Sunday, 17 February 2019

The developers' view

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As infrastructure projects increasingly become a behemoth undertaking, the successful delivery of not only sustainable but cost-efficient projects boils down to having a competent technical team present at every stage of a procurement process, say four industry experts. By Hamisah Samad.

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“Having the right and strong technical team on board, right from the start from when a project is conceived right through to the end when a project is handed over [to its owner] is a big factor,” Omar Shahzad, chief executive officer of Meinhardt Group, told Project Finance International.

“A good technical team should understand the requirements of the client, the sort of project they want, their budget, how quickly the project needs to be completed and the lifespan of the project,” Shahzad said.

A former investment banker, Shahzad has only helmed Meinhardt Group for two years. But the Singapore-headquartered company, a global multidisciplinary and integrated engineering, infrastructure and project management consulting company, turns 40 this year and has offices in more than 30 cities and employs over 3,500 professional staff. The company has been involved in more than 100,000 completed projects around the world and has a consultancy portfolio of projects worth US$15bn per year.

The role of the technical team is key from the feasibility study right through to the concept and detailed design, preparation and calling for tenders, making sure the right type of contractors tender for the job, giving the right advice to the client and recommending the most suitable contractor to take on the job based on a client’s objectives.

And when a project gets to the construction stage, which Shahzad said is the “real execution phase”, it is important that the technical team that conceived the design sees that it gets implemented.

Own your design

Getting involved in an infrastructure project during its construction phase is a huge risk. It is important to own the design and have continuity in the whole process; otherwise you might get a design that looks good only on paper, Shahzad said.

This is where the project team has to be strong. “When we look at a project in a third-world country where the quality of construction may not be the same as in Singapore or Malaysia, we tend to have a higher involvement because we need to be more hands-on,” he said. ”We’ll have a bigger team on site then we would have, say, in Singapore.”

Governments in Singapore, and elsewhere in Asia, follow the QCBS selection criteria, or Quality & Cost Basis Selection, during a tendering process that again underscores the importance of a technical team.

“It is not just the party with the lowest financial offer that wins in a tender process, but the party that understands the project, has a clear track record and one that has put forward the right people to be leading the project,” Shahzad said. Those same criteria are also adopted by multilateral agencies such as the World Bank and the Asia Development Bank, he added.

Roddy Adams, a partner at KPMG Advisory LLP and head of ASPAC Infrastructure Markets, concurs. A competent technical team is not only important, but crucial in the successful delivery of a project. “In terms of project development, the technical team is integral to the overall team and very much at the core,” he said.

”In bid evaluation, it can often be the easy option to go with the cheapest overall bid, [but] cheapest isn’t always best from a technical perspective and the technical team must be in a position to help promote innovative design when it has been delivered via a bid process.”

Own your project risk

Norwegian’s SN Power has moved away from the traditional best practice of an engineering, procurement and construction, or an EPC-base, and Fédération Internationale Des Ingénieurs-Conseils, known as FIDIC-based procurement models, opt instead for a hands-on approach in managing its complex and technically demanding projects.

“Best practices have changed a lot from our perspective,” said Erik Knive, executive vice-president of SN Power. An EPC-based approach stems from the need to transfer the risk to another party but in Asia, owners of a project would end up taking that risk themselves, he said. SN Power is a renewable energy – mostly hydropower – company that invests in emerging markets.

“These types of projects that we do in hydropower projects are so complex, so difficult, [wrought] with so many uncertainties that the risk comes back to you in delays and all sorts of things,” Knive said. “And as an owner you need to be strong in managing those changes and have the expertise in the project to deal with those issues.”

“And as a consequence, we shifted our procurement practices substantially to split [EPC] contracts and taking a much more active role in managing these contracts ourselves.”

Established barely 12 years ago, SN Power, a 40:60 joint venture between Norway’s government-linked investment agency, Norfund, and Norway’s utility company, Statkraft, today has 39 power plants in nine countries including the Philippines, Nepal, India, Chile, Sri Lanka and Peru generating a total of 1,303MW.

Its projects have become more bankable as a result of the company’s assumption of its own project risk. “The banks and financial institutions, which have been very pro-EPC models, also see the value in owners carrying the risks and have become more supportive,” Knive said.

One of the company’s most successful projects – and most technically challenging – was the asset rehabilitation project that it did in Ambuklao in the Philippines. “Technically, it was exceedingly complex and difficult where one of the underground power plants had to be shut down because of an earthquake,” Knive said. ”There had been an attempt to fix it but it failed and others had given up. Here we chose to split the contract – we had a strong project team and very strong technical capabilities.”

Ambuklao, in Benguet Province, Luzon, 180km north of Manila, one of the oldest hydropower plants in the Philippines, suffered damages from a major earthquake in 1990 and had not been operational since 1999.

SN Power through its joint venture SN Aboitiz Power received funding from a consortium of international and local financial institutions. “That combined project came in below budget and one year ahead of schedule,” Knive said. Today, Ambuklao is fully operational and has a new installed capacity of 105MW. One hundred percent of the electricity generated is sold in the Wholesale Electricity Spot Market.

Optimise returns

Tokyo Electric Power similarly puts a lot of emphasis on providing technical expertise in the projects in which it is involved. Tepco would send its engineers to all of its project sites around Asia.

“One characteristic of our investment IPP [independent power] projects is we do not only do invest but also give technical support. For example, for all projects in Asia we despatch engineers to the ground. The purpose is to optimise the returns of the project,” said Yoichiro Kubota, general manager of Tepco’s office in Singapore.

Tepco’s IPP projects include Phu My 2-2 in Vietnam; Chan Bin, Fong Der and Star Buck in Taiwan, and TeaM Energy in the Philippines. It also operates the Umm Al Nar Power and Water project in the UAE.

Following a huge earthquake and an ensuing tsunami that melted down its Fukushima nuclear power plant in 2011, Tepco now exports its consultancy services to Asian governments on Power Development Master Plans. It advises Cambodian, Myanmarese and Bangladeshi governments. Kubota is personally involved in advising the Bangladeshi government on a feasibility study to build 2 x 600MW coal-fired power plants in the outheast Bangladesh as part of the government’s Power Development Master Plan.

The two-year old feasibility study is expected to be completed next year. The project, which has received financial support from Japan International Cooperation Agency (JICA), will include a coal storage yard and a new port to facilitate coal imports, and will be the biggest port in Bangladesh. M more than 1.25m metric tonnes of coal will be needed per year for one 600MW plant, Kubota said.

Biggest challenge

Getting the right talent is the determining factor between a project’s success and failure, Knive said. “The biggest challenge for anybody is finding the right people – the people who are willing to be at a remote location for long periods of time,” he added. “And these are highly specialised technology, highly specialised know-how and getting those people there, to thrive there, motivate them  and motivate those teams probably are the most challenging thing that we do.”

Getting teams from both the project owners and contractors to communicate and work well together, to work through issues and not back down is also a big challenge, Knive said.

For some, the legal framework in some countries is a major obstacle in infrastructure procurement, according to Adams.

“Some countries have no concept of common law and therefore every PPP concession that they enter into has to be in statute that will need some form of parliamentary approval,” he said. ”This will seriously impact both the speed of delivery and the ability to optimise project structures.

”A lot of countries in the region have PPP units, some centralised, some decentralised. As a generalisation in a developing market, a centralised and autonomous PPP unit has often been seen as a force for good in developing confidence in projects for both the public and private sector.”

The lack of delivery of projects could lead to “deal fatigue”, Adams said. “A government who proclaim they are bringing a huge number of projects to market and five years later has delivered nothing. This produces severe deal fatigue in all concerned. This often occurs in countries where multiple agencies are involved in the delivery of projects, often resulting in a political impasse and projects going nowhere.”

Land acquisition and people relocation

Land acquisition is less of an issue for SN Power, although it remains a big challenge for the company. Other project owners have cited land access as one of the biggest problems to grapple with in developing countries, often delaying projects and incurring huge overruns.

“A lot of the land issues are an economic one – how do you look after people who are affected. And obviously that holds up the process,” Shahzad said.

“Often there’s a lack of register. Often there would be double titles to land and in a lot of places where we are depending on the market, there’s no registry at all. The land has to be classified and re-classified and that takes time and energy,” Knive said.

SN Power would first look at the possibility of getting the parcel of land and finding out who owns it.

“In some places we have to move people. I just have some of my guys looking at a project in a nearby country here and the first question I asked them is do we have to move anybody. Because even though we’ve done so successfully [in the past] it’s something that we don’t like to do unless there’s no other alternative,“ Knive said.

Developing the THPC 500MW power project in Laos had involved the relocation of 5,000 people belonging to nomadic tribes. The company gave them a village and provided them with housing, schools and hospitals.

THPC entered into operations in 1998 with an installed capacity of 220MW and an annual average production of 1.5 TWh. THPC, which is 60% owned by EdL Generation, 20% by GMS Power and 20% by SN Power, underwent an upgrade and an expansion over the last decade and today produces 500MW.

“[The tribes] are substantially better off now than they were before – they have housing with rice fields, community programmes and everything else. That to some extent is a gold standard on how to relocate people if you have to. But it also comes at a very high costs because we spent a very significant amount of money on that programme and we will continue to spend that kind of money because we want them to continue supporting the [power] project going forward. But consumers will end up paying for the cost,” Knive said.

In the case of Ambuklao and Binga, the company had to deal with some community legacy issues where people felt that they hadn’t been compensated by the government in the way that was agreed or didn’t get the money that they were supposed to have received. With support from IFC of the World Bank group, SN Power helped train locals on negotiating skills.

“We trained them from the very beginning on how to negotiate with the government,” Knive said. ”People realised that we also focus on the softer side [of things] and negotiators realised there are people on both sides of the table. That allowed for some solutions, but we came out with some funds and continuing programmes and it’s not something which we turn off or on. It’s a continuing commitment from us.”

In areas where land acquisition is a contentious issue, the government at some point has to step in and decide on its priorities. “If they want development, they need power that is indigenous, and renewable and relatively cheaper than in the long term, then hydropower is the alternative,” Knive said.

Community, community, community

A lot of the success of projects also involves communication and mutual respect, and the realisation that a project owner will be in a certain country for a long period of time, Knive said.

Magad, one of the assets that SN Power acquired in the Philippines, was government-owned. It wasn’t paying any taxes.

“Our business has had a very large impact on the environment. Part of our CSR programme is to try and work with the local communities,” Knive said. ”When they suddenly have substantial additional funds, they need to know how to manage the funds and how to plan. Together with the deployment of the [power] projects they feel the immediate impact of us being there. In Laos, an entire city has developed. There was nothing there when we came and now it’s quite a substantial city. Obviously, it has a significant impact.”

“What we find is local governments are relatively sophisticated,” he said. ”They know what they want and they talk to each other. And when we are evaluating a site, one of the first things we do is we go there and talk to them. We only go there if they truly want us to be there and be part of the community. If we feel that they don’t want us to be there, then there are other places to go. And what we find is, they’ll call up other places where we are and they talk to them and ask them how we behave and stuff like that.”

“Part of that process is a dialogue – we educate them on the impact and they educate us on the needs of the community, such as specific religious requirements,” Knive said. “There is an exchange – we try to educate them and they have to educate us. And I’m convinced that for something that’s sustainable and long term, we have to be partners for the next 100 years.”

“We have to start on the right footing. If we dominate and are not respectful of their needs and community, that’s not going to work.”

The next generation and a rare bird

In the case of Meinhardt, in many of its projects, particularly those in the Middle East, the top tier of its project team often comprises expatriates from its global offices, while the lower tier would consist of locals and young professionals.

“This is also to train the local workforce,” Shahzad. ”We give them scholarships and get them to work on these big projects. This is the value we give them and often times we bring groups of them to offices in Australia, the UK and Singapore and we send them back.”  This is Meinhardt’s way of offering value and contributes to the development of local leadership, he said.

Tepco educates the local governments on the impact of infrastructure projects on the environment and the need to treasure nature. For example, on deciding a location site for its coal-fired power plant, a local government had selected a terrain that was easy to develop. They, however, agreed to relocate the plant to another site after realising that the site was a place where a rare bird roosts at certain times of the year, Kubota said.

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