How can you evaluate capital projects in emerging markets effectively?

Detailed investigation of the socio-political and economic environments are crucial to get a realistic grasp of the emerging market context. Rule of law, long-term political and economic stability, fiscal policies, banking & financial systems, and overall national civil and services infrastructure are key parameters to be evaluated in detail. Compromise and involvement of local national, state, and municipal governments, and of private economic sectors with defined projects are also crucial to successful ascertaining of local context.

You can also check from the geographical investments prospective like: 1. who are the prominent market players who have invested in those markets and what are those projects? 2. which countries have invested in those markets and whether those have green light from their govt and also from the govt of emerging market 3. are their any existing treaties between countries etc.

To understand the context common tools like SWOT, PESTEL etc will not be sufficient. Besides the open to public aspects such as econonomic (statistical data), politics, legal, enviromental, there could be hidden cultural and social (which hard to understand until you not dig in and not live in that society). Especially in business field there could be a hidden ways to do the business, government entities or private companies owned by strong groups, which may enjoy special preferences which new foreign investor may not enjoy. Could be groups foreign investor + local partner which may have additional preferences which not mentioned on official legislation. All these may create not equal competitive environment for new comer.

Also while considering cash flows need to also evaluate environment under which the market is operating like for eg: force majeure etc.

Beyond cash flows, the integrity and reliability of the emerging market and the specific project clients is paramount to a successful project. The content and legal letter of the contracts must be bullet proof in terms of guaranteeing payments, including sovereign guarantees by the state and the government, for public sector contracts. Export credit agencies' involvement is also a practical way to minimize risk and strengthen project cash flows, whenever possible. Countries where the export credit agencies don't want to support specific projects is a red light to be taken seriously into account. Proper risk mitigation studies must be also conducted in depth, at length, and in detail.

The investor to emerging market definately should apply higher capital costs, and expect higher returns on capital. Ordinary profitability levels are not sufficient to emerging markets due to various risk (economical, political, etc). Also competitors may have hidden financial statements or respectively higher profits which covers country risks. Investors should expect early payback to secure their investments. Also should consider the mechanisms to repatriate capital and if the work properly. Legislation and actual processes maybe different. Local companies may have not following all the tax and other laws or hide part of their revenues.

For NPV calculation very important indicator is enterprice salvage value which is hard to estimate and calculate. Contingency analysis should be also done if the targets are not reached, revenues dropped and cost increased. Very common indicators for emerging markets are - currency instability and high inflation, while the local revenues are nominated in local currency, fuel prices, effect of curreng global changes (war, economical crisis etc).

I believe it is important to consider also any possible adverse outcome of the project - for instance on the local communities or the ecosystem. The cost of effective mitigation strategies should be accounted for.

Different countries and markets have different level of risk which is really hard to estimate precisely. But of course more preference should be given to less risk while sound profitability promising countries with more or less stable political and legal environment.

Other things to consider: 1. More rely or seek second opinion from local consultants (auditor, tax, commercial, legal) rather than Big4, Internaltional and well known names. Local consultans will give many inside information, grey area etc. 2. Consider working with local partner who has international style of management and business but knows how to deal with local specifics and issues. 3. Keep in mind and note that corruption level even amoung newly recruitted staff could be high, different levels of internal control will be required. Economic security will help to resolve them.