Group Project

Course: FIN-444, Section: 02

Submitted To:

Date of Submission:
28th December, 2017

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Introduction:

Bangladesh is 9th largest populous country in the world which means the task of
sustainable. Bangladesh has the 9 resource management is difficult for this huge
population. With the increase in population as well as industrialization the demand of
electricity is increasing day by day. According to REB (Bangladesh Rural Electrification
Board), there is around 1000-1500 MW electricity shortage in a year, which is immense.
The worsening gap between demand and supply of electricity as manifested by frequent
load shedding throughout the country, has pressurized the government to take urgent
measures to handle the situation. Therefore, the Government has decided to set up new
Power Plants of different types and different capacities to quickly add megawatts (MW)
of generation capacity. Currently in Bangladesh the source of power generation is given
below:
Source Percentage
Coal 50%

Gas 25%

Renewable energy 20%

Oil 5%

The present project is in response to the power requirement and need in Bangladesh. It
attempts to perform in a manner so that through contributing to the power sector need
and operating in an environmentally and socially responsive manner, this contributes
towards overall development of the country. Hence, our company is a US based MNC
company in the power sector industry which is interested to invest in Bangladesh.

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Operational Planning:
An Operational Plan is a detailed plan used to provide a clear picture of how a team,
section or department will contribute to the achievement of the organization’s strategic
goals. It is the process of linking strategic goals and objectives to tactical goals and
objectives. It is also a plan to manage day to day operations of the power plant. We
would like to start our power plant in Sylhet. The reason behind this location selection is
Sylhet has several gas field. So we will have more chance of getting undisrupted gas
supply in Sylhet. In addition, there are widespread free areas in Sylhet which will favor
us. As we will need a huge area of approximately 20 acres to build our plant and office
space for our corporation.

We are trying to establish a duel fuel power plant as in Bangladesh the supply of gas is
starting to run low. So in case we don’t get any supply of gas we can use liquefied
natural gas to generate electricity. Even though it will increase our production cost.

Some day to day operations include:

• Simple cycle mode to generate electricity

• Running 2 gas turbine generators, 2 heat recovery steam generators and 1 steam
turbine generators with net capacity 335 MW on gas and 305 MW on HFO in
combined cycle operation and net capacity 220 MW on gas and 203 MW
capacities on fuel at different conditions.
• Overall managing and ensuring efficiency of the machines, employees and plant.
• Maintaining proper safety standards.

Since our company is American based MNC, therefore, each year we have to share a certain
amount of our profit from the subsidiary company to the parent company. For our power
sector company, we can send 25 percent of our yearly profit earned to our parent company.
This is a lot of money transferring from one country to another so our money can be
exposed to the transaction exposure. Transaction Exposure measures how individual cash
flow we expect from investment will fluctuate over a period of time based on our forecast. It
is faced by the organizations which are involved in international trade especially when they
enter into the financial obligations. The risk which is faced by the companies is about the
changes occurring in the currency exchange rates after they have entered into trade
obligations in the international market. Hence, their day to day operations are to be managed
in such a way that it minimizes risk and maximizes profit.
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Since we are an MNC, so we are engaging in international trade and we are exposed to
this risk. So we need an appropriate strategy to minimize this type of risk and do proper
hedging. A money market hedge which is a short term hedging will help us with this. A
money market hedge helps a domestic company reduce its currency risk when doing
business with a foreign company. It allows the domestic company to lock in the value of
its partner’s currency (in the domestic company’s currency) in advance of an anticipated
transaction. So we can lock in our parent company’s currency and borrow money and
lend them in order to avoid exchange risk in future. There would be lot of foreign
monetary transactions between Bangladesh and the parent company abroad.

Therefore, our major risk factor is exchange rate fluctuation risk. So, we will hedge in
the money market to minimize our risk.

Financing Operation:
We will finance our company through debt and equity instrument. Bangladesh is an
investment friendly country; we will go for debt financing mostly. Bangladesh's total
installed electricity generation capacity (including captive power) was 15,821 MW as of
October 2017.But our country is currently producing around 8200-10000 mw of power
output or electricity but our forecasted maximum demand is more than 12644 MW by the
end of 2017. It is expected to increase around 10% per year. Here, demand is comparatively
high. So we will be able to retain a good amount of revenue with which we will be able to
make the loan payments. Debt financing has certain advantages. The lending institution has
no control over how one runs the company, and it has no ownership. Once the loan has been
paid back, the relationship with the lender ends. That is especially important as the business
becomes more valuable. The interest paid on debt financing is tax deductible as a business
expense, and finally, the monthly payment as well as the breakdown of the payments is a
known expense that can be accurately included in the forecasting models. However, debt
financing has some downsides too. To make loan payment we have to maintain cash flow.
Or else, we will be subject to greater credit risk. We need to maintain a steady cash flow if
we want to pay our interest timely.

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We will take 20 percent of our total investment from our parent country and we can issue
equity share in name of the local company limited on Bangladeshi market to raise money
worth 20 percent of our investment so this makes 40 percent of total investment from equity
investment and for the rest of 60 percent of our investment, we can take loans from world
bank or ADB with the help of Bangladesh government. We are following the financial plan
of Meghnaghat Power Plant which has almost 36% equity and 64% of debt.

We may face difficulty taking the loan from bank because power sector is very sensitive
but it is a highly potential sector too. Hence, we will try to take project loan from local
banks too. So this will be our investment structure: 40 percent equity investment and 60
percent debt financing. Our main challenge will be to form a purchasing power
agreement with BPDB to sell our electricity at a fixed rate which will be profitable for
us. Forecasted demand for 5 years is given below:

Year Peak Demand(MW)

2018 14,014

2019 15,527

2020 17,304

2021 18,838

2022 20443

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Government Facilities and Restriction in Power Sector:

Facilities:

• Exemption from corporate income tax for a period of 15 years.

• Allowed to import plant and equipment and spare parts up to a maximum of ten
percent (10%) of the original value of total plant and equipment within a period of
twelve (12) years of commercial operation without payment of customs duties, VAT
and any other surcharges as well as import permit fee except for indigenously
produced equipment manufactured according to international standards.
• Repatriation of equity along with dividends allowed freely.

• Exemption from income tax for foreign lenders to such companies.

• The foreign investors will be free to enter into joint ventures but this is optional
and not mandatory.
• Tax exemption on royalties, technical know-how and technical assistance fees,
and facilities for their repatriation.
• Tax exemption on interest on foreign loans.

• Tax exemption on capital gains from transfer of shares by the investing company.

• Avoidance of double taxation case of foreign investors on the basis of bilateral

agreements.
• Exemption of income tax for up to three years for the expatriate personnel
employed under the approved industry.
• Remittance of up to 50% of salary of the foreigners employed in Bangladesh and
facilities for repatriation of their savings and retirement benefits at the time of
their return.
• No restrictions on issuance of work permits to project related foreign nationals
and employees.
• Facilities for repatriation of invested capital, profits and dividends.

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Restriction:

• Investors in power sector must seek approval from the corresponding Government
ministers and the ministers often require unnecessary licenses and permissions
• Free repatriation of profits is allowed and profits are almost fully convertible on
the current account; however, companies report that the procedures for
repatriation of foreign currency are lengthy and cumbersome.
• The Board of Investment may need to approve repatriation of royalties and other
fees
• A fundamental restriction to investment in Bangladesh is a weak and slow legal
system in which the enforceability of contracts is uncertain.
• The ability of the Bangladeshi judicial system to enforce its own awards is weak

• Many laws affecting investment in Bangladesh are old and outdated

• Outdated real property laws and poor record-keeping systems can complicate
land and property transactions
• Documents affecting title to real property are often not registered, complicating
transfer of ownership and collateral agreements.
• The Government has limited resources for IPR protection

• Policy and regulations in Bangladesh are often not clear, consistent, or publicized.

• Bangladesh faces a system (power) loss often and more than 40% of the gross
power generation probing with the lowest per capita power consumption and
network coverage of electrification among developing country.

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Measures for Forecasting:

Forecasting exchange rates while operating in Bangladesh is a crucial task for every
MNC. Basically two prime objectives are available in this scenario which justifies the
necessity of forecasting exchange rates for our US based MNC. These objectives are:

Capital Budgeting Decisions: At the point when an MNC's parent assesses whether to
put funds in a remote venture, the firm considers that the venture may periodically
require the exchange of currencies. The capital planning analysis can be finished just
when all assessed cash flows are allotted into the parent's local currencies. Before
investing in the power sector of Bangladesh, we need to identify the required
components of fixed assets and their allocated funds. To determine the amount of
required funds, forecasting the exchange rates is required in the first place.

Earnings Assessment: Maybe this is the most critical goal of determining forecasting
exchange rates for our MNC on the grounds that managing the choice of reinvesting in
extension exercises requires the pattern of exchange rates in the foreseeable future. As
long as the demand condition in the power sector is very favorable, expansion would be
a very good idea to increase the profitability in the long run. But if the value of BDT is
expected to weaken against USD, then profit repatriation is a more important concern
than expanding in the host country. As BDT loses its value against USD, the measure of
benefit which would change over into USD will be less and consequently the greater
part of the MNC loses enthusiasm for growing operations.

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Techniques to be used:

We are proposing a mixed approach to forecast the exchange rates as we all know technical
forecasting is not that useful for MNC as it focuses on short term speculation. In the mixed
forecasting approach, we will emphasize more on the fundamental methods of forecasting as
the economic factors play a huge role for this power generation business. One of the most
important economic variables for this business is the price of input that is price of natural
gas. At the same time, we need to consider the availability of production inputs and labor
capital. Furthermore, we can use the theory of Purchasing Power Parity
(PPP) to specify the relationship between the inflation differential of USA and Bangladesh
and the exchange rate. Recall that according to PPP, the percentage change in the foreign
currency’s value (e) over a period should reflect the differences between the Home
Inflation rate (HI) and the Foreign Inflation rate (FI) over that period.

The U.S. inflation rate was to be 2.1 percent in the year 2016, while the Bangladeshi
inflation rate was 5.7 percent. According to PPP, the Bangladeshi taka’s exchange rate
should change as follows:

Ef= 1+Ius/1+IF -1

= 1.021/1.057 -1

= - 3.41%

This forecast of the percentage change in the American dollar can be applied to its
existing spot rate to forecast the future spot rate at the end of one year. If the existing
spot rate (St) of the Bangladeshi taka is $0.012075107, the spot rate at the end of one
year, E (St+1), was $0.0124 calculated as follows: E (St+1) = St (1 + ef)

= $0.012075107 [1 + (-0.0341)]

= $0.011663345
Along with the fundamental forecasting techniques, we will also use market based
forecasting techniques to determine the expected exchange rates in the future. Current
spot rate may be used as a forecast of the spot rate that will exist on a future date. To see
why the spot rate can be a useful market-based forecast, we assume that the Bangladeshi

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taka is expected to appreciate against the dollar in the very near future based on the
trend of last five years.

This expectation will encourage speculators to buy the taka with U.S. dollars today in
anticipation of its appreciation, and these purchases can force the taka’s value up
immediately. Conversely, if BDT is expected to depreciate against the dollar,
speculators will sell off BDT now, hoping to purchase them back at a lower price after
they decline in value. Such actions can force the taka to depreciate immediately. Thus,
the current value of the taka should reflect the expectation of the taka’s value in the very
near future. Our MNC can use the spot rate to forecast since it represents the market’s
expectation of the spot rate in the near future.

Conclusion:

Power is the prime mover of any economy. Any big push of the economy would need
uninterrupted power supply. The provision of adequate and reliable supply of electricity at a
reasonable cost is a prerequisite to attain the goal of being a middle income country by
2021. The government is working relentlessly to increase the country’s capacity to generate
required power. However, the focus of short term highly expensive power supply based on
rental and quick rental power project need to change and the government need to look for
low cost sustainable projects for generation of power. Moreover, uncertainly regarding
extension of power supply agreements remains a key concern for all the rental and quick
rental power projects to continue as a going concern. Even country like India is selling
electricity in Bangladesh with higher price just for short term as well sized projects. So
MNCs from developed countries like USA should grab the chance for investing or

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doing business in Bangladesh in power sectors. Even if they invest for short-term
projects, both Bangladesh and the MNCs will be benefitted.

References:
• http://www.bpdb.gov.bd/bpdb/index.php?option=com_content&view=article&id
=12&Itemid=126
• http://edra.energy/south-asia

• http://www.summitgroupbd.com/index.php?option=com_content&view=article
&id=1680&Itemid=575

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