Unprecedented move against Chinese contractor not easy, but "˜wise', local firm says
Vietnam's state-owned Construction Corporation No.1 has decided to end its contract with a Chinese supplier due to poor performance at a major hydropower project in the Central Highlands.
Beijing IWHR Corporation was terminated from the contract to supply and install the main electro-mechanical equipment for the Dakr'tih power plant also because of its unreasonable payment demands, officials from the Vietnamese company said.
The move by Construction Corporation No.1, often know as CC1, is believed to be the first attempt by a local investor to solve the persistent problem of delays at infrastructure projects contracted to Chinese companies.
CC1 officials said the 144-megawatt Dakr'tih project is a major project with a total investment of nearly VND4.4 trillion. The plant, located in Dak Nong Province, is expected to produce more than 600 million kilowatts of electricity a year.
The task of supplying and installing the main equipment was contracted to Beijing IWHR in 2007 at a cost of more than US$15.3 million. According to a post on IWHR's website, the contract was its biggest single contract.
Under the contract, IWHR was required to complete four generator sets by July 20, 2011. Even though the company only managed to finish less than half of the work by the deadline, it unilaterally pulled back key technicians from the site and failed to provide additional equipment as well as a plan to continue with other works, CC1 officials said.
Nguyen Trung Nhuong, chairman of CC1 Board of Members, said his company has paid for 85 percent of the equipment under the contract. Of the remaining 15 percent, 10 percent is supposed to be made payable to IWHR when the contract is fulfilled. The rest will be paid after the warranty expires, or two years later.
The problem is, Nhuong said, IWHR kept demanding the 10 percent payment in advance, threatening to back out of the project.
IWHR's unwillingness to cooperate caused delays to the project and serious losses to CC1, the Vietnamese construction firm said.
Too little too late
The decision to end the IWHR's contract came after many efforts to call for negotiations between July 16 and August 18, without any positive response from the Chinese company, CC1 officials said.
IWHR sent its representative for talks on September 3, only after CC1 had announced the contract termination, they added.
Le Huu Viet Duc, deputy general director at CC1, said Chinese contractors usually use many tricks to delay construction and avoid taking responsibility for their works.
Sometimes they installed operation software that expire after a short time, forcing Vietnamese investors to pay more to have the software renewed, he said.
Duc also said Chinese contractors bid very low on tasks that Vietnamese companies are capable of doing, in an attempt to drive competitors away. Then after winning the bid, they bring Chinese workers into Vietnam, taking advantage of the cheap labor force, Duc said.
Apart from delays in equipment supply, Chinese contractors have been unable to handle their contracts professionally, he said. "Some Chinese experts are not highly skilled and they often have to go back to China to seek consultation for technical problems," he said.
"There were times it took them weeks to work over a problem but they couldn't solve it. We decided to take the matter into our hands and the problem was solved in only 15 minutes."
Dakr'tih is not the first power project that has been delayed due to the slow pace of construction by Chinese contractors.
Up to 90 percent of thermal power projects under Vietnam's 2006-2010 master plan have faced delays and Chinese contractors are behind many of them.
Experts have said Chinese contractors are usually able to bid half the price of what their rivals from developed economies can offer, and Vietnam, with its limited funds, has to go with the low costs.
Vietnamese investors often make concessions to demands made by Chinese contractors, in order to keep their projects going.
Such tolerance has made the Dakr'tih project stand out as a rare case.
Duc of CC1 believed ending the contract with the Chinese contractor was the right move.
"We had been told by energy experts and officials to continue negotiating with the contractor and accept their advance payment demand," Duc said. "But now, we think terminating the contract was the wisest decision in the whole project."
"If we had given in and paid the 10 percent of the contract, it would still be uncertain whether the Chinese contractor would fulfill their obligations and the equipment would operate at the right capacity and under the proper warranty terms.
"One more day of the plant being delayed, we would have lost more than VND3 billion," Duc said.
He added that after the contract ended, progress at the project sped up. Two of the four generators became operational this month, while the others will begin production in October.
Commenting on the unprecedented contract termination, Duc said it was not an easy move. However, he said Vietnamese investors could gain the upper hand if they are careful when negotiating with Chinese contractors in the first place.
He said his company previously required IWHR to put down a contract performance guarantee of 10 percent, and now it can claim the money. The guarantee, when combined with the unpaid contract value of 15 percent, amounted to $4.5 million.
Le Thanh Huyen, a construction supervisor at the Dakr'tih project, said it's time Vietnam reconsidered its contractor selection strategy.
Prices offered by companies form Russia, Japan and Europe are actually not expensive given the fact that they are trustworthy and often right on schedule, Huyen said.
Chinese equipment and components, though cheaper, are prone to technical problems that can cause a whole power plant to stop, he added.
Vietnam, therefore, should stop favoring contractors with cheap prices, and go with reputation and quality instead, Huyen told Thanh Nien.
Nguyen Trong Oanh, chairman of the Da Nhim-Ham Thuan-Da Mi Hydropower Company, said Chinese companies are not responsible for the plants they build.
"During the bidding process, Chinese contractors are willing to accept all requirements from local investors. But when construction starts, they don't follow the contracts," Oanh said.
Then after the plants are completed, they often refuse to honor their warranty and delay fixing technical problems, causing huge losses, he said.
"We've chosen Chinese contractors because of their cheap prices. In fact it's not cheap at all," Oanh said.