Program + Semester Course Name Section Code BU1243-

IBM I – G2 International Trade Finance G2

Percentage Weight of Total

Type of Evaluation
Winter 2020 Evaluation
Project
20%

Course Instructor Due Date

Armando Barragan Week 15 (April 13, 2020) Total Marks: /100

International Trade Finance Project

Project: Analyse trade risk and risk assessment considering a specific case, complying with the following
requirements:

1. Include THIS PAGE AS A COVER OF YOUR PROJECT, WITH THE NAME AND STUDENT ID NUMBER
of all group members.
2. Thoroughly read the Chapter 1 “Trade Risk and Risk Assessment” of the Anders Grath’s book
The Handbook of International Trade Finance”. A copy of the book is posted in Google Classroom.
3. Answer at length the four case study discussion questions (see below), taking into consideration
all the elements of risk analysis developed by Anders Grath.
4. All assignments should be submitted in a hard copy. No late submissions accepted.
5. Cite properly every document consulted (including web sites).
6. You must include: Introduction (one page); Conclusions and recommendations (two pages max);
and Bibliography (correctly cited). Any plagiarism will lead to a zero grade in the assignment.
7. The final mark will consider: organization, neatness, and completeness.
TECHNOLOGY AND TRADE FINANCE
Submitted to: Mr. Armando Barragan

Submitted by:

 Aarti Satish Shah - 201900633

 Kamalpreet Kaur - 201901474

 Rajvi Rajendra Chatwani - 201900929

 Ruchika Singh - 201901398

 Taniya - 201901664
INTRODUCTION AND CASE SUMMARY:

Risk management and risk reduction is a mechanism that defines, assesses and mitigates risks to
project scope, schedule, expense and quality. Risks come in the form of opportunities and risks,
and are scored on the probability of occurrence and project effects.

All aspects of business include elements of risk, but the risk profile takes on a different dimension
when it comes to international commerce. You never have common laws globally that will help
the transaction, as would be the case within a single country. Alternatively, existing trading
practises and conventions are used to resolve the parties’ undertakings. It is important for the seller
to undertake a proper risk evaluation before actually entering into the transaction.

Infrastructure growth is one of the most significant activities which can improve the business of
different industries, thereby growing the country's gross domestic product (GDP). Owing to
advances in technology and operations, infrastructure projects have become more complex, and
larger in size. Infrastructure is vulnerable to high risk of financial, regulatory, and execution.
Effective implementation of infrastructure projects (IP) is difficult because of unpredictable events
that can occur and disrupt project activities.

Infrastructure projects most frequently involve assembling an infrastructure building into a space
(environment), which is why their success depends not only on internal factors, such as the client
and contractor, but also, to a large degree, on external environmental factors. The impact factors
can cause risk events on an infrastructure project, which in turn can have a very negative effect on
the project's progress, particularly on the execution time, on the costs, and sometimes on the quality
of the projects. Risk management is typically an integral part of a company's risk management
policy and is an important factor of decision-making processes. Risk management is especially
challenging in these projects so it is vital which risk management strategies are used.

In practise the most critical aspect of risk analysis and management is the knowledge or perception
that a risk may exist as in the given case of Engineering Tech. The goal of risk mitigation is to
reduce the consequences and probability of a risk event to an acceptable threshold and to define
an appropriate response which is the purpose of the given case study.

In the given case study, Engineering Tech (ET) is specialised in large-scale infrastructure
programmes, including PPP ventures. Engineering Tech sees an opportunity to take advantage of
a complex, profitable project in an area considered too risky by competitors of the company.

Although the numerous partners at Engineering Tech are excited and eager to spend time to put
together an offer, the company board was worried about how the company could succeed in a
country facing so many challenges like doing project execution in a country that is unfamiliar and
carries a higher risk. Partners who help this project are known at Engineering Tech as “Acacia
Crew”.

The "Acacia Crew" are experienced consultants and engineers with success in multiple high-risk
markets and recognise that things will eventually 'go wrong' but some foresight, combined with
strategic planning, will increase the probability of a positive outcome.
Question 1: How can Engineering Tech begin to organize an approach around risk
mitigation with so many factors at play? What are some of the resources and techniques that
can be explored as possible risk mitigation solutions in the context of a project such as this
one?

Answer: The project prepared even with the utmost caution will run into trouble. No matter how
well the preparation is, it will still run into unforeseen problems. Lack of manpower, resources that
are relied upon turn out to be unavailable, environmental issues, etc. Therefore, risk planning can
be used by Engineering Tech to recognise possible issues that could cause trouble for the project,
to determine how likely they may arise, to take steps to eliminate risks that can be avoided, and to
mitigate those that cannot be avoided. After proper planning Engineering Tech need to perform
Risk Management. Risk management is a process which includes risk assessment and mitigation
strategy for certain risks. Through risk assessment, Engineering Tech shall identify the potential
risk and evaluate the potential effect of the danger. Then each risk shall be analysed based on the
likelihood that a risk event will occur and the possible loss associated with it, after the potential
risks have been identified. Not all risks are equivalent. Some risk events are more likely than others
to occur, and the cost of a risk can vary considerably. Finally a risk mitigation strategy shall be
framed after the risk has been identified and evaluated to reduce the effects of an unforeseen
occurrence. The risk assessments of this major infrastructural project in Ethiopia illustrate complex
collection of risks which are as follows:

1. Political / Country risk: Political risk or country risk is often defined as: ‘the risk of a separate
commercial transaction not being realized in a contractual way due to measures emanating
from the government or authority of the buyer’s own or any other foreign country’. The risk
of not carrying out a commercial transaction due to legislation originating from the buyer's
own government, or some other foreign country. From the possibility of revolution similar to
the Ethiopian Civil War in 1974, to the danger of the completed project being expropriated
outright, if its ownership lies elsewhere than with the government of the day, just briefly. If a
project is funded only partly by means of development funds, the assets associated with the
project cannot be used to gain financing due to the in-market risks to those assets.
2. Corporate and Financial risk: There are various corporate and financial risks involved in
this transaction like, compliance requirements, availability of funds, etc. The project is funded
by multilateral organisation which is subject to substantial due diligence and review –
including potential comprehensive audit procedures – both of which involve risks and
incremental costs to Engineering Tech.
3. Counterparty risk: Counterparty risk is the possibility or likelihood that one of those
involved in a transaction will default on its contractual obligation. The chance of conflict
between Engineering Software and the funding agencies, including the World Bank and the
IFC, persists even in the ideal situation. These disputes can arise, and they can take time to
resolve.
4. Environmental risk: The possibility of a certain business venture or operation causing
damage to the natural world surrounding it. EFIC committed itself to perform environmental
impact reviews on all funded projects. This requires an impact estimate on local communities.
The World Bank has also developed guidelines related to environmental and sustainability
issues. Non-governmental organizations actively monitor and report on projects such as this
 one, and Engineering Tech might face consequences if it doesn’t comply with the
environmental standards published.
5. Shortage of Human Resources and project materials: Personnel, manpower, and material
shortages can cause significant delays and create substantial cost overruns; unethical business
practises and outright corruption can pose a serious danger, as can outbreaks of political
unrest.

Nonetheless, Engineering Tech (ET) needs to approach risk mitigation with a comprehensive,
systematic, and all-encompassing approach that ultimately ensures that the necessary and effective
mitigation tools and techniques completely mitigate all possible risks to the infrastructural project.
Many of the tools available to Engineering Tech are its main partners in this infrastructure project:
its excellent partnership with Export Finance and Insurance Corporation (EFIC), Australia's Export
Finance and Insurance Corporation and the Acacia Team.

The EFIC has a vast array of financial options that will eventually ensure the overall success of
Engineering Tech in Ethiopia which is a country with complicated risks. EFIC has always
dedicated itself to evaluating the environmental effects of any programmes it finances.

When properly harnessed, the expertise of Acacia Crew as experienced consultants and engineers
with experiences in several high-risk industries is a significant advantage for Engineering Tech.
Some risk mitigation techniques like Bonds, Documentary Letter of Credit, Working capital
guarantees, Medium export payment insurance, Political risk insurance, Foreign exchange
guarantees, etc. (discussed in detail in Answer 2) can be used by Engineering Tech to mitigate the
aforementioned risks.

Question 2: Do any of the basic or ‘vanilla’ trade finance products or services apply in
complex and high-risk scenarios such as this one?
Answer: Through an overview of the risks associated with Ethiopia's infrastructural programme,
basic trade finance products and services will be implemented to help increase the probability of a
positive outcome. Basic trade finance products and services are as follows:
 Documentary Credit guarantees: Instead of depending on overseas banks of ET's international
partners, a documentary credit guarantee will assist in project operation. A documentary loan
guarantee will help protect contract payments for Engineering Tech. If Engineering Tech
provides its bank with the documents provided by the documentary credit, it can get the
payment. This also helps the bank to forward working capital to Engineering Tech.

 Political risk insurance: It is an insurance that can be paired with a company's economic risk
in many developing countries, but it covers risks of a political nature by modifying or
withdrawing licences, licencing guarantees or other situations directly or indirectly created by
the government or some other public entity. Provided that this form of cover will also provide
insurance for similar incidents when involvement from these organisations makes it difficult for
the seller to meet the contractual obligations towards the buyer, this will help the ET to protect
itself from loss.
 Country analysis: Country assessment is an essential choice for international investors to help
determine the risk level within the target country.

 Bond/guarantee indemnity insurance: This insurance offers protection against the so-called
'unfair calling' of export-related bonds or guarantees given on behalf of the seller. It involves
both truly unjust appeals, and 'just appeals,' caused by a public authority or political
intervention, which makes it difficult for the seller to satisfy the obligations under the trade
contract and, thus, may activate the demand under the guarantee. So in the case of ET the
involvement of World Bank and through bond it can be protected.

 Tender guarantee or bid bond: This guarantee is made in accordance with the contract offer
or tender, which ensures the seller's commitment to abide by the agreement and that the party
submitting it will sign the contract, including the question of additional assurances, should the
tender succeed. The sum of the assurance is usually between 2 and 5 per cent of the deal. The
guarantee is often replaced by an agreement to provide a warranty, sometimes provided by the
seller or his parent or group company covering the seller's duty to sign the contract if granted,
and to provide the assurances offered. By using bid bond, ET can reduce the risk of payment.

Question 3: The risks in the transaction seem to be very broad and encompassing. Can
Engineering Tech effectively protect its interests and assure payment?

Answer: Every business involves different kinds of risk during business process we have to
identify the risk in ET the main risk involves payment assurity. Definitely, Engineering tech can
protect its interests and can assure the payments by adopting various strategies that would lead the
company towards more success. Some of these strategies and payment methods are as follows:

 It is partially funded by various development monies that means the government grants to the
small businesses at low rate of interests in this kind of projects this company associate the
project with those valuable things that may not be usable just to secure the financing.
Moreover, to reduce the in-market risk to those assets.
 The World Bank: The first premier arrangement is given by the World Bank. The World Bank
has protected, dependable and proficient national installment framework, which assists with
growing monetary consideration and bolster money related soundness. On account of
Engineering Tech., the World Bank likewise gave solid budgetary help and has given some
standard that is identified with supportability and ecological issues. So the world bank gives
cash and furthermore checking the task to Engineering Tech. Aside from this, it additionally
satisfies the credit necessities for Ethiopia
 EFIC (Export Finance and insurance Corporation of Australia): EFIC is an Australian credit
office that encourages the Australian organizations to send out with appropriate budgetary
support. It is an administration office which focused on lead ecological effect appraisals on
ventures funded. EFIC has a superb relationship with ET. It likewise remembers an evaluation
of effect for the nearby populace. So with the assistance of EFIC, ET can easily do its
installments and safe its inclinations
 Due to the scarcity of resources, staff and material can slow the entire production process and
this would increase the cost would prove better for the company later on. So, in this way
Engineering Tech can save their interests.
 Projects funded by multilateral agencies are consider as an important because of accuracy and
persistent work or efforts all of these are imposing risk and adding cost to the Engineering
tech.

There are some governments, non-governments organizations and strategies which helps the
Engineering Tech and support the project in Ethiopia .These organisations are the best options for
ET to protect itself from high and unpredictable risk.

Question 4.What assurances can the “Acacia Crew” offer to the Engineering Tech Board?

Answer: Acacia crew is the name given to the partners of ET supporting involvement in the
Ethiopia project and works to identify risks and its mitigation options. They are experienced
consultants and engineers with successes in numerous high-risk Markets, and believes that
effective planning can maximize the likelihood of a successful outcome. Some Assurances that
Acacia Crew offers to the Engineering Tech Board could be:

A through risk assessment: it is crucial for any business to get the risk assessment done thoroughly
before finally entering into the transactions of the business. Thus, Acacia crew assures to do a
complete risk assessment and take out the mitigation plan for a successful outcome.

Effective Planning: Acacia can also assure the board of Engineering Tech with effective planning
of project so that unnecessary risks can be avoided at the first place only. This will help the crew
to focus majorly on the potential risks which could occur and the control measures that the crew
can create to get rid of the risks easily and without any loss. Creating Mitigation plans for financial
and other main trade risks: Acacia Crew assures to create the right mitigation plans for the potential
risks that arrives. It could be the financial risk or other trade risks like product, currency, political,
commercial etc. It also makes sure to create mitigation plans for the country risk involving the
insolvency trends and payment methods by obtaining country information from the larger export
insurance companies and websites.

Ensuring the Adequate financing: Acacia assures that the business has adequate financing/ funds
throughout the period by creating the right financial strategy after studying the financial needs of
the business. This will ensure that the company has sufficient funds for the long-
term financial stability and flexibility. Ensuring the adequate Cash flow: Cash flow is the balance
between business income and expenses over a specific period and one need some accessible cash
to keep the business running. The crew can create the right strategy to monitor the cash
flow regularly, cut the cost where it is possible, keep a check on the involves on regular basis, keep
a track of money coming in and going out of the business etc.
CONCLUSION AND RECOMMENDATIONS:

After considering all the above factors, it can be concluded that an efficient risk assessment
followed by using effective risk mitigation techniques Engineering Tech can fulfill this project and
yield benefits.

Considering the opportunity that engineering tech have got they must try to give the best results by
overcoming all the risks such country risk, financial risk, counterparty risk, etc. through using risk
mitigation instruments like documentary letter of credit, bonds, working capital guarantees, etc. And
although they are not familiar with the country but as they have experienced consultants the “ Acacia
Crew “ and engineers with success in multiple high risk markets, this will help them to improve by
undertaking project like this and facing challenges related to high risk. Moreover through this project
they have got a chance to be leading executing firm under a World Bank development program,
facilitated partially through the World Bank/IFC (International Finance Corporation) Trade Finance
Program. Thus, Engineering Tech will be the prime contractor and risk taker in the whole contract.
However the result will be positive if they have proper planning and strategies to deal with this
project.

Members of the Engineering Tech Board are somewhat less experienced in developing market
projects, and would need detailed evaluations and extensive reassurance. It was observed that this
opportunity is primarily about risk management, and it is important to ensure sufficient funding and
cash flow over the project period. Engineering Tech and its Board must take a realistic view of the
situation and prove themselves by the use of suitable risk mitigation tools. The following are the
recommendations for Engineering Tech for successful implementation of the project:

 It must reduce the risk of disagreement with other funding agencies because it would take
large time to sort the problem and will resist the production upto some extent.
 It must learn about the necessary tools for the risk mitigation that they would use in the
situation of any kind of risk.
 It must ensure about the enough financing and revenue for the term of project.
 It must integrate with effective planning that will escalate the possibility of successful output.
 Environmental impact should also be a vital concern for these companies to whenever they
are building any project.
 It can build strong relationships with public to know the demands so that they can get more
success in their business.
 It must analyse the weakness of their resources, staff and material in order to tackle the issue
of delays.
 It can adopt the strategies that would help the company to protect its interest and ensure better
results.
 It must concentrate on retention that will refers to the techniques by the management to help
the employees to stay in the same organization for the longer period of time. It would also
give more success to the business.
 It must create a management contracting through which it works can be constructed by number
of different contractors.
BIBLIOGRAPHY:

1. The Handbook of International Trade Finance by Anders Grath

2. Project Management by Adrienne Watt and published by BCcampus Open Education
(https://opentextbc.ca/projectmanagement/chapter/chapter-16-risk-management-planning-
project-management/)
3. A Guide to Project Finance, dentons.com (https://www.dentons.com/en/insights/guides-
reports-and-whitepapers/2013/april/1/a-guide-to-project-finance)
4. A risk-management approach to a successful infrastructure project, November 2013 Report
(https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/a-risk-
management-approach-to-a-successful-infrastructure-project)