“Public private partnerships (PPPs)” have a critical role to play in implementing the development projects in developing countries. Traditionally, the responsibility of constructing and operating infrastructure facilities had rested with the government, but with the growth of economy outstripping infrastructure supply (Gupta and Sravat, 1998) and the need for providing infrastructure facilities to keep up the pace of development, the burden of infrastructure development has been shifted to private sector through concession contracts such as Build-Own-Transfer (BOT). As the term implies, public private partnership is a structure that implements and carries infrastructure projects into effect on a basis of partnership, each sector contributing what it does best.
In South Asia, private participation in electricity was oriented mainly towards building generation capacity also in the form of independent power producers (IPP). This focus reflects the need in the region to expand generation capacity to keep pace with expected demand. Nepal alone with substantial hydropower capacity will require an investment estimated to be US$ 1.8 billion (Private Participation in Infrastructure: Trends in Developing Countries in 1990-2001, 2001) for the expansion of the power sector for domestic demand over the next ten years. With the declining trend of availability of scarce public resources soft loans and grants from multilateral and bilateral agencies, such financial resources will have to be mobilized through the private sector, in the form of IPPs.
Despite having a feasible generation potential of about 43000 MW and with a demand growth rate of about 10%, Nepal's current total installed capacity is only about 526MW with only 40% of the total population having access to electricity. The quality of the supply is poor, system losses high, and power shortages persistent. The cost of electricity for the consumers in Nepal is also one of the highest in South Asia.
Project Sponsors and lenders seek to reap adequate returns in stable environments, minimizing political, financial, operational and other risks associated with the project ensuring a steady stream of revenues.
Likewise, the state owned public enterprises will want to limit the abuses of monopoly power by the private operator and will seek to maximize production efficiency. The responsibility of the state owned enterprises also lies in ensuring the appropriate quality, environment, health standards and social justice.
Similarly, other stakeholders to IPPs have interests ranging from social welfare from the project company to reasonable costs of services.
Private hydropower production is still in the phase of evolution in Nepal, and the process is proving to be slow and expensive. Prospective developers continue to face risks and difficulties and fifteen years after the introduction of the Hydropower Development Policy in the early 1990s, the government of Nepal has only been able to attract limited private investments in power generation.
As pointed out by Head (2000), all private infrastructure development carries common risks such as political, currency exposure, force majeure etc. but hydropower is perceived as being exposed to additional risks in project definition, risks in hydrology, environment, financing, and regulatory risks. Even straightforward issues like scheduled outages and contract energy have led to disputes in PPAs in the Nepalese environment. Therefore, in the process of designing PPAs, a variety of questions need to be asked about the best feasible means satisfying the concerned parties allowing them to come to a zone of possible agreement.
Mr. Raju B. Shrestha made a research which aimed to 1) identify the underlying factors in PPAs in hydropower production in the Nepalese environment; b) identify how the principle issues affect the stakeholders; and 3) identify ways to address the principle issues
He believed that the benefits of his study will have contributions to the body of knowledge pertaining to PPAs in the Nepalese environment.
· Assessment of the underlying factors for project sponsors, utilities, lenders and the host Government.
· The impact of the underlying factors to the concerned parties.
· Positions of the concerned parties, their shared interests, and uncertainties.
· The strategy to adopt for future projects.
His analyses of the PPAs concluded to date, and the perception study of the prime stakeholders has shown the following:
· The analyses of the PPAs concluded to date in the Nepalese environment have shown that discriminatory clauses and unequal treatment are present in the key issues of the agreements.
· The prime stakeholders have divergent perceptions in the key issues of the PPAs, and that not all the clauses have been acceptable to the parties concerned. The responses of the prime stakeholders of the contracting parties reflect the past trends and practices in PPAs between the utility and the IPPs of various types.
From this study, the contracting parties can better evaluate future projects as well as negotiate the terms in the PPAs and provide suitable alternatives wherever required. The past trends of PPAs, the degree of convergence of opinions in each clause in terms of its importance and its importance in inclusion in PPAs can be evaluated. This will facilitate the contracting parties in negotiations to come to agreement sooner and successfully conclude PPAs.
The responses regarding the clauses of the PPAs of the other major stakeholders, namely the lenders and the government, will further help in facilitating successful conclusion of PPAs. His conclusions are categorized in 5 aspects such as:
1. Power Purchase Guarantees
a. Take or Pay Clauses
b. Purchase Guarantees of Interim Energy
c. Supply Guarantee of Minimum energy
d. Purchase Guarantee of Excess Energy
e. Two Part Tariff- Demand Charge
f. Third Party Sales Guarantees
The clauses in the PPAs are more favourable to IPPs with foreign investment than IPPs with local investment with guarantees of purchase of excess energy, interim energy, and better escalation rates, more coverage from exposure to political and changes in law risks.
· The clauses of the PPAs with investment in JV with the Utility have favourable clause for the project sponsors with better escalation rates and purchase guarantees of excess and interim energy than projects with local investment, and explicit clause covering political risks.
· Take or pay clause has not been favourable to the utility as it has resulted in losses.
2. Force Majeure Guarantees
a. Political Risk s
b. Natural Disasters
c. Changes in Law
d. Buyout Clauses
3 Financial and Foreign Exchange Guarantees
a. Convertibility
b. Repatriation
c. Devaluation
d. Escalation
f. Tax Holidays
g. Concessional Funding
4. Operation Risks
a. Dispatch Rights
b. Scheduled Outages
c. Availability Declaration
d. Maintenance Clauses
5 Other Risk Mitigating Measures
a. Dispute resolution Methods
b. Informal Dispute Resolution Methods
c. Arbitration
d. Insurance
e. Insurance Before RCOD
f. Insurance after RCOD
His thesis abstract is copied and posted.
ABSTRACT
With the Introduction of Hydropower Development Policy in the early 1990s, combined with the changes in electricity legislation and the opening up of the power industry to the private sector, Independent Power producers (IPPs) have been playing a bigger role in the development of the electricity sector. However, further investment in this sector has been difficult to mobilize, and part of this difficulty can be attributed to the factors in the existing Power Purchase Agreements (PPAs) and inconsistencies in the guarantees provided by the state owned utility.
The research provides the underlying factors in PPAs in hydropower production in the Nepalese environment, which are of most significance to the stakeholders of independent power production. The research is carried out with a triangulation approach taking into account both the qualitative viewpoint, in the form of comparative studies; and quantitative viewpoint, a questionnaire survey, regarding issues of PPAs.
From a pool of existing independent power producers, 10 PPAs are compared for patterns of specific variables by examining, categorizing and tabulating the underlying factors of PPAs. Opinions in the form of a questionnaire are sought from the stakeholders and the means of the ranks tested by Kruskal-Wallis tests to see if the perceptions of the stakeholders differ in the key issues of PPAs. Further, Mann-whitney tests are carried out to examine the difference in the perception between the pairs of stakeholders in the key issues of PPAs.
The research shows that discriminatory clauses and unequal treatment are present in key issues of the agreements. Questionnaire survey of the stakeholder’s shows the significant clauses of the PPAs and the clauses most likely to be included in PPAs by the stakeholders. With the knowledge of the underlying factors in PPAs, the research allows the stakeholders of the power production to clearly understand the positions of the parties involved. The parties can combine their shared interests to create a joint value and deal with multiple issues and make trades between them, eventually both the parties getting something that they value.
Thursday, 22 October 2009
Wednesday, 21 October 2009
A Study Of Safety Management System And Audit In Oil And Gas Construction Projects In Ba Ria – Vung Tau, Vietnam
According to the report of International Labour Organization (URL 10, Website of ILO), 270 million accidents and 2.2 million deaths at work happened every year. Safety issues recently are the major problems and concerns in the construction industry in developing countries. Many efforts have been made to address this problem, but the results have been far from satisfactory when the number of accidents in construction and in industry continued to increasingly dominate. For these reasons, Safety Management System (SMS) including safety audits, safety programs, safety planning and safety tools are reasonably developed and gradually improved.
Oil and gas industry is one of important businesses in many countries including Vietnam nowadays. Currently, with the economic growth of 7%, Vietnam placed in the third rank in the field of oil production among Association of South East Asian Nations countries, after Indonesia and Malaysia (URL1, Website of CNN). With this rate, Vietnam will become the world's 30th largest oil-producing nation in the world (Brown, 2005).
Consequently, a safety auditing in oil and gas project becomes more essential in view of preventing the increasing accidents. This is the new topic which can support the management system and enhancement of effective SMS in the oil and gas industry. Occupational safety and health in Vietnam has been a serious issue for many years. The number of deaths is continuously increasing, while the number of accident is still too high compared with other counties in the world. (Website of Department of Occupational Safety, 2006 and Vietnamese Government Reports of Ministry of Labors)
Especially, construction field always takes the major percent in the number of accidents, death and severe injuries. At present, safety regulation and enforcement in Vietnam is still not adequate. Safety research, in addition, has not been extensively conducted. Lam (2004) and Van (2002) mentioned that the safety management system has not been properly implemented while safety researches are limited. In some countries, although SMS has been applied, the accident rate is still high. Through the use of Safety Audit System, Rowlinson and Lam (2006) revealed the strengths and weaknesses of SMS. The importance of safety audit is noted as followed:
Traditional approaches to benchmarking risk management and safe work performance with incident rate reduction have failed to provide a strong connection between program causes and direct factors influencing risk and loss frequency, Huang and Brubaker (2006). Workplace Audits are shown to be a common form of measuring an organization’s safety performance. Beside, safety auditing is not only the process in determining the ultimate value of an overall safety program, but also the activities examined those that will have the greatest impact.
Mr. Phan Thanh Hai made a case study which main objective was to identify the Safety Management System Practices and Safety Audit Processes and Factors in Vietnam Oil and Gas Construction Project and proposed some recommendations for the improvements of the studied system.
He found out that in construction field of Oil and Gas industry, the Safety Management System has still faced with many problems, and audit safety is using to solve these issues and improve the system. By the measurement method, Organizations or Companies are able to do business each other in their belief, safety and prestige. This auditing approach is also a better method than inspection.
However, the Safety Auditing System is new and strange in construction projects, so it still reveals some weaknesses and limitations. These pitfalls are what an effective auditing method is, how to use auditing tools, and how to make the effective checklist.
During his data collection, he intended to conduct his study with five companies with five identified projects, but there were only three Companies who participated and five of their projects were permitted to be studied. Luckily, ten people were able to arrange their time to join the studied interview in order to get the overview of SMS. However, at least, these situations satisfied his requirement.
His conclusions are elaborated below.
1. Safety management system – these practices are identified in the five projects. The studied methods were the observation, the documentation review and the interviews. The author got the overall of SMS (include Safety Auditing System). Besides, the expert interviews strengthened this awareness. Finally, SMS of the five projects might be clearly known before the safety auditing was studied.
2. Safety auditing process practice – this is the most important objective of this study. The auditing process was also identified by Observation, Documentation, Interviews, and especially Checklists. The Checklist was formed by necessary activities of the SMS audit. The auditor could use many auditing skills to compile, use and evaluate SMS. The request of auditing was that marking and comments had to fill a majority of Checklist’s activities during the audit.
To end the audit, a re-auditing was suggested to implement after the follow-up had given out. It was operated whenever the previous auditing had taken note of unmeasured activities. With five types of Safety Auditing Process, the common process had ever been practiced followed six stages such as 1) Audit Team; 2)Prepare; 3) Implementation; 4) Analysis and report; 5) Follow – up; and 6) Re-audit
3. Safety management system improvements - the Safety Management System Evaluation is found out at the last step of this Study. Five Projects and seven parts of their SMS are evaluated by the audit activities of Projects. It revealed that some international projects have more audit activities than domestic project. And two parts Leadership & Administration and Follow-up System are concerned more than others, whereas two parts Training and Implementation are not concerned properly in oil and gas projects.
According the result of Mr. Hai’s study, activities of part leadership and administration and part follow-up are important of Safety Audit System. They were listed in the Checklist more frequently than that of others. That means they were checked in all studies projects. Activities of part leadership and administration are considered as a necessary part of the Safety Management System.
Besides, the part follow-up also has more activities. They are useful to the audit in order to determine follow-up activities of many emergencies which are particular in the oil and gas construction projects, such as fire case, explosion case, on-site accident case etc. So, the audit has more activities of this part in the checklist.
Finally, during the audit, the auditor was responsible for checking many activities. Among them, activities of leadership, administration and follow-up are the most necessarily important. These parts are the target to reduce accidents in oil and gas construction projects. For this reason, oil and gas construction projects should have a good Standard, effective administration and practical follow up systems.
His thesis abstract is copied and posted.
Abstract
Safety was not only a concern of many companies, but also an unavoidable problem of many projects in oil and gas industry which currently was the strongest industry in Vietnamese manufacture and business. Thus, Safety Management System (SMS) was gradually improved by many new management practices which one of them was the Safety Auditing System (SAS). This system could evaluate SMS or any other systems with a checklist which is actually a list of activities set up to support the audit planning. The checklist is also the auditing tool to estimate the Safety System with some key markings (NC, NA, YES and OBS). Therefore, the study objectives were set to identify SMS practices and find out processes of the safety audit in oil and gas construction projects. To meet these requirements, three companies and five projects were studied. Five SMSs were identified by observation, interview and documentation in order to get the overview. Five auditing processes were also studied to evaluate these current SMS. Finally, the result of the study was the common process which had been implemented and applied to evaluate SMS effectively. The more activities of the auditing Checklist which were marked with position key (YES), the better SMS was. Moreover, another result was comments of SMS practices in oil and gas construction projects. It can be noticed that SMS in international projects was better than others; and in the Safety Management System, Administration & Follow-up were concerned more than other parts in order to support fully all usual and emergency activities on the project sites.
Oil and gas industry is one of important businesses in many countries including Vietnam nowadays. Currently, with the economic growth of 7%, Vietnam placed in the third rank in the field of oil production among Association of South East Asian Nations countries, after Indonesia and Malaysia (URL1, Website of CNN). With this rate, Vietnam will become the world's 30th largest oil-producing nation in the world (Brown, 2005).
Consequently, a safety auditing in oil and gas project becomes more essential in view of preventing the increasing accidents. This is the new topic which can support the management system and enhancement of effective SMS in the oil and gas industry. Occupational safety and health in Vietnam has been a serious issue for many years. The number of deaths is continuously increasing, while the number of accident is still too high compared with other counties in the world. (Website of Department of Occupational Safety, 2006 and Vietnamese Government Reports of Ministry of Labors)
Especially, construction field always takes the major percent in the number of accidents, death and severe injuries. At present, safety regulation and enforcement in Vietnam is still not adequate. Safety research, in addition, has not been extensively conducted. Lam (2004) and Van (2002) mentioned that the safety management system has not been properly implemented while safety researches are limited. In some countries, although SMS has been applied, the accident rate is still high. Through the use of Safety Audit System, Rowlinson and Lam (2006) revealed the strengths and weaknesses of SMS. The importance of safety audit is noted as followed:
Traditional approaches to benchmarking risk management and safe work performance with incident rate reduction have failed to provide a strong connection between program causes and direct factors influencing risk and loss frequency, Huang and Brubaker (2006). Workplace Audits are shown to be a common form of measuring an organization’s safety performance. Beside, safety auditing is not only the process in determining the ultimate value of an overall safety program, but also the activities examined those that will have the greatest impact.
Mr. Phan Thanh Hai made a case study which main objective was to identify the Safety Management System Practices and Safety Audit Processes and Factors in Vietnam Oil and Gas Construction Project and proposed some recommendations for the improvements of the studied system.
He found out that in construction field of Oil and Gas industry, the Safety Management System has still faced with many problems, and audit safety is using to solve these issues and improve the system. By the measurement method, Organizations or Companies are able to do business each other in their belief, safety and prestige. This auditing approach is also a better method than inspection.
However, the Safety Auditing System is new and strange in construction projects, so it still reveals some weaknesses and limitations. These pitfalls are what an effective auditing method is, how to use auditing tools, and how to make the effective checklist.
During his data collection, he intended to conduct his study with five companies with five identified projects, but there were only three Companies who participated and five of their projects were permitted to be studied. Luckily, ten people were able to arrange their time to join the studied interview in order to get the overview of SMS. However, at least, these situations satisfied his requirement.
His conclusions are elaborated below.
1. Safety management system – these practices are identified in the five projects. The studied methods were the observation, the documentation review and the interviews. The author got the overall of SMS (include Safety Auditing System). Besides, the expert interviews strengthened this awareness. Finally, SMS of the five projects might be clearly known before the safety auditing was studied.
2. Safety auditing process practice – this is the most important objective of this study. The auditing process was also identified by Observation, Documentation, Interviews, and especially Checklists. The Checklist was formed by necessary activities of the SMS audit. The auditor could use many auditing skills to compile, use and evaluate SMS. The request of auditing was that marking and comments had to fill a majority of Checklist’s activities during the audit.
To end the audit, a re-auditing was suggested to implement after the follow-up had given out. It was operated whenever the previous auditing had taken note of unmeasured activities. With five types of Safety Auditing Process, the common process had ever been practiced followed six stages such as 1) Audit Team; 2)Prepare; 3) Implementation; 4) Analysis and report; 5) Follow – up; and 6) Re-audit
3. Safety management system improvements - the Safety Management System Evaluation is found out at the last step of this Study. Five Projects and seven parts of their SMS are evaluated by the audit activities of Projects. It revealed that some international projects have more audit activities than domestic project. And two parts Leadership & Administration and Follow-up System are concerned more than others, whereas two parts Training and Implementation are not concerned properly in oil and gas projects.
According the result of Mr. Hai’s study, activities of part leadership and administration and part follow-up are important of Safety Audit System. They were listed in the Checklist more frequently than that of others. That means they were checked in all studies projects. Activities of part leadership and administration are considered as a necessary part of the Safety Management System.
Besides, the part follow-up also has more activities. They are useful to the audit in order to determine follow-up activities of many emergencies which are particular in the oil and gas construction projects, such as fire case, explosion case, on-site accident case etc. So, the audit has more activities of this part in the checklist.
Finally, during the audit, the auditor was responsible for checking many activities. Among them, activities of leadership, administration and follow-up are the most necessarily important. These parts are the target to reduce accidents in oil and gas construction projects. For this reason, oil and gas construction projects should have a good Standard, effective administration and practical follow up systems.
His thesis abstract is copied and posted.
Abstract
Safety was not only a concern of many companies, but also an unavoidable problem of many projects in oil and gas industry which currently was the strongest industry in Vietnamese manufacture and business. Thus, Safety Management System (SMS) was gradually improved by many new management practices which one of them was the Safety Auditing System (SAS). This system could evaluate SMS or any other systems with a checklist which is actually a list of activities set up to support the audit planning. The checklist is also the auditing tool to estimate the Safety System with some key markings (NC, NA, YES and OBS). Therefore, the study objectives were set to identify SMS practices and find out processes of the safety audit in oil and gas construction projects. To meet these requirements, three companies and five projects were studied. Five SMSs were identified by observation, interview and documentation in order to get the overview. Five auditing processes were also studied to evaluate these current SMS. Finally, the result of the study was the common process which had been implemented and applied to evaluate SMS effectively. The more activities of the auditing Checklist which were marked with position key (YES), the better SMS was. Moreover, another result was comments of SMS practices in oil and gas construction projects. It can be noticed that SMS in international projects was better than others; and in the Safety Management System, Administration & Follow-up were concerned more than other parts in order to support fully all usual and emergency activities on the project sites.
Tuesday, 20 October 2009
An Examination of the Relationship Between Risk Allocation and Project Success on PPP Projects Through Good Project Governance Assessment Case Studies
One of the key factors that have significant and positive influence on economic growth, especially in the developing countries, is infrastructure development (ADB, 1996).
However, infrastructure development requires massive capital investments because most infrastructure projects are large in size and have a high level of complexity (Grimsey & Lewis, 2002). Due to the capital-intensive nature of infrastructure projects, most developing countries do not have the required amount of capital to develop the necessary infrastructure on their own.
Without the required capital, these nations would not be able to properly develop their infrastructure sector, and without these developments their economic condition could suffer. Therefore, in order to keep pace with the economic growth and the increasing demand from the ever-growing population, the private sector participation was introduced with the intention to assist the government of these developing countries by providing additional capital investment to finance the infrastructure sector development (Walker & Smith, 1995).
However, the private participation in infrastructure in the East Asia and Pacific region is not regarded as a challenger or rival, instead it is utilized to complement the investment made by government agencies and/or state-owned enterprises. As a result of this approach, private participation is not utilized to increase the efficiency of the existing enterprises but rather to build new assets through Greenfield projects (World Bank, 2002). A Greenfield project is a project where a particular private entity or a public-private joint venture builds and operates a new facility for a period of time, which has been determined previously in the project contract, and the facility itself may be returned to the public sector at the end of the concession period (Beery & Crow, 2003). These projects can be broken down into several sub-classes, such as buildlease-own, build-own-transfer, build-own-operate-transfer, build-own-operate, build-operate-transfer, etc. However, the build-operate-transfer (BOT) approach is widely accepted as the preferred form of infrastructure financing, not only in Asia but also in many countries around the world (Lombardo, 1999).
Private sector participation had actually existed as early as the 17th century (Walker & Smith, 1995); however, there are currently still a lot of projects with private participation that have failed. There are several things that could cause these types of projects to fail and they are mostly due to the following reasons (Kumaraswany & Zhang, 2001):
1. Poor arrangement and coordination between government agencies in packaging the projects.
2. Insufficient legal arrangements.
3. Lack of coordination between private and public sectors.
4. The unwillingness of the host government to provide guarantees against the risks originating from the unstable economical and political environment.
The results of previous studies on risk allocation and project success is still insufficient because they have not been able to assess whether or not the risks have been properly allocated, which party actually has the ability and willingness to accept the consequences of these risks and what needs to be done to achieve proper risk allocation. Therefore, there is a need to develop a guideline that can help assess the ability and willingness of the parties that are involved in these kinds of projects to help achieve proper risk allocation and ultimately project success.
Mr. Martinus P. Abednego made a case study on PPP as his dissertation thesis for his Ph. D. degree. The main objective of his research is to assess the relationships between risk allocation and project success by developing a common ground concept of proper risk allocation and utilize its result as the foundation to produce a guideline that can help determine proper risk allocation arrangement at the project initiation stage as well as perform as a control system for the project and its participants along the concession period of a tollway project developed under PPP procurement system. From his main objective, several sub-objectives were further elaborated as follows:
1. To identify the project risks in each stage of project development based on the perceptions of the public sector (government agencies) and private sectors (concessionaire and contractors).
2. To identify the critical success factors that are significant for project success based on the goals and objectives of the public and private sectors.
3. To investigate the risk allocation arrangements used by the public and private sectors.
4. To investigate the influence of risk allocation arrangements on project success.
Moreover, the expected outcomes from his research are:
An improved theory of relationship between risk allocation and project success, especially in tollway projects that are developed under PPP procurement system.
A conceptual framework of good project governance (GPG) for assessing proper risk allocation so that it may enhance the project performance thus achieving an overall project success.
In his overall conclusions, he cited that Public-Private Partnership can be defined in many ways depending on which perspective one chooses. Regardless of differences in perspective, all possess similar characteristics (Peters, 1998). These characteristics can be summarized into a general perception of PPP as a form of partnership of at least one public and one private entity in which each entity contributes its key resource(s) with a willingness to accept the consequences that are associated with the responsibilities. Accordingly, a lot of advantages can be obtained from its implementation, especially in the development of public infrastructure. One of the main advantages is in terms of project financing. Unfortunately what generally happens is the exact opposite, especially when it is put into practice in countries such as Indonesia, Thailand and Vietnam that has less or no experience regarding the approach. The common misconception of the PPP procurement system is that the government as the owner of the project has more authority in the partnership, thus considered as a justification for being superior towards the other stakeholders.
Additionally, the general approach in dealing with the consequences of the risks that occur in projects developed under this system is through problem solving rather than prevention. As a result, the private sector has no choice but to accept these consequences for most of the times even though it does not have the required resources and experience to manage the unanticipated losses. When such situation continues, the possibility of projects experiencing further problems in the future will be greater - making it even more difficult to achieve success, both in the short-term and the long-term. Unfortunately, the majority of stakeholders do not realize that projects developed under this system would have to deal with short-term issues as well as long-term issues.
Mr. Abednego’s research provides an alternative point of view in observing PPP projects by pointing out that these projects are not only confronted with project management problems but also they have project governance concerns. Good Project Governance concept was developed in an effort to ensure the achievement of long-term project success. It has the characteristics of: 1) Making the right decision at the right time; 2) Ensuring contract fairness; 3) Information transparency; 4) Responsiveness; 5) Continuous project control and monitoring; 6) Equality; 7) Effectiveness and efficiency and 8) Accountability (Abednego & Ogunlana, 2006). Four core principles of GPG were established from this to help assess the relationship between risk allocation and project success in each of the case studies. These core principles are fairness, transparency, accountability and sustainability. Each of these principles was further devolved into subcomponents and each subcomponent into key analytical issues, which are then used to assess whether or not risks have been properly allocated and to judge how it affects project success.
Mr. Abednego has several significant conclusions made from his research and each of them is briefly described in the following sections.
1. Perceptions on risk and its allocation - The result of the analysis shows that the government has a clearly different perception compared to the private sector with regards to what is considered as potential risk. In all of the case studies, the governments tend to be more concerned about the problems that may occur during the construction stage of the project. On the other hand, the private sectors are more concerned about the lack of commitment and support from the government that shows in the existing regulations, laws and policies that tend to be discriminatory and insufficient in providing the necessary protection for private investments. This shows that the private sector is more concerned about the source of the problem rather than the actual problem itself because of the belief that problems can be prevented if necessary improvements are made towards the source. Although the private sector is more than willing to be responsible for the consequences of decisions and actions, however, they also expect the government to accept its own share of responsibilities, starting by honoring agreements and providing the necessary guarantees for the private sector, this condition most of the time if they want to be involved in such projects. This puts them in an inferior position relative to the government and eventually prevents project risks from being allocated properly.
2. Perceptions on project success - the following are the significant success factors that were identified from the case studies:
Ability to carry out negotiations
Accurate estimation (traffic demand & construction cost)
Advance risk management system
Availability of the required resources
Communication method
Compliance on agreement/contract
Continuous project monitoring and control
Attractive investment environment/condition
Non-discriminative and non-ambiguous agreement/contract
Effective project management
Equality of rights and responsibilities among stakeholders
Experience
Fair compensation policy
Fair tendering process
Financial achievement
Functionality
Good contractor/concessionaire selection system
Good coordination
Good managerial capabilities
Government guarantee
Government support
Improved laws/regulations related to PPP procurement system
Information dissemination
Market/demand oriented
Minimize government interference
Minimize land acquisition problem
Less political pressure
On-time project completion
Professionalism
Project quality achievement
Proper infrastructure development planning
Proper project financing strategy
Public participation
Reasonable payback structure
Sufficient time to complete project engineering design
Trust
There is a lack of knowledge with respect to the unique characteristics of projects that are developed under the PPP scheme. Most stakeholders do not realize that this kind of projects have governance concerns in addition to management concerns. Consequently, PPP projects are still managed like regular construction projects that are considered to be successful as long as they manage to deal with the short-term issues. Unfortunately, without acknowledging and understanding the importance of addressing the long-term issues, the overall success of PPP projects will be affected.
3. Assessment based on the fairness principle - The main issue discovered from the case studies that prevent the risks to be allocated properly and creating unfair conditions is government’s unwillingness to provide the necessary support and guarantees that would protect private sector investments. This condition is worsened by the ambiguity in the agreements between the government and private sector, and also by the constant interference by the government during the whole course of the project. As a result, the private sector was not able to properly identify the project risks, causing them to involuntarily assume the consequences that were not actually theirs. This would negatively affect the private sector’s revenue in the long run and eventually jeopardize the overall success of projects.
4. Assessment based on the transparency principle - Information dissemination is often a problem in PPP projects. Instead of being shared, it is often obscured; resulting in misperception and misinformation in the project. Unfortunately, this condition is often exploited by the government for fear that the information may be used by the private sector to make claims. Adding to the fact that the existing information management system is insufficient and still requires further improvements, these circumstances prevented the private sector from developing accurate plans and make better preparations. In addition, the government had not also been able or willing to make reasonable adjustments on the project’s financing strategy as previously agreed. Due to this lack of information and financial transparency, conflicts and disputes are inevitable, causing additional problems.
5. Assessment based on the accountability principle
The government and the private sector often overlooked the end-users of the infrastructure as well as its surrounding communities in the process of developing projects. Aside from the Don Muang Tollway project, the projects in Indonesia and Vietnam did not involve any public hearings. As such, the people were given no chance to raise their concerns or even offer suggestions for the project, which prevented them from participating and contributing directly to the project. Regarding the quality issue, most stakeholders refer to it in terms of the physical condition of the infrastructure whereas it should also include the management value and this, unfortunately, is the real situation. Unless the public is given more opportunity to be involved in the development process of projects and quality, both physical and managerial, is improved, the government is (here considered to be) accountable for the negative consequences that it may cause.
6. Assessment based on the sustainability principle
Lack of coordination between government agencies and also between the government and the private sector has prevented the stakeholders of PPP projects from sustaining their partnership in the long run. Consequently, this would affect project performance. For example, lack of coordination would result in inappropriate information dissemination creating difficulties to produce accurate estimation in terms of project cost. The latter situation would then further affect the development of a suitable project financing strategy and payback structure. Ultimately, disputes are inevitable and the sustainability of the project is vulnerable.
7. Overall achievement in terms of Good Project Governance
Based on the assessments that have been made using the four core principles of GPG, the risks in the three case studies were still allocated improperly. This condition influenced the performance of the projects, not only during the initiation and construction stages but also for throughout whole concession period. Consequently, it prevented the projects from achieving overall success. Therefore, these projects cannot be considered to have good project governance because they failed to deal with most of the issues that have long-term implications on the projects, which are mainly caused by improper risk allocation.
His thesis abstract is copied and posted.
Abstract
Studies have shown that there are increasing trends of using Public-Private Partnership (PPP) procurement system in developing countries, including the Southeast Asia countries. In addition to this, the concept of good governance is also becoming a more perceived issue, especially in state-owned enterprises. With such development in the construction industry, it is important to understand what would be the best approach to govern (manage) a construction project, especially public infrastructure projects under PPP procurement system such as tollway projects, so that it may increase the project’s level of success.
Proper risk allocation is considered as one of the critical success factors to enhance the performance of PPP projects. However, parties that are involved in a PPP project typically have different perception of risks, risk allocation strategy as well as project success. Moreover, PPP projects are generally challenged with both project management problems, which require day-to-day supervision (short-term) as well as partnership problems that require more of a strategic approach (long-term). Due to this unique condition, PPP projects can be considered to have governance concerns in addition to management concerns because it deals with monitoring and overseeing strategic direction as well as strategic decision-making (Mueller, 1981).
This research is conducted to examine the influence of risk allocation towards project success. Since proper risk allocation is considered to be an essential part for attaining good project governance, therefore, it is assumed that the performance level of a project would increase due to the proper allocation thus generating a successful project. A good project governance concept was developed as a result of this research. Its four core principles, fairness, transparency, accountability and sustainability is used to assess the influence of the risk allocation arrangements that were applied towards the project success, especially in the long-term. Three tollway projects from Indonesia, Thailand and Vietnam were selected as case studies for this research. The research discovered that the government clearly has a different perception of risk and proper risk allocation compared to the private sector. However, these two stakeholders still lack the knowledge to the unique characteristics of PPP projects and fail to recognize the fact that this kind of projects has governance concerns in addition to management concerns. As a result of their short-term oriented point of view, the project’s long-term issues were often overlooked, affecting its overall success.
However, infrastructure development requires massive capital investments because most infrastructure projects are large in size and have a high level of complexity (Grimsey & Lewis, 2002). Due to the capital-intensive nature of infrastructure projects, most developing countries do not have the required amount of capital to develop the necessary infrastructure on their own.
Without the required capital, these nations would not be able to properly develop their infrastructure sector, and without these developments their economic condition could suffer. Therefore, in order to keep pace with the economic growth and the increasing demand from the ever-growing population, the private sector participation was introduced with the intention to assist the government of these developing countries by providing additional capital investment to finance the infrastructure sector development (Walker & Smith, 1995).
However, the private participation in infrastructure in the East Asia and Pacific region is not regarded as a challenger or rival, instead it is utilized to complement the investment made by government agencies and/or state-owned enterprises. As a result of this approach, private participation is not utilized to increase the efficiency of the existing enterprises but rather to build new assets through Greenfield projects (World Bank, 2002). A Greenfield project is a project where a particular private entity or a public-private joint venture builds and operates a new facility for a period of time, which has been determined previously in the project contract, and the facility itself may be returned to the public sector at the end of the concession period (Beery & Crow, 2003). These projects can be broken down into several sub-classes, such as buildlease-own, build-own-transfer, build-own-operate-transfer, build-own-operate, build-operate-transfer, etc. However, the build-operate-transfer (BOT) approach is widely accepted as the preferred form of infrastructure financing, not only in Asia but also in many countries around the world (Lombardo, 1999).
Private sector participation had actually existed as early as the 17th century (Walker & Smith, 1995); however, there are currently still a lot of projects with private participation that have failed. There are several things that could cause these types of projects to fail and they are mostly due to the following reasons (Kumaraswany & Zhang, 2001):
1. Poor arrangement and coordination between government agencies in packaging the projects.
2. Insufficient legal arrangements.
3. Lack of coordination between private and public sectors.
4. The unwillingness of the host government to provide guarantees against the risks originating from the unstable economical and political environment.
The results of previous studies on risk allocation and project success is still insufficient because they have not been able to assess whether or not the risks have been properly allocated, which party actually has the ability and willingness to accept the consequences of these risks and what needs to be done to achieve proper risk allocation. Therefore, there is a need to develop a guideline that can help assess the ability and willingness of the parties that are involved in these kinds of projects to help achieve proper risk allocation and ultimately project success.
Mr. Martinus P. Abednego made a case study on PPP as his dissertation thesis for his Ph. D. degree. The main objective of his research is to assess the relationships between risk allocation and project success by developing a common ground concept of proper risk allocation and utilize its result as the foundation to produce a guideline that can help determine proper risk allocation arrangement at the project initiation stage as well as perform as a control system for the project and its participants along the concession period of a tollway project developed under PPP procurement system. From his main objective, several sub-objectives were further elaborated as follows:
1. To identify the project risks in each stage of project development based on the perceptions of the public sector (government agencies) and private sectors (concessionaire and contractors).
2. To identify the critical success factors that are significant for project success based on the goals and objectives of the public and private sectors.
3. To investigate the risk allocation arrangements used by the public and private sectors.
4. To investigate the influence of risk allocation arrangements on project success.
Moreover, the expected outcomes from his research are:
An improved theory of relationship between risk allocation and project success, especially in tollway projects that are developed under PPP procurement system.
A conceptual framework of good project governance (GPG) for assessing proper risk allocation so that it may enhance the project performance thus achieving an overall project success.
In his overall conclusions, he cited that Public-Private Partnership can be defined in many ways depending on which perspective one chooses. Regardless of differences in perspective, all possess similar characteristics (Peters, 1998). These characteristics can be summarized into a general perception of PPP as a form of partnership of at least one public and one private entity in which each entity contributes its key resource(s) with a willingness to accept the consequences that are associated with the responsibilities. Accordingly, a lot of advantages can be obtained from its implementation, especially in the development of public infrastructure. One of the main advantages is in terms of project financing. Unfortunately what generally happens is the exact opposite, especially when it is put into practice in countries such as Indonesia, Thailand and Vietnam that has less or no experience regarding the approach. The common misconception of the PPP procurement system is that the government as the owner of the project has more authority in the partnership, thus considered as a justification for being superior towards the other stakeholders.
Additionally, the general approach in dealing with the consequences of the risks that occur in projects developed under this system is through problem solving rather than prevention. As a result, the private sector has no choice but to accept these consequences for most of the times even though it does not have the required resources and experience to manage the unanticipated losses. When such situation continues, the possibility of projects experiencing further problems in the future will be greater - making it even more difficult to achieve success, both in the short-term and the long-term. Unfortunately, the majority of stakeholders do not realize that projects developed under this system would have to deal with short-term issues as well as long-term issues.
Mr. Abednego’s research provides an alternative point of view in observing PPP projects by pointing out that these projects are not only confronted with project management problems but also they have project governance concerns. Good Project Governance concept was developed in an effort to ensure the achievement of long-term project success. It has the characteristics of: 1) Making the right decision at the right time; 2) Ensuring contract fairness; 3) Information transparency; 4) Responsiveness; 5) Continuous project control and monitoring; 6) Equality; 7) Effectiveness and efficiency and 8) Accountability (Abednego & Ogunlana, 2006). Four core principles of GPG were established from this to help assess the relationship between risk allocation and project success in each of the case studies. These core principles are fairness, transparency, accountability and sustainability. Each of these principles was further devolved into subcomponents and each subcomponent into key analytical issues, which are then used to assess whether or not risks have been properly allocated and to judge how it affects project success.
Mr. Abednego has several significant conclusions made from his research and each of them is briefly described in the following sections.
1. Perceptions on risk and its allocation - The result of the analysis shows that the government has a clearly different perception compared to the private sector with regards to what is considered as potential risk. In all of the case studies, the governments tend to be more concerned about the problems that may occur during the construction stage of the project. On the other hand, the private sectors are more concerned about the lack of commitment and support from the government that shows in the existing regulations, laws and policies that tend to be discriminatory and insufficient in providing the necessary protection for private investments. This shows that the private sector is more concerned about the source of the problem rather than the actual problem itself because of the belief that problems can be prevented if necessary improvements are made towards the source. Although the private sector is more than willing to be responsible for the consequences of decisions and actions, however, they also expect the government to accept its own share of responsibilities, starting by honoring agreements and providing the necessary guarantees for the private sector, this condition most of the time if they want to be involved in such projects. This puts them in an inferior position relative to the government and eventually prevents project risks from being allocated properly.
2. Perceptions on project success - the following are the significant success factors that were identified from the case studies:
Ability to carry out negotiations
Accurate estimation (traffic demand & construction cost)
Advance risk management system
Availability of the required resources
Communication method
Compliance on agreement/contract
Continuous project monitoring and control
Attractive investment environment/condition
Non-discriminative and non-ambiguous agreement/contract
Effective project management
Equality of rights and responsibilities among stakeholders
Experience
Fair compensation policy
Fair tendering process
Financial achievement
Functionality
Good contractor/concessionaire selection system
Good coordination
Good managerial capabilities
Government guarantee
Government support
Improved laws/regulations related to PPP procurement system
Information dissemination
Market/demand oriented
Minimize government interference
Minimize land acquisition problem
Less political pressure
On-time project completion
Professionalism
Project quality achievement
Proper infrastructure development planning
Proper project financing strategy
Public participation
Reasonable payback structure
Sufficient time to complete project engineering design
Trust
There is a lack of knowledge with respect to the unique characteristics of projects that are developed under the PPP scheme. Most stakeholders do not realize that this kind of projects have governance concerns in addition to management concerns. Consequently, PPP projects are still managed like regular construction projects that are considered to be successful as long as they manage to deal with the short-term issues. Unfortunately, without acknowledging and understanding the importance of addressing the long-term issues, the overall success of PPP projects will be affected.
3. Assessment based on the fairness principle - The main issue discovered from the case studies that prevent the risks to be allocated properly and creating unfair conditions is government’s unwillingness to provide the necessary support and guarantees that would protect private sector investments. This condition is worsened by the ambiguity in the agreements between the government and private sector, and also by the constant interference by the government during the whole course of the project. As a result, the private sector was not able to properly identify the project risks, causing them to involuntarily assume the consequences that were not actually theirs. This would negatively affect the private sector’s revenue in the long run and eventually jeopardize the overall success of projects.
4. Assessment based on the transparency principle - Information dissemination is often a problem in PPP projects. Instead of being shared, it is often obscured; resulting in misperception and misinformation in the project. Unfortunately, this condition is often exploited by the government for fear that the information may be used by the private sector to make claims. Adding to the fact that the existing information management system is insufficient and still requires further improvements, these circumstances prevented the private sector from developing accurate plans and make better preparations. In addition, the government had not also been able or willing to make reasonable adjustments on the project’s financing strategy as previously agreed. Due to this lack of information and financial transparency, conflicts and disputes are inevitable, causing additional problems.
5. Assessment based on the accountability principle
The government and the private sector often overlooked the end-users of the infrastructure as well as its surrounding communities in the process of developing projects. Aside from the Don Muang Tollway project, the projects in Indonesia and Vietnam did not involve any public hearings. As such, the people were given no chance to raise their concerns or even offer suggestions for the project, which prevented them from participating and contributing directly to the project. Regarding the quality issue, most stakeholders refer to it in terms of the physical condition of the infrastructure whereas it should also include the management value and this, unfortunately, is the real situation. Unless the public is given more opportunity to be involved in the development process of projects and quality, both physical and managerial, is improved, the government is (here considered to be) accountable for the negative consequences that it may cause.
6. Assessment based on the sustainability principle
Lack of coordination between government agencies and also between the government and the private sector has prevented the stakeholders of PPP projects from sustaining their partnership in the long run. Consequently, this would affect project performance. For example, lack of coordination would result in inappropriate information dissemination creating difficulties to produce accurate estimation in terms of project cost. The latter situation would then further affect the development of a suitable project financing strategy and payback structure. Ultimately, disputes are inevitable and the sustainability of the project is vulnerable.
7. Overall achievement in terms of Good Project Governance
Based on the assessments that have been made using the four core principles of GPG, the risks in the three case studies were still allocated improperly. This condition influenced the performance of the projects, not only during the initiation and construction stages but also for throughout whole concession period. Consequently, it prevented the projects from achieving overall success. Therefore, these projects cannot be considered to have good project governance because they failed to deal with most of the issues that have long-term implications on the projects, which are mainly caused by improper risk allocation.
His thesis abstract is copied and posted.
Abstract
Studies have shown that there are increasing trends of using Public-Private Partnership (PPP) procurement system in developing countries, including the Southeast Asia countries. In addition to this, the concept of good governance is also becoming a more perceived issue, especially in state-owned enterprises. With such development in the construction industry, it is important to understand what would be the best approach to govern (manage) a construction project, especially public infrastructure projects under PPP procurement system such as tollway projects, so that it may increase the project’s level of success.
Proper risk allocation is considered as one of the critical success factors to enhance the performance of PPP projects. However, parties that are involved in a PPP project typically have different perception of risks, risk allocation strategy as well as project success. Moreover, PPP projects are generally challenged with both project management problems, which require day-to-day supervision (short-term) as well as partnership problems that require more of a strategic approach (long-term). Due to this unique condition, PPP projects can be considered to have governance concerns in addition to management concerns because it deals with monitoring and overseeing strategic direction as well as strategic decision-making (Mueller, 1981).
This research is conducted to examine the influence of risk allocation towards project success. Since proper risk allocation is considered to be an essential part for attaining good project governance, therefore, it is assumed that the performance level of a project would increase due to the proper allocation thus generating a successful project. A good project governance concept was developed as a result of this research. Its four core principles, fairness, transparency, accountability and sustainability is used to assess the influence of the risk allocation arrangements that were applied towards the project success, especially in the long-term. Three tollway projects from Indonesia, Thailand and Vietnam were selected as case studies for this research. The research discovered that the government clearly has a different perception of risk and proper risk allocation compared to the private sector. However, these two stakeholders still lack the knowledge to the unique characteristics of PPP projects and fail to recognize the fact that this kind of projects has governance concerns in addition to management concerns. As a result of their short-term oriented point of view, the project’s long-term issues were often overlooked, affecting its overall success.
Thursday, 15 October 2009
Contract Clauses In EPC Oil And Gas Projects: A Case Study Of The Pearl Development Project
Recently, the oil and gas prices increase day by day which makes difficulties for developing countries like China, India and Vietnam to have a stable economic condition. The demand of oil and gas consumption all over the world is increasing, therefore the services required in developing new offshore facilities for oil and gas exploration also increases.
Developing the facilities for an offshore oil and gas field such as platform, Oil and Gas Companies (hereinafter referred as the Project Company) normally sign an EPC (Engineering, Procurement and Construction) contract with the EPC contractor. For this field of industry, there are only few numbers of EPC Contractors in the Asian South East countries who can execute a full EPC project, therefore the EPC contractor is normally selected and awarded thru the international bidding tender. The major factors for executing an EPC project are the contract clauses which are normally generally stipulated, with unclear understanding and interpretation when having disputes between the contractor and the project company. Therefore, studying the method in developing the effective, simplified and understandable clauses in the EPC contract is necessary. In this context, involved parties will understand and interpret clearly the contract negotiation prior to the EPC contract signing and commencement. The understandable and applicable contract clauses properly will help an EPC project to be executed smoothly and effectively.
In order to minimize the interfaces and risks between the separated contractor and the project company during executing an oil and gas project, the oil and gas companies normally prefer to award and sign an EPC contract with the EPC contractor, however this project delivery method will take a lot of time to make clarification, explanation and get the mutually agreement on the contract clauses between the contractor and the project company. The following problems are normally involved with the EPC contract clauses:
1. Take time to make the clarification and finalization before contract signing;
2. Wrong understanding and interpreting of stipulated clauses in the contract;
3. Conflict between contractor and the project company during project execution.
Mr. Nguyen Van Diep made a case study that focused on the issues related to EPC contract. His study objectives are to (1) study the advantages and disadvantages of EPC contract; (2) study the contract clauses to manage EPC oil and gas project; and (3) state the problems in the contract and propose the effective solutions to resolve the problems.
Mr. Diep outlined below the summary of effective clauses in oil and gas EPC project and lessons learned in the EPC contract and conclusion. He also gave some suggestions in applying the effective clauses that can be carried out to expand the understanding regarding the contracting arrangement that are used in EPC project in the Vietnam Oil and Gas industry.
1. Summary of contract clauses
These clauses are normally defined and given by the Project Company in order to protect the project objectives and the Project Company from any kind of risks that may happen. However from contractor’s point of view, it will be very risky if the Contractor complies with all these clauses without any exception or amendment. Therefore, providing the effective clauses based on the project documents and the Project Company’s interest shall be addressed during the bidding preparation and negotiation.
In summary, the effective clauses are the terms and conditions stipulated in the contract which shall be defined based on the interest and “win-win solution” basis for both the Project Company and the EPC Contractor.
2. Lessons learned in the EPC contract
EPC contract is quite complicated in terms of legal issue, therefore the Project Company and the EPC Contractor shall have enough experiences and knowledge about the nature of project facilities in order to avoid their faults and minimize the risks during contract execution. There are some key elements that the Contractor shall be needed to focus on the following issues below to implement in an EPC contract:
- Incorporate a more thorough requirement of using an earned value system with an objective measurement method. Try to use the Contractor’s standard system to its full extent and make sure it is an objective, not a subjective, measurement.
- Specify the types, formats, and frequency of reports in the contract to set the expectations and to avoid disturbing contractor’s standard practices
- Agree on the monthly percent completion of EPC early and compare them with other past EPC project experiences
- Continue the use of “monthly milestone events” evaluation and payment structure.
- Distinguish documents subject to the project company’s approval turnaround and documents subject to the project company’s review
- Assign the Project Company’s specific equipment and drawing numbers early
- Ask each discipline engineer to write and communicate the hottest items/concerns in their areas of responsibilities in the early stage of the Project
- Promote a proactive planning effort throughout the organization
- Devise a method to facilitate the early detection of potential cost and schedule deviation to minimize surprises
- Use variance analysis to concentrate the management efforts
- Ensure that milestone events and progress curves support and consistency each other
- Clarify the project company’s responsibilities and roles in construction, commissioning and hand-over.
- Identify commissioning system/events early.
For the project company to manage EPC lump sum contract, they also need to understand lump sum contract characteristics from the perspectives of both the contractor and the Project Company. EPC projects offer a mutually beneficial and exciting form of project delivery for both the project company and the contractor. However the EPC contract come many new risks that are often severe, due to the complex nature and high cost frequently associated with this type of project. Understanding the risks and some of the other unique characteristics of EPC contracting is critical to a successful project where both the project company and the contractor obtain the high rewards for the risk.
3. Conclusion for the advantages and disadvantages of EPC Contract
The advantage from the Project Company’s point of view of an EPC contract is that the contractor takes full responsibility in respect of the following:
- Cost of completion if it is a lump sum contract (subject to limited adjustments);
- The time for completion (subject to extensions of time);
- The quality of the design and work and achievement of performance guarantees (subject to any exclusion).
This means that the potential factors for multiple disputes is also avoided. However, the major disadvantage for the Project Company of the EPC contract is that the detailed design is the contractor's prerogative. Accordingly, in an EPC contract, great care needs to be taken that the Project Company specifies and defines the design parameters and deliverables (including consumption of utilities and emissions) so that the Project obtains a project of the required standard. This is usually required more than simply stipulating performance criteria in relation to the output of the project, and will include design-life and maintenance issues.
The results from his study have identified that the advantages and disadvantages of EPC contract as well as description of the application for some major clauses and finding the way how to minimize the risks for the Project by providing the effective amendment in consideration of the EPC Contractor’s point of view and the project objectives expected by the Project Company.
4. Conclusion for the contract clauses to manage EPC oil & gas project
The contract clauses are the most important tool to manage the EPC project. Therefore, the involved parties (i.e. Project Company, EPC Contractor) shall understand and know how to apply this tool effectively to manage the project in term of costly, timely and quality.
The contract clauses will be only effective when these are defined and stipulated in accordance with the project specification, documents and nature of work to be performed. Finally, these clauses also are established and finalized according to the mutually agreement between the Project Company and EPC Contractor.
5. Conclusion for resolving the problems in an EPC contract
The problems always happen in the construction project and it will be very difficult to avoid problems happening to the project; however the problems can be ignored or minimized by understanding clearly about the scope of application for each contract clause in term of legal aspects and project requirement. In addition, these problems can be foreseen and negotiable during the bidding phase prior to finalization of contract documents and these shall be controlled and monitored during all phases of project.
In conclusion, besides the other relationships between Project Company and EPC Contractor, the fair and effective contract clauses stipulated in the contract document are tool to resolve all problems in an EPC contract in term of contractual relationships between Project Company and EPC Contractor.
General Conclusion
In conclusion, the major clauses in the EPC contracts are not the same for all project, these also depend on each project scope of work, complexity, specification and documents, the project company’s requirement and expectation and mostly on the outcome of contract negotiation between the Project Company and the EPC Contractor. Therefore, the meaning and application of major clauses in the EPC contracts shall be different in term of the standard form contract i.e. FIDIC or other organizations as well as in each kind of industry i.e. construction, oil and gas, etc.
His thesis abstract is copied and posted.
ABSTRACT
Nowadays, the EPC contract is very wide applied in oil and gas industry in this Region for developing an oil & gas field project, this EPC contract is as a “fast track” tool to reduce the project duration. In order to execute this kind of contract successfully in term of the benefit for all involved parties, it is necessary to focus on some key factors that shall be affected on the project during execution phase i.e. contract terms and conditions clauses. Therefore, understanding and interpreting the application of term and condition clauses clearly in EPC contract will help the project to be executed and monitored by using the proper manning level in accordance with project specification and the project will be achieved its goals without the minimized disputations and conflicts happening.
This study will also discuss on the advantages and disadvantages of EPC contract from both Contractor and Project Company’s point of view and how to manage the EPC contract in accordance with term and condition clauses stipulated in the signed contract documents; how to resolve problems by understanding the contract clauses. However, the improvement of some major clauses are still needed in order to specify and define clearly the duties and responsibilities as well as obligations of involved parties to minimize the conflicts, interfaces, risks and disputes that can be happened during the project execution phase.
Developing the facilities for an offshore oil and gas field such as platform, Oil and Gas Companies (hereinafter referred as the Project Company) normally sign an EPC (Engineering, Procurement and Construction) contract with the EPC contractor. For this field of industry, there are only few numbers of EPC Contractors in the Asian South East countries who can execute a full EPC project, therefore the EPC contractor is normally selected and awarded thru the international bidding tender. The major factors for executing an EPC project are the contract clauses which are normally generally stipulated, with unclear understanding and interpretation when having disputes between the contractor and the project company. Therefore, studying the method in developing the effective, simplified and understandable clauses in the EPC contract is necessary. In this context, involved parties will understand and interpret clearly the contract negotiation prior to the EPC contract signing and commencement. The understandable and applicable contract clauses properly will help an EPC project to be executed smoothly and effectively.
In order to minimize the interfaces and risks between the separated contractor and the project company during executing an oil and gas project, the oil and gas companies normally prefer to award and sign an EPC contract with the EPC contractor, however this project delivery method will take a lot of time to make clarification, explanation and get the mutually agreement on the contract clauses between the contractor and the project company. The following problems are normally involved with the EPC contract clauses:
1. Take time to make the clarification and finalization before contract signing;
2. Wrong understanding and interpreting of stipulated clauses in the contract;
3. Conflict between contractor and the project company during project execution.
Mr. Nguyen Van Diep made a case study that focused on the issues related to EPC contract. His study objectives are to (1) study the advantages and disadvantages of EPC contract; (2) study the contract clauses to manage EPC oil and gas project; and (3) state the problems in the contract and propose the effective solutions to resolve the problems.
Mr. Diep outlined below the summary of effective clauses in oil and gas EPC project and lessons learned in the EPC contract and conclusion. He also gave some suggestions in applying the effective clauses that can be carried out to expand the understanding regarding the contracting arrangement that are used in EPC project in the Vietnam Oil and Gas industry.
1. Summary of contract clauses
These clauses are normally defined and given by the Project Company in order to protect the project objectives and the Project Company from any kind of risks that may happen. However from contractor’s point of view, it will be very risky if the Contractor complies with all these clauses without any exception or amendment. Therefore, providing the effective clauses based on the project documents and the Project Company’s interest shall be addressed during the bidding preparation and negotiation.
In summary, the effective clauses are the terms and conditions stipulated in the contract which shall be defined based on the interest and “win-win solution” basis for both the Project Company and the EPC Contractor.
2. Lessons learned in the EPC contract
EPC contract is quite complicated in terms of legal issue, therefore the Project Company and the EPC Contractor shall have enough experiences and knowledge about the nature of project facilities in order to avoid their faults and minimize the risks during contract execution. There are some key elements that the Contractor shall be needed to focus on the following issues below to implement in an EPC contract:
- Incorporate a more thorough requirement of using an earned value system with an objective measurement method. Try to use the Contractor’s standard system to its full extent and make sure it is an objective, not a subjective, measurement.
- Specify the types, formats, and frequency of reports in the contract to set the expectations and to avoid disturbing contractor’s standard practices
- Agree on the monthly percent completion of EPC early and compare them with other past EPC project experiences
- Continue the use of “monthly milestone events” evaluation and payment structure.
- Distinguish documents subject to the project company’s approval turnaround and documents subject to the project company’s review
- Assign the Project Company’s specific equipment and drawing numbers early
- Ask each discipline engineer to write and communicate the hottest items/concerns in their areas of responsibilities in the early stage of the Project
- Promote a proactive planning effort throughout the organization
- Devise a method to facilitate the early detection of potential cost and schedule deviation to minimize surprises
- Use variance analysis to concentrate the management efforts
- Ensure that milestone events and progress curves support and consistency each other
- Clarify the project company’s responsibilities and roles in construction, commissioning and hand-over.
- Identify commissioning system/events early.
For the project company to manage EPC lump sum contract, they also need to understand lump sum contract characteristics from the perspectives of both the contractor and the Project Company. EPC projects offer a mutually beneficial and exciting form of project delivery for both the project company and the contractor. However the EPC contract come many new risks that are often severe, due to the complex nature and high cost frequently associated with this type of project. Understanding the risks and some of the other unique characteristics of EPC contracting is critical to a successful project where both the project company and the contractor obtain the high rewards for the risk.
3. Conclusion for the advantages and disadvantages of EPC Contract
The advantage from the Project Company’s point of view of an EPC contract is that the contractor takes full responsibility in respect of the following:
- Cost of completion if it is a lump sum contract (subject to limited adjustments);
- The time for completion (subject to extensions of time);
- The quality of the design and work and achievement of performance guarantees (subject to any exclusion).
This means that the potential factors for multiple disputes is also avoided. However, the major disadvantage for the Project Company of the EPC contract is that the detailed design is the contractor's prerogative. Accordingly, in an EPC contract, great care needs to be taken that the Project Company specifies and defines the design parameters and deliverables (including consumption of utilities and emissions) so that the Project obtains a project of the required standard. This is usually required more than simply stipulating performance criteria in relation to the output of the project, and will include design-life and maintenance issues.
The results from his study have identified that the advantages and disadvantages of EPC contract as well as description of the application for some major clauses and finding the way how to minimize the risks for the Project by providing the effective amendment in consideration of the EPC Contractor’s point of view and the project objectives expected by the Project Company.
4. Conclusion for the contract clauses to manage EPC oil & gas project
The contract clauses are the most important tool to manage the EPC project. Therefore, the involved parties (i.e. Project Company, EPC Contractor) shall understand and know how to apply this tool effectively to manage the project in term of costly, timely and quality.
The contract clauses will be only effective when these are defined and stipulated in accordance with the project specification, documents and nature of work to be performed. Finally, these clauses also are established and finalized according to the mutually agreement between the Project Company and EPC Contractor.
5. Conclusion for resolving the problems in an EPC contract
The problems always happen in the construction project and it will be very difficult to avoid problems happening to the project; however the problems can be ignored or minimized by understanding clearly about the scope of application for each contract clause in term of legal aspects and project requirement. In addition, these problems can be foreseen and negotiable during the bidding phase prior to finalization of contract documents and these shall be controlled and monitored during all phases of project.
In conclusion, besides the other relationships between Project Company and EPC Contractor, the fair and effective contract clauses stipulated in the contract document are tool to resolve all problems in an EPC contract in term of contractual relationships between Project Company and EPC Contractor.
General Conclusion
In conclusion, the major clauses in the EPC contracts are not the same for all project, these also depend on each project scope of work, complexity, specification and documents, the project company’s requirement and expectation and mostly on the outcome of contract negotiation between the Project Company and the EPC Contractor. Therefore, the meaning and application of major clauses in the EPC contracts shall be different in term of the standard form contract i.e. FIDIC or other organizations as well as in each kind of industry i.e. construction, oil and gas, etc.
His thesis abstract is copied and posted.
ABSTRACT
Nowadays, the EPC contract is very wide applied in oil and gas industry in this Region for developing an oil & gas field project, this EPC contract is as a “fast track” tool to reduce the project duration. In order to execute this kind of contract successfully in term of the benefit for all involved parties, it is necessary to focus on some key factors that shall be affected on the project during execution phase i.e. contract terms and conditions clauses. Therefore, understanding and interpreting the application of term and condition clauses clearly in EPC contract will help the project to be executed and monitored by using the proper manning level in accordance with project specification and the project will be achieved its goals without the minimized disputations and conflicts happening.
This study will also discuss on the advantages and disadvantages of EPC contract from both Contractor and Project Company’s point of view and how to manage the EPC contract in accordance with term and condition clauses stipulated in the signed contract documents; how to resolve problems by understanding the contract clauses. However, the improvement of some major clauses are still needed in order to specify and define clearly the duties and responsibilities as well as obligations of involved parties to minimize the conflicts, interfaces, risks and disputes that can be happened during the project execution phase.
Monday, 12 October 2009
AIT-CV (Hanoi and Ho Chi Minh) August 2009 Intake for CEIM and MPM Field of Studies
The AIT-CV Hanoi branch accepted 13 students for August 2009 semester. Twelve (12) students are now enrolled in Professional Master in Project Management and one (1) MS student for Construction, Engineering and Infrastructure Management.
In AIT-CV Ho Chi Minh City Branch, twenty four (24) students are currently registered; four (4) MS students and one (1) Ph. D. for Construction, Engineering and Infrastructure Management, while nineteen (19) students for Professional Master in Project Management field of study.
Below is the complete list of AIT-CV students.
Hanoi Branch
No. Name Field
1. Mr. Tran Van Trung - MPM
2. Mr. Pham Nhu Dung - MPM
3. Ms. Le Ngoc Diep - MPM
4. Mr. Doan Thai Duong - MPM
5. Mr. Le Nam Binh - MPM
6. Mr. Pham Van Thanh - MPM
7. Mr. Le Van Thu - MPM
8. Mr. Nguyen Trung Kien - MPM
9. Mr. Nguyen Duy Duc Thu - MPM
10. Mr. Dinh Quang Hiep - MPM
11. Mr. Bui Duc Luong - MPM
12. Mr. Vu Van Cao - MPM
13. Ms. Nguyen Phung Hai - CEIM
Ho Chi Minh City Branch
No. Name Field
1. Mr. Nguyen Tuan Tu - CEIM
2. Mr. Bui Duy Khanh - CEIM
3. Mr. Nguyen Quoc Trung - CEIM
4. Mr. Duong Quang Minh - CEIM
5. Mr. Ha Cong Huy - Ph.D – CEIM
6. Mr. Bui Kim Binh - MPM
7. Mr. Nguyen Phan Hoa Binh - MPM
8. Mr. Truong Thai Binh - MPM
9. Mr. Le Minh Đang - MPM
10. Mr. Truong Ngoc Dung - MPM
11. Mr. Nguyen Duy Thien Giang - MPM
12. Ms. Trinh Thi Thu Ha - MPM
13. Mr. Bien Nam Hai - MPM
14. Mr. Vo Si Hoai - MPM
15. Mr. Bui Hai Nam - MPM
16. Mr. Ha Chi Nghia - MPM
17. Mr. Nguyen Van Nhan - MPM
18. Mr. Nguyen Chanh Phuong - MPM
19. Mr. Nguyen Le Thuan - MPM
20. Mr. Le Mien Thuy - MPM
21. Ms. Nguyen Thu Trang - MPM
22. Mr. Nguyen Duc Trong - MPM
23. Mr. Nguyen Quoc Viet - MPM
24. Ms. Nguyen Thi Vui - MPM
In AIT-CV Ho Chi Minh City Branch, twenty four (24) students are currently registered; four (4) MS students and one (1) Ph. D. for Construction, Engineering and Infrastructure Management, while nineteen (19) students for Professional Master in Project Management field of study.
Below is the complete list of AIT-CV students.
Hanoi Branch
No. Name Field
1. Mr. Tran Van Trung - MPM
2. Mr. Pham Nhu Dung - MPM
3. Ms. Le Ngoc Diep - MPM
4. Mr. Doan Thai Duong - MPM
5. Mr. Le Nam Binh - MPM
6. Mr. Pham Van Thanh - MPM
7. Mr. Le Van Thu - MPM
8. Mr. Nguyen Trung Kien - MPM
9. Mr. Nguyen Duy Duc Thu - MPM
10. Mr. Dinh Quang Hiep - MPM
11. Mr. Bui Duc Luong - MPM
12. Mr. Vu Van Cao - MPM
13. Ms. Nguyen Phung Hai - CEIM
Ho Chi Minh City Branch
No. Name Field
1. Mr. Nguyen Tuan Tu - CEIM
2. Mr. Bui Duy Khanh - CEIM
3. Mr. Nguyen Quoc Trung - CEIM
4. Mr. Duong Quang Minh - CEIM
5. Mr. Ha Cong Huy - Ph.D – CEIM
6. Mr. Bui Kim Binh - MPM
7. Mr. Nguyen Phan Hoa Binh - MPM
8. Mr. Truong Thai Binh - MPM
9. Mr. Le Minh Đang - MPM
10. Mr. Truong Ngoc Dung - MPM
11. Mr. Nguyen Duy Thien Giang - MPM
12. Ms. Trinh Thi Thu Ha - MPM
13. Mr. Bien Nam Hai - MPM
14. Mr. Vo Si Hoai - MPM
15. Mr. Bui Hai Nam - MPM
16. Mr. Ha Chi Nghia - MPM
17. Mr. Nguyen Van Nhan - MPM
18. Mr. Nguyen Chanh Phuong - MPM
19. Mr. Nguyen Le Thuan - MPM
20. Mr. Le Mien Thuy - MPM
21. Ms. Nguyen Thu Trang - MPM
22. Mr. Nguyen Duc Trong - MPM
23. Mr. Nguyen Quoc Viet - MPM
24. Ms. Nguyen Thi Vui - MPM
Wednesday, 7 October 2009
Public Private Partnerships for Low Income Housing Development in Cantho City, Vietnam
According to assessment of World Bank (2006), Vietnam has made remarkable progress in GDP and poverty reduction over the past decade. A critical factor in this success is significant government emphasis on investment, particularly in infrastructure. Since 1997, infrastructure investment has highly occupied GDP growth, boosting the economy’s productivity. Vietnam, together with Thailand and China, has been the leading countries in terms of infrastructure investment in East Asian region (ADB et al., 2006a).
As for the future investment, some sector plans and forecasts (transport sector, electricity sector, telecommunications sector, and water and sanitation sector) future annual infrastructure investment assuming to 11.4% of GDP (World Bank, 2006). At provincial level, public private financing schemes have been found to assist in urban development carried out by local government (Kyvelou & Karaiskou, 2006). Provincial governments have more jurisdictions in choosing their own projects within a given budget envelop (ADB et al., 2006b). Some local governments have created specialist government investment funds with significant roles in infrastructure financing.
Private investment in infrastructure at provincial level has been noticeable growth as the result of decentralization policy of central government in recent years. There are a number of projects funded successfully by local governments as Hanoi, Binhduong, Dongnai, and Hochiminh including two main areas privatization of existing assets and green-field investment in new assets.
In Cantho city, there are no actual model BOT, BTO, BT implemented under city’s government up till now. Cantho City has to face with pressing needs in developing infrastructure in general while state budget is limited. Government of Cantho City is seeking for the possible models with participation of private sector to reduce the burden of state budget and offer the housing for employees with affordable price. Therefore, Mr. Tran Quang Ninh made a case study and considered the following problems:
1) Limit of using public private partnership approach at local government level may cause difficulties for infrastructure development;
2) Lack of reference to public private partnerships models applied in other countries to create the efficient delivery infrastructure system;
3) Lack of public private partnerships model is to support as the referential procurement in development low income housing in Cantho city, Vietnam.
Mr. Nihn made a case study which main objectives are to: (1) develop public private partnerships models for low income housing development in Cantho city, Vietnam; (2) evaluate the applicability of developed models, and 3) propose the applicable public private partnerships model and its implementation guidelines for low income housing development in Cantho city, Vietnam.
His study revealed that in the context, the price of land is extremely expensive compared with average income of the majority of the people, which makes housing always bother them and also, a big concern for Vietnamese government now. Three local governments were appointed to implement the pilot projects and only Binhduong province’s project proposal was approved by the Prime Minister.
Public private partnerships approach has been applied for developing infrastructure in Vietnam in recent years. There are many projects implemented successfully under PPP, especially power sector and transport sector. According to experts (ADB, 2005), public private partnership approach has much potential to be applied widely through many fields in Vietnam.
Mr. Nihn proposed 3 PPP Models, its strength and weakness for low income housing in Cantho city. See table below:
And finally, the PPPs structure of applicable model he proposed can seen below: 
His thesis abstract is copied and posted.
ABSTRACT
Public private partnerships approach is considered efficient tool for infrastructure development in Vietnam recently. There are many implemented successfully under this approach, especially power sector and transport sector. The objective of this study is to apply the public private partnerships approach into low income housing development in Cantho city, Vietnam. The Vietnam legal framework, existing Public private partnerships models in various countries, and case study in Binhduong are investigated to develop the possible Public private partnerships models. And then, interviews stakeholders are conducted to evaluate applicability of developed models. The study proposes the applicable model to develop low income housing in Cantho city under public private partnerships concept. The proposed model is adequate to the real context of Cantho city. And this model possesses some improvements in comparison with the case study’s model, especially in financial aspect, it reduces around 24% state budget under the same assumptions of case study’s project. The proposed model either satisfies the low income people due to adequate price of service or reduces spending state budget and also uses more efficient subsidies through private participations and an adequate subsidy mechanism. The prominent performances of proposed model are specifically showed in two aspects sources of funds and government. That leads the applicability of proposed model.
As for the future investment, some sector plans and forecasts (transport sector, electricity sector, telecommunications sector, and water and sanitation sector) future annual infrastructure investment assuming to 11.4% of GDP (World Bank, 2006). At provincial level, public private financing schemes have been found to assist in urban development carried out by local government (Kyvelou & Karaiskou, 2006). Provincial governments have more jurisdictions in choosing their own projects within a given budget envelop (ADB et al., 2006b). Some local governments have created specialist government investment funds with significant roles in infrastructure financing.
Private investment in infrastructure at provincial level has been noticeable growth as the result of decentralization policy of central government in recent years. There are a number of projects funded successfully by local governments as Hanoi, Binhduong, Dongnai, and Hochiminh including two main areas privatization of existing assets and green-field investment in new assets.
In Cantho city, there are no actual model BOT, BTO, BT implemented under city’s government up till now. Cantho City has to face with pressing needs in developing infrastructure in general while state budget is limited. Government of Cantho City is seeking for the possible models with participation of private sector to reduce the burden of state budget and offer the housing for employees with affordable price. Therefore, Mr. Tran Quang Ninh made a case study and considered the following problems:
1) Limit of using public private partnership approach at local government level may cause difficulties for infrastructure development;
2) Lack of reference to public private partnerships models applied in other countries to create the efficient delivery infrastructure system;
3) Lack of public private partnerships model is to support as the referential procurement in development low income housing in Cantho city, Vietnam.
Mr. Nihn made a case study which main objectives are to: (1) develop public private partnerships models for low income housing development in Cantho city, Vietnam; (2) evaluate the applicability of developed models, and 3) propose the applicable public private partnerships model and its implementation guidelines for low income housing development in Cantho city, Vietnam.
His study revealed that in the context, the price of land is extremely expensive compared with average income of the majority of the people, which makes housing always bother them and also, a big concern for Vietnamese government now. Three local governments were appointed to implement the pilot projects and only Binhduong province’s project proposal was approved by the Prime Minister.
Public private partnerships approach has been applied for developing infrastructure in Vietnam in recent years. There are many projects implemented successfully under PPP, especially power sector and transport sector. According to experts (ADB, 2005), public private partnership approach has much potential to be applied widely through many fields in Vietnam.
Mr. Nihn proposed 3 PPP Models, its strength and weakness for low income housing in Cantho city. See table below:
And finally, the PPPs structure of applicable model he proposed can seen below:
His thesis abstract is copied and posted.
ABSTRACT
Public private partnerships approach is considered efficient tool for infrastructure development in Vietnam recently. There are many implemented successfully under this approach, especially power sector and transport sector. The objective of this study is to apply the public private partnerships approach into low income housing development in Cantho city, Vietnam. The Vietnam legal framework, existing Public private partnerships models in various countries, and case study in Binhduong are investigated to develop the possible Public private partnerships models. And then, interviews stakeholders are conducted to evaluate applicability of developed models. The study proposes the applicable model to develop low income housing in Cantho city under public private partnerships concept. The proposed model is adequate to the real context of Cantho city. And this model possesses some improvements in comparison with the case study’s model, especially in financial aspect, it reduces around 24% state budget under the same assumptions of case study’s project. The proposed model either satisfies the low income people due to adequate price of service or reduces spending state budget and also uses more efficient subsidies through private participations and an adequate subsidy mechanism. The prominent performances of proposed model are specifically showed in two aspects sources of funds and government. That leads the applicability of proposed model.
Tuesday, 6 October 2009
Developer’s Investment Decision Making on Real Estate Development:
In Thailand, most of real estate investors depends their decision on the overall economic situation resulting to property development industry downsizing since 2005. This phenomenon directly affects the consumer’s confidence, and has direct coloration with economic situation. While housing demand was reducing gradually, housing supply was increasing at the same time. And some investors therefore could not gain revenues base on their expectation.
For real estate project, it is impossible to make investment decision which aim is to achieve the business goal without understanding the whole process of investment and the factors which influence every state of decision making process.
Ms. Rahongsree Prayongrut made a case study to investigate the investment decision making process of real estate project and to identify the key factors which influence every stage. In order to accomplish these primary objectives, she outlined three sub-objectives which are to (1) develop model of investment decision making process of real estate project and identifying factors which influence investment decision in each stage; (2) investigate the practice of developer’s investment decision making base upon developed model, through finding out significant factors affecting decision making process, and their behaviors in facing fluctuation and alter of factors in investment decision making process for real estate project; and (3) propose recommendations to developers in order to improve practical management decisions by using the model and significant factors.
Her study revealed that the residential property project investment decision is divided into two directions; a) investment decision driven by supply, and b) investment decision driven by demand. Each direction has four main decisions such as location, target group, design and finance. In the investment decision driven by supply, it started with land acquisition while investment decision driven by demand is started with identify target group. Some processes and key influence decision are different between two directions.
Her study also revealed that there are many internal and external factors which induce developer to follow each direction. These are:
1. The reasons for choosing any of investment direction
Generally investment decision making process driven by supply is long process of development and more in land bank strategy. On the other hand, investment decision making process driven by demand is raced against time and several competitors because of attractive existing demand. The developer can choose any investment direction, and the decision will depend on internal factors (investment strategy and financial health) and external factors (land price, economic situation, and property market trend). Land price and property market trend is one of the most important considerations of decision making process.
2. Residential investment decision driven by supply: land acquisition and target group selection.
For the acquisition of land through legal process, the developers should consider several factors such as land price, right of land, accessibility, transportation, the distant form CBD, amenity, facility, infrastructure, government development plan obligation, expropriate, physical feature of land, elevation, physical constrain, and previous building.
For identifying the target group, there are several factors which developers should consider such as housing demand, customer’ confidence, housing stock, demographic, housing supply, housing loan, housing affordability, average income, and government financial and housing policy, competitor’s price, quality and brand royalty for target group consideration.
3. Residential investment decision driven by demand: target group selection, land acquisition, and financial decision. To identify and analyze the target group, the developers are advised to do the following steps:
a) Evaluate the real estate market trend, housing demand and supply to find the existing demand in terms of number, income, characteristic, and affordability
b) Analyze whether the government policy in terms of housing development and finance is supportive or not.
c) Analyze the competitors in terms of their target group and location. The market segmentation is evaluated.
For site selection, the developers must identify where the existing demand and project’s competitors are. They need to evaluate the site in terms of transportation, accessibility, facility and amenity, physical feature and land price, and for the legal requirements, analysis of right of land and other legal title of land.
4. Design: The similar of two investment directions, the investment decision driven by supply and demand. Below are some points for developers to follow:
a) Start with developing detail financial plan and feasibility analysis in terms of cash flow statement, budget, unit price, discount rate, mark-up, break event point, D/E, and capital arrangement. Sensitivity analysis is achieved afterward.
b) Set up the construction cost following financial plan from financial activities,
c) Analyze customer in terms of customers’ needs, lift style and family size and then they identify selling point.
d) Point out the legal and environmental requirement and constrain if any, then carried out the project design and product design subsequently, and
e) Finally, conduct master plan, payment condition, and contract condition with other stakeholders and negotiation.
5. The difference between financial methods. Generally, investment decision making process driven by supply uses long term loan or developer’s equity for land acquisition, contrary to the process driven by demand which uses short term finance for projects.
Her thesis abstract is copied and posted.
ABSTRACT
Currently, economic and financial are varying over the time among increase in business competitors. Therefore, it encourages the higher investment risks especially in real estate industry because of its nature. The study focused on residential investment which is the major part of real estate industry. The study aims to investigate investment decision making process of real estate project and identifying factors which influence investment decision and recommend the effective operational method for making residential investment decisions.
The study uses case study as a research design. The processes begin with factor identification which consists of preliminary factor and verification of the factors. It is the continued with the data collection using the abovementioned factors to design the case study question. Data analysis is conducted toward the evidences using explanation building method in which all the important evidences are revealed and explained.
The result from project case studies indicated, that residential property project investment decision is divided into two directions. There are investment decisions driven by supply and demand. Any of investment direction, there are four main decisions which are location, target group, design and finance. The framework shows the how to choose the investment direction and how each investment direction are performed.
For real estate project, it is impossible to make investment decision which aim is to achieve the business goal without understanding the whole process of investment and the factors which influence every state of decision making process.
Ms. Rahongsree Prayongrut made a case study to investigate the investment decision making process of real estate project and to identify the key factors which influence every stage. In order to accomplish these primary objectives, she outlined three sub-objectives which are to (1) develop model of investment decision making process of real estate project and identifying factors which influence investment decision in each stage; (2) investigate the practice of developer’s investment decision making base upon developed model, through finding out significant factors affecting decision making process, and their behaviors in facing fluctuation and alter of factors in investment decision making process for real estate project; and (3) propose recommendations to developers in order to improve practical management decisions by using the model and significant factors.
Her study revealed that the residential property project investment decision is divided into two directions; a) investment decision driven by supply, and b) investment decision driven by demand. Each direction has four main decisions such as location, target group, design and finance. In the investment decision driven by supply, it started with land acquisition while investment decision driven by demand is started with identify target group. Some processes and key influence decision are different between two directions.
Her study also revealed that there are many internal and external factors which induce developer to follow each direction. These are:
1. The reasons for choosing any of investment direction
Generally investment decision making process driven by supply is long process of development and more in land bank strategy. On the other hand, investment decision making process driven by demand is raced against time and several competitors because of attractive existing demand. The developer can choose any investment direction, and the decision will depend on internal factors (investment strategy and financial health) and external factors (land price, economic situation, and property market trend). Land price and property market trend is one of the most important considerations of decision making process.
2. Residential investment decision driven by supply: land acquisition and target group selection.
For the acquisition of land through legal process, the developers should consider several factors such as land price, right of land, accessibility, transportation, the distant form CBD, amenity, facility, infrastructure, government development plan obligation, expropriate, physical feature of land, elevation, physical constrain, and previous building.
For identifying the target group, there are several factors which developers should consider such as housing demand, customer’ confidence, housing stock, demographic, housing supply, housing loan, housing affordability, average income, and government financial and housing policy, competitor’s price, quality and brand royalty for target group consideration.
3. Residential investment decision driven by demand: target group selection, land acquisition, and financial decision. To identify and analyze the target group, the developers are advised to do the following steps:
a) Evaluate the real estate market trend, housing demand and supply to find the existing demand in terms of number, income, characteristic, and affordability
b) Analyze whether the government policy in terms of housing development and finance is supportive or not.
c) Analyze the competitors in terms of their target group and location. The market segmentation is evaluated.
For site selection, the developers must identify where the existing demand and project’s competitors are. They need to evaluate the site in terms of transportation, accessibility, facility and amenity, physical feature and land price, and for the legal requirements, analysis of right of land and other legal title of land.
4. Design: The similar of two investment directions, the investment decision driven by supply and demand. Below are some points for developers to follow:
a) Start with developing detail financial plan and feasibility analysis in terms of cash flow statement, budget, unit price, discount rate, mark-up, break event point, D/E, and capital arrangement. Sensitivity analysis is achieved afterward.
b) Set up the construction cost following financial plan from financial activities,
c) Analyze customer in terms of customers’ needs, lift style and family size and then they identify selling point.
d) Point out the legal and environmental requirement and constrain if any, then carried out the project design and product design subsequently, and
e) Finally, conduct master plan, payment condition, and contract condition with other stakeholders and negotiation.
5. The difference between financial methods. Generally, investment decision making process driven by supply uses long term loan or developer’s equity for land acquisition, contrary to the process driven by demand which uses short term finance for projects.
Her thesis abstract is copied and posted.
ABSTRACT
Currently, economic and financial are varying over the time among increase in business competitors. Therefore, it encourages the higher investment risks especially in real estate industry because of its nature. The study focused on residential investment which is the major part of real estate industry. The study aims to investigate investment decision making process of real estate project and identifying factors which influence investment decision and recommend the effective operational method for making residential investment decisions.
The study uses case study as a research design. The processes begin with factor identification which consists of preliminary factor and verification of the factors. It is the continued with the data collection using the abovementioned factors to design the case study question. Data analysis is conducted toward the evidences using explanation building method in which all the important evidences are revealed and explained.
The result from project case studies indicated, that residential property project investment decision is divided into two directions. There are investment decisions driven by supply and demand. Any of investment direction, there are four main decisions which are location, target group, design and finance. The framework shows the how to choose the investment direction and how each investment direction are performed.
Subscribe to:
Posts (Atom)