Description of Chosen Project the Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

The Kuwait Metro project will envisage expressway’s construction and extension of a transportation facility in Kuwait. This project will service some large population. The government of Kuwait can hire the National Bank of Kuwait for evaluation of Kuwait Metro train, and the bank will hire an engineering economist to use various engineering economic techniques to evaluate the Kuwait Metro project. The objective of this report is to assess the financial viability using engineering techniques for constructing the Kuwait Metro train. The story will be built and designed with the specific purpose of demonstrating that either Kuwait Metro train construction project is viable enough or not to attract the potential investors along with facilitating public [1].

Added Value of Project and its Importance to the Market

The Kuwait Metro project will add value to the life of ordinary citizens of Kuwait. The Kuwait Metro Train will be a sophisticated set of information technology systems that will be environment-friendly. This information technology-based project will help Kuwait government to monitor and plan its transportation operations based on analytics of real-time and reduce pilferage in the collection of government revenue along with facilitating the passengers. The Kuwait Metro Train project will prevent accidents at a boarding time of buses, and a large number of passengers will be promoted at the same time. The government of Kuwait with the help of the National Bank of Kuwait will encourage the general public of Kuwait at subsidized rates. This service is expected to be cheaper, timely, and comfortable.

Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

Deliverable 2

Introduction of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

Engineering Economics includes the methods which help in decision making to managers via providing necessary information about economic evaluation of investment options and monetary quantification. Engineering economics concepts are used to evaluate the particular project and then to find out its advantages and disengages of each alternative investment option and to tell the decisions makers which one is more beneficial for them. All the investments projects required the identification and evaluation of the impact of the results of that decision making and then to forecast the capital resources needed. Usually, all the projects evaluated with the use of engineering economics techniques vary from each other, but in all alternative plans, financial and monetary aspect is evaluated. Feasibility parameters are established while assess the project with the use of engineering economics techniques that include the followings: Payback Period (PBP) is a time to recover initial investment, Net Present Value (NPV) or Internal Rate of Return (IRR) is accumulation of discounted cash flows (which is expected future cash flows equivalent present value) subtracted from initial investment [2].

At a time of buying capitals goods or making investment decisions, it is essential to check all the alternative investments or buying options via finding their advantages and disadvantages regarding their monetary value then the techniques of Engineering Economics plays a pivotal role in doing so.  The responsibility of making investment decisions in Kuwait, The National Bank of Kuwait is primarily responsible for the programs, policies, and plans related to investments which should also reflect the Federal Government policy acting as a strategic partner in those projects to the government. Due to the modernization and technological changes, Kuwait's economy is going through significant changes which are giving them more opportunities and in this regard; it is important to evaluate different available alternatives. In this context, the substantial role in the National Bank of Kuwait is to focus on new developments which lead to sustainable business strategies, support the existing and new ventures, evaluation and structuring of projects and focus more on local productive arrangements which result in better local potential. To fulfill this, the proper allocation of both public and private resources are needed to support the best investment projects.

Based on the above facts, this research aims to examine the Kuwait Metro Train construction project using Engineering Economics Techniques. The government of Kuwait can hire the National Bank of Kuwait for this construction project as it can handle such high-level projects. This paper constitutes the following section of the article: Introduction, Engineering Economics and its Methods of Analysis, research methodology, conclusion and recommendation.

In this project, Kuwait Metro’s case study has been presented along with the promotion agent in the form of performance and the mix of tools used by financial institutions for assessing and reviewing the Metro Project’s feasibility. At the ending of this paper, analysis of results, opportunities and suggestion, and conclusion have been presented.

Engineering Economics and its Methods of Analysis

The primary aim of engineering economics is the analysis of decisions regarding economic investments. Furthermore, it has many costly applications considering the state of finances from, government entities, individuals, and companies. In most of the engineering processes, economic elements are recognized as strategic. Due to it among the engineers, the broad acceptance of the duty concerning the solidification of engineering proposals form a financial as well as technical point of view regarding both value and cost played a role in the rise of confidence in the engineering profession [3].

 The initial analysis methods utilized in engineering economics for making decisions among investment substitutes are:

(PAYBACK) Pay Back Time: It includes the determination of the extent of time while a unit is mostly recognized as a year is needed by an investor in the recovery of invested capital. Through dividing or distributing the sum of expenses, costs, and investments incurred by the earned profit's amount [4]. 

(NPV) Net Present Value: It is explained as the sum in the form of an algebra of discounted values of cash flow linked with the project. Specifically, it is the present income's difference less than the current costs. With the positivity of NPV, the viability of this project should be illustrated or highlighted. With the utilization of the following formula, this feasibility's indicator is estimated:

While Initial investment = F0 and project life's period were compromising of cash flow = F1, F2, F3,….Fn; discount rate = r which is equal to the capital’s cost or investment’s opportunity cost [5].

(IRR) Or Internal Rate of Return: It is estimated project's cash flows with almost no requirement of arbitrating the discount rate. It is also a demonstration of a project's profitability regarding finance. Advantage will rise regarding finance with a higher IRR. For the acceptance of a plan, the IRR must exceed the cost of opportunity or at least interest's basic rate developed by Central Bank of Brazil or monetary authorities. With the utilization of the trial and error method, computers, and financial calculators, the IRR can be estimated while the outflows' present net values and net profits or cash inflows are zero. Following formula can be used for its estimation:

While return's internal rate is matched by r* and project's cash flows are F0, F1, F2, …Fn.

BC ratio or The Ratio of Benefit/Cost: Against other indicators, its interpretation and utilization are highly included due to its ease. Its calculation is carried out by dividing the benefits which are discounted by the project's discounted costs. If BC ration is lower than the unit, the rejection of the project will take place (i.e., B/C <1).

Breakeven point: It is the production's minimum standard linked with sales' level which surrounds the cost without any loss. The final sales' amount is defined by this point in which money is neither gained nor lost by an innovative unit. Profits are presented above this sign or point, and below it, losses are suffered. Therefore, the breakeven point is the lower level while the project's stability is against the modifications in costs and incomes. Through the following formula, the estimation of breakeven point takes place

While (Revenues – Variable Costs) divided by Revenues is equal to contribution margin.

Risk and Sensitivity Analysis: It is a way through which a projection or model is evaluated by modifying the value of a variable to understand just what happens once the end reaches. It helps in understanding the influence of productive elements on assumed results. It enhances the knowledge of importance concerned with each variable and input on a productive unit's performance. Regarding every variable, the profitability of the project is defined through sensitivity analysis. Project's sensitivity can be determined regarding each variable or element [6].

Financial report: It is a significant tool for supporting the process of decision-making. Through utilizing it, the effect of some aspects on the financial condition of the organization can be determined along with the economic issues which support the manager in getting more information about company's solvency, liquidity, and payment capacity [7].

(CBA) Or Cost-benefit analysis: In such type of study, the actual worth or value of all benefits and costs for overall stakeholders ought to be mixed for producing an NPV. It is essential to consider the externalities which are resulted from the process or project. In such, benefits or social costs are typically included which develop themselves over the project's realm or boundary and affect the third parties' welfare or well-being without the presence of compensation which is monetary. With the requirement of evaluation regarding a public body or entity, it is important to consider the externalities which are to be generated. From private bodies, the project's evaluation does not recognize the impact of external parties or third bodies erupting from the externalities which are linked. Nonetheless, the creation of externalities by a process or project is very tough to quantify. In various scenarios, the quantification is considered very difficult. Therefore, considering the external elements is also critical except the firm's perspective or point of view. It is significant for a project to include the aim of providing services and goods for enhancing society's welfare. Such needs and requirements can be fulfilled by assisting the process of decision-making with an analysis of cost-benefit through implementing social values to the project's all impact [8].

Research Methodology of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

To apply the engineering economic concepts on Kuwait metro evaluation and decision-making process, a descriptive and exploratory case study has been undertaken which will help in understanding the strategies of National Bank of Kuwait and to forecast the financial resources needed and targeted investors return of the project. In Kuwait, NBK is mainly responsible in an evaluation of all the projects which includes the financial investment or government spending on those projects and NBK apply all the engineering economics tools on that particular project for their evaluation and feasibility. World-class Capital investment house of NBK is the best choice for the Kuwait Government for the metro project as it will make its usefulness and will meet the financial needs of the project.

For the collection of the data, the following resources have been used:

Primary Sources of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

A detailed technical study has been conducted by the team of engineers which included the Project design, Traffic study, and geotechnical studies

Real estate agents have provided their services in the accurate valuation of the Land cost for the Metro project.

Also, all the domestic and local stakeholders related to Kuwait Metro project have consulted on a plan to examine and proper completion of the project.

Secondary Sources of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

A lot of secondary research has already conducted on the traffic issue of Kuwait and Metro which have also served as a great source of information for the project.

Kuwait Metro Construction Project Analysis

The four most important and relevant financial models of engineering economics have been used to evaluate the Kuwait Metro project. Out of four models, one is in regular procurement mode, and the other three are in PPP mode [9].

Build Operate Transfer (BOT)

BOT with government support

Project Cost Sharing

Viability Gap Funding

Build Lease Transfer (BLT)

 The deferred payment model is a fourth financing model, and it is not considered as PPP model. The detailed explanation of all four models is given below:

Build Operate Transfer (BOT): National Bank of Kuwait has been awarded the project, under BOT agreement and it is referred as Concessionaire which has responsibility for its construction, financing, and operation of the metro project. Kuwait government and National Bank of Kuwait are decision making authorities for the Revenues accruing, and through the collection of trolls, Kuwait government and NKB will recover its investment. As the National Bank of Kuwait finalizes feasibility, so it is responsible for all the revenue risk associated with it and after completion of the project its ownership and maintenance will be handed over to Kuwait Government.

BOT with government support: As it is expected that Kuwait metro is not entirely financial viable only by BOT and it requires government funding and subsidy to make it a more attractive option for the investors [10].

There are two ways how the Government of Kuwait can support this project:

Viability Gap Funding

Project Cost Sharing

It is tough to manage the project, under BOT due to the low revenue and high cost, so the government of Kuwait is ready to support the project with a remaining gap to cover its expense and make the IRR of this project useful. Government annuity will also be adjusted if the government troll revenue exceeds the expectations. The second option which Government can opt is to bear a one-time-cost and make the project operational and running. VGF results in higher payments which constitute the return on private investors' equity, and it is best for the government.

Build Lease Transfer (BLT): As per this agreement, National Bank of Kuwait has agreed to manage finances and then to build the Kuwait Metro till completion. After the completion period, the Lease agreement will be transfer to the government of Kuwait. The NKB or Kuwait Government manage the maintenance and operation cost of the Kuwait metro as per contract. It has been decided that Kuwait government is going to pay the fixed or variable amount of annuity to sponsor the project to National Bank of Kuwait as per their agreement. The expected return of the investors will be paid by the pension given by the government of Kuwait; if there will be any shortfall of the revenue to investors. After the completion of the lease, the whole project, its rights, ownership, and privileges will be handed over to the Government of Kuwait

Deferred Payment: In deferred payment arrangement, it is decided that the National Bank of Kuwait will finance the whole project and it will work as a contractor of that project, and the government of the Kuwait Government will pay all the costs and charges over the number of years in installments. As a contractor of the Kuwait Metro, a primary responsibility of the NKB is to make sure that project will be completed on time. Besides, a bank will also make sure to get profits on the project along with interest on the borrowed amount.

Project Financials: For the long-term projects, the risk of investing in Kuwait is relatively low. Kuwait is a perfect destination to spend money due to higher returns and developing economy which are possible because of the conducive business environment, infrastructure, business-friendly policies of a government, and a stable political system.

Those projects which have at least 18% IRR get the attention of the investors because in long-term plans safe option of bonds is available at the rate of 10% yearly. There are also so many old projects under BOT basis were completed having Equity IRR of 18% or above [11].

The table here provides a summary of the assumptions and project costs:

 Table 1: Overview of Uses and sources of funds:

To evaluate the viability of the Kuwait Metro construction project, a financial model has been built by assumptions and expected toll revenue which will be based on passengers and their need. BOT agreement with Kuwait government is on project cost sharing, and deferred payments are given below.

Table 2: Toll Structure

Option Analysis of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques

Different models have been used to evaluate the feasibility of the Kuwait metro project. The project is estimated to have a low plan of IRR of 16.52% in comparison to the expected IRR of 18% in the market. The net present value calculated for the Kuwait Metro project is 15469205 Kuwaiti Dinar over 25 years at a 10% discount rate.

BOT with Government Support (Project Cost Sharing)

For making the construction project of Kuwait Metro feasible for the investor who is private, Kuwait support's government is presented in the form of project's partial financing. Such financing is given to the amount of offset cost of integration concerned with Kuwait corridor that is dedicated into the project or plan. Bank of Kuwait has proposed 15 Million Kuwaiti Dinar which amounts for the price and is to be borne. The work's scope which remains yet with all overhead of project management is measured to be 18 Million Kuwait Dinar. Furthermore, it is sought through the finance which is private [12].

Table 3 Balance Sheet

Along with Kuwait support’s government and BOT agreement, the project is highly feasible at the rate of toll for vehicles falling under Class 1. Positive NPV will be expected for the project.

BOT with Government Support Sensitivity Analysis

For the further establishment of the feasibility of the project, construction cost, toll rate, and traffic volume are required. Below are given thorough tables of analysis concerned with the sensitivity. For modifications in construction and traffic volume, the observed value of Equity IRR was ±20% and ±10% from the lowest cost [13].

Table 4 Cash Flows

References of Evaluation of Kuwait Metro Train construction project using Engineering Economics Techniques