Hydropower Situation in Nepal

System Load Curve (Jan 20, 2009)800 700 600 500 400 MW 300 200 100 010 11 12 13 14 15 16 17 18 19 20 21 22 23 1 2 3 4 5 6 7 8 9 TOTAL ROR (PUBLIC) 24 TOTAL STORGE TOTAL IPP TOTAL DIESEL TOTAL STORGE TOTAL IMPORT

LOAD SHEDDING (2 16 hrs a day)

Time

Source: IHA/IEA,2006/REN21, 2006

Nepal

Total estimated hydropower potential = 83,000 MW Economic potential = 43000 MW Total installed capacity = 635 MW Only 1.48% of the economic potential is installed Covers 93% of total energy production 2% contribution to GDP , Backbone for Nepal Electricity export /import, Maximum 150 MW

Hydropower : Nepal

Source : NEA Annual Report, 2009

Hydropower Situation in NepalTotal Energy Available and Peak Demand Growth of Consumers

Load Forecast

Source : NEA Annual Report, 2009

Institutional Set UpMain governmental bodies looking after the hydropower sector: Ministry of Energy (MOE)

Divisions

Department

Administration Divisions Planning and Program Division

Law Division

Department of Electricity Development (DoED)

Water and Energy Commission Secretariat (WECS) Nepal Electricity Authority (NEA) Electricity Tariff Fixation Commission (ETFC)

Policy and Foreign Coordination Division

Functions:

WECS: Planning DoED: A government department under MOE responsible for licensing, facilitation, promotion, motivation NEA: Public utility owned by government of Nepal responsible for generation, transmission and distribution of electricity ETFC: A government appointed commission for tariff setting

Nature of Significant Risks in Hydropower Project Construction in Nepal Construction Delay: I. Weather Conditions II. Adverse Subsurface Condition III. Site Access IV. Contractors Performance Changes in the Work Availability of Labor, Materials and Equipments Delayed Site Access

Construction Related

Environmental Local People Disturbances

Political and Societal

Physical

Risks in NepalFinancial and Economical Contractual and Legal

Subsurface Conditions of Geology & Ground Condition

Inflation Funding

Performance Related

Defective Work Productivity of Equipment

Delayed Dispute Resolution Change order Negotiation

WHAT IS EPC/TURNKEY ?OwnerClient will be looking for the following key terms (requirements):1. 2. 3. 4. 5. A fixed complete date, A fixed completion price, No or limited technology risk, Performance guarantees, Liquidated damages for both delay and performance, 6. Security from the contractor and/or its parent, 7. Large caps on liability (ideally, there would be no caps on liability, however, given the nature of EPC contracting and the risks to the contractors involved there are almost always caps on liability), and 8. Restrictions on the ability of the contractor to claim extensions of time and additional costs

EPC Contractor

Engineering

Procurement

construction

Supplier

Sub-Contractor

An EPC contract delivers all of these requirements in one integrated contract. These provisions are crucial to ensuring the bankability or financeability of a project

CHALLENGES OF EPC PROJECTSEPC projects face a number of challenges:

Interdependence of activities Phase overlaps Work fragmentation Uncertainty in accurate prediction of desired outcomes Complex organizational structure

In the engineering and construction industry, larger firms usually use matrix organization for the management of projects.

PHASE OVAERLAPS IN ENGINEERING, PROCUREMENT AND CONSTRUCTION

Phase overlaps of E,P and C increase the risk of project overruns in schedule and cost due to lack of project information and frequent changes, especially those attributed to external factors

AN EPC PROCESS MODEL

EPC PROCESS AND POTENTIAL INTERFERENCES BETWEEN EPC CONTRACTOR AND CLIENTS/CONSULTANTSDevelopment Phase Bid Phase EPC Contractor advance the design further into basic or preliminary but incomplete design Execution Phase At Execution: The price is fixed, but the design is not Possible owner/consultant interference with the EPC contractor Clients requirement Design Vs. Scope changes Design Approval Schedule Approvals Suppliers/ Fabricators approvals Owners Supplied Equipments Spare parts Issues Interference during Commissioning and Testing Phase EPC Contractor to meet the employers requirements

Employer decision to go EPC Turnkey

Employer with his Consultant to express the requirements in a form of Design Brief

Forming EPC Team single Resp. Designer/Contractor

Award

Incorporating the Design into Bid Document

EPC Contractor prepare cost estimate based on the incomplete design

The design is partially prepared by the consultant and transferred to the EPC Contractor

EPC CONSTRUCTION CONTRACT MANAGEMENT STRUCTURE

Fig. Three-dimensional structure of contract management

Project Management-EPC Contractor Perspective

Clients Community Engineering

Interface Activities: Practice / Promulgate / Manage Effective Communication Provide/Obtain Information Coordinate/Manage Work Activities Lead/Guide/Direct Project Team

Pre-Op and Start Up

Procurement

Project Management InterfacesSubContractors Vendors/ Suppliers

Construction Other Home Office Services

Project Controls

FOCUS ON PROCUREMENTThe critical importance of procurement is due to following facts:

1.2. 3. 4. 5.

It is a connecting function between engineering and construction. Procured materials are the foundation of constructed facilities Material costs represent a major portion of total costs in EPC projects

It is highly dependent on external companies, who are the suppliers and subcontractors Procurement needs more communication and negotiation with these external parties

The control is not as strong as in the case of engineering and construction, especially in outsourcing and purchasing long lead-time equipment Unlike the manufacturing industry, neither the major equipment suppliers nor the client keeps buffer inventory for the project The capital equipment is very costly and requires long lead-time to manufacture Suppliers and prime contractors separately use time buffers to protect themselves from uncertainty due to unforeseen circumstances Successful procurement management can lead to superior performance in overall project cost and delivery.

6.7. 8.

9.

PROCUREMENT PROCESS IN EPCReceipt of engineering of process data and drawings from engineering/design departments Documentation and issuing request for proposal (RFP) or request for quotation (RFQ) Receipt of bids from vendors Bid summary, bids evaluation and approval Order placement with equipment manufacture Equipment fabrication and assembly Testing of the assembled equipment Expediting by customer/client Packing and shipping arrangement Delivery of installation drawings and test data Actual shipping or delivery of major equipment Receipt of equipment on site

A MINI-NETWORK FOR EQUIPMENT ENGINEERPROCURE-CONSTRUCT

Problems In EPC Contract

Risks In EPC Contract Project Team CapabilityBudget over-run Schedule Over-run Vendor Performance Shortfalls Relative to Guarantees Availability and Cost Insurance Timely Payment Scope Change Force Majeure Joint Venture Partner Disputes or Default Delay in Getting Decision From Owner

Contractual Issues Causing Point of Responsibility 1 A SingleDisputes2 3 4 5 6 7 8 A Fixed Contract Price A Fixed Completion Date Performance Guarantees Caps on Liability

Security Variations Defect Liabilities Intellectual Property

9

10 Force Majeure 11 Weather Downtime 12 Suspension 13 Termination 14 Performance Specification

Claims in Sub-Contracted Works and Strategy to ControlDefect in Formal Agreement/Contract

Error in DesignDiffering Site Condition Additional Drawings and Engineers Instruction as to Methods of Working Claim Concerning the Validity of a Variation Order Timely Review of Shop Drawings, Payment Requests and Change Notice Proposals Site Access Timely Performance Constructive Acceleration Increased Difficulty of Performance Escalation of Material Cost Additional Works Claim for Adjustment of Preliminaries Delay in Payment Force Majeure Claim for Unreasonable Liquidated Damages

Strategy to Control If Happens Factual DefenseCounter Claims Contractual and Legal Defense Negotiation Mediation Expert Panel Arbitration Litigation

Causal Linkage Between Conflicts, Claims and Disputes

Risks

Conflicts

Claims

Not Clearly Assigned

Not Clearly Managed

Not Clearly Resolved

Different Types of Claims

Based on Objectives of Claims(1) Claim for extra time to complete the contract, and (2) Claim for extra money arising out of the contract

By Considering Legal Bases[Chappell (1984), Alkass and Harris (1991) and Hughes and Barber (1992)]

To Facilitate Calculation of Damages of Claims[Adrian (1988)]

1) Contractual claims, 2) Extracontractual claims 3) Ex-gratia claims

(1) Delay claim, (2) Scope-ofwork claim, (3) Acceleration claim, and (4) Changingsite-condition claim

Claim Management Framework1. Claim Identification 7. Use of Total Quality Management Tools to Prevent Claims

2. Claim Notification

6. Claim Negotiation

3. Claim Examination

5. Claim Presentation

4. Claim Documentation

Problem Associated with Claim Management Process

Lack of awareness of site staff to detect a claim Insufficient skilled personnel for detecting a claim Inaccessibility of documents used for identifying a claim Unclear procedures in claim identification

Inaccessibility of documents needed for attaching along with notice Unclear procedures in notice preparation Unclear lines of responsibility as to who should prepare the notice Queries back from the other parties due to notice ambiguity

Unavailability of records used to analyze and estimate the potential recovery Unclear lines of responsibility as who should evaluate the amount of recovery Lack of legal/contract to establish the base on which the claim stands Unclear procedures for claim examination

Problem Associated with Claim Management Process (Contd..)

Some Information /instruction is not kept in writing Oral instruction by owner Inaccessibility of documents when required Inaccurate recorded information

Inaccessibility of relevant documents to submit along with the claim Insufficient staff skilled in preparing a claim submission Unclear responsible person to prepare full report of claim presentation Unclear procedures in preparation of claim presentation

Conflicts arising during negotiation Poor negotiation skills Insufficient evidence to convince other parties Adversarial relationship with other parties Difficult to settle without any litigation or arbitration

Problem Associated with Claim Management Process (Contd..)Time Overruns

Direct Effects Lack of application of

TQMtools Quality Deviation Cost Overruns

Revisions

Indirect Effects

Loss of Productivity Interruption of workflows and cash flows

Building Competence for Managing ClaimsLearning through Operational personal contacts Management be engaging quantity surveyors As part of the internal team, i.e. in-house employment As an external member under the control of the contractor on a contract basis Entering into a strategic alliance with a quantitysurveying firms

1.

2. Managing Competence Development of employees

Proper communication and education program Continuing professional development Integration of educational courses

Organizational learning i.e. managing through a joint venture partner

Re-skilling employees

Seminar and lectures

Alternatives intertwined together as a NETWORK of SOLUTIONS

1.

2.

Network of Solutions

Behavioral Attitudes in Claim Management

Conflict due to differentiation Conflict due to task interdependency Conflict due to communication obstacle Conflict due to tension Conflict due to personality traits Conflict due to differing values, interests and objectives

Primary Effect

Causes of interorganizational Conflicts

Stereotyping and attitudes of low friendliness Low trust Low respect

An adverse impact on performance Ultimate Effect

Team working approach on a project helps avoid opportunistic behavior through promoting cooperation and establishing good relations

Styles of Handling Interpersonal Conflict & Types of Negotiation SkillsStyles of Handling Interpersonal Conflict

Types of Negotiation Skills Distributive Bargaining Win-Lose Exercise Assertiveness Mutual Gain Bargaining Open Communication Mutual Respect & Trust Negotiation focus on fulfilling the mutual interest of both parties Cooperativeness

Conceptual Flowchart of Dispute Evolution and ResolutionEffective Contract Administration

Claim Management Framework