With the property market in the doldrums, the construction industry has suffered somewhat of a slump both locally and regionally. But industry players insist that things can only get better. Thin Lei Win reports.The depressed construction market is a mere shadow of its previous incarnation as one of Singapore’s most successful industries. Back then, boosted by government support for a sound infrastructure, the property and construction market enjoyed an unprecedented boom. Kampong Singapore was transformed into a gleaming metropolis, with an ever-expanding city skyline and much of the population calling housing developments home. At the height of the glory days, construction demand averaged S$20bn a year. The industry that supported it was, for a city-state with a population of four million, more than substantial. Singapore Connect, a portal supported by the Department of Statistics still lists some 600 building contractors.
Bleak times
But with every boom comes a bust. The latest GDP data has revealed construction profit of just S$2bn for the second quarter of 2002, down 8.7% from the same period last year.
In August, National Development minister Mah Bow Tan revised earlier forecasts for the year from a mere S$12.9bn to S$14.6bn. According to ministry calculations, the public sector is expected to contribute S$9.4bn worth of projects this year compared to the earlier estimates of S$8.4bn. Forecasts for the private sector have been revised to S$5.2bn, against S$4.5bn previously. However, even this good news has not been able to lift the gloomy outlook of the sector.
Low forecasts and profit margins have resulted in a consistently high retrenchment rate. In the last quarter of 2001, the construction sector shed 9,482 jobs. The number increased further in the first quarter of this year to 9,871 jobs, representing the bulk of Singapore’s unemployed. Overcapacity, falling demand and lower job volumes, have all led to consolidation in the construction sector. As a result, demand for architectural services plunged more than 60% to S$4-5bn.
Mohan Pillay, head of the construction and civil engineering group at WongPartnership, says: “It is obvious that the domestic market for the construction industry is increasingly difficult.”
Contentious vs. non-contentious
Constructions lawyers are feeling the pinch too. The economic downturn has slowed the construction industry – with many withdrawing from projects altogether – translating into a significantly lower number of construction transactions.
Gordon Smith, a partner at Baker & Mckenzie Wong & Leow, says: “A major part of our non-contentious work in Singapore has come in the last few years from US firms investing in Singapore on projects such as pharmaceuticals, computer manufacturing and other industrial facilities. Given that US investment on capital projects in Singapore has reduced overall with the US economic downturn, we are seeing some reduction in non-contentious work.”
However there is a flip side. Contractors are more willing to pursue disputes in the hope of a positive financial outcome during tough times, resulting in an increase in contentious work for law firms.
“To some extent, the greater proportion of contentious cases in this area is the natural consequence of the economic situation. A return to a more robust economic position should see an increase in non-contentious construction work returning to the market,” says Pillay.
Not all in the marketplace regard the rise of contentious work as a positive outcome. “In terms of volume of work, it has certainly increased because of the nature of the work,” says George Tan, director of ChanTan LLC. “But then the point is whether you simply want to file every case whether they’re meritorious or not.”
Compounding concerns is that alhough litigious work may be on the rise, cash flow problems in the industry mean that lawyers do not always get paid. “From the lawyer’s point of view, there is a tendency to see growth in terms of work,” says one lawyer. “But from the client’s point of view, these times are extremely unproductive.”
But although times are tough, the expected exodus of construction lawyers from Singapore’s shores has not occurred. Unlike conveyancing, which crashed with property prices and completely disappeared as a practice from some firms, construction law practices have remained relatively stable. The Society of Construction Law estimates that the numbers continue to hover healthily at around 200-odd practitioners.
There are several factors that have held the market steady despite the slump, not least of which are the ongoing government funded infrastructure programmes. Although the large contractors snap up most of the S$300-400m projects, sub-contracting to the smaller firms helps maintain market equilibrium.
“The position would have been worse if not for the public sector works, like the MRT Circle Line, SMU City Campus Project, New National Library Building Project and the Ministry of Education Schools Project,” says Latiff Ibrahim, head of construction, engineering and infrastructure projects at Harry Elias Partnership.
Measured growth
Any possible turnaround remains dependent on how long, and how sustainable, economic recovery will be. But there is hope. The government has announced a 2–4% growth in GDP this year, with analysts optimistic that the final result will be at the top of this range.
“I see a more measured growth of the construction industry in line with Singapore’s GDP growth,” predicts Latiff. “The present government is not going to allow any real estate asset inflation to build up in Singapore.”
Introduced with the aim of making the industry leaner, meaner and better equipped to handle tough times is the new Contractor Registration System (CRS). The new system, which became effective July 1, ranks contractors using seven grades – A1, A2, B1, B2, C1, C2, C3 – replacing the G1 to G8 grading. Contractors hoping to achieve or retain top rankings have to increase their minimum paid-up capitals and increase their number of professional staff. As the grades get lower, so does the tender limit.
Smith says: “These changes, coupled with legislative changes such as higher standards of construction noise control and minimum ‘buildability’ requirements, are intended to increase efficiency and drive consolidation of the industry. While they are likely to raise the efficiency of the industry, they will also mean that the less able construction companies will continue to fall by the way side. On the plus side, those firms which survive are likely to emerge out of the downturn with stronger organizations.”
Pillay adds: “The new CRS imposes more demanding criteria for contractor registration by the way of turnover, financial strength and professional manpower requirements among others. The object is probably to encourage mergers and acquisitions among contractors doing public sector work and to put the industry in a better position to expand into the region. The short-term impact will be a pain as contractors struggle to meet these more demanding criteria.”
This ‘pain’ of the contractors could produce an unexpected bonus for the local market. With local litigation cases expected to rise as contractors either merge or succumb to market forces, the recent push by the Singapore International Arbitration Centre (SIAC) for more business may be realized. The efficient court system enjoyed by Singapore has traditionally reduced the advantages of arbitration as seen in other jurisdictions. However, it is possible that for construction disputes where a large amount of capital is involved, the arbitration process may again find favour.
But the most positive development for the construction industry is the increasing push for regional business. Initially a pragmatic move that has allowed firms to meet their bottom line, more and more law firms are taking on regional construction projects, mirroring the current trend towards globalization. ChanTan LLC recently advised on a harbour project in Sri Lanka; Harry Elias Partnership is involved in two deals in China; while WongPartnership has advised on construction deals in both Vietnam and Mauritius. “Such work will receive a boost as more construction clients venture overseas as part of their regional expansion programmes,” says Pillay.
With the Beijing Olympics on the horizon, the opening of the Chinese market, cautious signs of improvement in the global economy and a consolidated industry, there is real hope the construction industry might emerge relatively unscathed.
The Society of Construction Law, Singapore
The Society of Construction Law, Singapore is seeking registration as a society under the Societies Act. Although associated with the Society of Construction Law, UK and Society of Construction Law, HK, it is an independent association.
Philip Jeyaretnam, a partner at Helen Yeo & Partners, is the proposed president of the Society. The founding members include senior members of building professions and prominent individuals including both developers and contractors. Membership is not limited to lawyers. Anyone with an interest in construction law and project administration is welcome to apply.
ChanTan LLC
Said to be the only Singaporean specialist construction law firm, ChanTan LLC has been going strong for 15 years. Its partners took time out to explain to Thin Lei Win why there will always be room for such a niche practice.
Chan Tan & Partners – now known as ChanTan LLC after incorporation in 2001 – was established in 1987. Although the partners didn’t intentionally set out to launch a boutique practice, let alone one focusing on construction, the firm found it difficult to develop a general practice. Says George Tan: “[General practice] requires quite a lot of public relations and we are not really cut out for that. So we had to go for complex work that does not need all these additional duties.”
The ball really started rolling when Raymond Chan began giving advice to the Real Estate Developers’ Association (REDAS) and the Singapore Institute of Architects (SIA) at the same time as Tan was advising the Singapore Contractors Association. The two, together with a third partner Monica Neo, decided to boldly go where few had gone before – to practise construction law exclusively. And they haven’t looked back.
Tan says: “Maybe it is not fashionable to talk about integrity or singularity of purpose anymore, but we made up our minds that we wanted to run a firm that is principle-based rather than the pursuit of profits. That sort of knocked us off from general work. And gradually, the kind of people who want to see us based on those terms are in the construction industry, where we’ve built up a certain expertise.”
Selective over the types of work it pursues, the firm’s mission statement includes the following sentence: ‘This firm will always select our clients, not the other way around.’
ChanTan practises both contentious and non-contentious construction law but is one of the few firms that does not handle conveyancing. Both Tan and Chan are accredited arbitrators and, with Neo, make up the board of directors at ChanTan LLC, which has five lawyers. Being also chairman of the multidisciplinary practice (MDP) committee of the Law Society, Tan is hoping for positive and concrete developments over the MDP debate, in order to supplement ChanTan’s headcount of lawyers and technical staff.
Along with embracing the opportunities that come your way, being the new kid on any given block brings with it a set of responsibilities as well. Tan, Chan and Neo have been active participants in the development and promotion of construction law, either through lecturing in the area or through the contribution of numerous articles.
Tan, Chan and Neo also acknowledge that clients can be very demanding and that lawyers who wish to practise construction law may find themselves faced with a very steep learning curve to climb.
The relative lack of resources – both in human and monetary terms – that are found at a specialist firm have meant that they have had to be deployed efficiently and cost-effectively. ChanTan has in its camp two engineers and a quantity surveyor and this has ensured an in-depth analysis of cases.
Evidence of their success can be seen in their involvement in numerous high profile construction projects, ranging from the Esplanade, Jurong Island reclamation works, Singapore Post Centre and One Raffles Quay. And in the majority of contentious and non-contentious cases, the name of ChanTan can often be found.
The firm joined the International Council for Building Research Studies (CIB) in 1995 and was invited to become one of the founding members of the International Construction Law Alliance (ICLA) in 2000. ICLA’s five other founding members originate from Hong Kong, the PRC, Australia, Europe and the US. Common to each is the recognition within their own jurisdiction for operating impressive construction law practices.
Neo says the idea behind the alliance is to service clients worldwide. Although the firm is yet to witness a flood of cases as a result of its ICLA membership, Neo says the experience has helped develop their regional and international perspectives.
ChanTan also maintains an informal relationship with UK construction and IT specialist firm Masons, following the dissolution of its alliance with Cooma Lau & Loh in 2001. Chan says: “So far as construction matters are concerned, Masons recognizes what we do. Basically, there is the understanding that we’ll support them and they’ll support us.”
With its commitment to the ICLA, ChanTan has no future plans to formalize its Masons ties although the non-exclusivity of ICLA would allow it to do so.
Being committed to a particular industry means the firm’s fortunes can be more or less tied to it. And that means having the clients’ interests at heart.
“Our concern for the clients is that the cost of litigation or arbitration can be quite prohibitive. It takes a company with sufficient resources to pursue the claim. So if there are alternative ways to resolve the dispute, we’ll do it – be it mediation or even negotiated settlements,” says Tan.
He adds that his firm has good reason to feel confident of its place in the construction sector in Singapore, even though that sector has suffered a downturn of late.
“We always feel that even if the construction industry shrinks drastically – which we don’t think will happen – we will have a place somewhere,” he says. “In that sense, it allows us to maintain our independence. Our growth might fluctuate, but we’re here to stay.”