• 
• 
• 
• 
• 
• 

Financing and anti-corruption

Print (optimised for IE8)

 Project procurement – risk management
Development infrastructure – financing
Getting infrastructure into poor communities
Improving the 'bankability' of infrastructure projects
Choosing the project procurement strategy

•  Project procurement – risk management

  Card 22
  Topic: Financing and anti-corruption
  

  • What are the risks in the procurement of investment programmes or projects?

    • Typical risks in the procurement of capital programmes / projects:
      
      
      Financial risks:
      ■ Increase of interest rate
      ■ Exchange rate fluctuation
      ■ Inadequate contingency funds
      ■ Inadequate revenue to cover maintenance cost
      ■ Availability of funding
      Construction risks:
      ■ Risks associated with different types of contract
      ■ Scope changes and claims
      ■ Delay of project completion
      ■ Cost overrun at completion
      ■ Over-estimate of the supply chain’s technical capability and capacity
      ■ Project fails to meet performance specification
      ■ Compliance with construction health and safety legislation
      Operation and maintenance risks:
      ■ Lack of necessary staff and skills
      ■ Failure to identify which party is responsible for any increase of operating costs
      ■ Neglect of maintenance
      ■ Force majeure events
      
       
    • Market risks:
      ■ Misjudgment of supply chain market
      ■ Difficulty of transporting/delivering the products
      ■ No long-term purchase agreement/guaranteed payment for the service or product
      Political risks:
      ■ New laws/legislations
      ■ Strikes/terrorism
      ■ Government consent/permit/priorities
      ■ Breach of contract due to political reasons
      ■ Expropriation or nationalisation of project assets
      Other risks:
      ■ Misidentification of project
      ■ Corruption in procurement
      ■ Failure of fulfilling social and environmental obligations
      ■ Technical/structural risks
      ■ Misidentification of procurement strategies and/or delivery procedures
      
      Further References:
      Merna, T and Njiru, C (2002) Financing Infrastructure Projects
      OGC (2007) Procurement and Contract Strategies
      Denton Wilde Sapte (2004) A Guide to Project Finance
      Hawkins, J, Herd, C and Wells, J (2006) Modifying Infrastructure Procurement to Enhance Social Development  

  • Understand the risk response process; allocate each risk to the project party best placed to deal with it

    • Risk response process:
      
      
      
      Example 1 Construction risk – health and safety in developing countries
      
      Facts:
      ■ UK – 100 fatalities on construction sites each year
      ■ India – 40,000 deaths at work in 2001
      ■ 262,000 dying from work related diseases
      ■ 65,000 from dangerous substances
      
      Actions: can be taken at each procurement stage.
      Example: Hong Kong government clients – “Pay for Safety” and recent procurement reform in Singapore.
      Reference: Engineers Against Poverty (EAP) Promoting Construction Health and Safety through Procurement: A briefing note for developing countries
    • 
      
      
      Example 2 Strategies for Managing Company/Conflict Risk
      
      
      
      Construction companies benefit from thinking constructively about understanding and minimising conflict risk and actively contributing to peace
      
      Reference: “Conflict-Sensitive Business Practice: Engineering Contractors and their Clients” by EAP
      
       
      
       

• Development infrastructure – financing

  Card 25
  Topic: Financing and anti-corruption
  

  • Which funding systems can deliver a long term systems approach to value?

    • "If you think standardisation as the best that you know today, but which is to be improved tomorrow; you get somewhere" – Henry Ford
      
      
       Funding from external sources
      ■ Funds from external sources for development projects mainly come from bilateral/multilateral donor agencies. The funds come as loans, grants or credits
      
      ■ In many instances, donor agencies have different eligibility criteria for accessing their funds. Most of the donors develop their own Country Assistance Strategies for selecting projects that they intend to fund
      
      ■ Funds to undertake key poverty-alleviating development projects are sometimes not provided, due to misalignment of donor and country goals
      
      ■ Donor agencies are generally reluctant to fund asset maintenance projects. In many projects, provisions are not made for the transfer of knowledge to selected local people in the areas of monitoring, operations and maintenance
    • Co-funding of projects
      Co-funding is a way of funding projects where different donors (sometimes involving the borrower) fund different aspects of the project, or pool resources in one basket for the purpose of funding a particular project.
      
      Co-funding options have not been exploited fully by donors due to differences in their eligibility criteria for assessing funds and their acceptable procurement regulations. These differences can be in turn translated into their Loan Agreements with borrowers.
      
      
      The Loan Agreement
      ■ The Loan Agreement usually refers to a procurement schedule which specifies special rules stating the method and guidelines of procurement and the exceptions to those rules, domestic preference, etc
      
      ■ The Loan Agreement for a specific project is mostly subject to International Law and takes precedence over domestic law. Procurement rules for the Loan Agreement will apply even where domestic laws indicate differently
       

  • Co-funding of projects can deliver value, through a long-term systems approach

    • The case for co-funding...
      ■ Co-funding advocates a long-term systems approach to value. It stimulates transfer of knowledge to selected local people, thus facilitating monitoring, operations, maintenance, and a sense of ownership locally
      
      ■ Co-funding reduces the financial commitment from each donor and hence, the risk involved in participating
      
      ■ Funds which could have been obtained as loans by borrowers may be written off as grants/credits, due to the reduced risk involved for the donors
      
      ■ Co-funding does not necessarily "enslave" the borrower to the foreign policy of one donor. It also engenders a self-help attitude among borrowers
      
      ■ Donor agencies must commit to engage in co-funding, while they seek to improve on its flaws and challenges. Standardising Loan Agreements and procurement regulations will greatly facilitate co-funding of projects
       
    • How can borrowers attract more co-funding opportunities?
      ■ Engage development partners more in the criteria for project selection and requests for funding
      
      ■ Include the synergy from Project Impact Assessments of co-funded projects in future negotiations for loans/credits
      
      ■ Communicate success stories from co-funded projects and highlight their contribution to the attainment of the MDGs
      
      ■ Show more commitment to asset maintenance and improvement during its service life
      
      ■ Include areas of mutual benefit in project planning through technical exchange programmes, study tours, etc
      
      Further reading
      www.iimm.org
      Procurement under IBRD Loans and IDA Credits (October 2006)
       

•   Getting infrastructure into poor communities

  Card 34
  Topic: Financing and anti-corruption
  

  • What is Community Driven Development, (CDD) and when is it appropriate?

    In developing countries, peri-urban slums, poor urban and rural communities may not be well served by 'market' or traditional 'top down' public sector delivery of urban infrastructure.
    
    Informal peri-urban settlements develop and improve over time, if allowed; but this process is regularly jeopardised by a wide range of constraints, including:
    
    ■ Physical and technical: difficult sites and terrain and complicated and crowded site layouts which make conventional services provision difficult
    ■ Economic and financial: the high cost of water and sanitation to families of low income, including connection fees, the shortage of (conventional) capital for investment
    ■ Institutional: ineffective public works systems, that see these difficulties and put serving the poor into a 'too difficult' box
    ■ Structural: planning and zoning exclusions and land tenure issues Serving their needs better requires different institutional, funding and organisational approaches, including facilitating and even encouraging working with the existing (slum) settlements.
    
    See: Constraints in Providing Water and Sanitation Services to the Urban Poor U.S. Agency for International Development, 1993
    
    One approach to improve delivery is Community-Driven Development (CDD) – "an approach that gives control of development decisions and resources to community groups. Poor communities receive funds, decide on their use, plan and execute the chosen local projects and monitor the provision of services that result. It improves not just incomes but also people's empowerment, the lack of which is a form of poverty as well."
    
    Why Community Driven Development (CDD)?
    ■ Enhances sustainability and makes poverty reduction efforts more responsive to demand
    ■ Increases efficiency and effectiveness of poverty reduction efforts through working at a local level
    ■ Inclusive of poor and vulnerable groups, builds positive social capital and gives them greater voice both in their communities and with government entities

  • Consider different options when designing a CDD project

    Alternative institutional arrangements
    CDD projects require different institutional arrangements, to facilitate coordination. They are often delivered through local Community Based Organisations (CBOs), working in partnership with NGOs, private companies, or local or central government..
     

    

    
    Source: Institution Options for Local Rural Infrastructure Services presentation by Gerrard, C
    
    Financing options other than grants
    Since projects are initiated/coordinated by wider common interests, the community end-users and/or private investors may also contribute to funding the project. Finance options (which may be a combination of these) include:
    ■ Direct Community Contribution (in cash or 'in-kind', perhaps labour and/or materials)
    ■ Credit Financing of the Community Contribution (by micro-finance, or via a CBO )
    ■ Private Commercial Investment
    
    Design principles for partnerships
    Partnerships play a key role in CCD projects. To enable and enhance their role in such projects:
    ■ Align rules with national decentralisation policies
    ■ Strengthen community voices and participation in local government decision making
    ■ Invest in Government and CBO capacity building
    ■ Delegate control to the lowest appropriate level

    Further reading, examples and opportunities:
    www.cultureandpublication.org
    IFAD's engagement in community-driven development
    Slum Networking
    ADB: Supporting CDD
    World Bank, Community Driven Development (CDD) Principles
    WSUP - projects in Africa, Latin America, Asia 

•   Improving the 'bankability' of infrastructure projects

  Card 36
  Topic: Financing and anti-corruption
  

  • What is the role of project preparation in improving the 'bankability' of projects?

    • Many potential infrastructure projects in developing countries struggle to secure financing, due to poor preparation and packaging of project proposals
      
      ■ In international development it is becoming clear that the reasons for the shortage of delivered infrastructure projects go beyond the need for policy and gover¬nance reforms. Nor is the key problem a lack of funding, as might be expected
      
      ■ Instead, it is the lack of packaged, bankable projects – project proposals with enough time and money already invested, to establish that they are financially viable from the standpoint of a financier. This points to a need for more and better project preparation
      
      ■ Many project proposals are backed only by out-of-date engineer¬ing studies, with little additional analysis or preparation. The projects need more preparation and packaging; but such preparation is expensive and takes time
      
      ■ Private operators and commercial lenders have money to do their own due diligence on projects for which bankability has been reasonably established - but little to spend on preliminary assessments of bankability
       
    • ■ A project's bankability can be determined only after establishing its feasibility in terms of social, economic, financial, technical, environmental, and administrative factors. Project development normally involves pre-feasibility and feasibility studies to assess these factors
      
      ■ But these studies need to be accompanied by conceptualisation, and consen¬sus building around a project's purpose and objectives. And these may need to be linked to required legal, regulatory and policy reforms in the relevant sector, to make the project effective
      
      ■ Many project proposals that are socially or economically desirable may not be bankable, no matter how well prepared and structured, if they incorporate poor engineering designs
      
      
      
      "A lack of proper project planning that flows from a poor feasibility study has been found to be a major contributor to the failure of projects." (Reside, 2007)
       

  • Careful preparation and feasibility studies will lead to 'bankable' infrastructure projects

    • A good feasibility study contains these modules, done in parallel and interactively:
      
      Supply and demand: market for the service
      
      Technical/engineering/procurement: options, choices, costs
      
      Financial: cash flow, financing, return on investment
      
      Economic: the CBA; can include 'shadow prices' for externalities, such a CO2e emissions
      
      Social: the positive and negative impacts on the well-being of the 'target', and other affected, people.
      
      Environmental: impact on the environment? The social and environmental questions should be asked from the start, as opportunities to be included in the scope; not just asked at the end, as risks, in 'compliance' mode. For 'bankable' good practice, see: www.equatorprinciples.org
      
      Key institutional 'success' questions: finally:
      ■ Is the entity managing the project organised, equipped and administratively capable for it?
      ■ Are local capabilities and facilities being properly utilised? www.nclo-vol.org.uk
      ■ Are changes needed in the policy and institutional setup, outside this local entity? (Adapted from Reside (2007): Renato Reside, Ph.D June 2007: USAid, Ateneo de Manila University)
       
    • ■ Such scoping/feasibility studies undertaken prior to project initiation, need to be reviewed,. Not just before setting the budget at the start, but also at 'gateways' through the project implementation, to ensure the project remains sustainable and bankable
      
      ■ Clients/governments and donor agencies should work together on this, making sure that an appropriate budget is set and is monitored during implementation to deliver a sustainable project
      
      ■ Knowledge can further be built by auditing projects and sharing the results, so as to learn lessons from any mistakes or omissions. This can feed into making future project proposals more bankable
      
      ■ It is important to educate all those who are involved, as to why such careful preparation and feasibility studies are necessary. Working together, with common best practice systems and procedures in place, the project will be sustainable and therefore bankable
      
      Useful links:
      www.worldbank.org: Projects & Operations; Data & Research
      www.eclac.org
      www.nclo-vol.org.uk
      CIDB (2010) Project Gateways for control, see: CIDB Infrastructure Gateway System – STAGES
      

•   Choosing the project procurement strategy

  Card 23
  Topic: Financing and anti-corruption
  

  • How to select the right procurement strategy?

    • There are many types of procurement and contract strategies available. Choosing the right one can make or break a project and will depend on the market, location and organisations involved.
      
      
      
      Case study: Escalating costs under traditional procurement: SA World Cup 2010
      Failing to select a procurement strategy which fits your objectives, strengths and capacity, and those of suppliers, can be expensive.
      
      "Provisional costs - a result of contractors not knowing what their client actually requires - in some cases made up as much as 60% of total project costs"- Malcolm Simpson, National Treasury 2010 Unit, 2007
       
    • Traditional, pre-planned, procurement Traditional contracts are widely used in developing economies. However, lack of public sector capacity results in private sector dominated construction, often involving many small contracts. This approach has created a bottleneck with countries typically spending just 2/3 of their budgets allocated for infrastructure.  
      
      Simplified pre-planned project timeline
      
      ■ Usually used with priced contracts based on lump sum or bill of quantities
      ■ Does not include incentives to produce an economic or efficient design or service or innovation during construction
       
      
      References:
      Watermeyer, R and Thumbiran, I (2009) Delivering infrastructure at scale in developing countries: numbers or systems? ASOCSA, Zambia Foster, V (2008) Overhauling the engine of growth: Infrastructure in Africa
       

  • Understand the project client's strengths and those of suppliers

    Analyse the project client's market strength in relation to workload, project scale, risk and supplier specialisation. Think about what needs to be achieved, what suppliers can offer and how to structure procurement to fulfil the aims. Decisions should be based on providing value for money over the whole life of a project..

    

    References: Ainger, C MWH (1992) Montgomery Watson Management Services-Appropriate procurement Procurement and Contract Strategies, Office of Government Commerce (2007)
    IDMS Practice Guide 2: Construction procurement strategy (2010)
    www.cidb.org.za