Dealing with a complex network of stakeholders is a key feature of major projects. Gain confidence when dealing with stakeholders of major projects by learning to identify and manage those that are involved in the project planning and delivery and explore project governance in theory and practice. Through real life examples you’ll understand how the critical challenges of the governance in major projects are resolved. Being able to successfully manage risk and uncertainty in major projects is vital for their delivery. In this course you’ll learn to distinguish between risk and uncertainty and the role of risk register. You’ll identify the unique challenges of scope management in major projects and employ scope management tools and techniques that will facilitate your project planning. This is the second course in the Managing Major Engineering Projects Specialization. The Specialization is the first step towards earning degree credit from the University of Leeds. Learners who successfully complete the specialization will be able to apply to the enhanced, for-credit Capstone project which will run as a private course on Coursera. Credit earned by successfully completing the Capstone project can be used as evidence of accredited postgraduate study.
Governance of major projects: part 2
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From the course by University of Leeds
Major Engineering Projects: Governance, Risk and Scope
6 ratings
From the lesson
Governance and project governance
Meet the Instructors
Dr Giorgio LocatelliLecturer of Infrastructure Procurement and Management
School of Civil Engineering
Now let's look at
the governance model in more detail.
This is the most important to major projects,
because many companies favour this model due to its flexibility.
Typically at the centre of the model,
we have the special purpose entity or SPE for short.
There are different types of special purpose entities,
but the most relevant one is the one called project company.
This company institutionalises the project and the purpose
is to finance the infrastructure project on behalf of its investors.
The governance model is based on many enforcing instruments, such as; contracts,
concessions, securities, ownership rights,
insurance policies and advanced financial instruments.
One of the most important contracts is called the off-take agreement,
which is between the special purpose entity and the client or user of the service.
The off-take agreements help to secure the revenues
and establishes conditions for delivering the project service to the client.
It also includes provisions to amend this contract and to deal with issues,
such as the litigation between the parties.
Let's think more about the special purpose entity.
The special purpose entity is
a brand new company created specifically for the major project.
It is connected to the key governing instruments characterising the major project.
The special purpose entities shareholders can be private sponsors,
public institutions or institutional investors.
Often private sponsors are industrial actors with a stake in the infrastructure project.
Typically they act both as a sponsor and
external contractor providing services or goods to the special purpose entities.
Examples of private sponsors,
include; the main contractor,
the technology provider, the operator and other industrial actors.
Public institutions might have a role as a shareholder in the special purpose entity.
For instance, sometimes the government
or a deputy administration have what's known as the golden share.
This is typical in the rational arrangements and governance models.
The institutional investor is much more a passive shareholder.
They invest in the equity of
a special purpose entity because the investment is appealing to them.
Generally, they don't have
a critical leadership role and they
don't have direct control of the special purpose entity.
Typically, the governance of
the special purpose entity is set up by the shareholder agreement.
The shareholder agreement provides specific decision making rules,
specific powers to the various sponsors and outlines their rights in terms
of how many directors a company can appoint to the special purpose entity.
It includes many governance provisions and
therefore it has a wide impact on the governance of the major project.
The direct link between the sponsor and the special purpose entity
is formed through equity or other forms of securities.
In project finance transactions,
the financial institutions are the main providers of
financial resources for the project and they provide
between 90% and 95% of the funds required to develop the project.
Usually the lenders are grouped under a form of syndicate of banks.
Another actor in this complex arrangement is the government.
Typically, it's linked directly to
the special purpose entity by means of public concessions,
which are temporary monopolies.
They provide a secure market and sometimes a secure price to develop the project.
From the government's perspective,
the concession helps secure a public service and
provides a mechanism to control the special purpose entity.
In public private partnerships,
the government can be a sponsor as previously described.
The government often provides
additional subsidies and guarantees to support the major project.
Also, the government can guarantee the special purpose entity against bankruptcy.
In terms of governance,
the financial institutions play a central role as they hold some power,
particularly in terms of negotiation and due diligence.
Typically in governance arrangements,
the financial institutions are the major contributors of funds for the major projects.
Financial institutions are exposed to the risk associated with
the project and therefore they require
appropriate guarantees and collateral against these.
For example, they often impose conditions and controls on
the acceptance of the construction works
and the operating performance of the major project.
Typically, these controlling powers are delegated to external independent certifiers.
Usually, these additional powers are provided by provisions of the loan agreement.
This means that the financial institutions might have
indirect control over or within the special purpose entity.
For example, they may appoint a shadow director to the board of directors.
When serious problems arise,
such as if a contract or the special purpose entity defaults,
the financial institution may have the power to take control of
the special purpose entity by virtue of the
so-called step-in provisions included into the loan agreement.
In such extreme scenarios,
the financial institutions have the option to restore the contracting network.
So, we can see how the financial institutions
play a central role in the governance of the major project.
In addition to the previous categories,
there may be additional types of investors,
including bond investors, multilateral developing agencies,
international development banks etc.
These additional categories of investors often have limited decision making powers during
the performance or execution of
the contractual framework characterising the governance arrangements.
So we have described how the sponsors and the other investors control or govern the SPE.
In a way, the special purpose entity institutionalises the voice of the investors,
thanks to the governance mechanisms provided
by the formal instruments previously described.
In addition, the special purpose entity provides a means to govern risk.
Typically, the SPE contracts out
the construction responsibility and risk
to the main contractor by means of the engineering,
procurement and construction contract or EPC contract on a lump sum turnkey basis.
In practice, the SPE transfers the construction rights to a main contractor,
that is held completely responsible for the construction performance.
In effect, the EPC contract effectively de-risks the special purpose entity or the SPE.
And similarly, the operational risk is
transferred to an external contracting stakeholder.
As you can see, the governance arrangement is
based on a very complex and sophisticated contracting network.
The contracting and the financing instruments supporting
the governance arrangements need to be negotiated and decided systemically.
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