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This pre-study will be a comprehensive telecommunication project for MTN Africa that's expected to increase the company's network coverage in East Africa. The project is estimated to be completed in a span of three years and expected to provide the financial details relating to the expected break even analysis, estimated budget, estimated rate of return, project stricture, implications of the project and other relevant financial estimates.
Business Case Overview
This project is important to MTN Africa because it is part of a strategy to increase its network coverage in Africa. MTN Africa finds pride in the fact that it is among the leading telecommunication networks in Africa and a rollout into the East African market will improve its market coverage over the next three years. The company already enjoys wide market coverage in the South, West and Central African markets and its penetration into the East African market will consolidate its efforts to be the leading continental telecommunication network. This project is expected to provide a blue print in project finance that's going to help the company achieve its goal of being Africa's widest telecommunication network.
Project Development Strategy and Structure
This project is expected to be rolled out in three East African countries comprising of Kenya, Uganda and Tanzania. The project is estimated to take three years and the company is expected to have completed the network roll out plan country by country in each year of operation. Presumably, at the end of the three years, the roll out plan in the three countries would be complete. The project structure is expected to be solely undertaken by the MTN technical team in collaboration with relevant stakeholders of the three countries.
This project is expected to increase the company's profitability in the long term because it will be enjoying economies of scale because of increased operations and market. The market dominance the project will create will be unrivaled in the African market as other market competitors don't have the same level of market presence MTN has. Other market competitors will also find it difficult to imitate the same level of dominance because such kind of network rollout is very capital intensive. In this regard, the company's competitive advantage will equally be elevated.
The estimated market growth for the company after the project is expected to be 17% over the next three years. However, this project isn't expected to reengineer MTN's processes but only increase its markets and operations in the entire African market. Upon completion of the project, not only will MTN benefit from increased markets and profitability; the customers in the respective markets will benefit from reduced prices and increased communication quality. This will happen because MTN has one of the strongest telecommunication networks in Africa. The company is also expected to introduce cheaper telecommunication and data network service in the coming years. This will make consumers in their respective markets enjoy competitive market rates.
Project Finance Budget
This project finance is expected to approximately cost $ 625 million. The cost factors for the entire project will incorporate equipments costs, labor costs, transport costs and maintenance costs. Equipment costs are expected to constitute a greater part of the budget with a $375 million allocation. Labor costs and transport costs are expected to cost $62.5 million each and the maintenance costs are expected to cost an estimated $125 million. The financial objectives involve raising the required capital in the course of the next two years in a three phased financing strategy that involves partnerships, sponsorships and long term financing. The expected revenues for this project will be realized as soon as the project is complete. The project is expected to generate at least 1.5 billion shillings annually with initial operations but cash flow is expected to increase at the rate of 5% annually.
Project finance has been majorly witnessed as the long-term financing strategy for industrial and infrastructure projects. It is based on the financial cash flows of the project rather than the balance sheet of the company (Gatti, 2008, p. 102). Majorly a syndicate of sponsors for financial institutions bankrolls these types of projects because of their capital intensive nature (Yescombe, 2002, p. 1). Project finance has been in existence for a long time; even before the advent of shares and stocks in public limited companies. Some of the most common examples of project financing include the completion of the Suez Canal project, development of the North Sea project, certain British Airways projects and the Euro Tunnel under the English Channel (Farrell, 2003, p. 547).
Project finance has therefore gained demand over recent decades and has become a viable way of financing capital intensive projects. However, most of its financing specifics are normally based on the expected cash returns and risk averseness of the project. The cash flow prospects are therefore expected to be the source of funds under which loan repayments will be made and the projects assets normally act as the financial security or collateral for the loan (Farrell, 2003, p. 547).
Unlike contemporary financial mechanisms, project finance sponsors usually don't have recourse to the assets of the project. Essentially such kinds of projects are expected to fund themselves and also liquidate themselves accordingly. The assets and cash flows attributed to the project are also expected to be differentiated from those of the sponsor with regard to the credit statements. They should also be segregated from the loan approval process and are equally supposed to be the sole mechanism of loan payments and return on equity (Farrell, 2003, p. 547).
Project recourse is therefore very important to the sponsor because it has a direct impact on the sponsor's balance sheet, debt to asset ration and risk elements. Conversely, it can be said that with an increase in recourse, the risk on the part of the sponsor also increases. When there is no recourse in financing, it becomes a prudent way of financing projects in an off balance sheet manner (Nevitt, 2000, p. 79). In other words, the project becomes, legally distinct from the sponsor because it is not reflected in the balance sheet. In the same regard, the sponsor's debt to asset ration is not affected in any way.
The non recourse method of financing is more risk inherent because it is distictively different from other traditional methods of asset financing like real estate financing where the assets developed from the project provides good collateral incase loans are defaulted. In contrast, under project financing, the asset base and future cash flows become of very little value in case the project fails. This is the reason why pure non recourse forms of financing are seldom witnessed (Farrell, 2003, p. 547).
Project finance demand is majorly comprised of public and private project initiatives that require a considerable level of financing over long periods (Grimsey, 2007, p. 227). The main players that supplement or compliment the demand of project finance involves engineers, construction contractors, suppliers and financial institutions (Farrell, 2003, p. 547). Project finance proposals are normally never the same especially in light of technological changes and capital market changes. This therefore means that every project finance initiative needs to be managed as an interdisciplinary approach of its own and also custom built to serve its own unique interests. With increased demand for project financing in the past and coming few years, there has been an equally increasing moral hazard risk perpetrated by independent agents who are least observant on their own actions (Farrell, 2003). For example in the potential risk of wealth transfer where the leaser is the owner of the lease asset and the lessee pays a fixed amount of money to the leaser, under a leased contract arrangement with terms and conditions, the lessee can increase his wealth by simply increasing the risk associated with asset before the market can detect the ex post behavior (Farrell, 2003).
Institutions and parties which sponsor projects therefore often emphasize due diligence when dealing with respective financing proposals because of the firm belief that most project proposals are often financially underestimated. This has therefore forced many sponsors to undertake project finance risk identifications and evaluation processes. This is normally done under the guidelines of legal and financial structures that combine the input of all project participants (Farrell, 2003). Normally, each project participant is expected to serve different roles in the project financing and each is equally expected to run different risks. Every participant is therefore expected to view the prospects individually and also expected to differently and subjectively analyze the risks. This therefore calls for the involvement of experienced personnel to oversee the project in a professional manner throughout all its phases.
The possibilities of undertaking project financing are indeed endless but the financing plan should be precise to coincide with the demand and supply specifics of the project. This should be done in the context of a risk financing framework that also includes a global analysis of the financial markets to reduce or eliminate the risks related to financing costs. This is a key determinant to the success of the project financing initiative but another element of equal importance is the allocation of risks (Farrell, 2003). There are five types of risk in project financing that should always be analyzed with regard to any business environment. They include: political risk, operating risk, start up cost risk, technology risk and market risk.
With regard to start up risk, the initial delay in starting the project may consequently lead to an underestimation of the startup costs. These may include labor and material costs, inflation, inaccurate engineering designs, increase in set up costs and the likes. The output risk directly relates to the decrease in productivity or an underestimation of the project outcome. Sometimes, this type of risk may be reflected in increased depletion rates of the output such that the cash flow is reduced and loans cannot be effectively financed. The technological risk arises from decreased reliability of the technology used in the project. This risk is often estimated from a market product technology index whereby new technologies increase the market product technology index (Farrell, 2003). The market risk is therefore manifested when the project loses its competitive position upon completion of the project. Timing is a key component in this type of risk because if a product or service is launched, say four or five months late, it may easily lose its competitive advantage; for instance in the automobile industry. Finally, the political risk directly hinders the level of output especially with regard to cross border projects. This is often witnessed in developing markets and includes trade restrictions, high taxes, royalties, uneconomical competitive rates and the likes (Farrell, 2003).
For proper management of project finances, there needs to be a functioning audit structure which has a positive impact on the management of the project's finances. In fact, in the 1990s the major problem in project financing was not the adoption of bad strategies or an unpredictable business environment that led to the failure of most projects; it was poor accounting and audit structures (Farrell, 2003). A good example of the need to implement proper audit and accounting structures can be seen from Enron Corp which enjoyed a good communication with its stakeholders including shareholders, government, the general public and the likes. Its book of accounts and internal financial reports were also prepared in accordance with federal regulations but their operations especially with regard to how much they were to sell, where to sell, and at what price (in their secondary markets, overseas) were largely deregulated. The accounting and audit staff were also largely unprepared to deal with cross border financial investments tools such as computerized trading, sophisticated multinational financial instruments and strategies and complicated financial instruments.
In this regard, the company started to sell energy generated by other companies which was a deviation from its primary mandate of producing energy. In light of these developments, it became some sort of energy broker and eventually a trader in risk which later became one of its hallmarks to success (Farrell, 2003). In addition, the company took advantage of a lapse in the US legislation not to disclose this information to its shareholders and other stakeholders. In this regard, the company formed some sort of web of partnerships with other foreign companies that locked in money arising from technological investments; later concealing millions of dollars in debts while reflecting highly performing financial statements to the stakeholders. This was a company strategy of attracting moree investments to keep off the debt entity from the company's financial statements. The company eventually collapsed after five audit firms probed the company's financial statements and discovered the grand conspiracy (Farrell, 2003).
Project financing has therefore been proposed to contain stringent audit and accounting standards. These standards should be in place to evaluate various project financing functions such as project requests, reviews and application processes to address the specific requirements of various personalized projects. For example, project standards relating to telecommunications and software designs should include application design, programming, and testing specifications among others.
Not only are project standards important in the management of project finances, they should be commensurate with the nature of the project and the risks attributed to it (Farrell, 2003). They should also never be vague, so that all participants can sufficiently relate and understand it. Project expectations that are clearly defined throughout the project phases are a prerequisite for successful accomplishment of projects and achievement of a buy-in throughout all participants in the project (Farrell, 2003). However, the standards whether in audit or accounting sectors all require the participations of all the stakeholders including those that will be affected by the proposal to define functional requirements and project deliverables.
Essentially, projects that are cross bordered or require functional coordination need to have a standard for coordination and management of projects from a functional perspective that covers all the project's operations. Such like standards may involve the procedure to be used in prioritizing projects, the coordination of resources, reporting structures, among others. In addition to tasks in project standardization, the project plans should encompass the benefits and weaknesses associated with the project financing plan. It should also explain the goals of the project, the specific users, information to be used or produced, systems to be incorporated, or the requirements for networking.
In this regard, quality assurance procedures and standards like the PMBoK, ISO10006 and the likes need to be in place, including procedures to manage risk, security standards, documentation procedures and the likes (Farrell, 2003). In the same manner, standards should also incorporate costs, staffing requirements, and the specifications relating to training needs when dealing with the human resource personnel. Such project criteria enhances the ability of the participants and indeed the sponsors to understand the objectives of the project and provide funds accordingly. Moreover, when such standards are in place, the sponsors feel secure that the project will be well managed.
Reflective Learning Report
From the above analysis we can come to the conclusion that proper management of project finances is key in generating a favorable cash flow to be able to finance the financial need of various projects. However, each project needs to be exclusively handled with regard to its own unique characteristics and need. Projects should therefore be properly customized with regard to the existing global capital markets and the changing technological environment.
With regard to cross border project financing, the risk analysis is normally complicated by a lack of effective accounting and auditing standards to adapt to the new changes in the capital markets and business environments. The failure of accounting and audit requirements to effectively serve the needs of the project analysis also strangles the success of the project. With the increased number of stakeholders in project financing, the moral hazard risk constantly continues to increase because sometimes agents may get away with unobserved actions that seek to selfishly gain themselves instead of the entire project.
As the debt ratio of specific projects increase, managers often tend to select projects that would finance themselves through owner equity or otherwise. On the other hand, if more risk projects are financed, in an ex post manner, the perceived debt transferred to financing, the premium related to the debt risk will not be justified under the current threat of risk the project faces. A transfer of wealth from the debt to equity owners will consequently be observed.
These project finance specifics will be conversely applied to the initial project in this study to roll out a telecommunication service for MTN Africa. The risk analysis information will be used by the sponsors to determine the viability of the project, especially with regard to the political risk (since the East Africa economy is a growing economy) and other risk factors such as technological, market, startup and operational risks. The importance of establishing operational standards especially with regard to audit and accounting standards will also be very crucial considering this project finance will be undertaken across three countries. The situation is therefore no different from Enron Company which was not deregulated with regard to its international operations. Proper project financing standards therefore need to be established to ensure the project runs smoothly.
This assignment will be developed from a team approach and an individual approach. The project study will be an individual effort but will still be subject to scrutiny on an team level. Ideas maybe subject to modification and improvement with possible omissions and commissions.
This study identifies that project financing should be undertaken with proper consultations with all stakeholders in developing project standards and other factors of operation. The importance of risk analysis with regard to return on equity and debt to asset ratios also needs to be comprehensively undertaken before the project kicks off. Complimentarily, risk factors like political or market risks need to be undertaken but overall, the project should be able to maintain a good cash flow to ensure its is able to pay off its debts.
This study identifies the need to undertake a comprehensive approach in covering all the key areas in project financing. Risk analysis, operational standards and sponsor considerations are some of the important factors that need to be considered in any project finance. Project financing being different from contemporary methods of financing, needs to be undertaken keenly so that it can generate cash flows to make the entire undertaking a success. This needs to be done after careful operation analysis.