Seminar on Challenges in Procurement and Contracting in Large Hydropower Projects

Seminar on Challenges in Procurement and Contracting in Large Hydropower Projects (Wednesday June 13, 2012 - IFC Auditorium, Washington DC) Session 1 The Vision of a Consultant Jean BINQUET, Tractebel Engineering France Coyne et Bellier

Introduction General Contracting the construction of a large HPP is always challenging for all stakeholders (the Owner, Lenders, and the Contractors): - Projects are big with respect to the Assets of the Owner and balance sheets of the stakeholders - Projects are often vital for the national economy - Projects are risky by nature (environment, socio-economy, physical data, etc.) Challenges in Procurement/Contracting? - Procurement/Contracting proper, and/or - Steps prior to the Procurement leading to the Project s Implementation

Introduction General What is a successful Contracting? performance, time and cost as close as possible to the expected values The success of a Project is the success of all stakeholders and not of one against the others: - Same boat concept - Solution Finding using Value Engineering and Open Mind Approach under the contract provisions - Being lucid when serious difficulties arise and evaluate with fairness

Introduction General Two Points: - EPC or not EPC - Steps leading to the Procurement: as important or even more important than the Procurement itself to; the Ethiopian Way

EPC or Not EPC First large hydropower projects implementation using EPC Contract started in the Nineties Linked to the development of the Private Sector in hydropower generation Now current practice for hydropower projects implementation for both Public & Private Sectors Our firm involved in more than 20 large projects around the world: Turkey, Uganda, Gabon, Ghana, Ethiopia, Brazil, Argentine, India, Nigeria, Ecuador, Peru, etc. with a total installed capacity of around 17,000 MW

EPC or not EPC Extensively used by Private Developers in regions where IPPs are very active (imposed by senior debts lenders): Latin America, Turkey, India, Laos, etc. Starting to be used in some other countries by Public Utilities especially in Africa (e.g. Ethiopia, Gabon, Ghana, Senegal, Cameroun, Nigeria, etc.) but also in Latin America (Ecuador, Venezuela), etc.

EPC or not EPC Manufacturing a product with a given Performance, in a given Time for Completion 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 Employer s risks linked to the Construction (design, local physical data like hydrology, geology, topography, gaps between various types of works, etc.) transferred to and to be borne by the Contractor Are all hydropower projects suitable for EPC type Contracts where Construction Risks are transferred to the Contractor?

EPC or not EPC The Answer is NO: - There are projects where it is not possible for several reasons to have an understanding of the site conditions (complex geology and 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 projects with lower risks - On the contrary there are projects where it is possible to understand the site conditions and to assess the possible unforeseen : This assessment can be discussed between the Owner and Employer and risks fairly shared. The EPC Contract Price will, as a result, be lower and the construction will be successful

EPC or not EPC As a consequence, don t use EPC type Contracts in exceptional risks situation (no understanding of the site conditions we have no idea of the possible unforeseen ) In other situations elaborate a sound sharing mechanism of the risks between the various stakeholders taking into account their capacity to absorb them

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 with silty sand with 400 m of water head above the tunnel; crossing considered 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 the change of the Civil Works member - Time for Construction of 15 years and final cost several times the original EPC Contract Price

Example: 390 MW Dul Hasti Project in India Conclusions: - Exceptional case in terms of geological conditions, long tunnel with high rock cover (more than 1,500 m), no intermediate window, very active seismo-tectonic area, etc. - Overall failure regarding the fixed Time for Completion and Cost - Actual Time for Completion and Cost more than 3 times the original - EPC type contract is one of the major reason of this Failure

Example: 672 MW Birecik Project in Turkey Turnkey Contract: - 70 m high dam 2.5 km long, 6 Units dam toe powerhouse, 18,000 m3/s gated spillway - Alluvial deposits over limestone rock foundation with heavy grouting works - Thorough joint preparation of the design between Owner s Engineer and Contractor before Contract conclusion - 5 years Construction Time Reality: - Some adverse geological conditions in some areas compensated by better conditions in other areas. No impact on cost and time - 5 years Construction Time

Example: 672 MW Birecik Project in Turkey Conclusions: - Simple overall geological features - Well prepared Contract - EPC type contract was a success (time, performance and cost respected) - EPC type of Contract well adapted to this type of Project and context

Example: 450 MW Cana Brava Project in Brazil Simple overall geological features Well prepared Contract EPC type contract was a success (commissioning ahead of schedule, performance and cost respected) EPC type of Contract well adapted to this type of Project and context

Examples: ongoing Projects in Ethiopia, Nigeria, Ecuador, etc. Turnkey Contracts - FIDIC Silver (1,870 MW Gibe III in Ethiopia, 700 MW Zungeru in Nigeria, etc.) or other specially developed contract (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 Completion in case of unforeseen difficulties (Fidic 4.12) - Some exceptions introduced which give the right to an Extension of the Time for Completion without any cost compensation - Exceptions may include special geological or geotechnical features like low mechanical properties materials, water ingress, heavily fractured rocks in faults with high water heads, high at-rest initial state of stress, etc.

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 and reach the first m3 of excavation when it works; sometimes it doesn t 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 and project can be completed - Less than one year was required to start Gilgel Gibe II, Beles, Gibe III 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.

Concluding Remarks We have known successes and failures with EPC Contracts for Hydropower Projects Success occurs when general physical conditions are simple and/or understood If it is not the case special risks allocation to be introduced to limit the risks to be borne by the Contractor in case of encountering specially adverse unforeseen conditions Projects with long tunnels, high rock cover, no intermediate windows and in very active seismo-tectonic areas are not recommended for EPC Contracts (without risks allocation)

Concluding Remarks Steps prior to the Procurement Process are tedious and extremely long (not adapted to the present needs of development) Often the process leads to a deadlock The Ethiopian Way which requires a strong political willingness may not be ideal but proved efficient and deserves attention and consideration There is the need of fast track approaches for hydropower projects in emerging economy countries

Thank you for your attention