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Homework answers / question archive / Risk and opportunity – together as always! Engineering Tech (ET) is a large national engineering partnership in Australia, with expertise in large-scale infrastructure projects, including public-private partnership (PPP) projects involving government departments and agencies

Risk and opportunity – together as always! Engineering Tech (ET) is a large national engineering partnership in Australia, with expertise in large-scale infrastructure projects, including public-private partnership (PPP) projects involving government departments and agencies

Finance

Risk and opportunity – together as always!

Engineering Tech (ET) is a large national engineering partnership in Australia, with expertise in large-scale infrastructure projects, including public-private partnership (PPP) projects involving government departments and agencies. ET has been a major player in various parts of Australia, and has ventured into consulting activities in Japan and parts of Asia.

A senior partner of the firm was approached recently about executing a major infrastructure project in Addis Ababa, Ethiopia near the Bolé Road airport. The country that was once referred to as the ‘Breadbasket of Africa’, and remains the only country on the continent never to be colonized, has experienced war, drought and starvation, and continues to face extreme poverty.

Those harsh realities aside, the country has benefited from some foreign aid and some investment, and the partner at Engineering Tech perceives an opportunity to do some good, as well as to take on a complicated, profitable project in a region considered too risky by the firm’s competitors.

Engineering Tech has an excellent relationship with EFIC, Australia’s Export Finance and Insurance Corporation. The national export credit agency Down Under is viewed by many as a very progressive, dynamic and innovative export credit agency that will go to great lengths to promote the success of Australian exports – even taking in significant country and bank risk to do so when warranted.

While the several partners at Engineering Tech are intrigued and willing to invest time to put a bid together, the company Board is concerned: how will the firm succeed in a country that faces so many challenges? How, they wonder, will Engineering Tech protect its interests and ensure excellent results in a place where a major national language, Amharic, is spoken nowhere else in the world?

The challenge

Several partners of Engineering Tech have been to Africa – including Nigeria, Ghana and Kenya, but none have traveled to Ethiopia, and previous projects involved a consortium of partners to share both the project execution and the risks. This time, Engineering Tech is the lead executing firm under a World Bank development program, facilitated partially through the World Bank/IFC (International Finance Corporation) Trade Finance Program. Engineering Tech will be the prime contractor, and must adequately provision for the risk.

The partners supporting involvement in this project – now known at Engineering Tech as the “Acacia Crew”, in reference to the tree that often frames sunsets outside of Addis – have engaged you to identify some risks and their mitigation options. You have been able to outline some preliminary risks to consider, and must now present viable risk management options.

The Risks

A complex infrastructure/engineering project in an LDC (Least-Developed Country) environment automatically brings with it a complex set of risks, from the possibility of revolution (as was the case in Ethiopia in 1974), through to the risk of outright expropriation of the completed project, if its ownership lies elsewhere than with the government of the day, even temporarily. In the event that a project is only partially funded through development monies, assets associated to the project may not be usable to secure financing, due to the in-market risk to those assets.

Shortage of resources, staff and materials can cause significant delays and generate significant cost overruns; questionable business practices and outright corruption can be a serious risk, as can eruptions of violence caused by political unrest.

Environmental impact concerns are increasingly critical in projects of this type, and any government agency which might be engaged to support in this project – including EFIC – has committed to conduct environmental impact assessments on any projects funded. This includes assessment of impact on local populations. The World Bank has also published standards related to sustainability and environmental issues. Non-governmental organizations (NGO’s) actively monitor and report on projects such as this one, and Engineering Tech has no desire to be dragged into a public relations nightmare.

Even in the ideal situation, there remains the risk of disagreement between Engineering Tech and the funding agencies, including the World Bank and the IFC. Such disagreements can occur and can be time-consuming to resolve. Projects funded through multilateral agencies are subject to significant due diligence and verification – even (potentially) stringent audit processes – all of which imply risk and added cost (both net new costs, and cost of funds on delayed payments) to Engineering Tech.

Your general impression after having studied the proposed project is that nearly every business risk imaginable is represented, to some degree, in this opportunity.

Risk Mitigation Considerations

The “Acacia Crew” are experienced consultants and engineers with successes in numerous high-risk markets, and understand that – inevitably – things will ‘go wrong’, but that some foresight, coupled with effective planning, will maximize the likelihood of a successful outcome. The Engineering Tech Board members are somewhat less schooled in the nature of developing market projects, and will require comprehensive assessments and significant reassurance.

Your assessment indicates that this opportunity is primarily about risk management and ensuring adequate financing and cashflow over the term of the project. Engineering Tech and its Board must take a holistic view of the situation and determine whether they have access to the necessary risk mitigation tools, and whether the firm has the financial wherewithal to see the project through.

 

Case Study Discussion Questions

  1. How can Engineering Tech begin to organize an approach around risk mitigation with so many factors at play? What are some of the resources and techniques that can be explored as possible risk mitigation solutions in the context of a project such as this one?
  2. Do any of the basic or ‘vanilla’ trade finance products or services apply in complex and high-risk scenarios such as this one?
  3. The risks in the transaction seem to be very broad and encompassing. Can Engineering Tech effectively protect its interests and assure payment?
  4. What assurances can the “Acacia Crew” offer to the Engineering Tech Board?

 

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