Leighton Holdings is sitting on internal advice that warns its troubled Middle Eastern joint venture will struggle to recover all of the $1.1 billion it claims to be owed for construction work.
Fairfax Media can also reveal the Al Habtoor Leighton Group (HLG) joint venture has reached settlements with the owners of Middle Eastern developments which have not been publicly announced and have resulted in big losses.
Company sources said HLG lost about $80 million by settling a dispute over the $272 million Emerald Palace development on Dubai's iconic Palm Island with its owner, Ukraine MP Nver Mkhitaryan.
It also incurred big losses in a contract dispute with Dubai's powerful Al-Ghurair family, with HLG paying about $30 million in liquidated damages for failing to meet project milestones and losing its $26 million performance bond in late 2011, sources said.
The internal advice about the prospect of HLG recovering the $1.1 billion - of which half is owed to Leighton - comes from "salvage teams" sent by Leighton to the Middle East over the past three years to help extract payments.
A review of the paperwork associated with several of HLG's Middle Eastern projects found the level of documentation to be poor, which has harmed the company's ability to litigate or arbitrate properly.
Company sources said other problems identified by salvage teams included contracts being weighted in favour of HLG's clients and Dubai laws that make it difficult to litigate or arbitrate with developers linked to, or financed by, government entities, as many of HLG's clients are.
Leighton has written down the value of its stake in HLG by more than $500 million after it paid $870 million in 2007 to buy 45 per cent of Al Habtoor Engineering.
Asked if it had been advised that HLG was unlikely to recover its $1.1 billion in claims, Leighton said it and HLG had "received a range of advice from both internal and external advisers".
"Leighton believes HLG is entitled to maintain the value of its claims," the company said.
The revelations come as Leighton remains under pressure over its exposure to the Middle Eastern joint venture.
Leighton has provided $800 million in loans to keep HLG afloat and has a carrying value in the company of $322 million. The loans are secured by HLG's other borrowings.
In 2010, Leighton estimated 66 per cent of HLG's "legacy receivables" would be recovered by the end of 2012. But it has extended its timeline by three years, this year forecasting that 41 per cent of outstanding claims would be recovered by late 2015.
Several former Leighton executives privately question the company's willingness to pump money into HLG given its problems in getting paid. "Leighton is happy to announce any small work won by HLG but are far more reluctant to talk about the reality of getting paid for work in the Middle East," a former senior executive told Fairfax.
Another former senior executive said the Leighton board should forensically investigate the company's association with the Al Habtoor group, saying shareholders deserved an explanation for the huge losses. In May last year, then chairman of Leighton Stephen Johns said the Middle East venture was something "we should never have gone into".
Leighton's majority shareholder, Germany's Hochtief, which owns 56 per cent of the company, was more forthcoming in its 2012 annual report, stating: "Risks remain in closing off [HLG's] legacy contracts, which may result in receivables not being recovered ... we cannot preclude the eventuality that further impairment losses may have to be recognised for our subsidiaries and associated companies or outstanding loan receivables in isolated cases in the future."
Leighton said it had publicly updated its carrying value in HLG as required by Australian corporate law. The firm declined to discuss the size of bonuses it paid to executives responsible for the Al Habtoor joint venture and for approving problematic Middle Eastern contracts.
One Leighton boss involved in the decision to buy into Al Habtoor, former Leighton International chairman John Faulkner, has been engaged as a consultant to help recover payments from Middle Eastern clients.