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Structuring and Drafting the Tender and Contract

57.2 Financial-Economic Capacity Criteria

Financial or economic capacity criteria are intended to guarantee that the company or group of companies (consortium) that are candidates for the project have a healthy financial situation. The criteria provide evidence that they will be capable of meeting the financial needs of the project, which may be summarized as having funds available to meet equity needs as well as capacity to raise third party funds in the form of long-term debt.

Typical indicators include financial ratios such as debt to equity/leverage, liquidity ratios, specific ratios for the project such as equity to project Capex, and others, as well as magnitudes, such as the average revenues of “last three years”, level of profits of “last three years” (or evidence of being in profit), and so on.

These indicators/benchmarks are calculated on the basis of balance sheet and profit and loss accounts of the previous year (or a number of recent years, normally no more than three)[66].

It is good practice to include specific forms on which to present the financial information requested, including the information specifically used to calculate financial ratios which should be clearly explained and defined.

Some additional guidelines and principles include:

  • Financial capacity may be easily confused with the experience in similar projects that demonstrate the capability to negotiate and raise significant amounts of funds in project finance schemes. This particular capability is better handled under the experience/technical capability criteria which is separate from the financial or economic criteria that establish the capacity to raise funds.
  • Any criteria should be as objective as possible. While some level of judgment may be unavoidable in evaluating qualifications (as well as proposals), in the case of financial capacity criteria, clear thresholds and a description of how to calculate and present the resulting values of each indicator is essential.
  • In a number of countries, it is customary to ask for bank “support letters” or “letters of comfort” reporting on the capacity of the companies or consortia to raise funds. This is generally regarded as good practice. However, the value of these as proof of financial solvency is quite limited and should not substitute for an active analysis of the capacity of the prospective bidder.

    [66] A
    relevant point that exceeds the scope of this PPP Certification Guide is the
    challenging situation for international bidders when submitting financial
    qualifications in countries where the accounting regulations and principles (generally
    accepted accounting principles – GAAP) do not follow the International
    Financial Reporting Standards (IFRS). An international bidder’s financial
    statements may comply with IFRS, but be inconsistent with the local GAAP. It
    may be difficult to fairly evaluate the financial capacity of one bidder that
    has IFRS-based financial statements against another bidder that has GAAP-based
    financial statements. Countries can receive a range of benefits, not just in
    the field of PPP transactions but in general business, from using or adapting
    accounting regulations to international standards. Otherwise, the translation
    of financial statements of an international bidder to local GAAP needs to be
    carefully assessed.

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