Ann: Half Year Results, page-34

Sabine
This covers what I was thinking when I wrote about NWH being a subcontractor to the JV. Only the JV partners would know what has been agreed. I can only hypothecise the kind of things that the JV contract might cover, and explain their impact via invented dollar values.

For the type of work that NWH normally offers the market, if NWH's gross markup were 50% of its base cost, the parties may have agreed that the JV will be charged a 20% markup, and the JV would quote at a 40% markup of the base cost. If all goes well, and the customer pays the price tendered, NWH would, as a subcontractor to the JV, pocket 120% of its base cost from the customer's payments, and there would be 20% in the JV kitty to be shared later by an agreed formula – say 80/20 in Salini's favour. There would be a number of work packages treated in a similar way to make up the entire body of work.

If the above were the case, which it was not, then if all went well on a $1.4b-tendered-price project (base cost price $1b), the sum of the work packages would leave $140m in the JV kitty – $112m for Salini, and $28m for NWH. NWH would also have made $20m via agreed markups to the JV (the component that I mentioned in my post when referring to NWH as a subcontractor to the JV).

It was possible that things would go awry, and instead of there being $140m in the kitty, there could be a $140m loss, or whatever. When structuring the JV agreement, NWH may not have had the capacity to handle a loss, so in a flight to safety, it negotiated to cap its take from the kitty to $19m in return for a cap of $9m on contributions to the kitty if things went badly. In this way NWH would have been confident that is could not lose, because the $8m is less than the $20m agreed markup it received as the customer made progress payments.

Based on the above type postulations, I am not fearful that some horrible FAL-related black-swan event is going to do much harm to NWH. Of course, I do not know the facts, and the above postulation simply reflects that the Samsung experience would have influenced Management's thinking on risks and risk mitigation.