Financing Local Infrastructure: Methodology for Developing Project Profiles

Transcription

1 Preliminary Roadmap Infrastructure Toolkit Methodology for Local Economic Development Finance Initiative of Tanzania (LFI-T) Financing Local Infrastructure: Methodology for Developing Project Profiles Prepared by: Thomas H. Cochran Odo Habeck Dennis Magna Dr. Barbara Samuels Bob Sheppard Global Clearinghouse for Development Finance (GlobalDF) Contact:

2 21 October, 2012 TABLE OF CONTENTS PAGE 1. Objective 2 2. Process Overview 2 3. Step One: Identifying Potential Projects 3 4. Step Two: Preparing the Preliminary Project Profile 3 5. Economic and Financial Viability (Sector Breakout by Economic and 5 Financial Rates of Return, Table 1) 6. Common Project Criteria 7 ANNEXES (worksheets for developing project profiles) A. Project Selection Criteria for LFI- T Projects 9 B. Overall Guidelines for Preliminary Project Profiles (general 13 guidelines for sectors not covered below) C. Specific Guidelines for Preliminary Project Profiles by Sector: Processing Plants and Storage Facilities 2. Energy D. Next Steps: Second Stage of Project Development 34 E. LFI Contacts 36 F. Other resources for Developing Projects 37 1

3 1. Objective: Design a process for developing profiles of small and medium- sized infrastructure projects (up to US30MM in total project cost) that are considered important for accelerating local economic and private sector development. The focus is on identifying and developing traditional infrastructure projects (such as energy) as well as industrial infrastructure projects (such as agriculture processing). The process of project profile development provided in this document can used by government officials and the stakeholders proposing projects from the private sector and local community. The process will facilitate project development by providing guidance on the following prerequisite steps in defining project profiles: 1) Preliminary categorization of the proposed project using the basic concepts used by the financial sector, such as sector, potential project sponsor, potential project income, etc.; 2) An initial assessment of the potential benefits from the proposed project in economic, strategic, and social terms; and 3) An initial determination of whether the proposed project can be financially viable or requires grant funding. 2. Process Overview: The full development of project definition required for financing is extremely costly, requiring detailed business plans and feasibility studies. As noted above, the initial process for project profile development is designed to be preliminary, providing guidance on the first prerequisite steps for successfully developing and financing projects. Therefore this project methodology involves a two- stage project profile development process. The first stage detailed in this document is relatively informal and will be devoted to determining if the project warrants acceptance into the second stage, which will entail a much greater expenditure to validate that the project is able to be financed with private capital. Specifically: First Stage of Profile Development All Projects: The need for most infrastructure projects will be apparent to many people in the local community. To the extent possible, local government officials, the local community, and private sector sponsors of the project should attempt to provide information (outlined below and in the Annexes) that will validate the project opportunity. Second Stage of Profile Development Selected Projects: If the project appears to have merit after being screened on the basis of its first stage preliminary profile, it will be required to produce additional documentation. Third- party consultants will prepare much of the second stage information. The project sponsor may provide funding to cover this work, if it has the resources. If not, alternative funding will need to be provided by the public sector (e.g., another government source, or development partners). (See Annex C for an outline of the information required for the second stage of development of the project profile). 2

4 The above two- step process will increase the technical capacity of governments and the private sector to define proposed projects so they can be effectively developed and financed. 3. Step One: Identifying Potential Projects: Projects may be proposed for financing through the LFI-T Programme by government officials (national and local), private sector entities, community organizations, nonprofit organizations, and development partners. Projects will be reviewed and selected in accordance with the technical criteria outlined in the Programme Document by the LFI-T Technical Team given their responsibility for evaluating, developing, and financing proposed projects As noted above, the proposed projects need to be prioritized for their potential impact in accelerating local economic development ( LED ). Those projects prioritized for LED need to have an acceptable economic, strategic, and social rate of return for the community. The economic and social need for a project will often be obvious to the local community and the private sector. In addition, determination of need will often be evident from statistics collected by government or other agencies. Examples include: A low percentage of the community and businesses have electric service, or potable water, or wastewater collection and treatment. Roads are inadequate and create difficulty in transporting agricultural products to market. Transportation is difficult because a bridge is needed. It is important to provide such indicators of economic and social need in the project profile (see below sections). Potential projects that increase the value chain for local products may be less obvious to the entire community but are likely to be highly visible to those who work in the sector that the project would serve. Those who would directly benefit from it can best determine the need for a warehouse or a certain type of processing facility. It is important also to think through the impact of the proposed project on employment creation, growth of suppliers, etc. (See Annexes with project profile worksheets.) 4. Step Two: Preparing the Preliminary Project Profile (First Stage): If local government or a project sponsor has access to specialized expertise at an affordable cost, this expertise should be used in preparing the information listed below. If special expertise is not available, the information should be prepared on a common sense basis by government officials and/or potential project sponsors. The information that is necessary at this stage includes: Project: The project should be identified in terms of: (1) sector or industry, and (2) proposed size. 3

5 o Sector: Please see sector categories listed in Table 1 below in the Guidelines for Filling Out the Project Profile Worksheet. It is important that Annex B be consulted to gain an understanding of what types of economic activities are suitable to be selected as projects. o Size: The magnitude of the project needs to be defined as much as possible. For example, if an organic cotton processing plant is being recommended, define the size by volume output and physical plant (e.g., an organic cotton processing plant with capacity to process lb (227- kg) bales of cotton per hour). Economic Rationale: A brief account should be provided of why the project is justified, setting forth its potential profitability and its broader impact on the local economy. Strategic Rationale: A brief description of the anticipated strategic value of the project should be provided with supporting evidence outlining the nature of this value. Social Rationale: The expected social return of the project should be described and quantified when possible using the number of households/people to benefit from the project (through direct involvement as employees or shareholders or suppliers) through increased income and potential improvement of quality of life. Project Cost: An estimate of the project s cost should be provided, based on the expertise of the project sponsor, discussions with engineers or construction contractors, or data from other comparable projects. The cost estimate at this stage may not be very accurate, but there should be no reason to believe that the project s cost will fall significantly outside the range appropriate for its project type, which will depend upon whether the project is suitable for private sector financing or requires grant funding. Project Site: The proposed project site should be identified and reasons behind its selection should be given. If there are alternative sites, they should also be identified. This should take into consideration the level of service coverage of the site, capacity to accommodate future expansion (e.g., availability of land at reasonable cost). Supporting Infrastructure for the Project: The availability of supporting infrastructure should be described. This may include electric service, water or other waste discharge and solid waste management facilities, transport facilities, communications service, and any other facilities necessary for the operation of the project. Potential Project Sponsor(s): The entity (or entities) that will take the lead in developing the project should be identified. Potential project sponsors may 4

6 include private sector firms (both local and foreign), NGOs, community organizations, and government itself. Potential Equity Capital: Sources and, in very general terms, potential amounts of equity financing for the project should be identified. Potential amounts of equity do not have to be committed at this stage, nor do they alone have to be sufficient to finance construction of the project. In general, the minimum level of equity in a project needs to be at least 20% of the total cost (i.e., 20% equity, 80% debt). Revenue Sources: Potential sources of revenue for the project should be identified. These may include transfer payments from local government or from the central government, fees paid by businesses, or fees paid by the general public. Financial Returns: If possible, operating expenses should be estimated and combined with potential revenues and a tentative financing plan to estimate the financial returns, if any, that the project could earn. Job Creation: An estimate of the number of full- time equivalent jobs that will be created at the project should be provided i.e., the number of jobs necessary to operate the project. This estimate may be subject to significant uncertainty. Environment: Any environmental issues positive or negative that will be created by implementation of the project should be identified. Social Impact: Any social impacts positive or negative - that will be created by the implementation of the project should be identified. For example, positive impacts may include job creation, supplier spillovers, government tax income, household income, training, etc. Negative impacts may include population relocation, damage to historical or cultural sites, etc. ANNEXES A and B contain worksheets to develop the preliminary project profiles. 5. Economic and Financial Viability: A critical issue is whether the proposed project is economically important, and whether it is financially viable or not. (1) Not Financially Viable: Projects with an acceptable economic rate of return ( ERR ) that cannot earn sufficient revenues to repay the needed debt and equity funding (i.e., private sector financing where private sector financing funds a significant portion of the capital cost of the project); and (2) Financially Viable: Projects with an acceptable economic rate of return that can earn sufficient revenues to repay a meaningful component of 5

7 private sector financing. These projects can earn an acceptable financial rate of return ( FRR ). The first type of project that has an acceptable ERR, but is not financially viable, must be financed by the Central or Local Government, or by grants from donors, or by a combination of both. The second type of project that is financially viable can attract private sector debt and equity financing. Although both types of projects share certain characteristics, the complete profile for a project differs significantly depending upon whether the project is of the first or the second type. How to categorize project financial viability: The main concept for financial viability is whether the project can create cash flows to pay down debt and, if private sector equity investors are involved, provide an acceptable equity return. For example, many productive projects can collect user fees from those benefiting from the project. The ability to collect user fees depends on the following factors: 1) Does the project provide specific benefits to targeted users? 2) Is the market of potential users large enough to support the project? 3) Is there a way to collect fees for this benefit? 4) Do the intended beneficiaries have the ability and willingness to pay fees? If so, what is the extent to which they are able and willing to pay the fees? The following table provides a breakout of economic and financial viability by sector. Table 1: Sector Breakout by Economic and Financial Viability 1 Sector Processing & Ancillary Facilities - Processing facilities for agricultural or marine products - Warehouses Economically Viable only Rate of Return Both Economically & Financially Viable X - Markets X X Electric Power - Generation X X 1 LEGEND: ERR: These sector projects usually meet the criteria of having an acceptable economic rate of return (ERR) even though they may not be financially viable; and (2) FRR: These sector projects usually have both acceptable economic and financial rates of return (FRR). Some sectors have a wide range of possible projects that can fit into either category (e.g., road, water, and market projects may in some cases be financially viable, and in other cases not financially viable). 6

8 - Transmission X X - Distribution X X Oil & Gas - Pipelines X - Distribution X Telecommunications - Wireless X - Wireline X Transport - Roads (including toll roads) X X - Bridges (including toll bridges) X X - Bus Companies X X - Bus Terminals X X - Rail X X - Ferries X X - Airports X X Water and Waste Water - Treatment potable water X X - Distribution potable water X X - Wastewater Collection X X - Wastewater Treatment X X - Irrigation Systems X X - Solid Waste Management X X Sector Economically Viable only Rate of Return Both Economically & Financially Viable Urban Infrastructure - Street lighting X - Curbs and sewers X Social Infrastructure - Municipal Buildings X - School Buildings X - Hospitals X X 6. Common Project Criteria: The sectors listed in the above Table represent infrastructure projects, if infrastructure is taken in an expansive sense to include ancillary facilities such as warehouses or processing facilities that increase the value chain for agricultural or marine products. Infrastructure projects share certain characteristics: Capital intensive Long physical and economically useful life 7

9 The economic returns of the project are determined primarily by the design of the project The project can be operated by a small number of workers Management of the project requires skills that are common there is little difference in the results produced by the best management team and the results produced by an ordinary management team The appropriate size range for projects in this LED process is: ERR Projects: [US$50,000 US$200,000] FRR Projects: [US$50,000 US$3,000,000] To proceed in developing preliminary project profiles, please use the attached worksheets: - ANNEX A: Project Selection Process and Criteria ANNEX B: Overall Guidelines for Project Profiles (general guidelines for sectors not covered below) - ANNEX C: Specific Guidelines For Project Profiles By Sector: Processing Plants & Storage Facilities Energy 8

10 Annex A: Project Selection Criteria for LFI- T Projects Project Selection Process: Projects may be proposed for financing through the LFI- T Programme by government officials (national and local), private sector entities, community organizations, nonprofit organizations, and development partners. Projects will be reviewed and selected in accordance with the criteria outlined in this document by the LFI Technical Team given their responsibility for evaluating proposed projects against the below technical criteria. All proposed projects will be validated with the respective local government and stakeholders as to their potential contribution to local economic development. The below detailed project finance criteria of bankability are based on best practice credit standards. These standards are important in ensuring the success of the first demonstration projects, proving to the private financial institutions that LFI- U projects can meet the required performance in paying back their debts. Detailed Project Finance Bankability Criteria The project should consist of a single plant/industrial facility (which may have ancillary off- site operations) that: o Is capital intensive (i.e., its capital cost is relatively high in relation to annual sales); o Employs proven technology; o Has a relatively long physical and economic life; o Can be managed successfully by any competent management team (i.e., management skill at operating this machinery is almost a commodity, rather than there being wide differences in outcome between the best operators and average or below average operators); and o Has an economic output that is determined primarily by its design and successful construction (this point is closely related to the previous point). The project s revenues should be in the form of: o Commercially reasonable charges for its output, sufficient to pay all project operating expenses and debt service, plus provide an adequate return on equity to the project s investor(s); or o Commercial revenues supplemented by output- based aid payments (where there appears to be a relatively high probability at the time of initial project development that the project will be successful in attracting output- based aid). The project should have revenues that: o Are sold pursuant to a long- term contract, or o Are sold on the open market where projected sales can be validated by an independent consultant s report. The project should have an assurance of its supply of critical inputs that are purchased either: o Pursuant to long- term contracts, or 9

11 o Are sourced locally under arrangements that assure an adequate supply at a reasonable cost. The project will be managed by an experienced management team that is: o Provided by the project sponsor, or o Hired pursuant to a management contract. The project can be structured so that it is owned by a separate legal entity has revenues that are ring fenced to assure their control and availability to pay project debt service. The total cost of the project should range between: o US$100,000, and o US$30 million. o In exceptional cases, the projects chosen could be somewhat above or below these thresholds. The project should be sponsored by a firm or organization that can provide, either from its own resources or in combination with other shareholders, equity equal to at least 25% of the total cost of the project. LGAs can contribute land to meet their equity requirement, with cash equity from other partners as needed. The project should have no adverse environmental or social impacts that cannot be effectively mitigated as part of the cost of the project. Financing Structure: The innovative nature of LFI- U is the application of proven project finance techniques to smaller infrastructure projects (including agriculture projects) that will be catalytic for LED. This approach will enable the mitigation of risks that now limit the availability of private finance for such projects. Financing for the projects will be secured from local commercial banks, pension funds and other financial institutions, with substantial technical, project development, and financial support provided by development partners and development finance institutions. (In a subsequent stage, these loans may be pooled and refinanced by local institutional investors, such as pension funds.) As noted in the earlier section, each infrastructure project developed under the LFI- U Programme will be structured as a Special Purpose Company with the financing obtained on a non- recourse basis to the project sponsor. This structure is designed so the project risks are mitigated within the structure of the project. Each project participant, including the project sponsor, contractors, and clients, fulfills its performance obligations, which determine the expenses and revenues of the project, ensuring adequate debt service coverage and attractive equity returns. Each project sponsor (and any equity partners) will need to contribute sufficient equity to the project to ensure economic viability. Individual projects will be structured using a project finance approach, with certain risks, such as construction cost, technical performance, and environmental compliance, being assured through contractual undertakings by third parties. This type of financing is the standard best practice for funding large infrastructure projects, and has proven extremely successful in both developing and developed countries worldwide. The breakthrough approach in the LFI- U Programme is mobilizing private 10

12 finance for smaller infrastructure projects through applying this same project development and finance approach. Benefits for Project Sponsors: This project financing structure will provide the following benefits to project sponsors that are developing projects in Uganda: 1) Enhance Access of Financing: The structure will facilitate access to long- term financing for local infrastructure projects that would have difficulty obtaining debt financing on a standalone basis. 2) Lower Cost of Financing: The structure will lower the cost of financing for infrastructure projects in Uganda by: Using the expert financial advisory service provided by GlobalDF senior project finance experts at no cost; Using credit support to help reduce the risk faced by lenders and therefore, lower the interest costs; Using donor funds or capital from development partners to lower the overall cost of capital; and Using local Ugandan consultants to conduct the independent analyses required as part of the due diligence process required by lenders. 3) Lower Project Development Risk and Risks: The LFI- U Programme provides access to both government and development partner support programmes, reducing the costs of project development and overall project risk. The costs of the needed technical costs may be offset by funds provided by the LFI- U Programme, development partners, or the government. The government can facilitate access to the local government needed for project viability, such as improved infrastructure (e.g., roads, energy); support in the mobilization of local inputs (e.g., the supply of agriculture crops), and the access to the local market for essential services (e.g., energy). 4) Non- Recourse Financing: The LFI financing structure uses best practice project financing approaches that limit recourse to the project sponsor by creating a separate Project Company using a Special Purpose Vehicle ( SPV ). This structure serves to protect the project sponsor (or borrower) from the risk of payment default since the lender relies only on the project's cash flow to repay the loan and the supporting project assets as collateral should the loan not be paid. 5) Longer Tenor of Financing: The structured project finance approach is expected to result in access to longer- term finance, with tenors of up to 8 12 years depending on the specific project. 6) Elimination of Foreign Exchange Risk: The reduction of foreign exchange risk requires that the currency of the debt match the currency of revenues. For projects with revenues in Ugandan shillings, the financing structure will provide access to financing in Ugandan shillings, matching the revenues earned by each project. For projects with revenues in foreign currency, the financing structure will provide access to finance in foreign currency. 11

13 t) Extensive Free Advisory Support in Project Development: The LFI Project Finance Team will be available to assist in supervising the project development process for selected projects, ensuring that the research and project development steps undertaken in the project development process are adequate to secure private sector financing and enable the longer- term viability of the project. This project finance structure will therefore offer project developers a financing alternative that will produce viable projects with a superior net present value when compared to alternative financing strategies with a lower level of financing risk. Development Benefits: The envisioned benefits of the LFI project finance approach is as follows: Local infrastructure projects are financed without reliance on the financial abilities of local governments or the central government; Project Sponsor financial contributions are limited to equity and funding of project development costs; Development partners will provide targeted support (e.g., technical assistance, guarantees, subsidies, loans, equity), leveraging the development impact of limited budgets by mobilizing local sources of private sector financing; Independent consultants (including engineers) will perform market assessment studies (including capacity to pay) and audit the costs of construction; Segregated accounts will control cash flow and insure that cash is used to pay, first, operating expenses; then maintenance expenses; next, debt service and, finally, dividends to project owners; Local governments and other Project Sponsors will gain experience in project development, without being at risk of having to pay project debts; and Lenders will gain experience in project finance credit analysis and, having gained a better understanding of project risks and how they can be mitigated, these lenders will eventually be able to provide financing with lower or no credit enhancements. The end result of developing such financing facilities is the development of local capital markets. Such finance mechanisms serve to unlock sources of local private sector finance, enabling the finance of local infrastructure projects critical to local economic development, and prerequisite to improving country competitiveness, job creation, and meeting the Millennium Development Goals. 12

14 ANNEX B: Overall Guidelines for Preliminary Project Profiles (please do not use for warehouses, processing, or and energy projects use the specific sector profiles in Annex C) NOTE: This is a draft template to be refined. Please provide suggestions to the LFI Technical Team. Project Name: Project Sponsor(s): Region - LGA: LG Official Accountable for Project: Checklist Questions Answer Guidelines Information Sources and Validation Process 1 Key questions that require answers are asterisked. The more detailed questions may need to be answered at a later stage. Elaboration on the question to help exchange in defining answers. A. Project Description & Rationale 1 *Description of the functions to be performed by the project? Document: (1) how many people you spoke with, (2) their positions, and (3) contact information. Please provide suggestions expert sources and data sources that can be used to build the LED Resource Center. Please use the information generated in later sections to prepare these answers. Activities/processes of Project sponsor(s) the project, target market 2 *Economic rationale? Provide a brief account of why the project is justified, setting forth its potential profitability and its broader impact on the local economy. 3 Strategic rationale? Provide a brief description of the anticipated strategic value of the project (contribution to local economic development), with supporting evidence outlining the nature of this value. 4 *Social rationale? The expected social return of the project should be described and quantified using the number of households/people to benefit from the project (through direct involvement as See information sources and validation processes in later sections. See information sources and validation processes in later sections. See information sources and validation processes in later sections. 13

15 B. Project Description 1 *Output and capacity of the employees or shareholders or suppliers) through increased income and potential improvement of quality of life. Scope, volume, sales, etc project? 2 *Project location? Physical location; alternative locations? 3 *Size of the site? Square meters of the project site; ability to expand later? Room for related functions, e.g., packaging? 4 *Other critical description? Other activities or purposes not yet covered C. Market Feasibility 1 *Overall Market Assessment: Who is now providing this service or product? What is current cost and demand? Nature of the proposed service or product, current activity and costs, market 2 Seasonality of market? Changes in sales each month 3 Is the proposed project How proposed project improving on the current adds value compared availability of the service with current providers or product? 4 Limitations affecting project? 5 Estimated size of the annual market? Limitations and risks, such as ability to access inputs (land, water, or adequate labor), and market Market size in unit volume, in monetary terms a Local market? Market size in unit volume, in monetary terms b Regional market? Market size in unit volume and in monetary terms Project sponsor(s); validate reason for selected location; validate by seeing legal title, or speaking with current owner of land to validate intent to sell Project sponsor(s) Project sponsor(s) Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product c National market/exports? Market size in unit Project sponsor(s), others now 14

16 volume and in monetary terms 6 *Specific Project Volume: Amount of total local Estimated annual volume production of goods or of sales or users? services 7 *Types of customers? Individuals, companies, brokers, government, other? 8 Estimated annual sales amount? 9 *Ability to secure written and/or verbal commitments? Specific indication of level of demand? 10 *What are key drivers for sales? Potential of project to sell product or service over 12 months Statistics on market demand, documents with clear evidence of demand Check for quality standards, volume minimums, timing requirements, etc 11 Marketing plans? Check to see if they are organized with contacts 12 What is the longer term potential for the project? For example: - What additional downstream activities could be introduced in the future to increase local added- value of commodity? - Is there local capacity for increased supply of base commodity to allow this to take place? D. Technical Feasibility 1 *Describe the technology, if any, to be used in the This question is aimed at estimating the longer term potential of the project and its strategic value. For example, a later stage of the project could be more feasible than an intermediate stage. Machinery, processes, etc. project? 2 Proven technology? Has the technology been successfully used in other facilities? providing service or product, Government data Project sponsor(s), others now providing service or product Project sponsor(s), others now providing service or product; Validate by contacting a representative sample of targeted buyers. Validate by contacting a representative sample of targeted buyers; Validate if possible based on historical records (business receipts from sellers, etc) Ask for signed documents, market research results, statistics Validate by comparing with other successful projects Project sponsor(s); Identify large buyers ready to buy if product is available at the right price and rate of delivery Interviews with market participants Project sponsor(s) or source of such technology Project sponsor s engineering consultant 3 Appropriate technology? Is the technology Project sponsor s engineering 15

17 4 *What skill levels will be required? How many employees of each skill level? 5 *Are the needed employees available in the local area? 6 *What utilities and transport services are required to operate the project? a *What capacity gaps are there for access to utilities and transport? b *What are needed supplies to build and operate the facility? c *Would supplies be sourced locally, and if so from what companies? appropriate for the local area and its level of development? Describe various required skills; Specialized training? Provided by whom? What is the local labor supply for the required skill levels? Ability of employees to travel to the facility? Estimate monthly required electricity, water, phone, internet, sanitation, waste disposal, and access to transport (roads, rail, air) Determine gaps and costs Check machinery, operational inputs, etc Estimate impact on local suppliers and employment 7 *Environmental effects? Environmental impact in terms of solid and chemical waste, noise and air pollution, soil and water pollution, etc. 8 *What are the legal and regulatory requirements for the project? National and local requirements for operating the project consultant Local government, other local employers Validate with providers of services and other similar projects Validate sufficient and/or additional estimated cost with providers of services Validate by comparing with other successful projects Validate by comparing with other successful projects Project Sponsor a *What is the legal entity for conducting the business? The legal owner of the project and the type of legal entity that will be used to set up the company Project sponsor; validate with Uganda Registration Services Bureau 16

18 b What are the required permits and utility contracts? c What specific environmental reviews are needed and/or approvals? List all permits and approvals necessary to construct and operate the facility Contacts with environmental officials? Process? Project sponsor, engineering consultant, and attorneys; Check for secondary line ministries (e.g., fishing, agriculture, etc); local operating license; NSSF if more than 5 employees; Uganda Tax Authority for Tax ID, Registration with Utility Providers (UNEME, NWSC, etc) for account numbers Project sponsor; Validate with environmental officials. List any environmental officials that have been contacted, requirements, and status. E. Management Feasibility 1 *Ownership structure and legal nature of entity? 2 *Who will manage the facility? 3 *How many employees will be needed at the facility? Type of legal entity that will own the project? Shareholders or partners or other equity owners? Jurisdiction of incorporation? Will there be a management contract with a third- party? If not, names and resumes of manager and principal staff? Total staffing level? How does this compare with similar facilities? 4 Auditors? Who are the proposed auditors? F. Financial Feasibility 1 *What is the average cost of producing the base service or product today? 2 *What is the average sales price of the service or product? On unit sales basis, total cost covering labor, land, machinery, transport, taxes, other inputs On unit sales basis, market prices in local, national, and regional buyers of service or product Project sponsor(s) and its attorneys Project sponsor(s) Project sponsor(s) Project sponsor; other suppliers Project sponsor; other suppliers validate with independent sources (e.g., Uganda National Farmers Federation, etc) 2 3 What is breakeven cost for Required revenue to Project sponsor; validate against 2 See 17

19 project? cover operating costs and start- up costs 4 *Project cost? What will be the total start- up cost of the project investment? a *Cost of site? How much will the site cost? b *Cost of building? What will the buildings cost? c *Cost of machinery and List major machinery; equipment? total machinery cost d Working capital? How much working capital will be necessary to operate the facility? e Start- up losses? What will be the cumulative loss before the facility becomes profitable? 5 *Proposed cost of services How will the facility of product? charge for its services and how much (on a unit basis) will it charge? 6 *Total annual revenues? Expected annual revenues 7 Additional revenue Could project receive sources? 8 Based on today s rates, what are estimated costs for the project to use the utilities and transport services required to operate the project? 9 *Potential sources of equity? subsidies? Estimate required volumes and calculate total costs based on published rates for service List potential equity investors and potential amounts of equity investment by each 10 *Potential sources of debt? Describe any contacts with local banks G. Economic Feasibility 1 Estimated annual pre- tax profit (average of first five years)? 2 Estimated after- tax return on equity? Calculate based on data presented above for revenues and expenses If proforma financial statements have been prepared for the project, please submit them. other similar projects accountant accountant Project sponsor(s), targeted buyers to determine what users are willing to pay Project sponsor Reference the terms of subsidy program(s) Validate with providers of service; contact designated officials at the country s utilities for support Project sponsor(s) List bankers contacted Project sponsor(s) Project sponsor(s) F. Social Rate of Return 1 *Total job creation? Take prior answer from Interviews with suppliers and 18

20 2 *Does the project increase revenues to the local government? 3 *What will be the increase in revenues to the users of the processing plant as a result of using the processing plant? 4 *Number of households to benefit through increased income? 5 *Number of households to benefit through increased access to employment? Section E.3 on total number of employees; ask for estimate of indirect number of jobs from suppliers Indicate taxes or fees paid to local government e.g., increase in unit sales price, multiplied by the volume processed and sold? Amount of increased income to suppliers and other local inputs to the project Number of new jobs (direct, indirect) and estimated salary levels 6 Negative impacts? For example, squeezing out smaller processors or packagers? Squeezing out smaller middlemen who are currently buying a portion of the product or service? users of the facility; interviews with customers of the facility List local government officials who provided information Interviews with farmers, wholesalers or other users of the facility Validate through interviews noted above with targeted suppliers, checking against market price levels Validate through interviews above with targeted buyers, checking against standard employment levels and salaries for similar projects NOTE: Please provide suggestions to the LFI Technical Team on ways to improve the form, as well as expert sources and data sources that can be used. 19

21 ANNEX C CONT D: Specific Guidelines For Project Profiles By Sector Guidelines for Project Profiles: Agriculture Processing Plants & Storage Facilities (NOTE: This is a draft template to be refined. Please provide suggestions to LFI Technical Team.) Checklist Questions Answer Guidelines Information Sources and Validation Process 1 Key questions that require answers are asterisked. The more detailed questions may need to be answered at a later stage. A. Project Definition & Rationale 1 *Commodity (or commodities) to be processed or stored? Elaboration on the question to help exchange in defining answers. Document: (1) how many people you spoke with, (2) their positions, and (3) contact information. Please provide suggestions expert sources and data sources Please use the information generated in later sections to prepare these answers. Names of commodities Project sponsor(s) to be processed or stored 2 *Description of the functions to be performed by the project? Activities/processes of the project 3 *Economic rationale? Provide a brief account of why the project is justified, setting forth its potential profitability and its broader impact on the local economy. 4 Strategic rationale? Provide a brief description of the anticipated strategic value of the project (contribution to local economic development), with supporting evidence outlining the nature of this value. 5 *Social rationale? The expected social return of the project should be described and quantified using the number of households/people to benefit from the project (through direct involvement as employees or shareholders or suppliers) through See information sources and validation processes in later sections. See information sources and validation processes in later sections. See information sources and validation processes in later sections. 20

22 increased income and potential improvement of quality of life. B. Project Description 1 *Capacity of the project? Annual volume of product that the project will be able to process or store 2 *Project site? Physical location; alternative locations? 3 *Size of the site? Square meters of the project site; ability to expand later? Room for related functions, e.g., packaging? 4 *Size of the proposed building(s)? C. Market Feasibility 1 *Overall Market Assessment: Annual supply of the commodity in the targeted area? 2 Seasonality of production of the commodity? 3 Annual amount of the commodity that is currently sold without being processed? 4 Limitations to expand commodity production? 5 Estimated size of the annual market for processed products, or storage? Square meters of each proposed building Annual volume of commodities available to be processed? Amount produced in the local area to be served by the plant How much of the commodity is produced each month How much of the commodity produced in the local region is sold without being processed Limitations on land, water, or labor limitations; Arable land; farmer capacity to work it (e.g., already cleared, etc) Market size in unit volume, in monetary terms Project sponsor(s); validate reason for selected location; validate by seeing legal title, or speaking with current owner of land to validate intent to sell Project sponsor(s) or construction contractor Project sponsor(s), local farmers, agricultural associations Project sponsor(s), local farmers, agricultural associations Local farmers, agricultural associations Local farmers, agricultural associations Local farmers, agricultural associations a Local market? Market size in unit volume, in monetary terms Local farmers, agricultural associations, Agricultural firms b Regional market? Market size in unit Local farmers, agricultural 21

23 volume and in monetary terms c National market? Export? Market size in unit volume and in monetary terms 6 *Specific Project Volume: Amount of total local Estimated annual volume production will be of the commodity expected processed at the facility to be supplied for (i.e., annual volume that processing? the facility is actually expected to process) 8 *Types of customers? Will the suppliers of commodities to be processed be individuals or businesses? 9 Annual amount by which production of the base commodity could be expanded if the processing plant were available? 10 *Who are targeted buyers of finished product? 11 *Ability to secure written and/or verbal commitments? Specific indication of level of demand? 12 *What are key drivers for sales? Potential for expanded production of the base commodity in the local region to be served by the facility Individuals, companies, brokers, government, other Statistics on market demand, documents with clear evidence of demand Check for quality standards, volume minimums, timing requirements, etc 13 Marketing plans? Check to see if they are organized with contacts 14 What is the longer term potential for the project? For example: - What additional downstream activities could be introduced in the future to increase local added- value of commodity? - Is there local capacity for increased supply of base commodity to allow this to take place? This question is aimed at estimating the longer term potential of the project and its strategic value. For example, a later stage of the project could be more feasible than an intermediate stage. associations, agricultural firms Local farmers, agricultural associations, agricultural firms, Government data Project sponsor(s), local farmers, agricultural associations Local farmers, agricultural associations, agricultural firms Local farmers, agricultural associations; validate if possible based on historical records (business receipts from sellers, etc) Validate by contacting a representative sample of targeted buyers. Ask for signed documents, market research results, statistics Validate by comparing with other successful projects Project sponsor(s); Identify large buyers ready to buy if product is available at the right price and rate of delivery Interviews with market participants 22

24 D. Technical Feasibility 1 *Describe the technology, if any, to be used in the Machinery, processes, etc. facility? 2 Proven technology? Has the technology been successfully used in other facilities? 3 Appropriate technology? Is the technology appropriate for the local area and its level of development? 4 *What skill levels will be required? How many employees of each skill level? 5 *Are the needed employees available in the local area? 6 *What utilities and transport services are required to operate the project? a *What capacity gaps are there for access to utilities and transport? b *What are needed supplies to build and operate the facility? c *Would supplies be sourced locally, and if so from what companies? Describe various required skills; Specialized training? Provided by whom? What is the local labor supply for the required skill levels? Ability of employees to travel to the facility? Estimate monthly required electricity, water, phone, internet, sanitation, waste disposal, and access to transport (roads, rail, air) Determine gaps and costs Check machinery, operational inputs, etc Estimate impact on local suppliers and employment 7 *Environmental effects? Environmental impact in terms of solid and chemical waste, noise and air pollution, soil and water pollution, etc. 8 *What are the legal and regulatory requirements for the project? National and local requirements for operating the project Project sponsor(s) or source of such technology Project sponsor s engineering consultant Project sponsor s engineering consultant Local government, other local employers Validate with providers of services and other similar projects Validate sufficient and/or additional estimated cost with providers of services Validate by comparing with other successful projects Validate by comparing with other successful projects Project Sponsor 23

25 a *What is the legal entity for conducting the business? The legal owner of the project and the type of legal entity that will be used to set up the company Project sponsor; validate with Uganda Registration Services Bureau b What are the required permits and utility contracts? c What specific environmental reviews are needed and/or approvals? List all permits and approvals necessary to construct and operate the facility Contacts with environmental officials? Process? Project sponsor, engineering consultant, and attorneys; Check for secondary line ministries (e.g., fishing, agriculture, etc); local operating license; NSSF if more than 5 employees; Uganda Tax Authority for Tax ID, Registration with Utility Providers (UNEME, NWSC, etc) for account numbers Project sponsor; Validate with environmental officials. List any environmental officials that have been contacted, requirements, and status. E. Management Feasibility 1 *Ownership structure and legal nature of entity? 2 *Who will manage the facility? 3 *How many employees will be needed at the facility? Type of legal entity that will own the project? Shareholders or partners or other equity owners? Jurisdiction of incorporation? Will there be a management contract with a third- party? If not, names and resumes of manager and principal staff? Total staffing level? How does this compare with similar facilities? 4 Auditors? Who are the proposed auditors? F. Financial Feasibility 1 *What is the average cost of producing the base commodity today? On unit sales basis, total cost covering labor, land, machinery, transport, taxes, other inputs Project sponsor(s) and its attorneys Project sponsor(s) Project sponsor(s) Project sponsor; other suppliers 2 *What is the average sales On unit sales basis, Project sponsor; other suppliers 24

26 price of base commodity? a *If the base commodity is to be processed, what is market price for processed good? 3 What is breakeven cost for project? market prices in local, national, and regional buyers of base commodity Market prices in local, national, and regional buyers of base commodity Required revenue to cover operating costs and start- up costs 4 *Project cost? What will be the total start- up cost of the project investment? a *Cost of site? b *Cost of building? c *Cost of machinery and equipment? d Working capital? e Start- up losses? 5 *Proposed charges for the processing services or storage fee? How much will the site cost? What will the buildings cost? List major machinery; total machinery cost How much working capital will be necessary to operate the facility? What will be the cumulative loss before the facility becomes profitable? How will the facility charge for its services and how much (on a unit basis) will it charge? 6 *Total annual revenues? Expected annual revenues 7 Additional revenue Could project receive sources? subsidies? 8 Based on current wage Calculate based on rates, what is the required skill categories estimated annual cost of and current wage rates labor for the project? 9 Based on today s rates, what are estimated costs for the project to use the utilities and transport services required to operate the project? Estimate required volumes and calculate total costs based on published rates for service validate with independent sources (e.g., Uganda National Farmers Federation, etc) 3 Project sponsor; other suppliers validate with independent sources (e.g., Uganda National Farmers Federation, etc) 4 Project sponsor; validate against other similar projects accountant accountant Project sponsor(s), local farmers or agricultural organizations to determine what users are willing to pay, i.e., the value from processing Project sponsor Reference the terms of subsidy program(s) Project sponsor s engineering consultant, government labor market data, other local employers Validate with providers of service; contact designated officials at the country s utilities for support 10 *Potential sources of List potential equity Project sponsor(s) 3 See 4 See 25