Download Total Quality Management in BOT Project

Total Quality Management in BOT Project
WANG Xuan1,2 , ZHAO Ping1
1 School of Civil Engineering, Xi'AN University of Architecture and Technology, Xi'AN, 710055
2 School of Civil Engineering, Henan Polytechnic University, Jiao Zuo, 454150
[email protected]
Abstract
Infrastructure constructions have kept pace with the rapid development of our national
economy, but the main problem is the shortage of funds which limits its development. The financing of
BOT mode can become the fundamental solution to the problem. The theory of Total Quality
Management has changed the awareness of quality management of large and medium-sized enterprises
and improved the quality and stability of project quality, product quality and service quality. Total
Quality Management in BOT means the control of different stages such as the project planning,
designing, construction, inspection, operation and maintenance. Based on the TQM theory and the
features of three stages of BOT project – Build, Operate and Transfer, the paper put forward to several
methods that manage the quality of BOT project. The methods are as follows: Project Controlling,
Value Engineering, performance evaluation, quality evaluation index system and the insurance of
project quality
Key words BOT, Total Quality Management, Project Company, Value Engineering, Project
Controlling, Insurance of Project Quality
1 Introduction
In recent years, infrastructure constructions have kept pace with the rapid development of our national
economy, but the urban infrastructure constructions failed to meet the needs of our economy
development. The shortage of funds is the biggest bottleneck in urban infrastructure construction. The
shortage of funds is generally understood as the scarcity of money, which is too superficial. The cause
of this problem is that the investing and financing policies are incomplete and that the management
system hasn’t adapted the rapid development of the constructions. The reason why the infrastructure
construction can’t meet the demand of society development is the single financing channel. Meanwhile,
a lot of capital is unable to be invested in a proper field. Therefore, it is necessary to find a project
financing method to guide funds to enter an effective circle, which meets the demand for infrastructure
constructions. Created in the early1980s by Turkish Prime Minister Ozal, BOT, the acronym of Build,
Operate and Transfer, represents a complete project financing concept. BOT mode has been attached too
much importance for the application in a number of large infrastructure projects as well as in some small
and medium-sized projects.
However, it is still a pending question whether BOT mode can be widely used in our infrastructure
construction projects and how the structural innovation can be carried out. In the case of the
longer-period franchise of the BOT mode, so far not a typical BOT project has been completed in China.
Therefore we lack the appropriate experience and lessons. More deep researches have been on the risks
and related laws and regulations of BOT mode than on the project quality management both in domestic
and abroad. This paper will base on the characteristics of the BOT mode to study how to conduct a
comprehensive quality management and how to achieve the expected goal of the project by quality
management.
2 The Introduction of TQM
TQM is a management philosophy that seeks to integrate all organizational functions (marketing,
finance, design, engineering, and production, customer service, etc.) to focus on meeting customer needs
and organizational objectives. TQM has features as follows:
(1) The comprehensiveness of quality concept: a broad concept includes not only the quality of products
(project) but also the functions and the values of the product, and the work quality.
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(2) The entire process of quality management: the entire process refers to the following links such as:
the planning, designing, procuring, manufacturing, processing, marketing and after-sales service.
(3) The all-staff quality management: it is about to organize the administration and production
technology to guarantee the quality of products (project). It encourages all the staff to guarantee the
quality by their own work quality.
(4) The comprehensive quality management: it takes various measures about the factors so as to ensure
the quality of products (project). Those factors such as people, goods, technology, management,
environment, social factors have impact on the quality of products (project).
TQM has been improved in many enterprises in China, especially in some large and medium-sized ones.
Those have achieved significant results that help to enhance and stabilize the product quality and service
quality. Firmly speaking, that total quality management in China is feasible and effective. As long as in
the implementation process, in close connection with the TQM theory and the situations of China, we
conscientiously put it into practice and try to develop and innovate, we make this emerging disciplines
to enhance the quality awareness of enterprises, accelerate the pace of improving quality and improve
economic efficiency of the enterprises and the society so that more of our products can be exported the
world.
3 TQM at Build-stage
3.1 To Intensify the QM at Project Planning and Designing Stage
As most BOT projects are public infrastructure projects such as highways, railways, power stations,
water supply and sewage treatment and so on, these projects play a vital role in the development of
national or regional economy. If the pre-planning of the project is unscientific and inaccurate, the impact
will be great. Such as Chinese first water supply BOT projects – No.6 Branch of Chengdu Water Supply
Factory, the inaccurate forecast of the market demand in project planning process led to the oversupply.
However, according to the agreement reached by the government and the project company, the
government had no choice but to accept all water, which brought relevant loss to the government. Hence
it is necessary to control the quality strictly during the advance planning and design stage.
The most crucial factor in the BOT mode of financing is to do the project feasibility study and
evaluation conscientiously, which include economy, conditions of construction and production, market,
law, technology, environment and so on. The study of BOT project is different from the common ones.
Apart from the law permission, the most important thing is economic evaluation that consists of
evaluation of finance and evaluation of the national economy. As for BOT project, the project can be
approved by the government if the indicators and conclusions of the both should be feasible. In
particular, the evaluation of finance should be done in details. If it is not feasible, it means that
investment is unprofitable so that the investor will not set up the project company to carry out project
financing and construction, while Value Engineering is an important means to improve the quality of
projects. By the collaboration of all relevant fields, Value Engineering analyzes the function and the cost
of the target systematically and innovated continuously as so to increase the value of thinking and
managing skills. The basic formula of Value Engineering:
Ways
1
2
3
4
5
Table 1
F
↑
↑
↑↑
→
↓
C
↓
→
↑
↓
↓↓
Ways to improve the value
Features
Function increase, Cost decrease
Function increase, Cost unchanged
Function increase greatly, Cost increase slightly
Function unchanged, Cost lower
Function decrease slightly, Costs decrease greatly
From the table we can see that the objective of Value Engineering is to raise the value of the project,
which analyzes the ratio between the function and the cost, rather than simply increase functions or
lower costs. The successful examples of Value Engineering are Tianjin TV Tower and Shanghai
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Oriental Pearl TV Tower. For the Tianjin TV Tower, 415.2-meter high, if it is only used for the
transmission tower, its annual fees of maintenance and replacement reach more than 100 million. The
use of Value Engineering principles, increasing less investment to expand the use, helps to support
tower by tower and to generate revenue by tower. At 274- meter, the comprehensive computer room can
offer the services for meteorology, environmental protection, fire control and communications. At 253
meter and 257meter, there are places for sightseeing and dining. Therefore, the project cost increased 10
million Yuan, but the comprehensive profits annually are near millions after the completion which
provides a full guarantee for the future maintenance and update.
3.2 The Introduction of Project Controlling to Improve Information Management
It is not easy to achieve the goal of the construction project because of the features of the large and
medium-sized construction projects, such as the large scale, large amount of investment, long
construction period, technical complexity, the participating units, organization and implementation
difficulties, and so on. For the construction projects adopting BOT mode, the advisory services provided
by the traditional model can not meet the requirements, so we can try a new organizational modelProject Controlling.
The Mode of controlling = Owner’s Team + Project Controlling + Project Management
Project Controlling: It is a management-organization model. With the modern information technology, it
conducts information collection, processing and transmission in the large and medium-sized
construction projects. The processed information can guide and control the material flow of the project
construction, in order to support the highest decision-makers to plan, coordinate and control the project.
The concept of Project Controlling has the following characteristics:
(1) Project Controlling is an organization model of the construction project.
(2)The core of control is information processing, that is, information processing reflects the situation of
the material flow.
(3)The work of control is the information collection, information processing, and various reports
preparation.
(4) The target of Project Controlling is the leading decision-makers.
Project
Project Management
Controlling
Corporation
Cybernetics
Application of
Information Technology
At Construct Engineering
Figure 1 Formation of Project Controlling
The task of Project Controlling is in the process of the implementation to collect and process the
following information – the project design, construction, supply and comprehensive information. The
general controller will be responsible for the information collection, information processing, data
analysis, evaluation and project control, the objectives inspection, the trends and project report about the
predictions of error, which is the premise for the decision-maker to take measures. But they are not
directly involved in the implementation of the project; instead make a report by processing the related
information to back up the premise.
3.3 To Ensure that the Project Will Be Completed on Schedule
For the project investors, whether BOT projects can be completed on schedule is the first step for them
to recover their investment and get profits, which is also the key to the success. In the course of
implementing the project, some reasons such as engineering or technical reasons, industrial disputes or
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other external factors can cause the extension of the project and the cost overruns. Those can result in
stopping or giving up the construction project, which will affect the completion of BOT projects.
Therefore, the measures must be adopted to deal with the risk of completing the project.
First of all, the project company can select the appropriate form of construction contracts to transfer the
risk of completion. For example, Shajiao B Power Plant in Shenzhen takes the form of the risk-sharing
by the two sides: with a fixed-price, the project company chooses the turnkey contract approach to
contract the project to a consortium, made up by Japanese group Mitsui & Co. The consortium is not
only responsible for the design, construction, but also responsible for equipment supply and trial
operation. In fact, the project company will transfer its own risk of completion on the turnkey
contractor.
Secondly, the project company can also choose to insurance companies. The commercial insurance can
reduce the impact of the risk of completion.
4 TQM at Operate-stage
4.1 Application of Performance Evaluation in the Process of the Business
Why BOT projects can attract investors is not about the fixed assets formed by the project but the
revenue generated from the project. After the completion, the BOT will enter the operational phase,
which is the crucial phase for the investors to recover the investment and earn profits. The strong
economic strength of BOT projects guarantees that the project company will receive a higher return on
investment as long as the project operates successfully. It is necessary to carry out the performance
evaluation in the project operating. A complete system should be set up such as the method system and
the organization and implementation of performance evaluation. The former should include performance
standards, content and index system, performance measurement and evaluation methods. The latter
should include regulations and systems, reward and punishment system, the allocation procedures,
organization and implementation methods and the like.
4.2 The Role of the Project Sponsors in Supervision and Management of Operating
Operate-stage requires a sound and complete regulatory mechanism in order to properly coordinate the
project sponsors and the project company and to regulate the behavior of each which is necessary for
BOT to realize the public interest. If the project sponsors are on the vacancy, all kinds of irregularities
violations of laws will appear and the public interest will be neglected. Of course, the project sponsors
should pay attention to safeguarding the public interest as well as the interests of investors. If the project
sponsors don’t limit the scope of supervision, lack of transparency in the operation and intervene too
much on the micro aspects, investors will be discouraged and then turn to better investment environment.
The supervision and management of the project sponsors are mainly embodied to ensure the company to
operate in accordance with the contents of the concession agreement.
4.3 To Strengthen the “Owner” Sense of the Project Company
The project sponsors have always been regarded as the real owner of the project because the project
company only possesses BOT projects in the franchise period and after that it will transfer the
ownership to the project sponsors at a lower price or for free. In addition, within the present laws of
BOT the project ownership has not clearly defined during a franchise period. As a result, the project
company was defined as “Operator” instead of “Owner.” Strengthening the “Owner” sense of the
project company means to take charge of the routine repair and maintenance. As we know, that
investment in construction projects, include two parts: initial investment and further investment. The
first part refers to the costs related to the design and the construction; the second part is the money used
to guarantee the length of the life span, including the costs of the maintenance throughout the life, test,
and repair or components replacement. A lot of practice shows that this part of the cost is considerable.
Therefore, in order to achieve and to extend the life span of the project, the project company should be
timely to maintain and update the project and to avoid the emergence of “malicious operation”.
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5 TQM at Transfer-stage
5.1 The Establishment of Quality Evaluation Index System
When the franchise period of BOT projects expires, the project company is obliged to transfer the
better-operated projects to the project sponsors with an agreed price or for free. Since then project
sponsors will also have real ownership of projects and the right to operate. Therefore, whether the
project is operated better or not decided whether the project sponsors will reach the expected aims or not.
However, there is no uniform standard for better-operation; what’s more, no example of BOT projects
have been completed in China, so there is no corresponding successful experience to offer to the project
sponsors. In a way, it is necessary to establish quality evaluation index system of a BOT project. In
setting such a complete and effective project quality evaluation index system, it needs to consider the
following Construction principles:
(1) to have the clear system frame, and the universal index
(2) to adhere the principles of objectivity, fairness, and economy
(3) to have a clear evaluation criteria
(4) to be operable
Index should include: the project revenue, operating costs, the degree of customer satisfaction,
technology, the status of equipment and the status of main project.
5.2 To Guarantee the Quality of Projects by the Project Company
After the transfer of the project, to protect the interests of the project sponsors and prevent the big
quality problems in a short period, we can require the project company to provide the assurance of
quality, such as the insurance of project quality. The introduction of quality insurance system can
manage and resolve the possible risks by market-oriented approaches. The involvement of insurance
companies will enable the project sponsors (the Government) away from the complex transaction
processing. In foreign countries, the ten-year span insurance requires that during the insurance period, if
quality problems occur, insurance companies will instantly compensate third-party, the victims, then
deal with the subrogation recovery to the responsible parties, which would maintain the project
sponsors’ profit in time lower the risk that when quality problems arising after the transfer, the project
sponsors can not receive timely payment. Therefore, the insurance of construction quality is of highly
assurance. The ultimate aim of it is to raise the participant’s awareness of risk as well as to promote
them to avoid and prevent risks.
6 Conclusion
With the wide application of the BOT mode in China, on one hand, we should learn the successful
experience from international practices on the other hand we can not just bake it up. According to the
Chinese actual conditions, we can develop our principles and policies to build our own BOT framework,
which consists of policies, regulations, management system, quality evaluation system, operating rules
and specific methods for business issues.
References
[1] Salman. Ahmed F.M. BOT viability model for large-scale infrastructure projects. Journal of
Construction Engineering and Management, 2007, v133:50~63
[2] Wibomo, Andreas. Valuing guarantees in a BOT infrastructure project. Engineering, Construction
and Architectural Management, 2004, v11:395~403
[3] [America] A .V .Feigenbaum. Total Quality Management. Beijing: China Machine Press 1991
[4] Zhang Jijing. Project Financing. Beijing: China Citic Press, 2003 (in Chinese)
[5] JIA Guangshe. Project Controlling. Shanghai: Tong Ji University Press, 2003 (in Chinese)
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