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?
Engineering Tech, a renowned engineering partnership, has been presented with a challenging opportunity to undertake a major infrastructure project near Bole International Airport in Addis Ababa, Ethiopia. While the venture offers the potential for significant positive impact and profits, it also brings along a myriad of risks associated with working in a complex and high-risk environment. This essay aims to provide a comprehensive risk mitigation strategy for Engineering Tech, addressing the key challenges posed by the project.
To begin organizing a robust risk mitigation strategy, Engineering Tech should follow a systematic approach:
Risk Identification: Engineering Tech needs to identify all potential risks associated with the project. These can include political instability, resource shortages, corruption, environmental impact concerns, disagreements with funding agencies, and more.
Risk Assessment: Once the risks are identified, they should be assessed in terms of probability and potential impact. This helps prioritize risks and allocate resources more effectively.
Risk Mitigation Techniques: Engineering Tech can explore various risk mitigation techniques, including:
Diversification of Funding: To reduce reliance on a single source of funding, the firm should explore partnerships with multiple financial institutions and investors.
Political Risk Insurance: This specialized insurance can provide coverage against risks related to political instability, expropriation, and other government actions.
Local Partnerships: Collaborating with local businesses and stakeholders can provide valuable insights and help mitigate cultural and political risks.
Transparency and Compliance: Adhering to ethical business practices and complying with local regulations can minimize the risk of corruption-related issues.
Continuous Monitoring: Regularly monitoring project progress and risk factors allows for timely adjustments and corrective actions.
In complex and high-risk scenarios like this, certain standard trade finance products and services can be adapted to mitigate risks:
Letters of Credit (LCs): LCs can provide assurance of payment by requiring the buyer’s bank to make payment upon presentation of specified documents. This reduces the risk of non-payment.
Export Credit Insurance: This insurance covers the risk of non-payment due to political events, commercial defaults, or other specified causes, offering protection against both commercial and political risks.
Project Finance: Tailored project finance solutions can allocate risks among project participants, ensuring that risks are appropriately managed by those best equipped to handle them.
Engineering Tech can protect its interests and assure payment through a combination of contractual agreements, insurance products, and careful due diligence:
Robust Contracts: Well-drafted contracts with clear terms and conditions can outline responsibilities, dispute resolution mechanisms, and consequences for non-compliance.
Political Risk Insurance: This insurance can safeguard against risks such as government actions, political instability, and currency inconvertibility that could impact payments.
Payment Guarantees: Obtaining performance and payment guarantees from stakeholders can provide financial security and ensure adherence to commitments.
The “Acacia Crew” can offer the Engineering Tech board members several assurances to instill confidence:
Expertise: The crew’s extensive experience in high-risk markets demonstrates their ability to navigate challenges effectively.
Strategic Planning: The crew’s approach to risk mitigation, comprehensive planning, and partnership-building showcases their commitment to successful project execution.
Adaptability: The crew’s track record of success in diverse markets highlights their capacity to adapt to varying conditions and ensure project viability.
Considering the comprehensive risk landscape, Engineering Tech should:
Engage Stakeholders: Collaborate closely with local partners, government agencies, and NGOs to address environmental and social concerns.
Leverage Expertise: Utilize the crew’s expertise to develop a detailed risk mitigation strategy, emphasizing adaptability and resilience.
Explore Insurance Options: Assess and secure appropriate insurance coverage, including political risk and environmental impact insurance.
Build Alliances: Forge strategic alliances with financial institutions, government bodies, and international organizations to enhance funding and support.
In conclusion, Engineering Tech’s ambitious infrastructure project in Ethiopia presents a blend of risks and opportunities. By diligently identifying risks, employing appropriate risk mitigation techniques, leveraging trade finance products, and assuring the board through expert assurances, Engineering Tech can navigate the complexities and uncertainties inherent in this venture. This approach will enable the firm to not only protect its interests and assure payment but also make a positive impact on the region’s development while achieving profitability.
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