Process of Making Go or No-go Decision

on Save Valley Irrigation Project

Executive summary

First, we collected history data of BLL's previous work in infrastructure and water facility field as well as potential competitors. Meanwhile, we broke down the Save Valley irrigation project according to function.

Based on OBIA's information model, we analyzed working environment in the host coutry, Mozambique, including nature and social environment

Next, we used IPRA model to analyze potential risk of this project based on feasibility of the project and BLL's strength.

Finally, taking all factors in to consideration, we made our decision that Bovis Lend Lease would notperform the Save Valley Irrigation Project.

Information considered

2.1 Organizations

Several different organizations are considered throughout the evaluation process. These include the evaluating organization, the owner, and the competitors. Each organization has goals and controls resources.

Evaluating Organization:

Bovis Lend Lease (hereinafter referred to as BLL) is one of the largest international project management and construction service companies in the world, as well as an international leader in property and infrastructure field. BLL provides a full range of project services, including several water projects（forming alliance with other companies).

BLL has rich experience with international construction, but had never delivered a project in Africa. Moreover, all water supplement projects BLL provided before were located in Australia, where the head quarter of BLL lies. As a global-wide company, BLL is willing to open the growing African construction market.
The information of specific significance in the decision to pursue is:

●BLL is an international leader in infrastructure construction. The water program provided in Australia are estimated at least 410 million USD.

●BLL has a goal to enter African market.

●BLL is capable of working effectively in Africa due to experience in other developing countries and similar type of work.

●BLL is proficient at project design, construction and management.

●BLL emphasizes much on the idea "no accident damage".

Owner Organization

The owner of the Save Valley Irrigation Project is the government of Mozambique, which has received funds from The Arab Bank for Economic Development in Africa (BADEA) and The OPEC Fund for International Development (OFID).The total cost is estimated at US$ 19.87 million,1 while funds from BADEA and OFID are of US$17.96 million.

Competitor Organization

There are six companies are invited to the bid for the project. And these companies are from different continents and have various experience and cultural background. By interviewing four of them, we find dis/advantages when competiting with BLL.

Competitor 1——China Road and Bridge

1. China Road and Bridge had many projects in Africa and has a good relationship with African governments.

2. It was not much experienced with irrigation works in a foreign country.

is a large international contractor with significant road experience.

Competitor 2——Chengda

1. Chengda is a leading company in China with a number of patent and proprietary technologies.

2. Chengda was not much experienced with irrigation works.

Chengda did not have projects in Mozambique.

Competitor 3——CSCEC

1. CSCEC is also a large international contractor with significant road and building experience.

2. CSCEC had many projects in Africa and even in Mozambique, so it had a good relationship with the owner due to the past project.

3. CSCEC is very capable of developing and constructing roads and buildings, but it has its own weaknesses at irrigation works.

Competitor 3——Hochtief

1. Hochtief is one of the largest contractors in Germany, so too in the world market. It has advanced technology and managerial experience.

2. Hochtie had many projects in Africa, but had no project in Mozambique.

3. whether Hochtie to pursue the project or not is not sure.

All in all, CSCEC is considered the most critical, though they don’t have enough experience in irrigation work.

2.2 Commitments/Contracts
There are several contracts which influenced the decision to whether to pursue the project. The following factors are considered for this contract:

1. The scope of the project includes Irrigation Works, Buildings and Road Works.
2. The period for the construction phase of the works for the different contracts shall not exceed the following:
Irrigation Works: 24 months
Road Works: 10 months.
Buildings: 8 months
A defects liability period of 12 months

3. The Employer has specific selection criteria and requirements to evaluate applications which are all listed in the PDS.
BLL meets all the requirements: it has no record for historical contract non-performance; a good financial situation; at least three projects the completed and ongoing projects of BLL in the field of water in recent years.

2.3 Processes

Processes to complete the irrigation project are as follows:

Management processes:
1. For tender invitation, make strategic planning, complete the tender documents.
2. Acquire the project.
3. Perform contracted services.

Providing the facility:
1. Design the construction works and use WBS to define the scope of every sub-project and facilities needed
2. Procure materials and transport them to the site.
3. Construct.

2.4 Environment2

2.4.1 Political Environment:

Since peace was restored in 1992, Mozambique has been in long-term stable political situation, turning political system from socialism to the presidential republic system. In 1995, Mozambique became one of the British Commonwealth of Nations, Australia is also a member of which. Though there no longer exists Commonwealth Preference, Mozambique, as a developing country, benefits from co-operation.

Australian government has ever donated 50 million Australian Dollar to support Mozambique to improve water and health condition.

2.4.2 Legal Environment:

While Australia uses common law, civil law system is applied in Mozambique. Judicial procedure in Mozambique is really complex and time-assuming. According to the data from World Bank, it takes 31 programs, 1010 days at average, before implementing the contract, ranking at 147 of overall 178 countries.

In order to tempt the foreign investment, Mozambique made a low tariff and tax rate and applied a loose foreign investment policy. The government have enacted the and to encourage the Foreign investors. In other words, there is few restriction of investing in Mozambique, and was listed as the top 10 African countries for foreign direct investment.

Similar to many developing countries, corruption is still one of the most serious and prevalent problems, and thus Mozambique fails to build an equal environment for investors and block itself of further development.
In addition, social security problems arise, such as small-scale riots and robberies.

2.4.3 Economic Environment

At present, Mozambique Coexists various economic systems. the Government encourages foreign investors to participate in the reform of changing state-owned business entities into private ones. The government now is seeking large-scale financial assistance to develop infrastructure which were totally devastated in the domestic war before 1992.

The country has maintained economic growth averaging at 8% of GDP in the past ten years, so too has the inflation rate at 3.3%. To stop the deteriorating situation of national currency, Meticais depreciation, the Central Bank of Mozambique declared a new rule of foreign exchange in July, 2011, that exporters have to exchange at least half of foreign payment to Meticais, that importers keep at least 40% local currency in the account, in order to limit the use of foreign currency, especially USD.

2.4.4 Culture Environment

Português is the official language of Mozambique. However, English is used in most business cases. The biding documents and contracts of Irrigation Project are required to write in English.

As for general quality of Mozambicans, we can only hear from local construction contractors. As is the case in most African country, Mozambicans, including youth, are quite lazy and corrupted which make them unwilling to work to make a living. This statement can be verified by their poor public security circumstance and the fact that many young people rob pedestrians for a living. Apart from that, Mozambicans are ‘good’ at delaying their jobs. It is hard for construction contractor because foreign investors are required to hire high percentage of local labors in order to protect local labor market.

2.4.5 Resource Environment

1. Natural resource:

Mozambique have plenty mineral and forest resources. An Australian company has invested to build the largest Aluminum factory in Mozambique. Moreover, water resource is abundant, which is benefit from the flowing through of three large rivers, Zambezi, Limpopo and Save River in Africa.

2. Infrastructure:

Mozambique has the Cahora Bassa hydropower station which is the seventh largest of the world. However, it is far from meeting the demand of manufacture and other industries in Mozambique.

Road, rail and waterway are main measures for domestic transport, but it is inconvenient to interchange between those transportations. Internet has not been so prevalent, either.

3. Human resource:

The total number of labor force in Mozambique reaches at 9 million, only 5% of which engage in mining and construction industry. Due to the tendency that skilled labors immigrate to South African, workers left are mostly non-skilled, thus they are only capable for undertaking the easiest jobs without expertise. In the meanwhile, local Labor Law has a preference to protect local labor, for instance, limiting the max number of foreign employees in one business entity and ordering the employers who fired a local labor to pay extra salaries for three months.

Overall, the cost of hiring a Mozambique labor is high and not worthwhile considering the benefit they can make for employers.

4. Financial Resources.

Mozambique’s banking system is lagging behind. Since issuing the letter of credit takes long time and charges a high service fee, this tool, which is supposed to be efficient, impedes the development of private business entities. Moreover, foreign exchange system is under strict control of the national government， making it inconvenient and costly for foreign contractors to arrange a proper financial plan.

2.5 Facilities

Various facilities are required for all irrigation, road and different types of building works. BLL has significant experience in professional water supply in Australia. For example, Lend Lease provided water network maintenance services to Yarra Valley Water in Melbourne from 2000 and Bulk Water Alliance, including pipeline work at 410 million USD. 3

But in this case, the difference is that it includes excavation, filling and concrete works for primary canal, secondary canals, field canals and delivery and distribution basins, which play a vital role in the whole project. Facilities required in this project are not all available from Mozambique market and have to be transported from somewhere else by ship.

3. Evaluation decision

According to the information listed above, we can evaluate the project based on the OBIA method.

3.1 Assess Project feasibility

The government of Mozambique really gives this irrigation project priority as an important infrastructure for Agricultural Development and spares no effort to ensure implementation of the project.

The funding of the project is from The Arab Bank for Economic Development in Africa (BADEA) and The OPEC Fund for International Development (OFID), both of which enjoy a high degree of credibility. Such financial arrangement guarantees the completion of the project.

3.2 Determine Ability to Perform

The following factors are considered to determine ability to perform:

1. Bovis Lend Lease, in the form of alliance with other professional companies, has successfully completed and is undertaking projects related to water in the domestic market.

2. BLL itself has experienced managers available for infrastructure project. However, they have never done tasks in excavation, filling and concreting works for canals.

3. The Save Valley project has much smaller working scope and involves much smaller financial investment than previous projects BLL did. Besides, as mentioned above, the inconvenient of transportation and lack of basic engineering facilities worsen the ability to perform the task.

3.3 Access Competitive Advantages &disadvantages

●Technology:

Bovis Lend Lease has delivered thousands of projects under severe environmental conditions. For example, in the Bulk Water Alliance project in Weston Creek, ACT, confronting with extreme weather condition such as flooding and dangerous geological features, BLL exploits innovated and cutting -edge technique to tackle those problems, consequently, overall excavation work was delivered under budget.

●Relationship

Good relationship with several construction companies specialized in water field, such as GHD, Abigroup and John Holland.

Australian government has ever help Mozambique. However, the cooperation between China and Mozambique is much closer and Mozambique government provides more preferential treatment to Chinese investors.

●Image

There are some values that BLL follows: respect, trust, collaboration, integrity, excellence， innovation and no damage, which lead BLL’s projects to be recognized around the world. This will bring advanced and sustainable concept to the market of Mozambique which is still very backward.

On the contrary, these advanced ideas could also be factors obstructing BLL. Since many developing countries do not possess these ideas, they are unwilling to spend money and time on these aspects. Just like their experience in China, they are forced to give up some projects.

3.4 Determine Project Risks

Here we choose to use the IPRA tool developed by CII, USA to determine project risks and we only consider the seven most critical risk events.

Rank IPRA
Element Likelihood of Occurrence
(L) Relative Impact(I) Element
Description Coordinates
L,I series
Project
Score
Baseline
1. Ⅰ.B1 1 _ E Source& form of funding 1,E ◆
2. Ⅰ.A1 3 _ E Business case 3,E ◆
3. Ⅰ.A2 3 _ E Economic model/feasibility 3,E ◆
4. Ⅱ.B2 2 E D Political stability 2,E ◆
5. Ⅱ.D4 4 _ E Contract type & procedures 4,E ◆
6. Ⅱ.B3 4 _ D Social unrest/violence 4,D ◆
7. Ⅱ.B6 3 _ E Relationship with government/owner 3,E ◆

The reasons of weight for each factor are as follows:

●Source & form of funding: Financial condition is always the essential factor whether a project can be delivered successfully. The Government of Mozambique has received funds, provided in USD, from BADEA and OFID. As two reputable organizations, constructors can trust the sources of fund.

●Business cases: BLL has no experience in such undeveloped regions. Since the company emphasizes much on the idea "no accident damage" which needs much more cost, BLL is not sure whether Mozambique government support this idea ; according to the previous cases, BLL would rather give up the project which goes against the “no accident damage” idea.

●Economic model/feasibility: As we have considered before, this project is feasible. But the cost of hiring Mozambique labors is quite high and beyond its real value. In addition, BLL, an Australian company, is not supposed to get the most preferential tax rate or tariff as some Chinese companies.

●Political stability: In general, Mozambique is in a stable political circumstance and the government continues to execute safety pragmatic policies, aiming at developing the economy and eliminating poverty. So this risk is low chance and unlikely to occur in most circumstances.

●Contract type & procedures: According to the bidding book, BLL satisfies the requirements of the relevant contract. The contract type has not stipulated in the bidding contract, so the company is undertaking the risk of the owner’s choosing contract type. According to previous experience, EPC mode are used most widely in the international construction. But since in this case, it only takes 40 days to prepare for bid and BLL has never involved in bidding in Africa before, BLL cannot carefully study and examine requirement of the owner as well as geology condition in this district during bidding process.Therefore, BLL may be exposed to great risk in a EPC contract.

●Social unrest /violence: In recent years, the public security situation is bad, the crime rate is high. Robbery cases even guns and gangs for Banks, shops, and looting in Mozambique's foreign institutions and foreigners also happen from time to time. In some cases, some robbery crimes aim at constructors and workers.

●Relationship with government/owner: This is the first time for BLL to cooperate with the owner, and BLL does not have any project before in Africa. Compared with CSCEC and other Chinese contractors invited to bid, this risk is higher for us.

Based on the above analysis, we obtain the IPRA Risk Matrix:

Very high

Likelihood
Of
Occurrence
(L)
Very low Negligible Extreme
Relative Impact

We can see that the seven risk events are relatively critical. The risks of Relationship with government/owner, Social unrest/violence and Economic model/feasibility are not to be ignored. And this will impact our final decision.

3.5 Select Project to Pursue

In terms of the professional area of BLL, BLL has the ability to do the irrigation project. But because BLL is not familiar with the target market, the financial condition of the market is underdevelopment, social is unrest, violence happens occasionally, the control of foreign exchange is under strict supervision. All factors above compell BLL to confront a relatively difficult situation to undertake projects.

4. Project Outcome

In conclusion, we make the no-go decision due to the following reasons:

Although BLL has advantages in the irrigation and buildings works, it has no experience in Mozambique,which forced BLL to confront a strange and undeveloped market. To this aspect, other constructors invited to bid like CSCEC got more advantages.

The circumstance both naturally and socially are so different from regions BLL has ever undertook in water projects. And some advanced ideas of the company are not practical the the present Mozambique market.

Last but not the least, since the project values no more than US$20 million, BLL cannot fully exploit its advantage in technology and financial management.