1
Ministry for Foreign Affairs
Concessional Credit Scheme
Guidelines for the Preparation of
Feasibility Studies
May 2010
Tanecon Oy
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Table of Contents
1. INTRODUCTION ... 3
2. GENERAL CONDITIONS ... 4
2.1 OECD
A
RRANGEMENT ONO
FFICIALLYS
UPPORTEDE
XPORTC
REDITS... 4
2.2 F
INNISHC
ONCESSIONALC
REDITL
EGISLATION... 5
2.3
F
INNISHD
EVELOPMENTP
OLICY... 6
3. THE FINNISH CONCESSIONAL CREDIT PROJECT CYCLE ... 6
3.1 P
ROJECT IDENTIFICATION AND PREPARATION... 6
3.2 P
ROJECT APPRAISAL... 7
3.3 N
OTIFICATION AND CREDIT GUARANTEE... 8
3.4 P
ROCUREMENT AND CONTRACTING... 8
3.5
F
INAL DECISION... 9
4. REQUIREMENTS OF A FEASIBILITY STUDY ... 9
4.1 G
ENERAL REQUIREMENTS... 9
4.2 C
ONTENTS OF A FEASIBILITY STUDY... 10
4.3 S
TANDARD TABLE OF CONTENTS... 11
4.4 S
ECTOR-
SPECIFIC ISSUES... 17
Annexes
Annex 1, Financial Procedure of Concessional Credit Scheme Annex 2, Concessional Credit Project Cycle in Vietnam Annex 3, Examples of Feasibility Studies
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1. Introduction
The Finnish concessional credit scheme was established in 1986 and the related legislation came into force on 1 January 19871. The new legislation concerning the scheme came into force in January 20012. The scheme is part of the official development co-operation of Finland and a mechanism for financing Finnish exports to developing countries for projects with a considerable Finnish content and which promote economic and social development. Thus, the concessional credit scheme has both commercial and developmental expectations. These two considerations set the parameters for the scheme.
As a financing tool, the concessional credit scheme remains basically a combination of export credits from a commercial bank and interest subsidy from public development cooperation funds. The scheme aims at increasing financial flows from Finland to low- and middle-income countries, and promoting economic co-operation between the countries.
These Guidelines provide advice on the preparation of project proposals seeking for concessional credit financing for exports of goods and services from Finland to developing countries. This document updates earlier guidelines on the subject. These Guidelines will be made available to project promoters and project owners both in Finland and abroad. The Guidelines will be updated as and when the legislation or rules or development policies may change. It is advisable to contact the Ministry for Foreign Affairs as early as possible with a project idea, in order to obtain the latest information.
To ensure that the project proposals comply with the rules and conditions the responsible authorities, the Ministry for Foreign Affairs (MFA) and Finnvera Ltd.3, require a feasibility study in English that addresses the technical, financial, environmental and social aspects of the project. The feasibility study must show that the proposed project has positive development effects to be eligible for concessional financing. Each feasibility study is considered a valid basis for assessment by the MFA for two years from the date it was written. The authorities make their preliminary assessment on the basis of a feasibility study. A thorough feasibility study that covers all angles of the project and its implementation as stated in these guidelines is a prerequisite for the project to be admitted for further consideration by the MFA. If the preliminary assessment by the MFA shows that the project may qualify for the Concessional Credit Scheme, the MFA will send a team of experts to the project country to carry out a field appraisal. Based on a satisfactory field appraisal the MFA may decide to approve the project for OECD notification. At this point it is considered that the MFA is committed to taking the project through the decision making process.
After the procurement and signing of the contract (to be finished within two years from the appraisal), MFA will conduct an assessment of the contract and then the Minister will make the final decision on granting the subsidy for the concessional credit. Generally the most time-consuming part of the process has been tendering.
Finnvera guarantees the export credit4 and to this end assesses the credit worthiness of the partner country concerned, and that of the borrower / guarantor. Finnvera accepts the lending bank according to its eligibility criteria. Finnvera also assesses that there is a sufficient Finnish component (50%) and interest in the project and that it complies with the terms and conditions of the OECD for soft financing of tied aid5. Finnvera notifies the concessional credit to the OECD. The MFA assesses the relevance, feasibility and sustainability of the projects. It also assesses that the project has local ownership and complies with the policies and strategies of the partner country, and has positive developmental effects to be eligible for concessional financing. As the final approving agency of the concessional credit the MFA also has to be satisfied that there is a significant Finnish component in the project and that it complies with the terms and conditions of the OECD for soft financing of tied aid. MFA as the final decision maker has the authority to prioritize between different project proposals bearing in mind the financial resources available
1 Laki kehitysmaiden taloudellista kehitystä varten myönnettävien luottojen korkotuesta (1058/1986) 2 Laki kehitysmaihin myönnettavistä korkotukiluotoista (1114/2000)
3 Finnvera is the official Export Credit Agency of Finland
4http://www.finnvera.fi/eng/Export/Finnvera-an-Export-Credit-Agency/Concessional-Credits
5 OECD Arrangement on Officially Supported Export Credits, the so called OECD Consensus. The Consensus
4 for concessional credit instrument. Any given year the limit to commit to new projects is defined by the State Budget as approved by the Parliament.
The credit is provided by a Finnish or European bank. The borrower / guarantor of the credit is often the Ministry of Finance of the partner country. The buyer is usually the end user. Annex 1 shows the financial procedure in a concessional credit arrangement.
2. General Conditions
By nature the Concessional Credit is a commercial export credit, a buyer‟s credit, financed by a Finnish or European financial institution. Through the official guarantee by Finnvera, the loan becomes an “officially supported export credit”, which is governed by the OECD Arrangement on Officially Supported Export Credits (OECD Consensus). According to the OECD Consensus, concessional credit may be granted only to projects that are commercially non-viable with an exception of small-scale industrial projects worth less than SDR 2 million (see definition in p. 4 and OECD‟s ex ante guidance for tied aid6).
The interest subsidy is paid out of the State budget, from funds for international development cooperation. Thus, projects financed by Concessional Credits are part of the official development co-operation of Finland. Concessional credits are meant for supporting economic and social development, advancing economic cooperation between Finland and developing countries, and increasing Finnish exports to developing countries. Thus concessional credits are tied both to the OECD Consensus and to the general objectives of Finnish development co-operation. The projects are assessed against these two sets of conditions.
A decision on the interest subsidy, and thus on the concessional credit, is made by the MFA. The OECD Consensus considers this interest subsidy as official financial support. As the projects financed through Finnish concessional credits are tied to a „considerable Finnish component‟ and have this official financial support, the package becomes tied aid under the rules and the provisions of the OECD Consensus. Although projects financed through concessional credits are part of Finland‟s development cooperation, only the interest subsidy is reported to OECD/DAC as ODA.
2.1 OECD Arrangement on Officially Supported Export Credits
The main purpose of the OECD Arrangement on Officially Supported Export Credits, the OECD Consensus, is to provide the institutional framework for an orderly market for officially supported export credits, i.e. to provide a level playing field for commercial competition and to encourage competition on the basis of “highest quality and best services at a competitive price”. The OECD Consensus covers policies for export credits and tied aid. Export credit policies should be based on open competition and the free play of market forces. Tied aid policies should provide needed external resources to countries, sectors or projects with little or no access to market financing. Concessional credits can be extended to Low Income Countries and Lower Middle Income Countries as defined in the OECD Consensus7 (excl. LDC-countries and non-LDC HIPC-countries8). The countries must also be creditworthy so as to get a Finnvera guarantee.
Proposed projects must comply with the guidelines in the OECD Consensus.
Concessional credits may not be extended to projects that would normally be commercially viable, because in that case the project should be able to carry financing on market terms or export credits on OECD Consensus terms, and no subsidies would be required. One rule of thumb for commercial viability is whether the project can generate sufficient cash flow to cover the operating costs and service the capital costs. An exception from this principle can be made if the project is classified as a small-scale industrial project worth less than SDR 2 million (Special Drawing Rights) (~ EUR 2.3 million, as per 18.2.2010). Another test is whether it can be assumed that the project can attract commercial financing.
6 http://www.oecd.org/trade/xcred/arrangement/text
7 The listing of countries is based on the World Bank‟s classification. 8 Accra Agenda for Action, 2008
5 The projects financed through Finnish concessional credits are conditioned to a “considerable Finnish content” and have the official financing support, and thus the package becomes tied aid under the OECD rules and the provisions. All projects to be supported by concessional financing must be reported or notified to the OECD. Figure 1 below shows the general structure of a concessional credit.
Figure 1,
Servicing of Concessional Credits
Concessional credits are also required to meet the minimum “concessionality level” indicated in the OECD Consensus9. The concessionality level is checked each time by Finnvera and Finnvera also notifies each concessional credit to the Participants of the OECD Consensus.
2.2 Finnish Concessional Credit Legislation
The present legislation concerning the concessional credit scheme came into force in January 2001. The legislation codifies the roles and responsibilities of the stakeholders as well as the key procedures. The starting point is that interest subsidy can be paid from development cooperation funds for projects that promote economic and social development and that include a considerably Finnish component within the framework of each year‟s government accepted state budget allocated to concessional credit projects.
The application for a concessional credit is submitted to Finnvera by the exporting Finnish company or the lending bank. This sets the formal handling process in motion. Finnvera informs the MFA about the application.
The loan can be granted by a creditworthy Finnish or European financial institution or bank. Finnvera must provide a guarantee for the loan (see Annex 1). To that end Finnvera will assess the creditworthiness of the country concerned, and that of the borrower / guarantor.
The MFA assesses the development effects of the project and makes sure that conditions of the OECD Consensus are met. Finnvera notifies the concessional credit to the Participants to the OECD Consensus.
The MFA approves the concessional credit application taking into account the OECD Consensus. The loan agreement is concluded between the lending bank and the borrower. MFA decides the size of the interest subsidy. In practice the interest rate has been zero to the borrower. The interest is paid to the lending bank.
The MFA has to monitor that the loan is used for the intended purpose. The Act on Concessional Credits to Developing Countries as well as other regulations relating to Concessional Credits has to be followed. The MFA can cancel or change the decision on a concessional credit if the loan is not used for the intended purpose or the circumstances radically change (Act on Concessional Credits to Developing Countries, 5, 10 and 11 §).
9 At least a 35% grant element
Disbursements Disbursement period Grace period Semi-annual instalments Credit period Risk period
First disbursement Starting point First repayment of Credit
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2.3 Finnish Development Policy
The Finnish Government's Development Policy Programme 2007, Towards a Sustainable and Just World Community, provides the policy framework for Finnish development cooperation, including concessional credits. While eradication of poverty remains the ultimate goal of development, Finland‟s development policy puts renewed emphasis on sustainability of development. Sustainable economic growth is a prerequisite for development and poverty eradication. Social sustainability should ensure that the benefits of development are widely available for all in the society, including the poor, women and vulnerable groups. Development must also be environmentally and ecologically sustainable so that development is not achieved by depleting natural resources.
Sustainable development depends on stability and security, progress towards democratic governance based on the rule of law, the consolidation of human rights – especially the rights of women – and support for the civil society. The principles of sustainable development must be followed in a consistent manner.
Finnish development cooperation focuses on areas where Finnish expertise and experience can be best used to support partner countries‟ own development programmes. Development cooperation is planned on the basis of the partner country‟s development plans and ownership. Project cooperation remains an important form of cooperation, in addition to programme-based cooperation. Project cooperation provides an opportunity to utilise Finnish know-how and expertise.
Concessional credits are used primarily for environmental and infrastructure investments under national development programmes. MFA especially encourages project proposals from climate and energy sectors.
The Ministry‟s guidelines are found in a MFA brochure for Concessional Credit Scheme10 of 2009. Projects financed by Concessional credits have to be in line with the Finnish Development Policy and equally important is the compatibility with the partner country's own development policy.
3. The Finnish Concessional Credit Project Cycle
The handling of Finnish concessional credit project proposals follows the practice of international financing institutions insisting that investment initiatives advance in an organized manner from one stage to another. This process is called “Project Cycle”. The cycle may differ slightly from one institution to another but basically it includes the following stages: identification, preparation, appraisal, tendering, contracts, implementation, handing over, and post-evaluation. It is important for stakeholders to understand the project cycle in Finnish concessional credits and the time that may be required for handling the project proposal through all the various stages. The standard concessional credit project cycle is shown below in Figure 2.
3.1 Project identification and preparation
Project identification and preparation are crucial planning phases. Most fundamental decisions concerning the scope and implementation of the project are made during these phases. Project preparation is the main planning phase and it may comprise several studies, including opportunity studies, market studies, environmental impact assessment, pre-feasibility and feasibility studies and supporting detailed research. The feasibility study is the main project document which must accompany the concessional credit application. The feasibility study is in general considered a valid-basis for an assessment by the MFA for two years within which the appraisal mission shall take place in case the preliminary assessment based on the feasibility study is positive. It is advisable to contact the Ministry for Foreign Affairs as early as possible with a project idea, in order to obtain the latest information.
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Project preparation when the Finnish supplier is responsible
The concessional credit scheme was designed assuming that the Finnish supplier, i.e. the exporting company, has the initiative with respect to concessional credits. Accordingly, the first formal step which initiates the handling process is the supplier‟s application to Finnvera for a buyer credit guarantee for a concessional credit. The application must be accompanied with a feasibility study of the project. In this basic design it is assumed that the supplier is responsible for project identification and preparation. Naturally this should be done in cooperation with the buyer and project owner. Project ownership of the partner country is important.
Figure 2,
Standard concessional credit process cycle
Finnvera Supplier/Partner Country Ministry for Foreign Affairs
Identification ▼
Application ◄ Feasibility Study ► Preliminary Assessment* ▼
Quality Assurance Board* ▼
Field Appraisal* ▼
OECD Notification
◄ ◄ ◄ Approval for OECD Notification
▼ Procurement
▼
Buyer Guarantee Decision
◄ Contract ► Assessment of the Contract*
▼ Final Decision* * Rejection possible in cases of non-compliance with the Finnish Development Policy
Project preparation when the buyer and project owner is responsible (only Vietnam)
Today, in Vietnam, potential concessional credit projects are handled - in many stages and sometimes for many years - between MFA and the partner country‟s authorities before a Finnish supplier is identified and an application is submitted to Finnvera starting the formal handling process. In these cases the project owner is responsible for project preparation and feasibility studies are often prepared by government organizations. In Vietnam the Finnish Embassy has hired framework consultants who can support the project owner in preparing the feasibility study.
Annex 3 shows the official preparation and handling process of a concessional project in Vietnam. The project is handled between authorities until the contractor is selected, towards the end of the cycle, and only then the formal processing of the concessional credit can start.
3.2 Project appraisal
The basic objective of project appraisal is to ensure that the project is technically feasible, economically (and financially) viable and that it complies with OECD rules and is in line with Finnish development policies. An assessment is made of several aspects of the project proposal. First Finnvera assesses the exporting company‟s trustworthiness as a supplier. They also assess the creditworthiness of the country concerned, the lending institution and the borrower / guarantor. Finnvera also makes a preliminary assessment of the eligibility of the project for a concessional credit and its compliance with OECD rules.
8 Finnvera also calculates the concessionality level of the financing according to a formula adopted by the OECD. The concessionality level determines the parameters of the loan in terms of maturity, grace period and interest rate. The parameters of the loan change every year in January and apply to those projects notified to OECD during that year.
The MFA assesses the technical feasibility and economic/financial viability of the project and its potential socio-economic and development impact. Also, they assess that the ownership of the project is with the partner country and that it is in line with their policies and strategies. Furthermore, the MFA assess that the project is in line with the Finnish development policy and that it complies with the guidelines in the OECD Consensus.
The MFA makes the assessment in two phases:
First a preliminary assessment is made on the basis of the feasibility study as a desk study to determine whether the project complies with the Finnish Development Policy Based on a positive recommendation from the preliminary assessment, the second phase is a full-fledged field appraisal
The feasibility study is the key basic document. In case there is not sufficient information available in the feasibility study to take the decision, the project proposal may be delayed or rejected.
The first phase is crucial in determining whether the project is eligible for further processing and therefore the thoroughness of the feasibility study is of key importance for the MFA‟s preliminary assessment. It should contain all the required information. In a positive case the MFA prepares a field appraisal. In a negative case, processing is terminated.
During the second phase the emphasis is on assessing the situation and conditions on the site, thereby providing the MFA with an independent review and analysis of the project for decision making. When carrying out the field appraisal the appraisal team checks the facts and figures about the feasibility and viability of the investment and assesses the project against the Finnish development cooperation policies. If no competitive bidding has been planned the assessment also verifies that the prices concur with the world market prices.
The final appraisal report is the basis for the MFA‟s approval for OECD notification. It is noteworthy that MFA can reject the proposal also at this stage if the results of the appraisal process do not comply with the principles and requirements of the MFA for concessional credits.
3.3 Notification and credit guarantee
Based on the MFA‟s approval, Finnvera will notify the concessional credit to the OECD. MFA‟s approval for OECD-notification represents a preliminary commitment to the project.
The OECD regulations require that the essential facts of the proposed project are submitted to the OECD member countries for review. The member countries have 30 working days to study the project, ask for additional information or invite the Finnish authorities to OECD headquarters for consultations to clarify the compatibility of the project for concessional financing.
3.4 Procurement and contracting
The procurement rules of the partner country must be taken into account when concluding the concessional credit delivery contract. Limited International Bidding (LIB) or direct negotiations may be required, depending on the case. The usual case is restricted tendering in Finland. The supplier may be selected through direct negotiations if the local procurement rules allow that and if there is only one Finnish supplier, but in that case the MFA will verify the price level of goods and services in order to avoid distortion of prices as a result of the concessionary element. The buyer must provide the MFA with a value for money assessment from an independent agent fulfilling the international standards. It is important that the procurement procedure is fully transparent. Agent fees must not exceed 5 per cent and the agent fee must be stated in the procurement contract.
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The bidding is arranged at a late stage of the Project Cycle when project preparation and appraisal have already been done. The acceptance of direct purchase is exceptional, possible only in cases when there is evidence that only one credible supplier exists in Finland. In some cases FINPRO may submit a supporting letter, confirming this status of the supplier. It is important that the supplier/contractor in advance carefully studies the local procurement legislation and procedures. Exceptionally and upon request MFA may provide technical assistance to the partner country for the preparation of the bidding documents.
These types of procurement procedures have extensive effects on the project cycle and handling process, affecting the role of the supplier at the project preparation phase. Furthermore, Finnvera cannot review the project proposal or accept the guarantee until the supplier and supplier‟s bank as also the borrower and the potential guarantor are identified. Before that the formal handling process cannot start.
An important issue is the considerable “Finnish interest” which is a condition to Finnvera‟s issuance of a concessional credit guarantee to the exporter. The considerable Finnish interest means that at least 50% of the supplies have to be sourced from Finland and that the responsible supplier is a Finnish company. All new projects submitted for appraisal shall fulfil this requirement. This applies to the new projects for which no OECD-notification has yet been made. The credit guarantee application has to be supported by a detailed description of the origins of the supply of goods and services to the project.
Another important aspect of the procurement process is transparency. Both the Finnish development policy and OECD rules and regulations are strict in this regard. This means that the procurement and contracting methods and rules as well as the process should be described in sufficient detail already in the feasibility study. Finnvera also requires Bribery / Anti-Corruption Declarations both from the guarantee holder and the Finnish exporter.
No malpractices are tolerated in the preparation, procurement and implementation of concessional credit projects. For the prevention of any such malpractice risk management and monitoring of the projects will be intensified. A report will be required after the finishing of implementation and monitoring & evaluation will be an integral part of every project. The juridical background of the projects is prepared in cooperation with the authorities of the partner country in the form of agreements and memorandums. This enables both Finland and the partner country to intervene in malpractices. The sales contracts and statements from Finnvera must be enclosed in the documentation for concessional credit approval.
3.5 Final decision
Before the project can be taken for the final decision all the above mentioned phases of the project must be completed. This includes waiting until the deadline of notification is over, commercial contract is signed and evaluated, all documents are ready and completed and Finnvera has made the decision to provide credit guarantee to the project. Only after all this, MFA presents the project proposal to the responsible Minister for final decision of concessional credit for the project.
4. Requirements of a Feasibility Study
4.1 General requirements
Project preparation culminates in the preparation of a Feasibility Study. This is the document that provides a basis for an investment decision on the proposed project. The study should thus include the relevant technical, economic, environmental, institutional and social elements that affect the project and show its viability and sustainability. The project owner (entities acting as buyer, borrower / guarantor) must be clearly identified. The feasibility study must show that the project complies with the development policies and strategies of both Finland and the partner country. It must also show that the project complies with the requirements of OECD and can be judged as commercially non-viable. Feasibility studies are normally between 50 to over 100 pages long excluding annexes.
10 First of all, the information and justifications in the feasibility study are the basis for
Finnvera and the MFA to determine whether the project proposal worthy of any further processing.
Secondly, if the project proposal is accepted for appraisal, the feasibility study will be the basis for the appraisal process where the information in the document will be verified and assessed against the reality on site and in the country.
The above text describes the type of issues that are assessed by Finnvera and the MFA in the two phase appraisal process. The appraisal is made largely on the basis of the feasibility study. The study should address all the relevant issues so as not to derail or delay the handling process. Thus, a well prepared feasibility study will address issues such as:
relevance of the project, what issues does it intend to address and how technical and economic/financial feasibility and viability of the project sustainability of the project
local ownership of the project and compliance with the policies and strategies of the partner country
the socio-economic and development effects of the project compliance with Finnish development policy
the Finnish content and components in the project procurement rules and procurement arrangements institutional and organizational setting of the project manpower and training needs
set up for implementation of the project and time-table operation and maintenance
investments, current costs and financing
financial and economic assessment of the project compliance with OECD rules on commercial non-viability environmental considerations
applied technology and technical solutions in the project potential risks and risk mitigation
A project may be outright rejected if the feasibility study does not contain the necessary information. Or the process may be severely delayed because a proper feasibility study may have to be prepared or all the missing information may have to be filled in.
In practice, appraisal missions have been commissioned up to now also on the basis of a deficient feasibility study and proposals for changes or requests additional information have been presented in the appraisal process. Project preparation and project appraisal must be kept separate because of the “conflict of interest”. Therefore, an appraisal report can only include outlines for the revision of the project proposal. However, the intention is to avoid these situations because drastic changes at this stage cause considerable delays and make the handling process much more cumbersome. It is therefore important that the requirements of a proper feasibility study are taken into account from the very beginning.
Also, the preparation of tender documents is difficult on the basis of a low-quality feasibility studies which causes further delays. It is important that the feasibility study provides sufficient and realistic project costs and cost break-downs, as well as guidance on items and information to be included in the bidding documents.
4.2 Contents of a feasibility study
The nature of development projects vary considerably depending on the size of the project, technology applied and the economic sector. Therefore it is difficult to describe detailed uniform requirements or a pattern for a feasibility study that could be applied similarly in all cases. Reasonable flexibility is required.
Despite the differences, there are some requirements that each feasibility study has to cover, even though feasibility studies are made using varying formats. The important factor is that the crucial items and issues are covered, not the order or format. The extent of coverage depends on the size and complexity of the project. Normally, the larger the project the more justification is needed and the more complex is the information required.
11 Practice shows that the technical description of the project is usually rather well covered in most feasibility studies. Investment costs and financial calculations are normally also contained, even though the local accounting practices sometimes make the financial and economic analysis problematic. Description of the project‟s functioning vis-à-vis the beneficiaries, and the surrounding environment as well as organizational and manpower considerations and training needs are often lacking or very general. Most often the feasibility studies pay inadequate attention on the analysis of development and socio-economic effects, sustainability, institutional issues and training.
However, without those considerations the project has little chances of being approved for concessional financing. Such shortcomings will at least cause considerable delays, as the questions will have to be addressed and answered before the appraisal can be carried out and completed.
Environmental considerations should also be addressed in all feasibility studies, be the anticipated environmental effect of the project small or large. Finally, the risks of the project as well as the related precautionary measures must be clearly described in the study. Most projects do have risks or preconditions for their success. Addressing these issues will convince the decision makers of good preparation of the project which usually will strongly support the approval.
4.3 Standard table of contents
The format of feasibility studies varies as does the contents. However, to fulfill the requirements of an appraisal and decision making on concessional credit projects a certain „standard table of contents‟ can be described which then needs to be tailor made for specific projects depending on the economic sector and the nature of the specific project. All headings may not necessarily be required in all projects as some issues may not be relevant to the specific project. This will be elaborated below.
A “standard table of contents” would include the following main issues: 1. Executive Summary
2. Background, History and Description of the Project
3. Market or Demand and Capacity of Project
4. Project Engineering, Technical Solutions and Technology 5. Materials and Inputs Required
6. Institutional Setup, Organization, Human Resources and Training Needs 7. Project Costs and Financing
8. Procurement and Contracting
9. Socio-economic and Cultural Analysis 10. Environmental Assessment
11. Sustainability of the Project 12. Financial and Economic Analysis, 13. Justification for Financing 14. Implementation and Time-table
15. Assumptions and Risks and Risk Mitigation 16. Conclusions and Recommendations
The above standard table can be regarded as a starting point when a feasibility study is prepared but necessary flexibility will be required. A description of the contents of each sub-title is provided in the following.
Executive Summary
The executive summary should summarize the main issues and all conclusions and recommendations covering the critical aspects of the study. The length should not exceed 4 pages.
Background, History and Description of the Project
Brief description of the project:
Project objectives, project location, inputs and outputs.
Presentation of the project owner and involved parties and their roles within the project. Dates and character of essential events in project history.
12 This chapter should give a brief overview of the project idea, objectives, location, project owner (buyer, borrower / guarantor) and promoters, required inputs and outputs as well as local conditions (physical, political, legal etc.). Secondly, the history of the project should be covered together with a list of studies and investigations that have already been made. Thirdly, the overall project time-table and implementation model should be shown.
Market or Demand and Capacity of Project (Beneficiaries)
Local and export market for the project products. Customer analysis.
Product programme, production capacity.
Competition situation for the project products, the main competitors. Price analysis.
Marketing strategy and plan, product pricing, promotional efforts, distribution, after sales service; etc.
For productive projects the term “market” is quite clear. In case of productive projects, the size and composition of the market and demand should be investigated in order to estimate the likely sales of the products/services. The revenue from sales should be projected to form the basis for a detailed production program and capacity.
The concepts “markets”, “demand” and “capacity” are not well suited for all kinds of projects. However, as an example, for a health-care project or a water utility the supply requirements define the demand. In all cases it is important to identify the beneficiaries and show how the outputs and results of the project will respond to their needs.
Project Engineering, Technical Solutions, Appropriateness of Technology
Technology:
Technology options and choice of technology. Process flow chart.
Area and functions of buildings and processing capacities of key equipment and machineries.
Production of liquid and solid wastes.
Materials and Inputs Required:
Infrastructure needs: site, power, water, sewerage, road and railway, etc.
Demand for and provision of raw materials and other material inputs for production. Draft technical specifications and itemized bill of quantities, expected supply under the
proposed concessional credit.
Building and infrastructure/utility requirements.
Operation and maintenance: user capability, local availability of spare parts and after sales service, local availability of other goods consumed.
The appropriate technological choices and production processes should be described together with the required amounts of materials, types of machinery and equipment as well as the industrial rights. An important aspect is the production of liquid and solid wastes.
This section should also include comparisons between different available solutions and justification for the choice taken. The various structures, civil works and infrastructure facilities have to be defined. The sustainability of the selected solution should be justified with special emphasis on operation and maintenance and in the light of the end-user demands.
Institutional Set-up, Project Organization, Human Resources and Training
Institutional setting and organization:
Legal and regulatory framework.
National and sector policies and master plans. Institutional set-up in the sector.
Project preparation and implementation organisation, involved parties, their roles and responsibilities.
Resources and experience of the project owner(s). Project organisation by main functions.
The sound legal and regulatory codes that respect the rule of law and good governance are important cornerstones of the Finnish development policy. No malpractices will be tolerated in the
13 preparation and implementation of the concessional credit projects. The juridical background of the projects should be transparent, prepared in cooperation with the authorities of the partner country in the form of agreements and memorandums.
The institutional set-up should be clearly defined, describing ownership and the relation of the project to authorities. An organization scheme should be attached to the feasibility study. The institutional set-up and project organization should support the above principles.
Human Resources and Training Needs:
Recruitment needs, availability of relevant workforce. Training needs and proposed training programme.
The present human resources situation and its further development are very important issues. The feasibility study should be able to answer the question: What are the existing and needed
knowledge and skills of the technical and other staff that is to work in the project?
Project engineering, technical solutions and the determination of manpower resources and training needs are closely related and should be studied both together and separately. The organizational layout should be supported by manpower and skills assessments and a training plan.
The Finnish concessional credit scheme does not include a separate grant element. This means that HRD and training costs related to the project must be included in the project costs to be financed.
Project Costs and Financing
All budgets shall be worked out in fixed prices.
Investment budget:
Investment budget by various items.
Total investment budget defined by financial sources: equity, grants, government budget, concessional credit, local loans.
Description of the borrower of the proposed concessional credit, and the terms of on-lending: spread, risk premium for repayment in foreign currency (EUR, USD), loan guarantee requirements.
Description of terms of other loans, fees and interest, grace period, repayment period, mode of repayment, loan guarantee requirements.
Operational budget:
Operational budget for the project in fixed prices for the lifetime of the investment by main income and cost items.
All budget assumptions shall be clearly explained.
Cash flow budget for the same period as the operation budget
The OECD requires that concessional financing is not used for commercially attractive projects. This requirement means that all proposed projects should be financially sustainable but commercially not attractive. All approved projects should eventually be able to cover at least the O&M costs. However, during the last few years an increasing number of proposed projects are financially not sustainable without support from public budget financing as they often are social in nature and do not have any revenue-earning capacity.
The important principles of financial planning (preparing project budgets) are that: (i) the costs should be quantitative expressions of the physical plans and the budget structure should follow natural activities of the project scope; (ii) they should show how the cost coverage is determined; and (iii) they are balanced with and justified by the consumer requirements and affordability.
All cost estimates should reflect real market prices, not bureaucratically determined standard prices. The use of standard prices or prices based on given norms would often lead to a distorted and unrealistic project budget and cause difficulties and delays in processing the project.
14 In the absence of financial revenues an attempt should be made to quantify the benefits of the projects and convert them to revenue flows. The main external impacts (both positive and negative) must be identified.
The estimates for investment costs and annual operation and maintenance costs should be shown by components and cost items for the whole project period. The production costs or recurrent costs should be estimated on an annual basis with the assumed capacity utilization. The sources of financing should be described and justified and annual financial costs should be estimated. All assumptions should be made transparent. Price comparisons should be given special attention.
Procurement and Contracting
Considerable Finnish component in the project should be shown.
National procurement legislation and procedures in target country described. Transparency of procurement.
According to the legislation covering the concessional credit scheme the proposed project should include a considerable Finnish component which is interpreted to mean that 50% of the total delivery of goods and services is sourced from Finland and that the main contractor is a Finnish company. At present all new projects are required to fulfill the 50% criteria. The sourcing of inputs, including raw materials, utilities, machinery, equipment and services should be described in detail.
The procurement rules in the recipient country must be taken into account when concluding the trade agreement. Limited International Bidding (LIB) or direct negotiations may be required. If the supplier is selected through direct negotiations, the MFA will verify the price level of goods and services in order to avoid distortion of prices as a result of the concessionary element. An important aspect is the transparency of procurement. Both the Finnish development policy and OECD rules and regulations are strict in this regard. This means that the procurement and contracting methods and rules as well as the process have to be described in sufficient detail.
Socio-economic and Cultural Analysis
The ultimate goal of Finnish development co-operation is to alleviate poverty and to improve the condition of the least privileged and marginalized groups of the society. The MFA considers this aspect crucial and the feasibility study should include the justification of the project from the development and poverty point of view: e.g. who are the actual beneficiaries, in which manner and how much will they benefit. In several cases the social analysis of concessional credit proposals has been either lacking or superficial, causing delays in the approval process.
The requirement means that the beneficiaries of the project should be clearly identified and the impact of the project on them should be assessed in relation to their needs and absorption capacities. Issues concerning poverty reduction, gender, equality, social justice, human rights and cultural issues should also be covered. Employment effects should also be quantified.
Cross-cutting themes:
o promotion of the rights and the status of women and girls, and the promotion of gender and social equality
o promotion of the rights of groups that are easily excluded, particularly children, persons with disabilities, indigenous peoples and ethnic minorities, and the promotion of equal opportunities for participation
o combating HIV/AIDS as a health and social challenge
Bearing in mind the ultimate goal of poverty reduction, the three cross-cutting themes are to be supported in all Finnish development cooperation. The integration of cross-cutting themes into development projects, including export credit projects, is not only a prerequisite for MFA support, but also affects the results and sustainability of a project. While the primary goal of a project may not involve one or all of the cross-cutting themes, any project that has an impact on society will inevitably have positive or negative effects on women and men, vulnerable groups, and the spread of HIV/AIDS. With careful preparation, the impact of a project can be greatly improved. For example, an electrification project can include specific measures to ensure electricity provision for communal activities such as water pumping or grain milling.
15 This enables women, who are often in charge of these tasks, to have more time for productive activity. Another example could be an HIV/AIDS education campaign linked to a road improvement project; as building new roads may catalyze the spreading of HIV/AIDS, it is important to mitigate this possible negative impact and ensure that road building improves people‟s lives. However, cross-cutting themes should not be considered as an add-on to regular work; rather, they should be considered throughout the feasibility study.
There are several tools that can be used to assess a project‟s impacts on the three cross-cutting issues during project identification, preparation, implementation and monitoring stages. The earlier the issues are taken into account, the better the results will be, and so baseline studies should include the current gender and social equality situation in the area, the position of marginalised groups, and the area‟s HIV/AIDS situation. This information can then be used for recommendations for measures to improve or at the very minimum not worsen the situation with regards to the cross-cutting themes. If necessary, project components or separate projects can be recommended to strengthen or ascertain positive impacts of a project. It is important to keep in mind that those individuals who belong to the aforementioned population groups are usually those who can best communicate their current situation and needs and as such it is important to engage in broad-based consultations before, during and after a project. Also, quantifiable and objective indicators are essential for evaluating the impact of a project on the cross-cutting themes.
Environmental and Social Assessment
National environmental standards and requirements.
Environmental impact and potential areas of conflict with: the sea, inland waters, soil, agriculture, forest areas, industry, urban areas, etc.
Social impacts due to population relocations or otherwise. Health and safety of workers and public.
Considered mitigation measures (environmental management plan).
There is an urgent general need to make environmental provisions an integral part of development plans, including zoning restrictions, requirements for sewer connection or alternative wastewater disposal methods, controls on sprawl, open space provisions, solutions for disposal of hazardous waste, emissions of gases etc. The MFA development policy makes environment considerations a crucial issue, requiring special attention in the feasibility study.
The expected environmental impacts, negative and positive, should be described in relation to the ecology, people and landscape (emissions, waste water, building of infrastructure, noise, etc.). The environmental legislation and regulations and their demands on the project should also be described, as well as organisational responsibilities for the internal and external environment. Working safety and health hazards and measures in this respect are also important aspects.
Sustainability of the Project
Sustainability can be seen as the ultimate test of development efforts. It requires not only that a project is successful in achieving its immediate objectives during its supported lifetime, but also that the benefits that it generates continue beyond the time of the donor‟s involvement. A development project is sustainable when it is able to deliver an appropriate level of benefits for an extended period of time after major financial, managerial and technical assistance from an external donor is terminated.
In the case of projects financed by concessional credits an important aspect is financial sustainability. Financial sustainability is related to cost recovery, either concerning total costs of the project or at least the operating and maintenance costs. In the case of public utilities it is important to study the tariff structure and rates as well as the willingness and ability of the project beneficiaries to pay for the services.
In some cases the proposed projects have not had direct revenues. In these cases the concept is economic sustainability. In these cases it is very important to clearly explain the benefits and sources and systems of financing.
Financial and Economic Analysis
Financial analysis:
Net Present Value (NPV) and Financial Internal Rate of Return (FIRR) in fixed prices using a discount rate of 5% should be calculated covering the lifetime of the project.
16 Investment pay- back period.
Cash-flow analysis for financial planning as cost recovery analysis shall be carried out. Relevant sensitivity analyses.
The financial viability in this context means that the project can generate a cash flow that is sufficient to cover production costs and service the capital that is invested in the project. The financial viability is assessed by the calculation of the Financial Internal Rate of Return (FIRR).
Economic analysis:
Direct employment and income generation of beneficiaries.
Human resource development, increased competitiveness, import substitution, exports, economic growth.
Subsidies from local/national budgets (to cover operational deficits) or contribution to the local/national budgets (tax payment from the project services).
In the economic analysis all taxes, subsidies and duties are excluded and prices are corrected from distortions. The external effects of the projects may be taken into account by including their monetarized costs and benefits into the calculation. The economic viability is assessed by the calculation of the Economic Internal Rate of Return (EIRR).
In the absence of EIRR calculations, the main external impacts (both positive and negative) need to be identified. External impacts are costs and benefits caused by the project to the society and people but are not included in the financial and economic analysis. Some of these may have monetary value while others can be assessed only in qualitative terms.
Eligibility for soft financing:
Eligibility for soft financing under the OECD terms, i.e. that the project is commercially not viable, is a key condition concerning the acceptability of the project proposal for a concessional credit. The feasibility study should show how the project complies with the following two key tests:
The project is financially non-viable, i.e. does the project lack capacity with appropriate pricing, determined on market principles, to generate a sufficient cash flow to cover the project‟s operating costs and the capital expenditure, or
Is it reasonable to conclude that it is unlikely that the Project can be financed on market terms
The financial and economic analysis should cover the whole lifetime of the project or at least the loan payback period. Because the projects are supposed to be non-viable on normal commercial terms this aspect should be clearly explained. All assumptions for the economic and financial analysis must be clearly explained.
Justification for Financing
Relevance of the project, what issues does it intend to address and how. Compliance with Finnish development policy and OECD regulations.
Key issues should cover at least commercial viability, development and socio-economic effect (particularly the project‟s impact on poverty reduction, employment and gender equality), sustainability of the project, environmental effects as well as organizational development and training needs.
Implementation, Assumptions and Risks Involved
Implementation program and time-schedule.
Responsibilities and main tasks of different operators.
The project implementation stage comprises the period from investment decision to the start of commercial production, including contracting, project design, construction and start-up. A detailed implementation program and time-schedule must be included. The implementation program should define the responsibilities of different operators at each stage of implementation.
Project preparation has to take into account the project cycle and the institutional, political and economic framework. In order to be able to appraise the project the assumptions should be transparent in order to judge whether the project is realistic given the facts on the ground and existing constraints. The feasibility study should describe the key assumptions which need to
17 materialize in order to avoid delays during the later stages of project cycle. Furthermore, an analysis of possible risks should be contained.
4.4 Sector-specific issues
Some projects require special attention on sector-specific issues. The projects vary from improving water supply to upgrading health facilities to supporting agricultural production and handling of foodstuffs and further to improving the environment, preventing flooding, industrial production, improving social services etc. etc.
The economic sector affects mainly the emphasis of the contents of the feasibility study. As an example, in the case of a complex IC project or high-tech hospital equipment the emphasis is more on the technological solutions, skills requirements and training than on environmental effects. On the other hand, in the case of, for instance, solid waste land-fills, waste-water treatment or industrial projects the environmental and social aspects need more attention. The Guidelines also include, in Annex 4, some examples of a table of contents in a few actual projects illustrating issues that need to be assessed before decision making. The examples reflect the variations caused by the nature of the project and the requirements of the country in question.
It is important to notice, that the main variations can be found in the “technical” parts, whereas all reports cover the social, financial, economic and environmental issues as well as OECD requirements, human resources, underlying assumptions and project risks. These issues must be addressed because they will be assessed during the appraisal phase. If these issues are absent or inadequately covered, the project may be rejected or implementation may be considerably delayed.
18
Annex 1
Financial Procedure of Concessional Credit Scheme
Exporting
Company Borrower Lender Bank Finnvera (Export Credit Agency of Finland) Delivery Contract Credit Agreement Guarantee Agreement Credit funds 100 % Interest SubsidyMinistry for Foreign
Affairs of Finland Deliveries
Buyer
On-lending Agreement
19 Annex 2
Concessional Credit Project Cycle in Vietnam
Feasibility Study
Appraisal Report
Procedure:
Responsibilities
:
PROJECT OWNER/ SUPPLIER MPI/Provicial departmentsBasic Design &
Tender Documents
PC/Project Owner/PMUConsultantBidding
Plan
Cost
Estimates
Tender
Documents
Comments from /DOC/DPI/DOF Decision PC Project Owner/PMU Consultant
Competitive Bidding
Project Owner/PMU ConsultantSelection of Contractor
Comments/Endorsement from MPI
PC/Project Owner/Consultant
Implementation
Establishment
of PMU
PROJECT OWNERComments from /DOC/DPI/DOF, Decision PC
Project Outline/
Pre-FS
Line Agency MPI Donor acceptance ”yellow light”
Donor Cooperation in FS preparation
Project appraisal
”No objections”
Required from donor
”No objections”
20
Annex 3
Examples of Feasibility studies
Example 1, Waste water treatment and drainage project, Vietnam
Table of contents 1 INTRODUCTION
1.1 The Project history 1.2 Stakeholders
2 ORGANIZATION OF WATER SECTOR
2.1 Institutional setting and legislation 2.2 Donor interventions
3 THE PROPOSED PROJECT
3.1 Project area and environment
3.2 Present situation and Project objectives
4 TECHNICAL SOLUTIONS
4.1 Technical components 4.2 Operation and maintenance
5 PROJECT ORGANIZATION AND HUMAN RESOURCES
5.1 Institutional setting 5.2 Project organization 5.3 HRD development 6 PROCUREMENT 6.1 Procurement legislation 6.2 Sourcing 6.4 Contracting
7 POVERTY REDUCTION AND SOCIAL & HEALTH IMPACTS
7.1 Poverty reduction
7.2 Beneficiaries, tariffs, and affordability 7.3 Resettlement and land asset compensation 7.4 Public awareness and participation
7.5 Socio-economic and health benefits
8 ENVIRONMENTAL ASSESSMENT
8.1 Environmental legislation and management in Ninh Thuan province 8.2 Impacts on environment
9 PROJECT COSTS AND FINANCING
9.1 Investment costs and Financing 9.2 Operation and Maintenance costs 9.3 Operating revenues
10 FINANCIAL AND ECONOMIC ANALYSIS
10.1 Financial and economic analysis
11 IMPLEMENTATION
11.1 Implementation program and implementation schedule
12 ASSUMPTIONS, SUSTAINABILITY AND RISKS 13 CONCLUSIONS AND RECOMMENDATIONS
21
Example 2,
Communications Project for Emergency response
development, the Philippines
Table of contents
1 INTRODUCTION
1.1 Background and Stakeholders
2 PROJECT ENVIRONMENT
National Setting
3 MARKETS AND CAPACITY
3.1 Current IT Markets in the Philippines 3.2 SBMA SERS Target Market
3.3 Market for Emergency Response System Support Equipment
4 PROPOSED TETRA COMMUNICATION SYSTEM FOR SBMA
4.1 Conditions at SBF
4.2 Technology and Industrial Rights 4.3 Structures and Facilities
4.4 Operation and Maintenance 4.5 SBMA‟s Telecom Training
5 EMERGENCY RESPONSE SYSTEM SUPPORT EQUIPMENT
5.1 User Requirements
6 EMERGENCY MANAGEMENTAND, ORGANIZATION
6.1 Institutional Setting, Communication between Authorities 6.2 Emergency Management and Security Solutions
7 PROJECT COST AND PUBLIC INVESTMENT FINANCING
7.1 Project Cycle and Approval Process 7.2 Project Cost and Financing
8 PROCUREMENT 8.1 Procurement legislation 8.2 Sourcing 8.3 Time schedule 8.4 Contracting 9 SOCIO-ECONOMIC ASPECTS 9.1 Economic Impacts
9.2 Social Aspects and Poverty Alleviation
10 ENVIRONMENTAL ASSESSMENT
10.1 Subic Bay Protected Areas Management Plan 10.2 Environmental Administration and Regulations
11 FINANCIAL AND ECONOMIC ANALYSIS
11.1 Financial Analysis and Economic Analysis of the Project
12 IMPLEMENTATION,
12.1 Implementation program and implementation schedule
13 ASSUMPTIONS, SUSTAINABILITY AND RISKS 14 CONCLUSIONS AND RECOMMENDATIONS
22
Example 3
,General Hospital, Upgrading of hospital equipment,
Vietnam
Table of contents 1 INTRODUCTION
1.1 Background
1.2 Legal Framework for the Project
2 OVERVIEW HEALTH SECTOR VIETNAM
2.1 Health Status and Coverage
2.2 Health Services Delivery System and Public Sector 2.3 Health Sector Strategy and Major Legislation 2.2.1 Development Goals
2.2.2 Major Legislation to Strengthen Health Care Delivery 2.2.3 Health Sector Priorities and Strategy
2.4 Health Financing 2.4.1 Health Insurance 2.4.2 Private Sector
3 HEALTH SECTOR OF HA NAM PROVINCE
3.1 General Information on Ha Nam
3.2 Health Status and Provincial Health System 3.3 Health Network and Facilities
3.4 District Health Services and Hospital Services 3.5 Health Financing
4 THE GENERAL HOSPITAL HA NAM
4.1 Hospital Profile and Services
4.1.1 Hospital Performance and Utilization 4.1.2 Human Resources and Training Needs 4.1.3 Hospital Funding and Operating Cost 4.1.4 Hospital Management
4.2 Equipment, Infrastructure and Buildings 4.3 Maintenance
4.4 Waste Disposal
5 PROJECT CONTEXT AND RATIONALE
5.1 Project Rationale and Beneficiaries
5.2 Objectives and Expected Results and Justification
6 PROJECT DESIGN
6.1 Project Components
6.2 Medical Equipment Supply and Procurement 6.3 Counterpart Funding
6.4 Operation and Maintenance
7 SOCIAL AND ENVIRONMENTAL IMPACT 8 IMPLEMENTATION
8.1 Framework and Capacity for Implementation 8.2 Training
8.3 Timetable
8.4 Project Monitoring and Evaluation
9 BUDGET AND FINANCING
10 FINANCIAL AND ECONOMIC ANALYSIS 11 ASSUMPTIONS AND RISKS
