LIEs – Important Connection Between Lenders and Developers

Lenders Independent Engineer

It is said about Lenders Engineer that they are less known but are an increasingly important function.

The Lenders Independent Engineer (LIE) is a representative of lending institutions such as banks and Non-Banking Financial Companies (NBFCs). His/her role is to audit a project from the technical viewpoint when a developer seeks funding. Risk teams have this process, some have it over time and others have it hard-wired into funding proposals by developers.

The purpose behind this requirement is the identification, mitigation and hedging the lending institution’s risks with regards to the technical aspects of construction.

There are a number of key risks included in such a project:

• The developer’s potential failure to service the debt.
• The potential use of the funds for purposes other than the ones they were allocated.
• Construction progress not keeping pace with expenditure.

Now for those who have a question that are LIEs truly needed?

The LIE appointed by the lenders studies the stage-wise development of the projects. He/she also determines that the milestones are reached effectively. In doing so, the problematic areas are noted, growth charts, drawdown schedules and implementation schedules are studied, and the project is overall reviewed from the point of view of the lender. LIE also ensures that the relevant legal permissions for the project are ready.

Now, let’s understand the role of a Lenders Independent Engineer:

Substantial and definite advantages can be brought by a trained, committed and neutral Lender Independent Engineer. The benefits of an LIE’s services in project monitoring are never limited to just providing security to lending institutions. They are also an important part of risk management and value addition for the developer himself.

The LIE is backed by sound technical knowledge. Hence LIE plays a vital role in overall project monitoring and coordination by providing regular technical feedback.

The feedback can help developers in presenting a more accurate and convincing picture of the progress that the project is making at important meetings.

The expert inputs can also help reduce the chances of project failures due to any conflict among the participants in a project. If the project manager lacks information or knowledge on a particular topic, then these inputs can avoid project failures.

These expert inputs also help to avoid indecisiveness among project participants on key decisions.

Professional project development and monitoring agencies bring in best practices on processes which even the developers can take time to learn and adapt. Increased efficiency in the development process leads to the finished product. Apart from this, proactive identification of risks can lead to better planning which subsequently leads the company in saving up to 10% on the project costs.

• Hence it is recommended for lenders to involve an LIE at the pre-investment stage.
• In this manner risks like labour availability, uncovered project costs, overall specification and project costs can be identified on time.
• Both the parties, the lending institution and the project developers must be aware of new technologies and the cost-benefit analysis before they can be leveraged for a more efficient project development.
• Social factors like environmental, health and safety practices need more emphasis than they are currently being given in the Indian construction industry. Only a neutral and well-qualified person whose concerns go beyond time and cost savings can help by providing impartial guidance on these concerns.

Lenders Engineer is appointed primarily to safeguard the interests of the lenders (banker/financial institution/investor) to ensure that the lender’s risk is minimal. It can be accomplished by appointing an experienced engineer to monitor the project and achieve the timely completion, maintaining the cost and its budget, ensuring the quality of material and workmanship. While performing a regular factual reporting from the site, the Lenders Engineer also has the duty to monitor the proper utilisation of funds.

It leads us to the next big topic.

How to recognise good Lenders Independent Engineer?

• Ethics is the key quality. An untrained professional can leave numberless areas in a construction project unattended. These can only be identified with technical involvement. These areas have to be brought to the notice of all stakeholders.
• A construction project has many elements to success. The technical aspects include various factors like geological factors, architectural design aspects, civil construction and the use of the most efficient mechanical and electrical equipment & services. The appointed LIE must be able to understand these complexities and help ensure that the project gets the benefits from a mix of architects, civil engineers and mechanical and electrical engineers.
• A technical analysis is incomplete without the use of technology. The LIE must be proficient in the use of technology in order to ensure safe risk management and progress mapping.
• The LIE must be able to translate technical information into relevant inputs for the financial participants in the project. These can include payback period and various other factors that impact returns.
• The primary scope of an LIE includes providing expert insights on the availability and applicability of statutory approvals for a project.
• The LIE must have extensive knowledge of statutory aspects and approvals and must employ a system to review such approvals through predefined checklists.

Now let us see the various reviews of finance that comes under the job of an LIE.

• It is an LIE’s duty to see the total requirement of funds for the successful completion of a project, taking into consideration other escalation factors.
• Besides this, the LIE also determines the availability of funds with the construction agency.
• He/she looks upon the mode of funds for the entire project, including the mode of schedule of payments.
• The lender’s independent engineer also helps in the planning of utilisation of funds.

The appointment of an LIE is complex in nature. The main reason being that the LE is appointed and paid by the developer but it provides the report to the lending institution. Appointing an LIE is necessary and all the developer can expect to get in return is a stamp of approval. A lot of developers look at the gloomy side of the appointment.

Another side of the coin is to perceive that developers need LIE as a partner in delivering a better product by both the project participants. The new level of awareness is already being witnessed among private equity investors who have better technical monitoring service providers on board because they have a stronger say in a project’s overall development process.

At the same time, lending institutions need to have a scientific basis on which pre-qualification for lender’s engineers takes place. It will allow professional project management companies with better resources, capabilities and scientific risk analysis processes to provide better data and ethical practices to provide higher value. Lenders, as key project partners, should have a stronger say in identifying their representatives.

This will ensure that the project’s development focuses on a higher quality of real estate products which take into consideration the social aspects of construction to include safety, health and environmental impact.

Rakesh Narula & Co. (RNC) is a well-known and respected name in providing techno-commercial services and consultancy for valuation of property, plant and equipment. RNC also acts as an independent engineer and is a leading valuation advisor with expertise in the areas from valuation for fixed assets to financial reporting, statutory compliances etc.

Rakesh Narula & Co. offers the following services as lenders independent engineer:

1. Review the physical progress of work against the project cost and schedule in the feasibility report.

2. Verify and take care of the government and other necessary approvals.

3. Monitor the progress of the execution of the project to ensure timely completion.

4. Suggest proper remedial measure to avoid or reduce a situation when time or the cost overruns.

5. Help in verifying the civil structure completion, erection and installation of machinery in all manners.

6. Provide regular feedback about the progress of the work and application of funds.