Financial Evaluation of a Project within Grameen phone, Network Operation

View With Charts And Images

Financial Evaluation of a Project within Grameen phone, Network Operation

Overview of the Organization (GrameenPhone Ltd.)

2.1 Company Introduction:

Grameenphone is the largest cellular operator in the country. It is a joint venture enterprise between Telenor and Grameen Telecom Corporation, a non-profit sister concern of the internationally acclaimed microfinance organization and community development bank Grameen Bank. Telenor, the largest telecommunications company in Norway, owns 55.8% shares of Grameenphone, Grameen Telecom owns the remaining 34.2% 2 and the other 10% shares belong to the general retail and institutional investors.

GrameenPhone was the first company to introduce GSM technology in Bangladesh. It was offered the cellular license in Bangladesh by the Ministry of Posts and Telecommunications in the year 1996. Grameenphone launched its service on the Independence day, 26th March, 1997.

It also established the first 24-hour Call Center to support its subscribers. With the slogan Stay Close, stated goal of Grameenphone is to provide affordable telephony to the entire population of Bangladesh.

After almost 10 years of operation, Grameenphone had over 10 million subscribers and it is now the leading telecommunications service provider in the country with more than 29.97 million subscribers as of December 2010.

In the fast-paced world of telecommunications, vibrant and dynamic Corporate Governance practices are an essential ingredient to success. Grameenphone believes in the continued improvement of corporate governance. This in turn has led the Company to commit considerable resources and implement internationally accepted Corporate Standards in its day-to-day operations.

2.2 Shares:

Fig 1: Distribution of GrameenPhone Share

2.3 Vision and Mission Statements:

2.3.1 Vision: To be leading provider of telecommunication services all over Bangladesh with satisfied customers and shareholders, and enthusiastic employees.

2.3.2 Mission: Grameenphone Ltd. aims at providing reliable, widespread, convenient mobile and cost effective telephone services to the people in Bangladesh irrespective of where they live. Such services will also help Bangladesh keep pace with other countries including those in South Africa region and reducing her existing disparity in telecom services between urban and rural areas.

2.4 Purpose of Grameenphone:

· To receive an economic return on its investment.

· To contribute to the economic development of Bangladesh where telecommunication plays an important role.

2.5 History and Major Milestones:

Table 1: History and Major Milestones of Grameenphone

2.6 Strategy:

Grameenphone basic strategy is coverage of both urban and rural areas. In contrast to the “island” strategy followed by some companies, which involves connecting isolated islands of urban coverage through transmission links, Grameenphone builds continuous coverage, cell after cell. While the intensity of coverage may vary from area to area depending on market conditions, the basic strategy of cell-to-cell coverage is applied throughout Grameenphone network.

2.7 People:

The people who are making it happen- the employees- are young, dedicated and energetic. All of them are well educated at home or abroad, with both sexes (genders) and minority groups in Bangladesh being well represented. They know in their hearts that Grameenphone is more than just about phones. This sense of purpose gives them the dedication and the drive, producing the biggest coverage and subscriber- base in the country. Grameenphone knows that the talents and energy of its employees are critical to its operation and treats them accordingly.

2.8 Organogram:

The success story of Grameenphone has been possible due to the alignment and commitment of the different departments collectively. The organization has the following departments to ensure the smooth operations of its services and achieve organizational goals.

Fig. 2: GrameenPhone Organogram

2.9 Values:

· Caring for customers

· Integrity

· Sense of urgency

· Creativity

· Honesty

· Empowerment

· Courage

2.10 Products offered by GrameenPhone:

Grameenphone was the first operator to introduce the pre-paid mobile phone service in Bangladesh in September 1999. Besides smile, Grameenphone also offers a youth based mobile to mobile connectivity within Bangladesh named “Djuice” and postpaid mobile service called “Xplore Postpaid”.

2.10.1 Prepaid and Postpaid Connections:

Xplore : Xplore is a postpaid connection and is available with Mobile to Mobile with BTCL connectivity. BTCL incoming is absolutely free in Xplore.

Shohoj : Grameenphone prepaid connection comes with this pre-activated package where you will be able to talk to any operator number at a low, flat rate of Tk 0.79.

Bondhu : This package with the highest number of F&Fs allows you to talk to your near and dear ones at the lowest rate.

Aapon : One can talk to over 25 million Grameenphone numbers at a very low rate of 49 Paisa per minute.

Baadhon : Grameenphone Ltd. introduces a new package named Baadhon, designed to serve the rural population of Bangladesh.

Smile: The Grameenphone Smile prepaid connection now gives you more freedom, more opportunities and more reasons to smile!!

2.10.2 Business packages:

Business Solutions: We are here to help you grow and win. No matter how unique or diverse your business is, we offer customized solution for you to win the tough war of business.

Ekota : For Small and SOHO enterprises Grameenphone offers a unique package Ekota.

GPPP: GP Public Phone is the package for PCO entrepreneurs.

GPVP : Village Phone Program is a noble effort by tri party (GP-GTC-GB) to eliminate poverty by providing self-employment opportunity.

2.10.3 Other Services:

Internet: GP provides internet service in its coverage area. As it has EDGE/GPRS enabled network, any subscriber can access to internet through this network. Grameenphone was the first mobile operator in Bangladesh to offer EDGE services to its subscribers.

BillPay: A service to enable users to pay their utility bills (Electricity, Gas etc) through mobile.

CellBazaar: Services to enable users sell or buy products through mobile or internet. Various other services like Stock Information, Instant Messaging, SMS Based Alerts/Services, Voice-based Services, Downloads, Music, Cricket Updates, Web SMS, Mobile Backup etc.

Chapter 3: Overview of Network Operation, Grameenphone:

3.1 Structure of Technology Division:

Technology division is a separate division in Grameenphone under Chief Technology Officer (CTO). The structure of it is as below

Fig 3: Organogram of Technology Division

3.2 Structure of Network Operation:

Network Operation is separate department within Technology Division under Director, Network Operation.

Fig 4: Organogram of Network Operation

3.3 Functions of Network Operation:

· O & M support of Network Elements

· Running projects for installation of new Systems

· Maintain GSM features for GSM network.

· Software & hardware update/upgrade

· Vendor escalation and trouble management

Chapter 4: Project Management at GrameenPhone, Network operation

At Network Operation, a typical project follows the following sequences:

1. Formulation of Project Proposal

2. Writing Project Memo

3. Formulating the Project Plan and Follow-up

4.1 Project Proposal:

A project proposal is the first step to initiate a project. Project proposal is meant to obtain a goo d understanding of the project goals, outcomes etc. Project Proposal encompasses the following information

· Project Name and Description

· Financial Information like Capital Expenditure (CaPex), output in the format of Operation Expenditure (OpEx) Savings, Revenue etc.

· Background, Project Goals, Limitations, Risk Factors, Stakeholders involved in the project.

The project proposal for the Battery Units Addition project is as below

Project information:

Key information:

Risk factors:

Relationship with other projects / partners:

Realization of effect goals:

Resources in establishment / scope definition / planning phase:

Steering Committee:

Reporting from Project Manager:

Authorization:

Additional important information:

Attachments to project proposal:

Signatures (Date and names):

4.2 Memo:

The next step involves writing a memo for the project. At Grameenphone Network Operation, an internal MIS tool is used to write the memo for approval from concerned stakeholders. Also, a Financial Evaluation Report is also needed to be submitted along with the memo for evaluation and approval. At any time, the initiator and other concerned stakeholders can view the approval status of the project.

The memo of the project is as below

Request Details

Top of Form

Fig 5: Project Memo

4.3 Project Plan:

Project plan details the breakdown of different activities according to schedule and keeps track of those. The Project Plan for “Addition of 350 Battery Units in BTS” is as below

Project information:

Fig 6: Project Plan

Chapter 5: Financial Evaluation of the Project

In a climate of increasing financial control, it is more important than ever that investment analysis is of a high standard. Investments can have many risks that can keep away many potential investors. To avoid this to happen, the most accurate financial/economical analysis has to be made. Financial evaluation is a rational method for making choices .Any good commercial organization should be able to identify more viable investment opportunities than it has money to invest in, so it has to choose which projects to fund.

5.1 Objectives of Financial Evaluation:

The objectives of economic evaluation are:

· To decide which investments will make the best use of the organization’s money?

· To ensure that the optimum benefits are available from each of these investments.

· To minimize any risk to the organization.

· To provide a basis for the later analysis of the performance of each investment.

The process of economic evaluation:

· Produces measures of the financial improvement that each project could make to the business.

· Identifies the risks and uncertainties in each project.

· Defines the expected costs and benefits.

The decision maker can the use the results of the evaluation to choose between projects. Financial evaluation helps organizations make the right choices. However, as projects to improve energy efficiency are likely to be competing for funds against other projects, what is really being evaluated is project’s position within a list of possibilities. To give energy projects the best chance of being funded, an economic evaluation should be presented with the proposal. The decision maker will then be able to compare the benefits of the energy project directly with the other investment proposals.

5.2 Key Stages in Financial Evaluation:

Financial evaluation produce financial measures of the potential of each of the possible investments open to the organization. These measures can then be used to decide which projects should be funded and the priority they should be given. Financial evaluation tries to show the benefits of projects in relation to their capital costs; however, it is often difficult to find any single parameter which measures this. There are many different measures that can be used for economic evaluation, each of which highlights a different aspect of a project. No one measure is better than any other, and each as its strengths and weaknesses.

5.2.1 Cash Flow:

The first step in any economic evaluation is to gather the information on the project costs and benefits and calculate the cash flows. This gives a statement of how much money will be spent or will be earned in each year of the project.

To determine the cash flow for a project, the costs and savings must be collected for the years in which they occur. The cash flow for each year is found by adding the savings (Positive amounts) to the costs (Negative amounts) for that year. According to the type of project, prediction of the cash flows becomes more or less difficult. There are even cases where a quantitative estimation is almost impossible and the financial evaluation becomes almost unfeasible.

In our case study we considered battery cells as a substitution investment. The cost savings, namely the conservation and maintenance cost savings are known and they can be predicted with a satisfactory degree of accuracy.

5.2.2 Financial Evaluation Techniques

5.2.2.1 Net Present Value (NPV):

NPV is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

The NPV is a financial parameter of particular interest to the financial manager, because it indicates the amount that the project will earn for the business over its expected lifetime in today’s money. If the NPV is positive, the project is viable. If the NPV has been calculated using a realistic discount rate, it can provide information on how to finance the project. For example, the current interest rate to borrow the capital required could be used as a realistic discount rate. If the NPV is negative, it would not be worthwhile borrowing the money for the project. A positive NPV would show the project could repay the loan and still give the investing organization a profit.

5.2.2.2 Internal Rate of Return (IRR):

IRR is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

The IRR measures the project’s profitability. It represents the rate of return that money would have to earn if invested outside, or elsewhere in the organization on another project, to be a better investment than the project being proposed. The higher the IRR, the better the project is As with NP, the IRR can help assess ways of financing the project. The IRR can be compared with the current interest rate for borrowing the capital required .If the IRR is lower than this interest rate, the project would lose money if it was financed by borrowing. If the IRR is greater than the cost of borrowing the capital, the project will generate enough income to repay the loan and still provide profit.

5.2.2.3 Payback Period:

It is the length of time required to recover the cost of an investment.

Calculated as:

The easiest financial parameter to calculate is simple payback, which is defined as the capital cost divided by the average annual savings. Using Payback has some obvious benefits like ease of calculation, tangibility and accuracy, but Payback has some serious disadvantages like it takes no account of any savings after the Payback period and it does not take into account any income from reselling the capital asset later on.

Payback, however, is an useful screening method for projects. A project with a Payback of a few months clearly deserves further investigation, whereas a project with a Payback of 10 years would usually have little chance to receiving funding.

5.2.2.4 Return on Investment (ROI):

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula “gains from investment”, refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

ROI > 1 means that the is profitable

ROI < 1 means that for the discount rate used the NPV < 0 and the project is not profitable.

5.3 Financial Evaluation of the Targeted Project:

In the Financial Evaluation of the project, Addition of 350 Battery Units in BTS, we have tried to determine whether the project is financially viable by calculating Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period and Return on Investment (ROI) by first determining the Cash Flows during the lifetime of the project. The following information have been taken into consideration while determining the Cash Flows

1. 300 sets of batteries will be make 300 generators free. Therefore, 300 generators will be offloaded by adding these 300 sets of batteries.

2. Battery lifetime has been considered as 36 months but savings is calculated for 32 months considering any los due to any unwanted situation.

3. A portion of these 300 sets will be used just for addition with existing batteries to enhance capacity. Rest sets will be used as replacement of existing batteries where some cells are faulty.

4. After installing 300 sets we’ll make 50 sets free from some sites which will be used to reduce outage in some additional sites.

5. Fuel Cost/Running Hour (RH) is TK. 196 and TK. 225 for Generator and Non-AG (Outage Reduction) respectively.

6. The Weighted Average Cost of Capital (WACC) has been accepted as 15.6% and the lifetime of the project has been taken as 3 years.

7. All the figures are in TK.

5.3.1 Capital Expenditure (CaPex):

Table 2: Capital Expenditure Calculation

5.3.2 Generator Deployment Plan:

Table 3: Generator Deployment Plan

5.3.3 Detailed Breakdown of Savings:

Table 4: Savings Breakdown

5.3.4 Saving Calculation:

Table 5: Savings Calculation

5.3.5 Cost Benefit Analysis: