IFC Project Appraisal and Analysis
1. Sponsors: IFC should evaluate the sponsor's long-term strategic interest in a project, particularly with regard to how important it is to the sponsor's overall business, commercial interests in the project (other than as an investor), and the sponsor's commitment in terms of equity contribution, quality of seconded managers and ongoing operational support.
2. Competitive response: IFC's appraisal of markets must assess the response of existing and potential competitors (domestic and foreign).
3. Use of specialists: When investing in an unfamiliar business, or when the project business requires specialized knowledge, IFC should seek guidance from experts with extensive experience in that sub-sector. Using independent consultants to evaluate market projections and cost estimates provides an important cross-check to sponsor estimates.
4. Data sources: Project appraisals should incorporate all available information within IFC, such as lessons from experience and relevant OEG special studies. IFC should also take into account relevant Bank and EBRD experience to benefit from project-specific technical knowledge.
5. Technical partners: Technical partners should be evaluated not only for their technical skills, but also for their deep pockets and on-site management skills. Where a project business faces rapid technological change, it is particularly important for the technical partner to be a leader in the field.
6. Sensitivity analysis: IFC sensitivity analysis should be rigorous and examine large, multi-factor impacts (e.g., simultaneous combination of lower output and higher unit costs). When structural adjustments are needed in an economy, it should also examine the potential impact of changes in the macro-economic environment.
7. Management: IFC should focus closely on management capabilities during appraisal, particularly with respect to management transition to ensure that management quality is maintained.
8. Foreign currency exposure: IFC's analysis of projects in an inflationary economy should more fully consider the impact of inflation on project profitability as well as the impact of currency devaluation, particularly when a substantial portion of the project's debt is to be denominated in foreign currency.
9. Technology: During appraisal, IFC should undertake comprehensive testing of key technical assumptions, even with well-established production processes.
10. Government intervention: Where there is significant government intervention which affects the project's sector, the effects of this must be taken into account since market forces (e.g., cost competitiveness) may not determine financial performance.
11. Price assumptions: Commodity markets require an in-depth analysis, especially where company performance depends heavily on one commodity.
The above lessons are based on 83 lessons from past IFC investments.
Last updated September 1998.
