Expert Mission on studying the most advanced experiences and application mechanisms in the field of allocation of state concessional loans to entrepreneurs organised by TAIEX, DG Enlargement in co-operation with National Fund for Entrepreneurship Support of Azerbaijan Republic Baku, 9.1.2012

Improve and re-prepare minimum requirements concerning the preparation of investment projects and adapt to EU requirements Themistoklis Kossidas Scientific Collaborator/ Auditor Ministry of Interior, Decentralisation and E-government

1. Introduction 2. Project appraisal 3. Conclusion 4. Sources 5. Questions and Answers

1. Introduction The EU requirements for investments projects such as concessional loans, cohesion funds, structural funds etc., despite the differences of procedures and methods, the economic logic of analysis and the methodology should be homogeneous. Concessional loans (definition by IMF): These are loans that are extended on terms substantially more generous than market loans. The concessionality is achieved either through interest rates below those available on the market or by grace periods, or a combination of these. Concessional loans typically have long grace periods. It is illustrated a regulatory framework of the project appraisal process of investment projects: a) Scope and Objectives of investment projects b) Definition of the projects c) Responsibility of the prior appraisal d) Information required for the evaluation.

2. Project appraisal a) Scope and Objectives of investment projects: three priority objectives of the existing financial instruments: i) promoting the development and structural adjustment of regions whose development is lagging behind, ii) supporting the economic and social conversion of areas facing structural difficulties, iii) supporting the adaptation and modernisation of policies and systems of education, training and employment.

2. Project appraisal continue b) Definition of the projects: Project is an economically indivisible series of tasks, related to a specific technical function and with identifiable objectives. Group of projects are projects that satisfy the following three conditions: i) they are located in the same area, ii) they belong to a general plan for that area, iii) they are supervised by the same agency that is responsible for co-ordination and monitoring. For these projects, whatever their financial size, the proposer must prepare a Cost-Benefit Analysis that takes into account the direct and indirect effects on employment, possibly integrated with other evaluation methods in the case of projects in the environmental field.

2. Project appraisal continue Some specifications for financial thresholds are the following: i) the key economic variable is the total cost of the investment. To evaluate that figure one must not consider the sources of financing but the overall economic value of the infrastructural or productive investment proposed. ii) if one assumes that the investment costs will be spread over a number of years, then one must consider the sum of all the annual costs, iii) while one needs to consider only the cost of the investment, without the running costs, it is advisable also to include any one-off expenses incurred in the start-up phases, such as hiring and training expenses, licenses, preliminary studies, planning and other technical studies, price revision, appropriation of operating capital, etc., in the calculation of the total cost; iv) sometimes the interrelation among different smaller projects is such that it is better to consider them as one large project.

2. Project appraisal continue c) Responsibility of the prior appraisal. This section illustrates the responsibility for prior appraisal of projects on the basis of information given by proposer. The Commission regulation for the Cohesion Fund (CF) states that: The beneficiary Member States shall provide all necessary information, including the results of feasibility studies and ex-ante appraisals. The Commission regulation for the Instrument for Structural policies in Pre-accession countries (ISPA) states: The beneficiary countries are to provide all necessary information including the results of their feasibility studies and appraisals, an indication of alternatives not pursued and co-ordination of measures of common interest situated on the same transport route, to make this appraisal as effective as possible.

2. Project appraisal continue For the evaluation of projects the assistance of the European Investment Bank (EIB), whenever appropriate, may be availed. In practice, recourse to the experience of the EIB is very common in the case of projects, both when the Bank itself is financing the project and when it is not. In any case, the final decision will be the result of a dialogue and a common commitment with the proposer, in order to obtain the best results from the investment. The beneficiaries often have structures and internal procedures for evaluating projects of a certain size, but sometimes difficulties may emerge in carrying out a quality evaluation. The Commission can help to overcome these difficulties in different ways. Technical assistance for the preparation of the evaluation of a project may be co-financed and other appropriate ways.

2. Project appraisal continue d) Information required for the evaluation: Community regulations indicate which information must be contained in the application form for the purposes of an effective evaluation on the part of the Commission. They ask for: the name of the body responsible for implementation, the nature of the investment and a description thereof, the cost and location of the investment, including where applicable, an indication of the inter-connection of investments, the timetable for implementation of the work, a cost-benefit analysis (CBA) including the direct and indirect effects on employment, a risk analysis, a financial plan that includes information about the economic viability of the project, wherever possible, detailed indication of the alternatives rejected,

2. Project appraisal continue the criteria to be applied in order to ensure the quality of the evaluation (the application of the Polluter Pays Principle), an evaluation of the environmental impact as well as the impact on equal opportunities. A project examiner should consider these and other similar lists of regulatory norms more as a general indication of the minimum information required rather than as a rigid set of criteria. The applicant has the responsibility to supply the required information but the Commission should verify that the information provided are consistent, complete and of sufficient quality to assess the appraisal.

2. Project appraisal continue In general, for any type of investment a financial analysis is always advisable and important, since this analysis is the basis for the CBA and its existence improves the quality of the project evaluation. It is particularly important to understand the extent to which the capital invested in the project may be at least partially recouped over the years. This may come about, for example, via the sale of services, if this is contemplated, or through other means of non-transitory financing that may generate inflows of cash sufficient to cover expenditure for the whole period of implementation of the project.

3. Conclusion Investment projects need detailed and careful work. The acceptance or rejection relies on details.

4. Sources European Commission, 1997, Guide to cost-benefit analysis of investment projects, (Structural Fund-ERDF, Cohesion Fund and ISPA), Evaluation Unit DG Regional Policy. European Commission, 1997, Financial and economic analysis of development projects, Office for Official Publications of the European Communities, Luxembourg. European Commission, 2001, Project cycle management, EuropeAid Co-operation Office, Evaluation Unit, Brusssells. Regulation 1164/1994 “Establishing a Cohesion Fund”. Regulation 1260/1999 “Laying down general provisions on the Structural Funds”. Regulation 1265/1999 “Amending Annex II to Regulation (EC) No 1164/94 Establishing a Cohesion Fund”.

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