Risk and opportunity - together as always! Engineering Tech (ET) is a large national engineering partnership in Canada, with expertise in large-scale infrastructure projects, including public-private partnership (PPP) projects involving government departments and agencies. ET's annual revenue is in excess of $2 Billion CAD. ET has been a major player in various parts of Canada 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 Bol Road airport. The project is estimated to have a value of $40-60 million USD and will take about 4 years to complete. 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 Export Development Canada (EDC), Canada's Export Finance and Insurance Crown Corporation. EDC 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 Canadian 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. The Finances The company's estimators and finance department have collaborated have completed the financial estimates. They are confident that a bid of $75,000,000 CAD will be competitive and profitable. The estimate Details: Construction Stages: Stage 1: Setup and Implementation. Permits, hiring of staff, selection and hiring of sub-contractors, acquiring and transport of equipment, etc. Cost: $5,000,000 CAD. Capital Equipment Value: $20,000,000 CAD. Time to complete 6-12 months. Stage 2: Preconstruction Phase: Work force training and orientation, equipment setup, site preparation, etc. Cost: $10,000,000 CAD. Time to complete. 4-6 months. Stage 3: Construction Phase: Work required to complete project. Cost $30,000,000 CAD. Time to complete: 2-3 Years Stage 4: Decommissioning: Cleanup, fixing deficiencies, removal of equipment, sale/disposal of equipment, etc. Cost $5,000,000 CAD. Time to complete: 3-6 months. Sale of equipment. As a good will gesture, ET will sell the used equipment in Ethiopia for an estimated $10,000,000, which is well below market value. Payment Schedule: As per the RFP, payments will be made by the customer, when phases of the project are completed, as follows: 10% of contract value on contract signing 10% of contract value after stage 1 is complete and verified 10% of contract value after stage 2 is complete and verified 20% of contract value after stage 3 is 50% complete and verified 30% of contract value after stage 3 is 100% complete and verified 10% of contract value after stage 4 is 50% complete and verified 10% of contract value, 12 months after stage 4 is complete and the customer is completely satisfied The customer as requested a performance bond to be issued as part of the agreement. Dealing in multiple currencies The Ethiopian customer has issued the RFP for payment in Ethiopian Birr. ET will have expenses in three currencies though out this project: Ethiopian Birr (ETB): local sub-contractor and labourers, some operating expanses (fuel, supplies, travel, accommodations, etc.). Canadian Dollar (CAD): ET staff, head office expenses, some sub-contractors, some equipment purchases, travel, etc. American Dollar (USD): some sub-contractors, some equipment purchases Exchange rates: 1 ETB = .026 CAD 1 ETB = .021 USD 1 CAD = .79 CAD

Question:

Complete a conservative cash flow projection and income statement for the project, in CAD, based on the information given. Please note, do not factor exchange rates, insurance or interest costs into your calculations.