international development and construction projects columbia university
DESCRIPTION
On April 22, 2014 I had the opportunity to give a lecture to graduate construction management students at Columbia University. The focus of the talk was on international development and construction projects, looking at these projects very much from a risk perspective. While the slides do not provide direct links to some of my other papers I hope some on the connections are obvious.TRANSCRIPT
© 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
** Company Confidential **
… 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
** Company Confidential **
Challenge of International Projects
Understand Risks Allocate Risks Manage Risks
. . . . Understand That They Change
** Company Confidential **
“ESPRIT” – Framework for Understanding Risk
Economic Social Political Religious Intellectual or Ideas Technological
** Company Confidential **
Economic Risks
Market and Revenue Finance Risks Cost Risks
– Construction Phase – Operation Phase
Cos
t of Y
our M
ista
kes
Level of Overconfidence
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
Cost Risk – Construction Phase
Scope
Schedule
Budget
Terms & Conditions
Quality
Legal – Know Who Has the Authority to Approve
** Company Confidential **
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 !
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
Quality
Poor Workmanship
Inadequate QA/QC
Poorly Defined Performance/ Acceptance Standard or Process
Incomplete Documentation
Environmental
** Company Confidential **
Cost Risk – Operations Phase
Service Scope Performance Standards Operating Costs Changes in External Environment
** Company Confidential **
Service Scope
Battery Limits of Project/Scope
– Other (Free) Services to be Provided
– Required Future Investments and Schedule
** Company Confidential **
Performance Standards
Reliability – Tolerance Limits and Measurement
Availability – Scheduled/Unscheduled Service Disruption – Extent (Reach) of Service Areas
Maintainability – Maintained Condition – “Quality” of System Turnover
** Company Confidential **
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
** Company Confidential **
“ESPRIT” – Framework for Understanding Risk
Economic Social Political Religious Intellectual or Ideas Technological
** Company Confidential **
Social Risks
Culture
Ethics
** Company Confidential **
Culture
Sense of History Cultural Imperatives
– Work/Life Balance – Risk Aversion – Individual vs. Group – Sport – Wealth
** Company Confidential **
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
** Company Confidential **
Ethics
Cultural “Norms” OECD vs. FCPA
– Facilitation Payments
Bribery – By Your Staff – Of Your Staff
Corruption Use of Agents
– Role – Limits – Payments
Whistle-Blower
** Company Confidential **
Ethics
Not Just Agents –
What Are Your Partners Doing?
** Company Confidential **
Ethics
Tips
Political Contributions
“Publish What You Pay”
** Company Confidential **
Ethics
Perception of Engineering and Construction Industry
** Company Confidential **
“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
** Company Confidential **
“ESPRIT” – Framework for Understanding Risk
Economic Social Political Religious Intellectual or Ideas Technological
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
“ESPRIT” – Framework for Understanding Risk
Economic Social Political Religious Intellectual or Ideas Technological
** Company Confidential **
Technological Risk
New Technology New Applications Scale Capacity Building Intellectual Property
** Company Confidential **
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
** Company Confidential **
Scale
Scalability Replicability External Resource Requirements Unknown Unknowns Growth
** Company Confidential **
Capacity Building
Institutional – Aging – Laws & Regulations – Due Process
Management Specialized Expertise Craft/Technician Maintenance Supply Chain Supporting Infrastructure
** Company Confidential **
Intellectual Property
• Patent
• Trademark
• Copyright
• Usage
• Royalty & License
• Counterfeiting
** Company Confidential **
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
** Company Confidential **
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
** Company Confidential **
Should You Do Business Here?