,
and for at least five years of operation.
7.9.1.7.9. On the basis of the results
of the Income statements in 7.9.1.7.7
and the Cash Flow Statements in 7.9.1.7.8, prepare balance sheets
for the period of implementation and five years of operation.
7.9.1.8. Financing Plan Involving Private Sector Funding
7.9.1.8.1.
Determine all sources of funds forecast
to be required external to the company's own resources, from the
private sector, governmental institutions (where appropriate) and
ADB.
7.9.1.8.2. Where loans are proposed
from private sources, including banks and finance houses, check
the terms and conditions proposed by the potential lenders and confirm
the capacity of the company to meet the future obligations against
the background of its forecast costs, sales and revenue streams
and capital funding commitments. In particular check the security
offered by the company, particularly any specific assets, which
if lost due to default to a lender, would seriously impair earnings.
7.9.1.8.3. Where the company is proposing
to attract equity contributions as a private company, check to validity
of its proposals and of the offers made by potential stakeholders.
7.9.1.8.4.
Where a company is, or intends to
be, a public company and is proposing to seek an initial public
offering on a stock market/exchange, review all documentation and
correspondence relating to the proposed flotation. In particular,
review the auditor's report and ensure the report was made in accordance
with ISAs. Any concerns should be expressed in a meeting with the
auditors and the company counterparts to obtain full assurances
as to the reliability of the proposed flotation documentation. Discuss
with the concerned financial advisers to the company who are managing
the flotation (and if necessary, with the stock exchange managers)
the prospects for the flotation, and in particular, the realism
of the timing of entry into the market and the nature/class of the
stock/shares to be issued.
7.9.1.8.5.
Where a company is seeking to issue
additional capital, if necessary up to its limit of authorized capital,
examine the records of stock/shares management and related auditor's
reports for due performance. Review the effective use of the existing
capital issue, particularly the return on capital issued and dividends
paid to stakeholders. Review the proposed terms of the proposed
issue including the class of share(s), and particularly the issue
price(s) for realism and potential to meet the financial needs of
the company for the period of the project.
7.9.1.9. Defining Financial Performance Indicators and Reviewing Projections
7.9.1.9.1.
On the basis of generated data as
a result of 7.9.1.6 (for an ongoing operation),
7.9.1.7 (for a new production operation) and 7.9.1.8,
compile the FIRR and appropriate financial performance indicators
for the project and the company. Discuss proposed indicators with
Project Officer and counterparts, explaining logic of selection
and methods of calculation.
7.9.1.9.2. With Project Officer, explain
in detail to counterparts the method of compilation and the forecast
results of all financial statements at all appropriate levels of
concerned institutions and management with the objective of reaching
agreement on the project cost table, the financing plan, the financial
statements containing the financial projections, and any tariffs
and charges proposed.
7.9.1.9.3. With the Project Officer,
meet with cofinanciers at mutually agreed locations (whenever possible
in the presence of counterparts) to explain the method of compilation
and the forecast results of all financial statements at all appropriate
levels of concerned institutions and managements with the objective
of reaching agreement on the project cost table, the financing plan,
the financial projections, financial performance indicators, and
tariffs and charges proposed.
7.9.1.9.4. Draft the section of the
Aide Memoire relating to all financial aspects of the project and
discuss with Project Officer. Make any agreed amendments for presentation
of complete Aide Memoire to counterparts at appropriate levels.
7.9.1.9.5.
Draft paragraphs for inclusion in
the financial section of the RRP and prepare financial appendixes
to attach to the RRP. Review with the Project Officer.
_________________________
27
Financial
Analysts have discretion to agree alternative arrangements (see
paragraph 2.4.3).
28 Financial
Analysts have discretion to agree alternative arrangements (see
paragraph 2.4.3).
29
Financial
Analysts have discretion to agree alternative arrangements (see
paragraph 2.4.3).
30
Financial
Analysts have discretion to agree alternative arrangements (see
paragraph 2.4.3).
 Back
7.8. Appraisal Checklist: Revenue-Earning Project | Next
7.10. Appraisal Checklist: Financial Institution |
Publications 
Top of page