Fresh Opportunities

As the world’s developing nations continue to upgrade their standards of living, fresh opportunities are emerging for North American companies engaged in construction and power infrastructure services. These opportunities might be fostered by local governments eager to harness North American expertise, or might be facilitated via government agencies.

In either case, companies with contacts in foreign nations must deploy the latest technological solutions while still remaining mindful of worker safety, environmental issues and positive relations with the local community, including the hiring and training of as many local workers as possible. Below I review some of these considerations in greater detail.

First, how valuable are the opportunities involved? According to the prominent consulting firm Accenture, construction in emerging markets is set to become a $6.7 trillion business by 2020. The majority of the world’s top construction and power infrastructure contractors are based in North America or Western Europe, where fiscal deficits are likely to constrain government spending for some time to come.

This factor and a variety of others make it more likely that the major infrastructure projects worldwide will be concentrated in emerging markets for the foreseeable future. As a result, these markets are potentially attractive for North American companies. The company I serve as president and CEO, Pernix Group, has been involved in a range of both construction and power infrastructure activities in the North and South Pacific, including Fiji, the Northern Mariana Islands and Vanuatu.

In addition, the many construction projects that the developing nations require for their socioeconomic development are beyond the capability of their local industries to undertake. This is due to the size, novelty and complexity of the projects.

Therefore, it is necessary that the expertise and resources must be imported. The involvement of international finance also facilitates a wider range of development activities in these countries, including the ability to underwrite major infrastructure improvements.

Going Overseas

As for the challenges involved in undertaking overseas projects, they come in varied guises. First and foremost, it is vital to properly understand the economic feasibility of a potential project in a developing country. Sufficiently detailed financial modeling should be undertaken with respect to the likely costs and required equity investment, working capital requirements, bonding/performance guarantees, revenues, margins and after-tax profits that may be achieved.

Understanding and protecting against risks of collection is also critical when entering a new market. This analysis should be undertaken in consultation with local professionals before significant resources are invested in a new market and before submitting a tender for any project in a new country.

Equally important is a dedication to safety – ensuring a safe and healthy workplace for all of the company’s employees and subcontractor personnel working abroad. Training and incentive programs should be designed to reward employees and subcontracting teams for putting safety first.

A safety management program should be designed to prevent unnecessary work delays, which will result in savings of time and money, and most importantly, will keep the company’s worksites injury free. This also is an area where we can share North American best practices with developing country workforces to enhance the quality and safety of the work they perform in their home markets.

In some markets, local conditions of contract or local law require a specific proportion of nationals to be employed by the international party working in the country, and require preferential treatment to be given to local suppliers and subcontractors. As stated earlier, however, it is always desirable for the company to hire and train local workers within the community voluntarily as a generator of good relations.

Naturally, it is important for employees stationed abroad to respect regional traditions and business practices. A failure to understand these can significantly impact the success of an international venture. The same considerations apply to local cultural traditions, such as the importance of face-to-face meetings, and religious issues, including awareness of religious holidays and daily prayer times.

A separate consideration involves the subcontractor and supply chain quality. The domestic success of construction contractors is often driven by the strong relationships with quality subcontractors and suppliers. These relationships often take time to develop and can be the result of trial and error. As a long-term strategy, it may be possible to establish informal strategic alliances with local subcontractors and to use such arrangements to educate the supply chain as to the quality requirements for a project.

Forming Relationships

A North American company’s relationship with the government of a developing nation is naturally of paramount importance. In both public and private projects, a poor relationship or the lack of a relationship with the incumbent government can constitute a significant jurisdictional risk. It also can increase the challenges of collecting on a timely basis.

Of course, the more involved a government is in a specific project, or the more politically or socially sensitive the project, the greater the potential consequences. Working closely with the local U.S. consulate can also help U.S. companies working abroad to learn and manage the “ropes” in any foreign country more quickly.

A related issue is political stability in a developing market. This is of particular concern with respect to projects where revenue is paid by the government periodically over the long term, such as in public-private partnership (PPP) projects. Overturned or replaced governments can place PPP projects at risk.

Effectively linked to political stability, social unrest and violence constitutes a genuine jurisdictional risk for some projects. The so-called “Arab Spring” and the resulting reluctance of international participants and funders to be involved in project-financed deals during early 2011 is indicative of the potential consequences of social unrest.

Although it is not an issue in every jurisdiction, climatic issues necessitate consideration. Projects in tropical climates, for example, must take into consideration such aspects as heat, humidity and precipitation during the summer months, which affect labor efficiency and consequent work quality, as well as choice and storage of building materials. The countries with monsoon seasons also require careful climatic risk assessment and work scheduling.

Finally, it is increasingly desirable for companies to incorporate green and sustainable design and production into the overseas facilities they build and maintain. From detailed material management or the recycling of demolished concrete into base rock, to the protection of natural surroundings, environmental conservation and protection in the construction process is as a must. A dedication to implementing the standards covered by the LEED rating system is critical to establishing the contractor’s “green” credentials.

In conclusion, the mobility of labor, plant and capital, the ease of electronic communication technologies, and the advent of advanced project management techniques have made overseas projects more attractive and accessible for North American construction and power infrastructure companies. That said, these companies must formulate their strategies clearly. Careful attention to the challenges involved will not only prove financially rewarding, but also generate good will among the governments and peoples of the developing world.

Nidal Z. Zayed is the president and CEO of Pernix Group Inc., a construction and power infrastructure company offering diversified general contracting, design/build and construction management services to private clients and public agencies. He can be reached at info@pernixgroup.com.

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