Q58 Rowlands and Medeleev (R&M)

Summary
Para 1:
o R &M
: Major listed European civil engineering company.
: Become principal contractor to build Giant Dam Project in an East Asian
country.
o Government of the East Asian country
: Take several factors in appointing principal contractor.
o Giant Dam Project
: Provide hydroelectric power.
: Environmentally clean.
o Environmental pressure group- Stop-the-dam
: Criticize against the project.

Para 2:
o Effects on the project
Para 3:
o Board of R&M
: Aware of the controversy.
o Finance director- Sally Grignard
: Responsible for the financing of the project for R&M.
: Anticipate number of working capital challenges for R&M.
: Financing issue in managing the cash flows
o R&Ms usual bank
: Wary of lending because receive negative publicity for the project.

Para 4:

o Institutional shareholders
: Contacted Richard.
: Wanted assurance that company had fully taken environmental issues and
other risks.
o Chairman: Richard Markovnikoff
: Gives a statement at next AGM
: Address environmental concerns.
: Make statement on the importance of confidentiality in the financing of
early stage working capital needs.

(a)

(i)
Stakeholders (pg. 18)
: Any entity that affect or be affected by the achievements of an organizations
objectives.
: Bi-directional relationship.

Stakeholders claims (pg 19)

(a) Direct claims: do so with their own voice
: communicate with the company.
(b) Indirect claims: unable to make claims themselves.
: have no significance for the organization.
: have no physical voice.
Four stakeholders

Government of East Asian Country

Stop-the-dam
First Nation People
Banks

(ii) Stakeholder claims

Government of the East Asian Country
: Most primary stakeholder
: Concerns about the completion on time of the project.
: Concerns that project will serve more community.

Stop-the-dam
: Active shareholders.
: Take actions if the project brings negative environmental and social footprint.

First Nation People

: Narrow, involuntary stakeholders.

: Wish their current lives to continue.

: Had no say in a decision

Banks
: Primary stakeholders as they provide funds.
: Concerns about the level of risk to be consistent with the return of lending.

(b)
Risk Assessment (pg 217 & 221)
: Involves analyzing, profiling, and consolidating risks.

Likelihood-consequences matrix

(c)
i) Disruption to the project

: Stop-the-dam: Take actions if the project brings negative environmental and

social footprint. Eg: Creating human barriers to the site.
Hiding people in tunnels.
: Represent risk to the progress. Eg: delays to the actual work
Risk: high (disrupt the project)
Consequences: low to medium (depending on the completion on time of the
project)

ii) First Nation people

: highlighting the adverse impact on themselves and consequences of the project to
the environment.
: incur reputation risk to R&M.
: Difficult to find partners as some may emphasis on corporate social
responsibility.
Risk: high (strong determination on protesting)
Consequences: less likely to be high/ medium (sub-contractors may wish to earn)

iii) Financial risks

: Some banks may reluctant to provide lending.
: Banks concern about the viability of the project.
Risk: low to medium (depending on the risk attitudes of banks)
Consequences: high (project unable to begin without funds)

(d)
(i) Introduction: Greetings

Content:
: Concern with the impacts upon the environment
: Project reflect R&Ms commitment to sustainable development.
: Funding depends on the sensitivity of the project.

Sustainable development (pg378)

: development that is not a fixed state of harmony, but rather a process of
change in which the exploitation of resources, the direction of investment, the
orientation of technological development and institutional change are made
consistent with future as well as present needs.
or
: investing in developments that will safeguard the needs of those living in the
future as well as those living in present.
: Key issue: energy, usage of land and natural resources and waste emissions.

(ii)
Implications of Giant Dam project
Resource depletion
: rely on hydroelectric power but not fossil fuels.
: Supply of fossil fuels is finite

Global warming
: burning fossil fuel will release greenhouse gases
: contributing to global warming
: government emphasis on meeting the obligation to reduce carbon emissions.

Impact on natural environment

: destroy rare plant and animal habitats.

: loss of balanced environmental conditions.

: building dam can provide supporting power resource.
: weighted against the impact on the natural environment of global warming.

Loss on productive farmland

: destroy farmland.
: impact upon the countrys ability to sustain itself.
: However, long term consequences global warming could heavily affect the
farmland. Eg: flooding.

Conclusion:
: choosing to change the source of power.
: contribute to sustainability than preserving the original environment.

(iii)
Confidentiality
: significant funding is required to undertake the project.
: incur early project costs and pay to sub-contractors.
: in order to obtain funding, keeping the identity of financial supplier is needed.

Conflict with transparency

: keeping the suppliers identity secret conflicts with duty of transparency.
: committed to disclose info but not conceal it.
: suppliers are aware of the other main sources of finance
: would like to determine the risk of investment.
: do not normally disclose the identity of individual lenders.

Resolution of conflict
: obtaining funding from banks will minimize the risk to the project.
: project failure will affect the market value of company.
: thus, ensure Stop-the-dam pressure group does not know about the identity of the
lenders.

Conclusion
: addressing all the concerns of the shareholders.
: the chairmans hope.
: thank the audience.

(e)
Culture
: subcontractors may not have same attitude to risks and control as R&M.
: laxer, as they are encouraged to finish jobs as quickly as possible.

Agency cost
: R&M need to review their work.
: their self-certification will not be strong evidence.
: R&M need to incur some costs.
Eg: send some staffs to check their works.

Tracking progress
: a number of sub-contractors may be used on the projects.
: difficult to control the time and limit budget.

Dealing with problems

: over-budget
: sub-contractors not under the control of R&M.
: R&M difficult to take actions if they do not work efficiently.