Government Issues
1. Government policies and market distortions: A favorable economic and regulatory environment is important to the success of any company or institution. IFC should be wary of financing projects whose profitability depends on government policies. At appraisal, it is important to look at the specific effects of government policies and regulations on a company's business, particularly:
controlled prices;
foreign exchange cover schemes; and
local preference rules.
Sales prices, margins and volumes are particularly uncertain in such circumstances.
2. Liberalization: If a country is undergoing a structural adjustment/liberalization program, the project's market and price projections should be very conservative. IFC should only finance companies which are likely to succeed regardless of the outcome of the stabilization program.
3. Competitive analysis: Even when price distortions due to protection prevail at appraisal, project viability should be established using international prices.
The above lessons are based on 38 lessons from past IFC investments.
Last updated December 1998.
