Corporate-Policy Project Rating (GPR )

Corporate-Policy Project Rating (GPR ) - Brief Description - (05.2013) Contents: 1. Preliminary remark 2. The four benchmarks of GPR 3. The GPR total index 4. The GPR range of application 5. The GPR profile and corporate-policy appraisal 6. The organisation of GPR within DEG 7. The correlation between the role of DEG, development effects and the achievement of the MDGs 8. Conclusion

1. Preliminary remark In order to improve the measurability of the overall quality of its projects, DEG introduced an integrated assessment tool in September 2000: the Corporate-Policy Project Rating (GPR). After an 18-month test period, the tool was completed in spring 2002. The GPR makes the corporate-policy quality of a project transparent and facilitates portfolio appraisals both exante (target parameters at the time of approval) and ex-post (actual performance after several years of operation of the investment project). The current document provides an overview of the GPR, which is available in different versions for infrastructure and financial sector projects, private equity funds and productive companies. 2. The four benchmarks of GPR The GPR is an index point system combining four benchmarks. 1. The long-term profitability of the project as an indicator of a project company s financial sustainability in the country of investment. Without sustainability in this sense, the other development effects of a project are not assured either. 2. Development effects/sustainability: As the development effects differ between the various types of projects financed, different indicators are taken into account for different sectors. In case of productive enterprises, these are quantitative effects (government revenues, net currency effects, national income, employment effects) and effects relating to qualitative parameters (technology and know-how transfer, qualification and advanced training, gender effects, market and structural effects, improvement of infrastructure, social effects, compliance with social and environmental standards, etc.). Financial sector projects and private equity funds especially focus on the contribution of the project to financial sector development (e.g. savings mobilisation, diversification of credit allocation). In the case of infrastructure projects, the evaluation also considers the contribution of the project to the mitigation of supply bottlenecks or to performance increases in connection with private operators (e.g. lower tariffs). 3. The special role of DEG is assessed in the sense of determining to which degree DEG fulfils its role as a development finance and consultancy institution in the respective project. It is evaluated if DEG acts in compliance with the principle of additionality, if it actively mobilises additional funds from third parties for a project company (e.g. arranging a parallel financing as part of a finance package) and if DEG also acts as a consultant for the project company (project development, financial engineering). 4. Return on equity of DEG: This criterion assesses to which degree a project reaches the target of an adequate return on equity which is necessary for both the long-term existence of DEG itself and for the sustainability of its further growth (profits for the year are reinvested to finance new projects in developing countries). 3. The GPR total index The assessment of a project s quality combines the four benchmarks in a GPR total index. From the total index values, six quality groups (based on German school grades from 1 to 6) 1

are derived allowing for the categorisation of the projects as a very good project (scoring 1) to an obviously insufficient project (scoring 6). The integration of the four benchmarks in a total index requires a weighting of the individual effects by means of points. The maximum of 500 points which a project can reach are distributed to the four benchmarks as follows: 1. Long-term profitability of the project: maximum of 150 points 2. Development effects/sustainability: maximum of 150 points 3. Strategic role of DEG: maximum of 100 points 4. Return on equity of DEG: maximum of 100 points In the GPR, the 150 points related to Development effects/sustainability are distributed over the following number of assessment fields: 12 for productive companies, 8 for financial sector and private equity funds and 9 for infrastructure. For each project type, some development effects have particularly strong weighting. For productive companies, assessment fields that have a higher weight include training, market/structural effects and social effects. The GPRs for financial sector projects and private equity funds gives particularly high scores to effects contributing to the development and stabilisation (broadening and deepening) of the financial sector in the country of investment. The infrastructure GPR highly weights the contribution to the reduction of supply bottlenecks and improvement in performance compared to the local standard. Effects directly contributing to poverty reduction, such as employment creation, are specifically weighted in all types of projects. The benchmark Strategic role of DEG particularly focuses on DEG s compliance with the principle of additionality which scores particularly high. The indicators that are assessed in this benchmark include among others investments in Africa, small and medium-sized enterprises (SME) and low-income and high-risk countries, equity finance, mobilisation of additional private capital, promotion of Corporate Governance, environmental and social standards and CSR. Regarding the Return on equity of DEG, threshold values are established. On the basis of the score, a project can then be allocated to one of the six quality groups. Projects of GPR groups 5 and 6 may only be realised with an exceptional approval of the Board of Management. The following table gives a summary of the six groups: GPR total index GPR group in words > 320 points GPR group 1 very good project > 280 points GPR group 2 good project > 240 points GPR group 3 fully satisfactory project > 200 points GPR group 4 still satisfactory project > 160 points GPR group 5 unsatisfactory project, needs specific justification < 160 points GPR group 6 obviously insufficient project In order to prevent an unlimited mutual compensation of the four benchmarks e.g. in case of a project with a high return on equity for DEG but only minor development effects six quality groups were analogously established for benchmark 2, Development effects/sustainability (referred to as EPOL groups 1 to 6, with 1 being the highest possible score). Consequently, the GPR provides an overall score (GPR) as well as a score based on a detailed assessment of the development quality of a project (EPOL). 2

The GPR range of application GPR is a multifunctional tool aimed at having several applications: ex-ante project selection based on expected effects of the project, i.e. DEG only follows up such project proposals with a minimum GPR score and which comply with general corporate policy; ex-post project monitoring of the actual effects of portfolio companies with the aim of carrying out, e.g. ex-ante and ex-post comparisons for projects or identifying bestpractice model projects; ensuring the institutional learning, i.e. sensitisation towards development issues for DEG staff; strategic portfolio management and portfolio ranking, i.e. ex-ante and ex-post comparisons, average grades and/or time series analyses, evaluation of regional and/or sector portfolios; public relations. 5. The GPR profile The GPR results are not only categorised by GPR group, they are also presented graphically as a GPR profile. The GPR profile clearly reflects the corporate policy and especially the developmental strengths and weaknesses of a project, mirroring the data of an individual project in comparison to the average sector profile in the DEG portfolio (e.g. average of productive enterprises). The following graph illustrates the GPR profile taking the project enterprise S as an example (columns = project S; green line = DEG sector average): With a total score of 316 points, the project enterprise S is a "good" project. As the graph illustrates, the corporate-policy strengths of the project are its development effects and the strategic role of DEG because here the project is above the DEG sector average. For a detailed analysis of the developmental strengths and weaknesses, please see the right-hand 3

side of the graph. It shows that for all assessment fields except for gender, the project scores on or above the average for productive companies. 6. The organisation of GPR within DEG The GPR is applied throughout the entire project cycle. In the acquisition phase (up to Clearance in Principle (CIP) ), investment managers have the opportunity to fill in a first ex-ante GPR based on the available data and expected effects of the project to initially understand the strengths and weaknesses of the project from a corporate policy point of view. Applying the GPR at this stage is voluntary. As part of the due diligence, a mandatory ex-ante GPR is filled in. The investment managers that fill in the GPR, base their assessment on available documents as well as discussions with the clients within the scope of the due diligence. The assessment is cross-checked by another investment manager to ensure a four-eye principle. The staff of the department Corporate Strategy and Development Policy takes control samples to ensure the quality of the GPRs filled in. For every project company in DEG s portfolio, an ex-post GPR is filled in every two years. The GPR assessment should provide an image of the project company at that specific point in time, thus only actual realised effects are included in these GPRs. These GPRs are also cross-checked by another investment manager to ensure a four-eye-principle and control samples are taken by the staff of the department Corporate Strategy and Development Policy to ensure the quality of the GPRs. The following graph illustrates the organisation of the GPR within the project cycle: CIP Due diligence / structuring Portfolio management Concluded projects GPR-CIP (ex-ante / voluntary) GPR appraisal (ex-ante / mandatory) GPR-Portfolio management (ex-post) GPR-concluded projects (ex-post) The staff of the department Corporate Strategy and Development Policy is responsible for the aggregation and analysis of the GPR-data. An analysis on portfolio quality and on the GPR ranking of new commitments and/or the portfolio management is compiled at regular intervals. DEG experience has shown that the compilation of the GPR as part of the due diligence or the preparation of the project report in Portfolio Management can be handled with reasonable time expenditure. The majority of the quantitative data (e.g. jobs, exports) can be taken from the annual financial statements and/or the business report. A project manager, who has made an onsite visit to the project company, should also be able to provide information on the qualitative data (training and qualification, market and structural effects, social benefits). For the support of the operational departments, the department Corporate Strategy and Development Policy has a specific questionnaire, so-called GPR checklist. 4

7. The relation between the strategic role of DEG, development effects and the achievement of the MDGs DEG s corporate goal is to promote the expansion of the private sector in developing and emerging-market countries. DEG can thereby render a contribution to the Millennium Development Goals (MDGs). However, the GPR cannot directly measure MDG contributions as such an assessment would no longer be justifiable with the rating tool in the operational project business under time and cost aspects. For plausibility considerations on MDG contributions at portfolio and project level, however, GPR continues to be a useful tool which is suited for this purpose. The following graph shows the possible causal chain between the role of DEG/DEG financing, investment and in case of success improved competitiveness of the project company, the development effects observed and finally the potential contributions to poverty reduction and other MDGs. Other DFIs/IFIs 1: Enhanced profitability 3: Role of DEG DEGstructuring + financing Investment Improved Competitiveness of the project company 2: Development effects Contribution to economic growth, poverty reduction, (MDG) Other financiers External factors e.g. market factors 4: DEG s ROE External factors e.g. pro poor growth Input = financing and consulting service Output = results Outcome = microeconomic effects Impact = macroeconomic effects The provision of long-term finance and the consultancy services of DEG are the starting point. The following role of DEG is conceivable: DEG provides finance under consideration of the principle of additionality, makes projects bankable, contributes to mobilising further lending or provides an umbrella function for a European company. This role is considered by GPR benchmark 3 and may be defined as DEG's INPUT. As an OUTPUT and/or result, a new company ("greenfield project") or the modernisation of an existing company ("expansion investment ) might be involved. As a first step, a successful investment can make the company more competitive because it is, for example, able to produce more cost-efficiently. Whether the OUTPUT results in the expected OUTCOME is, however, also influenced by external factors. The international competitiveness of the company may, for example, be adversely affected by market factors like commodity prices, political instability, a financial crisis or a general economic downturn. In the event of improved competitiveness, the investment may reveal further effects in terms of performances of the project company (micro-economic level; not impacts!): improved long-term profitability/financial standing of the project company (GPR benchmark 1); development effects such as employment effects, taxes, social benefits for employees, etc. (GPR benchmark 2); 5

possible contribution towards a positive return on equity for DEG (GPR benchmark 4). Development impacts are structural changes within the regional and/or macroeconomic environment of the company within the scope of which the development effects of the project company can render a contribution to poverty reduction. For example, if a company pays taxes, the government can use such tax revenues to finance pro-poor growth programmes including, for example, the construction of public hospitals, schools or kindergartens. A plausibility assumption may indicate that the project company renders an indirect (taxrelated) MDG contribution to poverty reduction if the government implements a pro-poor/progrowth strategy as part of its governmental spending policy and if the principles of good governance (e.g. anticorruption) are considered. Examples for possible direct MDG contributions are: agriculture projects including unskilled workers (MDG #1), projects with an HIV/AIDS component (MDG #6), the implementation of World Bank environmental standards (MDG #7) and selected financial sector and telecommunications projects (MDG #8, e.g. improvement of teledensity rates by mobile network investments). 8. Conclusion The use of the GPR as a transparent rating tool for the corporate-policy appraisal of privatesector projects has generally proven its value in DEG practice. These are the major advantages of the rating tool: transparent assessment of four benchmarks: financial profitability, development effects/sustainability, role of DEG and return on equity of DEG; a user-friendly rating (on SAP and Excel basis), which can be applied in the operational financing business at reasonable time and cost expenditure; sector-specific GPR types allow for an adequate consideration of the different framework conditions of productive companies, infrastructure, financial sector and private equity funds projects. An external evaluation on the effects of DEG projects carried out on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ) in 2004 confirmed the positive developmental effects and impacts of DEG projects. The evaluation also confirmed the general applicability of the GPR as a useful tool to assess private-sector investments in developing countries at market-oriented finance conditions. The BMZ system analysis of 2008 declared the rating tool as an innovative tool for the appraisal of private institutions. In the circle of the European development finance institutions, GPR was met with great interest and has become the market standard. All over the world, 15 development finance institutions and funds are currently using the GPR as a steering and evaluation tool. For further information please contact: Elleke Maliepaard Manager Corporate Strategy and Development Policy DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbh Kämmergasse 22 50676 Köln (Cologne) Germany Tel: 0221 4986 1649 Fax: 0221 4986 1292 E-mail: elleke.maliepaard@deginvest.de 6