The International Who’s Who of Construction Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing lawyers today.
Karim Vakil & Cruz Vizaco Advogados
Who’s Who Legal: What construction projects are underway in your jurisdiction and how does this compare with previous years? According to sources energy projects remain particularly active, would you agree with this?
Bashir Vakil: While the rest of the so-called civilized world deals with one of the biggest all-time financial crises, Brazil has shown an amazing ability to avoid the turmoil and keep on booming. Although the country’s GDP is not showing growth indexes like it did back in 2010, the numbers are still impressive when compared to most of the world.
These days, if you talk about construction projects in Brazil, at least three subjects are impossible to miss: the 2014 FIFA World Cup; the 2016 Olympics; and Petrobras, the government-controlled oil and gas company. The pre-salt findings are also a major topic. In general, the whole economy is booming which ends affecting all areas of activity, including infrastructure and logistics-related projects that seem to be mushrooming.
The two sports events alone are responsible for numerous infrastructure projects which include, among several others, refurbishing old stadiums and sports arenas and building completely new ones from scratch; privatising and revamping airports; extending train and subway stations; building new traffic lanes exclusively for public transportation usage; expanding housing and tourism accommodation facilities; renovating harbours and adjacent compounds, etc.
In the Brazilian oil and gas sector, Petrobras alone will invest close to $225 billion in 2011–15. Recently, a tender was issued for the construction of 28 drill ships and semi-submersibles. Considering that there is an increasing local content policy – and that the already-existing FPSO, support vessel and rig fleet still need maintenance, dry-docking and repair – new shipyards are being built just to be able to undertake these construction contracts. The numbers show that demand in the offshore sector will continue to increase in the coming years, which means that new and existing shipyards will need to keep up to date in order to meet this demand.
All this economic growth, despite being very good for the country, puts an enormous pressure on the Brazilian government, which – after the 2009 blackout – races to keep a safe energy production surplus. This has increased the investment requirements in energy projects both in Brazil and abroad.
In general, most sectors of activity are going through a golden era in Brazil, which means new construction projects will keep on coming.
Geoffrey Wood: Like Brazil, Australia has also been in some respects unaffected by the global financial crisis, but it is not a consistent story; rather, it is one of contrasts, with resource industry-related infrastructure and construction work booming, fuelled by Australia’s abundant natural resources which provide a link to Asian (and especially Chinese) growth, and traditional areas like high-rise residential and CBD office work still very flat. The smaller builders were very cleverly sustained by the Australian government’s targeted post-financial crisis stimulus spending on education infrastructure, but that work has now dried up, and competition between those contractors is fierce for the little work on new “bricks and mortar” projects that is being let.
As well as documenting contracts for the billions of dollars’ worth of mine, port and rail infrastructure for the massive mineral and LNG projects being developed in (and offshore of) the northern half of the country (Western Australia, Queensland and the Northern Territory), front-end construction lawyers in Australia have had some large public-private partnership (PPP) projects to work on, although the flow of those badly needed projects (as Australia has much ageing infrastructure that requires upgrading and augmenting) has been slower than the private sector had hoped, as project finance markets slowly recover post-financial crisis and governments exhibit great caution with one eye on their own credit ratings. Nevertheless, some huge desalination plants are under construction around the country, as well as road, hospital and rail infrastructure.
Nicholas Gould: The UK construction industry has benefited for some years from the projects relating to the construction of the 2012 London Olympics facilities. This has created almost £6 billion worth of new business across 1,400 contracts. Around 75,000 organisations have won work relating to the Olympics, taking into account the business passed down the supply chain. This has been beneficial to the UK construction industry as commercial and residential development stumbled almost to a halt in 2009, as the effects of the European-wide recession took hold.
In reality, however, much of the Olympics work has been carried out and completed before the start of 2012, with 2012 seeing the Olympics projects move into initial operation and the facilities management phase. A number of large infrastructure projects have already begun to fill the gap including Crossrail and Thameslink, as well as other rail, highway and airport projects. In January 2012 the high-speed rail link between London, Manchester and Leeds was given the go-ahead with a value of around £32.7 billion. Discussions relating to fixed broadband investments are much needed, but have yet to materialise.
In respect of energy, the government still plans to build replacement nuclear power plants and wind farms in order to meet its commitment to cut CO2 emissions. Around £4.5 billion worth of innovative carbon capture projects are also in the pipeline. On the other hand, two players in the UK energy market (RWE and E.ON, both German companies) have recently announced that they will not participate in the UK nuclear power plant expansion. They blame financing issues in the light of Fukushima, but others question how viable these projects will be. On a more positive note, substantial wind farm projects are under construction as well as innovative ocean current power plants.
Who’s Who Legal: To what extent has the PPP model influenced the volume of work where you are?
Geoffrey Wood: The Australian market for PPPs is one of the most highly developed and active in the world, although a recently released survey of over a hundred key players in that market conducted by our firm (and available from our website, bakermckenzie.com) saw respondents consistently comment that more needs to be done by Australian state governments to ensure a strong, clear and prioritised pipeline of projects (including by establishing central PPP agencies as the Commonwealth and New South Wales governments have now done with Infrastructure Australia and Infrastructure NSW), and to improve tendering processes that are still seen as overly complex and too expensive (typical consortium bid costs on major Australian PPPs now regularly exceed A$30 million).
Nevertheless, while it can be improved, the Australian PPP market continues to strengthen as a key part of Australian governments’ strategies for infrastructure procurement, and many of the largest capital value projects across a wide range of sectors – road, rail, light rail, prisons, hospitals, water, waste water, social housing – are let as PPPs.
With a track record that now stretches over more than 25 years, Australian PPPs are here to stay, and most construction lawyers see roles for governments, equity, lenders and contractors (both construction and facility management) as a key part of their client portfolios these days.
It is likely that PPPs will continue to grow as a percentage of major project work, with freight routes for road and rail and defence projects as areas that Infrastructure Australia has recently flagged it wants to see targeted for more PPPs. The massive new North West Rail Link project (around A$8.5 billion) in Sydney is but one example of the megaprojects likely to be procured on a full or partial PPP basis in the near future.
Bashir Vakil: Unlike the Australian market, the Brazilian PPP market is still taking its first steps. PPPs in Brazil were only enacted in 2004, through Law No. 11,079. Before this, since 1993, we have had a public tendering regime where companies tender for rendering public services; and since 1995, we’ve had a system that allows for public concessions, where in practical terms there are no financial obligations imposed on the public conceding entity. Although these might also be considered forms of PPPs, they are not “pure” PPPs, where public and private sector companies form partnerships and share risks.
A study made in mid-2011 showed that, at that time, there were only 17 PPP contracts (worth approximately 15 billion reais) signed between private companies and public entities, in seven Brazilian states – out of 26! Moreover, among these projects, five were for the construction of stadiums or sports arenas, meaning that they come as a result of Brazil hosting either the 2014 FIFA World Cup or the 2016 Olympics.
This year, three Brazilian airports were privatised for an astounding figure of 24.5 billion reais. This came as an incredible surprise, since government bodies had established a ground figure of R5.5 million for these privatisations. The immense success achieved has definitely helped the government realise the potential in establishing PPPs for the construction of new airports.
This, of course, applies to several other areas of activity, and shows that there is still a lot of room for improvement in the Brazilian PPP market. On the other hand, it shows that Brazil is taking small but sure steps in exploring the potential in PPPs. All of Brazil’s new (and renewed) economic capacity will definitely help push forward and boost this and other forms of partnerships for developing and facing the country’s infrastructure needs, on its route towards social and economic growth.
Nicholas Gould: In many respects the UK led the way with PFI and PPP projects. The UK government introduced PFI in 1992 in order to reduce its outlay for major projects. However, this has not been reflected in the UK (or Europe) in recent years. For some years, the debate in the UK has focused on the cost-effectiveness of PFI and PPP, with the research of public clients showing that the procurement method is slow and inefficient.
Nonetheless, the government maintains some commitment to PFI. For example, in May 2011 the Treasury reported that 459 PFI contracts were underway in England, and the government announced a new £2 billion PFI-based schools programme. In reality the government has to deliver these projects and PFI provides a way to fund the investment. We are likely, given the criticisms of the existing PFI system, to see a revised approach to PFI during the new round of government-backed long-term public investment projects.
Who’s Who Legal: Lawyers we spoke with noted a decline in contentious work as a result of the current financial climate. Is this the case in your jurisdiction? If so how has your firm responded to this trend?
Nicholas Gould: The financial crisis has certainly had an impact on the work of construction lawyers. Our experience has been that this has mainly affected non-contentious work because of the reduced number of new development projects. Our predominantly contentious practice has remained stable throughout, filling the drop in non-contentious work with increased activity in UK and international contentious matters.
Much of this is because we are aware of the shortage of cash flow and the need to maintain relationships where possible. We therefore focus on providing advice about the appropriate method of dispute resolution, always making the most of any ADR process including mediation and adjudication, in order to reduce dispute resolution costs. Fenwick Elliott has always maximised the use of mediation (winning a CEDR Award for Excellence in 2010), and working innovatively with adjudication and dispute boards.
Geoffrey Wood: It is certainly true that over the last few years there had been a noticeable reduction in the number of full-blown, “take no prisoners” major litigations and arbitrations in the Australian construction industry. However, more than the economic climate per se, this can mostly be explained by two key developments. Firstly, the adoption across all jurisdictions of UK-style security of payment legislation, leading to most payment-related disputes becoming subject to initial statutory adjudication, and often resolved in those forums; and secondly, the growth of the use of non-confrontational alliance-style contracting models, which through their management structures and cost-plus-based remuneration provisions have taken the heat out of many projects which traditional “hard dollar” contracting always seemed to generate.
However, it is our observation that the amount of more traditional, non-statutory adjudication dispute work has recently begun to rise again, as capital city-based contractors not riding on the resources boom look to squeeze the last few dollars out of the few projects around, and owners who perceive that the economic conditions have changed the “balance of power” revert to letting more projects on a traditional, hard-dollar basis. This has led to us seeing some very large and hard-fought disputes, and reminded our older construction litigation partners of how things used to be done back in the 1980s! So we have seen our junior lawyers in particular spending a greater proportion of their time on contentious work, not only due to this rise in formal disputes but also because, in recent times, many contractors have built far larger in-house legal departments than they have ever had before, and are not briefing out the “plain vanilla” tender and contract preparation and review works to the degree that they used to.
Bashir Vakil: Regarding a decline in contentious work, especially in the infrastructure sector, I have to agree with my Australian counterpart when he says that this can be explained by current contractual provisions more than by the economic climate itself. This is true here in Brazil too.
One may argue, however, that non-confrontational “alliance” style contracting models, especially in big and expensive infrastructure projects, come as a response to expensive financing and costly security in the current world market, which in turn is a consequence of the financial climate.
In times like these, the tendency is that infrastructure projects become more cost-efficient. One way of achieving this is through more comprehensive contractual provisions where the parties agree on risk-sharing, cost-plus pricing and joint managing structures. This, in a way, tends to avoid litigation, which in big projects can be costly and can heavily burden the project. In this sense, new and alternative dispute resolution clauses, such as technical fast-track arbitrations and alternative mediation provisions, tend to help diminish the amount of disputes that actually reach arbitration chambers or courts.
The way we found to respond to this trend was to focus our work more on contract drafting, project structuring and corporate law, rather than on litigation, which is why we now consider ourselves as a corporate-oriented boutique law firm, instead of seeing ourselves as traditional litigation or full fledged practitioners.
Who’s Who Legal: What are the challenges that construction lawyers have faced in your jurisdiction and how have you dealt with them?
Geoffrey Wood: Australian construction lawyers have faced two key challenges in recent times. First, the growth of client in-house teams to sizes never before seen (some large contractors have well over 20 lawyers on their team) has meant that much of the less complex front-end work is no longer briefed out: meaning that to be successful firms have had to concetrate on having the specialist expertise to gain roles on the more complex PPP and resources-related EPC and contract mining work for which there are still good roles.
Secondly, security of payment legislation passed over the last 13 years in all Australian jurisdictions, plus increasingly frequent adoption by contracting parties of alternative dispute mechanisms in contracts, has seen dispute work fundamentally change in nature, from the previously much more common traditional litigation and arbitration processes spanning sometimes years, with which back-end construction lawyers were familiar, to the “quick and dirty” scrambles the Security of Payment Act procedures have precipitated (with little notice, lawyers have to work around the clock to help clients gather together statutory responses to payment claims in the statutory 10-day period allowed), and to learn the different techniques required to assist clients with ADR processes like mediation and expert determinations. Of course, the traditional litigation and arbitration processes still occur (and have begun to increase again very recently), but Australian back-end construction lawyers have had to develop a far wider array of skills to assist clients in the more complex and diverse environment in which they practise in 2012.
Nicholas Gould: Construction and engineering contracts have certainly become more complex and sophisticated. Risk-sharing provisions, time-bar clauses and the bespoke nature of contracts raise more issues than in the past, and require lawyers to keep up to date with legal and industry issues. These include design liability, insurance, defects liability, project security, employment and labour law, environmental issues, finance, corporate matters, energy and renewables, as well as dispute resolution. These issues are amplified in relation to international projects.
In the UK the introduction of the Bribery Act in 2011 has had wide-ranging implications, while recent changes to the legislation affecting adjudication has reminded us that the statutory-based rapid 28-day adjudication process has been used in the UK since May 1998, and that it is well established, rapidly enforceable in the courts (in a matter of months or even weeks) and widely used.
Bashir Vakil: The search for more cost-efficient structures has had bigger companies develop their in-house legal departments, which can be twice as big as any small to medium-sized law firm. Petrobras, for instance, with a legal department that’s close to 1,000 lawyers strong, is commonly joked to be one of the biggest law firms in Brazil.
With structures this big, companies tend to refrain from hiring external counsels, affecting the amount and the kind of work that law firms are left with.
However, it is our experience that most companies’ legal departments are mostly populated with trainees and junior lawyers, having very few senior lawyers, which usually dictates that companies hire external counsels when they are flooded with work, and need senior legal expertise in sensitive or strategic aspects of their projects. Still, due to their internal costs in maintaining huge legal departments, even when they hire external counselling, they tend to squeeze legal fees to a bare minimum, which is always a struggle, and sometimes makes working for smaller companies more interesting than for bigger ones.
On the technical side, the fact that the Brazilian economy is booming (along with the development of in-house legal departments) has made it difficult for law firms to secure talent, since companies tend to hire lawyers offering high wages for eight-hour day jobs. Although Brazilian universities are pumping talent every year into the market, the fact is that there are still not enough qualified and experienced people out there, and those that are demand high salaries.