Deloitte GCC Powers of Construction 2015 …...Oman The largest project in pre-execution phase is Oman Rail - Oman National Railway, with a total length of 2,135 kilometers (km), which

Deloitte GCC Powers ofConstruction 2015 Construction – The economicbarometer for the region

2 | Deloitte GCC powers of construction 2012 | Five lessons to learn from

Deloitte GCC Powers of Construction 2015 | Construction – The economic barometer for the region | 3

Contents

Foreword

Analysis of projects planned and underway in the GCC

China State ConstructionOur Middle East journeyCSCEC ME interview

Challenges and developments in the Qatar construction marketQSE interview

DAMAC’s view on Dubai’s real estate and hospitality marketsDAMAC Properties interview

Get it right the first time – A view from the President of HBK GroupHBK interview

4

6

12

20

26

32

Development for sustained economic growthThe tale of a visionary Emirate

Construction C-suite survey

A KSA infrastructure boom Absorbing the economic impact

The changing focus of airport investmentThe facilitator of economic progress

GCC building materials industry set to bechallenged by the emerging trends in 2015

Developing debt and capital markets for funding infrastructure projects

Towards a project delivery focusFIDIC in the Middle East

38

44

50

56

62

72

80

4 | Deloitte GCC Powers of Construction 2015 | Construction – The economic barometer for the region

2015 stands to be another key stepping stone year asthe Gulf Cooperation Council (GCC) continues to grow,with the ever-increasing launch of major projects. Fromroad to rail, hotels to hospitality, engineering to Expos,most sectors and service providers are under increasingstrain to meet demand. Liquidity, absent from the marketjust three years ago, is flowing again with bankers andinvestors keen to be involved in the resurgence ofambition and opportunity.

Accordingly, the increasing scene of tower cranesgracing the skyline of the region’s major cities bearstestament to this. Equally, traffic, whether on theground, the sea or in the air, is increasing strongly year-on-year with the region’s major carriers showinggrowing passengers, freight and revenues driving inwardinvestment in infrastructure and capital projects tofurther exploit the region’s central geographical positionbetween the world’s major economies – East to West,North to South.

With growing regional economic activity in many sectors,we are now very well positioned to maximize theopportunities as GCC countries continue to build theirneeded infrastructure and built environments to supporteconomic and social growth. Six years on from theWorld Financial Crisis (WFC), the marked difference in2015 is the growing divergence of those countries thatare turning their backs on the traditional hydrocarbon-based fiscal policies of the last 40 years to morediversified economies. This developing challenge andchange is seeing some governments diversifying intowider trade, tourism and commerce models, which willprovide new opportunities for residents and expatriatesalike.

The unprecedented investment across the region intransportation, infrastructure and social infrastructureover the last 10 years looks to continue unabated,increasing trade and travel driving inbound andoutbound investment across the region. These are allopportunities for an increasingly brighter future for us all.

Of course nothing is ever without risk or counterbalance,but, unlike the perfect storm of the last regional boom(high oil prices and rampant demand), Newton’s theoryof relativity is an interesting context on which we shouldpause and reflect:

“Every action has an equal and opposite reaction.”(Newton’s third law)

This is a familiar phase imprinted on us in our formativeyears. At the time of writing, this ‘opposite reaction’ tothe optimism trend across the region is the continuinglow price of oil (currently US$50 a barrel). This is the greycloud threating to put the brakes on the growthmentioned above, and on governments and privatesector spending as revenues continue to be squeezed.

ForewordPowers of Construction 2015

Andrew JefferyManaging DirectorCapital Projects AdvisoryMiddle East


What seems clear is that the necessity to move awayfrom oil-based economies has never been greater andthat in the race to diversify, there will be winners andrunners-up. Quite how this will play out is too early tosay, but the gap is likely to grow, providing a regionalhotspot of investment and development – hence theaptness of our title for this year’s edition, ‘Construction –The economic barometer for the region.’

This year’s edition of our annual Powers of Constructionfocuses on areas and topics facing the region wheredemand for construction and its allied services iscurrently at its greatest. Using our experience gainedthrough working with the region’s leading organizations,who are delivering this agenda, this year’s articles andinterviews from some of the region’s most prominentleaders give insight and ideas on how these currentchallenges are being met and what will be the enduringimpact of the maturing GCC market over the comingyears.

We hope you enjoy this year’s edition, and thank all ourcontributors responsible for their views, thoughts andpredictions as to how we will realize the unrivaledambition that so sets the region apart from anywhereelse in the world.

This year’s edition of our annualPowers of Construction focuses onareas and topics facing the regionwhere demand for construction and itsallied services is currently at its greatest.


The construction sector is an economic barometer forthe GCC, many will agree. So what does this tell usabout the economic backdrop? Per MEED Projects, theforecast for projects planned and underway in the GCCin 2015 is US$172 billion, the highest on record to date.

This is all against a backdrop of lower oil prices,continuing political unrest and reduced InternationalMonetary Fund (IMF) growth forecasts across the GCC.It is also impacted by the deepening recession in Russiaand, as reflected in the IMF World Economic Outlookupdate in February 2015, the projection for globalgrowth in 2015 has been lowered to 3.5%, only a smallincrease from 2014. Per the IMF, the GCC export oilearnings are expected to decline by US$300 billion fromthe original estimate in October 2014.

However, as we know, the GCC countries have thebenefit of reserves, which they have built up as a bufferand which they can continue to spend to achieve theiroutlined strategies; this has also been acknowledged bythe IMF. Therefore, they are expected to continue tospend on infrastructure and capital projects in order toachieve their strategies for diversification of their

economies as continually emphasized by the IMF as a critical requirement. Diversification plans includeindustrial bases, transport, tourism, manufacturing,logistics, finance and Information and CommunicationsTechnology (ICT).

Key drivers for diversification include job creation giventhat 50% of the GCC population is under the age of 25.In the Kingdom of Saudi Arabia (KSA) alone it is forecastthat four million jobs will be needed in the next fiveyears. GCC population growth is forecast to grow from35.0 million to 60.2 million by 2050, all driving the GCCcountries’ strategies to provide education, healthcare,infrastructure and support to communities. And ofcourse all this growth will require energy and water: a34% increase in electricity generation capacity and afurther 2.2 billion liters desalination capacity is requiredby 2020.

So when you stand back and understand the social andpolitical drivers on top of key events in the region –Qatar World Cup and Dubai Expo - it becomes clear tosee where the project growth is coming from.

Analysis of projects planned andunderway in the GCC

Cynthia CorbyPartnerConstruction Industry Leader Middle East

Total contract awards in the GCC, 2008-14 (US$M)

127,107

149,536

139,182

133,210

118,408

161,328

170,550

2008

2010

2011

2012

Source: MEED Projects

2013

2014

2009


This graph shows the history of contract awards acrossthe GCC since 2008, as tracked by MEED Projects. Thegraph below reflects MEED Projects’ evaluation of theprojects which had indicated that they were anticipatingawarding the contracts in 2015, and this amounts to atotal of US$504 billion. When these projects are furtheranalyzed, given the status of the pre-execution phaseand contractor capacity as well as other factors, MEEDProjects has tempered this and anticipates that US$172billion of this US$504 billion could be awarded in 2015.This does not take into account any anticipated tenderswhich may emerge in the third and fourth quarters ofthe year.

So which projects are driving these much anticipatedawards? We have analyzed the largest projects in eachof the GCC countries, based on data collected by MEED Projects.

BahrainThe largest expected 2015 award for Bahrain is theBahrain International Airport upgrade, which amounts to US$4.6 billion in total. This will be the largest projectBahrain has seen for years and is expected to beawarded in packages/phases with the first wave ofthese anticipated to be in 2015. This is planned to be a 170,000 square meter terminal building, together with associated buildings and infrastructure for car parks and aircraft parking areas.

KuwaitThree of the largest project awards for Kuwait which are expected this year are all related to Kuwait NationalPetroleum Company (KNPC) - New Refinery Project:Package 1 (process plant) US$3.55 billion, New RefineryProject: Package 2 (process plant) US$3 billion, and New Refinery Project: Package 3 (utilities and offsites)US$3 billion. KNPC, which currently operates threerefineries, has planned to set up a fourth one with thestrategic goal of supplying local power plants with lowsulfur fuel (less than 1% compared to current 4%),therefore aiming to enhance Kuwait’s petroleumproducts on the world markets, and significantly reducepollutant emissions. The largest expected award is forKGOC/Chevron - Wafra Joint Operations Heavy OilProject: Phase 1, for US$5 billion, to boost output ofheavy oil by more than 80,000 barrels per day (bpd).Based on MEED Projects data, there are significantprojects in the pre-execution phase which employershope to award in 2015, with US$23 billion purely for the oil and gas sector.

MEED Projects forecast of project awards 2015


Q1 2015

Oman

13,7201,077

Qatar

28,8515,365

Saudi Arabia

58,95211,962

42,540

UAE

6,690

Kuwait

27,3905,660

Bahrain

1,490173

2015 forecast


Sum of net project value planned and underway for the GCC (US$M)

Chemical 64,916

Construction

Gas

Industrial

Oil

Power

Transport

Water

475,218

25,402

28,717

23,409

332,305

217,569

36,035

KSA1,203,571(US$M)

Chemical 24,809

Construction

Gas

Industrial

Oil

Power

Transport

Water

539,793

21,083

8,996

50,899

35,055

99,226

6,253

UAE786,114(US$M)

Chemical 565

Construction

Gas

Industrial

Oil

Power

Transport

Water

80,080

11,848

250

55,188

29,019

46,876

8,732

Kuwait232,558(US$M)

Chemical 5,000

Construction

Gas

Industrial

Oil

Power

Transport

Water

30,967

1,258

4,656

5,025

6,148

11,050

1,778

Bahrain65,882(US$M)

Chemical 1,484

Construction

Gas

Industrial

Oil

Power

Transport

Water

139,843

12,889

970

16,559

8,785

103,083

16,098

Qatar299,711(US$M)

Chemical 15,450

Construction

Gas

Industrial

Oil

Power

Transport

Water

43,160

25,712

12,179

14,659

9,039

36,506

6,860

Oman163,565(US$M)



OmanThe largest project in pre-execution phase is Oman Rail -Oman National Railway, with a total length of 2,135kilometers (km), which is budgeted at US$15.6 billionand is the single largest project currently planned inOman. It will be executed in nine segments andcompleted by 2022. Joint ventures of leadinginternational construction and engineering companiesare bidding for this railway project’s first segment, which is a design and build contract that is expected to be awarded by the second half of this year. The nexttwo largest projects employers hope to award in 2015are ORPC – Liwa Steam Cracker & Polyethylene Projectfor US$1.7 billion, which will enhance both fuel andplastics production, and SEZAD - Liquid Terminal Projectfor US$1.3 billion, designed to handle the increase inliquid volumes associated with a large-scale refinery and petrochemicals hub envisioned at the SpecialEconomic Zone (SEZ). When looking at projects in thepre-execution phase which employers hope to award in 2015, the oil, gas and chemical sectors stand out as the largest once again, amounting to US$11.6 billion.

QatarIn Qatar, the two largest projects in pre-execution phaseand expected to be awarded in 2015 are from QRail,namely the QIRP: Passenger & Freight Rail, budgeted at US$15 billion, and from QIRP, whose Passenger &Freight Rail: Phase 2 is budgeted at US$3 billion. A total of 400km of mainline rail connecting Qatar toneighboring countries and 260 km of metro and lightrail are planned; most of this is to be completed beforethe World Cup begins. This is followed by two projects, one for the new Qatar Economic Zone budgeted at US$3 billion, which is one of the three new plannedeconomic zones mainly focusing on logistics and airfreight companies (expected to be the biggest of thethree), and Occidental Petroleum Corporation (Oxy) - Idd e Shargi North Dome Expansion Phase 5, againbudgeted for US$3 billion. So in Qatar a clear focus oninfrastructure continues as expected.

KSAThe largest project in pre-execution phase in KSA is Al Mozaini - Riyadh East Sub Center, for US$15 billion.Riyadh East Sub Center is a mixed use commercial, retailand residential high-density development to be situatedwithin the eastern sub-center of the Saudi Arabiancapital, Riyadh. It is spread over a 200 hectare site andhas been designed with a total built-up area of 7.2million m2 with a maximum building height of 300m.When fully realized, it will cater to the needs ofapproximately 600,000 people within a 20km radius.The second largest project in pre-execution phase isKhozam Development in Jeddah for US$13.3 billion.This mixed-use development located in the south east of the center of Jeddah is expected to develop the areaeconomically, culturally and socially. It will be built infour phases executed in parallel, with a site area of 4million square meters and a planned built-up area of15,000,000m2, and will include residential units,commercial districts, hospitals, leisure and relatedfacilities. These are obviously massive mixed-usedevelopments which will take several years to beexecuted. When and how these projects will beawarded is yet to be determined by the developers.

The dwarfing infrastructure project of the region is of course DWC: Al Maktoum International Airportexpansion, currently budgeted atUS$32 billion.


In the city of Mecca, the project Mecca Metro: Lines B and C for US$8 billion is to be awarded to helptransport pilgrims around the Holy City. With the firstline in operation, Mecca Municipality is planning todevelop a network of four further lines, which will runboth over and underground for a total distance of113km. This is followed by the Military Medical City inRiyadh budgeted at US$7.2 billion. This is planned toprovide highly specialized care to military personnel,their families and national leaders. The medical complexwill be located at the premises of King KhalidInternational Airport.

Obviously there are several other sectors with severalbillions being planned on capital projects, with the topsectors for 2015 represented by healthcare projectsamounting to US$19 billion, infrastructure projects(roads and bridges) at US$35 billion, and power plants at US$13 billion. This is all much needed capital spend in KSA.

UAEThe dwarfing infrastructure project of the region is of course DWC: Al Maktoum International Airportexpansion, currently budgeted at US$32 billion. Thedevelopment, anticipated to be the biggest airport in the world, accommodating more than 200 millionpassengers a year, is being built in two phases, withphase 1 calling for two main terminals and threerunways. The entire development will cover an area of 56km2.

This is followed by a massive industrial project in AbuDhabi for Tacaamol - Al-Gharbia Chemicals IndustrialCity, planned at US$20 billion. Being led by Abu DhabiInvestment Council (ADIC), the project comprises 12plants that will be located in the new Mina KhalifaIndustrial Zone. The first phase of the project is expectedto have an output of more than eight million tons peryear. The chemical industrial city will help diversify thepredominantly oil-based economy by setting upcomplementary industries and associated services.

The UAE projects would not be complete if there wereno plans for large scale, mixed-use developments, suchas Dubai Holding/Emaar Properties- MBR City: DubaiCreek Harbour planned at US$17.7 billion. Located atthe head of the Dubai Creek, the development of theRas Al Khor area into a business hub is being planned.Covering an area of 3450 hectares, the project willcomprise a mixed-use development, an entrepreneurialzone, residences, educational facilities, cultural amenitiesand leisure, while the centerpiece will be The DubaiTwin towers, which will be the tallest twin towers in the world. There are several other sectors with severalbillions being planned on capital projects, with the topsector for 2015 being mixed-use and residential projectsamounting to US$24 billion.

In summaryIn summary, some mammoth projects are on thehorizon once again. Out of the total US$2.8 trillionprojects which are in execution and pre executionphases, 40% of this value relates to residential, leisureand hospitality buildings and mixed-use developments,totaling an anticipated budget value of US$1.1 trillion.These projects are the most sensitive in terms ofbalancing supply and demand in each of the GCCcountries, with timing of delivery balanced alongside a sensible return on investment likely impacting theawards of these projects specifically.

In the city of Mecca, the project MeccaMetro: Lines B and C for US$8 billion isto be awarded to help transportpilgrims around the Holy City.


So we expect to see the GCC countries managingeconomic growth and planned capital projects to creatediversified economies with effective debt and capitalfunding in the coming years. Here is to a new anddiversified tomorrow!

Design

Net sum of pre-execution and execution project values (US$M)

Net sum of execution project value (US$M)

Sum of pre-execution and execution project values

Source: MEED Projects, IMF, UN-DESA, WPP ZOIO and IEA - World Population Bureau

Execution

FEED

Main contract bid

Main contract PQ

Study

228,840

618,369

30,643

243,205

62,290

1,568,054

2,751,401(US$M)

Material

Labour

Equipment

Energy

358,654

216,429

37,102

6,184

618,369Execution

30,918Cement

185,511Interiors

30,918Steel

781,000 of pre-execution represents remaining packages to be awarded on projects already underway

Pre-execution

2,133,032

We expect to see the GCC countriesmanaging economic growth andplanned capital projects to creatediversified economies with effectivedebt and capital funding in the comingyears. Here is to a new and diversifiedtomorrow!


China StateConstructionOur Middle EastjourneyChina State Construction Engineering CorporationMiddle East (CSCEC ME) is the regional operation of theworld’s largest construction company and top homebuilder, the CSCEC groups (the Company). Since its firsticonic housing project on the Palm Jumeirah over 10years ago, CSCEC ME has firmly established itself as amajor international contractor offering multidisciplinaryengineering and construction services, includingbuilding, infrastructure, and mechanical, electrical andplumbing (MEP) work, from its base in the UAE. Despitethe economic crisis which stalled the industry for quitesome time, CSCEC ME has up to this day securedmandates totaling over AED16 billion in project value.

We spoke to the president and CEO of CSCEC ME, Mr. Yu Tao, about his journey leading the firm’s regional expansion since the very first assignment, andthe opportunities and challenges that he consideredsignificant for CSCEC ME and other market participants.When asked about his outlook for the forthcomingyears for the construction industry, Mr. Yu is optimisticabout the market prospect in the region, and expectsbigger projects in the coming years. He has strongconfidence in the growth potential in the UAE andbroader GCC market; in particular, he stressed on whathe observed as the defining vibe of Dubai, which in


essence says “Everything is possible.” This is whatinitially attracted him to Dubai, with the Palm JumeirahVilla Project.

He reflected on his own experience coming to Dubai 10 years ago, having previously managed CSCEC’sbusinesses in Singapore. Singapore at that time,according to Mr. Yu, was comparatively more matureand systematic a market to operate in; whereas Dubaishowed more promise and growth potential, with manymega projects in the pipeline, such as the PalmJumeirah, JBR/JLT Phase 1. The sentiment at the timewas very welcoming; for example, the chairman of theRoads and Transport Authority (RTA) emphasized theimportance of infrastructure in Dubai and UAE, andexpressed his wishes to see more involvement ofChinese contractors to help constructing theirinfrastructure faster.

CSCEC started with a market study in both infrastructureand building markets. Then the successful completion ofPalm Jumeirah Villa Project cemented their reputation inthe local market. Many of their new projects cover avariety of developments, including airports, roads,utilities, and local housing development.

We asked Mr. Yu what are the main challenges that heencountered in this environment. He said the mainchallenge was to selectively take CSCEC’s best globalpractices, and turn them into success in the localmarket. There were specific demands from the localindustry that CSCEC ME needed to meet, hence, it wasimportant to be creative in how they could leveragetheir global resources and experience in a differentmarket. CSCEC is now the world’s largest contractor,with operations in over 40 countries and 30,000 staffworldwide supported by 3 million workforce in itsoverseas operations. Such extensive and experiencedworkforce provides the company with solid capability todeliver projects to clients with quality and efficiency.However, there are always practical challenges when itcomes to taking any of their best practices abroad: firstof all, there are differences in building processes, asChina has Chinese standards and building codes,whereas in the UAE, they tend to use US and UKbuilding practices and codes, and they needed to investtime in understanding the differences and how to traintheir workforce in addressing these differences.

The above adds to the challenges for consultants andclients themselves, who had never experienced theextent and complexity of some of the projects that havesince been built and will continue to be built.

All of these together, required them to be much moreinvolved in providing solutions to achieve the designobjectives as well as the timescales in the Middle Eastcompared to elsewhere in the world.

Therefore there are most certainly more extensivedemands for the contractors to align all stakeholdersthroughout the construction process. Secondly, localdecision makers also require time to familiarizethemselves with Chinese contractors. There werenumerous cases where CSCEC ME had to convince localclients by referencing to CSCEC’s project success in over100 countries, as well as its 35 years of overseasexperience with solid credentials.

There were specific demands from thelocal industry that CSCEC ME neededto meet, hence, it was important to becreative in how they could leveragetheir global resources and experiencein a different market.


Local credentials also proved to be very important,hence, choosing the right project to start with is ofcritical value to any new comer to the market. CSCECME started its Middle East market entry via the idealanchor opportunity, the Palm Jumeirah Villa Project,which really put CSCEC ME on the map and helped theCompany establish a home (regional hub) away fromhome (the head office).

We asked Mr. Yu about the cultural challenges the staffmay have faced in working in a new country with newbuilding codes and extreme climatic conditions andtimescales. Mr. Yu considered the strong sense ofcommitment as the most important quality that is closeto the heart of their Company and their people. He said:“It is our belief that commitment makes miracleshappen.” He agreed that the construction industry is full of challenges, which quite often makes giving up aseemingly easier option to choose; however, they arecommitted to ensuring delivery of projects, regardless ofthe issues they may face.

Taking account of these challenges and havingovercome them and adapted to the way of work in theGCC, Mr. Yu confirmed that CSCEC ME has a long termstrategy to continue working in the Middle East. Whenasked about the current market and opportunities, Mr. Yu noted that the building sector seems to havebeen recovering faster than the infrastructure sector. He said that there are visible signs that the buildingmarket is really coming back, with more tender inquiries,specifically for hotel projects, in accordance with thegovernments’ plan to attract more transit visitors.

The infrastructure market is taking longer to recover. The water canal project, being one of the largerinfrastructure projects currently underway, is not enough to keep contractors busy.

There is an increasing population and this is puttingmore demand on infrastructure, which the RTA has been very effective in addressing despite cash flowchallenges. CSCEC ME built the fly-over bridge nearDubai Investment Park, which was delayed due to thefunding shortage resulting from the previous economiccrisis a couple of years ago. The funding was eventuallyput in place and the project was completed. He said:“We expect funding to be the ongoing challenge whenlooking at the extent of infrastructure projects plannedand underway; that is why we have developed a uniqueproposition for our clients, which is to offer projectfunding or export credit opportunities.”

With expected increasing demand in the building sector,CSCEC ME is well positioned with its professional teamwhich has increased by 100% and its workforce whichhas increased by 200% to cope with demands and fulfillthe market needs.

He said they expect that managing costs effectivelythroughout the work process will remain a priority, asthe tender process is still very competitive and this hasan impact on the tender margins which are underpressure before work is even awarded.

The infrastructure market is takinglonger to recover. The water canalproject, being one of the largerinfrastructure projects currentlyunderway, is not enough to keepcontractors busy.


Material cost is the one that has a significant impact on their bottom line. Costs went up with projectsparticularly around 2006-2008. Material cost went up from AED2700 to AED5000/6000 per ton for steel. Many contractors had to secure additional funds to get projects completed. However, we now have theeconomic slow-down in China and therefore the pricefor production materials is under less upward pressure;even with the current price increase alongside therecovering economy, they are still within the reasonablerange. Taking into consideration the inflationaryincreases, CSCEC ME always ensures to lock in the priceof materials as soon as the contracts are awarded, andthat way protect their margin from price fluctuations.

Mr. Yu also expects ongoing challenges regardingdesign variations and managing variations to remain afeature of the construction industry, particularly becauseof the complexity of projects as well as the timescales inwhich designs are done and executed.

He said that they take this fact as an inevitable part oftheir business, and they have strong processes andcontrols in place to track and manage change orders toensure that they recover all this additional value for

additional work done. He said that CSCEC ME iscommitted to work closely with consultants and clientsto ensure they all work as a team to address anyproblems they encounter, which enables them to moveon as quickly as possible with the construction. Theyalso use their design experience from Design & Build toEPC contracts to ensure that they provide relevant inputinto a project to guard against any other design aspects.

One other important factor Mr. Yu brought up was thechanging approach of the clients. He considers theclients of today to be more cost conscious, they are nowmore focused on the projects’ feasibility and whole lifecost of the asset which impacts their developmentbudgets. There is a lot of pressure from clients andconsultants to manage the budget efficiently.

In order to ensure they have good controls in place tomonitor the project budgets and avoid surprises, CSCECME has its own internal control system to ensure costsare captured in detail and itemized by task. Their projectmanagement teams are tasked to enforce detailedtracking against budgets which together with earlywarning systems they have in place, helps themefficiently track, manage and mitigate costs whereappropriate. They also leverage their China/Singaporesystem which reconciles expenditure with the details perthe finance department, and compares budgets andactuals on a monthly basis. It is a very sophisticatedsystem to help manage the whole record-keeping effort,the software-enabled tracking between finance and theproject team to ensure completeness of costs perproject.

Variation orders are also tracked in the system andlinked to tracking shop drawing changes as well, toensure all additional work on a project is captured toprotect the company’s interest, which is critical whenadministering the contract to comply with timelyrequests for additional change orders wheneverappropriate and to avoid scope creep.

Mr. Yu expects ongoing challengesregarding design variations andmanaging variations to remain afeature of the construction industry,particularly because of the complexityof projects as well as the timescales inwhich designs are done and executed.


And of course with change on any project, comes delayas well. When commenting on the unavoidable delays inconstruction, Mr. Yu emphasized that it is crucial to keepa balance between ideal requirements and reality whenworking with clients/consultants.

CSCEC ME adopts a can-do approach, and always triesto work together with different stakeholders on theproject, finding ways to ensure successful completion.

Mr. Yu said that CSCEC ME always reiterate their goodintention to work as part of the team. They keep theirfocus on building trust with the client and this translatesinto confidence of delivery of the project. Should therebe an issue, the Company would do everything in itscapacity to help mitigate any delays via any other meanspossible. In the cases where there is a complete changein specification, which has happened on one projectwhere there was a change from UK to US specifications;CSCEC ME then decided to get external help fromconsultants who are specialized in these areas to come to train and coach both parties, and therefore got allstakeholders on the same table to understand what the impact of the change means for the project.

The bottom line is to stay reasonable, and rememberthat in a successful collaboration, there is always giveand take involved.

Dealing with these industry challenges is not all thecompany and its leadership are focused on however.Thinking about new and innovative ways to approachthe market to remain competitive is also key. There hastherefore been a noted change in their business model,by adding a financial factor to the equation. CSCEC MEis increasingly bringing in a project finance offering todifferentiate their bid and increase their opportunity towin the project. Offering buyers credit, project financeor coming in as investors in the project are allmechanisms that CSCEC ME are open to offer on theprojects they choose to bid for.

On an operational level, Mr. Yu is keen on makingCSCEC ME more systematic, through the use of BIM,Primavera, and better planning, to ensure there is betterproject coordination from the outset and hence bettermanagement focus on reducing the lead time onprojects, and a clearer understanding of the critical path.

Besides internal systems, the industry is moving moreand more to the use of BIM modelling with the aim toimprove efficiency. There is also a number of newtechnologies which enable the contractor to see theproject in 5D. These are all costly at present, but in thelong run they will be very beneficial not only for efficientproject scheduling but also to capture all data for theasset being built. This data, if captured accurately, canbe passed back to the owners so they have a full set ofinformation which links to suppliers, operator’s manuals,maintenance information, warranties, etc.

Of course, part of being more systematic involves aninterdependence with their subcontractors who are acritical part of their supply chain. CSCEC ME maintainshigh standards, international sub-contractorrelationships, with a strong focus on capability,efficiency and being economical in its businesses. Whenit comes to procurement, CSCEC ME adopts an openand transparent approach in choosing between localand international, including Chinese material suppliers.

Offering buyers credit, project financeor coming in as investors in the project,are all mechanisms that CSCEC ME areopen to offer on the projects theychoose to bid for.


As a lead contractor on most projects, CSCEC MEensures they have a full understanding of the wholesupply chain, managing all resources efficiently to make sure costs are well managed.

Leaving us with his last thoughts on the industry andwhere Mr. Yu would like to see some changes, wediscussed the current competitive bidding process allcontractors are facing.

Previously, with government sector tenders, as long asone had a qualified tender, the tendency was that thelowest price wins. However, over the last few years, the practice has somewhat changed. Today’s processappears to be more of an open forum negotiation;clients are increasingly using this practice to push thetender price down, indirectly leading to contractorsbuilding this factor into their first tender price, which is really complicating the tendering process.

This open forum negotiation is now a common practicewith public sector tenders, which results in contractorscontinuously lowering each other’s price, which createsan unhealthy bidding environment.

He felt the procurement process should go back to astrong first bid so contractors are focused on quality and efficiency, and as a result benefit the industry aswell as all market participants involved. At present, thecontractors are under pressure to build at low costs,which is not good for a sustainable environment and assets.

In this regard, RTA has been leading by example. It isperceived as highly efficient and effective, adopts a very transparent approach around procurement, movesfast in the process, and consequently, their projects tend to generate better results in the long run, for allstakeholders including end-users.

Mr. Yu also noted that profit margins across the industryare very low; even globally, the margin is at 2%. This hasmade the sector highly risky – contractors have beenstruggling to meet a 2% margin, while carrying theburden of funding a 10% retention. Many of theoutstanding payments are a result of unpaid retentionswhich are well overdue, and result in significant losses if they remain uncollected. He felt that the industry hasto find a way to create an environment conducive to the healthy development of the market that takescontractors’ concerns into consideration.

The initial rationale of the 10% retention is to ensure the quality of projects delivered; however, in practice, it often leads to contractors being unpaid, causingserious stress on the cash flow of their businesses. Socontractors have been focused on all these outstandingamounts, despite the fact that projects have beendelivered several years ago.

This has become a huge risk for contractors participatingin any projects, and the industry needs to find a way tobalance the interests of all parties involved.

Mr. Yu suggested that it would be highly productive tohave in place a mechanism that could facilitatecollaborative and constructive behavior, something inthe form of an escrow account subject to valid andindependent third party assessment to release retentionbonds on time and in line with the contracts.

This way, clients are protected, and contractors do notneed to build additional risks in the contract pricing andcan focus instead on their core business – to build.

With this in mind, CSCEC ME’s vision and strategy forthe next two to three years is to focus on three bigs: big market, big proprietor and big project.

At present, the contractors are underpressure to build at low costs, which is not good for a sustainableenvironment and assets.


Mr. Yu expects the Company to dedicate more time to major partners, and work with them to truly createprojects together. For these partners, CSCEC ME canprovide funding as well as deliver technical expertise inthe built environment. Bids are costly for all involved, so it is of crucial importance to Mr. Yu that CSCEC MEdeals with its clients sincerely and fairly.

The projects of highest interests to CSCEC ME are thosein the multi-billion range, which will be playing to thestrength of CSCEC ME. The Company is actively lookinginto both the building and infrastructure sectors.Projects of interest include airports, railway and highway networks.

Speaking on the Company’s strategy in the local marketand potential joint venture opportunities, Mr. Yureiterated that CSCEC ME is open to partnershipopportunities with both international and localcontractors alike. For the mega projects that CSCEC MEis targeting, they would consider forming consortiumswhere needed, to accelerate the execution of theprojects; simply because of the sheer scale of thetargeted projects, they would stand a better chance of delivering and managing the execution risk together.The partners that Mr. Yu values are those who sharesimilar vision, appreciate the collaborative approach, and are willing to pledge the same commitment asCSCEC ME.

His final word was, given that the industry profit marginson projects are as low as 1%, he felt more matureclients would be better served by considering thatcontractors need to make a profit at the end of the day,rather than squeezing the contractor so much that theyfind it difficult to execute the project. They shouldimplement a pricing strategy whereby they rewardquality through innovative models of engagement: as an example, offer X% as a performance reward, shouldset targets be met. This ensures all participants’ effortsare fully acknowledged and taken into consideration,and as a result, makes sure that quality, above all, staysthe focal point of the project.

In summary, CSCEC ME sees great potential aroundsupport related to Dubai Expo 2020, and other regionalinfrastructure needs. Out of the GCC countries, the UAEremains the key market focus, with Kuwait increasinglybecoming a focus for CSCEC ME, given the megaprojects they are planning. Oman is another market thatCSCEC ME currently tenders in, and last but not least,CSCEC ME has just started to enter the Saudi market. Sooverall, CSCEC ME is clearly committed to continue tooperate and participate in the GCC construction marketin the long term.

CSCEC ME’s vision and strategy for thenext two to three years is to focus onthree bigs: big market, big proprietorand big project.

Mr. Yu TaoPresident and CEOof CSCEC ME

The views expressed in this article/interview are those of the author,and do not necessarily represent the views of Deloitte.


We spoke to Ahmad Jassim Al Jolo who is the chairman of the board of The Qatar Society of Engineers (QSE). He shared his views, strategy, and vision regarding theorganization. He also shared his thoughts on the Qatarconstruction market.

QSEQSE is a non-profit professional organization. It wasestablished and registered on 27/01/2007 at the Ministry of Social Affairs, Doha - Qatar, under Law no. 12 of the year2004. Before registration, it was known as ’the Forum ofQatari Engineers.’ QSE is managed by a board that consistsof 11 members, including the chairman. The organizationhas approximately 200 Qataris as members out ofapproximately 5,000 engineers. At present, only a smallnumber of places are available for non-Qatari nationals but this membership route is not yet available as a route to entry. In terms of current legislation, QSE membership is not yet obligatory for Qataris, but rather voluntary.

QSE either has Memoranda of Understanding and/orcollaborates with other construction and regulation bodiessuch as the Royal institute of Chartered Surveyors, CharteredInstitute of Builders, and Gulf Engineering Council.

QSE has several chapters and board members coming fromsectors such as civil engineering.

Challenges anddevelopments in theQatar constructionmarket


QSE would like to enjoy more active participation inQatar’s construction industry. QSE is also lobbyinggovernment to become the regulator of the engineeringprofession in Qatar. Unfortunately to date, there appearsto be very little progress. This has resulted fromobserving the many challenges and issues affectingengineers and the engineering profession in Qatar,whilst the government is too inundated with work.

QSE has a mission to advance and promote theengineering profession in Qatar through collaborationwith local universities and helping them review andimprove engineering degree courses, and other relevantuniversity curriculum. The society has also beenconducting social awareness activities with the localcommunities including promoting the engineeringprofession in high schools.

There has been a number of construction, infrastructureand real estate seminars, conferences, and trainingcourses in which QSE has either sponsored, chaired, orbeen present to lend its support. Of prominence are TheGulf Engineering Forum, and Cityscape.

QSE currently faces financial challenges as it is notfinanced by the government and has a low membershipbase. Some of its funding is obtained from organizingtraining courses and sponsorship from contractingcompanies.

Qatar’s construction marketMr. Ahmad stated that he believed the greatestchallenge to Qatar’s massive infrastructure program wascoordination amongst the various stakeholders despitethe efforts of the Central Planning Office (CPO). TheCPO which is part of the Ministry of Municipality andUrban Planning (MMUP) was given the mammoth taskof coordinating Qatar’s infrastructure program for allroad, rail, metro and other infrastructure projects. Oneof the toughest challenges has been identifying andrelocating existing underground services to enableconstruction work to proceed. This challenge has arisen because some of the records for works completedmany decades ago are no longer available, and/or theavailable records do not appear to be accurate. Mr. Ahmad emphasized that teamwork amongst all the country’s stakeholders was imperative, and that the involvement of the public would be to the successof these mega projects.

Asked whether or not the falling oil price would affectQatar’s 2030 National Vision (QNV2030) strategy, Mr. Ahmad stated that in his opinion, the massiveinfrastructure programs would mostly stay immune toany financing shortages especially since Qatar was leastaffected amongst the GCC states. However, there was asmall chance that the private sector in Qatar might beexposed to some of the risk brought about by the fallingoil prices as some planned oil and gas developmentshave either been postponed or cancelled. This risk isbelieved to be minimal.

QSE has a mission to advance andpromote the engineering profession inQatar through collaboration with localuniversities and helping them reviewand improve engineering degreecourses, and other relevant universitycurriculum.


In line with the government’s strategy of increasingprivate participation in the economy, other forms ofinfrastructure financing/procurement could beintroduced, such as the Public-Private-Partnership (PPP).However, the key to this success is transparency, robustregulation, and awareness campaigns with members ofthe public and all other project stakeholders.

There is a perception that the Middle East constructionmarket is a difficult market to participate in. Howeverserious technical issues should be considered minimal asall infrastructure and construction programs always facesome problems during the project’s lifecycle. There hasbeen a concerted effort by some governmentdepartments to reduce problems faced by contractorsand consultants with some of the standard governmentforms of contract; these are now being reviewed andrevised to improve the contracting environment in thecountry and ultimately help reduce contractor claims. Itis of great concern that a lot of traditionally procuredconstruction projects are being released for tenderwithout a clear and robust technical specification. Theresult observed in Qatar has been that contractors/consultants now price the risk, which resulted in thevery expensive construction pricing in Qatar, as it iscurrently believed to have the highest constructionprices in the GCC.

Introduction of alternative dispute resolutionmechanisms in more government contracts would helpreduce the current negative effects of constructiondisputes. Mechanisms such as dispute resolution boards,conciliation, adjudication and the like, will assist inreducing the number of construction disputes that go to arbitration and litigation.

The prompt payments act model from Ireland is a goodexample of legislation that could help the country’svarious government departments reduce the period ofpayment to contractors. During Ireland’s construction

boom at the turn of the century, this act ensured thatcontractors were paid within the agreed invoicingtiming. This helped contractors stay afloat financiallyand helped reduce some delays. This also helpedcontractors to reduce the pricing risk for late or delayed payments.

That said, experienced contractors in Qatar appear to understand how to correctly claim payments fromgovernment, and thereby experience less delays withtheir periodic/milestone payments than those whosubmit incorrect documentation to support their interim payment applications.

As Qatar progresses with QNV2030, the country will witness greater diversification of its economy asconstruction, infrastructure and oil and gas industriesreduce their contribution to the GDP, whilst othersectors in the Qatari economy such as tourism, sporthubs, health industry etc., all grow the economy into a more knowledge based economy. The presence offoreign universities in Qatar was part of the governmentstrategy to transform the country into a knowledgebased economy hence the construction of EducationCity universities and their individual specializations. Withtime, the economy is expected to increase its servicesoriented products.

It is of great concern that a lot oftraditionally procured constructionprojects are being released for tenderwithout a clear and robust technicalspecification.


Mr. Ahmad believes Qatar has been unfairly targetedwith regards to the treatment of labor. He acklowedgesthat there has been a large number of highly publicizedviolations in the international press, but asks whetherany of those countries publishing these stories, canconfirm 100% that there have not been any laborviolations in their country.

Government has had legislation in place which is beingmodified to help protect workers more, whilst at thesame time stepping up enforcement of such laws. Itmust be noted that whilst some local contractors havebeen found to be non-compliant with labor regulations,a number of international contractors have been foundflouting local regulations as well.

Whilst the construction industry has been fieldingnumerous complaints to the Ministry of Interior (MOI)about visa allocations, one must bear in mind that theMOI has very legitimate social and security concerns,hence the visa quotas. This is not to say that flexibilityon the part of the MOI could be improved.

There is another big challenge in the local constructionmarket, that of building codes. Qatar does not have arobust set of building codes. The result has been thatthe consultants employed bring their own standards,

and this does not bode well for uniformity andconsistency. The Ministry of the Environment (MOE) isworking on producing a solid and relevant set ofbuilding code in coordination with the Ministry ofMunicipality and Urban Planning (MMUP). MOE iscurrently responsible for the Qatar ConstructionStandard, and their standardization department is alsoworking with the Justice Ministry, but all this is stillcoordinated with MMUP.

Project challenges will always exist. However, problemssuch as high Qatari construction prices need to beresolved, mostly by reducing the risk faced bycontractors and increasing the use of ‘pain/gain’ sharingmechanisms. The local industry needs to embrace theconcept of partnering and stop viewing the contractoras an adversary; it must always be remembered that thecontractor is in business to make a reasonable profit.

There has also traditionally been a lot of wastage in the Qatar construction market. Also of concern is theinefficient design of buildings and spaces. This wastageand inefficiency needs to be reduced through education,continual professional development and theintroduction of more innovative and efficient methodsof building/infrastructure design and construction. Both consultants and clients have a lot of room forimprovement.

Government clients require robust in-house teamscapable of managing multiple projects and differentcontactors. These teams must be emotionally intelligentand experienced in order to deal with this multiculturalenvironment.

Project challenges will always exist.However, problems such as high Qatari construction prices need to beresolved, mostly by reducing the riskfaced by contractors and increasingthe use of ‘pain/gain’ sharingmechanisms.

Ahmad Jassim Al JoloChairman of theBoard of QSE



DAMAC’s view on Dubai’s real estate and hospitality markets1. How would you describe your group and itsculture?DAMAC Properties is a leading luxury real estatedeveloper, based in Dubai and operating across theMiddle East. The company develops high-end luxuryliving experiences in prime locations from privateapartments to villa communities, serviced hotelapartments and hotel rooms, to ‘limited edition’branded real estate, with partners including Versace,FENDI, Paramount Hotels & Resorts and The TrumpOrganization. The company’s footprint now extendsacross the Middle East with projects in the UAE,Qatar, KSA, Jordan and Lebanon.

DAMAC Properties is an innovator within the realestate sector having proved time and time again thecompany’s ability to bring the right product to themarket at the right time. This is proven with thecollaborations with global luxury brands that startedin 2010, the establishment of DAMAC Hotels &Resorts in 2011, with five hotels already open andoperational, and a further 10,000+ units indevelopment, and most recently the company’s move into master planned lifestyle communities in mid 2013.


2. What specific factors do you believe will drivegrowth over the medium term?We have recently reported sales for Q1 2015 thatreached AED2.8 billion. This was supported by acontinued strong interest from overseas markets inthe DAMAC luxury living experiences, primarily withinthe two master developments, AKOYA by DAMACand AKOYA Oxygen.

In-bound tourism to Dubai continues to grow, with2014 numbers around 13 million and 2020 numberspredicted to hit 20 million, with an additional fivemillion people coming to experience the World Expo.With so many people coming to experienceeverything Dubai has to offer, it will set a strongfoundation for real estate growth. This tourismgrowth is supported by a strong internationalmarketing campaign, with Emirates and EtihadAirlines both taking on new routes and bringingDubai closer to potential visitors all around the world.

In addition, UAE’s government continues to investheavily in infrastructure with 13% of the AED41billion budget in 2015 allocated to these projects,and there is a commitment in place that this level ofspending will continue for at least the next five years.

3. Any clouds on the horizon?Dubai is in the fortunate position that it benefits from both positive and negative international events.Following the Arab Spring uprisings across the region,many people moved to the safe haven environmentof Dubai, investing in real estate.

When the oil price dropped, Dubai saw a slight fall-off in investments from oil producing countries – butplaces with heavy manufacturing industries, such asIndia, boomed, with more non-resident Indians (NRIs)looking to invest in Dubai.

When the rouble fell in Russia, we saw moreinvestors from China. Dubai is built on strongfoundations, with a transparent and attractivebusiness environment. Tourism is growing, as ispopulation; Dubai International Airport is the busiestin the world with 70 million people passing throughin 2014; and World Expo 2020 will be hosted inDubai in five years’ time. There are so many positivesdriving the growth of Dubai – it is our home city andwe believe strongly in its future development as aleading city anywhere in the world.

4. What are some of the challenges that areunique to the Middle East?There are many challenges when delivering high-end,luxurious living environments, but the two regularchallenges are the weather/environment and accessto workforce. Obviously temperature can get quitehigh during the summer months and this reduces the amount of time that contractors can have staffworking outside, which can slow down the rate ofconstruction. In addition, as the majority of theworkforce is from overseas, there is a challenge torecruit high quality, experienced workers, as thecompetition to attract them is very high.

DAMAC has been in the market for more than 10 years and has very good relationships withexperienced contractors and suppliers, and has built a strong reputation in the market.

In-bound tourism to Dubai continuesto grow, with 2014 numbers around13 million and 2020 numberspredicted to hit 20 million, with anadditional five million people comingto experience the World Expo.


One area we would like to see implemented is that ofthe off-plan property mortgage. It is currently virtuallyimpossible for a serious buyer to obtain credit fromthe UAE banks to help finance the purchase of theirfuture Dubai homes. We believe a comprehensive,well-regulated and transparent off-plan mortgage willopen up the Dubai property market to many investorswho are looking to purchase their home, but do nothave the initial start-up capital to currently invest.

5. How would you describe the current marketstatus for the industry and what do you thinkthe key challenges are and will continue to be?The Dubai real estate market is currently goingthrough a welcome phase of stabilization as themarket matures. It is worth noting that expatriatebuyers have only been able to access freeholdcontracts to own their own property in Dubai for 13years. Following the global financial crisis of 2009-10,the Real Estate Regulatory Authority (RERA) has donean outstanding job of bringing in clear rules andregulations, which in turn have gone a long way inmaking Dubai one of the most transparent andsecure markets in the world.

Dubai is outperforming real estate markets aroundthe world, with long-term stable growth patterns.We remain confident that savvy international buyersrecognize the intrinsic value of luxury property in theright location at the right price.

A big percentage of recent sales has been made upof 3-4 bedroom villas within the AKOYA Oxygengreen master development and units within theserviced hotel apartment projects, such as DAMACTowers by Paramount.

The regulations put in place 18 months ago are now taking effect, and the Dubai property market ismaturing. The lower number of speculators and theincrease in end users is seeing the real estate marketmake a natural progression to its next level. We haveseen prices stable over the past six months andexpect this to continue in 2015.

6. What is DAMAC’s strategy and priority overthe next five years? How do you envisageachieving this?As one of the most influential developers in theregion, we are now able to develop larger scaleprojects, including lifestyle communities and masterdevelopments, such as our AKOYA by DAMAC andAKOYA Oxygen projects. While we focus ondelivering these to the highest standards, we will alsobe investing in new strategic land to ensure we havea high quality land bank across the Middle East.

We are also growing rapidly in the hospitality space.At the time of writing, we have five luxury servicedhotel apartments open in Dubai, and over the nextcouple of years we will be one of the largestoperators of hospitality in the region with around11,000 hotel rooms or hotel apartment units underour DAMAC Hotels & Resorts brand.

7. What are some of the challenges of working inDubai and how does this compare to the restof the region?Dubai is a mix of international cultures, with over 120 nationalities calling Dubai home. It is a vibrantand welcoming city, with open and transparentregulations creating a secure and peaceful place

Dubai is outperforming real estatemarkets around the world, with long-term, stable growth patterns. We remain confident that savvyinternational buyers recognize theintrinsic value of luxury property in the right location at the right price.


to live in. Language barriers, working with so manydifferent cultures and personalities, can be achallenge, but it is also part of what makes Dubaigreat.

8. DAMAC Properties has been successfully listedon the Dubai Financial Market (DFM), prior towhich it had listed GDRs on the London StockExchange (LSE). Based on your experiencewhat would be your top five recommendationsfor a regional company considering a listing?What are the advantages of listing within theUAE as opposed to an overseas market?DAMAC Properties was the first UAE real estatedeveloper to list on the LSE. This was a huge step for DAMAC Properties and elevated our brand to aglobal scale and provided access to global capitalmarkets. The most important thing, however, wasthat it was the right time for a company of our sizeand scale to look at going public as we embraced the procedures necessary to list on a market such as London.

After a year on LSE, in which we grew our brand andour valuation, and we increased our product portfolioin Dubai, the natural progression was to list on theDFM as this provided the liquidity in the stock fromour local and regional investors.

It was key to provide access to DAMAC for thoselocal GCC-based investors who wanted to be part ofthe DAMAC story but could not take a stake whilewe were based in London.

The move also increased the level of transparencyand reporting structures which enabled us toshowcase more of our success story to the world.

9. What have been the key challenges forDAMAC Properties in transitioning into amaster developer?We have been pleased with the response we haveseen to our two master developments, AKOYA byDAMAC and AKOYA Oxygen.

The challenges come with the size and scale of theproject, but we have almost 2,000 staff who are realestate experts who have transitioned seamlessly intothe development of master developments. As wehave a comprehensive in-house team of projectmanagers, designers, architects and quantitysurveyors, we are able to face any challenges whichcome our way, quickly and efficiently within thecompany, without passing the responsibility over to a third-party.

Language barriers, working with so many different cultures andpersonalities, can be a challenge, but it is also part of what makes Dubaigreat.

Adil TaqiGroup ChiefFinancial OfficerDAMAC



The HBK group of companies, today known as HBK Group,started with the establishment of HBK Contracting CompanyW.L.L. by the late Sheikh Hamad Bin Khalid Al-Thani in1970. The company’s main goal was to undertake civilconstruction projects in Qatar, thus contributing to theeconomic progress of the country, both in the private andgovernmental sectors.

The president said that although the late Sheikh Hamad was not an engineer, nor did he have any formal educationin building or construction, he managed to achieve so muchin such a short space of time because of his never-endingsense of pride in quality, which formed his main focus, side-by-side with ensuring customer satisfaction andachieving goals.

Sheikh Ali Bin Hamad Al-Thani later assumed the presidencyof the HBK Group and continued the tradition set forth byhis father of focusing on meeting project timelines andbudgets whilst maintaining the highest standards of safetyand quality.

We interviewed Sheikh Ali, who explained how the HBKGroup started in civil construction then moved to differentsectors and services, predominantly those of oil and gas,mechanical, electromechanical and plumbing. HBK greworganically because of the nature of the constructionindustry in the region and the shortage of subcontractorswho could deliver the quality required by HBK and embraceHBK’s strategy of ‘get it right the first time’ and ‘qualityrather than quantity.’ Currently, HBK’s order book is in excess of QR4 billion.

Get it right the first timeA view from thepresident of HBK Group


As the HBK Group continued to grow and to support itsvision whilst maintaining quality – the abovementionedservices were introduced through the establishment ofseparate companies in order to control the supply chain.The Group now includes HBK engineering, HBK Oil andGas, Aluminium Technology, HBK Remix, HBK PrecastFactory and HBK Trading, which are all independent andhave to compete normally for business in the market.

Sheikh Ali believes that the vast experience that HBKacquired in the construction industry over the pastdecades, alongside the key factors of maintainingquality, efficiency and well organized working practices,continued internal improvement, not losing focus,adapting to technology and updating their business andsystems, all contributed to the growth of HBK to dateand in the future. As the construction industry in theregion and Qatar is heavily guided by governmentalexpenditure, HBK has to embrace and adapt toconstantly arising challenges. Obviously theinfrastructure related to, and the stadium constructionfor, the 2022 FIFA World Cup will be a major contributorto drive growth. In addition, the implementation of HHthe Emir’s Qatar National Vision 2030 (QNV2030) isanother major factor in the expected growth in Qatarover the coming years. This is being implemented nowand the construction market is expected to be moredynamic and robust than before to build this vision.

The current reduced oil and gas prices have affected theconstruction industry, especially those contractors in theoil and gas industry itself. However, HBK Oil and Gas hasnot been affected so much, as the company focuses onmaintenance, facilities, and quality assurance. In Qatar, the private sector is also becoming a keyplayer, which supports the continuity of businesses,rather than only depending on governmental projects.The reduced oil and gas prices have not materiallyaffected the construction sector in Qatar due to thegovernment’s commitment to achieve HH the Emir’svision towards QNV2030. Sheikh Ali therefore sees theeconomy growing because of the committed projectsand budgets.

Sheikh Ali explained that the Gulf can be a difficultregion to operate in, due to some cultural differenceswith other parts of the world and also due to itscompetitive nature, which is further complicated bymany nationalities working in the region. In his opinion,it is a matter of proper anticipation of what lies ahead in the market – new market entrants must be realisticabout the working environment, must also adapt to thelocal norms, and need to be committed to the country.Contractors have to be organized to cope with thechallenging market and most importantly the ever-changing workforce available to the market. Thesechallenges are coupled with increased expectations ofcustomers to deliver on time and within budget, a safelyexecuted project which is completed to a very highstandard. Contractors have to learn to manage projectsmore efficiently to meet the customers’ expectations as well as meeting the contract administrationrequirements to collaborate with the appointed projectconsultants. Although it might be simple to enter themarket, it requires commitment to remain and to besuccessful. Contractors should invest in the market forthe long-term and they will then benefit from morebusiness and success in the long run. Sheikh Ali believesthat coming in as a foreign contractor should not beabout a ‘get-rich-quick’ approach, but rather aboutunderstanding the unique local markets, ‘getting yourhands dirty,’ and getting a good quality job done.

The Gulf can be a difficult region tooperate in, due to some culturaldifferences with other parts of theworld and also due to its competitivenature, which is further complicated by many nationalities working in the region.


Local contracting companies must be robust as a lot ofreliance is placed on local business. There are somegeneral misconceptions about this market due to notfully understanding it – even by some very largeinternational companies. A solution for internationalfirms seeking business in Qatar is ‘partnering’ with localbusinesses on a long-term basis, e.g. buying shares inlocal companies, or entering some form of joint venturepartnership.

The GCC countries are facing the same challenges,although the depth of these challenges may vary fromone country to another. For example, the local workforce, consisting of temporary laborers in theconstruction sector and coming from different culturespresents one of the biggest challenges. Governmentsare trying to adapt to the increasing local, regional andinternational demands of new labor laws, whilemaintaining the unique local culture and security. Theskilled and qualified human resource challenge in Qatarrequires both government and the private sector topartner to find mutually amicable and beneficialsolutions.

Logistics also pose another challenge in the currentenvironment. One needs to fully understand theprocedures required by customs authorities in order to import goods, and any other goods certificationrequirements by the different authorities in the country.Land has proven a very tough challenge as availability is very limited and the cost of land has been driven up to unsustainably high levels as a result; all this land is required for construction, facilities, laboraccommodation etc. The Qatar Chamber of Commerceis, however, currently collaborating with thegovernment, and as a result, the government is nowissuing temporary land to assist developers in genuineneed of land parcels.

Qatar is different from the rest of the GCC countries andMiddle East due to its fast pace of development and theurgency to complete large infrastructure on time and toa high standard. Qatar differs from most as a smallcountry starting its recent development from a rather

lower baseline and with limited existing infrastructure.Qatar is now a major focus of most international andregional contractors all targeting the new contractscoming to tender.

Additionally, the eyes of the world are certainly focusedon the country as preparations are underway andinfrastructure is being built to facilitate the 2022 FIFAWorld Cup. Qatar is also unique as it has to balancespending and continual investment, from its recentlycreated wealth fund accumulated from its large oil andgas reserves, to focus on investing in its own developinginfrastructure and overseas interests.

The current priorities of the HBK Group are gearedtowards internal development, and robust yet efficientpolicies and procedures. Furthermore, the pressure onthe execution of their projects to demonstrate being asound professional local company is important and vitalfor the successful construction of Qatar’s infrastructure.They are fully aware of the need to behave as a tier 1contractor in their management, their approach, andcommitments to complete projects on time and withinbudget. HBK is now in joint ventures with largeinternational contractors to share their experience of the local market and to learn new and fresh ideas to complement and maintain its status as a tier 1contractor. HBK’s business model is based oncooperation with other international businesses, and the employment and engagement of internationalcontractors and experience of individual professionals.

Governments are trying to adapt to the increasing local, regional andinternational demands of new laborlaws, while maintaining the uniquelocal culture and security.


Sheikh Ali sees opportunities in the market for buildingand infrastructure, and HBK will therefore continuegrowing subsidiaries and sister companies like Alu-tecand HBK Engineering Services, to diversify its serviceofferings and reduce its risk exposure.

The unprecedented growth currently being seen will notalways continue at this pace; growth is expected toreduce after major government milestones are reached,e.g World Cup 2022 and the Qrail, although it will notstop. Contractors need to prepare and plan theirbusinesses accordingly.

Sheikh Ali also stated that since the start of this year,they are seeing a considerable number of projects beingawarded in quick succession, and are fortunate to havebeen awarded a number of prestigious projects, such asKahramaa Mega reservoirs, Marina Mall in Lusail andQatar Foundation Al Khor Academy, to name a few.

Longer term challenges for Qatar beyond 2022 are themajor infrastructure projects like long distance rail, theexpansion of the rail network into the GCC and freightlinks as well as the major expressways/motorwaysprojects that will potentially happen over a longer time period.

Contractors should focus on those long-termpossibilities, as well as the short-term requirements ofbuildings for new hotels, offices, schools and retailassociated with increased expatriate populations aheadof the FIFA World Cup.

Beyond 2022, perhaps the building sector will see arelative downturn whilst civil engineering projects andinfrastructure schemes are likely to continue as part ofthe rapid pace of change engulfing Qatar to achieve theQNV2030. Therefore, HBK expects a lot of work in theyears ahead for those contractors who show long-termcommitment to the market.

Contractors should focus on thoselong-term possibilities, as well as theshort-term requirements of buildingsfor new hotels, offices, schools andretail associated with increasedexpatriate populations ahead of theFIFA World Cup.

Sheikh Ali binHamad Al ThaniPresident of HBKGroup



Development for sustained economic growthThe tale of a visionary Emirate Think back to media images of the Middle East in the period 2006-2009 construction boom and what do youremember? The GCC region in particular was typified byseemingly endless footage of high-rise residential towersspringing out of the desert, surrounded by sprawlingconstruction sites and infrastructure projects that supportedand connected them – well sometimes! Most iconic werethe scenes of Nahkeel reclaiming the sea to form the PalmJumeirah - a civil engineering feat of a scale and visionunseen before by mankind.

Fast forward to today, 2015. Has anything changed?Whilst the overall scenes of tower cranes swinging aboveconstruction sites seem very reminiscent, the economicbackdrop to this is very different - especially in Abu Dhabi.Gone are the ‘trophy’ schemes of iconic buildings looking to catch the headlines and eyes of the property world toattract high-end buyers. Gone too are the excesses of overly elaborate building shapes, irregular facades, waterlandscaping and the OTT opulence that signified the end of that ‘heady era.’


Over five years on from the 2009 crash, what havepolicy makers and boardrooms learnt and how is itinfluencing their strategies as development increasesacross the region? To understand this better, Abu Dhabiprovides perhaps the best barometer I can think of, anexample of how one Emirate has learnt so much onhow economic development and successful capitalinvestment (construction) are intrinsically intertwined.What have they done and why?

First, Abu Dhabi has successfully managed to reduce the‘boom-bust’ rollercoaster of speculative development.The market has now become better balanced based ondemand, not supply, reflecting the higher level ofmaturity in understanding how capital projectdevelopment underpins sustainable economicdevelopment.

Next, learning from the lessons painfully learnt followingthe last boom, Abu Dhabi has reflected and taken a veryforesighted and outward orientation over the last fewyears. Whilst other parts of the GCC have ‘bunkereddown’ dealing with the effects of the global financial

crisis and property collapse, Abu Dhabi has choseninstead not to just hibernate but actively seek out, lookand observe other innovative countries and cities tounderstand how they have developed. Infusing theseinfluences and observations, Abu Dhabi has a new more progressive model for future investment anddevelopment. Singapore is one of the cities Abu Dhabihas studied. It has looked at every aspect of which it hasdeveloped, increasing trade, commerce and politicallinks with it. All this thinking has been embodied in AbuDhabi’s Vision 2030 plan that sets out its core strategicobjectives and priorities, the results of which arebeginning to shape the Emirate’s economic and fiscalstrategies which will ‘power’ it, in an economic sense,over the next 30 to 50 years.

What Abu Dhabi has seen in Singapore is a city that had risen from marshes into a true Asian ‘tiger’ bydeveloping a long-term economic plan that has driven it to be one of the most successful economies in theworld and one of the most sought after places to work,visit and live. A real economic engine with a builtenvironment ‘engineered’ to support it.

Taking this inspiration and that of other successful new cities, Abu Dhabi has, rather than focus on pureresidential development, developed key longer termeconomic strategies at a macro-level and matched thesewith core infrastructure investment to provide thecatalyst for a future more diversified economy, one notprincipally based on oil. In doing so, Abu Dhabi haschallenged and thrown out the traditional oil incomemodel, for a newer, bolder direction based on coreinfrastructure, key industries and employment that willsupport the vision to be a truly fully diversified,international city.

Whilst the tower cranes stopped swinging elsewhereover the last five plus years, Abu Dhabi has initiatedmajor capital projects to support its long, not short-term, key economic strategies:

What Abu Dhabi has seen in Singaporeis a city that had risen from marshesinto a true Asian ‘tiger’ by developinga long-term economic plan that hasdriven it to be one of the mostsuccessful economies in the world and one of the most sought afterplaces to work, visit and live.


TransportationAviation - The commencement of the AED10.8 billion,30 million passengers per annum, Midfield Terminal atAbu Dhabi International Airport in 2012, was the firstindicator of a new economic development strategy.With passenger numbers increasing exponentially withthe success of Etihad Airways globally, the need toestablish Abu Dhabi as a global aviation hub was sealed.Driving growth through investment in Etihad’s fleet aswell as code-sharing with other national airline partners,travelers have increased as have inward and outwardbusiness trade opportunities locally and globally. Tosupport this, Abu Dhabi committed to completing hotels across the city and investing in leisure attractions(Yas Mall, Yas Water World…) to attract and retainvisitors, giving direct local economic impact as well as showcasing and profiling Abu Dhabi to an ever-increasing world market which are increasingly investing in its vision.

Ports - In parallel, the delivery of the Khalifa Port in2012 at the cost of US$7 billion, provides Abu Dhabiwith one of the largest container ports in the world. Thiswill act as an ‘economic gateway’ catalyst to driveimport and export opportunities, as well as develop anew industrial zone around KIZAD, to eventually includea manufacturing hub, meaning more local investmentand reducing reliance on imports for the decades tocome.

Rail –The construction of Etihad Rail’s US$11 billion,1,200 km-long rail network, started in 2011. This willeventually link the oil and related industries in theWestern Region through the Emirates, connecting toKIZAD and onto the UAE’s eastern coast borderingOman. The investment in this state of the art freightrailway network will revolutionize the transportation of raw, refined and manufactured goods – improvingspeed, driving down transportation costs and increasingAbu Dhabi’s competitiveness and freer access tointernational markets.

Power – Probably one of the most visionarydevelopments in the last five years has been the UAE’sdevelopment of its nuclear power capability through theEmirates Nuclear Energy Corporation (ENEC). Planningfor a ‘life after oil,’ the UAE was the first Arab nation tobe licensed to generate electric from nuclear power.Ruwais, Abu Dhabi, was chosen as the location to buildthe stations. The first power is expected to be generatedin 2017 as part of the UAE’s investment of US$20 billionwith a joint capacity to generate a combined 5,600megawatts per year, reducing its reliance on oil topower economic growth. This has to be the testamentof the vision of the nation and the trust of the world theUAE now generates to allow it to build underinternational license the first of its kind in the MiddleEast. What a barometer reading!

Social infrastructureNational housing – Abu Dhabi was one of the first inthe region to recognize the need and priority to developnew modern housing developments to house, supportand develop its citizens. Situated on the prime outskirtsof the major cities, these developments are drawingfrom the very best in urban planning to create newvibrant world-class communities in a modern high-quality environment, with amenities, including retail,schools, recreation and the like, yet still reflecting thelocal culture, heritage and way of living. In the last fiveyears, the government has invested extensively in thesenew communities, providing thousands of new homes.

Abu Dhabi was one of the first in theregion to recognize the need andpriority to develop new modernhousing developments to house,support and develop its citizens.


Education – Recognizing the pivotal role educationplays in a country’s economic development and success,Abu Dhabi, through Abu Dhabi Education Council(ADEC), embarked in 2010 on an ambitious ten-yearschools program to improve the physical currentschools, build 300 new world class schools and closeand replace ageing villa schools to improve the standardof education across the Emirate. In parallel, itencouraged increased private sector investment anddevelopment in the international schools’ sector, toprovide expatriates with an ever increasing ‘openmarket’ access and choice of great schools. In doingthis, Abu Dhabi is recognizing the growing need toattract the best world talent and their families for thedecades to follow. In the last five years, Abu Dhabi hasalso been very active in the further and higher educationsectors, delivering two of their flagship projects in theperiod - New York University and UAED Al Ain.

Healthcare – Significant focus has been on improvingaccess to and quality of public healthcare, including thenew US$600 million, 739 bed Mafraq hospital thatstarted in 2011, and the imminent opening of the newUS$1.6 billion Cleveland Clinic in downtown Abu Dhabi,which will offer 364 beds, and specialist operating andtreatment facilities to rival any facility, anywhere in the

world, that started in 2010. In parallel, the privatehealth sector has flourished, responding to Abu Dhabi’shealth insurance scheme, another first in the region,where all residents can choose their treatment provider.

What really stands out is the time window in whichthese key investment decisions were made by AbuDhabi, 2010-2012 – the time where elsewhere in theGCC, markets were quiet.

It reflects an increasingly ’mature’ capital projectsmarket, focusing on creating the framework for futureinvestment in trade and commerce, to grow populationfor housing, education, recreation and long-termpartnerships. A platform to capture and harness newinvestment, new thinking and collaboration that willresult in enormous opportunities wherever you sit theplanning, financing, development, execution, operationor divestment value chain in the construction industry.

To date, we have talked about things that make directeconomic impact, but there are two areas that havemore profound influence on the ‘health’ of Abu Dhabiand the wider UAE.

Tourism, culture and heritage - Taking its lead fromother international cities such as Singapore, thedevelopment of Saadiyat Island as Abu Dhabi’s culturaldistrict will define it as the cultural hub for the MiddleEast, drawing visitors, domestic and international, overthe coming years to visit its iconic museums, the Louvre,Guggenheim, Sheikh Zayed and others to follow. Thiswill secure year-round visitors to experience thesedevelopments, enjoying the surrounding culturalcommunities and the hospitality of the purpose-buildhotel complexes, art and cultural facilities with naturalbeauty and a mesmerizing array of activities from golfcourses to Formula 1 racing, to waterparks and manymore, at the highest standards of quality and service.

The private health sector hasflourished, responding to Abu Dhabi’shealth insurance scheme, another firstin the region, where all residents canchoose their treatment provider.


Similar parallels can be drawn between Saadiyat Islands’development and that of Singapore’s Sentosa Island –created to provide a leisure, recreation and culturalfocus.

Defense - Over the period, the government hascontinued to invest in facilities for home defense as wellas its role in the wider Middle East. Recognized as oneof the safest places in the world to live in, these projectssupport the long-term safety of the region - therebyassuring continuing confidence in future global inboundinvestment.

Thinking back to those images of a sea of tower cranesrising out of the desert on the media in 2006 andcomparing it to what we have discussed, we have comea very long way - longer and further in five years thanwhat most countries achieve in decades.

Granted there have been some mistakes, overexuberance, great triumphs and some lows, but lookhow the barometer looks now in light of what AbuDhabi has and wants to achieve. In a period of globalfinancial problems, Abu Dhabi could have done nothingand adopted a ‘hold’ position. Instead, it has chosen a‘bold and expansive’ plan for its economic future, andthat of everyone involved in the built environment,wherever you sit in the value chain.

We all have within our industry, our organizations, ourprofessions and in ourselves, the chance to step forwardand take part in the realization of this enormousopportunity. If we look at Abu Dhabi as the barometerfor the Middle East for investment and ambition weshould be nothing but optimistic in what we achieve‘together.’

Thinking back to those images of a seaof tower cranes rising out of the deserton the media in 2006 and comparing itto what we have discussed, we havecome a very long way - longer andfurther in five years than what mostcountries achieve in decades.

Andrew JefferyManaging DirectorCapital Projects AdvisoryMiddle East


During March and April 2015, Deloitte conducted a surveytargeting construction company CEOs and CFOs (C-suitemembers) to obtain their views on a range of topical issuesimpacting the construction industry across the GCC region.

This is a ‘pulse survey’ that provides C-suite members ofconstruction firms with information regarding their peers’thinking regarding these issues. It is not, nor is it intended tobe, scientific in its number of respondents, selection ofrespondents, or response rate.

Following is a summary of the key findings arising from this survey.

Optimism remains Despite the continuation of geopolitical risks and theinstability of oil prices impacting the GCC over the past six months, C-suite respondents are optimistic. 71% ofrespondents are more optimistic about the financialprospects for their companies compared to 12 months ago.

This optimism flows through to the financial statements,with 83% of respondents anticipating growth in revenuesover the coming 12 months, while 68% expect this growthto translate into an improvement in operating margins.

This sentiment is driven largely by external factors impactingcompanies (71%) compared to internal/company specificfactors. The volume of tender opportunities, particularly inthe UAE, Qatar, KSA and Oman, is picking-up, and contractawards appear to be occurring at a faster pace than wehave experienced in the past few years, which is potentiallycontributing to this improved sentiment.

Construction C-suite survey


Preparation for key regional events such as the WorldExpo in Dubai in 2020 and the Football World Cup inDoha in 2022, would appear to have a limited impacton this perception of optimism, with 32% ofrespondents expecting no direct impact from theseevents to them, and 59% anticipating only a smallimpact on their business from preparation work forthese events.

Cash flow managementCash flow management remains a key concern for amajority of construction companies. A closer look at thecash flow cycle explains why this is such an issue:

The above implies that the monthly progress paymentswill take somewhere between 31 and 180 days to becertified according to 74% of respondents, with theremaining 26% either taking longer or being certifiedimmediately.

Once certified, an invoice is issued, and the certifiedreceivable is collected for 94% of respondentssomewhere between 1 and 120 days after thecontractor’s credit period has elapsed (which is typically around 30-60 days).

Therefore, from the time the work is completed, thecollection cycle takes: a) approximately 90 days to certify a progress billing b) a typical receivable credit period of 45 daysc) approximately 90 days to collect certified receivables

This adds up to a total of 225 days from completing thework to collecting the cash. This protracted collectionperiod can and has put a strain on constructioncompanies’ cash flows. Employees and laborers still haveto be paid and materials need to be procured, and thecontractor then typically ends up funding this. For thisreason, 86% of respondents have identified collection ofreceivables and work in progress (WIP) recovery as a keypriority for the business over the next 12 months. Thereis still a focus on collecting legacy receivables for manycontractors which impacts this view significantly.

Interestingly, 62% of respondents expect no change inthe average days in receivables and WIP (i.e. thecollection cycle) in the next 12 months, implying this isan issue contractors have accepted they are powerlessto control in the short term.

On average, how many days is your revenue locked up in uncertified WIP ?Certification generally occurs:

Within 31-90 days

% of respondents

Within 91-180 days

53%

21%

On average, how many days is your revenue locked up in certified receivables ?Payments are received:

Within 1-60 days past credit period

% of respondents

Within 61-120 days past credit period

44%

50%

Preparation for key regional eventssuch as the World Expo in Dubai in2020 and the Football World Cup inDoha in 2022, would appear to have a limited impact on this perception of optimism.


Pricing riskWhile winning new work is a strong priority for 79% ofrespondents, their approach to pricing bids to securenew work differs considerably as demonstrated in thechart to the right.

While securing new work at an appropriate commercialmargin to improve the bottom line seems to be a focus for the majority (47%) of respondents, a largeproportion (27%) of contractors are still focused moreon winning new work, and are willing to accept small orno margins at the tender stage to try to secure a project.This approach results in the contractor running a highrisk of project losses being incurred as they have verylittle margin to cater for typical project risks andunforeseen project complications which regularly ariseon projects in the GCC.

Respondents were then asked to compare, on average,their final realized project gross margins relative to theinitial tender gross margin. Actual realized project grossmargins were less than the original tender margin for50% of respondents, and approximately the same as the tender margin for 50% of respondents.

No respondents confirmed that actual gross marginswere typically higher than the tender margin. Pre thefinancial crisis, it was common for contractors to acceptnew work at a lower tender margin, and then look toincrease this margin via pricing on variation ordersanticipated to be received. It would appear this strategyis no longer favorable, as indicated by only 6% ofrespondents employing this pricing strategy as notedabove, presumably due to the inherent risks thisinvolves.

To help understand why final project margins were lower than the tender margin for 50% of the respondents, the forecasting process used bycontractors was also examined. Given all projects involve some level of risk in relation to unknowncircumstances/costs which may arise during the courseof the project, we asked respondents how they typicallymitigate such risks during the tender process. Theresponses were as follows:

?What strategy have you typically adopted in pricing bids to win new work?

Priced at break-even with a view to make a margin on change orders

% of respondents

Priced in risk with a small margin

Priced in risk with a commercial margin

Priced at an annual targeted margin set by the group/company

Total

6%

21%

47%

26%

100%

Modify contractual terms to exclude certain perceived issues on the project

% of respondents

Include contingency provisions in your forecast cost to allow for potential issues which may arise

Make a best estimate assumption on the risk to include in your forecast cost, and hope for the best

Total

56%

31%

100%

How do you typically mitigate unknown risks during the tender process? ?

13%


While approximately half (56%) of contractors appear tobe pricing in risk to their tender forecasts through risk orcontingency provisions, it appears the remaining 44% ofrespondents may be a little less conservative during thetender process. This may be for commercial or otherreasons, and may help to explain why final projectmargins were lower than the tender margin for 50% of survey respondents and also why there is a longcollection process on uncertified WIP where contractorshave a protracted negotiation period to recover thesecost through claims.

Given these pricing risks, and the cash flowmanagement issues (mentioned above) facing manycontractors, respondents were also asked if they wouldconsider funding a project or a portion of a project inorder to secure the bid. 78% of respondents wouldconsider this on a case-by-case basis provided theproject margin warranted the additional risk of bringingproject finance onto the contractor’s balance sheet.

Impact of contract claimsThe majority of respondents in the survey (53%)consider that the level of contract claims has increasedsince the financial crisis impacted the Middle Eastregion. Despite this perceived increase in volume ofclaims, 62% of respondent companies do not recognizeuncertified/unapproved claims within contract revenuein the financial statements. Such claims revenue iseffectively deferred until it is certain of recovery andapproved by the contract owner.

Based on the fact that claims are not being recognizedas revenue until formally approved in the majority ofcases, respondents were asked how significant theanticipated settlement of these unrecognized claims to their profit or loss would be, with the followingresponses:

While it is likely some of these claims will be back-to-back with subcontractors’ claims, there is a significantamount of potential profit still to be realized onunapproved claims for many contractors, which will go a long way to shoring up the financial position ofthese contractors after the past few leaner years for the contracting industry in certain markets.

Project risk and reportingWhen asked what key concern was keepingconstruction CEOs and CFOs awake at night,respondents advised as follows:

The majority of respondents in thesurvey (53%) consider that the level of contract claims has increased sincethe financial crisis impacted the Middle East region.

How significant is the anticipated settlement of unapproved claims to your profit or loss? ?Likely settlement expected to be less than 1% of revenue

% of respondents

Likely settlement expected to be between 2% and 5% of revenue

Likely settlement expected to be more than 5% of revenue

Contract claims are already included in contract revenue

Total

48%

19%

19%

14%

100%

What are the key concerns impacting CEOs/CFOs at present ?Political instability and/or declining oil prices impacting government spending/project funding

% of respondents

Delivering projects on time and within the budget

Cash flow management/collection of receivables

Workforce skills shortage/retention

Other

37%

22%

19%

11%

11%

Total 100%


Despite events such as the Football World Cup in Dohaand the World Expo in Dubai in the near future, thenumber one concerns raised by respondents were thegeopolitical instability in the wider region, the decline inworld oil prices, and the impact these may have on localgovernments’ appetites for construction projects in theshort to near term. This in turn impacts the growthprospects for contractors, and is understandably a keyconcern for C-suite members.

Delivering projects on time and within budget was alsoa key concern noted above. 82% of respondents alsostated this was a priority focus area for their business to concentrate on during the forthcoming 12 months.

When asked to rate the information systems currently in use in the contractors’ business, 56% of respondentsclassified their information systems as being robust, butsaid that they are currently not being used to their fullpotential (for example, Excel documents are still beingwidely used to perform tasks that could be performedjust as easily, if not quicker, within the system).

Despite the perceived reliance on spreadsheets outsideof the main information systems, 53% of respondentssaid the senior management team at their organizationreceived monthly or quarterly project summary reportsand updated project forecasts. A further 34% ofrespondents have periodic management meetings to discuss project statuses and updated forecasts onprojects, thus ensuring senior management is keptinformed of project progress and pertinent issues beingfaced, such as cash flow management and claims.

Overall, it would seem that there are some keyimprovements required in the way contractors managetheir costs and budgets on projects, especially while thecompetitive landscape for tendering is still very toughand there is little room to maneuver on thin projectmargins. This, along with the constant focus to stronglyadminister contracts and have detailed supportingdocuments to support claims and variations, is critical if costs are to be recovered in the long run.

Therefore, it is likely that the cash collection cycle willremain a continuing feature on any CEO and CFO’s dailydashboard – especially where we are seeing a marketrequiring more project finance.

Cynthia CorbyPartnerConstruction Industry Leader Middle East

Scott JuergensAudit Principal

34% of respondents have periodicmanagement meetings to discussproject statuses and updated forecastson projects.


A KSA infrastructureboom Absorbing the economic impactYou do not need to travel around too many cities in the GCC countries to appreciate that governments areinvesting heavily in infrastructure, in a bid to supporturban expansion. The rationale is that having anefficiently working economy where people can movereliably around the ever expanding urban environment,requires investment in integrated public transportationsystems. Take KSA as an example, where six cities areactively designing, or, in Riyadh’s case, buildingintegrated public transport systems, with each programregistering in the tens of billions of dollars’ worth ofgovernment expenditure.


Whether you are an advocate of the various economictheories related to public sector expenditure as a tool to stimulate an economy or not, the fact is thatgovernments are pouring money into industries thathave had, in the past, a tendency to send this moneyoverseas to buy the goods and services necessary tofulfill their contractual obligations.

This ‘offshoring’ of money (or ‘economic leakage’) isconsiderable: Deloitte’s own analysis suggests only alittle over 20% of the direct cost of a capital program inKSA is typically retained within its domestic economy.But this is only part of the story. Particularly, in the publictransport sector, major capital programs have longoperating lives, often in excess of 100 years (think, forexample, of transport systems in some of the majorcapitals across the world, such as the LondonUnderground or the New York Subway). Day-to-dayoperating costs, maintenance, expansion, upgrades andreplacement of these systems, over the long-term, oftendwarf the initial capital cost of establishing the network.This points to potentially enormous repercussions interms of economic leakage, far beyond the initial capitalexpenditure, but also significant opportunities togenerate a sustainable economic impact locally if seized.Before we consider some of the actions to prevent thiseconomic leakage, it is important to look at whyeconomies in the region struggle to absorb and retaincapital and operating expenditure. Deloitte’s analysisshows that economies face two primary challenges inthis regard – the presence of a suitable and scaledsupply chain and a capable workforce (the ‘QuantityChallenge’) and access to appropriate levels of technicaland delivery skill that is available in a competitive andtimely manner (the ‘Quality Challenge’).

These challenges conflict with the pressure on a publictransport program to achieve a good quality solution forcitizens in as short a timescale as possible, and thereforeprovide a justification for the use of foreign goods andservices – which include: • Constructing effectively and efficiently: theobjective of the program is a public transport system,for the satisfaction of local residents. Its success willbe measured against these transport objectives.

• Achieving technologically advanced solutions: it is wholly unrealistic to wait for a local economy todevelop the technical capabilities, when they can bebrought in from abroad.

The issue with localization

Key challenges to investment localization

Quantity challenge

Very limited presence of value chains

Severe shortage of human capital

Low absorptive capacity

Required expertise, skills and capabilities

mismatch

Competitiveness gap

Quality challenge

Whether you are an advocate of thevarious economic theories related topublic sector expenditure as a tool to stimulate an economy or not, thefact is that governments are pouringmoney into industries that have had, in the past, a tendency to send thismoney overseas to buy the goods and services necessary to fulfill theircontractual obligations.


• The maturity of the public private interface:complex primary contracting arrangements need theorchestration of construction, design, engineering,technical and supply services, which may not beavailable locally.

So is it worth investing in addressing the ‘quantity’ and‘quality’ challenges? Your answer may depend on yourview of economic investment and whether a financial or social return is preferred, although often both areinextricably linked. National economic developmentpolicies across the region focus on sector or clusterbuilding, so major public transport should not beexempt from contributing results to these policies andstimulating what would be new sectors for mostcountries in the region.

The diagram below distills the key campaigns requiredto deliver local economic impact and sustainedeconomic development: For an example of success in developing a local

economy to improve absorption, looking to Istanbul ishighly recommended. The city-owned metro systemoperator (Ulsam) took the responsibility 10 years ago to actively engage with local businesses to help thembecome manufacturers of components for its metrotrains (originally supplied by German and Frenchmanufacturers). Over the course of seven years, Ulsamall but replaced foreign component suppliers with localalternatives – in the process cutting costs by up to 75%and significantly improving supply time reliability. Adecision to commit time and share technical know-howresulted in financial savings for the operator and jobcreation in the local economy, which is a clear ‘win-win’situation.

National economic developmentpolicies across the region focus onsector or cluster building, so majorpublic transport should not be exemptfrom contributing results to thesepolicies and stimulating what would be new sectors for most countries inthe region.

CorePrioritized forimmediate focus

SupportingDelivered in thelonger term bya range ofstakeholders

Develop the local supply chain1Develop the labor supply and workforce2

Change community behavior3Promote private and foreign investment4


Another good example is the Tunneling andUnderground Construction Academy in London, a jointventure between the Crossrail contractors and industrytraining organizations, that is delivering relevant skillsand qualifications within the workforce for the Crossrailproject, and a legacy of leading expertise to be exportedglobally.

Each project and country has its own specific challengesto address, but the delivery of a successful strategy thatincreases the local economy’s absorption of expenditure(both capital and operational) and supports aneconomic development agenda can be seen through the following indicators.

Indicators of success• Leadership and ownership of the benefit realizationagenda: presence of a stakeholder whose mission andvision is to achieve local impact

• A set of clear goals, grounded in reality: a strategythat pushes the envelope of local capabilities andcapacity, without jeopardizing the delivery of theproject

• Incorporated in the contractual components:considering local impact from the outset and buildingappropriate obligations for contractors

• Strategic joint ventures: recognizing the opportunityfor knowledge transfer to the local economy from the international markets

• Scale to retain the impacts: the opportunity for thedeveloping local sector to learn and do more onfuture projects

Ultimately, success will be driven from having the visionto see public transport as an opportunity for economicdevelopment and the leadership to navigate localstakeholders through a long-term and complexprogram.

Ultimately, success will be driven from having the vision to see publictransport as an opportunity foreconomic development and theleadership to navigate localstakeholders through a long-term and complex program.

Neal Beevers Senior ManagerMonitor Deloitte



The Middle East’s major regional airlines are increasing theirmarket share, and establishing their respective airports asglobal hubs for international travel. The growth of Emirates(EK), Qatar Airways (QTR) and Etihad Airways (ETD) haschallenged their base airports to deliver the requiredinfrastructure and provide the customer service expected by the discerning traveling public. Also, within the GCCcountries, KSA, Oman, Bahrain and Jordan, are allundertaking significant modernization programs of theirairports. However, could the region’s approximately US$100billion pipeline of airport development be at risk withdeclining oil prices? And if there are lower levels of fundsavailable for capital expenditure, are there alternative waysfor increasing capacity?

Over the past five years, the region has achieved acompound average growth rate (CAGR) in passengers of13.1% and the International Air Transport Association (IATA)is forecasting continued growth at a CAGR of 4.9% to 2034.Each of the airlines that support the region’s major hubs,including Dubai International Airport (DXB), HamadInternational Airport (DOH) and Abu Dhabi InternationalAirport (AUH) are each pursuing, arguably, very differentgrowth strategies.

The changing focus of airport investmentThe facilitator ofeconomic progress


Emirates is seeking to grow organically and throughstrategic alliances, Qatar Airways through globalalliances, and Etihad through partial ownerships ofinternational airlines. There is every possibility that allthe regions’ hub airports will achieve their growthforecasts through growing market share by challengingthe traditional hub airports of Asia and Europe.

Regional aviation growth has been led by Emirates,which has resulted in the continual expansion of DubaiInternational Airport since the 1990s. Beyond thecapacity of DXB, Dubai is planning the expansion of thesecond airport, Dubai World Central (DWC), with phase1 of the US$32 billion expansion to be delivered by2022. The government of Dubai is forecasting andplanning for DWC to be the world’s largest airport with an ultimate capacity of 160 million passengers and 12 million tons of cargo per annum. Integral to this growth will be the continuing success of Dubaiacting as a maritime, aviation and logistics clusterfacilitating the efficient transition of both people andproducts globally, in addition to continuing to developDubai as a tourism destination.

Qatar has recently completed the much anticipateddevelopment of the new Hamad International Airport ata cost of US$17 billion to facilitate forecast growth of28-30 million passengers by 2018. Qatar Airways isseeking to leverage its membership of the OneworldAlliance and is also now IAG’s (the owners of BritishAirways and Iberia) largest shareholder. This providesIAG with greater access into the high growth markets ofIndia and Southeast Asia while giving Qatar access toIAG’s strong European, Transatlantic and SouthAmerican networks.

Abu Dhabi Airport is well advanced with delivering thenew mid-field terminal at an estimated construction cost of US$2.94 billion which will deliver a terminal with capacity for 30 million passengers per annum. Thiswill support Etihad’s growing portfolio of airlines whichhas resulted in Abu Dhabi Airport achieving 20 millionpassengers in 2014, a 20% increase on the previousyear. Continuing to grow at this rate may put significantpressure on the existing infrastructure prior tocommencing operations from the new mid-field terminal in 2017.

Emirates is seeking to grow organicallyand through strategic alliances, QatarAirways through global alliances, andEtihad through partial ownerships ofinternational airlines.


Also, within the GCC, KSA is investing heavily tomodernize its airport infrastructure. The sheer size of the Kingdom combined with relatively weak internalconnectivity is demanding significant improvements toits airport network. Also, Oman is well advanced indelivering its modernization program with the recentopening of its new runway and significant progress onthe delivery of its new terminal with a capacity of 12million passenger per annum. This will support Oman’sincreasing focus on tourism and the expansion of Oman Air.

There is much speculation that the significant decline inoil prices is expected to have far-reaching effects on theeconomies of the region. This has cast a shadow overthe potential risk for certain capital projects being scaledback, including airports. Our expectation is that this may to an extent be true for certain marginal projects.However, the reason many of the region’s governmentsare so focused on investing in their aviation industries isto diversify their economies away from their historicreliance on oil. Restricting, or scaling back, investmentas a result of potentially short-term commodity pricefluctuations will run counter to these long-termstrategies. Deloitte expects there will be changes togovernments investment strategies and that someprojects may be scaled back and/or partly deferred, butoverall, the region will continue to invest in their airportsto meet passenger growth. Also, as a result of morechallenging government budgets, there will be a greaterfocus on project fundamentals including valueengineered design, efficient project cost control andgreater consideration of full asset life cycle costings. This can only be positive to instilling a culture ofefficiency and having a commercial view on creatingassets against an appropriate return on investment and robust business case.

There is also the potential for this to further support the region’s PPP market, as the governments seek toleverage private sector capital and operational know-how. A relevant example of this is the developing

pipeline of airport concessions in KSA where the GeneralAuthority of Civil Aviation (GACA) has already tested anumber of alternative partnering arrangementsincluding Build Transfer Operate (BTO) for MadinahAirport and operations and maintenance concessions forTerminal 5 at King Khalid International Airport in Riyadh.In the future we expect to see increasingly innovativefinancing solutions to develop infrastructure and attractestablished airport operators to develop capabilities inKSA and transfer knowledge.

Against this backdrop of commercial pressures andgreater public scrutiny on delivering value for money,there is an increased priority for capital projects to bedelivered efficiently and by fit-for-purpose organizations.Setting up the delivery strategy and organization at thestart of the project is, of course, critical to success, andthis is something that Deloitte has been supporting anumber of global and regional airports to achieve.

Airports are increasingly seeking to minimize the upfrontcost of developing airports by optimizing capitalinvestment to core assets aligned to the organization’scapabilities. As a result of increasing technology beingincorporated in airport terminals, we are witnessingincreasing outsourcing of baggage systems and ITsolutions. Outsourcing allows the airport operator toconcentrate on value-added activities, reduce upfrontcapital costs, transfer risk to service providers, capture,guarantee and accelerate savings, and transfer to a

The reason many of the region’sgovernments are so focused oninvesting in their aviation industries is to diversify their economies away from their historic reliance on oil.


variable cost structure. An interesting example of this isMumbai Airport, which outsourced its complete ITinfrastructure through the creation of a separate jointventure partnership with the service provider. We expectthis trend to continue as governments seek moreinnovative business partnerships to reduce the capitalrequirements to develop their airports.

However, increasing capacity is not always aboutconstructing more terminals and runways. Improvinghow airports operate, ‘sweating the assets’ byimproving staff capabilities and better ways of workingthrough the application of technology, are becomingincreasingly important and a more cost-effectivealternative to further construction. Nowhere is this moreevident than in the London market where optimizing thecapacity of existing infrastructure has enabled the SouthEast London airport network to continue to grow;however, even this is reaching capacity.

Creating world-class airport infrastructure is only part of the challenge to producing a best-in-class passengerexperience. Delivering on this challenge requires theright combination of technology employed, productoffering and service delivery, which requires continuousimprovement of organizations’ people. Improving thepassenger experience will be critical for all the region’sairports to capture market share and monetizepassenger throughput to achieve appropriate returns on investment.

The dynamic growth of the region’s aviation industrywill continue to demand further infrastructure to bedelivered. However, we expect that as the availability of funding becomes more challenging, there will beimprovements in project controls and an increased focuson value for money from planned projects. At the sametime we expect the region’s airports to continue tofocus on driving greater efficiencies and an enhancedpassenger experience from existing infrastructurethrough the deployment of new technologies andimproved ways of working to meet the service levelsexpected by passengers.

We expect the region’s airports tocontinue to focus on driving greaterefficiencies and an enhancedpassenger experience from existinginfrastructure through the deploymentof new technologies and improvedways of working to meet the servicelevels expected by passengers.

Dorian ReeceDirectorHead of Airports UK and Middle East



Setting the scene The manufacturing of building materials in the GCC plays avital role in supporting the building and construction sector,which is one of the main pillars of regional industrial andeconomic development contributing to economydiversification and job creation. Although the currentcapacity of key building materials in the GCC, ranging fromcement, concrete, glass, plastics to metal products such assteel, is largely absorbed by the regional constructionmarket, the developing macroeconomic changes could have a significant impact on this trend.

While the trillions of dollars’ worth of infrastructure projectsled by the Gulf countries would continue to drive thebuilding material industry in the GCC1, there are imminentchallenges facing the growth of the industry in the mediumto long-term. The recent sharp decline in oil prices andrevenues, slower economic growth prospects, reductions inenergy subsidies and ongoing natural gas shortages in theregion are primary factors that could have a negative impacton the GCC building materials industry. The oil priceevolution would significantly determine the future capacityand market size of regional suppliers to compete againstlow-cost market players such as China and Turkey.

Building material suppliers will, therefore, need to keep aclose eye on the trends emerging on the macroeconomiclandscape and make strategic decisions around thedeployment of their capital and resources to benefit fromthe growth opportunities presented in the region.

GCC building materialsindustry set to bechallenged by theemerging trends in 2015


Assessing the size of the GCC building materialsThe building materials sector is very diverse and rangefrom construction products (e.g. cement, sand, gypsum,stone, glass and fiber glass) to plastic materials used forpiping and insulation and metallurgical industries suchas steel and aluminum used to manufactureconstruction materials.

The Gulf Organization for Industrial Consulting (GOIC)estimated that in 2013, the building materials sector’sinvestments were almost US$34.5 billion (9.3% of thetotal industrial investments), employed nearly 234,000workers (17% of the overall industrial workforce) andoperated 2,741 plants (17.5% of the total factories).

Understanding the recent macroeconomicchanges impacting the industryPotential slowdown in infrastructure projects iflow oil prices persist over the longer term Given the heavy dependence of the GCC constructionindustry on energy revenues, the most significant eventof 2014 for the industry has been the sharp plunge in oilprices. The price of crude has decreased by more than50% since June 2014. As a result of this new priceenvironment, all GCC countries, with the exception ofKuwait, are forecast to run fiscal deficits in 2015. In theshort-term, the deficits that GCC countries are likely toencounter are not perceived to be a pressing concern,due to the strong fundamentals of most of thesenations, particularly the large financial buffers they haveaccumulated and their low debt levels. However, if oilprices remain subdued for an extended period, this willplace a growing strain on public finances and may slowdown their capital and social spending levels. of investments

US$34.5Bfirms2,741

%13.5* %6.6*

workers

*Average growth rate (2009-2013)Source: GOIC, 2014

Snapshot of the contribution of building materials to the GCC industry (2013)

234,100

%10*

Estimated fiscal breakeven oil price (US$/bbl)

BahrainUS$116Oman

US$108

UAEUS$77

KuwaitUS$54

KSAUS$106

QatarUS$60

US$57/bblJan ’15baselineAPSP priceGiven the heavy dependence of the

GCC construction industry on energyrevenues, the most significant event of2014 for the industry has been thesharp plunge in oil prices.

Country Fiscal deficit (% of GDP)

2014 2015

Bahrain -5.4 -12.1

Kuwait 21.9 11.1

Oman -1.4 -16.4

Qatar 9.2 -1.5

KSA 1.1 -10.5

UAE 6.0 -3.7

Source: IMF Regional Economic Outlook, Jan 2015

Deloitte MarketPoint forecasts average 2015 West TexasIntermediate Crude Oil (WTI) price to reach US$62/bbland then to rise gradually over the next few years until it reaches a new steady range of US$75-$80/bbl as early as 2018. Similarly, the Energy InformationAdministration (EIA), the US Energy statistics andanalysis agency, expects the WTI crude oil price toaverage US$55/bbl in 2015 and then gradually increase to reach US$71/bbl in 2016.

Low oil prices increases volatility in the energy-intensive building material industry anddecreases regional cost competitiveness In addition to the impact on the fiscal position of GCCgovernments, the dip in the oil prices will likely impairthe prices of petroleum-based industries, including steel,cement, asphalt, roofing materials, insulation, plasticand other building materials as energy costs constitute a major input in their production. This will lead to adecreased competitive advantage for GCC producers.

The price of steel has already fallen significantly sincelast year’s oil price drop and is forecasted to remainvolatile, similar to other building materials. For instance,in Abu Dhabi, major building material groups havewitnessed price decreases of between 0.4% and 13.6%in February 2015 compared to figures from the sameperiod in 20142.

Slowdown in the world economy has trickle-down effect on the GCC marketAnother key threat challenging the demand and supplybalance of the building materials industry is thedownturn in the global economy which is expected togrow slower than earlier anticipated due to a weakergrowth in Japan and Europe, a sizeable slowdown inChina’s rapid growth and volatility in emerging markets.The slowing of the Chinese economy specially has directimplications for the UAE and the GCC, a significant onebeing the impact on the building materials industryoversupply: indeed, reduced construction and industrialactivity in China has led to a weak domestic and globaldemand which is likely to increase the dumping ofexcess building materials like steel by Chinesemanufacturers at cheaper prices in the GCC impactingthe revenues of regional manufacturers.

US$

/bbl

1985

150

Oil prices

100

50

01990 1995 2000 2005 2010 2015

Jul ‘14Jun ‘14

Source: US Energy Information Administration

Aug ‘14 Sep ‘14 Oct ‘14 Nov ‘14 Dec ‘14 Jan ‘15

US$

/bbl

110

100

90

80

70

60

50


Another key threat challenging thedemand and supply balance of thebuilding materials industry is thedownturn in the global economywhich is expected to grow slower thanearlier anticipated due to a weakergrowth in Japan and Europe, a sizeableslowdown in China’s rapid growth andvolatility in emerging markets.

GCC building material producers face limited gassupplies and rising utility costsA looming threat to the energy-intensive buildingmaterials industry remains the limited local gas supply inthe region. Most countries are net gas importers and theregional focus on energy-intensive industries has putpressure on the allocation of gas. GCC countries willneed to address their gas challenges throughdiversification of gas supply portfolio, exploringalternatives and assessing short- and long-termdomestic needs. An added challenge, which hasimpacted the cost structure of energy intensiveindustries such as steel, is the rise in water and electricitytariffs structure for industries, as introduced in the UAE,Oman, and Bahrain. For instance, in Abu Dhabi,electricity pricing for industrial has recently doubledduring summer peak hours3.

Aside from the gas shortage, heavy reliance on theenergy sector and the market dumping from low priceimports, the lack of national engineers and thecompetition for funding through commercial means are other key challenges hampering the growth of the sector.

Infrastructure projects will be the primary driverof the building materials growth In the midst of the oil price and economic volatility, the key driving force for construction activities remainsthe government’s commitment towards economicdiversification and infrastructure projects. In a typicalconstruction project, the building material costcomponent is estimated at 58% of the total cost of theproject. At an aggregate level, growing infrastructureinvestments are expected to drive demand and growthof building material in the GCC region. Preparations for the FIFA World Cup in Qatar in 2022 and the DubaiExpo 2020 are expected to generate healthy projectactivity across the GCC region that will fuel the marketfor construction materials and act as a catalyst forfurther developments.

Assessing key building materials industry outlook Market forecast of the building materials sectorby segmentKey building materials used in the construction sectorrange largely from cement, concrete, glass, plastics tometal products such as steel. Aluminum is also aconstruction material that continues to gain traction asan alternative to steel and iron, given its favorableproperties (light weight, strength, corrosion resistance,ease of recycling). The current and following sectionswill focus on the main building materials i.e. cement,steel, aluminum that largely influence the constructionindustry sector and their market size forecasts. Below isa snapshot of the global and regional market forecastsof cement, steel and aluminum that anticipates a brightmarket outlook in the long-term for constructionmaterials.

In the midst of the oil price andeconomic volatility, the key drivingforce for construction activities remainsthe government’s commitmenttowards economic diversification and infrastructure projects.


Segment Projectedglobal market

size

Projectedglobal CAGR(2013-18)

Projectedregional

market size

Projectedregional CAGR(2013-18)

Cement 4,600Mt (2017) +4.6% 147 Mt (2017) +4.6 %

Finished steel 1,677 Mt (2019) +2.9% 50 Mt (2020) + 3.8%

Aluminum 66.7 Mt (2020) +5.9% 8.2 Mt (2020) + 4.9%

Construction materials – Key trends and market growth


Cement industry will be less vulnerable to theslowdown in the global economyThe global cement market is expected to grow atapproximately 5% a year, despite a slowdown inChinese construction. Emerging economies in Asia,particularly India and Indonesia, are expected to leadconsumption of cement in the global market. Thegrowth rates, however, will be at a lower rate than the15-year growth spurt beginning in the late 90s, whichwas primarily driven by China. No significant realincreases in global cement prices are anticipatedbetween now and 2018.

Key highlights• Refractory cement, concretes and mortars areexpected to constitute the largest growth markets upto 2017.

• Ready-mix concrete is expected to be the fastestgrowing segment of the cement and concrete marketin 2015, with a projected market share of 27%.

• Blended cement is projected to account for over 70%of cement consumption, partly due to its lower costand environmental friendliness.

Regional trends in the cement industryDemand for cement remains stable in the MENA regiondue to major infrastructure investments underway.

Key highlights• Cement capacity rose from 81.5mtpa in 2008 to123mtpa by 2013

• GCC capacity is 30% of the MENA region and 3% ofthe world’s total capacity

• KSA leads the GCC with a capacity of around 62mtpa(around 50% of the GCC) in 2013

Source: Morgan Stanley, October 2014

3.00%

2013f 2014f 2015f 2016f 2017f 2018f

3.10%

4.70% 4.70%5.20% 5.10%

Global consumption growth forecast (2013-18)

CAGR4.60%

The global cement market is expectedto grow at approximately 5% a year,despite a slowdown in Chineseconstruction. Emerging economies inAsia, particularly India and Indonesia,are expected to lead consumption ofcement in the global market.

Source: Morgan Stanley, October 2014

2010

104.2 106.1117.1 123.0 124.4

KSA

2011 2012 2013e 2014e

C

GCC cement capacity by country (mtpa)

UAE Oman

Qatar Kuwait Bahrain

KSA’s multi-billion dollar infrastructure spendingprogram is driving the bulk of demand in the GCC. KSAhas the second largest market share, after the UAE, inthe overall MENA cement industry. Demand has grownin Egypt as the economy is stabilizing and the GCCstates are providing significant funds and grants forinvestment in Egypt. Algeria has launched a number ofmajor housing and railway projects, which will alsoincrease demand for concrete and cement.

Steady steel demand anticipated in medium- tolong-term despite fears of economic slowdownIn 2015, global steel demand will grow slower (+2%)than the global GDP, as a result of the weakness in the emerging economies and China; however, Asia inparticular South East Asia will continue to be the globalcenter of steel production and consumption. Increasedopportunities for the steel industry are expected in theUS due to upturn in the construction sector.

Yet the biggest challenges facing the steel industry is theoversupply of steel in China and continued investmentsin the steel industry leading to record levels of excesscapacity.

Regional trends in the steel industryThe region in 2014 remained one of the fastest growing in terms of steel production and consumption.Consumption of steel in the GCC has been driven bysignificant investments in the construction sectors of the UAE, KSA and Qatar. GCC finished steelconsumption rose by 6.0% in 2014 and is forecast tofurther grow by 6.1% in 2015. The traditional steelproduction hubs in the region have been Iran and Egypt;however, the bulk of steel production activities has beengradually shifting to the GCC countries with Qatar andKSA experiencing the fastest production growthrespectively 36% and 15%.

Despite the rise in production, the Middle East & Africa(MEA) region remains a net importer of steel (tradedeficit of around 50 million tons in 2013). The steelexports from the MEA region represented less than0.9% of the global volume of steel exports in 2013.Only 3% of the steel produced in the Middle East &Africa is exported within the Middle East: 41% isexported to Africa, 24% to Europe, and 12% to NAFTA.The Middle East imports the majority of its steel fromEurope, including Turkey (34%), China (21%) and CIS(20%)4.

The regional forecast for finished steel demand isfavorable with steel consumption expected to grow by3.8% between 2013 and 2018. MENA steel demand isexpected to reach 50 Mt by 2020 driven by US$4.3trillion worth of spending in reconstruction andinfrastructure across the MENA region from 2015-20.

KSA’s multi-billion dollar infrastructurespending program is driving the bulk of demand in the GCC. KSA has thesecond largest market share, after theUAE, in the overall MENA cementindustry.


However, the medium- to long-term impact of therecent collapse in oil prices has yet to be determined as this could also affect the funding of the majorinfrastructure projects that are underway.

Main barriers to the growth of the GCC steel sectorhave been the drop in oil prices, market dumping bysome overseas suppliers at much higher volumes than in 2013, which has affected GCC steel producers,increased use of aluminum as a substitute by end-userindustries and the heavy reliance on imports due tolimited capacity.

The global aluminum market will continue growingas both the transport and construction sectors areexpected to further expandThe growing number of applications of aluminum inbuilding and construction, transportation, packagingand other industries has increased the production ofaluminum across the world. Global demand is expectedto continue to grow, especially in emerging markets dueto lower per capita consumption of aluminum in theseregions. Further, legislation on CO2 emissions and capsmay encourage the use of aluminum by supporting thedemand for energy-efficient and light-weightingproducts, with beneficiaries in sectors such astransportation, power distribution and transmission, airconditioning, renewable energies and green buildings.

Aluminum industry in the GCC poised for stronggrowth and downstream activityAluminum produced in the GCC now accounts for 10% of global aluminum production, and this figure is set to increase to 15% by 2020, with the rise ofaluminum application in building and construction.


Source: World Steel Association

Iran Egypt KSA UAE Qatar Libya Morocco Algeria

6,7545,471

712 558 417

2,878 2,236

Crude steel output in 2014 (’ tonnes) and year-on-year growth000

15,442

Main barriers to the growth of the GCCsteel sector have been the drop in oilprices, market dumping by someoverseas suppliers at much highervolumes than in 2013, which hasaffected GCC steel producers, increaseduse of aluminum as a substitute by end-user industries and the heavy relianceon imports due to limited capacity.


The investments in the aluminum sector across the Gulf region are also poised to hit US$55 billion by 2020,which include expansion of smelters and new projects in the region. Over the next years, aluminum smelterswill increase their efforts to enhance efficiency of theproduction of existing plants and gain a larger share ofthe global market. The ability to cope with constantfluctuations in London Metal Exchange (LME) prices ofaluminum, along with the appropriate optimization ofthe production processes, regular supply of feedstock,mainly bauxite, and pressing environmental issues would be the most significant challenges facing the GCC aluminum suppliers going forward.

All in all, global and regional market forecasts indicate a positive outlook in the long-term for the majority ofthe construction materials. As sustainability and greenbuilding regulations become increasingly a priority forthe governments in the region, the demand forenvironmentally friendly and energy-efficient buildingmaterials such as aluminum, stone, marble and ceramicsis expected to grow, offering significant opportunities toregional manufacturers.

SourcesUS Energy Information AdministrationEIU Country Economic ForecastsIMF Regional Economic Forecast, Jan 2015MEED Projects, 2015Morgan Stanley, October 2014World Steel AssociationGulf Organization for Industrial Consulting (GOIC),‘GOIC publishes the GCC Petrochemicals Industries’Guide, 16th Feb 2015Abu Dhabi Regulation and Supervision BureauThe Statistics Centre Abu DhabiGCC Investment Strategy 2014, Gulf Investment HouseGlobal Investment House, March 2013

Aluminum produced in the GCC nowaccounts for 10% of global aluminumproduction, and this figure is set toincrease to 15% by 2020, with the riseof aluminum application in buildingand construction.

3.95%

CAGR(2012-18)

Packaging

4.28%

Source: LME, 2015, Bloomberg 2015, Oxford Economics 2015

CAGR(2012-25)

Construction

2.81%

CAGR(2013-20)

Automotive

Forecasted growth of global aluminum consumption (2012-2018)

As sustainability and green buildingregulations become increasingly apriority for the governments in theregion, the demand for environmentallyfriendly and energy-efficient buildingmaterials such as aluminum, stone,marble and ceramics is expected togrow, offering significant opportunitiesto regional manufacturers.


Endnotes1. As per a recent MEED study, construction projects

worth US$2.01 trillion, roughly two-thirds of theGCC’s entire annual GDP, are currently planned andun-awarded in the GCC

2. Abu-Dhabi-building-materials-prices-decline-in-Feb,The Statistics Centre Abu Dhabi (SCAD)

3. New water and electricity tariffs structure forindustries in Abu Dhabi, Jan 2015 - Source: AbuDhabi Regulation and Supervision Bureau

4. Source: World Steel Association 2014

Virginie ClemanconSenior ManagerMonitor Deloitte


Developing debt andcapital markets forfunding infrastructureprojects

The Middle East is sometimes perceived as a market thatis still in the early stages of its evolution in terms offinancing large infrastructure projects, where typicallypublic finance has been predominantly in use. Globally,infrastructure and project finance evolution has recentlyseen the return of project bonds, the growingimportance of Export Credit Agencies (ECAs) and theemergence of infrastructure debt funds which act asplatforms to channel infrastructure lending into pensionfunds and life insurance company asset books. How theMiddle East markets will adopt these trends in the nearterm is key to financing its infrastructure projects in the wake of recent global oil price trends and thegovernment’s vision to make their assets self-funding if there is to be a focus on further developing debt andcapital markets for Infrastructure finance in the region,the key question that ultimately prevails is whether theattention should be on financing innovation, or perhapsmore on government appetite on the extent of need forprivate finance.


There is often talk in the market about the increasingneed for private finance in the delivery of infrastructureprojects. However, it is key to establish whether theneed really exists at the procurer’s level, and, if so,whether this need is driven by better utilization of publicfunds, or a need to drive better Value-for-Money (VfM)solutions.

If one were to look at it from a VfM perspective, the useof private sector based finance not only providesalternate funding options but also brings in efficienciesof scale and best practices of the industry whilefacilitating an optimum risk allocation between thepublic and private sectors, especially if one properlytakes into account the time value of money and lifecyclecosting. This can be allied to a vision or a strategy bygovernments to create assets that become self-fundedand can be measured based on predetermined KeyPerformance Indicators (KPIs), to drive a more corporateapproach to managing these otherwise public assets.

Once the need for private capital is established, onewould need to further explore two layers of furtherchallenge, namely, the extent to which projects andprograms would be packaged in a form that isconducive and appropriate for private finance, anddeploying the most appropriate and efficient financingmodel.

The state of the current market and how best topackage projects for private capital deploymentIn the Middle East, the use of private finance is seldomseen in key emerging sectors like social infrastructureand transport driven by a traditional view that it is thegovernment’s responsibility to provide the funding forthese sectors. The key sectors to have typically seenprivate financing play a large role in the Middle Easthave been the power and utility sectors. Theprocurement of independent power and/or waterprojects (IPPs, IWPs and IWPPs), in Oman, UAE, Qatarand KSA markets where the private sector and financehave had a material role to play are examples of itssuccess in the sector.

What these power and water project structures haveoffered the private sector is a platform that does nottransfer too much risk that are normally seen ontransactions in more developed markets with strongregulatory frameworks.

Typical types of models that have been used to generatebest value through optimal risk transfer include: buildoperate transfer (BOT), build own operate (BOO), buildown operate transfer (BOOT), design, build, finance andoperate (DBFO), design, build, finance and maintain(DBFM) models or concession arrangements. However,it is to be noted that risk allocation between keystakeholders is key to the success of such arrangements.

The key sectors to have typically seenprivate financing play a large role inthe Middle East have been the powerand utility sectors.


Apart from the risk transfer issue, at times, anotherfactor that is seen to prevent private involvement inpublic assets is a concern about control over strategic orsensitive public assets to the private sector. Whilst theseare very valid concerns, retaining ownership publicassets can be structured into appropriate models whileonly giving the private sector the benefit of certainrevenue streams. Another example would be to useprivate sector for building, financing and maintaininghard infrastructure assets (e.g. public schools) while not being made responsible for the provision of theunderlying services (i.e. governments would still beresponsible for providing faculty and curriculum for the school’s operation).

Private finance deployment and developing the markets through innovationObserving trends in the Middle East and moredeveloped markets, it is apparent that project finance is one of the most commonly used methods forchanneling private finance into projects. It is henceworth considering some of the key characteristics and trends of the project finance market.

Project finance market: characteristics and trendsSince the onset of the global financial crisis, many banksin the Middle East that were previously able to lend toproject finance structures on a long-tenor basis (10-40years) have ceased to have the appetite or ability to doso apart from lending to traditional projects in thepower and water sectors over the last few years wherethe majority of projects still continue to be financed on a relatively long term basis (typically 20+ years).

It is therefore interesting to observe that financiersproviding project finance in the region include a fullspectrum of players from conventional commercial andIslamic banks to multilateral agencies and Export CreditAgencies (ECAs).

Subcontracts

Typical project finance arrangement

Public authority

DebtPrivatecapital

Non-recourse/limited recourse financing

Special Purpose Vehicle

Revenue streams typically underpinned by contractual arrangements and/or from user payments commencing once construction is complete and project is operational

May retain asset ownership or right to have asset handed back upon concession expiry

Will likely retain risks that are better managed by

public sector

Equity

Design and build or engineering procurement and construction

Facilities management or operations and maintenance

Apart from the risk transfer issue, attimes, another factor that is seen toprevent private involvement in publicassets is a concern about control overstrategic or sensitive public assets tothe private sector.


The market is starting to develop solutions to deal withlonger-tenor financing challenges, as well as solutions to deal with the more general challenge of lack of depthin the bank debt market. These solutions include:• Development of mini-perm solutions (soft and/or hardbullet), which can help facilitate capital markets accessand better economics to infrastructure projects

• Development of other capital market solutions toinclude construction financing/bridge to bondsolutions and additional methods to channelinstitutional capital into projects (including debt funds,agency models and direct investment/lending units ininstitutions).

• Diversification in sources of financing to include ECAs, Islamic Finance providers, governmentgrants/guarantees and multilaterals.

Take the case of mini-perm solutions, which is oneemerging development of financing solution in theMiddle East. Short-term or hybrid structures arecommonly seen in project finance markets generally,with a hard or soft bullet repayment assumed (oftenknown as hard or soft mini-perms). These loans typicallycome with a repayment requirement of 5-10 years, withrepayment assumed to come primarily from the

proceeds of a refinancing exercise. Such structures havebeen used in the past when the market has struggled toprovide longer-tenor debt options, but can also be usedto increase competition, broaden the available pools ofcapital and achieve improved pricing.

However, some of the challenges with short-termstructures include:• Short term structures expect refinancing ahead of the expected expiry date

• Hard mini-perms involve an event of default in thecredit agreement at expiry

• Soft mini-perms rely on less harsh, albeit stillsignificant, measures, such as free cash lock-ups, cash-sweeps and/or margin ratchets

• Where short-term debt is deployed, the issue ofrefinancing risk is raised. This refers to the risk ofincreased financing costs compared to what isassumed at the onset of a project

• Lenders and sponsors alike may have strong views aswhere the refinancing risk would lie which would inturn affect the project’s bankability or invest ability

• Some opinions in the market consider the publicsector to bear part or all of the risk of increasedfinancing costs as a result of refinancing. However, the competitive state of the market (driven by limitedproject finance opportunities) would in all likelihooddrive the market to accept this risk on the privatesector side.

The emergence of ECAs as an increasingly prevalentfeature of the project finance market is a keydevelopment that has provided an added attractivenessto a private sector players’ proposition while financingprojects. It may not be accurate to refer to ECAfinancing as ‘private finance’ per se, given they areultimately backed by their respective host governments,but nonetheless they are a critical source of finance forinfrastructure.

The market is starting to developsolutions to deal with longer-tenorfinancing challenges, as well assolutions to deal with the more generalchallenge of lack of depth in the bankdebt market.


The nature of the purpose of ECAs allows them to offerterms and conditions not otherwise available in the debtmarket. Their ability to provide long-tenors and bolsterfinancing capacity in the market helps make them anattractive option.

ECAs have been a key source of funding in the recentpast, in particular for those agencies capable ofproviding direct lending. Since 2009, most mega-projectfinanced deals in the region have had ECA involvement.Some Asian ECAs, as a particular example, havedemonstrated a strong capability to fill the gap inlending. However, it is worth mentioning that the duediligence credit approval process for ECA basedfinancing is seen to be more rigorous and timeconsuming than what is seen with normal commercialbanks.

Another material source of finance is that ofInternational Financial Institutions (IFIs) or multilateraldevelopment banks, particularly in the non-GCC MiddleEast countries. IFIs have the ability to provide finance onterms better than the commercial market and typicallyget involved in supporting/ financing projects whenthere is a gap in availability of lending from commerciallenders on projects that are seen to be key to acountry’s economic development in addition to some ofthe social benefits arising from the project. For politicallyand economically challenged countries such as Egyptand Iraq, IFIs will continue to play an important role inthe funding of key infrastructure assets. The criticality ofthese institutions is demonstrated by the roles that theInternational Finance Corporation (IFC) and EuropeanBank for Reconstruction and Development (EBRD)played in the recent market successes within theJordanian renewable renewable energy space (withwind and solar projects being closed).

Any assessment of a Middle East financing marketwould not be complete without consideration ofIslamic/Sharia’-compliant financing as a potential sourceof capital. Some notable examples of recent Islamicfinancing in the Middle East include the 2014 QueenAlia airport restructuring/refinancing in Jordan, the RasAbu Fontas A2 desalination project in Qatar and therecent Medina airport Public Private Partnership (PPP) inKSA. Whilst this form of finance has seen an increasinginterest in most Middle East countries and with certainproject sponsors, there still remains a question on itsability to open any incremental pools of capital. Mostinstitutions participating in the Islamic market face thesame constraints on their balance sheets and lending aswith commercial lending markets. Therefore, althoughIslamic funding may provide additional tranches of debt,to some extent, it may be seen to replace partly, ratherthan be in addition to, conventional commercial debt.

The emergence of ECAs as anincreasingly prevalent feature of theproject finance market is a keydevelopment that has provided anadded attractiveness to a private sectorplayers’ proposition while financingprojects.


A key area to consider when contemplating how thefinancing markets may evolve and progress to facilitateinfrastructure development is the use of capital markets,and more specifically the notion of project bonds. Bondsare long-term debt securities generally purchased byinstitutional investors through public markets, althoughthe private placement of bonds is gaining popularity.

Institutional investors who are the typical buyers of suchcapital market products, require a high level ofconfidence in a project and its sponsors in addition tostrong contractual arrangements, and country specificconfidence. These investors are usually risk-averse,preferring projects with independent credit ratings.Whilst project bonds have been used to financeinfrastructure projects globally, and have certainly beenmore prevalent in the pre-2007 markets, it has onlyrecently begun to re-emerge. However, given thereluctance of investors to bear construction risk and thecumbersome decision making process involved in votesof bond holders, its use in financing projects pre-construction would remain a challenge and hence isunlikely to be used to provide funds during theconstruction period of projects in the Middle East.

However, bonds would offer a viable option forrefinancing operational projects and this can free upmarket liquidity for future project financing.

Beyond capital markets, the more developed regions(e.g. the UK, Canada and Europe) have seen the rise of anumber of infrastructure-focused debt funds in the lastfew years. These funds seek to compete with and takethe place of commercial banks in the provision ofinfrastructure and project finance debt, particularly onprojects in developed markets. Such debt fund platformsexist within many of the large life insurance and pensionfund institutions, as a vehicle to use project finance debtas an asset to service their long-term, annuity styleliabilities (e.g. pension payment obligations).

Whilst infrastructure debt funds have not becomeprevalent in the region yet, there have been instances ofinfrastructure equity funds exploring the Middle Eastmarket in anticipation of opportunities. However, thesefunds have found it difficult to add value as part ofconsortia bidding for primary projects where they arenot the only parties able to provide equity. Additionally,while such equity funds have explored opportunities tobuy assets in the secondary market, competition withsovereign/quasi-sovereign entities (e.g. sovereign wealthfunds), who are able to offer a higher price, driven bypolitical and/or strategic considerations have notprovided an attractiveness to these funds.

ConclusionWith the above factors as a backdrop to consideringhow debt and capital markets may be developed forinfrastructure projects in the Middle East, it isencouraging to note that there is a good degree ofinnovation and potential for further efficiencies andpositive movement. However, to see the sort ofinnovation that might bring a step-change, one wouldneed to consider whether sufficient drivers and

A key area to consider whencontemplating how the financingmarkets may evolve and progress tofacilitate infrastructure development isthe use of capital markets, and morespecifically the notion of project bonds.


incentives exist to bring about this change. Currently,the pipeline of projects expected to come to market in aform that expects private finance is an unknownquantum, over which current market participantsspeculate. The real challenge for governments would beto structure such projects into a form that is primed fordebt and capital markets to unlock material financinginnovations. There is certainly a sentiment in the debtand capital market that a real incentive exists to unlockfunding conundrums and enable the anticipatedprojects to commence and move towards the region’sdiversification goals.

SourceIJ Global

There is certainly a sentiment in thedebt and capital market that a realincentive exists to unlock fundingconundrums and enable theanticipated projects to commence and move towards the region’sdiversification goals.

Umer AhmadDirectorHead of Project and Infrastructure Finance

Thomas JohnAssistant DirectorCapital Projects Advisory


IntroductionSince the release of the Fédération Internationale desIngénieurs-Conseils (FIDIC) rainbow suite in 1999, procurersof major infrastructure in many jurisdictions haveincreasingly focused on effective project delivery inconstruction contracts in order to facilitate an optimal result for project outcome.

Such an approach focuses on identifying and dealing withproject risk early on and working together to mitigate oreliminate those risks before they have a material impact onthe project. It also requires a collaborative approach whichmitigates or reduces the prospect of claims and avoidsentrenched disputes at or towards the end of the project,which, by themselves, can threaten successful projectdelivery.

The New Engineering Contract 3 (NEC3) perhaps typifies thisapproach and has been used in jurisdictions such as the UKand Hong Kong to deliver major infrastructure programssuch as the London 2012 Olympics. Indeed, it has beenmandated by the UK government that all projects aredelivered using this form of contract. However, it has notbeen taken up in the Middle East to any significant degree,with FIDIC remaining the preferred form of contract formajor infrastructure projects.

Towards a projectdelivery focusFIDIC in the Middle East


Given the scale of major infrastructure planned for theMiddle East over the next few years and the fact thatprojects such as Dubai Expo 2020 and the Qatar 2022World Cup having firm immovable deadlines, one mightreasonably expect procurers in the region to movetowards a project delivery focus based on the success of this model in other jurisdictions.

Within this context, this article looks at the successes of NEC3 in the UK in terms of project delivery, whichargues in favor of a project delivery focus in the MiddleEast, before moving on to exploring the extent to which FIDIC contracts already embody a project delivery approach and the potential barriers to this in the Middle East.

The benefits of project delivery focus: someobservations from the UKBy adopting a project delivery focus, procurers, andhitherto clients, can be assured that there are tangibleoutcomes linked to specific contract clauses.

By way of example, NEC3 has specific ‘early warning’provisions which place the onus of responsibility on thecontractor to respond within pre-determined timescales(14 days) to fully quantify and offer a solution for aVariation Order. This is issued as a contract instruction,and upon acceptance, the instruction then becomes acompensation event which has already agreed upon

rates, and embedded design and time impactconsiderations.

The rigid adherence to this process does not obviatedelay nor claims for additional monies per se, but werecontractors across the Middle East to follow the NEC3model, you could reasonably foresee projects withsignificantly less ambiguity around change, the accuracyof pricing of those changes, and the apportionment ofresponsibility for the same.

Project delivery focus under FIDICThere are a number of aspects of the FIDIC 1999contracts which can legitimately be said to promoteproject delivery in terms of early identification of risk,collaboration and effective project management.

By way of example, clause 4.21 deals with progressreporting and requires the contractor to identify on amonthly basis, variations, employer and contractorclaims, as well as ‘comparisons of actual and plannedprogress with details of any events or circumstanceswhich may jeopardize the completion in accordancewith the contract, and the measures being (or to be)adopted to overcome delays.’

Similarly, clause 8.3 which deals with programming,provides that ‘the contractor shall promptly give noticeto the engineer of specific probable future events orcircumstances which may adversely affect the works,increase the contract price, or delay the execution of theworks.’ It also requires the contractor to ‘submit arevised program whenever the previous program isinconsistent with actual progress.’

Clause 20.1 which deals with the notification of claimsfor additional time and money, also provides for thegiving of notice within a period of 28 days after thecontractor became aware, or should have becomeaware, of the event or circumstance giving rise to theclaim.

By adopting a project delivery focus,procurers, and hitherto clients, can beassured that there are tangibleoutcomes linked to specific contractclauses.


These provisions are all directed to the promptnotification of events or circumstances which mightadversely impact upon the delivery of the project so thatthe parties are able to identify and address project risk.There is, however, no express obligation on the partiesto proactively meet and resolve issues notified underthese provisions, unlike the early warning provisionscontained in the NEC3 contract.

That said, the FIDIC conditions do encourage a degreeof interaction and collaboration in relation to project risk and potential claims through the engineer and inparticular his administration of the determinationprocedure. The engineer is required to makedeterminations in relation to a wide range of mattersincluding claims under clause 20.1, the value ofinstructed variations (clause 13), the contractor’sentitlement to interim payments (clause 14.6) andextensions of time (clause 8.4).

In producing determinations under clause 3.5, theengineer has a positive obligation to first consult witheach of the parties in order to endeavor to reachagreement. It is only when an agreement cannot bereached that the engineer must produce a ‘fairdetermination’ on the matter. The procedure thereforeenvisages and requires a dialogue between the partiesand the engineer to explore the extent to whichagreement can be reached. This again encouragescollaboration in relation to issues affecting the projectand is consistent with a project delivery focus, providedof course that all parties properly engage with thatprocess.

Areas for potential developmentWhilst the FIDIC 1999 suite of contracts do promoteeffective project delivery, there are areas where thiscould be strengthened.

It is understood that FIDIC is currently in the process of updating the rainbow suite and we have identifiedbelow some areas for consideration in terms ofencouraging a project delivery focus in the new FIDICcontracts.

Early warning procedureThe early warning procedure is a concept which appearsin NEC3 but which is also a common type of ‘projectdelivery’ structure. It requires the contractor and theproject manager/employer’s representative to bothnotify the other as soon as they become aware ofanything that could increase the total cost or delay the completion date or impair the performance of the finished works.

This is a notification obligation for the sake of sharinginformation, rather than a prerequisite to claiming or atime-barring procedure. The parties then engage in an‘early warning meeting’ to cooperate and discuss howthe problem can be avoided or reduced. Notified eventsare then entered onto a ‘risk register’ which identifiesthe risk, the likelihood of it occurring, the potentialconsequences, the anticipated date of its occurrenceand expiry (if known) and the actions that canreasonably be taken to reduce or minimize the risk.

The FIDIC conditions do encourage adegree of interaction and collaborationin relation to project risk and potentialclaims through the engineer and inparticular his administration of thedetermination procedure.


In the NEC3 approach, typically, the contractor’sentitlement to relief, if it fails to discharge the ‘earlywarning’ obligation, is limited to that which he wouldhave been entitled if early warning had been provided -that is, if there was a more efficient way to manage oravoid the dispute which could have been implementedby either party on the basis of an ‘early warning’ thecontractor will be limited to that relief. There is,therefore, both a positive motivation and a type ofpunishment for not engaging in the early warningprocess.

Proactive program controlAnother area that might be strengthened is the programcontrol and sequencing in terms of requiring the partiesto proactively manage the contractor's program, withthe contractor being encouraged to request or proposeadjustments to issues outside of its control which mayassist the contractor in delivering the works.

For example, if the contractor considers that a newwork space could be opened up or issued to him, he will recommend this. Alternatively, if the employer or

engineer considers that the contractor should re-sequence to enable another trade to work efficiently inone space, then this is a matter that will be discussedand agreed upon.

Claims procedureThe claims procedure under clause 20.1, and inparticular the time bar if notice is not given within time,have been subject to much debate.

The purpose of the claims notification provision in clause20.1 is to ensure that the employer is aware of potentialclaims as soon as possible so that these can beevaluated and the cost or time effects mitigated. If theemployer is not aware of the effects of the claim (or not made aware until much later) then he loses theopportunity to do this.

In the event that the contractor fails to give noticewithin 28 days, the consequences are drastic: ‘The time for completion shall not be extended, thecontractor shall not be entitled to additional payment,and the employer shall be discharged from all liability inconnection with the claim.’

Whilst this undoubtedly provides the proverbial ‘stick’for the contractor to get his notices in on time, it alsohas the potential to give rise to entrenched disputes,particularly where the time or money consequences are such that the contractor simply cannot afford to let the claim go.

In such circumstances, the risk is that the engineer doesnot proceed to determine the claim - including theimportant process of consultation between theemployer and the contractor to try to see if agreementcan be reached - and the claim is rejected out-of-handon the basis of non-compliance with the notice. Theonly steps available to the contractor in thosecircumstances are to then escalate the matter to theDispute Adjudication Board (DAB) and finally, toarbitration.

Another area that might bestrengthened is the program controland sequencing in terms of requiringthe parties to proactively manage thecontractor's program, with thecontractor being encouraged to requestor propose adjustments to issuesoutside of its control which may assistthe contractor in delivering the works.

It is submitted that this outcome is not in the interests ofeither party where there is a valid basis for the claim andthe late notification has not prejudiced the employer interms of him being able to take action to mitigate oravoid the claim. An alternative approach would be toprovide for some discretion on the part of the engineer(or DAB) to allow the claim where the failure to givenotice in a timely manner has not and could notprejudice the claim such that the substance of the claim can be addressed.

In this regard, it is to be noted that the FIDIC Gold Book,which was released in 2010, goes some way toachieving this by providing that the DAB may considerclaims which have not strictly complied with the noticeprovisions, provided that there is a valid and justifiablereason why the claim was not submitted within time.

If this approach were to be rolled out across the otherFIDIC contracts, then this would potentially minimize thepotential for entrenched disputes and encourage theparties to engage in relation to the substance ofpotential claims and how the consequences might bestbe mitigated on a best-for-project basis.

Potential barriers to effective project delivery inthe Middle East There remains historic and deeply entrenched barriers to project delivery across the region. The resistance toother forms of contract has been one such issue, butthe operating practices of some clients, and indeedcontractors, have been prejudicial to collaborative,transparent and ultimately successful delivery.

Within the context of the use of FIDIC in the region, oneissue in particular is the extent to which the discharge ofthe engineer’s duties is fettered by the requirement toobtain prior approval from the client, which canundermine the engineer’s ability to properly administerthe contract, and which in turn can prohibit the partiesidentifying and dealing with issues early on, and canalso lead to entrenched positions and, ultimately,disputes.



Clause 3.1 of the FIDIC 1999 standard form contractsdeals with the engineer’s duties and authority, andprovides that ‘the engineer may exercise the authorityattributable to the engineer as specified in or necessarilyto be implied from the contract.’ However, the clausealso goes on to state that “if the engineer is required toobtain the approval of the employer before exercising aspecified authority, the requirements shall be as stated inthe particular conditions.’

It is relatively common for clients in the region to usethe particular conditions expansively to require priorapproval in relation to the discharge of the engineer’sduties, including the issuance of determinations as toextensions of time, variations, cost claims and otherclaims falling under clause 20.1.

As set out above, the determination process is a keyaspect of the FIDIC regime and one that encourages the parties to collaborate in relation to issues affectingproject delivery, with the engineer ultimately producinga ‘fair’ determination in the event that the parties areunable to reach agreement. If, however, the engineer is required to obtain the prior consent of the clientbefore issuing that determination, then it is at leastquestionable as to whether it would have been reachedfairly, particularly where there is no transparency as towhat has passed between the client and the engineerprior to the issuance of the determination.

Where the engineer’s ability to produce a fairdetermination is perceived by the contractor as beingfettered by the process of prior approval required by the client, then this is likely to give rise to more formaldisputes under clause 20, which distracts the parties’efforts from successful project delivery towards a moreadversarial and claims-driven environment which is notin the best interest of the project.

The issue is compounded by the fact that, in the MiddleEast, the DAB procedure written into clause 20 of theFIDIC 1999 suite is often deleted and replaced by anengineer’s decision process akin to that provided forunder the FIDIC 1987 form. This effectively requires theengineer to provide a ‘decision’ in relation to disputes incircumstances where a determination has already beenissued in respect of a claim for additional time or money.

The difficulty with that procedure (and presumably oneof the drivers for the introduction of the DAB process) is that the engineer that has already produced anunsatisfactory determination is unlikely to produce adecision contrary to its early determination of the sameissue. Thus the parties can very quickly find themselveson the brink of an arbitration during the course of a liveproject, which can be both damaging to the parties’relationship and to the delivery of the project.

It follows that even on the basis of the existing FIDIC1999 suite, the engineers’ ability to discharge theirduties fairly (and to a certain degree impartially) isparticularly important in terms of ensuring theadministration of the contract in a manner whichpromotes proactive and collaborative projectmanagement and avoids entrenched disputes.

This is an area which could be improved in the MiddleEast by relaxing the areas where clients’ prior approval is required for the discharge of the engineer’s duties,and in particular in relation to the determination ofentitlements to additional time and money in order to avoid entrenched disputes.

The determination process is a keyaspect of the FIDIC regime and onethat encourages the parties tocollaborate in relation to issuesaffecting project delivery, with theengineer ultimately producing a ‘fair’determination in the event that theparties are unable to reach agreement.


Concluding thoughtsIt is undoubtedly the case that there is a shift towards aproject delivery focus in many jurisdictions, as is evidentfrom the development of standard forms such as theNEC3 and the widely publicized successes of high profileprojects such as the London 2012 Olympics, which havebenefited from this approach.

The FIDIC 1999 suite undoubtedly contains provisionswhich are consistent with a project delivery focus,although there are some areas where this could bestrengthened, particularly around issues such as theearly warning procedure, and more prescriptive projectmanagement tools to aid the early identification andresolution of matters which threaten successful projectdelivery.

Whilst the FIDIC suite is and remains the contract ofchoice for many procurers in the Middle East, it is notuncommon for the risk allocation provided for in theseforms to be heavily amended to ensure wholesaletransfer of risk to the contractor and to ensure that the client retains maximum control over the project,through, for example, the requirement for wide-rangingapprovals prior to the engineer discharging their dutiesunder the contract.

Such an approach risks running contrary to a projectdelivery focus and instead may encourage an adversarialenvironment that increases the risk of lengthy formaldisputes arising, and which ultimately fail to bedetermined by arbitration, particularly where there is no intervening DAB procedure in place.

Given that there are time-critical projects of internationalimportance in the horizon, such as Dubai Expo 2020and the Qatar World Cup 2022, now is perhaps the time for the region to re-evaluate its approach to theprocurement and administration of major infrastructureprojects, and to move towards a project delivery focuswhether through the use of the FIDIC suite and theforthcoming updates thereto, or through the use ofother standard forms such as the NEC3.

It is undoubtedly the case that there isa shift towards a project delivery focusin many jurisdictions, as is evident fromthe development of standard formssuch as the NEC3 and the widelypublicized successes of high profileprojects such as the London 2012Olympics, which have benefited from this approach.

Ben HughesDirectorCapital Projects Advisory

Manfield MandigoraAssistant DirectorCapital Projects AdvisoryTel +974 (0) 4 434 [email protected]

Scott JuergensAudit PrincipalTel +971 (0) 4 376 [email protected]

Akbar AhmadAudit PartnerTel +971 (0) 4 376 [email protected]

Madeleine Chen ToddChinese Services Group ManagerTel +971 (0) 4 376 [email protected]


Virginie ClemanconSenior ManagerMonitor DeloitteTel +971 (0) 2 408 [email protected]

Contributors

Andrew JefferyManaging DirectorCapital Projects AdvisoryTel +971 (0) 2 408 [email protected]

Neal BeeversSenior Manager Monitor DeloitteMob +971 (0) 56 100 [email protected]

Dorian ReeceDirectorHead of Airports UK and Middle EastTel +971 (0) 4 506 [email protected]

Umer AhmadDirectorHead of Project andInfrastructure FinanceTel +971 (0) 4 506 [email protected]

Thomas JohnAssistant DirectorCapital Projects AdvisoryTel +971 (0) 4 506 [email protected]

Rami QudahPartnerTel +974 (0) 4 434 [email protected]

Cynthia CorbyPartnerConstruction Industry LeaderMiddle EastTel +971 (0) 4 376 [email protected]

Ben HughesDirectorCapital Projects AdvisoryTel +971 (0) 4 506 [email protected]


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