The mobile telecommunication industry in Zimbabwe

The overall success of a company depends upon its capital budgeting process, so capital budgeting should be handled properly because it shows the efficiency and financial strength of a company. Capital budgeting process is very important in companies because it is used to generate returns and profits to the company and its stakeholders. Capital budgeting is the most important function done by financial managers and it is not only a popular corporate finance topic but one that has been widely researched by academics particularly in international researches.

A capital budgeting project is a decision to make a cash outlay to receive future cash inflows, therefore shareholder value is created if the present value of cash inflows exceeds that of the outlay. J Hall (2001) , The importance of the capital budgeting process for the firm lies in the fact that relatively large amounts of money are committed for along time thus once the decision is made to embark on a particular project the process cannot be reversed unless a value destruction decision is taken to salvage what has been invested.

A number of stages, calculations, evaluation methods and refinements to the capital budgeting process can be used and it is these aspects of the capital budgeting process that are investigated in this study and the uncertainty involved in the process. Capital Budgeting process involves the relationship between a firm’s initial capital outlay, net cash flows as well as the terminal cash flows. G Muponda (2007) , Defines capital budgeting as a process which is subjected to cash flows that is determined to certain appraisal techniques.

A capital expenditure is an expenditure on fixed assets and other long-term infrastructure necessary for the implementation of projects. The assets bought for the project are expected to generate cash flows. The appraisal of capital projects is done in two steps. Firstly, we must determine the cash flows that are expected to be generated by the project. Secondly, we must estimate the cost of funds (cost of capital) that have been used in the project. Finally, we subject the expected cash flows to certain appraisal techniques.

Honorable members will be aware that in the hyperinflationary environment characterizing the economy at present, our people are now using multiple currencies for day to day business transactions, alongside the Zimbabwe Dollar. These currencies include the South African rand, United States dollar, Botswana pula, Euro, pound Sterling, among others. In line with the -+prevailing practices by the general public, Government is, therefore, allowing the use of multiple foreign currencies for business transactions, alongside the Zimbabwe dollar.

” The introduction of the multi-currency system by the then Acting Minister, Hon Cde Patrick Chinamasa saw a new lease of life in local business operations, containment in inflation and a drastic reduction in currency risk greatly associated with the moribund local currency. The new dispensation of the Government of National Unity saw the resurrection of planning and budgeting which had become almost obsolete in the hyperinflationary economy as the political climate calmed and more stable currencies were in use in the transaction process system of the nation.

The era has seen organizations making out capital expenditures either to replace outdated equipment usually inherited before the nation’s independence or equipment for expansion to meet the greater demand for local products. Mining houses, organizations in the communication industry and the beverage sector have been involved in multi-million (US) dollar capital outlays to enhance capacity and realize economic gains in the more stable environment in comparison with yesteryears.

Capital budgeting or investment appraisal is the planning process used to determine whether firms’ long term investments such as new machinery, new plants, new products and research and development projects are worth pursuing. It is a budget for major capital, or investment expenditures of an organization and requires higher accuracy in the decision-making process and involves higher level management. Therefore, whether in good times or in anticipation of market contractions, the expenditure of cash in exchange for future generated uncertain benefits requires a distinctive decision making structure.

Central to this decision making framework is capital budgeting. The capital budgeting process is the decision makers’ primary tool for evaluating the benefits of projects under consideration and for selecting long term investments from among alternative available projects.

The methods and analysis used in the acceptance or rejection of a project are important because the commitment to a given capital project involves a significantly large, future oriented sum of money and is frequently irreversible; i. e. the decision, once made, locks the firm into a production technology for an extended period of time. These decisions will directly impact the firm’s expected future earnings and future cash flows as well as their timing and risk levels. Capital budgeting is the most important function performed by financial managers since results of investment appraisal decisions span for years and a firm loses its flexibility.

Therefore a firm’s capital budgeting decisions define its strategic direction as moves into new markets; products are preceded by capital expenditures. Therefore tomorrow’s business success depends on investment decisions made today, prospects or aspects of the investment decision which are used to help management make investment decisions are often inadequate and misleading.

Business organizations are continually faced with the problem of deciding whether the commitment of resources i. e. time and money, is worthwhile in terms of the expected benefits. If the expected benefits are likely to accrue over a relatively long term, the solution is more complex and chances of making an incorrect decision increase. Mobile Telecommunications have an important role to play Zimbabwe development. The extent of contribution these business units can make towards the growth and development of Zimbabwe is dependent on the level of success attained by their operations.

The fact is that, underlying the success of a business enterprise is the establishment and application of controls by the owners or management in addition to the systematic record keeping of business transactions, which at the end of the period, keeps the owner well informed about the performance of the business. Furthermore, analysis of capital budgeting is needed so that financial statements will be fairly and consistently describe as a financial performance. Without information and standards, users of financial statements would need to learn the accounting rules of each business, and comparisons between the firms would be difficult.

In Zimbabwe Mobile Telecommunications have dominated on the Zimbabwe Stock Exchange with respect to Econet Wireless Zimbabwe. The head offices are usually located in the Central Business Districts. 1. 2 Statement of the Problem The selection of capital investments is one of the most important strategicdecisions financial managers of a firm can make therefore capital budgeting is one of the most decisive influences on firm value, competitiveness and ultimately, survival.

The motivation to undertake this study stems from the better outlook in the nation though hinged on the success of the inclusive government which has resulted in capital expenditures being undertaken therefore necessitating a critical analysis of the appraisal methods in the wireless communications industry, particularly the three service providers Econet Wireless Zimbabwe, Net-one and Telecel Zimbabwe. An industry requiring large capital outlay with a vast untapped market in Zimbabwe, and high potential for exponential growth, the telecoms industry is on its boom.

The use of multiple currencies spawned massive investments in the sector as mobile operators embark on programs to grow their subscriber base. The industry having endured a decade long of underinvestment as the economic crisis took a toll on the sector, the massive expansion programs have resulted in the increase in the mobile penetration rate to 21% as of August 2009 from 14% in February 2009. Mobile penetration rate describes the number of active mobile phone numbers, (usually as a percentage) within a specific population. T. Mboweni (2009) “The equipment facility is valued at US93. 9m.

We have not been able to identify a bank or an equipment supplier willing to take the financial and political risk for such a large facility to a Zimbabwean company. ” The aim is to analyze the applicability of investment appraisal techniques in an environment of high political risk, and bring out limitations in such tools.

Extensive research has been carried out under normal economies and on a general spectrum. Very little has been produced on the effects and implications of the analysis on the telecommunication industry concern’s capital budgeting. The telecommunication industry is one of the sectors that received the hardest blow of the budgeting process and therefore warrants a further probe into the problem especially considering the fact that the telecommunication sector contributes significantly to the Gross Domestic Product of the country.

This research is going to draw attention of the management on the analysis of the capital budgeting process in the telecommunication industry for planning, organizing as a means of decision making. The study is also designed for evaluation of the analysis of capital budgeting process in telecommunication industry and can be used for future interested researches in capital budgeting. Scope of the Study Econet Wireless Zimbabwe, having made the largest investment into its network of US$115m as reported in the interim results for the half year ended 31 August 2009, including Telecel and Net-one who also have planned expansion projects.

Conceptually the study hovers around the implicit role proper analysis of capital budgeting and the techniques play far as mobile sectors business were in concern in Zimbabwe. The research was limited to Econet Wireless in Zimbabwe due to my schedule. The effectiveness of the various capital budgeting techniques was also put into consideration. The research will be able to access all current developments pertaining to capital budgeting techniques. The selected individuals to provide information will afford the researcher the time to respond to the questions and in time.

The espondents will be cooperative; and financial resources are going to be enough to meet all the costs involved. The words capital budgeting and investment appraisal would be used interchangeably as they both refer to the evaluation of the viability and profitability of capital projects. The terms wireless communications industry, telecoms industry will imply the mobile industry in this research.

Appropriate theoretical and empirical lessons to be drawn from the review of literature will assist shape the methodology. Therefore this section highlights the methods I will use in gathering information for my research. I will issue out three questionnaires to financial managers in the wireless communications industry to get their views on my topic. I am also going to interview the budgeting staff from Econet Wireless Zimbabwe in order to get views on the analysis of their capital budgeting processes.

I will compare the information I will get from Econet to the information from the other companies in the telecommunication industry. I will review literature from a wide variety of authors in relation to capital budgeting and its analysis to the telecommunication sector. Capital budgeting methods and concepts such as evaluation of fixed assets and net value of cash flows as discussed above will be reviewed so we can understand the analysis to telecom activities.

Therefore having introduced the subject in consideration, this chapter seeks to further and critically analyze and review literature relevant to the research objectives to give a sound theoretical framework of the study, by relating it, exposing shortcomings and the knowledge gap, to be covered by the project. Literature of the various capital budgeting techniques, their strengths and weaknesses, input information in the process and uncertainty in investment appraisal will be explored.

In a summary, chapter one gives introduction of the research topic of the analysis of capital budgeting in the mobile telecommunication industry in Zimbabwe. The research is carried out in order to determine the function, components, theories and concepts of capital budgeting affects the performance of the industry. The research will provide information about the budgeting of the capital of the company assist in the investment decisions. This will be beneficial to companies in the mobile telecommunication sector taking into account an analysis of capital budgeting in reporting investment situations.

Hypothesis would have proven and defined clearly the effectiveness and efficiency of capital budgeting in relation to the performance of Econet Wireless Zimbabwe. This project has five chapters. Chapter one gives an introduction of what the author wishes to achieve and a layout of how it shall be solved. Chapter two focuses on literature review. Chapter three focuses on research methodology. Chapter four focuses on data presentation, analysis and discussion. Chapter five focuses on conclusion and recommendations