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1.Client and Project due diligence process
Integrity due diligence and beneficial ownership verification
This is the first step carried out when assessing new projects. Companies and shareholders are reviewed using available sources in the company’s or sponsor’s local language as well as commonly employed databases. In some instances, in coordination with the IIB’s compliance department, a more detailed assessment is carried out including, if necessary, with the help of external consultants. A thorough study is carried out of the ownership structure of relevant entities, as well as of beneficial ownership, in order to understand the motivation of owners for using different companies and jurisdictions as part of organizing their business. Transparency and sound business reasons are vital. In addition, relevant entities and persons linked to the project, as well as any fewer formal associations – past or present – are explored in order to assess matters of integrity and reputational concern. Whilst it is impossible to discover every detail of interest, the IIB deploys a risk-based approach: conducting more intrusive integrity due diligence where there is reason to do so. Similarly, for repeat projects, the IIB will place some reliance on past experience whilst, at the same time, also rechecking core features, as above.
Financial due diligence
Each project considered for investment by IIB undergoes comprehensive and careful assessment of all their financial processes. This includes (but is not limited to) detailed assessment of their financial reports, off balance sheet obligations (including hedging), related party transactions, arm’s length dealing and transfer pricing, management information systems, cash and working capital management including sample testing of these. In addition, the company’s financial policy is reviewed and its implementation tested. Practically all deals are required to have IFRS or similar reporting standards, and be audited by an auditor acceptable to the IIB, by the time IIB invests in the project. During the due diligence process a financial business plan needs to be presented where all key assumptions will undergo a process of verification by the IIB. The IIB builds its own financial models where base and stress cases are determined independently. In large, sophisticated or acquisition driven deals full external financials and tax due diligence may be required where assumptions will be sanity checked and tested for realism.
Market due diligence
In each project the IIB takes careful consideration of country and market (sector) implications which are closely reviewed. In cooperation with the IIB’s internal economist and treasury departments projections are used to mimic the effects of currency and interest rate fluctuations. Transfer, convertibility and market access – impacting refinancing are also modelled and stressed. Sector considerations– in particular market share positioning and performance vis-a-vie peers are also analyzed and benchmarked as relevant.
Management due diligence
Management is seen as a critical element in the success of a project. Assessment of key and senior management capabilities forms an important part of the appraisal process. During the due diligence process, particular focus is put on assessing the proven, measurable and relevant track record management can demonstrate. Management’s background and experience is individually evaluated and current management methods analyzed. External assessment of management capabilities and background is occasionally carried out. Deal structuring of joint ventures with multiple owners typically require some form of agreed voting rules and procedures for the appointment of top managers in the shareholders’ agreements. A practical dispute resolution is required.
Technical /operational due diligence
Technical and operational due diligence is carried out in all new IIB projects. The use of experts (internal and external) is more commonly used when assessing technical and operational due diligence. The IIB has developed expert knowledge in several sectors and fields and has in-house expert in the fields of oil and gas, metal and mining, chemicals and pulp and paper to name a few. It will always endeavor to ensure specialists are carrying out rigorous technical due diligence in all projects and oftentimes strict technical project monitors are assigned for each deal disbursement. A detailed technical business plan should be presented and as part of the due diligence process all key assumptions will be reviewed, checked including engineering design and construction and equipment costs as well as supervising where relevant.
Legal due diligence
The IIB operates in a challenging legal environment. In many jurisdictions, the application and enforceability of laws are subject to uncertainties and court practices are not always well established. Legal due diligence is therefore an integral part of the preparation of an operation. At a minimum, it typically includes a review of a client’s corporate documents and material contracts impacting the operation, as well as key licenses and permits. The IIB typically engages outside counsel in the client’s jurisdiction to assist in the due diligence process and to advise on legal risks. The outcome of the legal due diligence, and any specific risks identified as a result, are shared with other IIB departments, and form part of the IIB’s overall risk analysis underpinning its decision to proceed and on what terms.
Environmental and Social due diligence
All projects undergo environmental and social due diligence to assess the potential environmental and social impacts and risks. The due diligence will help IIB decide whether the project can be structured to meet the IIB requirements. It is the responsibility of the client to undertake, or commission an independent consultant to undertake an environmental and social assessment of the project to determine the way in which potential environmental and social impacts and associated financial, legal and reputational risks should be addressed in the project planning, implementation and operation.
Procurement due diligence
The IIB has developed and incorporated as part of its project appraisal and approval a risk-based method to assess Client’s procurement capacity. This method is mandatory for all operations involving public procurement. The IIB has a fiduciary responsibility to ensure that resources are used with economy, efficiency, quality of results, contractual protection and timely completion. Such a fiduciary responsibility can only be delivered if the IIB is able to identify risks to the successful delivery of each lending operation and find ways to mitigate those risks.
The objectives of the Capacity Assessment (CA) are to:
(a) evaluate the capability of the Clients, and the adequacy of procurement and related systems in place, to administer procurement (goods, works, services and consulting services) in general and particularly for IIB-financed procurement;
(b) assess the competitiveness of the Client’s sector operations environment;
(c) assess the risks (institutional, political, organizational, procedural, etc.) that may negatively affect the ability of the Client to carry out the procurement process, including identification of procurement practices unacceptable for use in IIB-financed projects; and
(d) develop an action plan to be implemented, as part of the project, to address the deficiencies detected by the capacity analysis and to minimize the risks identified by the risk analysis.
The Risk Analysis provides a solid platform for the IIB to work with the Client, to design Client’s Procurement Capacity Building/Development Programs and Action Plans. With the CA application, the IIB is able to understand where procurement risk is allocated and what mitigating measures in addition to Selective Review, may be adopted in order to ensure adequate project implementation.
