FINANCIAL ANALYSIS AND EVALUATION

1 FINANCIAL ANALYSIS and EvaluationTechnical Guidance Note FINANCIAL ANALYSIS and EVALUATION of implementing and executing agencies (EAs/IAs) and projects are tools used by Asian Development Bank (ADB) for ensuring prudent use of its resources. This Technical Guidance Note (TGN) describes ADB s requirements and good practices for fi nancial ANALYSIS and EVALUATION of sovereign projects, and identifi es measures for ensuring that ADB-supported investments are fi nancially viable and sustainable. In addition, this TGN provides a sound analytical framework for assessing whether Developing Member Countries (DMC) agencies are fi nancially capable of implementing an ADB project and operating and maintaining it in a fi nancially sustainable manner over the investment s economic life. In alignment with Strategy Operational Priority Strengthening Governance and Institutional Capacity, robust fi nancial ANALYSIS and EVALUATION allows ADB and EAs/IAs to identify and agree actions for enhancing their fi nancial capacity, which contributes to strengthening DMC s overall governance and institutional the Asian Development BankADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacifi c, while sustaining its e orts to eradicate extreme poverty.

2 Established in , it is owned by members from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical DEVELOPMENT BANK6 ADB Avenue, Mandaluyong City1550 Metro Manila, DEVELOPMENT BANKFINANCIAL ANALYSIS AND EVALUATIONTECHNICAL GUIDANCE NOTEOCTOBER ASIAN DEVELOPMENT BANKFINANCIAL ANALYSIS AND EVALUATIONTECHNICAL GUIDANCE NOTEOCTOBER 2019 Creative Commons Attribution IGO license (CC BY IGO) 2019 Asian Development Bank6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, PhilippinesTel +63 2 632 4444; Fax +63 2 636 rights reserved. Published in 2019. ISBN 978-92-9261-820-9 (print), 978-92-9261-821-6 (electronic)Publication Stock No. TIM190489-2 DOI: views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

3 ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not making any designation of or reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or work is available under the Creative Commons Attribution IGO license (CC BY IGO) By using the content of this publication, you agree to be bound by the terms of this license. For attribution, translations, adaptations, and permissions, please read the provisions and terms of use at # CC license does not apply to non-ADB copyright materials in this publication.

4 If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the contact if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB to ADB publications may be found at :In this publication, $ refers to United States design by Josef Ilumin. CONTENTST ables ivAbout This Publication vAcknowledgments viiAbbreviations viiiExecutive Summary ixI.

5 Introduction 1II. Policy Requirements 3 III. FINANCIAL ANALYSIS 5IV. FINANCIAL Cost Benefit EVALUATION 14V. FINANCIAL Covenants 22VI. Reporting and Monitoring 24 Appendix 1: Definitions 27 Appendix 2: Sector-Specific Considerations 31 Appendix 3: Basic FINANCIAL Statements 33 Appendix 4: Definitions of FINANCIAL Ratios 34 Appendix 5: Weighted Average Cost of Capital 37 Appendix 6: Risk and Sensitivity ANALYSIS 41 Appendix 7: FINANCIAL Performance Indicators and Draft Covenants 46 TABLES1 Fiscal ANALYSIS of Operations and Maintenance Allocations 72 Present Value of Money 193 Calculating Net Present Value 20 ABOUT THIS PUBLICATIONThis guidance note was issued to facilitate Asian Development Bank (ADB) staff and consultants as well as staff of executing agencies and/or implementing agencies in conducting the FINANCIAL ANALYSIS and EVALUATION required during processing, implementation, change of scope, and completion of projects financed under sovereign-backed loans by ADB.

6 The following is a list of guidance materials on FINANCIAL due diligence issued by the Procurement, Portfolio, and FINANCIAL Management Department, ADB and shows their applicability in the ADB project Strategic PlanningProcessingImplementation Project ClosingCPSCOBPC oncept StageFact FindingRRPR eportingPCRG uidelines on the FINANCIAL management and ANALYSIS of projects Handbook for borrowers on the FINANCIAL management and ANALYSIS of projects FINANCIAL ANALYSIS and EVALUATION FINANCIAL management assessment Guidance on using the APFS checklist about this PubliCationThis technical guidance note is one in a series issued to facilitate Asian Development Bank (ADB) staff, staff of the executing and implementing agencies, and consultants in conducting FINANCIAL due diligence of ADB-supported projects.

7 The following is a list of guidance materials on FINANCIAL due diligence issued by the Procurement, Portfolio, and FINANCIAL Management department, adb, and shows their applicability in the adb project cycle: Guidance Material Medium Term Strategic PlanningProcessing ImplementationProject CloseCPSCObPConcept StageFact FindingRRPPAMPCRG uidelines on the FINANCIAL management and ANALYSIS of projects Handbook for borrowers on the FINANCIAL management and ANALYSIS of projects FINANCIAL ANALYSIS and EVALUATION FINANCIAL management assessment Guidance on using the apfs checklist Preparing cost estimates continued on next pagecontinued on next pagevi About This PublicationMedium-Term Strategic PlanningProcessingImplementation Project ClosingCPSCOBPC oncept StageFact FindingRRPR eportingPCRP reparing cost estimates Project FINANCIAL reporting and auditing Preparing a country audit strategy APFS = audited project FINANCIAL statement, COBP = country operations business plan.

8 CPS = country partnership strategy, PCR = project completion report, RRP = report and recommendation of the guidance note is intended to assist readers by elaborating and explaining how to perform FINANCIAL ANALYSIS and EVALUATION of ADB s sovereign-financed DocumentThis guidance note is intended to be a living document and will be revised as ReaderReaders are expected to use this guidance note according to their needs. For consistency purposes, throughout the document, it is assumed that the reader is a professional, with basic FINANCIAL knowledge, who is involved in activities financed in whole or in part by an ADB sovereign-backed loan or grant, or by ADB-administered asked questions, clarifications, examples, additional information, links to training, and other useful resources are available on the ADB and Order of PriorityIn the event of any discrepancy between this guidance note and legal agreements, the latter will prevail.

9 The legal agreement governs the legal relationship between the borrower and continuedAbout This PublicationviobjectiveThis guidance note is intended to assist stakeholders by elaborating on and explaining ADB s FINANCIAL due diligence requirements for borrowers and grant recipients of FINANCIAL documentThis guidance note is intended to be a living document and will be revised as reader In many circumstances, readers are expected to use this guidance note in a manner unique to their needs. For consistency throughout the guidance notes, the following assumption is made about the reader:The reader is a professional involved in activities financed in whole or in part by an ADB loan or grant, or by ADB-administered asked questions, clarifications, examples, additional information, links to training, and other useful resources will be made available on the ADB and order of PriorityIn the event of any discrepancy between this guidance note and legal agreements, the latter will prevail.

10 The legal agreement governs the legal relationships between the borrower and ADB. Guidance Material Medium Term Strategic PlanningProcessing ImplementationProject CloseCPSCObPConcept StageFact FindingRRPPAMPCRP roject FINANCIAL reporting and auditing Preparing a country audit strategy COBP=Country Operations Business Plan, CPS=country partnership strategy, PAM=project administration manual, PCR=project completion report, RRP=report and recommendation of the continuedAbout This PublicationviobjectiveThis guidance note is intended to assist stakeholders by elaborating on and explaining ADB s FINANCIAL due diligence requirements for borrowers and grant recipients of FINANCIAL documentThis guidance note is intended to be a living document and will be revised as reader In many circumstances, readers are expected to use this guidance note in a manner unique to their needs.