Facilities, Equipment and Raw Materials
1. Refurbishing hotels: Upgrading a hotel will not necessarily lead to increased real room rates, as many tour operators view refurbishment and good maintenance as necessary to continue promoting and booking hotels. Because tour operators are reluctant to book guests into hotels undergoing construction, an expanding hotel must adjust for a drop in occupancy levels during construction. Since refurbishment projects are particularly susceptible to cost overruns, industry specialists should be contracted at the outset to specify standards and assess the work involved.
2. Second-hand equipment: In certain industries, used equipment can greatly reduce capital costs and can give a project competitive advantage. Special care must be taken, however, in inspecting the equipment and in carrying out cost-benefit analysis. Projections should reflect the uncertainty of used equipment in operations and production volume.
3. Second-hand equipment - shipping: . The purchase of second-hand ships when market prices are unusually low can reduce risks. However, there is also a high degree of uncertainty until firm contracts are signed due to wide fluctuations in ship prices.
4. Supplying raw materials to agricultural projects: When a company needs farmers to produce a new product, the following steps can help to secure a regular and sufficient supply. The company can:
contract directly with producers;
pay a premium for the product;
offer support to the producer; and
accept lower quality produce.
IFC should look for projects where the processing plant is close to the supply, to minimize transportation costs. Since the supply of raw materials is seasonal, large inventories with associated large amounts of working capital, are required.
5. Vertical Integration: While integration may ensure a reliable supply of a raw material, it must be justified in terms of clear, long-term, financial benefits.
6. Land acquisition: Appraisal teams should be conservative in their assumptions concerning land acquisition time frames especially if:
projects are pioneers in the region; and/or
land needs to be acquired from many small owners.
The above lessons are based on 58 lessons from past IFC investments.
Last updated January 1999.
