Project Life Cycle & Delivery Systems PDF

Project Life Cycle FEASIBILITY ANALYSIS project evaluation and financing, understanding risk, deciding on whether to construct or not PROJECT DELIVERY...

Project Life Cycle FEASIBILITY ANALYSIS project evaluation and financing, understanding risk, deciding on whether to construct or not PROJECT DELIVERY SYSTEMS DESIGN and ENGINEERING Organisation, estimating, develop a realistic plan of the work scope, the budget, the AND CONTRACTUAL schedule and also the appropriate technology deciding on project delivery system, award ARRANGEMENTS method, contract type and conditions DEVELOPMENT Cost control, performance reporting, understand variances, corrective actions, forecast final cost and schedule CLOSEOUT Acceptance of facility OPERATIONS DISPOSAL Disposal of the facility, fulfillment of useful life PROJECT DELIVERY SYSTEMS AND PROJECT DELIVERY SYSTEMS AND CONTRACTUAL ARRANGEMENTS CONTRACTUAL ARRANGEMENTS ► To sum up, there are three decisions that should ► Project Delivery System (PDS): A PDS is a be made by the client before commencement of way (a method) of organizing all phases of the project: a construction project by establishing relations (contractual or non-contractual) ▪ Which PDS shall be used? between parties involved in the project. PDS ▪ Which contract type shall be used? is chosen by the client (or known as the ▪ What kind of bidding shall be used? owner) and it determines the responsibilities of different parties involved in the construction process. 1 Parties Involved in a Construction Procurement strategies in construction Project Project Delivery systems in construction ► OWNER/CLIENT ► DESIGNER/ENGINEER/CONSULTANT ► Traditional (Design-Bid-Build)_DBB ► Seperate Contractors Method ► CONTRACTOR ► Self-Performance Method (Force Account ► SUBCONTRACTORS Method) ► SUPPLIERS ► Design and build _ Turnkey ► Construction management ► Build, operate, transfer (BOT) Tendering strategies in construction Traditional contracting Seperate Contractors Method CLIENT(OWNER) ENGINEER CLIENT ENGINEER ARCHITECT/ ARCHITECT DESIGNER MAIN CONTRACTOR 1 CONTRACTOR 2 CONTRACTOR 3 CONTRACTOR SUBCONTRACTORS SUPPLIERS owner acts as a general contractor SUBCONTRACTORS SUPPLIERS The owner should have the necessary organizational skills, knowledge and experience in construction works so that this PDS can be successful 2  Self-Performance Method (Force Design Build Method (DB)/ Account Method) Turnkey CLIENT/OWNER CLIENT ENGINEER (OWNER) DESIGNER- DESIGNER CONTRACTOR OR DESIGNER ENGINEER WORKERS SUPPLIERS It is possible to minimize the costs since the owner acts SUPPLIERS SUBCONTRACTORS as a main conractor and doesn’t pay the profit to the main contractor It is impossible for an owner who doesn’t handle a construction team and has activity in construction Construction Management (CM) Build Operate Transfer (BOT) CLIENT ARCHITECT (CM) Construction ENGINEER ► Due to lack of governmental funds to Manager OR Company MAIN finance basic infrastructure projects such CONTRACTOR as; hydropower plants, tolled motorways, tolled crossings (Bridges, tunnels, channels) SUBCONTRACTORS SUPPLIERS etc., a private company is given the right to Mediated routes (CM) are characterized by the first develop/construct and then to operate introduction of additional actors other than those these facilities. directly responsible for design and construction ► It is common in developing countries This actor is normally designated as the construction manager 3  Build Operate Transfer (BOT) Towards project finance ► In BOT, usually, a consortium of firms - Distinction between the financing of (contractors, designers, financial companies and financing of projects institutions, operator firms etc.) is - BOT, BOOT , BOO. established to finance, construct and - Large infrastructure projects traditionally operate the facility for a concession financed by government period awarded by the government. - Design, finance, construct, operate and ► Participants of this consortium are finally transfer the facility (BOT type) (contractors, designers, financial - Example: Birecik Dam and Hydroelectrical institutions, operator firms etc.) Power Plant ► And this consortium is called as PROJECT COMPANY Project finance: A simplified Project Structure Example Project Finance GOVERNMENT OR PUBLIC AUTHORITY ◼ The development of the PF system INVESTORS FINANCIERS Concession ◼ Project Finance: features Supports contract loans Equity ◼ Organizational and financial structure Input supply ◼ Problems encountered in the PF system Offtake contract agreement PROJECT INPUT SUPPLIER COMPANY OFFTAKER O&M contact Construction contract CONTRACTOR OPERATION AND MAINTENANCE 4  Contents Project Finance ◼ The development of the PF system ◼ PF is a method of raising long term debt financing for major projects based on lending against the cash flow ◼ generated by the project alone. ◼ ◼ Project cash flow is the main resource for the repayment ◼ of debt service (credit+interest) and the distribution of dividends. ◼ Power plants, infrastructure projects, healthcare, telecommunication, mining and oil projects etc. Project Finance Project Finance ◼ Equity, provided by investors ◼ “project finance” is not the same thing as financing projects ◼ Debt provided by lenders ◼ corporate loan is primarily lent against a company’s ◼ Lenders have to be confident that they will be repaid balance sheet and projections extrapolating from its past especially taking account of the additional risk from the cash flow and profit record high level of debt inherent in a project finance transaction ◼ A project may be financed by a company as an addition to ◼ This means that they need to have a high degree of its existing business rather than on a stand-alone PF basis confidence that the project a. can be completed on time and on budget ◼ A project company unlike a corporate borrower has no b. is technically capable of operating as designed business record to serve as the basis for a lending c. There will be enough net cash flow from the project’s decision. operation to cover their debt service adequately 5  The Development of Project Finance: The Development of Project Finance Triggering Factors ◼ Privatization of public sector capital investment. ◼ Aim:To benefit from the capital resources and managerial - Since 1990’s capabilities of the private sector - increase in public debt ◼ Roads, airports, ports, bridges, parking, railways, power - Efforts to increase productivity plants, healthcare structures etc. ◼ Internationalization of investment in major projects: -Yap-işlet-devret (Build-Operate-Transfer) Increasing competitiveness, the development of international -Yap-işlet-sahip ol (Build-Operate-Own) finance markets ◼ Growth of public debt. The scarcity of public resources for large scale construction investments vs. increase in infrastructure demand Project finance: features Contents ◼Ring-fenced project (i.e. One which is legally and economically self-contained) through a special entity whose ◼ only business is the Project (“project company”, “special purpose vehicle (SPV)”) ◼ Project Finance: features -international joint ventures ◼ -public private partnerships (PPPs) ◼ -contractors, suppliers, offtakers, O&M firms, public bodies: shareholders’ agreement (AGREEMENTS in PF system) ◼ High ratio of debt to equity: debt may cover 70-90% of project cost (“LEVERAGE” or “GEARING”) 6  Project finance: features Contents ◼ Non-recourse finance: there are no guarantees from the investors in the Project Company. ◼ ◼ Lenders rely on the future cash flow projected to be ◼ generated by the project for interest and debt repayment (debt service), rather than the value of its assets. ◼ Organizational and financial structure ◼ The main security for lenders is the project company’s ◼ contracts, licences, or ownership of rights to natural resources; the project company’s physical assets are likely to be worth much less than the debt if they are sold off after a default on the financing. Project finance GOVERNMENT OR PUBLIC AUTHORITY INVESTORS FINANCIERS Concession Supports contract loans Equity Input supply Offtake contract agreement PROJECT INPUT SUPPLIER COMPANY OFFTAKER O&M contact Construction contract CONTRACTOR OPERATION AND MAINTENANCE 7  Lenders Lenders ► Banks ◼ Export credit agencies(Eximbank, U.S. Exim, Coface) - project finance departments - aim: support exports in a country - public or private companies ► Debt investments - Long repayment periods compared to commercial banks ( e.g. 14 yrs vs 8 yrs.) - firms that look forward to have long term investment and fixed income investment – life and ◼ Multilateral development banks retirement insurance firms- - Established by different states - World Bank, European Investment Bank, European Bank for Reconstruction and Development, Asian Development Bank - When a mdb supports a project, it is easier to find finance for the remaining financing requirement. Contents Problems encountered in the PF system ◼ Value for money and the cost of debt ◼ - The cost of debt for private sector vs. The cost of debt for public sector (opponents) ◼ - Low life cycle costs for the public sector (proponents) ◼ ◼ Problems encountered in the PF system Changes A B Costs of delaysi Construction costs Construction O&M cost increases phase Operation phase Operational No costs payment A)Traditional system and B) Project Finance (National Audit Office, UK) 8  Problems encountered in the PF system Problems encountered in the PF system ◼ Risk allocation problems ◼ High transaction costs - In theory, construction and operation risks to the - Hidden expenses (collecting info about suppliers, private party. evaluation of suppliers, selection of contracts, contract preparation, preparation of bidding documents, ◼ High level of bureaucracy and lack of political support performance monitoring and control costs) ◼ Scale of construction firms - Financing problems faced by relatively smaller sized firms and higher interest rates Project Finance and Hydropower Projects: Birecik Dam and Hydroelectrical Power Plant Case Study of Birecik Dam and Contents Hydroelectrical Power Plant 1. Characteristics of Hydroelectrical Power Plants 2. Overview of the Project 3. Organisational Structure 4. Financial Structure 5. Construction Contract 6. Offtake agreement 7. Project evaluation 8. Risk allocation 9. Observations and findings 9 Birecik Dam and Hydroelectrical Power Plant Birecik Dam and Hydroelectrical Power Plant 1. HEPP’s – Characteristics 2. Overview Particular difficulties Advantages ▪ Birecik is located in southeast of Turkey ▪ High initial investment cost ▪ Long lifetime ▪ First major hydropower project realized on BOT basis in Turkey ▪ Long construction period ▪ Lower negative ▪ Total project cost of app. €1,114m environmental impacts ▪ High risks related to dam compared to other ▪ Installed Capacity 672 MW construction energy resources ▪ Hydrological risk ▪ Low operating and Feasibility Study 1984 maintenance costs ▪ Environmental Concerns Implementation Contract 1993 ▪ Renewable Construction 1996-2001 ▪ Social impacts: displacing Operation 2001-2016 people and resettlement. Transfer to Turkish gov. 2016 Birecik Dam and Hydroelectrical Power Plant Birecik Dam and Hydroelectrical Power Plant 3. Organisational Structure 4. Financial Structure ▪ Debt to equity ratio: 85/15 Republic of Turkey ▪ Two observations can be made from financial data Implementation Contract 1. Majority of debt comes from ECAs Water utilisation Directorate agreement Offtake agreement Electric Utility Commercial Debt…………237.7 m Euro (21% of TIC) (Total investment cost) of State Project Company TEAŞ ECA Loans (Export Agency Loans)…………709.5 m Euro (64% of TIC) Hydraulic Works Philipp Holzmann Gama Verbundplan 70% Reluctancy of the lenders to provide loans in a high-risk environment Lenders Loan agreements Strabag O&M contract Operation & Mismatch between the maturity of loans and long lifetime of HEPP projects Hyd&Mec.sup. Maintenance TEAŞ 30% Indep. cons. Insurance agreement policies 2. No funding in local currency - High foreign exchange risk Independent Construction Insurers Consultant Contract Construction Consortium Possibilities of raising longer-term finance that match with the long plant life and incentives to increase the availability of long-term funding in local currency Civil works Hydroelec.& Designer should be considered. JV mech. cons. 10 Birecik Dam and Hydroelectrical Power Plant Birecik Dam and Hydroelectrical Power Plant 5. Construction Contract 6. Offtake agreement ▪ Fixed price, date certain turnkey contract ▪ Take or pay contract with no availability no payment principle. ▪ All contractors are equity holders in the project company. ▪ Base tariff price as cost recovery basis ▪ One domestic contractor ▪ Hydrological risk is assumed by the public sector ▪ Result: Project cost underrun, no schedule delays, good technical performance ▪ Host government assumes foreign exchange risk by making the necessary payments in Euros Project’s success factors: Experienced contractors A long term offtake agreement was essential to ensure that the necessary Contractors’ interest to perform exceptionally as they are equity holders funding is available. With an uncertain income stream the lenders would be Substantial public sector support: unforeseen ground conditions risks, land reluctant to finance the project. Even if the necessary debt would be acquisition and resettlement provided, the interest rates charged would reflect the high risk assumed. Birecik Dam and Hydroelectrical Power Plant Birecik Dam and Hydroelectrical Power Plant 7. Evaluation 8. Risk allocation Public risk RISK assumption Risk mitigation mechanism Major components of feasibility study by the public sector: Market risk Take or pay contract.. ▪ IRR, profitability index Inflation and Cost increases caused by inflation are reflected in tariff price. Also subordinated loans are available in case of excess of actual over forecasted inflation. ▪ Environmental impact report interest rate Interest rate risks are included in base tariff price as a component of senior debt service. ▪ Cost / Benefit analysis Foreign exchange risks Payments are denominated in Euros. Socio-economic development benefits (i.e. regional development) and costs Project completion Public sector arranged land acquisiton and resettlement. Unforeseen ground conditions are regarded as force majeure. Subordinated loans for cost overruns. (i.e. social costs) of dam construction were mentioned without taking place in calculations. The difficulty in translating social and environmental costs and Hydrological risk State utility TEAŞ is obliged to make the payment as long as the plant is available. benefits in monetary terms has been the major obstacle in evaluation studies. Technical Public sector does not assume any technical performance risks. EPC Contractors- Liquidated damages become payable if output is insufficient performance There is a need for more comprehensive decision making process that enables Operating O&M Operator- limited damages payable depending on the amount energy produced. the quantification and integration of all social, environmental and economic gains risk If damages exceed limit then Project Company is responsible. and losses taking into account equal distribution of such benefits and costs to Force majeure& different communities. Public sector assumes increasing costs arising from conditions of force majeure and Ministry fault ministry fault risks 11 Birecik Dam and Hydroelectrical Power Plant 9. Summary of observations and findings ▪ Birecik was a success in schedule and technical performances due to its organisational structure and substantial public sector support. ▪ Possibilities of raising longer-term finance that match with the long plant life and increasing the availability of long-term funding in local currency should be considered. ▪ A long-term offtake agreement was essential for financing reasons. ▪ For feasibility studies, more research is needed to develop decision making techniques that enable the quantification and incorporation of intangible factors in the evaluation process. ▪ High risk sharing by the Public sector contrasts with risk-sharing concept of BOT model. Especially assumption of completion risks by public sector is significant. Further work is required on optimizing risk sharing mechanisms so that the utilisation of BOT model is favorable over other financing models. 12