Development of Road Transport Systems Using International Contractor Joint Ventures

7/30/2019 Development of Road Transport Systems Using International Contractor Joint Ventures

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DEVELOPMENT OF ROAD TRANSPORT SYSTEMS USINGINTERNATIONAL CONTRACTOR JOINT VENTURES

Dr Cyril Chern, BArch, Juris Doctor, RIBA, AIA, FCIArb, BarristerCrown Office Chambers

2 Crown Office RowTemple

London EC4Y 7HJemail: [email protected]

Abstract:

International Contractor Joint Ventures and their Selection, The Contract Documents, and RiskAllocation

The development strategy for a road transport system in Bosnia and Herzegovina must take intoaccount the use of joint ventures between local and international contractors as well as possiblerelationships between Public Private Partnerships and Private Finance Initiatives. The teamapproach to the development of any effective road system i.e. one that can be built within time andbudget constraints, is based upon a proper selection process for international and/or localcontractors, the correct forms of contract that are used in the actual construction and a proper riskanalysis. With the proper risk allocations, selection procedures, and contracts in place as well as aknowledgeable supervisory group in charge, a consortium of international and local contractors caneffectively build (and maintain) a new road transport system in Bosnia and Herzegovina, withinbudget, on time and without dispute and/or delay.

Key words:Joint ventures, Road Construction, team approach, international contractors, local contractors,form contract, FIDIC, dispute avoidance, dispute resolution, contractor selection, risk allocation,PPP, PFI


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International Contractor Joint Ventures and theirSelection, The Contract Documents, and Risk

Allocation

The use of International Joint Ventures in theconstruction of road projects, tunnels, and bridgescontinues to increase. In such cases, governments

and foreign companies must consider the optionsavailable before agreeing a joint venture structure.Joint ventures can benefit both local and foreigninvestors when a local partner has certainstrengthssuch as central or local governmentsupport, land, licenses, distribution, and access tosuppliersthat reduce start up costs and improvethe foreign investor's chances of success and theforeign partner has the construction expertise andfinancial ability to successfully complete the project.

JOINT VENTURES IN ROAD CONSTRUCTION

A joint venture is an association of two or moreindividuals or business entities who combine andpool their respective expertise, financial resources,skills, experience, and knowledge in the furtheranceof a particular project or undertaking. Joint Venturesare generally created for a single activity or project,and may have a limited time span.

Joint Venture agreements are usually either anEquity Joint Venture (EJV) or a Contractual JointVenture (CJV) both are commonly referred to as a"JV". These joint ventures are typically formed

either by individuals, business entities, corporationsor partnerships. The contributions to the jointventures are in the form of money [capital], services,or physical asset(s) or a combination of both.

Joint Ventures Generally

Most joint ventures arise via an express writtenagreement, but could arise by the nature of theparties conduct [a non-contractual JV]. As the rightsand duties of joint venturers are typically governedby the same principles that govern 'partnerships' i.e.each joint venturer has the power and ability to bindthe other joint venturer personally to unlimitedliability to third parties, unless of course, the JV hasbeen incorporated as a separate business entity. Itis highly recommended, therefore, that the JV beexpressed by a written agreement and incorporatedas a formal corporation.

Types Of Joint Ventures

Joint Venture agreements generally take one ofthree forms:

Contractual Joint Venture Corporate Joint Venture

Partnership Joint Venture

In a 'Contractual' joint venture, the terms,obligations, and liabilities of the parties are set forthin a written instrument signed by both parties. In a'Corporate' joint venture, the obligations, terms andliabilities are also set forth in a written agreement,however, this agreement is a much more extensivedocument in that it contemplates that the JV will beincorporated and become a separate legal entity. Inthe 'Partnership' joint venture, the partners eitherform a general or limited partnership and the rightsand obligations of the venturers are set forth in a

partnership agreement. The Partnership form of JVis primarily used for road and transportation systemdevelopment. In a non-contractual joint venture,there is no written agreement, but the JV doesbusiness under a selected name and the conduct ofthe parties and the law establishes the liability andobligations of the venturers to third parties doingbusiness with the JV.

In many parts of the world joint ventures are equityjoint ventures (EJVs), though some investorsestablish contractual joint ventures (CJVs). CJVsand EJVs are similar in many respects. In mostcountries the government approval process,approval authorities, format of agreements, taxbreaks, legal standing, and the means, laws, andauthorities for dispute resolution are identical. Thegeneral management structure and governanceprocedures are also virtually the same.

But contractual joint ventures and equity jointventures differ in two important ways. First, unlike anEJV, a CJV generally does not need to be aseparate legal person under most legal systems. (ACJV that is not a separate legal person may benefit

from lower costs, but also may expose the parties togreater liability than if they were legal persons,because CJVs with legal person status conferlimited liability on parties to the joint venture.)Second, the CJV parties' profit, control, and risks aredivided according to negotiated contract terms. Incontrast, an EJV's profit, control, and risk are dividedin proportion to the equity shares invested by theparties.


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Contractual Joint Venture disadvantages

As is true for any investment structure, CJVs havetheir drawbacks. First, since all CJV contract detailsneed to be negotiated, establishing a CJV can betime consuming and expensive. Indeed, CJVnegotiations can derail potential ventures as partiesdiscover that they cannot reach agreement on everydetail. Second, CJVs are sometimes not the mostappropriate business structure for the project. Forexample, a Italian Road Construction Companyrecently signed a memorandum of understanding fora CJV with a Romanian state-owned enterprise(SOE) for the construction of a toll bridge outside ofBucharest. The venture did not proceed, however,because the state-owned enterprise ultimatelydetermined that it preferred an economic jointventure so that profit sharing ratios would matchshareholdings and future changes in registeredcapital.

Why choose a CJV?

A CJV parties' profit, control, and risks are dividedaccording to negotiated contract terms.

CJVs nevertheless can offer investors severaladvantages. Compared to EJVs, cooperative jointventures

Allow access to restricted sectorsIn a CJV, local partners can hold and "lend"

assets and licenses that may be forbidden toforeign investors under local law, or that areundesired by the foreign partner, until theventure terminates or foreign ownershiprules are relaxed. Undesirable assets mayinclude those with a high transfer tax, orthose that are too complicated or costly forthe foreign investor to obtain, such as land.

A CJV could also allow negotiated levels ofmanagement and financial control, as wellas methods of recourse associated withequipment leases and service contracts; in

an EJV, foreign investors may not alwaysobtain such control since EJVs typically relyon equity levels to assign board seats andkey staff and to determine other rights.

Alleviate capital contribution problems

The CJV's foreign partner can contribute orlease to the joint venture expensivetechnology and equipment, such astunnelling and construction equipment. TheCJV can then repay the foreign partner at an"advanced rate" from revenues before profitsharing. This strategy can be used incountries in which the law caps foreign

ownership and when the local partnercannot afford to fund assets up front. Underan EJV ownership structure, such anarrangement is impractical or impossibleunless the local side can contribute theamount of cash or assets needed to fund itsequity up to any minimum local ownershiplevel which may be required.

Allow more foreign management controlForeign partners can often obtain thedesired level of control by negotiatingmanagement, voting, and staffing rights intoa CJV's articles of association. Becausethese rights do not have to be allocatedaccording to equity stakes, the CJV againprovides more flexibility than an EJV.

Reduce the risk of non-complianceThe CJV structure also tends to forcepartners to address rights and

responsibilities in advance. It is goodpractise if the local government is requiredto approve all CJV investments.Government approval of detailed CJVcontracts has the added benefit ofsanctioning the detailed agreements anddeterring local partner non-compliance.Thus, CJV contracts commonly providebetter recourse than EJV contracts if onepartner fails to comply with agreements.

Are easier to terminate or modifyEnding a CJV may be easier than ending anEJVparticularly if the partners held assets

separately and clarified contingencydissolution terms in advance. In somesectors, when risk of failure in thedevelopment phase of a project is high, CJVcontracts can be modified withoutterminating a partnership and forgoinginvestments and goodwill.

Resolve expense controversiesIf the CJV's foreign party finds it necessaryto incur expenses that the local partydisapproves of, the expenses may bestructured under a contract with the foreignparty.

Offer extra tax benefits and advantagesThough CJVs and EJVs generally have thesame tax advantages, CJVs offer someextra tax benefits. For instance, CJVs cansometimes appropriately avoid the assettransfer tax.

Cooperative Joint Venture Case Studies

While the CJV is often more time-consuming andcomplex to negotiate in the beginning, it is thiscomplexity that is its main benefit.

The following cooperative joint venture (CJV) casesillustrate potentially useful strategies:


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A Turkish Toll Road CJV

Typically, toll road projects in Turkey involveconstruction and operation of roads that have beenclassified and approved for toll collection. Thegovernment sees toll roads as a way to encourageforeign investment in the development oftransportation infrastructure.

CJVs are almost always used for such investmentsbecause other investment structures cannoteffectively address the financial risk to investors thatcontribute a large amount of cash. A CJV enablessuch investors to recoup their investment morequickly than other structures, since the parties cannegotiate how and when profits are ultimatelydivided. Because toll roads are "build-operate-transfer" projects (the assetsthe roadswill returnto the government at the end of a project's life),foreign investors are concerned about how much

time it will take to recoup the investment and focuson more than just the total investment return by theend of the project. Since the value of cash flowsdeclines over time, most foreign investors measureinvestment returns by internal rate of return. Foreigninvestors typically negotiate to get more than aproportionate share of the cash relative to sharecapital in the early years. For example, a foreigninvestor could negotiate to receive up to 100 percentof the available cash for an initial period (perhapsthe first 5 to 15 years). In the next 5 to 10 years,available cash could be split to match the parties'shareholding. In a final period, perhaps the last 5 to

10 years, the foreign party could receive a share inthe available cash less than proportionate to itsshareholding. All agreements and definition of rightsare usually carefully spelled out in the detailed CJVcontract.

In many toll road CJVs, the foreign party owns themajority of share capital. Most toll road CJVs havetwo categories of investors: financial and localgovernment affiliate. Financial investors may beforeign or local; for the sake of simplicity they arecalled "foreign investors" here. This side contributesmost of the needed cash. The second category of

partners, which usually includes a subsidiary of thelocal traffic bureau, contributes licenses,construction, and the workforce. This side, forsimplicity's sake called "local investors" here, puts inassets but may also contribute cash.

A Romanian Toll Road

In one example of a toll road CJV, a project includedan expressway and a Class 2 road (a parallel orconnecting road giving access to the expressway).Most of the cash was used to build the expressway,

and a lesser portion was used to repair and upgradethe Class 2 road. The foreign party maintainedmanagement control by assigning 60 percent of

board seatsmatching its share capital. The foreignparty appointed the general manager and thefinancial controller so that it would be on top of dailyoperations and in charge of the material fund flows.The CJV set up checks and balances tocommunicate among foreign parties, local parties,and authorities. The CJV, a legal person with limitedliability, had a four-year construction period and has

a 30-year life. The parties divide profits based on theschedule described above. All of this was writteninto the CJV contract.

Exit Strategies

In toll road projects, the CJV structure should notinhibit exit strategies. Some investors view toll roadprojects as being similar to a utility with a limited life.Others have a strategy to expand their projects byadding more roads and by focusing on projectswithin a region or on key city-to-city projects. Thus, a

successful exit strategy in this sector has been topool toll roads and package them into a holdingcompany for listing on a public stock exchange.

THE TEAM APPROACH

The team approach to the development of aneffective road system is based upon the format thatis used in both the selection process of internationaland/or local contractors, and the forms of contractthat are used in the actual construction process(including local sub-contractors). In practise this

means that before any construction project isfinalised, the government should have in place aDevelopment Team to facilitate all parts of a roadtransport system and be in a position to helpallievate any potential problems that may arise.

A Development Team Approach (DTA) is theconcept of bringing together all local authorityregulatory agencies, which affect the roaddevelopment process, to provide a developer/ JV/designer with a coordinated approach to thedevelopment from concept to completion.

The Development Team Approach is primarily aimedat those major roadwork development projects,which involve consultation with a wide varyingnumber of agencies. A DTA provides a single groupcontact point to co-ordinate submissions through tofinal approval. Developers and constructionprofessionals receive the benefits of a single point ofcontact within the government to co-ordinateservices to be provided; a reduction in conflictingadvice and decisions given by the varying regulatoryservices; and savings on time and money byreceiving pre-construction advice at an early stage

of the process.


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In the United Kingdom, for example, to accomplishthis at the initial stages of roadwork development, ateam is set up to advise the JV and help speed theprocess from inception through to final approval.Most development teams will involve a core ofofficers from Planning, Building Control andHighways but any other specialists can be brought inas required, e.g. Engineering, Environmental Health,

Licensing and the Fire Service. Building Control willalso carry out pre-application consultations with theFire Safety Officer on any matters that may proveproblematic later on.

ESTABLISHING THE METHOD OF CONTRACTORSELECTION

The development of an effective, operational andcost effective road system involves not only thedesign of the road system and its engineering but

also the proper selection of contractors. Ideally aconsortium of engineers and government officialsshould be put in place to determine the varioussegments of any particular project, the critical pathfor the construction of the segments, the necessaryskills that can be obtained locally, financing/fundingavailability and the need for foreign resources.Based upon this initial study, a determination can bemade as to what type of entity should be invited totender for any segment of the project.

Invitation vs Advertisement

There are two schools of thought on contractorselection for major roadwork projects includingtunnels, bridges and related infrastructure. Themost prevailing method is Invitation where pre-chosen and pre-qualified contractors are invited tobid on the project in question. Under this methodthe selection committee or selection group pre-establishes which international contractor has theappropriate resources and abilities to complete theroad project. After inviting those that qualify, theselection committee can then review the invitedcontractors presentations, interview theirrepresentatives and then make an appropriate

selection before entering into a negotiatedagreement for the work.

Under the Advertisement method, the road projectis advertised in various international journals aseither a request for proposal or notification that theproject exists and the timetable for applying to theselection committee and expressing an interest incontracting for the project. The difficulty with thismethods is that the number of possible contractorcompanies replying to an advertisement can berather large and the slection committee is then facedwith a large number of potential contractors who

may or may not be suitably qualified.

The Successful Contractor Lowest Bid vsAbility to Complete

From the owners perspective a successful contratoris the one who can complete the road project bothwithin the scheduled time period and within theowners budget. Also the successful contractor isone that can provide the appropriate completion

bonds and guarantees and who has sufficient capitalof its own in the event of any dispute. Futherexperience in the type of road project is essential aswell as the team that will be put in place to run theproject. If a particular contractor can satisfy theselection committee that it possesses the qualitiesneeded for a successful project then it should beselected rather than the contractor who is the lowestbidder for the project. Also on occassion no onesingle contractor has all of the qualificationsnecessary and in these circumstances the selectioncommittee should consider suggesting a jointventure between several smaller contractors who,together, can accomplish the goals of the project.The use of this type of joint venture is alsosuggested where, for local reasons, it is wise tohave smaller local contracotrs joint venture withlarger international contractors to provide the bestsolution to complex road projects local knowledgeof labour and supplies combined with aninternational perspective and experience and readycapital reserves to complete the project.

Another consideration is the use of PPP and/or PFIcontractors relationships. Under thesecircumstances the risk allocation on a project shiftsfrom the governmental agency to the contractorand/or joint vernture that is constructing the project.The goal then also shifts to ensure that what isconstructed is in the best interests of thegovernmental agency and not just for the contractori.e. that what is built is exactly what was designedand engineered with no material substitutions. Theways to prevent this are covered later in this paperunder Dispute Boards.

THE TYPE OF CONTRACT TO BE USED

The most frequently used form contract for roadworks is published by the International Federation ofConsulting Engineers (FIDIC). There are three thatapply for the use in road projects. The Conditions ofContract for Construction First Edition 1999 alsocommonly referred to as the Redbook is the mostcommon and is used in the majority of roadconstruction projects worldwide. This Contract forConstruction is recommended for building orengineering works designed by the Employer or byits representative, the Engineer. Under the usualarrangements for this type of contract, theContractor constructs the works in accordance with

a design provided by the Employer. However, theworks may include some elements of Contractor-


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designed civil, mechanical, electrical and/orconstruction works.

The Redbook has become popular over the yearsas it has been prepared by an experienced groupengineers/contractors and others in the field and hasproven effective in balancing the risk equallybetween owner and contractor.

Another version of this contract is the FIDICConditions of Contract for Construction (MultilateralDevelopment Bank) Harmonised Edition. March2006. Which is again for Building and EngineeringWorks designed by the Employer and is referred toas the MDB version.

The next most useful form for roadwork is the FIDICEPC/Turnkey Contract 1st Ed (1999) (The SilverBook). These Conditions of Contract arerecommended where one entity takes total

responsibility for the design and execution of anengineering project. Under the usual arrangementsfor this type of contract, the entity carries out all theEngineering, Procurement and Construction:providing a fully equipped project, ready foroperation (at the "turn of the key"). This type ofcontract is usually negotiated between the parties.

Finally, the other form agreement that is used intransportation projects, particularly in electrical sub-stations and related engineering facilities is theFIDIC Yellow Book - The Conditions of Contract forPlant and Design-Build, which are recommended forthe provision of electrical and/or mechanical plant,and for the design and execution of building orengineering works. Under the usual arrangementsfor this type of contract, the Contractor designs andprovides, in accordance with the Employersrequirements, plant and/or other works; which mayinclude any combination of civil, mechanical,electrical and/or construction works.

Of these three the best one for the protection of thegoverning agency is the Red Book or the MDBVersion with the Yellow and Silver Book versions

being used in PPP projects.

DISPUTE AVOIDANCE

The successful completion of any project isdependent not only on the ability of the contractorand the clarity of the drawings utilized but also in theavoidance of any disputes. The FIDIC forms ofcontract are unique in this respect in that theyprovide for the use of Dispute Boards to preventdisputes from getting out of control on any projectand thus minimizing the risk to either side of adelayed or cost inefficient project.

Worldwide, substantial sums of money over andabove the actual original contract sum aretransferred several hundred times annually frommunicipalities to construction engineering firms. Thisis because statistically the construction industrieshave a high rate of disputes and delay, which untilrecently have not been easily resolved withoutrecourse to lengthy arbitrations or worse yet to the

Courts.

This is changing however, thanks in great measureto FIDIC and the use of Dispute Boards in itscontracts. As an example the Ertan HydroelectricDam in China valued at USD$2 Billion had 40disputes referred to its the Dispute Review Board fordecision and no decision of this Dispute Board wenton to arbitration or litigation of any kind. The HongKong International Airport valued at USD$15 Billionhad 6 disputes referred to its Dispute Board and ofthose only one went on to arbitration at which timethe decision of the Dispute Review Board wasupheld, and the Katse Dam in South Africa valued atUSD$2.5 Billion had 12 disputes referred to itsDispute Board and of these only one went on toarbitration where, again, the decision of the DisputeReview Board was also upheld. In each instancethe Dispute Board, did resolve those disputes asquickly, economically and sensibly as possible

Dispute Boards work and sometimes their merepresence and the ability of the Dispute Boardmembers to give informal opinions before anydispute even arises can be of immense assistance.A good example of this in the United Kingdom is theDocklands Light Railway valued at USD$500 Millionwhere no disputes ever fully arose or weresubmitted to the Dispute Board or the SaltendPrivate Gas Turbine Power Plant in the north ofEngland valued at USD$200 Million where both thenumber of disputes referred to the Dispute Boardand the number that ever went to arbitration wereboth zero. Needless to say such statistics wereunheard of in the construction industry before theadvent of the Dispute Board.

What is a Dispute Board?

A Dispute Board or Dispute Review Board (DRB) orDispute Adjudication Board (DAB) is a job-site'dispute adjudication process, typically comprisingthree independent and impartial persons selected bythe contracting parties. The significant differencebetween Dispute Review Boards and most otherAlternate Dispute Review techniques (and possiblythe reason why or Dispute Review Boards have hadsuch success in recent years) is that the DisputeReview Board is appointed at the commencement ofa project before any disputes arise and, byundertaking regular visits to the site, is actively

involved throughout the project (and possibly anyagreed period thereafter).


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A Dispute Board becomes a part of the projectadministration and thereby can influence, during thecontract period, the performance of the contractingparties. It has real-time value. The idea behind astanding Dispute Resolution Board is that it may becalled upon early in the evolution of any dispute,which cannot be resolved by the parties and be

asked to publish decisions or recommendations onhow the matters in issue should be settled. It isusual (but not compulsory) that an opportunityremains for the matter to be referred to arbitration orto the courts if the Dispute Review Board's decisiondoes not find acceptance by the parties. Thus aDispute Resolution Board may be likened to theUnited Kingdoms adjudication process, either understatutory-compliant contracts or under the regimeestablished by statute itself. What a Dispute ReviewBoard does that United Kingdom statutoryadjudication does not do is to provide a regular andcontinuing forum for discussion of difficult orcontentious matters, to identify ways forward byacting in an informal capacity and to create valuableopportunities for the parties to avoid disputes bykeeping proactive communication alive. Anotheraspect, which is less often discussed, is that byestablishing a Dispute Board from the inception ofthe project the Dispute Board members become partof the project team and are thought of in a differentfashion and because of their hands on approachcan be trusted to be fair and impartial and theiradvise respected and taken more readily than woulda third party or stranger to the project.

The terms Dispute Board or Dispute Review Boardare generic terms and include (a) the DisputeReview Board (DRB) which is a device thatoriginated in the USA and provides non-bindingrecommendations); (b) the Dispute AdjudicationBoard (DAB) which is a device emerging from theearlier USA model, but which provides a decisionthat has interim-binding force); and (c) theCombined Dispute Board (CDB), which is a hybrid ofDispute Review Boards and Dispute AdjudicationBoards which was created by the InternationalChamber of Commerce in 2004. Various other termshave been used such as Dispute Settlement Panel,Dispute Mediation Board, Dispute Avoidance Paneland Dispute Conciliation Panel. Fundamentallythese different varieties of Dispute Review devicesare the same, each providing early adjudicationbased on the contractual bargain between theparties.

A Dispute Review Board is a creature of contract;the parties establish and empower a Dispute ReviewBoard with jurisdiction to hear and advise on theresolution of disputes. The FIDIC forms of Contractexpressly require dispute boards and as such

prevent disputes from escalating on roadwork andother projects. They also provide a method ofensuring that the work is being properly constructed

due to their ongoing nature and the ability of theEmployer to bring issues of improper work to theattention of the Dispute Board at an early stage.

RISK ALLOCATION

Risk is often ignored or dealt with simply by addingcontingencies to estimated costs, time andperformance. The development of non-traditionalcontract and funding arrangements, such as PPPand PFI along with international joint venturearrangements, means that a structured and logicalapproach is necessary to deal with the new types ofrisk to the new types of project objectives.

Project objectives are not always solely financial.The most serious consequences to a projectsobjectives may include:

Construction cost overrun; Construction time overrun; Inadequate performance (through-put or

quality); Operating cost overrun.

Whether such consequences are acceptabledepends upon the identification of the risk and theattitude to the risk and the importance to theprojects objectives.

RISK IDENTIFICATION

Risk Identification requires the establishment of therisk profile and the frequency and severity of hazardtogether with the impact on the project operation andproject finance. The profile is established bysystematic identification and quantification of the riskexposure.

The essential technique is to obtain a detailedunderstanding of the international joint ventureproject, its process and the environment in which itis to be constructed and in which it will operate. Thisrequires all three processes to be adopted.

The following are simple examples of hazards,which are applicable to international roadwork jointventures and if properly anticipatedand planned for, can be adequately controlled:

Employer/Owner

Political or economicchanges

Revenue changes (market) Operability Maintainability Reliability Health and Safety


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Environment

Project

Cost increases Time over-run Quality not compliant

Inadequate information fordesign

Weather Buildability Health and Safety Environment

Contractor

Client performance Inadequate project definition Inadequate project

organisation Inadequate estimate Subcontractor performance Inflation Exchange rates Health and Safety Environment

ENVIRONMENT

The environment of the Project dictates theprobability of a particular hazard and the likely

consequences. The impact of the environment canbe described as follows:

Existing Location Environment

It is in the nature of road construction projects to befixed and to form part of the land and indeed to bedependent upon the land in one way or another forits intended function. This may be seen mostobviously in transport projects such as roads,bridges, and tunnels that exploit their location. It isequally true of property and infrastructuredevelopments that take advantage of availablesupply routes or favourable local conditions eitherweather or resources or legislation.

This exploitation factor creates four separate butinterdependent sources of environment risks. Theseare:

Geography Site Traffic Legal and Cultural System.

The success of the project inevitably requires theenvironment and the effect of the project on theenvironment to be correctly assessed and modeled.

Site risks involve risk from sub-soil conditions, notonly the nature and properties of each strata, butalso the existence of ground water, faults, swallowholes, or even the presence of capped reservoirs ormethane. The construction of a tunnel may causesurface ground movements both absolute anddifferential that could affect buried services andexisting buildings. The tunnel itself could affect thesub-soil through additional stresses oncarbonaceous deposits and shales, which thenrelease methane. On the other hand construction ofdeep foundations creating very large bulbs of highstress could affect existing tunnels. The location ofthe site can also involve risks from the presence ofcertain materials on the site, such as asbestos in apower station that is required to be demolished,

which because of the danger to personnel will affectthe method of demolition. The difficulty of makingclear and unambiguous allocation of liability for theconsequences of "changed conditions" - whether ofthe ground or an existing structure - by drafting ofcontract terms is a constant problem in constructioncontracts.

The other physical environment that needs to beconsidered is traffic - essentially man-made trafficsuch as cars, people etc. Traffic environment needsto be effectively modeled, not only how constructionmay affect the behaviour of Traffic, and therefore,

risks associated with it, but also how the road maypermanently affect traffic, and therefore the functionof the facility. In the case of road developments forinstance, the model may have to take into accountnot only how the roadway will change transportationroutes, but also how other proposed roaddevelopments will affect trade and how thedevelopment of the roadway will affect the amount offuture traffic. Such projects require macro-economicmodeling and expert knowledge of particular trends.Similarly in planning for a new ring road, trafficmodeling would need to accurately predict the effectof the route from other forms of man-made traffic.

Inaccurate assessment of any of these factors couldsignificantly affect the construction or function of theproject yet there must be a level of uncertainty inany such assessment. The question then becomeswhose responsibility this modeling becomes theinternational contractor or the local individuals, thePPP or the local government. In either case thisissue needs to be resolved before the start of theproject so that any risk can be pre-determined.

Legal & Cultural System

Another other category or source of risk is the legaland cultural system. Both the cultural and the legalenvironments in which the project operates have


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been grouped together, since they operate togetherand interact. The use of a dispute board with resortto the ICC for final decision can help alleviate anyconcern by international contractors.

Other factors include the legal requirements relatingto import and export of machinery or relating tohealth and safety or relating to control of pollution ornuisance. The effect of these factors on projectoperation needs to be clearly assessed by eachparticipant in the project otherwise there may bevery real risk of financial losses in implementingprocedures not allowed for, or in payingcompensation due to breach of such legalrequirements.

The legal and cultural system must be clearlyunderstood when drafting the contract terms. Animportant characteristic of contracts is that theyallocate liability and responsibility for risk. Any

uncertainty or lack of precision in the contract terms,itself creates a risk - the risk of disputes. If thecontract terms are to allocate risk as intended thenthey must be drafted in recognition of the legal andcultural system in which the contract will operate anddisputes decided, this is one of the key reasons whythe FIDIC form of contract is recommended.

Project Environment

The Project Environment required for a roadconstruction project introduces risks arising from:

Communication Organisation Resources Finance

These risks cannot be considered as peculiar toroad construction projects. For instance, althoughconstruction and assembly work must be carried outat the site location the risks of major elements beingconstructed off site are common to all complex roadprojects. This may be for instance, a resource risk inthe transport of such elements at the right time.

The response to these categories of risk is to dividethe project into packages that are manageable bythe participants. Thus the risk from finance may bemanaged by using a number of funders, the riskfrom organisation by dividing the work into discretecontracts to suit each participant with a constructionmanager or managing Contractor, the risk fromcommunication by appointing a Project Manager,and the risk from resources by adopting designs thatreflect availability of materials at the location and thedifficulty of transporting materials or pre-assembledunits to the assembly location. All these responsesinvolve scaling down the project into manageablepackages, and involve analysis techniques and

decision-making processes that are well understoodand not peculiar to construction projects.

When preparing a contract strategy for any roadworkproject involving international contractors anunderstanding of local laws and regulations arenecessary. Also existing or proposed legislation,may make a significant difference to resolution ofdisputes, cashflow in terms of the paymentprovisions and the risks of insolvency. Local versusinternational performance bonds may also have asignificant effect on the safeguards put in place forcontractor default in performance.

CONCLUSION

It can be seen that through the utilisation of FIDICcontracts, Dispute Boards, proper Contractorselection, understanding and analysis of the localand international risk factors involved, and a

determination of whether a sole company, a jointventure or a PPP will be utilised, a complex roadwork project can be effectively managed and asuccessful result obtained.

Development of Road Transport Systems Using International Contractor Joint Ventures

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