ICON Q2 2012

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02 QUARTER 2012

International Construction Review

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FAILING IN THE FAVELAS Why Brazil's visionary plan to deliver homes to millions of its poor is falling foul of the market

INSIDE: WHAT’S WRONG WITH KUWAIT? EAST AFRICA’S ROAD-BUILDING BOOM ALL SHOOK UP IN CHRISTCHURCH

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CONTENTS | 3

IN THIS ISSUE 6 GLOBAL ROUND-UP

Balfour Beatty commits millions to BIM; New Shanghai business district aims low; What’s keeping Mumbai’s skyline down; Korean firm to build 100,000 homes in Iraq; Turkey’s diplomacy of charity in Somalia; Should we worry about China tying up Latin American resources?

10 SNC-LAVALIN UNDER SIEGE

The Canadian engineer’s slow-motion PR car crash grinds on as shareholders sue and stocks tumble in the fallout over dealings with the Gaddafis 12 EUROPE: HEARTLAND OF INTEGRITY?

6

Bribing police, doctors and teachers may not be standard, yet, but a new report suggests a link between corruption and financial instability, and shows just how vulnerable Europe’s anti-graft culture is 14 PAVING THE WAY IN AFRICA

Despite its wealth in minerals and agriculture, East Africa struggles to reach local and international markets because its roads are so bad. Shem Oirere reports on an historic campaign to bring highways to a region the size of western Europe, where the average road speed currently tops out at 8mph

Calvin Payne reports from Christchurch, New Zealand, which in the last year has suffered four major quakes and 10,000 aftershocks (and counting). This is a city that is still too busy tearing itself down to work out how, and what, and where to rebuild

EAC

18 EARTHQUAKE CAPITAL

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24 FAILING IN THE FAVELAS

Brazil’s plan to deliver two million affordable homes in just five years has been hailed as a bold way of attracting private developers to a sorely underserved social housing market. Except that it isn't working, says Ruban Selvanayagam. Here he explains why

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28 KUWAIT CONUNDRUM

Why isn’t Kuwait booming like Qatar? It has more oil, plus ambitious plans to rival Dubai as a finance and logistics hub. It also boasts the Gulf region’s only parliamentary democracy, which, say Radhika Venkat and David Rogers, may be why its development keeps stalling 32 THE UNWELCOME GLAMOUR OF GREEN

COVER: MAREK A. COOWATCH, WIDERVUE.COM

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HOK

Sustainable design has enjoyed a fair amount of success in India even without the government having to legislate for it. But the problem is, it has become a fashionable niche when it really needs to be completely mainstream – if 1.3 billion Indians are to be housed and their living standards raised.

Mridu Khullar Relph examines the barriers

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LESS MONEY, MORE SENSE There is such a stark contrast between the hundreds of millions flowing into road infrastructure in East Africa and the hundreds of billions being pumped into the failing economies of Europe. In the former, a relatively modest investment will unlock the potential of a vast area rich in agriculture and minerals but whose treacherous roads, where they exist at all, keep the average speed of freight transit at horse-and-cart levels: 8mph. This seems like smart money. It could help lift the region’s 135 million people out of poverty and lay the foundation for historic levels of development. In the latter, the drastic cash infusion seems likely only to delay the collapse of a social and economic order that is debt-addicted and uncompetitive.

The contrast is like the difference between sprinkling water onto parched but fertile soil and pouring it down the drain.

In June the outgoing chief economist for the World Bank, Justin Yifu Lin, told the Financial Times that rich countries should invest in the infrastructure of poor countries because the resulting growth will stimulate demand for what the rich countries have to sell. Lin was considered a maverick, but far from the self-absorbed hand-wringing of the Eurozone, something like that is already happening. China’s investment in Latin America has risen steeply to US$75 billion since 2005, and while some of this money is designed to secure much-needed oil and natural resources, Chinese investment, far more than OECD-based international financial institutions like the World Bank, goes to infrastructure and housing (see Global Round-Up). And in the last year Turkish volunteers have flooded into Somalia, the world’s least functional state, risking bombs to build hospitals and schools. Is it a coincidence that China and Turkey had the highest by-country percentage of firms in last year’s ENR Top 225 International Contractors league table?

Money is no guarantee of real progress, however. Brazil’s plan to offer subsidies to home-buyers in an attempt to enlist private developers in the project of lifting millions out of housing poverty is visionary, but, as Ruban Selvanayagam argues (page 24), so far it has succeeded only in tempting those developers to gamble on a notional emerging middle class, leading to a mid-range housing glut. Nor does Kuwait’s vast riches seem of much use to it just now. There, the ongoing stalemate between the ruling house of al-Sabah and the democratically elected but hamstrung National Assembly looks set to stall indefinitely a development programme that rivals Qatar’s. Our advice to those in the international construction space must be: If you can work out where the smart money is, follow it.

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6 | GLOBAL ROUND-UP

TECHNOLOGY

BALFOUR BEATTY COMMITS MILLIONS TO BIM ROLL-OUT

Buildings in the Hongqiao business district, rival to Pudong, will be limited to eight storeys in height

Ian Tyler

Balfour Beatty and software specialist Autodesk have struck a deal that sees the global contractor commit £7.5m to a company-wide rollout of the 3D modelling and scheduling software known as Building Information Modelling, or BIM. Under the agreement – which the companies are calling the largest of its kind in construction – Autodesk will provide training, support and consultancy as well as its BIM software to Balfour Beatty.

Balfour Beatty chief executive Ian Tyler said the deal would set Balfour Beatty apart from its competitors.

“It extends across all of our capabilities and markets, from infrastructure investment and professional services to construction and on-going built asset management. We will be able to provide our clients with a wealth of new information about the infrastructure we are building and managing on their behalf.”

The contractor has already used Autodesk BIM on a number of high profile projects including the San Francisco Bay Bridge, the widening of the M25 outside London, and the new Heathrow Terminal 2.

Roland Zelles, vice president of worldwide sales for Autodesk Architecture Engineering and Construction, said: “Moving to BIM is about more than implementing new technology – to fully realize its benefits requires a process change.

“Through this comprehensive agreement, Balfour Beatty is demonstrating their commitment to this change and Autodesk is excited to work with them and help extend the value of BIM to their clients around the world.” icon

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CHINA DESIGN

SAY HELLO TO SHANGHAI’S RADICAL NEW LOW-RISE BUSINESS DISTRICT British architect BDP has won an international competition to design a new business district in Shanghai to rival its existing business district, Pudong – and it is aiming low.

Located 17km from Pudong, the new Hongqiao Business District, for client Golden Kingdom, aims for a very different environment. While Pudong bristles with skyscrapers, including China's tallest building, the Shanghai World Financial Centre, buildings in Hongqiao will be restricted to eight storeys.

BDP says its design creates “places for people” by designing to a “human scale”. Office accommodation will be placed around the edge with commercial and

entertainment spaces at street level in the centre to foster human contact and interaction.

The new development will comprise 350,000 sq m of office, retail and landscape, and is part of a flexible mixed-use, mixed-density masterplan that allows for future growth.

Hongqiao hopes to capitalise on its proximity to Shanghai’s main railway station and its main domestic airport.

BDP will provide masterplanning, architecture, landscape architecture, sustainability, acoustics, lighting, structural engineering on the project, which is expected to start on site in September 2012. icon

INDIA HOUSING

Red tape, lack of financing and corruption make I With India listed as one of the fastdeveloping BRICS nations you might think its most populous city, Mumbai, is on the way to becoming a high-rise metropolis like Shanghai, Hong Kong and Manhattan.

But a report in The Economist (9 June 2012) points out that Mumbai has only 31 buildings over 100 metres high, compared with more than 200 in Shanghai and 500 in Hong Kong and, further, that a toxic mix of anti-development red tape, inadequate financing and corruption is strangling the high-rise development that could affordably

house its huge population.

With a relatively modest US$10$20bn having been spent on land and building there in the last decade, it will take more than 60 years to build homes for the existing population of 12 million, the report calculates.

The lack of investment has meant that the average price of a 1,000square-foot apartment in the city is US$250,000 – 90 times GDP per head. With homes out of reach, the share of people in slums has risen to as high as 60%, compared with 20% in Rio de Janeiro and Delhi.

Speculative building so far has targeted the wealthy, and the saturation of this market means that, at current rates of sale, it would take between three and four years just to clear the stock of 28,000-38,000 unsold flats that are finished or under construction.

Extreme land-use restrictions limit a new building’s floor space, as a ratio to the plot it is built on, to 1:3 times compared with 1:5 or more in New York and Hong Kong. Rules inhibit new construction near the coast.

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POLICE SPOTLIGHT SHINES YET AGAIN ON DELHI COMMONWEALTH GAMES It's two years now since the biggest sporting event in India's history, and the scandal of corruption just keeps spreading.

In early May this year India's Central Bureau of Investigation (CBI) launched fresh raids in connection with alleged scams during the 2010 Delhi Commonwealth Games, catching those who'd hoped it was all over by surprise.

This time police raided 20 locations in Delhi, Calcutta and Siliguri in the north-east, reports say, to investigate alleged irregularities in the construction of synthetic tracks in five stadiums.

The row over the Games is one of a series of corruption scandals that has rocked India in recent months.

The CBI is yet to give details of the latest raids, but reports say the homes of some officials of governmentcontrolled Delhi urban development agencies and the premises of a private sports equipment manufacturer have been searched.

The Games were meant to be Delhi's moment of glory, but the run-up to the event was mired in ugly controversies with missed deadlines and serious allegations of corruption and incompetence.

Suresh Kalmadi, the disgraced former chief of the Games, was arrested in April last year. He was accused of conspiracy regarding the awarding of commercial contracts for the Games.

He was released on bail in January. He denies any wrongdoing.

He was removed from his post in January last year.

Earlier, Mr Kalmadi was accused of "conspiracy to cause favour to a company in Switzerland while procuring timers and scoring equipment for the Games".

He was also accused of granting contracts at a 2009 event in London which marked the start of a baton race across Commonwealth countries.

Other Games officials, including VK Verma, the former director general of the organising committee, have also been accused of financial irregularities linked to the event. icon

IRAQ RECONSTRUCTION

String of wins for Hill International Anybody hoping to win work in Iraq will need to keep an eye on US-based Hill International, which has won a varied string of contracts there this year.

On May 14 Hill announced it had been awarded a contract by the Iraq Ministry of Youth and Sports to provide project management for Baghdad's new Al Risafa Sports Stadium. The three-year contract has an estimated value to Hill of approximately US$3.3 million.

The new Olympic-sized, 30,000-seat stadium, which will be designed to comply with FIFA standards, is expected to have a construction cost of approximately US$100 million.

The previous month Hill announced it had won a contract by the Ministry of Higher Education and Scientific Research to provide design management and construction management services for the new Al Bayaa Teaching Hospital in Baghdad. Hill estimates the value of the three-year contract at $5.2 million. The US$210-million, 600-bed hospital will train physicians and other professionals.

Baghdad

These two projects followed an announcement in March of further public-sector contract wins together worth US$15 million to Hill, including housing and sewage treatment projects.

KOREA’S HANWHA TO BUILD 100,000 HOMES NEAR BAGHDAD Iraq has signed a contract worth US$7.75 billion with South Korea's Hanwha Engineering & Construction company to build 100,000 housing units in Bismayah, set to be a satellite city of Baghdad.

The project is part of a Iraq's plan, announced in 2010, to build one million new homes to alleviate the shortage left by years of war and economic sanctions. Iraq needs between 2 and 3 million new homes for its growing popula-

tion, officials have said.

The contract is South Korea's largestever overseas construction project, and represents more than 10 percent of the country’s total current overseas construction order book of $70 billion, The Korea Herald reported on May 24.

Last year, Hanwha E&C signed a US$1bn deal to build a power station and desalination plant in Saudi Arabia at Yanbu industrial complex by 2014. icon

e India’s biggest city ‘flat and knackered’, report says developers finance construction by forcing customers to pay upfront, often without redress if the project stalls.

The report says that builders still bribe officials and politicians in order to achieve the desired density. It quotes one official as saying the height rules are “the biggest mafia scam in India” and are a vital source of funding for political parties. The result: despite pockets of tall buildings “much of Mumbai— supposedly a rival to Hong Kong, London and New York—looks flat and knackered.” icon

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Mumbai skyline: lower than Panama City

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8 | GLOBAL ROUND-UP

QATAR INFRASTRUCTURE

MAJOR PROGRAMME WIN FOR MACE-EC HARRIS JV Qatar's public works authority Ashghal has appointed a joint venture of British firms Mace and EC Harris to deliver a major programme of social infrastructure. The contract is worth a total of 415m Qatari riyals (US$114m) over five years, with an option to extend a further two years.

The JV was appointed programme management consultant for planning, procurement, and management of the design, supervision, and construction contracts for a range of projects including education, healthcare, ports, waterfront development, sports, parks and leisure facilities.

Mark Reynolds, Deputy CEO, said: “This appointment is a unique opportunity to facilitate the devel-

opment of the public works landscape across Qatar and we are thrilled to be part of the delivery team. The size and scope of the infrastructure project will provide the opportunity to demonstrate how collaboration and partnership can produce a scheme of innovation that places the country's society at the heart of the project.”

Keith Brooks, Head of Property & Social Infrastructure at EC Harris said: “This represents a further example of how an integrated approach in partnership with a government organisation enables a faster and more sustainable delivery of ambitious nation building strategies.”

The tiny, oil- and gas-rich Gulf nation is experi-

encing a development boom as it prepares to host the 2022 FIFA World Cup and pursues its development goals laid out in the Qatar National Vision 2030. icon

Mark Reynolds, Mace

Tunnel construction on Lusail Light Rail System, centrepiece of Qatar’s ambitious development plans

THE FLOW OF MONEY

$75 billion in Chinese loans to resource-rich Latin America China’s success in securing resources in Africa is well known, but attention has swung to similar moves in Latin America.

In March China chipped in $150m together with the Inter-American Development Bank (IDB) as seed money for a $1-bn fund for equity investments in Latin America. But that’s just the tip of the iceberg. According to a report released in February by Tufts University, “The New

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Banks in Town: Chinese Finance in Latin America”, China has provided around $75 billion in loan commitments to Latin American countries since 2005. In 2010 alone, China loaned more to Latin America ($37bn) than the World Bank, IDB and US Ex-Im Bank combined, the report says. What’s more, Chinese lending helps Latin American countries extract minerals and build things. The report

found that Chinese banks channel 87% of their loans into the energy, mining, infrastructure, transportation and housing (EMITH) sectors, while only 29% of IDB loans and 34% of World Bank loans go to these sectors.

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Mogadishu, Somalia, devastated by decades of civil war

SUDDEN DEPARTURE OF QATAR RAIL'S DEPUTY CEO Geoff Mee, Qatar Rail’s deputy CEO and figurehead for the country’s ambitious railway infrastructure development, left his post in June, ConstructionWeekOnline.com has reported.

In April invitations to tender were issued for four tunnelling packages worth US$2bn to US$3bn each for the first sections of a metro network that must be done by the time Qatar hosts the FIFA World Cup in 2022. With mounting pressure over whether the national rail development would be able to meet FIFA deadlines, the news portal said Mee had expressed concerns but had remained positive that the necessary works would be completed on time.

Qatar Rail and Deutsche Bahn's joint venture, QRDC, is entrusted with delivering the country's rail infrastructure in a US$37-billion project that involves some 300km of track and 98 stations, eventually connecting with the planned, Gulf-region-wide, high-speed rail network. icon

INTERNATIONAL STRATEGY

Turkey's labour of love wins hearts in the most dangerous country in the world Eager for regional influence, and with a keen, internationally-oriented construction sector, Turkey has been sending hundreds of volunteers to help rebuild the most dangerous country in the world – Somalia.

Since last year Turkish relief workers and volunteers have poured into the capital, Mogadishu — a city deemed too dangerous to work in by most governments — building hospitals, schools, and public infrastructure.

While Somalia’s warring factions have been negotiating a new national government, and as African Union troops battle for territory against Al Qaeda-linked Islamist group Al Shabaab, Turkish engineers and builders have repaired Mogadishu's crumbling airport, built schools, installed street lighting and sent hundreds of Somalis to Turkey to

erica since 2005: should we be worried? about being frozen out of this important resource base.

In “Chinese Investment in Latin American Resources: The Good, the Bad, and the Ugly”, the authors describe multibillion-dollar loans China makes to Brazil, Venezuela and Ecuador, to be repaid with oil, but also, in other countries, rail development or mine rehabilitation loans, and irrigation infrastructure deals with con-

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tracts attached to grow wheat, corn and soy for Chinese consumption.

Should we worry? Not really, the authors say. China tends, as Japan did in the 1970s, to invest in “frontier” or “competitive fringe” supply ventures that other investors pass by. They argue that this leads to the development and expansion of the supply base, which could benefit all customers. icon

study on scholarships.

Turkey’s Prime Minister Recep Tayyip Erdogan has led this investment of charity. He made an official visit to Mogadishu last August, becoming the first non-African leader to set foot in the city in two decades. Three months later Turkey opened an embassy in Somalia and in March this year Turkish Airlines became the first international airline to operate commercial flights to Mogadishu in 20 years.

Analysts say the humanitarian drive is to bolster Turkey's status as a regional power. Over the past decade Turkey’s trade ties with poorer Islamic nations have surged, giving Turkish construction and manufacturing firms new markets. A case in point is Libya. When the civil war erupted in 2011 Turkish contractors had unfinished projects there worth a

reported US$15bn. Last year Turkey’s exports to Africa reached $10.3 billion, up from $2.1 billion in 2003.

Whatever the reasons, its generosity is making Turkey very popular in Somalia.

“They are the sponsor we have been looking for the last 20 years,” Somalia’s interim Prime Minister, Abdul Weli Mohammad Ali, told Reuters (reported 3 June). “They are the Holy Grail for Somalia.”

Late last year, Reuters reports, the charity Doctors Worldwide Turkey converted a building formerly used as an ammunition dump into Mogadishu's most hitech hospital, doing it in just two months. The charity has trained thirty of the hospital's doctors, nurses and midwives in Turkey.

Reuters reported that another Turkish charity has secured six school renovation projects worth $30 million. icon

“KUWAIT IS NOT IN A POSITION TO ACHIEVE THE TARGET IT HAS SET FOR ITSELF: TO BECOME A TRADE AND FINANCIAL HUB BY 2014” RR KUWAIT’S AMBITIOUS BUT FAILING DEVELOPMENT PLANS, PAGE 28

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10 | BRIEFING SNC-LAVALIN

THE SIEGE OF SNC Investigation of Canadian firm enters its fifth month as shareholders, reporters and police in three countries try to work out just what it was up to in Gaddafi’s Libya. David Rogers reports

T

he series of astonishing revelations and allegations about the conduct in Gaddafi’s Libya of Canadian firm SNC-Lavalin – or its senior executives acting on their own initiative – has continued over the past quarter.

The latest development, announced on 9 May, is the launching of a class-action lawsuit for CAN$1.5 billion on behalf of investors angry that SNC’s shares have lost about $3.5 billion of their value since their year-high of $59.97.

The first signs that something had gone badly wrong at SNC were publicly visible on 9 February, when the company announced the departure of two senior executives. After that there followed criminal investigations by the Swiss, Canadian and Mexican police, allegations of a plot to spirit Saadi Gaddafi, the late Libyan dictator’s third son, out of the hands of victorious rebels, an internal review that found that $56 million in “unauthorised payments” had been made, an

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anonymous email that said it was more like $300 million and the resignation of the firm’s chief executive.

THE MIDDLE MAN: Ben Aïssa, SNC’s Libyan fixer, presently detained in Switzerland

WHAT DID BEN AÏSSA DO? The man at the centre of the allegations is Riadh Ben Aïssa, a Tunisian-born businessman who began his career as a software engineer in France. He joined SNC in 1985 and rose to become the vice president in charge of global construction. He was the driving force behind SNC’s success in Libya: the firm won a reported billion dollars in projects there, including a detention centre in Tripoli designed to ease pressure on the prison estate, which filled to capacity under the dictatorial regime.

Ben Aïssa was close to Saadi Gaddafi. Canada’s Globe and Mail newspaper reported that Ben Aïssa helped Saadi create the Libyan Corps of Engineers in 2008, a joint civilian-military venture that Saadi headed.

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9 February (SNC says he was dismissed, Ben Aïssa says he resigned and will sue anyone who says otherwise); he was then arrested by Swiss police in the middle of April on charges related to corrupting a public official, fraud and money laundering, and the Swiss authorities confirmed to Canada’s National Post newspaper that they involve Ben Aïssa’s actions in North Africa.

After the arrest, the Swiss said they were working in conjuction with the Canadians, and on Friday 13 April the Royal Canadian Mounted Police raided SNC’s Montreal office.

So what exactly was Ben Aïssa accused of? The company’s internal review, which was released on 26 March, was, at the same time, scathing and vague. It focused on $56 million of “unauthorised payments” made to “agents” in North Africa to help secure contracts for two projects. It found that Ben Aïssa, who worked out of offices in Tunis and Montreal, was “believed to have direct and significant knowledge about most of the investigated transactions” and that $22.5 million passed through SNC’s Tunis office between 2010 and 2011.

However the board said it did not believe the payments went to anyone in Libya, although it also said it didn’t know who else they went to. Ben Aïssa refused to cooperate with the investigation.

The review also found that Pierre Duhaime, SNC’s chief executive, had approved the payments despite their being rejected by the firm’s finance director. Duhaime resigned from the firm on the same day the report was published, although SNC maintained that this was not linked. He was given a golden handshake of almost $5 million.

Gwyn Morgan, the chairman of SNC, issued a statement saying that the company would pass on the “inconclusive results of our investigation” to the relevant authorities.

ACCORDING TO ANONYMOUS SOURCES …

After the review was published the Canadian media tried to fill in some gaps. The Globe and Mail quoted a “source familiar with the company’s investigation” who said some of the payments went through banks in Switzerland and the Middle East, which might explain the Swiss involvement.

It wasn’t until early May that more detailed allegations came to light. Canadian public broadcaster CBC obtained a “poisoned pen email” sent in December 2011 to the SNC board from an anonymous member of staff. This made more explicit, and more damaging, allegations. The note said: “Since the early 1990s Ben Aïssa has organised more than 300 million [Canadian dollars in] payments to shell companies acting as intermediaries between SNC and the Libyan government (ie the Gaddafi family).” The message then called on the board to show “courage and ethics” and “move your ass!” to do so.

CBC added that it had no proof of the substance of the allegations contained in the email, nor any evidence that they related to the allegations Ben Aïssa faces in Switzerland.

Ben Aïssa denies any allegations of wrongdoing.

THE GADDAFI CONNECTION The other executive to leave SNC on 9 February was Stéphane Roy, who was Ben Aïssa’s financial controller. Roy also was thought to have had close links with the Gaddafi family.

According to Morgan, both were involved in recruiting an Ontario mediator called Cynthia Vanier in July of last year. With no previous experience of the Middle East or war zones, she went to Libya ostensibly to investigate how SNC might work with the Libyan government while the civil war continued and

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how it should re-establish itself in the country.

She reported to SNC in September. Then, two months later, Vanier and one of her colleagues were arrested in Mexico on charges relating to human trafficking and the falsification of passports. Mexican authorities allege she was the ringleader of a plot to smuggle Saadi Gaddafi by plane into Mexico.

Sensational as this was, what really aroused the press was that on the day after her arrest Vanier had been due to meet Roy in Mexico to discuss – again, ostensibly – possible water projects in the country despite the fact that Roy, as a financial controller, would not ordinarily be doing that kind of work.

Questioned about this at SNC’s annual meeting on 3 May, SNC chair Gwyn Morgan said the “escapade” involving Vanier “was done without the knowledge of the board or even the management”. He said Roy’s trip to Mexico to meet Vanier and her co-accused was not sanctioned and when asked if SNC was working on water projects in Mexico last November, Morgan replied, “No. We have no idea what Stéphane Roy was up to in Mexico.”

Vanier remains in a Mexican jail. She says she is innocent, has complained of torture and her appeals for help from the Canadian government have led nowhere. SNC refuses to pay her outstanding invoice of nearly $400,000, saying whatever deal she may have had was struck with “employees acting outside the scope of their normal duties”.

THE PLAYERS: From top to bottom, Morgan, the chairman of SNC who is trying to pick up the pieces; Roy, who went to Mexico in mysterious circumstances; Vanier, the consultant who ended up in a Mexican prison; Duhaime, who left with a $5 million golden handshake; and Saadi Gaddafi, who is now thought to be somewhere in Niger

BACK TO THE LAWSUITS The $1.5-bn class action filed on 9 May alleges that the company misled shareholders by stating that its internal procedures were good enough to ensure that its financial position was what it said it was. Rochon Genova, one of the legal firms acting for the shareholders, said in a press release: “When a company repeatedly highlights its strong governance practices to the investing public, revelations of serious misconduct cause damage to the company’s reputation and, in turn, substantial harm to its investors.”

The suit claims, among other things, that a 2009 prospectus offering $350 million of debentures failed to contain “full, true and plain disclosure of all material facts”, and that “SNC and the defendants knew, ought to have known, or were reckless in not knowing that the former Gaddafi regime awarded contracts for infrastructure projects in Libya in return for improper or unlawful payments”.

The move follows an earlier class action for $250 million launched in March by investors in Quebec.

More worrying for SNC’s board than these legal actions, perhaps, is the decision of two of its largest shareholders to express doubts about its handling of the allegations. At the end of April, pension fund Jarislowsky Fraser, which owns a 14% stake in SNC, said the board failed to provide proper oversight in the months leading up to its internal investigation.

This was followed shortly after by a letter from Caisse de Quebec, Canada’s largest pension fund manager, which expressed its unhappiness with the “malaise” at the firm.

The latest crunch in SNC’s slow-mo PR car crash came when the World Bank suspended its eligibility to bid for bank financed projects while it investigated its tender for the US$1.2 billion Padma bridge in Bangladesh.

On the plus side for SNC, it has a bulging order book and profits for Q1 2012 were up 8.8% on Q1 2011. And in June it was ranked 11th of the 50 best Canadian corporate citizens in 2012 by Canada’s Corporate Knights, which calls itself “the magazine for clean capitalism”. icon www.iconreview.org

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12 | BRIEFING CORRUPTION IN EUROPE

MORAL EUROPA? On the face of it Europe is much less corrupt than other parts of the world.

At least there, bribing police, doctors and teachers isn’t standard... yet. But a new report suggests a link between corruption and financial instability, and shows just how vulnerable Europe’s integrity is. David Rogers reports

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ack in the autumn of 2002, a lawyer and politician called Cesare Previti, was in a Milanese court facing charges that in the 1980s he had bribed Italian judges on behalf of a businessman called Silvio Berlusconi.

Interestingly, Preveti’s defence was to admit that he did indeed hold $434,000 of the businessman’s money in foreign bank accounts, but that he was simply doing it to evade tax, and there was nothing wrong with that. And this was the man that prime minister Berlusconi had wanted to put in charge of the justice department …

Of course Italy is Italy, and shouldn’t be taken as representative of Europe as a whole. Except that Europe as a whole is a fairly corrupt place, too. Even if we ignore the fact that firms accused of bribing public officials have not been investigated for political reasons (BAE Systems), and that entire industries have developed to make corruption more convenient (the banking sectors of Switzerland and Liechtenstein), the picture is still disturbing.

This is true at the highest and lowest level. It’s an extraordinary fact that the European Union’s Court of Auditors has refused to sign off its last 17 budgets, and in 2011, it estimated that about €4.6 billion of the EU’s money was spent “against the rules”. And it’s equally extraordinary that in 2008, 60% of the economically active population of Greece claimed to have made less than €12,000 over the financial year, yet the country’s per capita GDP was about twice that.

(Of course, €12,000 is the threshold for paying income tax.)

TRANSPARENCY IN PUBLIC PROCUREMENT The report’s recommendations for improving the system ● Bring in dedicated legislation to encourage and protect whistleblowers. At present only two countries in Europe have adequate protection for whistleblowers: Norway and the UK. ● Avoid dealing with contractors and suppliers known or reasonably suspected to be paying bribes. ● Undertake due diligence, as appropriate, in evaluating prospective contractors and suppliers to ensure that they have effective anti-bribery programmes. ● Make known anti-bribery policies to contractors and suppliers. ● Monitor significant contractors and suppliers as part of a regular review of relationships with them and have a right to termination in the event that they pay bribes or act in a manner inconsistent with the enterprise’s programme. ● Promote citizen inclusion in the monitoring of public procurement activities at the national level. ● Make more contracts public (using e-procurement as a tool) to ensure greater transparency in public procurement both above and below EU thresholds. ● Ensure greater scrutiny and monitoring mechanisms to guarantee concerns over public procurement are investigated and monitored in a way that allows for pan-EU comparison.

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All in all, 74% of Europeans surveyed stated that corruption was a major problem in their country. But how does it vary between states? In particular, can firms bidding for public contracts expect to have their tenders assessed on their merits, or was the job always going to go to somebody’s brother-in-law?

Transparency International, the anti-corruption NGO, has made an attempt to answer this question in its latest report, Money, Politics, Power: Corruption Risks in Europe, which was published in June, and its conclusions ought to be read by anybody who feels the need to be forewarned.

PUBLIC PROCUREMENT Every year, the countries of the EU spend about €1.7 trillion on public procurement. Most of these contracts are supposed to be let according to a fairly inflexible set of rules, but unfortunately these rules are so complex and onerous that many public authorities do all they can to avoid having to comply with them by, for example, splitting a contract into smaller units that stay beneath a particular threshold. For example, in Hungary, contracts worth less than €800,000 do not have to be publicly reported. There are lots of contracts just below €800,000 in Hungary.

The worst countries in which to bid for public sector work seem to be Bulgaria, the Czech Republic, Italy, Romania and Slovakia. As we have already noted, Italy is just weird, but the other countries seem to have merged the 2004 EU Public Procurement Directive with the old nomenklatura system with the result that competition law is “circumvented with impunity”.

The worst place seems to be the Czech Republic, where a survey of managers of smaller companies found that 60% believed it to be impossible to win a public contract without offering a bribe. In Bulgaria and Italy the final public procurement contracts are not published and it is common to go on negotiating after an award, adding annexes to the deal as you go.

In Romania, elaborate legislation is in place to ensure fair play, and is riddled with an equally elaborate set of loopholes.

These include, among others, establishing the tender criteria in such a way that one particular company is bound to win, misuse of the country’s present state of emergency to derogate from EU rules and negotiate with a single bidder and, finally, providing confidential information to one tenderer, who can then put in just the right price. All of this is made easier by the absence of any competition authority along the lines of the UK’s Office of Fair Trading or the German Bundeskartellamt.

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THE WEAK SPOTS The assessments also show that the private sector is not playing a meaningful role in preventing and combating corruption. Across all the countries, only Scandinavia has a private sector that “adequately engages with government and civil society on anti-corruption issues”.

However, it is political parties and public administrators that are most distrusted and disliked by ordinary people.

There is an overwhelming sense that parties are influenced by donations and that civil servants are often corrupt, bad at their jobs and largely immune to censure. In Greece, despite extensive reported cases of corruption, only 2% of civil servants have been subject to disciplinary procedures.

Following this trend, in Portugal, a recent study found that

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THE BRIGHTER SIDE Some bits of the European polity are working well: elections are free and fair, public services are delivered fairly and the judicial system is independent.

To fully appreciate these facts, we should glance across for a moment at Transparency International’s global corruption index for 2010. This shows that Europeans do have much to be grateful for. Above all, bribery generally happens only when politicians and businessmen sit down to discuss what contributions each can make to each other’s wellbeing, rather than though a car window with the policeman who’s just stopped you. In the EU, only 4% of transactions with a policeman involved a bribe, compared with 44% in SubSaharan Africa, 37% in the Middle East and 19% in Latin America. And in the states of the former Soviet Union, a mindbending 28% of people interacting with a medical professional felt they had to offer a bribe (the total was similar for teachers and judges, 20% and 26% respectively).

Although the overwhelming majority of Europeans feel that corruption is becoming more of a problem, and many in the south have joined the “indignados” and expressed their anger with their governments in public, there are countries with good integrity systems, and some that have acted to improve their cultures.

The Scandinavian countries are, as we know, among the cleanest in the world, but the report picks out Latvia for particular praise. This tiny state outperforms its neighbours and exhibits a generally strong integrity system. The executive and judiciary together with the Corruption Prevention and Combating Bureau has brought the fight against corruption to an “unprecedented level of intensity”.

Another plaudit goes to Poland, which is one of the very few countries in Europe to take effective action against parties that accept questionable donations. The National Electoral Commission withdrew public subsidies for three years from the Polish Peasant Party, the Democratic Party, the Labour Union and the Social Democracy of Poland for breaking transparency rules.

Switzerland’s public procurement system is praised for “effectively reducing the opportunities for collusion in most of the key areas”. It does this by using a comprehensive online tendering process, awarding work on the basis of value for money and by publishing all calls for tenders and documentation on the “simap.ch” platform for e-procurement.

Many other standardised files relating to procurement reporting and oversight are also included on the web. The Federal Office for Buildings and Logistics has introduced an integrity clause that should be included in every public contract. icon

Here’s how company executives ranked the ethical behaviour of firms in their own countries.

Integrity score (out of seven)

SELFASSESSMENT

World rank (out of 142 countries)

troubles of Portugal, Italy, Greece and Spain and the poor state of what the report calls their “national integrity systems”.

All have “serious deficits in public sector accountability and deep-rooted problems of inefficiency, malpractice and corruption, which are neither sufficiently controlled nor sanctioned”. The result has been social upheaval.

As you might expect, Greece is the pick of the litter. If you approach 100 Greeks at random and ask them whether corruption is a major problem in their country, 98 will answer yes. Ask a Greek executive to rank the integrity of the private sector and he or she will suggest it is about the worst in the world (125th out of 142). More than 80% believe that political parties are corrupt or very corrupt. (At least here they are not alone: a similar proportion of Spanish, Romanians, Irish and of course Italians feel the same way.) In Greece, donations to political parties can be of any value and do not have to be declared (also the case in Sweden and Switzerland) and the audit office is appointed by, and answerable to, the government, rather than parliament, as is standard practice elsewhere.

less than 5% of all corruption-related proceedings ended in a conviction.

1 3 5 6 8 9 12 14 17 18 24 30 39 50 53 54 66 74 79 101 103 104 105 109 125

Denmark Sweden Finland Switzerland Netherlands Norway UK Germany France Belgium Ireland Estonia Spain Portugal Poland Slovenia Lithuania Latvia Italy Bulgaria Romania Slovak Republic Hungary Czech Republic Greece

6.7 6.6 6.6 6.5 6.4 6.3 5.9 5.9 5.7 5.6 5.4 5.1 4.7 4.4 4.1 4.1 3.8 3.7 3.7 3.4 3.4 3.4 3.4 3.3 3.1

Source: World Economic Forum

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FINDING A WAY In the last of our series on East Africa’s infrastructure boom, Shem Oirere reports on the millions being spent to turn single-lane gravel tracks into modern highways across a region the size of western Europe

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conomic growth may not solve all of East Africa’s problems, but it’s clear that nothing much will happen without it. And it’s equally clear that growth is going to be limited unless the countries in the region can get their goods to the outside world, and make the most of each other’s markets as well. In particular, it requires something that any developed country takes for granted: a network of paved roads.

The heart of the region is a circular cluster of states made up of Tanzania, Kenya, Uganda, Burundi and Rwanda.

Together they are about the combined size of the UK, France, Spain and Germany, although their total population is much lower, at 135 million. All things being equal, the economic prospects for the region are improving: growth of 6-7% is forecast for Kenya, Uganda, Tanzania and Rwanda this year, and internal trade has doubled to $3.5 billion in the six years to 2011. The outlook would be brighter still if it were easier, quicker and cheaper to move commodities over the ground, whether to the main ports at Mombasa and Dar es Salaam, or to markets in neighbouring countries. As reported previously, the rail network is under development, but roads are necessary, too.

Last year the World Bank published a report on the state of the East Africa’s physical infrastructure. This found that it has the worst trade logistics in the world. The density of paved roads is about a third that of southern Africa, there are “prominent patches” of poor-quality roads, and “significant stretches” that aren’t paved at all. What this phrase actually means is that in Uganda, for example, 2.7 percent of the country’s GDP is lost through road accidents; on the road to the provincial capital of Liri recently, a truck grinding along in a low gear was overturned by a water-filled pothole whose depth the driver misjudged, sending him to hospital with multiple fractures. Together with congested ports and long administrative delays at borders, this leads to an average speed for overland freight that is no faster than a horse and cart: 8mph.

THE BUILDING PROGRAMME The East African Community (EAC), which brings together the core five countries, estimates that at least $25 billion is needed for roads over the next 10 years, and projects to upgrade 1,102 km of road are in progress. The authors of the World Bank’s East Africa’s Infrastructure report noted that some countries had already made the investments necessary to pave their portions of the regional network. “All of the regional roads in Rwanda, almost all of the regional roads in Burundi, and 80 percent of the regional roads in Kenya are paved.” However, in Ethiopia, Tanzania, and Uganda that figure is 60-70 percent, whereas in Sudan only 12 percent of the regional network is metalled. www.iconreview.org

Where is this $25bn to come from? The main international sources of finance include the French government, the World Bank, the European Union (EU) and Japan International Cooperation Agency (JICA).

However, the most notable development in recent years has been the growing role of the Chinese government and the African Development Bank (AfDB) as providers of project finance. These two funders are to invest 44 billion Kenyan shillings ($500 million) in the present financial year. This brings their total contribution in two years to more than 80 billion shillings ($950 million).

However, much heavy lifting will still have to be done by the region’s governments, and there have indeed been large increases in investment. For example, the Kenyan regime of President Kibaki has allocated $1.2 billion for road sector projects this financial year, compared with $1 billion in the previous. Deloitte, the economic consultant, expects this to be repaid by lower transaction costs, higher competitiveness and a better chance of attracting foreign direct investment.

Landlocked Rwanda, which posted economic growth of 8.2% last year, has increased its last budget for the transport sector 22%, to $123 million. John Rwangombwa, the minister for finance, said the government planned to put 46% of the road network in a “good condition”, compared with 38% the previous year.

Uganda, a country in which potholes have become a lively political issue, has allocated $480 million to its transport sector.

Only 4% percent of the country’s total road network is paved.

TOP LEFT: Road in Uganda, on the way to Kampala MAP: East Africa is a rich agricultural area whose economic growth has been stunted by the worst trade logistics in the world. Now this is beginning to be addressed by the roads programme, but there’s still a long way to go …

WHO’S GOT THE JOB? As has been widely reported over the past 10 years, Chinese companies have become important players in Africa’s internal economy as sources of both project finance and operational expertise. This has been particularly true of the civil 02 QUARTER 2012

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“WE CAN’T HAVE PEDESTRIANS, MOTORCYCLE OPERATORS AND CYCLISTS JOSTLING FOR THE SAME SPACE. THERE CAN ONLY BE ONE OUTCOME IN SUCH A SITUATION.” PATRICK LUMUMBA, THE NAIROBI TRAFFIC COMMANDANT

Addis Ababa

South Sudan

Ethiopia

Juba

5 Nimule

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Ouganda

Kenya Mbarara

Rwanda

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Nairobi

Kigali

Thika

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Burundi

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engineering sector. For example, in Kenya, a subsidiary of China Railways, the China Overseas Engineering Group, is working on the Namanga Multinational Corridor (of which more below), and the China Road and Bridge Corporation, another state-owned contractor, has won a series of projects to improve the “northern corridor” that runs between Mombasa, Nairobi, Kampala and the Great Lakes region to the south-west of Kenya. (According to the United Nations’ Trans-African Highway plan, this road will eventually stretch to Lagos in Nigeria.)

The presence of the Chinese has been controversial, particularly after the World Bank’s decision three years ago to penalise three of the companies active in Africa, China Road and Bridge, China Wu Yi and China Geo-Engineering after they were found to have colluded with local firms on road tenders in the Philippines. The companies were banned from tendering for bank projects for between six and eight years.

Local roadbuilders, no doubt aware of the increasing amounts of Chinese money flowing into civil engineering projects, have complained of a bias towards Chinese contractors when it comes to handing out work, and accuse the government of excluding local firms on the pretext that they lack experience of big projects. They also claim that Chinese nationals take most of the middle and senior project roles, leaving the menial jobs for locals.

Franklin Bett, Kenya’s minister for roads, told a press conference that the protests were unfounded because Chinese companies had offered their nationals only management and technical posts, which account for just 10% of jobs on the schemes; he added that the quality of the Chinese firms’ work was greatly superior to local companies. Meanwhile, Giao Hong Feng, China’s deputy minister for transport, recently told the Kenyan press that Chinese firms had “generated practical benefits” and that Chinese contractors created a “win-win cooperation situation”, which is perhaps a more diplomatic restatement of Bett’s position.

In the remainder of this article we will look more closely at some of the road projects that are joining the dots around the core area, and also some of the others in the northern periphery of Sudan and Ethiopia.

1. INTEGRATING KENYA AND TANZANIA One of the key links in the region network is the 240-km highway that runs due south from Nairobi to Arusha in northern Tanzania. The existing route suffered from poor drainage, a dangerous lack of visibility and a lack of places to pass safely. It also needed frequent maintenance. Its replacement is nearing completion, with the help of $156.3m joint financing from the AfDB and JICA. Kenya is finalising its section of the road, from Athi River to Namanga, a distance of 135 km, aided by $93.1 million from the AfDB. As mentioned above, China Overseas RR

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2. KENYA’S SUPERHIGHWAY The AfDB is financing the upgrade of a 45-km highway from Nairobi to the town of Thika in the north-east. This route is now more than 30 years old, and is often blocked by traffic jams caused by poor conditions and limited capacity.

China Wu Yi is widening the road from six lanes to eight, repaving it and building six on- and off-ramp interchanges to replace roundabouts. Wu Yi will also rehabilitate bridges and improve drainage.

Work was supposed to finish in February but was delayed by the Ministry of Road’s decision to replace two contractors who were re-routing underground water and power cables and sewer lines. The action followed complaints from electricity provider Kenya Power and the Nairobi Water and Sewerage Company about the quality of their work.

It’s a tough job. The road already supports 30,000 vehicle trips a day and work on the upgrade has to stop during rush hour.

The road is also proving deadly for users. Police statistics in March show that more than 70 people have died on it so far this year. “We can’t have pedestrians, motorcycle operators and cyclists jostling for the same space,” Patrick Lumumba, the Nairobi Traffic Commandant, told iCON. “There can only be one outcome in such a situation.” He called for footbridges and pedestrian lanes to be added.

The Kenya National Highways Authority (KeNHA) says it hopes that in the next two-to-three months most of the 18 footbridges along Thika Road will be complete. “Although it still remains to be seen whether pedestrians will be wise enough to use them,” said Michael Kidenda, director general of KeNHA. However, some engineers involved in the superhighway say the design is the best Kenya has implemented in recent times, and blame careless driving. “It is the usage of the facility that is causing death and not the facility itself,” James Karanja, one of the consultants involved in the highway project, told the Sunday Nation newspaper in April. “There is some excitement in zooming on the highway and public

“I WANT TO CAUTION ALL THOSE INVOLVED IN THIS KIND OF OUTRIGHT THEFT THAT THE LAW WILL UNDOUBTEDLY CATCH UP WITH THEM SOONER RATHER THAN LATER” YOWERI MUSEVENI, PRESIDENT OF UGANDA, ON THE HIGH COST OF KIGALI-MBARARA LINK www.iconreview.org

service vehicles have refused to use the service lanes created for them, and there are those members of the public who steal signage.”

Despite the safety issue, many hopes are resting on the new road. Politicians hope it will ease traffic congestion and cut fuel consumption and emissions. Kenyan and Ethiopian importers and exporters hope it will speed up the movement of their goods through Mombasa and the airports, and farmers hope it opens up the capital, Nairobi, for their produce.

3. NAIROBI TO ADDIS ABABA Kenya and Ethiopia share a border almost 1,000 km long, but there are no all-weather roads across it. The A2, the 245-km Kenyan segment of the main link, was built in 1974 and is still gravel-surfaced. Route 6, the Ethiopian segment, was built in 1969 and although it is paved for about 120km between the border and Hagere Mariam, the remaining 300km to the capital is in bad shape.

The result is a good illustration of why infrastructural improvements bring economic returns. The agriculturally rich Oromia area in southern Ethiopia produces livestock, dairy, coffee and the stimulant khat. Across the border, the north-eastern provinces of Kenya account for close to 70% of the country’s red meat production. The economic development of both regions has been stunted by the difficulties of getting produce to market.

In addition to this, landlocked Ethiopia relies on Mombasa for 20% of its sea-bound imports, most of which must be brought up over the link, with all that that implies.

The $493-million project will run a 7-m-wide carriageway with 2-m shoulders the whole 438km between Addis Ababa and Nairobi. The Kenyan section has been split into two contracts, each awarded to a Chinese firm: China Wu Yi and Jiangxi Zhongmei Engineering. Ethiopia awarded its segment to Egypt’s state-owned Arab Contractors.

Completion of the whole road (which is another part of UN’s ambitious Trans-African Highway system, this one running from Cairo to Cape Town) is expected by the end of next year, according to the KeNHA’s Kidenda. The project is co-financed by AfDB ($315m) and the EU ($114m), with Kenya and Ethiopia paying $39m and $25m respectively.

EAC

RR Engineering is doing the work, which also involves upgrading the road to help it cope with increasing vehicle loads, especially those transporting cement from the nearby East Africa Portland Cement Company.

Tanzania’s 105-km section runs between Namanga and Arusha, built with $63.2m from JICA. This section is being undertaken by the China Geo-Engineering Corporation.

Michael Kamau, the permanent secretary at Kenya’s ministry of roads, told iCON that the improvement of this project would significantly boost trade between Kenya and Tanzania, which is currently estimated at $456 million. “We must connect ourselves to our neighbours because they are the source of our business,” he said.

4. THE RWANDA-UGANDA CONNECTION These two countries are using the EU’s European Development Fund money to rebuild a link between Kigali in Rwanda and Mbarara in southern Uganda.

Two construction firms, Strabag International of Austria and Reynolds Construction Company of Nigeria, have won the work. Strabag will build the 78-km Rwandan section for $61 million and Reynolds will tackle the 124-km Ugandan section for $155 million.

The grand strategy is to link the Rwandan capital to Mombasa through Kampala. According to Michel Arrion, the head of the EU delegation in Rwanda: “With those two roads, we are integrating four countries, Rwanda, Uganda, Kenya and the Democratic Republic of the Congo.”

The project in Rwanda involves the reconstruction of 115 concrete culverts, the construction of 73 arched metal duct drainage systems and improvement works for bridges as well as the building of a roundabout near Kigali. The poor condition of the present road has been blamed for travel delays and high vehicle maintenance costs, according to Arrion. In Uganda the project will rebuild the Katuna-Mbarara road.

When the highway is completed in two years’ time, it will be 9-m wide: 7m for the roadway, and 1m for each shoulder.

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MEN AT WORK: Kenya has almost reached the end of this road. The upgraded ArushaNamanga link replaces a narrow waterlogged highway where overtaking was often a perilous operation

president of Uganda, used his new year’s address to the nation to “regret” that the Uganda segment was paying $1.2 million for each kilometre whereas Rwanda was paying $794,000. He said: “I want to caution all those involved in this kind of outright theft that the law will undoubtedly catch up with them sooner rather than later. I am repeating my directive to the auditor general to immediately carry out a forensic value-for-money audit using a firm of international repute.”

In February the Uganda National Roads Authority said the disparity was because the design life of its segment was 20 years compared with 10 years for Rwanda. A resolution of the dispute will have to await the publication of the auditor’s report.

5. SOUTH SUDAN TO UGANDA South Sudan, the world’s youngest state, is finalising its first modern road link to the south. The 192-km highway will connect the capital, Juba, to Uganda via the border town of Nimule.

The work is being undertaken by the US engineer Louis Berger Group (LBG). South Sudan had much of its infrastructure destroyed during the 22-year civil war that ended in 2005. In the aftermath of that conflict, vehicular traffic was almost impossible in several parts of the country, so LBG’s first assignment has been to repair the bridges that had been blown up.

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LBG has said it is involving local firms to help them develop their capacity to take on major projects in the future, and that the project has created 1,000 jobs and contributed to the expansion or establishment of 750 businesses along the route.

These points are important to the US firm, which will be looking to repair some damage to its own reputation after a report by non-profit organisation CorpWatch accused it of shoddy work and repressive management on reconstruction projects in Afghanistan and Iraq. And in 2010 LBG agreed to pay $69.3m to avoid being prosecuted for defrauding USAID out of at least $10m for inflated valuations of its work in those countries. Despite this, USAID still had enough faith in LBG to award it the $225-million highway.

In South Sudan, LBG says it has replaced eight single-lane bridges with two-lane versions, including the three-span Aswa Bridge, the biggest of which is 87m long.

The project broke ground in February of last year, and when completed will cut travel time between Juba and Nimule from eight hours to about 2½, according to Barrie Walkley, the US consul general in South Sudan.

Salva Kiir, South Sudan’s president, described the road as a “lifeline” for the country. “A proper road infrastructure is a prerequisite for any favorable trade to take place because it affects the cost of doing business, especially in a waremerging region like South Sudan.” icon

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18 | MARKETS NEW ZEALAND

STARTING FROM SCRATCH Last April Calvin Payne reported on conditions in Christchurch after the second major earthquake hit the city in six months. Since then four more quakes have struck, plus 10,000 aftershocks. Here, amid continuing seismic activity, he offers a unique insight into a city that is still tearing itself down and working out how, and what, to rebuild

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ost newswatchers will know that New Zealand has had some earthquake trouble, but in international media it has been eclipsed by the catastrophes in Japan, which is understandable as Japan’s losses are so much greater.

But from a built environment perspective, New Zealand’s experience is notable because an entire city, the country’s second largest, with a population of around 368,000, hasn’t stopped shaking. Nor has it finished tearing down its compromised buildings, or even assessing which ones need to come down. Much of its downtown central business district (CBD) is a no-go zone. Half of its tall buildings will be demolished and a third more are yet to be assessed. Ground conditions are still unstable. Although heavily insured, the pot of money available for reconstruction will be empty long before everybody’s homes and business premises are repaired or replaced. Construction costs are rising and shortages of materials and skills are starting to bite.

In many ways this city will have to start again from scratch.

It has only begun tackling a very basic set of questions: What to build, where to build it, how to build it, who to build it, with what, and, of course, how to pay for it.

BAD VIBRATIONS New Zealand is called “The Shaky Isles” for good reason. It sits on the Ring of Fire, the volcanic zone in the basin of the Pacific Ocean, and earthquakes happen a lot. But you’d need to go back to the Napier quake of 1931 to find an event that caused significant damage and loss of human life.

Prior to 2010 Christchurch saw only a handful of very minor earthquakes per year. But on September 4 2010 a new era of bad vibrations began. Since then (see box) we’ve had four large earthquakes and over 10,000 aftershocks, causing massive damage and the loss of 188 lives.

Only a handful of days in the last 18 months have been quake-free. Up to January 31 this year, Christchurch has had on average 19.47 aftershocks per day since September 4, 2010, which have all been shallow and close to the city. In comparison, Turkey had an average of 1.05 per day after the 7.1m-quake in October 2011, and even Japan only had an average of 5.42 per day after its disaster in March last year. In Christchurch we’re all quake experts now. When an aftershock happens, we place bets on its size, location and depth.

Where to start in describing the damage? Here's one statistic: we used to have 3,800 hotel rooms but now we have 1,100. Christchurch's 26-storey Grand Chancellor Hotel finally www.iconreview.org

came down in May 2012, after a seven-month hard demolition, preceded by a five-month design and stabilisation period.

But I think the fate of the landmark Anglican cathedral actually best sums up the “when-will-it-stop?” character of the disintegration. It survived the September 2010 quake with some internal damage. The February quake caused the tower and spire to collapse, but the rose window survived and was braced with steel framing. The June quake caused the rose window to collapse and twisted the support framework. The December quake then further destabilised the whole building.

It's currently being demolished to make the site safe while longer term plans are put in place.

To understand the damage it helps to split it into eight main categories: 1. Fatal building collapses.

2. Buildings damaged that may collapse in an aftershock, slated for urgent demolition.

3. Buildings damaged that are uneconomic to repair.

4. Buildings initially thought to be okay but are later deemed beyond repair upon closer examination.

5. Liquefaction.

6. Uneven settlement.

7. Lateral Spread of land normally towards rivers.

8. Land Damage by physical movement at surface.

The most deadly outcome of the 22 February 2011 quake was the collapse of two buildings, the Pyne Gould Corporation (PGC) headquarters, a five-storey office building, and the sixfloor Canterbury Television (CTV) building. Together these collapses killed 133 people and are the subject of a Royal Commission inquiry.

ABOVE AND LEFT: Christchurch's Anglican cathedral was damaged progressively in each major quake

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“WE’RE ALL QUAKE EXPERTS NOW. WHEN AN AFTERSHOCK HAPPENS, WE PLACE BETS ON ITS SIZE, LOCATION AND DEPTH” ABOVE AND RIGHT: Freight containers are put to wide use. Here they support the damaged Roman Catholic cathedral, Christchurch Basilica

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Apart from these two collapses most injury and death was caused by unreinforced or unrestrained masonry. The main issue here was parapet walls that collapsed as people ran out of shops and cafes when the earthquake happened. In some buildings the precast stairs collapsed and people had to be craned or abseil to safety. Precast stairs have been used extensively in Christchurch for years but their design and use needs to be reviewed.

Twenty city blocks remain out of bounds while buildings are demolished and made safe. A number of tall towers up to 28 floors remain to be demolished and access to the Red Zone is tightly restricted because they could topple in an aftershock. Of the approximately 30 towers that are 10 stories and above in the CBD, 25% have already been demolished, 25% are confirmed for demolition and another one third are still under review. Only a handful are currently confirmed as repair options, this includes what is now the tallest building in Christchurch and South Island, the Pacific Tower, a 23-floor, 86-metre structural steel tower completed only in 2010.

Demolition is slow and fraught with danger. Explosives are forbidden as they could cause further damage to subsoils and surrounding buildings. A building over 11 floors is typically propped up and then stripped back to the structural frame, which is normally concrete, precast or insitu. The floors above

the 11th then have to be taken down piece by piece using a cut and crane method. Once at floor 11 or 12 the high-reach excavators can move in. The largest of these in Christchurch is a 208-tonne excavator with a 65-metre reach, nicknamed “Twinkle Toes”. So you can see why it took a year to take the Grand Chancellor down.

Most council and public facilities such as pools, sports facilities, council buildings and libraries were closed after the February quake until reviews could be done. Some reopened only to close again after more detailed reviews.

Heritage building owners face painful choices, as the cost of repairing and strengthening buildings is reported to be up to three times higher and to take at least twice as long as careful demolition and rebuilding. Many heritage buildings RR

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LEFT: Liquefaction is when soil loses its stiffness and bubbles up to the surface like liquid. Estimates are that at least 200,000 tonnes of silty sand has been removed from the streets

RR will disappear. One significant group of such buildings that may be saved is the Arts Centre complex, originally the University of Canterbury, much of it built in the 1880s. It is being restored under a multi-million dollar contract that will probably run for between five and 10 years.

GROUND CONDITIONS “Liquefaction” is when soil loses its stiffness and bubbles up to the surface like liquid. Estimates are that at least 200,000 tonnes of silty sand has been removed from the streets. It causes significant settlement to roads and buildings as the surface has to accommodate the movement of material to the surface. Buildings tilt and lean. Complete buildings are currently being re-levelled where the differential settlement is not acceptable. Buildings are being re-piled. Pressure grouting is also being used under raft slabs.

Lyttelton Port was significantly damaged. Most of the dockside is reclaimed land and this area settled up to two meters and is still settling. Clean demolition material from the city is being used to claim it back.

We don’t know yet the full implications of the shift in ground conditions. It’s not the same ground anymore. Soil investigations indicate that foundations for multi-storey buildings will need a 20-metre pile depth to reach the dense gravel layers beneath the city. Before the quakes five metres was considered adequate for buildings up to five storeys. CFA piles (continuous flight auger) to the new depth are estimated to cost NZ$10,000 each, and a two- to three-metre grid is required for a five-storey building. This means sinking millions of dollars into the ground for even minor buildings. There is also likely to be a new height limit in the CBD, which will make development uneconomic due to the extra foundation costs.

As of May 2012, 1,936 buildings in the city centre have been assessed and over 600 have been demolished and the sites made safe. The majority of the taller towers are planned to be demolished by the end of 2012 which will help to open up the CBD Red Zone.

MEND AND MAKE DO It's amazing what you can do with a freight container.

“Restart: Cashel Mall” is a freight-container shopping centre that opened in October 2011 in time for Show Day in Canterbury. (Show Day is bigger than Christmas here.) On opening day an estimated 10,000 people queued to check out its 27 shops. Another such mall, Cashel Mall 2, is planned to open in October 2012 farther down Cashel Street. Freight containers have many ingenious uses now. As well as offices, cafés, bars, banks and shops, they prop up buildings and façades, provide safe pedestrian routes and protect roads against collapsing cliffs.

These are welcome sparks of gumption and ingenuity, but more will be needed. The Christchurch Central Development Unit (CCDU) was established on 18 April 2012 and given 100 calendar days to develop a blueprint for the city centre, now

THE MAIN EVENTS Earthquakes are all about size in magnitude, depth in kilometres and location. The four big quakes in Christchurch have all been 6.0m or above and are centred on four new faults that stretch from Greendale in the West to New Brighton and out to sea in the East, a distance of approximately 70km. The table describes the significant quakes so far and their details.

Note that the fatal February quake was big, shallow and close.

The magnitude scale is not linear, but base-10 logarithmic, so the energy release from a 6.3m quake is 43 kilotonnes while a 7.1m quake releases 680 kilotonnes.

In summary the top 99 aftershocks since 04/09/2012 are as follows: 4 of 6.0m and over, 47 of 5.0m and over and 100 of 4.6m and above all of which were under 16km deep.

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Date

Time

4 Sep 2010 22 Feb 2011 13 Jun 2011 13 Jun 2011 23 Dec 2011 23 Dec 2011

04:35 12:51 13:00 14:20 13:58 15:18

Magnitude 7.10m 6.30m 5.90m 6.41m 5.90m 6.00m

A shallow quake is normally described as under 70km deep.

Thankfully, the Canterbury quakes have been short, up to a maximum of about 40 seconds. It is difficult to imagine what five minutes of intense shaking, which Japan experienced in March 2011, would be like. The difference with the Canterbury quakes is that they were short, the advantage is that IT is normally not too long to wait, the disadvantage is that the same energy is released in a

Depth/km 11.04 5.95 8.90 6.92 9.57 6.95

Km from Cathedral Squ. 37.8 6.7 10.4 9.2 13.8 8.5

shorter time making them more violent and damaging.

Earthquakes less than 3.0m in magnitude are normally only felt if they are shallow or right under you.

At 4.0m they start to be felt by most people and are a continuing insurance issue. At 5.0m they damage local buildings. 6.0m quakes cause major damage if they are near populated areas. 7.0m quakes will be felt over a large area and will severely damage even buildings

designed for earthquake areas if they are close to the epicentre.

Earthquakes differ from tornados, volcanos, even tsunamis in one important respect – you have no warning. It starts with a jolt, during which time you understand that a big one is coming and maybe from what direction, but all you can do is ride it out, hope it stops soon and check on family and friends. In June 2011, for the first event I was in the CBD red zone watching buildings drop around me. For the second, larger event that day I was alone in my car listening to my daughter's class evacuating on my mobile phone. Everyone in Christchurch now has emergency plans for communications going down, and backups of food and water. Most families keep close track of family members and steer clear of tall buildings.

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an creepy ghost town. With nearly 3,000 landowners involved, this will be a challenge. Key to success will be streamlining the consent process. The blueprint is due on 27 July, the day the London Olympics open, and the Unit is being headed by veteran local government boss, Warwick Isaacs, previously operations manager for the team working in the CBD Red Zone to make the area safe.

Parallel to this, the city council has put forward for comment its plan to repair or replace 10 “key facilities” within five years, including the Town Hall, the main library, the Convention Centre, the QEII pool and the Art Gallery.

In the bigger picture, the Canterbury Earthquake Authority (CERA) has been given special powers and a five-year mandate to lead recovery. Also, the Stronger Christchurch Infrastructure Rebuild Team (SCIRT) has been formed as an alliance between CERA, Christchurch City Council, NZ Transport Agency and contractors City Care, Downer, Fulton Hogan and Macdow Fletcher. SCIRT is responsible for NZ$2bn worth of horizontal infrastructure works over the next five years. (Note: all dollar figures are New Zealand dollars.)

Elsewhere, Christchurch is mending and making do according to some typical national priorities. It took only 100 days and $30m to finish, in March, the temporary, 17,000seat Rugby Union stadium to replace AMI Stadium, which had been expanded to 40,000 seats for the 2011 Rugby World Cup before the 22 February quake damaged it. The “old” stadium is being assessed for repair or replacement as one of the City Council's 10 key facilities.

A transitional, $5-m Anglican cathedral is hoped to be complete by November 2012 for the visit of the Archbishop of

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Canterbury, Rowan Williams. Designed by Japanese Architect Shigeru Ban, the cathedral incorporates cardboard. Any permanent repair or replacement of the damaged Cathedral is likely to take decades.

Housing is a huge problem. There are 7,256 homes deemed beyond repair because of land damage in the residential Red Zone. The government has offered to buy these properties at the latest (2007) valuation. More than 4,000 owners have signed agreements and over 3,000 of these have been settled. A further quantity of homes have been given repair approvals, but many more are still waiting to be assessed.

ABOVE: Restart: Cashel Mall is a freight-container shopping centre that opened in October 2011

“CONTRACTORS ARE TENDERING FLAT OUT BUT WITH THE BOTTLENECK IN INSURANCE CLAIMS MOST OF THESE TENDERS ARE GATHERING DUST AND SLIDING OUT OF DATE” The Earth Quake Commission (EQC), the country’s earthquake insurer, has been swamped with 459,046 claims.

So far it has undertaken 149,143 assessments, which is probably a more accurate estimate of the number of damaged properties as most people have submitted multiple claims because of the multiple events. The EQC has recognised 15 events and has completed only 12,554 repairs since September 2010. The repair rate needs to speed up or it will take over 10 years just to complete the residential repairs. RR

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ABOVE: Freight containers stabilise cliffs along half a kilometre of road RIGHT: Containers prop up a facade

RR FOOTING THE BILL Insurance is the biggest issue. Cash needs to start flowing soon, but it's not clear where it will all come from.

Financially, New Zealand could hardly have been better prepared. The government set up the EQC in 1945 to provide earthquake cover, and over the decades a small levy on home and contents insurance amassed a fund of $6 billion.

It isn't enough. The EQC said in April 2012 it had paid out $3 billion in claims and predicted the total cost will be $12 billion over the next two to three years – just for the residential damage it covers.

“ONLY A HANDFUL OF PROJECTS HAVE STARTED AND YET ALREADY THE LEAD TIME FOR BIG CONCRETE POURS IS TWO TO THREE WEEKS”

FAR RIGHT: Calvin Payne's first project in New Zealand after arriving in 2007, a luxury development called Waters Edge, being demolished. Most of the 32 flats had not even been occupied www.iconreview.org

The EQC provides domestic insurance for the first $100,000 of building and land damage and the first $20,000 of contents damage. Over these amounts the owner's private insurance company provides cover. But a law change in 2011 means that each of the four biggest quakes count as separate events, potentially increasing the EQCs liability to $400,000 on buildings.

This should cut drastically the liabilities of the private insurance companies, but they are still struggling. AMI insurance has been split into two companies: one, propped up by the government, supports the earthquake damage, while the other provides ongoing cover for existing policy holders. Australian insurer IAG purchased the second company recently but has only guaranteed cover for the next two years.

Businesses are on their own, as the EQC doesn't do commercial insurance. Some companies were lucky enough to have business interruption insurance in place. But this cover often lasts only a year.

The EQC is swamped by claims, but needs to start making

settlements so that people can take their lives off hold. The insurance companies need to make decisions on commercial properties so that the rebuild can start in earnest and the construction industry can have the confidence to meet the challenge.

But confidence is as shaky as the ground. After the latest aftershock (5.2 magnitude on 25 May) New Zealand's finance minister Bill English said the government would press for closer cooperation between the EQC and insurers to speed up payouts. Meanwhile, insurance companies are only supporting existing customers and not taking on new business or new buildings. Rates for insurance in Canterbury are doubling in some cases, for buildings and contents and even for vehicles.

SHORTAGES AND BOTTLENECKS On many fronts, the way forward is far from clear. For instance the city council's draft plan sees the repair or rebuilding over a five-year period of 10 key facilities for an estimated $746.9m, of which $287.2m is covered by insurance, and the rest, $459.7m, to be paid by the council, central government and rate payers. Some see this plan as unrealistic, as $746.9m amounts to the combined turnover of New Zealand's top three construction companies. A period of 10 to 15 years may be more sensible.

Industry capacity will be an issue. A large number of buildings have been tendered for rebuild and most contractors are tendering flat out. But with the bottleneck in insurance claims putting projects on hold, most of these tenders are gathering dust and sliding out of date.

Material shortages are certain. Only a handful of projects have started and yet already the lead time for big concrete pours is two to three weeks. When the commercial rebuild gets properly underway, with hundreds of live sites, the situation will be impossible unless action is taken now. In 2007 we had seven ready-mixed concrete plants. We now have nine, and there are at least two on order, but we don’t know where to put them. We also need to get permission to 02 QUARTER 2012

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FROM THE GROUND: A SUBCONTRACTOR'S VIEW Working for a subcontractor, we see what’s going on at ground level in Christchurch. People are flocking from the city. It's tough for those who remain. Homeowners can one minute be waiting for structural assessment and the next be given half an hour to gather all belongings and go. The lack of progress and information has been exhausting.

The waiting means many construction companies and suppliers have had to lay off staff. Rumors of big contractors going bust make everyone jumpy. All we can do is keep patting the main contractors’ backs to make sure we’re remembered when it does kick off.

Companies from out of the area are trying to get a foot in the door by tendering cheaply. Locals are trying to give work to locals to sustain the local economy, sometimes regardless of whether they're the best for the job. Under pressure to spend, insurers are losing sight of technical soundness, which I think will cause problems later.

For instance there’s a lot of concrete crack injection going on. The problem is, no one actually knows how big the voids are. Work has been rushed by the cheapest contractors so there are no guarantees the fix will be permanent. We see contractors blindly injecting flexible resins into floor cracks without drilling a second hole to see when the product pushes out, indicating the void is filled. Who knows how big the subterranean spaces are without testing? A few solitary voices are calling for correct methods now but there is pressure to keep whacking out the minimum value for money.

When it does kick off the demand for labour will be huge.

All the best skilled workers are working away or are tied up with jobs here to tide them over. We have cold-calling emails each week from foreign agencies selling us workers from Ireland, Thailand, Pakistan and other countries.

use river gravel as aggregate. The whole Canterbury Plain is made of gravel.

Overall, the domestic industry needs to double or triple its current capacity. Foreign workers and management have started to appear although the massive foreign influx hasn't happened yet.

There will be administrative strain as well, as the city council will need to deal with thousands of resource and building consents all at once.

And people are having a tough time. Christchurch is witnessing a housing crisis with extensive residential property damage, an influx of workers preparing for the rebuild, and consequent hikes in rents and property prices.

BLANK SLATE There is a fair amount of confusion over how to build back.

Buildings are assessed as earthquake-prone if they are less than 33% of the Building Code. Most repairs are considering reinforcing buildings up to 100% of code. 67% is now the minimum, but is still expensive. New designs are considering 120% or even 130% of code to secure the confidence of the public and insurers.

Engineers insist the new Christchurch should be more steel than concrete. Steel was avoided here in the 1980s and early 1990s because it was scarce and because labour issues and fire regulations combined to make it expensive. International engineers are surprised at the extensive use of precast concrete in such an active earthquake zone. The majority of buildings in the CBD performed to their design in that they did not collapse and allowed people to escape, but in most cases they are still ruined.

More profoundly, Christchurch needs to step back and decide what sort of city it will become. It was originally planned in the 1840s as a grid with the four central blocks based around the university, the church and professional services. Now it's more like a donut as companies and offices have moved out of the ruined CBD to the periphery.

It used to be known as “the Garden City” but there is now so much land you can't build on, that is useful only for parks and reserves, that “City-in-a-Garden” may be more appropriate. Some radical ideas are floating around, including a series of linked sky gardens. Whatever it is, we need a plan.

Then we need a plan for how to build it.

The rebuild must also involve all parts of the community, not least the local Maori nation, Iwi Ngai Tahu. Ngai Tahu operate a company called Ngai Tahu Property which has significant land holdings in Canterbury. In 2010 the company developed new offices for the council.

I've heard it said that after a major disaster the following things help a successful recovery: Money: Strategic finance, insurance and tax incentives; Leadership: Someone to articulate a vision that extends beyond political timescales and bridges competing interests; Deadline: A major event to provide a target, such as the Rugby World Cup (if only!) or the Commonwealth Games.

Despite the hardship and uncertainty, there is a sense of optimism. During a worldwide recession we’re gearing up for the biggest construction boom in our history. Our currency is at its highest value ever against Sterling and the US dollar. For the next 20 years Christchurch could be a very busy and interesting place… if only the earth would stop moving. icon Calvin Payne FCIOB teaches construction management at the School of Architecture at Christchurch Polytechnic Institute of Technology. He is also a programme consultant for demolition and rebuild in Christchurch

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BRAZIL’S FLAWED AFFORDABLE HOUSING STRATEGY Setting out to deliver two million homes in just five years, Brazil's “Minha Casa, Minha Vida” initiative was hailed as a bold way of attracting private developers to the social housing market. But it isn't working, says Ruban Selvanayagam.

Here he explains why

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key lesson of last year's Arab Spring is that where inequality, injustice and hopelessness are allowed to fester too long in a country, that country's government will either have to give ground fast, step aside, or wage war on its own people.

In Brazil, the balconies of multi-million-dollar Rio de Janeiro apartments command views of vast urban slums, known as favelas. Armoured vehicles have been rolling into some of these slums as part of the government's “pacification”

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programme. Of course it's not the same as Syria or Libya because here police operations are preparing the ground for improvements by first ousting criminal gangs. But for the situation to have come to this shows, to me anyway, that Brazil had long since entered a social danger zone.

Decent housing for the population is key to any country's stability and development and here, Brazil has a major problem.

Genuine statistics on inadequate housing are hard to come by and the picture is further muddied by what officially counts

DANGER ZONE: Observers say the official tally of Brazil’s housing deficit – 6.93m – is too low by half. Top right: are new developments on cheap land outside the cities solving the problem?

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“THE BASIC PROBLEM IS THAT DEVELOPERS CAN'T BUILD HOUSES CHEAPLY ENOUGH”

as a home. The government, for example, classifies a structure built of haphazardly laid bricks, without regard to building standards, perched high up a steep, muddy hillside as “sufficient” for the low-income Brazilian. But even a cursory examination of the situation would suggest that the official deficit of 6.93 million homes (according to the João Pinheiro Foundation) is a big understatement. Some commentators say the real figure is at least double that.

The government can't be accused of burying its head in the sand. Policies, including those of former presidents Fernando Henrique Cardoso and Lula da Silva, have reduced poverty levels markedly. Pacification tackles endemic drug trafficking and violence and new infrastructure is fostering more integrated urban environments. But what set Brazil apart most as a model for low-income housing provision was the March 2009 launch of the Minha Casa, Minha Vida initiative – “My House, My Life”. We’ll refer to the scheme as MCMV from here.

Its aim was to construct homes for low-income families, specifically, families earning up to three to times the national minimum salary. Note: in Brazil the minimum salary, R$622 per month, around US$311 per month, is not a lot, particularly considering the fast-rising costs of living. Families bringing in three times that are likely still to be living in favelas or other low quality environments.

The MCMV scheme has two principal streams. The first tried to lure homebuilders to the lower end of the market by offering, through the state-owned bank Caixa Econômica Federal, subsidies of up to R$23,000 for home-buyers to use as a down payment. In this stream developers have been given some leeway to set prices.

In the second stream, publicly financed partnerships

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between the Federal Union, the states, the municipalities, entrepreneurs and social organisations collaborate to deliver homes. Price ceilings are set much lower in this stream.

Finance is applied via the Residential Lease Fund (Fundo de Arrendamento Residencial, FAR) and administered by the Caixa Econômica Federal.

The home-building targets for MCMV shift regularly but in the most recent announcement, in January 2012, planning minister Miriam Belchoir and finance minister Guido Mantega said that two million units are “expected” to be delivered in total by 2014.

It was widely viewed as a bold, new direction, and Brazil's developers wanted in. They knew that most of the housing deficit was in the low income sector. Research by the João Pinheiro Foundation showed that 90.3% of the deficit lay among the population earning up to three times the minimum salary. At three-to-five times the minimum salary the deficit share was way down at 6%, at five-to-10 times it was 2.9% and above 10 times it was only 0.8%.

There were also signals that the upper end of the property market was heading for saturation, which has been borne out as a raft of homebuilders, including Brazil's biggest, PDG, reported lower profits or net losses in the first quarter of 2012, following a huge expansion in the previous two years.

So property companies saw an opportunity at the lower end of the market – what we call the “base of the pyramid”.

But like many over-hyped government initiatives in Brazil, the MCMV scheme is failing. The brilliance of the ideas are proving unequal to the realities of the market.

The basic problem is that developers can't build houses cheaply enough.

UNVIABLE MODEL We recently examined open-market sales prices of so-called “affordable housing units” in Rio de Janeiro and found that the average price was R$106,402. Low-income families cannot get mortgages for homes in this price bracket, even with the MCMV subsidy. So developers have tried to use MCMV to sell to what I argue is a largely phantom demographic, the “new middle class”. I say “phantom” because while income levels have been rising among RR www.iconreview.org

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NEW PARADIGM: With its patented, gypsum-block building system, Fez Tá Pronto (developments shown here) claims it can build faster and with 40% reductions in cost

RR Brazilian people, the corresponding property price inflation has kept home-ownership out of reach for most of them.

Undaunted, developers kept pushing. In 2011 the government caved in to their pressure and raised the maximum price ceiling for homes in the first stream of MCMV to R$170,000, but they're struggling to sell many of these units.

Why not just bring down prices? Unfortunately, this is not possible without severely compromising quality. The economics of Brazilian homebuilding as it is today won't allow it.

Let's look at the costs. While the reliability of Brazilian building price indices is open to debate, the government index of construction costs (SINAPI) is most commonly used.

Looking at Rio de Janeiro, a state with the highest proportion of the housing deficit in the country, in May 2012 the cost per metre square was R$951.85. Applying the minimum dimensions of an apartment under the MCMV programme at 39m² of useable area, plus an extra 3m² needed to give a constructed area space of 42m², the total cost per unit amounts to R$39,978.

Further costs need to be thrown in, including land, works administration, licenses, utility costs, equipment and the compulsory sales tax which aggregately add at least 33% extra, bringing the total cost per home to R$53,171 (R$1,266 per m²).

With a unit cost of R$53,171, how do developers fare under the MCMV scheme? Not well at all.

In stream two of MCMV, homes have a maximum price ceiling that varies slightly according to location. Applying the stipulated maximum price for Rio de Janeiro – R$63,000 – which is correctly deemed an affordable price for the MCMV target demographic in the state, the margin of R$9,829 is far too low for developers, considering that prices are fixed but costs are rising. Despite the noble intentions of the publicprivate partnerships in stream two, developers are still developers and require a juicy return.

What about stream one? As we've seen, here they've tried to pitch their product at a market, the “new middle class”, which I don't believe exists and which at any rate exhibits sluggish demand for the homes offered them. Even if developers were to knock prices down, to R$85,000, say, in an attempt to preserve some kind of margin and aim for volume, they still encounter a brick wall, as the real target MCMV demographic can't get mortgages for sums even this big.

To wriggle out of the straightjacket, some developers have turned to single-storey developments on cheaper land outside the cities. This appears to increase project viability in the short term, in cases where the land comes especially cheap, but longer term it’s hardly sustainable because it requires too much land and new infrastructure, and homes are located far from shops, essential amenities and workplaces.

The sad result of all this is that, since 2010 under stream one, not one unit has been delivered to a Brazilian family earning between one and three times the minimum salary.

This explains the market correction we're seeing now: too much of the wrong product.

WHY IT'S NOT WORKING You don't have to dig too far below the surface to see why MCMV is doomed to fail. Near the top of the list of reasons is Brazil's traditional approach to construction which, as it does the world over, wastes vast amounts of materials, time and money. Here as elsewhere, innovation in the building process is sorely overdue. The natural response has been “corner cutting”, which leads to penalties and developments being struck off the programme – “de-authorised” – by the Caixa Econômica Federal. Smaller construction companies have fallen most into this trap.

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The disproportionate rise in land prices also prevents the viability of the low-income housing sector, especially in metropolitan Brazil where the demand for prime plots is stronger than ever – and plots now viewed as “prime” are often where favela communities have taken root. In January of this year the mass eviction of more than 6,000 slum residents in the Pinheirinho district of São José dos Campos, 87km from São Paulo city, showed clearly what happens when the aspirations of the top of the social pyramid confront the needs of the bottom. With trading being speculatively dominated by the country’s elite, in reality, little priority is given to true social needs.

Nor is MCMV given much tactical support to succeed.

Quite the opposite, in fact. For instance new laws, such as the requirement for asphalted roads for developments, have merely added to developers' difficulties.

Another crack in the edifice is labour shortages. Building sites across the country are plagued by insufferable working conditions, low salaries and payment delays, which have led to unrest and workers leaving the sector. 2011 and 2012 alone have seen strikes in the states of Piauí, Ceará, Bahia, São Paulo, Espírito Santo, Pernambuco and Mato Grosso. More are expected.

Bureaucracy also plagues the MCMV effort. Forgotten sometimes in all the talk of Brazil as a fast-growing “BRICS” nation is that it still has one of the worst bureaucracies on the planet. In the World Bank's “Doing Business” league table (June 2011), Brazil wallowed way down the list at 126th out of 183 countries. The MCMV initiative, administered as it is by the publicly-owned Caixa Econômica Federal, is as much a victim to red tape as every other good idea.

In February 2012 a public audit by the General Union Controller of 4,243 government contracts, signed between 2004 and 2011 to improve housing-related infrastructure – an investment worth R$12.5 billion – 74% had been signed but had not yet moved forward as intended. Housing secretary Inês Magalhães publicly acknowledged that the delays are caused by licensing procedures, environmental regulations, land approvals and the slow responses by municipal governments to local infrastructural needs.

Related to the point about bureaucracy is the fact that, despite its noble intentions, MCMV is not objectively led by industry specialists who understand how both construction and the property market work in Brazil. It means that the mainstream, wrong-headed ideology is allowed to prevail.

Finally, the MCMV plan is undermined by Brazil's ongoing property bubble. The immature and low-leveraged housing credit market, combined with rising employment and incomes, have caused aggressive price rises. As a case in point, the population of the country’s largest city, São Paulo, has increased by approximately 10% over the last 10 years.

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“HERE AS ELSEWHERE, INNOVATION IN THE BUILDING PROCESS IS SORELY OVERDUE” National per capita income rose by 20% from 2005 to 2011.

All good, but during this period the cost of construction rose by 35%, according to the National Index of Construction Costs (Índice Nacional de Custo da Construção, INCC). And openmarket property values have risen 135% since 2008, according to Brazil´s leading real estate sales portal, Zap. The result is that low-income families have even less homepurchasing power than ever, despite recent interest-rate drops.

The bubble has even reached the favelas. In Rio de Janeiro, for example, Brazilian media report that since the pacification initiatives poor-quality favela homes are selling for unrealistic prices, and payment delinquency for favela rental units is rising.

All these factors combine to make developers wary of the affordable housing market. Their scepticism was confirmed in November 2011 when Tenda, Brazil's leading low-income housing developer, reported heavy losses. It emerged that of the 30,000 units under construction around the country, 11,000 were stalled by bureaucracy, issues with Caixa Econômica Federal and labour problems, which may well see their abandonment. Both Tenda and MRV, another leading “affordable” housing developer, have seen dramatic rises in complaints related to poor quality and late delivery.

PARADIGM SHIFT Affordable housing provision may be more advanced in Brazil compared to its Latin American neighbours and indeed some of its BRICS peers, but it's clear that the MCMV initiative is failing.

Still, the government continues to plough money into the programme. Its argument goes something like this: Yes, the situation is bad, but the capital is in place and it's better to spend than not to spend, because not to spend would be political suicide. Meanwhile, in order to wrench the MCMV initiative more into line with their own creaking business models, developers continue calling for the price ceilings to be raised.

The resulting stalemate means that millions of Brazilians

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are forced to continue living in squalor.

Theoretically, a number of things could break this stalemate. Some are less realistic than others. For instance, the shareholders of Brazil's property developers could take a more relaxed attitude toward the expected return on their investments. Or, the central government could throw fiscal probity to the wind and double, triple or quadruple subsidies to poor families. Edging toward the more realistic end of the spectrum, Brazil's banks could start devising sensible mortgage products for the huge base of Brazil's social pyramid. In this respect, Brazil's mortgage market is in its infancy compared to America and Europe. If lenders here descended from their elitist towers and engaged with this base it would release much needed cash into the sector.

But what if change came from a different, altogether unexpected quarter? What if the necessary paradigm shift came from the homebuilders themselves?

I spent over a year studying the low-margin housing sector in Rio de Janeiro for opportunities, and was on the brink of giving up when, in 2010, I came across the work of developer Manoel Pinto and the Fez Tá Pronto Construction System.

Manoel and his chief engineer Paulo Vilena between them had nearly five decades of property development experience when they launched a delivery model that challenged the chaotic and outmoded construction process that dominates here and around the world.

Fez Tá Pronto is a semi-industrialised and copyrighted building system that uses specially designed, patented gypsum plaster blocks to build high quality and environmentally friendly housing units, from single storey bungalows to multi-storey apartment blocks. Fez Tá Pronto projects have been approved by the leading home lenders of the country: namely the Caixa Econômica Federal, Banco do Brasil and the Banco Real (now merged with Santander). It has been tested in developments over the last eight years, including the Rio das Ostras project that was successfully audited (and mortgage financed) by Caixa. Crucially for the unviable low-income market, Fez Tá Pronto delivers high quality homes at a minimum of 40% less cost than is standard, using materials normally reserved for luxury homes in Brazil. Our method delivers homes up to four times faster than the Brazilian industry average, regardless of development size. We also offer workers a safe and clean environment, and salaries up to three times the norm.

Meanwhile, some observers have likened Brazil now to America as it was in the 1950s, characterised, in the popular imagination at least, by steady and profound increases in living standards. I don't believe this holds, and I think the mess being made of the deep and growing housing deficit is proof of that.

The wild exuberance of recent years looks set to hurt developers who bet on quick returns from some notional “new middle class”, and there is a serious risk of going back to intense, boom-bust property cycles. Brazil is still a relatively poor country, and people continue to flock to the major cities in a bid to improve their lots. Many end up in the favelas.

Decent housing for all is a key component of true social sustainability, but achieving that will require bold innovation across the board, from finance and law to delivery, and not just the sticking plaster of headline-catching programmes like the MCMV. icon Ruban Selvanayagam is a base-of-the-pyramid housing developer and international investment advisor for the Fez Tá Pronto Construction System. He regularly blogs on Brazilian and global real estate

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WHAT’S WRONG WITH KUWAIT? Why isn’t Kuwait booming like Qatar? It has more oil, ambitions to rival Dubai as a finance and logistics hub, the Gulf region’s only parliamentary democracy and... Hang on: that may be the problem. By Radhika Venkat and David Rogers www.iconreview.org

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hey say that Kuwait City has more Porsches than anywhere else, but if that really is true, you have to wonder why. Traffic is bad downtown and so is the state of many inner city roads, so these sleek machines spend much of their time revving in jams or picking their way gingerly around potholes.

But they do serve one useful purpose: as an analogy for the country as a whole. All things being equal, Kuwait ought to be moving faster than Dubai in its glory years.

For one thing it has considerably sounder finances than that emirate. It is a country of 3.5 million people, of whom only 1 million hold Kuwaiti citizenship.

But this tiny population owns 7.6% of the world’s oil (according to BP); only Saudi Arabia, Venezuela, Iran and Iraq have more. The US government’s Energy Information Administration (EIA) estimates that Kuwait pumps about 2.5 million barrels a day, and could continue to do so for at least the next century.

What is more, unlike many other Gulf countries, the government of Kuwait owns the “upstream and downstream” elements of the industry, meaning exploration, drilling and the process of turning crude oil into everything from petrol to fertilizer. This allows it to make a higher revenue per barrel than other Gulf countries, and, you might think, gives it greater control over its economic destiny.

And yet, there is an air of doubt and cynicism among many Kuwaitis. The public realm is shabby, the smell of sewage pumping into Kuwait Bay along Al Blajat Street can be overpowering, and despite the fact that the country is pretty much one enormous oil field, there are power blackouts during the summer. There is also a sense that there is something deeply wrong with the economy. The IMF thinks that Kuwait’s real GDP will grow by only 4.5% in 2012, thanks to higher oil production and government spending. This is a 1.2 percentage point fall from the 5.7% it managed in 2011.

Certainly, the economy is severely unbalanced: the EIA reports that the oil industry generates half of the country’s GDP, and 95 percent of its export earnings and government revenues. This kind of profile is generally the hallmark of a developing country; Kuwait is just lucky that its monoculture happens to be oil rather than, say, coffee or bananas.

And oil swamps the rest of the economy: the non-oil sector has been flat since the construction boom that followed the 1990 Iraqi invasion, which had a devastating effect on Kuwaiti society (see box).

Of those Kuwaitis who work, an astonishing 92 percent do so for the government or a government-owned company. As a result, the country resembles an enormous universal welfare state, which is so generous that citizens have no need to make a career in the more rigorous world of the private sector; as a result the government estimates that 98 percent of private sector workers are expats.

FALLING SHORT One obvious reason for this poor performance is underinvestment. Whereas the structurally similar economy of Saudi Arabia put 12% of its GDP into capital projects in 2010, the figure for Kuwait was 4.8%, and this takes into account the 41% increase in capital expenditure included in the Kuwait Development Plan that was supposed to have started in 2010.

The plan, which is the first phase of Vision 2035 (see box), is supposed to rebalance the economy by making the country a regional hub for trade and finance, led by a dynamic private sector that has developed state of the art manufacturing and logistics expertise.

To pay for this development, capital expenditure is to be

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increased to 6.8% of GDP during 2011/12, and although the $74 billion budget announced recently is the largest since 2003, one can never be sure the money will be invested: Kuwait has underspent its budget for the past five years, in some cases by as much as 20%. Rather than being put to work at home, Kuwait’s money tends to be spent in other countries. For example, the Kuwait Investment Authority, the state’s sovereign wealth fund, has assets worth $300 billion, making it one of the largest sovereign funds in the world.

The Kuwaiti paradox owes something to the legacy of the Gulf wars (see box) and something to its deadlock-prone political system, in which a constitutional monarchy with absolutist tendencies tries to occupy the same space as a divided and quarrelsome democratic assembly.

STREET LEVEL: Under the gleaming towers in Kuwait evidence of a lack of investment can be found in cracked pavements and increasingly shabby common spaces

PARALYSED POLITICS To achieve the fundamental economic retooling Kuwait needs would require either the finely-tuned political-administrative machine that delivered Japan’s post-war economic miracle, or the visionary absolutism underpinning both Sheikh Rashid alMaktoum’s remarkable Dubai experiment and Sheikh Hamad bin Khalifa Al Thani’s successes in Qatar.

Neither of these factors operate in Kuwait.

The country is a democratic constitutional monarchy, but the ruling emir, Sabah Al-Ahmad Al-Jaber Al-Sabah, has a great deal more say in its running than his European counterparts. For example, he appoints the 16 or so ministers who make up the government, he can dissolve the national assembly and call an election, or he can dismiss the assembly and resume supreme authority himself.

The 50-seat national assembly is also rather different to a Western parliament. For one thing, parties are forbidden. You might think this would reduce conflict but actually it has the reverse effect, since informal blocs form along lines seen elsewhere in the Gulf region – Islamic vs secular, Shi’a vs Sunni and liberal vs conservative – but without the party machines that impose discipline and allow deals to be made.

The assembly’s powers are mostly negative: it cannot initiate laws, but does have the power to block them. It also has the traditional legislature’s power to approve the budget, and can subject members of the government to rigorous cross examination.

This process of “interpolation” or “grilling” has become the assembly’s main weapon against the government. Its principal target has been Sheikh Nasser Al-Mohammed, the prime minister, who has been accused of a number of offences, including “irregularities in the expenses of the prime minister’s office”.

The irony here is that many of the members leveling the accusations are no strangers to corruption investigations themselves: last year 16 of them – more than one quarter RR

THE LONG AFTERMATH OF INVASION The Iraqi invasion set Kuwait back years. It wasn’t just the physical damage, most of which occurred as a result of the liberation. The more lasting damage was psychic. Many households lost not just property but had family members captured, tortured and killed. Resident foreigners perceived as collaborators were expelled. Many were highly skilled and performed senior administrative roles in government. People in Kuwait with long experience of delivering public sector projects say that their departure led to dysfunction and the spread of stultifying bureaucracy. A pessimistic and cynical frame of mind permeated. The lesson for many was that all you had could be snatched away at any moment. The fact that Saddam was still in power across the border for another 12 years didn’t help. Corruption increased and an attitude of short-termism replaced an earlier drive to build and invest. Private wealth transferred outside Kuwait while investment in essential infrastructure began to fall behind.

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RR of the entire assembly – were investigated for irregularities of their own.

The sheikh, a nephew of the emir, has been subjected to eight calls for grillings. On six occasions none took place, either because the government resigned or the emir dissolved the assembly. Two happened behind closed doors.

The result of all this is that the emir and the assembly resemble a couple whose marriage has broken down but are forced to live in the same house. There are brief rapprochements, such as the period after the last vote of confidence in January last year, when the two sides cooperated and long-term projects were approved, but these periods of calm give way to furious rows, such as the protest the following November, when thousands of demonstrators, including legislators, stormed the national assembly building to sing the national anthem and call for the removal of the prime minister.

After that outbreak, the emir convened a crisis meeting of the cabinet and released a statement saying the demonstrators’ actions were “a step towards anarchy”. At the time that looked like the preliminaries to a dissolution of parliament and the imposition of rule by decree, which emirs have done on five occasions since the founding of the National Assembly in 1962. But, perhaps taking into account public opinion in the context of the Arab spring, the emir pulled back.

Since then there have been signs that the government is taking a more liberal attitude: in March it allowed the public interpolation of the prime minister for the first time ever.

Whether this is the beginning of a new maturity, in which both parties agree to stay together for the sake of the economy, has yet to be seen. As iCON was going to press in mid-June another round of cabinet resignations was starting.

WHY IT MATTERS The political paralysis has had a serious effect on the implementation of Vision 2035, for the simple reason that a

great deal of legislation must be enacted to create the framework for development to take place.

For example, Kuwait is relying on the private sector to bear half the cost of the development plan but laws and policies facilitating this are not yet in place. Foreign investors face a difficult and lengthy process in obtaining licenses. Access to finance and land for setting up manufacturing industries has not been easily available. Long drawn out approval procedures and bureaucratic hurdles have been deterring investors, and the Kuwait authorities have also struggled to award contracts because their tendering system is so strict compared with other countries in the region. As a result, foreign direct investment (FDI) in Kuwait was only $140m in 2009 compared with $10 billion in UAE. Ed James, head of Meed Insight, a market analyst specialising in the Middle East, says the upshot of all this is that “as far as progress on the development plan is concerned, Kuwait is not in a position to achieve the target it has set for itself: to become a trade and financial hub by 2014”. This assessment is borne out by the fact that much of the $18.5-billion second annual development plan, which covers 2011/12, is made up of work originally listed in the first.

Indeed, only 30% of first plan’s $17.8 billion of targeted expenditure was made owing to a lack of clarity in financing mechanisms, legislative constraints and bureaucratic hurdles (which are all factors that are supposed to be addressed by the plan itself).

And it seems that there is no end in sight to political deadlock. In a recent move, the Kuwaiti parliament rejected the bill setting out the government’s third development plan, which covers 2012/13. The parliamentarians have called the plan “unrealistic” and have criticised the government for delays in the implementation of projects. For its part, the government is showing little willingness to talk to the assembly members and build a compromise.

A final difficulty on the horizon is that, according to the World Bank, Kuwait’s spending on development may not be

A RAPID METRO TRANSIT SYSTEM: KUWAIT’S BOLDEST PLAN YET... IF IT HAPPENS Kuwait has been shelving plans for mass public transit for decades. From the time urbanisation got underway seriously in the 1950s fuel was cheap, roads were empty and low-density development ensured plenty of parking.

But strains on its love-affair with the car are starting to show. Rush-hour jams double or triple simple journey times, queues of idling four-wheeldrives and Humvees spew emissions, road accident and fatality rates are among the highest in the developed world, and parking will only get scarcer if the population continues to grow at past rates in this limited territory hemmed by vast oil fields and the sea.

Which is why the plan for the Kuwait Metropolitan Rapid Transit System (KMRT), if it ever gets realised, is revolutionary.

The 160-km, US$7-bn KMRT rail project is hoped to be completed by 2020. The finished network will have four lines and 69 stations. Two thirds of the network are planned to run above ground on an elevated track, with one third underground.

In February 2012 Kuwait’s Partnerships www.iconreview.org

Technical Bureau (PTB) initiated a feasibility study for KMRT, and in March invited expressions of interest for developing rolling stock and systems.

Official news agency KUNA said in June that more than 60 such expressions were received.

PTB envisions a Public Private Partnership model (PPP), and plans to offer winning bidders 40% to 50% of the shares in ‘design-buildfinance-maintain’ packages.

Subsequent phases of the KMRT project will involve design and construction and the latter is expected to begin in 2013.

Work relating to contact systems has reportedly begun.

The KMRT is hugely ambitious, especially in light of Kuwait’s recent track record of following through with its stated plans.

The project’s main vulnerability lies in the involvement of the private sector. PTB’s project leader for KMRT, Eng. Fatima Al-Kandari, told KUNA news agency in June: “we hope to have it finished even earlier [than 2020]. We cannot completely control or regulate the date, however, as the private sector is carrying this project.”

The catch-22 here is that for the PPP model to succeed, the government must get its regulatory house in order and establish a legal framework that offers the private sector room to manoeuvre, predictability and security for its investments.

If this is not addressed, the confusion and buckpassing will drive it into the buffers.

Another risk for timely completion of KMRT is similar mass transit projects underway in Doha, Qatar and Abu Dhabi, which may result in resource constraints across the region.

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sustainable, as the price of oil is expected to fall over the next few years. Besides, a series of public sector wage rises, including a massive 25% hike in March 2012, have put a huge strain on public finances.

Then again, Kuwait has so much cash that if it doesn’t want to balance its books it doesn’t much have to – in the short term anyway. The trouble will start if oil prices go into a longterm tailspin due to increased supply, global depression, the discovery of alternative energy sources, or some mix of these.

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WHAT IS TO BE DONE? Any solution to Kuwait’s entrenched problems will have to include the following points: ● An ethos of cooperation and consensus building should come about between the government and parliament to make effective decisions. ● The National Assembly should focus on its job of passing legislation. Existing laws relating to PPPs, foreign investment and build-operate-transfer schemes and corruption should be reformed and implemented properly. ● A number of processes should be streamlined in order to drive efficiency; administrative and approval related barriers should be removed, a collaborative approach across ministries and government departments should be adopted, a clear time line for major projects should be announced and relevant institutions should be made accountable for progress. ● Clarity needs to come about in the financing mechanisms of major projects. Besides traditional financing, other options such as private equity and bonds need to be evaluated in consultation with the banks, and a financial framework drawn up. ● Kuwaiti nationals need to acquire the right skills and attitudes to wean themselves off the public payroll and take up jobs in the private sector. Repeated attempts at “Kuwaitization” of the labour force have not been successful. ● Kuwait has a strong tradition of national control over key sectors such as oil and gas, and over major projects, and finds it difficult to let go. Kuwaiti authorities need to learn to relinquish control where foreign investment and expertise is required. ● An action plan should be drawn up, with institutions given clear mandates; they should be held accountable for progress on the plan. Progress against key indicators should be evaluated and reported on a quarterly basis.

MEED Insight’s Ed James, offers this final thought about Kuwait, which brings us back to our opening analogy. “The country never got out of the first gear as far as project development is concerned and is lagging behind other Gulf countries. A number of projects have stalled due to parliamentary interference. There have been a few instances where there has been evidence of acceleration of activity via PPP projects, such as Al Zour North power and desalination plant. If this does go well, an element of optimism may set in the project arena.

“Going forward, Kuwait can become a significant player if it demonstrates a strong political will that will make things happen. It can become a potentially major market if it gets its act together.”

In other words, there’s nothing wrong with the design of the car, you just have to learn to drive it. icon Radhika Venkat is a management consultant in Middle Eastern infrastructure development. David Rogers is a freelance journalist specialising in the built environment ●

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Al Abraq Al Jahrah

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LITTLE COUNTRY, BIG PLANS: VISION 2035 This grand scheme is split into five-year Kuwait Development Plans (further subdivided into annual plans). The first five-year plan began in 2010 and called for a spend of about US$110bn under the following headings: ● Transport infrastructure: Kuwait is presently the third largest logistics hub in the Gulf, behind Bahrain and the United Arab Emirates but well ahead of Saudi Arabia, Qatar, Oman, Iraq and Iran.

The aim is to make it a gateway for the whole region. Kuwait has three main commercial ports, at Shuwaikh, Shuaiba and Doha. These are to have new gantry cranes, yard equipment and an enhanced computer system, but the really ambitious development is the building of a new port at Bubiyan island. Preliminary work began in 2007 and is expected to continue until 2033.

Kuwait hopes this new port will cement its edge over Bahrain and the UAE. Total cost is estimated at $4 billion.

Parallel to the port developments, the plan sees a new rail network linking Kuwait to its neighbours, and also to Turkey and the economies of the Mediterranean.

The transport sector is hoped to grow by 15% a year through these ambitious projects and also a metro rapid transit system (see box) and further expansion of Kuwait International Airport. ● Sounder commercial laws: The plan calls for the overhauling of Kuwait’s commercial legal system. This includes laws relating to public-private partnerships (PPP), privatisation, mergers and acquisitions, capital

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markets, bankruptcy, corporate governance, competition, consumer protection and state property. The aim is to improve the efficiency, governance and competitiveness of the national economy.

Housing: The second annual plan will focus on housing projects in five residential areas. About 70,000 homes will be built to meet the needs of Kuwait’s growing population.

Power and water: The first five-year plan will involve investment in these two industries of $6.4 billion. Within that are the next phase of the $1.3-billion, 828MW Shuaiba North gas-fired power and desalination plant (2), and the $2.7billion, 2,000-MW Sabiya plant, being delivered by General Electrics and Hyundai Heavy Industries, and which should end those summer blackouts for a while. Other elements of the plan are the Al Zour power and desalination plant, which will follow PPP models.

Administration: Administrative processes are expected to be streamlined to reduce bureaucracy and speed up tendering.

Financial: The plan also aims at improving Kuwait’s financial structure and promoting the country as a wealth management hub.

Oil and petrochemicals: The Ministry of Public Works, Planning and Development has recently announced a detailed plan aimed at transforming Kuwait into the world’s oil capital. The plan aims at creating 21,000 jobs in the oil and manufacturing sectors.

However, all these plans will exist on paper only as long the political deadlock continues to paralyse development.

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GREEN GLAMOUR

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Sustainable design has become a high-end niche in India when it really needs to be embraced at all levels.

Mridu Khullar Relph examines the barriers to full engagement

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or all the wrong reasons, India is presently one of the greenest countries on Earth. According to the Organisation for Economic Cooperation and Development (OECD), the average Indian in 2009 was responsible for about a quarter of the carbon dioxide of the average Chinese person, a fourteenth of that of the average American and a fortieth that of the average Qatari. The wrong reasons, of course, relate to the fact that the average Indian lacks the money to spend on cars and air-conditioning and all the other goods and services that cost so much carbon to produce.

This is certain to change, however, and a glance at the economic forecasts suggests that it’s likely to change quickly.

The OECD also notes that our representative Indian made twice as much money in 2010 as they did in 2003, and if the country’s 10% growth rate continues, they will make twice as much again by 2018. When you consider that India’s population is about 1.3 billion, that money is going to release a massive amount of repressed demand for every kind of building. Some (highly speculative) forecasts even claim that India and China’s construction output between 2000 and 2025 will be equal to that of the entire world’s from the founding of Babylon to now.

More soberly, a study by the Indian Green Building Council (IGBC) calculated that, on present trends, another 75 billion square feet of built space will be required over the next 15 or

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20 years. These buildings have the potential to transform living standards in India, but only if the country can also transform its capacity to provide them with power and water.

Yusuf Turab, managing director of environmental consultant YT Enterprises, says India does not have the same environmental agenda as developed countries. “In the West there is no real shortage of energy or water and hence green buildings get linked to climate change and building life-cycle costs,” he says. “In the Indian context, I like to call it ‘common sense building’. India is a large country with almost too many people. It is practically impossible for even the most efficient government to supply water and electricity to 1.3 billion people and also manage the waste generated by them. We are a waterdeficient country and the energy crisis seems to be perennial.”

The danger for the rest of the world is that India will address its perennial energy shortage in the same way that China has, by relying on fossil fuel: it presently produces about a third of the 3 million barrels of oil it consumes every day, and has vast reserves of coal: 267 billion tonnes according to one estimate.

“IT IS PRACTICALLY IMPOSSIBLE FOR EVEN THE MOST EFFICIENT GOVERNMENT TO SUPPLY WATER AND ELECTRICITY TO 1.3 BILLION PEOPLE”

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FLIGHTS OF FANCY New Delhi International Airport’s Terminal 3 makeover is an example of how sustainable design is given prestige in India. Part of a nation-wide airport upgrade, Terminal 3 features natural lighting, airconditioning set to “a bit warm”, the use of recycled construction materials, the recycling of construction waste, the use of vehicles powered by battery operated and compressed natural gas, a metro line to provide public transit to the airport, rainwater harvesting and storm water absorption, on-site reverse osmosis treatment for drinking water, and on-site greywater treatment to supply toilet cisterns, air-conditioning units and horticulture.

The IGBC uses this statistical picture to argue for the urgency of the situation. M. Anand, a senior counsellor at the council, says: “We cannot afford to build in non-green ways and retrofit after five or 10 years. It makes business sense and economic sense to go green by design.”

DEFINING MOMENTS As we know from other countries’ experience, a number of problems have to be solved if sustainable construction is to take off. Broadly speaking, the problems fall into two categories: first there is the technical task of creating of a framework of rules for defining and measuring “green construction”; second, India must find ways, politically and economically, of persuading profit-driven developers and traditionally minded bureaucrats to favour it.

To take the first of these problems, India started work on setting green standards only very recently. Some people date the founding of the green movement in India to a visit Bill Clinton made in the final year of his presidency, during which he encouraged his hosts to take the lead in sustainable design. They responded by forming the IGBC, and it adopted the US Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard. In 2003, the Confederation of Indian Industry’s Godrej Green Business Centre in Hyderabad, central India, became only the third building in the world to win a platinum LEED rating.

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Subsequently, the American standard has been supplemented by India’s own Green Rating for Integrated Habitat Assessment (GRIHA), which assesses the environmental performance of homes, factories, commercial office spaces, government buildings, trade institutions, and even multi-building developments such as townships and special economic zones. Right now, they have six rating programmes that mark buildings on the following five categories: site, water, energy, material and resources, and indoor environmental quality.

A CARROT-BASED APPROACH Despite its auspicious beginning, the Indian government was slow to understand how sustainable construction could be built into its own economic plans. This meant that the IGBC’s first task was to bring together the interested parties and persuade them that environmental design was something that they should be thinking about.

Anand says: “We were able to bring together the government, architects, builders and developers, engineers, consultants, material manufacturers, students and nodal agencies to order to convince them that by going green, we’d be saving a lot of energy, a lot of water, as well as enhancing the productivity or happiness index, something that has been neglected in the past 40 to 50 years.”

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SEVEN PREDICTIONS, GOOD AND BAD Yusuf Turab, managing director of environmental consultant YT Enterprises, says the following things can be expected to happen over the next 10 years: 1 The green building sector will outpace the growth of the overall construction sector.

2 Green building certification programmes will get increasingly popular among developers and customers will start to demand certified projects.

3 The government will bump up incentives for green buildings, such as tax exemptions, increased floor area ratios and faster project approvals.

4 Green building products will flood the market with manufacturers making various environmental claims with no real scope to verify those claims, thereby creating confusion.

5 Many green building services and products that never existed will come to market.

6 The current practices of planning, designing, and project management will be obsolete as there will be greater integration among all stakeholders in the design stages of the project.

7 There will be a huge growth in green building education and training, which will produce thousands of professionals with some understanding of sustainability.

RR government has adopted an approach based on rewarding good behaviour, rather than the more effective strategy of setting regulatory standards and demanding that developers and their project teams meet them.

For instance, the Ministry of Environment and Forest gives faster clearance to a project if it is registered with the IGBC. Municipal corporations (that is, local councils for cities of more than 200,000 people) offer a 5% higher floor area ratio to a project that is green.

A third incentive is that banks such as the State Bank of India offer more attractive loans for residential projects registered with the IGBC. For these projects, the transactional and operational fees are waived, the interest rates are 50 points less than they would be otherwise and down payments are 15% rather than the 20% usually required for a conventional building. “A few of the local government bodies have started offering these kinds of incentives,” says Anand.

“Because they’re able to see that when these buildings are able to save a lot of energy and water, they’re not only meeting the local norms, they’re exceeding them.”

SNOB VALUES The government’s mild approach has been offset by the expanded environmental consciousness of the corporate world. Here a green office has become a status symbol, and a LEED rating is de rigueur for the new-build headquarters of self-consciously high-tech firms such as Indian IT consultants Infosys and Wipro. “Corporates love to flaunt their commitment towards the environment and hence green buildings automatically became a buzzword in the sector,” says Turab. “The IGBC also did an excellent job of marketing green buildings,” he adds.

For developers looking to find tenants, a green building may provide a marketing edge. “Many don’t agree with me on this but a significant factor is also the lack of differentiation creeping into the real estate sector at the moment,” says Turab. “Green buildings bring about a certain differentiation factor which developers can leverage for brand building, quality improvement and commanding a premium for their spaces.”

Underlying the perception of green buildings (and by association, their inhabitants) as more sophisticated, caring www.iconreview.org

and intelligent than the conventional product, are the bottom line savings. Anand explains that an average building consumes 10-12 MW of electricity per million square feet, but a green building requires only 6-7 MW, so the capital cost of transformers, cables, wiring and switch gears can be sized down, and of course the running costs are halved as well.

The IGBC also claims that time and motion tests show that productivity of green-building occupants goes up by as much as 20% and firms have found that they’re able to retain employees longer. “These buildings had more fresh air, better views, daylight, and so on,” says Anand. “They had no cabins at all and 100% open offices.”

There was an unexpected downside, however, to this vogue for green headquarters. “Because the early movers were all big office guys, people got the idea that this sort of architecture was only applicable for corporates who have a big land parcel or who have resources and money,” says Anand. To overcome this challenge, the IGBC focused on public buildings, such as police station in Karnataka, southwest India, as well as airports, hotels, factories and even ordinary houses.

BARRIERS TO SUCCESS Despite the enthusiasm of some in the commercial sector, it would be wrong to assume that India as a whole has embraced low energy design. As Turab says, “The construction sector in India has been booming for over a decade now, albeit with massive fluctuations. The green building sector has simply moved along with this boom and somehow become the more glamorous chunk of the whole pie.”

Last September the Times of India reported that the market was expected to grow from about $4 billion in 2008 to $30 billion in 2015, but for that to happen many challenges need to be overcome. It may even require a wholesale restructuring of India’s construction and property sector.

For one thing, there is a shortage of trained professionals to design and engineer the buildings and to supply them with specialised equipment. “We identified that as an area that would make it or break it,” says Anand. Initially, demand was low and the IGBC offered its own consultancy service. Over the past 13 years, they’ve trained almost 17,000 professionals, and have launched 12 local chapters across the country, but that is not enough.

“We call it the three As,” says Anand. “One is to bring more awareness, second is that the materials and services should be available – trained professionals, that is. And the third is affordability. So we’ve done these three things very aggressively.”

Other challenges, says Turab, include false band-waggoning which clouds public perception and lowers standards. “We are seeing “greenwashing” and there is a lack of green product certifications, poor practices among builders, inadequate project management skills and many others.”

There is also a lack of an industrial base to manufacture the building materials and specialised M&E equipment specified in the designs. For example, every part of India has at least 300 sunny days a year, so solar power is an obvious option – if the units can be obtained at a sensible price.

On the plus side this gives plenty of grist for entrepreneurs in every area, and the fact that India’s growth in green buildings has so far been almost entirely market driven is a hopeful sign. If the government also manages to put together a regulatory framework the sector really will be in business, and India may end up as one of the greenest countries on Earth – for the right reasons. icon 02 QUARTER 2012

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