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Howrey LLP
The selection of a project delivery method is driven by cost, quality, time and risk management. The risks faced by investors on large infrastructure projects in Asia and Southeast Asia are legion. They can be anticipated and they can be addressed, but while one can diminish risk or allocate risk, one cannot control all risk. The selection of project delivery method should be influenced by the amount and nature of the risks anticipated.
Project Options
The current project options include:
|  | Design/Bid/Build (DBB).
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| | Design/Build (DB).
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| | Design/Build/Operate (DBO).
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| | Design/Build/Operate/Maintain (DBOM).
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| | Design/Build/Finance/Operate (DBFO).
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| | Build Operate Transfer (BOT).
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| | Build Own Operate Transfer (BOOT).
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| | Construction Manager at Risk.
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| | Construction Manager at Fee.
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| | EPC or Turnkey.
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Variations of the foregoing are used on projects, and different delivery modes are used for differing project phases. For example, a project might be broken into three phases when the owner is mostly concerned with having input in the first phase of design but would prefer less involvement in later phases.
DBB is the more traditional project delivery method, but because of experience with project delays and cost overruns, it now is less favored. DB, DBOM and DBFO increasingly are being seen in water, wastewater, airport, government facility, rail and energy/power projects.
The owner's choice of project delivery method must be individual and should vary depending on the host country, the nature of the project (type and size), and the time and cost anticipated as well as the likelihood of changes to the project.
The type of owner also plays a role: Does the owner have significant in-house construction management capability, what are the financing terms for the project, how soon does the project need to be completed, and how much input does the owner want to have in the design phase.
Project Risks
Traditionally, project risks can be categorized as follows:
| | Social/Environmental Risk.
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| | Host Country Risk.
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| | Economic/Financial Risk.
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| | Technical Risk.
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Social and environmental risks often are discounted and not seriously considered before commencement of a project. Large projects sometimes result in destruction of ecosystems, displacement of towns and people, loss of livelihoods and jobs, and pollution of air, water and land. Construction of a dam for hydroelectric power is one example of a project likely to encounter social and environmental risk. Mitigating these risks would tend toward a project delivery method that had greater owner involvement in the design phase, given that the owner or in-country partner will be more sensitive to these issues and in a better position to address them before they become a problem for the project as a whole.
Host country risk is well-documented and often is a preliminary project consideration. Government instability, political violence, terrorist activity and the risk of nationalization of assets all are significant issues for investors. The Dabhol power project in India was a prime example of a project that fell victim to change in the political environment. Regulatory regimes also influence risk. The absence of certainty for utility rates and ultimate return on investment also play a role. China's energy sector currently struggles with this hindrance to foreign investment. In tandem with this is the lack of a well-established legal framework in many countries and varying legal frameworks from country to country - for example, the law governing BOT projects may differ from country to country. In certain countries, owners may find it difficult to find a reliable BOOT contractor or the regulatory regime may make BOOT-type ownership and operation impossible.
Economic and financial risks also influence the choice of project delivery and the project documents. Certainly currency fluctuation plays a role in determining what portion of the project can be contracted for performance off-shore. In the power sector, power purchase agreements frequently are in the currency of the host country while financing is through international bodies utilizing foreign currency. Thus, currency fluctuation will impact return. Project financing also will differ depending on the amount of risk the investor deems acceptable. DBFO may be attractive to in-country public and private owners while inbound contractors may find the financing too risky or too difficult to obtain.
Technical risk is the risk associated with physical construction, operation and maintenance of the facility. This risk often is escalated by lack of in-country experience. Projects delays -- associated with not fully knowing local requirements for safety and quality procedures, lack of familiarity with project procurement systems, lack of skilled labor, lack of building materials and failure to fully anticipate issues such as customs delays -- create risk to a project. Delays and disruption due to design changes, non-performance of subcontractors or suppliers, and other execution problems on the job all can lead to disputes with owners, subcontractors and vendors. Some of this risk can be overcome through in-country partnering and strong subcontracting, but often that network does not yet exist for the first foray in that particular country. Design/build with the right partner may be ideal to address some of these risks.
Conclusion
Regardless of the delivery method, participants must have in-country experience and a network of reliable contacts and subcontractors. In my experience on international claims, I see that problems on projects, particularly technical problems in construction, almost always are the product of naiveté and lack of information and/or experience with that type of project in that country. Smart in-country partnering will lead to successful projects under most project delivery methods.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2006 Howrey LLP
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