CAPACITY BUILDING OF LOCAL CONTRACTORS: TECHNOLOGY TRANSFER THROUGH JOINT VENTURES Background In its Position Paper entitled “Lifting Foreign Equity Restrictions for EPC Contractors” issued last September 2011, the Philippine Contractors Accreditation Board (PCAB) recognized the “need to consider relaxing the current policies on foreign contractors entry into the Philippines for the purpose of encouraging technology transfer and capacity building of local contractors. This can provide certain benefits to promote and accelerate the growth and development of the construction industry.” In particular, PCAB proposed to allow up to 95% foreign equity for construction projects where there is limited local capacity. Capacity building – through technology transfer – of local contractors is important because of the following: . expansion of technical expertise of local contractors; . track record improvement, enabling local contractors to bid for more projects abroad; . Public-Private Partnership (PPP) projects demands bigger and more capable local contractors; and . further development of the construction industry, which is beneficial to other industries and the economy as a whole. Local contractors, in general, are capable of undertaking infrastructure construction projects. Attached in Annex A is the list of major projects undertaken by the local contractor, whether as proponent or sub-contractors. They have limited capacity, however, on projects that require modern or advanced detailed engineering designs, technology or equipments. Often, these projects include international airport terminals, power plants, oil exploration, and gas and renewable energy projects. In those areas where local contractors have limited capacity, foreign contractors should precisely be encouraged to enter in the country. This entry can facilitate technology transfer and capacity building for the local contractors. Technology transfer happens when there is a joint venture1 agreement between foreign and local contractors in projects or its components where local contractors have limited capacity in.2 1 Joint venture means “a cooperative arrangement of licensed constructors to jointly perform a single specific undertaking/project with each of the partners contributing to the performance” (Implementing Rules and Regulation of RA 4566 or the Contractors’ License Law). 2 This is widely supported by studies in the past. For example, “formation of joint ventures between local and foreign” (World Bank, 1981) and “integration of local and foreign contractors in construction projects can facilitate the transfer of technology” Carrillo (1993). Furthermore, Simkoko (1989) argued that “integration of both local and foreign technological and managerial capabilities in the project delivery process can facilitate the transfer of technological capabilities to the developing countries.” This implies that a partnership between foreign and local contractors can lead to improving local contractors’ technical capacities. Joint Venture is much more preferred over subcontracting because it does not just enable technology transfer, but also ensures that the track record of local contractors improve significantly. Project undertaken can be formally attributed to the local contractors, and thus, they can bid for bigger and more projects locally and abroad. In the past, joint ventures between local and foreign contractors have been very successful. The table below shows examples of successful joint ventures. Through joint ventures, foreign and local contractors work closely together and engage in productive discussions, hence fostering transfer of technology. Successful Local-Foreign Contractors Joint Ventures Project Local Foreign Technology Project Cost Year Contractor Contractor involved Completed Eugenio Lopez, Jr. Datem Beta Form Precast and Center (studio/office (Australia) form works Phh708.5 M 1998 buildings) system LRT 1 North Extension DMCI Siemens Signalling – (German) Electro- Php10.1 B 2010 Mechanical Works Ilijan Combined-Cycle First Balfour NACAP Design, Power Plant (Netherlands) Installation Php301.6 M 2000 Source: respective company website; interview with construction companies . On the other hand, the case of infrastructure projects financed by loan from other countries (i.e. official development assistance or ODA) can lead to foreign entry with minimal technology transfer. Usually in ODA-financed projects, foreign contractors (from where the loan was sourced) serve as the general contractor and local contractors will just be tapped as sub-contractors.3 . While policies vary, joint ventures have become a norm in encouraging technology transfer in several Asian construction industries. These construction industries, especially Malaysia, have already benefitted from the positive effects of foreign-local joint ventures to their respective construction industry. Salient Features of Joint Venture Policies in Asia Country Policy on joint ventures Brunei Foreign investment policy ensures foreign business activities are done thru joint ventures with local companies, preferably with Brunei partner holding a 51% stake Malaysia Different set-up for joint venture arrangements: a. foreign equity ≤ 30%; local equity ≥ 70% b. for ASEAN citizens: foreign equity ≤ 51%; local equity ≥ 49% *treated local entity and can undertake any project c. foreign equity ≥ 30%; local equity ≤ 70% *treated as foreign entity can undertake project to project basis only Thailand Foreign contractors may undertake projects with foreign funding, private sector projects with concessions from government and projects calling for high technology thru joint venture with local company Vietnam Foreign contractor must have a joint venture with at least one identified local contractor Domestic funded projects are open to foreign contractors. Value is usually less than US$1 M 3 Dr. Eduardo C. Tadem discussed this on details in his paper “The Crisis of Official Development Assistance to the Philippines: New Global Trends and Old Local Issues” Successful Joint Venture Projects in Asia Project Local Contractor Foreign Technology Project Year Contractor involved Cost Completed/ On-going Electrification of Gamuda (Malaysia) Malaysia Laying of two new US$3.8 B 2013 Double Track Mining parallel tracks, electrification of Project (Electrified Corporation tracks and Railway Project) (international signalling holdings) systems Brunei Shell Syarikat Kejuteraan Wood Group Construction and US$160 M 2012 Petroleum Sistematik Sdn Bhd PSN PLC maintenance of Company offshore (SKS), Petrokon (WGPSN) offshore projects Utama Sdn Bhd (United activities (BSP) Kingdom) (Brunei) Western Access GrupoConcesionario IJM Toll way US$350 M 1997 Tollway (55 km del Oeste S.A Corporation construction, expressway) Berhad operation Argentina (Malaysia) The infrastructure projects under the PPP program of the Aquino Administration provide a huge opportunity for the local construction companies to forge joint ventures with foreign contractors, and hence encourage technology transfer. Given the cost and components of several PPP projects, this also provides local contractors to undertake EPC (Engineering, Procurement, Construction) contracts. Through joint ventures, foreign contractors will enable local contractors to learn better the “engineering and procurement” components of an EPC contract. This will make local contractors a more fully capable EPC contractor. Given the global importance of EPC, more experience on this type of contract will allow local contractors to bid for bigger projects abroad in the future. While there are already local contractors (e.g. EEI and DMCI) that undertake overseas projects, it must be pointed out that there has been a decline in the number of those overseas projects. Insufficient marketing promotions and financial assistance have led to the decline. Given sufficient marketing promotions and financial assistance and expanded technical expertise of local contractors, this can lead to increase in the number of overseas projects. In view of the preceding discussions, PCA therefore recommends the following: 1. Encourage foreign contractors to undertake joint venture construction projects where local contractors have limited capacity to foster technology transfer. 2. Adopt similar programs implemented by other countries (especially Malaysia4) to foster joint ventures with foreign contractors, especially in the following areas: 4 Salient features of ACT 520 (Lemabaga Pembangunan IndustriPembinaan Malaysia) on joint ventures: - foreign contractors are registered on a per project basis - no equity limitation for projects requiring high technology or producing priority products for the domestic market - foreign contractors are obliged to ensure transfer of technology & train local personnel - 100% foreign company incorporated outside Malaysia is required to establish a representative office - contractors are required to secure a provisional license before bidding & registration after winning the bid - no foreign equity limitation for joint operation not locally incorporated but can undertake on a per project basis only a. components of projects related to gas, oil exploration, and renewable energy that require new or modern/advanced technology or equipment; b. for projects related to international airport terminals and power plants: i. detailed engineering design ii. operation iii. maintenance c. develop/enhance new/existing policies concerning capacity-building of local contractors; 3. Establish a center for