Project and Infrastructure Finance Slides Module9_Ver2

8/11/2019 Project and Infrastructure Finance Slides Module9_Ver2

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MODULE - 9

TECHNICAL ASPECTS


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Technical Aspects

1. Locational Aspects

2. Technology Selection

3. Technology Content4. Nature of Collaborators

5. Machinery Procurement

6. Project Implementation


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Locational Aspects

Increasing sizes of industrial units andenvironmental concerns are leading to shift oflocation of industrial units away from urbancentres.

Locational Criteria

a) Cost of bringing raw materials and productevacuation.

Port and size of vessels to be handled (draft)

Pipelines, rail and road facilities

Hazards associated with raw materials/productstransport


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Locational Criteria

b) Environmental Aspects:

Land locked location Availability of common facilities

Damage to endangered species (submarine pipelines)

Concentration of fishing industry

Damage to the soil/water and its impact on agriculture

Size of the population and air pollution

Environmental clearances

Rehabilitation in hydroelectric power projects

c) Quality and availability of infrastructure

- Power, Water, Roads


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Locational Criteria

d) Downstream and upstream industries

e) Labour Policy of the State governmentf) Perishable nature of raw material/product

Cases: Inland Refineries

Cement PlantsAuto assembly units

Distillery units

Chemical units

Power and water intensive units

ExplosivesSugar units

Carbon Black


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Technology SelectionIndustry is getting increasingly globalised with increasing sizes and

reducing energy consumption levels to make it internationallycompetitive.

Criteria for Technology Selection:

a) Proveness of Technologystate of the art

b) Collaborators background, his standing in the industry, size and

nature of the operations.c) Collaborators financial, technical, organisational and research

strengths

d) Collaborators technical manpower resources and ability toprovide in plant training

e) Details of plants set up based on the technology and theirperformance.


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Technology Selection (contd.)Criteria for Technology Selection:

f) Capacity of the plant proposed - MESg) Raw materials envisaged for the project

h) Desired product range

i) Government Policies

j) Minimising the overall cost representing the sum ofoperating cost and capital related charges

k) Nature of the product (commodities/ specialties)

l) Plant flexibilityfrequency of shutdown, change over

m) Sophistication

Cases: Technology from R&D units

East European Technologies

Raw material issues (Petrochemicals, steel, paper)

Product range (Plastics, automobiles) GHCL


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Technology Fees

Fees are small as compared to project capital/ operating costs

(around 5 to 8%) and hence are less important in technologyselection. Optimising the total cost of production is the key.

a) One Time License Fee Benefits company when the business risk is less

b) Recurring Royalty as percentage of sales

Benefits company in high risk businessesc) Issue of equity to the collaborator

Adopted by companies in either high risk cases or involvement ofcollaborator is required continuously for supplies, technologyupgradation and market development.

Normally overall compensation to the collaborator is a combinationof the above.

RK


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Guarantees and Penalties

Again penalties are small (around 10 to 15% of the fees)

and hence the collaborators reputation is important.

Plant capacity

Consumption of inputs

Quality of product (100% penalty)

Plant workmanship / Performance

RK


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Technology Content

Licensor (Suzuki, Mitsubishi, Shell)

1. Basic data of manufacture

2. Plant Operating know-how

3. Product application/product design know-how

4. Operational Training

5. Supply of Imported components/consumables6. Consent to allow the use of trademark

7. Protection against patent infringement

8. Exclusivity

9. Right to sublicense the know-how10. Right to export


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Technology Content (contd.)

Equipment Designer (ABB, Siemens, L&T, BHEL)

1. Basic design of equipment based on licensor of product / process2. Supply of imported equipment

3. Inspection of equipment

4. Supervision of erection and commissioning

5. Plant Maintenance procedures

Detailed Engineer (Powergas, Uhde)

1. Design of auxiliary items such as power and water supply, effluenttreatment, storage etc., which are not plant specific.

2. Supply / Inspection of local fabricated equipment.

FabricatorsWork for equipment designer / detailed engineer

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Technology Content (contd.)

In many plants such as power, cement etc., the entirerole may be performed by only one party. In the caseLumpsum Turnkey Contracts (LSTK) the entire

technology / equipment is supplied by a single vendor ata fixed price.

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Nature of Collaborators

Advantages -A. Manufacturers of product

Product knowledge / upgradation

Easier to evaluate technology performance

Can provide better operating and application know-how Can design multipurpose plants

Can use renowned trademarks.

Procuring/Patented know-how

Cases: Dupont/Reliance, Toray/Raymond; Century Enka/EnkaHindustan Motor/Mitsubishi, Hero/Honda, Bajaj Auto/Kawasaki

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Nature of Collaborators (contd.)

B. Project Engineering Companies

Better selection and procurement of equipment and erection

services

Lower fees

BHEL/Powerplants, Larsen & Toubro/Cement plants

Inventa AG/DCL Polyester


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Procurement of Machinery

1 Inhouse Fabrication Small items like vessels or simple

critical items

2 Direct Purchase Repeat purchase of small standardequipment, spares

Proprietary equipment

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Criteria for Selection

a) Experience of the vendor in the relevant line and past performance with

respect of quality, reliability and efficiency ascertained from earlier users

b) Size of the vendor

c) Financial position of the vendor

d) After sales service / spare parts

e) Delivery schedules

f) Price and payment terms

g) Order book position of the vendor vis--vis his capacity

Procurement of Machinery

3 Limited Tendering Multiple vendors and large value

equipment

4 International Competitive bidding

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Schedule of Implementation

A. General: Bar Charts CPM charts

Critical Activities the management / lenders to concentrateimportant for lenders

Impact on cost of project if certain critical activities areexpedited incurring additional costimportant for projectmanagement

B. CPM: Activity is a definite task, job, function (with head and tail of

the arrow signifying beginning and end of activity)

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C. Problem:

Activity Time Taken (Months) No.*

Land acquisition / roads / civil construction 13 1 - 2

Design of equipment / ordering 12 13

Delivery of equipment 8 34

Foundation 2 24

Utilities 15 25Erection and equipment commissioning 2 4 - 5

* 1 -2 indicates that land acquisition / roads / civil construction will start at 1 and

End at 2 after 13 months

** Activities have an order; 3-4 cannot start before 13; (i.e) unless the equipmentis designed and ordered, delivery cannot take place

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Network Diagram

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Calculation of Earlier Occurrence Time (EOT)

Event EOT

1 0

2 13

3 12

4 20

5 28

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Calculation of Latest Occurrence Time (LOT)

Event LOT

1 0

2 13

3 18

4 26

5 28

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Event EOT LOT

1 0 02 13 13

3 12 18

4 20 26

5 28 28

1 -2 -5 is critical path

Land Acquisition /Civil construction

Utilities

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Special issues in Infrastructure projectsA) Toll Road Projects

a) Traffic studies

-Population modelling (growth, migration)

- Trip generation (willingness to pay, origin and end of journey)

- Trip distribution (growth, simulation of traffic)

- Econometrics (trends, future estimation)

- Other cash flows (advertising)

-

Traffic diversion (alternate routes)- Land use (accessibility of toll way, traffic history regressions)

- Selection of toll booth site / toll optimisation

- Mode of transport

- Traffic assignments (counts, time saved, time value of money, preferences)

- Hassle factors (ease of use, parking)

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Special issues in Infrastructure projectsA) Toll Road Projects

b) Traffic forecasting

-Potential users (existing)

- How many of current users will use toll road (advantages of toll road,willingness to pay, total cost saved)

- Growth of traffic in the recent past (volume)

- Growth in economic activity

- Growth in employment

c) Model

- Design a model for potential traffic through economic, demographic, markettrends

- Factor in willingness to pay and user benefits to arrive at traffic revenue

- Toll is a function of cost saved

- Cost saved = (differential distance X vehicle operating cost)

+ (differential travel time X value of time)

+ Motorway bonus (safety, convenience)

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Special issues in Infrastructure projectsB) Power

- Review design, EPC and construction management (LE)

-Completion / performance guarantees and liquidated damages (LE)

- Cost estimate, schedule (LE)

- Study the enforceability of contracts (LC)

- Logistics (LE)

- Conduct / review Environment Impact Assessment (EIA) study

C) Resources (oil, mining)- Reserve estimation

- Production cost

- Environment

D) Telecom

-Subscriber studies

- Obsolence of technology

- Initial large equity

Project and Infrastructure Finance Slides Module9_Ver2

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