China's state-backed construction firms have earned an enviable reputation for their competitiveness in delivering huge infrastructure projects on time and under budget at home. But that reputation has taken a battering abroad thanks to two high-profile failures.
One long-running saga relates to conglomerate Citic Pacific's project to build two iron-ore mines in the Pilbara region of Western Australia.
The project is more than three years behind schedule. It is hoped ore from the first of the two production lines will be loaded onto vessels bound for the mainland this month. Construction on four more production lines has yet to begin.
Equally embarrassing for Hong Kong-listed Citic Pacific, 58 per cent owned by the state investment body Citic, is the soaring cost of the project, which is already three times over budget.
The two mines were estimated to cost US$2.47 billion but the bill had soared to US$9.1 million by the end of last year. Citic Pacific management has not said how much the other four production lines will cost but analysts say the budget's likely to be US$1.2 billion.
Citic Pacific has placed much of the blame on its chief contractor, state-backed Metallurgical Corporation of China (MCC), which said in February that the cost of completing the construction work it was commissioned to do had surged to US$4.26 billion, 2.4 times the US$1.75 billion budget agreed in mid-2007.
The work include the building of rock crushers, ore concentrators, a pellet plant, material handling systems, a power plant, a desalination plant, workers' camp, workshops, offices and handling facilities at the port.
Citic Pacific is not the first state-backed Chinese firm to suffer construction cost blowouts in a major overseas project. China Railway Construction Corp (CRCC), one of the nation's largest railway builders, booked a loss of 4.15 billion yuan (HK$5.18 billion) in 2010 for an 18-kilometre railway it built in Mecca, Saudi Arabia, to transport Muslim pilgrims.
The Mecca project ballooned from 12.35 billion yuan to 16 billion yuan, partly due to the Saudi government imposing extra demands on the project, according to CRCC. Analysts believe the costs were down to Riyadh pushing to have the project ready in time for the haj pilgrimage in late 2010.
While politics was at play in the railway project, given that China is the largest importer of Saudi Arabia's oil, management shortcomings were partly responsible for the troubles at Citic Pacific.
Citic Pacific chairman Chang Zhenming attributed the cost blow-outs to the surging Australian dollar and the cost of materials and labour due to inflation and talent shortages in the booming Australian economy. It also cited what it called "miscalculations" by MCC.
And it's not only Citic Pacific that has suffered rising costs in Australia. Global mining giants like British-Australian firm Rio Tinto have also cited similar factors as project costs have risen sharply.
The London-based firm's then chief executive, Tom Albanese, said late last year: "It used to be, five years ago, that support costs in Australia were some of our cheapest in the world. Now they're the most expensive in the world.
"Some of it has to do with services, some of it has to do with procurement, and a lot of it has to do with the Australian dollar."
But unlike Rio Tinto, Citic Pacific and MCC lack local knowledge and experience Down Under.
MCC chairman Jing Tianliang said a year ago that some of its miscalculations were due to differences between Australian and mainland project management procedures, as well as Australian labour rules that required MCC's Chinese technical staff to be proficient in English and meet specific qualifications.
That forced MCC to hire more local staff rather than cheaper mainland engineers who have worked on its other projects, particularly in regions like Africa and the Middle East.
Citic said in 2007 that MCC had the experience to do the job since it had worked on large iron ore projects in China, Brazil, Iran and Venezuela.
It added that MCC was chosen for the Australian project because it offered "world-class standards in terms of construction and safety management" and would "comply with the relevant legal and technical requirements in Australia".
Jing's talk of "miscalculations" suggests that Citic Pacific overestimated MCC's ability to work in the unfamiliar Australian environment.
And unlike rivals with established Australian operations, Citic Pacific lacks the flexibility to delay or reduce the size of its projects.
As a new entrant to the market developing its operations from scratch, Citic Pacific will struggle for a return on its huge investment unless it can complete all six production lines and utilise much of their combined output capacity of 24 million tonnes a year.
The other factor that limits Citic Pacific's options is the type of ore it is mining - magnetite. Just 25 per cent to 40 per cent of the mineral is iron, and it can only be used to smelt steel after it goes through an expensive process of concentration, taking the proportion of iron to 65 per cent or above. Hematite, the type of iron ore retrieved at most Australian mines, is more concentrated and can be sold after basic processing.
Chang says most quality Australian hematite projects are already in the hands of international firms.
While magnetite fetches a higher price because the ore production and steel smelting process is more energy efficient and environmentally friendly, the cost of the extra infrastructure makes it less profitable.
Shaun Browne, chairman of metals and mining consultancy AME Group, says some magnetite projects have struggled to achieve their target of concentrating the mineral to their target of a 68 per cent iron content, meaning prices will be lower still.
All of those factors mean the likelihood of over-budgeting - requiring a higher price for the finished product than estimated to achieve a worthwhile return - is high.
"The budget was way too optimistic," says a Hong Kong-based analyst at an American brokerage covering the infrastructure sector. "If Citic Pacific and MCC had engaged more consultants to find out more about Australia's mining industry environment beforehand, they would have been better prepared."
The analyst says Chinese construction firms tend to be subject to looser operating standards and MCC and Citic Pacific are both learning the ropes in Australia.
Firms with limited experience in heavily regulated markets like the United States, Australia and the European Union will likely fall foul of regulators at some point and comprehensive risk assessment is essential, says Dane Chamorro, Asia-Pacific director of London-based risk consultancy Control Risks. But China's state-backed giants have, he says, become more "risk aware" and sophisticated in recent years.
A person close to Citic Pacific says besides MCC, the company has engaged multiple Australian contractors and advisers. She declined to name them.
She says outsiders need to consider that iron ore prices have surged. The import price of ore with 62 per cent iron content at the port of Tianjin was US$134 a tonne at the end of April, more than four times the US$30 it brought in mid-2006 when the company decided to invest in the project.
It was because of sharp rises in iron ore prices - 18.6 per cent in 2004, 71.5 per cent in 2005 and 19 per cent in 2006 - that Citic Pacific ventured into developing Australia's largest magnetite mine.
A third of its output will feed its special steel production operation in China, with the rest sold to other mainland steel mills.
Other than selling a 20 per cent stake in the project to MCC in 2007, Citic Pacific has not struck any deal to sell part of the project to other steel mills or entered into long-term ore sales agreements to share risk, despite indicating in 2006 that it planned to do so.
Analysts from Citic estimate that Citic Pacific's iron ore operation will lose HK$2.46 billion this year and HK$1.72 billion next year, before breaking even in 2015, when all six production lines are expected to have come on stream. The analysts estimated in September the project requires prices of US$108 a tonne to break even.
Iron ore prices are forecast to gradually fall to US$100 a tonne by 2018 from US$124 this year, according to a Deutsche Bank research report, amid softer demand in China.
Meanwhile, MCC has learned a big lesson, which it said would benefit other mainland firms.
"The central government has been encouraging mainland enterprises to expand abroad ... MCC has achieved some breakthroughs in this regard and has also paid some tuition fees and earned some experience and lessons," a spokesman said. "This experience is valuable to other enterprises.
"Going abroad is not a simple matter. One must have internationally experienced operating talent, technical competency and commercial acumen. One must also understand local law and regulations, and exercise stringent management."