international development and construction projects columbia university

© 2014 Fluor Corporation. All Rights Reserved.

** Company Confidential **

The Challenges of

International Development and Construction Projects

by Bob Prieto

Fluor

Columbia University April 22, 2014

** Company Confidential **

** Company Confidential **

Types of Risks

Known Knowns

Known Unknowns

Unknown Knowns

Unknown Unknowns

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… And A Challenging Future

Simple → Complex Static → Dynamic Certain → Uncertain Capital Efficiency → Life Cycle Effectiveness Build for decades → Build for generations The Bottom Line → Triple Bottom Line Safety Focus → Hazard Avoided Business Case → Scenario Based Resiliency

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Challenge of International Projects

Understand Risks Allocate Risks Manage Risks

. . . . Understand That They Change

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“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

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Economic Risks

Market and Revenue Finance Risks Cost Risks

– Construction Phase – Operation Phase

Cos

t of Y

our M

ista

kes

Level of Overconfidence

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Market and Revenue

Market Development Slower Than Projected – Slower General Economic Growth – Changed Priorities – Longer Gestation Time

Market Rates Lower Than Projected – Higher Than Anticipated Price Sensitivity – Increased Competition – Free Government Alternate – Price Caps

Reduced Market Share – Delayed Project Completion – Increased Competition

Synergistic Opportunities Fail to Emerge – Hope is Not a Strategy

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Finance Risks

Cost of Money – Interest Rate Risk – Inflation/Deflation Risks – “Credit Risk”

Cost of Currency – Absence of Long Term Local Financing

• F/X Risk on Construction Financing – Volatility

• F/X Risk on Hedging Annual Profits • Absence of Hedge/Convertibility

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Cost Risk – Construction Phase

Scope

Schedule

Budget

Terms & Conditions

Quality

Legal – Know Who Has the Authority to Approve

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Scope

Poorly Defined or Incomplete Interfaces Not Well Defined Referenced Standards

– Not Well Defined – Not Fixed in Time

Responsibilities Not Defined – Government – Owner/Concession Company – Prime Contractor

Limitations Due to Changed Conditions Not Well Defined – Ouch !

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Schedule

Labor Volatility/Work Stoppages

Changed Work Rules

Labor Productivity

Timeliness of Inputs/Approvals/Permits

Linkage to Timely Payments

Weather and Environmental

Government Action

NGO Action

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Budget

Labor Cost Growth – Local Labor – TCN – Expatriate Premium

Materials/Supplies Cost Growth – Availability – Supply Chain Costs

• Energy

• Security

• Customs

Inefficiency – Management – Labor Skills – Means & Methods

Additional Taxes and Fees – Government Charges – Royalties – Other Small Charges

Increased Financing Costs

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Terms & Conditions

Expropriation – Land – Equipment & Materials

Change in Law – Corporate – Tax – Staffing/Visa/Employment

Force Majeure Conflict Between Local/Regional/National Laws Defaults

– Government – Concession Company – Contractor – Sub-contractor

• Local Partner • Bonding Company • Bank • Insurance Company

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Terms & Conditions

Payments – Signature Bonuses

– Mobilization

– Retention

– Progress or Milestone Payments

– Obligations to Pay

– FCPA/OECD Limitations

Bonds – Bonding Requirements

– Availability of Bonds

– Satisfaction of Bonds

– Default

Dispute Resolution – Jurisdiction

– ADR / Mediation / Arbitration

– Obligations During Dispute Period

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Quality

Poor Workmanship

Inadequate QA/QC

Poorly Defined Performance/ Acceptance Standard or Process

Incomplete Documentation

Environmental

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Cost Risk – Operations Phase

Service Scope Performance Standards Operating Costs Changes in External Environment

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Service Scope

Battery Limits of Project/Scope

– Other (Free) Services to be Provided

– Required Future Investments and Schedule

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Performance Standards

Reliability – Tolerance Limits and Measurement

Availability – Scheduled/Unscheduled Service Disruption – Extent (Reach) of Service Areas

Maintainability – Maintained Condition – “Quality” of System Turnover

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Operating Costs

Labor Cost – Wage Growth – Benefits – Mandates – Pension – Termination Costs

Energy – Availability – Cost

Consumables – Availability – Cost

Maintenance Costs – Excessive Wear – Skilled Labor – New Technology

Insurance – Availability – Cost – Security Costs

• Civil Strife • WMD

Uninsured Risks – Environmental – Political or Labor Strife

Tax Performance Bonds

– Increased Cost – Reduced Availability

** Company Confidential **

Changes in External Environment

Defaults – Government – Concession Company – Prime Contractor

Change of Government

War

Natural Disaster

Boycott or Embargo

Currency Devaluation

Inadequate Financial System Capacity

Corruption

Expropriation

New Technology

Force Majeure

Inadequate System Core Capacity

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“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

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Social Risks

Culture

Ethics

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Culture

Sense of History Cultural Imperatives

– Work/Life Balance – Risk Aversion – Individual vs. Group – Sport – Wealth

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Culture

Norms – Age – Gender – Social Stratification – Food – Sex – Hygiene – Authority – Generational Variation

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Culture

Language and Meaning Cross-cultural Issues Perception of Time Decision Making Framework

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Ethics

Cultural “Norms” OECD vs. FCPA

– Facilitation Payments

Bribery – By Your Staff – Of Your Staff

Corruption Use of Agents

– Role – Limits – Payments

Whistle-Blower

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Ethics

Not Just Agents –

What Are Your Partners Doing?

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Ethics

Tips

Political Contributions

“Publish What You Pay”

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Ethics

Perception of Engineering and Construction Industry

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“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

** Company Confidential **

Political Risks

Change of Government – Party – Revolution

Sequestration

Exclusivity

Changes in Fiscal Policy – Can Change Sovereign Debt

Ratings Affecting Project Financing

Changes in Law – General – Project Specific

Approvals – Development – Right-of-Way – Environmental – Construction – Import/Export – Operating – Repatriation of Profits

** Company Confidential **

Political Risks

Adverse Government Action/Inaction

Regime Change – Political Stability Process to

Avoid Collapse – Economic or Cultural Stability

to Uphold Agreements Provision of Utilities/Other

Services Increases in Taxes

– General – Project Specific

Political Force Majeure Events – Civil Strife – Terrorism – Conventional War – WMD

Termination of Concession/Contract

Payment Failure by Government

Property Rights – Clear Title or Lease – Easements or Other

Limitations – Intellectual Property

(Patents/Copyrights)

Ownership of Assets

** Company Confidential **

Political Risks

Structure of Project Securities Availability of Securities Market Insolvency by Government or Concession Company Changed Conditions on Foreign Ownership or Operation Enforceability of Legal Rights

– Contract Rights – Regulatory Obligations – Financing Documents – Security and Insurance

** Company Confidential **

“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

** Company Confidential **

Religious Risks

Tension & Intolerance – Christian, Jew, Muslim, Hindu,

Native Peoples, etc. Practices

– Holy Days – Daily Prayers – Diet and Food Preparation

• Kosher • Vegetarian

– Gender Separation

Rise of Militant Fundamentalism – Muslim – Jewish – Christian – Hindu – Different From Political or

National Culture Risk

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“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

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Intellectual/Idea Risks

Corporate Social Responsibility – Child Labor – Indigenous Peoples – Social Outreach

• Poverty Alleviation • Social Benefits for General Population

– Environmental Stewardship • Mitigation/Enhancement • Wildlife Preservation • Greenhouse Impact • International and Local Pressure Groups • “Kyoto Protocols”

Corporate Governance – More “Stakeholders” – More Disclosure – Reduction in Risk Appetite

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Intellectual/Idea Risks

Evolving Political Form – Socialism with Chinese Characteristics – Militant Islam – Nuclear Blackmail

Homeland Defense International and Local Pressure Groups

– Can Be a Major Risk to Schedule, Costs & Approvals – Can Stall Projects Indefinitely

Globalization vs. Unilateralism Access to Knowledge

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“ESPRIT” – Framework for Understanding Risk

Economic Social Political Religious Intellectual or Ideas Technological

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Technological Risk

New Technology New Applications Scale Capacity Building Intellectual Property

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New Technology Risk

Time to Deployment

Learning Curve – Failure Rates – System Environment

Social Acceptability

Export-Import – Controls – Licenses

Installed Base Advantages

Tax & Duty Environment

** Company Confidential **

New Applications

Learning Curve Environmental Factor Effects Transferability of Lessons Learned Social & Economic Framework Supply Chain Extension

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Scale

Scalability Replicability External Resource Requirements Unknown Unknowns Growth

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Capacity Building

Institutional – Aging – Laws & Regulations – Due Process

Management Specialized Expertise Craft/Technician Maintenance Supply Chain Supporting Infrastructure

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Intellectual Property

• Patent

• Trademark

• Copyright

• Usage

• Royalty & License

• Counterfeiting

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Challenge of Int’l. Projects

Understand Risks Allocate Risks Manage Risks

. . . . Understand That They Change

** Company Confidential **

Potential Risk Managers

Government

Sponsors

Concession Company

Contractor

Engineers

Major Suppliers

Project Lenders

Local Partners

Labor Unions

Insurers

Bonding Companies

Counter-trade/ Offset Managers

Venture Capital/ Equity Markets

** Company Confidential **

Potential “Risk Managers”

Government – Multilateral/Bilateral

Agreements – International Aid or

Lending Agency – National/State/Local

Governments – Government Department – Quasi-Government

Corporation

Sponsors – Public Private Partnerships – NGOs – Financial Institutions – “Benefiting Parties”

• Public • Private

** Company Confidential **

Challenge of Int’l. Projects

Understand Risks Allocate Risks Manage Risks

. . . . Understand That They Change

** Company Confidential **

Manage Risks

Right People Right Place Right Time Right Approach Right Attitude

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Manage Risks

A High Risk of Exposure in: – Contractual Matters – Financial Matters – Professional Reputation

…Should Be Examined. Even if Apparently Mitigated, It Is a Good Reason to

Re-examine a Decision to Proceed with Business

** Company Confidential **

Should-You-Do-Business-Here Test

Corporate Political Contributions – “Encouraged” and “Actively Solicited” – Provide Timely Access to Influence Government Actions – Developers, Engineers, Contractors Specifically Targeted

Government Officials Regularly Receive De-minimus Favors from Private Sector

Procurement Often Based on Factors “Other Than Price”

Lapses of “Ethical” Judgment Are Not Uncommon

** Company Confidential **

Should-You-Do-Business-Here Test

High Level of Government Sector and Trade Debt is De-Facto Financed by Others

Growing Percentage of National Expenditures Targeted to Military

High Exposure to Energy Security Risk

Risks Associated with Infrastructure Development Projects Are High

Labor Productivity Growth in Engineering and Construction Sectors Lagging Most Other Sectors

High Risk of Obtaining Timely Government Approvals

** Company Confidential **

Should-You-Do-Business-Here Test

Tax Environment Shows High Probability of Increased Volatility and General Upward Pressure

Insurance and Bonding Capability Significantly Limited for Development, Engineering and Construction Sector

Growing Risk of Terrorism and Security Related Costs

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Should You Do Business Here?