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Performance Bonding

May 26, 2010

Performance Bonding

Q:

I was wondering if my firm could save money by relaxing or even eliminating the bond requirement for rejuvenation. Because rejuvenation is executed and invoiced at a cable segment level, the traditional notion of performance bonding seems to not apply.

Dollar sign
A:

I lean toward the technical so at first when you mentioned “bonding” I was thinking you were referring to the bonding of neutrals to the system ground. But hey, I am all about saving money. That is one of the many reasons why I chose the Novinium team. We are always looking for ways to save a buck and we love to challenge old paradigms whether technical or financial.

You are exactly right about performance bonds, they are not required for rejuvenation. If a circuit owner requires a bond, the cost of the bond gets passed onto the circuit owner … that’s you! While there is no one smarter than me when it comes to the technical matters of cable rejuvenation, I decided to ask for some help from my brother-in-law who has been in the bond surety business since 1987. He is the president of The Bond Exchange and his name is Jim. Check him out at www.thebond-exchange.com. My sister can vouch for his character. Check out our dialog below …

Thermo: How is my sister treating you?

Jim: If I do everything she asks without sassing she treats me quite well.

Thermo: That’s what makes you a good husband. She was that way even when she was a tadpole … she was the last one to hatch so I think she might have gotten a tad spoiled. Hey, one of my fans has a question for me that I need your help to answer properly. Don’t lay any of your bonding lingo on me either … I understand the Romans came up with the word surety, and we know what happened to them!  Bonding was never required by any circuit owners for rejuvenation work before the dawn of the 21st century, but suddenly a few circuit owners have started requiring performance bonds. Do circuit owners benefit from requiring performance bonds?

Jim: I wish I could answer yes, because I get a cut of every bond, and I still have one of your nieces in college, but the honest answer is no. There are basically two reasons why this is so. First of all, you provide a proprietary product and service. Nobody else in the world can provide the same technology that Novinium does. Even if a circuit owner was willing to settle for a 20th century approach and all the safety and performance compromises that choice entails, the cost of the bond far exceeds any risk.

Thermo: What are those risks?

Jim: A performance bond puts the risks of non-completion of the project on the surety. A surety is large financial institution that acts as insurance. In most construction projects there are two main categories of risk contemplated. The first category of risk includes technical or operational snafus that make project completion impossible with the planned method. For example, if the circuit owner was replacing cable with directional drilling and the intended path turned out to be solid rock, conventional directional drilling may not be possible. This type of risk is entirely missing with all rejuvenation technology, because an integral part of rejuvenation implementation is testing of the cable prior to injection. The testing determines the suitably of the cable to be rejuvenated. It is normal, indeed expected, that at least some portion of the cables, which are desired to be treated, cannot be treated. Cables cannot be treated for either technological or economic reasons. The other main category of risk is the mid-project insolvency of Novinium. Novinium is backed by one of the largest investment banks in the world, so this risk is pretty small to start with, but even assuming that catastrophic outcome, the circuit owner would have been billed for only that part of the work that is actually completed.  Since each segment of cable stands on its own, there are no pre-paid sunk costs that would need to be recovered. In this worst-case scenario the circuit owner would have the same choices to complete the project that it would have had if Novinium had never existed. The circuit owner could replace the cable or it could utilize less advanced rejuvenation approaches.

Thermo: In short, technical risks are zilch because rejuvenation is inherently integrated with a rejuvenation suitability test. Financial risk is negligible, because rejuvenation is implemented on a segment-by-segment basis—in essence with hundreds of mini-projects, each typically lasting less than one day. Novinium’s proprietary technology cannot be performed by anyone else, so even in the case of the unthinkable financial failure, the bond holder would have to settle for second best or third best. That is, the remaining segments could be completed by another rejuvenation vendor or replaced—these are precisely the same choices that would have been available had Novinium not existed in the first place. How much does this bonding cost the circuit owner?

Jim: Some owners think that the bonding cost is born by the technology supplier, but that is naïve. In the end, the bonding cost is born entirely by the circuit owner—it may be buried in the unit prices, but the circuit owner bears the cost none-the-less. The surety gets paid, the broker—that’s me—gets paid, and Novinium has to incur overhead to put the bond together, and I assume you pay those folks to do that work.

Thermo: My compensation is in crickets and goldfish … I don’t see anybody else at Novinium getting better stuff than me.

Jim: Well, even the first two pieces can amount to several percent of the project cost. If one understands the cost of the bond and the risks associated with rejuvenation, one would not require a bond because the cost far outweighs the potential risk mitigation.

Thermo: Thank you Jim, you make a confusing subject very simple. I will make up something nice about you when I speak next to my sister. Try to get as much mileage from that as you can.