Project Delivery Competencies

Module 4: Project Appraisal and Due Diligence

Overview of Project Appraisal

With studies in hand and a solid concept, the project enters full assessment and appraisal. This is the due diligence phase where the IFI and client rigorously evaluate the project's soundness from all angles – technical, economic, financial, social, environmental, institutional, and risk.

For sovereign projects, this often culminates in a formal Project Appraisal Document (PAD); for non-sovereign, an Investment Proposal or credit memorandum – these are comprehensive reports synthesizing all findings and recommendations.

Key Components of Appraisal

Technical Appraisal

Engineers and sector specialists verify that the project design is technically feasible and appropriate. They examine whether the chosen technology and design meet the objectives effectively. Alternatives are revisited to ensure the selected approach is optimal.

For example, in an appraisal of a power project, the team would confirm the generation capacity is needed, the technology (solar, wind, hydro, etc.) is suitable for local conditions, and that designs follow international standards.

Site visits are usually conducted: the investment team assesses the project through discussions with the client and visits to the project site. Site visits can reveal on-the-ground realities – e.g. difficult terrain, or unanticipated community issues – that papers can miss.

Lessons from prior projects are explicitly considered at this stage; if similar projects faced delays due to poor maintenance, the team might incorporate a maintenance training component now.

Economic and Financial Appraisal

Economists perform a cost-benefit analysis (for public projects) to ensure the project's economic rate of return is acceptable and that it yields net positive benefits to society. Financial analysts model cash flows for revenue-generating projects or assess fiscal impact for non-revenue projects.

A financial analysis checks that, for example, a water utility project will result in a financially sustainable operation (tariffs can cover costs or subsidies are secured). For private deals, credit analysts evaluate the company's financial health, projected income, and debt service capacity.

The IFIs require that each investment be financially sound and have economic and development value – at appraisal, this is documented with quantitative indicators (NPV, IRR, debt-service ratios, etc.) and development impact metrics.

Many institutions also use frameworks to assess development impact systematically (e.g. IFC's AIMM or the IDB's DEM framework) which score how well the project contributes to development goals.

Environmental and Social Appraisal

Perhaps the most scrutinized aspect in modern IFI projects, this involves reviewing the ESIA and related plans (Environmental Management Plan, Resettlement Action Plan, Indigenous Peoples Plan, etc.). The appraisal must confirm that the project can comply with the IFI's environmental and social standards.

For example, IFC's Performance Standards or the World Bank's Environmental and Social Framework set requirements on issues like labor conditions, pollution prevention, community health and safety, land acquisition, and biodiversity protection.

The team asks: Are mitigation measures adequate and costed? Is there capacity to implement them? Have affected people been properly consulted and informed of their rights?

Disclosure and consultation requirements must be met by this point – IFIs often require that draft ESIA reports or summaries be disclosed publicly for a certain period (e.g. 60 days for high-risk projects) before Board consideration, to allow stakeholders (civil society, affected communities) to provide input.

During appraisal, the project's environmental category (risk level) is confirmed, which dictates the disclosure timing. An example: for a Category A project (high risk) in IFC's pipeline, a Summary of Investment Information (SII) and the ESRS must be publicly disclosed 60 days prior to Board review. The appraisal team ensures this timing is built into the schedule.

Failure to manage E&S issues at appraisal can lead to serious problems later – a cautionary tale is the IFC-funded Tata Mundra power project in India, where communities later sued IFC for harm; one finding was that project impacts (cooling water discharge affecting fishermen) may not have been adequately mitigated upfront. Thus, meticulous E&S appraisal is not just compliance, but risk management for the IFI and client.

Institutional and Governance Assessment

For sovereign projects, this checks the capacity of the implementing agency and overall arrangements. Is the executing agency experienced enough? Does it need capacity building or additional staff/consultants? How will coordination among government entities be handled?

Appraisal might recommend institutional strengthening measures (training, new systems, hiring advisors) to ensure the project can be implemented successfully.

For private projects, governance refers to the company's management strength, corporate governance practices, and perhaps integrity record. IFIs conduct integrity due diligence to check for any history of corruption or sanctions on the company or key individuals – a critical step to protect the IFI's reputation and ensure funds are not misused. Compliance teams run checks against anti-money-laundering and sanctions databases at this stage.

Legal and Regulatory Assessment

The IFI's lawyers analyze any legal issues: e.g., for a sovereign loan, does the country need to pass a law or get parliamentary approval to take the loan? Are there any policy exceptions required (say, if the project structure is unusual)?

For private deals, legal due diligence covers project contracts (concession agreements, supply contracts, etc.), collateral or security arrangements for loans, and ensuring enforceability of the agreements. They also check regulatory requirements – e.g., does a power plant have its generation license, or does a microfinance institution have the needed approvals? Any pending legal disputes that could affect the project are flagged.

Risk Assessment

Throughout appraisal, a consolidated risk matrix is developed. This identifies all significant risks uncovered and rates them (typically High, Substantial, Moderate, Low) along with mitigation measures.

Categories commonly include: technical/design risk, implementation capacity risk, fiduciary risk (financial management/procurement), environmental and social risk, stakeholder risk, regulatory risk, market risk (if the project revenues depend on market demand), and others.

An example risk: "Land acquisition delays could postpone construction – mitigation: start acquisition early, hire a resettlement specialist, and closely monitor progress." Another: "Counterparty risk – the power utility off-taker has weak finances, risking non-payment – mitigation: project backed by partial risk guarantee or escrow of payments."

The lessons of past projects feed into this; if similar projects in the country saw delays due to slow procurement, the risk is flagged and perhaps a procurement specialist will be embedded in the PIU as mitigation.

In one notorious case (Uganda road project), the Bank failed to classify the project as high risk for social issues, which led to inadequate measures and ultimately serious harm. The lesson learned is to correctly assess and categorize risks during appraisal, as downplaying risks can lead to devastating consequences later (as was the case with unaddressed sexual exploitation issues in that project).

Therefore, IFIs have become more diligent in incorporating social risk into their overall risk assessment framework, often using specialized risk tools (e.g. Gender-Based Violence risk assessments where relevant).

AI Tools for Risk Assessment

Co-Financier Coordination

If multiple financiers are involved (e.g. parallel loans from ADB, EIB, World Bank in a large infrastructure project), appraisal is ideally conducted jointly or in a coordinated fashion. Joint appraisal missions can be arranged to avoid burdening the client with duplicate meetings.

Lenders often share among themselves key studies (with client permission) to form their independent judgments. A lead co-financier might take responsibility for certain assessments.

Harmonizing requirements is important – for example, if one bank has a slightly different environmental standard, the partners will negotiate a common approach so the client isn't pulled in different directions. The appraisal documents might note which partner covers which component and how risks are shared.

Co-financing, when well-coordinated, "can reduce aid fragmentation, lower transaction costs, and simplify funding arrangements for client countries", but this requires alignment during appraisal.

A real-world illustration is the Nam Theun 2 project: World Bank and ADB conducted a joint appraisal given their shared financing, producing a unified set of project documents and requirements (indeed a joint World Bank/ADB team evaluated the project's performance later).

Tools and Templates

Key outputs at this stage include the Appraisal Report (or PAD) outline – which often has standard sections (Project Context, Description, Results Framework, Implementation Arrangements, Assessment of Risks and Mitigations, etc.). IFIs have templates to ensure no aspect is omitted.

Another crucial document is the Environmental and Social Action Plan (ESAP) or similar, which compiles all required mitigation measures, assign responsibilities, and timelines – this will later be attached to legal agreements.

A Financial Model Review Checklist is used to verify that the financial projections make realistic assumptions and include stress tests (e.g. sensitivity of project outcomes to cost increases or delay).

IFI teams also prepare a Decision Meeting presentation – a slide deck to brief management or an Investment Committee on the project's key points and seek their clearance to move to approval.

Assessment