WORKING CAPITAL MANAGEMENT IN PPP-BOT PROJECTS

Department of Civil Engineering

Indian Institute of Technology (IIT) Delhi

Under the Guidance of Dr. K.N.JHA

ByVIKALP AWASTHI

2010CEC3853

Introduction Concept and Issues in PPP-BOT Literature review Objectives Plan of Work References

CONTENT

Definition According to Guttmann & Dougall-

“Excess of current assets over current liabilities”.

According to Park and Gladson-

“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.

According to Khan and Jain, The goal of working capital management is to

manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. If firm cannot maintain a satisfactory level of working capital it is likely to become insolvent and may be forced to bankruptcy, in case of infrastructure project it becomes crucial due to level of risk and longer gestation period.

Introduction

Key Terms

CONCEPT OF WORKING CAPITAL

Balance Sheet ConceptOperating Cycle Concept

There are two interpretations of working capital under the balance sheet concept.

• Excess of current assets over current liabilities (Net working capital)

• Gross or total current assets.

The definition is meaningful only as an

indication of the firm’s current solvency

in repaying its creditors. ◦ When firms speak of shortage of working

capital they in fact possibly imply scarcity of cash resources

Accounts Payable

Cash

RawMaterials

W I P

Finished Goods

AccountsReceivable

SALES

Two possible interpretations• Balance sheet concept• Operating cycle concept

A Public-Private Partnership (PPP) constitutes a sustained collaborative effort between the public sector (government agencies) and private enterprises to achieve a common objective (e.g., the road project) while they pursue their own individual interests.

BOT Projects – According to Kansal and Gupta (1999), BOT is a device that helps the government to develop infrastructure projects by transferring all the risk and responsibility to private sector, it requires appropriate allocation of risk and assigning risk to those best placed to control them.

BOT Projects in Indian Scenario

◦ Budgetary allocations are not sufficient◦ NHAI Act has been amended to levy fee on selected road networks ◦ Private firms can participate in constructing those networks ◦ Global tenders are invited by NHAI for building specific segments on PPP-BOT

basis

CONCEPT OF PPP-BOT

WORKING CAPITAL ISSUES According to Gupta ( 2007), Inappropriate risk allocation due to issues like land

acquisition problems, delayed environmental clearances is a major problem in projects. The project has gestation period of generally 20 years which is too long for blocking the

investment.

Problem faced by construction companies Shortage of working capital Slow and non moving stocks Funds locked in work in progress Requirement of high growth company Reduction in interest rates

According to Parikh and Samson ( 1999) the following hurdles are encountered arranging finances for BOT projects.

Lack of Prime Security The Escrow Account Placement of Equity Back-ended Cash flows

LITERATURE REVIEW

Cheung and Chang (2011) evaluated a model suitable for assessing the suitability of PPP by studying their attractive and negative factors by taking a survey of Industrial practitioners.

Respondents were asked to rank the importance of 15 attractive and 13 negative factors for adopting PPP. The weights for these factors formed the basis of evaluation model. Calculating the total weights negative factors outweighed attractive factors by 27%.

The model presented a system for users to analyze whether potential public projects

should be procured by PPP or not.

Likert Scale : 1- Least Important , 5-Most Important

Cheung and Chang (2011)

Wibowo and kochendoerfer (2011) presented a project selection strategy under a chance-constrained goal programming framework for Indonesian PPP-BOT industry.

Objective ◦ Brings maximum welfare gain to the economy as a whole, ◦ Maximum total net change in financial NPV◦ Putting government at the lowest fiscal risk for a given budget constraint.

The constraints included budget constraint, financial impact, economic constraint annual fiscal risk constraint .

The ultimate objective was to minimize the unwanted deviational variable.

LITERATURE REVIEW

Wibowo1 and kochendoerfer (2011)

Mahalingam (2010), emphasized that India must invest more than $150 billion over the next five years in the development of urban infrastructure.

Pointed out the role of PPP as Urban bodies lack financial resources . Used a combination of case studies and archival sources to elaborate five important

barriers faced by PPP projects face. Five points included Distrust, lack of willingness, absence of enabling institutional

environment for PPP , lack of project preparation strategy, and poorly designed and structured PPP projects.

Each case study involved interviews with government officials, private project sponsor representatives, stakeholders from the local communities, project consultants and transactions advisors as well as a study of project documents such as the concession agreements.

LITERATURE REVIEW

Mahalingam (2010)

Zhengbiao and Minjie (2008) applied fuzzy real option in the transportation infrastructure project s where investment is large and have long revenue cycles.

The transport infrastructure investments are divided into two or more steps to invest. Thus the question that management must answer for a deferrable investment opportunity is “if we postpone it up to time period T what is the project valuation?”.

They emphasized that due to the uncertainty of the infrastructure, the BOT project and the limitation of traditional investment decision on BOT projects are problematic.

They accentuated the importance of fuzzy real option for judging and estimating future cash flows

LITERATURE REVIEW

Zhengbiao and Minjie (2008)

Attarzadeh et al. (2011) used stochastic an probabilistic methods, tools and software in real cases to show their role in lifecycle risk assessment of long term infrastructure projects namely PPP-BOT projects and compared them with current methods.

Due to high level of contingencies and uncertainties involved it becomes essential to incorporate all these methods .

They infer that in order to manage well all risks and uncertainties the model shown below which is considered in the dynamic environment is the best way.

LITERATURE REVIEW

Attarzadeh et al (2011)

LITERATURE REVIEW

Jiang & zongh (2010) emphasized on the application of Supply Chain management by forming a conceptual model based on it to regulate working capital .

An enterprise should form a strategic alliance with external supply enterprises, while internally enhance the use of ideas of supply chain, to do better on inventory management, purchasing management, vendor management and customers relationship management, to strengthen working capital management in the supply chain internally and externally, and balance the relationship between capital inflows and outflows, to achieve optimal operation efficiency to meet customer's needs

Integrated study of Working capital management specially for PPP-BOT project is needed as it represent unique structure of project and involves complex cash flows.

Adequacy of Matching principle of financing policy with respects to the PPP-BOT kind of project has to be evaluated and to be compared with current policies of financing such projects.

Provision of security to the lenders by providing a solution from combining ‘step-in-right’ and Escrow account.

Forming a new policy for funding high growth company involved in PPP-BOT projects to meet the higher current assets requirements which is higher than their growth of sales.

Evaluation of different methodologies and their accuracy to forecast traffic on PPP-BOT projects.

Impact of back ended cash flows ( its increase or decrease ) on profitability of project needs to be evaluated in concept stage of such project to evaluate contingencies required in financing the project.

RESEARCH GAP

OBJECTIVE

Design an Integrated system which projects the need of cash flow in detail during the construction period

Develop a system for working out alternate ways of increasing cash flows to reduce capital requirement for PPP-BOT projects

Comparison of various Working Capital policies and Techniques and their Impact

PLAN OF WORK

Anand, M. (2001), “Working Capital Performance of Corporate India: an Empirical Survey” Management and Accounting research (April-June 2001) pp 35-43.

Bangia, N. (2007), “ Viability Gap Funding” Indian infrastructure, (February 2007) pp 66-69.

Bangia, N. (2007), “PPP Roadblock” Indian Infrastructure, (June 2007) pp 62-63.

Chandra, P. (2007), “Financial Management” , 6th edition, Tata McGraw-hill Publishing Company Limited, New Delhi.

Debasish, S. and Mallik, A. (1998), “Working Capital and profitability” The management accountant (Novemeber 1998) pp 805-806.

Kansal, R. and Gupta M. C. (2007), “Government Role in BOT Projects” The ICFAI journal of infrastructure, (Volume 5,No. 2), pp 79-88.

REFERENCES

“Jiang,Q. & Zhong, W.(2010)” International Conference on Future Information Technology and Management Engineering , 2010.

“Afza, T. and Nazir,M.S. (2011) “Working Capital Management Efficiency of Cement Sector of Pakistan”,2011.

“Padachi,K. (2006) “Trends in Working Capital Management and its Impact on Firms” Performance: An Analysis of Mauritian Small Manufacturing Firms,2011.

“Shelton, F.Jr., CPA, MBA, CVA (2002) “Working Capital and the Construction Industry”,journal of construction accounting and taxation November/December 2002

REFERENCES

THANK YOU