Assignment task:
Risk and Opportunity-Together as Always!
Engineering Tech 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. It has been a major player in various parts of Australia and has ventured into consulting activities in Japan and other parts of Asia.
A senior partner of the firm was recently approached about executing a major infrastructure project in Addis Ababa, Ethiopia, near the Bole International Airport. The country has a proud history of never being colonized. Recent history has not been kind to the nation, with it facing war, drought, starvation, and the growing threat of Islamic extremist groups operating in the region.
Those harsh realities aside, the country has benefited from 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 agency is viewed by many as a very progressive, dynamic, and innovative export credit body that will go to great lengths to promote the success of Australian exports, including taking the insignificant country and bank risk to do so, when warranted.
While several partners at Engineering Tech are intrigued and willing to invest time to put a bid together, the company's board members are concerned about an endeavor in a nation beset by 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 the 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/International Finance Corporation (IFC) Global 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 the least developed country (LDC) 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. In the event that a project is only partially funded through development monies, assets associated with 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 this project-including Efic-has committed to conducting environmental impact assessments on any projects funded. This includes an assessment of the impact on local populations. The World Bank has also published standards related to sustainability and environmental issues. Non-governmental organizations (NGOs) 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, including strict audit processes. This all adds risk and cost (both net new costs and the 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 while the risks are many, effective strategic planning can maximize the potential for success in this endeavor. The Engineering Tech board members are somewhat less familiar with dealing with the realities of developing market projects, and will, therefore, require strong assurances.
Your assessment indicates that this opportunity is primarily about risk management and ensuring adequate financing and cash flow 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 Questions:
1. With so many factors to consider, how can Engineering Tech begin to organize a risk mitigation strategy? What are some of the resources and techniques that can be explored as possible risk mitigation solutions in the context of this project?
2. Do any of the standard 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 the Engineering Tech board members?
5. What is your recommendation for Engineering Tech?