The Roadmap to Successful Ventures in the Middle East Series – No 5

Managing Credit and Payment Risks

By Hugh Fraser, managing partner

Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region. My fifth theme is “Managing Credit and Payment Risks”.

The Middle East, as much as any international operating environment, is marked as one with high credit and payment risks. Contracts held directly with NOCs or major tier 1 contractors are rarely characterized as payment risks but payment delays are not uncommon. However, businesses further down the supply chain in fiercely competitive EPC and O&M contracts can be highly exposed. The risks accentuate towards the end periods of contract when the services and product may have already been supplied and the supplier is chasing payments without the ability to suspend or deploy other commercial levers against unscrupulous “cost-saving” strategies.    

Here are my top five golden rules on this theme:

  • Prevention or Cure
    A defensive “prevention rather than cure” approach must be taken because legal bureaucracy, jurisdiction, enforcement and recovery challenges can quickly skew a cost/benefit recovery analysis into a walk away decision. Any credit risk exposure must be underpinned by appropriate security arrangements or be of a scale which is “absorbable” in a worst-case scenario and the temptation to chase higher risk sales should also ways be carefully measured. In some cases, placing a non-paying contractor into the “hall of shame” with the end client can be more effective than pursuing legal routes.    
  • Invoice Discounting and Credit Insurance
    There is obviously a major differentiation between slow payment risks to solvency and credit payment risks. The former can be countered to some extent by invoice discounting facilities which are in common use throughout the region and by hedging instruments where currency risks also apply. The latter can be addressed by credit insurance but that will depend on its availability in the specific circumstances and it does not come cheaply. The UK Export Finance service is certainly worth a visit to review whether cashflow and/or insurance facilities are available economically.
  • Contracting Defences
    Although contracts are harder to enforce in the region for the reasons given above, they should still be deployed as effectively as possible at the outset and then via variation orders if the scope and pricing terms move along during the term of the contract. If the paper trail is not complete then there is a low to zero chance of any legal recovery opportunity. The local legal system as also more pedantic on “authorisation” rather than relying on “ostensible authority” so formal stamping of contracts signed under power of attorney is always the best route to go to avoid a procedural challenge.  
  • Jurisdiction Clauses
    Jurisdiction, Governing Law and Dispute Resolution clauses must be drafted pragmatically with a close eye on the realities of addressing forward problems. An English Law contract with arbitration in London will probably be a worthless “asset” due to economics and legal challenges if a business is chasing a US$100,000 debt into a Middle East jurisdiction. If the primary risk to the business is payment then choosing the local law and the jurisdiction of the local courts may well be the best approach to maximise the ability to use legal recovery methods effectively, apply pressure and recover on a cost benefit basis.
  • Debt Purchasers
    In some but limited circumstances receivables may be marketable to third party purchasers, especially where the buyer is able to build up a “portfolio” of receivables which makes the economics to chase recovery workable. However, these are invariably subject to high discounts to face value and/or continency elements but partial recovery or its prospect will always outweigh a total write off.