1. Introduction Introduction: “The Kalimantan Paper Project” which was introduced by Ibrahim Hanaffi, a prominent Indonesion industrialist. He took this project on hand but the fact was that lack of financial position creates a barrier to fulfill this project. For that, on April 1, 1988, Ibrahim sent a request to three country's prominent bank (such as Deutsche Handelsbank AG of West Germany, the Metropolitan Bank of New York and the Kamakura Bank of Japan) and arranged a discussion session. The main aim of this discussion was within the end of June,each bank should be prepared enough to offer indicative terms for making funds available to the project with loan signing. Ibrahim also got support from the Indonesian Ministry of Finance(MOF) and the bank of Surabaya. Product of the Project Ibrahim Hanaffi wanted to produce high quality paper . Management: Analysis the Economy: Economy is determined by country's GDP. So, the most important factor is population of Indonesia. Indonesia is the largest islamic populated country in the world. It has more than 13000 islands and considered as a wide diversity country in terms of culture. Many ethnic groups are seen including chinese, Indians,Arabs,Micronesians, Malay and Melanesiam. Among those, Malay is the most dominent ethnic group and only it introduced a officel language “ Malay Language”. Over 250 distinet native spoke and use this language. Indonesia got
Transcript
1. Introduction
Introduction:
“The Kalimantan Paper Project” which was introduced by Ibrahim Hanaffi, a prominent Indonesion industrialist. He took this project on hand but the fact was that lack of financial position creates a barrier to fulfill this project. For that, on April 1, 1988, Ibrahim sent a request to three country's prominent bank (such as Deutsche Handelsbank AG of West Germany, the Metropolitan Bank of New York and the Kamakura Bank of Japan) and arranged a discussion session. The main aim of this discussion was within the end of June,each bank should be prepared enough to offer indicative terms for making funds available to the project with loan signing. Ibrahim also got support from the Indonesian Ministry of Finance(MOF) and the bank of Surabaya.
Product of the Project
Ibrahim Hanaffi wanted to produce high quality paper .
Management:
Analysis the Economy:
Economy is determined by country's GDP. So, the most important factor is population of Indonesia.Indonesia is the largest islamic populated country in the world. It has more than 13000 islands and considered as a wide diversity country in terms of culture. Many ethnic groups are seen including chinese, Indians,Arabs,Micronesians, Malay and Melanesiam. Among those, Malay is the most dominent ethnic group and only it introduced a officel language “ Malay Language”. Over 250 distinet native spoke and use this language. Indonesia got independence in 1945. after defeating the Dutch colonialists in 1949, the economy of Indonesia was positive. But due to Sukarno ( The first president of Indonesia),economy was going downward. For the first time, economy faced hyperinflation,closed the economy to outside competition,ruined the plantations,embarked an ineffective and costly military confrontation with Malaysia, introduced chronic budget deficits,nationlized the financial sector. For those reason, Indonesia's business did not raise as much as predict. Foerign investor did not enter into Indonesia because of high inflation and close economy. Paper industry did not grow up due to ruin forest and plantation. The business relationship between Indonesia and Malaysia was decresing. All these were liable for over control of economy. But Suharto give his best and brought the economy under control.
In 1970's, Indonesia's economy followed a path of development. It tried to protect domestic economy ,basically an agriculture industry,Indonesia moved from being a grain importer to self
sufficiency. Thwe Govertment introduced a transmigration program by which poor farmar were given govertment subsidies to resettle the sparsely populated region of East Kalomantan. This program was expensive but saw it as an economic and cultural expendient. The Indonesian currency , the rupiah can be convertible easily to the U.S dollar. So it creates a big opportinity to expend business in US market and US investor easily came here for running business. Due to increase foerign private capital to Indonesia, domestic savings ( GDP) was increasing. Economy boost in 1970's due to oil industry. Indonesia's economy trun into good position due to export commodities such as rubber, tropical wood, coffee and spices. Budget surpluses to soak up liduidity that save the country from serious inflation.
In 1980's, the boom economy of Indonesia was bust in 1980's while oil price steeply declined. Sudendly oil export decline from US $ 15 billion to US $ 505 billion by 1986. Due to increase import ( Trade Balance Deteriorate), debt was increasing and international marke was decreased by higher debt service obligation.
2. Analysis of the economy
In the 1960s, the economy deteriorated drastically as a result of political instability, a young and inexperienced government, and economic nationalism, which resulted in severe poverty and hunger. By the time of Soekarno's downfall in the mid-1960s, the economy was in chaos with 1,000% annual inflation, shrinking export revenues, crumbling infrastructure, factories operating at minimal capacity, and negligible investment. Following President Soekarno's downfall in the mid-1960s, the New Order administration brought a degree of discipline to economic policy that quickly brought inflation down, stabilized the currency, rescheduled foreign debt, and attracted foreign aid and investment. ( Berkeley Mafia). Indonesia was until recently Southeast Asia's only member of OPEC, and the 1970s oil price raises provided an export revenue windfall that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981.High levels of regulation and a dependence on declining oil prices, growth slowed to an average of 4.3% per annum between 1981 and 1988. A range of economic reforms were introduced in the late 1980s including a managed devaluation of the rupiah to improve export competitiveness, and de-regulation of the financial sector, Foreign investment flowed into Indonesia, particularly into the rapidly developing export-oriented manufacturing sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%.GDP per capita grew 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.Suharto, the 2nd president of Indonesia. Under his New Order administration, the country enjoyed the sustained economic development from 1970s to 1996.High levels of economic growth from 1987–1997 masked a number of structural weaknesses in Indonesia's economy. Growth came at a high cost in terms of weak
and corrupt institutions, severe public indebtedness through mismanagement of the financial sector, the rapid depletion of Indonesia’s natural resources, and a culture of favors and corruption in the business elite.[16] Corruption particularly gained momentum in the 1990s, reaching to the highest levels of the political hierarchy as Suharto became the most corrupt leader according to Transparency International's corrupt leaders list.As a result, the legal system was very weak, and there was no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions.Asian Financial Crisis
The Asian Financial Crisis that began to affect Indonesia in mid-1997 became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Soeharto. The rupiah remained weak, however, and President Soeharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B.J Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform and governance targets.The effects of the financial and economic crisis were severe. By November 1997, rapid currency depreciation had seen public debt reach US$60 bn, imposing severe strains on the government's budget. In 1998, real GDP contracted by 13.7%. The economy reached its low point in mid-1999 and real GDP growth for the year was 0.3%. Inflation reached 77% in 1998 but slowed to 2% in 1999.The rupiah, which had been in the Rp 2,600/USD1 range at the start of August 1997 fell to 11,000/USD1 by January 1998, with spot rates around 15,000 for brief periods during the first half of 1998. It returned to 8,000/USD1 range at the end of 1998 and has generally traded in the Rp 8,000–10,000/USD1 range ever since, with fluctuations that are relatively predictable and gradual.This is a chart of trend of gross domestic product of Indonesia at market prices [32]
by the IMF with figures in millions of rupiah.Year GDP USD Inflation Nominal Per PPP Per Capita
1980 60,143.191 627 10 5.25 5.931985 112,969.792 1,111 11 3.47 5.981990 233,013.290 1,843 16 3.01 6.631995 502,249.558 2,249 24 4.11 8.142000 1,389,769.700 8,396 53 2.32 6.922005 2,678,664.096 9,705 83 3.10 7.512010 6,422,918.230 8,555 121 6.38 9.05For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only.Mean wages were $2.32 per manhour in 2009.InflationIn 2011, Indonesia's inflation rate was 3.79 percent, below the government-set target of 5.65 percent. It was the lowest inflation rate since 1998.[
International Economy for Pulp and Paper
The paper industry began a hasty expansion, during the 1960s, in response to rapid increases in demand. Consumption in the two main subdivisions of the industry, bulk paper grades (products used in publishing, container and food industries) and value-added grades (stationary and coated paper), grew at 5 percent annually. During this time Canadian interests supplied the United States and European Community with pulp and newsprint grades they could not produce for themselves; Scandinavian producers supplied the European Community; and any surplus produce of pulp and paper products were exported to Asia, particularly Japan (Waitt 1994a, 1994b).
In the 1970s industry growth shifted and slowed due to trade liberalization and a fall in demand from 5 percent to 2 percent per annum. This decade was characterised by falling tariff duties, maturing markets (for newspaper and writing paper grades), and increasing paper prices. As prices increased quantity-demanded responded appropriately, as consumers conserved and substituted for paper by using new forms of media - particularly the electronic medium.It was also during the 1970s that the industry made a transition from predominantly family owned businesses to professionally managed transnational corporations via merger or takeover acquisitions. Acquisitions fulfilled two purposes,
internationalisation of production, and vertical or horizontal integration. Waitt observes that: "formation of large, diversified, pulp and paper conglomerates was the corporate strategy around the world" (1994b: 19). The diversification occurring within the industry referred to by Waitt was primarily geographical, providing a secure access to growth opportunities lacking in local markets; and it was predominantly North American and Scandinavian companies which came to dominate international activity (Waitt 1994a, 1994b).From 1983 onwards the industry once again gained momentum as consumer and corporate markets expanded for high quality paper grades, especially in graphic and coated paper (Waitt 1994a). However, as suggested above, the pulp and paper industry is notorious for its 'boom and bust' cycles. "No sooner has health been restored to the industry than managers and investors have begun to worry about the timing and severity of their next recession" (The Economist 14 January, 1995: 67). Continually, during the past thirty years, any surge in demand has, according to Kerski (1995: 144), resulted in more investment in production capacity than is required to meet it. Firms have attempted to aggressively increase their market share by carelessly expanding capacity, hoping to become price setters with the aim of minimizing price-falls when the cycle turned. The boom which began in 1983 went bust from 1989 to 1993, sending the pulp and paper industry into another severe recession. Pulp prices fell by more than half to a fifty year low, industry profit levels fell by nearly 50 percent, and bankruptcies and divestments became common (Business Week 9 January, 1995: 83; Leffler 1994; The Economist 14 January, 1995; Kerski 1995). The recession was primarily a result of the industry's previous foray into strategies of diversification, expansion and acquisitions which resulted in greatly increased capacity and oversupply. Mergers and acquisitions in the industry continued to sharply between 1992 and 1994 (Paper & Packaging Analyst, August, 1994). Many companies also began to reorganize by concentrating on niche markets and selling or swapping assets. The oversupply situation was further exacerbated by a world recession (Edwards 1995). Ayres (1993) and Chege (1994) further suggest that the intensifying burden of overcapacity, oversupply, and declining prices was due, in part, to a rapid increase in new paper plants in Asia whilst demand for paper in Western markets was declining. In the United States and Europe, the demand for newsprint, which accounts for 13 per cent of total paper production worldwide, declined as consumers turned more to the electronic media for entertainment and news (Chege 1994). Leffler (1994) likened the state of the pulp and paper industry in Europe and North America during this period to the steel industry crisis on those continents twenty years ago.Typically, 1994 registered a rapid turnaround with paper prices skyrocketing and profits rising. The price of pulp climbed from a low of US$380 per tonne at the end
of 1993 to US$750 per tonne in January 1995 and to US$1000 by June, 1995. Furthermore, the price of "everything from liner board - used for the outside of corrugated cardboard - to newsprint and fine paper were climbing too" (The Economist 14 January, 1995: 67). Pulp and paper factories were operating at about 90 per cent of capacity on average, and profits in 1995 increased by 130 percent (Business Week 9 January, 1995).However, Stefan Kay, chairman of the Paper Federation of Great Britain, interposed a more gloomy prognosis: "I now believe that the headlong and almost unprecedented increase in world market pulp prices is laying the basis not only for the next recession but perhaps for the long-term decline of the paper industry" (Kay 1995). Kay went on to identify three long-term consequences: first, non-integrated mills will continue to close as has been the case in the United States and Europe where a number of less specialised mills have already closed or announced closure, citing an inability to pass on pulp costs as a major factor; second, more printers will close as technological innovation and increasing capacities leave less room; and third: "grotesque profits from pulp will excite new investment (and kick off the next collapse)".The advice firms are now receiving from industry journals is to invest in automation technology and information-management systems, and to change the 'just-in-time' production mode. Whether this will exacerbate or alleviate cyclical turns in the industry remains to be seen.
3. Analysis of the industry
PESTEL Analysis
The Political and legal factor-
Government has attempted to enocourage domestics and foreign investors. Government gives different type of facility like- simplification of permision procedure,trade regulations,banking facilities,allocation of land fo plantation and reforestation policy.government trad regulation policy on import tarrif for pulp and paper production has been continuously reduced.from25 to 30% in 1994. Government also provide tax exemption for betterment of pulp and paper Industry.
Regulation for foreign capital investment
The government has paid much attention to foreign capital investment(PMA), as reflected in following provisions-
PMA companies that obtained government’s approvals under law no. 1/1967 are given a 30 years’ period of investment feom the date of establishment of the legal business.
Pma companies that have commited investment according to the government’s approval can apply for a permit to expand
Pma companies are required to be in the form of joint ventures and a minimum of 20% of the companies shares is to be national capital at the time of investment and it is to increase to 51 percent within 15 years from the commitment of the commercial production.
Pma companies are entitled to the same facilites as pmdn companies if the government owns 51% of the shares, or national private companies , on condition that 20% of the total shares are sold through the stock exchange as market as shares on behalf of public share.
The pulp and paper industry is now attracted PMA investors , as indonesian’s conditions are considered competitive, particularly for export purpose.
Facilities for investment
Financial facilities provided to PMA/PMDN companies introduced in law no. 7 of 1983 regarding value added tax for goods and services and sales tax for luxurious goods and law no.13 of 1985 concerning Stamp Duties for Fiscal Facilities are as follows:
a) Reduction of / exemption from import duty for machines and spare parts, except for specified types already produced locally.
b) Exemption from import dutyfor raw materials/ supporting materials for a two years period of production.
c) Exemption from Chang of Name Duty for the first ship registration act applied in Indonesia.
d) Exemption from income tax for importers of capital goods and raw materials for a one year perid for new companies on condition that the company is not under obligation to pay income tax.
In the 1960s, the economy deteriorated drastically as a result of political instability, a young and inexperienced government, and economic nationalism, which resulted in severe poverty and hunger. By the time of Soekarno's downfall in the mid-1960s, the economy was in chaos with 1,000% annual inflation, shrinking export revenues, crumbling infrastructure, factories operating at minimal capacity, and negligible investment. Following President Soekarno's downfall in the mid-1960s, the New Order administration brought a degree of discipline to economic policy that quickly brought inflation down, stabilized the currency, rescheduled foreign debt, and attracted foreign aid and investment. ( Berkeley Mafia). Indonesia was until recently Southeast Asia's only member of OPEC, and the 1970s oil price raises provided an export revenue windfall that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981.High levels of regulation and a dependence on declining oil prices, growth slowed to an average of 4.3% per annum between 1981 and 1988. A range of economic reforms were introduced in the late 1980s including a managed devaluation of the rupiah to improve export competitiveness, and de-regulation of the financial sector, Foreign investment flowed into
Indonesia, particularly into the rapidly developing export-oriented manufacturing sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%.GDP per capita grew 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.Suharto, the 2nd president of Indonesia. Under his New Order administration, the country enjoyed the sustained economic development from 1970s to 1996.High levels of economic growth from 1987–1997 masked a number of structural weaknesses in Indonesia's economy. Growth came at a high cost in terms of weak and corrupt institutions, severe public indebtedness through mismanagement of the financial sector, the rapid depletion of Indonesia’s natural resources, and a culture of favors and corruption in the business elite.[16]
Corruption particularly gained momentum in the 1990s, reaching to the highest levels of the political hierarchy as Suharto became the most corrupt leader according to Transparency International's corrupt leaders list.As a result, the legal system was very weak, and there was no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions.
SOCIAL FACTORS AFFECTING THE PULP AND PAPER INDUSTRY
Linked to the economic factors above social changes have significantly impacted thepulp and paper industry in relation to changing demographics in terms of the customers it targets. As such then changes in customer's needs and preferences for quality paper products and changing preference towards the paper rather than fiber or plastic has increased the pace of the demand in terms of meeting these needs. Increased globalization arguably has led to customers demanding faster responses to their needs creating much more competitive business fields attempting to satisfy these desires. The industry is not only about technology but about pictures illustrating the industry attempt to relate to the lifestyles of consumers. This is because customers have become more environmental sensitive as well as technique and quality orientated as a result of higher educational levels and income levels creating much more discerning customers in relation to these.
The sociological context of human resource has been a major influence. Flexibility in terms of labor in Indonesian pulp and paper industry has been mainly achieved by enlarging the scope of tasks and a relaxation of organizational boundaries within the business industry. Paper manufacturers are producing white paper and supply it at a concessional rate to the educational sector and to the governmental departments as well as per regulation given by the government.
TECHNOLOGICAL FACTORS AFFECTING THE PULP AND PAPER INDUSTRY
Currently, governmental as well as sector initiatives focus on overcoming the acute raw material constraints, implementing and adopting better technologies, increasing production, productivity and efficiency, expanding to economies of scale and decreasing environmental effluents. Various new technologies are entering the Indonesian market that support these movements.
Presently, large pulp and paper mills are more efficient, using better and more modern technologies and appropriating economies of scale. Additionally, they provide chemical recovery facilities which reduce both emissions and external energy requirements. However, the large paper mills also face severe basic problems such as high production costs, raw material constraints and low productivity. Overall performance has been best in medium size firms with regards to average profitability
Environmental factor: G eographical location: Its geographic environment is one of the most complexes and varied in the world. By one count, it has situated in South-Eastern Asia between the Indian Ocean and thePacific Ocean. It has total 1,904,569 sq km area in that land is 1,811,569 sq km and water is93,000 sq km. Basically it is hot and humid country. At least 669 distinct languages and wellover 1,100 different dialects are spoken. The nation encompasses some 13,667 islands; thelandscape ranges from rain forests and steaming mangrove swamps to arid plains and snowcapped mountains. Indonesia is very attractive industry for pulp and paper productions for it’s natural resourses with low cost.Geographically plant is matured at least 7 years where,North America and Europe require twentyfive to fifty years to reach maturity. Time zone: Indonesia is time zone is UTC+7 mean seven hours ahead of GMT and 16 hoursahead of U.S. Pacific Standard Time. Natural or environmental disaster:
Due to its geographic location, several times Indonesia has faced many natural disasters. In the same way, due to its mountainous interior regions of Kalimantan,Sulawesi, and Sumatra, country has faced deforestation, soil erosion and massive forest fires. In1983, about 3 million hectares of prime tropical forest worth at least US$10 billion weredestroyed in a fire in Kalimantan Timur Province. The disastrous scale of this fire was made possible by the piles of dead wood left behind by the timber industry. Even discounting the calamitous effects of the fire, in the mid-1980s Indonesia's deforestation rate was the highest inSoutheast Asia, at 700,000 hectares per year and possibly as much as 1 million hectares per year.
Porter’s 5 Factors
PORTERS 5 FACTORS-
Rivel among existing firmThere is large number of players in pulp and paper industry, which increases rivalry among them.There is an intense rivalry as pulp and paper have high storage cost. There is a higher level of rivalry as there is a low level of product differentiation. Industry growth rate is high and demand of the product is also high. So continuoussly new firm will come . in indonesia cost of wood and raw materials is lower than other country and government is not so strick to control the environment. the more firm the more deforestation but government concern about the economic growth.Bargaining power of suppliersA producing industry requires raw materials - labor, components, and other supplies. Thisrequirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Indonesia has the world's second-largest tropical rain forest, after Brazil, wood prices are half those in Taiwan.Most of the Pulp and paper industry are vertically integrated . Industries raw materials like rice straw, bamboo, bagasse ,pulp, waste paper and chemicals etc are available in Indonesia so this industry is not dominated by supplier. Even Fuel costs are low because Indonesia is a major oil producer. wage costs, which account for 22 percent of the total cost of production, are about one third of those in Thailand and Malaysia and one tenth of Taiwan. They sometimes involves as suppliers because this industry is vertically integrated. Government also give the opportunity to use the forest and land to collect and produce plant . without plant this industry is not possible to go ahead because it is the main factor to produce pulp and paper. So most of the investor control the supplier .
Bargaining power of buyersThe power of buyers is the impact that customers have on a producing industry. In paper industry, buyers are powerful as they purchase a significant proportion of output, andthey possess a credible backward integration threat, they are weak as they are fragmented.
Entry and Exit barriers
Entry barriers Government policy
Economies of scale
Capital requirement
Special access to distribution
Switching cost
Expected retaliation from present players
Large investments in technology, not capable of alternate uses
Exit barriersEasy to exit as exit cost is low and it is an independent business. if firm has high debt , it has to repay on this debt so huge cost incure to exit.Threat from substitutesIn Porter's model, substitute products refer to products in other industries. 6 GB pendrive can hold the same data where 6 tonnes of paper can hold. Substitutes for paper is pendrives, PCs, etc and in case of packaging, glasses, aluminum foil, plastics, etc.. Threatarises from the price change of substitute product and also their availability which gives more choice for the customers
4. Analysis of the CompanyRatio Analysis
Du Pont
SWOT Analysis
“The Kalimantan Paper Project” which was introduced by Ibrahim Hanaffi, a prominent Indonesian industrialist. He took this project on hand but the fact was that lack of financial position creates a barrier to fulfil this project. Ibrahim Hanaffi wanted to produce high quality paper.
Every corporation has some internal and external factor under which some factor encourage them and some factor discourage them. So, “The Kalimantan Paper Project” has some strengths and weakness which indicate internal factor of “The Kalimantan Paper Project” and also has some opportunities and threats which indicate external factor of “The Kalimantan Paper Project”.
Internal factors:
Strength: The site offered not only suitable terrain for clear-cutting and subsequent planting of the
forest plantation, but also offered exploitable growing timber. Nearby settlements of Javanese migrants promised a reliable source of production and
forestry labor. The Indonesian government had shifted its policies from import substitution to export
growth, and had implemented a ban on export of hardwood logs. The EDC of Canada had committed in a letter of intent to provide up to $ 115 million in
term financing at a fixed annual rate of interest of 8 % directly to the importer in return for receipt of a guarantee from a prime international bank or the MOF and various undisclosed fees to be received from the exporter. The remaining $125 million of export credit equipment financing could be secured on terms not significantly different from those indicated by Hermes and the EDC.
Weakness: The investors argued that they were taking a high risk in investing in a facility using
plantation technology untested in Indonesia. They had to repayment their loan amount in eight semiannual repayments starting in June
1993 and ending December 1996. Rupiah principal outstanding at the end of construction period is left as working capital facility through life of project.
External factor:
Opportunities: The investors were eligible for a five-year corporate tax holiday following
commissioning. The Bank of Surabaya and other local bankers would provide short term rupiah funds for
working capital of up to $60 million. The investors remained highly flexible with regard to the capital structure of the project.
They would consider any serious financing alternative.
Threats:According to the estimation, among the top 50 countries in institutional investor’s country risk ratings in 1998; the Indonesia rating is 42 number ranks in both 1988 & 1987. The investors will be unsecured to invest the highly risk country project.
Risk Analysis:
Risk is defined as the variation from the expected return. Risk is measured by the standard deviation of return. Business risk and financial risk is total risk of a firm. Two types of risk in a firm,
Business Risk Financial Risk
If the firm does not have debt:
Business risk:
Business risk is the variation of return for the main operation of the firm. The risk associated with projections of a firm’s future return on asset (ROA, ROE if the firm uses no debt.
Demand variability: In Kalimantan paper project, Indonesia’s economy faced recession when the price of oil steeply declined in 1980. It was offset by aid financing of project and raising debt in international financing market, which brought with it higher debt service obligation. As considered the equipment demand variation is high with the economic condition, the business risk is also high for the project.
Sales price variability: The project components are hardwood log sales, plywood production and pulp & paper production. The components sales prices variation is too high in 1989 to 1998 throughout the project. The sales price direction is increasing but business risk is high for changes the sales prices.
Input cost variability: the Kalimantan paper project raw material is timber cost, plywood materials and paper materials which prices also variation throughout the project. The business risk is also high.
Ability to adjust output prices for changes in input cost: The project adjusts the output prices for changes in input out following year. So, business risk is comparatively low. Ability to develop new products in a timely cost effective manner
Foreign risk exposure
Operating leverage: The extent to which cost are fixed. In Kalimantan paper project, the fixed cost percentage is almost 80% or above. Depending on fixed cost in operating the project increases the business risk of the project.
Financial Risk
Financial risk is the additional risk placed on the common stockholders for the use of borrowed capital. The portion of stockholder’s risk, over & above basic business risk, that results from the manner in which the firm is financed.
If Kalimantan paper project takes long term debt then financial risk will arise. A debt ratio indicates that a company has more assets, meanwhile, a debt ratio of more assets than debt which creates asset availability risk. The Kalimantan paper project debt ratio can help investors determine a company’s level of risk which is financial risk.
The project’s main sources of financing were to be export credit loans (US $ 360 million) which interest rates are assumed to be 8%, a syndicated Eurodollar loan (US$ 100 million) at 9% interest rates and with a revolving rupiah debt on 12% interest rates. The term loan is repaid in eight semi-annual repayments starting in June 1993 and ending in December 1996. As the interest is capitalized during construction.
Total Debt (745-150) =595 US$Total Equity =150 US$
1. Problem StatementImmediate problem
In Kalimantan paper project each participants have something to gain from the project, as long as it was structured to allow those gains, but each could achieve the desired project structure only with the cooperation of other decision makers. If all participant thinks about their own return then this project will not be attractive to
everyone so every decision maker had not only to accurately evaluate its own project risk-return tradeoffs, but also those of all project stakeholders.
Liquidity ratios Current RatioThe current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. It is expressed as follows:
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If a company's current ratio is in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management.
Here we can see the Current ratio was higher in the earlier periods than the later periods. We can say that this company had good short-term financial strength as its current ratio was higher but as it is low in the later periods the liquidity position is going to worse position. As they are repaying their loans their current asset is decreasing and so the current ratio is also decreasing.
.
Quick RatioInThe Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities.
Note that Inventory is excluded from the sum of assets financially. Ratio are financially viable option for business entities but the liquidity of the liabilities show financial stability. Generally, the acid test ratio should be 1:1 or higher, however this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets). We will compare this ratio with our industry average
Here we can see the quick ratio was higher in the earlier periods than the later periods. We can say that this company had good short-term financial strength as its quick ratio was higher but as it is low in the later periods the liquidity position is going to worse position. As they are repaying their loans their current asset is decreasing and so the quick ratio is also decreasing.
Asset Management RatiosInventory Turnover
Inventory turnover is the ratio of cost of goods sold to average inventory. It is an activity / efficiency ratio and it measures how many times per period, a business sells and replaces its inventory again.
Based on our calculation we found that inventory turnover ratio was higher in the earlier periods. But in later periods it becomes lower. This ratio suggest that this company is holding excess stocks of inventory and excess stocks are, of course, unproductive and represent an investment with a low or zero rate of return. So the company also hold excess inventory and they had not enough liquid asset.
Days Sales Outstanding
A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers credit and taking longer to collect money.
Days sales outstanding is calculated as:
Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the
chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to disguise weak sales, or is generally being ineffective at bringing money in.
Based on our calculation we found that Days Sales Outstanding ratio was high in the earlier periods. But in 1992 it becomes too lower but again it grew from 1993. This ratio suggest that it is holding receivables and it is, of course, unproductive and it may cause higher bad debt. TATOThe total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets.
The calculation for the total asset turnover ratio is:
Net Sales/Total Assets
The lower the total asset turnover ratio ,as compared to historical data for the firm data, the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing total assets - inventory, receivables, or fixed assets.
The total asset turnover ratios indicate that over the historical years, the company's efficiency had decreased, but according to their projection it is indicating that the company's efficiency was increasing from 1991 to 199 which may be because of their very high growth rate of projection. But from 1994 to 1998 it is decreasing.
FATO
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.
The fixed-asset turnover ratio is calculated as:
The fixed-asset turnover ratio was lower in the earlier periods as company's ability to generate net sales from fixed-asset investments was lower. But in later periods is become higher and a higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.
Debt Management RatiosDebt Ratio
A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.
A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.
From 1989 to 1991 the debt ratio was lower for this firm but it grew in 1992 as it took more debt then agai it came down. But still this is a high ratio which indicates higher debt and for this reason investor will not be attracted as there is too much risk in this project,
TIE
A metric used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy.
Ensuring interest payments to debt holders and preventing bankruptcy depends mainly on a company's ability to sustain earnings. However, a high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects. The rationale is that a company would yield greater returns by investing its earnings into other projects and borrowing at a lower cost of capital than what it is currently paying to meet its debt obligations.
From 1989 to 1994 the time interest earned ratio was lower for this firm but it grew in 1995 as it took more debt. But this is a more higher from 1987 to 1989 which indicates this company is in better position and it can easily meet its obligation with its earnings.
EBITDA
A financial metric used to assess a company's profitability by comparing its revenue with earnings. More specifically, since EBITDA is derived from revenue, this metric would indicate the percentage of a company is remaining after operating expenses.
Sometimes referred to as "EBITDA margin".
Calculated
Profitability Ratios
BEP
The basic earning power ratio (or BEP ratio) compares earnings apart from the influence of taxes or financial leverage, to the assets of the company. This interactive tutorial explains the concept by walking you through the calculations, including where to find the numbers on the financial statements.
PM
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
Also known as Net Profit Margin.
Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.
ROA
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".
The formula for return on assets is:
ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.
The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment.
ROE
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.
Also known as "return on net worth" (RONW).
DU PONT
A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".
DuPont analysis tells us that ROE is affected by three things:
-Operating efficiency, which is measured by profit margin
-Asset use efficiency, which is measured by total asset turnover
-Financial leverage, which is measured by the equity multiplier
It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.
A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.
Also known as "cash cycle." Calculated as:
Where:DIO represents days inventory outstandingDSO represents days sales outstandingDPO represents days payable outstanding
Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery.
This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.
Broadly speaking, a company’s assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.
A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.
PV of outflows Total 187.7 248.1658 176.824 71.44243 684.1322
PV of inflows NPV 187.7 286.6184 239.7571 100.655 814.7306 130.5983
YearCash Flows
-684.130 187.71 286.6182 239.7573 100.655
IRR 8%
Discounted Payback period 2.195453
Different Investors Perspectives
MetroPolitan Bank, Management, which would have to approve any loan, was concerned with the risk-return trade-off. With consideration project finance experience, Metropolitan was keen to consider complex arrangements which could justify higher spreads and fees from the borrowers and could entice providers of capital- either debt or external equity- with sufficient expected return to justify project risk. Metropolitan’s legal department would have to sign off on any documentation and had been particularly concerned that offer letters reflect the kinds of detailed specifications of availability, security, representation, warranties, covenants and events of defaults which would be required in the final loan agreement negotiation.
A checklist prepare
The bank of Surabaya, having worked with those projections, it was keenly aware of the degree to which the sales volume, cost, price, and timing assumption implied in the projections affected project viability. It was confident that the projections constituted a “best guess” as to project outcome, but that the actual realization would be subject to considerable variation. The bank of Surabaya considered that, with the participation of other domestic banks, it could arrange for as much working capital and short-term rupiah financing as the project needed- provided the credit was appropriately structured. It could serve as domestic loan agent for project monitoring and would be happy to take the role as collateral agent for loan security. Because its valued customer, Hanaffi, was leading the project, the bank’s staff members had a strong incentive to do whatever they could within the strictures of prudent banking to see the project successfully financed.
6. Alternative Courses of Action
6.1 By Introducing New Technology
The investors argued that they were taking a high risk in investing in a facility using plantation technology untested in Indonesia. Only after 2001 (after the first plantation trees on the clear-cut land had matured and had been harvested) would the feasibility of that technology be established. Hence, the investors had negotiated with the government considerable discount on the timber tax, which constituted the largest part of the annual timber costs. More important, they still had the right to use the Kalimantan forest site from which they were permitted to harvest hardwood logs for up to ten years, provided the project was implemented. The investors planned to concentrate log harvesting in the early years, which would both meet the clear-cutting needs of the plantation and maximize early cash flow for debt service. The logs would be sold to the investors’ own mills elsewhere in Indonesia, and were expected to bring profits to those mills of roughly 75% of their purchase price from Kalimantan parer. In addition, contract for the preproduction site, civil works not part of the turnkey contract, and marine insurance on equipment shipments were expected to be awarded to interests under the control of the investors.
6.2 Minimizing Cost Kamakura Bank of Japan had flexibly provided low-cost facilities to hanaffi on many occasions, and other members of the investors had worked with its leasing subsidiary in Jakarta. The investors had originally engaged Metropolitan as its
financial adviser because of the bank’s project-financing experience and contacts with export credit agencies. They viewed Metropolitan as entitled to its success fee if it earned it by lead-managing the final financing package. Their acquaiance withe deutsche Handelsbank was recent but positive. They were keen to use the export credit loans which Deutsche Handelsbank was helping to arrange and to take advantage of the 8% concessionary U.S. dollar financing. Notwithstanding the cashflow projections and negotiations carried on to date, however, the investors remained highly flexible with regard to the capital structure of the project. The would consider any serious financing alternative.
Especially in bringing new technologies to Indonesia, and as because that support would be seen as a signal to the international business community of the favourable Indonesian climate. However. The MOF was equally concerned that it be seen as even-handed, especially in the light of the fact that the project involved one of the country’s depletable natural resources hardwood timber stands.
If Kalimantan paper were to be eligible for export credits, those export credit loans would have to be guaranteed either by the Indonesian MOF or by a well-known commercial bank in a developed country. The guaranteeing commercial bank could extend its guarantee in return for appropriate guarantee fees and credit support. The form of that credit support was a matter of negotiation, but might take the form of counter guarantees (from other international banks, local banks, business entities, wealthy individuals, etc.).Mortgages or liens over property, assignment of proceeds of contracts and commercial guarantees, assignment of take or pay contracts, government undertakings with regard to preferential treatment of the project or letters of comfort. Official application to export credit agencies for funding could only be made by the exporter. However, because of banks’ involvement with lending, especially in the second structure described above, the help of a bank in securing advantageous export credit terms for any large export of capital equipment was often useful. Thus KND had secured for the Kalimantan paper project, initially with the help of Metropolitan and later with the support of Deutsche Handelsbank, the export credit agencies’ letters of intent.
6.3 Joint ventureKND as the project’s principal contractor.
6.4 By Contracting with New Supplier from Brazil
Here is an opportunity of buying their raw materials from Brazil. Because in Brazil there is a forest plantation of fastest growing tropical pine and eucalyptus, which mature in 8 to 14 years and this can provide a cheaper source of high quality pulpwood for paper, where it takes 25 to 50 years to mature in North America and Europe. Indonesia can take this opportunity to buy the raw materials from Brazil. If they can bring it in cheaper cost by a contract with Brazil then it can able to minimize its raw material cost and which leads a higher return. By this way investors will also be able to get higher returns.
6.4 By Issuing Common Stock
This Kalimantan Paper Project is financed by taking more debt and less equity. When any company or country takes more debt than equity then power goes to the debt holders. And many covenants restricted the management decisions. The same problem will arise in this project. So if we issue more common stock in the market to raise our capital then debt holder will not be able to get more power.
