One of the special modes of carrying out international business is a ¨ Turnkey Project exports ¨. Generally, projects that involve rendering of services like designing, civil construction and erection and commissioning of plants/factories along with supply of machinery, equipment and materials are known as turnkey projects. In this article you can find various essential provisions related to Turnkey project exports.
1. What is a Turnkey Project
Turnkey (or turn-key) project is a term typically used with reference to construction projects for which the developer undertakes the whole responsibility from design to completion so that the building is available to the buyer in a ready-to-use condition.
Another way to define it is as a real estate development project characterized by the builder absorbing all risk until a specific point has been reached. This usage has its origins in the construction industry to refer to the day when a job is finished to the last detail and the owner just has to turn the key in the door to begin using the facility. This point is generally the culmination of the project or when the real estate construction is ready for occupancy. Thus, turn key property is purchased property that already contains furnishings or other objects when the buyer occupies it.
A lot of public housing projects owned by the government are turnkey projects. For these projects, a private developer takes up responsibility for all activities required to perform the projects. The activities include land purchases, plans, construction and permits. He then sells the completed structure to the housing authority.
Some of the few examples of Turnkey Projects include Engineering Projects, large construction projects i.e Construction of Airports, Ports, skyscrapers, Bridges, In IT (turn-key implementation of information systems), and more.
2. What is the process of establishing a Turnkey Project
3. Exports of Goods and Services in execution of a Turnkey Project
Exports of engineering goods on deferred payment terms and execution of Turnkey Projects abroad are collectively referred to as ¨Project Exports¨. These contracts are generally of high value and exporters undertaking them are required to offer competitive credit terms in order to be able to secure orders from foreign buyers in the face of stiff international competition.
Indian exporters offering deferred payment terms to overseas buyers in respect of export of goods and those who have been awarded Turnkey projects by overseas parties have to secure prior approval at post award stage from Authorised Dealer/ Exim Bank for credit terms to be offered, third country imports, etc.
Provisions relating to Project exports and Service exports have been laid down in the “Memorandum of Instructions on Project Exports and Service Exports”.
3.1 Broad Criteria for consideration of Proposals
(i) Authorised Dealer / Exim Bank will mainly examine, among others, the following aspects while considering grant of package approval for proposals for export of engineering goods on deferred payment terms or for undertaking turnkey contracts abroad:
- Period of deferred credit offered vis-a-vis foreign competition, moratorium, rate of interest, adequacy of advance and down payment provided for as well as requirement of foreign exchange for execution of contract (viz. imports from third countries, agency commission, freight, etc.) and overall economics of the proposal.
- Nature of security obtainable from the foreign buyers against payments due and nature and extent of various bonds/guarantees required to be offered by the exporter (including those for procuring third country supplies).
- Nature of escalation, force majeure and arbitration clauses provided in the contract and penalty/damages payment provisions.
- Extent of fund-based and non-fund-based facilities required in India including pre-shipment and post-shipment credit and/or bridge finance requirements.
- Economic and technical viability thereof as well as special features relating to erection, supervision and commissioning of the contract.
(ii) As regards civil construction contracts, turnkey engineering contracts, process and engineering consultancy services and project construction items (excluding steel and cement), the Authorised Dealer / Exim Bank will consider proposals only from contractors who are on the approved list of Ministry of Commerce and Industry, Government of India in order to ensure that only contractors having the necessary competence and capability undertake overseas construction contracts. While considering proposals, Authorised Dealer / Exim Bank.
3.2 Period of Deferred Credit
The periods for which credit may be offered for export of goods, consumer durables, turnkey contracts will depend on the merits of individual cases and may be determined by the exporter and his banker in mutual consultation on the basis of commercial judgement. However, consumer durables and miscellaneous engineering goods listed in the Project Exports Manual (PEM) should ordinarily be exported on cash terms. Four major factors viz. anticipated life of the goods to be exported, extent of foreign competition, nature of the foreign market and the contract value constitute the criteria for determining the overall terms of credit.
Exporters who have secured orders for undertaking supply contracts on deferred payment terms, those who have secured turnkey contracts abroad or for export of services in the area of management, technical consultancy, etc. where execution of the contracts involves grant of fund-based and/or non-fund based facilities from the Indian banking system or where deferred payment terms are to be offered require approval from Authorised Dealer / Exim Bank.
3.3 Post-award clearance of Proposals
Each project export contract or Service Export Contract involving Deferred Payments needs to be approved either by AD/ EXIM Bank in India. Such approval needs to be obtained on the post award stage but before actual execution of the project.
- After entering into Engineering or Civil contract, the exporter should submit to his AD bankers an application in Form DPX-1 (in respect of turnkey and deferred payment supply contracts) or in Form PEX-1 (in respect of civil construction contracts), as the case may be, in six copies along with six copies of the contract. Now ADs are permitted to approve the contract without any limit. However, in case the participation of EXIM Bank or ECGC is involved for credit facilities or insurance etc., then the AD need to furnish the details of contracts etc., to them accordingly
- In case of export of Service Contracts, requiring furnishing a performance guarantee to the overseas employer in respect of the project as a whole especially for contracts in the field of erection/installation of plant and machinery as well as services like electrical or air-conditioning installations associated with civil construction work. The details of the contract need to be submitted to AD in Form TCS-1 in six copies along with six copies of contract for necessary post-award clearance.
3.4 Follow-up of Turnkey Contracts
Exporters and all their Indian sub-contractors executing turnkey contracts abroad should furnish progress reports in Form DPX 2 on a half-yearly basis (June and December) to concerned approving authorities.
The final Report in Form DPX 2 should clearly indicate the fact of completion of the project and full compliance with the requirements relating to completed projects.
3.5 Third country purchases
While granting package approval for turnkey contracts involving purchase of machinery or equipment or materials from third country sources, the AD or Exim Bank will indicate the extent upto which such purchases may be made.
Ordinarily, the third country purchases should be paid for separately by the overseas project authority or by the Indian exporter out of advance/down payment received from the project authority. Where the payments for the contract are receivable on deferred payment basis, the exporter should, as far as possible, try to secure matching deferred payment terms in respect of third country purchases required for the project to avoid a net outlay of funds in foreign exchange.
3.6 Export of construction equipments and other equipments from India
Exporters executing turnkey contracts abroad should usually take any construction equipment or other equipment required for performance of the contract from India. On application, AD may permit export of equipment from India on the condition that it will be re-imported into India on completion of the contract and if let out or sold, the full hire charges/sale proceeds will be promptly repatriated to India.
Exporters will also be permitted to purchase construction etc. equipment abroad, where necessary.
3.7 Requirements relating to Completed Projects
- Exporters executing turnkey contracts abroad should take the following steps after completion of the contracts:
- Close the foreign currency accounts and transfer the balances to India;
- Wind up site and liaison offices opened abroad;
- Ensure that the guarantees for performance of the contract and other guarantees issued are cancelled and returned to exporters;
- Liquidate fully overseas borrowings or overdrafts, if any obtained and cancel counter-guarantees as well;
- Make suitable provision for payment of taxes, customs and other statutory obligations in the country of project;
- Dispose of the equipment, machinery, vehicles, etc. purchased abroad and/or to arrange their import into India.
- Recover funds, if any, transferred to other overseas project(s) and repatriate them to India.
- A report giving full account of the various steps taken should be sent by the exporter through his bankers to the concerned Authorised Dealer / Exim Bank as the case may be, depending upon the authority which had granted post-award approval for the project contract within one month from the completion of the project. Such report should also invariably be sent to Exim Bank / ECGC where their participation in funded / non-funded facilities, risk sharing is involved. The following documents should also be forwarded along with the report:
- A completion or final handing over certificate.
- A certificate from the overseas bank regarding closure of the account held with it.
- A statement of remittances made to India. Bank certificates about repatriation of funds to India should be enclosed.
- Tax clearance certificate/No tax liability certificate about the overseas project.
- Bills of Entry for re-import of machinery, etc.
- Statements of income and expenditure and profit and loss account of the project duly certified by a Chartered Accountant/Project Manager.