Property Matters – Pay Day? Part Two

past-dueI previously estimated State debt to the construction industry in the $3.2-3.5 Billion range. I have since been reliably informed that construction industry claims against WASA are estimated to be in the $600M range, which of course would be subject to verification as discussed previously. My revised estimate (see table below) is now in excess of $3.8 Billion, compared to the JCC’s 27 July 2016 estimate of $2.3 Billion.

The size of my more recent estimate gives a severe picture of the State’s indebtedness to the construction industry, which is the sector that Central Bank research shows to be the largest employer in the national economy. Apart from that, the construction industry also has deep links to other important parts of the national economy such as quarrying; banking/finance/insurance; hardware stores; a range of manufacturers; transportation and so on.

All of this is against the backdrop of reduced national revenue and the extent to which the State intends to rely on Public Private Partnerships (PPP) in the short to medium term.

The PPP approach is attractive to the State since it allows substantial capital expenditure to continue with the cost of the works or services being met from the revenue account. The private sector is expected to do certain projects for the State and be repaid over several years. The crucial point is that the private sector will be sceptical to enter PPPs if the State is delaying settling its existing bills. If this debt to the construction sector is left substantially unresolved, it is likely that the State would have to offer what amounts to a risk premium to attract private sector groups to participate in PPPs. That would be an extra level of guaranteed profit to compensate the players from the risk of non-payment.

The State can ill afford to pay these extra monies under the PPP, so it is therefore imperative for these debts to be settled swiftly and equitably.

Issuing bonds, is one of the ways in which the State can ease the burden of settling these debts, by pushing the obligation to pay into the future. The construction industry has already signalled its willingness to consider part-settlement of these debts via bonds.

For its part, the construction industry members who are owed face a challenge in that pre-qualification procedures require contractors and consultants to specify what litigation they are involved in. A company bringing a lawsuit against the State therefore faces a kind of grim double-jeopardy of balancing the uncertainty of litigation against the negative impact of having to declare that action.

One of the main avenues for the construction industry to consider is taking a Class Action Lawsuit via the JCC, or its member bodies, on behalf of individual companies. The learned advice I have received is that it is possible to launch Class Action lawsuits in this situation. That would be facilitated in this situation since many of the companies were engaged on similar types of FIDIC contracts.

This proposal has considerable merit in that costs of litigation can be shared between the companies. This collective approach can offer significant reductions of both costs and risks to the companies of being singled-out or subjected to any punitive actions by the State and its agencies. Such an approach would also offer a higher profile to the lawsuit in terms of public visibility, which is a crucial aspect of this matter.

The challenging aspect of a Class Action approach is that it would require the affected companies to share information with their rivals in an unprecedented manner. Companies are colleagues to the extent of their membership in the various JCC bodies — representing contractors, architects, surveyors, engineers and town planners — but in an inescapable sense, we are actually rivals. So this approach would only work if members give priority to the collective interest.

Claims which have become time-barred, outside the four-year rule under the Limitation Act, should be given serious consideration for two reasons –

  1. Firstly, the delay by companies in making formal claims against the State would likely have been based on a long-established pattern of forbearance which would seldom be considered in a strictly commercial setting. The State has a duty to be exemplary at all times in its conduct, the alternative is unacceptable.
  2. Secondly, the State has been litigating in the eTeck case to sue previous Directors beyond the four-year threshold. The circumstances of that case are beyond the scope of this article, but the State’s case has been upheld in the Appeal Court.

This situation is a serious challenge to the State, the construction industry and indeed, the nation at large.

ESTIMATED STATE DEBT to the CONSTRUCTION INDUSTRY August 2016 (Revised)

MINISTRY/AGENCY DEBT
Works & Transport (includes PURE and NIPDEC) $640M
WASA $600M
Estate Management & Business Development Co (EMDB) $900M
Housing Development Corporation (HDC) $800M
Education Facilities Company Ltd (EFCL) $800M
Urban Development Corporation (UDECOTT) $93M
ESTIMATED TOTAL $3.833 Billion
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