Language, laws and loopholes

With 20 years of experience of delivering infrastructure projects for clients, John Judge of Judge 3D shares some key lessons for European power firms undertaking work in the US or the Middle East.

The US is currently investing heavily in upgrading its domestic infrastructure, which has resulted in the completion of some major power projects, with hundreds more due to begin soon. In August this year, for example, an extra $473 million was allocated to the trillion-dollar budget for future works. Also, oil rich countries in the Middle East continue to develop and expand their infrastructure. with growth continuing to surge across the region.

This is good news for the US and Middle East countries – and also for European power companies with the technical skills and experience to participate in these projects, although some recent high-profile setbacks could dent this ambition.

On the face of it, whether you are in New York or Dubai, infrastructure clients are basically the same the world over. They all want to procure something, want value for money and all want their project delivered on time and within or on budget. There are subtle variants to this, such as clients wanting a Rolls-Royce finish as opposed to a family hatchback one, and so on. But these are known challenges – nothing out of the ordinary.

Most, if not all, setbacks to projects come about through human error, and these setbacks can be avoided with better knowledge of who and what you are dealing with. But before starting business in a foreign country, a company needs to grasp several critical issues.

Working in the US

We share the same language and much of our culture overlaps, yet of all Western countries, the US arguably holds the biggest pitfalls for European companies.

For instance, the US legal system can appear similar in some aspects to our own, but it has significant differences. Many companies fall foul of the law, and undo a lot of their good work, because they assume what they are doing is legal because it is legal back home.

Or, to make matters complicated, they assume a back-to-back trading environment because they have just successfully completed a similar project in another US state. So how can there possibly be pitfalls in that? The US has a very political landscape, so laws differ from state to state. Then, to make matters really complicated, within one state the laws can vary from town to town and city to city. Without due diligence it is easy to slip up. Being ignorant of rules and regulations does not make you exempt from them.

Knowing national and local laws and political structures is vital in any country you plan to trade in. Seeking local expert legal advice to make sure you are compliant beforehand is not only good practice, but also a worthy investment, costing far less than what you could lose.

In a few notable cases, European power companies embarking on infrastructure projects in the US have been caught out by the project management team set-up. Deploying UK or European forms of contract models in an environment that is unfamiliar with them has caused costly delays.

US transmission project
US transmission project: America holds significant pitfalls for European companies
Source: Judge 3D

Traditionally, American infrastructure projects have no quantity surveyor nor commercial manager. They rely on cost engineers and lawyers, which comes as a surprise to Europeans and has been shown to escalate problems rather than resolve them swiftly. Without quantity surveyors and commercial managers, projects can suffer when problems they would have dealt with arise, as no one takes ownership in support of the project director/manager to steer the project back on track.

If a European business fails to understand and address this from the outset, huge amounts of time and money can be lost further down the line. This is especially true when the works to be carried out undergo sudden significant changes, which can send a project into turmoil.

European companies take a huge risk when they adopt the unfamiliar US project management team structure. Blending US and European structures to create something new and equally unfamiliar is also risky, although perhaps less so. Working in a familiar framework allows the team as a whole to move forward to complete the work by eliminating uncertainty over roles and responsibility. It is essential to start the project with the right set-up, or at least identify faults early into proceedings and make the necessary corrections quickly. An element often overlooked is shareholder subsidiaries, which regularly offer great value, but equally have limited legal leverage in many project structures and joint ventures.

Recently, my company assisted Parsons Brinckerhoff and Balfour Beatty Utilities (USA) on the $1.3 billion New Energy Alliance 3 state power distribution contract in the US. In my opinion, Parsons Brinckerhoff and Balfour Beatty Utilities (USA) are successfully delivering the New Energy Alliance 3 state power distribution contract because a familiar European structure is being used to deliver it, and a team of professionals experienced in operating in its format has been assembled. This means the lines of communication are open from the bottom up and people on the project know exactly what is expected from them, ensuring difficult issues can be dealt with swiftly.

And in the Middle East

For European power companies, going to the Middle East with new forms of contracts is perhaps easier on many levels than taking the step into the US.

Despite very real and obvious cultural differences, European firms have a close, long-term trading relationship with Middle East nations. The two regions have an understanding on how we both do business and work. Crucially, Middle East nations also understand the challenges of new forms of contracts and what they represent. All but the FIDIC (France’s International Federation of Consulting Engineers) has been the mainstay of trading for decades now, with NEC (New Engineering Contract) suite an increasing presence. In addition, people in senior positions in the Middle East have often been educated in Europe. And this familiarity is a distinct advantage for companies wanting to expand in the region or move into it.

But some European companies have recently been guilty of complacency in failing to recognise the importance of the relationship with the senior representative who controls project finance. This is particularly so when significant changes affect the project but are not clearly and concisely communicated to the budget holder. As a consequence, the contracting organisation is often underpaid, and, ultimately, if this persists for an extended period of time, the organisation finds itself with serious financial problems in its trading in these localities.

Right now, the main issue for European power companies to overcome in the Middle East is how best to present and control change on major infrastructure projects.

Companies need to understand the trading environment of the country they are entering and the traditional methods of trading within that environment. How people deal with each other varies markedly around the world. It is still quite common in many countries for a person’s word to be their bond, but it is important to set conditions out clearly in writing. An accurate contract that all parties agree on, and which plainly defines for each exactly what is required of it and the others, leaves no room for confusion.

It is a must that European companies then stay on top of administering the contract, and that they keep the client properly informed through all avenues of communication. Formal notices and written reports are required, as well as one-to-one meetings, according to which works best for your client.

A good contract eliminates risk to a project by having all core principles closely aligned for all parties, so everyone should be united going forward towards the conclusion. And if at any stage they are not united, you have the contract to refer to.

While the written word of a contract is valued around the world, this principle is regularly challenged by high-value, complex projects that have not been fully worked through on paper and so have huge gaps and ambiguity in their contracts. Because of its unpredictability, this situation can generate a whole raft of problems, particularly where a client attempts to influence the works and how they are done without fully understanding the consequences.

Be aware when drawing up the contract that intent can be interpreted in different ways. You can use this, but it can also be used against you. If you have doubts that need to be eased, do not shy away from asking difficult questions and posing certain scenarios if it will help analyse what should be represented in the contract. It is better to discuss hypothetical problems at this point than have to deal with real ones once the project has started and there is no going back.

Lessons Learnt

  • Do your homework and know your market and clients
  • Have a clear understanding of the legal and trading environment you are entering
  • Seek local knowledge partners and advisors to bolster your management of risk
  • Understand where real levels of authority lie in terms of the client, regulation and political landscape
  • Can you expatriate profits and is taxation at viable levels to allow sufficient return
  • Select local partners with care, break ups can be extremely costing
  • Have a clear strategy to target new markets against real prospects and clients you have researched

Clear communication

No matter what country you are in, you need to make yourself understood and you need to understand others. Projects necessitate that you know precisely how to ask for things, how to make deals, how to give out praise when it is deserved and how, when occasion demands it, to make it known you are not happy.

There has to be an awareness of how you are perceived by clients, and an ability to adapt to situations and people so that your goal is reached.

It goes against European culture to act in a subservient manner towards a client. Instead, Europeans tend to act as equals. But in some countries and with some clients a slight deference can make all the difference between success and failure. Homework has to be done. Playing your client’s positive buttons is an extremely important facet to the smooth running of a project, especially when there is a need to resolve a problem swiftly.

When problems do occur, you should be in a position whereby the client also wants to solve the issue. You do not want them to just listen and give a holding answer, or to continue thinking about the problem, prevaricate or give the impression they might do something while they are instead preparing to strong arm you. You actually want them to go to the next level and categorically say they want the problem resolved and will work with you.

This only happens with good communication. In this, being unable to speak the language of the country can actually be to your advantage. Work with a trusted interpreter and discuss with them your objectives before meetings. I have attended meetings where delegates have held talks in their own language that contradicted not only what I was trying to achieve, but also what I had been told previously. When this occurs, rather than have the interpreter begin questioning them during the meeting, I find it more effective to request a break in which the interpreter can explain what was said, giving the opportunity to decide whether to continue with the meeting or postpone it while you deal with the underlying problem. This practice is effective at weeding out anyone untrustworthy and damaging to the success of the project. In many cultures, being identified as untrustworthy can bring shame, so it is essential to know how to deal with such issues sensitively. What is important to remember is language need not be a barrier if you have a strategy in place.

Knowledge on the ground

We have seen how obtaining good local legal advice and having a trusted interpreter adds value, but there are other areas that also require expert local knowledge:

  • Seek out a mentor who can explain to you the characteristics of the culture you are entering and how best to communicate difficult messages without threatening important relationships.
  • Speak to your bank and leverage off this relationship when setting up your business and bank accounts in your new country. This will ensure your banking relationship has a good start. It is also important to discuss with your bank the best method to deal with and mitigate foreign risk.
  • The repatriation of funds attracts taxes and/or requires governmental approvals. Make sure your strategy is right from the outset and you have a good local firm of tax practitioners to vet it before starting.

Infrastructure is infrastructure, no matter where you are in the world, but institutional and cultural differences can make applying even the basic principles tricky. If European power companies can respond to this challenge positively, then the world will be theirs.

John Judge   John Judge is managing director of Judge 3D, a UK-based management services company. For more information, please visit https://judge3d.com

Lee Hewitt   Lee Hewitt, the commercial architect of the Gas Distribution and Electricity Transmission Alliances in the UK, joined the US Electricity Transmission team to deliver its New York and New England power projects in 2008.

When the US electricity transmission business was facing the same capital delivery regulatory drivers encountered by the UK, it turned to National Grid UK for experience and support in creating integrated regional delivery vehicles with construction partners under a shared risk and reward arrangements.

Its key implementation challenges were:

  • Alliancing, integrated delivery and shared risk and reward arrangements were largely untested in the US;
  • Inability to understand, and subsequently quantify the risk of the model;
  • Adversarial relationships;
  • Supply chain landscape fundamentally different – the UK has a number of large multi-national delivery partners, and the US is more provincial in its contracting base;
  • Labour laws and union hall influence; and
  • State by state regulation, with a different strategy, and a different level of regulatory intervention being adopted by each.

What proved key to implementing the alliance model was local contracting entities engaging with UK partners already integrated with National Grid in its UK arrangements. The UK partners provided a translation service and added a reassuring presence when pricing risk, developing functional offerings and negotiating contractual terms.

National Grid employed a model to determine if a collaborative procurement strategy fits with the contracting environment it was facing.

  • Client maturity – Is the client leadership, project and support staff able to operate in an integrated manner?
  • Supply chain maturity – Is the supply chain developed sufficiently to operate alongside the client, understand and price the different risk profile, and have the balance sheet strength to take both good and bad times?
  • Sufficiency of duration – Is there a sufficient period to recover start up costs and lost productivity during mobilisation and establishment?
  • Sufficiency of turnover – Is there enough turnover through the contract to recover the overhead intensive nature of the Alliance arrangement?
  • Can business objectives be achieved by any other method? If so, why embark on the risk of putting an Alliance into play?

When those five ‘Golden Rules’ played out, it was clear that the Alliancing contracting strategy fitted the electricity transmission market.

However when it looked to apply the model to meet the electricity distribution market challenges that fit was not there. National Grid reverted to a risk transfer, fixed price schedule of rates scenario, which the market knows and loves, to deliver on its business objectives.

Lessons Learned

  • People, organisations and markets do not change because a client creates a new contracting strategy – change-management processes and tactics need to be employed.
  • Keep talking, keep explaining and work with the supply chain to achieve full understanding.
  • Introduce a third party to the market to act as ‘translator”‘of requirements.
  • An intelligent client needs to be nimble and employ the right contracting strategy for the market it is facing.
  • Get the regulators, or ultimate client, on board early, and stay close.