“Thus the future American Business will require the highest degree of sensitivity to the political framework in which it functions and to the great coming changes in the World political process.” KISSINGER, Henry A. (1977). Speech before the Future of Business Project of the Center for Strategic and International Studies. Georgetown, Virginia, Washington, D.C.

“First, it is clear that managers consider political instability and/or political risk, typically quite loosely defined, to be an important factor in the foreign investment decision. Second, It is just as clear that rigorous and systematic assessment and evaluation of the political environment is exceptional. Most political analysis is both superficial and subjective and not integrated formally into the decision making process. It would appear that the resulting subjective perceptions of ‘political instability’ are equated on almost a one to one basis with a poor investment climate. The response frequently is avoidance; firms simply do not get involved in countries or even regions, they perceive to be risky. Last, managers appear to rely primarily on internal (to the firm) sources for environmental information. Wlien they look for outside data, they are most likely to go to their banks or the general and business media.” KOBRIN, Stephen Jay (1978). Political risk : a review and reconsideration. Cambridge, Mass. : Alfred P. Sloan School of Management, Massachusetts Institute of Technology.

In any cross-border financing, parties (banks specially) take a political risk in the sense that a collapse of the existing political order in the borrower’s country or the imposition of new taxes, exchange transfer restrictions, nationalisation or other laws may jeopardise the prospects of repayment and recovery. In project financing, the political risks are more acute for many reasons, including:

a) the project itself may require governmental concessions, licences or permits to be in place and maintained, particularly where the project is for power generation, transport, infrastructure or the exploitation of the country’s natural resources – oil, gas and minerals; and

b) the project may be crucial to the country’s infrastructure or security and accordingly be more vulnerable to the threat of expropriation or requisition – power projects, airports, seaports, roads, railways, bridges and tunnels are obvious examples.

The term political risk is widely used in relation to Project Finance and can conveniently be defined to mean both the danger of political and financial instability within a given country and the danger that government action (or inaction) will have a negative impact either on the continued existence of the project or on the cash flow generating capacity of a project. Different projects and different project structures will obviously encounter different types of political risk. However, examples of events that might be classified as political risks are set out below:

a) expropriation or nationalisation of project assets (including the shares of a project company);

b) failure of a government department to grant a consent or permit necessary for starting, completing, commissioning and/or operating a project or any part of it;

c) imposition of increased taxes and tariffs in connection with the project, including products generated by the project, or, perhaps, the withdrawal of valuable tax holidays and/or concessions;

d) imposition of exchange controls restricting transfer of funds outside of the host country or availability of foreign exchange;

e) changes in law having the effect of increasing the borrower’s or any other relevant party’s obligations with respect to the project, e.g. imposing new safety, health or environmental standards or other changes in law that result in changes being necessary to the design of any equipment or process;

f) politically motivated strikes; and

g) terrorism.

There is no single way in which a lender can eliminate all project risks in connection with a particular project. One of the most effective ways of managing and reducing political risks, however, is to lend through, or in conjunction with, multilateral agencies such as the World Bank, the European Bank for Reconstruction and Development and other regional development banks such as the African Development Bank and the Asian Development Bank.

There is a view that, where one or more of these agencies is involved in a project, then the risk of interference from the host government or its agencies is reduced on the basis that the host government is unlikely to want to offend any of these agencies for fear of cutting off a valuable source of credits in the future. This is a persuasive argument and certainly one that has some historical basis. For example, when countries such as Mexico, Argentina and Brazil were defaulting on their external loans in the early 1980’s, they went to some lengths to avoid defaulting on their multilateral debts, whether project-related or not.

Other ways of mitigating against political risks include:

a) private market insurance – although this can be expensive and subject to exclusions. Further, the term that such insurance is available for will rarely be long enough;

b) obtaining assurances from the relevant government departments in the host country, especially as regards the availability of consents and permits;

c) the Central Bank of the host government may be persuaded to guarantee the availability of hard currency for export in connection with the project; and/or

d) as a last resort, but an exercise which should be undertaken in any event, by a thorough review of the legal and regulatory regime in the country where the project is to be located to ensure that all laws and regulations are strictly complied with and all the correct procedures are followed with a view to reducing the scope for challenge at a future date.

In some countries, host governments (or their agencies) may be prepared to provide firm assurances on some of the above matters to foreign investors and their lenders. Obviously such assurances are still subject to a performance risk on the host government concerned, but at a minimum they can make it very difficult, as well as embarrassing, for a government to walk away from an assurance given earlier in connection with a specific project and on the basis of which foreign investors and banks have participated in a project.

As indicated by ASHLEY and BONNER:  ”Political risk identification, measurement, and management are key to successful international construction contracting. Multinational contractors are particularly sensitive to quick, unexpected change in the political environment that affects principal cash-flow elements of their projects. Traditional political risk analysis used by manufacturing or heavy industrial firms for capital investment decisions does not adequately address contracting risks. An alternate approach is presented to fill this important gap. Essential to this treatment is the identification of the primary political source risks and their impacts on project cash-flow elements. Recognition and planning, rather than gambling, is emphasized as a contractor’s best approach to successful international construction.” Let’s learn with them.

Reference:

AHARONI, Yair (1966). The Foreign Investment Decision Process. Boston, Harvard University Press.

ALFARO, L., KALEMLI-OZCAN, S. and VOLOSOVYCH, V. (2008). Why doesn’t capital flow from rich to poor countries? An empirical investigation, Review of Economics and Statistics, Vol. 90, pp. 347–368.

ASHLEY, David B. and BONNER Joseph J. (1989). Discussion of ‘Political Risks in International Construction’, Journal of Construction Engineering and Management, Vol. 115, Issue No. 1 (March/April, 1989), pp. 161-161.

FITZPATRICK, Mark (1993). The Definition and Assessment of Political Risk in International Business: A Review of the Literature, The Academy of Management Review, Vol. 8, No. 2 (April, 1983), pp. 249-254.

FRYDMAN, R., GRAY, C., HESSEL, M., and RAPACZYNSK, A. (1999). When does privatization work? The impact of private ownership on corporate performance in the transition economies, Quarterly Journal of Economics, Vol. 114, No. 4, pp. 1153-1191.

GLEASON, K. C., MCNULTY, J. E., and PENNATHUR, A. K. (2005). Returns to acquirers of privatizing Financial Services Firms : An International Examination, Journal of Banking and Finance, Vol. 29, pp. 2043-2065.

KOBRIN, Stephen J. (1979). Political risk : A review and reconsideration, Journal of International Business Studies, Vol. 10, pp. 67-80.

KOBRIN, Stephen J. (1980). Foreign enterprise and forced divestment in the LDCs, International Organization, Vol. 34, pp. 65-88.

LEWIS, M. (1979). Does political instability in developing countries affect foreign investment flow?, Management International Review, Vol. 19, No. 3, pp. 59-68.

REEB, D. M., KWOK, C., and BAEK, Y. (1998). Systemic Risk of the Multinational Corporation, Journal of International Business Studies, Vol. 29, No. 2, pp. 263-280.

SCHMIDT, D. A. (1986). Analyzing political risks, Business Horizons, Vol. 29, No. 4, pp. 43-50.

Whilst interest in the recent UK judgment in the case of City Inn v Shepherd Construction may be confined to these shores, it is sufficiently important in the UK construction arena to warrant a mention on this Blog. The level of interest generated by this case initially may seem disproportionate to the complexity of issues and the amounts of money at stake. But ever since the option to adjudicate became compulsory for all UK based “construction contracts” in 1996 (Under the Housing Grants, Construction & Regeneration Act – see opsi), there has been a distinct lack of relevant construction UK case law on matters such as causation and delay – as parties choose the quicker, cheaper option of adjudication to settle disputes. If you also take into account the duration of this dispute (the project in question was completed in 1999) you can start to see why everyone (at least in the UK) is looking at the latest City Inn judgement.

This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (”EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

Introduction

With the loss of capability of investment by the public sector, there was a global tendency in 80’s and 90’s to diminish the role of the State, with the privatization and concession of public services to the private sector. In Brazil, The Brazilian Privatization Program – PND, was instituted under the Law No. 8,031, of 04/12/1990, when the concept of privatization became an integral part of the economic reforms initiated by the Federal Government. At that time, all effort was concentrated on the sale of productive state owned companies, tied to strategic sectors, which allowed the inclusion of steel manufacturers, petrochemical and fertilizer companies in the PND.

Between 1990 and 1994, the Federal Government privatized 33 companies, 18 of which were controlled companies and 15 minority shareholder participations of Petroquisa and Petrofertil. Other eight auctions of minority shareholdings were held under Decree No. 1,068. Through these operations the Government obtained receipts of US$ 8.6 billion that, along with the US$ 3.3 billion in debt transferred to the private sector, brought the total to US$ 11.9 billion.

Due to the large amount of funds needed for the viability of infrastructure projects, private companies were incapable of compromising their budgets during the long course of maturation of such projects. The transfer of part of the infrastructure to private initiative, demanding substantial investments in its planning, development and operation, began to be financed by other agents and other sources, due to the integration of the partners in the respective projects.

Commercial banks, multilateral agencies, export credit institutions, pension funds, insurance companies and participants in international capital markets became important financiers of infrastructure projects in Brazil through Project Finance. As a financial model which adapts itself to the need of funds for projects developed by the private sector, Project Finance represents an important instrument to make investments in infrastructure viable in developing countries viable.

The Practical Use and Importance of Project Finance

Project Finance is usually defined as the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project. In this context, it represents a financing technique which generally allows a company to raise funds to set up a project based on the feasibility of such a project and its ability to generate revenues at a level sufficient to cover construction and operational costs, as well as debt service and a return for the investor (cf. FINNERTY, John D. Project Financing: Asset-Based Financial Engineering. London: John Wiley and Sons, 2007, p. 4).

Projects like power plants, toll roads or airports share a number of characteristics that make their financing particularly challenging. Large-scale projects might be too big for any single company to finance on its own. On the other hand, widely fragmented equity or debt financing in the capital markets would help to diversify risks among a larger investors’ base, but might make it difficult to control managerial discretion in the allocation of free cash flows, avoiding wasteful expenditures. Project Finance is than used to strike a balance between the need for sharing the risk of sizeable investments among multiple investors and, at the same time, the importance of effectively monitoring managerial actions and ensuring a coordinated effort by all project-related parties.

Project Finance transactions require joint efforts from lenders, investors, suppliers, off takers and sponsors of the project in order to make feasible the implementation of a project, dealing with special challenges, such as:

(1) They require large indivisible investments in a single-purpose asset: Project Finance than deals have contemplated the creation of a special purpose vehicle with bankruptcy remoteness features, as a ring fencing technique, which usually results in credit enhancement for financiers and cost reductions for sponsors, although the creation of a project company is not necessarily a rule inherent to project finance;

(2) Projects usually undergo two main phases (construction and operation) characterised by quite different risks and cash flow patterns: Construction primarily involves technological and environmental risks, whereas operation is exposed to market risk (fluctuations in the prices of inputs or outputs) and political risk, among other factors. Most of the capital expenditures are concentrated in the initial construction phase, with revenues instead starting to accrue only after the project has begun operation; and

(3) The success of large projects depends on the joint effort of several related parties so that coordination failures, conflicts of interest and free-riding of any project participant can have significant costs: From the construction company to the input supplier, from the host government to the off-taker, all parties have substantial discretion in allocating the usually large free cash flows generated by the project operation, which can potentially lead to opportunistic behaviour and inefficient investments.

Trends of Project Finance Structures in Brazil

A. Detailed Financial Structure

In project finance, several long-term contracts such as construction, supply, off-take and concession agreements, along with a variety of joint-ownership structures, are used to align incentives and deter opportunistic behaviour by any party involved in the project. The definition of the advantages and limits of a Project Finance structure requires a detailed analysis of the various aspects must be made by those interested, involving, amongst others:

(1) A study of the structure that comprises Project Finance, detailing the advantages, the disadvantages and limits of each model;

(2) The criteria of evaluation and requirements established by the agents in charge of classification of credit and the respective impact on the composition of the interest rate of the financing;

(3) Identification, allocation and development and implementation of the criteria and methods to manage the risks involved;

(4) Formulation of an accurate economic-finance model to obtain the resources on the international market;

(5) Techniques and implications of the necessary due diligence; and

(6) Monitoring the project during its building and operational phases and respective management of financial documents, also contemplating the securitization of the receivables.

In Project Finance equity is held by a small number of sponsors and debt is usually provided by a syndicate of a limited number of banks. Concentrated debt and equity ownership enhances project monitoring by capital providers and makes it easier to enforce project specific governance rules for the purpose of avoiding conflicts of interest or suboptimal investments. The use of non-recourse debt in project finance further contributes to limiting managerial discretion by tying project revenues to large debt repayments, which reduces the amount of free cash flows. Moreover, non-recourse debt and separate incorporation of the project company make it possible to achieve much higher leverage ratios than sponsors could otherwise sustain on their own balance sheets.

Nonrecourse debt can generally be deconsolidated, and therefore does not increase the sponsors’ on-balance sheet leverage or cost of funding. From the perspective of the sponsors, non-recourse debt can also reduce the potential for risk contamination. In fact, even if the project were to fail, this would not jeopardise the financial integrity of the sponsors’ core businesses. One drawback of non-recourse debt, however, is that it exposes lenders to project-specific risks that are difficult to diversify. In order to cope with the asset specificity of credit risk in project finance, lenders are making increasing use of innovative risk-sharing structures, alternative sources of credit protection and new capital market instruments to broaden the investors’ base.

Hybrid structures between project and corporate finance are being developed, where lenders do not have recourse to the sponsors, but the idiosyncratic risks specific to individual projects are diversified away by financing a portfolio of assets as opposed to single ventures. Public-private partnerships are becoming more and more common as hybrid structures, with private financiers taking on construction and operating risks while host governments cover market risks.

There is also increasing interest in various forms of credit protection. These include explicit or implicit political risk guarantees, credit derivatives and new insurance products against macroeconomic risks such as currency devaluations. Likewise, the use of real options in project finance has been growing across various industries. Examples include: refineries changing the mix of outputs among heating oil, diesel, unleaded gasoline and petrochemicals depending on their individual sale prices; real estate developers focusing on multipurpose buildings that can be easily reconfigured to benefit from changes in real estate prices.

Finally, in order to share the risk of project financing among a larger pool of participants, banks have recently started to securitize project loans, thereby creating a new asset class for institutional investors. Collateralised debt obligations as well as open-ended funds have been launched to attract higher liquidity to project finance.

B. Partnering Construction Contractual Structure

Within time and the more use of Project Finance structures, parties have evolved to the use of Engineering Procurement Construction (EPC) – the favourite contract model for the lenders – and Engineering Procurement Construction Management (EPCM). Nevertheless, because the EPC contract approach shifts all the risk of project completion cost and performance onto the contractor’s shoulders, it tends to trigger an adversarial project team relationship, potentially leading to a breeding ground for conflict, contractual disputes and major claims that undermine the project’s financials and its ultimate successful outcome. Therefore, the challenge in Project Finance has been the adoption of the Alliance contracting as a viable, proven alternative to adversarial business-as-usual contracts.

Alliance contracting offers a unique system of project delivery whereby risks are shared between owner and contractor. They are incentive-based relationship contracts in which the parties agree to work together as one integrated team in a relationship that is based on the principles of equity trust, respect, openness, no dispute and no blame. Alliance contracting can relieve the pressure of the short-term demands on the industry and set the foundation for longer term structural improvement in the way the industry works. Also, significantly reduces, the risk of claims and disputation between the parties through the use of inclusive and collaborative legal and commercial arrangements. These arrangements enable the parties to work together in an open and generative manner and to strive to achieve the business goals of everyone in the relationship and can provide a bankable project delivery method even for project financing.

C. Submission to the Equator Principles

Project Finance transactions may encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets. Large industrial and infrastructure projects, such as for power generation, are becoming increasingly conditioned to social and environmental risk assessments in order to be approved. In this context, Brazil is following the international trend to adopt the Equator Principles for Project Finance transactions.

Equator Principles represent a set of socioenvironmental guidelines adopted by 61 banks worldwide for financing projects amounting to US$10 million or more and are intended to serve as a common baseline and framework for the implementation by each lender of its own internal social and environmental policies, procedures and standards related to its project financing activities.

Today, 7 banks are signatories of the Equator Principles in Brazil. They work to ensure that the projects they finance are developed in a manner that is socially responsible and reflect sound environmental management practices. By doing so, negative impact on project-affected eco-systems and communities should be avoided where possible, and if this impact is unavoidable, it should be reduced, mitigated or compensated for, or both, appropriately.

Conclusion

The success in the financing of an infrastructure project, by means of Project Finance, depends on all the parties involved satisfactorily complying with their various contractual obligations under the Project Finance Documentation. Lenders, as well as the other participants, in accordance with the level of risk being assumed and in proportion to the benefits received from the implementation of the project, will undertake the due diligence needed to adequately measure the risks involved.

The viability of the Project Finance model, in short, is based on the consistency and efficiency of its network of agreements. Such documents must be structured and negotiated in a consistent manner with the respective legislation applicable in the jurisdictions involved, and be constructed in such a way as to allow full implementation of their respective terms and conditions, notwithstanding the natural complexity of the same, in a form which will satisfactorily identify, mitigate, allocate and allow the adequate management of the various risks involved in the Project Finance.

The Brazilian bullet train project

On July 13th 2010 Brazilian Federal Government launched bidding documents regarding the concession regime and procedures for implementation and operation of the High-Speed Rail (TAV – Trem de Alta Velocidade) that will connect the cities of Rio de Janeiro, São Paulo and Campinas. The project, the most ambitious infrastructure project under the country’s Program to Accelerate Growth (PAC – Programa de Aceleração do Crescimento), specifies that the construction, operation, and maintenance will be granted to the consortium that provides the lowest fare for service.

The concession contract establishes the limit of six years to complete the entire stretch Campinas – São Paulo Rio de Janeiro. The final schedule calls for the railway to be completed by 2017, although the Brazilian Federal Government anticipates the line will be partially open before the 2016 Summer Olympics in Rio de Janeiro.

TAV is worth US 20 billion. The Brazilian Federal Government will invest, through a new state-run entity, US$ 1.5 billion in the project and extend loans worth 60% of the total cost by the Brazilian Development Bank (BNDES – Banco Nacional de Desenvolvimento Econômico e Social).

Potential customers in the parcels market can be classified into two main groups:

- existing logistics companies, interested in moving consolidated loads, using rail as part of the chain – principal players in this field are the Brazilian National Post Office (Correios – Empresa Brasileira de Correios e Telégrafos) and Courier Companies; and

- end users, such as businesses, or individuals.

The construction of TAV will create a very large site, which will directly require numerous professional skills and directly or indirectly generate employment upline and downline The commissioning of the railway and, in particular, the development of land traffic and associated commercial zones served by the railway will create jobs in a progressive manner during the first 10 years’ of operation.

It is estimated that the railway will generate around 30,000 jobs throughout the area affected within about 10 years after commissioning. In addition a further 30,000 jobs could be generated by around 2050 in response to more fundamental shifts in the regional economy.

The choice of consortia contractor by the end of 2010

The Brazilian Federal Government will pick the contractor for the TAV in December 2010. Competitors must submit their proposals before November 29 and the winner will be announced on December 16 at the headquarters of Sao Paulo Stock Exchange (BOVESPA – Bolsa de Valores de São Paulo). Term of the concession is 40 years.

The line will be built and run on a concession basis and the government will rank bids based on the lowest fare, with a maximum permitted price of US$ 0.28 per kilometre. That would translate into economy class ticket fares up to US$ 115.00 for the 430 kilometres (270 miles) stretch between Rio and Sao Paulo.

International interest

The bidding is open to both Brazilian and foreign firms. News report that several countries and international companies have expressed interest in participating of the project:

- Austria;

- China (China Railway Materials);

- France (Alstom);

- Germany (Siemens);

- Italy (Ansaldobreda);

- Japan (Hitachi, Kawasaki, Mitsui & Co, Mitsubishi and Toshiba);

- Spain;

- South Korea (Hyundai and Samsung); and

- United Kingdom.

A new company called ETAV

Federal Government also proposed the creation of the Company of High Speed Rail (ETAV – Empresa de Transporte Ferroviário de Alta Velocidade), With the objective of planning and promoting the development of other high-speed rail lines in the country.

ETAV will be linked to the National Agency of Terrestrial Transports (ANTT – Agência Nacional de Transportes Terrestres) and will be also responsible for managing the technology used by the contractor that wins the High Speed Rail bidding process, in addition to monitoring the project’s deadlines.

Speed, locations and planned route

TAV proposal calls for trains to run at speeds of up to 350 kph (217 mph) and the trip between São Paulo and Rio de Janeiro is expected to last 93 minutes. Seven mandatory stations are be built on the line:

- City of Rio de Janeiro downtown area;

- Rio de Janeiro International Airport;

- City of Aparecida, State of São Paulo;

- São Paulo/Guarulhos International Airport;

- City of São Paulo downtown area;

- Campinas/Viracopos International Airport; and

- City of Campinas downtown area.

The planned route will include 90.9 km tunnels and 103 km bridges and viaducts. An extension to Campinas, 70 kilometres from Sao Paulo was planned with the purpose of reaching the heartland of Brazil’s richest manufacturing and farming state.

The planned route is as follows:

By Matthias Scherer and Samuel Moss (Lalive)

An acceleration of the drilling and construction of the Gotthard Base Tunnel over the past years has left its planners faced with the unusual prospect of the project being completed a year ahead of schedule. Work on the 57 km long railway tunnel through the Swiss alps, the longest in the world, was scheduled to be completed in 2017. However, following faster than anticipated progress in the excavation and construction of the tunnel, the consortium of companies responsible for the second phase of the works, the installation of the railway infrastructure, will propose the possibility of a 2016 hand-over date.

The Gotthard Base Tunnel is part of the 20 billion Swiss Franc AlpTransit project to build a new rail link through the Alps, with the objective of creating a direct and level route for high speed passenger and freight trains. The new rail link will lead to significantly shorter travel times, for example shaving an hour off the current 3.5 hour trip from Zurich to Milan, and will partially accommodate the projected increase in passenger and freight traffic through the Alps. The project involves the boring of several tunnels, of which the Gotthard Base Tunnel will be the longest and most costly, at just under 10 billion Swiss Francs. The tunnel construction is led by Alptransit Gotthard GA, a wholly owned subsidiary of the Swiss Federal Railways.

Instead of the dual-track tunnel which was initially planned, the Gotthard Base Tunnel consists of two parallel single track tunnels, allowing for faster excavation and shortening construction time by two to three years. Construction time was also shortened by digging several access tunnels, allowing for construction to be conducted on several sections simultaneously. Various consortia were assigned the construction works for different sections of the tunnel, and consist of several major international construction companies. For example, the Consorzio TAT, responsible for the Faido and Bodio sections, includes Hochtief, Implenia and Impregilo, among others. Excavation works are being conducted using four imposing tunnel boring machines, as well as by drilling and blasting. Only a small portion of the tunnel still remains to be excavated, with final break-through in one of the parallel tunnels expected to occur in the autumn of 2010, and break-through in the other expected for the beginning of 2011.

The progress of the boring and construction works has allowed for the second main phase of the project to begin at the end of June 2010: the installation of the railway infrastructure, including the railway tracks, power supply, telecommunication and safety systems. The consortium which was awarded the 1.7 billion Swiss Franc contract for installing the railway infrastructure, Transtec Gotthard, is composed of Swiss energy company Alpiq, British infrastructure company Balfour Betty, French technology company Alcatel-Lucent/Thales and Austrian construction company Alpine Bau. Transtec Gotthard expects to complete the first section of the tunnel by 2013, allowing for test runs at speeds of up to 230 km/h.

AlpTransit Gotthard SA has recognised that it would be technically possible to complete the project a year before schedule, barring any delays to the final break-through of the excavation works, which could for example be caused by cavities or water. It is uncertain however whether AlpTransit Gotthard SA and the ultimate user of the tunnel, the Swiss Federal Railways, will approve the acceleration of the works. In particular, such an acceleration would engender additional costs and would require a greater coordination of the construction works. The political overseers of the project have expressed reservations. Moreover, given that the tunnel is unlikely to be profitable, the advantages of a sooner than planned entry into service are not readily apparent. Indeed, it is uncertain whether revenues from the tunnel will even be sufficient to cover its operating and maintenance costs.

Offer my wife a diamond and you’ll see her eyes sparkle and a warm smile light up her face. I certainly wouldn’t take a gamble on offering her sand instead with a patient explanation that diamonds are actually compressed sand.

The worth of “sands” in Singapore has taken on added dimensions in recent years given the republic’s dependence on imported sand from its neighbours for its thriving construction needs. Much hullabaloo has similarly been generated on the newsfront with the phased opening of two casinos, one of which happens to share the namesake of Marina Bay Sands.

Singapore’s construction demand in 2010 is projected to reach between S$21 billion and $27 billion this year (£10.5 to £13.5 billion at today’s rates) led by strong public sector construction demand at an estimated 65% of Singapore’s total construction bill. The city state embarked on more reclamation works and various road projects plus expansion of its network of stations and tunnels with a new Circle Line for its Mass Rapid Transit (MRT) System.

Private sector growth has been fuelled by the development of a new financial downtown area. Gamblers and thrill seekers meanwhile rejoiced at the government’s award in 2006 of two Integrated Resorts helmed by casinos and the much anticipated Universal Studios.

This growth brought with it increased demand for sand – land sand for concrete and sea sand for reclamation works. Malaysia banned the export of both sand types in 1997 and Indonesia followed suit in 2003 (sea sand) and 2007 (land sand). Highly disruptive to the MRT lines and the new financial downtown (i.e. including the casino complexes), the supply disruption sparked construction delays and lawsuits between contractors and employers as the price of sand tripled. The government stepped in to release stockpiled sand and a legislative fix saw licensing regulations in 2009 requiring importers to have procurement plans to handle any sudden supply disruptions and ensure the reliable growth of the construction industry.

From our new office on the 22nd floor overlooking the waters of Marina Bay to Marina Bay Sands Integrated Resort, the skyline has never been more dynamic and ever changing as Marina Bay Sands slowly emerges from delays to its original opening date of end 2009. Touted as the world’s second most expensive casino after MGM Mirage Las Vegas, Sands remained under construction as its rival, Sentosa Resorts World commenced phased opening of themed hotels such as its Hard Rock Hotel in January and casino in February. To the delight of thrill seekers, March witnessed the opening of Universal Studios on Resorts World (though not without hiccups as its Battlestar Gallactica duelling roller coaster ride remains suspended due to technical glitches).

With much relief, Sands got its casino license 1 day before its opening just last month on 27 April. However, Sands’ strength in MICE (meeting, incentive, convention and exhibition) suffered a slight blip recently after complaints during the 2010 Inter-Pacific Bar Association (IPBA) Conference plagued Sands, the first convention hosted by Sands. In the broad scheme of things though, we wait patiently for Sands to throw open its SkyPark sitting above its three hotel towers and for the world’s largest oceanarium to open at Resorts World.

Visitors to Singapore in a more professional capacity are also set to take advantage of recent updated arbitration legislation. The International Arbitration (Amendment) Act 2009 came into force on 1st January to reflect the 2006 changes to the UNICITRAL Model Law, from which Singapore’s International Arbitration Act (IAA) is based on.

Key changes to the IAA include support from the courts in granting orders in aid of foreign arbitrations (e.g. taking of evidence) and interim relief (freezing of assets, amongst others).

These changes stand Singapore arbitration in good stead along with the January 2010 official opening of Maxwell Chambers, a custom designed international dispute resolution centre with 12 preparation rooms and 14 medium and large hearing rooms, the largest being able to accommodate 80 people for a hearing. A full suite of available support services is available, from wireless internet, video conferencing and state of the art digital recording to transcription services, translation services and catered meals. In the 6 months from its soft opening in July 2009 to its official opening, 60 cases have been heard, the majority of them being international arbitration.

There are probably worse places to be in now than in Singapore, a city where the worth of sands may, to some at least, be worth more than diamonds…

Mohan R Pillay
Managing Partner, MPillay (in association with Pinsent Masons)
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@mpillay.com

For the past 10 years, the private initiative has invested more in the Brazilian railway system than the Federal, State or municipal governments altogether (public initiative). With the prospect of a World Cup (2014), Olympic Games (2016) and lots of investments in the energy sector, Federal and State governments are willing to play a more decisive role on this area.

According to a survey recently disclosed by the Ipea – Institute of Applied Economic Research (www.ipea.gov.br), while private capital injections have grown steadily during this period, State investments have faltered. In 1999, public initiative counted only R$ 20.9 million in railways while private initiative channeled R$ 232.8 million. Public initiative’s peak occurred in 2007 with R$ 352 million when, at the same year, private initiative have soared and exceeded R$ 1 billion in 2004. In 2008 private initiative came to R$ 4.3 billion (led in Brazil by mining company Vale, steel company CSN, and logistics company ALL) and State’s investments downsized to R$ 237 million.

As public investments have not changed significantly during the last decade, railway works and network expansion have primarily counted on the funds raised by private concessionaires. The overwhelming presence of highway transportation has caused the railway system to account for only 30% of total transports in volume terms in 2008, as compared to more than 50% in other countries. This is one of the Brazilian infrastructure bottlenecks that impair long-term investments, since it is difficult to make country’s agricultural output flow smoothly.

The Brazilian railway network comprises 12 railways for cargo transportation stretching along circa 28 thousand km. Between 1999 and 2008, the cargo volume carried soared 79.6%, with emphasis on iron ore, pit coal, soybean, corn, sugar, and others. These products are primarily carried through the Vitória-Minas and Carajás railways, and by MRS Logística (controlled by Vale and CSN). For the sake of comparison, thanks to hefty public investments, China can already count on a railway network that stretches along 86 thousand km, and is planning to expand it to 125 thousand km in the next few years.

Ipea estimates that 141 new infrastructure railroad projects would be required to improve efficiency and competitiveness in this industry. Such priority works comprise, among others, the Transnordestina network linking the Brazilian ports of Pecém (CE) and Suape (PE); the North-South railway extension up to the Brazilian port of Rio Grande (RS); and the additional route along this same network to the interior region of São Paulo. Current Brazilian network could be expanded to at least 40 thousand km by 2020. At least R$ 40 billion (around US$ 22 billion) would have to be invested in these projects in the next 10 years.

Basic notes on some of the major projects to come:

1) North-South Railway (EF 151)

1st Parcel – 50% of the winning Auction bid, at the time of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Palmas (TO) – Anápolis (GO), scheduled for December 2010.

2nd Parcel – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: the Ouro Verde de Goias (GO) – Rio Verde (GO), scheduled for July 2011.

3rd installment – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: Rio Verde (GO) – Estrela D’Oeste (SP), scheduled for December 2011.

2) West-East Integration Railway (EF 334)

1st Parcel – 40% of the winning Auction bid of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Ilhéus (BA) – Caetité (BA), scheduled for July of 2012.

2nd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Caetité (BA) – Correntina / Barriers (BA), scheduled for December 2012.

3rd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Figueirópolis (TO) – Correntina / Barreiras (BA), scheduled for July 2013

Procurement conditions for participation in the railroad projects:

• Acquisition of the Bidding Documents (www.valec.gov.br)
• The participation of individual Brazilian and Foreign Companies is permitted
• The participation of consortiums between Brazilian and / or Foreign Companies in one Consortium is also permitted
• The presentation of a commitment to form a consortium indicating the participation of each member of the consortium and the leader
• The members of the Consortium will reply jointly and individually for all the actions taken with joint responsibility
• The Consortium can not alter its composition without the prior consent of VALEC (VALEC – Engenharia, Construções e Ferrovias S.A., a public company supervised by the ANTT – National Transport Agency and which has the concession for the North South Railway and the West-East Integration Railway)
• Competence in Public Administration
• Unconditional Acceptance of the Conditions in the Procurement Documents

I am a contractor working on a wastewater project in Eastern Europe, using the FIDIC Yellow Book –Design & Build. Vol.3 of our contract contains the following clause:

“Tests on Completion

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (”The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

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]]> http://kluwerconstructionblog.com/2010/04/14/tests-on-completion-under-the-fidic-yellow-book/feed/ 0 http://kluwerconstructionblog.com/2010/03/19/changes-afoot-%e2%80%93-the-proposed-arbitration-fairness-act/ http://kluwerconstructionblog.com/2010/03/19/changes-afoot-%e2%80%93-the-proposed-arbitration-fairness-act/#comments Fri, 19 Mar 2010 16:49:12 +0000 Andrew Ness http://kluwerconstructionblog.com/?p=429 by Andrew Ness

by Andrew Ness The U.S. has been a staunch supporter of arbitration since 1925, when the U.S. Arbitration Act became law. The Arbitration Act makes arbitration agreements binding and simple to enforce, without significant exception. Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest [...] read more »



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Leave a comment on Changes Afoot – the Proposed Arbitration Fairness Act]]> by Andrew Ness

The U.S. has been a staunch supporter of arbitration since 1925, when the U.S. Arbitration Act became law. The Arbitration Act makes arbitration agreements binding and simple to enforce, without significant exception. Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest indicators is the proposed Arbitration Fairness Act (H.R. 1020) that was introduced in the House of Representatives in February of 2009, and is still very much in play. While the anger is not directed at construction dispute arbitration, the concern is that commercial arbitration will end up being limited in important ways, as well as mandatory arbitration schemes where the use of arbitration is seen as one-sided and unfair.

The proposed AFA would limit the scope of the Arbitration Act to exclude from its coverage: a) disputes between an employer and employee arising out of their employment relationship; b) consumer disputes between an individual and the seller or provider of real or personal property, services, money, or credit for personal, family, or household purposes; and c) disputes between a franchisor and a franchisee.
More significantly, the AFA would take away in all arbitrations the arbitrators’ authority to determine the validity and enforceability of arbitration agreements. This is a hallmark of U.S. arbitration law that has been generally successful in keeping courts from interfering in the interpretation and enforcement of arbitration agreements. It would be a major departure from current federal policy and several decisions of the United States Supreme Court.

Supporters of the proposed change believe that mandatory arbitration is being used in ways unfair to parties of unequal bargaining power who routinely fail to read the “fine print” mandating arbitration in many consumer transactions, such as when opening a bank account or obtaining a credit card. Among other objections, opponents fear that adding such restrictions would have the unintended consequence of reducing the effectiveness of arbitration as a cost effective remedy for commercial disputes. In reality, the pending legislation is likely to undergo significant revisions in both House and Senate committees before any final votes are taken.

While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.
Laura Kamas
Andrew Ness

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]]> http://kluwerconstructionblog.com/2010/03/19/changes-afoot-%e2%80%93-the-proposed-arbitration-fairness-act/feed/ 2 http://kluwerconstructionblog.com/2010/02/24/u-s-crackdown-is-raising-the-price-of-corruption/ http://kluwerconstructionblog.com/2010/02/24/u-s-crackdown-is-raising-the-price-of-corruption/#comments Wed, 24 Feb 2010 18:31:21 +0000 Andrew Ness http://kluwerconstructionblog.com/?p=417 by Andrew Ness

The principal weapon of the U.S. government to combat corruption in international business dealings is the Foreign Corrupt Practices Act (FCPA). To say that the U.S. is now aggressively pursuing FCPA cases is an understatement. In the past year, we have seen billions of dollars of fines, sting operations, and the pursuit of individuals around the world. Here are some of the latest FCPA headlines: read more »



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Leave a comment on U.S. Crackdown is Raising the Price of Corruption]]> by Andrew Ness

The principal weapon of the U.S. government to combat corruption in international business dealings is the Foreign Corrupt Practices Act (FCPA). To say that the U.S. is now aggressively pursuing FCPA cases is an understatement. In the past year, we have seen billions of dollars of fines, sting operations, and the pursuit of individuals around the world. Here are some of the latest FCPA headlines:

 Hefty penalties are the order of the day – In the past year, companies have settled with regulators to the tune of billions of dollars in penalties, fines and disgorgement.

• Halliburton/KBR paid $600 million;
• Siemens paid $1.6 billion;
• BAE paid $450 million; and
• It is reported that Daimler will pay an estimated $200 million.

Not factored in here is the cost of these investigations. Technip recently reported a charge of approximately $500 million related to government investigations into its involvement in the TSKJ joint venture in Nigeria (the Halliburton/KBR settlement). By contrast, investment in a comprehensive compliance program and FCPA due diligence on agents and consultants looks like an inexpensive way to protect a healthy bottom line.

 Sting operations – In a very aggressive move, the US Dept. of Justice’s sting operation in conjunction with the UK authorities caught everyone by surprise. In tactics often reserved for crime syndicates, the DOJ and UK police arrested 22 individuals who allegedly attempted to make improper payments to FBI agents posing as representatives of procurement officers for a top minister of an African country. The improper payments were intended to obtain the award of contracts to sell military and law enforcement supplies. In an unusual twist, no actual foreign officials were involved.

 Intergovernmental cooperation – On February 5, 2010, BAE settled with both the DOJ and the UK’s Serious Fraud Office. In addition to pleading guilty to one count of conspiracy to making false statements to the U.S. government, BAE also pled guilty to a charge that it failed “to keep reasonably accurate accounting records in relation to its activities in Tanzania.” BAE’s settlement included a payment of $400 million to the US and £30 million to the Crown Court (with a designated use to benefit the people of Tanzania). The Siemens settlement of $1.6 billion included a payment of approximately $560 million to the Munich Public Prosecutors Office for corporate failure to supervise officers and employees.

The February 11, 2009 Halliburton/KBR settlement only resolved issues with U.S. regulators, and investigations by French, British and Nigerian authorities remain unresolved. Additionally, as mentioned above, the FBI and City of London Police coordinated efforts in the January 19, 2010 sting operation that captured 22 individuals.

According to public reports, the US SEC made over 750 requests for assistance from foreign regulators in fiscal 2009, an increase of almost 200 requests from the prior year. Geographic and economic boundaries have all but dissolved, making it more difficult to hide corrupt payments in offshore entities and far flung subsidiaries.

 Individual prosecutions and more litigation – The U.S. government has also sent a clear signal that it is willing to go after individuals and to litigate when necessary. Regulators are pursuing the middlemen and agents (as in the Siemens and Halliburton investigations) who conceal the corrupt payments to government officials. 2009 alone saw three FCPA trials against four individuals. That equals the total number of trials in the prior seven years.

 Increased scrutiny on agents and consultants – Companies subject to the FCPA need to exercise due diligence to ensure that they form business relationships with responsible and qualified agents and consultants. The DOJ has provided companies with a list of “red flags” which, if present, should trigger heightened scrutiny. Red flags include unusual payment patterns, high commissions, a refusal by the agent or consultant to provide FCPA certifications, a lack of qualifications or expertise to perform the services being offered, and a referral to the agent or consultant by an official of a potential governmental customer. As highlighted in the Siemens, Halliburton and BAE settlements, failure to conduct comprehensive due diligence, or turning a blind-eye to any one of these “red flags” can be highly damaging to a company’s reputation and bottom line.

Multinational construction companies take note – enforcement of the FCPA is here to stay!

Fiona Philip
Andrew Ness

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