Park Jae-hyuk is a seasoned journalist who has provided comprehensive coverage of South Korea's corporate dynamics, economic policies, industry challenges and the global positioning of Korean companies. Based on the articles he has written since joining The Korea Times in 2016, his investigative approach has helped readers understand corporate governance, economic trends and business strategies shaping South Korea’s economy.
EXCLUSIVE Daewoo E&C faces big loss in Morocco
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The Safi coal-fired plant in Morocco under construction. / Courtesy of Daewoo E&C
By Park Jae-hyuk
Builder to face up to $400 mil. loss due to broken heater
By Park Jae-hyuk
Daewoo Engineering and Construction (E&C) is expected to face losses of up to $400 million in its $1.8 billion project building a coal-fired power plant in Morocco.
Sources said Tuesday that the heating facilities of the plant broke during recent test operations under construction on the coast of Morocco 15 kilometers south of Safi.
The faulty facilities at issue are designed to heat up water to enhance the efficiency of the power generation system.
“The heating facilities are not that expensive at around $1 million. But it will take some 10 months to build them again. That means that Daewoo cannot meet the deadline this March for the completion of the power plant,” said a source familiar with the issue.
“Then, Daewoo will have to pay liquidated damages for the delay, which could be up to 20 percent of project costs. Plus, additional costs will be incurred such as obliging engineers to stay there longer. Total losses are feared to reach $400 million.”
Among the amount, Daewoo included some $300 million in its fourth-quarter balance sheet as provisions. As a result, its operating profit was about $400 million, which is $300 million smaller than originally expected.
“The consensus seems to be that $300 million is too small. I think the company should take more in losses. The additional amount is $100 million or more,” said the source who asked not to be named.
A Daewoo E&C official acknowledged that the accident is chipping away at its bottom line. But he expected that the overall losses would not soar to $400 million.
“We are building two power generators and the problems took place in Unit 1 for which the expected loss is $300 million. If Unit 2 operates well, there will be no additional losses,” the official said.
“We put forth every effort to find out the reason why Unit 1 broke down. We think that Unit 2 will work properly.”
In response, the source countered that such a wish was naive.
“Despite months of study, the company has yet to find the reason why Unit 1 crashed. In addition, Unit 2 has basically the same structure as Unit 1,” he said.
“Chances are that Unit 2 will not work appropriately.”
It remains to be seen which side will be proven correct at the end of the day.
Although Daewoo E&C can manage to deal with the case with losses of $300 million, however, this has already dealt a severe blow to the Seoul-based builder.
The losses prompted Hoban Construction not to purchase Daewoo’s controlling stake of 50.75 percent from the Korea Development Bank. Late last month, the state-run bank picked Hoban as the preferred bidder for Daewoo. But Hoban eventually decided to withdraw.
The sale of Daewoo E&C is expected to take a few more years.
In 2010, the Korea Development Bank bought the controlling stake in Daewoo E&C from Kumho Asiana Group to help the debt-ridden conglomerate stabilize.
Kumho Asiana Group has undergone a restructuring program due to a severe cash crunch after the chaebol took over the construction firm in 2006.
In August 2013, Daewoo E&C signed the deal with Safi Energy Company, a private business, to build the power plant in Morocco. Back then, the contract was hailed as the builder’s biggest overseas project.
“Daewoo has never assumed such a project. I think it was too much for the company,” the anonymous source said.
An equity analyst said that “What is much more important than the losses is that Daewoo may lose the trust of the market. It would struggle in the bourse for the time being.”
Daewoo E&C shares went down almost 10 percent in the morning.