The relationship between Finance and Engineering is a simple one. Engineering costs money and finance provides it. It is easy for an engineer to become focused on the technical detail of their profession, particularly when a project is technically large or innovative provided that it is well managed to ensure its sustainability.
Sustainability can not be measured without a proper Finance management system, which ensures effective use of the firms resources so as to help in achieving its objectives, fulfil commitments agreed on, become more accountable to stakeholders and gain the respect and confidence of funding agencies, partners and beneficiaries.
Finance Management is concerned with management of firms financial resources which are directed according to some budget put in place. Budget guides the day to day operations of the firm’s projects through various strategies put in place to make sure that targets aspired are efficiently achieved. This helps to guide on maximazation of income while minimizing on expenses significantly and thus producing best positive results.
To make this possible proper Record keeping is essential for all projects run by a firm. This helps to keep track of all the day to day transactions which in turn helps to manage the firm efficiently by understanding how projects are doing by keeping track of all transactions, cash flow and tax obligations.
Most firms don’t see the need to keep proper transactions records which in turn creates management challenges. This makes the rate of project failure to be very high due to lack of proper information to rely on for management or taxation purposes.
Keeping proper records can be daunting at first. The key is to break things down into a series of straight forward, manageable tasks. Then you can access and update them on a regular basis, rather than letting the paper work pile up. These records can be maintained manually, computerized on a certain system or kept online. The system used should be easy to operate and complement the projects of the firm. Documents that contain details of payments, receipts, credit purchases and sales, bank statements, assets and liabilities should be filled appropriately. If a receipt for an expense or income is not obtained a note of the same should be recorded.
It’s necessary to design and implement accounting system that ensures that proper books of accounts are maintained and prepared according to the principles laid down. This ensures that proper financial statements are produced which state a true and fair view and that actual amounts incurred reflect budget and strategies put in place.
Taxation is a key factor of getting accounts done right which is used for tax calculations. Firms are required to file and pay for various taxes to the relevant authority (Kenya Revenue Authority) in accordance to the laid down guidelines. These taxes include but not limited to pay as you earn, Value added tax, Withholding tax and Vat, custom and excise duty and corporate tax. As it is stipulated by tax Act, It is important to keep project business records where Authorities may want to proof transactions from past records. These records will include but not limited to copies of all sales invoices, original purchase invoices, credit and debit notes, custom entries, audited accounts, cash books, bank statements, copies of ETR monthly print outs, tax pay in slips, summary of statutory incurred.
Firms should do tax planning which is necessary to help reduce tax exposure while restricting themselves within the law. Noncompliance with tax regulations can be expensive and frustrating at long run. Tax planning management helps the firm;
- To manage expenses claimable for tax purposes which reduces tax obligations.
- To have readily available evidence of transactions should Kenya Revenue Authority audit taxes.
- To plan for tax and tax payments incurred while doing business transactions.
- To avoid over or under payments of taxes by knowing the correct taxes to be paid as required.
- To identify if Projects are liable for VAT payment and also withholding payments.
- To ensure efficiency in tax returns.
Also project records are maintained for financial management purposes. This helps the firm achieve its objectives efficiently since necessary reports are done to guide and monitor actual results and thus enable comparisons with the budget and strategies put in place.
Therefore this helps management;
- To prepare accounts and there after audited accounts thus financial statements which reflects a true and fair view of the firm’s projects.
- To ensure timely and accurate management financial reports. Thus manage projects with ease where information needed is readily available.
- To lay down strategic plans which ensures long and short term guidelines for projects thus ensures objectives are effectively achieved.
- To identify the strength and weaknesses of the projects and thus know how to handle them.
- To identify internal controls to be put in place to safeguard firm’s assets and liabilities.
- To manage changes for instance environment, political etc. and thus improvement on the projects.
- To create credit control policies to ensure efficient working capital thus proper cash flow.
- To make capital budgeting decisions which are optimal and manageable.
- To determine firms current net worth thus effective projects valuation for sale or purchase. Also makes it easier to secure funding from various agencies.
- To identify if projects has made profit or a loss thus ease in distributing profits to shareholders as dividend or partners as a share of profits as stated in the deed.
MEGA PROJECT FUNDING IN AFRICA
The importance of infrastructure in an economy cannot be over-emphasized. It is the bedrock upon which all other economic development initiatives spring, for instance, if an economy is primarily driven by Agriculture, the soils could be fertile, the rains could be abundant and general weather conditions favorable but if perishable farm produce cannot be moved efficiently and economically to the markets due to bad roads aggravated by heavy rains during the wet season, bumper harvest or none, the famers will still not be able to literally optimally reap where they sowed. In the same vein, where an economy is dependent on extractive industries, e.g. oil or coal, the crude extracts must be transported to the factories’ locations or where these are meant to be exported outside the country the gap between the extraction site and the ports of exit must have reliable infrastructure for transportation. This will include, roads, bridges, railway lines, airports and sea ports etc. All these projects are without an exception capital intensive and where African countries are still grappling with issues like staggering local and foreign debt, inflated wage bills for civil servants, disease and corruption etc., funding for infrastructural projects is always an extra burden on their already strained budgets. The countries therefor have to source funds from various quarters.
Traditionally, the go-to guys were the Bretton woods’ institutions i.e. IMF and good old-World Bank and western governments. These two always bailed African countries out of funding problems through, grants and loans. For a long time, these ruled the roost in funding of projects from roads, ports, airports, hospitals, schools and health programs. Depending on who you were ask, going for funding from these was a necessary evil that was more necessary than evil. This is due to the fact that the aid came with conditionalities most of which were frowned upon by citizens of the countries who found themselves on the receiving end of business. These conditionalities, popularly known as structural adjustment programs included but not limited to forced reduction of civil workforce, raising of taxes, revaluation of currency, wage cuts, elimination of subsidies to various sectors of the economy, restructuring of foreign debts, restrictions as to the usage of funds provided described.
All these had a direct negative effect on the general citizenry and were highly unpopular. Besides, it has been argued in certain quarters and not without merit that the aid availability was also dependent on who was in power in these countries and especially their leaning whenever world political conditions called for them to choose sides. For instance, during the cold war days, all countries that sided with Russia/USSR against the US were hard done by their decision as the US or Russia looked at them as enemies by their action of straight up or deemed support of the opposing sides. Some of the civil wars fought in African countries have been said to have had their genesis from these foreign policy alignments whereby if the incumbent leans on one side and the opposition the other, the arguments at times escalated to wars and the super-powers had as such to take sides further aggravating domestic conflicts. Put succinctly, these benefactors can be likened to a shopkeeper who gives you groceries on credit but before you get the groceries, he gives you a checklist of conditions that you must fulfill e.g. you must belong to his clan, you must sell the milk from your cows to a certain dairy company, you must take your kids to a certain school etc. and more often than not, the grocer has a direct or indirect interest in the said investments. This means his is a win-win position. He owns the borrower lock, stock and barrel. The relationship between borrower and lender was never on equal standing. It had all the hallmarks of a patron-beneficiary relation where the borrower was guaranteed to always pull the shortest straw. The adage ‘beggars are not choosers’ cannot be better explained. The popularity of western aid has waned over time owing to the above and was at an all-time low towards the end of the 20th century but in more recent times we have seen hugely successful Eurobond issues by African countries e.g. Kenya that raised 202bn recently on an infrastructure bond floated in London Stock exchange which is a sign that even though the rate of borrowing is falling, the west is still a force to reckon with and important development partner.
Enter China and other Eastern powers e.g. Japan and Malaysia. Upon realization of the unrealistic nature of some of the conditionalities tied to western aid, an alternative source of funds or rather any alternative was welcome to African countries. The rise of countries like China and Japan put paid to the hitherto unchallenged hegemony of the likes of USA, Britain, Germany, France as well as the Bretton woods institutions.
These new boys on the block especially China were always open for business and never bothered to know who was in power in which country or how many journalists and political activists the despot from which banana republic lynched or locked up recently. The populous nation of China ensured a seemingly inexhaustible supply of labor meaning any serious corporate that could afford to set up a sweat shop in China had at its disposal more than enough source of manpower at next to zero cost compared to their country of origin. China’s no-questions-asked policy on foreign direct investments saw big manufacturing industries relocating to China and closing shop in their mother countries leaving behind impoverished communities and at times whole cities converted into ghost towns. The resultant boom in manufacturing industry ensured a steady flow of revenues from the exports as well as taxes from these investments. This had China’s economy growing consistently in double digits and ramped up its balance of payment to so favorable a position that they made no bones about undertaking seriously capital-intensive projects domestically as well as in addresses beyond the great wall.
According to African Business magazine, a reliably quotable authority in matters African economics, as at 2013, China had overtaken the US to become Africa’s single biggest trading partner accounting for 13.9% of all African trade vis a vis the US’ 13.1%.
However, the countries in the European Union at that point remained Africa’s biggest trading partners. According to ‘The white paper on China’s Foreign aid’-which is the Chinese blue print enumerating China’s aid policy in depth, as at 2009, 45.7% of all aid from China went to Africa as opposed to 12.7% going to Latin America and the Caribbean. Out of this, 61% went to funding of large infrastructural projects. These numbers are impressive but depending on who you ask, this is just the petals to the rose. The thorns are real and still abound. Cases have been reported of countries that took up loans from China, for projects that have turned into huge elephants whereby China has ended up taking them up with fresh agreements entered for management/operation of these for agreed periods after which these are meant to be handed back to the government e.g. the famous Hambantota port in Sri Lanka or the rumored take-over of Kenneth Kaunda Airport in Zambia also by China. The IMF and THE World Bank have issued warnings as to the ‘repayability’ of some of these loans by African countries with their economic growth rate numbers and current GDPs in mind. These concerns have been dismissed from some quarters as hollow and alarmist but from a general perspective and given China’s ravenous appetite for resources in Africa, the sentiments need to be revisited to ensure they are not driven by emotion and rhetoric.
There just could be an element of fire in the smoke. One economist friend of mine joked that he suspects Chinese engineers set mines underneath every road, every bridge and every rail they build in Africa so that when the indebted country is held unable to repay the loans and China doesn’t deem the project important, they will just let the mines go off, destroy the road or bridge or railway and write the debt off their books. I called it a figment of his fertile imagination but a great movie idea.
The newest kid on the block is the new-fangled PPP an abbreviation used to denote Public-Private- Partnerships. As a source of funding, this is where governments seek long-term partnerships with private entities e.g. banks or private construction companies in undertaking of capital-intensive infrastructural projects whereby the governments contract these partners to bid and design, build, finance, operate, maintain. One entity or a combination will be enlisted to do some or all of the above activities. These have been criticized because of their tendency to raise the cost of debt to smaller entities as the banks would rather lend to the government where they are assured of a return on their investments to persons and private individuals whose going concern is at the mercy of the prevalent economic conditions at any one point. These have as such been not so successful. For instance, In Kenya, the govt announced an ambitious plan to tarmac 10,000km of road through this vehicle based on finance, design, build and maintain model.
The uptake by the local companies have not been so encouraging and has been hampered by allegations of corruption in the road ministry which necessitated the sacking of a cabinet secretary and his principal secretary in the ministry of roads alongside general lack of interest by the private sector. The budget outlay for the project was Kshs 178bn but only two banks took it up and these only bid for only 26% of the total project value about 48bn Shillings. This has forced the government to move the projected deadlines on the projects as well as change figures in terms of the normal budgetary allocation towards infrastructural development upwards due to the mentioned low appetite of private enterprise to take up any substantial stake in the PPP. It is also alleged the project has also been delayed by lack of comprehension of the intrinsic mechanics of the idea as initially floated by the government it being the first of its kind and magnitude in the country.
This is a relatively new concept in project financing and there may not be sufficient data on which to base extent of failure in success. The governments however must actively involve the corporates -who are their intended customers to create deep awareness of this model and highlight its successes in other parts of the world to whet the appetites for these.