The Risks

A complex infrastructure/engineering project in a 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) to unsatisfactory performance by one of more of the firms involved 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 to the project may not be usable to secure financing. Shortages 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 due to political unrest.

It is expected that the infrastructure project would ideally take about 36 months to complete. The project financing will be denominated in U.S dollars.

The banking sector in Ethiopia has several challenges related to its development history, lack of a suitable regulatory framework and infrastructure issues. Several domestic and international banks have encountered financial difficulty and either collapsed or left the market. The bank that will be used by LEC for some aspects of financing the project has had some challenges in the past notably related to the Financial Crisis in 2007-2009.

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.

Some of the firms that are part of LEC have had varying degrees of experience and success in projects of this size historically. Engineering Tech has been unable to obtain adequate information on all of the firms to substantiate their creditworthiness, financial strength and reputation.

Some of the component parts and equipment to be used in the project will be sourced from around the world and will be transported at great lengths over sea, in the air and over land. The terrain near the project site can be tough and difficult to transport and there has been some recent incidents of piracy near the coast.

Environmental impact concerns are increasingly critical in projects of this type, and any government agency which might be engaged to support this projectincluding EFIChas 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 (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.

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

1.Utilizing concepts from our class lectures, identify and describe the various risks faced by Engineering Tech in its project in Ethiopia.