ANNUAL REPORT 2006 - Skanska

To the left:
The first phase of Derby City
General Hospital, U.K., is
up and running. Construction
is underway on the
remaining portions, which
will open in 2009. With
1,200 beds and 35 operating
rooms, the hospital will
be the workplace of about
7,000 people.
To the right:
The 90 km (56 mi) long
A1 highway near Gdansk,
northern Poland, is one of
Europe’s largest highway
projects. It is also Skanska’s
first public-private partnership
project in Central
Europe. Construction work
began late in 2005.
Thorough selection process
The selection process is crucial to Skanska, since there is a very wide
range of projects. First and foremost, projects must be in product and
geographic areas matching Skanska’s competencies. As mentioned earlier,
the investment must also meet Skanska’s return targets. Skanska
performs a thorough examination of risks and opportunities, in close
collaboration with the Group’s construction units. Among the available
projects, Skanska selects those in which it has the greatest potential
to achieve success. Since public-private partnership projects largely
undergo final planning during the bidding phase, the bidding costs
are substantially higher than for traditional construction contracts.
The bidding period is usually also longer. By means of a very thorough
selection process, Skanska’s total bidding costs can be kept down and
the prospects of being selected can increase.
Together with one or more suitable partners, Skanska ID forms
a bidding consortium. In collaboration between the bidding consortium,
Skanska’s local construction unit and other suppliers, Skanska
ID develops a bid. If the bid is accepted by the customer, the consortium
is appointed the preferred bidder. Other bidders are thus eliminated.
At this point, Skanska ID and its partners form a special project
company to own and operate the facility during the concession period,
often lasting 20 to 35 years.
After the consortium has been selected as the bidder, final negotiations
with the customer and potential financiers begin. Only when financial
close has been achieved are the assignments included in the order
books of the construction unit and in Skanska ID’s market appraisal.
Integrated model
As a rule, Skanska’s local construction company carries out most of the
construction project as a design-build contract with a fixed price and
completion date. The margin potential in these projects can, if risks are
managed, be higher than is the case in traditionally procured projects.
This is primarily because Skanska is involved in the entire process and
can thus influence planning and design from the very beginning. The
local construction company is often also contracted to operate and maintain
the completed facility. The greatest risk from an investor perspective
is that the asset cannot go into service on schedule and that quality
standards are not met. When Skanska itself carries out the construction
assignment, this risk is substantially lower.
Two different compensation models
Once the construction phase ends, the ramp-up phase begins. Its length
varies depending on the type of project and the payment model. In
projects using the availability model, the ramp-up phase is normally no
more than one year. In highway projects using the market risk model, for
example, the ramp-up phase is instead connected to the functionality of
the toll and invoicing systems and whether traffic revenue achieves the
expected levels.
The project company, in which Skanska ID is a part owner, receives
compensation mainly according to one of two different models.
In the availability model, compensation is based on providing a
given amenity and agreed services at a predetermined price. Compensation
is payable regardless of the extent to which the facility is utilized.
Phases in development processes
Terminology Meaning Implications for Skanska Market appraisal
Bidder Company that actively tries to be Costs are recognized continuously in No
awarded the project.
the income statement.
Preferred bidder A consortium is selected and pursues final The project is highly likely to be implemented. No
negotiations to sign a contract with
Bidding costs are capitalized in the balance sheet.
exclusive rights.
Financial close All contracts are signed. Debt funding is raised, often Construction and service contracts are reported among order bookings. Yes
in the form of a syndicated bank loan or bonds. The An initial risk premium is added to Skanska’s discount rate.
first disbursement is made to the project company.
Completion of Construction is completed, entirely The initial operating phase has begun. The initial risk Yes
construction phase or partly (in stages), and the asset is in operation. premium has gradually been reduced, but a certain
risk premium is retained through the ramp-up phase.
Ramp-up The initial operating phase. The duration varies, The ramp-up risk premium is gradually reduced. Yes
depending on the type of project and payment.
Steady state The project is in in full operation and has The long-term discount rate is applied. Yes
achieved long-term revenue and cost levels.
Skanska Annual Report 2006 Infrastructure Development 39