Roundtable: Construction 2011
Júlio César Bueno -
Mark Blanksby -
Deborah Ballati -
Robert S Peckar -
Douglas Jones -
Who's Who Legal has brought together five of the leading practitioners in the world to discuss key issues facing construction lawyers today.
Participants
Deborah Ballati
Farella Braun + Martel LLP
California
Clyde & Co LLP
Dubai
Pinheiro Neto Advogados
Brazil
Clayton Utz
Australia
Peckar & Abramson PC
New York
Who’s Who Legal: What construction projects are underway in your jurisdiction and how does this compare with previous years? Describe the role that public private partnerships are playing.
Robert Peckar: As most readers likely know, the US has been undergoing tough economic times. In terms of construction projects the negative impact of this situation has been widespread, affecting all types of construction from home building (due to the decreased availability of mortgages), to commercial buildings (due to the lack of available project finance and decreased need for many types of buildings), to infrastructure projects (due to the difficult budget challenges of government). The federal government did attempt to ‘stimulate’ the infrastructure side of the industry with the infusion of billions of dollars, however it would appear that most of those funds never made it to ‘shovel-ready’ construction projects. Public-private partnerships continue to be a slowly growing sector in the US. This fact would seem illogical given the difficulties that government (particularly state and local) has affording to build very necessary infrastructure. This fact is more understandable when one appreciates that the federal government funds many infrastructure projects, in whole or part, but does not actually build them - they are built by state governments. Each state government has its own procurement laws. To date, most states in the US do not have laws that allow for PPPs, no less encourage them. Until that mindset changes, PPP will continue to grow but not nearly at the pace that the US needs.
Douglas Jones: There are very significant projects underway in Australia in both the public and private sector. In the private sector there are many projects related to resources including coal, iron ore, and oil and gas. Indeed there is increasing concern that the level of resources project activity will lead to a repeat of the personnel and material shortages, which beset the Australian construction industry immediately prior to the global financial crisis (GFC).
On the public sector front there are many public transport projects, road, heavy and light rail planned or underway in a number of the states. Following the March NSW state election it is expected that there will be increase in public sector project activity in that state.
The very substantial damage to infrastructure caused by the summer floods will also have an effect by requiring substantial expenditure to repair the damage leading to a spike in construction activity and also to the deferral of some expenditure on new infrastructure
PPP’s are alive and well with very substantial ‘social’ infrastructure projects closed and close to finalisation. There remains a low appetite however for greenfield traffic risk so the previously used model for PPP toll roads is undergoing substantial revision.
Mark Blanksby: New construction projects within the UAE, and Dubai in particular, have very much tailed off at present, coincident with the reduction in available bank and government funding. Prior to the end of 2008, the UAE was very much at the centre of the action as far as projects of all kinds were concerned, but now the focus is largely on finishing those projects that stumbled for lack of funding, but still nevertheless need completing. Abu Dhabi has curtailed its ambitious 2030 plan temporarily, but we are seeing the large museum, airport and stadium projects there moving forward to pre-qualification and tender stage now.
The key projects going forward will likely focus on infrastructure works rather than commercial or retail - there is still a large demand for power, water and sewerage across the GCC region and, of course, Abu Dhabi has recently embarked upon a nuclear energy programme. A large volume of rail infrastructure is also in the planning across the GCC states, with an intention of ultimately linking Kuwait in the north to Oman in the south of the GCC, and with cities around the region also looking at metro systems.
PPP is gaining momentum. Within the UAE, a new PPP law is shortly due to be enacted and the RTA has indicated an intention to embark on a number of projects on a PPP basis going forward. Saudi Arabia appears to have embraced the IPP and IWPP model, and PPP is being adopted as a procurement model within Kuwait. These are steady steps, but predicted as something of a growing trend.
Deborah Ballati: While Robert is right that most states don’t have statutory schemes, which permit the use of P3s as a construction and development tool for public lands, many states, including my own state of California, do. In those states, various cities and local entities have utilised the P3 model with varying degrees of success. In California and some other states, toll roads are the oldest and most common P3 projects, and their benefit to both the governmental entities that permit them and the private sector funders are by no means uniform and clear. If the variable success rate of toll roads remains static or declines, they are not likely to be expanded in the future.
Conversely, completion of other projects and development on land that financially challenged governmental entities own outright or in trust for the public may only be possible over the next few years with substantial private funding added to the funding available from the federal government. The City of Oakland and the Port of Oakland are both pursuing P3s for land within their control, including the former Oakland Army Base.
Finally, California is moving forward with the concept of a high-speed rail system to be funded in large part by federal funds available for that purpose which other states have turned down. As with most development in California, the high-speed rail concept has sparked controversy throughout the state, and it has not had, and likely will not have, an easy ride to completion, but it is underway nonetheless. The controversy is fuelled by many concerns. Will there be enough funding available to complete a fully viable statewide system? What businesses, open space and communities will be disrupted or eliminated by the system? Will the jobs the system provides in the short-term be there for the long term? Despite these concerns, however, the system is underway, and the momentum for it is building, in my opinion.
Júlio César Bueno: With ambitious energy programmes in place and on the verge of hosting the World Cup in 2014 and Olympic Games in 2016, major infrastructure projects are springing up all over Brazil, provoking a substantial increase in demand in the construction industry.
A total of 274 billion reais (about US$153 billion) is expected to be placed into infrastructure projects between 2010 and 2013, an increase of 37.3 per cent from the current figure. Construction works are being launched all the time throughout Brazil, even in the most remote states, and foreign investment in the field is increasing even further.
Major projects in infrastructure expected to take place between 2011 and 2016 include the following: sporting events (airport expansions; stadiums and sports facilities; accommodation); energy (hydro-power energy expansion projects, including Belo Monte Dam of 11,000 megawatts; Angra 3 nuclear power plants expansion; thermal power plants wind farm projects); transportation (São Paulo to Rio de Janeiro high-speed train; line 4 of the São Paulo subway system; roads and bus rapid transit; metro and light rail system; ring road system in São Paulo state); port expansions (expected investment around US$10.6 billion in five years).
As for public-private partnerships (PPPs), we may say that there is a long road to travel yet. Since 2004, Brazil has a federal law defining the general rules for bidding and contracting of PPPs. Nevertheless, since then the Brazilian federal government has not developed a single project of its own. If it wasn’t for the efforts of certain Brazilian states - mostly São Paulo, Minas Gerais and Bahia, with their wastewater and sewage PPPs - we could say that PPPs have not yet happened in Brazil.
Who’s Who Legal: According to sources worldwide, international interest in China and India has continued to rise over the past 12 months. To what extent are Chinese investors and Indian construction projects increasing in prominence, and is this as anticipated?
Robert Peckar: From my experience on behalf of US contractors (some of which are owned by foreign companies) opportunities in India are becoming more and more interesting to them. India is an exciting market in several respects. The rise of the new middle class is stimulating an explosion of residential communities designed for this emerging class of people with money to spend. Interestingly, unlike the practices in some other parts of the world, these new residences are typically fully paid for before construction even begins. This practice is not at all common in many western countries. The word ‘explosion’ may not be expansive enough to describe the plans of the Indian government for development of the country’s infrastructure. International consortia are forming to respond to this opportunity as well.
China seems like ‘old news’ in comparison to India. Nonetheless, a visit to Shanghai and other major cities gives one a visual reference to the continued growth of these markets. As far as the eye can see, tower cranes stand tall as new residential complexes of all heights and types continue to grow like weeds. It is quite exciting to see this growth. However, it should be noted that the project signs on each and every one of these massive residential expansions indicate the name of a domestic Chinese construction company. While there still seems to be a welcoming of high-end foreign architecture and engineering to China, the strength of its own construction companies through their affiliations with the major ministries of government, reduces the interest of foreign companies to participate. Even in infrastructure, China has certainly developed a cadre of fine, experienced and sophisticated infrastructure construction companies that are capable of building their new projects. Thus, hereto, it would appear that any importation of talent from abroad is largely limited to design and project management, but not the ‘bricks and mortar’ construction itself.
Douglas Jones: The Indian market is of increasing interest to international contractors where the capacity for contractors and consultants to participate in the enormous demand for transport and power infrastructure remains much greater than is the case in China where indigenous contractors not only dominate the local market but are expanding to successfully compete for work the world over.
Mark Blanksby: Within the GCC, the interest in China moves in both directions - Chinese contractors are extremely active across the region and have succeeded in winning good projects, particularly in Saudi Arabia where they have established a good portfolio of rail infrastructure works. In the other direction, we have seen a significant number of clients and construction professionals returning to Hong Kong as the pace of work in the UAE slows, clearly hoping to capitalise on the strong Chinese economy and opportunities there.
India, it seems, is a much harder market to crack. There is a huge demand as Doug says, and many of our international clients based in Dubai have in their business plans the intention of moving in to India from here. The reality, however, seems to be that it is currently difficult to compete or differentiate from the local market.
Deborah Ballati: Those construction lawyers whose practices remain largely, if not exclusively, local or regional, will make a mistake if they fail to understand what can be learned from greater understanding of what is happening in the construction world beyond our borders. As the world continues to be opened up by technology, there is much to learn about how projects are built, how delivery systems are structured and where resources exist and can be utilised.
Júlio César Bueno: Chinese investors and Indian construction projects are increasing in prominence recently, much growth of their activities overseas (especially in Brazil) is anticipated.
China has rocketed to become the biggest foreign direct investor in Brazil in 2010, with purchases ranging from iron ore mines to vast tracts of farmland and the electricity grid. Following similar forays in Africa and other parts of the globe, several important Chinese contractors have made their move to Brazilian market recently and are seeking a permanent foothold in Brazil, aiming to diversify their income and meet Brazil’s acute need for new infrastructure.
Not as much as the Chinese, but also Indian investors are increasing their presence in Brazil. India and Brazil recently decided to work towards achieving a target of US$10 billion bilateral trade over the next few years from the US$7.73 billion in 2010.
Who’s Who Legal: “The general trend has been toward contentious work”. Is this true for your jurisdiction? How are the ways in which disputes are resolved changing? What method is emerging as the most popular form of ADR?
Robert Peckar: The US construction market has been moving away from contentious relationships between contractors and their customers, both in private and public work, since the 1990s when ADR really took hold in the market. It is important to understand that while ADR was promoted by industry leaders at that time in reaction to the high costs of litigation (in terms of money, time and distraction from productive business), the construction bar was the instrument of the move towards creative ADR techniques that have now achieved such levels of success as to become a part of, if not the entire, dispute avoidance and resolution process. The most commonly used form of ADR in the US is mediation. The vast majority of disputes submitted to mediation are resolved in that process by the parties.
Douglas Jones: Domestically in Australia, adjudication and mediation dominate as the preferred methods of dispute resolution. On high value, hard dollar public sector contracts the use of Dispute Resolution Boards has proved remarkably successful in assisting their completion without significant dispute. Alliance forms of delivery also continue to be popular as means of reducing project disputes.
There has been a surge in international construction arbitrations during the global downturn.
Mark Blanksby: Within the GCC and UAE in particular the focus over the last 12 months or so has very much been around securing payment for work done and, where necessary resorting to litigation or arbitration to that end. Fresh construction projects have been in relative short supply so the trend has generally been towards contentious work.
As to the means of dispute resolution, the engineer’s decision followed by amicable settlement, then arbitration largely remains the norm, save for those principals that have adopted local litigation in their contracts (largely as a disincentive for raising disputes). The use of ADR is unusual. There is an appetite for mediation, adjudication but a concern generally that without judicial support to implement it that it is of little practical utility.
Deborah Ballati: Over 25 years after the promise of ADR was first conceived – that it would be a faster, easier, and more economical way to resolve construction disputes than traditional litigation – the jury is still out (forgive the pun) regarding how well the various ADR mechanism have delivered on that promise. Mediation has, by all accounts, delivered well: as long as it is conducted late enough in the dispute process that the parties have enough information to make meaningful decisions, but early enough that the costs of more traditional methods of dispute resolution like litigation, or even litigation-like arbitration, are avoided, it is easily the best method for resolving a construction dispute. And as clients have become more sophisticated about the dispute resolution process over the past 25 years, they have become more adamant that their lawyers pursue mediation early and often.
Arbitration has not delivered on the ADR promise quite as well, in my opinion, but not because it can’t. Rather, as parties and their counsel have become more and more inclined to turn streamlined arbitration into a process that looks remarkably like litigation, the benefits of arbitration as initially designed can be lost, and the price of agreeing to arbitration (waiver of a jury, no right to appeal) may seem too high to pay. For these reasons, more emphasis needs to be placed on evaluating the types, rules and framework for arbitration before committing to it in construction contracts.
Júlio César Bueno: Up to the 1996 Arbitration Law, disputes involving construction matters in Brazil were only resolved through litigation before a state or federal court. Since then, arbitration has established itself as the preferred method of dispute resolution, with several local chambers to be chosen by local players. On high-value projects, ICC and LCIA also have an important presence in Brazil.
Other ADR methods are gaining space in the Brazilian construction industry recently. Dispute boards (especially its adjudication model) are likely to assume an important position in the coming years in assisting in the completion of projects with lesser disputes, much more than mediation and expert determination.
Who’s Who Legal: What does the future hold for construction practitioners? How is your firm remodelling its practice to meet a changing demand?
Robert Peckar: The practice of construction law has been changing for quite some time in response to any number of factors, including the development of information technologies, the increasing role of in-house general counsel and their staff, and the changing attitudes of the construction industry. These changes are affecting construction lawyers differently around the world. However, if there is any one common element to the future of construction practitioners, it is the need to adapt to the globalisation of our clients. Our firm is presently engaged in legal matters for clients throughout the world as we continue to increase our knowledge of these global markets and to form relationships with the best construction practitioners around the world.
Douglas Jones: New and innovative delivery methodologies continue to evolve. Construction practitioners will need to evolve with them. The impact on the international market of Chinese and Indian contractors will continue to grow. Local markets will be impacted by the globalisation of both contractors and consultants.
Mark Blanksby: Robert is right, a key feature of life going forward will be increasing globalisation. As existing markets contract, many of our clients are moving into new and challenging markets, where they may not have operated before. This may be Saudi Arabia, Libya, Yemen or Iraq - and that will require construction practitioners to develop a broader understanding of the legal environments in which their clients are operating, and will require practitioners to be ‘connected’ within those countries. Clients build relationships with lawyers they trust and will expect them to follow them as trusted advisers into those new markets.
As a firm, we have a solid network of contacts and relationships with practitioners in nearly all jurisdictions. To meet anticipated demand within the GCC region in which I operate, we are placing specific emphasis on putting construction lawyers in Saudi Arabia and are looking at placing construction lawyers in other markets in which our clients are likely to be operating over the next five years.
Deborah Ballati: I can’t say it any better than Robert, Doug and Mark have in their comments. Those lawyers who do not keep up with the globalisation of our construction industry run the risk of being left behind, or at least of not being as useful to their clients as they could be.
Júlio César Bueno: Globalisation (of clients’ business and the practice of law) is the key factor for the future. In this scenario, construction lawyers have to be prepared to assume a clear position of trusted advisers for their clients in this ‘Brave New World’, anticipating trends, challenges and risks.