Koreans do it rather differently

18 October 1996

A CURSORY glance at recent awards suggests that the big projects in the Middle East are concentrated in the Gulf region, and in the oil and gas industry in particular. The winners are the big engineering companies from the US, Europe and Japan, and their local partners. With most of the essential infrastructure in place the giant construction contracts of yesteryear are few and far between. Some of the world's largest contractors have moved on to seek their fortune elsewhere and now maintain a much reduced presence in the area.

Dong Ah Construction Industrial Company of South Korea manages to defy all the conventional wisdom about working in the Middle East. Since it arrived in Saudi Arabia in the early 1970s it has rung up regional orders worth more than $13,000 million. Far from seeking diversity, it has for the past 12 years focused its energies on a single country and a single project. At one time it accounted for Dong Ah's entire overseas turnover.

The Great Man-made River (GMR) project in Libya looks like madness to some, an epic undertaking in an erratic country. To Dong-Ah, it is the eighth wonder of the world. In April, it also delivered the company's largest ever order and the biggest deal seen in the region for many years. The company is to take on a third and fourth phase of the gigantic water transfer project for an estimated $10,000 million and there is more to come. Far from winding down its presence in a country that is a political pariah and economically isolated by sanctions, Dong-Ah is all set for the long haul.

The company owes its involvement in GMR more to chance than calculation. Sitting serenely in the padded comfort of head office in Seoul, overseas president Jin Sam Chung recalls hearing a rumour in 1981 and heading for Houston immediately to find out more about it. The US' Brown & Root was working on initial plans to raise water from aquifers deep in the desert of central Libya and pipe it to the populated coastal regions, turning the desert green on the way as it irrigated vast areas of arid countryside. Chung was determined that Dong Ah should get involved, and the rest is history.

There may have been occasions when Chung regretted his original enthusiasm but he prefers not to mention them. The $3,575 million, Phase-1 turnkey contract that began in January 1984 ran into difficulty almost immediately due to US sanctions against Libya. The first element of the contract was the construction of a pre-cast concrete pipeline factory to run out the seven-metre sections of piping that would transport the water. It was specified to a US standard using vertical construction rather than the more familiar horizontal methods. No US engineers could enter Libya to help with the construction. 'There was a seven-month delay as Dong Ah struggled to master the pipeline plant,' says Chung.

The entire project uses US codes and specifications but Libya was barred from procuring in the US. The sanctions played havoc with Dong Ah's original costings. For example, the company had to buy pipe coating materials in Europe at twice the price of the US alternative. Ductile iron pipes had to be bought in Japan instead of the US, adding $250 million to the projected costs.

'At the early stage of the project the balance sheet was not good,' says Chung. 'Due to sanctions it was not possible to get US technical support. It was a single currency contract and the dollar was devaluing. Devaluation on top of the sanctions, plus purchasing from Europe and Japan - the balance sheet was very bad.'

The first phase was completed in November 1993 when water started flowing to the coastal city of Benghazi at a rate of about 500,000 cubic metres a day (cm/d). This is only a quarter of the pipeline capacity which will not be fully used because of problems with some of the first well fields. About 120 wells were drilled by Brazil's Braspetro but only a third are being used. A huge area has been prepared for use as farmland but there is not enough water

available to develop it yet.

Lessons learnt

Dong-Ah had learnt many lessons by the time it came to negotiate GMR- 2 in 1990. The first phase was a dollar only contract but Dong Ah made sure the next, $4,632 million deal was more flexible. 'Through this experience we asked the client to introduce a system for balancing money market fluctuations,' says Chung. 'Payments are made in five different currencies fixed to the bidding day rate. From Phase-2 we have not been affected by exchange rate factors, so we have recovered.'

Work on GMR-2 is scheduled to run to the end of the century although it has already passed a major milestone. In late July, the first water from the system arrived in Tripoli and will be available to the capital at an initial rate of 400,000 tonnes a day (t/d). By the time that GMR- 2 is handed over in 2000 it should be delivering 2 million t/d of water to Tripoli, for agriculture and for industry at the Misurata complex.

Despite the much-improved financial details of the project, GMR-2 is still no ordinary contract. In addition to the US sanctions which hampered the first phase, Libya has since become subject to UN sanctions too. 'What Dong Ah is concerned about is when UN sanctions are escalated,' says Chung. 'Then we will have real problems.'

The ban on air traffic means that the contractor has to rotate 14,000 expatriate personnel via Tunisia which is inconvenient, expensive and dangerous. Several staff have died in road accidents on the long overland route. Most of the workers are from Thailand, Vietnam, China and the Philippines; only about 15 per cent are Korean.

Details of the second phase expansion have also been changed. Plans for a 15-kilometre tunnel at Tarhunah which would have carried water under the mountains to serve settlements to the west of Tripoli were dropped on the instructions of revolutionary leader Muammar Gadafi. Observers believe the decision may have been intended to head off persistent US accusations that Libya was hatching plans to build a chemical weapons plant in just such a concealed location.

Needless to say, the accusations continue. A huge regulating tank being built at Garabuli to maintain a constant supply of water to Tripoli has aroused suspicions, as has a similar structure nearby being built by a German contractor for Tripoli municipality. Both of the underground structures are about 250 metres square and 10 metres deep. Chung wonders whether these two massive constructions are not being wilfully mistaken for something more sinister by observers who are determined to find evidence of secret chemical weapons installations in Libya.

In April, Dong Ah received confirmation that it will be retained to build phases three and four of the GMR. The work involves another 1,700 kilometres of pipeline to carry water to new centres, as well as the development of new well-fields. The third phase alone will keep the company busy until 2006.

The new contracts still have to be hammered out in detail. 'So far we have discussed GMR-3 not as a separate independent contract but as a 'changed order' to Phase-2, so all the conditions will be the same,' says Chung. 'We asked them for escalation as phase-2 was calculated on 1987 figures but this escalation question is not yet fixed.' Chung says that higher labour costs and the rising steel index are the most expensive areas of escalation.

The third phase is valued at $5,100 million; the fourth phase is estimated to cost $4,900 million. Together the new deals will lift the total value of Dong Ah's GMR contracts to more than $20,000 million.

Despite the impressive scale of the future GMR contracts the project is unlikely to ever dominate the Dong Ah order book as it did in the early 1990s. Until 1993, GMR accounted for almost 100 per cent of Dong Ah's overseas turnover of $1,200 million. In 1995 it fell to 85 per cent. Chung says that it should be reduced to 65-70 per cent of turnover this year.

The company has been spreading its wings again, reducing its reliance on Libya by picking up business elsewhere. New business includes a $600 million hydropower project in Laos and a land development scheme in Australia. Last year it won the first phase of the Bakun dam project in Malaysia which could have an eventual contract value of $6,000 million. Dong Ah is also involved in housing and property development in China and the US. It has six self-financed housing and condominium contracts underway in the US and plans to expand its investment-type development project portfolio in the US and Australia.

The years in the Middle East, and in Libya in particular, have earned the company a wealth of experience which it can deploy worldwide. Chung says that Dong Ah can be of assistance to water transfer projects in Africa, China and elsewhere. Senior engineers are working on a Chinese masterplan for transporting water to northern China and Chung has even been invited by the city of Las Vegas to help work on solutions to future water shortages. 'All around the world there is interest in water conveyance systems,' he says. In the Middle East, the company has been approached by Jordan to help with the Disi aquifer project but there is no finance available for the scheme. 'We could do it,' says Chung. 'We could manufacture pipes in Libya and transport them by barge.'

Like the rest of Korea's major corporations, Dong Ah sees its future as a multinational enterprise, reducing its reliance on the domestic market and moving into new areas overseas. The expansion into major projects in south-east Asia is part of the push to broaden the company's geographical spread, as is the creation of new business divisions in the US and Australia.

Dong Ah is also breaking away from pure construction business and planning a departure into information and communications. The long-term business plan is nothing if not ambitious. It envisages a 50 per cent expansion in turnover to $4,272 million this year, and a further leap over the next four years to $14,193 million in 2000. As its track record in Libya suggests, Dong Ah likes nothing better than to think big.

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