One of the special modes of carrying out international business is a turnkey project.
It is generally taken to mean that all the customer has to do is turn the key in the lock to open the door and start operating. Everything has been done and is ready to go.
It is a contract under which a firm agrees to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for a remuneration.
Most franchises operate in this way. For example, if one wishes to open a McDonald's franchise, everything from the products to the uniforms has already been determined. One merely needs to put up the appropriate capital and start the business.
Setting Up of a Turnkey Substation Project
In substation project management, developers hire construction companies and contractors to build a substation complete with all components in place to immediately power up the substation when the project is turned over to the developer. To set up a turnkey substation project, the developer must first do all the ground work that leads up to the project so that the contractor can begin work on the substation.
Turnkey Projects deliver enforcement for Developing Countries
In the enforcement sector, the concept of technology provider also being responsible for operations is hardly a new one. Nevertheless, it has gained significant traction over the last five or six years and has the potential to radically change the complexion of the industry.
“Looking worldwide, the trend started in about 2000, with smaller-scale projects here and there. Project sizes quickly grew, with the effect that projects’ decision times became longer and longer. We’ve reached a point where gestation periods can be as long as six to seven years,” he says.
“The trend has hardened since around 2005/6 with the result that we now see perhaps one to two projects a year – customers tend to be countries so inevitably they’re limited in number and a national-level presence is needed in order to meet KPIs.
Prime markets
“The bigger projects are usually generated in countries where very little has happened in the past. This is related to political strategies – pressures to reduce accidents and so on. You need governments with an understanding of the issues and the budgets to effect change.
“Western Europe has been a mature market for many decades now. We still see some growth and some equipment upgrades but very few projects which are national or even regional in scale. That’s because there tends not to be centralised decision-making; instead we see community-level decisions on strategies and orders.
“Eastern Europe, Middle East and Asia is more characterised by centralised decision-making and there are the budgets for major projects. Countries there tend to have no history of automated enforcement but want quick solutions and with no strong local manufacturing industry they have to look abroad.
“In Northern Africa, we’re seeing much the same things happening, perhaps driven by the proximity of the countries there to the Mediterranean Sea and so to countries such as Spain and Italy where they can see what’s being done abroad; countries such as Algeria, Morocco, Tunisia and Egypt all want to emulate what’s going on in Europe and seem to be finding the budgets for implementation. Central African countries are doing very little as yet, whereas South Africa is already a mature market.
“There are countries in Asia and South America where traffic safety isn’t an issue at present but will be soon.”
Holistic approach
In terms of technological enablers clients want a full turnkey project, Schmitz says: “They want the road technology, communications and processing software, as well as an understanding of the whole process.
“That requires local recruitment and training – you have to enable the client to operate a national system. The concept has to make sense in terms of ease of use and total cost of ownership over a period of years.
“Many things affect customer awareness, because automated enforcement isn’t just about setting up cameras and taking pictures. Processing capabilities are also needed – clients need to know how to contact offenders and enforce fines. It’s better that they wait a year or two with a country-sized project to make sure they’re on solid ground. That includes getting the right legislation in place before go-live – that in itself has caused a year or two of delay in some cases.
clients sholud prepare properly first and then embark on projects, or else start with a small project; ‘small’ in this case might be a city or town rather than a whole region or country.
Technology mix
Most countries, he continues, want a mix of enforcement strategies.
“So, for speed measurement, we’re talking about traditional, fixed, polemounted cameras but also mobile and average speed solutions. A proper mix makes sense to most clients. Again, that’s a product of awareness of both the advantages and disadvantages of the various technologies as well as the upfront costs of a major deployment.
Learn and relearn
What this results in is a level of technology being deployed in developing countries which compares very favourably with – and often even betters – that fielded in the European market, which has long been regarded as the world’s most mature.
“Developing countries allow innovation,they want accurate, reliable systems which meet, for example, European standards but they take a more pragmatic approach and are happy to give technology a chance."
“The developed countries are far ahead in terms of user experience. It’s not uncommon to see three or four generations of systems co-existing – because the roads and infrastructure are already there. Developing countries, by comparison, can decide on the most appropriate enforcement strategy as a road is being built. They can set up everything new, taking advantage of the latest and fastest communications principles, or the best way to supply power. They can actively and more closely integrate enforcement into traffic management regimes, rather than have it continue to exist as a discrete entity.
“We’ve reached a point where the developed countries can actually learn a lot from the late-starters.”
A live example of a Turnkey Projects between two companies of Different countries
Crompton Greaves Ltd, a part of the Avantha Group, in India has bagged a 3.5 million euros (around Rs 27.3 crore) contract from Nordex and H2air for setting up a wind farm sub-station at the 75 MW Seine Rive Gauche Nord windfarm in France . The scope of the work includes design, engineering, supply, installation and commissioning of the substation. CG (Crompton Greaves) will also be responsible for upgrading and building the overall electrical system.
STEPS INVOLVED
1
Collect all permits. Permits should be obtained from the state, landowners and the Environmental Protection Agency before any work or planning is done. If environmental studies are requested, they must also be done before any other work can be started.
2
Obtain all of the specifications needed for the operation of the substation. These documents must come from the state or company that is requesting the substation. When the specs are obtained, the engineers must be contacted to draw up plans for the substation.
3.
Submit a plan for the substation. Place a public notice advertising for bids in the local newspaper. Choose a contractor from the available bids.
4
Procure financing. Once the financing is obtained, work can begin on the substation.
Advantages and Disadvantages of turnkey projects
Advantage - it allows countries to share technological know-how, like middle eastern companies do not want USA and other countries to take part in their oil refining and want to profit from it themselves, but do not have the knowledge of the process, the middle east enters into a turnkey project to gain the technological know-how.
Disadvantage - You are automatically creating a competitor, if your technology is a source of advantage over competitors, allows this information is providing it to the competitor.
CASE STUDY
"Turnkey contracts: getting it right from the start"
Ellis Baker, partner and head of Construction and engineering practice group, White & Case,London, presents the legal aspects behind turnkey projects
‘The work on site started on 9 June
2000. Prior to that, no contract
documents had been prepared, no
tendering process had been undertaken….
The contract documentation would be
produced and agreed and a contract
entered into as work proceeded.’
This snippet of narrative describes the
beginning of a construction project.
Given the scenario presented, it comes as
no surprise that the story is told as part
of a judgment of the Technology and
Construction Court being heard on appeal
in the Court of Appeal. If ever there was
a scenario likely to lead to litigation,
surely that was it.
The project in question was not
a power project. On the whole,
the power industries cannot afford
to operate like that. The
relationship between
client/purchaser/owner and
contractor/supplier has to be
regulated from the outset, so that
both parties are clear about rights
and obligations. It is a question of
getting it right from the start.
The turnkey contract
Design and build, whereby the contractor
is responsible both for producing the
design and constructing it, is increasingly
used in most sectors of construction and
engineering. In the power sector, the use
of this method is well-established; for
example, a power station would typically
be procured by means of a turnkey
contract, a version of design and build.
The name derives, obviously, from the
contractor's obligation to provide all
work, materials and services necessary to
enable the client to turn the key and
take over an operational facility.
Check-list of contractual issues
Plenty of work in the power sector is
done using standard form contracts, such
as the Institution of Mechanical Engineers
form (or ICE for Civils work) or, in the
case of international projects, the
Fédération Intenational des Ingenieurs
Conseils (FIDIC) Conditions of Contract.
However, a turnkey contract for a power
station will almost certainly be tailormade for the project. The legal team will
sit down with their clients and address
the issues.
At a risk of over-simplification, the key
legal issues which have to be dealt with
can be summarised in the following
check-list form (the list refers to a power
station, but many of the issues are
generic):
Payment
Usually, 10-15 per cent payable in
advance to support contractor's initial
mobilisation and orders, against a bank
guarantee from the contractor of equal
amount. Monthly interim payments linked
to achievement of identified milestones,
often with significant final payment on
completion of work.
The function of the turnkey contract is:
• to express the contractor's basic obligation to
produce the power station to the client's
specification, by the specified time and for an
agreed price. The facility must be free from defects
for a specified period following completion; and
• to set out in detail the parties' position in
relation to payment, quality and time,
anticipating and providing for certain, probable and
even possible events.
Timely completion
Provision for liquidated damages at a
specified rate in the event of time
overrun; the amount and purpose must
be realistic compensation of the owner,
not penalising the contractor. The
contractor will usually require a cap
(maximum amount) on these; the client
will want to have the right to terminate
on reaching this.
Performance standards
There will be performance guarantees to
be satisfied for contractor to achieve
completion and others where failure is
compensated by liquidated damages. A
minimum threshold of performance will
typically be 95 per cent of guaranteed
power output and 105 per cent of
guaranteed heat rate, with the shortfall
compensated by liquidated damages.
There will be a detailed testing regime.
Sub-contracting
Owner will wish to control what subcontracting (especially Mechanical and
Electrical) is permitted and to whom.
Contractor will need some flexibility
within this, to provide alternatives in the
event of a specified sub-contractor's
failure.
Adjustment to price and completion date
Contractor will be entitled to claim extra
payment and/or extension of time for
matters outside its control, such as
changes in legal requirements, force
majeure and undisclosed ground
conditions, although what is included is
purely a matter of negotiation. The claim
will have to be made by a specified
procedure, which will be a 'condition
precedent' to entitlement.
Warranty periods
Again subject to detailed negotiation but
generally the warranty periods for Civils
work will be longer than for the
Mechanical and Electrical elements. In a
cogeneration project, obviously the gas
turbine warranty period is critical.
Security
Contractor will assess owner's financial
status when bidding but in independent
power projects, the owner under the
turnkey contract may have no assets,
being a special purpose vehicle created
for the project. The contractor may then
be paid by direct disbursement of the
project loans, directly from the project
lenders.
The contractor usually has to give a
bank guarantee of at least 10 per cent of
contract price (five per cent during
warranty period), payable on certification
of contractor's default.
Limitations of liability
A power station turnkey contract is
regarded as high-risk for contractors, who
usually require a limit of financial
liability of 100 per cent of contract price
and a limit on liquidated damages.
The precise terms reached are thus
negotiable; the outcome depends on the
strength of the parties' bargaining
position, the state of the market and the
requirements of lenders. Specialist
lawyers can advise on what is achievable
in the light of these factors and then help
to achieve it. What will never change is
the need to get it right from the start.
Regards,
Surbhi Maheshwari [MBA Fin / Mktg ]
Manager Finance
On Line Assistence :
Gtalk : SurbhiM.AeroSoft@gmail.com
Y! Messenger : SurbhiM.AeroSoft@yahoo.com
Rediff Bol : SurbhiM.AeroSoft@rediffmail.
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