3. THE EVALUATION
METHODOLOGY
3.1 The sample chosen
A random and representative sample of 22 CDC
projects was selected from "qualifying" 1992 Board Approvals,
that is the pool of approvals remaining after excluding supplementary
investments (including rights issues) relating to earlier approvals
and resulting from cost over-runs, restructuring, refinancing
or short-term funding for working capital.
This number of projects is large enough to be
statistically significant and therefore to allow broad conclusions
to be drawn about the full spectrum of new projects approved by
Board in 1992. That year was chosen because the projects approved
then have now been operating long enough to have two years of
audited accounts and it is possible to make a meaningful assessment
of prospects. Procedures and approaches have changed to some extent
since 1992 and some of the projects approved in 1992 would not
be considered appropriate for CDC today.
The 22 CDC investments totalled £137 million,
representing 61 per cent by value of the total unlapsed Board
approvals in 1992. Eighteen of the projects selected were in non-capital
market sectors, ranging from power to tourism. Four projects were
in capital markets.
The 22 projects are representative of the spread
over regions and sectors of projects approved by Board in 1992.
In 1992 the proportion of Approvals relating
to equity investment was low, at below 10 per cent of the total.
"Qualifying" equity total £14 million, of which
£9 million was selected for evaluation.
Annex A shows the regional and sectoral spread
of the evaluations undertaken in 1996-97, and the type of instrument
used.
3.2 Methodology
Non-capital markets projects were classified
using the decision tree. Because financial and economic internal
rates of return are not meaningful calculations for businesses
based on interst rate spreads, the same methodology could not
be applied to capital markets projects.
Capital markets projects were instead given
scores in a number of different aspects of their operations. Financial
performance was measured by reference to a number of indicators,
including return on equity, return on assets and specific provisions.
Operational performance was scored by a reference to factors such
as strategy and market share, management, cost effectiveness and
portfolio risks. Scores for economic performance depended on the
extent to which the project contributed to skills transfer and
training, capital market development, local resource mobilisation
and competition in the financial sector. The social and environmental
performance of the financial institutions was scored in terms
of attention given to these issues in their due diligence procedures.
The reports for all projects were prepared by
staff in the overseas offices, none of whom had been involved
with the original appraisal. Each report has been tabled and discussed
in an Investments Management Committee meeting to ensure that
the project's classification is deemed appropriate. All of the
EDIs have been subject to an independent review by the Evaluation
Unit. The Unit also made site visits to four projects, representing
45 per cent of the evaluations portfolio by value. Two of the
projects visited were chosen as the most likely among the group
to have been significantly disruptive in social terms.
3.3 Turn-out
All 22 Evaluation of Development Impact reports
(EDIs) have been received. One is in provisional form because
it is a Government-controlled company and the 10-year Plan covering
its strategy is only due to be ratified by Government in July.
This will allow for a more accurate calculation of the expected
returns but will not affect the project's classification.
