Worldwide: Construction & Engineering London Legal Update – Summer 2014

Last Updated: 24 September 2014
Article by Richard R.N. Craven

Keywords: construction, engineering,

In this issue

Welcome to issue 66.

In which we continue our tour of emerging markets. Nate Galer and Juan Pablo Moreno take us to South America, where they introduce us to Colombia and Mexico and Kwadwo Sarkodie and Fabiana Blasiis report on Brazil. In Asia, Kevin Owen is our guide to Indonesia and, in Africa, Kwadwo Sarkodie reports on Ethiopia and, following his visit to Johannesburg, tells us about South Africa's arbitration law.

Joanna Horsnail and Rachel Smith highlight key issues in bidding or contracting for US governmental projects, while, closer to home, Maurits Kalff, Sander Maarschalkerweerd and Bas van Zelst of Van Doorne in Amsterdam provide the answers to our questions about the modernisation of Dutch arbitration law.

Mark King and Tom Duncan look at recovery of the cost of management time spent in dealing with a breach of contract and there are the usual case notes and news items.

We hope you enjoy the contents.

Viva Mexico?

By Nathan B. Galer and Juan Pablo Moreno

Much has been made of the potential of the "MINT" countries, Mexico, Indonesia, Nigeria and Turkey, to contribute to the world's economy in upcoming years. Some see Mexico developing into the world's 5th largest economy, ahead of the UK, by 2050. Mexico's energetic new president, Enrique Peña Nieto, has already introduced a variety of reforms to attract international investment, including last December's groundbreaking energy reform, which offers foreign investors new opportunities in one of the largest unexplored natural energy reserves of the world. So what opportunities does Mexico offer for UK construction?

CHALLENGES AND OPPORTUNITIES

With a GDP of US$1.177 trillion, Mexico is the world's 14th largest economy, the second largest in Latin America behind Brazil. It has vast natural resources, a large manufacturing industry, with some of the lowest manufacturing costs among emerging economies, and a consumer base of approximately 120 million inhabitants. Despite this, Mexico still suffers from a variety of challenges, primarily the low infrastructure quality in many industries. In the World Economic Forum's 2013 Global Competitiveness Report, Mexico ranked 65th out of 144 countries in infrastructure quality. It needs infrastructure investment to realize its potential and it is this challenge that, coupled with last year's reforms, creates significant opportunities.

The Mexican government plans to increase spending by 8.8% (compared to 2013 levels). Of this, a large portion will go to infrastructure and construction projects, notably in transportation infrastructure. The government recently allocated to the Transport and Communications Ministry Mx.118 billion (US$9.12 billion) for infrastructure spending, approximately 40% more than in 2013. These funds will allow the agency to initiate public tenders for some of its flagship projects, including the expansion of Mexico City's airport and metro, the construction of the new passenger train routes from Mexico City, the expansion of the Veracruz Port, and construction and maintenance of key federal highways.

The energy infrastructure sector is expected to follow a similar path and the new energy reform is expected to result in the participation of the private sector in the development of new oil and gas pipelines, gas processing and petrochemical facilities and oil refineries and of Mexico's huge deepwater and shale gas reserves. This, in turn, could lead to a new era of energy investment and construction in Mexico.

Elsewhere other planned projects include the construction of five million social homes.

FREE TRADE, ARBITRATION, AND FOREIGN INVESTMENT

Mexico has a solid legal framework for international investors, with rules promoting free trade, a stable arbitral environment and encouragement of foreign investment. Mexico has entered into a variety of foreign trade agreements with more than 40 countries, including the North American Free Trade Agreement (NAFTA) with the U.S. and Canada (1990) and the Free Trade Agreement with the European Union (2000). In addition, Mexico was among the earliest to sign and ratify the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Mexico's 1993 Foreign Investment Law (Ley de Inversión Extranjera) governs foreign investment in Mexico and provides for non-discriminatory treatment of foreign investors. It also allows foreign investors to own up to 100% of equity in local companies, acquire fixed assets, engage in new economic activities, manufacture products and open and operate establishments.

LOOKING AHEAD

An ambitious new President, a raft of radical reforms and a need for infrastructure add up to significant and exciting opportunities. Not for nothing is Mexico the "M" in "MINT".

This article first appeared in Building.

Indonesia - how about the 'i' in potential?

By Kevin Owen

As the "I" in the "MINT" countries, Indonesia was seen as a rising star. Until, that is, concerns about the emerging markets hit its star billing. But Indonesia is the world's third largest democracy, it has a population of almost 250 million with demographics similar to the BRIC countries. It has an affluent and aspirational middle class said to exceed 35 million, it has been outperforming its neighbours in growth rate, it is rich in natural resources and the FCO says that it is likely to remain one of the world's fastest growing emerging markets. Which adds up to huge potential – and opportunities for UK construction.

Despite the current market concerns, Indonesia needs to invest in infrastructure to exploit its natural resources, to maintain growth and to meet the demands of its youthful (60% under 30) population. Which translates into a lengthy infrastructure shopping list that includes power generation, rail projects, new and modernised ports, roads, public transport to alleviate congestion, new and expanded airports for a country of 17,000 islands and water and sanitation projects. And Indonesia is also keen on renewable energy sources and technology.

To speed up transport projects it has put in place a long-awaited regulation on land acquisition and it sees Public Private Partnerships as a key to financing Indonesia's economic development. Inevitably, however, there are challenges.

DOING BUSINESS

To obtain substantial work, a local office or partner is a necessity but there is a limited number of major Indonesian contractors. There is high inflation in the construction sector, continuing electricity shortages and this election year brought political uncertainty. Another economic concern is the recent mineral export ban that has produced a mining crisis.

And doing business is not easy. The World Bank Group 2013 Ease of Doing Business rankings placed Indonesia overall at 120th out of 189. Bureaucracy is a problem, perhaps reflected in the rankings of 175th for starting a business and 147th for enforcing contracts and, despite the commitment by President Susil Bambang Yudhoyono to deal with corruption, Indonesia ranked 114th out of 175 in the Transparency International 2013 Corruption Perceptions Index.

There is also a new problem with contracts in Indonesia – language. All contracts with an Indonesian national or entity have to be written in Indonesian and, in July 2013, the District Court of West Jakarta ruled (contrary to Ministry of Law and Human Rights advice) that a loan agreement drafted in English was void on the grounds of illegal cause. Until the decision is overturned, determinative Indonesian versions of such contracts now appear to be essential.

DISPUTE RESOLUTION

Indonesia is a civil law jurisdiction, with no system of binding precedent, with Dutch law as the underlying basis, to which have been added a number of new laws since independence in 1945.

International arbitration, with its usual advantages of expertise and speed over local courts, is the obvious choice for dispute resolution. Indonesia has ratified the New York Convention but will only apply it to arbitral awards made in other contracting states in respect of commercial disputes. It has also ratified the ICSID Convention and has entered into bilateral treaties with a number of countries, including the UK.

Indonesia's arbitration law is largely to be found in Law No.30 of 1999. International arbitration awards (unless Indonesia is a party) are enforced by obtaining a writ of execution from the Central Jakarta District Court. In addition to the reciprocity and commercial reservations, the award must not conflict with "public order". Many foreign investors in Indonesia insist on specifying Singapore as a neutral seat for arbitration and use of the arbitration rules developed by the Singapore International Arbitration Centre.

THE CHALLENGE

Indonesia is therefore potentially a very big market. There are risks to assess and obstacles to overcome but, ultimately, it's the same old story - if you don't go after the business, someone else will or, in the case of the Japanese, Korean and Chinese contractors, already has.

This article first appeared in Building.

Colombia – Latin America's newcomer

By Nathan B. Galer and Juan Pablo Moreno

Often referred to as the oldest democracy in Latin America, Colombia has benefited from relative political stability, economic stability and growth. It is one of the few Latin American countries that has not suffered a lasting dictator or a coup d'état. It benefits from an investment grade rating by all major rating agencies. It has only had one year of negative growth since the 1930s.

Despite this impressive record, Colombia's advancement has been held in check for much of the past century due in part to cumbersome policies on foreign investment and a long-running internal war with drug cartels and guerillas. Recent legal reforms and security initiatives to overcome these obstacles have started to pay off, however, and Colombia looks to finally be living up to its full potential. With this potential come enormous opportunities for the infrastructure and construction sectors.

INFRASTRUCTURE OPPORTUNITIES

As with many Latin American countries, Colombia's infrastructure lags behind other developed countries. In the World Economic Forum's Global Competitiveness Report, Colombia consistently ranks as one of the countries with the lowest transport infrastructure quality in the world (ranked 111th out of 144 countries in 2013). To meet this challenge, Colombia has focused on aggressive legal reforms and policy initiatives.

Colombia has recently passed legal reforms aimed at attracting international investment in infrastructure and construction. Of particular note is Law 1508 of 2012, which created an innovative legal framework for public private partnerships (PPP) to further boost construction and development in the country.

To back up these legal reforms, the Colombian government has put forward an aggressive US$55 billion 10-year plan to improve the country's low infrastructure quality. The plan aims to upgrade more than 8,000 kilometres of roads and attain more than 3,500 kilometres of four-lane highways before the end of the decade. As part of this plan, the government is planning on investing nearly US$12 billion in infrastructure and related construction projects in 2014 alone.

The flagship projects planned by the government include the construction of Bogota's underground system, considered the 4th most important infrastructure project in Latin America, a variety of concessions on roads to facilitate access to the Pacific and Atlantic seaports, the expansion of Cartagena's seaport and the construction of the Bicentenario oil pipeline in the northeast of the country. In addition, Colombia is already planning on opening nine new tenders for road projects that will bring an estimated US$6 billion in private investment in 2015 alone.

LOOKING AHEAD

Colombia is a party to numerous free trade agreements, including with the United States and the European Union, and is a party to the New York Convention on the Recognition and Enforcement of Arbitral Awards. Today, Colombia is ranked as the third most business-friendly and as the leading reforming country in Latin America according to Doing Business 2013 of the World Bank. It is attractive for foreign investment and, according to fund flow tracker EPFR Global, enjoyed as of March 2014 the largest inflow of capital into any emerging-market country (the UK regularly ranks as one of the top sources of foreign direct investment). With its solid legal framework, coupled with infrastructure-specific initiatives such as the PPP programme and 10-year plan, Colombia's future is bright. Indeed, Colombia's Finance Minister estimates that the government's infrastructure efforts alone will allow the country to boost its annual GDP growth by one percent, which in turn will allow the country to grow at 7% annually on a sustained basis. This would be an unparalleled record when compared with peers in the region. Latin America's newcomer is charging full speed ahead and offers significant opportunities for UK construction firms.

This article first appeared in Building.

To read this Update in full, please click here.

Originally published 12 September 2014

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