Assessment of Project Organization and Management Methods

What is the product design like? Are the technical and skill requirements for product production high?

c. Technology and equipment

Is the technological process advanced and modern? At what level in the world? Is the technology suitable for the current level of Vietnam? Why choose this technology?

Is the technology transfer method reasonable or not, does it ensure that the investor can grasp and operate the technology or not? Consider and evaluate the quantity, capacity, specifications, types, list of machinery and equipment and the synchronization of the production line. The advanced level of the equipment, when it is necessary to change the product, can this equipment meet or not? Are the equipment prices and payment methods reasonable or suspicious? Is the delivery and installation time of the equipment consistent with the expected project progress or not? The reputation of the equipment suppliers, do the equipment suppliers specialize in manufacturing the equipment of the project or not?

d. Scale and construction solutions

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Consider the construction scale, whether the architectural solution is suitable for the project or not, and whether it can take advantage of existing facilities or not.

Total estimate and estimate of each project item, are there any items that need investment but have not been estimated, are there any items that are unnecessary or do not need to be invested in yet?

Is the construction progress consistent with the provision of machinery and equipment, and is it consistent with reality?

Infrastructure issues of transportation, electricity, water supply and drainage...

e. Environment, fire prevention and fighting

Review and evaluate the project's environmental and fire prevention solutions to see if they are adequate and appropriate, and if they have been approved by the competent authority if required.

In this section, the appraiser needs to compare with current regulations on whether the project must be submitted for approval, environmental impact assessment by the environmental management agency as well as fire prevention and fighting capabilities.

2.3.4.8. Assessment of project organization and management methods

Factors to be assessed:

a. Basic information about organization and management

Provide information about the investor's name, address, contact phone number, bank account, business type, governing body, date of establishment, and business lines according to business registration.

Main information about the unit's key leadership positions: date of birth, professional qualifications, length of experience of the Chairman of the Board of Directors (if any), General Director/Director, Chief Accountant, etc.

Total current staff: direct workers, indirect workers, ratio

expertise (if any).

Information about the parent company (if any): name, date of establishment, location of operation, business lines.

Information about affiliated units (if any): list affiliated units, operating areas, main business lines.

Information on related units (if any): in case the Investor invests in many different independent legal entities. List the units, areas of operation, main business lines, and the Investor's capital contribution ratio to the above units.

b. Assess the capacity of the leadership team and key staff

Evaluation of experience, expertise, and management system

production, business acumen and dynamism,…

The position of the enterprise in the market: Information about the main consumer market (important customers of the unit), the market share of the unit (if any),... Characteristics of the production and business activities of the unit: difficulties and

Typical advantages in the unit's production and business activities.

2.3.4.9. Project risk assessment

In general, due to many economic, legal and market factors, investment projects may contain many risks. Therefore, assessing, analyzing and predicting possible risks is very important to increase the feasibility of the expected calculation plan as well as proactively take preventive and mitigating measures. Below is a classification of some of the main risks and risk mitigation measures:

a. Policy mechanism risks

This risk is considered to include all financial and policy uncertainties of the project location, including: new taxes, restrictions on money transfers, nationalization, privatization or other laws, resolutions, decrees and sanctions related to the project's cash flow.

This type of risk can be minimized by:

- When appraising a project, it is necessary to consider the project's legal compliance to ensure strict compliance with current laws and regulations related to the project.

- Investors should have separate preferential contracts regulating this issue to minimize force majeure risks due to changes in Government policies....

- Incentives on foreign currency supply will help limit the impact of exchange rate issues on the project.

b. Construction and completion risks

This is the risk when the investment project does not complete on time, does not comply with the parameters and implementation standards. This type of risk is beyond the ability of VCB to adjust and control, but can be reduced by proposing to the investor to implement the following measures:

- Choose a reputable construction contractor with financial strength and experience

- Strictly implement contract performance guarantee and construction quality warranty.

- Closely monitor construction progress during construction.

- Support from competent authorities, financial reserves of customers in case of exceeding the budget.

- Clearly define responsibilities for compensation and site clearance.

- Fixed price or turnkey contract with clear division of obligations of the parties.

c. Market, income, payment risks

This is the risk that occurs when the market does not accept or does not have enough demand for the project's output products and services, due to competitive pressure, the product's selling price is not enough to cover the project's costs. This type of risk can be minimized by:

- Market research, market analysis and evaluation, market share carefully

- Cautious supply and demand forecasts (should not be overly optimistic)

- Analysis of consumer's ability to pay, willingness and behavior

final (not just the underwriter)

- Increase the competitiveness of the project's output products and services by means of: analyzing design improvements, improving product quality, saving production costs...

- Consider long-term product offtake contracts with financially capable parties (if any)

- Support for government product consumption (if any)

- Flexibility of output product and service structure

- Minimize non-compete clauses (if any)

d. Supply risk

When the project does not have the source of raw materials (main and important inputs) with the expected quantity, price and quality to operate the project, create stable cash flow... to ensure the ability to repay the debt. This type of risk can be minimized by:

- During the project review process, the Appraiser must carefully study and evaluate reports on the quality and reserves of input materials in the project documents. Make initial assessments in calculating and determining the financial efficiency of the project.

- Research on competition between material suppliers

- Flexible in time and quantity of purchased raw materials

- Contracts and agreements with mechanisms for transfer to users

- Long-term input material supply contracts with reputable suppliers.

e. Technical, operational and maintenance risks

These are risks that the project will not be able to operate and maintain at a level consistent with the original design specifications. To assess this type of risk, the appraiser should verify the implementation and compliance with the following standards:

- Using proven technology

- Project operations department must be well trained and experienced.

- Can sign operation and maintenance contracts with clear incentive terms and penalty scope.

- Insurance for force majeure events such as floods, earthquakes, wars

- Control budget and operating plan

- Right to replace the operator due to failure to fully perform obligations

f. Environmental and social risks

This is the risk that occurs when the investment project causes negative impacts on the environment and surrounding people during the process of forming and operating the project. To assess this type of risk, the appraisal officer needs to check whether the following contents have been completed by the investor or not:

- Environmental impact assessment reports must be objective and comprehensive, and approved in writing by competent authorities.

- There should be participation of stakeholders (environmental management agencies, local authorities) from the beginning of project implementation.

- Comply with environmental regulations

g. Macroeconomic risks

Risks arising from the macroeconomic environment, including exchange rates, inflation, interest rates... Appraisers need to pay attention to the following contents to assess this type of risk:

- Analysis of basic macroeconomic conditions

- Make calculation assumptions taking into account the impact of macroeconomic factors to assess the impact on the project's efficiency and debt repayment capacity.

h. Other types of risks

There are other types of risks that may occur to the project and depending on each specific project, the appraisal officer will propose preventive and mitigation measures.

The risks of the project are also the risks in the lending activities of commercial banks in general and VCB in particular. Therefore, to ensure the safety of loans, it is necessary to analyze scientifically and closely the risks in investment activities.

2.4. ASSESSMENT OF THE LEVEL OF COMPLETION OF INVESTMENT PROJECT LOAN APPRAISAL AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM

Through studying the entire content of loan appraisal for investment projects at VCB, as well as the actual implementation of loan appraisal regulations for Da Nang hotel and villa projects, it is possible to evaluate the implementation of loan appraisal for investment projects at VCB from two perspectives: the results achieved, the limitations and the causes.

2.4.1. Results achieved

Investment loan appraisal activities at VCB during the research period achieved positive results, specifically expressed in the following contents:

First, the calculation of project efficiency indicators is carried out in a systematic manner.

science

Factors such as capital plans, funding sources, cash flows and indicators reflecting project efficiency are calculated scientifically and fully. In addition, the evaluation of financial indicators has also been processed according to the principle of time value of money. Indicators are calculated with high accuracy, with very few errors.

Second, multiple valuation scenarios are carefully calculated.

During the appraisal process, the appraisal officer took into account changes in market factors affecting input and output prices, operating capacity, expected revenue and expenses, thereby creating appropriate scenarios to assess project risks before making a lending decision.

Third, the appraisal process is always researched and improved to minimize the time and cost of appraisal for investment project loans.

The progress of project loan appraisal completion at VCB is always focused on improvement. Most projects are appraised by VCB in a short time with the lowest cost for investors, creating conditions for early project operation, saving capital costs. This is an important factor, having a positive impact on the construction progress, investment and business performance of the project later.

Fourth, the appraisal staff is always given attention in training and fostering professional expertise and ethics.

VCB's appraisal staff have good moral qualities, are knowledgeable in professional knowledge, market economics, finance, and banking. That helps facilitate the operation as well as the acquisition of knowledge and training skills in appraisal of investment project loans; this is an important factor for the orientation and roadmap for perfecting the investment project lending work at VCB.

Fifth, the decentralization of project appraisal and approval is well implemented.

VCB has decentralized the organization of appraisal between branches and the central government. The bank sets the maximum loan judgment level of the branch based on the characteristics of each branch such as capital capacity, professional qualifications of staff and local characteristics. Branches are entitled to make decisions within the permitted credit judgment limit. When exceeding the limit

In addition to the right to decide, the Branch still conducts project appraisal, and only when the project is feasible will it be sent to the Head Office. This has reduced the workload for the Head Office, saving time and effort for appraisal officers at the Head Office. For complex projects requiring large investment capital, the approval of the funding decision must be approved by the Credit Council. In addition, VCB regulates the lending process according to the principle of ensuring independence and clearly defining the responsibilities between the appraisal and credit approval stages. This both creates collective strength and contributes to controlling the ethical risks of credit officers.

2.4.2. Some limitations

Besides the achieved results, the appraisal work for investment project loans at VCB still reveals some limitations as follows:

2.4.2.1. About appraisal method

The appraisal methods applied by the bank are scientific and modern. The main methods used by the bank in the appraisal process are the comparative method, the sequential appraisal method and the forecasting method. These methods are applied flexibly depending on the nature of the project and the amount of information collected by the appraisal staff. The bank also applies efficiency indicators such as: NPV, IRR..., to evaluate the effectiveness of the project, in some projects, the sensitivity analysis method is also used in risk analysis.

The criteria used in the appraisal process are also applied quite flexibly. This is shown in the fact that: although the appraisal process has clearly defined the steps and stages in the appraisal process, in reality there is still a certain open space, meaning that the selection of which criteria, how many criteria to evaluate for each project depends quite flexibly on the qualifications and perspective of the appraisal officer, and even depends on the relationship of the customer with Vietcombank... However, no matter how flexible, the appraisal officers always direct their analysis and evaluation to ensure that they are presented in the most objective and comprehensive manner.

The biggest limitation in appraisal methods is that banks have not yet fully applied modern mathematical software such as simulation software in risk analysis, time series forecasting software, etc.

For each appraisal method, the bank has the following limitations:

Comparison method: The bank mainly compares indicators with standard norms, not focusing on comparing and contrasting indicators with similar projects.

Risk analysis and risk elimination methods have not received due attention. Because an investment project when put into operation may encounter many different types of risks. Risk assessment, analysis and appraisal will help banks come up with appropriate preventive measures as well as provide additional advice to customers.

Risk analysis through Crystal Ball simulation analysis is an advanced and modern method, but due to some subjective and objective reasons, this method has not yet been applied and implemented at this bank.

Sensitivity analysis method: The selection of impact variables is still subjective to the appraiser, not taking into account the specific characteristics of each type of project as well as each industry sector .

For the sensitivity analysis method, the level of deviation in revenue and cost under different conditions and for different types of projects is different. Therefore, CBTĐ needs to analyze and choose deviation levels flexibly, rather than rigidly applying levels of 5%, 10% or 15%. It is important that CBTĐ needs to understand why it is necessary to choose such fluctuation levels.

In addition, banks need to use more modern methods to calculate financial expenses and calculate discount changes to see the impact of the environment.

2.4.2.2. Regarding appraisal content

The appraisal of total investment capital, capital structure as well as capital usage progress mainly relies on data provided by customers, which cannot accurately know the actual situation of the project, leading to the situation where investors are dishonest in detailing the capital structure to implement their projects.

Some cases where investors dishonestly declared and misrepresented their own capital when implementing projects have caused them to default on their debt to banks.

Some financial appraisal contents of the project such as revenue and cost appraisal often do not take into account fluctuations in related risks. Costs for long-term construction investment projects are accepted as in the feasibility study report, because the project implementation process takes place over a long period of time, making it difficult for appraisers to monitor regularly and according to each specific stage of the project. Revenue appraisal also does not take into account fluctuations in market factors such as domestic and foreign product demand, but is based only on signed contracts of the investor.

The basic contents that determine the accuracy of calculation results such as revenue, costs, etc., although being implemented with attention, still do not meet the requirements of investment project loan appraisal.

a. Appraisal of financial performance assessment indicators

In most of the projects that have been appraised, the appraisers have only selected a few basic criteria for calculation such as: NPV, IRR, other criteria such as break-even point, benefit-cost, break-even capacity, return on investment rate, etc. have not received much attention.

The NPV and PP indicators are calculated based on a constant interest rate. However, in theory, interest rates are factors that change frequently under the influence of many factors over time. Therefore, the above indicators will more or less no longer have full meaning, especially for medium- and long-term projects, because their calculation depends largely on the choice of discount rate.

b. Project appraisal forms in the VCB system are not unified.

Although the project appraisal report forms have been unified throughout the system, however, for projects appraised by branches (not belonging to the TTDA Department, Head Office), the appraisal steps from collecting, analyzing information, approaching customers are not unified among branches but are often conducted based on the personal experience of the appraisal staff at each branch.

This leads to the limitation that: although the appraisal form has been unified throughout the system, the implementation method is not the same, leading to difficulty in controlling the quality of appraisal for investment project loans.

c. The method of determining the discount rate in project financial appraisal is still limited.

According to the survey results, 10% of the appraisers interviewed gave a score of 1/5 for the content: "Consistency in management and operations throughout the VCB system for appraisal of investment project loans". This is because appraisers often encounter difficulties in determining the financial discount rate in calculating the effectiveness of projects with complex capital structures. Although the VCB Credit Handbook and the Investment Project Loan Appraisal Handbook have provided instructions on the method of determining the financial discount rate by calculating and using the Weighted Average Cost of Capital (WACC). However, the method of determining WACC is quite simple and cannot be applied to projects with complex capital structures. Therefore, when appraising complex projects, determining WACC is entirely subjective to the appraisers, and there is no consistency across the system.

2.4.2.3. About information sources and equipment serving appraisal work

It can be said that VCB is a pioneer bank in technology in Vietnam. Information and data sources are collected in many ways, the bank has a department to store customer information and data throughout the system. This helps reduce time and costs in the appraisal process. However, the management and provision of credit information at VCB is currently undertaken by the Credit Information Department - Head Office. In fact, appraisal officers often have to buy information to serve the appraisal work for most projects. This causes many costs for VCB and slows down the project appraisal progress due to incomplete information sources. In addition, there are many projects that must be appraised at the Head Office but are deployed in many regions across the country, leading to many costs for supervision and field work at the project; wasting time, reducing the working efficiency of appraisal officers.

In addition, the information source supporting appraisal work from VCB's Credit Handbook and Investment Project Loan Appraisal Handbook is not complete and does not cover all working situations of appraisal officers.

2.4.2.4. About the appraisal staff

Most of the appraisal officers as well as Vietcombank staff are competent, have a firm grasp of technological knowledge, have good professional qualifications, can work in a high-pressure work environment, have the ability to learn and absorb well, and are ready for the common goal of Vietcombank. The work of training officers and improving appraisal skills is also regularly focused by the bank. Currently, the bank has its own appraisal officer training center, regularly updates knowledge and advanced modern appraisal methods, and promptly issues guidance documents to each branch and department. Therefore, the qualifications and appraisal skills of the officers have been greatly improved.

However, appraisal of investment project loans is a difficult field and contains many potential risks, requiring the staff directly doing the appraisal to have deep professional knowledge and a broad and updated understanding of the socio-economic situation. In that situation, the team of staff appraising investment project loans at VCB is not really even-handed, especially the staff working at the branches.

2.4.3. Causes

The information system between commercial banks is not yet developed.

Due to competition, information about customers serving the appraisal of investment project loans is rarely shared by commercial banks with each other. Information is exchanged mainly through personal relationships.

Lack of information support from the State Bank

The Credit Information Center under the State Bank of Vietnam’s Credit Department (CIC) has been established for many years but has not yet fully fulfilled its role in supporting commercial banks. Information from CIC has not yet met the requirements of completeness and timeliness. This is a limitation that commercial banks in general and VCB in particular must always find ways to overcome.

Lack of transparency of information from customers

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