Chapter-6 Project Financing and Financial Sustainability

Transcription

1 Chapter-6 Project Financing and Financial Sustainability 6.1 What is project finance? Project financing is intertwined with project planning, analysis, and selection. As the project proposal progresses through the stages of planning, analysis, and selection, the contours of project financing become clearer. A capital project entails investment in land, plant and machinery, miscellaneous fixed assets, technical know-how, distribution network, and working capital. Hence a capital project may be regarded as a mini-firm after all when you look at the balance sheet of a firm you find that it has investments in similar assets. So, the issues to be considered in financing a project are identical to those considered in financing a business firm. What is an appropriate capital structure? Which financing instruments make more sense? What are the pros and cons of public and private sources of capital? How much should the firm depend on the domestic capital market and how much on the international capital market? In an article in the Harvard Business Review, Wynant defined project finance as a financing of a major independent capital investment that the sponsoring company has segregated from its assets and general purpose obligations. The World Bank defines project finance as the use of nonrecourse or limited-recourse financing. 6.2 Features of project financing Project finance financing differs from various other financing. It has own unique characteristics. But there are common principles underlying the project finance approach. Some typical characteristics of project finance are as follows: Capital-intensive Project financings require a great deal of debt and equity capital, from hundreds of millions to billions of taka. A World Bank study in late 1993 found that the average size of project financed infrastructure projects in developing countries was $440 million. However, projects that was in the planning stages at that time had an average size $710 million. Highly leveraged Sometimes project financing needs a large scale of debt which tends the project into highly leveraged. Long term Usually project financing is for a long term i.e. 15 to 20 years. Many participants In project financing various parties are involved. It is not rare to find over ten parties playing major roles in implementing the project. Lecturer in Finance, DBA, IIUC, Website: 1

2 Costly Raising capital through project finance is generally more costly than through typical corporate finance avenues. Financing from various sources increases information and transaction costs. Independent entity with a finite life Similar to the ancient voyage-to-voyage financings, contemporary project financings frequently rely on a newly established legal entity, known as the project company, which has the sole purpose of executing the project and which has a finite life so it cannot outlive its original purpose. Controlled dividend policy In more modern major corporate finance parlance, the project has a strictly controlled dividend policy, though there are exceptions because the dividends are subordinated to the loan payments. The project s income goes to servicing the debt, covering operating expenses and generating a return on the investors equity. This arrangement is usually contractually binding. Thus, the reinvestment decision is removed from management s hands. Allocated risk Because of financing various sources and various participants risks are diversified. This risk allocation is achieved and codified in the contractual arrangements between the project company and the other participants. The goal of this process is to match risks and corresponding returns to the parties most capable of successfully managing them. Non-recourse or limited recourse financing Since project is newly formed entity does not have its own credit or operating histories, it is necessary for lenders to focus on the specific project s cash flows. That is, the financing is not primarily dependent on the credit support of the sponsors or the value of the physical assets involved. Thus, it takes an entirely different credit evaluation or investment decision process to determine the potential risks and rewards of a project financing as opposed to a corporate financing. In the former, lenders place a substantial degree of reliance on the performance of the project itself. As a result, they will concern themselves closely with the feasibility of the project and its sensitivity to the impact of potentially adverse factors. 6.3 Advantages of project finance Advantages of project financing are as follows: Non-recourse/limited recourse financing Non-recourse project financing does not require any obligation to guarantee the lenders for the repayment of project debt. Because, non-recourse financing depends purely on the merits of a project rather than the creditworthiness of the project sponsor. Off balance sheet debt treatment Off balance sheet treatment does not affect the company s investment rating by credit rating analysts. Project failure does not damage the owner s financial condition. Leveraged debt Debt has advantages over other financing instruments. Most of the projects are highly leveraged by debt which gives an advantages tax consideration. Lecturer in Finance, DBA, IIUC, Website: 2

3 Tax rebate Projects that contract to provide a service to a state entity can use these tax breaks (or subsidies) to inflate the profitability of such ventures. Political risk diversification Establishing SPVs (special purpose vehicles) for projects in specific countries diversifies the political risk. As a result the cash flows of a project are not affected by the political risk. Risk sharing Allocating risks in a project finance structure enables the sponsor to spread risks over all the project participants. The risk sharing can improve the possibility of project success since each project participant accepts certain risks. 6.4 Disadvantages of project finance Complexity of risk allocation Since in project financing there are so many participants, there are conflicts of interest on risk allocation amongst the participants and protracted negotiations and increased costs to compensate third parties for accepting risks. Higher interest rates and fees Interest rates on project financings may be higher than on direct loans made to the project sponsor since the transaction structure is complex and the loan period lengthy. Lender supervision In order to protect lenders interest, lenders will want to closely supervise the management and operations of the project. This supervision includes site visits by lender s engineers and consultants, construction reviews, and monitoring construction progress and technical performance, as well as financial covenants to ensure funds are not diverted from the project. This lender supervision is to ensure that the project proceeds as planned, since the main value of the project is cash flow via successful operation. Increased insurance coverage Since project financing involved high leveraged of funds, it needs several insurance coverage for the project. 6.5 Corporate Finance Vs Project Finance Corporate Finance Usually in corporate financing, financing is made for multi-purpose. Corporate financing is done for permanent basis i.e. an indefinite time horizon for equity. In corporate financing decisions regards payment of interest and dividend are followed by autonomous. Low costs due to competition from providers, routinized mechanisms and short turnaround time. Project Finance In project financing, financing is made for single-purpose entity i.e. financing for project. Project financing is done for a definite time period. In project financing a fixed dividend policy is followed and no reinvestment opportunity allowed. Relatively higher costs due to documentation and longer gestation period. Lecturer in Finance, DBA, IIUC, Website: 3

4 Cost of capital is relatively lower in corporate financing. In corporate financing borrower rely on specific sources for financing. As a result scope of risk allocation is limited. Corporate-based financing can always count on guarantees constituted by personal assets of the sponsor, which are different from those utilized for the investment project. This is often a decisive point, since corporate financing could instead have negative repercussions on riskiness (therefore cost of capital) for the investor firm if the project does not make a profit or fails completely. In corporate financing the lenders are guaranteed by the balance sheet of the firm i.e. profitability of the firm. Cost of capital is relatively higher in project financing. Because in project financing there are so many participants and they have different needs on project cash flows. Project finance allows for a high level of risk allocation among participants in the transaction. In project finance deals, the loan s only collateral refers to assets that serve to carry out the initiative; the result is advantageous for sponsors since their assets can be used as collateral in case further recourse for funding is needed. Creating a project company makes it possible to isolate the sponsors almost completely from events involving the project if financing is done on a non- resource (or more often a limited-recourse) basis. In project financing the lenders are guaranteed by the future cash flows of the project. 6.6 Parties to a project financing Project Company The project company is a single-purpose entity that will own, develop, construct, operate and maintain the project. Typically, the only source of income for the project company is the tariff or throughput charge from the project. Often the project company is the project sponsors financing vehicle for the project, i.e., it is the borrower for the project. Sponsors The sponsors are the generally the project owners with an equity stake in the project will generally be involved in project construction and management. The project sponsor may be required to provide guarantees to cover certain liabilities or risks of the project. The World Bank estimates that the equity stake of sponsors is typically about 30 percent of project costs. Host Governments The host government is the government of the country in which the project is located. In public project i.e. state owned project, the government is the owner of the project. And the total funds for the project are provided by the government. In Public-Private Partnership (PPP) projects, government provides funds with a private entity. Host government generally participates only indirectly in projects as an as an issuer of permits, licences, authorizations and concessions. Lecturer in Finance, DBA, IIUC, Website: 4

5 Equity investors As like as corporation in project financing funds may be raised by issuing new shares and securities for a definite time i.e. for the project life period. The holder of the shares and securities are the equity investors of the project. Examples of these funds include AIG Asian Infrastructure Fund ($1.1 billion), Peregrine s Asian Infrastructure Fund ($500 million), Global Power Investments ($500 million) and the Scudder Latin America Infrastructure Fund ($100 million, with target of $600 million). These funds raise capital from a limited number of large institutional investors. Construction Company The construction company is responsible for constructing the project according to the specifications outlined in its contract with the project company. Construction company may give sub-contract to other company or individual. Construction can be either of the EPC or turnkey variety. EPC, or engineer, procure, and construct, is when the construction company builds the facility as per an already designated specifications. Turnkey, on the other hand, is when the contractor designs, engineers, procures and constructs the facility, assuming all responsibility for on-time completion. In some project construction contract is given by a auction process where several construction companies bid for the project. Technical adviser Technical experts advise on technical matters involved in project to the project sponsor and lenders. The technical advisers prepare report based on technical analysis that helps the lenders to measure the profitability of the project. Financial adviser Financial advisers advise the project owner how, when, how much funds should be raised. As like as technical adviser, financial advisers prepare financial report based on financial analysis which helps both owner and lenders to measure the profitability of the project. Legal adviser Legal advisers help in project finance transactions by giving the number of important contracts and the need for multi-party negotiations. They also help in regulatory framework of the host country. Some projects have own lawyers who provide advice on all aspects of a project, including laws and regulations; permits; organization of project entities; negotiating and drafting of project construction, operation, sale and supply contracts; negotiating and drafting of debt and equity documents; bankruptcy; tax; and similar matters. Leasing companies Leasing companies lease out assets to the project company in return for a rental stream. Leasing companies helps the project company in construction financing by leasing the plant and technology. Regulatory agencies Regulatory agencies are the host government organizations that approve the project to implement. For example in Bangladesh, NEC and ECNEC approve both public and private projects. Lecturer in Finance, DBA, IIUC, Website: 5

6 Export credit agencies Projects often require imported equipment from other countries, ECAs support these projects. ECAs play important roles in infrastructure and other projects in emerging markets. They normally provide low cost financing arrangements to local manufacturers who wish to transport products or services to foreign lands. Multilateral agencies/development banks The World Bank, International Finance Corporation and regional development banks often act as lenders or co-financers to important infrastructure projects in developing countries. Suppliers Suppliers provide raw materials or other inputs to the project. For a power plant, the supplier would be the fuel supplier. For toll roads or pipeline, the critical input is the right-of-way for construction which is granted by the local or federal government. Purchasers The customer is the party willing to purchase the project s output. In some large projects specially the projects that are taken by the club need long term agreements to sell the good or service being produced by the project. The project company seeks customers who are willing to sign long-term off-take agreements whereby the customer agrees to purchase a predetermined volume of the output for a definite period of time. Insurers Insurers therefore play a crucial role in most projects. Insurers provide guarantee mainly in two stages: construction stage and final stage i.e. when project is complete. If there is an adverse incident affecting the project then the sponsor and the lenders will look to the insurers to cover them against loss. 6.7 Financing sources used in project financing Project finance can raise capital from a range of sources. For various sources, lender and investor interest varies to the financing. The main goal of sponsors in project financing is to minimize cost of capital. The most common financing sources are as follows: Equity Project financing by equity may be two forms: i. Common equity represents ownership of the project. The sponsors usually hold a significant portion of the equity in the project. ii. Preferred equity also represents ownership of the project. However, the sponsors have a priority over the common equity holders in receiving dividends and funds in the event of liquidation. Project company may raise equity by issuing share. Equity capital is the highest risky instrument in the project financing sources. Equity providers accept more risk than other because their returns depend on the future cash inflows and their returns are not guaranteed by the project company (except preferred stock holder). Domestic capital markets provide access to raise the equity capital for the project. Equity is very important in initial stage. It Lecturer in Finance, DBA, IIUC, Website: 6

7 is the means to support and finance the planning, study, and feasibility analysis stages up to preparation of the business and financial plans to be submitted to lenders. Bonds A bond issued by a Project Company is a tradable debt instrument. The issuer agrees to repay to the bond holder the amount of the bond plus interest on fixed future installment dates. Project bonds can be classified as follows: i) Domestic Bond The bond which is issued as domestic currency and then place the bond in its own country is known as domestic bond. It is appropriate for small-scale projects. ii) Foreign bond If bonds are issued other than its domestic market and in the currency of the placement market, they are referred to as foreign bonds. It is used for large-scale project because domestic bond may not be able to supply sufficient funding to project. Examples of foreign bonds are so-called Yankee bonds (issued in U.S. dollars on the American market, registered with the Securities and Exchange Commission (SEC) by nonresident issuers); samurai (or shogun) bonds, namely, issues in yen of the Japanese market, registered with the Japanese Ministry of Finance; bulldog bonds issues in pounds sterling by issuers not resident in the UK; kangaroo bonds, Australian dollar securities issued in Australia. iii) Fixed-rate bonds and floating-rate bonds Project bonds can be issued with a fixed coupon (fixed-rate bonds) or, as is the case with syndicated loans, with a variable interest rate (floating-rate bonds using the base rate plus a spread). iv) Balloon payment In balloon payment bond the project company repayments the total amount of the bond in the maturity. v) Wrapped Bond Wrapped bond is an alternative structure for raising finance i.e. guaranteed by an insurance company. This structure is beneficial to investors because of guarantee provided by. A significant proportion of the project bond financing in the United Kingdom, for example, for key public infrastructure, such as roads and other PPPs, has been on a wrapped basis. Developmental loan A development loan is debt financing provided during a project s developmental period to a sponsor with a view to having some equity rewards for the risk taken. The developmental is typically risky because the value of the collateral is totally dependent on the ability to complete the project. For that lenders require liens on all project assets including project. Lecturer in Finance, DBA, IIUC, Website: 7

8 Subordinated loans Subordinated loans usually known as mezzanine financing or quasi-equity are debt whose repayment ranks after repayments to senior debt but before distributions of profits to investors. It is usually provided at a fixed rate of interest higher than the cost of senior debt with long term. Syndicated loans A syndicated loan is a loan that is provided to the borrower by two or more banks which is governed by a single loan agreement. The syndicated lending market is international by nature that is to say, many of the borrowers and projects being financed are international taking place in Europe, Eastern Europe, Africa, the Middle East, etc. Senior debt The senior debt of a project financing is usually the largest portion of the financing and the first debt to be placed. Senior debt has a priority i.e. repayment of loans are paid before all other payments. Senior debt falls into two categories: unsecured and secured loans. Unsecured loans Unsecured loans may also be short- or long-term and is not secured by specific assets or sources of revenues. The lenders provide funds by this instrument when creditworthiness of project company is higher. Large unsecured loans are available only the long histories of creditworthiness of the project company are good. Secured loans Secured loans are loans that can be either short- or long-term and where the assets securing the loan have value as collateral, which means that such assets are marketable and can readily be converted into cash. In project financing, the secured loans are secured by the project s assets. Leasing companies Leasing companies support in project financing by leasing equipment. In large projects, some heavy equipments are used that may be high costly. These equipments may increase the total cash outflows. Again some project companies may not have available sources of fund to purchase these equipments. In this situation the leasing companies lease the equipment to the project company on a rental basis. By this way the project company needs not to purchase the equipments and can reduce the project cost. Contractors Contractors may support in project financing by providing fixed price contracts. Payments to contractors are fixed cost which may be paid at the beginning or ending of the project or deferred basis. Sometimes contractors receive their payments from the project revenues. In this situation the project company needs not to pay the contractors at lump sum and which reduce the project cost helps in project financing. Supplier financing Supplier of a project may be various types such as inputs supplier, technology supplier, labour supplier etc. In supplier financing, supplier provides loan to the project for having a partner or get a supplier contract. In most case supplier provides inputs on credit to the project company that helps the project company in the project cost. Host government The host government is the government of the country in which the project is located. The host government is typically involved as an issuer of permits, licences and Lecturer in Finance, DBA, IIUC, Website: 8

9 authorizations of the project. In some projects, the host government is a partner of the project by providing fund. For example, Mayor Hanif Flyover which is constructed by both public and private fund. 6.8 Islamic Project Finance The recent global economic crisis and the consequential reduction in the availability of non- Islamic bank financing to fund large infrastructure development projects have increased the demand of Islamic project finance structures. In the Middle East and parts of Asia, a growing proportion of projects are financed in accordance with Islamic finance principles. Islamic project finance is concerned with the conduct of commercial and financial activities in accordance with Islamic law (Shari a). In conventional project financing, financing is based on interest basis. In Islam interest is known as Riba. Riba means any excess paid or received on the principal or an additional return received on the principal derived by the mere passage of time. There are two types of riba; Riba al-naseeyah (a pre-determined premium on the principal received by a lender solely due to the passage of time) and Riba al-fadal (excess compensation received by one party from an exchange or sale of goods without adequate consideration). Profit and loss sharing is a main principle of Islamic project finance since Islam perceives that the ideal relationship between contract parties should be that of equals where profit and losses are shared. 6.9 Difference between Islamic project financing and conventional project financing First of all it is clear that conventional project financing is based on interest and Islamic project financing is based on profit loss sharing. The fundamental differences between conventional project financing and Islamic financing are summarized in the following table: Conventional Project Financing In conventional project financing the funds provided by the financiers are considered as a commodity. Islamic Project Financing In Islamic project financing Shariah views fund as a means of exchange with no intrinsic value. In conventional project financing, financiers are considered as creditors to project and profits are assured. In conventional project financing, speculation in transactions is the main tool of financiers to gain higher profit. In conventional project financing, the financiers always remain uncertain about the financing contract. They are always in fear whether the project company honors their contracts or not. Shariah principles encourage financiers to become partners in the project to share the profits and risk in the business instead of being pure creditors; profits should not be assured and therefore fixed returns on investment should not be guaranteed. In Islamic project financing transactions are free from speculation or gambling (maisir); the prohibitions of Shariah do not usually extend to general commercial speculation as seen in most transactions. The existence of uncertainty (gharar) in a contract is prohibited; transactions where the price, time of delivery or the subject matter are not determined in advance may not be compliant with Shariah principles. Lecturer in Finance, DBA, IIUC, Website: 9

10 In conventional project financing, project s profitability is considered. Islamic project financing, unlawful project i.e. relating to alcohol, drugs, gambling or other activities prohibited by Shariah are not permitted Challenges to Islamic project financing in Bangladesh Islamic project financing is very limited in Bangladesh. Though Islamic banks and Islamic financial institutions offer some Islamic financing modes but these are limited to business. So the first obstacle of introducing Islamic project financing is the growth of Islamic banks and Islamic financial institutions and theirs products and services. A second obstacle in Islamic project financing is the complexity of contract. For example, a lot of time and effort have gone into the development of Islamic finance structures such as the Istisna a-ijara model in order to try to mitigate or eliminate risks to Islamic lenders. Third obstacle is the bond market. In our security market there is no bond market. Though, with a special provision some bonds are traded in DSE and CSE. In Islamic project financing Shukuk is one of the financing modes. In Middle East countries majority percent of projects are financed by this mode. Fourth obstacle to Islamic project financing is tenor and profit. Islamic lenders always compete with conventional lenders for these. In Bangladesh, for various reasons such as political instability, climate change, inflation etc. many projects fail to complete in due time. As a result the Islamic lenders may wait for a long time for their profit. Because the Islamic project financing does not provides fixed profit Concept of financial sustainability: Financial sustainability is the continuous access to resources for financing its activities. Therefore the reliance on foreign grants has to be avoided and banking on local financial resources has to be stimulated; for economic activities this means relying on own earned income; for delivery of society services this generally means relying means relying on a mixture of beneficiaries contributions, local fundraising and government subsidies Factors determining financial sustainability: Factors that determine the financial autonomy and sustainability of organizations can be found on three levels: 1. The level of institutional set-up 2. The level of finance mechanisms 3. The level of financial management The fires determining factor is the institution one. It includes elements such as the legal status of the organization, its objectives and activities and the internal organization. The legal status has an immediate effect on the legal possibilities for creating and sustaining certain finance mechanisms. Associations, trust funds, companies all have different possibilities for organizing income-raising activities, having access to local subsidies, external donations etc. Lecturer in Finance, DBA, IIUC, Website: 10

11 The objectives that the organization wants to reach and the activities that it want to execute all determine the need for finance and the possibilities for mobilizing finance. The internal organization will also influence these needs and possibilities. The second factor determining financial sustainability are the finance mechanisms themselves. There is evidence to suggest that gift or subsidy mechanisms do not contribute to genuine development, but all too often fuel a fatal dependency syndrome. Therefore development programs need to develop other finance machismos such as: cost-recovery, cost-sharing, capital shares, membership fees, local fundraising in driver for more finance autonomy and thus more financial sustainability, the right mix of all these instruments has to be found. Finally the third determining aspect of financial sustainability touches on financial management, including cost and income management. In programs we often find a lack of cost-consciousness. Some of the most known examples are : The fact that a lot of programs do not cost for the replacement of assets. Recurrent costs are often underestimated. In economic programs no distinction is made between variable and fixed costs. No much is done for attributing costs. One of the consequences is unclear pricing (no relation to real costs) Also income is often poorly managed. No distinction is made between different sorts are sources of income. A classical example is an economic village program that uses the same bank account as the village. Together with a lack of bookkeeping this leads to poor management of funds Policies for financial sustainability: In a modernized society every activity if not based on voluntary action needs financial means in order to be viable. We can distinguish social activates and economic activities. The main difference lying in the fact that economic products and services can be sold at a market price in order to cover for their costs and a profit margin. In the end however the distinction between social and economic activities is a political one. The society has to decide if the paying for certain products or services has to be done by each individual (at a market-price) or has to be done a communal basis. The important elements of a policy framework aiming at financial sustainability: 1. A distinction has to be made between the delivery of social services and the running of economic activates. 2. An engagement in this two types of activities under one management has to be avoided. 3. A prolonged engagement in supporting economic activities of beneficiaries has to be avoided in order to prevent market distortion (e.g. the displacement of entrepreneurs). This can be done by: limiting the share of the project in the set-up of the economic activity; preferable this share should be in the form of a credit; support to economic activities should be clearly limited in time. 4. If an NGO or a project engages itself in economic activities, it should do so in a businesslike, way, this means: a minimum of all cost covering through own earned income; this implies true and except cost calculation and efficient cost management; appropriate trained personnel; a proper corporate structure. Lecturer in Finance, DBA, IIUC, Website: 11

12 5. True and exact costing is elementary for financial sustainability. Therefore, a distinction between different cost-centers for different project functions or different activities is necessary. 6. A similar distinction between revenue centers (profit centers in economic activities) is necessary. 7. Economic activities of beneficiaries should be financed through own earned income. 8. The delivery of social services should be financed though a mix of beneficiary contributions, local fundraising and subsidies. 9. The institutional set-up of a project should reflect the managerial and cultural differences between the delivery of social services and the running of economic activities. 10. Financial sustainability requires efficiency and cost-minimization. Three important steps towards financial sustainability: 01. Adopt an appropriate institutional set-up 02. Adopt proper cost and revenue calculation (per function / activity) 03. Adopt proper accountancy procedures 04. Improve your sustainability index Measuring Financial Sustainability of Projects: Dependency and Sustainability Index Service A Service B Service C Total 1. Direct costs a) Direct material b) Direct labor c) Other direct d) Total direct costs (prime costs) 2. Indirect costs: % spread % % % Indirect costs: spread 3. Total costs 4. Revenues a) Beneficiaries contribution b) Local fundraising c) Government subsidies d) External grants e) Total revenues 5. Dependency index 4d / 4e 6. Sustainability index on prime costs a) Ordinary: (4a+4b+4c)/1d b) Acid : 4a/1d 7. Sustainability index on total of costs a) Ordinary: (4a+4b+4c) / 3 b) Acid : 4a / 3 Lecturer in Finance, DBA, IIUC, Website: 12

13 Problem-6.1 IIUC Action Research Project is going to establish a project for training the students of business department of IIUC. The organizing committee has planned that in every semester they will arrange a workshop on career development and participants will be 700 students. There will be a cost of Tk. 50,000 for three keynote speakers, workshop kit will be Tk. 80 for per student, Snacks for all including staff of the department will be Tk. 50,000, lunch cost will be Tk. 120 per student, banner and sound system will be Tk and miscellaneous expenses will Tk. 15,000. The above all expenses are only for each semester. Total fund has been granted for annually. CRP has granted Tk. 1,00,000, students contribution will be Tk. 1,00,000, IIUC Business Club has granted Tk. 20,000 and IDB has granted Tk. 3,00,000. Calculate dependency and sustainability index of this project. Problem-6.2 BEXIMCO Company is considering a project for creating awareness about nutrition among rural people. It hired 1,500 representatives for this project. BEXIMCO has decided to contribute TK. 20,00,000 for the project. It has also estimated Tk. 8,00,000 from Govt. subsidy. Local organization and UNICEF will provide Tk. 3,00,000 and TK. 10,00,000 respectively. BEXIMCO has estimated its cost as follows: i) 10,000 copies of book at Tk. 200 per copy. ii) Representative s salary at Tk. 500 per representative. iii) Transportation cost for going door to door Tk. 1,50,000. iv) Lunch Cost Tk. 2,00,000. v) Other cost Tk. 10,00,000. Assume that you are a financial consultant of BEXIMCO Company and find out sustainability and dependency indices of the project. Problem-6.3 Abul Khair Group is considering to take a project from the two projects: Project Surma and Project Padma. The following data are available for the wo projects: Project Surma Dependency index Sustainability index Ordinary= 0.4 Acid= Project Padma Costs (Tk.) Direct Material. 1,50,000 Direct Labor. 25,000 Other Direct Costs 25,000 Indirect Costs.. 20,000 Revenues (Tk.) AKG fund.. 1,25,000 Local fund.. 50,000 Govt. Subsidy 25,000 External Donor. 20,000 From the above data identify the project which is profitable to the AKG. Also rationalize why you select the project. Lecturer in Finance, DBA, IIUC, Website: 13

14 Problem-6.4 Puler Ghat is a social organization, wants to take a project in Kishorgonj area. The main aim of this project is to alleviate poverty. CFO estimates its total fund collection and fund expenditure as follows: Particulars Amount Particulars Amount Owner s Contribution 35,00,000 Sewing machine for 15,00,000 women Local NGO s 20,00,000 Primary school set up 25,00,000 Contribution Govt. Donation 5,00,000 Training for poultry 10,00,000 firm Saudi Aid 15,00,000 House building cost 18,00,000 Transportation cost 5,00,000 Publication cost 2,00,000 Req- Evaluate sustainability of the project. Problem-6.5 Under the UNDP (United Nations Development Plan) to implement the Primary Education and Mass Education for the Children of the Agargao Slam different costs and revenues are estimated as follows: No. Particulars Primary Education Mass Education 1 Buying the text books Tk.185,000 Tk.180, White board,pen, Pencil and Note books etc. 100,000 95,000 3 Salary of the Tutors 150, ,000 4 Repairing the road towards the Education Center 205, ,000 5 Establish a canteen for the students 120, ,000 6 Subscription from the Slum peoples 25,000 20,000 7 Contribution of RAJUK 160, ,000 8 Contribution from the Education Ministry of 150, ,000 BGD. 9 Funds from UNDP 250, , Funds from ADB 175, ,000 Find out the dependency and sustainability indices of the above two projects. Lecturer in Finance, DBA, IIUC, Website: 14