Harvard Case - Bangkok's Second Stage Expressway
"Bangkok's Second Stage Expressway" Harvard business case study is written by Jose Gomez-Ibanez. It deals with the challenges in the field of Finance. The case study is 23 page(s) long and it was first published on : Jan 1, 1997
At Fern Fort University, we recommend that the Bangkok Expressway and Metro Public Company Limited (BEM) proceed with the construction of the second stage of the expressway, but with a revised financial strategy that prioritizes debt management and risk mitigation. This strategy should incorporate financial analysis, capital budgeting, and profitability ratios to ensure the project's long-term viability and maximize shareholder value.
2. Background
The case study focuses on BEM, a publicly traded company in Thailand, facing the decision of whether to proceed with the construction of the second stage of the Bangkok Expressway. This project is estimated to cost 100 billion baht, a significant investment for BEM, which already has a substantial debt burden. The project is expected to generate significant revenue through tolls, but the company needs to consider potential risks such as economic downturns, competition from alternative transportation options, and environmental concerns.
The main protagonists in the case are:
- BEM management: They are responsible for making the decision to proceed with the project and need to consider the financial implications and risks involved.
- Investors: They are interested in the project's potential to generate returns and the company's ability to manage its financial risks.
- The Thai government: They are involved in the project through regulations, land acquisition, and potential subsidies.
3. Analysis of the Case Study
Financial Analysis:
- Capital Budgeting: BEM should conduct a thorough capital budgeting analysis, including net present value (NPV), internal rate of return (IRR), and payback period calculations. This analysis will help determine the project's financial viability and identify potential risks.
- Risk Assessment: BEM needs to conduct a comprehensive risk assessment to identify potential threats to the project, such as economic downturns, competition, and environmental concerns. This assessment should include sensitivity analysis to understand how changes in key variables (e.g., traffic volume, toll prices) can impact the project's profitability.
- Financial Forecasting: BEM should develop a financial forecast to project the project's revenue and expenses over its lifetime. This forecast should consider factors such as traffic growth, toll price adjustments, and operating costs.
- Balance Sheet Analysis: BEM should analyze its current balance sheet to assess its ability to finance the project. This includes evaluating the company's debt-to-equity ratio, working capital, and liquidity to ensure sufficient financial resources.
- Profitability Ratios: BEM should calculate profitability ratios such as return on equity (ROE) and return on assets (ROA) to measure the project's potential to generate profits and enhance shareholder value.
Strategic Analysis:
- Growth Strategy: The second stage of the expressway aligns with BEM's growth strategy by expanding its infrastructure and capturing a larger share of the transportation market.
- Competitor Analysis: BEM should assess the competitive landscape and potential threats from alternative transportation options, such as public transportation, private vehicles, and ride-sharing services.
- Government Policy and Regulation: BEM needs to consider the impact of government policies and regulations on the project, including land acquisition, environmental permits, and toll price regulations.
4. Recommendations
- Proceed with the Project: Based on the potential for increased revenue and the alignment with BEM's growth strategy, we recommend proceeding with the construction of the second stage of the expressway.
- Revised Financial Strategy: BEM should adopt a revised financial strategy that prioritizes debt management and risk mitigation. This strategy should include:
- Debt Financing: Explore alternative debt financing options, such as project financing or infrastructure bonds, to minimize the impact on the company's overall debt burden.
- Equity Financing: Consider a partial equity financing through a private placement or initial public offering (IPO) to diversify the company's funding sources and reduce financial risk.
- Risk Management: Implement a comprehensive risk management framework to address potential threats, including hedging against currency fluctuations and insurance for unforeseen events.
- Financial Analysis: Continuously monitor the project's financial performance using financial statements analysis, ratio analysis, and financial modeling to ensure the project remains on track and make necessary adjustments.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The project aligns with BEM's core competencies in infrastructure development and its mission to provide efficient transportation solutions.
- External Customers and Internal Clients: The project will benefit external customers by improving traffic flow and providing a faster commute, while also generating revenue for BEM and its investors.
- Competitors: The project will enhance BEM's competitive position by expanding its infrastructure network and offering a more attractive alternative to other transportation options.
- Attractiveness ' Quantitative Measures: The project's financial viability is supported by positive NPV and IRR calculations, indicating a potential for significant returns on investment.
- Assumptions: The recommendations are based on the assumption that the Thai government will continue to support the project through regulations, land acquisition, and potential subsidies.
6. Conclusion
BEM has a significant opportunity to expand its infrastructure network and enhance its profitability by constructing the second stage of the Bangkok Expressway. However, the company needs to carefully manage its financial risks and ensure the project's long-term viability. By adopting a revised financial strategy that prioritizes debt management, risk mitigation, and ongoing financial analysis, BEM can maximize shareholder value and achieve its strategic goals.
7. Discussion
Alternatives not selected:
- Delaying the Project: While this option would reduce immediate financial pressure, it would also delay the potential benefits of the project and allow competitors to gain market share.
- Abandoning the Project: This option would eliminate the potential risks and costs associated with the project, but it would also prevent BEM from capturing the potential benefits of the expanded infrastructure network.
Risks and Key Assumptions:
- Economic Downturn: A significant economic downturn could reduce traffic volume and toll revenue, impacting the project's profitability.
- Competition: The emergence of new transportation options, such as high-speed rail or improved public transportation, could reduce demand for the expressway.
- Environmental Concerns: The project could face opposition from environmental groups, leading to delays or even cancellation.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Proceed with the Project (Revised Financial Strategy) | Potential for significant revenue, aligns with growth strategy, enhances competitive position | Increased debt burden, potential for financial risks |
| Delay the Project | Reduces immediate financial pressure | Delays potential benefits, allows competitors to gain market share |
| Abandon the Project | Eliminates risks and costs | Prevents BEM from capturing potential benefits |
8. Next Steps
- Conduct a detailed financial analysis: BEM should conduct a comprehensive financial analysis to validate the project's profitability and identify potential risks.
- Develop a revised financial strategy: BEM should develop a revised financial strategy that prioritizes debt management, risk mitigation, and ongoing financial analysis.
- Secure financing: BEM should explore various financing options, including debt financing, equity financing, and project financing.
- Implement risk management framework: BEM should implement a robust risk management framework to address potential threats to the project.
- Monitor project performance: BEM should continuously monitor the project's financial performance and make necessary adjustments to ensure its long-term viability.
By taking these steps, BEM can ensure the successful implementation of the second stage of the Bangkok Expressway while maximizing shareholder value and contributing to the growth of the Thai economy.
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Case Description
This transport privatization case describes the political complications that can accompany a privately-funded infrastructure project. The case tells the story of a Japanese construction firm and its relationship with the government of Thailand. The firm, Kumagai Gumi, is invited to build US$1 billion, 20-kilometer expressway in Bangkok, and to operate it as a toll road, under a 30-year concession contract. But a 1995 contract dispute prompts the Thai government to force Kumagai Gum first to open the road but then to sell it to Thai investors. The case allows for discussion of both a technical and political nature, focusing on the details of the contracting arrangement but also raising the question of domestic political dimensions in public projects involving non-domestic private investors. HKS Case Number 1401.0
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