Infrastructure Project Finance
Broma is a commercial and residential Central European city with a population of 2.5 million. It represents a major logistical focal point for the country of Sylvania, and many main roads and rail connections pass through this conurbation. The Government, through the National Highways Authority (NHA), an autonomous Government agency created in 2010, which has responsibility through the Min. of Transport for motorway construction, operations and maintenance, has put aside the financial resources necessary to upgrade this highway and has authorised the NHA to undertake the project. Given overall Government budgetary constraints, however, the Government would like to consider PPP as an optional funding mechanism. (Virginia Clark, Margaret Reed, Jens Stephan (2010)).
Study on Site
It’s a complete Brownfield site for motorway project and hence the total development will start from scratch. This brings in its own set of advantage and disadvantage. The main advantage is that you do not carry backward load while main disadvantage is the allotment of the capex.
For decades, the broadly adopted and consistently applied measures of business value have been the traditional accounting measures such as net profit, earnings per share and return on invested capital. However, a measurement gap has developed between accounting measures and real business value.Keith Alexander, (2012)
A profile of a stakeholder should include:
- Name — Identify people by names, not just roles. This ensures that communication is focused on their specific needs, interests and impacts.
- Title — Identify their specific titles and parts of the organization.
- Stance — Does this person support, reject or sit on the fence regarding the EA program and any of its past, present and future initiatives?
- Camp — Who influences them, whom do they listen to, what camp do they align with and how do they vote?
- Level of influence — Determine if this person is a decision maker, influencer or supporter.
- Power — Determine if this person has formal power based on his or her position, or more informal power based on his or her knowledge, connections and personality.
- Issues — Identify this person’s pain points and major challenges with respect to the future state of the business.
- Opportunities — Identify the knowledge, skills resources that they can enable or support to further the future state of the business.
- Decision style — Identify whether this person makes decisions based on being command-and-control-directive; collaborative and analytical; or high-level-conceptual. Also identify whether this person is indecisive or unwilling to make decisions.
- Personal characteristics — What is this person’s personality? Is the person outgoing or more aloof? Do they have an open door and casual style, or are they more hierarchical and formal?
- Success metrics — What drives this individual? How are they measured? What would motivate them to support or resist an enterprisewide perspective?
- Passion points — Identify what makes them excited personally and professionally. These personal interests can be leveraged to gain the interest of a key stakeholder in your efforts.French Caldwell, (2008)
Q1:- What are the key risks? How might they be controlled or mitigated?
Value Driver 1: Maximize Business Effectiveness
- Sol 1) Exchange rate risk: Since the value of currency is not stable, this is one of the biggest risks which any corporations involved in international business faces. Many a time’s profit margins of the traders get eroded because of the impact they face from the movements in the currency. A proper hedging policy of the company alongside proper advice from the bank on the same is very important to save the company from currency risks.
- Non Payment Risks: It does not matter with which country you are trading, risk of not getting paid in lieu of goods and services provided in the foreign nation is one of the biggest risk in international trade. Some of the instruments which can save the exporter from this kind of risk are pre payment mode or Irrevocable Letter of Credit. Companies in Australia can create stringent credit policy and also look into taking credit insurance. Exporter can look into ‘Export Finance Navigator’ which is the insurance provider on credit provided and is managed by Australian government.
- Legal Risks: There are very high chances that there exist huge difference between the law of the other country and current prevalent law in Australia. In such cases taking legal advice from experts about the law of the other land is highly desirable. Both the importer and the exporter need to understand the differences in law which exist and then determine whether the trade can be established or not. (Siti Zaleha, 2011)
- Political Risks: Export contracts can be highly disturbed if there is political turbulence in the land where export is taking place. Same can also happen if one is importing any good and your own country is facing political problems. A trader in Australia can take help in this matter from The Department of Foreign Affairs and Trade (DFAT). They monitor political changes in any Australian business and can be an appropriate guide for the business people.
- Quarantine compliance risks: Most of the countries in the world have strict quarantine requirements. Any business which is exporting to any country should be aware about the quarantine law of that country. On the other side there might be huge import restrictions if one is importing certain kind of good in one country. Both the side of business should adequately prepare themselves for the quarantine law for the destination. If one wants to know about the Australian agency for the same they can look for Australian Quarantine Information Service (AQIS).
2. Is the project financially feasible? Will investors and lenders be attracted
To this project [prepare a simple cash-flow model]
- Business process directors are unable to identify which strategic business outcomes matter to their organization, because the business strategy is not documented or well-communicated.
- Without a clear business strategy, it is hard for the business process director to determine which business process management (BPM) projects best support strategic business outcomes and should, therefore, be prioritized.
- Business process directors without a clear business strategy have no mechanism to understand and balance which business domains present the best opportunities for BPM to bring significant value to the organization.Peter Massingham, (2010)
- Find where senior executives are stating (directly or indirectly) their strategic intent. Key sources of such information include financial reports and investment analyst interviews.
- Bring senior business executives a draft of what you think the business strategy is (based on directly and indirectly stated strategic intent) to further refine and clarify their performance objectives and goals. Next, leverage draft statements of strategic intent to get business and IT leaders engaged, understanding the opportunities and challenges they face, and discussing how BPM could help them achieve or overcome them.
- Create a model that gives a coherent picture of the overall enterprise business strategy based on the information gathered (Massingham, 2010).
- Develop a value creation map to reveal which key stakeholders, core competencies and resources are crucial to executing the enterprise business strategy.
- Cash flow model
|Finance Executional Process and Insight Areas||Business and Decision Processes||Primary Data Periodicity and Type||Information Sources||Analytic Capabilities||Business Apps Using the Analysis|
|Finance Operational Close Processes||Identify that all transactions have been posted, and that all appropriate adjustments have been made (e.g., accruals) to allow the GL to close||Monthly, balance and transactional||GL, accounts payable and accounts receivable
|Financial reporting tools (to produce trial balance, profit and loss [P&L], and balance sheet)
Online inquiries from GL account balances, with drill down to subledgers
Disclosure management apps
|Finance Corporate Consolidation and Close Processes||Identify that all corporate close processes have been completed, and that the appropriate adjustments have been made (e.g., intercompany account reconciliations) to finalize the consolidated close||Monthly, balance and some transactional||GL(s)
Subsidiary finance apps
|Financial reporting tools (to produce P&L and balance sheet)
Financial reconciliation apps
Close process analytics
|Financial consolidation apps|
|Accounts Receivable Analysis||Monitor outstanding customer balances, and identify collection strategy to optimize working capital||Real time or near real time, and transactional||Accounts payable
|Aged trial balance
Ad hoc analysis to identify large outstanding balances and delinquent customers
Accounts receivable process analytics
Collection manager dashboard
Collection agent task list
|Accounts Payable Analysis||Monitor outstanding vendor balances, and identify payment strategy to optimize working capital||Real time or near real time, and transactional||Accounts receivable
|Aged trial balance
Ad hoc analysis to identify upcoming payments and cash requirements
Accounts payable process analytics
Accounts payable manager dashboard
3. How might the project be funded? How much debt? How much equity?
The project can be funded by debt as well as be equity and as well as by combination of both that is debt and equity. As to raise the fund government has issued a short term euro bond at the 6% to collect the funds but at the same time it was overspent on the public services investments in 2013-014 so the corporate defaults were rising. So the motorway should try to fund its project by both ways that one is debt and another is equity. (Kieso, Donald E.; Weygandt, Jerry J. & Warfield, Terry D. (2007)).
4. What financial structure would you recommend?
We would recommend the finance structure of mixture of long term debt and equity so that motorway can finance its operation. The mixture of financial structure directly affects the value and the risk at the company. The main concern for financial manager for the company is deciding how much money has to be borrowed and what will be the capital structure and how it would be invested. So we would prefer to use the mixed structure for motorway project.(Lemke, Lins, Hoenig and Rube)
5. What addition information or support is required?
Having established and prioritized key enterprise assets in accordance with business value of motorway project, sylvania, it is of fundamental importance that the associated risks are fully understood. The reason this is so critical is that for the organization to adequately protect itself it must make informed decisions on which risks should be mitigated, which of them it is able to accept and those it can transfer. Alongside key performance indicators, key risk indicators (KRIs) need to be well understood so that information strategy can appropriately support business objectives.A.J. BAKER, (2009)
The analyst Business Risk Model is a framework for risk-based thinking. It contains within it a structure showing business aspects (for example, demand management), outcomes (sales effectiveness) and KRIs (for example, customer loss and forecast inaccuracy). Using the analyst Business Risk Model as a starting point, enterprise risks and specific KRIs can be customized where required so it more accurately reflects the threats faced. For example, if your information policy document has been identified as an item on the information asset risk register and requires that public cloud implementations be carried out in a controlled (under governance) manner, the “cloud rogue index” as defined in the Business Risk Model, could be used as a leading risk indicator. The business impact of this risk, the metric applied (for example, unauthorized cloud projects/total number of cloud projects) and mitigating measures required will provide the basis for effective risk management and a risk-aware culture.Siti Zaleha Abdul Rasid, Abdul Rahim Abdul Rahman, Wan Khairuzzaman Wan Ismail, (2011)
Recommended Actions to Extract Information That Reveals the motorway Strategic Intent
- Understand your company vision and/or mission statement.
- Search your organization’s website, intranet, press releases and other key communication sources to find clues. (Lubka Tchankova, (2002))
- Evaluate the business context in which your company operates, using this information. Consider how the following aspects might impact the business strategy:
- Are there any current internal cost-cutting initiatives or mergers and acquisitions?
- Have any regulatory changes been announced that could impact both the business strategy and business processes?
- What is happening external to the company in its industry, environment, competitive landscape, and the regional and global economies that could impact the business strategy?
- Assess how the company differentiates itself in the market and gains competitive advantage. It is crucial for the business process director to understand this, in order to determine which processes are critical to driving strategic business outcomes and how they should be developed to improve strategy execution.
- Once information that indicates the organization’s strategic intent has been gathered, use it to deduce which business outcomes (such as the ones listed above) are crucial to the organization.
- A.J. BAKER, (2009) “GROWTH AND VALUATION IN ‘MANAGERIAL’ THEORY: AN ALTERNATIVE VIEW”, Journal of Economic Studies, Vol. 6 Iss: 1, pp.39 – 63
- Keith Alexander, (2012) “Facilities Management in the New Organization”, Facilities, Vol. 10 Iss: 1, pp.6 – 9
- Lubka Tchankova, (2002) “Risk identification – basic stage in risk management”, Environmental Management and Health, Vol. 13 Iss: 3, pp.290 – 297
- French Caldwell, (2008) “Risk intelligence: applying KM to information risk management”, VINE, Vol. 38 Iss: 2, pp.163 – 166
- Peter Massingham, (2010) “Knowledge risk management: a framework”, Journal of Knowledge Management, Vol. 14 Iss: 3, pp.464 – 485
- Siti Zaleha Abdul Rasid, Abdul Rahim Abdul Rahman, Wan Khairuzzaman Wan Ismail, (2011) “Management accounting and risk management in Malaysian financial institutions: An exploratory study”, Managerial Auditing Journal, Vol. 26 Iss: 7, pp.566 – 585
- Benefits, Features and Tools of a Managed Motorway – Roads and Traffic Authority. Retrieved on 15 December 2014
- Virginia Clark, Margaret Reed, Jens Stephan (2010). Using Monte Carlo simulation for a capital budgeting project, Management Accounting Quarterly, Fall, 2010
- Kieso, Donald E.; Weygandt, Jerry J. & Warfield, Terry D. (2007). Intermediate Accounting (12th ed.). New York: John Wiley & Sons. p. 738.
- Lemke, Lins, Hoenig and Rube, Hedge Funds and Other Private Funds: Regulation and Compliance, Chapter 15 (Thomson West, 2014-2015 ed.).