Agreements
1. Venture Capital Funds: IFC should structure contracts for managers of venture capital funds to ensure that:
- incentives are tied to achieving project commitment and profit performance objectives;
- fund managers can be removed if non-performing; and
- until dividend income flow is sufficient, the fund must retain enough liquid assets to ensure that interest income covers management fees.
2.
Conflict of interest: Particularly where sponsors are supplying inputs or purchasing outputs of a project, IFC should ensure that:
- arrangements are on an arms length basis; and
- a monitoring mechanism (possibly with outside agencies) is put in place.
3.
Completion guarantees: Project completion and support arrangements are vital for protecting IFC's interests given the possibility of, inter alia, changes in project scope and design.
4.
Security arrangements: When IFC negotiates security arrangements, it is important to obtain security which is valuable to the company. This simplifies IFC's administration of the operation and can motivate the company to remain current on IFC's loan despite financial difficulties.
5.
New technology: In a project with new or complex technology, IFC should insist on:
- tight contractual arrangements with suppliers; and
- strong financial support arrangements from sponsors.
6.
Price distortions: Contractually determined prices that do not reflect market prices, (e.g., due to government subsidies or because they are tied to raw material prices), are unlikely to be sustainable.
7.
Contractual incentives: IFC should encourage sponsors to negotiate incentives for contractors to exceed performance targets. Cost plus contracts should be complemented with incentive features.
The above lessons are based on 24 lessons from past IFC investments.
Last updated December 1998.
