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© 2014 Fluor Corporation. All Rights Reserved.
** Company Confidential **
The Challenges of
International Development
and ...
** Company Confidential **
** Company Confidential **
Types of Risks
 Known Knowns
 Known Unknowns
 Unknown Knowns
 Unknown Unknowns
** Company Confidential **
… And A Challenging Future
 Simple → Complex
 Static → Dynamic
 Certain → Uncertain
 Capita...
** Company Confidential **
Challenge of International Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . ...
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Economic Risks
 Market and Revenue
 Finance Risks
 Cost Risks
– Construction Phase
– Operati...
** Company Confidential **
Market and Revenue
 Market Development Slower Than Projected
– Slower General Economic Growth
...
** Company Confidential **
Finance Risks
 Cost of Money
– Interest Rate Risk
– Inflation/Deflation Risks
– “Credit Risk”
...
** Company Confidential **
Cost Risk – Construction Phase
 Scope
 Schedule
 Budget
 Terms & Conditions
 Quality
 Leg...
** Company Confidential **
Scope
 Poorly Defined or Incomplete
 Interfaces Not Well Defined
 Referenced Standards
– Not...
** Company Confidential **
Schedule
 Labor Volatility/Work Stoppages
 Changed Work Rules
 Labor Productivity
 Timeline...
** Company Confidential **
Budget
 Labor Cost Growth
– Local Labor
– TCN
– Expatriate Premium
 Materials/Supplies Cost
G...
** Company Confidential **
Terms & Conditions
 Expropriation
– Land
– Equipment & Materials
 Change in Law
– Corporate
–...
** Company Confidential **
Terms & Conditions
 Payments
– Signature Bonuses
– Mobilization
– Retention
– Progress or Mile...
** Company Confidential **
Quality
 Poor Workmanship
 Inadequate QA/QC
 Poorly Defined Performance/ Acceptance Standard...
** Company Confidential **
Cost Risk – Operations Phase
 Service Scope
 Performance Standards
 Operating Costs
 Change...
** Company Confidential **
Service Scope
 Battery Limits of Project/Scope
– Other (Free) Services to be Provided
– Requir...
** Company Confidential **
Performance Standards
 Reliability
– Tolerance Limits and Measurement
 Availability
– Schedul...
** Company Confidential **
Operating Costs
 Labor Cost
– Wage Growth
– Benefits
– Mandates
– Pension
– Termination Costs
...
** Company Confidential **
Changes in External Environment
 Defaults
– Government
– Concession Company
– Prime Contractor...
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Social Risks
Culture
Ethics
** Company Confidential **
Culture
 Sense of History
 Cultural Imperatives
– Work/Life Balance
– Risk Aversion
– Individ...
** Company Confidential **
Culture
 Norms
– Age
– Gender
– Social Stratification
– Food
– Sex
– Hygiene
– Authority
– Gen...
** Company Confidential **
Culture
 Language and Meaning
 Cross-cultural Issues
 Perception of Time
 Decision Making F...
** Company Confidential **
Ethics
 Cultural “Norms”
 OECD vs. FCPA
– Facilitation Payments
 Bribery
– By Your Staff
– O...
** Company Confidential **
Ethics
 Not Just Agents –
What Are Your Partners Doing?
** Company Confidential **
Ethics
 Tips
 Political Contributions
“Publish What You Pay”
** Company Confidential **
Ethics
Perception of Engineering and
Construction Industry
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Political Risks
 Change of Government
– Party
– Revolution
 Sequestration
 Exclusivity
 Cha...
** Company Confidential **
Political Risks
 Adverse Government
Action/Inaction
 Regime Change
– Political Stability Proc...
** Company Confidential **
Political Risks
 Structure of Project Securities
 Availability of Securities Market
 Insolve...
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Religious Risks
 Tension & Intolerance
– Christian, Jew, Muslim, Hindu,
Native Peoples, etc.
...
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Intellectual/Idea Risks
 Corporate Social Responsibility
– Child Labor
– Indigenous Peoples
– ...
** Company Confidential **
Intellectual/Idea Risks
 Evolving Political Form
– Socialism with Chinese Characteristics
– Mi...
** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or...
** Company Confidential **
Technological Risk
 New Technology
 New Applications
 Scale
 Capacity Building
 Intellectu...
** Company Confidential **
New Technology Risk
 Time to Deployment
 Learning Curve
– Failure Rates
– System Environment
...
** Company Confidential **
New Applications
 Learning Curve
 Environmental Factor Effects
 Transferability of Lessons L...
** Company Confidential **
Scale
 Scalability
 Replicability
 External Resource Requirements
 Unknown Unknowns Growth
** Company Confidential **
Capacity Building
 Institutional
– Aging
– Laws & Regulations
– Due Process
 Management
 Spe...
** Company Confidential **
Intellectual Property
• Patent
• Trademark
• Copyright
• Usage
• Royalty & License
• Counterfei...
** Company Confidential **
Challenge of Int’l. Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . Underst...
** Company Confidential **
Potential Risk Managers
 Government
 Sponsors
 Concession Company
 Contractor
 Engineers
...
** Company Confidential **
Potential “Risk Managers”
 Government
– Multilateral/Bilateral
Agreements
– International Aid ...
** Company Confidential **
Challenge of Int’l. Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . Underst...
** Company Confidential **
Manage Risks
 Right People
 Right Place
 Right Time
 Right Approach
 Right Attitude
** Company Confidential **
Manage Risks
 A High Risk of Exposure in:
– Contractual Matters
– Financial Matters
– Professi...
** Company Confidential **
Should-You-Do-Business-Here Test
 Corporate Political Contributions
– “Encouraged” and “Active...
** Company Confidential **
Should-You-Do-Business-Here Test
 High Level of Government Sector and Trade Debt is
De-Facto F...
** Company Confidential **
Should-You-Do-Business-Here Test
 Tax Environment Shows High Probability of Increased
Volatili...
** Company Confidential **
Should You Do Business Here?
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International development and construction projects columbia university

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On April 22, 2014 I had the opportunity to give a lecture to graduate construction management students at Columbia University. The focus of the talk was on international development and construction projects, looking at these projects very much from a risk perspective. While the slides do not provide direct links to some of my other papers I hope some on the connections are obvious.

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International development and construction projects columbia university

  1. 1. © 2014 Fluor Corporation. All Rights Reserved. ** Company Confidential ** The Challenges of International Development and Construction Projects by Bob Prieto Fluor Columbia University April 22, 2014
  2. 2. ** Company Confidential **
  3. 3. ** Company Confidential ** Types of Risks  Known Knowns  Known Unknowns  Unknown Knowns  Unknown Unknowns
  4. 4. ** Company Confidential ** … And A Challenging Future  Simple → Complex  Static → Dynamic  Certain → Uncertain  Capital Efficiency → Life Cycle Effectiveness  Build for decades → Build for generations  The Bottom Line → Triple Bottom Line  Safety Focus → Hazard Avoided  Business Case → Scenario Based Resiliency
  5. 5. ** Company Confidential ** Challenge of International Projects  Understand Risks  Allocate Risks  Manage Risks . . . . Understand That They Change
  6. 6. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  7. 7. ** Company Confidential ** Economic Risks  Market and Revenue  Finance Risks  Cost Risks – Construction Phase – Operation Phase CostofYourMistakes Level of Overconfidence
  8. 8. ** Company Confidential ** Market and Revenue  Market Development Slower Than Projected – Slower General Economic Growth – Changed Priorities – Longer Gestation Time  Market Rates Lower Than Projected – Higher Than Anticipated Price Sensitivity – Increased Competition – Free Government Alternate – Price Caps  Reduced Market Share – Delayed Project Completion – Increased Competition  Synergistic Opportunities Fail to Emerge – Hope is Not a Strategy
  9. 9. ** Company Confidential ** Finance Risks  Cost of Money – Interest Rate Risk – Inflation/Deflation Risks – “Credit Risk”  Cost of Currency – Absence of Long Term Local Financing • F/X Risk on Construction Financing – Volatility • F/X Risk on Hedging Annual Profits • Absence of Hedge/Convertibility
  10. 10. ** Company Confidential ** Cost Risk – Construction Phase  Scope  Schedule  Budget  Terms & Conditions  Quality  Legal – Know Who Has the Authority to Approve
  11. 11. ** Company Confidential ** Scope  Poorly Defined or Incomplete  Interfaces Not Well Defined  Referenced Standards – Not Well Defined – Not Fixed in Time  Responsibilities Not Defined – Government – Owner/Concession Company – Prime Contractor  Limitations Due to Changed Conditions Not Well Defined – Ouch !
  12. 12. ** Company Confidential ** Schedule  Labor Volatility/Work Stoppages  Changed Work Rules  Labor Productivity  Timeliness of Inputs/Approvals/Permits  Linkage to Timely Payments  Weather and Environmental  Government Action  NGO Action
  13. 13. ** Company Confidential ** Budget  Labor Cost Growth – Local Labor – TCN – Expatriate Premium  Materials/Supplies Cost Growth – Availability – Supply Chain Costs • Energy • Security • Customs  Inefficiency – Management – Labor Skills – Means & Methods  Additional Taxes and Fees – Government Charges – Royalties – Other Small Charges  Increased Financing Costs
  14. 14. ** Company Confidential ** Terms & Conditions  Expropriation – Land – Equipment & Materials  Change in Law – Corporate – Tax – Staffing/Visa/Employment  Force Majeure  Conflict Between Local/Regional/National Laws  Defaults – Government – Concession Company – Contractor – Sub-contractor • Local Partner • Bonding Company • Bank • Insurance Company
  15. 15. ** Company Confidential ** Terms & Conditions  Payments – Signature Bonuses – Mobilization – Retention – Progress or Milestone Payments – Obligations to Pay – FCPA/OECD Limitations  Bonds – Bonding Requirements – Availability of Bonds – Satisfaction of Bonds – Default  Dispute Resolution – Jurisdiction – ADR / Mediation / Arbitration – Obligations During Dispute Period
  16. 16. ** Company Confidential ** Quality  Poor Workmanship  Inadequate QA/QC  Poorly Defined Performance/ Acceptance Standard or Process  Incomplete Documentation  Environmental
  17. 17. ** Company Confidential ** Cost Risk – Operations Phase  Service Scope  Performance Standards  Operating Costs  Changes in External Environment
  18. 18. ** Company Confidential ** Service Scope  Battery Limits of Project/Scope – Other (Free) Services to be Provided – Required Future Investments and Schedule
  19. 19. ** Company Confidential ** Performance Standards  Reliability – Tolerance Limits and Measurement  Availability – Scheduled/Unscheduled Service Disruption – Extent (Reach) of Service Areas  Maintainability – Maintained Condition – “Quality” of System Turnover
  20. 20. ** Company Confidential ** Operating Costs  Labor Cost – Wage Growth – Benefits – Mandates – Pension – Termination Costs  Energy – Availability – Cost  Consumables – Availability – Cost  Maintenance Costs – Excessive Wear – Skilled Labor – New Technology  Insurance – Availability – Cost – Security Costs • Civil Strife • WMD  Uninsured Risks – Environmental – Political or Labor Strife  Tax  Performance Bonds – Increased Cost – Reduced Availability
  21. 21. ** Company Confidential ** Changes in External Environment  Defaults – Government – Concession Company – Prime Contractor  Change of Government  War  Natural Disaster  Boycott or Embargo  Currency Devaluation  Inadequate Financial System Capacity  Corruption  Expropriation  New Technology  Force Majeure  Inadequate System Core Capacity
  22. 22. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  23. 23. ** Company Confidential ** Social Risks Culture Ethics
  24. 24. ** Company Confidential ** Culture  Sense of History  Cultural Imperatives – Work/Life Balance – Risk Aversion – Individual vs. Group – Sport – Wealth
  25. 25. ** Company Confidential ** Culture  Norms – Age – Gender – Social Stratification – Food – Sex – Hygiene – Authority – Generational Variation
  26. 26. ** Company Confidential ** Culture  Language and Meaning  Cross-cultural Issues  Perception of Time  Decision Making Framework
  27. 27. ** Company Confidential ** Ethics  Cultural “Norms”  OECD vs. FCPA – Facilitation Payments  Bribery – By Your Staff – Of Your Staff  Corruption  Use of Agents – Role – Limits – Payments  Whistle-Blower
  28. 28. ** Company Confidential ** Ethics  Not Just Agents – What Are Your Partners Doing?
  29. 29. ** Company Confidential ** Ethics  Tips  Political Contributions “Publish What You Pay”
  30. 30. ** Company Confidential ** Ethics Perception of Engineering and Construction Industry
  31. 31. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  32. 32. ** Company Confidential ** Political Risks  Change of Government – Party – Revolution  Sequestration  Exclusivity  Changes in Fiscal Policy – Can Change Sovereign Debt Ratings Affecting Project Financing  Changes in Law – General – Project Specific  Approvals – Development – Right-of-Way – Environmental – Construction – Import/Export – Operating – Repatriation of Profits
  33. 33. ** Company Confidential ** Political Risks  Adverse Government Action/Inaction  Regime Change – Political Stability Process to Avoid Collapse – Economic or Cultural Stability to Uphold Agreements  Provision of Utilities/Other Services  Increases in Taxes – General – Project Specific  Political Force Majeure Events – Civil Strife – Terrorism – Conventional War – WMD  Termination of Concession/Contract  Payment Failure by Government  Property Rights – Clear Title or Lease – Easements or Other Limitations – Intellectual Property (Patents/Copyrights)  Ownership of Assets
  34. 34. ** Company Confidential ** Political Risks  Structure of Project Securities  Availability of Securities Market  Insolvency by Government or Concession Company  Changed Conditions on Foreign Ownership or Operation  Enforceability of Legal Rights – Contract Rights – Regulatory Obligations – Financing Documents – Security and Insurance
  35. 35. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  36. 36. ** Company Confidential ** Religious Risks  Tension & Intolerance – Christian, Jew, Muslim, Hindu, Native Peoples, etc.  Practices – Holy Days – Daily Prayers – Diet and Food Preparation • Kosher • Vegetarian – Gender Separation  Rise of Militant Fundamentalism – Muslim – Jewish – Christian – Hindu – Different From Political or National Culture Risk
  37. 37. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  38. 38. ** Company Confidential ** Intellectual/Idea Risks  Corporate Social Responsibility – Child Labor – Indigenous Peoples – Social Outreach • Poverty Alleviation • Social Benefits for General Population – Environmental Stewardship • Mitigation/Enhancement • Wildlife Preservation • Greenhouse Impact • International and Local Pressure Groups • “Kyoto Protocols”  Corporate Governance – More “Stakeholders” – More Disclosure – Reduction in Risk Appetite
  39. 39. ** Company Confidential ** Intellectual/Idea Risks  Evolving Political Form – Socialism with Chinese Characteristics – Militant Islam – Nuclear Blackmail  Homeland Defense  International and Local Pressure Groups – Can Be a Major Risk to Schedule, Costs & Approvals – Can Stall Projects Indefinitely  Globalization vs. Unilateralism  Access to Knowledge
  40. 40. ** Company Confidential ** “ESPRIT” – Framework for Understanding Risk Economic Social Political Religious Intellectual or Ideas Technological
  41. 41. ** Company Confidential ** Technological Risk  New Technology  New Applications  Scale  Capacity Building  Intellectual Property
  42. 42. ** Company Confidential ** New Technology Risk  Time to Deployment  Learning Curve – Failure Rates – System Environment  Social Acceptability  Export-Import – Controls – Licenses  Installed Base Advantages  Tax & Duty Environment
  43. 43. ** Company Confidential ** New Applications  Learning Curve  Environmental Factor Effects  Transferability of Lessons Learned  Social & Economic Framework  Supply Chain Extension
  44. 44. ** Company Confidential ** Scale  Scalability  Replicability  External Resource Requirements  Unknown Unknowns Growth
  45. 45. ** Company Confidential ** Capacity Building  Institutional – Aging – Laws & Regulations – Due Process  Management  Specialized Expertise  Craft/Technician  Maintenance  Supply Chain  Supporting Infrastructure
  46. 46. ** Company Confidential ** Intellectual Property • Patent • Trademark • Copyright • Usage • Royalty & License • Counterfeiting
  47. 47. ** Company Confidential ** Challenge of Int’l. Projects  Understand Risks  Allocate Risks  Manage Risks . . . . Understand That They Change
  48. 48. ** Company Confidential ** Potential Risk Managers  Government  Sponsors  Concession Company  Contractor  Engineers  Major Suppliers  Project Lenders  Local Partners  Labor Unions  Insurers  Bonding Companies  Counter-trade/ Offset Managers  Venture Capital/ Equity Markets
  49. 49. ** Company Confidential ** Potential “Risk Managers”  Government – Multilateral/Bilateral Agreements – International Aid or Lending Agency – National/State/Local Governments – Government Department – Quasi-Government Corporation  Sponsors – Public Private Partnerships – NGOs – Financial Institutions – “Benefiting Parties” • Public • Private
  50. 50. ** Company Confidential ** Challenge of Int’l. Projects  Understand Risks  Allocate Risks  Manage Risks . . . . Understand That They Change
  51. 51. ** Company Confidential ** Manage Risks  Right People  Right Place  Right Time  Right Approach  Right Attitude
  52. 52. ** Company Confidential ** Manage Risks  A High Risk of Exposure in: – Contractual Matters – Financial Matters – Professional Reputation …Should Be Examined.  Even if Apparently Mitigated, It Is a Good Reason to Re-examine a Decision to Proceed with Business
  53. 53. ** Company Confidential ** Should-You-Do-Business-Here Test  Corporate Political Contributions – “Encouraged” and “Actively Solicited” – Provide Timely Access to Influence Government Actions – Developers, Engineers, Contractors Specifically Targeted  Government Officials Regularly Receive De-minimus Favors from Private Sector  Procurement Often Based on Factors “Other Than Price”  Lapses of “Ethical” Judgment Are Not Uncommon
  54. 54. ** Company Confidential ** Should-You-Do-Business-Here Test  High Level of Government Sector and Trade Debt is De-Facto Financed by Others  Growing Percentage of National Expenditures Targeted to Military  High Exposure to Energy Security Risk  Risks Associated with Infrastructure Development Projects Are High  Labor Productivity Growth in Engineering and Construction Sectors Lagging Most Other Sectors  High Risk of Obtaining Timely Government Approvals
  55. 55. ** Company Confidential ** Should-You-Do-Business-Here Test  Tax Environment Shows High Probability of Increased Volatility and General Upward Pressure  Insurance and Bonding Capability Significantly Limited for Development, Engineering and Construction Sector  Growing Risk of Terrorism and Security Related Costs
  56. 56. ** Company Confidential ** Should You Do Business Here?

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