Go to the Prior Tip The Problem with Girls
Go to the Next Tip Wise Choices: Decisions, Games, and Negotiations
Return to MaxValue Home Page
by John A. Rutgers and H. Dean Haley, Cost Engineering, vol. 38, no. 9, September, 1996, pp. 27-30. AACE International, 209 Prairie Ave., Suite 100; Morgantown, WV 26505. (304) 296-8444 or 800-858-2678, fax (304) 291-5728.
Economic evaluation is the heart of mergers, acquisitions, and divestitures. This article focuses on the acquisition of an asset, such as a construction project. Decision analysis is helpful in preparing to negotiate. Not only is it important to understand the value of the project, also the value apportioned to each party in the negotiation.
Authors Rutgers and Haley summarize the issues and provide checklists risks to consider. They segregate risks into three stages of the (power plant) project:
Development: technical feasibility, commercial/financial feasibility, project economics, permits/authorization, third-party intervention, and political change.
Construction: schedule, cost, performance, design changes, interest rate escalation, consequential damages, force majeure, country risk, currency changes.
Operations: market changes, capacity/production shortfalls, fuel supply interruption and cost escalation, operating and maintenance cost escalation, currency depreciation, statutory change/civil unrest/strikes, acts of God, Third-party liability, and plant residual value.
The Developer/Sponsor Company must contract with a variety of different entities. All of these contracts must be negotiated. Each party is concerned with how much risk it retains, shares, and transfers. Everyone must end feeling that the risks borne are accompanies with adequate compensation. This article provides a good overview and many good ideas for persons working on project agreements.
--John Schuyler, September 1996