Contracting for Hydropower Projects - Insight by Yogesh Bahadur


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Issues with Contracting for Hydropower projects (prepared for a CBIP conclave, but unpublished)

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Contracting for Hydropower Projects - Insight by Yogesh Bahadur

  1. 1. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*   CBIP Conclave on Model Contract Documents for Development of Hydropower Projects CRITICAL ISSUES IN CONTRACT FORMULATION OF HYDROPOWER PROJECTS - a trans-national InsightBy YOGESH BAHADUR*Presently consultant in power & renewable energy sector and President, Pentacle Power Marketing & Consultancy Services; he wasPresident-CEO/Power Business with Best & Crompton and Head of Business Development for VATECH HYDRO/Flovel, Faridabadearlier. Mr. Bahadur is a graduate Naval Architect & Marine Engineer from University of Michigan, USA.IntroductionRecalling the early days of hydro privatization in early nineties, when the Department of Non-Conventional Energy (DNES) made its first transformation towards a Ministry and came to be known asMNES, I remember a meeting with the Advisor while representing my small hydro manufacturingcompany, by name of Flovel, of which I was then a part. One of the main issues was to put an end todownscaling of large hydro projects to arrive at a technological or commercial understanding of thesubject in its broken down economies of scale. That was the phase when only small hydro could beconceived for privatization and so came the question. Finally with MNES formation came the definition ofsmall hydro and it has changed from 3 MW to 25 MW, but not without the remaining question, “How big isbig and how small is small?” in a science, where unit capacity is based on permutations of head versusdischarge and various land related isssues. With definition of MNES changing to MNRE, surely moreideas ought to be added, such as global warming and its impacts ahead.So should low head canal have a different definition as against a hilly high head hydro power plant?There have been numerous debates on the “Standardization” aspect. Those of us from the Turbinedesign & contracting sector can truly wink as to what the hullabaloo is all about because our principalswould always put a significant engineering cost while adapting a so called “standardized” design to aproject.With forming foreign joint ventures then, we had perhaps given some semblance to the MNES desire forstandardization, but were far away from executing multiple orders of a “small hydro industry” with a smallengineering work force and I would tend to ponder, whether had it not been better to develop the turbinesindigenously, because the expenses have been no less.Even so, deep within I am certain it could never have been possible that way, in a fraternity whereanything internationally borrowed is acceptable, but we have not come to accept that we can learn towork in an international manner ourselves. And there, my fellow ‘hydrozens’, lies the moot problem ofhydro, be it technology, manufacturing or contracting. 1  Of 6  
  2. 2. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*  Now down almost two decades, when small hydro has grown by more than 200 private developers, ofwhom many have completed and others are in various stages of clearances and project execution, wehave a participative industry encompassing both private and public/government sector. Yet I have seen abeeline of private sector professionals travelling the globe and many ending spellbound in China, only toremain as perplexed as ever before once they return to grass-roots of long gestation hydro powerprojects.As such, even when working towards a Model Document for Hydro Contracting, we will have to thinkdeep down the science and its implications for the future; otherwise we will grope with “how model ismodel” just as “how standardized is standardized” and “how big is big”.Evolution of the Hydro Contract DocumentThe last decade has been a mixed bag of miracles and miseries for the hydro world and I can only say itfrom the eyes of a marketing & contracting professional with a global multinational hydro manufacturingand contracting company. Even so, the significance might well be lost on say, a middle managementmarketing counterpart in public or government sector. One of the main reasons is that he (in publicsector) is not pulled in two opposite directions by the controller of accounts in Europe adamant to haveme build additional risk costs every time there is a bomb blast in India and to deal with head of contractsof a public sector entity on the other, who asks “so you have done great work in Europe on similarproject….but what have you to show in India?”This has been perhaps the greatest challenge of this unique but growing breed of multinational andtransnational contracting professionals in last two decades. The fact is that more than 80% of mypartners-in-progress hydro professionals are in or from Public sector wherever they may presently be.Also it is true that there are equal opportunities presently for contracting personnel in private sector as inpublic sector and this shift of Human Resources shall have a definite impact on contracting to where it isheaded.But before that happens with time, we must look holistically across the country and how the contractdocument has developed in recent years. Even now, when I am writing a tender document and forget theright phrase, I would tend to say “…..shall be as per NHPC clause pertaining to the same”. I have seenby virtue of my close proximity to their office in Faridabad, how the thinking and adaptation process hasbeen and how the delays in contract awards have been caused and later in some cases prevented, inthis learning process at the core of hydro power sector. I recall our own and our foreign principals’frustration when even NHPC would still ask for “fully homologous model tests” for a small hydro projectand found impossible not to use its entire strength of a large hydro project to a small hydro project inAndaman Nicobar Islands. However, the project was a success and then there were perhaps not asmany large projects on the table as they have now. 2  Of 6  
  3. 3. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*  Perhaps this proximity in my educative phase and the fact that NHPC officials have headed CBIP andother private and public groups even after retirement from NHPC, becomes the reason for me to writethis article at the 11th hour of the conference for the benefit of all, especially the new generation ofcontracting personnel in both private and public sector.Yes, firstly the famous NHPC ‘Forms’ section of the contract which gives no room to fudge the truth, butrepetition over and over again has made it a drudgery of sorts. I have also felt that when references andexperience lists become so focused it leaves no room for growth and development within an innovativeorganization, which can very well develop new ideas and products if given leeway to experiment. Whycannot the customer’s contracting think tank give some benefit of doubt to new and entrepreneurcompanies in building new ideas and products. In fact they should actually be giving marks for that, if weare in progressive India which has found water on the moon!One of the greatest drawbacks of hydro contracting is that we get confused by hydro specific local andpolicy issues and start treating the sector like it involved ‘Rocket Science’, rather than to dovetail the localand policy issues with evolving technology and development of indigenous or “Made for India” overseasskills and capabilities in hydro engineering practice. Also, the oft repeated phrase that itself secludeshydro from all else, “but are you from hydro?” is irrelevant when even public sector transfers from thermalto hydro and vice versa have hitherto been quite normal.I also recall a quip from a thermal project official from public sector, that thermal sector officers aresmarter than hydro sector. While I would not tend to agree nor disagree with something so generally put,I do agree that the rate of progress in thermal has been far greater and the crossover bridge to and fromthermal to hydro is essential, but commercial and technical verticals in public & government sector wouldhave to thinned down significantly to dovetail the two essential elements when formulating contracts.Many of my fellow ‘hydrozens’ will recall PFC made model contract documents for the R, M & U programin the ‘90s after much debates, seminars and meetings and with aegis of CEA and MOP. It did trigger theprogram and helped some private sector multinationals like my erstwhile employers SULZER/VATECHsubsidiaries as also others like VOITH to emerge as options to BHEL. Even NHPC and the StateElectricity Boards welcomed the private alternatives, since BHEL was a monopoly until then. Even soafter the initial spurt, the R, M & U program has laid dormant, depleted and back to the small contractorphase as development of contracting documents never happened. Even larger and important hydroprojects of NHPC, UJVNL & BBMB were shelved or put on hold as evaluation aspects looked widelyhazy. Yet we have stood by the lowest bid fixation and cannot define the ‘lowest evaluated bidder’,because that needs contracting ‘finesse’, especially for innovative areas of R, M & U and some cases oflarge and mega hydro in Himalayan or silt-prone regions.The evolution process of making contract documents, to create models that are flexible and adaptive tosituation and change, rather than ‘language documents’ of ‘standard forms’ that have insinuations ofbeing gospel is the real challenge in hydropower sector contracting, if it is to rise as popular and powerfulas its thermal or nuclear cousins. 3  Of 6  
  4. 4. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*  For selection of hydro developers we have tariff based evaluation, fine, but the same used in judginggenerating equipment and machinery contractors has not been without raising eyebrows over the manyassumptions that are required as tariff aspect is broken down into smaller elements. Also, we are stillunsure of measurements of efficiency and find it impractical to enforce guarantees. I sometimes feel allthis is still irrelevant, and project owners would have done better if they had worked to reduce theirproject costs in simpler way, rather than enforcing so many guarantees on contractors that they hike theirprices for risks involved! In end they have qualified bidders who do not meet their budgets. Either theymust move parliament for hike in costs or delay until a contract-worthy solution is found. In any case, theproject is delayed! Sometimes we have to look beyond pragmatism of modernization & change and resortto convention – all this means the need for flexibility and not creating bibles in contract modeling.Lessons from Global ContractingI recall asking my German counterpart contract manager once, “then how would you award consultancyand execution of the same project to the same company” pertaining to a hydropower RM&U project inwhich the contractors were selected on basis of best and cost economical solutions. In fact, the flexibilityof contracting process (on a global platform, mind you!), gave birth to several SULZER’s innovations inlow head turbine configurations such as Straflo (generator with its hub as turbine inside water path) andmany other unique and innovative concepts, while finding specific solutions for replacement of oldturbines with new within existing civil works. I say this, as I can count lot more more than 25 projects oncanal falls in the country which are not operational for 10 or more years since they were taken up,because no one can contribute the right techno-commercial idea and within the parameters of SEBguidelines, the most that I can recommend is to change the entire equipment, which would never beacceptable and I am sure to be mocked at.But my question is, will you pay me to find the solution and execute it too. Then we do not have acontract document to do that…no sir, not for 10 years.We have to understand the simple logic of a mathematical equation, that the more the ponderables, morethe variables and more the creativity to sequence these variables and variables into multiple equationsand to merge these equations into a simple single and solvable equation….but that takes talent andideas and money to back up. So the challenge can we be creative to formulate these contracts which canbe fair to all concerned without asking “have you done it before”, because we have never done itourselves. But who bells the cat?Fortunately, I notice from recent contracts, we are becoming less binding even in new construction largehydro projects of some private developers while specifying generating equipment…yes, we have alllearnt from our mistakes and even CEA is clear on how to handle the ‘cusp’ in regions when a PeltonTurbine can be used just as well as a Francis, perhaps with some advantages too in some cases. Sodefinitely we are improving!Even so, we are still sure that we have mastered every civil engineering aspect; because with privatesector developers coming in, the civil engineer has become the contract specialist and has given due 4  Of 6  
  5. 5. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*  flexibility for the E&M contractor, but not to another civil contractor. So we have in some cases desiltingtanks that cost a fortune when perhaps the cost could have been cut and better utilized to find othersolutions and other such situations. We all know that the civil document of a DPR cannot be touchedduring contracting phase. But here there is another problem of project authority approval and horsebefore the cart and vice-versa scenario. Getting Civil consultants and Civil Contractors to work side byside in DPR phase can indeed be a challenge, but prevent delay-intrinsic situations when even minordrawing changes must go through a long process and we have only the CEO in case of a privatedeveloper to be the deciding authority in the end, once the government experts have okayed the DPRand drawings.It is such pressures on top management of SPVs and private owners that cause possible catastrophes(alternatively delays!) if we are over-tenacious in expediting our project but lack knowledge andcontracting skills that have seen mega hydro project successes world-wide. This also calls for training oftop management of private sector companies in phasing out the innings with the skills of a SachinTendulkar; such is the process of project scheduling and contract development.I see training ourselves through global ideas rather than taking on foreign technology or well learntpostulates as gospel as the prime area of focus, even as we have developed such ‘model contractprocedures’, but may lack skills to follow them eventually. As such the ‘model’ can at best be a guide.Adapting the lessons to Contact Models for HydroIn a nutshell Indian Hydropower has to re-evaluate itself, now that we have learnt something so that weare not China or any other country-dependent to formulate our own thinking, but have adequateawareness of how they all succeeded in their countries. China, if you must see has only looked inwardsand has immense faith in its people as a whole, whereas we are no where near accepting that aspect,even when we boast we have the best engineers in the world. But who is believing them in a nation ruledby its financial wisdom of short term gains; perhaps lessons that can be drawn from the economicslowdown, now that even the west has failed!It would be futile to create model documents with a yet untrained private sector which is still coming toterms with the specifics of hydro and any day, might well want to run back to comfort of thermal & windfor some degree of ‘certainty’ in how he must proceed…..the reason that hydro projects, especially insmaller ranges have become more like property investments than power sector development. As such, I see contracting as a HRD issue, especially in wake of post recession period when I am seeinga welcome influx of HR consulting companies wanting to specialize in power & infra. It would bepragmatic to create forums with hydro expert groups in development of HR ideas for training,development & placement of personnel. The wide-scale web based networking opportunities are a boonto professionals and can be made instrumental in such progress to provide greater penetration in shortertime. 5  Of 6  
  6. 6. CBIP Conclave on Model Contract Documents for Development of Hydropower ProjectsCRITICAL ISSUES IN CONTRACT FORMULATION OFHYDROPOWER PROJECTS - a trans-national Insight By YOGESH BAHADUR*  Further Hydro, both in new construction & in cases for Renovation-Modernization, is qualified for carboncredits under CDM and these issues will have to be incorporated with a eye on each contractingconstituent of the hydro project, because failures not only can cause negative impact with depletingglaciers and water bodies as also erratic rainfalls as witnessed in very recent times too.An overall idea to get the hydro (and for that matter the Renewal Energy) sector out from its closet intomainstream industry in a guided manner can be a role taken by a central body of the government. Thisshould also address grievances of bidders and developers and prevent present situations that we are leftwith no viable bidders in certain categories of hydro projects, such as services, repairs, overhaul wherecontracts are still tailored for BHEL (who must concentrate more on larger challenges ahead), unless alocal and smaller contractor who has repaired a shaft seal of a 100 MW project succeeds in proving in hisbid that he has ‘executed’ a 100 MW project. Such provisions will encourage entrepreneurship anddevelopment of new companies, formed by experts from the larger groups perhaps, to build a largersubcontracting base and hence viable local options for developers and owners of projects both in publicand private sector.Formulation, execution, understanding and appreciation of contract documents are key to solving all thehitherto prominent problems of hydropower: 1. Lack of understanding of multiplicity of issues involved from local to technology & finance 2. Development of contracting and subcontracting base 3. Indigenization of manufacturing technologies & enhancement of severely depleted indigenous manufacturing base progressively over coming years 4. Education & grooming of management & personnel talent within private and public sector 5. Developing new age contracting and engineering personnel in government departments to put power sector in India on par with the best in the world 6. To reduce the Thermal to Hydro gap by facilitating faster completions and allotment process 7. Enhancing Public Private Partnership and facilitating the two to work jointly towards development of power & infra within the country. 8. Contribute to arresting climate change and making optimum use of natural resources at our disposal - while they last and are within man’s control. ************************************** 6  Of 6