World Bank Good Practice Guidelines: Financial analysis of revenue-generating entities
This paper, World Bank Good Practice Guidelines: Financial analysis of revenue-generating entities, provides good practice guidance in using financial analysis to underpin policy advice and to aid in structuring operations in the infrastructure (and, potentially, social) sectors, including investment loans whose beneficiaries are non-bank, public sector, revenue-generating entities, as well as sector adjustment loans and guarantee operations.
It discusses the scope and content of financial analysis, and it provides recommendations on key financial analysis issues that, since multilateral development banks (MDBs) work in developing and transition countries, they need to approach somewhat differently than do commercial banks working in countries with highly developed financial sectors.
This note specifically targets two sets of interrelated issues:
- at the sector level, tariffs, subsidies, and affordability; and
- at the level of the executing agency, the use of financial ratios as covenants and as monitoring tools.
Financial analysis can be used to diagnose the scope and sources of such problems, and identify ways to improve the financial viability and efficiency of existing and prospective service providers. Used as an input to sector dialogue and investment lending, financial analysis can help promote the financial sustainability of enterprises and the sectors in which they operate; develop local capacity to manage without external assistance, ultimately enabling enterprises to gain access to capital markets; and protect the borrowers’ and the MDBs’ financial interests.