Development of port infrastructure in uncertain waters

Whilst the full political and economic fallout of Brexit remains uncertain and may not be known for some time, the recent announcement of the go ahead for Hinkley Point, the UK Government is demonstrating that the UK is keen to encourage investment and development of the UK’s infrastructure projects.

With the UK being a major economy, its Port Infrastructure plays a significant role in the UK economy. Indeed, in 2012 the Government published a National Policy Statement for Ports  in which it confirmed that it wished to see port development as a driver for economic growth with benefits not only for the overall UK economy but also a driver for local and regional economic growth.  Peel Port’s £400million investment in the new deep-water container terminal at the Port of Liverpool,  the completion and opening of DP World London Gateway, Associated British Ports £50M investment in Southampton port and the Port of Dover’s commitment to the redevelopment and regeneration of its Western Docks are testament to this.

Investment in the UK Ports and Marine sector means there will be significant opportunities for those operating in the sector.  However, given the uncertainty and the fact that many UK port developments involve cross border transactions, Brexit has created a number of risks and issues which contractors, port owner’s and operators should consider than they may have done previously in a pre-June 2016 world.  These include:

Currency/Price Fluctuation

With the Pound at its lowest value against the Euro for five years and with concerns that it may fall further, there is currently significantly more currency / price volatility in the market than in recent years.  Given that substantial elements of Port Infrastructure involve materials, such as steel, which may be purchased abroad and with a significant proportion of the marine contractors being non-UK based, price / currency fluctuations in contracts is a real and significant issue.

Within the UK, the traditional approach has been to use sterling as the sole currency with little, if any, regard to fluctuation.  This is likely to change.

Without a currency / price fluctuation arrangement in place, contractors put a risk premium on their tender prices.  In perhaps more certain times this was less of a risk for employers and contractors but given the volatility of currency will change. 

Ways in which this risk could be managed in the contractual framework include:

• Differentiating between elements of the works to be procured inside and outside of the UK and make allowance for payment in different currencies;
• Incorporation of clauses which expressly fix rates, or caps and bands on currency fluctuations

 From an employer’s perspective, having allocated the risk, it needs to take steps to manage that risk allocation.  If it is sufficient in size and regularly uses foreign currency, it could simply buy the requisite amount of currency on entering into the contract, transforming the employer into a currency trader.

Alternatively the employer could take out a forward foreign exchange contract, where it agrees to buy or sell a specific amount of foreign currency at a certain rate on or before a certain date. Clearly there is a risk involved if the currency rate falls. There is also a cost for this, but it is generally dealt with in the exchange rate itself. This does however rely on a strong degree of certainty in the requirement.

Finally, an employer could take out a currency option or similar products from the wide range on offer.

One factor to consider when considering which option suits the project / employer best, is the potential for the package being procured in a foreign currency to be varied and or for claims to emanate from and thereby leading to a greater requirement for foreign currency than the original package value.  Obviously, cost based contracts are far more susceptible to this issue than rates based contracts where the rates dictate to an extent the cost of any variations.

Changes in Law

Whilst the laws in the UK are not expected to change for some time, projects which may be coming on stream around the anticipated time of the UK’s exit in March 2019 may be exposed to greater risk from changes in law. 

Most standard form contracts entitle contractors to additional time and money in the event there is a delay to the project or additional cost arising from a change in the law during the currency of the project.  Employers often amend such clauses so that only changes in law which are not reasonably foreseeable result in additional time and money.

However, in a more uncertain world, perhaps the parties require a more sophisticated mechanism for dealing with this risk giving greater consideration to which party is best placed to assess and provide for the risk. For example, does the contractor have greater visibility on how import duties and a smaller labour pool would affect price and delivery? Or would the employer prefer to carry the risk and put in place a contingency rather than pay a risk premium on the contractor's price?

Alternatively, the parties could consider splitting the risk. For example, the contractor accepts the risk of changes in law except for those directly due to Brexit (or, more narrowly, such as increases in import duties and restrictions on labour).

Summary

Although opportunities remain for the development of the UK Ports and Marine sector, despite the Brexit decision, it does carry with it risks.  In these uncertain times and as with any procurement of substantial infrastructure projects, open and frank communication between the contractor and the employer with clear contract mechanisms in place can only be beneficial to the parties in having a full understanding of their respective risks under the project.

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This article was written by Michael O'Connor, senior associate. For more information please contact Michael on +44 (0)20 7427 6441 or michael.oconnor@crsblaw.com