Part 7-4: Working Overseas, Advanced Civil Engineering, (NTUST, 5908701)
MT KAO (Blog: http://mtkaoforum31.blogspot.tw/)
9) Unmanageable Risks:
(1) Politic risks (regime change, war, commotion, nationalization, sanctions, embargo)
When people go to foreign countries for construction or engineering works, they've to assume that the host country will be socially, economic and political stable. Because when it tumbles, no company or individual will be able to bear the consequence.
In general, government in the developed economies will provide insurance to cover part of the loss suffered financially by the companies working for projects in the troubled area. But the compensation can only cover part of monetary loss; freedom and lives of the people is losing forever if it involves violence or antagonism.
State function will be disturbed if war, riot or public disorder happen, they will cause the progress of the project hindered. Regime change though not violent may've brought in abrupt change of policies hurting market and economies. For contractors, efforts to call for the resources to complete the projects can be interrupted, contract payment suspended, permits and licenses withdrawn, currency devalued, the risk is not predictable, and too big to manage.
The idea of national insurance is not only that the government has to provide coverage for the contractors going to less developed economies, also they will evaluate the general situation of the places where the contractors will go in terms of politic, social and economic essentiality. The appraisal will reflect in the quotation of insurance premium; or in the other sense, reject to insure for any works in that country.
So, if the contractors feel he’s not secure after getting national insurance and obtain adequate compensation, he will not venture in that country. It’s a good system for contractors pursuing overseas construction works, and can be extended to the equipment and systems exportation business requiring less local content.
We saw a lot of political risk came true in the real world since late last century: petrochemical plants worth 10s of billion dollar in Basra owned by Mitsui of Japan destroyed as war broke out between Iraq and Iran 1980; invasion of Iraq to Kuwait in 1990 resulted in all the contractors including Taiwan’s BES Corporation evacuated; downfall of Suharto government 1998 leading to social unrest, realignment of industries, and broke of banks ; etc.
(2) Exchange and currency risks
It’s almost a legend that big corporation dealing with foreign currencies will have its daily balance convert into USD or home country currency without shortest time exposure to fluctuation.
The saying also supports the fact that exchange and currency risk is really difficult to manage. Because the risk stays not only for currencies in a weak economy but also exists between currencies of first world countries. For example, 2 years after Plaza Accord 1985, Japanese Yen appreciate by more than 50%, meaning Japanese contractor will receive 50% less for whatever the payment of the contract. Pure loss.
A general contractor will mitigate the risk in several ways: 1. Request the payment made in currencies to be used during the execution. 2. If the contract stipulation can’t allow to pay the currencies in the type and amount of what he’ll have requested, buy the balance in the futures.
For international tenders, the evaluation may be as long as 6 months, during when, the currency may vary against each other for many percent; it’s really a dilemma for contractor: he’s stupid if he buys the fortune to cover the period and lost the tender; he may face loss if he doesn’t buy the fortune and get award of contract.
(3) Economic risks (inflation, interference in manufacture and transportation system)
When people are doing business in their own country, they will make decisions depending on their own witness and past experience: in what extent regulation to abide can be predictable, their compatriot’s ability and work ethic, and finally the efficiency and reliability of the governmant.
The contractors need to deliver the completed work in time, so they can’t put up with anything that will bring in the delay or default: interruption in manufacture or transportation, willful contravention of a major sub tier contract, and sudden collapse in market mechanism for work items, but all of them may happen in a strange country.
Though due diligent investigation can and has to be done before the contractor actually steps into strange country, but the data can be deceiving and time is limited. So, the contractor needs to read the situation through features of history, culture and society in addition to figures obtained from engineering renaissance.
It’s not to say what happened or not happened yesterday will occur or not tomorrow; but people have to be humble to learn there can be uncertainties that the individuals may not be able to manage even he's under umbrella of big company.
A simple solution for foreign contractors will be that they won’t go to places where economic risk were recorded severe historically; but in practice people like to go to particular country where they think the room to administer the contingency is great , for example, foreign contractors always like to go to Indonesia and it seems they find ways to co-exist with risks like inflation and currency fluctuation.
(4) Natural disasters (flood, typhoon, earthquakes, avalanches)
Professional engineers always think they will make clear the occurrence, scale and devastating power of natural disasters with formal and scientific approaches. They certainly will get sufficient data and knowledge to address the problems and minimize the risk in their home country, but if they go for overseas, they will possibly become innocent student facing natural disasters entirely new to them.
For example, typhoon and earthquakes are new to many of the European engineers in design and construction, and they become entirely the freshman students coming to Taiwan. It’s funny and embarrassing if they insist that they shall steer to provide the solutions for the project just for the reason their companies are more eminent in contractual positions. But it's true they're doing so at tremendous expense of the company.
Yes, the said disaster and the risks can be judged and solved by theoretical calculations; but it always requires ample time and local experiences to complete the perfect estimation works in an overseas project. Therefore, people have to admit that there shall be elements that they won’t be able to control at least to the extent that professionalism shall not be bent to commercial correctness.
(5) Legal risks (change of law, unpredictable adjudication)
The laws and the regulation in a country is specific, that people can read it before they go there for execution of the projects undertaken. But the interpretation and rulings can be different everywhere. It’s so called “predictability”.
So, the international contractors have to be careful to check the applicable law, contract language, jurisprudence, place and mechanism for reconciliation during tendering.
However, the enforcement can be something else despite what ruling will be. In certain countries, the verdicts can be at best regarded as reference.
When the laws and regulation applicable for part or all of the contract change, the contractor as one of the signing parties may not be protected for cost and time arising out of the changes.
People shall be aware that not all the changes (of laws and regulation) will have neat numerical indication for claimant; and there will also be cost and schedule implication, for example, revising safety measures for workers will demand longer time to finish the works but hard to explain in the claim. And it always remains as the contractor’s legal risks in overseas works.
Normally, international contractors will set up contractual conditions under which they’d rather decline the tender to protect the company. They call it “dealbreakers”, meaning nobody even it is company chairman can agree on the terms forcing them to bear the risks.
(6) Cultural Risks, incoherent mental and behavioral model between host country people and foreign contractor.
According to the story of the Tower of Babel, human race spoke a single language. At some time, they intended to build a city and a tower tall enough to reach heaven. God doesn’t like the idea and confounds their speech so that they can no longer understand each other, and scatters them around the world.
More than difference in language custom and culture, people go to places they call foreign countries to build something would find the locals not so friendly as to render full collaboration. The expatriates complain the inhospitality, dishonesty, and irresponsibility often seen in local staff while resent for their ignorance, egoistic and discriminative behaviors.
The contacts are necessary between foreign contractor and their local employees, clients, sub tier contractors, vendors and authorities, and even with people surround daily life. There could be pleasant encounters but also frustrated ones, always at cost to the foreigners as they’re always imagining a coherent and amiable relationship will help them to deliver assigned works.
Reciprocity shall be the only way to avoid the worst part of confrontational foreign and local relationship which, always leads to extravagant cost to complete the works.
It’s not a matter of how much shall be provided for ties assumed might have been gone soured; more important, if a company or cohort of professionals want to go to different country for construction and engineering works, they’ve to respect what have been existed there and prepare to treat their counterparts equal.
10) Manageable Risks (with care and monetary provision):
(1) Construction schedule and completion date.
The contractor have to assume that the Client and his representative will behave according to conditions and terms stipulated in the contract, or decline to tender; stringent it maybe, when the contractor fulfill his obligation and meet the exact formality required by contracts, they will pay.
Completion date as ultimate project objective shall be observed by the signing parties and detailed schedule will be developed for the purpose of progress monitor and control. Time and duration specified for each activity and mile stone in the schedule manifest the contractor’s explicit commitment to the concerned parties that a reputable contractor will always try hard to keep with.
But there will be disagreement by the parties over reasons and substantiation of time and cost required for extension, all these will be complicated and take time and tedious effort to settle. Usually the client and his representative will insist the claim be rejected for technical or procedural reasons while the contractors will maintain the cause of delay attributable to the client and money spent for mitigation shall be returned in full.
There could be moments of impulse that the contractor felt the client or his representative might not pay him for the money to catch up the progress for delays not attributable to him. Maybe just out of fear that the client won’t honor the contract or impatient to wait until dispute settled, many of the contractors, especially the Asian ones, might resort to suspend the works expecting the client yielding to pay him for the outstanding amount.
However, the brinkmanship approach replicated from the contractor’s often-used experience in their own country will be disastrous for overseas works as the bluff interpreted under different culture will probable turn every friend the contractor’s adversary.
The risk for contractors to bear the enormous cost for catch up (as demanded by the client) or acceleration (as claimed by the contractor), can be real, but the orthodox way to manage it still is to trust the contract mechanism for time extension and dispute resolution. Of course, contingency provision shall be allocated if the contractors select to tender.
Because the disputes and problems always happen with regard to construction schedule and works completion date, so the modern day clients or lending agencies like banks will demand “Completion Guarantee” from the contractor especially for BT or BOT projects; the document is more important than the performance guarantees usually submitted by the contractors for late performance.
It further confirms only the works is completed the investment will have been protected.
(2) In time delivery of construction material and equipment in quality and quantity, as well as certain service.
The contractors have to make sure material and equipment required for the project will be delivered according to project schedule or he shall decline the tender. Foreign country is a different market, so he has to check the manufactureror vendors’ supply record, and pay serious attention to conceive an extreme situation under which he is still in effective control.
Local partner will be crucial, first to furnish information regarding material and service forayed locally, and then expedite. There will be delays, of which, the types and reasons will confuse people other than natives in addition to simple price hikes. The provision to mitigate must be spared in the tender though risks with regards to simple local procurement seems like to be manageable.
There will also be material, equipment and service imported from third country, many of the items will be produced and delivered from developed economies. It’s not for granted that production and delivery from western countries will have no problem.
On the contrary, the supply chain prevailing in developed economies is complicated, and many episodes may influence the delivery: strike, sabotage, minimum order requirements, multiple manufacturers, soft or hardware breakdown, weather conditions, etc. Also, the vendor or sub tier contractor may insist “reasonable” terms in their contract thus delivery schedule more vulnerable.
(3) Contractual risks
As mentioned above, the contractor has to assume the Client and his representative will execute the contract based on rationality and faith, or he doesn’t agree to work for the project. He may have chance to do due diligence for the country to go, the project to undertake and the client to work for shortly before reaching concrete contract with the Client.
However, a construction contract involves many work items and its successful performance depends on benign interactivity with society and authority in addition to the Client. A good contract will provide guidance and information for what to do and what to abide by for the parties; but it will be minimal. And it means most part related to actual execution will only be known sometime after contract signing.
An experienced contractor will be able to judge how risky the contract terms mean to him in the tender stage through reading carefully the contract draft and find ways safely to averse the risks during execution.
But in foreign land and dominated by unfamiliar legal practice, even the most adaptable contractors have to allocate monetary provision for any contractual information provided, clarification made to him, or clues for events he’d have collected won’t be favorable to him.
(4) Safety and security of expatriates (persons, property, accidents).
In general, countries open gates for foreign contractors working in their territory for whatever the work, the governments will welcome and protect the expatriates and their spouse.
But the actual situation is more complicated than official announcement and bookish regulations. Whether or not the expatriates will feel safe and secure will depend on if there is a friendly private sector, and enduring social conditions in the countries to support the foreigner’s free activities in both work and living.
Politic can be also the subject when assignment for positions in foreign country is sensitive, sometimes the nationality of expatriate can be problem to invite more trouble, though people are talking about unrestricted person flow under big name of globalization.
Religion plays big part for whether or not a heresy be allowed to come to the same land; there may be radicals causing trouble for expatriates despite officially there won't be any discrimination. The disturbance can be ranged from making menace on life or drawing lines for places the foreigner can’t cross or restrain their what they can do.
Public order can also be a problem in a country that everybody’s money and life are threatened, and for foreigners, they can be more prominent for burglar, robbery or even murder.
There can be places and moments that the expatriates shall be attended by body guards, translators and drivers for wherever they go and whatever they do. It’s still possible that the contractors for commercial reasons will go to places where religion fervor, revolution zeal or social commotion are underway. The cost has to be added as minimal management provision.
(5) Free flow of capital.
There’re many countries in the world will control sharply the flow of money; they need hard currency and are meticulous to spend it. It happens they’re also the countries who need foreigners to do projects big in size, sophisticated in nature for them.
Normally, the Client of such kind of project will describe in the tender exchange rate for foreign currency, contract amount to be paid in foreign currency, and most important, definition of working capital, their conversion and remission.
By prudent calculation, the risks can be minimized, and can even be deminished if hard currency required will be closed to 100 %, but doing so, tender price will be evaluated high and the contractor will never win the tender.
If the contract is BOT or PFI, the revenue for the projects may come from toll paid in local currency over many years and thus complicated the matter. For foreign contractors, the return and investment of the projects need to be made in hard currency, particular proposal shall be submitted to address the situation knowing that the capital flow may not be free in certain economies.