Credit (Risk) Management; Capital management

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Table of Contents

CHAPTER 2: LITERATURE REVIEW1

Background of Financial Management1

Working Capital Management2

Managing working capital3

Focus for working capital management4

Risk Management4

Commodity Risk Management7

Capital Management and its main components8

Capital Budgeting11

Indirect Infrastructure Financing13

Global Barriers14

Infrastructure Financial Instruments15

Capital Providers in Infrastructure Investment15

REFERENCES17

CHAPTER 2: LITERATURE REVIEW

Infrastructure project expenditures in the world economy have been growing substantially in the last two decades (Koven 2003, pp.1). Public owners of infrastructure projects, who have originally shouldered the burden of infrastructure finance through a variety of public-financing structures, must face the daunting challenge of balancing the huge spending demand with a constrained budget. Therefore, governments around the world are looking for economically efficient and creative alternative ways to deliver infrastructures.

Background of Financial Management

Public financial management is especially important in controlling levels of revenue and expenditure and in allocating public resources among various sectors and programs. Hyman (2009) explained, “Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures” (p. 5). Governments invest most of the collected revenues mainly from taxes on public goods especially on varied capital that constitute a nation's physical infrastructure (Hyman, p. 224). Capital management is a crucial part of public financial management. It has received more attention when the management of capital assets has been inadequate and problematic in many states. Governmental capital management has been controversial (Lane 2000, pp.132). It is always related to capital budgeting or management of public capital assets. Public capital assets often mean land, buildings, public infrastructure, and equipment. However, the concept of public assets has been expanded with more comprehensive and diversified services demanded by the public. Let us clarify the concept of capital assets before we start the discussion of capital management.

Working Capital Management

Working Capital is a financial metric measuring the amount of liquidity available to an organization as a consequence of its daily operational processes. Even when everyone can agree on this high level definition, the measurement and daily management of working capital will vary widely by organization. Executive management has recently re-focused on working capital management because access to external liquidity comes with more and more strings attached. Measures taken by governments and the Basel Committee suggest that credit will remain tighter and more expensive for a prolonged period. The business approach to working capital differs by entity. Bankers typically assess working capital from the perspective of funding and liquidity risk. Corporate (finance) managers would rather assess the topic from a business process improvement perspective.

For the purpose of this document we will stay closer to the corporate perspective, and in particular the funding requirement related to the cash locked in the different stages of the cash conversion cycle. The swiftness of the cash conversion cycle and the speed at which for instance inventory is converted into receivables and thereafter into cash defines the level of funding required from suppliers and financial markets for staying in business. Working capital is also closely related to two other, more fashionable notions; the physical and financial supply ...