North Africa’s real estate and construction industry has undergone significant development over the last five years, offering interesting opportunities for economic operators across the industry, from lenders to contractors, subcontractors, engineering and architect firms.
Remarkably, this trend is enduring despite the turmoil ensuing from the civil war in Libya, which has put a halt to a series of construction projects in that country, and the upheaval of Arab Spring and its aftermath.
For instance, Algeria has launched a series of projects for the construction of public infrastructure, such as ports, roads, telecommunications and transport facilities, public housing projects and the development of renewable energies in an effort to diversify its power production by reducing reliance on fossil fuels and to promote economic development.
Another example of this trend is Egypt, which has embarked on large construction projects, including the excavation of a second shipping lane along part of the Suez Canal worth in excess of USD 8 billion, the creation of a new administrative capital city 45 km east of Cairo that will house 5 million people and create 1.7 million new jobs, the construction of a major tourist resort on the Mediterranean coast near Alexandria and several projects in the renewable energy sector. Similar projects have also been launched in Morocco and Tunisia.
The construction and real estate industry in North Africa has thus proved its resilience and is in full expansion.
The same is true for the bordering region of East Africa: Ethiopia, for instance, is in the middle of a construction boom, with giant projects such as the Grand Ethiopian Renaissance Dam (the largest dam in Africa), and various energy projects, roadworks projects (construction, maintenance and upgrading) and real estate developments underway.
Without providing a detailed, country-by-country analysis of all the projects in each North African country, we will analyze below the common risks and problems that projects normally face in the area and suggest solutions to these problems.
PROBLEMS THAT CONSTRUCTION COMPANIES ARE LIKELY TO FACE IN THE AREA
In EPC or turnkey contracts, which are frequently used in major projects, contractors are required to take responsibility for all the aspects of the works – from design to build.
It is therefore crucial that bids accurately consider all the critical aspects of the project. Indeed, offering a competitive but insufficient bid may be ill-advised and result in the contractor failing to make a profit or even to cover the actual costs of the project.
Another critical aspect is the financing of the project. This hinges on a number of factors, chiefly the banking sector’s appetite to finance long-term projects and the contractor’s size and creditworthiness.
Cash flow shortages and late payments by the employer (or by the contractor in case of subcontractors) are also a key concern that may even lead to the works being interrupted for lack of funds. Devaluation of the local currency may seriously affect contractors that rely on imported materials, equipment and machinery.
Likewise, currency restrictions constitute a source of problems, which are exacerbated when the contract price (or a large portion of it) is denominated in foreign currency.
Foreign contractors and sub-contractors are also faced with labor market regulations imposing restrictions and quotas on the hiring of expatriate personnel in favor of local workers (e.g. the mandatory domestic-to-foreign worker ratio under Egyptian law).
Constraints of this kind can prove burdensome for contractors and sub-contractors that need specialized manpower that may not be available in the local labor market. It is thus important to identify business structures that may be totally or partially exempt from such constraints.
Finally, the efficient performance of the works may be affected when the relationship between contractors and local partners or between contractors and subcontractors get strained. This may occur for a variety of reasons, including the allocation of responsibility for delay and disruption of the works.
As prevention is better than a cure (as the saying goes), negotiating balanced and fair contracts is the key to the success of a project.
Claim management plays a pivotal role in overcoming many of the problems illustrated above. A good claim management strategy may prevent costly, lengthy and potentially unsuccessful litigation – particularly when the contractor has accepted the jurisdiction of domestic courts. And when litigation is unavoidable, effective claim management improves the chance of success.
In particular, since construction contracts typically contain time-bar provisions, timely notification of claims is critical to the success or failure of a claim and allows the contractor to focus on the relevant issues (who owes whom how much) rather than wasting a great deal of time on procedural issues.
Conversely, poor claim management, especially when coupled with poor contractual drafting, invites litigation and may result in the contractor’s inability to obtain time extensions and/or to recoup extra costs. However, it is not impossible to recover from bad drafting or poor claim management – for instance, strict time-bar clauses or limitation of liability clauses can be held unenforceable when they are inconsistent with the overarching principle of good faith.
A foreign contractor should always make sure that its contract contains an arbitration clause, possibly with the seat of the arbitration in a jurisdiction that has an independent judiciary experienced in handling arbitration matters.
International arbitration institutions commonly chosen for their experience and reliability as appointing and administering authorities are the International Chamber of Commerce (ICC), the London Chamber of International Arbitration (LCIA) and the International Centre for Settlement of Investment Disputes (ICSID).
Regional institutions such as the Dubai International Arbitration Centre (DIAC) and the Cairo Regional Centre for International Commercial Arbitration (CRCICA) are also increasingly used by the players in the area.
Foreign investors can, in any event, avail themselves of the substantive protections and the procedural remedies (including arbitration) afforded by bilateral and multilateral investment protection treaties.
Egypt, Tunisia, Morocco and Algeria are parties to an extensive network of bilateral investment protection treaties. Notably, Egypt is party to more than 100 bilateral investment treaties, Morocco more than 70, and Tunisia and Algeria around 50, with countries such as France, Germany, Italy, the Netherlands, the United Kingdom, the United States and several Arab countries.
Article first published by africanlawbusiness.com http://www.africanlawbusiness.com