The Opportunities for working with Chinese Contractors John Bishop Partner Pinsent Masons

Today’s Talk Pinsent Masons –But only enough to put the talk in context The Mainland Infrastructure market –My opinion as to the opportunities for Taiwan’s contractors The Mainland Contractors experience in the international market –The kinds of problems they have been experiencing –Why I think those problems offer an opportunity for Taiwan’s contractors 2

Introduction – Pinsent Masons Law Firm with 1200 lawyers In Europe (more than 100 years) –London, Birmingham, Leeds, Manchester, Edinburgh and Glasgow In Asia (30 years) –Beijing, Shanghai, Hong Kong, Singapore, Dubai –Alliance with Hesen Law Firm for Mainland China Alliances with more than 25 other offices around the world 3

Introduction – Pinsent Masons Full Service Commercial Law Firm but with some particular specialities –Projects Construction and Engineering More than 300 specialist lawyers - Probably the largest group of construction lawyers in the world Global Construction Law firm of the Year for 2011, 2010, 2009, 2008 and 2006 (Who's Who Legal) Construction Law Firm of the Year for 2011, 2010 & 2009 (Asian Legal Business) UAE Construction Law Firm of the Year 2010 (ACQ Global Awards) Number One Ranking for construction law in Legal 500 and Chambers legal directories in UAE, UK, and Asia (Mainland China, Hong Kong and Singapore) 4

Introduction – Pinsent Masons Pinsent Masons in Mainland China (since 1987) –Beijing and Shanghai Specialist areas –Projects and Construction –Corporate/Commercial/FDI –IP Projects and Construction –3 partners –10 other lawyers –Only firm with two “Leading Lawyers” in the Projects and Construction field (Who’s who legal) –Only “Leading Lawyer” in the field of Mediation/ADR (Who’s who legal) –Members of CIETAC and BAC arbitration panels –Alliance with Hesen Law firm 5

Introduction – Pinsent Masons Pinsent Masons’ clients in Mainland China International Clients with construction needs in Mainland China Mainland clients with construction needs in China Mainland Contractors in the international market –The largest part of our business –More than 40 major construction/power/energy companies –Working with 16 of top 25 Chinese Contractors 6

The Mainland Infrastructure market Of the largest Infrastructure Markets of the World (2009) –Mainland China was second largest with USD 1,034 bn. USA largest at USD 1,310 bn. UK and India both about 25% of Mainland China Of the predicted largest Infrastructure Markets of the World (2020) –Mainland China is predicted to be largest with USD 2,425 bn. USA second largest with USD 2,150 bn. UK is under 15% of Mainland China India is just over 25% So the opportunities for Taiwan’s contractors ought to be good 7

The opportunities for Taiwan’s Contractors in Mainland China BUT –Difficult Market Regulatory problems e.g. Decrees 113 & 114 Very competitive Few non mainland contractors have made real inroads –Will it change? Specialist skills through JVs 8

The opportunities for working with Mainland Contractors in the International Market Place Enormous growth 51 of the ENR top 225 by turnover Largest aggregate turnover of any Nation Growth has outstripped the project management experience Some risks are now becoming problems Seems the ambition in this market will continue Market advantages will continue –low labour cost, low material/plant cost, willingness to work in inhospitable places, engineering skills 9

Problems that Mainland Contractors have been facing Wide range of problems but highly publicised events in places such as: –Saudi Arabia – Mecca Railway –Poland – A2 motorway –Libya –China – rail crashes Problems are rarely technical - nearly always – Contractual, Related to the structuring of the project –Understanding risk –Negotiating suitable terms Reacting appropriately when things go wrong – Cultural – Lack of Project Management experience Particularly at local level 10

Risks that Mainland Contractors have been facing Change in type of project from –State purchased infrastructure (usually mainland money), to –Privately procured facilities, to –EPC “full risk” contracting, to –PPP type contracts This progression has resulted in major changes in risk profile Lets look at some of the problems we see regularly –Beware of drawing the wrong conclusion –Natural that we would see the unfortunate end of the experience –many Mainland contractors well experienced, cautious and with excellent track record of contract performance 11

Problems in risk assessment and contract formation Inadequate risk assessment, –Late formation of Risk Assessment team Not all disciplines represented –Cursory understanding of country risk e.g. labour, taxes, import duties etc, –Superficial understanding of contractual risk, e.g. no appreciation –of implied terms. –of local laws that may override/affect the contract provisions –different approaches to contract interpretation desire to hold on to the “safe round” of FIDIC wording –A presumption of a fair approach – not just to interpretation –No use of Tender clarifications process 12

Contract assessment and formation Risk Assessments (Cont’d) –Limited experience of using subcontractors –Even if likelihood and consequence are considered, no consideration of speed of occurrence element –Limited assessment of risk in other parties involved –No mitigation/sharing element, e.g. Limited experience of insurance Limited experience of hedging or sharing currency risk, e.g. –with employer –hedging contracts –buying forward currency 13

Other Common Problems Use of Mainland Standards –Problems with such provisions Local law Subcontractors Consultants Law and language clauses –No real appreciation of consequences 14

Other Common Problems On demand bonds –Regarded as inevitable –Sometimes believe the bond is conditional when in fact a demand bond –Some presumption Chinese Banks will not pay if unfair Disputes Clauses –Very little experience of disputes So little attention at time of contract No experience in choosing form of disputes clause –Enforceability –Venue –multi tier disputes clauses rejected »No experience of DABs/Mediation Difficulty in understanding what is required when a dispute occurs 15

Problems occurring during the Contract The experience of the risk assessment team often not passed to the Site Team Working with Employer’s Foreign Consultants and the Employer –Understanding what they say and what they expect –Differences in approach to problems to confrontation Approaches to obtaining entitlements, e.g. –Time limits (e.g. Conditions Precedent) Importance of observance not always appreciated Reluctance to criticise When not observed give up Sometimes the contractor’s procedures do not permit compliance 16

Risk handling during the Contract No single person responsible for risk and compliance Lack of experience in the right place – Head Office decision making Sometimes limited experience of the international market even at this level – Lack of delegation to local level – Freezing when the problem occurs –Subcontracting Limited experience of the need to supervise, monitor and control 17

PPP Related Risks For EPC Contractor –Management not prepared for different risk profile of limited recourse financed projects Liability Caps –none or 100% to 200% of CP –none if contract terminated due to “contractor default” Consequential losses not excluded Liquidated damages caps (e.g, 20/20/35%) Termination Risk –with potential indemnity Step in rights 18

PPP Related Risks As investors –Very little experience but great ambition –For countries with very little experience, great ambition and no legal infrastructure –Not prepared for time, cost and need to involve experienced consultants –So far not working in a formal consortium –Another problem for the future. 19

Some conclusions from all these risks and problems Mainland Chinese Contractors will not withdraw from their role as leaders in turnover in the international construction market Mainland Chinese Contractors will seek to be cleverer in how they tender – but an experienced project management pool is a generation away One solution is to joint venture with organisations who have –The required experience –The cultural understanding as to how to deal with international clients and their consultants 20

Some conclusions from all these risks and problems There is some experience of Joint Ventures with non Chinese Construction interests but cultural misunderstandings can still occur Taiwan’s contractors who have the right experience can take advantage of their language and cultural empathy. Could this be the route to the Mainland Infrastructure potential? 21

The Opportunities for working with Chinese Contractors THANK YOU 谢谢 ! To contact presenter: 演讲者联系方式 John Bishop 22

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