Project Delivery Competencies

Module 5: Project Approval and Structuring

Project Decision and Structuring

In this phase, often overlapping with late appraisal, the focus shifts to decision-making and final structuring before seeking formal approval from the IFI's authorities (senior management or Board of Directors). Essentially, it's moving from analysis to action: packaging the deal for approval and ensuring all conditions are set.

Internal Review and Clearance

The project is presented to an internal review body. At the World Bank, this could be the Operations Committee or Country Director for smaller projects; at IFC, an Investment Review Meeting with departmental management is held. Here the project team's recommendations are scrutinized.

The team must demonstrate that the project is sound on all fronts and that the client is able and willing to meet the IFI's standards. For instance, IFC's investment department must be confident the client will comply with environmental and social requirements and improve sustainability.

Questions are asked and answered: Is the development impact clear and significant? Are the risks manageable and properly mitigated? Is the implementation plan realistic? Is the financing plan secured (especially if co-financed)? The committee may give a green light, ask for revisions, or in rare cases, ask for major redesign. Gaining this clearance is a prerequisite to moving to final negotiations and Board presentation.

Negotiations (Term Sheet and Agreements)

For sovereign operations, once internal clearance is obtained, the IFI and the borrower government negotiate the legal agreement(s). Typically, this includes a Loan Agreement (and possibly a Project Agreement if the implementing agency is a separate entity).

The negotiation covers the terms and conditions: loan amount, interest rate or service fee, repayment period, any special terms (like grace period, currency), and detailed covenants. Covenants are legally binding promises – for example, the government might covenant to maintain a certain budget for road maintenance or to establish a project steering committee.

The negotiation also finalizes the implementation arrangements in legal text: procurement methods, disbursement conditions, reporting requirements, and safeguard obligations.

For non-sovereign projects, the IFI negotiates with the company a term sheet or heads of terms outlining the investment structure (loan, equity, guarantee terms). Key points include pricing (interest or return), security (collateral, guarantees), covenants (financial covenants such as debt-to-equity ratios, E&S covenants like implementing the ESAP), and conditions precedent (actions the company must complete before funds disburse, such as obtaining permits or adding certain policies).

These negotiations are often complex, requiring give-and-take. IFIs strive to protect their investment and developmental intent while the client seeks manageable obligations. One outcome could be an agreed Action Plan attached to the agreement – for example, IFC often includes the client's Environmental and Social Action Plan as part of the legal commitment, ensuring the client is contractually bound to undertake specific improvements and to report any serious accidents or incidents immediately. This highlights how negotiations cement not just financial terms but also compliance and reporting duties.

Final Board Documentation

In parallel with or after negotiations, the team prepares the final documentation for approval. For MDBs like the World Bank or ADB, this is typically a Board Package consisting of the Project Appraisal Document (revised as needed), a Memorandum from Management highlighting key issues, and draft legal agreements. For IFC or private-sector arms, an Investment Board Report is prepared.

An important part of these documents is the development justification – Boards expect to see how the project contributes to the institution's mission. For example, IFC's Board demands that each investment have economic, financial, and development value and reflect IFC's commitment to sustainability.

Thus, the documentation will explicitly state the project's expected development outcomes (e.g. people benefitting, jobs created, emissions reduced, etc.), financial returns, and compliance with sustainability standards. The risk sections in the Board paper detail how key risks are mitigated, reassuring the decision-makers that those risks are under control or acceptable. If any policy exceptions or novel approaches are involved, those are clearly justified.

Conditions and Readiness

Before seeking approval, the team ensures any prior actions or conditions precedent that should be met are in train. For a sovereign loan, sometimes certain policy actions (like enactment of a sector reform) are required upfront or certain documents (like resettlement plans) must be finalized.

While these might not all be done before Board, the team will gauge if the borrower can meet them soon after. In private deals, conditions precedent to disbursement (e.g. secure a key customer contract, or raise equity from sponsors) are firmed up. Basically, the project is structured such that after approval, it will become effective and start without major delays.

Board Approval

Finally comes the formal approval step by the IFI's Board of Executive Directors (or equivalent authority). In many cases, especially for significant loans, the Board holds a meeting to discuss the project. The project team (and country representatives) might make a short presentation, and Board members (who represent shareholder governments) ask questions or raise concerns (common topics: debt implications for the country, environmental risks, alignment with strategy, co-financing partnerships, etc.).

However, some IFIs have streamlined procedures for smaller or low-risk projects – for instance, IFC allows certain small projects to be approved on a no-objection basis without a Board meeting. In such cases, Board members review the documents and approve in writing if they have no concerns.

Either way, when the Board (or delegated authority) approves, the project moves from planning to reality. The approval is often a milestone marked by a press release or public disclosure of the Project Summary Document (for public sector projects, the PAD may be made public with sensitive info redacted; for private, a summary is published).

Structuring Results-Based Financing

Example – Terms Negotiation

During negotiations for a World Bank education project loan, the government raised concerns about a covenant requiring annual increases in the education budget. After discussion, the parties agreed on a slightly adjusted covenant: the government would ensure a minimum percentage of the budget for education, which was aligned with its own policy commitments.

In an IFC scenario, consider a loan to a manufacturing company: IFC might negotiate an anti-corruption clause (if any project-related bribery is found, IFC can demand immediate repayment) and a sponsor support agreement where the parent company guarantees certain obligations. The company, in turn, negotiates flexibility such as a grace period on principal payments until the new factory is operational. Both scenarios show balancing the IFI's risk control with the client's practical needs.

Stakeholder Considerations at Closing

At closing, stakeholder engagement shifts focus. Internal: The legal department now finalizes the loan or investment agreements based on negotiation outcomes; the finance/treasury teams ensure financial terms (like interest rate, currency) are correctly reflected and plan for disbursements; the risk department might set the final risk rating for the project which affects how it's monitored; and country management prepares any political outreach needed (e.g. informing the IFI's governors or local offices of the new project).

External: The borrower's parliament or board may need to ratify the agreement. Co-financiers coordinate to sign their respective agreements – often a signing ceremony is held with all financiers and the client, symbolizing collective commitment.

It's also time to re-engage with the broader stakeholder group: public communication of the project's approval is often done, which should be transparent about the project's goals and benefits to maintain community support. For controversial projects, IFIs sometimes prepare Q&A or briefings for civil society to preempt misinformation. Ensuring all parties (donors, NGOs, community reps) are informed of the final project design and mitigation plans can help set a cooperative tone going into implementation.

Trend: Blended Finance Structures

A growing trend in project structuring is the use of blended finance to mobilize private capital. This approach combines concessional funding (from IFIs or donor funds) with commercial financing to make projects more attractive to private investors.

For example, MIGA guarantees might be used to mitigate political risk for private investors in infrastructure projects. The blended finance approach is particularly important for meeting the Sustainable Development Goals, as public resources alone are insufficient.

When structuring blended finance, IFIs must ensure that concessional elements are used only to address specific market failures or risks, and that they don't crowd out private financing. The goal is to create sustainable markets that will eventually function without concessional support.

Tools and Templates

By now, many templates have been filled. Additional useful tools at this stage include a Negotiation Checklist (covering all points that need agreement – from major terms down to reporting formats – to ensure nothing is overlooked in the heat of talks).

A Board Paper Template or standard format guides the preparation of the approval document so that it meets the IFI's requirements and addresses all areas Board members focus on. For example, it will have sections for country context, link to strategy, lessons from other projects, financial terms, etc., often in a consistent structure for easy reading.

After approval, an Effectiveness Checklist is used to track conditions that must be met before the loan or investment becomes effective (for instance, legal opinions provided, guarantee agreements signed, key staff hired in the PIU, etc.). Both IFIs and borrowers maintain such checklists to hit the ground running post-signature.

Assessment