Contractors sans frontières

Contractors working across borders are self-styled international locals

has begun trading as ‘Brian Perry Civil’, part the Fletcher group of companies since 1986.

DAVID SPRING PT COLUMNIST Sydney, Australia

INFRASTRUCTURE projects are the great playing field of a geopolitical contest. Playing fields need players, and the arena right now is filled with donors, consultants and contractors. From Pacific Games infrastructure, to rural roads, hydroelectric schemes, wharves and ports, donors are pouring in money – US$4.25bn spent in 2020, a 36% increase on 2019. This has animated the Pacific contractor’s market as post-covid spending withdrawals hit the Australia-NZ markets.

Interest in tenders remains strong, although this is uneven and other significant factors still come into play. Contractors only need to have one negative experience to teach them that some risks are not worth taking. Typically slow project start ups compounded by unrealistic time pressures make success a difficult formula to discover, let alone repeat. That’s why contractors who can deliver in more than one Pacific country are a rare breed indeed. Those who have are worth observing.

The chosen few

Out of New Zealand, Downer set up a base in Vanuatu when they won the MCA contract to upgrade the Efate Ring Road in 2008. From there, they’ve launched operations in Solomon Islands to construct Munda Runway, rebuild the Chinatown bridge after the April 2014 floods, and more recently, runway extensions in Taro and Seghe. The supply of work has never been sufficient to warrant a full set up there. This flexibility – being able to operate abroad without a base in that country – shows their operational capability and depth. It also shows the key to their model –working with local firms and suppliers. If everything is imported, one can operate autonomously, without reliance on locals. This model works until something goes wrong and construction work grinds to a halt for the sake of a hydraulic hose.

Fletcher has had a long history working across the Pacific islands. Its first foray outside of New Zealand was to Samoa in 1946, building a range of government structures including ports. They later worked in Palau and opened in Fiji in 1972 with a joint venture partner. Fletcher repeated the joint venture model in Cook Islands, Papua New Guinea, and Solomon Islands. Vanuatu and Tonga also followed and also operates in US territories across the North Pacific, including Hawaii. The joint venture with Kwaimani in Solomon Islands has now dissolved, but over several decades, they undertook buildings of significance across Honiara. Fletcher in Vanuatu

Continuing the New Zealand tradition, in 1990, McConnell Dowell completed their first major Pacific project - a wharf in Marshall Islands. In 1992, they started the Kutubu oil pipeline in Papua New Guinea. According to their website, this “consolidated the Company's reputation as an international expert in remote location projects.” They have now worked in most Pacific Island countries but have not set up a base in the Pacific.

Fulton Hogan has had a permanent operation in Fiji for a decade. Fletcher, now trading as Higgins, also operates there. The Fiji contracting market has greater volume of work and is less volatile than elsewhere in the Pacific; partly due to population size and steady funding streams, particularly for maintenance work. Australian firms have been less keen and less successful working in the Pacific. Japanese contractors have always undertaken work for the Japanese aid agency (JICA), most notably Kitano.

China, China, Everything China, China

Chinese funding began flowing for the rebuilding of the Nuku’alofa CBD in Tonga, after the riots there in 2006. About 10 years ago, Chinese construction companies began winning contracts in Fiji. The China Railway Construction Corporation (CRCC), China Harbour Engineering Company (CHEC) and China Civil Engineering Construction Corporation (CCECC) all made inroads into the Pacific contracting market over the next several years. In an early sign of the geopolitics of this to come, Solomon Islands National Transport Fund was on the brink of implosion in 2015 when Australia, a significant contributor to the fund, blocked a contract award to CHEC, citing fictional procurement irregularities. That move backfired because it was a watershed moment for Solomon Islands government, realising that Australia’s priority was excluding China, not delivering for Solomons development. There has been a gradual expansion of Chinese firms in the Pacific. CCECC now operate in the larger Pacific countries. CHEC are undertaking projects in Tuvalu and Nauru amongst others. This is one of the reasons that NZ (and Australian) firms are less likely to bid for multilateral bank work now, unless they know that the bid evaluation criteria have been stacked against the Chinese firms on non-price elements. This reluctance to bid is evidence of the key difference between state-backed (Chinese) and free-market firms – profit motive. Despite popular assumptions, Chinese firms are not part of a centrally co-ordinated, government-controlled, state-funded grand strategy to take over the Pacific. But for them, winning contracts at below-market rates is more business-as-usual than it is existential threat.

The Chinese will hire locals for non-skilled labour and will secure local materials supply where it’s economical. It is their reluctance to use local subcontractors for anything but the most basic tasks that puts them at odds with other firms. Where other firms will subcontract whole trades or disciplines, or order to reduce their own staffing requirements, get the advantage of local knowledge and gain a social licence to operate, Chinese firms gain legitimacy through high-level relationships and delivering on small community projects.

The Chinese reputational record has been patchy. They are usually (rightly or wrongly) associated with Chinese debt –a sentiment that has turned against them in recent years. CCECC’s parent company is CRCC. In 2019, the World Bank debarred CRCC and its “730 controlled affiliates, with the exception of China Railway 20th Bureau Group Co.” due to misrepresentations of capability during the procurement for a project in Georgia. The mind boggles as to the reasons why 730 affiliates, or the “20th Bureau Group” are necessary. But their internal governance models are more autonomous than this aggregation suggests.

Dictatorship or democracy

Ironically, it is the Chinese who tend towards an autonomous (independent) governance model for their Pacific operations. A separate firm is set up in each country, with a manager who is responsible for that firm’s profit and loss, operations and reputation with politicians and communities. It’s something they take seriously and are answerable for to regional managers. But, they are not co-ordinating with their own affiliates in other countries or other Chinese firms, and sometimes compete against them for contracts. Firms with private owners or shareholders are the ones who are more likely to operate a centralised governance model. Efficiency is king, so any logistics, suppliers, expertise, subcontractors or resources that can be shared or optimised across countries will be encouraged and directed by senior managers in market-led firms. The executive will operate as ‘dictators’ to achieve these aims as a way of maximising profits. The internal culture of these firms is unlikely to be a dictatorship however, as this doesn’t sit well with employees who grow up in democracies.

Choose your recipe!

There is more than one recipe for success. Each firm cooks with the ingredients they have - the markets they know, their technical and managerial competence, their financial backing. We could have written another complete article about firms who have expanded to win a contract in a new country, only to fail and suffer financial and reputational losses. Yet there are enough examples of success for there to be optimism.

Less important than governance models, is the ability to read the market and adapt to local distinctiveness. One cannot assume that the new country’s operating environment is the same as the last one. Engaging with local firms, who may become local partners, is the key to gaining this understanding. And this takes time. The politicians may be in a mad rush to cut ribbons - let them play their own game.