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.

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. ** Company Confidential **

3. ** Company Confidential **
Types of Risks
 Known Knowns
 Known Unknowns
 Unknown Knowns
 Unknown Unknowns

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. ** Company Confidential **
Challenge of International Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . Understand That They Change

6. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

7. ** Company Confidential **
Economic Risks
 Market and Revenue
 Finance Risks
 Cost Risks
– Construction Phase
– Operation Phase
CostofYourMistakes
Level of Overconfidence

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. ** 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. ** Company Confidential **
Cost Risk – Construction Phase
 Scope
 Schedule
 Budget
 Terms & Conditions
 Quality
 Legal
– Know Who Has the Authority to Approve

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. ** 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. ** 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. ** 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. ** 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. ** Company Confidential **
Quality
 Poor Workmanship
 Inadequate QA/QC
 Poorly Defined Performance/ Acceptance Standard or
Process
 Incomplete Documentation
 Environmental

17. ** Company Confidential **
Cost Risk – Operations Phase
 Service Scope
 Performance Standards
 Operating Costs
 Changes in External Environment

18. ** Company Confidential **
Service Scope
 Battery Limits of Project/Scope
– Other (Free) Services to be Provided
– Required Future Investments and Schedule

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. ** 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. ** 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. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

23. ** Company Confidential **
Social Risks
Culture
Ethics

24. ** Company Confidential **
Culture
 Sense of History
 Cultural Imperatives
– Work/Life Balance
– Risk Aversion
– Individual vs. Group
– Sport
– Wealth

25. ** Company Confidential **
Culture
 Norms
– Age
– Gender
– Social Stratification
– Food
– Sex
– Hygiene
– Authority
– Generational Variation

26. ** Company Confidential **
Culture
 Language and Meaning
 Cross-cultural Issues
 Perception of Time
 Decision Making Framework

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. ** Company Confidential **
Ethics
 Not Just Agents –
What Are Your Partners Doing?

29. ** Company Confidential **
Ethics
 Tips
 Political Contributions
“Publish What You Pay”

30. ** Company Confidential **
Ethics
Perception of Engineering and
Construction Industry

31. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

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. ** 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. ** 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. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

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. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

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. ** 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. ** Company Confidential **
“ESPRIT” – Framework for Understanding
Risk
Economic
Social
Political
Religious
Intellectual or Ideas
Technological

41. ** Company Confidential **
Technological Risk
 New Technology
 New Applications
 Scale
 Capacity Building
 Intellectual Property

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. ** Company Confidential **
New Applications
 Learning Curve
 Environmental Factor Effects
 Transferability of Lessons Learned
 Social & Economic Framework
 Supply Chain Extension

44. ** Company Confidential **
Scale
 Scalability
 Replicability
 External Resource Requirements
 Unknown Unknowns Growth

45. ** Company Confidential **
Capacity Building
 Institutional
– Aging
– Laws & Regulations
– Due Process
 Management
 Specialized Expertise
 Craft/Technician
 Maintenance
 Supply Chain
 Supporting Infrastructure

46. ** Company Confidential **
Intellectual Property
• Patent
• Trademark
• Copyright
• Usage
• Royalty & License
• Counterfeiting

47. ** Company Confidential **
Challenge of Int’l. Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . Understand That They Change

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. ** 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. ** Company Confidential **
Challenge of Int’l. Projects
 Understand Risks
 Allocate Risks
 Manage Risks
. . . . Understand That They Change

51. ** Company Confidential **
Manage Risks
 Right People
 Right Place
 Right Time
 Right Approach
 Right Attitude

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. ** 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. ** 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. ** 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. ** Company Confidential **
Should You Do Business Here?