Project Financing

Assignments

Name ID. No.

Alemu Olika WU1300173

Submitted to: AdamuTerfa (Dr.)

Submission Date: Feb 2022

Assignment 1:

Review pertinent literatures on project funding alternatives in Ethiopia

Articles review with concerning to pertinent literatures on project funding in Ethiopia:

Several articles titles under my review:

1. Project Financing, Implementation and Control Practice: A Study on Selected Business

Organizations in Ethiopia: By Deresse Mersha Lakew; 2017
2. Establishing financial markets in Ethiopia: the environmental foundation, challenges and
opportunities: By Tiruneh Legesse; June 2012
3. Ethiopia‟s New Financial Sector and its Regulation Tony Addison Wider, UN University,
Helsinki, Finland and Alemayehu Geda KIPPRA, Nairobi, Kenya April 2002.
4. Capital structure and profitability: Panel data evidence of private banks in Ethiopia
Zemenu Amare Ayalew, August 2021.
5. Financial Performance Analysis: A study on Selected Private Banks in Ethiopia By
Wesen Legessa Tekatel, June 2021

Name of the Reviewer:

Alemu Olika…….. ID. No. WU1300173
Program: Weekend
Campus: Nekemte
Signature: ______
Submitted to: Adamu Terfa. (Dr.)
Overview of the articles

To review articles done by different authors depending on their project funding analysis at
different sectors. Therefore by doing this the reviewer try to evaluate their articles by focusing
what they have said, their strength, their weakness, and the reviewer try to put his own idea
depending as a conclusion and recommendation and

Introduction:

A project finance arrangement is a structured finance scheme based on the long-term cash-flows
generated by an enterprise incorporated for an isolated project, taking as collateral said
enterprise‟s assets. The truly differentiating element of a project finance arrangement is that it is
structured based on the long-term predictability of its cash flows in accordance with a structure
of fixed contracts with its customers, suppliers, market regulators, etc.

For the current situation Government leaders continually struggle for funding. Budgets are
constrained and critical needs are great. That creates great stress. However, public officials have
options. Lots of alternative funding sources are available for projects that result in certain
positive outcomes. Alternative funding sources can be accessed through a number of federally
funded programs. And, while these are attractive funding options, many of the programs are not
as well-known as they should be.

Much of the funding from federal programs comes from incentivizing private- sector investment.
The programs offer tax incentives for investing in projects that meet certain criteria projects that
provide a desired outcome such as job creation, revitalization of underserved areas, rural
upgrades, healthcare facilities, etc.

2. Objectives

2.1. General Objectives

The General objectives of this article is to review the what the different authors have said about
project funding in Ethiopia
2.2. Specific Objectives

The specific objectives of this article are to review:

 Project Financing, Implementation and Control Practice: A Study on Selected Business

Organizations in Ethiopia: By Deresse Mersha Lakew; 2017
 Establishing financial markets in Ethiopia: the environmental foundation, challenges and
opportunities: By Tiruneh Legesse; June 2012
 Ethiopia‟s New Financial Sector and its Regulation Tony Addison Wider, UN University,
Helsinki, Finland and Alemayehu Geda KIPPRA, Nairobi, Kenya April 2002.
 Capital structure and profitability: Panel data evidence of private banks in Ethiopia
Zemenu Amare Ayalew, August 2021.
 Financial Performance Analysis: A study on Selected Private Banks in Ethiopia By
Wesen Legessa Tekatel, June 2021

3. Literature Review

Financing Projects in Ethiopia The survey result and experts interviewed indicated that the
followings are main sources of financing capital projects in Ethiopia; internal source, borrowing
from banks, industry development fund, and initial public offering. In addition, as a strategy to
encourage investment, Ethiopian government also gives incentives in the form of tax exemption
and provide land and industry zone for free or at a lower lease price. Since most firms in
Ethiopia are small in size, they do not qualify for bank borrowing. Therefore, they try to finance
their project from their own internal sources including; portion of net income from operation,
sale of another non usable property, using traditional saving called “Iqub” or contribution from
families and relatives et al Deresse M (2017). Some of the problems of banks are attributed to
external factors. According to this journal; the different regulatory and administrative controls
limit capacity of banks to provide financial service to investors.

Tiruneh L (2012), in countries like Ethiopia, bank loans are the most important source of capital,
but are limited by the amount of deposits banks are able to mobilize. As a result, banks tend to be
very conservative in their lending policies, thereby penalizing younger or emerging companies
whose business risk are higher than those faced by established firms, and yet contribute to the
dynamism and future growth potential of the economy through innovations. Thus, the role of the
private sector is limited due to the banks unwillingness in granting loans to risky investments on
long term basis. Since banks in emerging economies are also mostly owned and run by
governments, they extend loans to priority sectors in response to government directives without
due regard to quality, and often at interest rates below the bank„s cost of funds.

Zemenu A (2021) banks with relatively high loan to deposit ratios have higher profit than those
with a lower proportion of loans relative to their deposits. Cost income ratio, the inverse of
operational efficiency, affects profitability in a negative and significant way for the ROA models
while the estimates of credit risk implying that Ethiopian private commercial banks are boosting
their profits by taking risks. This might be due to the growing trend of the loan to deposit ratio of
most commercial banks in the industry. The study has also found mixed results regarding the
impact of employees‟ productivity; a positive and significant impact for ROA models and
statistically insignificant coefficient estimates for NIM models.

Wesen Legessa (2021,) one of the main points to understand about the financial analysis is that
all the information that would be conclusive judgment about what is going on in the companies
are found in the financial statements.

Tony & Alemayehu (2002) Ethiopia's emphasis on maintaining macro-economic stability even at
the cost of retaining inefficiency in the financial system—may be optimal in the second-best
world that characterizes Africa's transition economies.

Methodology

A reviewer was selected from different authors whom wrote about project funding and financial
sectors in Ethiopia. At the second the reviewer was read all journals and researches wroted by
different authors listed here above. Therefore the reviewer tried to reviewed with five key
journals and researches from different universities. Also this article review fully relied on
secondary data obtained from various sources. These sources mainly include publications of
scholars from academia.
Findings from the articles

The findings from the selected articles are:

 Well-functioning financial system requires strong institutions and a sound legal

framework. Among others consumer and property rights protection, contract enforcement
laws and corporate governance can be considered as the key elements for creating deep
and vibrant financial markets and creating an enabling business environment.
Establishing financial markets is not an easy task for the Ethiopian government.

 The legal and constitutional instruments do not provide an adequate regulative

framework, investor and creditor protection laws are inadequate, and the absence of an
organized capital market is a remarkable deficit and contributes to a lack in transparency.
However, recent developments prove an emerging commitment to corporate governance
standards and a corporate governance code is expected to be introduced in the near
future.

 Financial reform raises complex technical issues over which there is at best partial
consensus. Since reform began, Ethiopia has seen considerable reorganization of state
banks as well as the entry of private banks and insurance companies. Interest rates have
been significantly decontrolled and interbank foreign exchange and money markets have
been established. Simultaneously, regulatory capacity has been strengthened. Financial
reform has been gradual, but nevertheless determined.

Strength of the authors

All authors are aligned the Ethiopian project financing and financial sectors with respect to the
systems has good success story in achieving a consolidated strong record of fiscal and public
management.

The statement of the problem is well defined on the research journal of By Tiruneh Legesse;
June 2012.
The hypothesis was tested with journal titled by Zemenu Amare (2021) “Capital structure and
profitability: Panel data evidence of private banks in Ethiopia”.

The research entitled with “Financial Performance Analysis: A study on Selected Private Banks
in Ethiopia” By Wesen Legesse (2021) was well defined objective of the study, statement of the
problem, hypothesis testing and other research contents to answer the financial performance
analysis among the banks.

Weakness of the authors

The journal of research entitled with “Establishing financial markets in Ethiopia: the
environmental foundation, challenges and opportunities”: By Tiruneh Legesse; June 2012 was
not have specific hypothesis tested; therefore it‟s hard to decide on his findings.

The journal of titled with Ethiopia‟s New Financial Sector and its Regulation Tony Addison
Wider, UN University, Helsinki, Finland and Alemayehu Geda KIPPRA, Nairobi, Kenya April
2002.) has not statement of the problem and tested hypothesis.

The statement of the problem was not described with journal titled by Zemenu Amare (2021)
“Capital structure and profitability: Panel data evidence of private banks in Ethiopia”.

Some authors are not put the exact estimation of their journals; they did not put the
recommendation for the reader.

Conclusions:

The article review empirically reviewed the project fund financed and financial sectors and
performance among the Ethiopian Projects and Ethiopian private commercial banks using most
recent available data.

When it comes to challenges and prospects for establishing securities market in Ethiopia
different parties and scholars accomplished different studies in different times and came up with
different conclusions.
The government has been very aware of the structural and institutional problems that need to be
overcome for a market-based financial system to develop. This has at times provoked
disagreement with the IMF, but reform experience in Africa. It is to be hoped that other African
countries can learn from Ethiopia with its emphasis on macro-economic stability and institution
building in the financial sector. The creation of a sound financial system is crucial to transition
and reconstruction, and to raising the living standards of Ethiopia's people.

The number of commercial banks fund for projects has been increasing from time to time. The
intensive and continuous increasing competition in the financial service market creates a need for
an access to information that would allow evaluating commercial banks operating in this market.
In Ethiopia there is no adequately compiled data and bench marks to evaluate the performance of
commercial banks. The regulatory body (National Bank of Ethiopia) or other concerned bodies
have to take the responsibility.

References

Project Financing, Implementation and Control Practice: A Study on Selected Business

Organizations in Ethiopia: By Deresse Mersha Lakew; 2017.

Establishing financial markets in Ethiopia: the environmental foundation, challenges and

opportunities: By Tiruneh Legesse; June 2012.

Ethiopia‟s New Financial Sector and its Regulation Tony Addison Wider, UN University,
Helsinki, Finland and Alemayehu Geda KIPPRA, Nairobi, Kenya April 2002.

Capital structure and profitability: Panel data evidence of private banks in Ethiopia Zemenu
Amare Ayalew, August 2021.

Financial Performance Analysis: A study on Selected Private Banks in Ethiopia By Wesen

Legessa Tekatel, June 2021
Assignment 2:

i) Write driving factors for the use of PPP approach in developing countries in general
and particularly in Ethiopia.

Definition and Concepts of PPP

The concept of public-private-partnership (PPP) has been defined differently in different

contexts, and there is no broad international consensus on what constitutes a public-private
partnership (PPP). Generally it refers to a collaborative arrangement between government or the
public sector, and a private entity for better provision of public infrastructure and services. The
classical definition of public private partnership (PPP) describes it as a government service or
private business venture which is funded and operated through a partnership of government and
one or more private sector companies. In the context of the United Nations, PPP is defined as a
voluntary and collaborative relationship between various parties, both state and non-state, in
which all participants agree to work together to achieve a common purpose or specific task, and
share risks and responsibilities, resources, and benefits.

Generally a public-private partnership, or P3, is a contract between a governmental body and a

private entity, with the goal of providing some public benefit, either an asset or a service.
Public-private partnerships typically are long-term and involve large corporations on the private
side. A key element of these contracts is that the private party must take on a significant portion
of the risk because the contractually specified remuneration how much the private party
receives for its participation typically depends on performance.

According to the World Bank, PPP refers to arrangements, typically medium to long term,
between the public and private sectors whereby some of the services that fall under the
responsibilities of the public sector are provided by the private sector, with clear agreement on
shared objectives for delivery of public infrastructure and or public services. PPPs typically do
not include service contracts or turnkey construction contracts, which are categorized as public
procurement projects, neither to they include the privatization of utilities where there is a
limited ongoing role for the public sector. PPPs are different from other forms of private sector
engagement in the provision of public goods where the private sector gets involved as a
provider of goods and services to public procurement. PPPs involve long-term private sector
engagement and partnership with the public sector. The main goal of New Public Management
was to introduce the functioning principles of private firms into public administrations with the
aim of modernizing the state structure and improving the management of public enterprises. The
importance of integrating PPPs into the development policy of developing countries, elaborates
that the major goal of integrating PPPs in the development strategy is to build a society that
improves the attainment of the four values, namely efficiency, equity, sustainability and
security.

In case of Ethiopia

Decentralization in the context of Public Private Partnership denotes sharing responsibilities,

costs and revenues between Private and Public institutions. Providing public goods is
traditionally assumed to be a sole responsibility of the Public sector. In a situation where the
intentions of the Public Sector to provide public goods and Services is restrained because of
lack of financial, technological and skilled human resource, PPP is a means to transfer risks and
responsibilities to the Private sector while responding to the demand for public utilities. Thus,
Public-Private-Partnership is an instrument through which the public sector divides its authority
and responsibility with the Private sector and in which the latter is bestowed with a role in
decision making based on the right and duties captured in the contractual agreement signed. As
a means to meet theoretical objective of good governance, governments have to work with
principles of governances that promotes participation, rule of law, transparency, responsiveness,
concession oriented, equity and inclusiveness, effectiveness and efficiency and most
importantly accountability. It is therefore worth to note that these are principles which are the
foundations for the success factors in PublicPrivate-Partnership. Therefore, PPP has been
welcomed as a useful tool designed to ease financial and technical constraints of governments in
developed and developing countries instrumental in the provision of public infrastructure.

ii) State at least 10 projects that have been recently decided to be undertaken through
PPP project financing arrangements in Ethiopia.
 PPP Project Financing in Ethiopia:
1. PPP in Education Sector
2. PPP in Health Sector
 3. PPP Tourism Investment
4. PPP Agricultural Projects
5. PPP Manufacturing Projects
6. PPP Mining and Industry Projects
7. PPP Agro-Processing Projects
8. PPP Construction Projects
9. PPP Agro-Mechanization Projects
10. PPP Banks
iii) Discuss some advantages and Disadvantages (if any) of PPP arrangements.

Public-Private Partnership Benefits

Public-private partnerships offer several benefits; those benefits are listed below:

 They provide better infrastructure solutions than an initiative that is wholly public or
wholly private. Each participant does what it does best.
 They result in faster project completion and reduced delays on infrastructure projects by
including time-to-completion as a measure of performance and therefore of profit.
 A public-private partnership's return on investment (ROI) might be greater than projects
with traditional, all-private or all-government fulfillment. Innovative design and
financing approaches become available when the two entities work together.
 Risks are fully appraised early on to determine project feasibility. In this sense, the
private partner can serve as a check against unrealistic government promises or
expectations.
 The operational and project execution risks are transferred from the government to the
private participant, which usually has more experience in cost containment.
 Public-private partnerships may include early completion bonuses that further increase
efficiency. They can sometimes reduce change order costs as well.
 By increasing the efficiency of the government's investment, a P3 allows government
funds to be redirected to other important socioeconomic areas.
 The greater efficiency of P3s reduces government budgets and budget deficits.
  High-quality standards are better obtained and maintained throughout the life cycle of
the project.
 Public-private partnerships that reduce costs potentially can lead to lower taxes.

Public-Private Partnership Disadvantages

P3s also have some drawbacks; those taken as a backward are listed below:

 Every public-private partnership involves risks for the private participant, who
reasonably expects to be compensated for accepting those risks. This can increase
government costs.
 When there are only a limited number of private entities that have the capability to
complete a project, such as constructing a high-speed rail system, the relatively small
field of bidders might mean less competition and thus less cost-effective partnering.
 Profits of the projects can vary depending on the assumed risk, the level of competition,
and the complexity and scope of the project.
 If the expertise in the partnership lies heavily on the private side, the government is at an
inherent disadvantage. For example, it might be unable to accurately assess the proposed
costs.
Assignment 3:

The important concepts to be understood by financial analyst in assessing the financial feasibility
of a project by:

i) Time value of money

ii) Cost of capital
i. Time Value of Money

Understanding the Time Value of Money (TVM)

The time value of money (TVM) is an important concept to investors because a dollar on hand
today is worth more than a dollar promised in the future. The dollar on hand today can be used
to invest and earn interest or capital gains. A dollar promised in the future is actually worth less
than a dollar today because of inflation.

Provided money can earn interest, this core principle of finance holds that any amount of money
is worth more the sooner it is received. At the most basic level, the time value of money
demonstrates that, all things being equal, it is better to have money now rather than later.

Investors prefer to receive money today rather than the same amount of money in the future
because a sum of money, once invested, grows over time. For example, money deposited into a
savings account earns interest. Over time, the interest is added to the principal, earning more
interest. That's the power of compounding interest.

If it is not invested, the value of the money erodes over time. If you hide $1,000 in a mattress
for three years, you will lose the additional money it could have earned over that time if
invested. It will have even less buying power when you retrieve it because inflation has reduced
its value.

As another example, say you have the option of receiving $10,000 now or $10,000 two years
from now. Despite the equal face value, $10,000 today has more value and utility than it will
two years from now due to the opportunity costs associated with the delay.

In other words, a payment delayed is an opportunity missed.

The Time Value of Money is an important concept in financial management. The Time Value of
Money (TVM) includes the concepts of future value and discounted value. It is mandatory for a
financial professional to know and operate the specific techniques of TVM.

Formula for Time Value of Money

Depending on the exact situation, the formula for the time value of money may change slightly.
For example, in the case of annuity or perpetuity payments, the generalized formula has
additional or fewer factors. But in general, the most fundamental TVM formula takes into
account the following variables:

FV = PV x [ 1 + (i / n) ] (n x t)

FV = Future value of money

PV = Present value of money

i = interest rate

n = number of compounding periods per year

t = number of years

How is time value of money used by a financial analyst?

Time value of money formulas is used to calculate the future value of a sum of money, such as
money in a savings account, money market fund, or certificate of deposit. It is used to calculate
the present value of both a lump-sum of money or a stream of cash flows that you'll receive
overtime.

What is the role of time value of money in finance?

The time value of money (TVM) is an important concept to investors because a dollar on hand
today is worth more than a dollar promised in the future. ... Provided money can earn interest,
this core principle of finance holds that any amount of money is worth more the sooner it is
received.
 i. Cost of Capital

The concept of cost of capital helps the management to determine optimum capital
structure along with ideal debt-equity ratio, based on minimum cost. This criterion is help for
the approval of investment projects. It is helpful in the assessment of the financial efficiency of
higher management. The cost of capital means that rate of return, which a company has to earn
on investments to maintain its value intact. In other words, the cost of capital is the minimum
rate of return, which maintains the per-share market price (at the current level).

The importance of cost of capital in financial decisions

The importance of cost of capital is that it is used to evaluate new project of company and
allows the calculations to be easy so that it has minimum return that investor expect for
providing investment to the company. It has such an importance in financial decision making.

The other its importance may be understood as follows:

1. The concept of cost of capital helps the management to determine optimum capital
structure along with ideal debt-equity ratio, based on minimum cost.
2. These criteria for the approval of investment projects.
3. It is helpful in the assessment of the financial efficiency of higher management.
4. The decision regarding the use of a particular source at any particular time may be
done by the comparative study of the costs of various sources to meet capital
requirements.
5. The cost of capital helps keep the control of ownership.
6. Decisions regarding the quantity of working capital, selection of its sources and
dividend policy may be taken, on its basis.
7. The investors get information regarding expected income and implicit risks of the
firm, through the cost of capital.

If the capital cost of any institution is high, it will imply that the present rate of income is low,
business involves risks and the capital structure is imbalanced. In such conditions, investors
expect higher rates of Return.
Why is the importance of Cost of Capital in Finance?
Although being a disputed matter in the financial world, the cost of capital is an important
measure that helps the managers in decision-making in the correct manner. The following are the
reasons why the cost of capital is an important measure.

Evaluation of Investment

The cost of capital is used in both NPV and IRR methods of investment evaluation.

 In the NPV method, a project is accepted if it has a positive NPV. The project‟s NPV is
usually calculated by discounting its cash flows by the cost of capital. In this sense, the
cost of capital is the discount rate used to check the usability of a project.

 In the IRR method, the project is accepted if it has a greater internal rate of return than
the cost of capital. This rate of return is known as the cut-off rate.

 A project with a positive NPV makes a net contribution to shareholders‟ wealth. When
the NPV is zero, it means that the project has yielded a return just equal to the cost of
capital. In the case of zero NPV, the project makes no effect on shareholders‟ wealth.

The cost of capital is the minimum rate of return on the investment project that keeps the net
wealth of shareholders unchanged. Therefore, the cost of capital is an important part of
evaluating an investment in the most profound manner.

Designing the Debt Policy

As debt helps to minimize the taxes, a company's debt policy should be formed by taking the
right amount of debt.

 Debts exceeding the limits can cause harm to shareholders‟ wealth, as it increases the
chances of default. Therefore, in building the project‟s capital structure, an optimized
debt inclusion is required to make an optimum impact on the investment policy.

 In general, the proportion of debt and equity is a determinant of a firm‟s value that is
required for maximizing the value by minimizing the cost of capital.

 The cost of capital also helps in determining the methods of investments in some cases.
For example, costs may be used to compare between lease and borrowing.
  The other important factors are control and risks of a project where the cost of capital can
help the top management to choose between projects.

Performance Appraisal

The cost of the capital policy can be used to evaluate the performance of the top management. To
do so, a comparison of the actual profitability of the project with the overall cost of capital, and
the appraisal of actual costs incurred in raising the funds may be used. Performance appraisal is
one of the most important functions of the cost of capital calculations.