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TURNKEY OPERATIONS
Turnkey projects involve a contract for construction of operating facilities that are transferred for a fee to the owner when the facilities are ready to commence operations. Firms performing turnkey operations are frequently industrial equipment manufacturers that supply some of their own equipment for the project. Most commonly, they are construction firms. In addition, they may be consulting firms or manufacturers that do not find an investment on their own behalf in the country to be feasible.
The customer for a turnkey operation is very often a governmental agency that has decreed that a given product must be produced locally and under its auspices. As in the case of the management contract, a firm building a turnkey facility may be developing a future competitor. Yet many firms have chosen to perform design and construction duties, particularly where there are restrictions on foreign ownership. In recent years, most of the large projects have been in oil-exporting countries, which are moving rapidly toward infrastructure development and industrialization. Of course, not all turnkey projects are developing potential competitors. Projects to build airports and port facilities, for example, do not lend themselves to competition.
The size of these contracts is one of the things setting this business apart from most other international business operations. Most of the contracts are for hundreds of millions of dollars, and many are for several billion, which means that a few very large firms account for most of the international market. Smaller firms are largely excluded from direct contracts, such as in the rebuilding of Kuwait after the liberation from Iraq, or serve as subcontractors for primary turnkey suppliers. One firm, Kellogg Rust, accounts for a significant share of the international market and of the U.S. portion of that market.31 This also has meant hiring executives with top-level governmental contacts abroad who can gain entry with the right decision makers to negotiate their proposals in foreign countries.
Pullman-Kellogg, for example, secured a large fertilizer plant contract in Nigeria by sending Andrew Young, a former UN ambassador who enjoys immense personal prestige in Africa, to negotiate the contract.32 The nature of the large-scale government contracts also has placed great importance on ceremony, such as opening a facility on a country’s independence day or getting a head of state to inaugurate a facility in order to build goodwill for future contracts. Although public relations is important, it takes much more to sell contracts of such magnitude. The U.S. Department of Commerce lists the following four factors in order of importance:
1. price,
2. export financing,
3. managerial and technological quality, and
4. experience and reputation.33
Payment for a turnkey operation usually is in stages, as a project develops. It is common for 10 to 25 percent to be made as a down payment, another 50 to 65 percent to be paid as the contract progresses, and the remainder to be paid once the facility actually is operating in accordance with the contract. Because of the usual long time periods between conception and completion, the company performing turnkey operations is exposed to possible currency fluctuations for an extended period of time and should be covered, if possible, by escalation clauses or cost-plus contracts. Since the final payment is made only if the facility is operating satisfactorily, it is important to specify very precisely what constitutes “satisfactorily.” For this reason, many firms insist on performing a feasibility study as part of the turnkey contract in order not to build something that, although desired by local governmental authorities, nevertheless may be too large or inefficient. Although the facility may be built exactly as desired, its inefficiency could create legal problems that hold up final payment.
Many of the turnkey contracts are in remote areas, thus necessitating massive housing construction and importation of personnel. They may involve building an entire infrastructure under the most adverse geographic conditions.
If a firm holds a monopoly on certain assets or resources, it will be difficult for other companies to be competitive in building facilities. As the production process becomes known, however, the number of competitors for performing turnkey operations increases. The president of an international consulting engineering firm has listed five stages for developing countries:
1. expatriates do all the work,
2. local subcontractors develop,
3. small local contractors start up,
4. local contractors take over local work, and
5. local contractors go abroad.34
This series of changes has pushed U.S. firms’ involvement in recent years to the high-technology end of the spectrum, whereas firms from such countries as India, Korea, and Turkey can compete better for conventional projects where low labor costs are important.35