Reference no: EM133313782

Case Study: International Trade Finance Group Assignment - Trade Finance, Risk and Risk Mitigation Case Study Risk and Opportunity GBCWorld Design and Engineering is a large Canadian vertically integrated engineering firm, 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 North America and has ventured into consulting activities in other areas in the world. The firm was recently approached about executing a major tourism project, a green powered luxury hotel east of Worcester, South Africa, about 350 kilometres beyond the Cape Town International Airport and Seaport. The project once complete will be valued at $35 million Cdn. In recent years, corruption has grown, crime has increased and contributed to social instability. Those harsh realities aside, the country has benefited from foreign investment, and GBCWorld perceives an opportunity to take on a complicated, profitable project in a region considered too risky by the firm's competitors. GBCWorld has an excellent relationship with Canada's Export Development Corporation. The agency is viewed by many as a very progressive, dynamic and innovative export credit organization which will go to great lengths to promote the success of Canadian businesses, including taking on significant country and bank risk to do so, when warranted. While senior management at GBCWorld are willing to invest time to put a bid together, the company's board members are concerned by so many challenges. How, they wonder, will GBCWorld protect its interests and ensure excellent outcomes? The Challenge GBCWorld has done work in other parts of Africa but has usually been one of the supporting firms. This time, GBCWorld is the lead firm under a World Bank development program. They will work with a consortium of fourteen local South African construction and hospitality firms known as SA Consortia or "SAC Ltd". GBC will provide design, engineering and construction services to SAC, several government agencies and other firms involved in the project. Most of the firms in SAC tend to be smaller and have limited access to working capital. GBC will need to be flexible and creative in doing business with these partners/customers. The board of directors have engaged your team to provide some consulting with respect to identifying 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 The project is only partially funded through development monies, assets (the land and buildings) associated with the project may not be usable to secure financing. Many of the firms in SAC will rely on generous and flexible credit terms from GBCWorld. Shortages of resources, staff and materials can cause significant delays, in payment and delivery, and generate International Trade Finance Group Assignment - Trade Finance, Risk and Risk Mitigation Case Study significant cost overruns; questionable business practices and outright corruption can be a serious risk, as can eruptions of violence due to social unrest. It is expected that phase 1 of the infrastructure project, which includes transportation links, site services and core buildings, would ideally take about 24 months to complete. The full project will take over 60 months to finish. The project financing will be denominated in U.S dollars. South Africa has been plagued by much corruption. It ranks 69th out of 180 countries on Transparency's Corruption Index. Violence is also a daily occurrence in parts of the country as political and tribal groups protest inequities and wrestle for control. Economically the country has stagnated and its currency, the Rand has been volatile and weakening against the U.S dollar. The banking sector has experienced several challenges. New entrants have increased competition and driven down profitability of existing banks. Several domestic banks have encountered financial difficulty related to the Financial Crisis in 2007-2009 and the pandemic. Historically, some of the firms that are part of SAC and other customers of GBCWorld have had varying degrees of experience and success in projects of this size. GBCWorld has been unable to obtain adequate information on all of the local firms to substantiate their creditworthiness, financial strength and reputation. In many cases, credit will need to be extended to some of the SAC firms for both shorter periods such as 30 - 60 days and longer periods of time upwards of 6 to 12 months. So far $2 million of preliminary assessments and design services have been provided to SAC and another $9 million of accounts receivable in engineering and construction services generated by other recent projects are outstanding. They are experiencing delays in collecting several sales invoices and related receivables which has strained cash flow and created some concern amongst the CFO and the Finance Committee of the board. They wonder if now is the time to take on this significant new project amidst this financial uncertainty? 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 is rough and difficult to transport and there has been some recent incidents of theft. The railroad and roadways between the seaport and airport and the construction site is antiquated and may need upgrading. Your general impression after having studied the proposed project is that nearly every business risk imaginable is represented, to some degree, in this opportunity but there is great financial reward if it is completed successfully. Risk Mitigation Considerations Many of GBCWorld's management team 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 International Trade Finance Group Assignment - Trade Finance, Risk and Risk Mitigation Case Study GBCWorld 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. GBCWorld 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

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

Question 2. After identifying and describing the various risks, explain the differences from the point of view of risks to GBCWorld between the four primary payment methods Open Account, Payment in Advance, Documentary Collections and Letters of Credit that could be employed to mitigate the risks identified in Question 1 Recommend and justify a payment method that addresses the most important risks.

Question 3. If GBCWorld were to work with secure and reputable banks and surety insurance companies experienced in international trade, describe additional tools and instruments that could be used to secure both its financial interests and the increase the likelihood that the infrastructure project will be completed. Include any advantages or disadvantages as appropriate.

Question 4. How might GBCWorld address the cash flow risks it is encountering?