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BOOM GLOOM: Contractors face perils in Gulf construction boom

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Irregular payments, a lack of transparency in deal-making, weak enforcement of the law and occasional political turmoil have left some companies badly burnt.

June 28, 2012 5:25 by



 

For British architects Austin-Smith Lord, winning a contract in 2006 to help design a cultural complex in Abu Dhabi looked like a lucrative deal as oil-rich Gulf states were showering billions of dollars on infrastructure and tourism projects.

 

Its involvement, however, proved disastrous after its client, a government agency, failed to pay it millions of dollars in fees on time, forcing the company to announce lay offs late last year and hold discussions with creditors, the company said at the time.

 

The case underlines the perils of the Gulf’s infrastructure boom, which has seen construction firms, architects, engineers and consultants flock to the region from around the world.

 

The Gulf Arab countries’ enormous wealth and the size of its projects mean rewards can be huge. The total value of construction projects planned or underway in the six Gulf Cooperation Council states – the United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman – was about $1.9 trillion in 2011, according to a report by Citigroup.

 

But the risks are considerable – problems that go well beyond the usual travails of the construction business in developed economies. Irregular payments, a lack of transparency in deal-making, weak enforcement of the law and occasional political turmoil have left some companies badly burnt.

 

Last year, the average value of disputes in the construction industry in the Middle East doubled to $112 million from $56 million in 2010, bucking a downward global trend, according to global consultancy firm EC Harris.

 

In Kuwait, a political crisis, which saw the cabinet submit its resignation on Monday, has put the implementation of multi-billion dollar economic projects on hold.

 

ERRATIC

 

Abu Dhabi enjoys political stability but the government can be a capricious client. Erratic payments have been compounded by the global economic downturn, which has seen even the emirate, which owns some 95 percent of the UAE’s oil, slow projects.

 

“We can’t make a big fuss as we don’t want to upset them too much, but in the long run we can’t afford this,” an executive at a European consultancy firm told Reuters. It claims to be owed 50 million dirhams ($13.6 million) by an Abu Dhabi state entity.

 

Major local companies have been hit too; slow payments from Abu Dhabi for projects were a factor in the troubles of Al Jaber Group, a family-held conglomerate that is conducting a $1 billion-plus debt restructuring, a c ompany source and bankers have said.

 

Last year Abu Dhabi launched a strategic review of government spending that saw big projects pushed back, funds frozen and management shake-ups at the top of state-linked companies. Even the most high-profile projects were not spared; openings of branches of the Louvre and Guggenheim museums and the Zayed National Museum planned for Saadiyat Island, a $27 billion cultural and tourism project, were pushed back.

 

After neighbouring Dubai’s debt crisis of 2009 and 2010, some contractors were left unpaid for years. Dubai renegotiated many of the contracts, leaving builders with no option but to take a cut on their payments.

 

By contrast, analysts do not think Abu Dhabi is running out of money, seeing its spending review as a prudent step to avoid waste and shift emphasis to social welfare rather than prestige projects.

 

But the review has put enormous strain on the construction industry. Scores of companies, including British, U.S. and Australian firms, are waiting to be paid by Abu Dhabi government entities. A total value for the amount owed to contractors has not been made public, but it is likely to be several billion dollars, according to estimates by three construction industry sources.

 

WILLING TO FIGHT

 

Companies affected by slow payments in Abu Dhabi say their options to recover the money are limited.

 

“There is an absence of effective recourse, or fear that recourse will mean no future contract,” a partner at a company carrying out advisory work for an Abu Dhabi government entity told Reuters on condition of anonymity.

 

A local contractor agreed: “If anything happens, you don’t dare to go down the route of legal action. You will definitely have a black mark against your company if you do that.”

 

However, attitudes are starting to change as even some big companies find they need to obtain funds owed to them to stay afloat, said David Dale, regional head of contract solutions at EC Harris International.

 

“More contractors are now seriously considering taking these developers on. There seems to be a growing appetite for fighting to get their money back,” said Dale.

 

Dale and an Abu Dhabi-based lawyer involved with the industry, who declined to be named, said they had seen an increase in disputes being referred to arbitration.

 

Abu Dhabi authorities, who estimate government-linked entities are working on around 1,300 projects in the emirate, say they have taken steps to address the situation.

 

“The Abu Dhabi Government is fully aware of its obligations in terms of outstanding payments to contractors, and has taken the appropriate steps to ensure that all these obligations are met by the responsible government entities,” the government said in a statement issued to Reuters this week.

 

“One may appreciate that … in such a large portfolio of projects some delays in delivery or payment are to a certain extent inevitable,” it added.

 

Earlier this year some funds were released to settle some late payments, foreign diplomats and industry sources said.

 

CONCERN

 

Such steps have only partially eased contractors’ concern. After announcing the end of the spending review in January, the Abu Dhabi Executive Council said a raft of multi-billion dollar projects had been approved but did not reveal budgets or timelines. This has left contractors involved in projects uncertain about payment schedules.

 

“Issuing a statement announcing the completion of the review and more spending for projects, and actually releasing that money into the economy, are two different things,” noted Ayesha Sabavala, an economist at the Economist Intelligence Unit.

 

Some firms say they have been so put off by problems in Abu Dhabi that they are looking for work elsewhere in the region.

 

“We’ve held back from bidding here and are doing more work in Kuwait and Qatar,” the consultancy firm executive said.

 

Some industry experts say foreign contractors themselves are partially to blame for their difficulties. They are so eager to obtain work in the Gulf that they sometimes throw caution to the wind when signing deals, only to regret the terms later.

 

“One of the problems is that so many companies come here and sign very onerous terms that developers put in front of them. These people are willing to sign anything. It’s not all one-way traffic,” said Dale.

 

And sectors of the industry continue to do well. They include the construction of middle-income housing for Abu Dhabi citizens, which is a government priority. In some cases, contractors are even being paid more than the specified price if they are working on key projects, industry sources said.

 

“It depends on what the country needs. Hotels and so on are not needed, so when the demand slows, the payments are not there. But when it comes to infrastructure and facilities, there is no issue,” the local contractor said. (Editing by Andrew Torchia and Susan Fenton)



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1 Comment

  1. Mohammed Khan on July 1, 2012 1:02 pm

    It is so strange, people/organisations do not learn. After having burned themselves of millions of Dirhams in the period 2009-11, they are still sticking in the country hoping things will turn for better in the ner future. There is an ongoing global economic/financial crisis. The smart ones should save whatever finances they have now instead of losing everything and just living in hope. As an example, banks in Dubai, UAE have to recover an amount of USD 51 billions which they had lent in the Dubai market during its glorious days before 2008. When do you reasonable think that banks will get its loans (depositors monies) back. Anyones guess.

     

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