Challenges in Procurement and Contracting

7/28/2019 Challenges in Procurement and Contracting

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Seminar on Challenges in Procurement andContracting in Large Hydropower Projects(Wednesday June 13, 2012 - IFC Auditorium, Washington DC)

Session 1

The Vision of a ConsultantJean BINQUET , Tractebel Engineering FranceCoyne et Bellier
http://meteor.cobnet.suez/images/viewer/viewer.html


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Challenges in Procurement

Introduction General

Contracting the construction of a large HPP isalways challenging for all stakeholders (theOwner, Lenders, and the Contractors):

- Projects arebigwith respect to the Assets of theOwner and balance sheets of the stakeholders

- Projects are oftenvitalfor the national economy

- Projects areriskyby nature (environment,socio-economy, physical data, etc.)

Challenges in Procurement/Contracting?

- Procurement/Contracting proper, and/or- Steps prior to the Procurement leading to the

Projects Implementation


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What is a successful Contracting?performance, time and cost as close as possibleto the expected values

The success of a Project is the success of allstakeholders and not of one against theothers:

-Same boat concept

-Solution Finding usingValue Engineering andOpen Mind Approach under the contract

provisions- Being lucid when serious difficulties arise and

evaluate with fairness


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Two Points:

- EPC or not EPC

- Steps leading to the Procurement: as important oreven more important than the Procurement itselfto; the Ethiopian Way


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EPC or Not EPC

First large hydropower projects implementationusing EPC Contract started in the Nineties

Linked to the development of the Private Sectorin hydropower generation

Now current practice for hydropower projectsimplementation for both Public & Private Sectors

Our firm involved in more than 20 large projectsaround the world: Turkey, Uganda, Gabon,

Ghana, Ethiopia, Brazil, Argentine, India,Nigeria, Ecuador, Peru, etc. with a total installedcapacity of around 17,000 MW


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EPC or not EPC

Extensively used by Private Developersin regions where IPPs are very active(imposed by senior debts lenders): LatinAmerica, Turkey, India, Laos, etc.

Starting to be used in some othercountries by Public Utilities especially inAfrica (e.g. Ethiopia, Gabon, Ghana, Senegal,Cameroun, Nigeria, etc.) but also in LatinAmerica (Ecuador, Venezuela), etc.


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EPC or not EPC

Manufacturing a product with a givenPerformance, in a given Time forCompletion and for a fixed Price

This is, in principle:

- Simplifying the job of the Owner (no design, no coordination) and

- Reducing (eliminating) most of the classical Employers riskslinked to the Construction (design, local physical data likehydrology, geology, topography, gaps between various types ofworks, etc.) transferred to and to be borne by the Contractor

Are all hydropower projects suitable forEPC type Contracts where ConstructionRisks are transferred to the Contractor?


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EPC or not EPC

The Answer is NO:

- There are projects where it is not possible for several reasons tohave an understanding of the site conditions (complex geologyand high rock cover above headrace tunnel for example):

The possible unforeseen cannot be assessed/estimated and

priced even in an approximate manner the real/actual unforeseen can only possibly be borne by large

Utilities who are able to mutualize the risks with other projectswith lower risks

- On the contrary there are projects where it is possible tounderstand the site conditions and to assess the possible

unforeseen:

This assessment can be discussed between the Owner and Employerand risks fairly shared.

The EPC Contract Price will, as a result, be lower and the constructionwill be successful


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EPC or not EPC

As a consequence, dont use EPC typeContracts in exceptional risks situation (nounderstanding of the site conditions we haveno idea of the possible unforeseen)

In other situations elaborate a soundsharing mechanism of the risks between thevarious stakeholders taking into account theircapacity to absorb them


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Example: 390 MW Dul Hasti Project in India

Turnkey Contract:

- 70 m high dam, 10 km long Headrace straight alignment Tunnel(8.0 m dia.) and underground powerhouse complex

- 5 years construction time

- Fixed price except in fossil valley (300 m long)

Reality:

- Graben much wider and deeper than Fossil Valley and filled withsilty sand with 400 m of water head above the tunnel; crossingconsidered as almost not feasible

- Geology generally much more complex than anticipated

- Loop alignment invented for the tunnel to avoid graben

- Serious conflicts between Owner and Contractor led to thechange of the Civil Works member

- Time for Construction of 15 years and final cost several timesthe original EPC Contract Price


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Example: 390 MW Dul Hasti Project in India

Conclusions:

- Exceptional case in termsof geological conditions,long tunnel with high rockcover (more than 1,500 m),no intermediate window,

very active seismo-tectonicarea, etc.

- Overall failure regardingthe fixed Time forCompletion and Cost

- Actual Time for Completionand Cost more than 3 times

the original

- EPC type contract is one ofthe major reason of thisFailure


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Example: 672 MW Birecik Project in Turkey

Turnkey Contract:

- 70 m high dam 2.5 km long, 6 Units dam toepowerhouse, 18,000 m3/s gated spillway

- Alluvial deposits over limestone rock foundationwith heavy grouting works

- Thorough joint preparation of the design betweenOwners Engineer and Contractor before Contractconclusion

- 5 years Construction Time

Reality:

- Some adverse geological conditions in some areascompensated by better conditions in other areas.No impact on cost and time

- 5 years Construction Time


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Example: 672 MW Birecik Project in Turkey

Conclusions:

- Simple overallgeological features

- Well preparedContract

- EPC type contractwas a success (time,performance andcost respected)

- EPC type of Contractwell adapted to this

type of Project andcontext


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Example: 450 MW Cana Brava Project in Brazil

Simple overall geologicalfeatures

Well prepared Contract

EPC type contract was a

success (commissioningahead of schedule,performance and costrespected)

EPC type of Contract welladapted to this type ofProject and context


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Examples: ongoing Projects in Ethiopia, Nigeria, Ecuador, etc.

Turnkey Contracts

- FIDIC Silver (1,870 MW Gibe III in Ethiopia, 700 MWZungeru in Nigeria, etc.) or other specially developedcontract (1,500 MW Coca Codo Sinclair in Ecuador)

- Sufficiency of Tender

- Sufficiency of the Contract Price

- No adjustment of the Contract Price and Time for Completionin case of unforeseen difficulties (Fidic 4.12)

- Some exceptions introduced which give the right to anExtension of the Time for Completion without any costcompensation

- Exceptions may include special geological or geotechnicalfeatures like low mechanical properties materials, wateringress, heavily fractured rocks in faults with high waterheads, high at-rest initial state of stress, etc.


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Steps prior to the Procurement: the Ethiopian Way

Ordinary Way:- Master Planning, Prefeasibility Studies, Feasibility, EIS, EIA,

Financing Preparation, Final Design and Tendering for Construction,Selection of Consultants at each stage, etc..

- 10 to 20 years are necessary to achieve this process completely andreach the first m3 of excavation when it works; sometimes it doesnt

works

The Ethiopian Way:- Select a Strategic Partner who prepares the ground (investigations,

designs, etc.) leading to an EPC Contract

- Engage the EPC Contract with partial financing

- Once the Project is engaged, complementary financing is found andproject can be completed

- Less than one year was required to start Gilgel Gibe II, Beles, GibeIII and Grand Renaissance (9,000 MW in total)

- GGII and Beles (1,000 MW) in operation and Gibe III (1,870 MW)should be completed in the next 1.5 year.


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Concluding Remarks

We have known successes and failures withEPC Contracts for Hydropower Projects

Success occurs when general physicalconditions are simple and/or understood

If it is not the case special risks allocation tobe introduced to limit the risks to be borne bythe Contractor in case of encounteringspecially adverse unforeseen conditions

Projects with long tunnels, high rock cover, no

intermediate windows and in very activeseismo-tectonic areas are not recommendedfor EPC Contracts (without risks allocation)


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Concluding Remarks

Steps prior to the Procurement Process aretedious and extremely long (not adapted to thepresent needs of development)

Often the process leads to a deadlock

The Ethiopian Way which requires a strongpolitical willingness may not be ideal butproved efficient and deserves attention andconsideration

There is the need offast track approaches

for hydropower projects in emerging economycountries


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Thank you for your attention

Documents

Challenges in Procurement and Contracting