Australia: Contracting with Chinese Construction Companies

International Best Practice in Project and Construction Agreements
Last Updated: 4 February 2013
Article by Damian McNair

THE RISE OF CHINESE CONTRACTORS ON INTERNATIONAL PROJECTS

Since the late 1990s, the international construction market has witnessed the steady growth of Chinese contractors competing for work abroad. Chinese contractors are becoming important and influential players in the international market. The demand for infrastructure development, especially in developing countries, provides a solid platform for Chinese contractors to engage in the international arena. Similarly, strong support from the Chinese government as well as very competitive pricing played an important role for the expansion of Chinese contractors globally in recent years. Increasingly, international lenders are asked to consider lending against Chinese contractors, bringing the competitiveness of Chinese contractors to the attention of the international project financing community.

Chinese contractors are relatively new participants in the global construction market, particularly on project financed deals. Most of these contractors are familiar with limited or non-recourse financing as many projects in mainland China have been financed through project finance structures. Broadly, the 'Chinese project finance model' – where only banks provide funding – has been considered less rigorous than the traditional risk allocation and other bankability requirements commonly required by foreign banks. Until recently, these factors contributed to many Chinese contractors' reluctance to step onto the international stage and assume a higher degree of risk than what was 'market' on domestic deals. Further, many lenders were unfamiliar with Chinese contractors' ability to deliver given their relatively low international profile. Also, Chinese manufactured equipment is not yet proven to the extent required by some lenders.

By way of example, in the Chinese power sector it is generally considered 'market' on domestic project financed deals for the total cap on liability under an EPC contract to be between 10-15% of the Contract Price. There are relatively 'soft' performance and liquidated damages regimes and bonding and retention requirements are less stringent than on international projects. Clearly this risk allocation is not acceptable to many international lenders. Conversely, concepts such as a 100% liability cap, rigorous performance, availability and reliability regimes supported by unconditional, on demand and irrevocable performance bonds are difficult for Chinese contractors to accept. Unsurprisingly, with the fallout of the recent global financial crisis, international lenders are becoming more conservative in their assessment of risk and bankable projects. This bankability evaluation includes close scrutiny of the technical and financial capability of a project's construction contractor to deliver on time, within budget and to meet the required quality guarantees (regardless of the contractor's origin). However, despite the fact that project finance structures do place particular risk pressures on contractors, many Chinese contractors have been quick to realise that such financing arrangements also offer significant opportunities where the risk profile is appropriately realised, managed and mitigated.

We are seeing the appetite for using Chinese contractors grow, especially due to the comparative advantages they bring to international projects. Many Chinese contractors offer significantly lower labour, materials and other procurement costs which positions them well to win projects based on cost. On recent international deals, Chinese contractors were rumoured to have undercut bids by between 20-30%. Further, importing their entire labour force allows Chinese contractors to offer accelerated timetables, delivering the end product well in advance of many competitors. Although, we have also seen this approach cause immigration / visa issues which can ultimately affect delivery.

Chinese contractors now also enjoy strong backing from the Chinese government, mainland China lenders and the Export-Import Bank of China (China Exim Bank – China's export credit agency). They are also supported by the China Export and Credit Insurance Corporation (SINOSURE) – China's policy-oriented insurance company providing export credit insurance. It is mandated to promote Chinese exports and investments by offering export credit insurance against non-payment risks. We are beginning to see a number of international banks lend against such guarantees, including HSBC and some French banks. However, some international companies have also raised concerns regarding competition amongst Chinese contractors (generally due to the fact that many Chinese contractors are state owned).

Some of China's largest construction contractors are active in the international market on high profile projects, particularly in developing countries. China Harbour Engineering Co LLC and China Communications Construction Company are part of consortiums bidding on the Abu Dhabi government's first multi-billion dollar highway PPP project. China Railway Construction led the consortium which was successful at securing the $1.8bn Al Mashaaer Al Mugaddassah Metro Line project in Saudi Arabia. Many other Chinese contractors, such as China State Construction Engineering Corporation Ltd, Sinopec and Shanghai Electric Power Generation Group, are active throughout Africa, the Middle East, Eastern Europe and Australia.

With the demand for infrastructure development, especially in developing countries, remaining steady (despite the recent financial crisis), we are witnessing more Chinese contractors seeking to participate in international deals. Their comparative advantage regarding labour, materials and build times allows them to remain competitive with other international contractors that have long deal sheets. Strong support from the Chinese government (particularly through SINOSURE and China Exim) plays an important role for the expansion of Chinese contractors globally. In order to fully realise the opportunities available on the international playing field, Chinese contractors must begin to accept the terms on which the global lenders are prepared to offer finance. Conversely, Chinese contractors' strengthening reputation for project delivery is positioning many of them as a viable (and cheaper) alternative to other more experienced international players. In our recent experience, international lenders are getting comfortable with Chinese equipment manufactures in the power sector and some contractors are prepared to take full turn-key risk but still struggle with usual international lender

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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