Transformation in the construction industry: Keeping pace with change
Three pillars are at the heart of global efforts to boost sustainability and make our built environment cleaner, greener and more socially responsible: construction, energy and technology. These three industries have come to be intricately connected in an era of transformation on a scale never seen before.
Across the world, leading construction industry players are developing innovative projects and deploying new technology to transform the way we live and work.
Meanwhile, energy and mining & metals companies in rural Africa are increasingly installing generating assets and distribution facilities to ensure continuity of energy supply for their operations.
The predicted increase in flexible working may well result in a more widespread move to the development of "smart cities," with technology built into the heart of daily life.
All this is happening amid the fallout from the COVID-19 pandemic, which has shifted perceptions of how the world may look in the future.
But the pandemic has also forced project owners, developers and contractors to look at their contractual terms more closely, as budgets are cut and works are interrupted due to government restrictions.
This compendium of articles, written by colleagues from offices across the world covers a wide range of issues, examines some of the key topics relating to the shifting relationship between the construction, energy and technology sectors in our rapidly changing world.
It looks at the role the construction industry is playing in the development of distributed energy projects in the US and battery storage in the UK.
In the Middle East, the boom in the construction of smart cities has led to the use of new project structures to embed energy -saving measures within the developments. In Africa, renewable energy projects driven by public procurement programs have attracted investors and developers from around the world, drawn by the vast opportunities on the continent.
Increasing work in a volatile environment, however, means that risk allocation and mitigation are more important than ever. Courts in regions as diverse as Russia, India, Latin America, the Middle East and the UK have all been examining force majeure and risk clauses within contracts. Industry players would be wise to take note of these decisions and trends as markets are beginning to return to post-coronavirus normality.
Insolvency can also be another resultant risk, with recent reforms in the UK, Australia and Singapore affecting the construction sector if contracts are not carefully reviewed and, potentially, redrafted to reflect the new rules.
Although the current environment may have raised awareness of risk in construction projects, there is no doubt that the recent disruption and focus on innovation, new technology and sustainability is bringing immense opportunity to the industry around the world with a real chance of lasting impact.
“Focus on innovation, new technology and sustainability is bringing immense opportunity to the construction industry around the world”
Construction considerations in the US distributed energy market
The commissioning and startup phase of any energy project—liquefied natural gas, power, renewables, petrochemical—represents an important, and potentially perilous, transitional period during the construction process.
The coronavirus pandemic has had, and will continue to have, profound effects on the global construction industry. There have been and will continue to be substantial delays and cost impacts as a result of labor shortages, disruption to supply chains and financial pressure.
Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.
In 2020, the UK courts heard two significant cases with an impact on the way construction contracts and subcontracts are drawn up and carried out, affecting employers, contractors and subcontractors to major projects.
Increased battery storage capacity can and is being encouraged in order to facilitate the move towards the decarbonisation of electricity generation and can contribute to greater resilience and efficiency of integrated grids.
COVID-19 has had a significant effect on construction projects around the world, delaying work and forcing many parties to go back to their contracts and examine whether there is scope for a claim, and Saudi Arabia was no exception.
Where large projects exist, disputes will often arise. The Indian construction sector is no exception, but the lack of a standard form contract and the option of several forms of dispute resolution means that resolving disputes can be complex.
Although there was a drop in activity in 2020 caused by the COVID-19 pandemic, particularly in East Africa, in the past few years the African continent has seen sustained activity driven by private and foreign investment in major projects in the transport, oil & gas, and renewable energy sectors in particular.
Projects have included the construction of the first banked liquefied natural gas (LNG) terminal in sub-Saharan Africa in Port Tema in Ghana; Total’s multibillion-dollar investment in a Mozambique LNG project; the US$10.9 billion Tahrir petrochemical complex in Egypt; and the Indorama Eleme’s multi-stage fertilizer project in Nigeria.
Other activities generating interest include a sustained focus on the development of renewable energy and electricity generation generally. For example, the South African Department of Energy launched a risk mitigation independent power producer (IPP) program in 2020 aimed at procuring 2,000 MWs of electricity on an expedited basis.
South Africa is also expecting to launch the fifth round of its well-established renewable energy IPP program in the first half of 2021, aimed at procuring a total of 6,800 MWs of energy from wind and photovoltaic generators. Botswana has published an integrated resource plan that includes an allocation for the procurement of energy from photo voltaic, concentrating solar power and coalbed methane projects to reduce its reliance on its neighbors for electricity.
Interest in these types of projects in Africa has been encouraged through the involvement of development finance institution-sponsored and auction-driven renewables procurement programs, which have helped reduce costs significantly. This type of procurement increases the potential for price discovery, allows financing to be tailored to specific programs or government objectives, and helps countries attract more private investment through clearer and transparent procurement frameworks.
These auction processes have not, however, been without flaws. Delays between the submission of bids and the awarding of contracts or the commencement of construction have been common, exposing developers and contractors to inflation and currency fluctuations, and negatively impacting the appetite of some developers for such projects.
The Chinese connection
Another important and consistent feature of many major projects in Africa has been the continued support and involvement of Chinese contractors, which remains strong, although last year saw a slight decline.
Research by Deloitte found that China funded 20.4 percent of African projects in 2019 and 15.1 percent in 2020, making it the second -biggest source of funding after African governments themselves. Chinese contractors constructed an estimated 140 African projects in 2019 and 121 projects in 2020, accounting for more than of 30 percent of all major projects in both years.
While this represents a decrease from the highs experienced in 2018, it is also broadly in line with the drop in major construction activity experienced during and as a result of the 2020 pandemic.
Despite this slight decrease in its involvement, China still maintains a strong presence in various regions, particularly in southern Africa, where it has funded in excess of a quarter of all major projects in this period. Chinese funding and construction activities have mainly been directed toward the mining, oil & gas and renewable energy sectors, with South Africa and Mozambique being the two largest beneficiaries, according to IJ Global.
In West Africa, Nigeria has been the largest recipient of funding sourced by China, which has been directed toward Nigeria’s transport sector, particularly the financing and construction of standard-gauge railways.
The risks of African projects
Risk allocation in African projects broadly follows international trends. Key risks specific to the continent that can be especially challenging include currency volatility—this has, for instance, limited debt funding sources for South African rand-denominated IPP programs to local South African banks. Meanwhile, the comparative unpredictability of commodity prices and interest rates makes fixed and firm price contracts less common than elsewhere, or significantly increases the costs of these contracts.
Secondly, the COVID-19 pandemic continues to pose a threat to the completion of projects as a consequence of the actions taken by various authorities to stop the spread of the virus. Many African countries, such as Nigeria, Ghana, Kenya and South Africa, have imposed hard lockdown measures in response to both waves of the pandemic, which have resulted in delays to existing construction projects.
Finally, political instability, concerns with business practices and conflict in certain areas represent significant threats to the construction of infrastructure in these areas. There have been a number of eruptions or escalations of conflict in certain areas which have the potential of delaying significant projects, whether as a consequence of the proximity of conflict to those projects or as a result of such conflict.
Despite these risks, overall projects in Africa are still thriving. They will have weathered the global pandemic relatively well because of the great drive for infrastructure on the continent, direct foreign investment and international support, and the increasing robustness of contractual terms.
All this allows for better risk mitigation, which should encourage continued interest in the construction of and investment in African infrastructure projects for years to come.
Rhulani Matsimbi (Trainee Lawyer, White & Case, Johannesburg) contributed to the development of this publication.