Rail & Infrastructure

Not a Mecca for profitability

A Saudi railway project brings a $623 million loss for Chinese firm, CRCC

Not a Mecca for profitability

Now accessible by train: Mecca

One of the Five Pillars of Islam is the Hajj, a pilgrimage to Mecca that every Muslim should complete at least once in their lifetime. The number of pilgrims making the journey is increasing every year (in 2009, there were more than 2.5 million). That can lead to crowd control issues, which can turn fatal: in 2006, 345 Muslims were killed in a stampede.

Some help on the transport front is coming from the Beijing-owned company, China Railway Construction Corporation (CRCC), which has completed a light-rail project in Mecca, set to go operational later this month.

Although the track is only 18 kilometres long, it will be able to transport a record-breaking 72,000 passengers per hour, making it easier to move huge numbers of pilgrims.

It all sounds like the kind of success story that China wants to hear – a local company winning a big contract abroad in a promising new market. That was until the news came out last week that CRCC will make a Rmb4.1 billion ($623 million) loss on the project.

The causes are numerous: after signing the contract the client increased the planned capacity, changed other instructions and delayed land purchases, reports Bloomberg. CRCC was also forced to throw in extra resources to make sure that the project was completed on time.

In an announcement, CRCC said the fundamental problem was that “there was only a conceptual design at the signing,” with the owner adding new requirements subsequently, thus bumping up the cost. CRCC is currently in talks to receive compensation.

Clearly, it looks like CRCC’s tendering process might need a rethink. But some observers suggest that situations like this are business as normal.

“With the intensifying competition in the international engineering contract market, the contractor’s success or failure on the contract project management depends largely on [compensation] claims,” Zhang Xi, of Shandong University’s Department of Business Administration told 21CN Business Herald.

Zhang added that experienced contractors can get around 10% to 15% of the project’s total cost back in compensation, and that it is possible to retrieve as much as 30%.

CRCC is China’s second largest state-owned construction company. It has been involved in the building of many of the country’s newer railway lines, as well as other infrastructure projects such as highways, bridges and tunnels. But although the company remains a major player in its domestic market, overseas contracts are becoming an important source of revenue – to the extent that foreign orders were already accounting for more than 30% of total contracts (by value) in 2007.

Not all of the overseas projects have run smoothly. A tragedy occurred in 2004, when 11 employees of a CRCC subsidiary were shot in Afghanistan. And in 2008, a railway modernisation programme in Nigeria was put on hold when responsibility for the project was handed to a different government body, which changed its requirements. That contract was worth $8.3 billion, but the losses resulting from the changes were not disclosed.

Of course, the risks associated with working overseas will become more prominent as more Chinese construction companies sign contracts abroad.

But industry expert Niu Yonghong told 21CN Business Herald that the blame lies with Chinese companies leaping into new markets, where it can be hard to get adequate data for the tendering. Furthermore, rapid commercial expansion means that senior staff are overloaded, and project management suffers as a result.

Foreign companies doing business in China have spent years getting used to a difficult market. So perhaps it should be little surprise that Chinese companies are encountering a few difficulties themselves in their early forays abroad.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.