Financial Questions

Assignment:

Please note this assignment consists of two separate parts.

The first part gives the cash flows for two mutually exclusive projects and is not related to the second part.

The second part is a capital budgeting scenario

Part 1

Calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above:

Table 1

Cash flows for two mutually exclusive projects

YearInvestment AInvestment B
0-$5,000,000-5,000,000
1$1,500,000$1,250,000
2$1,500,000$1,250,000
3$1,500,000$1,250,000
4$1,500,000$1,250,000
5$1,500,000$1,250,000
6$1,500,000$1,250,000
7$2,000,000$1,250,000
80$1,600,000

Part 2

Study the following capital budgeting project and then provide explanations for the questions outlined below:

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers (stringed instruments). The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million after-tax. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $415,000 per year, and variable costs are 15% of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Networking capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%.

Now provide detailed explanations for the following:

  • Explain how you determine the initial cash flows.
  • Discuss the notion of sunk costs and identify the sunk cost in this project.
  • Verify how you determine the annual operating cash flows.
  • Explain how you determine the terminal cash flows at the end of the project’s life.
  • Calculate the NPV and IRR of the project and decide if the project is acceptable.
  • If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock.

Provide detailed and precise explanations and definitions. Comment on your findings and provide references for content when necessary. Explain everything in your own words use APA 7th Format, references cited needs to be peer-review articles.

 Turnitin report’s similarity must be less than 20%!!!

[ Don’t use too many tables and numbers which will increase the similarity, focus is not on the calculation process, focus is the detailed explanations and definitions, you must write enough text explanations, which is your original analysis.

Rubric:

Criteria  Performance Indicators  (Observation descriptors indicating extent to which criterion is met.)
  Exemplary 109  Proficient 876  Needs Improvement 54  Unsatisfactory 321  No Submission
Depth   30% of overall gradeContent indicates synthesis of ideas, in depth analysis, and evidence of original thought and support for the topic. Content indicates  original thinking and develops ideas with sufficient and firm evidence. Content indicates thinking and reasoning applied with original thought on a few ideas.Content indicates some thinking and reasoning but most ideas are unoriginal or underdeveloped. 0 points
Resources   25% of overall gradeAll evidence supports arguments and is relevant to the topic. The student uses the required number and type of resources identified in the syllabus to support his/her argument. Most evidence supports arguments and is relevant to the topic. The student uses 75% of the required number and type of resources identified in the syllabus to support his/her argument. Some evidence supports arguments and is relevant to the topic. The student uses 50% of the required number of sources.Limited evidence to support arguments, with few sources relevant to the topic. The student uses less than 50% of the required number of sources.0 points
Organization   15% of overall gradePaper has a high degree of attention to logic and reasoning of points. Paper clearly leads the reader to the conclusion and stirs thought regarding the topic. 

Paper is coherent and logically organized with transitions used between ideas and paragraphs to create coherence. Overall unity of ideas is present. Paper is somewhat structured and logically organized. Some points remain misplaced and stray from the topic. Transitions evident but not used throughout. Paper is limited in logical organization with major errors. 0 points
Mechanics   15% of overall gradeFew errors in spelling, punctuation, capitalization, sentence structure, and grammar.Occasional errors in spelling, punctuation, capitalization, sentence structure and grammar, but meaning is not obscured.Frequent errors of spelling, punctuation, capitalization, sentence structure and grammar; meaning confused or obscured.Dominated by errors in spelling, punctuation, capitalization, sentence structure and grammar; meaning at times unidentifiable.0 points
Formatting   15% of overall gradePaper meets all formatting guidelines and assignment requirements, including page-length and APA formatting requirements.  Paper is correctly assembled with a professional look. The paper follows most formatting guidelines, including page-length and APA formatting requirements.Paper is correctly assembled.  Paper generally follows formatting guidelines and assignment requirements, including page-length and APA formatting requirements. Paper has some assembly errorsPaper does not follow formatting guidelines and assignment requirements, including page -length and APA format requirements. Paper has major assembly errors0 points

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Literature Review- Block Chain Technologies and Crypto Currency as Financial Assets

Literature Review- Block Chain Technologies and Crypto Currency as Financial Assets

Literature Review- Block Chain Technologies and Crypto Currency as Financial Assets

Introduction

Block chain technologies and cryptocurrencies have emerged as a new and rapidly evolving field in the world of finance. Cryptocurrencies, in particular, have gained significant attention as a potential new financial asset that could challenge traditional currencies and financial instruments. The performance of cryptocurrencies as an investment, the impact of government cryptocurrency adoption on the economy and financial system, and the effect of blockchain technology on the stock market are the topics that were utilized to collect the data. This literature review will examine three articles that explore various aspects of block chain technologies and cryptocurrencies as financial assets.

The literature review articles were sourced from the Monroe College library’s PROQUEST and EBSCOhost databases. Useful supplementary data was obtained from scholarly books, magazines, newspapers, and articles. They aided in the collection of data pertinent to the study of green cloud computing’s effects on preserving the natural world. Articles from scholarly publications were retrieved online using a variety of search engines as well as by entering the title directly into the website of the respective publication’s publisher.

Review of Literature

The evolving of blockchain technology

Cobert et al. (2018) extensively researched blockchain technology and the essential topics in such markets. The authors come from higher learning institutions like Dublin City University and Trinity College Dublin. The authors present the study in 2018 about the major topic since the development of Bitcoin as a financial asset in 2009 up to 2018. The main areas of the research paper include how blockchain technology has evolved, the developments happening in such markets, and unique issues about such demands. The researchers wanted to analyze various literature surrounding the growth of blockchain markets.

The authors also explain that direct transactions and payments between parties could be at risk of pricing bubbles. Cobert et al. (2018) suppose that this currency could endure the problem of price bubbles because of the recent increase in the price of Bitcoin. The new technology in finance will impact financial regulations because it brings forth a new set of currencies that traders will engage in. Companies that diversify to this technology are better positioned to earn returns as their income is also diversified. The authors suggest that Bitcoin technology consumes more energy in the present than before. Other studies indicate that bitcoin technology only consumes a little power since mining costs exceed revenue.

Minimization of risks

Masoomzadeh and Salmani (2022) presume that all other research in the past has been focusing in the risks of stock exchange. They put effort in explaining the relationship between blockchain and the market of stock exchange. Masoomzadeh and Salmani (2022) determine that the technology of blockchain could indeed be used to control several risks that arise in the stock market. The researchers, who are also members of Tabriz University, are qualified for such kind of research. These researchers embarked on research in the year 2021 in Iran.

           The authors used applied research to find and fulfill the purpose of the study. The analytical part of the research explained the analysis of various findings. Masoomzadeh and Salmani (2022) made effort to determine whether those companies in the business of stock trade would benefit from the improvisation of blockchain techniques, especially in Iran. The study period was between April 2011 to August 2021. The authors use documentaries and library means from the stock exchange of Iran to collect statistics for the research. The results show that the market share negatively affects the total risk. The total risk of the market rises by 0.01% when the market share of the stock rises by 1 percent. The study’s finding showed that the profits that companies can get out of transactions are inversely proportional to the risks they face. Most importantly, blockchain technology positively influences risk since it increases risk by 0.0002.

Adoption of cryptocurrency strategies

               Mahdavieh (2019) conducted research to analyze the characteristics of kleptocratic regimes and how these attributes help to adopt cryptocurrency strategies of the government. The paper by Mahdavieh (2020) was impactful in showing that developing countries like Iran have suffered a lot from the restrictions of the first world countries like America. The authors were determining whether the national governments are likely to implement new cryptocurrency policies, especially in kleptocratic regimes.

               The research methodology was a complex analysis of statistics to determine the relationship between dependent and independent variables. The author used Mill’s method of agreement to establish whether attributes lead to the same outcome, thus confirming the correlation. The author also went further to conduct a comparative case study of the three countries. The findings of the study showed that cryptocurrency is initially part of the citizens of Iran, Russia, and Venezuela. The citizens of these countries share the attributes of a depreciating currency because of the sanctions from the West. Sanctions from western nations like the US continue to depreciate the value and progress of the economy.

Analysis of Literature

Cobert et al. (2018) provides a comprehensive overview of cryptocurrencies as a financial asset, with a focus on their performance as an investment. The authors review the literature on cryptocurrency pricing, volatility, and correlation with traditional assets such as stocks and bonds. They also analyze the role of macroeconomic factors such as interest rates, inflation, and economic growth in affecting cryptocurrency prices. On the other hand, Mahdavieh (2019) examines the motivations behind these countries’ decisions to adopt native cryptocurrencies and the potential benefits and risks of government-issued cryptocurrencies. The authors analyze each country’s economic and political context and discuss the legal and regulatory frameworks governing cryptocurrency adoption. Masoomzadeh and Salmani (2022) examined the effect of blockchain technology on the Iranian stock market and its volatility during the COVID-19 crisis. The researchers give an outline of blockchain technology and its possible applications in the financial field, as well as an analysis of the Iranian stock market before and during the crisis.

The articles have different strengths and limitations. Cobert et al. (2018) article’s strengths include its systematic and comprehensive analysis of the literature, which provides a thorough understanding of the topic. The authors use a quantitative approach and provide statistical evidence to support their arguments, which is different from other articles. However, the article’s limitations include its focus solely on cryptocurrencies as an investment, rather than their potential as an intermediary in the exchange. Mahdavieh (2019) article’s strengths include its in-depth analysis of the case studies, which provides insight into the potential motivations and outcomes of government cryptocurrency adoption. However, the article’s limitations include its focus solely on three countries, which may limit its generalizability to other contexts. Masoomzadeh and Salmani (2022) article’s strengths include its focus on the effect of blockchain technology on the stock market, which is a relatively unexplored area of research. The authors also provide an analysis of the Iranian stock market, which may be of interest to scholars and policymakers. However, the article’s limitations include its narrow focus on the Iranian stock market and its reliance on secondary data sources.

Cobert et al. (2018) article is suitable for gaining an understanding of the performance of cryptocurrencies as an investment and the factors that affect their prices. Its systematic approach and statistical evidence make it a reliable source for this topic. Mahdavieh (2019) article is suitable for gaining an understanding of the motivations behind government cryptocurrency adoption and the potential benefits and risks of such adoption. Its in-depth case studies make it a valuable source for this topic. Masoomzadeh and Salmani (2022) article is suitable for gaining an understanding of the potential effect of blockchain technology on the stock market and its volatility during crises. Its focus on a specific country and context may limit its generalizability, but its analysis of the Iranian stock market is still valuable.

References.

Corbet, S., Lucey, B., Urquhart, A., & Yarovaya, L. (2019). Cryptocurrencies as a financial asset: A systematic analysis.  International Review of Financial Analysis,  62, 182-199. https://doi.org/10.1016/j.irfa.2018.09.003

Mahdavieh, R. (2019). Governments’ Adoption of Native Cryptocurrency: A Case Study of Iran, Russia, and Venezuela. Retrieved from https://stars.library.ucf.edu/cgi/viewcontent.cgi?article=1532&context=honorstheses

Masoomzadeh, S., & Salmani, B. (2022). The Blockchain Revolution and the Volatility of Stock market in Iran During the COVID-19 Crisis. Retrieved from https://www.researchsquare.com/article/rs-1935978/latest.pdf

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THE NATURE OF THE CONFLICT BETWEEN SAUDI ARABIA GOVERNMENT AND THE OPPOSITION UNDER INTERNATIONAL FINANCIAL SUPPORTERS

CHAPTER ONE

Introduction

Saudi Arabia is one of the most religious states in the world which has successfully combined the state (dawla), religion (din), and princes (umara) (Teitelbaum & Pipes 2001). The country has thrived on the arrangement between the royals and the religious clerics. The Al-Saud royal family provides funding and a stable structure of government which allowed the growth of a conservative religion throughout the nation, while the clerics provided the government with the religious legitimacy to rule (Teitelbaum & Pipes 2001) . The arrangement made it possible to have an authoritarian regime that uses the nation’s wealth to the favour of only the royal family. Clerics legalize all action made by the authoritarian regime even though unjustified. Arbitrary detentions and enforced disappearance were legalized by clerics as the Royals’ right to protect citizens which completely contradict with Islamic teaching. Detaining thousands of people for more than six months, in some cases for over a decade, without referring them to courts for criminal proceedings (Justice 2008) . Arbitrary detainees held for very long periods has obviously increased dramatically in recent years. Cleric Salman AlOudah has been detained since 1st September 2017 without a legal charge or indictment and was not brought to the court. It was not only the Islamists who were exposed to such violations but the intellectuals and human rights activists. The clerics were free to enforce Sharia in the country, and the Royals were free to run the wealth and affairs of the country. However, as the Saudi state grew and started embracing modernism, some changes were made, and this revealed subordination of clergy to the Royals at the expense of religion. The Royals welcomed some western ways, and this foreign influence should be rejected by the clerics (Kostiner 1996) . The royal family now is fully controlling the clerics. Conflicts arose as a result of this modernization of the country in that; the clerics support the reforms implemented by the state. Accordingly, official religious establishment became part of the government and worked in line with. The royal family wanted a more centralized system of government while citizens keen to huge reform away from the authoritarian regime.

Security grip is a royal way to keep interests and stay in power. It is impossible to talk about pluralism nor political participation as that can be conceded as disobedience of the royals and Islam teaching.  In the meantime, all opposition forces are calling for democracy, pluralism and political participation. Citizens are also seeking change not calling for dropping the royals but by calling for constitutional monarchy. Citizens and opposition forces believe in the political reform which obviously unacceptable to the Royals. Therefore, citizens’ perceptions are important for more understanding the needed reform. 

Saudi Arabia government approved a huge shift when prince Mohammed Bin Salman appointed as crown prince on June 21, 2017 (Barnell 2017). The new crown prince has made a number of exciting reforms, such allowing women to drive, opening cinema halls and performing concerts. Unfortunately, political reforms were not part of the crown prince’s plan. Furthermore, the crown prince has embarrassed the Wahhabi religious establishment as all his reforms contradict their approach. 

Crown prince Mohammed Bin Salman stated that Saudi authority adopted Wahhabism as requested by western states to stop the Communist expansion in the late 1970s (DeYoung 2018). The statement can be considered as a coup against the religious establishment which has been silent. Opposition forces welcomed the statement as it removes the authority religious legitimacy that violates rights and confiscates freedoms.  

CHAPTER TWO

Literature

The opposition in Saudi Arabia can be traced back to the early 1930s. Prior to this period, the Islamic rules were practised in accordance with the Wahhabi creed. These principles laid the basis of the Saudi expansion as an enforcer of the sharia law. The laws were used as a moral compass to guide the actions of the citizens. After the establishment of a state that was more centralized than decentralized, individuals and groups resisted the control from the state. A dispute later arose between Abd al- ‘Aziz Ibn ‘Abd al-Rahman (Ibn Sa’ud), the Saudi leader at that time, and a number of tribal groups, the Ikhwan, who were loyal to the religion and resisted being under the control of the government. Fierce disagreements arose between the leading clerics and the royals. In the 1930s, the king, Ibn Sa’ud made the Wahhabi Islam the official state religion. Only the senior clerics had supreme religious authority. This meant that all the other clerics could only conduct their affairs within the religious framework put in place by the king. He also made state interest superior to the religious interests (Matthiesen 2015) .

The Wahhabi Islam became the only moral guide in the state. However, they were only allowed to operate in accordance with the interests of the state. The clerics were limited to guiding the behaviour of the public, educating individuals, and preaching. They could not take part in governing the state. The state was run by the royals and the elite clerics. The Ikhwan tribal groups which opposed the king’s control over the people lost the battle in between 1929 and 1930 after a military help from Great Britain to King Abdulaziz. They were not able to spread their ideologies. They remained underground, and their ideas were adopted by various other opposition movements over time. The opposition in Saudi Arabia came to be as a result of people resisting change and state control (Meijer, Aarts, Wagemakers, & Kanie 2012) .

After the Second Gulf War, the opposition continued to grow. The opposition groups and individuals in this era had slightly different grievances. When the Saudi military was unable to defend the country, and the U.S military troops were called in to help, most of the people criticized the state. The royal family was seen as weak and incompetent leaders. The opposition groups that developed in this period were determined to end the reign of the royal family. There was a public outcry when the non-Muslim troops came into the country. The presence of the foreign troops in the state led to the opinion that the royal family held foreign interests in high esteem. The opposition criticized the royals as being keener on protecting the interests of outsiders (Teitelbaum & Pipes 2001) .

In the years 1991-2001, the activities of the opposition were restricted by the state. Outspoken individuals who challenged the royals were imprisoned or detained without a trial (Teitelbaum & Pipes 2001). The opposition groups such as the Movement for Islamic Reform in Arabia started operating outside Saudi Arabia to avoid being persecuted. Most of the opposition leaders used London as a base of operations. They were able to reach their supporters through the internet and the media without facing any repression from the royal family.  The grievances and issues addressed were the same throughout the 1990s. Both the radicals and the liberals agreed on the issue of foreign interference (Jenkinsc 2017) .

Their oppositions have grown ever since despite the constant repression from the Saudi government. The opposition in Saudi Arabia is similar to other movements in the Middle East except for the fact that the Saudi opposition derives from the Wahhabi school of thought in that, they have their interpretation of the Sharia that they use to challenge state control as being unlawful. Some of the religious ideologies of the modern opposition and activism correspond with some of the ideas from the West, and as a result, they can influence the modern middle-class individuals (Matthiesen 2015) explain the assertion – democracy- pluralism- human rights principles. The Saudi oppositions accept and call for democracy, political participation, and pluralism that denied by Wahhabism. It is easier for them to influence the educated people since they purport to seek to address a modern issue such as corruption, human rights violations, among other things. Even though some of the oppositions have clear objective sand structures, they are at risk or becoming ineffective due to the measures were taken by the Saudi government and other interested parties in repressing opposition. This means that even though most of these oppositions exist and have a lot of influence, their activities are quashed even before they become established. 

The Theory of Saudi Arabia Political Opposition

All political oppositions fighting the authoritarian regime and call for democracy but under Islamic rules (sharia law).  It is common for the opposition parties in Saudi Arabia to uses the language of Islamic laws, to accuse the government of breaching the holy law by neglecting Islamic goals and deviating from Islamic practices in the administrative, economic and political affairs. The opposition party also suggests alternatives to the existing government based on the Islamic Sharia laws. The radical Islamic opposition movement such as the Tajdeed Islamic Party (Islamic Renewal party) questions theexisting state order by giving its own interpretation of Wahhabi Islam.

Liberalism enjoys a global victory in some sense, and it is perceived to perpetuate the ideals of political liberties or free trade to maximize individual freedom best. However, the opposition in Saudi Arabia believes in liberalism but under Islamic rules (not pure liberalism). The opposition in the country does not advocate a strictly secular state. The opposition is against a West’s spiritually vacant secular culture but instead want a liberal democracy’s based on divine authority. While the opposition supports most of the liberal democracies including popular elections and economic modernization, God’s sovereignty is central to the opposition politicians. The political opposition tends to align their politics with a righteous society with the precepts of shari’a; spiritualism rationalized in the technocratic ways they use to rise against the government and its absolute authority.
While the Political oppositions call for Pluralism as they believe in the need for political parties and institutions of civil society, but they support the activities of the groups should be based on their interpretation of the Islamic law.  Interpretation of the Islamic law differs from one group to another, but that does not change the nature of the liberalism they want to see in the country.

The Islamic Umma Party.

          The Islamic Umma Party is regarded as the first opposition political party in Saudi Arabia. It had defied the order that forbade the existence of political parties in Saudi Arabia. The party came into being after nine Saudi scholars, and political activists came together to fight for political reforms. The party was made public on February 9th, 2011. Unlike other organizations that came before and after it, it had a very organized structure with leaders and a well spelled out (Alsalem 2011) .

            After the party was formed, the officials of the party made invitations to activists who shared the same opinions to join them. As a result of this announcement, the founding members of the party were arrested and detained on 16th February that same year. The detainees included; Dr Ahmed bin Sa’ad bin Gharm al-Ghamidi who was a professor at Umm al-Qura University, Mr Sa’ud bin Ahmed al-Dughaithir a political activist, Shaykh Abdul Aziz bin Muhammad al-Wuhaybi; a lawyer and political activist; Dr Abdul Kareem bin Yusuf al-Khidhr who was a university professor, Shaykh Muhammad bin Hussein bin Ghaanim al-Qahtani, a businessman; Mr Muhammad bin Naser al-Ghamidi, a political activist, and Dr. Waleed bin Muhammad Abdullah al-Majid, a lawyer. The detention of these individuals was fueled by the fact that the party had amassed a big following using the media. Its growing influenced threatened the government which is keen on restricting opposition. The actions of the state succeeded in disabling the activities of the party for a while. However, by this time, the Islamic Umma Party had managed to capture the attention of a lot of the people in Saudi Arabia and outside the country. The party’s influence of the people made it a strong opposition organization in the country (Alsalem 2011). It was not just merely existing but also making a difference in terms of political opinions.      

Movement of Islamic Reform in Arabia, MIRA

        Robert Ryan writes an account of the MIRA opposition from its inception to the year 2005. This opposition movement was started in the early 1990s by Sa‘ad al-Faqih. Faqih was one of the founding members of another radical group, the Committee for the Defense of Legitimate Rights (CDLR). When CDLR relocated to London in 1993, he formed MIRA as an opposition movement against the regime in Saudi Arabia. The opposition movement claimed to be running in accordance with the sharia laws. After September 11, 2001, Faqih attracted the attention of the media and publicly condemned the Al-Saud family for various reasons including their exercise of power in Saudi Arabia. He claimed only to support peaceful means of resolving conflict (Ryan 2005).

The movement has a strong horizontal but weak vertical structure. It is a single person organization since it was formed by Faqih alone. This makes it very weak and is bound to disappear once its leader is disappeared — the movement aimed at removing the Al-Saud family from power using peaceful means. Faqih was an expatriate and this limited the ways through which the Saudi government would capture and imprison him. The movement was also based in London and utilized technology to reach its supporters. Ryan argues that Faqih and the movement were not as effective as they were unable to inspire any kind of reform. In 2004, Faqih called for demonstrations, but the turnout was low since public protesting is outlawed in Saudi Arabia. On the day of the protests, the government increased security troops on the streets to prevent the assembly of people and direct traffic. The other reason why there were very few people willing to take part in the demonstrations was that they did not know what they were protesting against. When Faqih called for the protests, he only told his followers to demand reforms. The movement was linked to terrorist groups. In 2004, Faqih was put on the list of al-Qaeda operatives by the United Nations Security Council (Ryan 2005) .

Tajdeed Islamic Party (Islamic Renewal party).

          The Tajdeed Islamic Party was formed in London. Its focus is on the jurisprudence issues that affect Muslim. It supports the “freedom of thought and believes in dialogue based on argument and evidence” (About the Ideology of Party of Islamic Renewal). This is a radical Islamist group that believes in fulfilling their duties at any cost. The growth of the influence of the group is curtailed by both the Saudi government and the Western world.

Ghanem Almasarir

Ghanem Almasarir is a Saudi human rights activist and a well-liked political comedian who is based in London. He is a known political satirist popular for hosting the Ghanem Show that features many popular sections such as “Fadfada.” The show involves criticism of the royal family using black comedy. As an individual opposition, he is very effective in reaching the people. He has a very good media presence and has over half a million followers on tweeter and more on the other social media platforms. The work he does not only sensitizes the world on what is happening in Saudi Arabia but also provides an alternative to the use of violence and threats in the fight against an oppressive regime. The show and the other video clips he publishes on websites and on YouTube reaches thousands of people. His YouTube channel and tweets are readily available to the public. The fact that he can reach a lot of people makes Ghanem one of the most effective opposition. The use of social media improves his chances of reaching the young generation.

Almasarir had been in self-imposed exile since 2003 in London, where he controlled his YouTube-based show from 2015. In his show, he condemns the Saudi royal family, whom he tags as “Salmanco” (relating to the techniques used by the King in controlling the nation in a fashion comparable to a business or as private possession) and “al-Dub al-Dasher” (means fat stray bear) correspondingly in a funny way. Almasarir accused Saud al-Qahtani, an advisor to the Saudi royal court, of being involved in crimes linked to “visa fraud” in Saudi Arabia.

Oppositions Financial Support

The Royals have not lacked the oppositions, although for a long time the Royals have been capable of containing or coopting them. After the second Gulf War, nevertheless, the socio-religious troubles that have overwhelmed the country have resulted in the development of a small opposition society that has disputed royals’ public image. The oppositions were funded later on by international countries such as Libya, Qatar, and Iran.

It has been recognized and noted that Saudi oppositions receive some financial support from states such as the former Libyan regime, Qatar, and Iran. The late Gaddafi’s regime in Libya offered financial aid to Mohammed Almassari, Saudi’s opposition leader, to assassinate former king Abdullah (Burger & Macleod 2004). Qaddafi termed the Saudis that they can even ally with the devil to save themselves. King Abdullah referred to Gaddafi as a liar and states that his grave awaits him. That was in 2003. In 2009, the two leaders insulted each other again in an Arab League summit. Gaddafi had confirmed supporting the assassination attacks on the Saudi King Abdullah. This was to happen in either of the following ways: a personal attack, or by oppositions that would overcome the Royals. Gaddafi planned to interfere and harm the royals and was looking for an opposition who were eager to get involved (Fotopoulos 2011). Al-Massari was the primary suspect of the plan who was charged for the proceedings on colluding for the murder of the late King Abdullah.

Qatar has supported the Saudi Saad Al-Faqih and others to utilize them as instruments to strike the royals. Qatar’s want to respond to the Saudi royals whom supported and planned the 1996 coup against Qatar regime. Qatar preferred to attain that objective by destabilizing UAE, Egypt, and Saudi Arabia, by supporting their arch-rival, Iran that is also planning on disrupting order in the Middle East (Almezaini & Rickli 2016).

Al-Faqih and others were paid millions of Qatari Riyals to create and spread falsehoods concerning Saudi royals. Al-Faqih, currently living in London received 395 million Qatari riyals to use in the plan, in any manner, on weaving fictions on Saudi royals (Qatarileaks 2017) . Qatar has established then use Aljazeera channel to sponsor socio-political reforms in the region. Aljazeera channel helped Saudi oppositions to spread their ideas and political projects to stepdown the Saudi royals for a limited period of time. 

Iran had funded Al-Dosari since 2015 when he started his Ghanem show with Iran offering Almasarir free TV studio recording. Ghanem show could freely use the Iran network as a Saudi human rights campaigner and a well-liked political comedian to criticize the Saudi government. This provided a great chance for the Protestants in Saudi to demonstrate and disrupt the government. Ghanem show and the black comedy also gives the opposition a chance to disclose mysteries linked to the royal family and incited demonstrations against the Saudi rule.

Through external funding from Iran and its London organizations arm, Almasarir had led an opposition group referred to as “September 15 Movement.” The protest occurred all over Saudi Arabia in 2017 that has been depicted as convincing a large group of citizens. The protests supported by Almasarir led to a point where the existing crisis with Qatar had authorized gathering so many people protesters like never before that might be the reason for the anxiety of the system towards the demonstrations. London has functioned as an Arab media house. Running away from the bans at home, media personalities find liberty in exile. United Kingdome provided the safest place for Saudi Arabian oppositions. 

Famous clergymen like Salman al-Ouda and Awadh al-Qarni were captured because of being detected as “pro-Doha” and a big following in social media networks that the Saudi regime dreaded would be used to aid protests mandated by Almasarir (Mabon 2018). Frequent leading priests associated with the Saudi like Grand Mufti and Saleh Al Maghamsi have pointed out flaws in Almasarir’s campaign and demanded Saudi people to oppose it.

Al-Sheikh was hosted in MBC show and assured that the advocators for protests for the 15th September campaign were supporters of fraud and sedition “fitna.” He confirmed that they do not have a good intention and that they want to disrupt the government and cause unnecessary civil war, which is promulgated by the rivals of Saudi Arabia. He has accused Almasarir of working with Iran to incite and sponsor the “September 15 Movement”. He also termed demonstrators as the advocates of ignorance “Jahiliyyah” and perverseness. Since late 2017, it was recorded that Almasarir already had about 553,000 followers on Twitter and million viewers on his YouTube-based channel. 

Iran is funding and politicizing the Shia distinctiveness that is intended only to enhance tensions in Saudi Arabia and might even undermine other parts of the Middle East. Iran has long attempted to institute itself as a main, political, economic and cultural competitor in the Middle East by tactically funding the minority Shia in the area. As the leading Shia majority nation in the area, Iran has an interest in offsetting Saudi power through the area and conquering a place as a local power with worldwide accomplishment. As the Sunnis are ruled by functional governments, Iran fights to gain more influence in Iraq than all other interested parties do. Tehran would want to keep Iraq stable but would have to mediate between Shia and Sunni conflict, helping Shia regain its influence in the region but keeping them from being too powerful.

Massive Reforms in Saudi Arabia

Saudi Arabia is known for the history of maintaining the legacy of Islamic conservatism to shape the country’s education and economy. However, with Crown Prince Mohammed bin Salman ascend to power social liberalization has become central to the economic modernization, Islamic tolerance and moderation. For several years, Saudi Arabia has been an oil-dependent economy, and economic liberalization would have a significant economic impact in the country’s future.

According to Stancati (2018) , Saudi Arabia was the only country in the world that had banned women from driving, and it was considered a taboo for women to drive. Music and entertainment were also considered taboo in the country while women were also prohibited from watching soccer or getting involved in sports. However, Prince Mohammed bin Salman’s “Vision 2030” program is intended to transform the country economically, socially and culturally by lifting most of the practices that hold the country back. According to Kubersky (2018) , Saudi Arabia has pledged to use billions of dollars to modernize and overhaul the country’s entertainment sector in a bid to achieve the economic value of the sector. During an ultra-conservative past, the participation of women in public entertainment was unheard, and it was a taboo for women to enter entertainment venues. However, with reforms women are free to participate in all entertainment activities. 

Most of the new reforms are intended to make the Kingdom more progressive in line with moral standards of the West. According to Thompson (2017) , Saudi Arabia under Prince Mohammed bin Salman has entered an unprecedented phase in its history with much of Kingdom’s tight religious policies being eased to alleviate the oppression many Saudis have experienced in the history of the country. Much of the religious policies have been oppressive especially on the part of women since they could not drive or participate in sports or even any kind of entertainments, but with the new reforms, women can enjoy a normal life like other women elsewhere in the world.

Saudi Arabia’s oil industry has been central to most of the benefits that are enjoyed by its citizens including free health care and subsidized housing. However, with the declining global oil prices, Mohammed bin Salman perceives that privatizing certain sectors such as the national oil industry would help diversify the economy an end the Kingdom’s overreliance on oil-economy. According to Ignatius (2018), the new reform plan is intended to make Saudi Arabia into a more entrepreneurial, more modern, less-hidebound and more youth- ­oriented society. Majority of the country’s population is made up of youth, and more than 12% of the labour force is unemployed. Salameh (2016) contends that the new changes will help the country become more attractive to foreign investors and empower the country’s own youth in the facing of growing underground extremist groups and limited opportunities for the youth. The revenue from oil has been declining since the prices of the product plummeted in 2014. A drive to economic diversification will help the country overcome vulnerability that arises from the reliance on oil alone.

Reforms imposed by Prince Mohammed bin Salman prove essential to Saudi Arabia’s alignment with the global social and economic changes. Diversification of the economy is vital to help the country overcome economic challenges in the face of declining fortunes from the oil industry. Changes in the social and cultural welfare of the country are essential since alleviation of rigid religious policies gives women much-needed freedom they deserve.


Hypothesis

This research has developed the below hypothesis to act as a guide when conducting the research.

  • Hypothesis: The repression of political opposition by authoritarian Saudi monarchy is not centred on Islamic fundamentalism but the response to radical movements challenging the strength behind the authoritarianism including US imperialism and modernization.

Most of the political opposition parties in Saudi Arabia are concerned about the increased US imperialism and secularization of the society which is against the Islamic fundamentalism which is the source of the countries national pride. The hard stance taken by the monarch against political activities in the country is influenced by the desire to maintain the strengthening forces behind the authoritarian government which are the US imperialism and oil capitalism.

The US and other foreign forces have been a significant role in supporting the Saudi Arabia monarch to crush the slightest political opposition be it peaceful, conservative or radical.  In the aftermath of radicalization that led to the infamous 9/11 terrorist attack in America, the Western forces including the US and UK have supported the monarchy in a large to repress any political opposition using any means possible.  While the legitimacy of the authoritarian government is supported by the clerics, who have been the force behind the conservative religion that is the central to national unity, increased US imperialism has made the monarch to drift away from the Islamic Sharia laws that are fundamental Islamic religion.  The democratic space in the country has been repressed to impede the political opposition a chance to thrive in the country. In the aftermath of the Arab spring, the monarch employed harsh measures intended to crush the slightest form of opposition in the country.

Research Objectives

The primary aim of this research is to explore which factors affect the success of the Saudi Arabia opposition parties in light of authoritarian monarch government that uses all forms of powers to outlaw political opposition in the country.  The study will explore how a wide range of factors empower or disempowers the political opposition in the country.

Objectives

  1. To determine how the political opposition thrive in the face of authoritarian government.
  2. To establish western influence in Saudi Arabia affects the success of the opposition political parties.
  3. Determine whether international financial supports the success of political opposition in Saudi Arabia.
  4. To determine how lack of democracy hinders political opposition activities in Saudi Arabia.
  5. Establish how monarch has learned how best to deal with opposition groups since the Arab Spring.

Research Questions

Research questions help in providing the direction that the research will take. This particular research will use the following research questions

  1. To what extent does lack of democracy affect political opposition, Saudi Arabia?
  2. How has the Arab Spring affected success or failure of political opposition in Saudi Arabia?
  3. How have Western countries affected political opposition in Saudi Arabia?
  4. Which is the main factor that affects the success of the Saudi Arabia political opposition?
  5. How is international financial support shaping the future of political opposition in Saudi Arabia?
  6. What are the achievements of political opposition parties in Saudi Arabia?

The following chapter presents the methodology of the main study in order to examine the research questions.

CHAPTER THREE

Methodology

The study employed a qualitative content analysis approach.  The study extracted data for specific variables of interest including a year of publication, type of publication and availability of the content. The study selected freely available information on the internet which included publications by major digital newspapers, print, websites and scholarly articles. The study employed a systematic coding approach to code a large volume of text to identify to identify patterns or themes and meanings from the texts. The coding approach was developed based on the conventional qualitative content analysis approach. A systematic generation of theory (The Theory of Saudi Arabia Political Opposition) was used to develop codes directly from the texts.  

The code names developed in the study included

  1. Attitude from the West
  2. Democracy
  3. Constitutional monarchy
  4. International financial support
  5. Political openness
  6. Historical hostility among opposition’s groups
  7. Saudi authority suppressing for each group since the Arab Spring

Analysis

While the Saudi Arabia monarchy regime prohibits formation of political opposition outfit in the Kingdom, a number of political parties including The Islamic Umma Party, Movement of Islamic Reform in Arabia, MIRA, Tajdeed Islamic Party (Islamic Renewal party) and Ghanem Almasarir have been formed in protest to a wide range of issues they do not agree with in the monarch. However, the political outfits have experienced a mix of failures and success in the light of the authoritarian government for a wide range of factors.

Suppression by Saudi Authority after the Arab Spring

The Arab Spring played a significant role in influencing regime change in large part of the Arab World including countries such as Egypt, Libya, Tunisia and Bahrain.Saudi Arabia remained untouched by the Arab Spring by employing successful counterrevolutionary mechanisms. However, the Arab Spring played a vital role in promoting the formation of political opposition in the Kingdom that had experienced limited political opposition activities for several decades (Mabon 2012). The Umma Islamic Party is one of the parties whose position was predominantly influenced by the Arab Spring in 2011. It is regarded as the first opposition political party in Saudi Arabia since it was the first to defy the order that forbade the existence of political parties in Saudi Arabia. Party came into being after nine Saudi scholars, and political activists came together to fight for political reforms. The party was made public on February 9th, 2011. Unlike other organizations that came before and after it, it had a very organized structure with leaders and a well spelled out (Alsalem 2011) . In light of the  Arab Spring that was informed by the need to bring an end to the Authoritarian Regimes in most of the Arab States, The Umma Islamic Party also wanted an end to the authoritarian Saudi monarch regime. The Arab Spring had succeeded in toppling oppressive regimes in Tunisia, Egypt, Libya and Bahrain and it played a significant role to buttress formation of the first political movement in the Saudi Arabia soil. All the other political movements were operating outside Saudi Arabia including the Movement of Islamic Reform in Arabia, MIRA and Tajdeed Islamic Party (Islamic Renewal party) which are based in U.K.

Since early 2011 the monarch has taken stern action against Islamist and liberal critics without clear reasons behind the arrests and other measures taken by the government. Open criticism of prominent princes or the ruling family as a whole and overt challenges to the Wahhabi interpretation of Islam predominant in the country drew particularly harsh responses (Mabon 2012). The Islamic Umma Party (Hizb al-Umma al-Islami) which formed a political opposition in the state despite being banned by the monarch government experienced the wrath of the government (Bsheer 2018). The Saudi ruling family assumed that the Islamic Umma Party (Hizb al-Umma al-Islami) wanted to topple their regime despite the party having moderate demands. The founding members of the Islamic Umma Party were arrested but later released on the condition that they would refrain from any form of political activities in the future. Any activist or individual who made any form of provocative demands in the aftermath of the 2011 Arab Spring faced heightened state repression liberal activists such as Muhammad al-Qahtani and Abdallah al-Hamid.

Democracy and Constitutional Monarchy

The Saudi monarch government employs authoritarianism which comprises of a ban on political action, frequent resort to police violence, opacity, and disinformation. Use of excessive power to crack down dissidents through waves of arrests and imprisonments has impacted negatively on political opposition in Saudi Arabia (Matthiesen 2012). Additionally, there is the use of specialized Criminal Courts that use the counterterrorism regulations to repress pro-reform activists and peaceful dissidents. A sheer criticism of the regime through media interview or social media warrants arrest and imprisonment. Arbitrary arrest s of political party leaders and activists coupled with systematic violations of due process and fair trial rights have made it hard for the political opposition to thrive in the country (Ménoret 2016). The authorities detain arrested suspects for months, even years, without judicial review or prosecution with the sole intention of crapping down any form of political opposition. The intellectuals behind the formation of the Umma Party were arrested following the formation of the party. Other party leaders including those of the Movement of Islamic Reform in Arabia, MIRA and Tajdeed Islamic Party (Islamic Renewal party) had to operate from U.K in fear of being arrested and lack of democracy in Saudi Arabia. Ghanem Almasarir, one of the major activists and critics of the Saudi Royal family, operates from U.K. for fear of being arrested.

The Western Attitude

The Al Saud have consolidated their grip on power, against popular protest and unrest, with the aid of the U.S. oil company Aramco and of international security cooperation. In the past decades, the Saudi state has benefited from the French, British, and U.S. input in the design of a brutal repression machine. All the opposition parties in Saudi Arabia are against the Western Imperialism adopted by the royal family in governing the country.  The increased involvement of the Western Powers such as the U.S.A, U.K., France and Germany in the affairs of Kingdom has led to increased modernization which is interpreted as the secularization of the society and western imperialism by the opposition parties (Madawi 2015). In the aftermath of the terror attack on the American soil in 9/11, the American government supported the Saudi Arabia government in the fight against terrorism with the intention of suppressing any form of radicalization in the country. Consequently, the Suadi Arabia government adopted the 2014 terror laws extended the definition of terrorism to cover the peaceful protest, political speech, and organized action (Rosie 2012). The kingdom now has full power to crush any protest or criticism, no matter how peaceful or constructive it may be. Ultimately, the Saudi Arabia opposition today is organized principally on Islamist foundation which is the sense of national pride (Beranek 2009). However, the support of the western powers Saudi Arabia has been able to crush every form on the opposition in the country making opposition activities hard to thrive.

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THE NATURE OF THE CONFLICT BETWEEN SAUDI ARABIA GOVERNMENT AND THE OPPOSITION UNDER INTERNATIONAL FINANCIAL SUPPORTERS

CHAPTER ONE

Introduction

Saudi Arabia is one of the most religious states in the world which has successfully combined the state (dawla), religion (din), and princes (umara) (Teitelbaum & Pipes 2001). The country has thrived on the arrangement between the royals and the religious clerics. The Al-Saud royal family provides funding and a stable structure of government which allowed the growth of a conservative religion throughout the nation, while the clerics provided the government with the religious legitimacy to rule (Teitelbaum & Pipes 2001) . The arrangement made it possible to have an authoritarian regime that uses the nation’s wealth to the favour of only the royal family. Clerics legalize all action made by the authoritarian regime even though unjustified. Arbitrary detentions and enforced disappearance were legalized by clerics as the Royals’ right to protect citizens which completely contradict with Islamic teaching. Detaining thousands of people for more than six months, in some cases for over a decade, without referring them to courts for criminal proceedings (Justice 2008) . Arbitrary detainees held for very long periods has obviously increased dramatically in recent years. Cleric Salman AlOudah has been detained since 1st September 2017 without a legal charge or indictment and was not brought to the court. It was not only the Islamists who were exposed to such violations but the intellectuals and human rights activists. The clerics were free to enforce Sharia in the country, and the Royals were free to run the wealth and affairs of the country. However, as the Saudi state grew and started embracing modernism, some changes were made, and this revealed subordination of clergy to the Royals at the expense of religion. The Royals welcomed some western ways, and this foreign influence should be rejected by the clerics (Kostiner 1996) . The royal family now is fully controlling the clerics. Conflicts arose as a result of this modernization of the country in that; the clerics support the reforms implemented by the state. Accordingly, official religious establishment became part of the government and worked in line with. The royal family wanted a more centralized system of government while citizens keen to huge reform away from the authoritarian regime.

Security grip is a royal way to keep interests and stay in power. It is impossible to talk about pluralism nor political participation as that can be conceded as disobedience of the royals and Islam teaching.  In the meantime, all opposition forces are calling for democracy, pluralism and political participation. Citizens are also seeking change not calling for dropping the royals but by calling for constitutional monarchy. Citizens and opposition forces believe in the political reform which obviously unacceptable to the Royals. Therefore, citizens’ perceptions are important for more understanding the needed reform. 

Saudi Arabia government approved a huge shift when prince Mohammed Bin Salman appointed as crown prince on June 21, 2017 (Barnell 2017). The new crown prince has made a number of exciting reforms, such allowing women to drive, opening cinema halls and performing concerts. Unfortunately, political reforms were not part of the crown prince’s plan. Furthermore, the crown prince has embarrassed the Wahhabi religious establishment as all his reforms contradict their approach. 

Crown prince Mohammed Bin Salman stated that Saudi authority adopted Wahhabism as requested by western states to stop the Communist expansion in the late 1970s (DeYoung 2018). The statement can be considered as a coup against the religious establishment which has been silent. Opposition forces welcomed the statement as it removes the authority religious legitimacy that violates rights and confiscates freedoms.  

CHAPTER TWO

Literature

The opposition in Saudi Arabia can be traced back to the early 1930s. Prior to this period, the Islamic rules were practised in accordance with the Wahhabi creed. These principles laid the basis of the Saudi expansion as an enforcer of the sharia law. The laws were used as a moral compass to guide the actions of the citizens. After the establishment of a state that was more centralized than decentralized, individuals and groups resisted the control from the state. A dispute later arose between Abd al- ‘Aziz Ibn ‘Abd al-Rahman (Ibn Sa’ud), the Saudi leader at that time, and a number of tribal groups, the Ikhwan, who were loyal to the religion and resisted being under the control of the government. Fierce disagreements arose between the leading clerics and the royals. In the 1930s, the king, Ibn Sa’ud made the Wahhabi Islam the official state religion. Only the senior clerics had supreme religious authority. This meant that all the other clerics could only conduct their affairs within the religious framework put in place by the king. He also made state interest superior to the religious interests (Matthiesen 2015) .

The Wahhabi Islam became the only moral guide in the state. However, they were only allowed to operate in accordance with the interests of the state. The clerics were limited to guiding the behaviour of the public, educating individuals, and preaching. They could not take part in governing the state. The state was run by the royals and the elite clerics. The Ikhwan tribal groups which opposed the king’s control over the people lost the battle in between 1929 and 1930 after a military help from Great Britain to King Abdulaziz. They were not able to spread their ideologies. They remained underground, and their ideas were adopted by various other opposition movements over time. The opposition in Saudi Arabia came to be as a result of people resisting change and state control (Meijer, Aarts, Wagemakers, & Kanie 2012) .

After the Second Gulf War, the opposition continued to grow. The opposition groups and individuals in this era had slightly different grievances. When the Saudi military was unable to defend the country, and the U.S military troops were called in to help, most of the people criticized the state. The royal family was seen as weak and incompetent leaders. The opposition groups that developed in this period were determined to end the reign of the royal family. There was a public outcry when the non-Muslim troops came into the country. The presence of the foreign troops in the state led to the opinion that the royal family held foreign interests in high esteem. The opposition criticized the royals as being keener on protecting the interests of outsiders (Teitelbaum & Pipes 2001) .

In the years 1991-2001, the activities of the opposition were restricted by the state. Outspoken individuals who challenged the royals were imprisoned or detained without a trial (Teitelbaum & Pipes 2001). The opposition groups such as the Movement for Islamic Reform in Arabia started operating outside Saudi Arabia to avoid being persecuted. Most of the opposition leaders used London as a base of operations. They were able to reach their supporters through the internet and the media without facing any repression from the royal family.  The grievances and issues addressed were the same throughout the 1990s. Both the radicals and the liberals agreed on the issue of foreign interference (Jenkinsc 2017) .

Their oppositions have grown ever since despite the constant repression from the Saudi government. The opposition in Saudi Arabia is similar to other movements in the Middle East except for the fact that the Saudi opposition derives from the Wahhabi school of thought in that, they have their interpretation of the Sharia that they use to challenge state control as being unlawful. Some of the religious ideologies of the modern opposition and activism correspond with some of the ideas from the West, and as a result, they can influence the modern middle-class individuals (Matthiesen 2015) explain the assertion – democracy- pluralism- human rights principles. The Saudi oppositions accept and call for democracy, political participation, and pluralism that denied by Wahhabism. It is easier for them to influence the educated people since they purport to seek to address a modern issue such as corruption, human rights violations, among other things. Even though some of the oppositions have clear objective sand structures, they are at risk or becoming ineffective due to the measures were taken by the Saudi government and other interested parties in repressing opposition. This means that even though most of these oppositions exist and have a lot of influence, their activities are quashed even before they become established. 

The Theory of Saudi Arabia Political Opposition

All political oppositions fighting the authoritarian regime and call for democracy but under Islamic rules (sharia law).  It is common for the opposition parties in Saudi Arabia to uses the language of Islamic laws, to accuse the government of breaching the holy law by neglecting Islamic goals and deviating from Islamic practices in the administrative, economic and political affairs. The opposition party also suggests alternatives to the existing government based on the Islamic Sharia laws. The radical Islamic opposition movement such as the Tajdeed Islamic Party (Islamic Renewal party) questions theexisting state order by giving its own interpretation of Wahhabi Islam.

Liberalism enjoys a global victory in some sense, and it is perceived to perpetuate the ideals of political liberties or free trade to maximize individual freedom best. However, the opposition in Saudi Arabia believes in liberalism but under Islamic rules (not pure liberalism). The opposition in the country does not advocate a strictly secular state. The opposition is against a West’s spiritually vacant secular culture but instead want a liberal democracy’s based on divine authority. While the opposition supports most of the liberal democracies including popular elections and economic modernization, God’s sovereignty is central to the opposition politicians. The political opposition tends to align their politics with a righteous society with the precepts of shari’a; spiritualism rationalized in the technocratic ways they use to rise against the government and its absolute authority.
While the Political oppositions call for Pluralism as they believe in the need for political parties and institutions of civil society, but they support the activities of the groups should be based on their interpretation of the Islamic law.  Interpretation of the Islamic law differs from one group to another, but that does not change the nature of the liberalism they want to see in the country.

The Islamic Umma Party.

          The Islamic Umma Party is regarded as the first opposition political party in Saudi Arabia. It had defied the order that forbade the existence of political parties in Saudi Arabia. The party came into being after nine Saudi scholars, and political activists came together to fight for political reforms. The party was made public on February 9th, 2011. Unlike other organizations that came before and after it, it had a very organized structure with leaders and a well spelled out (Alsalem 2011) .

            After the party was formed, the officials of the party made invitations to activists who shared the same opinions to join them. As a result of this announcement, the founding members of the party were arrested and detained on 16th February that same year. The detainees included; Dr Ahmed bin Sa’ad bin Gharm al-Ghamidi who was a professor at Umm al-Qura University, Mr Sa’ud bin Ahmed al-Dughaithir a political activist, Shaykh Abdul Aziz bin Muhammad al-Wuhaybi; a lawyer and political activist; Dr Abdul Kareem bin Yusuf al-Khidhr who was a university professor, Shaykh Muhammad bin Hussein bin Ghaanim al-Qahtani, a businessman; Mr Muhammad bin Naser al-Ghamidi, a political activist, and Dr. Waleed bin Muhammad Abdullah al-Majid, a lawyer. The detention of these individuals was fueled by the fact that the party had amassed a big following using the media. Its growing influenced threatened the government which is keen on restricting opposition. The actions of the state succeeded in disabling the activities of the party for a while. However, by this time, the Islamic Umma Party had managed to capture the attention of a lot of the people in Saudi Arabia and outside the country. The party’s influence of the people made it a strong opposition organization in the country (Alsalem 2011). It was not just merely existing but also making a difference in terms of political opinions.      

Movement of Islamic Reform in Arabia, MIRA

        Robert Ryan writes an account of the MIRA opposition from its inception to the year 2005. This opposition movement was started in the early 1990s by Sa‘ad al-Faqih. Faqih was one of the founding members of another radical group, the Committee for the Defense of Legitimate Rights (CDLR). When CDLR relocated to London in 1993, he formed MIRA as an opposition movement against the regime in Saudi Arabia. The opposition movement claimed to be running in accordance with the sharia laws. After September 11, 2001, Faqih attracted the attention of the media and publicly condemned the Al-Saud family for various reasons including their exercise of power in Saudi Arabia. He claimed only to support peaceful means of resolving conflict (Ryan 2005).

The movement has a strong horizontal but weak vertical structure. It is a single person organization since it was formed by Faqih alone. This makes it very weak and is bound to disappear once its leader is disappeared — the movement aimed at removing the Al-Saud family from power using peaceful means. Faqih was an expatriate and this limited the ways through which the Saudi government would capture and imprison him. The movement was also based in London and utilized technology to reach its supporters. Ryan argues that Faqih and the movement were not as effective as they were unable to inspire any kind of reform. In 2004, Faqih called for demonstrations, but the turnout was low since public protesting is outlawed in Saudi Arabia. On the day of the protests, the government increased security troops on the streets to prevent the assembly of people and direct traffic. The other reason why there were very few people willing to take part in the demonstrations was that they did not know what they were protesting against. When Faqih called for the protests, he only told his followers to demand reforms. The movement was linked to terrorist groups. In 2004, Faqih was put on the list of al-Qaeda operatives by the United Nations Security Council (Ryan 2005) .

Tajdeed Islamic Party (Islamic Renewal party).

          The Tajdeed Islamic Party was formed in London. Its focus is on the jurisprudence issues that affect Muslim. It supports the “freedom of thought and believes in dialogue based on argument and evidence” (About the Ideology of Party of Islamic Renewal). This is a radical Islamist group that believes in fulfilling their duties at any cost. The growth of the influence of the group is curtailed by both the Saudi government and the Western world.

Ghanem Almasarir

Ghanem Almasarir is a Saudi human rights activist and a well-liked political comedian who is based in London. He is a known political satirist popular for hosting the Ghanem Show that features many popular sections such as “Fadfada.” The show involves criticism of the royal family using black comedy. As an individual opposition, he is very effective in reaching the people. He has a very good media presence and has over half a million followers on tweeter and more on the other social media platforms. The work he does not only sensitizes the world on what is happening in Saudi Arabia but also provides an alternative to the use of violence and threats in the fight against an oppressive regime. The show and the other video clips he publishes on websites and on YouTube reaches thousands of people. His YouTube channel and tweets are readily available to the public. The fact that he can reach a lot of people makes Ghanem one of the most effective opposition. The use of social media improves his chances of reaching the young generation.

Almasarir had been in self-imposed exile since 2003 in London, where he controlled his YouTube-based show from 2015. In his show, he condemns the Saudi royal family, whom he tags as “Salmanco” (relating to the techniques used by the King in controlling the nation in a fashion comparable to a business or as private possession) and “al-Dub al-Dasher” (means fat stray bear) correspondingly in a funny way. Almasarir accused Saud al-Qahtani, an advisor to the Saudi royal court, of being involved in crimes linked to “visa fraud” in Saudi Arabia.

Oppositions Financial Support

The Royals have not lacked the oppositions, although for a long time the Royals have been capable of containing or coopting them. After the second Gulf War, nevertheless, the socio-religious troubles that have overwhelmed the country have resulted in the development of a small opposition society that has disputed royals’ public image. The oppositions were funded later on by international countries such as Libya, Qatar, and Iran.

It has been recognized and noted that Saudi oppositions receive some financial support from states such as the former Libyan regime, Qatar, and Iran. The late Gaddafi’s regime in Libya offered financial aid to Mohammed Almassari, Saudi’s opposition leader, to assassinate former king Abdullah (Burger & Macleod 2004). Qaddafi termed the Saudis that they can even ally with the devil to save themselves. King Abdullah referred to Gaddafi as a liar and states that his grave awaits him. That was in 2003. In 2009, the two leaders insulted each other again in an Arab League summit. Gaddafi had confirmed supporting the assassination attacks on the Saudi King Abdullah. This was to happen in either of the following ways: a personal attack, or by oppositions that would overcome the Royals. Gaddafi planned to interfere and harm the royals and was looking for an opposition who were eager to get involved (Fotopoulos 2011). Al-Massari was the primary suspect of the plan who was charged for the proceedings on colluding for the murder of the late King Abdullah.

Qatar has supported the Saudi Saad Al-Faqih and others to utilize them as instruments to strike the royals. Qatar’s want to respond to the Saudi royals whom supported and planned the 1996 coup against Qatar regime. Qatar preferred to attain that objective by destabilizing UAE, Egypt, and Saudi Arabia, by supporting their arch-rival, Iran that is also planning on disrupting order in the Middle East (Almezaini & Rickli 2016).

Al-Faqih and others were paid millions of Qatari Riyals to create and spread falsehoods concerning Saudi royals. Al-Faqih, currently living in London received 395 million Qatari riyals to use in the plan, in any manner, on weaving fictions on Saudi royals (Qatarileaks 2017) . Qatar has established then use Aljazeera channel to sponsor socio-political reforms in the region. Aljazeera channel helped Saudi oppositions to spread their ideas and political projects to stepdown the Saudi royals for a limited period of time. 

Iran had funded Al-Dosari since 2015 when he started his Ghanem show with Iran offering Almasarir free TV studio recording. Ghanem show could freely use the Iran network as a Saudi human rights campaigner and a well-liked political comedian to criticize the Saudi government. This provided a great chance for the Protestants in Saudi to demonstrate and disrupt the government. Ghanem show and the black comedy also gives the opposition a chance to disclose mysteries linked to the royal family and incited demonstrations against the Saudi rule.

Through external funding from Iran and its London organizations arm, Almasarir had led an opposition group referred to as “September 15 Movement.” The protest occurred all over Saudi Arabia in 2017 that has been depicted as convincing a large group of citizens. The protests supported by Almasarir led to a point where the existing crisis with Qatar had authorized gathering so many people protesters like never before that might be the reason for the anxiety of the system towards the demonstrations. London has functioned as an Arab media house. Running away from the bans at home, media personalities find liberty in exile. United Kingdome provided the safest place for Saudi Arabian oppositions. 

Famous clergymen like Salman al-Ouda and Awadh al-Qarni were captured because of being detected as “pro-Doha” and a big following in social media networks that the Saudi regime dreaded would be used to aid protests mandated by Almasarir (Mabon 2018). Frequent leading priests associated with the Saudi like Grand Mufti and Saleh Al Maghamsi have pointed out flaws in Almasarir’s campaign and demanded Saudi people to oppose it.

Al-Sheikh was hosted in MBC show and assured that the advocators for protests for the 15th September campaign were supporters of fraud and sedition “fitna.” He confirmed that they do not have a good intention and that they want to disrupt the government and cause unnecessary civil war, which is promulgated by the rivals of Saudi Arabia. He has accused Almasarir of working with Iran to incite and sponsor the “September 15 Movement”. He also termed demonstrators as the advocates of ignorance “Jahiliyyah” and perverseness. Since late 2017, it was recorded that Almasarir already had about 553,000 followers on Twitter and million viewers on his YouTube-based channel. 

Iran is funding and politicizing the Shia distinctiveness that is intended only to enhance tensions in Saudi Arabia and might even undermine other parts of the Middle East. Iran has long attempted to institute itself as a main, political, economic and cultural competitor in the Middle East by tactically funding the minority Shia in the area. As the leading Shia majority nation in the area, Iran has an interest in offsetting Saudi power through the area and conquering a place as a local power with worldwide accomplishment. As the Sunnis are ruled by functional governments, Iran fights to gain more influence in Iraq than all other interested parties do. Tehran would want to keep Iraq stable but would have to mediate between Shia and Sunni conflict, helping Shia regain its influence in the region but keeping them from being too powerful.

Massive Reforms in Saudi Arabia

Saudi Arabia is known for the history of maintaining the legacy of Islamic conservatism to shape the country’s education and economy. However, with Crown Prince Mohammed bin Salman ascend to power social liberalization has become central to the economic modernization, Islamic tolerance and moderation. For several years, Saudi Arabia has been an oil-dependent economy, and economic liberalization would have a significant economic impact in the country’s future.

According to Stancati (2018) , Saudi Arabia was the only country in the world that had banned women from driving, and it was considered a taboo for women to drive. Music and entertainment were also considered taboo in the country while women were also prohibited from watching soccer or getting involved in sports. However, Prince Mohammed bin Salman’s “Vision 2030” program is intended to transform the country economically, socially and culturally by lifting most of the practices that hold the country back. According to Kubersky (2018) , Saudi Arabia has pledged to use billions of dollars to modernize and overhaul the country’s entertainment sector in a bid to achieve the economic value of the sector. During an ultra-conservative past, the participation of women in public entertainment was unheard, and it was a taboo for women to enter entertainment venues. However, with reforms women are free to participate in all entertainment activities. 

Most of the new reforms are intended to make the Kingdom more progressive in line with moral standards of the West. According to Thompson (2017) , Saudi Arabia under Prince Mohammed bin Salman has entered an unprecedented phase in its history with much of Kingdom’s tight religious policies being eased to alleviate the oppression many Saudis have experienced in the history of the country. Much of the religious policies have been oppressive especially on the part of women since they could not drive or participate in sports or even any kind of entertainments, but with the new reforms, women can enjoy a normal life like other women elsewhere in the world.

Saudi Arabia’s oil industry has been central to most of the benefits that are enjoyed by its citizens including free health care and subsidized housing. However, with the declining global oil prices, Mohammed bin Salman perceives that privatizing certain sectors such as the national oil industry would help diversify the economy an end the Kingdom’s overreliance on oil-economy. According to Ignatius (2018), the new reform plan is intended to make Saudi Arabia into a more entrepreneurial, more modern, less-hidebound and more youth- ­oriented society. Majority of the country’s population is made up of youth, and more than 12% of the labour force is unemployed. Salameh (2016) contends that the new changes will help the country become more attractive to foreign investors and empower the country’s own youth in the facing of growing underground extremist groups and limited opportunities for the youth. The revenue from oil has been declining since the prices of the product plummeted in 2014. A drive to economic diversification will help the country overcome vulnerability that arises from the reliance on oil alone.

Reforms imposed by Prince Mohammed bin Salman prove essential to Saudi Arabia’s alignment with the global social and economic changes. Diversification of the economy is vital to help the country overcome economic challenges in the face of declining fortunes from the oil industry. Changes in the social and cultural welfare of the country are essential since alleviation of rigid religious policies gives women much-needed freedom they deserve.


Hypothesis

This research has developed the below hypothesis to act as a guide when conducting the research.

  • Hypothesis: The repression of political opposition by authoritarian Saudi monarchy is not centred on Islamic fundamentalism but the response to radical movements challenging the strength behind the authoritarianism including US imperialism and modernization.

Most of the political opposition parties in Saudi Arabia are concerned about the increased US imperialism and secularization of the society which is against the Islamic fundamentalism which is the source of the countries national pride. The hard stance taken by the monarch against political activities in the country is influenced by the desire to maintain the strengthening forces behind the authoritarian government which are the US imperialism and oil capitalism.

The US and other foreign forces have been a significant role in supporting the Saudi Arabia monarch to crush the slightest political opposition be it peaceful, conservative or radical.  In the aftermath of radicalization that led to the infamous 9/11 terrorist attack in America, the Western forces including the US and UK have supported the monarchy in a large to repress any political opposition using any means possible.  While the legitimacy of the authoritarian government is supported by the clerics, who have been the force behind the conservative religion that is the central to national unity, increased US imperialism has made the monarch to drift away from the Islamic Sharia laws that are fundamental Islamic religion.  The democratic space in the country has been repressed to impede the political opposition a chance to thrive in the country. In the aftermath of the Arab spring, the monarch employed harsh measures intended to crush the slightest form of opposition in the country.

Research Objectives

The primary aim of this research is to explore which factors affect the success of the Saudi Arabia opposition parties in light of authoritarian monarch government that uses all forms of powers to outlaw political opposition in the country.  The study will explore how a wide range of factors empower or disempowers the political opposition in the country.

Objectives

  1. To determine how the political opposition thrive in the face of authoritarian government.
  2. To establish western influence in Saudi Arabia affects the success of the opposition political parties.
  3. Determine whether international financial supports the success of political opposition in Saudi Arabia.
  4. To determine how lack of democracy hinders political opposition activities in Saudi Arabia.
  5. Establish how monarch has learned how best to deal with opposition groups since the Arab Spring.

Research Questions

Research questions help in providing the direction that the research will take. This particular research will use the following research questions

  1. To what extent does lack of democracy affect political opposition, Saudi Arabia?
  2. How has the Arab Spring affected success or failure of political opposition in Saudi Arabia?
  3. How have Western countries affected political opposition in Saudi Arabia?
  4. Which is the main factor that affects the success of the Saudi Arabia political opposition?
  5. How is international financial support shaping the future of political opposition in Saudi Arabia?
  6. What are the achievements of political opposition parties in Saudi Arabia?

The following chapter presents the methodology of the main study in order to examine the research questions.

CHAPTER THREE

Methodology

The study employed a qualitative content analysis approach.  The study extracted data for specific variables of interest including a year of publication, type of publication and availability of the content. The study selected freely available information on the internet which included publications by major digital newspapers, print, websites and scholarly articles. The study employed a systematic coding approach to code a large volume of text to identify to identify patterns or themes and meanings from the texts. The coding approach was developed based on the conventional qualitative content analysis approach. A systematic generation of theory (The Theory of Saudi Arabia Political Opposition) was used to develop codes directly from the texts.  

The code names developed in the study included

  1. Attitude from the West
  2. Democracy
  3. Constitutional monarchy
  4. International financial support
  5. Political openness
  6. Historical hostility among opposition’s groups
  7. Saudi authority suppressing for each group since the Arab Spring

Analysis

While the Saudi Arabia monarchy regime prohibits formation of political opposition outfit in the Kingdom, a number of political parties including The Islamic Umma Party, Movement of Islamic Reform in Arabia, MIRA, Tajdeed Islamic Party (Islamic Renewal party) and Ghanem Almasarir have been formed in protest to a wide range of issues they do not agree with in the monarch. However, the political outfits have experienced a mix of failures and success in the light of the authoritarian government for a wide range of factors.

Suppression by Saudi Authority after the Arab Spring

The Arab Spring played a significant role in influencing regime change in large part of the Arab World including countries such as Egypt, Libya, Tunisia and Bahrain.Saudi Arabia remained untouched by the Arab Spring by employing successful counterrevolutionary mechanisms. However, the Arab Spring played a vital role in promoting the formation of political opposition in the Kingdom that had experienced limited political opposition activities for several decades (Mabon 2012). The Umma Islamic Party is one of the parties whose position was predominantly influenced by the Arab Spring in 2011. It is regarded as the first opposition political party in Saudi Arabia since it was the first to defy the order that forbade the existence of political parties in Saudi Arabia. Party came into being after nine Saudi scholars, and political activists came together to fight for political reforms. The party was made public on February 9th, 2011. Unlike other organizations that came before and after it, it had a very organized structure with leaders and a well spelled out (Alsalem 2011) . In light of the  Arab Spring that was informed by the need to bring an end to the Authoritarian Regimes in most of the Arab States, The Umma Islamic Party also wanted an end to the authoritarian Saudi monarch regime. The Arab Spring had succeeded in toppling oppressive regimes in Tunisia, Egypt, Libya and Bahrain and it played a significant role to buttress formation of the first political movement in the Saudi Arabia soil. All the other political movements were operating outside Saudi Arabia including the Movement of Islamic Reform in Arabia, MIRA and Tajdeed Islamic Party (Islamic Renewal party) which are based in U.K.

Since early 2011 the monarch has taken stern action against Islamist and liberal critics without clear reasons behind the arrests and other measures taken by the government. Open criticism of prominent princes or the ruling family as a whole and overt challenges to the Wahhabi interpretation of Islam predominant in the country drew particularly harsh responses (Mabon 2012). The Islamic Umma Party (Hizb al-Umma al-Islami) which formed a political opposition in the state despite being banned by the monarch government experienced the wrath of the government (Bsheer 2018). The Saudi ruling family assumed that the Islamic Umma Party (Hizb al-Umma al-Islami) wanted to topple their regime despite the party having moderate demands. The founding members of the Islamic Umma Party were arrested but later released on the condition that they would refrain from any form of political activities in the future. Any activist or individual who made any form of provocative demands in the aftermath of the 2011 Arab Spring faced heightened state repression liberal activists such as Muhammad al-Qahtani and Abdallah al-Hamid.

Democracy and Constitutional Monarchy

The Saudi monarch government employs authoritarianism which comprises of a ban on political action, frequent resort to police violence, opacity, and disinformation. Use of excessive power to crack down dissidents through waves of arrests and imprisonments has impacted negatively on political opposition in Saudi Arabia (Matthiesen 2012). Additionally, there is the use of specialized Criminal Courts that use the counterterrorism regulations to repress pro-reform activists and peaceful dissidents. A sheer criticism of the regime through media interview or social media warrants arrest and imprisonment. Arbitrary arrest s of political party leaders and activists coupled with systematic violations of due process and fair trial rights have made it hard for the political opposition to thrive in the country (Ménoret 2016). The authorities detain arrested suspects for months, even years, without judicial review or prosecution with the sole intention of crapping down any form of political opposition. The intellectuals behind the formation of the Umma Party were arrested following the formation of the party. Other party leaders including those of the Movement of Islamic Reform in Arabia, MIRA and Tajdeed Islamic Party (Islamic Renewal party) had to operate from U.K in fear of being arrested and lack of democracy in Saudi Arabia. Ghanem Almasarir, one of the major activists and critics of the Saudi Royal family, operates from U.K. for fear of being arrested.

The Western Attitude

The Al Saud have consolidated their grip on power, against popular protest and unrest, with the aid of the U.S. oil company Aramco and of international security cooperation. In the past decades, the Saudi state has benefited from the French, British, and U.S. input in the design of a brutal repression machine. All the opposition parties in Saudi Arabia are against the Western Imperialism adopted by the royal family in governing the country.  The increased involvement of the Western Powers such as the U.S.A, U.K., France and Germany in the affairs of Kingdom has led to increased modernization which is interpreted as the secularization of the society and western imperialism by the opposition parties (Madawi 2015). In the aftermath of the terror attack on the American soil in 9/11, the American government supported the Saudi Arabia government in the fight against terrorism with the intention of suppressing any form of radicalization in the country. Consequently, the Suadi Arabia government adopted the 2014 terror laws extended the definition of terrorism to cover the peaceful protest, political speech, and organized action (Rosie 2012). The kingdom now has full power to crush any protest or criticism, no matter how peaceful or constructive it may be. Ultimately, the Saudi Arabia opposition today is organized principally on Islamist foundation which is the sense of national pride (Beranek 2009). However, the support of the western powers Saudi Arabia has been able to crush every form on the opposition in the country making opposition activities hard to thrive.

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Madawi, A. (2015). Muted Modernists: The Struggle over Divine Politics in Saudi Arabia (London: Hurst Publishing), pp. 33–34

Matthiesen, T. (2015). The domestic sources of Saudi foreign policy: Islamists and the state in the wake of the Arab uprisings. Washington: Brookings Institution, 1-12.

Matthiesen, T. (2012). A” Saudi Spring?”: The Shi’a Protest Movement in the Eastern Province 2011–2012. The Middle East Journal66(4), 628-659.

Ménoret, P. (2016). Repression and Protest in Saudi Arabia. Middle East Brief n101.

Meijer, R., Aarts, P., Wagemakers, J., & Kanie, M. (2012). Saudi Arabia between conservatism, accommodation, and reform. Clingendael: Netherlands Institute of International Relations.

Qatarileaks. (2017, August 09,). Doha buys al-faqih, al-dokki to attack Saudi Arabia, UAE. Retrieved from https://qatarileaks.com/en/leak/doha-buys-al-faqih-al-dokki-to-attack-saudi-arabia-uae.

Rosie, B. (2012). “Dissent and Its Discontents: Protesting the Saudi State,” in Bassam Haddad, Rosie Bsheer, and Ziad Abu-Rish, The Dawn of the Arab Uprisings: End of an Old Order? London: Pluto Press, pp. 248–259.

Ryan, R. (2005). Saudi Arabia and post 9/11 Islamism opposition. DePaul University:

Salameh, M. G. (2016, July 13,). Saudi Arabia’s vision 2030: A reality or mirage. USAEE Working Paper Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808611##

Schweizer, K., Steinwascher, M., Moosbrugger, H., & Reiss, S. (2011). The structure of research methodology competency in higher education and the role of teaching teams and course temporal distance. Learning and Instruction, 21(1), 68-76. doi: 10.1016/j.learninstruc.2009.11.002

Stancati, M. (2018, January 10,). Mohammed bin Salman’s next Saudi challenge: Curtailing ultraconservative Islam. The Wall Street Journal Retrieved from https://www.wsj.com/articles/mohammed-bin-salmans-next-saudi-challenge-curtailing-ultraconservative-islam-1515525944

Teitelbaum, J., & Pipes, D. (2001, Holier than thou: Saudi Arabia’s Islamic opposition. Middle East Quarterly, VIII, 75. Retrieved from http://mdx.summon.serialssolutions.com/2.0.0/link/0/eLvHCXMwtV1LS8NAEB4sXhQPtdZXFRYPeiiRJJs0qeChSqUtKIXW4q1ski0G-sK0YP-9M9k8WoWiBy9LMoFN4Bu-nZ18swPAzVtd-8YJHnfqnm5L0_YE-pAua74bGH4g6xgxcKlElvbgrfbScLp534vc9q_Aow2hp0LaP4CfTYoGvEYXwBGdAMdfuUFrNqZ6EkqQkxhoSRmAnlgGYbXxITxSylK-nvwi9KuzearhWo9Zn-McRrUporgGc1MD2pcYs449odold2bR-zIj-m44VySk6tg3EgxGJlVLORFZQKtbqmtGSpqDdru95h7WGgeqTijJaoo3dIb5JAj9xb2caq-9AhS4Q70m3IdOtmY6tq1KIZJX_VgZ4-W-X4R9KgFh6r_JIezIaQnK6kCVFbtmdFqviDsir0pwspFTZZm4sATFRFuI1oRBj4ArPBjhwQiPOxajwRQaNxFLsGA5FmW4emr2H1ta-q1D4VGCyl9EQ9z5Y7RlmOYxHAgqVpgu4qLG4BQYxrVSd6WQ3BhZPpe4y7E81-COJWlL7p5BZcuM51ufVmAvB_ECdkfoyPISCpPg8wvYVCOc

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Manage budgets and financial plans

BSBFIM501

Manage budgets and financial plans

Case Study Learner Workbook

Table of Contents Instructions to Learner 3 Assessment instructions 3 Assessment requirements 6 Candidate Details 7 Assessment – BSBFIM501: Manage budgets and financial plans 7 Activities 8 Activity 1A 8 Activity 1B 9 Activity 1A-1B checklist – for assessor 10 Activity 2A 11 Activity 2B 12 Activity 2C 13 Activity 2A-2C checklist – for assessor 14 Activity 3A 15 Activity 3B 16 Activity 3C 17 Activity 3D 18 Activity 3A-3D checklist – for assessor 19 Activity 4A 20 Activity 4B 21 Activity 4C 22 Activity 4A-4C checklist – for assessor 23 Summative Assessments 24 Section A: Skills Activity 25 Summative Assessments: Section A checklist 26 Section B: Knowledge Activity (Q & A) 27 Summative Assessments: Section B checklist 28 Section C: Performance Activity 29 Summative Assessments: Section C checklist 30 Competency record to be completed by assessor 31

Instructions to Learner

Assessment instructions

Overview

Prior to commencing the assessments, your trainer/assessor will explain each assessment task and the terms and conditions relating to the submission of your assessment task. Please consult with your trainer/assessor if you are unsure of any questions. It is important that you understand and adhere to the terms and conditions, and fully address each assessment task. If any assessment task is not fully addressed, then your assessment task will be returned to you for resubmission. Your trainer/assessor will remain available to support you throughout the assessment process.

Written work

Assessment tasks are used to measure your understanding and underpinning skills and knowledge of the overall unit of competency. When undertaking any written assessment tasks, please ensure that you address the following criteria:

· Address each question including any sub-points

· Demonstrate that you have researched the topic thoroughly

· Cover the topic in a logical, structured manner

· Your assessment tasks are well presented, well referenced and word processed

· Your assessment tasks include your full legal name on each and every page.

Active participation

It is a condition of enrolment that you actively participate in your studies. Active participation is completing all the assessment tasks on time.

Plagiarism

Plagiarism is taking and using someone else’s thoughts, writings or inventions and representing them as your own. Plagiarism is a serious act and may result in a learner’s exclusion from a course. When you have any doubts about including the work of other authors in your assessment, please consult your trainer/assessor. The following list outlines some of the activities for which a learner can be accused of plagiarism:

· Presenting any work by another individual as one’s own unintentionally

· Handing in assessments markedly similar to or copied from another learner

· Presenting the work of another individual or group as their own work

· Handing in assessments without the adequate acknowledgement of sources used, including assessments taken totally or in part from the internet.

If it is identified that you have plagiarised within your assessment, then a meeting will be organised to discuss this with you, and further action may be taken accordingly.

Collusion

Collusion is the presentation by a learner of an assignment as their own that is, in fact, the result in whole or in part of unauthorised collaboration with another person or persons. Collusion involves the cooperation of two or more learners in plagiarism or other forms of academic misconduct and, as such, both parties are subject to disciplinary action. Collusion or copying from other learners is not permitted and will result in a “0” grade and NYC.

Assessments must be typed using document software such as (or similar to) MS Office. Handwritten assessments will not be accepted (unless, prior written confirmation is provided by the trainer/assessor to confirm).

Competency outcome

There are two outcomes of assessments: S = Satisfactory and NS = Not Satisfactory (requires more training and experience).

Once the learner has satisfactorily completed all the tasks for this module the learner will be awarded “Competent” (C) or “Not yet Competent” (NYC) for the relevant unit of competency.

If you are deemed “Not Yet Competent” you will be provided with feedback from your assessor and will be given another chance to resubmit your assessment task(s). If you are still deemed as “Not Yet Competent” you will be required to re-enrol in the unit of competency.

Additional evidence

If we, at our sole discretion, determine that we require additional or alternative information/evidence in order to determine competency, you must provide us with such information/evidence, subject to privacy and confidentiality issues. We retain this right at any time, including after submission of your assessments.

Confidentiality

We will treat anything, including information about your job, workplace, employer, with strict confidence, in accordance with the law. However, you are responsible for ensuring that you do not provide us with anything regarding any third party including your employer, colleagues and others, that they do not consent to the disclosure of. While we may ask you to provide information or details about aspects of your employer and workplace, you are responsible for obtaining necessary consents and ensuring that privacy rights and confidentiality obligations are not breached by you in supplying us with such information.

Assessment appeals process

If you feel that you have been unfairly treated during your assessment, and you are not happy with your assessment and/or the outcome as a result of that treatment, you have the right to lodge an appeal. You must first discuss the issue with your trainer/assessor. If you would like to proceed further with the request after discussions with your trainer/assessor, you need to lodge your appeal to the course coordinator, in writing, outlining the reason(s) for the appeal.

Recognised prior learning

Candidates will be able to have their previous experience or expertise recognised on request.

Special needs

Candidates with special needs should notify their trainer/assessor to request any required adjustments as soon as possible. This will enable the trainer/assessor to address the identified needs immediately .

Assessment requirements

The assessment activities in this workbook assess aspects of all the elements, performance criteria, skills and knowledge and performance requirements of the unit of competency.

To demonstrate competence in this unit you must undertake all activities (formative and summative) in this workbook and have them deemed satisfactory by the assessor. If you do not answer some questions or perform certain tasks, and therefore you are deemed to be Not Yet Competent, your trainer/assessor may ask you supplementary questions to determine your competence. Once you have demonstrated the required level of performance, you will be deemed competent in this unit.

Should you still be deemed Not Yet Competent, you will have the opportunity to resubmit your assessments or appeal the result.

As part of the assessment process, all learners must abide by any relevant assessment policies as provided during induction.

If you feel you are not yet ready to be assessed or that this assessment is unfair, please contact your assessor to discuss your options. You have the right to formally appeal any outcome and, if you wish to do so, discuss this with your trainer/assessor.

Candidate Details

Assessment – BSBFIM501: Manage budgets and financial plans

Please complete the following activities and hand in to your trainer/assessor for marking. This forms part of your assessment for BSBFIM501: Manage budgets and financial plans.

Name: _____________________________________________________________

Address: _____________________________________________________________

_____________________________________________________________

Email: _____________________________________________________________

Employer: _____________________________________________________________

Declaration

I declare that no part of this assessment has been copied from another person’s work with the exception of where I have listed or referenced documents or work and that no part of this assessment has been written for me by another person. I also understand the assessment instructions and requirements and consent to being assessed.

Signed: ____________________________________________________________

Date: ____________________________________________________________

If activities have been completed as part of a small group or in pairs, details of the learners involved should be provided below:

This activity workbook has been completed by the following persons and we acknowledge that it was a fair team effort where everyone contributed equally to the work completed. We declare that no part of this assessment has been copied from another person’s work with the exception of where we have listed or referenced documents or work and that no part of this assessment has been written for us by another person.

Learner 1: ____________________________________________________________

Signed: ____________________________________________________________

Learner 2: ____________________________________________________________

Signed: ____________________________________________________________

Learner 3: ____________________________________________________________

Signed: ____________________________________________________________

Activities

Activity 1A

Estimated Time40 Minutes
ObjectiveTo provide you with an opportunity to access budgetfinancial plans for the work team; clarify budget/financial plans with relevant personnel within the organisation to ensure that documented outcomes are achievable, accurate and comprehensible; negotiate any changes required to be made to budget/financial plans with relevant personnel within the organisation.
ActivityCreate a one-page guide for a hypothetical organisation outlining how to access budget and financial plans. You should also note which personnel you would need to consult and what issues might need to be addressed, e.g. any changes to be made.Your assessor should have existing procedures and documentation for reference.Attach your guide to your workbook.

Activity 1B

Estimated Time40 Minutes
ObjectiveTo provide you with an opportunity to prepare contingency plans in the event that initial plans need to be varied.
Activity1. What is the purpose of a contingency plan? Note five possible contingencies that an organisation could implement.2. Refer to Case Study A.Highlight at least four guidelines that are relevant and helpful in your line of work, start to prepare them as much as possible now and attach your notes to your workbook.

Activity 1A-1B checklist – for assessor

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the unit activity. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Marking Checklist
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Activity 2A

Estimated Time25 Minutes
ObjectiveTo provide you with an opportunity to disseminate relevant details of the agreed budget/financial plans to team members.
ActivityWho might you need to inform about budget/financial plans in an organisation? What information would the respective people need to know?

Activity 2B

Estimated Time45 Minutes
ObjectiveTo provide you with an opportunity to provide support to ensure that team members can competently perform required roles associated with the management of finances.
ActivityRefer to Case Study B.This is a roleplay activity to be conducted in pairs. Using the information, speak with the team member (Sam/your partner) and identify what support they may require to improve their performance. Plan how you would implement this.This activity will need to be observed and a signed observation documented.

Activity 2C

Estimated Time30 Minutes
ObjectiveTo provide you with an opportunity to determine and access resources and systems to manage financial management processes within the work team.
ActivityOutline how the following resources and systems can help to manage financial management processes in your line of work (maximum one page):· Hardware and software· Human, physical or financial resources· Record keeping systems (electronic and paper-based)· Specialist advice or support.

Activity 2A-2C checklist – for assessor

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the unit activity. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Marking Checklist
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Activity 3A

Estimated Time30 Minutes
ObjectiveTo provide you with an opportunity to implement processes to monitor actual expenditure and to control costs across the work team.
ActivityRefer to Case Study C.Analyse the general ledger and summarise your main findings. For example, where are most of the costs coming from? Are there any issues arising from the information?

Activity 3B

Estimated Time40 Minutes
ObjectiveTo provide you with an opportunity to monitor expenditure and costs on an agreed cyclical basis to identify cost variations and expenditure overruns.
Activity1. List three causes of cost variation.2. Outline how cost expenditure meetings can be undertaken, list possible participants and what would be discussed in each one.

Activity 3C

Estimated Time20 Minutes
ObjectiveTo provide you with an opportunity to implement, monitor and modify contingency plans as required to maintain financial objectives.
ActivityWhat processes are involved in the monitoring of a contingency plan?

Activity 3D

Estimated Time60 Minutes
ObjectiveTo provide you with an opportunity to report on budget and expenditure in accordance with organisational protocols.
ActivityPrepare a template Business Activity Statement, complying with Australian Tax Office regulations and broad organisational protocols. Attach the template to your workbook.

Activity 3A-3D checklist – for assessor

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the unit activity. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Marking Checklist
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Activity 4A

Estimated Time20 Minutes
ObjectiveTo provide you with an opportunity to collect and collate for analysis, data and information on the effectiveness of financial management processes within the work team.
ActivityWhat financial records could be kept by an organisation and what methods of storage/organisation do they need? Give at least ten examples.

Activity 4B

Estimated Time25 Minutes
ObjectiveTo provide you with an opportunity to analyse data and information on the effectiveness of financial management processes within the work team and identify, document and recommend any improvements to existing processes.
Activity1. Briefly outline the following terms:· Earnings growth· Earnings stability· Return on equity.2. How might you determine a company’s performance regarding the above? Give at least three methods.

Activity 4C

Estimated Time45 Minutes
ObjectiveTo provide you with an opportunity to implement and monitor agreed improvements in line with financial objectives of the work team and the organisation.
ActivityIdentify an improvement that needs to be made in your organisation and implement it.(If this isn’t possible, imagine a common workplace improvement and plan in detail how you would implement and monitor it).

Activity 4A-4C checklist – for assessor

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the unit activity. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Marking Checklist
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Summative Assessments

The summative assessments are the major activities designed to assess the learner’s skills, knowledge and performance, as required to show competency in this unit. These activities should be completed after finishing the Learner Guide. These should be completed as stated under the trainer/assessor instructions.

Skills, knowledge and performance may be termed as:

· Skills – skill requirements, required skills, essential skills, foundation skills

· Knowledge – knowledge requirements, required knowledge, essential knowledge, knowledge evidence

· Performance – evidence requirements, critical aspects of assessment, performance evidence.

Section A: Skills Activity

The Skills Activity is designed is designed to address the foundation skills of the unit through a case studies, with a series of applicable questions to address the skills criteria.

Section B: Knowledge Activity (Q & A)

The Knowledge Activity is designed to be a questionnaire where the assessor asks the learner a series of questions to confirm their competency for all of the required knowledge in the unit of competency.

Section C: Performance Activity

The Performance Activity is designed to address the performance evidence of the unit through case studies, with a series of applicable questions to address the skills criteria.

If necessary for the activities, you should attach completed written answers, portfolios or any evidence of competency to this workbook.

Section A: Skills Activity

Objective: To provide you with an opportunity to show you have the required skills for this unit.

A signed observation by either an approved third party or the assessor will need to be included in this activity as proof of completion.

This activity will enable you to demonstrate your knowledge of the following foundation skills:

· Reading

· Writing

· Oral communication

· Numeracy

· Navigate the world of work

· Interacts with others

· Get the work done.

1. Read a financial document provided by your assessor and interpret the information written on it. Write a short report explaining the contents of it.

2. Give a short presentation about the contents of the document to members of your group in a style and structure which suit the audience. Ask questions to test their understanding and clarify any information that wasn’t clear.

3. Complete a task relevant to a budget or financial plan that will be provided by your assessor, you should use a range of mathematical calculations. Attach the relevant document(s) and a record of your calculations to your workbook with a brief written summary of the task you undertook.

4. You will be provided with an example copy of a Financial Procedures Manual or equivalent document. Using this document as reference:

· Identify five organisational requirements that relate to your intended job role

· Perform two tasks that will allow you to demonstrate your adherence to at least three of these requirements

· Write a brief 250 word summary of each task you completed, describing the ways in which you demonstrated your adherence to organisational requirements.

This activity will need to be observed and a signed observation documented.

5. Assist a member of your group or team member on a task which requires collaborative effort.

6. For a task you have been given by your assessor, plan how you will complete it including timescales. If the situation changes, adapt your plan.

Summative Assessments: Section A checklist

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the summative assessment. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Learner’s name
Assessor’s name
Unit of Competence(Code and Title)
Date(s) of assessment
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Section B: Knowledge Activity (Q & A)

Objective: To provide you with an opportunity to show you have the required knowledge for this unit.

The answers to the following questions will enable you to:

· Describe basic accounting principles

· Identify and explain the relevant legislation and current requirements of the Australian Taxation Office, including the Goods and Services Tax (GST)

· Explain the key requirements for financial record keeping and auditing

· Describe the principles and techniques involved in managing:

· budgeting

· cash flows

· electronic spreadsheets

· GST

· ledgers and financial statements

· profit and loss statements.

1. Choose and explain in detail three aspects of basic accounting principles.

2. What information may you be required to report to the Australian Taxation Office?

3. Explain the key requirements for financial record keeping and auditing

4. Describe the techniques involved in managing budgets.

Summative Assessments: Section B checklist

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the summative assessment. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Learner’s name
Assessor’s name
Unit of Competence(Code and Title)
Date(s) of assessment
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Section C: Performance Activity

Objective: To provide you with an opportunity to demonstrate the required performance elements for this unit.

A signed observation by either an approved third party or the assessor will need to be included in this activity as proof of completion.

This activity will enable you to demonstrate your knowledge of the following performance evidence:

· Use financial skills to work with and interpret budgets, ageing summaries, cash flow, petty cash, Goods and Services Tax (GST), and profit and loss statements

· Communicate with relevant people to clarify budget/financial plans, negotiate changes and disseminate information

· Prepare, implement and modify financial contingency plans

· Monitor expenditure and control costs

· Support and monitor team members

· Report on budget and expenditure

· Review and make recommendations for improvements to financial processes

· Meet record keeping requirements for the Australian Taxation Office (ATO) and for auditing purposes.

1. In a simulated workplace environment, review and make recommendations to improve a budget or financial plan. Negotiate these changes and implement them.

Ensure that you:

· Monitor relevant financial factors such as expenditure and controls of costs

· Prepare, implement and modify financial contingency plans as necessary

· Meet record keeping requirements for the Australian Taxation Office (ATO) and for auditing purposes

· Monitor and support any team members that you are working with.

When this is completed, prepare a report on how the budget/financial plan has been improved.

Summative Assessments: Section C checklist

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the summative assessment. Indicate in the table below if the learner is deemed satisfactory (S) or not satisfactory (NS) for the activity or if reassessment is required.

Learner’s name
Assessor’s name
Unit of Competence(Code and Title)
Date(s) of assessment
Has the activity been answered and performed fully, as required to assess the competency of the learner?Yes No(Please circle)
Has sufficient evidence and information been provided by the learner for the activity?Yes No(Please circle)
Comments
Provide your comments here:
The learner’s performance was:Not yet satisfactorySatisfactory

Competency record to be completed by assessor

This should be used by the trainer/assessor to document the learner’s skills, knowledge and performance as relevant to the overall unit. Indicate in the table below if the learner is deemed competent or not yet competent for the unit or if reassessment is required.

Learner’s name
Assessor’s name
Unit of Competence(Code and Title)
Date
Has the learner completed all required assessments in this workbook to a satisfactory standard?Yes No(Please circle)
Comments from trainer/assessor:
Learner is deemedNot competentCompetent
Assessor’s signature

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What is the opinion of the auditors about the financial statements?

General Motors (GM) CEO: Mary T. Barra Inspect the 10-K 1. What is the opinion of the auditors about the financial statements? The opinion might be that the financial statements are ‘fairly presented.’ The opinion might be that the financial statements are not fairly presented. -The opinion of the auditors is that the financial statements are presented fairly, in all material respects, the financial position of the company at Dec. 31, 2020 and 2019, and the results conform with US generally accepted accounting principles. (Page 47) 2. Who audits the financial statements? The Big 4 accounting firms are (1) Deloitte, (2) Ernst & Young, (3) KPMG, and (4) Price Waterhouse Coopers. They audit the most publicly available companies. State who audits your companies – Ernst & Young audited GM. Serving as the auditors since 2017. 3. Most, but not all companies evaluate their internal control over financial reporting. In the opinion of the management, does the company have good internal control? This is frequently described at Item 9A

Controls and Procedures.

-Management deemed their internal control over financial reporting effective as of Dec 31, 2020. These internal controls were also audited by Ernst & Young, and they concluded that GM maintained effective quality control. (Page 99) 4. What standard does the company use to evaluate whether the internal control is satisfactory? This is frequently COSO Internal Control –Integrated Framework (2013), but it might be another standard. – The assessment of the internal control utilized the criteria discussed in the “Internal Control – Integrated

Framework (2013) issued by the COSO. (Page 99)

Inspect the report on management compensation. Most of the time this is included in the proxy. It is in a form that starts DEF. It might be DEF 14A, titled “Other Definitive Proxy Statements,” or something similar. 1. Most companies have a Compensation Committee. How many of the members of the Compensation Committee are independent? -The compensation committee consisted of 4 members: Carol Stephenson (Chair), Wesley G. Bush, Joseph

Jimenez and Patricia F. Russo. (Page 68). The committee is composed of independent directors

determined by the board under NYSE guidelines. (Page 67)

2. Has the company ask for shareholder opinion on management compensation? This is a ‘say-on-pay’ vote.

-Yes, the company has an annual meeting for say-on-pay voting. The company views shareholder engagement as a continuous process and seeks shareholder feedback. 96.5% of shareholders voted in favor of the executive compensation programs. (Page 44) 3. Describe a little of how the Compensation Committee makes the pay decision. a. Do they use an outside consultant to help with the decision or is it based only on their own deliberations? If they use a consultant, who is it? b. Is there a set of peer companies that they use as a comparison? -The compensation uses recommendations from an outside independent compensation consultant. FW Cook was the independent consultant. (Page 67). The committee used Dow Jones Automobile & Parts Titans 30 Index members as an OEM peer group. (Page 46) They also used another peer group of 15 companies to inform 2020 target compensation consisting of 3M, Boeing, Caterpillar, Deere & Company, Ford Motors, GE, Honeywell, HP, IBM, Intel, Johnson & Johnson, PepsiCo, Pfizer, Proctor & Gamble, and United Technologies. (Page 47) 4. Describe how much the CEO makes. Include a breakdown of the components of the pay. Commonly, it is salary, bonus, and equity.

-Target – Salary: $2,100,000; Short Term Incentive Plan: $4,200,000; Performance Share Unit: $11,250,000; Stock Options: $3,750,000. (Page 50)

Actual Compensation – Salary: $1,995,000; Short Term Incentive Plan: $3,780,000; Performance Share Unit: $12,988,702; Stock Options: $3,750,000; Restricted Stock Unit: $105,020

5. What measures are used to evaluate management, particularly for the bonus? I hope it’s not a long list

of measures. If the list is long, select some representative measures. Describe the chosen measures.*

a. Is the data item drawn from the financial statements? Which financial statement, Balance Sheet, Income

Statement, or Statement of Cash Flows?

b. If the item is not drawn from the financial statements, what information does it seem to capture?

-STIP performance measures 50% -Earnings Before Interest and Taxes-adjusted (EBIT) ($12.9 B is the target) Focus on Operating Profit and driving strong profitability; 25% – Adjusted Automotive Free Cash Flow AFCF ($7.1 B is the target) Focus on driving strong cash flow for investments; 25% Strategic Goals (25 pts) Focus on performance that aligns to company vision and drives business results. (Page 51)

EBIT is from the income statement. Net Income is the accountant’s measure of profitability. Both Interest and Taxes are expenses to arrive at Net Income on the income statement. The measure, EBIT, uses profitability without the subtraction of Interest and Taxes. This suggests that management is incentivized to pay careful attention to aspects of profits other than interest and taxes. AFCF is from the statement of cash flow, and some detail in the computation is provided in the proxy’s Appendix A. I speculate that AFCF is used because the company’s core focus is automobiles.

LTIP performance measures

50% – Relative Return On Invested Capital-adjusted (ROIC) (20% or higher returns in vehicles and technology); 50% Relative Total Shareholder Return (TSR) (Shareholder returns outperform OEM peer group) (Page 52)

ROIC is EBIT/Average Net Assets. Net Assets is Shareholders’ Equity. This is profitability scaled by the level of shareholders’ equity, resulting in a percentage figure. A percentage figure can be compared across companies of different sizes. For example, profits of $100 may seem not as good as $200. However, if the profits of $100 are generated using assets of $500, that 20 percent profit figure may be superior to the $200 that required $2,000 of assets to generate a 10 percent return. Both EBIT and Average Net Assets are derived from accounting reports. EBIT uses the income statement as the starting point. Average Net Assets uses the balance sheet as the starting point. Relative TSR is not clearly defined in the proxy, so I looked it up. A shareholder return is the dividends plus the market price increase of a share. Scale the dividends plus the market price increase by the starting market price and the TSR is a percentage. To make the TRS a ‘Relative TRS,’ examine where the company’s TRS ranks among peers. A Relative TSR that ranks near the top of peers is superior to a Relative TSR that ranks at the bottom of the peers. Accounting does not play a role in computing Relative TSR. Market price are determined by the market, and not directly by accounting reports.

6. What does the committee have to say about whether the incentives in the compensation plan can be dysfunctional? -The committee completed an annual risk review and determined that the compensation program included

the following features to mitigate the risk (which the committee deemed as a low-risk program (page 66)):

Mix of pay elements, short-term and long-term programs, adjustments to compensation, compensation

committee oversight, multiple performance measures and stock ownership requirements. (Page 65)

7. If the measures turnout to be wrong, or misreported, does the company have a policy of trying to recover the pay. For example, suppose the bonus depends on net income, and perhaps a year later, the company discovers that the net income was incorrectly reported. Does the company have a policy of trying to recover the pay? -The company does have a clawback policy. The policy includes all executive officers and certain circumstances includes approximately 275 senior leaders. The committee is empowered to recoup compensation paid to executive officers. In the event of misconduct that causes damage to the reputation, material inaccuracy, or accounting restatement the committee may seek to clawback incentive compensation. The committee may also cancel any outstanding equity-based awards to the employee. (Page 66) the policy is publicly available here: investor.gm.com/resources 8. The tax code, Section 162(m), mostly limits deductions for management compensation to $1 million. Is the company seemingly influenced by the tax code limit on deductibility, or is the company mainly concerned with compensation and not the tax deductibility? -The committee choses to align itself to executive pay with performance, regardless of the performance-based exception being removed under IRS Section 162(m) (Page 67). The company pays executives according the compensation committee’s sense of incentivizing, and does not consider whether the pay will be deductible for tax purposes.

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MAKING FINANCIAL DECISIONS

MAKING FINANCIAL DECISIONS

TASK 1

There are different types of accounting records, and such records are important in any organization. One of the common account records is the income statement. An income statement provides an accurate description of the company’s profitability over a set period. An income statement could be an accounting statement that matches a company’s revenues with its expenses over a given period usually a quarter or a year. An income statement is composed of several items including sales, costs, increases and decreases in intangible value, taxes, and outstanding shares. Another key accounting record is the balance sheet. A balance sheet categorizes a company’s resources such as assets, liabilities and owner’s equity. According to Pandey (2002, p.67), the components of a balance sheet are divided into current and long-term categories. Pandey (2002, p.68) further observes that these components are listed in order of liquidity. Besides a balance sheet and income statement, a statement of cash flows is also essential in a business. A cash flow statement provides one with information about a company’s cash receipts and cash payments. According to Khan and Jain (2003, p.56), a cash flow statement has several objectives. Firstly, it is effective in predicting the amounts of timing and ascertaining future cash flows.  Secondly, it indicates how cash is used and generated. It also helps the creditors, stockholders and customers to determine the flow of cash in a business. Thirdly, it helps an entrepreneur to understand the differences between net income and net cash flow from operating activities. Finally, it helps an entrepreneur to examine a company’s investing activities and financing transactions.

Needless to say, an entrepreneur needs to understand different accounting concepts the common of which are a business entity, matching concept, money measurement, going concern, accounting period, cost concept, realization concept and accrual concept. To understand the importance of each of these concepts, it is instructive to examine their roles. To start with, a business entity treats a business and an owner as two different entities. In other words, a business entity is a fundamental accounting concept, conventions and principles. The money measurement concept allows an entrepreneur to distinguish between transactions that can be expressed in terms of money and those that cannot. The going concern concept assumes a business entity can carry out its activities for an indefinite period. This concept is important as it facilitates the preparation of financial statements. The accounting period concept is important in calculating tax, predicting the prospects of a business and helping an entrepreneur to procure credit from financial institutions. The accounting cost concept requires all assets to be recorded in the books of account at their purchase price. This requirement is helpful in the sense that it allows an entrepreneur to calculate the depreciation of fixed assets. Another key concept is the dual aspect concept which allows an entrepreneur to detect errors and the realization concept which makes accounting information more objective. Equally important is the accrual concept which helps an entrepreneur to know the actual expenses and income during a particular period. Using this concept, an entrepreneur should be able to calculate the net profit of his or her business. Finally, there is the matching concept which states that revenue and expenses should be recorded in the same accounting period. This concept should help an entrepreneur to ascertain the exact amount of profit or loss of the business.

In order to effectively run a business, it is also important for an entrepreneur to understand the factors that influence the structure of the accounting system. One of the factors is the company’s need for accounting information. Accounting information generated in a company could be useful not only to the investors but also to the creditors and the management. It is also worth noting that accounting systems are influenced by the nature of the business and the operations of that business. Other factors that come into play include the perception of the employees and the management, the level of training accorded to the users, the nature of implementation and the implementation partners, and the resources available for the system’s operation.

TASK 2

Risk in any business could affect both primary and supporting assets.

Failing to manage risk can lead to litigation. Litigation can end up being costly as businesses are forced to incur several injurious costs including attorney fees, out-of-pocket expenses, and foregone revenues. Failure to manage risk could also lead to sanctions from private and public regulatory bodies such as the Securities and Exchange Commission. It could also lead to an impaired professional reputation as a result of adverse publicity.

In any organization, there is a possibility of the risk occurring. Fraud in an organization manifests itself in many ways. For instance, fraudulent financial reporting could occur due to improper revenue recognition, overstatement of assets and understatement of liabilities. Other actions that are fraudulent include misappropriation of assets, revenues or assets, conflict of interests, discrimination, antitrust practices and environmental violations.

In an organization, fraud and risk can be prevented and detected in several ways. Firstly, fraud and risk can be managed through auditing and monitoring. However, according to Prasanna (2006, p.71) it is not possible to audit every fraud and misconduct risk, and so it becomes necessary to perform a risk assessment beforehand. For this method to work, it is imperative to have competent employees who should have a comprehensive understanding of what fraud is and what its red flags are.

Besides auditing and monitoring, fraud and risk can be prevented and detected through proactive data analysis. Proactive data analysis is effective in the identification of suspicious transactions, assessing the effectiveness of internal controls and monitoring fraud threats and vulnerabilities. Organizations could choose to either use continuous transaction monitoring or retrospective-based analysis. The former allows organizations to continuously monitor areas that pose strong risks while the later allows organizations to analyze transactions in one or two-year increments.

Another prominent way of fraud prevention and detection is the use of process controls. According to Prasanna (2006, p.71) process controls are effective in detecting fraudulent activities. In his view Pandey (2002, p.81) observes that to effectively manage risk and fraud in an organization, the management should put in place internal controls. But what are internal controls? According to Charles, Gary and John (2009, p.80) internal controls refer to the procedures and policies that are adopted by the management to ensure a business entity operates in an efficient and profitable manner. Internal controls safeguards both physical and un-physical assets. This is achieved by conducting reliable and safe back-up procedures, clearing assignment of duties and controlling operating environments. It is also worth noting that one of the other roles of an internal control system is producing accurate and complete accounting records and timely preparation of financial reports. Most importantly, a control system is composed different component. The first component is maintenance of a control environment. In order to avoid risk and fraud it is important for all the stakeholders to understand, be aware and commit themselves to the policies and procedures established. A strong control environment should be implemented using tight budgetary controls and effective internal audit functions. The second component is risk assessment which is the act of identifying, prioritizing and implementing risk management strategies, policies and procedures. The third component is control activities which include accounting systems and specific control policies and procedures. In this regard, setting up an accounting and portfolio tracking system could be helpful play an important role in the process of data preparation, data entry, and transaction processing and document generation. Control procedures could include activities such as performing independent checks, separation of duties, authorization and approval of transactions and activities, use of adequate documents and records, and maintaining physical control over assets and records. The fourth component is information and communication. In this regard, internal audit reports, monitoring and evaluation reports need to be shared among the stakeholders. Finally, internal control cannot be effective without continuous monitoring and supervision. This can be achieved by strengthening the internal audit functions.

TASK 3

Factors to consider when planning for an audit

In this scenario audit risk is high because the company’s financial statements are likely to be misstated. It is also highly possible that the auditor will fail to detect such material misstatements. Given these possibilities, the auditor is likely to issue an inappropriate opinion on the financial statements. To effectively conduct the audit it will imperative for the audit to keep the audit risk at low levels.

Given the prevailing circumstances it will be important for the auditor to ascertain the degree to which users will rely on the client’s financial statements. Using incomplete or erroneous documents could prove injurious to the users and the auditor. It is also worth noting that some businesses have high levels of inherent risk. To deal with this problem, the auditor is required to identify inherently risky areas and gather appropriate evidence regarding those areas. Inherent risk is also determined by the integrity of the management, results of pervious audits and client motivation to misstate the financial statements. Another important component of audit risk is detection risk. In this scenario detection risk is high and as such the auditor will be required to select proper audit procedures.

Another important concept in the auditing process is materiality. In this regard, the auditor should determine whether the misstatements will distort the view given by the financial statements and influence the understanding and economic decisions of the users. The scope of audit is also very important and it should help the auditor all areas of concern. In order to improve the accuracy of the audit report it will important for the auditor to get an assurance from the client as to whether the information contained in the accounting records is reliable and sufficient. Most importantly, the auditor will be required to apply the compliance test and substance test examine the validity of the information contained in the financial records.

Audit tests

Audit tests will play an important role in detecting any misstatements in the financial statements. According to there are several types of tests that can be used during the auditing process and they include: risk assessment procedures, test of controls, substantive tests of transactions, analytical procedures, and tests of details of balances. The risk assessment procedures can be used by the auditor to assess the risk of material misstatement in the financial statements. In this case, analytical procedures will also be important for preliminary analytical review. Given that conducting a detailed audit may be difficult, analytical procedures will give the auditors an accurate view of the level of material misstatements.

TASK 4

Purpose of an audit report

Auditing plays a pivotal role in providing the internal and external parties with financial information about particular information. The information generated by an audit could be helpful to the employees, the management, shareholders, lending institutions, regulatory agencies and security market. According to Prasanna (2006, p.81) auditing is an important social control mechanism for promoting accountability. There are four types of audit reports, each of which is discussed below.

Types of audit report

Qualified opinion

A qualified opinion is issued when a report fails to conform to generally accepted principles of accounting. A qualified opinion is also expressed when there no sufficient audit evidence. A qualified opinion contains an explanatory paragraph contains a paragraphs where the auditor highlights the reasons why the audit report is not unqualified

Unqualified opinion

It states that the financial statements were prepared were prepared in accordance with the generally accepted accounting principles and is presented when auditor ascertains that each of financial records is free of any misrepresentations. This kind of report is repaired by an unbiased third party and its titles contain the word “independent.”

Adverse opinion

In Charles, Gary and John’s (2009, p.80) view this is the worst type of an audit report that a business entity can receive. This report does not conform to generally accepted accounting principles and indicates that the financial records provided by the business have been grossly misinterpreted. When a auditor expresses an adverse opinion he or she is required to include an explanatory paragraph that should contain all the reasons for his or her adverse opinion.

Disclaimer of opinion

A disclaimer of opinion is expressed when the auditor is unable to make an informed opinion as to the fairness of presentation of the financial statements in conformity with GAAP. It is also appropriate if the auditor is unable to perform a sufficient audit. When this happens, the auditor is required to issue a disclaimer explaining the issues why the opinion of the firm’s financial status could not be determined.

Constituents of an audit report

An audit report should have a title indicative of the word “independent.” The title is followed by an address and an introductory paragraph. The introductory paragraph indicates the responsibility of the external auditor, and the management. It also contains the company’s financial statements including the balance sheet, statement of income, and statement of cash flows. An audit report also has a scope paragraph indicating the purpose, the nature and the scope of the audit. In any report, there must also be an opinion paragraph which indicates the auditor’s assessment of corporate risks and controls. An opinion paragraph is followed by an explanatory paragraph. A sample of an auditor report is detailed below.

                     AN INDEPENDENT AUDITOR’S REPORT_____________________

The Board of Directors,

Upton Company,

New York.

We have audited the accompanying balance sheet of the Upton Company which comprise of the balance sheet as of 31st December 2012 and other financial statements for the year(s) ended then.

Scope paragraph

The audit was conducted according to the generally acceptable accounting principles. The prevailing standards requires the auditors to examine whether financial statements are free from material assessment, to examine evidence supporting the amounts and disclosures in the financial statements, and evaluate the principles used. 

Opinion

In our opinion, the financial statements give a true view of the financial position of Upton Company as of 31st December 2012, and of the results of its operations for the year ended in accordance with GAAP.

Stratton and Briggs limited

24th December, 2012_____________________________________________________________

Purpose and contents of a management letter

A letter of management is written by the auditor towards the end of the audit. It contains information on weaknesses that have been identified by the auditor and recommendations of how they can be mitigated. The letter of management serves several purposes. Firstly, it enables an auditor to give his or her comments regarding accounting records, systems and controls. Secondly, it highlights any materials errors and ways through which they can be rectified. Thirdly, it offers the management constructive advice and improves the quality of the evidence gathering process. A letter of management starts off with an opening paragraph, after which any matters arising from the audit are listed. A raft of weaknesses and recommendations are then listed. The letter ends with a concluding paragraph. An example of a management letter is show below.

__________________     MANAGEMENT LETTER___________________________

Stratton and Briggs limited

                               Certified accountants and registered auditors

London

The Directors,

Upton Company,

New York.

Dears Sirs,

Audit for the year ended 31st December 2012

We are writing to you regarding the matter arising from the audit for the year ended 31st December 2012. Our responsibilities are guided by the relevant regulations and in accordance with generally acceptable accounting principles. This report has been prepared for the use by the management and others within the organization and none of its contents may be disclosed to external parties. The matters detailed in this report reflect matters coming to our attention during the auditing process.

Forecasting

Present system

Appropriate forecasting procedures are not undertaken and this problem can be attributed to the significant turnover in the finance management directorate.

Implications

The management does not receive reliable information for the decision-making process.

Recommendations

A strong financial management framework should be put in place.

We would be pleased to discuss the above issues at your own convenience.

Yours faithfully

Stratton and Briggs limited________________________________________________________

Reference List

Charles T. H., Gary L. S., and John A. E. (2009). Introduction to

Financial Accounting.  Pearson Education

Khan, M. Y.  & Jain, P. K. (2003). Financial Management – Text and Problems.

New Delhi: McGraw Hill Publishing Company Limited, New Delhi

Pandey, I. M. (2002). Financial Management. Vikas Publishing House Pvt.

Prasanna, C. (2006). Financial Management – Theory and Practice. New Delhi:

 Hill Publishing Company Limited,

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The Financial Statement below is Apples Inc for the year ended 28th September 2013 APPLE INC.

The Financial Statement below is Apples Inc for the year ended 28th September 2013

APPLE INC.

Financial Statement for the year ended 28/09/2013

In Millions of USD (except for per share items)As of 2013-09-28As of 2012-09-29As of 2011-09-24As of 2010-09-25
Cash & Equivalents14,259.0010,746.009,815.0011,261.00
Short Term Investments26,287.0018,383.0016,137.0014,359.00
Cash and Short Term Investments40,546.0029,129.0025,952.0025,620.00
Accounts Receivable – Trade, Net13,102.0010,930.005,369.005,510.00
Receivables – Other
Total Receivables, Net20,641.0018,692.0011,717.009,924.00
Total Inventory1,764.00791.00776.001,051.00
Prepaid Expenses
Other Current Assets, Total10,335.009,041.006,543.005,083.00
Total Current Assets73,286.0057,653.0044,988.0041,678.00
Property/Plant/Equipment, Total – Gross28,519.0021,887.0011,768.007,234.00
Accumulated Depreciation, Total-11,922.00-6,435.00-3,991.00-2,466.00
Goodwill, Net1,577.001,135.00896.00741.00
Intangibles, Net4,179.004,224.003,536.00342.00
Long Term Investments106,215.0092,122.0055,618.0025,391.00
Other Long Term Assets, Total5,146.005,478.003,556.002,263.00
Total Assets207,000.00176,064.00116,371.0075,183.00
Accounts Payable22,367.0021,175.0014,632.0012,015.00
Accrued Expenses4,782.003,283.002,428.001,593.00
Notes Payable/Short Term Debt0.000.000.000.00
Current Port. of LT Debt/Capital Leases
Other Current liabilities, Total16,509.0014,084.0010,910.007,114.00
Total Current Liabilities43,658.0038,542.0027,970.0020,722.00
Long Term Debt16,960.00
Capital Lease Obligations
Total Long Term Debt16,960.000.000.000.00
Total Debt16,960.000.000.000.00
Deferred Income Tax16,489.0013,847.008,159.004,300.00
Minority Interest
Other Liabilities, Total6,344.005,465.003,627.002,370.00
Total Liabilities83,451.0057,854.0039,756.0027,392.00
Redeemable Preferred Stock, Total
Preferred Stock – Non Redeemable, Net
Common Stock, Total19,764.0016,422.0013,331.0010,668.00
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)104,256.00101,289.0062,841.0037,169.00
Treasury Stock – Common
Other Equity, Total-105.008.0023.0035.00
Total Equity123,549.00118,210.0076,615.0047,791.00
Total Liabilities & Shareholders’ Equity207,000.00176,064.00116,371.0075,183.00
Shares Outs – Common Stock Primary Issue
Total Common Shares Outstanding899.21939.21929.28915.97

The assets are listed in order of liquidity, most liquid current assets appear first, and Current assets appear first such as cash, bank balances and short-term investments, receivables, and inventories. Current assets are expected to be converted to cash or use within an operating period. Inventories and accounts receivables appear at the bottom of current assets as noted in the Apple Inc financial statement. Long term assets are then presented and categorized as Property which includes plant property and equipment this are physical used in the course of operations.  An intangible asset is an intellectual property, the company then I identify other current assets which might include a prepaid expense.

The classifications of assets are defined in terms of property and possessions of the business they include: Fixed assets not acquired for sale but for business purposes they include, property, plant and machinery. They can also be classified as wasting Assets as they are prone to wear and tear. : Circulating Assets are assets that are held for sale such as bills receivable although not defined in the report stated above: Intangible assets have no physical existence and do not represent anything valuable: Contingent assets like uncalled capital in which they happen after an event and then Outstanding Assets which are expenses paid in advance but are not received by the limited company in a fiscal year (Eisen, 2007).

Cash and cash equivalent is an asset that are highly liquid can only be converted into cash example saving accounts, bonds, money market, and treasury Bills. They appear on a financial statement of an organization and include cash in bank and cash in hand accounts. Cash is generated from the sale proceeds of products and services, borrowing from financial institutions and creditors and from capital contribution from owners or shareholders. They do not deteriorate in value until maturity.

Current liabilities are the debts that a company owes and are payable within a fiscal year. Examples of current liabilities include Loans, consumer deposits; Federal taxes, account payables, interest payable and reserves. In Apples Financial statements they are mentioned below

Total Current liabilities (For the period ending 09/28/13)

= Accrued Expenses + Accounts payable/creditors + Notes Payable+ Current port. Of LT Debt + leases +Other Current Liabilities

(All numbers in millions of US Dollars$ (‘000,000,000))

4,782+22,367+16,509= 43,658

Total Current liabilities (For the period ending 09/29/13)

=Accrued Expenses + Accounts payable/creditors + Notes Payable+ Current port. Of LT Debt + leases +Other Current Liabilities

 (All numbers in millions of US Dollars$ (‘000,000,000))

3,283+21,175+14,084= 38,542

Current liabilities are essential to enable an investor, creditors and employees know how much a company owes in the short term. It assists investors to make decisions on lending company money or other resources. The current ratio or quick ratio usually determine whether a company can pay off its current liabilities. Financial ratios are used to understand how the company is fairing in terms of debt. Current ratio shows amount of assets to liabilities and point to the ability to pay.

Most investors would invest in a company that has less debt within a financial year or progressed in paying off debt in a financial period. Investors would compare amount of short term debt to cash position within current asset to compare financial standing of the company. Paying debts requires one to change some assets to cash, this will help you compare how much current asset you have and lets you know how much liquid cash you have.  Looking at apples financial statement can help determine which liabilities are priorities to take care of and which assets can be converted to assist with to maintain the financial position of the company. It is advisable as above financial statement that a company with accrued expenses total liabilities would drastically increase.

A financial statement summarizes the company’s assets liabilities and shareholders’ equity at a specific point in time to analyze how a company pays for things (Weygand, Kieso, 2008). The balance sheet is efficient because it accounts for cash inventory and property on the asset side while accounts payable or long-term debt is accounted on the liability side. This allows investors to evaluate company’s performance and gives a prospect on the way forward. The balance sheet also presents the strengths of a company; investors are able to factually calculate days of working capital. Balance sheets can also identify trends of how net profit is used, receivables and the payables.

Reference

Eisen, P. J. (2007). Accounting Barron’s business review series business, Review books (5 ed., pp. 177-200). New York: Barron’s Educational Series

Weygand, Kieso, P. D. K. A. L. D. (2008). Hospitality financial accounting (2 ed., pp. 110-145).New Jersey: John Wiley and Sons.

Fidelity Bank Financial Statements-HIMX (APPLE INC INC0

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Analyse the performance of your chosen company using relevant financial and non-financial ratios

Analyse the performance of your chosen company using relevant financial and non-financial ratios

Module NameFinancial Decision Making
Level  7
Module LeaderEwan Tracey
Module Code  FINM036
  Assessment title:  Written Assignment
Weighting:50%
Submission dates:Please see NILE
Feedback and Grades due:    Please see NILE

Assessment Task

This assessment requires students to produce an individual report analysing the performance and operations of a publicly listed company within a selected sector. A list of companies will be provided for students to select from.This assessment represents 50% of the total marks.

Module Assignment Information

Due date: To be determined – UK semester 1 / overseas assignment due from 1st September 2022 to 31st August 2023

FINM036 Written Assignment

This assignment aims to test students’ knowledge and understanding of key accounting and corporate finance concepts, theories and tools that can be used to analyze organizations critically. It will also test the ability to present non-financial information.

Required:

You have been asked to write a report to the board of directors of one of the selected companies below as part of the interview process for your first appointment as a Finance Director of a company listed on AIM (which is the Alternative Investment Market for small companies) within the London Stock Exchange (LSE). The board of directors have asked you to write a report about your vision and strategic financial goals for the company.

The companies are within a selected sector of the AIM. Assume that your selected company has ambitions and plans to become a FTSE 100 (the largest UK listed companies) company in the near future.

Guide:

You need to introduce the company, discuss the product or services, location, turnover, number of employees, etc. The report should be maximum 2,500 words (+/- 10%). Remember you need to make an impression on the board of directors to be considered for the critical position of Finance Director.

The essence of this assignment is to test your knowledge and understanding of key accounting and corporate governance concepts, theories and tools and ability to present data concisely.

Required:

You have been asked to write a report to the board of directors of one of the selected companies below as part of the interview process for your first appointment as a Finance Director of a AIM company. The board of directors have asked you to write a report about your vision and strategic financial goals for the company.

The companies are within the AIM index. Assume that your selected company wants to become a FTSE 100 (the largest UK listed companies) company in the near future.

Additional Guidance

You need to introduce the company, discuss the product or services, location, turnover, number of employees, the contribution of the sector to the UK economy. To analyse, you need to compare the financial data / ratios of your selected company with either a competitor within the sector or the average of the sector. The report should be maximum 2,500 words. Remember you need to make an impression on the board of directors for you to be considered for the critical post of Finance Director.

Please note that you must select a company from the list below for 2019/20

List of companies to select from for 2019/2020

Company NameICB Super-SectorCountry of IncorporationMarketCompany Market Cap (£m)
ACCSYS TECHNOLOGIES PLCConstruction & MaterialsUnited KingdomAIM£87.65
BILLINGTON HOLDINGS PLCConstruction & MaterialsUnited KingdomAIM£37.25
EPWIN GROUP PLCConstruction & MaterialsUnited KingdomAIM£114.34
JAMES HALSTEAD PLCConstruction & MaterialsUnited KingdomAIM£848.53
MICHELMERSH BRICK HOLDINGS PLCConstruction & MaterialsUnited KingdomAIM£82.33
NEXUS INFRASTRUCTURE PLCConstruction & MaterialsUnited KingdomAIM£78.90
SIGMAROC PLCConstruction & MaterialsUnited KingdomAIM£56.46
VAN ELLE HOLDINGS PLCConstruction & MaterialsUnited KingdomAIM£72.80

Section A- 2000 words.

  1. Analyse the performance of your chosen company using relevant financial and non-financial ratios (5 years). Your analysis should include profit ratios, efficiency, liquidity and other ratios that you consider relevant.

Section B 500 words

  1. Critically evaluate the company’s corporate governance compliance and its impact on the brand and reputation as reported in the press (print, online and social media)
  2. Discuss the proposed medium term financial strategies for your selected company to become a FTSE100 company or for your company to become dominant in the industry / sector.

Please note:

If you select a company outside of the list above, you will automatically fail this part of the assignment, unless you get a prior written approval from your tutor.

You can use www.northcote.co.uk, pro-share and the FT to identify companies within their sectoral classifications. It is essential that all sources of information are correctly referenced using the Harvard system.

Word Limits

The word limit for this assignment is 2500 words (+/- 10%)

Where the submission exceeds the stipulated word limit by more than 10%, the submission will only be marked up to and including the additional 10%. Anything over this will not be included in the final grade for the assessment item. Abstracts, bibliographies, reference lists, appendices and footnotes are excluded from any word limit requirements.

Where a submission is notably under the word limit, the full submission will be marked on the extent to which the requirements of the assessment brief have been met.

Assessment Learning Outcomes

The learning outcomes to be addressed through this assignment are:

(a)        Demonstrate a critical understanding of the nature and role of the finance professional and how financial control processes impact on the organisation and its stakeholders.

(b)        Critically evaluate the impact of the external context on the financial domain, both domestically and internationally.

(c)        Identify, critically appraise and analyse the content, relevance and use of key financial accounting information and techniques, both within organisations and by reference to relevant research.

(d)        Demonstrate the ability to evaluate critically and communicate effectively the financial performance of an organisation by reference to internal or published financial information.

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The impact of the global financial crisis on public private partnerships: a UK perspective

The impact of the global financial crisis on public private partnerships: a UK perspective

 

This chapter examines how Public Private Partnerships (PPPs) have been affected by the global financial crisis (GFC). After briefly discussing PPPs, particularly with reference to risk, the chapter outlines their contribution to the development of worldwide public infrastructure and highlights some initiatives designed to assist projects following the withdrawal of credit. It then analyses the effect the GFC has had on United Kingdom (UK) PPPs by investigating approximately 630 projects to assess whether difficulties in obtaining finance brought about by the crisis has led to a delay in PPPs reaching financial close. The findings confirm that PPPs currently in procurement are finding it more difficult to achieve financial close than pre-GFC projects and that therefore there are fewer PPPs now underway. The chapter concludes by looking at the future of PPPs in the UK following the change of government in 2010.

 

INTRODUCTION 

Her Majesty’s Treasury (HMT) (2000) claims that PPPs bring the public and private sectors together in long term partnership for mutual benefit, asserting that the PPP label covers a wide range of different types of partnership including (p. 8):

  • the introduction of private sector ownership into state-owned businesses, with sales of either a majority or a minority stake;
  • arrangements where the public sector contracts to purchase services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure; and
  • selling government services into wider markets and other partnership arrangements where private sector expertise and finance are used to exploit the commercial potential of government assets.

 

In many cases, PPPs use a private company to design, build, finance and operate (DBFO) a new development such as a hospital or school over a contract period of 20-30 years. Throughout this period, payments are recouped from the public sector, which is ultimately responsible for the delivery of these services. When first introduced in the UK by the Conservative Government in 1992, the PPP initiative[1] was met with relative scepticism and, although Labour opposed the scheme in opposition, it embraced PPP when it came to power in 1997. Since then the volume of PPPs, not only in the UK but throughout the world (Grimsey and Lewis, 2004), has increased significantly. Despite widespread criticism, the use of PPPs showed no sign of abating. However, the GFC that began in 2007 has significantly reduced the availability of private finance, and has therefore had a detrimental impact upon PPPs.

 

There are a number of well-documented reasons behind the GFC. One of the principal factors was the sharp rise in the number of subprime mortgages sold in the United States of America (USA) (Krinsman, 2007; Brunnermeier, 2009) and the subsequent ramifications in other countries, including the UK (Hall, 2008a). Uncertainty over the magnitude of the crisis has meant that banks have been reluctant to lend, with even the largest companies finding it difficult to obtain finance due to default and insolvency fears (Hall, 2008a). In the UK, the desire to safeguard existing PPPs and future infrastructure projects led at the time to government initiatives and increased borrowing from the European Investment Bank (EIB). Since, then, concerns over sovereign debt levels have also emerged in many countries within the European Union (EU) (for example Greece, Italy, Spain and Portugal) as well as elsewhere (for example, Japan and the USA). These concerns have exacerbated financial nervousness. Whilst Burger et al. (2009) provide some general statistics for how the GFC has affected PPPs in a number of countries; this chapter examines approximately 630 PPPs in the UK, a key user of this procurement method, to assess the impact of the GFC on the programme.

 

In terms of the format of the chapter, the next section reviews the literature associated with PPPs and risk. The effect of the GFC on PPP funding is then considered, together with several of the initiatives designed to safeguard existing and future projects. The methodology is then outlined before the research findings are presented and conclusions drawn. 

 

public private partnerships

The introduction of PPPs was in response to concerns about the need to provide public infrastructure despite the high level of public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. As a consequence, pressure mounted to change the standard model of public procurement. In essence, a PPP is a contract between government and a consortium of private companies (referred to as a Special Purpose Vehicle (SPV)), under which the latter is required to DBFO an asset in return for payment over a number of years for both the cost of construction and the operation of the related service. Such payments may be based on either direct user charges (for example, toll roads), or a unitary payment from a public authority or a combination of both (Grimsey and Lewis, 2004).

 

The original objective of PPPs in the UK was to enable new infrastructure to be provided outside of the public sector borrowing requirement; however when Labour came into power in 1997 the emphasis shifted towards the achievement of value for money (VFM). This change in focus was in response to an amendment of Financial Reporting Standard (FRS) 5 which stated that the purchaser (the public sector) was required to demonstrate that the involvement of the private sector offered VFM when compared with alternative ways of providing the services (Accounting Standards Board (ASB), 1998). This VFM calculus was achieved by valuing the transfer of risk from the public to the private sector, with VFM being assessed through a comparison of the Public Sector Comparator (PSC) – the hypothetical cost of undertaking a project under conventional procurement – with the cost of procuring via PPP. VFM was deemed to be achieved when the price established under the PSC exceeded the price offered by the most competitive private bidder.

 

Since its conception, PPP has been heavily criticised. Some critics argue that the transfer of risk to the private sector is inappropriate, overvalued or does not take place at all. This criticism is on the basis that PPPs are rarely terminated, often due to potentially high litigation and counter claims by contractors (Hencke, 2003). Furthermore, as essential public services must continue to be delivered even if the contractor fails, this risk cannot be transferred. Edwards et al. (2004), for example, raised concerns over the level of risks actually being transferred and questioned whether those who are not best able to manage the risks are bearing them nonetheless, with the public sector being left with risks which are not easily quantified. Broadbent et al. (2008) also found that with regard to 17 PPP health projects certain items could be made invisible, whilst others that were either deemed more significant or possibly easier to monitor, were given unprecedented attention. Moreover, Pollock and Price (2008, p. 176) suggested that ‘the government’s central justification for PPP in terms of risk transfer remains largely unevaluated’ due to a lack of oversight in this area by government and reported that out of 622 PPP contracts signed up to October 2007, ‘only 10 financial inquiries into central government operational PFIs had been undertaken by the NAO [National Audit Office] by 2006, and of these only three examined the relationship between risk transfer and risk premiums’ (p. 177). 

 

The risks posed by the GFC and today’s continuing market turbulence on PPPs stem from the interaction of threats and vulnerabilities. Burger et al. (2009, p. 10) identify the follows threats (i.e. the likelihood of a negative event occurring in the future):

  • The risk of an increase in interest rates leading to increasing costs, liquidity problems and project feasibility considerations for private partners and the possible postponement of projects by the government or it having to inject cash to support the SPV;
  • The risk of credit being unavailable leading to the termination of existing projects, existing projects failing to reach financial close and capital injections from government;
  • The risk of a decline in stock market prices leading to banks having reduced capital, which affects their ability to lend and causes reduced investment in new and existing PPPs;
  • The risk of exchange rate depreciation making new investments that rely on external borrowing less attractive, with private partners being tempted to export their services thus reducing the pool of domestic bidders; and
  • The risk that there is a slump in domestic demand leading to liquidity problems for private partners and lower domestic revenue for governments, meaning lower investment for new and existing PPPs.

 

PPP vulnerabilities (i.e. the preparedness of the partners to either prevent a threat or cope with its impact) to market turbulence can be project specific or extend more widely. The former includes overly optimistic revenue projections (for example, with respect to toll roads) while the latter may be related to the institutional framework. The institutional context is fundamental to managing PPPs to secure their benefits whilst containing the risks, which can be can be classified in a number of ways. 

 

The ASB (1998) identified six main risks: demand; residual value; design; performance/availability; potential changes in relevant costs; and obsolescence. Moreover, a distinction may be made between commercial, macroeconomic and political risk. Macroeconomic risks entail aggregate demand risk, interest rate risk, liquidity risk and exchange rate risk. The materialisation of macroeconomic risk can, in turn, cause other risks. For instance, interest rate or demand risk can cause credit risk. Risk may also be categorised as exogenous and endogenous, with the latter being those risks that can be actively managed by changing behaviour. The risk management philosophy underpinning VFM has long asserted that risk should be allocated to the party best suited to carry, or manage, that risk. In principle, this should incentivise each party to act in a manner that manages the risk allocated to them and therefore improves the overall efficiency of the PPP.

 

To best allocate risk, two questions need to be answered (Organisation for Economic Co-operation and Development (OECD), 2008): first, which party is best able to prevent an adverse occurrence from occurring, and thereby ensure that the actual outcome conforms as closely as possible to the expected outcome; and second, in the case where no party can prevent an adverse occurrence (an exogenous risk), which party is best able to manage its outcome. Different parties carry different types and amounts of risk, and not all are affected in the same way. This may alter the attractiveness of PPPs for the parties most affected and reduce their interest in participating in PPPs unless they are compensated. As such they may not want to: enter into new PPPs; refinance debt in existing PPPs; or continue operating under an existing agreement. Risk can be managed in several ways including through (OECD, 2008): risk avoidance – the risky activity is not undertaken as, for example, when a public body forgoes an investment; risk prevention – action is taken to reduce vulnerabilities, for example, when a PPP consortium borrows in domestic currency to avoid exchange rate risk; and risk transfer – risk is transferred to another party through a contractual arrangement, such as minimum traffic guarantees. 

 

The notion of ‘risk transfer’ plays an important role in justifying PPPs. Firstly, it is a key element in Eurostat’s definition of whether the debt is treated as being on or off the government’s balance sheet. Secondly, it is used, especially in the UK, to justify the use of PPPs which do not demonstrate that they are better value than the public sector option. This occurs when the aforementioned PSC is compared with a PPP bid and the latter is made less expensive by factoring in risk.  However, transferring risk is not free. While it is possible to create contracts that transfer the risk of construction delays to the contractor, such contracts cost about 25 per cent more than conventional contracts (Hall, 2008b). Nor is risk transfer necessarily the best policy option, and it needs to be subjected to a cost-benefit analysis. For example, a theoretical analysis of risks and PPPs concluded that it is most efficient for demand risk to remain with governments (Engel et al., 2011). The International Monetary Fund (2004, p. 14) warns that governments may ‘overprice risk and overcompensate the private sector for taking it on, which would raise the cost of PPPs relative to direct public investment’. It is argued that this may have occurred in the UK as no attempt appears to have been made to monitor if risk transfer happens in reality, or how much benefit it really brings (Pollock and Price, 2008).

 

THE IMPACT OF GFC ON PPPs

The value of PPPs in Europe (excluding the UK) rose sharply during the period 2004 to 2006 to approximately €18 billion per annum (European PPP Expertise Centre (EPEC), 2010). The total value of PPPs signed by the end of 2006 was €31.6 billion, of which €23.6 billion were signed between 2004 and 2006. Moreover, at the start of 2007, projects valued at €67.6 billion were in procurement (Hall, 2008a). In the UK, the annual PPP programme increased from nine projects valued at £667 million in 1995 to 65 projects valued at £7.6 billion in 2002 (HMT, 2003). In addition, it was estimated that a further 200 projects with a total value of £26 billion would be closed between 2005 and 2010 (HMT, 2006). However, the value of PPP transactions reaching financial close fell sharply across Europe in 2008 and 2009 (from a high of approximately €30 billion in 2007) and, whilst returning to the 2004-6 levels in 2010, it remains well below the record years of 2005-7 (EPEC, 2010). In terms of the number of transactions, the UK remains by far the most active market across the European Union, with 44 PPP deals reaching financial close in 2010  (EPEC, 2010) and 20 during the first half of 2011 (with a total value of approximately €1.8 billion) (EPEC, 2011a). In value terms, Spain was the largest PPP country in 2010 (with 13 deals totalling approximately €4.4 billion) (EPEC, 2010), with France being the largest during the first half of 2011 (with eight deals totalling approximately €8 billion). Regardless of the improvement in 2010 and the first half of 2011 reflected in the figures above, the numbers and value of PPP transactions remain considerably less than those observed prior to 2008. To put the extent of this reduction in context, while the value of all European PPP deals for 2007 was approximately €30 billion, this figure had fallen to €18.3 billion in 2010 (recovering from just over €15 billion in 2009); this represents a decline of 39 per cent. (See Figure 1 for an illustration of the financial details of European PPPs between 2003 and 2011a.) Moreover, few large deals closed in the UK in 2010 and the first half of 2011 (EPEC, 2010 and 2011a).

 

 

FIGURE 1 European PPP Market 2003-2011 by € Billion

 

Source: EPEC, 2011b

 

PPPs are normally funded by 90 per cent debt finance and 10 per cent equity finance. Equity is higher risk as it will be lost first if the project company fails. Therefore, such shareholder loans are seen as junior to the external debt, known as senior debt, which is repaid first (NAO, 2010). Between 1995 and 2002 the use of both indexed linked and wrapped bonds in the financing of PPPs grew (see Kirk and Wall (2002) for a fuller explanation). However, following the 2007 housing market decline, the monoline industry, which guaranteed bond repayment if an issuer defaulted, collapsed resulting in the closure of the wrapped bond market (BBC, 2009). Consequently, the only viable source of finance for infrastructure projects was banks; however, the demise of Lehman Brothers in September 2008, widely accepted as the tipping point for the GFC, meant that the global interbank lending market dried up as banks stopped trusting each other. At the height of the crisis, banks were unable to fund themselves at the wholesale money market reference rates and there were suggestions that those rates had become unrepresentative. This constraint on liquidity meant:

  • less debt available for any given project and the need for a consortium of banks for all but the smallest of projects;
  • a higher price of debt, making it harder for privately financed deals to beat the PSC;
  • a shorter term for debt leading to refinancing risk and hedging issues; and
  • greater conditionality relating to the debt during the procurement phase.

 

A global review by PricewaterhouseCoopers (2008) reported that interest rates for lending to infrastructure projects had risen between 1.5 and 2 per cent above the lowest rates obtainable by governments, causing difficulties for both existing and future PPPs. Indeed, the NAO (2010) found that loan margins (i.e. above the interbank rate) for UK PPP projects had increased to around 2.5 per cent on average, with some complex projects facing margins of 3 per cent. EPEC (2010) reports similar commercial debt pricing. With respect to existing PPPs, loan repayments become more difficult, refinancing problematical due to the reluctance of banks to provide funding and, for concession-type PPPs such as toll roads, forecasted earnings are unlikely to be achieved due to a slump in domestic demand (Hall, 2009). Consequently, as reported above, the flow of new PPPs has slowed down. 

 

Standard and Poor’s (2008) warned that some Spanish public authorities may have their credit rating revised downwards unless expenditure on employment and services is reduced because of the inflexible burden of PPP debt coupled with declining tax revenues due to the GFC. Ironically, this will increase the cost of debt and further reduce uncommitted income. In other countries there is also evidence that PPPs are being cancelled because of the GFC. For example, in Ireland, six social housing PPPs have been cancelled, a planned prison PPP was postponed indefinitely (Hall, 2009) and a metro PPP has been deferred (Department of Transport, Tourism and Sport, 2011). In Australia, despite its extensive use of the PPP model, there has also been a renewed questioning of overinflated traffic forecasts (Ferguson, 2009; KPMG, 2009a) following the failure of a number of projects.

 

The GFC has also had a significant impact on PPPs in the UK with only 34 deals being signed in 2008 (Hall, 2009), which was approximately half that of 2007 and the lowest level of activity for over a decade (Kapoor, 2008). Although, as noted above, EPEC reports that this has recovered slightly to 44 deals in 2010 (albeit the value of such deals is much lower). The NAO (2010, p. 9) highlighted that as well as charging higher margins, banks are adopting a more cautious approach to lending following the credit crisis and are as a result: lowering the proportion of debt in projects; requiring the private sector to inject equity earlier; and placing more onerous conditions on when the private investors can withdraw cash from the project. Hence, UK public service programmes that currently rely on PPPs may suffer. Moreover, the GFC led to the collapse of land and property values which contributed to the failure of businesses, declines in consumer wealth, substantial financial commitments incurred by governments and a significant decline in economic activity. This impacted upon PPP deals which involved disposal of land as part of the financing, and may have contributed to the termination of the Defence Training Review programme (see Case Studies) (Defence Policy and Business, 2010). Further issues include increased government guarantees, greater state involvement in some UK banks and direct HMT lending (see below) which makes the achievement of VFM more difficult. This increased public sector risk coincides with substantial strain being put on public finances, arguably due to the measures taken by the previous Labour Government to protect the fragile economic recovery, support growth and job creation and provide reassurance to capital markets (Ostry et al., 2010). Consequently, the Coalition Government has reversed a number of policies implemented by the previous Labour Government, including the Building Schools for the Future (BSF) programme (see Case Studies) (Richardson, 2010). Given these difficulties, the UK and other countries have sought to introduce measures to assist PPPs struggling to reach financial close. Some of these are now outlined. 

 

UK Initiatives

Four main approaches being were trialled in the absence of traditional financial approaches in the UK; they were mini perm structures, HMT lending, the non-profit distributing model and the prudential borrowing framework. Each of these is now briefly explained.

 

Mini-perm structures

Broadly speaking, a mini-perm is a short-term financing tool, usually payable in three to five years and typically used to pay off income-producing construction or commercial properties. The term ‘perm’ is short for ‘permanent’, alluding to permanent financing, albeit for a short period of time as indicated by the word ‘mini’. Mini-perm financing might be used by a developer until a project has been completed and can therefore start producing income and establish an operating history. In other words, this type of financing is used prior to being able to access long-term financing or permanent financing solutions. The interest payable on a mini-perm will usually be higher that longer-term financing options, often with a balloon payment at the end of the term in anticipation that the loan can then be easily refinanced due to the fact that the asset now has an operating history on which to successfully obtain less-expensive permanent financing. They can be split into two distinct types – hard and soft (KPMG, 2009b). The former has a relatively short maturity, typically five to seven years, at which point the bulk of the loan remains outstanding. Arguments for hard mini-perms are that they force refinancing, which would be at prevailing market prices, and they allow the lenders to price on a short term basis. In contrast, soft mini-perms have a longer maturity, for example 26 years of a 28 year contract. Nevertheless, two features encourage early refinancing. Firstly, incremental step ups of 25-50 basis points at certain dates result in the cost of borrowing being more expensive if the loan is not refinanced. Secondly, a cash sweep at a certain date is used to repay the outstanding debt rather than distribute rewards to shareholders. In 2009, it was reported that two large PPP projects and one small one had been financed using a mini-perm; however, it was felt that these projects had caused affordability issues for the public sector and increased the private sector’s risk exposure (KMPG, 2009b). Therefore it is doubtful that such structures will prove to be much of a solution, particularly with their emphasis on refinancing which is less likely due to the GFC. An example of a large project using a soft mini-perm structure would be London’s Riverside waste-to-energy £570 million PPP, which reached financial close in July 2008.

 

HMT lending

In 2009, the Labour Government announced its intention to lend to PPPs which were unable to raise sufficient finance (HMT, 2009). The aim was not to replace banks or capital markets, but to provide additional funding, with the private sector and EIB continuing to supply the majority of finance. To qualify for HMT lending, there must have been a failure to secure finance following a competitive process and any funding offered must have been unrepresentative of market terms. These loans would still bear interest and be repaid over the life of the project. However, HMT hoped that if favourable market conditions returned the loans could be sold prior to maturity at a profit. These loans were to be issued by HMT’s own finance unit known as The Infrastructure Finance Unit (TIFU), which was established with the aim of supporting PPP schemes in procurement, thereby safeguarding £13 billion of public investment (HMT, 2009). These included the Greater Manchester waste project (see Case Studies), the M25 widening, Merseyside Waste, Building Schools for the Future (see Case Studies) and a number of hospital projects. However, TIFU only provided lending for the Greater Manchester waste project (see Table 5) and was subsequently placed under the umbrella of Infrastructure UK, which has a much wider role in reducing the cost of infrastructure projects (NAO, 2010). As with mini-perms TIFU loans were seen as a short-term solution until the project could obtain more conventional finance.

 

Non-Profit Distributing model (NPD)

Although similar to PPP, the main difference is that the NPD provides economic or social infrastructure financed 100 per cent by debt (90 per cent senior and 10 per cent junior). This differs from PPP deals, which normally consist of 90 per cent debt and 10 per cent equity. Under an NPD, SPV shareholders receive a capped return on their capital, with any surpluses remaining at the end of the contract being passed to a designated charity as opposed to being paid out as dividends. Subsequently the dividend opportunity is removed, which is considered to flatten out overall risks when compared to equity-based PPPs or public procurement. NPDs are therefore still attractive to banks, but not as popular with investors or bidders as they do not obtain the same returns (Hellowell and Pollock, 2009). This model was piloted in Scotland in the Argyll and Bute Council’s schools’ project, which reached financial close in September 2005. Since then, two more schools’ projects (in Falkirk and Aberdeen) reached financial close in May and December 2007 respectively. Moreover, the National Health Service in Tayside has used this model for a PPP and the Borders rail link project, which was announced in 2008, will also use NPD.

 

Prudential Borrowing Framework (PBF)

Although it could be argued that the PBF was not initiated in response to banks’ reluctance to lend, it does provide an alternative to PPP. Indeed, as it excludes the private sector from all aspects of the project apart from construction it is closer to traditional procurement. Under the Local Government Act 2003, local authorities were given greater freedom over their capital expenditures; therefore whilst most of their revenue still comes from central government, it now has less say over how this money is spent. Therefore local authorities are no longer forced down the PPP route by central government. However, whilst Hood et al. (2007) believe that the PBF has benefits, they feel it is not as robust as PPP regarding the treatment and allocation of risk. One UK local authority spent £11 million on a programme of highways structural work via the PBF, which they calculated would not only deliver a better long-term solution but would deliver savings of £1 million from the highways maintenance budget and reduce future liabilities by a further £1.9m. Moreover the resurfacing work would increase the operational life of the road and reduce the number of insurance claims and litigation from potholes created by adverse weather conditions. Had they gone down the PPP route they would have had to deal with the substantial running costs of such projects, complex contractual arrangements and extended contractual periods, all of which contribute to a heightened risk profile (Hood et al., 2007).

 

Other initiatives

PPPs in France have never been equivalent to PPPs elsewhere from a legal perspective, but recent financial turmoil has prompted financial reforms, there too. In order to alleviate the problems with the financial markets, several measures have been introduced (Hall, 2009). These include: a government guarantee for all PPP bank loans; tax allowances; allowing the government to advance to a bank the majority of the loan required by the private partner (thus enabling the bank to pass on lower interest rates obtainable by government); and allowing PPPs to be signed on the basis of ‘adjustable financing’ without finalising a deal with banks so that it can proceed on the basis of government advances while waiting for improved conditions in the financial market. PPPs have been widely promoted in developing countries for many years by the World Bank and other donors and development banks. However, the International Finance Corporation (IFC), the World Bank’s private sector arm, believes that the GFC will make it even harder to finance PPPs. It estimates that projects totalling $110 billion may be delayed or cancelled, and that $70 billion of existing PPPs are at risk because of increased financing costs (IFC, 2008). Therefore, the IFC has created a global equity fund and a loan financing trust to support PPPs. 

 

It can be seen therefore that the financial threats highlighted by Burger et al. (2009) have impacted on the PPP initiative. Interest rates have increased, credit has become less available, there has been a slump in domestic demand and increased borrowing from the EIB could expose the UK public sector to exchange rate risk.

 

METHODOLOGY

The data used for this research was obtained from two primary sources: HMT (2011) statistics for both signed projects (698) and those still in procurement (61) at 16 March 2011 and Partnerships UK’s (PUK) (2011) project database[2]. The HMT signed projects’ list is revised on a six-monthly basis to reflect the updates HMT receives from departments at Budget and Pre-budget Review. The list of projects in procurement is also updated regularly. The PUK database holds details of 920 projects that have all achieved financial close. In compiling this database, PUK liaise with HMT, government departments, the Welsh Assembly and the Northern Ireland (NI) and Scottish Executives. The main reason for the difference between the HMT signed list of 698 projects and the PUK database of 920 is that the latter also contains non-PPP projects. Furthermore, with respect to the HMT list of both signed projects and those in procurement, the same amount of information is not provided for each project. Accordingly, for the purposes of this research, 570 (82 per cent) signed projects and 57 (93 per cent) of those in procurement were deemed useable.

 

In order to ascertain whether the GFC has led to delays in projects being closed, the length of time between the appearance of the project in the Official Journal of the EU (OJEU) and financial close was measured. The EU Public Procurement Directives require all public sector bodies to publish details of tenders and contract opportunities in the OJEU and financial close is deemed to be when both the bidder and the purchaser have reached agreement on: all the contractual documents; all relevant technical issues; and all matters affecting the unitary charge. The only remaining issue is for the bidder to fix the interest rate on the debt taken out to finance the project. Comparisons were then made between the length of time from the OJEU notice to financial close for projects signed since the beginning of the PPP scheme in 1992 and those in procurement at 16 March 2011. It was expected that these latter projects would have been delayed due to the reluctance of banks to lend. 

 

Three case studies are also presented to demonstrate some of the difficulties that projects have had in obtaining finance and the attempts to overcome these.

 

FINDINGS

Table 1 presents a list of both signed projects (570) and those in procurement (57) by government department. As can be seen the average number of months from the OJEU date to financial close for signed projects was 33.9. If departments with three or less projects are excluded, the time to financial close ranges from 25.8 months (HMRC) to 40.6 months (Health and MoD). Table 1 also indicates that on average it is estimated that projects in procurement will reach financial close in 42.1 months (which is approximately eight months longer than for signed projects). However, while this difference in the time to reach financial close may not appear that significant in the context of the GFC, the following points need to be considered. Firstly, the figure for projects in procurement is only an estimate, and in a number of cases this has been exceeded. Secondly, the signed projects list takes into account all projects since the scheme was launched in 1992, therefore one would expect the earlier projects to have taken longer as the process was new to all parties. Thirdly, as the average figure only provides an overall perspective, it is necessary to examine each department separately. 

 

TABLE 1 UK PPP projects signed and in procurement at 16 March 2011 by government department

DepartmentNumber of ProjectsAverage Months – OJEU to Financial Close
 SignedIn ProcurementSignedIn Procurement
Business, Innovation and Skills1         20.0 
Communities and Local Government (CLG)5014      39.3 47.1
Culture, Media and Sport (CMS)151         35.9 50.3
Education11811         26.6 48.8
Environment, Food and Rural Affairs (EFRA)2211 35.7 39.8
Foreign and Commonwealth1         48.6 
Government Communications Headquarters (GCHQ)1          36.7 
Health1025         40.6 30.6
HM Revenue and Customs (HMRC)6          25.8 
HMT1         58.1 
Home Office222          34.4 24.8
Ministry of Defence (MoD)28         40.6 
Ministry of Justice (MoJ)19          33.4 
NI Executive325          35.4 38.5
Scottish Government81          30.4 
Transport458          30.2 40.3
Welsh Assembly Government23          36.2 
Work and Pensions3         40.8 
Overall57057          33.9 42.1

 

Comparing signed projects with those in procurement, it is estimated that the latter projects in CLG, CMS, Education, EFRA, the NI Executive and Transport will take longer to reach financial close than those already signed in the same departments; whereas it is predicted that projects in procurement in only Health and Home Office will close more quickly than those already signed. However, as will be seen later in the chapter, four projects across three of the departments named above (Education, Transport and the NI Executive) have missed their predicted financial closure date at 16 March 2011 and will take longer still. In addition, as illustrated in Table 4, while 29 of the 57 projects in procurement at 16 March 2011 were due to reach financial close by 31 October 2011[3], only six had done so by this date; thus 23 (79 per cent) missed their predicted date of financial close.

 

If the information in Table 1 is analysed by project category, it is found that the average time for signed projects to reach financial close ranges from 20.9 (Information Technology (IT)) to 52 months (Housing: Housing Revenue Account (HRA)). HRA housing refers to subsidised or ‘council’ housing and the long time taken to reach financial close is perhaps not surprising as the system has been under review since 2009 due to concerns over how the scheme is financed (Bury, 2010; Wilson, 2011). In October 2010, it was announced that the HRA system is to be reformed from April 2012 to give local authorities which own housing stock full control of their housing income and expenditure and allow them to make their own decisions on how and in what way they invest in tenants’ homes. If they wish they will even be able to build new homes using surplus rental income (Wilson, 2011). If single projects are excluded from the analysis, the estimated time to reach financial close for projects in procurement ranges from 24.8 months (Police) to 51.8 months (Housing (HRA)). 

 

While the overall averages for signed projects and those in procurement (33.9 months and 42.1 months respectively) by government department and project category will be identical, analysing any differences in length by the type of project gives a clearer idea of those taking longer to come to financial close. Projects in procurement, in seven of the 12 project categories, in Housing (non-HRA) (5), Libraries (1), Roads and Highway Maintenance (4), Schools (BSF – 11; non-BSF – 1), Street Lighting (4) and Waste (14), which account for 40 (70 per cent) of the 57 projects in procurement, are taking longer than those already signed. Two project categories are taking approximately the same time (Fire and Housing (HRA)) and three are estimated to take less (Health, IT and Police). There is naturally a link between some of the projects in procurement that are estimated to take longer to reach financial close than similar signed projects and the equivalent position referred to above with respect to departments (Table 1) (for example: CLG – Housing; Education – Schools; EFRA – Waste; and Transport – Roads and Street Lighting).

 

In February 2001, the Labour Government launched a review of PPP, called Gateway, which sought to cut delays to PPP contract negotiations (HMT, 2001). In order to ascertain whether the length of time to financial close was subsequently reduced, the data was analysed in the following time frames: 1993 (the first OJEU date) to 2000; 2001 to 2006; and finally 2007 onwards (post-GFC). Table 2 displays projects by department with an OJEU date between 1993-2000 and 2001-6. It can be seen that the earlier projects took 34.8 months on average to reach financial close, whereas the later ones took approximately two months less (32.9 months). Of the 13 departments represented in both periods, eight reached financial close more quickly in 2001-6 than in the period 1993-2000 (CMS, Education, Health, Home Office, MoJ, Scottish Government, Transport and Work and Pensions); these eight departments accounted for 188 (74 per cent) of the 254 cases in 2001-6. The five departments taking longer to reach financial close in 2001-6 than 1993-2000 were CLG, EFRA, MoD, NI Executive and the Welsh Assembly Government; these five departments accounted for 66 (26 per cent) of the 254 cases in 2001-6.

 

TABLE 2 Signed PPP projects with OJEU dates 1993-2000 and 2001-6 by government department

DepartmentNumber of ProjectsAverage Months – OJEU to Financial Close
 1993-20002001-61993-20002001-6
Business, Innovation and Skills1              20.0                 –   
CLG2226              33.4           45.1 
CMS410              41.9           35.8 
Education4670              27.7           25.6 
EFRA1111              31.2           40.2 
Foreign and Commonwealth1              48.6                –   
GCHQ1              36.7                –   
Health5844              44.7           35.1 
HMRC6              25.8                –   
HM T1              58.1                –   
Home Office166              34.6           33.9 
MoD217              38.5           47.1 
MoJ181              34.1           20.0 
NI Executive1319              34.3           36.2 
Scottish Government4635              31.8           28.5 
Transport2021              31.1           28.5 
Welsh Assembly Government203              33.0           57.4 
Work and Pensions21              48.3           25.8 
Overall307254              34.8           32.9 

 

An analysis of the information in Table 2 by project category reveals that of the 20 project categories represented in both periods, only eight reached financial close more quickly in 2001-6 than in the period 1993-2000 (Defence (Education and Training and Other), Health, Leisure Centres, Prisons and Secure Training Centres, Schools (non-BSF), Street Lighting and Water). However, these eight project categories accounted for 175 (73 per cent) of the 239 comparable cases (i.e. excluding 15 BSF Schools’ cases in 2001-6 for which there were no projects in 1993-2000 (see Case Studies). Therefore, it is clear that, overall, projects reached financial close more quickly following the Gateway review.

 

Due to the problems with regard to bank lending it could be reasonably expected that projects that had an OJEU date from January 2007 onwards would take longer to come to financial close. However, perhaps surprisingly, as can be seen from Table 3, which displays projects by department and project category with an OJEU date between 2007 and 16 March 2011, it was actually quicker (30.6 months). However, these figures must be put into context as they only refer to nine projects with a lower estimated average capital value[4] (£59 million) than other signed projects (£76 million) and projects in procurement (£122 million). Moreover, the extremely low number of projects signed between 2007 and 2011 when compared with the previous periods is in itself an indication of the impact of the GFC. It should also be noted that the reduction in PPP projects post 2006 is partly due to the unpopularity of the scheme in Scotland. As a result, those projects already signed have been allowed to continue; for those not yet in procurement the NPD model has been adopted (Scottish Government, 2008).

 

TABLE 3 Signed PPP projects with OJEU date between 2007 and 16 March 2011 by government department and project category

DepartmentProject CategoryNumber of ProjectsAverage Months – OJEU to Financial Close
CLGFire128.3
CLGJoint Service Centres128.6
CMSLeisure Centres112.4
EducationSchools (BSF)232.9
TransportStreet lighting435.2
Overall 930.6

 

Prior to the GFC, it was estimated that projects would close more quickly than in the past due to all parties gaining more experience with the processes involved. This would appear to be confirmed by an initial analysis of the 57 projects in procurement at 16 March 2011 (see Table 1), which reveals that only four (7 per cent) had missed their estimated financial close date by 3.4 months on average. However, whilst this appears quite positive at first sight, further analysis of the projects in procurement at 16 March 2011 provides a different interpretation. Table 4 provides an analysis of the estimated financial close dates of projects in procurement at 16 March 2011. This indicates that the aforementioned four projects, which had missed their estimated financial close date, were the only projects that were due to close by this date. Of the 29 projects in procurement at 16 March 2011 which were due to reach financial close by 31 October 2011, only six (21 per cent) had actually closed by this date (not shown in tables); thus suggesting that a growing number of projects are having difficulties achieving financial close as originally expected.

 

TABLE 4 Analysis of the estimated financial close dates of projects in procurement at 16 March 2011

Estimated Date of Financial Close20101 January 2011 to 16 March 201117 March 2011 to 31 October 20111 November 2011 to 31 December 201120122013Total
Number of Projects2225518557

 

Whilst the analysis above has focussed on the length of time taken for PPP deals to come to financial close, it could be reasonably argued that this in itself does not confirm that PPPs have been affected by the financial crisis. The increase in time could be the result of a number of process issues such as the size or complexity of a project. Moreover, as with Scotland and some UK local authorities, delays could be down to a general dissatisfaction with PPPs as a method of procuring infrastructure. Likewise, on coming to power in 2010, the UK Coalition Government exhibited caution over the use of PPPs due to concerns over VFM. However, as the case studies in the following section illustrate, a lack of funding has clearly led to project delays. Furthermore, it is perhaps a little ingenuous to assume that factors apart from financing have been the major cause of the slowdown in PPPs when the falling number of projects directly coincides with the timing of the GFC. Additionally, Labour was still in power in the UK when the GFC begun and its appetite for PPPs had shown no signs of diminishing.  

 

 

 

 

CASE STUDIES

Defense Training Review (DTR)

The DTR aimed to deliver military technical training on a defence basis rather than separately by the Royal Navy, Army and Royal Air Force and originally consisted of two separate PPPs, termed Package 1 and Package 2. The first, estimated to cost £12 billion, covers technical training, including aeronautical engineering and communications and information systems. The second was to include logistics, personnel administration, security, languages, intelligence, and photography. DTR involves considerable infrastructure investment as well as the sale of large amounts of MoD property. A consortium called Metrix, consisting of QinetiQ, the MoD’s privatised former research and development agency, and Land Securities Trillium (LST) as equity partners, was set up to finance and manage the project (Hansard, 2007). 

 

In January 2008, funding issues forced MoD to retract Package 2, with LST withdrawing from Package 1 in December 2008 over financing concerns (Defence Management, 2009). In 2009, two years after the DTR was awarded to the Metrix consortium, major questions remained over the affordability of this project. This was brought about by the collapsing property market as the project was to be financed largely from the sale of vacant MoD land; but declining property prices meant Metrix’s original projections for financing the deal were no longer appropriate. Norton-Taylor (2009) reported in February 2009 that, according to the MoD, the DTR was in trouble as a result of increases in the cost of borrowing and other areas of cost growth which have arisen as a consequence of the GFC. The MoD stated that the project had been ‘more difficult and prolonged than expected’ and could fall victim to the ‘abnormal market environment’ – a reference to its dependence on banks affected by the GFC (Norton-Taylor 2009). Furthermore, in July 2009, Smith (2009) reported that the government had provided £44 million to keep the project going, in addition to ‘contingent liability’ funding of about £50 million. It was widely accepted that the future of the DTR was uncertain following the election of the Coalition Government (Public and Commercial Services Union, 2010) and the project was eventually terminated in October 2010 due to affordability issues as a result of falling asset values and increases in borrowing costs against a backdrop of already fragile UK public finances.

 

Greater Manchester Waste Disposal Authority (GMWDA)

An analysis of Table 1 by project category indicated that waste projects in procurement are estimated to take longer to reach financial close than those already signed, and a waste project was one of four that missed the estimated date of financial close at 16 March 2011.

 

The GMWDA project provides an interesting example of issues faced by large projects in general and waste projects in particular. GMWDA was given permission for a £640 million waste disposal and recycling project. This was the largest of its kind in Europe and involved the development of a network of state-of-the-art recycling facilities, comprising 36 plants on 23 sites across Greater Manchester, capable of handling 1.3 million tonnes of waste per annum. Shifrin (2009) identified the GMWDA project as a prime example of a PPP that had suffered serious delays due to banks’ reluctance to finance large and complex projects and reported that although interest rates had reached a record low, the costs of financing PPPs was higher than ever. Financial close was due in June 2008, but a lack of funding meant that this deadline was missed. Although the outlook for the project remained somewhat uncertain, PUK’s chief executive expressed confidence that even if they had to hold out for credit from existing banks or introduce new ones, they were reasonably confident that they would hit their 2013 completion target. However, the final financial package (see Table 5) demonstrates the reliance of the scheme on non-conventional sources. 

 

TABLE 5 Funding for Greater Manchester waste project 

FunderAmount (£m)Comment
PFI Credits124.5Grant from UK government
TIFU120Loan from UK government
GMWDA103Two-thirds equity and one-third loan facility
European Investment Bank (EIB)100Non UK bank
Bank of Ireland95Non UK bank
Viridor Laing Consortium90Equity stake
Banco Bilbao Vizcaya Argentaria55Non UK bank
Lloyds Banking Group55Partly owned by UK government
Sumitomo Mitsui Banking Corporation40Non UK bank

 

As can be seen from Table 5, only one UK bank committed finance to the project, and that is partially owned by the UK government. Banks from outside the UK contributed £290 million (37 per cent of total), which could expose the government to exchange rate risk, and £347.5 million (44 per cent) came directly from public sector sources. Eventually it took approximately 50 months for this project to reach financial close, which is much higher than the average of 36.6 months for signed waste projects[5]. Pinsent Masons (2009), who advised the construction company Viridor Laing, stated that ‘completing a transaction of this size and complexity in the face of the credit crunch provided a great challenge for the sponsors and their advisers’. A spokesperson from GMWDA (2009) also stated that the project had ‘been secured during a period of unprecedented financial turbulence’, underlining how the GFC had led to delays. Whilst the eventual funding of this project may be categorised as innovative and flexible, others may see it as highly risky on the part of the public sector. None of the debt is being forwarded by a conventional UK bank and thus the purchaser is primarily borrowing from overseas or public sector sources. This raises issues about the higher levels of risk being retained by the public sector, which could potentially jeopardise the achievement of VFM. Moreover, the NAO (2010) estimated that the increase in the financing charges of this project added 12 per cent to its annual contract price.

 

Building Schools for the Future (BSF)

Another project category that is estimated to take longer to close than existing signed projects is BSF Schools (48.8 months versus 36 months5). BSF, which was launched in February 2004, was a long-term strategic investment programme by the Labour Government intended to transform the delivery of secondary school education (Partnerships for Schools (PfS), 2010). It involved the rebuilding and renewal of 3,500 secondary schools in England and transforming them into a standard fit for 21st century education. In late 2008, the Labour Government announced that it would continue to invest in public services such as schools and hospitals; but the announcement of a review of three key education programmes, including the £45 billion BSF initiative, which almost inevitably meant a cut in investment, undermined these promises. The NAO (2009) revealed in January 2009 that BSF was £10 billion over-budget and two years behind schedule. While reports in February 2009 (Anon) confirmed that more than six banks were interested in providing financial backing for BSF, in previous years this figure was as high as 30. With an estimated £1.2 billion needed for the programme, there was concern that the funding committed by the banks would be insufficient. In March 2009, it was announced that the EIB was in talks with PfS over the possibility of doubling the £300 million it had already made to BSF. Many individual projects had already suffered significant delays, notably in Salford and Wigan, where the £350 million developments were already 15 months behind schedule and were expected to be further delayed because of financing difficulties (Richardson, 2009). A House of Commons Select Committee warned that the reliance placed on private funding by the BSF scheme meant it was severely under threat and could be one of the ‘first major casualties’ of government spending reductions (Curtis, 2009). 

 

On 5 July 2010, the Secretary of State for Education, Michael Gove, announced that the BSF programme was to be abandoned and that BSF projects which had not achieved financial close would not proceed, meaning that 715 school refurbishments already signed up to the scheme would not now go ahead (Richardson, 2010) . The 706 schools which had reached financial close will continue, however officials have been charged with seeing how savings can be made within them.

 

THE UK POLICY ENVIRONMENT

It is difficult to draw any robust conclusions about changes to the UK’s attitude to PPPs, and in particular PPP funding, when less than two years after the first real impact of the GFC there was a change of government. However, despite an initial indication that the new Coalition Government would be more circumspect over the use of PPPs, like many new governments it has accepted that the private sector can play a major role in infrastructure development beyond purely design or construction. Notwithstanding, it can be argued that prior to the GFC financiers saw PPP projects as less risky than other investments due to factors such as implicit government guarantees (Asenova and Hood, 2006; Edwards et al., 2004), the passing on of risks to sub-contractors and the long-term returns on offer (Asenova and Beck, 2010). Consequently there was a tendency for PPP projects to be driven by private sector consortia that could transform a government wish list of desirable projects into concrete propositions. Raising finance was not a problem during the boom period of the late 1990s to the onset of the GFC and therefore the UK government, as with the governments of many other countries, could be seen to be actively rebuilding the nation’s infrastructure and concurrently creating and maintaining jobs across a range of sectors.

 

When the bond market collapsed and the banks became increasingly reluctant to lend, the Labour government, now under the premiership of Gordon Brown, took on what some would describe as a Post Keynesian (Holt and Pressman, 2001) approach to stimulating the economy by seeing the role of government as driving demand. However, the short term solutions offered by HMT lending or encouraging the use of mini-perms were not overly successful and thus initiatives such as quantitative easing (the printing of extra money to repurchase government debt) were introduced to encourage banks to begin lending again. As has been seen in this chapter, although the PPP market did not come to a complete halt, the number of projects reaching financial close decreased and those that proceeded became increasingly reliant on non-conventional lending. More recent announcements by the Chancellor of the Exchequer, George Osborne (at the time of writing), have emphasised the role that private finance still has to play in infrastructure development (BBC, 2011). Therefore it would be naïve to think that a new era has begun when the UK government has become so sceptical of the advice that it receives from the financial sector that it eschews increasing private involvement in the public sector. Indeed, it is likely that right of centre thinking will dominate and that the private sector will move into a number of new areas. For these reasons the dominant position held by the financial sector prior to the GFC is likely to remain in the UK regardless of pressure from the EU, and, despite different approaches in certain parts of the country and government rhetoric about caution, the private finance element of PPPs will continue.

 

CONCLUSIONS

This chapter does not claim the GFC is the only factor leading to project delays; indeed reasons such as project size, project complexity and policy learning leading to a general dissatisfaction with PPPs as a method of infrastructure development could all be contributing factors. However, it is proposed that the GFC is clearly having an adverse effect on the PPP initiative. This assertion is supported by Asenova and Beck (2010), who state that PPPs create profit opportunities for finance capital and that financiers apply strict risk-return criteria when making key investment and procurement decisions. They also felt that financiers had a preference ‘for the relatively safe long-term returns offered by PFI projects’ (p. 4). Therefore, if the risk-return ratio for PPPs remains unchanged, one reason why less PPPs are reaching financial close must be a lack of this capital. Prior to 2007, the impact PPPs were having on public infrastructure in the UK was significant. With 641 signed projects worth just over £64 billion and the number and value of PPPs steadily increasing between 2004 and 2007 (HMT, 2006), it appeared the momentum was set to continue, despite its many critics. However, the banking collapse that led to the GFC affected the private finance upon which PPPs were reliant. As a consequence of the GFC, banks were unable to fund themselves at the wholesale money market rates, which had become too high. This led to the subsequent constraint on liquidity in debt markets and, as the securing of finance is crucial to PPPs, the lack of funding was a contributing factor to half the usual number of projects being signed in 2008. 

 

Therefore, whilst this research has shown that some recent projects have come to financial close relatively quickly, a far greater number are exceeding their estimated targets. Out of 57 projects in procurement at 16 March 2011 (Table 1), 29 had an estimated date for financial close on or before 31 October 2011. However, 23 of these projects (79 per cent) had not reached financial closure by this date; as the remainder of those projects in procurement at 16 March 2011 have estimated closure dates after 31 October 2011, whether these projects will close as predicted remains uncertain. The first case study demonstrated that whilst factors such as project complexity may have originally led to a delay, the impact of the GFC has also had an impact and that due to falling asset values and the higher cost of borrowing the DTR project was ultimately terminated. The second case study illustrated that whilst certain projects do eventually obtain funding, this is often not from traditional sources. The increasing reliance on the EIB as a source of PPP funding, and borrowing from foreign banks, exposes the UK to exchange rate risk (Burger et al., 2009). Furthermore, as the government is financing this and other projects, either directly or through banks in which it has a major share, it makes a mockery of the ‘private’ in PPP and completely undermines the claims of its proponents that it spreads the cost of projects as well as transfer the risk of borrowing away from the state and on to private firms. This has implications for the achievement of VFM. 

 

It is clear that significant improvements are required in the economic circumstances, together with a greater availability of finance, before PPPs will become as substantial as they were prior to the GFC. The data provided by EPEC (2011) show that whilst large amounts of money are still being raised for PPPs, the totals remain considerably lower than they were before the crisis. However, a return to what may be termed as normal lending conditions may not be enough to resurrect PPPs as a major means of improving the UK’s infrastructure. Indeed, there should be no presumption that continuing the use of private finance at current rates will achieve VFM (NAO, 2010). Moreover, the abolition of the BSF scheme highlights the fact that the Coalition Government is prepared to abolish flagship PPP programmes introduced by the previous Labour Government. What has also become clear since the change of government in 2010 is that there is a much greater emphasis on what is appealingly referred to as ‘efficiency savings’ on projects; however, whether this leads to PPPs being seen as a less attractive proposition for the private sector remains to be seen. Indeed, the financial sector continues to have a dominant position in the UK economy and thus the role of private finance in infrastructure development is unlikely to disappear. What is more likely is a shift from bank lending to more market-based solutions such as pension and wealth funds and investment from insurance companies.

 

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[1] The PPP initiative was initially referred to as the Private Finance Initiative (PFI), and while these terms are not completely synonymous, they are often used interchangeably; the term PPP will be used primarily throughout the remainder of this chapter.

[2] PUK has embarked on a process of disposing of its various businesses and is expected to close down during 2011. Consequently, while PUK’s website is no longer updated, it can still be viewed, together with the Projects Database.

 

[3] The time of analysing the data presented in this Chapter.

[4] Capital values not shown in tables.

[5] This was revealed by the analysis of Table 1 by project category.

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The economics of money, banking, and financial markets

 

  1. The monetary base. 

 

Monetary base = reserves + currency 
                  MB          =      R       +     C

 

30 + 15

 

AED 45 billion

 

 

  1. The banks’ reserve ratio. 

 

Separate the sum the bank has close by the aggregate estimation of stores. For instance, on the off chance that you verify that the bank has $300 million in stores and $10 million available, you would separate 10 by 300 to get 0.3. At that point increase by 100

This gives you is equal to reserve ratio= 30%

 

  1. Currency drain as a % of deposits.  (1 Mark)

 

Currency drain ratio = currency / deposits

= 10/300

0.03

 

 

 

  1. Illustrate how the banks create money with the help of given information. 

(Show first 5 steps)

  • The “cash” in your ledger does not speak to physical money that you can hold in your grasp; it is basically a bookkeeping risk from the bank to you, and just exists as an issue in a machine framework. 
  • We now utilize these bank liabilities/ bookkeeping passages to make installments in excess of 99% of all exchanges (by worth). In this way we could depict bank liabilities, bank credit and bank stores (which are all the same thing) as being comparable to cash in the cutting edge. 
  • Banks make bank stores (the cash in your record) when they make advances. They add liabilities to the borrower’s record, and at the same time include a benefit (the credit contract) to their asset report. 
  • The repayable primary of the advance is recorded as a benefit. Nonetheless, the investment payable isn’t recorded as a benefit on the monetary record, yet is recently recorded as wage as and when the premium is paid. 
  • The cash that banks utilization to pay one another – national bank holds – is itself made out of nothing as a bookkeeping passage by the Bank. 

In synopsis, what we use as “cash” – the numbers in our ledgers – are just bookkeeping entrances made by banks. These bookkeeping entrances make up in excess of all the cash that

  1. Calculate the total money creation in the economy with the help of formula. 

To calculate the multiplier uses marginal propensities, as follows:

1/1-mpc

1/1-0.9

10

Hence, the multiplier is 10, which means that every AED 1 of new income generates AED 10 of extra income.

Reference

Mishkin, F. S. (2007). The economics of money, banking, and financial markets. Pearson  education.

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