Deloitte GCC Powers of 2017 | If it’s fundable it’s feasible

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02 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Contents

4 10 14 18 GCC’s construction Interview with Marcus Investing in innovation in VAT implementation industry outlook Truscott, Managing ’s largest airport What does it mean for the Director at Multiplex construction industry? Middle East 22 28 32 38 KSA’s & IFRS 15 disclosure Interview with Mr. LIU funding squeeze construction sector 2017 requirements Fangjiang, Vice President Myth or reality? Who dares wins Are contractors ready & MENA President of for it? SEPCOIII Electric Power Construction Corporation Delivering power construction solutions fit for the region

44 48 52 56 What’s happening in the UAE Causes of construction The evolution of Interview with Bishoy construction market? disputes in the Middle construction Azmy, CEO and Executive East How building information Director at Al Shafar modeling and lean General Contracting (ASGC) management are transforming the industry

60 64 72 76 Why is construction Interview with Mr. YU Tao, Emerging risks, trends Leisure and entertainment productivity so low? President & CEO of China and risk management investment and economic State Construction mechanisms related to diversification in the GCC Engineering Corporation third parties A long-term play Middle East (CSCEC ME) How CSCEC ME is leveraging technology to add value to construction projects and pushing the boundaries of what is feasible

03 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

04 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

GCC’s construction industry outlook

05 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Some of the key Whilst business conditions are tougher Fiscal adjustment will need to continue today and project activity has been over the medium-term with measures to strategic initiatives slowing down since 2015, the increase revenue, such as further energy construction industry in the Middle East price reforms or the value-added tax in which governments are region will sustain its workflow going the GCC, and controls on public grappling with involve forward. This will be driven by economic spending. The International Monetary and demographic needs, initiatives Fund (IMF) predicts that as a result of the the private sector taking associated with the Saudi Vision 2030, oil price recovery, lowered spending, and a more active role in the Economic Vision 2030, the reforms implemented on energy Plan 2021, and Qatar National Vision prices, the overall GCC deficit is expected economy, job generation 2030, as well as tourism related projects, to reduce in 2017 to 4 percent of GDP, for a rapidly growing and the commitment from governments from 10 percent of GDP in the past two towards infrastructure investment. years. The fiscal balance in the GCC has labor force, increased been negative since 2014, but the deficit Regional governments remain focused on could be reduced to less than 1 percent localization, and changing their development models and of GDP by 2022 if the implementation attracting foreign pursuing fiscal adjustment policies, while of reforms is sustained, according to ambitious national transformation plans the IMF. investors through to strengthen economic resilience are updated laws and the work in progress. Some of the key Project activity declined in 2015 and strategic initiatives which governments further decreased in 2016 to $117bn easing of restrictions. are grappling with involve the private of project awards. In 2017, the value of sector taking a more active role in the contracts awarded was $108bn, led by economy, job generation for a rapidly the UAE with $43.5bn and Saudi Arabia growing labor force, increased with $24bn. The projects market has GCC fiscal balance (In % of GDP) localization, and attracting foreign underperformed across different sectors 2015 2016 2017e 2018e investors through updated laws and and geographies except for Dubai, and in 0 the easing of restrictions. particular on the real estate side, where

-5 -4 GCC project awards 2014-2017 ($bn) GCC project awards in 2017 ($bn)

-6.5 200 50 -10 -9.4 40 -12 150 -15 30 n n b 100 b $ Source: IMF $ 20

50 10

0 0 2014 2015 2016 2017 UAE Saudi Kuwait Oman Qatar Bahrain Arabia

Source: MEED Projects

06 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

developers have the financial capability to fund projects and are less reliant The region needs to adjust to, and on government budget spending on infrastructure. When looking at the understand the need to, assess the market sentiment amongst contractors, there is consensus that Dubai is still the whole life cost of assets for PPP to be a bright spot compared to the rest of the GCC markets, where there are viable partnership and result in more significantly fewer construction opportunities. pragmatic assessments of return on

A number of multibillion dollar schemes, investment on all infrastructure and including various metro systems, have contributed to the increase of total capital project investments. contract awards in the region over the past years, and these will likely stabilize to lower levels in the foreseeable future The regional projects pipeline appears Projects pipeline in the GCC by industry, as of December 2017 ($m) as various social infrastructure projects solid with over $2tn of projects currently in the planning stage, indicating there is conclude over the next few years. Various 59.01% GCC governments intend to have the still a need and demand. Construction, private sector supporting the provision the largest sector with more than $1tn of costly traditional government projects of projects in the pipeline, is followed by through the use of public-private transport with $447bn, and power with $224bn, according to MEED Projects. 1.16% $2,444,680m partnership (PPP), build-operate-transfer 2.21% Dubai and Qatar, focused on Expo 2020 (BOT) or other financing models, which 2.89% will have a positive impact on sector and the World Cup, will continue to be 3.22% activity. PPPs, however, still seem to event-driven markets, whilst a number of 4.03% large-scale mixed-use developments are 18.32% generate a certain level of skepticism 9.17% within the market, outside the power being planned in Saudi Arabia. and utility sectors which have a more Construction Chemical established model. Supporting Transport Gas regulations and project bankability, and Power Water hence feasibility, should aim at further Oil Industrial strengthening the legal framework and build up confidence for PPPs to gain Source: MEED Projects some traction. The region needs to adjust to, and understand the need to, assess the whole life cost of assets for PPP to be a viable partnership and result in more pragmatic assessments of return on investment on all infrastructure and capital project investments.

07 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Kuwait, the strongest financially in the There are significant affordable region, has a focus on public-private partnerships, particularly due to the housing requirements across the benefit of bringing in private sector expertise. The major projects being region, and more specifically in Saudi planned are in the construction and transport sectors. Kuwait Authority for Arabia, Kuwait, and Bahrain, where Partnership Projects is planning to develop a metro system within Kuwait housing schemes are being planned City, as a PPP type of project that will cost around $7bn. On the construction side, to build a large number of new units. the Public Authority for Housing Welfare (PAHW) plans to build a $14bn residential city with 35,000 housing units and other The outlook for Abu Dhabi is slow, with services, including clinics, banks, and potentially two transport projects coming commercial malls. back to market, the and Network, which were put on There are significant affordable housing hold in early 2016. Other projects in the requirements across the region, and study phase in the emirate are ADNOC more specifically in Saudi Arabia, Kuwait, gas developments and power generation and Bahrain, where housing schemes are plants. Dubai, a market underpinned by being planned to build a large number of building a tourism Industry and delivering new units. Expo 2020, with growing population demands, still has a solid level of project In Qatar the government continues its activity. The announced 2018 budget is policy of prioritizing projects related to the largest ever; 21 percent of it has been World Cup 2022, including the roads and allocated to infrastructure investments as public transport networks, stadiums and the emirate prepares for construction other commercial developments, such as projects related to Expo 2020. Transport Lusail City. Transport projects expected to projects in the planning stage are the be awarded by mid-2018 are the metro expansion of Al Maktoum International connection to the airport terminal, phase Airport being awarded in different more 2 of Doha Metro, which comprises the manageable package sizes, as well as extension of four lines, and Hamad extensions to the and Dubai International Airport’s main terminal Tram to further connect the city and extension. The Lusail City mixed-use serve a growing population. Dubai development is currently under Harbour, Dubai Creek Harbour and construction and will see some sub ’s Marsa Al Arab near the packages awarded next year. hotel are some significant ongoing and planned mixed-use Both Oman’s and Bahrain’s project construction projects that will comprise markets are relatively small in size. Oman residential areas and tourist attractions. has been substantially affected by the

08 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

oil price drop, but the one key ongoing space designed to increase the capacity As we know, GCC geographies differ in project is the airport expansion. Due to for pilgrims and visitors to the Grand their infrastructure needs, and their be awarded in 2018 are an industrial Mosque. Saudi Arabia’s Public Investment stages in development and investment economic zone budgeted at $10bn, Fund (PIF) is planning a project in the in key infrastructure and social phase 1 of the Omagine mixed-use north-western region called NEOM, which infrastructure. All of the countries have development comprising residential aims to develop nine key economic state-led economies, where governments and commercial buildings, and a water sectors, including biotech, energy, are reliant on natural resources which desalination plant, a project funded by mobility and digital science. The Ministry they remain focused on diversifying. the GCC to meet the growing needs of of Housing is studying a project funded water consumption in the Gulf countries. by the government to build 100,000 GCC governments, conscious that the oil Bahrain’s government is planning the housing units over the next seven years dependent model is not sustainable, construction of a 115km light rail network in Riyadh. Transport projects due in the continue to implement reform agendas in the country connecting different cities next couple of years are other Jeddah with various initiatives to lower the and aiming to ease traffic congestion. metro lines, and the high-speed rail burden on public budgets and transition The project is expected to be awarded connecting Riyadh to Dammam with a to a diversified economy with a more- towards the end of this year. Two mixed- $14bn cost. There is a lot of large-scale skilled workforce. use schemes due to be awarded in 2018 opportunities for the Kingdom to be are Marsa Al Seef and Bander Al Seef, delivered in the foreseeable future, once The privatization of some key state- with respective budget values of $2.5bn the government will have completed a owned entities, such as the plans to issue and $2.7bn. Both will include residential review and reprioritization of key projects. an initial public offering (IPO) for part of buildings and various other amenities. Aramco and more recently ADNOC, is a phenomenon that most economies go Saudi Arabia has undergone significant The privatization of some through as they start to mature and reforms during the past two years. Saudi change to a more private sector-led Vision 2030 comes with a broad set of key state-owned entities, economy. Fundamental to the success of objectives to wean the country off its such as the plans to this transition will be the private sector dependence on high oil prices. The involvement. The use of public-private Kingdom aims to increase the issue an initial public partnerships, attracting foreign direct contribution to GDP from the private offering (IPO) for part of investment and privatization of state- sector to 65 percent from the current owned assets are key elements to 40 percent. There is a plan to privatize Aramco and more achieve the GCC leaders’ visions for a number of public entities in the recently ADNOC, is a socio-economic reform and fiscal healthcare, services and energy sectors, balance. as well as privatizing projects and having phenomenon that most them delivered on a PPP basis. by Cynthia Corby , Audit Partner and Construction of mixed-use schemes is economies go through Infrastructure & Capital Projects Leader, being planned in the Kingdom, some of as they start to mature Deloitte Middle East which are The Heart of Jeddah, a major economic development with business and change to a more and residential areas and commercial private sector-led facilities in the north of Jeddah. Rou’a Al Haram and Rou’a Al Madinah, each economy. valued at $10bn and part of Vision 2030, will include residential and commercial

09 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

10 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Marcus Truscott, Managing Director at Multiplex Middle East

11 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Multiplex is a leading international change happening towards the end of collaborative approach with clients and contractor with more than 55 years of 2018, when market conditions are likely project management consultants (PMCs.) building experience and significant to improve and all participants, including Multiplex believes that consultation and presence in the Middle East since 1997. employers, contractors and funders will collaboration significantly improve the At a time when the region and the contract in a more measured way. progress and quality of projects, and, as industry have been subject to significant such, they work together with their clients change, the company has performed When speaking about the company and delivery partners from the outset, solidly and completed more than 50 and their goal, he says they are not just including them within the team. This major projects since their establishment limited to on-time and on-budget delivery usually gives them a clearer in the region. Projects include the W of projects but exceeding clients’ understanding of clients’ objectives, Hotel in Doha, expectations, adding genuine value to makes it easier to anticipate challenges (commercial tower), The Index and Gate projects by leveraging their experience and remain flexible to deal with complex Buildings in DIFC, JW Marriott Marquis and knowledge from their global network. and dynamic situations. Hotel and the in On each project, appointing dedicated Dubai, Eastern Mangroves and the team leaders who think like owners, Over the past five years they have looked Westin Golf Resort & SPA in Abu Dhabi. champion the project and guide at diversified projects, such as schools Multiplex operates and delivers in all progress. “When others say it cannot and malls, and continue to play to their aspects of the property cycle, and be done, we deliver.” strengths that reside in commercial continues to play to their strength, which construction. They are selective in is major commercial construction. With He believes key to their success to date choosing the projects to bid for and will an established presence both in the UAE is taking a long-term view, partnering only proceed where they believe the and Qatar, the company continues to with clients and communities to create project will be profitable, whether small pursue opportunities in other GCC enduring benefits for all stakeholders. or large scale. Over fifty percent of their countries. Multiplex has a proven ability to deliver contracts are design and build (D&B), large-scale and complex landmark being this their preferred delivery route We spoke to Marcus Truscott, Managing buildings and commercial structures. as they have proven over time that their Director at Multiplex Middle East, who design teams spend more time on build- shared his views on the industry at He thinks their clients choose them only projects. present, some of the key challenges for their innovative excellence, with the being faced and the future outlook. key being that innovation and creative On industry challenges, he mentions the Marcus expects to see some positive thinking are usually the result of a major ones are delayed certifications, delays in approvals of variations and claims, and significant changes to design He believes key to their success to date that continue to occur in the construction phase. The requirement of unconditional is taking a long-term view, partnering performance bonds by project employers continues to present a key risk to with clients and communities to create contractors, and often meaning that the contractor manages this risk whilst enduring benefits for all stakeholders. dependent on supply chain performance to ensure milestones are met and Multiplex has a proven ability to deliver projects delivered. large-scale and complex landmark When asked about the company’s strategy and long-term focus, Marcus buildings and commercial structures. said they are focusing on three areas:

12 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

concentrating on every stage of the project life-cycle, upstream control of Contractors are happy to be pushed critical elements through rigorous analysis of risks and opportunities, and on time and delivery, but need to be closing the gap between concept and work process amidst the variability of backed up with timely approvals of behavior and performance within the industry. Marcus recognizes the value of variation orders and a sensible planning every phase of a project, and the importance of tempering the focus assessment of the time and cost based on both the client and project needs in order to minimize risk and impact of changes. maximize value.

One of Multiplex’s strengths lies in Their corporate governance processes modelling (BIM) on every project several appropriately applying these principles are robust and encompass local and years ago. They have also developed a into a fully integrated management global credit committees, client due bespoke ‘jump formwork” system, which system known as ‘BOS’ – the Multiplex diligence and the PMCs. It is key in this has increased the speed of construction Operating System. This system economic cycle to assess the feasibility of significantly. Multiplex is also committed encompasses not only key certified the project in order to appraise the to looking for sustainable ways to work systems but also those disciplines that paymaster’s ability to raise capital and and deliver projects and are using bio are the cornerstone of their business, funding, and hence secure timely fuel instead of diesel and more recently including customer relations, operations payments for the contractors. Marcus solar energy for power & water (design, programming, logistics) also highlights the importance of regeneration projects. marketing, people, accounting, safety and cooperation amongst PMC’s, and says sustainability. Multiplex has all of these that a good PMC has the drive to Multiplex remains focused on their systems working cohesively, meshing as complete the project, is proactive, approach, their diligence and their appropriate in order to deliver efficient, collaborative, and focuses on progress building systems working cohesively, in consistent, and seamless high- and delivering on time. Contractors are order to deliver efficient, consistent, and performance outcomes for clients. happy to be pushed on time and delivery, seamless high-performance outcomes but need to be backed up with timely for their clients in this demanding A highly-skilled staff base also gives them approvals of variation orders and a economic environment where demands the ability to better deliver their projects sensible assessment of the time and cost revolve around acquiring more for less. with a loyal workforce which reduces the impact of changes. learning curve and builds critical skills Marcus Truscott , Managing Director across all jobs. The senior management In a rapidly changing technological of Multiplex ME team members have been in the environment, the construction industry is company for over a decade, and the one step behind many others in terms of labor force is trained in training camps technology adoption. On this arena, the company has set up to ensure all Marcus thinks 3D printing will shape the labor develops the requisite skills to industry in the future and mentions thin maximize productivity and efficiency. margins to be an inhibitor towards They also provide long service incentives technological advancement. The to their staff and a labor education fund company promotes innovative building for their dependents, which they believe methods, which have provided very improves productivity and loyalty to the efficient and effective building processes. company. They introduced building information

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Investing in innovation in the world’s largest airport

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15 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

At Dubai Airports having a long-term view 2018 traffic across both of our airports, passengers. Current legacy thinking is an absolute necessity and each DXB and DWC, is projected to exceed has also produced a series of vertical progressive year gives us the opportunity 91 million. In the long-term Dubai’s solutions for our customers to pass to track progress and reaffirm our geocentric location, open skies policy, through horizontally – during which they strategic approach. While we are mindful which promotes traffic expansion, and are massed together into queues. This of short-term fluctuations to regional and the city’s continued emergence as a is not modern thinking. Today’s most global traffic volumes due to socio- leading center for trade, commerce and successful companies start with the economic factors, we must also consider tourism will continue to spur traffic customer. Examples of this abound. macro-economic factors and emerging growth. By 2025 we will see passenger Uber, Amazon, Facebook and eBay all trends that will shape our world 10 years traffic levels rise to 120 million. take what customers hate about taxis, or more from today. All of these elements shopping, communication and selling are ultimately factored into the Accordingly, we are solidifying plans to things – and eliminate all the hassle investment strategy which ensures the accommodate increased passenger from their chosen industry. provision of timely capacity to numbers and growing cargo volumes. accommodate growth. That in turn While we continue to invest sufficiently As an industry, we need to foster enables the continuation of the sector’s in cost-effective connection services and an environment which is genuinely significant contributions to the local GDP infrastructure, scale cannot and will not collaborative. An environment that and employment levels, which are be our sole focus going forward. Our DXB uses a common language, has common estimated to rise to $53.1 billion or Plus program, for example, is designed to objectives and does not hide behind 37.5% of GDP and 754,500 jobs or 29.5% generate capacity of an additional 28 boundaries. We need to eliminate weak of employment by 2020, according to million passengers per year without links. The most intrusive processes in Oxford Economics. building anything. Technology and travel revolve around documentation, process will boost DXB’s capacity to 118 validation and security. And these occur As a case in point we can look at 2017 million by 2023. In a nutshell, we are multiple times during the course of a results where we achieved some 89 investing in innovation to extract optimal single journey. The processes on the million passengers despite numerous value out of our most important asset. ground are the weakest part of the challenges to growth, including laptop Historically the industry’s approach to aviation supply chain. Legacy thinking bans, visa restrictions, geo-political capacity expansion has been all about would lead to the conclusion that the issues and the resulting fluctuations in investing in bigger and bigger facilities industry must strengthen the weaker consumer confidence and demand. In to accommodate more and more links. Forward thinking would suggest that we eliminate them all together.

Our DXB Plus program, for example, The power of the customer to select the most convenient components of their is designed to generate capacity of end-to-end journey must drive the design of airport infrastructure, processes and an additional 28 million passengers technology. The definition and adoption of global industry standards for initiatives per year without building anything. such as a single biometric footprint will transform the customer experience, by Technology and process will boost enabling a one-time capture of data which can then be used at multiple DXB’s capacity to 118 million by 2023. points in the customer journey in a seamless and non-intrusive way.

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Imagine an airport with no check-in, no immigration, and discrete, non-intrusive Personal mobility is also in the midst security, all enabled by a single identity database, securely held in the cloud and of a revolution. Fast airport links will available to those who currently need physical evidence of our identity as we no longer be part of a mass transit travel. The possibility then emerges to re-order the entire travel process around system. Pods will be able to take customer service rather than around the convenience of everyone else in the customers from their chosen point supply chain. And if we extend our thinking around making the links of entry directly to their plane in a between ground and air more efficient, then maybe we don’t need an airport matter of a few minutes – without terminal at all. The prospect of eliminating that infrastructure and the leaving their seat. capital investment required is another example of the value an integrated approach would bring. In Dubai, we have a unique opportunity to take the next step in the evolution of Why not make the start of that journey the airport experience with our shared, at multiple points of convenience near connected customers. So, as we review where people live or work? Why not last year’s progress and this year’s disaggregate the airport terminal and projections, the long-term aspirational build multiple smaller, convenient entry goal of revolutionizing the travel points into an airport transit system that experience continues to propel us can take customers from their homes or forward ever mindful of the service places of work directly to their plane? It improvements and return on investment would enable the bypassing of all the this would bring. changes of mode, baggage issues, queues, multiple documentation and by Paul Griffiths , CEO of Dubai Airports security checks and long walking distances – all the things we hate when we travel.

Personal mobility is also in the midst of a revolution. Fast airport links will no longer be part of a mass transit system. Pods will be able to take customers from their chosen point of entry directly to their plane in a matter of a few minutes – without leaving their seat. A seamless, door-to-door solution will make the entire journey experience faster, more relaxing and more efficient. It lies within our grasp.

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18 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

VAT implementation What does it mean for the construction industry?

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With its unique practices and latter may benefit the customer, it can persons only if they are unable to recover arrangements, the construction industry also cause problems for commercial VAT in full, such as because they also faces a number of challenges and relationships. perform exempt or non-business complications with respect to the activities. Suppliers should be sensitive application of VAT in the GCC. Saudi Arabia has introduced some to this during price negotiations. grandfathering provisions that allow zero- With a significant focus being on rating to continue for contracts entered In the context of commercial leases, development in the region, and with into before May 30, 2017 but only until landlords may wish to consider different large-scale commercial, residential, and the contract expiry or December 31, incentives for tenants that make exempt infrastructure projects ongoing, it has 2018, whichever occurs first. The UAE has supplies (e.g. financial institutions). That been critical for the authorities to indicated that it will allow businesses to said, many larger institutions that make develop specific rules to ensure that the charge VAT in addition to the price in significant exempt supplies can employ VAT system is fit-for-purpose by the time cases where the contract is silent about other strategies to address the blockage of the introduction of VAT on January 1, VAT and the customer can recover VAT on VAT credits. For example, they might 2018. With this objective, however, come in full. Obviously, there are terms and incorporate separate taxable supplier special rules to benefit the industry, and conditions for both, but it provides entities to act as the landlord in respect with special rules, comes a complexity some relief. of property used by the exempt supplier that creates an environment of risk that so that they can manage the timing and needs to be mitigated through the In Saudi Arabia, any contracts agreed cash flow impacts of the VAT as a cost to adoption of appropriate controls and after May 30, 2017 are obviously still at them. processes. risk, as the transitional provisions will not apply. The same is true for contracts that While this does not have the effect of With the deadline for the introduction were signed prior to May 30, 2017, and ridding them of the VAT burden of VAT in Saudi Arabia and the UAE which will continue. So a major area of altogether, it can have the effect of having recently passed, and while for potential risk still exists for any contracts altering or delaying the timing of the other GCC member states it is still agreed before the implementation of VAT negative effects of VAT on businesses looming, we look at the main challenges but which will be executed or delivered that cannot recover VAT as an input tax for this transitional period, and beyond it, after it. credit. below, with some suggested options for addressing them. Barter and incentive transactions The UAE has indicated Property transactions often involve Lead times on major projects that it will allow considerations other than, or in addition Lead-in times for major construction to, money and this can cause complex projects can be extremely long and a businesses to charge VAT VAT problems. For example, an exchange large number of the major projects due of property interests such as the to be delivered over the next few years in addition to the price in surrender of an old lease in exchange for will not have had VAT factored into them cases where the contract the grant of a new lease, or a sale and on the cost, revenue, or commercial leaseback transaction, may take place side. A significant number of contracts is silent about VAT and without a clear exchange of money. understandably do not include VAT the customer can These are barter transactions and it is clauses designed to protect the supplier important to analyze the VAT implications and/or customer, where ideally these recover VAT in full. for each party and to ensure there are would be expected in jurisdictions no unexpected VAT costs. Failure to where VAT is in place. Property developer commercial recognize these transactions could result challenges in penalties. As a result, parties to such contracts are For reasons apparent below, we have faced with few options. Either they rely on dealt with residential real estate Issues often arise when the two parties any transitional provisions that may be development separately from commercial either ignore the transactions, as they included in the relevant domestic VAT law, real estate. do not go through the accounts, or they or they renegotiate their agreements to account for them at different values. This put an appropriate clause in place, or The development and charging of VAT is an easy target for the authorities in the supplier is forced to take a hit to the on the supply of commercial buildings such situations. profitability of the contract. While the creates an additional cost to taxable

20 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Similarly, it is relatively common for for work completed – the date of the What is clear from the above is that the property developers, particularly in the original invoice, the date of certification, ability for a construction company to retail, office, and industrial markets, to or the date of the amended invoice, pass on the full impact of VAT to property offer rent-free periods and other based on the values certified. As services developers depends on whether incentives to prospective tenants. This are usually required, for VAT purposes, developers will be able to claim a full can trigger a VAT liability for the tenant to be accounted for when completed, VAT credit. A developer’s VAT recovery and the landlord if it is determined that we would generally suggest that this is position will be determined by reference something additional has been supplied treated as when the work is certified, to the VAT treatment of the real estate in return for the incentive, for example, and the final invoice is issued, rather than transactions that the developer enters building works. when the initial invoice/claim is made, for into. the simple reason that it is only at this Furthermore, some jurisdictions seek to stage that the ‘completion’ of services is Cash flow deem a market value for rental during a confirmed. One of the biggest concerns for the ‘rent-free’ period, requiring the landlord whole property sector will be planning to account for VAT, especially if it is not a Residential property its cash flows. The sector, which often lease between arm’s-length parties. This The development, construction, and operates on thin margins, could be is regardless of whether the ‘rent-free’ supply of commercial, industrial, and under pressure in terms of meeting period is effectively subsidized by the retail properties and infrastructure is the additional requirement of paying 5 higher rental received during the subject to VAT at the standard rate. The percent VAT on the purchase of goods or remaining term of the lease. treatment of the supply of residential services each month or quarter on an real estate is different for a variety of accruals basis. Mixed-use properties policy factors. For companies engaged in the supply of Conceptually, this should be offset by both exempt (residential) and taxable In the UAE, the first supply of residential claiming refunds of such VAT from the (commercial) properties, the impact could premises is zero-rated if it occurs within relevant government where the net be significant, as there will typically be three years of completion of the amount of VAT due payable/refundable complicated calculations for the recovery premises. As long as that first supply is a dictates. However, the payment of of proportionate input tax credit for each sale, this allows the VAT incurred during those refunds, in practice, could take a accounting period. Any mistakes in the the construction process to be recovered substantial amount of time, which will calculations will make VAT an additional and the VAT has no impact on the costs still impact on cash flow. cost for the business, impact its of construction. As a result, the VAT competitiveness, and may give rise to passes through the chain to be deducted Hopefully, by now businesses will have penalties. by the developer. performed a comprehensive impact assessment to determine the additional The development, Where the first supply is a lease, every cash flow requirement and the impact subsequent supply, whether a lease or on working capital to identify additional construction, and supply sale, will be treated as exempt. The funding if necessary. of commercial, industrial, developer is not able to recover VAT incurred during the construction, as Conclusion and retail properties and there are claw-back provisions on the It is clear that this article is only VAT on the construction costs. Instead, scratching the surface of the complex infrastructure is subject the developer needs to recover the practical, technical, and commercial to VAT at the standard additional cost of the VAT as well as its issues facing the construction industry. margin if possible when the property is rate. sold or leased. This makes it essential It is essential that developers and that the first supply be by way of sale construction contractors seek assistance Construction work rather than lease. in navigating their way through the The provision of construction services, process, as there are many competing including materials, will be subject to VAT In Saudi Arabia, in contrast, the supply of objectives and outcomes that could trip at the standard rate. Subcontractors are residential real estate is standard rated, up the unwary. also likely to be impacted because of the and it is simply the supply by way of lease manner in which construction contract that is exempt. This means that VAT will by Bruce Hamilton , Partner Indirect Tax, work is usually certified prior to payment be a real cost for enterprises that lease Deloitte Middle East being made. This can cause confusion as residential property, and this needs to to when there will be a need to account be factored into their returns.

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Real estate development funding squeeze Myth or reality?

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23 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In the UAE, whilst there In the current economic environment, In the UAE, whilst there may be isolated there is a prevalent notion that bank cases of individual banks facing liquidity may be isolated cases of lending has been constrained from both shortages, the overall picture is of a individual banks facing a real estate development perspective banking system which has experienced and general corporate lending landscape. increased deposit taking from both the liquidity shortages, the The recurring themes typically revolve public and private sector. The central around a perceived credit squeeze and bank data below (Figure 1) reflects asset overall picture is of a lack of liquidity in the bank market. This build-up in line with deposit growth over banking system which article seeks to understand the extent of the last three years. any liquidity constraints in the GCC’s two has experienced largest real estate development markets, In Saudi Arabia, the bank market is far increased deposit taking namely the UAE and Saudi Arabia. more robust and liquid; although the Government sapped liquidity levels from both the public and Loans and deposits data trends in the through bonds placed with local banks, UAE and KSA seem to depict a picture it later replenished deposits by way of private sector. which is at odds with some of the international bond sales. Whilst overall anecdotal viewpoints. lending activity has tapered slightly (see Figure 2), banks have added an estimated Figure 1. UAE loan to deposit levels (AED billion) SAR 200 billion in assets to their balance 1,650 sheets since the beginning of 2015. 1,592 1,600 Indeed, central bank data suggests that 1,550 the overall bank market in both countries

1,500 is capable of maintaining and building 1,444 deposit levels as well as deploying much 1,450 1,494 1,400 of this liquidity back into the market. 1,400 Notwithstanding this banking liquidity, it is clear that the investment appetite of 1,350 GCC economies is currently subdued, 1,300 and investment into local real estate 1,250 markets by government, private local Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 developers and international investors is cautious and less aggressive than before. Total Deposits Actual Loans Source: UAE Central Bank Banking credit policies In order to appreciate the full extent of the impact of the general liquidity and Figure 2. KSA loan to deposit levels (SAR billion) macro environment on the behavior of banks, we need to consider the credit 1,700 1,628 1,578 1,603 policies employed. The following table 1,600 1,521 is a brief overview of the real estate 1,500 development financing credit policies that banks were implementing during the era 1,400 of $100 per barrel of oil in the UAE and 1,300 KSA.

1,200

1,100

1,000

900 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Total Deposits Actual Loans Source: SAMA

24 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Business Plan • Fully funded business plans (equity + debt required = total capex, contingency provisions and project working capital)

Land purchase • To be paid out of equity in full prior to loan approval and or drawdown

Loan to construction value • Limited to 65%-70%

Debt servicing during construction • Must be serviced during construction from either additional equity contributions or unencumbered cash flows from operations outside of the particular development project

Recourse • Yes, to project owners in the form of personal and or corporate guarantees

Security • At least 100% cover of the loan amount • In some cases, especially in KSA, lenders required between 1.25x and 2x cover depending on the nature of the development and loan request

Pricing • Typical margins above interbank rates ranging from 380 basis points to 450 basis points during construction • Stepping down to an average of 350 basis points during the amortizing period of loans

Tenor • 5 years through to 12 years including construction periods

Source: Deloitte Corporate Finance Advisory Limited

The reality is that the same table also Most common areas where borrowers applies to banks today. Indeed, in times fall short are: of higher market risk, one would reasonably expect credit committees to 1. Requesting much higher loan to require (1) lower loan to construction construction values values (2) additional security (3) tighter 2. Requesting banks finance part of tenor profiles and (4) more aggressive the cost to purchase land margins. 3. Project business plans are not fully funded – reflecting potential future Our experience is that, whilst there is an funding shortfalls during construction overall heightened level of caution when 4. Proposals not having the required appraising lending opportunities, overall equity commitment levels and/or credit terms are largely the same in the alternative unencumbered cash flow to current environment for well-structured service debt until the particular project and appraised credit applications. is in a position to generate its own cash flow and meet covenants Where most borrowers fall short We often see potential borrowers failing In the last twelve months, both in the to secure funding because they do not UAE and in KSA, we have assisted meet the above lending policies. borrowers in attaining approval for

25 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Bank debt is not the only funding requests (circa AED 3 billion deal • There are a limited number of quality flow) that are on better terms than the lending opportunities in the market; form of debt that is general credit policies stated above due • Borrowers expect banks to take equity available to borrowers; to the commitment, transparency and risk with minimal, if any, commitment overall “deal readiness” that was coming from borrowers themselves; there are other forms of forthcoming from these borrowers. and • Loan pricing requests are typically debt that cost more than We have witnessed bilateral deals for reflective of AA rated investment grade bank debt and if used loan amounts that would typically be returns rather than the actual risk that financed by a club or syndicate of banks loans are requested to fund. correctly can help and in some cases with much higher loan borrowers fund their to construction values than are the norm. Bank debt is not the only form of debt that is available to borrowers; there are projects. Our experience is that lenders are other forms of debt that cost more than competing heavily with each other to bank debt and if used correctly can help secure good quality, well-prepared borrowers fund their projects. business plans, borrowers and mandates. Critically, very few borrowers understand Indeed, lenders typically have a number the risk and cost allocation across the of complaints, which we feel are a different stacks of capital. The below recurring theme: table is a basic overview of this risk and cost allocation:

Annual cost Risk profile

Bank debt – senior lenders 4%-6% • Typically fund mature operating businesses with steady cash flows. • Repaid in priority and rank to other forms of capital, with security in place. Do not enjoy equity upside.

Higher yielding non-bank debt 7%-10% • Repaid only after senior lenders are repaid. • Carry a second charge on security behind senior lenders. • More flexible terms compared to banks with regards to amortization and debt servicing requirements.

Mezzanine debt 12%-18% • Fund gaps between equity and senior debt requirements. • Often with limited security but with noted share pledges. • Enjoy limited, contracted equity upside. • Very flexible terms compared to banks, such as minimal or no amortization and flexible debt servicing and/or interest roll-ups.

Equity +20% • Repaid only after all other forms of capital have been paid/ serviced. • Makes the highest return as this form of capital takes the highest risk.

Source: Deloitte Corporate Finance Advisory Limited

26 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

All too often we see potential borrowers for real estate development projects fall Our experience is that there is appetite short of either the prerequisite equity commitment levels, or they do not from banks to lend to real estate provide banks with the tangible comfort that lenders require. The result is that development projects that are well banks are, more often than not, being asked to take equity risk at senior debt structured from a funding perspective. cost of capital. Indeed, other credit terms (e.g. security, amortization, tenor etc.) that borrowers ask for are not usually reclassify corporate loans that are aligned to the risk/return profile banks secured by real estate assets as “real are designed to satisfy and the role they estate sector” loans, which might hinder are expected to play in the capital some local banks from taking more structure. exposure to the local real estate market.

International lenders Conclusion This article is focused on local banks We started this article by posing a and their ability to support funding local question around the state of the current real estate development. There are local bank lending market. Our international banks that have supported experience is that there is appetite from local borrowers in the past directly or banks to lend to real estate development against Export Credit Agency support projects that are well structured from a mechanisms backing importation of funding perspective. foreign capital goods and employment of foreign construction companies. Our view is that borrowers need to Western as well as Asian banks have approach their business plans, funding taken such exposure in the past, and requirements and ambitions with realism may still support certain transactions and suitable levels of equity commitment in the future. to ensure there is sufficient “skin in the game”, so as to allow senior lenders to Importantly, international banks are satisfy their role in the capital structure. generally less competitive in local currency loan pricing than the local by Kosta Georgiadis , Head of Debt banks, and are usually more conservative Advisory, Deloitte Middle East than local banks with respect to local real estate exposure and credit policy.

Potential future tightening of credit policies Some local banks are already carrying high levels of real estate-related exposure, and may allocate surplus liquidity to other sectors moving forward. New accounting standards that are planned to be implemented in the near future may require local banks to

27 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

KSA’s engineering & construction sector 2017 Who dares wins

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29 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The Kingdom of Saudi Arabia’s international markets, and that the contracting culture. The market was engineering & construction (E&C) sector foreseeable trend will have an ever characterized by very poor project is in the throes of a once-in-a-generation increasing number of major stakeholders delivery performance, which was often disruptive change which is precipitating exploring ways of leveraging leading accompanied by wasteful and very costly radical innovation. The long-term industry practices to gain competitive actions of dispute. sustainable future of many major business advantage. businesses within this market segment is The failure of the Channel Tunnel Project being shaped by their ability to create This is hardly surprising when one (10 workers killed, 80 percent over new and modern built-asset solutions considers that the major economic and budget, two years late) created a major that customers want to buy and/or invest social drivers guiding the KSA markets industry inflection point and contributed in whilst optimizing the operational search for improved project delivery significantly to the British government’s performance and efficiency with which performance, in many ways echo decision to demand change. such products and services are delivered. historical conditions in other parts of It could be said that the essence of the the world. Of particular consequence With the support of the country’s Kingdom’s Vision 2030 plan has well and is the extent to which these conditions construction industry leaders ( Sir John truly taken root, and that the race to precipitated a complete cultural and Egan – Rethinking Construction, 1998 and establish market relevance under a systemic step-change in the way these Sir Michael Latham – Constructing the revised demand and supply compact is markets elsewhere went about correcting Team, 1994 ) a new order was ordained most definitely on. the inefficiencies of their outdated capital which realized a fundamental step- project delivery and contracting change in the overall approach to capital Few would disagree that the basic approaches. project delivery. economic fundamentals that underpin KSA’s E&C market remain sound, albeit temporarily constrained, and that the It could be said that the essence of the sector has a major role to play in contributing significantly to the overall Kingdom’s Vision 2030 plan has well growth and prosperity of KSA as a nation whilst extending and diversifying its and truly taken root, and that the race economic activity in neighboring and new markets alike. However, many would to establish market relevance under a acknowledge that the successful realization of any future strategic revised demand and supply compact is ambition will undoubtedly depend on the rate and pace at which the industry can most definitely on. realistically modernize and transform itself, or more pointedly normalize to a The E&C sector in KSA maintains a rather What became known as the ‘Egan & level of competitive parity with similar traditional composition, which in many Latham era’ produced a new philosophy international markets. ways resembles that of Britain up to the that incorporated the tenets of enhanced mid to late 1990s. During this period the partnership, smart procurement & supply KSA’s rapid transition to a competitive market was severely depleted of chain management, collaborative working market paradigm is being led by one adequately skilled resources due to arrangements, integrated data unescapable reality, that the traditional decades of underinvestment in management practices, equitable risk rule book for capital project delivery infrastructure, economic pressure, and sharing, and ‘open-book’ contracting with within the Kingdom is being progressively poor industrial relations, which in itself performance-based incentives. superseded by modern standards that supported an environment of predatory have become commonplace within many tendering accompanied by an adversarial

30 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Equally, this era saw the rapid challenges can be simply overcome delivery teams, active risk management, a advancement of technology enable through the reconfiguration and/or focus on early scope definition supported project delivery systems, which sought to upgrade of existing enterprise resource by robust change control, and a help bridge the capacity and capability planning (ERP) and enterprise consistent requirement to work with best gaps through the deployment of program/project management (EPPM) of breed delivery partners with proven sophisticated digital platforms. The rather technology platforms is flawed. Complex capability. unfortunate side effect, and continued capital projects demand significant legacy, of this widespread technology financial resources, and require The KSA E&C sector is primed and ready adoption is that many of the available significant contributions from all critical to take advantage of the lessons learned solutions are often directed at a data- business dimensions, e.g. policy, from other global centers of excellence, centric rather than information-centric standards, people, processes, systems, and the first adopters who are able to agenda, which to this day continues to tools, etc., all of which need to be package these solutions for the domestic frustrate the industry, to the extent most expertly guided by a strong and credible market will undoubtedly have the upper of the recognized technology providers leadership – a holistic challenge that hand in what will become an increasingly have not yet cracked the proverbial nut requires a holistic solution. competitive industry. Suffice to say…who as far as the E&C sector’s core data dares wins! objective is concerned i.e. reliable Credible, trustworthy knowledge that supports decision- by Sheldon Morris , Vice President of making. information is a El Seif Engineering Contracting

A further extension of this precedent is prerequisite for the that many industry stakeholders continue successful delivery of any to maintain the belief that mass automation will allow a discreet cost- major capital program or effective team of skilled, often project, and without it inexperienced, resources to successfully deliver substantial portfolios of extremely failure is guaranteed. complex pieces of built-assets – the net result being that these organizations Over the past at least 15 years there have deploy significant resources to develop been a number of stand-out examples of equally complex enterprise and project successful mega-projects (Heathrow management technology platforms with Terminal 5, London 2012 Olympics, associated applications that are poorly London Crossrail, National Highways designed, configured, and implemented. Agency, etc.) that have set new global This provides senior management with benchmarks for capital project delivery. an array of confusing and in many cases The distinguishing characteristics of all conflicting statements on the overall these exemplar projects is a prioritized performance of their capital project agenda that places significant emphasis portfolio – quite often speeding up the on well-articulated vision statements with rate at which bad news is delivered. clear executable objectives, accompanied by robust delivery strategies supported Credible, trustworthy information is a by sound policy, strong and accountable prerequisite for the successful delivery of leadership empowered to make decisions any major capital program or project, and based on reliable data, transparent without it failure is guaranteed. The governance structures that avoid notion that complex project delivery authority bottlenecks, well integrated

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IFRS 15 disclosure requirements Are contractors ready for it?

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33 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

extensive, and in some cases, The disclosure objective of IFRS 15 is to commercially sensitive disclosures in their financial statements. establish the principles that an entity These comprehensive disclosure requirements were the International shall apply to report useful information Accounting Standards Board’s response to criticism that IAS 11 and IAS 18 to users of financial statements to revenue recognition disclosures were inadequate. The disclosures understand the nature, amount, timing requirements under the new standard will impact all entities – including and uncertainty of revenue and cash contractors. IFRS 15 is effective for annual reporting periods beginning on or flows arising from a contract with a after 1 January 2018. customer, including qualitative and The disclosure objective of IFRS 15 is to establish the principles that an entity quantitative information. shall apply to report useful information to users of financial statements to Everyone demands transparency. In understand the nature, amount, timing business, transparency is pivotal for an and uncertainty of revenue and cash effective decision making. And in an flows arising from a contract with a industry like construction, the bases of customer, including qualitative and the significant estimates and judgments quantitative information. However, are almost always left undisclosed to the greater transparency may be perceived users of the financial information as the differently by different users – whilst current accounting standards do not shareholders, lenders and competitors require a significant level of disclosure in get greater insights into the contractor’s these areas. business, the information may be considered commercially sensitive by In May 2014, the International management. Accounting Standards Board (the “Board”) issued IFRS 15 Revenue from Contracts In the table below, we have reproduced with Customers to replace the current the significant disclosure requirements standards on revenue recognition, and also highlighted some of the key including the construction industry’s challenges we believe contractors will “accounting manual”, IAS 11 Construction face in collating the information and the Contracts . The standard introduces a 5 possible commercial sensitivities that step model to revenue recognition from may arise as a result of this disclosures in Contracts with Customers, which to a an industry where this level of certain extent is more prescriptive transparency is commercially very compared to previous requirements. It sensitive and would be a new concept. also requires entities to provide

34 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Significant disclosure requirements 1

Disaggregation Contract balances Performance obligations Transaction price allocated to of revenue the remaining performance obligations

Entities shall disaggregate revenue Entities shall disclose: Entities shall disclose: Entities shall disclose the recognized from contracts with (a) the opening and closing (a) when the entity typically satisfies significant accounting estimates customers into categories that balances of contract assets its performance obligations and judgments made in depict how the nature, amount, and contract liabilities; (b) the significant payment terms; determining the transaction price, timing and uncertainty of revenue (b) revenue recognized in the (c) types of warranties and related allocating the transaction price to and cash flows are affected by reporting period obligations. the performance obligations and economic factors. - that was included in the determining when performance contract liability balance at the obligations are satisfied. beginning of the period; and - from performance obligations satisfied (or partially satisfied) in previous periods.

Potential challenges

Contractors should exercise Have contractors considered Have contractors considered Contractors should exercise judgment to categorize their the current capability of their whether their contracts include a judgment and be able to revenues. Some of the categories accounting systems? Is the significant financing component, demonstrate the viability of their can include, but not limited to the system able to extract the paying particular attention to forecast on when they expect to following: quantitative information unusual terms in the contract in recognize the revenue related to - market or type of customer required? relation to advance payments and unsatisfied or partially unsatisfied (i.e. government or private) collection of certified amounts? performance obligations. - type of contract (i.e. fixed-price Have contractors considered the This consideration is likely to or re-measurable) need to upskill their existing require significant judgment and Do contractors have written - geographical region (i.e. country finance function? a greater collaboration between policies describing: or region) tender, project and finance teams - the methods used to recognize in order to obtain the relevant revenue (description of the Have contractors considered the information to assess this output or input methods used, current capability of their requirement. how are these methods information systems? Are they applied)? able to monitor their contracts - how variable consideration is based on the applicable category estimated and whether this is to facilitate the disaggregation constrained or not; process? - how highly probable revenue will be defined and described to comply with the requirements for recognizing variable revenue; - how obligations for warranties, decennial liabilities and other similar obligations are measured; - the judgments made in evaluating when a customer obtains control of the project? Have contractors considered the current capability of their accounting systems to facilitate the extraction of this information considering the number of contracts maintained?

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Potential commercial sensitivities

Does the requirement expose the Does the requirement highlight Will the disclosure of significant Does the requirement expose the contractors’ market share to the information that could allow financing components included contractors’ budgets, targets and readers of the financial readers of the financial within contracts hinder any future future cash flows related to its statements, including its business statements to decipher the negotiations with customers and ongoing and confirmed projects strategy while on the other hand amount of excess billing financers? Furthermore, will this in pipeline (excluding cancellable allowing key stakeholders insights compared to the performance provide competitors with insights wholly unperformed executory on how the business is being obligation satisfied as at reporting into the entity’s business model? contracts) to the readers of the managed? date and long-outstanding financial statements? satisfied performance obligations * Disclosures on unsatisfied not yet billed or collected? performance obligations should Will this requirement provide a not be confused with the order benefit to the stakeholders by book, as these two can actually informing them if the entity will be differ (for example, IFRS 15 able to continue to operate in the disclosure may exclude foreseeable future due to the cancellable executory contracts disclosed expected revenue on its as per IFRS 15 paragraph 12, or existing contracts? IFRS 15 disclosure will reflect constrained revenue, which may be markedly lower than what is really expected). Some entities may choose to make separate “order book” disclosures, which should be reconciled to the IFRS 15 disclosures.

Sources: https://www.iasplus.com/en/standards/ifrs/ifrs15

With the advent of the effective date of standard will have on the opening 1. This article provides a summary of the key IFRS 15 on 1 January 2018, there is balances as at 1 January 2018 to realign disclosure requirements in IFRS 15 Revenue from Contracts with Customers and provides currently no room to deliberate. the existing accounting policies with potential challenges and possible commercial Contractors have much to consider IFRS15 as well as determining the future sensitivities. However, this article does not including: accounting policies and preparation of cover all the required disclosures either by IFRS • the capability of its current information the information required to meet the 15 or any other standards. Therefore, this article should not be taken as a replacement for systems to support the new accounting disclosure requirement in its next a need for any accounting consultation nor and disclosure requirements, financial statements. For contractors that should be treated as accounting advice. • the need to upskill finance and have taken unapproved variations and operational employees and enhance claims to book under IAS 11, where they by Jaimi Raikundalia , Audit Principal, their collaboration could meet the threshold of “probable” Meanne Rose Franco , Audit Principal, • the commercial impact on the choices it now have to reassess if these claims and and Jonathan Mandon , Audit Manager, makes on disclosures requirements variations meet the threshold of “highly Deloitte Middle East • the transition choices it elects to adopt probable” under IFRS 15. Such an assessment could lead to material For contractors that have not yet adjustments to revenue on transition to assessed the impact of IFRS 15 on their IFRS 15 which is required to be disclosed contracts, there is much work to be in the current year financial statements. undertaken to assess the impact this

36 37 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

38 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Mr. LIU Fangjiang, Vice President & MENA President of SEPCOIII Electric Power Construction Corporation Delivering power construction solutions fit for the region

39 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In light of slow economic In light of slow economic recovery on a includes those of thermal, nuclear, gas global scale, there has been a lack of and oil-fired, hydro, wind, solar and recovery on a global growth in the electric power sector biological power plants. It has globally, marked with a slowing down of distinguished itself with strong scale, there has been a project awards overall, and subsequently capabilities across the power industrial lack of growth in the intensified competition among chain to deliver tailored solutions as an engineering, procurement, and EPC contractor, or a variety of forms that electric power sector construction (EPC) contractors. This is include EPC+Operation, Built-Own- globally, marked with a particularly the case in the Middle East Transfer (BOT), Built-Own-Operate (BOO) region, where the new normal of and Project-Management-Contract (PMC) slowing down of project sustained low oil prices has led to fewer basis. In the Middle East and North Africa awards overall, and funded projects being launched in the (MENA) region, the company has been market. Yet at the same time, the region delivering power plant projects since subsequently intensified itself remains a market of potential in the 2008, starting with Jordan before eyes of many international power EPC expanding into multiple markets across competition among contractors, underpinned by factors such the region including those of Saudi engineering, as population growth, urbanization, Arabia, Oman, Kuwait, Egypt, Iraq and industrialization, and low electricity Morocco. Currently SEPCOIII is a leading procurement, and prices; moreover, with China’s Belt and power contractor among its peers, with construction (EPC) Road Initiative featuring the region the largest unit capacity under prominently, a growing number of construction across the region. contractors. Chinese power contractors are now joining this already crowded market, Although long a well-known brand among making it even more difficult for other Chinese power sector companies, the power contractors to stay alive and company’s foray into the MENA region thrive. wasn’t easy and it took nearly nine years of dedicated efforts to reach the market Considering the immense challenges recognition it enjoys today. facing such contractors, we reached out to Mr. LIU Fangjiang, Vice President and Looking back at where they started in MENA President of SEPCOIII Electric 2008, Mr. LIU recalled their MENA Power Construction Corporation, to get journey in a three stage development his views on market opportunities and path familiar to many international risks of relevance to his company and contractor peers operating in a new other international EPC contractor peers, market full of opportunities and as well as what it may take for a power associated risks. SEPCOIII’s first phase contractor to stay competitive amid spanned 2008 to 2012, with a focus on sluggish market growth. understanding the local market regulations, requirements and pricing As one of the first globally active power mechanisms, via a number of pilot EPC contractors from China, SEPCOIII projects in key markets. This was followed Electric Power Construction Corporation by a second phase from 2012 to 2015, is a wholly-owned subsidiary of during which the company started to be PowerChina group, specializing in power more active in bidding for and winning related construction and installation that projects in these markets, leveraging its

40 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

acquired experience and knowledge of update. Such ambiguity inevitably led to In consideration of market requirements, the local operating environment. Then, inconsistent enforcements, and the company focuses on project delivery during the third phase from 2016 until subsequently room for rent seeking in select markets to build solid today, the company has built a large behavior and an arbitrary approach credentials and let its track record speak pipeline of achievements via continuous towards market participants, which could for itself, which then paves the way for a wins and consistent project delivery, and be prohibitive for foreign companies who sustainable business expansion across benefits from its strategic partnership lack the market experience and know- the region with continuing collaboration with reputable developers, which include how to navigate such conditions. with existing project owners as well as ACWA, Marubeni, Mitsui and NG. Competition-driven pricing pressure is building a growing network of strategic another area Mr. LIU brought up as an partnerships with key international Speaking about his experience in growing important consideration for power financial institutions, design agencies and the business, Mr. LIU highlighted the contractors. He noted that, during the equipment providers. Such an approach challenges associated with market past year, the average price level had has landed the company repeated requirements, regulatory ambiguity and decreased by 10 percent compared to contract wins with key market project competition-driven pricing pressure. the previous year. This is largely driven by owners across a broad spectrum of the limited number of independent power mandates, including Noor II/III On market requirements, the main power producer (IPP) projects in the Solar CSP power plant (Morocco), regional markets, in particular the GCC market, and too many companies joining IBRI/Sohar/Salalah natural gas power countries, tend to adopt American and the competition. Despite these plant (Oman), Yanbu Power and Water European standards when it comes to challenges, Mr. LIU stressed that the project III (KSA), Samara Phase IV (Jordan.) equipment as well as infrastructure company has adopted measures to building practices and codes. This ensure their interests are protected and In dealing with regulatory ambiguity, presents practical challenges when lessons learned. Mr. LIU mentioned that over the years SEPCOIII wishes to leverage its global they have learned the lessons from first- resources to deliver efficiently on local projects. The company has to invest time in identifying the differences between Regulatory ambiguity is another area Chinese standards and the market- required American/European standards, which Mr. LIU felt had significant and it also needs to invest resources to reconcile the differences and tailor its impact on how they do business in the overall solution to meet market requirements. This comes in addition to region. Unlike mature markets, many demonstrating to local developers that the company has the capability to deliver of the laws guiding the industry tend to on standards as per their request. be less precise and government/legal Regulatory ambiguity is another area which Mr. LIU felt had significant impact procedures less linear; at the same on how they do business in the region. Unlike mature markets, many of the laws time regulatory measures associated guiding the industry tend to be less precise and government/legal with laws are often subject to constant procedures less linear; at the same time regulatory measures associated with laws change and update. are often subject to constant change and

41 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

For highly technical hand working experience in target a workforce owning the right mix of markets, and have gradually developed skills. For highly technical aspects of aspects of the project, an approach to best protect their the project, such as high pressure pipe business from associated risk factors. welding, electrical equipment debugging, such as high pressure Measures have been taken to ensure SEPCOIII usually sends its well-trained pipe welding, electrical relevant considerations be factored into workers from China to lead the work, its project tenders and contracts. For this, whereas for civil work and steel equipment debugging, the company enlisted support from structures, the company will leverage SEPCOIII usually sends professional consultants and legal the competitive subcontractors locally advisors. During the project to deliver the work. its well-trained workers implementation process the company from China to lead the hires local talent extensively for its Speaking about the importance of project management team across funding in recent years, Mr. LIU work, whereas for civil regional markets, and partners with acknowledged the increasing role that quality local subcontractors, to ensure funding capabilities play in securing work and steel a smooth execution on the ground. project wins and getting projects started structures, the company across the region. For traditionally Addressing the competitive pressure, resource-rich countries like the GCC, will leverage the Mr. LIU acknowledged that SEPCOIII shrinking public funding as a result of competitive is facing fierce competition from all sustained low oil prices has led to an directions – companies from mature increasing willingness of governments to subcontractors locally markets, such as Europe, the US, Japan embrace private sector participation in and Korea, with a strong reputation, satisfying the demands of power to deliver the work. technical capabilities, and strong funding infrastructure developments. For support, as well as companies from China countries with a shortage of resources, willing to undercut competition on price such as other MENA countries (Jordan, and competing with similar sources of Egypt, Morocco among others), Chinese financing. Mr. LIU emphasized governments are eager to tap into that for SEPCOIII the importance is to additional financing to get the much play to its own strengths, in particular, needed power projects off the ground. a well-balanced solution combining With China’s Belt and Road Initiative world-class technical capability and focusing on this region, SEPCOIII, as a highly efficient project execution skills. state-owned enterprise, has the natural Compared to other Chinese contractors, advantage of financial backing from SEPCOIII is well versed in the most Chinese FSIs as well as its parent group advanced international technology and PowerChina. However Mr. LIU is more standards in its space, having worked on realistic about how much leverage it will complex overseas projects and partnered allow SEPCOIII in terms of project wins. with leading global power developers for For projects supported by bilateral years across many high-end markets. government agreements between China Compared to other international EPC and target markets, Chinese contractors contractors, SEPCOIII has demonstrated could benefit from having such financing stronger on-site project management support from Chinese FSIs. However, for capability, with a reputation for timely other projects on commercial terms, delivery. This is achieved by having rates offered by Chinese FSIs don’t always assembled efficient on-site project teams compare competitively against European with experienced management staff and or Japanese FSIs in the international

42 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

project finance market. In such cases, SEPCOIII prefers to partner with other In the renewable energy space, the reputable developers while taking the EPC mandate only. company is putting more efforts

In order to differentiate itself from around concentrated solar power competition in the MENA region, SEPCOIII is focusing more on making selective (CSP) power projects, where the decisions about where to play, leveraging its credentials in relevant areas while barrier to entry tends to be much further building such credentials in the regional market. For example, in the higher than Photovoltaic (PV) projects, conventional energy space, SEPCOIII has solid credentials, having completed hence less prone to competing on 18450 MW total installed capacity in gas- fired combined cycle power plants to price only. date. In the renewable energy space, the company is putting more efforts around contractor to have secured a place concentrated solar power (CSP) power among Saudi Electric Power Company projects, where the barrier to entry tends (SEC)’s qualified EPC contractors, after to be much higher than Photovoltaic (PV) solid delivery on the Rabigh power plant projects, hence less prone to competing project in the KSA. This qualification on price only. The Noor II/III Solar CSP further opened doors to a number of projects, where SEPCOIII plays the role of subsequent contract awards in KSA and the main EPC contractor, are the world’s access to more opportunities in the largest and most advanced CSP power high-end GCC markets, mostly using plants. Such experience helped SEPCOIII American/European standards. It has credentialize itself in preparation for also made steady progress into the growing demand in this space. In operations and maintenance (O&M) addition, SEPCOIII has also stepped into space, building upon strong project water desalination with the Salalah and delivery on two of its EPC contracts in Rabigh projects in Oman and KSA KSA and Morocco respectively. respectively. This is consistent with the company’s regional project mix: out of Despite the challenges and risk factors SEPCOIII’s 12 ongoing projects in the associated with carrying out projects in MENA region, nine are conventional gas- the region, Mr. LIU is optimistic in terms fired power plants, with another two in of what the MENA market has to offer: renewables and one being a coal-fired the market potential is enormous power plant. compared to many other countries in the world, and such potential is firmly All these efforts are consistent with supported by population growth and a aligning SEPCOIII’s vision and strategy still developing economy in need of with realities on the ground, making its efficient energy. regional expansion plan more sustainable and viable. The company Mr. LIU Fangjiang , MENA President of is the first and only Chinese power SEPCOIII

43 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

44 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

What’s happening in the UAE construction market?

45 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Summary • More parties are trying to terminate because employers are using it as a Like much of the UAE, the construction their contracts as a result of all these tool to get contractors to carry out industry is being affected by an uncertain payment issues. However, termination additional work. Similarly, employers economic climate and in particular the in these circumstances is always difficult are refusing to sign off the end of the drop in the oil price. For the construction and sometimes the process is not defects liability period because they industry, this means a lack of cash and administered correctly, which in turn are anxious not to relinquish potential liquidity across the supply chain. As a can have significant effects on leverage over contractors and do not result, projects are slowing down, being contractual rights (and payment) post- want to release retentions. suspended or not completed at all. termination. Employers are increasingly seeking to rely What’s happening in the legal on their contractual rights and remedies The DIFC Courts have market? to avoid having to pay or to delay • The DIFC Courts have launched a payment. Meanwhile, contractors feel launched a new new Technology and Construction that they have no choice but to initiate Division (the "TCD".) This is a positive claims to get paid. All of this leads to a Technology and step and shows an appreciation of the very active disputes market. Construction Division importance of the construction industry in the UAE. However, we are yet to What's happening in the (the “TCD”.) This is a see how effective this will be in a new construction market? positive step and shows jurisdiction and, in a region that favors • Contractors are seeing greater arbitration (largely due to its competition for fewer contracts. This an appreciation of the international focus), the TCD's success means they are reducing their margins is likely to rest on the specialist in order to win work and the project is importance of the construction expertise of the judges it started on a tight budget, with little construction industry can attract. room for contingency. This tends to mean that parties are less likely to in the UAE. • The threat of potential criminal work collaboratively to overcome any sanctions for bias is reducing the changes and issues that (inevitably) • Bonds are being held by employers UAE’s attractiveness for experienced arise during the project. Instead, both against contractors , and also by arbitrators and experts. The parties have a tendency to focus on contractors against subcontractors. amendment to Article 257 of the UAE payment and enforcing their strict Until recently, bonds were thought of Penal Code imposes the possibility of contractual rights, often at the expense as being a "last resort" if there was no imprisonment on arbitrators and of the longer-term needs of the project. other way to ensure performance of experts if they fail to perform their a contractor/subcontractor (such as duties in accordance with objectivity • Employers and/or contractors are liquidation.) However, it is becoming and integrity. Anyone accused of a unable to finish the work because more common for bonds to be used criminal offence may have their they run out of cash. This results in to put significant pressure on passport confiscated whilst the some projects being abandoned mid- contractors/subcontractors. We are allegation is investigated. This is leading way through. We are seeing some increasingly seeing employers or to some arbitrators, and even some contractors still trying to get paid for contractors refusing to release a bond experts, declining instructions in the legacy projects from 2008-2010 or at the end of a project. This compounds region. Some arbitrators are, instead, earlier. the issue of decreased margins and insisting that the arbitration is held makes the successful resolution of outside of the UAE - although this is • Employers are not paying their disputes between the parties less, unlikely to help as they still need to be contractors for variations, not paying rather than more, likely. physically present in the UAE to sign the them on time or, in some cases, not award (otherwise the award itself may paying them at all. This, in turn, is • Taking over certificates are not being be unenforceable.) passed down to subcontractors and granted , as employers are worried that suppliers; affecting the entire chain. contractors will then disappear without completing the snagging and/or

46 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

• The long-promised Arbitration Law is market. There are lots of negative Communication is key. still awaited, but is it just around the indicators including: the unpredictability corner? With numerous drafts issued of Donald Trump, the nuclear threat from Being honest and open over the years, the new Arbitration Law North Korea, continuing issues with is highly anticipated. When it finally neighboring Qatar, and potential early on in a project, and arrives, the new law should provide a instability caused by Iran. fostering a collaborative singular legislative framework for arbitrations in the region and is However, it is not all doom and gloom, relationship (both up and expected to be based on the well- and there are a number of positive things down the chain), can respected UNCITRAL Model Law and on the horizon: The region has seen an influenced by Egyptian arbitration law. increase in solar power projects (with really help to identify The introduction of a domestic Abu Dhabi announcing plans to build the issues early on and find arbitration law ought to be welcomed world's largest solar power plant in a by the construction sector. project worth $870 million.) Dubai is an amicable way to deal gearing up for Expo 2020 and Qatar is • Contractors and suppliers in the gearing up for the World Cup in 2022, with them. region need to register for VAT. A new both of which are causing an increase all the difference if issues are escalated law put into effect on January 1, 2018 in developments and hope to produce to a formal dispute. One particular will require all those who supply goods significant income for the region (as well issue we are seeing is where and/or services to register for VAT. as, hopefully, some cash flow in the contractors feel unable to rectify Given the current low margins and the construction market.) meeting minutes. Although not ideal, value and volume of contracts that an accurate and detailed internal contractors have in place at any one In recognition of the continuing issues record setting out why the meeting time, "sticking VAT" could become a real surrounding the oil market, we are seeing minutes cannot be amended will assist burden for them. the UAE diversifying from the oil industry in a dispute. with projects such as the Emirates Global • The Judicial Tribunal (JT) continues to Aluminium’s $3 billion Al Taweelah 3) Escalate issues for a prompt assert its dominance. The JT has alumina refinery, ’ Khalifa resolution – waiting rarely, if ever, emphatically confirmed that the DIFC Industrial Zone Logistics Park (which helps. Problems tend to continue cannot simply be used as a conduit involves the construction of 100 escalating throughout a project, with jurisdiction for the recognition and warehouses), and Abu Dhabi Industrial each party becoming more and more enforcement of domestic or City (where hydrocarbons-intensive entrenched in their own position. If the international arbitral awards in onshore industries have been one of the major problem can be dealt with early and Dubai. Whether or not the DIFC Courts areas of growth.) head-on, then this can avoid it can still be used as a conduit becoming a much bigger problem jurisdiction for enforcing foreign court What should parties do? Top 3 tips: further down the line. Seeking advice judgments is yet to be resolved. We Communication, records and early on can help you avoid disputes anticipate that it will be resolved in the escalation rather than becoming embroiled in next 12 or so months, so watch this 1) Communication is key. Being honest them. space. and open early on in a project, and fostering a collaborative relationship by Alastair Young , Partner and So what’s next? (both up and down the chain), can Suzannah Fairbairn , Associate, both It seems that the oil price is unlikely to really help to identify issues early on members of the Construction and rise significantly and there is a risk that it and find an amicable way to deal with Dispute Resolution Team in the Dentons’ will drop further. Either way, this will them. Even if problems cannot be Dubai office mean a continuation of the issues solved immediately, it will prevent outlined above, with potential worsening them escalating to the point where over time as the lack of cash flow they are out of control. continues to bite. 2) Accurate record keeping. Whilst While the UAE is stable, the wider keeping accurate records can seem instability of the geopolitical climate will like an additional administrative have an effect on the UAE's international burden during the project, it can make

47 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Causes of construction disputes in the Middle East

48 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

49 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The economic slowdown caused by low Firstly: Poor contract drafting • Ensure that all known risks are oil prices has negatively impacted the and risk allocation addressed in the contract with a clear construction industry in the Middle East Proper contract drafting and a balanced and balanced allocation of risks over the past years. Government risk allocation are the first steps towards between the parties spending has decreased across the dispute avoidance. A sound construction • Ensure that clear consequences are region, giving rise to various challenges contract reduces the potential of defined for the identified risks (e.g. amongst construction companies and disputes to a great extent by addressing What would happen if a contractor reducing the pool of available work for as many potential risks as possible. identified a discrepancy in an the construction sector. The These are ideally drafted by experienced employer’s design? Would the consequences include many contractors lawyers and/or contract specialists. contractor be liable to propose having experienced delayed payments, Whatever the reason for not achieving solutions or should he wait for a stronger negotiations over contractual sound contracts may be, the impact can resolution, and what happens if he conditions and risks, lower profit margins be significant and is often felt during the doesn’t meet the agreed obligation?) and other challenges. Claims have completion stages of projects. therefore become a real method to Experience, continuous learning, and There are a number of major risks in the generate revenue, not necessarily to development for commercial managers Middle East that should be dealt with in increase profits, but to reduce the extent are needed when considering the various new construction contracts given their of losses on some occasions. obligations and liabilities of the parties frequency and impact. These include Disputes arise when claims are not related to a construction contract. agreeing on the delay analysis method in resolved through the contractual There are some simple steps that can be extension of time claims, the criteria of mechanisms agreed by both parties (i.e. taken to mitigate risk and ideally avoid demonstrating concurrency and its an employer and a contractor.) Even disputes, namely: consequences, and the measurement when these mechanisms are sound, • Apply a recognized standard techniques of prolongation, disruption disputes may still arise due to lack of international form of construction and acceleration. These, among others, proper application. Claims management contracts (e.g. forms issued by the could be potentially controlled, if in general can best be described as International Federation of Consulting reasonably and clearly addressed at the immature in the Middle East, which is Engineers or “FIDIC”) contract drafting stage, reducing the reflected by the poor quality of claim • Use caution when making additions or probability of disputes. documentation. Our experience shows changes to the adopted form of that there are three main causes of contract and ensure that the full impact Secondly: Poor contract disputes frequently seen in the Middle of the changes is understood administration and claims East construction market, as further • Ensure that there are no conflicts with management explained below. the applicable laws including, but not A review of construction claims in the limited to, labor laws, health and safety, region suggests that the majority of etc. claims are poorly substantiated and prepared due to poor internal contract and claims management. The matter Proper contract drafting and a here is not necessarily related to poorly drafted contracts; in fact, the contracts balanced risk allocation are the first could still be well drafted but not well administered. Poor contract steps towards dispute avoidance. A administration and claims management occurs due to several reasons, including sound construction contract reduces insufficient resources, lack of associated experience, and budget constraints, all of the potential of disputes to a great which could impact the main elements of a successful claim, such as the availability, extent by addressing as many potential quality and management of records. risks as possible. Instances where contractors report

50 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

sudden significant losses near to the Sound contracts are This opportunistic behavior can be linked completion of a project are becoming to poorly drafted contracts as well as more common, whereas the causes of designed to make clear weak contracts and claims management loss are sometimes not fully practices, since opportunities could arise comprehended by the senior perspectives on risk from contractual flaws and procedural management. These can be largely allocation between the non-compliances, as well as lack of attributable to a lack of records to contractual knowledge. Sound contracts substantiate claims, misreporting, poor parties, and experienced are designed to make clear perspectives contract administration, poor cost specialists are able to on risk allocation between the parties, management, etc. They can also be and experienced specialists are able to attributable to unrecognized revenues, properly administer properly administer contracts and deal pertaining to missing entitlements under contracts and deal with with contractual matters as they arise, the contract, which can potentially lead to and therefore, the probability of time and/or cost compensations. The lack contractual matters as opportunism occurrence should be of proper claims management can affect diminished. the perspective of what is a win and what they arise, and therefore, is a loss, by actually not realizing the probability of Conclusion contractual entitlements and therefore In summary, the simple solution for not claiming them. opportunism occurrence reducing the probability of projects falling should be diminished. into dispute is to ensure that sound When it comes to settlement of claims contracts are in place from the very start, and disputes, it is likely in the region that, a contracts and claims management opportunistic party can actually harm the due to poor claims management, claims strategy is set at the early stage of a other by unfairly transferring a risk to and disputes are settled through project, and qualified/experienced another to secure additional profit. amicable negotiations based on a specialists and consultants are appointed Opportunistic behavior in the Middle East percentage of the total submitted value to administer the contract. can occur in many forms and due to of claims. The level of analysis and various factors, such as language method of applying these discounts are These measures can reduce the impact barriers, communication skills, lack of usually shallow and based on subjective of claims and disputes, and lead to experience between the parties and lack views. This mainly occurs when a benefits, such as: of proper contractual understanding. submitted claim is a “global claim”, • Maintaining the planned financial These factors usually appear in the early meaning that it does not include a cause position of the stakeholders and stages of dispute resolution prior to any and effect analysis and therefore there is avoiding surprises at the end of projects official resolution methods such as no certainty over whether the identified • Enabling claims to be dealt with as they arbitration and litigation. An example of heads of claim have actually led to the arise, allowing more certainty over the this can be seen where a negotiator uses alleged impacts or not. Whilst business impact, following good industry practice complex terms to overwhelm others and relationships can be an effective factor in • Allowing mitigation by the time a risk win arguments unrightfully in a claims negotiation, knowledge of the full event arises, rather than dealing with its settlement meeting. Another example and complete extent of entitlements impact at the end of a project can be where an employer uses their through applying sound methods of • Maintaining good relationships between power, as the project sponsor, to benefit quantification can be an effective tool the stakeholders and avoiding from a contractor with poor contractual when it comes to recoverability of claim opportunistic behaviors. knowledge, or vice versa, where a values. contractor submits a claim with by Amr Ibrahim , Manager, Real Estate & unrealistic contractual risk events and Thirdly: Opportunistic behavior Construction, Deloitte Middle East unsubstantiated costs in order to take Opportunism is the act of one party advantage of an uninformed employer. taking an unfair advantage over another as an opportunity presents itself. An

51 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The evolution of construction How building information modeling and lean management are transforming the industry

52 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

53 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

There is no secret as to the challenges Examples of early adoption Further afield, in the Netherlands, the that face the construction industry and Recent local and international examples world’s first 3D printed bridge was specifically the delivery of capital projects. demonstrate the direction in which the opened to the public in October of 2017. As the dozens of reports on the sector’s construction industry is traveling. For The bridge spans eight meters and was productivity suggest; capital projects take example, the Dubai Government’s 3D made with 800 layers of reinforced, pre- too long, cost too much and often fail to printing strategy has an objective that stressed concrete by printing machinery fully meet the requirements of the 25% of every new building in the Emirate that only deposits concrete where it is customer. should be 3D printed by 2025. The needed. The contractor commented that strategy aims to “reduce labor by 70%, 3D printing the structure produced far However, construction is on the brink of a reduce cost by 90% and reduce time by less waste than traditional concrete transformation which will provide benefits 80%” across the construction, medical casting methods. to industry stakeholders and society alike. and consumer product sectors. If fully embraced, two new methods of With regard to BIM, the Dubai working can deliver the sustainable Municipality mandated its use on all productivity the global economy needs in As the dozens of reports governmental projects in 2015, pre- order to address rapid urbanization and on the sector’s empting the UK Government’s mandate scarcity of resources. in 2016. Take-up in the region is productivity suggest; beginning to accelerate, with early The first is the digitization of assets capital projects take too adopters noting positive client feedback through Building Information Modeling and huge improvements in the way it (BIM). In short, BIM is the collaborative long, cost too much and accelerates and improves the design production of a 3D representation of an often fail to fully meet the process. Clients can now visualize and asset (containing geometric and non- understand the asset, in a way that was geometric data) that is used to manage requirements of the not possible in the past. There are this asset throughout its lifecycle. The numerous examples of projects that have second is the application of lean customer. adopted BIM in the region, most notably management principles to construction. the award-winning Etihad Museum in The principles originated from the This commitment is being backed up by Dubai. automobile manufacturing industry and action. The Dubai Future Foundation’s focus, among other things, on ‘just in time’ offices, opened in 2016, were 3D printed Delivering better value and efficiency production, reducing waste and the use and assembled on site in less than three for all stakeholders of stable and standardized processes that weeks. The structure cost $140,000 in One of the core principles of BIM and are continuously improved. One example labor, plant and materials costs, which is collaborative design is that it shifts the of how this is manifesting itself in estimated to be half the cost of a greatest effort level to earlier in the construction is the use of modern comparable structure built using project lifecycle. Designers, contractors, construction techniques, such as 3D traditional construction methods. The owners and operators are all involved printing and modular, prefabricated Road and Transport Authority and the during the concept (or ‘scheme’) design building products. Dubai Electricity and Water Authority stage by reviewing and optimizing a 3D have also both made commitments to model of an asset before it is built. As the Both methods will provide a much developing and implementing 3D printing design is finalized, its architectural, needed increase in construction in their businesses. structural, mechanical and electrical productivity as well as cost and time elements are integrated, reducing the certainty that the construction industry In addition, across the GCC, governments need for costly changes on-site in the needs in order to retain stakeholder are starting to emphasize and incentivize construction phase. confidence and meet the needs of the use of modular, pre-fabricated society. They represent a paradigm shift building products in order to boost the Based on this collaborative approach, from the view that construction should construction sector and deliver affordable some of the benefits BIM can provide to provide ‘more for less’, to ‘much, much housing to their citizens. clients and contractors are as follows: more for the same’. • Ensures design integration is completed before work begins on-site and

54 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

facilitates communication between the client, end user, and supply chain. The barriers to the evolution of • Provides fixed and indisputable construction materials data – allowing construction are, by and large, not quantity surveyors to perform ‘take-offs’ (for tendering purposes) with far greater technological. They are more linked to clarity than the current drawing-based methods. a behavioral resistance to change that • Facilitates time-related construction planning and site management by has long been prevalent in the industry. combining the project schedule with the 3D model (4D BIM). building components, thus reducing It leads to more expensive projects as waste and enabling processes to be un-coordinated design and gaps in scope The traditional construction methods and continuously improved. rear their head later in the construction processes are well established with the phase of projects. Traditional methods of vast majority of production taking place Barriers to implementation construction, while providing flexibility, on-site using a variety of skilled and The barriers to the evolution of consistently lead to increased costs unskilled trade labor, a flexible but time- construction are, by and large, not without a corresponding improvement in consuming process delivered at low technological. They are more linked to a quality. margins. behavioral resistance to change that has long been prevalent in the industry. The adoption of BIM and lean The design fixity and certainty, as management principles are just two delivered through collaborative BIM This typically comprises a reluctance to let ways the construction industry is moving design and the adoption of lean go of traditional methods of construction forward and delivering projects more management principles, can and fear of the unknown (“better the devil efficiently. Further investment in skills subsequently enable more efficient you know…”), skills-gaps in both and research and rewiring contracts to methods of construction, such as new technology and lean management accommodate collaborative working, will materials (e.g. modular, 3D printed principles and processes, and an further support the proliferation of new products) to be utilized on projects. This entrenched ‘lowest price wins’ methods and technology. brings the construction process closer to construction business model. manufacturing and will ensure a higher Early adopters, be they client quality output for clients with less waste. Specifically in regard to BIM adoption, organizations or the supply chain, who awareness of the benefits and a common embrace and invest in these areas, are New methods of construction include understanding of what BIM is (i.e. a tool to likely to reap rewards in the future by advanced automation (3D printing and construct, operate, maintain and manage delivering more work with greater value, robotics) and modular construction the asset throughout its life) are key certainty and profitability. (panels and volumetric components for challenges. The main challenge currently repeatable areas such as kitchens.) experienced by suppliers is a lack of by Matt Hanson , Assistant Director, Real Adopting lean management principles informed clients who typically request Estate & Construction, Deloitte Middle and new methods of construction has that a project “be delivered in BIM” rather East been shown to: than setting out what their asset • Achieve a higher quality of output - information requirements are. components are manufactured in a factory, then assembled efficiently on Conclusion site; The current established practice of • Require less on-site labor and greatly awarding architectural, structural, reduce construction duration – bringing mechanical and electrical packages based financial benefits to clients; and, on an un-coordinated, paper-based, • Provide standardized and repeatable outline design is unsound.

55 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Bishoy Azmy, CEO and Executive Director at Al Shafar General Contracting (ASGC)

56 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

57 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The UAE-headquartered construction Your main focus market is the UAE. organization, is implementing changes in company Al Shafar General Contracting Do you have plans to expand your how we operate in almost every aspect of (ASGC) was named ‘Contractor of the services across the region? our being. We have more than 30 live Year’ at the Construction Week Awards We have a small set-up in Egypt which we projects at this point, and we use the 2017. With more than 16,000 staff and an are looking to grow, and are currently technology offerings of some of the best annual turnover of approximately $1bn, looking at some specific countries in companies out there, including Oracle, the group has maintained its leading Africa. Microsoft and IBM. market position through the quality of its operations, an extensive service offering, Big data is becoming Big data is becoming relevant in sound client relationships and by construction. There are millions of data demonstrating best practices. We asked relevant in construction. points or facts around us which we can Bishoy Azmy, CEO and Executive Director, There are millions of data collect easily. If we analyze those, we can to share his thoughts on the company’s make better inferences about our strategic plans and the future of the points or facts around us decisions and this affects our future construction industry, generally. behavior. Different software now assist which we can collect the construction process, ranging from ASGC has been named ‘Contractor of easily. If we analyze estimation programs and e-procurement the Year’ at the Construction Week to labor tracking and asset IOT Awards 2017. How do you think ASGC those, we can make connectivity. distinguished itself from the better inferences about competition and how have you Dubai aims to 3D print 25 percent managed to develop to being a our decisions and this of its buildings by 2030. What do you prominent home grown contractor think are the limitations posed by that now competes with affects our future 3D printing construction and how international contractors? behavior. should this technology evolve? What By focusing on our clients – how we can innovation initiatives is ASGC using serve them better in all respects. We try or developing for the future of and put ourselves in our clients’ shoes What is the strategic direction you construction? and imagine what is important to them have set for ASGC for the next five 3D printing is certainly going to be rather than be focused on what is years? become relevant to the future of important to us. By doing that we • Organic growth buildings, globally and in Dubai. But generally succeed in having their • Targeting even more complex, special, currently the lack of codes and proper satisfaction and appreciation even if we challenging projects research on its safety and strength for slip in some area which is not so crucial • Entering the infrastructure space mainstream construction is curtailing its to them. • Expanding into Africa entry into mainstream construction use. • Evolving use of technology You delivered a number of The construction industry is making prestigious projects in 2017. Are How is the group developing in steps towards sustainability and there any projects which you are terms of systems, procedures and green building. Have you particularly proud of, or which you technology adoption? Does your implemented any sustainable feel were a new challenge for ASGC internal supply chain still give you an practices? in terms of capability? advantage in terms of delivery as a Yes, we have. From the selection of Delivering the country’s national museum main contractor? materials, to the usage of resources, to celebrating the formation of the UAE, the We are adopting a lot of new initiatives the handling of waste. We have been ISO Etihad Museum, is something we are very using technology. This is already starting 14001 certified for almost a decade but proud of. Also Citywalk has turned out to to bear fruit. We have a chief information that is only the beginning of this be the new destination for the city’s officer (CIO), who, along with the IT team important journey. trendy pedestrians. and the various stakeholders across the

58 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The GCC needs more infrastructure and social infrastructure to replace older networks, enable newer more efficient human and business connectivity, and to cater to a growing and increasing young population.

What is your assessment of the international contractors we have heard construction industry in the GCC, about recently as well as local listed ones and what are the sectors that you in the region. think offer the greatest opportunity for contractors in the short term and Given the liquidity concerns in the will continue to attract investment? market and the continuing focus on The GCC needs more infrastructure and a large pipeline of developments in social infrastructure to replace older the GCC, how do you see the networks, enable newer more efficient opportunities around Public-Private human and business connectivity, and to Partnerships (PPPs) developing to cater to a growing and increasing young provide the much needed funding population. required? I think this model will become more How would you characterize the relevant and more common in this region current market situation for over the coming few years. Primarily this contractors – opportunities and is a vehicle governments resort to for two threats? reasons – it allows them to tap into There are certainly both. private funding sources and embark on infrastructure expansion beyond their The growing young population and the current capital budgeting limitations and direction of the governments to remain it shifts the onus of successful design, at the forefront of business and urban construction, operation and maintenance relevance and their drive to diversify their to private sector players with skin in the economies means there is plenty of work game which may mean higher to be done in various fields of efficiencies. construction. Bishoy Azmy , CEO and Executive The never relenting emphasis on Director of ASGC competitive pricing is leading to contractors succumbing to take on projects with either very little or no margin, which ultimately does not bode well for the industry because these companies eventually fold, such as some

59 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

60 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Why is construction productivity so low?

61 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

It is important to observe The Department of Economic 1. Labor-intensive: construction has yet Development in Dubai recently published to utilize more mechanization, that construction “The Economic Report 2017 for Dubai”. automation and use of Following the report’s approval by His smart/intelligent systems. productivity is low not Highness Sheikh Hamdan Bin Improvement could be two-fold; only in Dubai or the Mohammed, Crown Prince of Dubai, reducing labor intensity and newspapers gave their front pages to the improving the productivity of the region, but rather that it story “Innovation and High Productivity remaining labor force. This will require is a global problem. With are the Focus”. From analysis of the data a deep review of the execution related to the productivity of the processes, material handling, the construction industry construction sector, locally and globally, automation, methods and employing 7 percent of we find that in the past few years the production/construction techniques. growth rate of labor productivity in the the world’s labor force construction sector has been negative. In 2. Physical: the more physical the one sense, this says that the growth in nature of an industry, the lower the and construction activity the value of the output is less than the productivity is, and, simultaneously, representing up to 13 growth in cost and/or efficiency of the the more the opportunities for construction labor force. This does not improving productivity through percent of the global say that the total (labor, material and incorporating e (electronic), Gross Domestic Product capital) productivity in construction is virtualization (e.g. models), negative, yet, since construction is a applications (IT, Smart, BIM) and (GDP), the size and labor-intensive industry, the effect of creating value virtually. Apparently, labor productivity is significant. It is this cannot be the case in all aspects importance of the important to observe that construction of construction, however, there are problem makes it, at the productivity is low not only in Dubai or many examples where this concept the region, but rather that it is a global applies. For example, when hard disk same time, equally problem. With the construction industry drives (HDD) in computers became compelling and, if solved, employing 7 percent of the world’s labor solid state drives (SDD), a big jump in force and construction activity efficiency and speed, and reduction in potentially rewarding. representing up to 13 percent of the size, temperature and noise resulted. global gross domestic product (GDP), the size and importance of the problem 3. Sequence-dependent: construction makes it, at the same time, equally is a highly sequence-dependent compelling and, if solved, potentially industry. As such, delay at any stage rewarding. could propagate to affect the rest of the activities. Again, labor costs Needless to say that productivity, either money whether it is active or not. of labor or as a total, has grown at a faster rate in other sectors. The question 4. Inflexible: a study of many aspects of is: “Why is construction productivity low the construction industry will reveal and not growing as fast as other that, relatively speaking, little change industries?” The obvious answer is that has taken place over the years in: the development rate of the construction a. Contracts sector is much slower than other sectors. b. Materials So why is this? The answer lies in some of c. Methods the sector’s current characteristics, which d. Requirements could be addressed. For example: e. Standardization (vs. customization)

62 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

f. Skills and competencies g. And many other construction Many functions are lacking or are at an aspects In total, the rate of change in these inadequate level in construction, aspects is not helping in improving productivity. especially in contractor organizations.

5. Data, information and knowledge: Some of the important ones are the accuracy of data, information and knowledge applied and necessary in research and development, innovation, construction has not improved, unfortunately, as much as desired. knowledge management, systems Incorrect information, lack (or late availability) of important data, and engineering, industrial engineering, uncertainty still result in significant variations, delays and cost. engineering management and others.

6. A man’s world: other industries have 8. Integration of IT: other industries 10. Project organization: classically, work benefited from the inclusion of have integrated modern IT in all its can be organized around a project, a women in management and aspects more than the construction product or a process. It is well known supervision. The edge of women’s industry has done. Compare for that project organization is the least competencies in planning, multi- example, a modern manufacturing productive of the three types of tasking and follow up, as well as other facility with CAM (computer aided organization. The question is can advantages has led to improvements manufacturing) robots, AGVS construction projects benefit from in productivity in other industries. This (automated guided vehicle system), product or process organization, i.e., has yet to happen for construction. AS/RS (automated storage retrieval can we embed organization for systems) to a construction site with process, product or a combination of 7. Standardization: construction, zero or very little automation. the same into a construction project? almost globally, is customized. Each The answer is definitely, yes. project differs from the other. While 9. Modern technology: yes, there have some components are standardized, been some developments in In conclusion, there are other the majority are not; foundations, construction, however, much more is characteristics that affect the productivity structure, and concrete work are possible and desired. For example, of construction, however, these highly project-specific, and material handling on site, internet of characteristics together predict that consequently not standardized, things (IOT), design/construction improving construction productivity is resulting in lost opportunities for integration (just like CAD/CAM possible and attainable, rewarding and improving productivity. Elsewhere, in integration) automation and others. not risky. The opportunity is big. Some the manufacturing industry, a major Many functions are lacking or are at estimates for the gains from productivity productivity improvement was gained an inadequate level in construction, improvement worldwide for the by standardizing production especially in contractor organizations. construction industry are in the order of processes, standardizing products, Some of the important ones are trillions of dollars, equivalent to the sum using special purpose machines, research and development, of GDP for many countries in the region: ensuring repeatability and innovation, knowledge management, is this rewarding enough to strive for? interchangeability. In construction, systems engineering, industrial this is an open opportunity for engineering, engineering by Dr. Zain Tahboub , Chief Advisor at improvement. management and others. Dubai Aviation Engineering Projects

63 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Mr. YU Tao, President & CEO of China State Corporation Middle East (CSCEC ME) How CSCEC ME is leveraging technology to add value to construction projects and pushing the boundaries of what is feasible

64 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

65 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Construction, as one of the world’s oldest the outlook is an almost 20 percent traditional industries, is not generally reduction in total life-cycle costs of a known for being the most advanced project, as well as substantial when it comes to adopting new improvements in completion time, technologies. The fragmented nature of quality, and safety.” the industry has made any efforts to roll out innovative solutions much more As a fully-owned subsidiary of the world’s difficult and time-consuming. In an largest construction and real estate ecosystem of numerous small conglomerate in terms of revenue, CSCEC subcontractors operating at varying levels ME has the full support of its of maturity, embracing technology and government-owned parent – the CSCEC building new capabilities at scale seems Group – both in terms of technological almost naïve if not entirely impractical. expertise sharing and financial backing. The Middle East, as elsewhere, is no Over the years the company has built exception to this. comprehensive capabilities through its experience in undertaking building works However, there is also a strong incentive as well as civil and infrastructure facilities for market participants to embrace construction in the region. It is no technological advances, especially in light stranger to technology adoption in the of mounting issues currently contributing Middle East market, having pioneered to stagnating the industry, including large many technological advances here, project overruns, declining productivity, including undertaking the task of putting as well as low and volatile financial together the world’s first fully functional returns for contractors. As per the World 3D printed office in Dubai, among other Economic Forum article ‘What’s the future areas. of the construction industry?’ , the upside is too attractive to overlook: “Wherever With this in mind, we spoke with Mr. YU the new technologies have properly Tao, President & CEO of CSCEC ME, to permeated this fragmented industry, hear his thoughts on the role of technology in pushing the boundaries of what is feasible in the industry; the Automation in construction is made technological advances he considers of relevance to the local market; how his possible by advances in digitalization, company has been making technology work as an integral part of the business; disruptive technologies and building what challenges remain ahead and what techniques, such as the emergence of the future holds for market participants. What are the trends and building information modeling (BIM), technologies that will shape future construction projects? 3D printing, AI, advanced building Speaking of technological advances shaping the future of construction, one materials, and their respective key concept that drives such efforts, as in many other industries, is the idea of application along the whole automation, and the benefits this would bring to the whole industrial value chain, construction project life cycle. from improving workplace safety, to

66 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

currently available technological AI (Artificial Intelligence) is another advances being introduced, experimented with or adopted, with promising direction with the potential varying degrees of popularity. This is partially a result of technology inventors to define the future of the industry. and suppliers finding it very attractive to target key stakeholders in this region, be enhancing quality and productivity, to consistency and scale challenging to it developers, consultants or contractors. making the industrial process more achieve via traditional methods. However, It is also driven by the market dynamic proficient and sustainable. currently the technology is constrained and associated challenges: given the Automation in construction is made by the grade of printing materials, which sheer volume of works underway, there is possible by advances in digitalization, lacks strength to be viable for a multi- a relative shortage of skilled manpower; disruptive technologies and building story building without the need for the extreme weather conditions during techniques, such as the emergence of additional steel reinforcement. Thus, summer further affect manpower building information modeling (BIM), 3D new materials need to be developed in productivity. All these factors have printing, AI, advanced building materials, order for the technology to be more contributed to making the market here a and their respective application along the widely adopted. frontrunner compared to other regions in whole construction project life cycle. terms of technological adoption. Improvements brought by such advances AI (Artificial Intelligence) is another can be seen in many different aspects, promising direction with the potential to Having said that, being a China-based from the design stage where define the future of the industry. At the company, we are part of a construction implementation of BIM technology helps moment, it is still in its infancy, yet there tradition with thousands of years’ history, automate the design conceptualization are already automated robots being used which has had its share of continuous and review process, to the engineering in laying bricks, digging, and painting, technological advances over time. Many stage where shop drawing preparation among other functions. AI can be utilized of the drivers of such advances are very could be digitized, up to the operations to improve safety and efficiency on a similar to those in the local market here, stage, where critical records including construction site by having it perform hence we can easily relate to the certification, specification, supplier info, repetitive and dangerous tasks. The same development of the industry here and and the warranty are all centralized on can be applied to assist inexperienced its ever changing dynamic. BIM, making operations and maintenance workers in handling complex tasks and (O&M) management much easier to to improve consistency in working Based on our understanding of the handle. performance, which can be very helpful local market, we are bringing in new in an industry that’s experiencing technological practices, in particular Besides automation in the engineering increasing difficulty in sourcing highly those we believe to be the well-tested process, the more important changes skilled workers. best practices from China’s construction have been brought on by automation market – one of the largest and most during the actual construction phase, What is the level of technological complex in the world; we do so only either through off-site precast and advancement in the construction after having revalidated the optimal prefabrication of building components, industry in this region compared to implementation of such practices here, or onsite through the facilitation of 3D other markets that you’ve and having ensured their consistency printing technology in the process, which experienced? And what is CSCEC ME’s with local market requirements and is now a promising area of the industry. plan for staying ahead of its peers in regulations. Such access to deep industry Precast and prefabrication could this area? expertise and local know-how is what significantly improve efficiency, although The GCC market in general, and differentiates us from the competition. at the moment this comes with a high particularly the UAE, is widely considered price tag; 3D printing could produce as one of the most active construction modular building components – markets in the world, with many large- especially those complex, curved ones scale projects underway. In this market that are used in modern buildings, with one can arguably find most of the

67 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In terms of how we do Has your company adopted business efficiency. For example, we innovative approaches over the past foresaw the importance of BIM in business, we are actively years to improve the business? construction at a very early stage, and We are fully committed to innovation started implementing BIM in our projects diversifying our business as a way to continue our business even without it being a specific model from general success, and we look at innovation in a requirement from the client. broad spectrum of areas, including an contracting to financing innovative approach around how we do We also were the main contractor to and investment-driven business, and in terms of how we manage and complete the world’s first leverage cutting edge technologies to fully functional office using 3D printing engineering, improve our business. In this regard, technology in the Middle East – the procurement and we have the full support of our parent “Office of the Future” for Dubai Future company with its strong research and Foundation. Despite all the challenges construction (EPC), development (R&D) capabilities and associated with such projects as a proprietary techniques. prototype, we strongly believed in how utilizing our strong such technology could change the capability in bringing In terms of how we do business, we are construction industry, and hence we actively diversifying our business model decided to take the risk. We were heavily in a competitive holistic from general contracting to financing involved, not only in terms of project solution including and investment-driven engineering, management but also through procurement and construction (EPC), investments in research and technology finance/investments, utilizing our strong capability in bringing development through our in-house in a competitive holistic solution including research and development center in design and construction finance/investments, design and China, of which we brought a local branch services to our clients. construction services to our clients. to the Middle East for the project. As an To help our clients capitalize on the ongoing effort around this leading increasing demand for development technology, we are currently in the opportunities in the region, CSCEC ME process of setting up the first local can properly assist them in getting the laboratory for 3D cement printing much needed funds to ensure project research in the Middle East. success. We were successfully awarded the Five Dubai Hotel In addition to pioneering the 3D printing Project and Five Jumeirah Village Dubai initiative, at CSCEC we are also highly Project by adopting such an approach. It experienced in constructing was a major breakthrough for CSCEC ME such as super-high-rise to diversify our business from general buildings, with a number of innovations contracting to an alternative business under our belt. We have built more than model. 90 percent of super-high-rise buildings in China (buildings higher than 300 meters), In addition, since we first came to the and 50 percent of super-high-rises in the local market in 2003, CSCEC ME has world (buildings higher than 500 meters). always been introducing unique solutions We pride ourselves on having a for the construction challenges facing our comprehensive offering in this regard, industry. We always believe in the value including the relevant expertise and of technology in construction, and have experience, the complete team, the latest been pioneering a number of technology and the right equipment. technological adoptions to improve

68 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In building such megastructures, CSCEC Group has developed a range of Efficiency will be achieved through the innovative construction technology and solutions to make the construction dual effort of improving productivity process more efficient, which includes an integrated smart platform, a crane while reducing abortive works. That is slewing system, a circular elevator for vertical transportation, ultra-high mainly what technology has to offer. concrete pumping, and a magnetic safety escape device, among others. on top of the integrated platform for meters per second (90 meters in one super-high-rise projects. It can host minute.) The device is now being further The integrated smart platform is a holistic multiple cranes of different scale and refined and tested for use on solution, considered an industry-leading swiftly rotate 360 degrees around the construction sites. innovation dedicated to super-high-rise center of the system to allow full construction projects. It functions as a coverage of the high rise under As one of the world’s leading moving manufacturing construction, as well as utilizing each construction companies, we are powerhouse, with construction crane’s capacity for varying types of committed to spending a lot of resources equipment such as tower cranes, a installation tasks. and funds on R&D of new technologies. construction elevator, concrete spreader Five years ago our headquarters set up a and work station, steel structure and To address the logistic challenge of separate fund to study super-high-rises other facilities such as formworks, a transportation up and down super-high- of above 1,000 meters. This year we are material storage yard, equipment rise construction sites, CSCEC came up in the running to build these kind of warehouse, temporary water tank, labor with the circular elevator for vertical buildings. Every year we start new welfare area, and lavatories all installed transportation, which can remarkably projects and go from strength to on-site; in addition, the platform is fully increase the transporting capacity of a strength, for which R&D is a critical equipped with a smart alert system, construction site elevator and reduce driving force. China is developing rapidly offering live monitoring of stress levels, operation space. CSCEC was the first in today in terms of new technology wind, temperature, and surface evenness the world to use this system, which runs developments and applications, and we etc., to ensure safety. The platform is several lift cages circularly on a single benefit a lot from having access to such a designed to allow working on four floors track, so that one circular elevator can be pool of resources. For example, we use simultaneously, and can bear thousands as effective as several traditional BIM technology and our company is of tons of load while resisting windstorms elevators. spending lots of money on refining it and amid a severe tropical cyclone at implementing it throughout our business, Beaufort wind force level 14, i.e. at 86-89 CSCEC has also mastered ultra-high to ensure we make it work for us to stay knots, which is stronger than a hurricane concrete pumping in the case of super- ahead of the competition. Our company (Beaufort wind force level 12). Adoption high-rise construction, which won us a is also currently building the world’s of the platform has proven to significantly Guinness World Record in 2015 for longest bridge over water, a 55 km-long, improve efficiency and reduce waste in concrete pump delivery up the Tianjin Y-shaped span linking the three cities of super-high-rise projects, as evidenced in 117 Tower at 621 meters, with a concrete Hong Kong, Zhuhai and Macao, for which the recent six cases where it was grade of C60. As a recent example of we overcame one of the most complex adopted for building towers above 400 CSCEC’s continuing efforts around challenges ever to confront engineers, meters, for which the construction innovation and improvements in and incorporated the latest engineering duration was shortened by three to six workplace safety, the company’s R&D technology and design, to build a months on average. team successfully tested the magnetic structure capable of withstanding an slow down safety escape device, which earthquake, typhoon and potential strike A crane slewing system is a 20m-high weighs 10kg and allows the safe by cargo vessel. structure designed as an X-shaped evacuation of workers in cases of high- spatial truss, which usually gets installed rise emergencies at a speed of 1.5

69 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

With 3D printing The industry is calling for more the improvements in quality, as reducing efficient ways to complete the human interference will, by default, technology, only one construction projects. How can new automatically reduce the associated technology such as 3D printing human error, and ensure consistency copy needs to be contribute to this, if at all? in the quality of construction output. produced – thereby Efficiency will be achieved through the The third aspect is the contribution to dual effort of improving productivity while environmental preservation and minimizing and reducing abortive works. That is mainly sustainability. With 3D printing eliminating most what technology has to offer. By technology, only one copy needs to leveraging advances in the digital space, be produced – thereby minimizing and . strict control of the construction process eliminating most construction waste. Moreover, the can be achieved. Computerized systems Moreover, the technology allows the leave little room for compromises in use of local available materials, hence technology allows the quality, or for time delays which directly requiring less transportation to get the impact productivity. work done, and thus making it greener use of local available to execute. Last but not least, it also materials, hence Therefore, utilizing BIM in different stages opens new areas for designers to of design and coordination will ensure experiment. 3D technology is removing requiring less the early detection of clashes and the limitations of the need for repetition transportation to get the accordingly reduce the time costs related associated with the precast and to delays or abortive works. As a result, conventional construction due to work done, and thus efficiency of the construction process molding and reuse, therefore one can will be improved. This also goes for 3D make every piece a unique one. making it greener to printing. When we reduce human error execute. in the process and minimize several Regarding the cost factor, any new elements of false works, the overall technology will be more expensive than efficiency can be improved. Such are the conventional technology. This is simply ways that technology can add significant due to the limited number of suppliers value. and the risks associated with initial testing to eliminate misapplication. The world's first 3D printed office However, once the technology has building opened in Dubai last year, proven itself through on-site application, which your company helped put its cost will gradually drop to the break- together. What advantages does this even point with conventional methods. technology offer versus traditional At that time the advantages gained from construction methods, and how is it using the new technology will gradually relevant to the industry? become known and will eventually The 3D printing application in result in the complete displacement of construction has several aspects of conventional methods. This is a common added value to construction activities. trend and is what we believe will happen The very first aspect is the improvement with 3D printing technology as well. in the safety of workers. Taking certain elements of dangerous and risky What are the limitations and activities traditionally carried out by challenges posed by 3D printing laborers and replacing them with construction, and how do you see machine and 3D-printed prototypes will this technology evolving for the no doubt make the built environment improvement of the whole industry? safer for workers. The second aspect is The current limitations for 3D printing

70 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

technology applications in the local be produced which maximize the value construction market can be listed of the technology. as follows: • The availability and use of higher Dubai aims to become the global strength ‘inks’ (currently in the center of 3D printing and print 25 equivalent strength of C20 to C30) percent of its buildings by 2030. In require more research on material a city of high-rise buildings it is development. This is exactly what we difficult to see how this technology are currently doing in our in-house will satisfy demand. What are your R&D center. views on this? • Further tests for fire resistance, The application of 3D printing technology durability and the long-term behavior of has several forms, but unfortunately the the material. This would require further common perception of this application is testing and involvement of reliable only limited to structural printing. In fact, testing agents, so that new testing 3D printing technology is currently methodologies can be developed to applied in 3D printed buildings more as a better anticipate the long-term method of concrete construction without performance of the material. the need for formwork, and it could have • Additional tests for raised health a broad range of applications in the form concerns over fiberglass, which is used of architecture, ID works, landscaping, in the ‘ink mix’ to prevent shrinkage fixed or moveable furniture, etc., i.e. cracks. This also requires specialists creating specialized components for the from the field of health and safety to built environment, which tend to be investigate the impact and provide an difficult to fabricate via other means. assessment to confirm if those concerns are actually warranted. If so, All these applications add up to 25 are further mitigation measures percent of the building works. Setting required or are they unfeasible and such a target and formalizing it as an can be dispensed with? aspirational goal could act as a catalyst • Improvement of the printing head and for change, a clear invitation and a strong speed to create thinner layers (currently signal to all market specialists to 20mm) with a smoother appearance. collaborate and do their part, which This is something we are seeing develop without doubt would receive a positive gradually, but for the moment it is still response. The aspiration is a visionary not very satisfactory. one, and what remains to be done is for • Attaining international code/standards key market participants to respond by recognition and building authorities’ aligning their internal strategy with the approvals, which I believe is currently overall vision of the Emirate. Such an being worked on by the authorities. We alignment should be done based on a will be waiting for their official release. real understanding of the objectives • The preparation of design guidance for behind this target and appreciating how general use in the construction industry. it will be beneficial to everyone in the This is crucial in order to get the best future. out of the technology, as the architectural and structural designs Mr. YU Tao , President and CEO need to consider the utilization of the of CSCEC ME technology during their early stages. Accordingly, custom-made designs can

71 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Emerging risks, trends and risk management mechanisms related to third parties

72 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

73 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Development and construction providing services to development and opportunities to improve operations companies in the world and in our region construction companies. The next and/or identify needs for further risk are increasingly relying on third parties to question on everyone’s mind is: “What mitigation plans. Without this right to run their daily activities and operations are those risks arising from third parties audit, there is an increased risk of loss and reach their short/long-term goals. and how can businesses be better of reputation, fines, litigations and Although historically third party prepared to deal with such risks?” financial losses, business interruption, relationships occurred as a result of cost or cash flow issues. reduction measures, third parties have In this article we set forth the emerging become an integral part of the business third-party risks and also introduce • Inadequate compliance network of development and potential detection and mitigation Contracts between the contracting construction companies, as they provide measures. organizations and their business flexibility, insight, increased manpower, partners can create risks to both enhanced quality, and specialization. The ability to audit third parties. Contracts should be reviewed by appropriate legal experts to ensure As per a 2016 Deloitte Global extended parties can also provide that the proper terms and conditions survey on Third Party Governance and opportunities to improve are included. Risk Management (TPGRM) across different industries (Financial Services, operations and/or • Poor labor and human rights Real Estate, Construction, Energy & considerations Resources, Manufacturing and Public identify needs for further Labor rights and human rights have Sector, amongst others), “73.9 percent risk mitigation plans. been some of the hot topics within the of respondents [from 170 senior members real estate and construction sector for of management from a variety of the past couple of years – whether it organizations] said they believe third parties Emerging third party risks relates to workers' pay, benefits, or safe will play a highly important or critical role • Insufficient collaboration and working conditions. Although the in the year ahead, up from 60.3 percent the communication with third parties control does not always rest with previous year.” 1 This goes to show that Cross-functional teams not working in development and construction organizations will increasingly rely on tandem, leading to disputes between companies, they almost always suffer third parties in conducting day-to-day the collaborating parties. from negative media coverage and activities/operations. In addition, the reputational risks that might unfold survey highlighted that 87% of • Inability/Inadequate audit which lead to litigation, fines, respondents faced a disruptive incident of third parties suspension of operations and almost with third parties in the previous two to Organizations doing business with third always to reputational damage. three years, 28% of which faced a major parties sometimes include provisions in disruption and 11% a complete third- the contract that allows the contracting • Unreliable third parties party failure. organization to conduct audits. These Failure to select appropriate third party audits can help ensure that contract service providers and monitor their In the Middle East and the GCC, reliance requirements are met and that business activities may result in delays, on third parties and related risks has also practices with the third parties do not dependency, and customer increased in recent years, with some risks conflict with the culture of the dissatisfaction. materializing in major disruptions/ contracting organization. The ability to complete third-party failures when audit third parties can also provide

74 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Effective risk management of third parties Contracts should be reviewed by Globally, for the above risks and others to be mitigated, organizations are appropriate legal experts to ensure increasingly taking steps to enhance the maturity of their TPGRM programs that the proper terms and conditions and are spending more on new technologies to help mitigate third party are included. risks. However, and as per the abovementioned 2016 Deloitte Global A more innovative detection control extended survey on TPGRM, gaps are not increasingly used in development and entirely bridged with the introduction of construction companies, relates to data technology, as “94.3 percent of respondents analytics (DA). With the increasing have only low to moderate levels of reliance on technology, data analytics – confidence in the tools and technology used which is the process of examining data to manage third party risk and 88.6% have in order to make conclusions and guide a similar level of confidence in the quality of a more informed decision-making – is the underlying risk management processes, helping organizations control costs at despite significantly higher levels of an early stage, which in turn helps confidence in organizational commitment management with the early detection and governance frameworks – creating the of cost overruns and excess payments. execution gap.” by Khalil Balaa , Manager, Risk Advisory, Thus, technology and tools to curb third Deloitte Middle East party risks have to be accompanied by other detection and mitigation controls 1. “Third party governance and risk management: The threats are real.” (2016). Accessed at that could span from traditional all the http://www2.deloitte.com/content/dam/Deloitte/uk/Documents/audi way to innovative. t/deloitte-uk-third-party-gov-risk-management-2016-printable.pdf on May 30, 2016.

Amongst the more traditional detection controls is the reliance on an established and strong internal audit function to perform risk-based internal audit reviews that will allow contracting organizations to detect process and excess payment issues. Contract compliance and contract management reviews could also help contracting organizations recover a percentage of the excess unjustified payments, which could be material in some cases.

75 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

76 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Leisure and entertainment investment and economic diversification in the GCC A long-term play

77 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Almost all GCC countries The fall in global oil prices has resulted in All key cities in the GCC have experienced a tightening of national budgets across this decline in performance, with Medina have identified the the GCC and put pressure on experiencing the lowest decrease in government expenditure, resulting in RevPAR of 0.1%. tourism industry, which economic diversification becoming more encompasses the critical now than ever before. Almost all The region continues to be impacted by GCC countries have identified the global economic headwinds in key source travel/transport, hotel, tourism industry, which encompasses the markets, such as the UK and India, in entertainment, leisure travel/transport, hotel, entertainment, addition to regional geopolitical tensions leisure and other sectors, as a key pillar and foreign currency fluctuations. and other sectors, as a of economic diversification. Although in Despite the relatively moderate fall in key pillar of economic different stages of development, a performance, Dubai continues to be significant amount of investment has one of the best performing hospitality diversification. been made and is planned in the leisure markets globally. Previously positioned sector across the respective GCC states as a luxury destination, a reduction in to further strengthen their respective average daily rates is expected as hotel positioning and support economic supply evolves to cater to the mid and diversification. budget market segments, and as it looks to attract the targeted tourist volume Two key segments within the wider needed to sustain the desired growth. tourism sector are the hospitality sector and the leisure sector. Below we highlight Hospitality is a key sector in which the differences and also the inter- diversification efforts are generally relationships of investing in both sectors. perceived to have been successful. The sector has a high economic Hospitality performance in the GCC multiplier effect, and while there are Performance in the GCC hotel market significant variances from city to city, the softened in 2017 compared to 2016 sector is viewed to be less dependent on across all key cities. Revenue per available government spending when compared room (“RevPAR”) declined by between to other sectors. The leisure and 0.1% – 17% over the first nine months of entertainment sector, which is often the year compared to the same period of viewed as supporting tourism the previous year, as shown in Figure 1. “infrastructure”, continues to be highly dependent on government spending.

Figure 1. Change in RevPAR: YTD 2016 vs. 2017

-17.1% Doha Central

-2.2% Kuwait

-4.3%

-16.4% Al Khobar/ Dammam

-15.8% Riyadh

-11.0% Jeddah

-0.1% Medina

-14.3% Makkah

-10.3% Abu Dhabi

-4.3% Dubai

-18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

Source: STR Global

78 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Investment in leisure and Figure 2. Existing entertainment and leisure facilities in the GCC entertainment in the GCC In order to support the goal of economic diversification, GCC governments are investing in leisure and entertainment facilities, for both the domestic and Iraq international target markets. Key investments include IMG World of Jordan Kuwait Adventure and Dubai Parks & Resorts, which have recently opened in Dubai, the 4 2 Bahrain Botanical Gardens in Riyadh, and Al Shaheed Park in Kuwait City. Each 1 Qatar 3 country has adopted a different strategy Riyadh 5 12 and is at different stages of development, KSA as illustrated in Figure 3. The UAE’s 4 emphasis has been on water and theme parks and other integrated destination Oman offerings, while KSA has historically focused on sporting facilities, religious 2 tourism and adventure. Yemen The leisure development pipeline in the GCC is significant, with $25.4 billion of investment having been announced in leisure parks and $26.0 billion in sports- related facilities, according to MEED Figure 3. Project status of GCC non-sport leisure projects pipeline Projects.

UAE 22% 8% 7% 23% 3% 37% Leisure investments are a long-term play Qatar 7% 38% 30% 2% 10% 13% While these types of projects are likely Saudi Arabia 5% 4% 80% 1% 11% to ultimately benefit and support the tourism industry and hotel sector Kuwait 38% 4% 6% 27% 25% through a strengthened destination Oman 3% 1% 23% 55% 18% offering, they require major capital expenditure and, as such, are Bahrain 100% unlikely to generate meaningful 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% commercial/investment returns in the short term. Complete Execution Contracting Design & Study On Hold Cancelled

79 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The relationship between Hotels can generally be expected to both global and national economic reach stabilization in three to five years, factors. Dubai’s top source markets the hospitality and while leisure facilities and theme parks, (India, KSA and the UK), are all facing leisure sectors is both in particular, typically have significantly national challenges, such as the recent longer stabilization periods of closer to demonitization in India, the lower oil cyclical and symbiotic. ten years. While well-conceived and price and the subsequent reduction in appropriately located hotels are able government spending affecting KSA, and Once a destination and to generate investment-grade returns, Brexit in the UK. Regionally, the removal its hotel market have leisure facilities and tourism of subsidies, the downturn in the oil and infrastructure, which serve as a catalyst gas sector, growing inflation, and the grown beyond infancy, a for tourism and support hotel introduction of VAT are all likely to lead to stage is reached where development, often need to be perceived lower disposable incomes in the GCC in a different way. market, and, as such, these economic additional investment in challenges call for a review of national Due to the high capital investment and diversification strategies. tourism infrastructure is relatively fixed operating cost profile, required to grow and theme parks in the region are not A symbiotic relationship generally as profitable or lucrative as The relationship between the hospitality enhance demand. investments in the shorter term. and leisure sectors is both cyclical and However, their economic impact extends symbiotic. Once a destination and its beyond just the facility and supports the hotel market have grown beyond infancy, development of the greater tourism offer a stage is reached where additional of a destination. Studies 1 show that the investment in tourism infrastructure is development of theme parks has a required to grow and enhance demand. measurable impact on the hospitality The phasing of this infrastructure and broader tourism industry (through provision is key, and the ‘build it and they increased employment and increased will come approach’ is generally not tourist spending), and in some examples effective in this regard. has led to longer lengths of stay. The lifecycle of destination development Leisure and entertainment investments typically starts with the initial hospitality must also be reconsidered as long-term development coupled with rudimentary place-making investments instead of entertainment provision on a small purely commercial ventures. Economic scale. As the hotel market matures, it impact studies are likely to be a better generates a higher requirement for tool of measurement, as opposed to tourism infrastructure, typically gauging success through the profitability including transport, retail and of the facilities on a stand-alone basis. leisure/entertainment. In order to support the scale of the required tourism While leisure and entertainment infrastructure, the destination will require attractions have the ability to induce demand growth across additional market demand in certain economic climates segments. One key trend includes the (usually in immature markets), they are evolution of the demand profile to lean not able to counter broader global more heavily towards families, tour economic trends/realities that affect groups and their accommodation travel purchasing decisions. Key source requirements. Hotel supply thus evolves markets for the GCC are currently facing to meet these market requirements.

80 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The government will continue to serve as key enabler, and leveraging inexpensive but effective strategies, such as tax incentives and visa permissions, will further bolster the sector.

We can see this trend in the Dubai hotel A shift in perspective and strategy market, which 10 to 15 years ago was In conclusion, a perspective shift primarily positioned as a luxury regarding the investment returns of destination, with attractions, such as leisure products is required. While Aqua Adventure, Wild Wadi, and Dubai investment grade returns are not always Aquarium, developed later on to support likely, efficient operations are critical to and grow hotel demand. In recent years, ensure that the fixed cost profile of these we have seen investors targeting more facilities is well managed and capital mid-market, family-oriented and budget expenditure is well phased to match the segments. In order to support and likely demand profile/market lag. These complement this sector, attractions, such investments and facilities are critical for as IMG Worlds of Adventure, Dubai Parks the continued growth and appeal of a and Resorts, and more retail destinations destination but must be phased and are being planned and delivered. There coordinated with the supporting is, however, a lag between the provision of hospitality products. investment, the opening, and market demand being realized to reach the scale by Robin Williamson , Partner and Head required to support this tourism of Real Estate & Construction, Deloitte infrastructure. Middle East

1. Milman, Ady & Okumus, Fevzi & Dickson, Duncan. (2010) The A balancing act contribution of theme parks and attractions to the social and Thus, the efficient allocation, phasing, economic sustainability of destinations. Worldwide Hospitality and Tourism Themes Crompton, John. (2010) Measuring the Economic and sizing of capital resources are critical Impact of Park and Recreation Services. National Recreation and Park Association to ensure that both investment goals and market needs are met. Balancing the two is challenging, with value engineering, dynamic marketing, and phasing being the primary tools for achieving a balanced and successful destination. The government will continue to serve as key enabler, and leveraging inexpensive but effective strategies, such as tax incentives and visa permissions, will further bolster the sector.

81 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Contributors

Cynthia Corby Robin Williamson Bruce Hamilton Audit Partner and Partner and Head of Partner Infrastructure & Real Estate & Indirect Tax Services Capital Projects Leader Construction [email protected] [email protected] [email protected]

Kosta Georgiadis Jude Rodrigues Jaimi Raikundalia Head of Debt Advisory Audit Partner Audit Principal [email protected] [email protected] [email protected]

Meanne Rose Franco Jonathan Mandon Madeleine Chen Todd Audit Principal Audit Manager Manager [email protected] [email protected] Chinese Services Group [email protected]

Amr Ibrahim Matt Hanson Khalil Balaa Manager Assistant Director Manager Real Estate & Real Estate & Risk Advisory Construction Construction [email protected] [email protected] [email protected]

External contributors

Marcus Truscott Paul Griffiths Mr. YU Tao Alastair Young Suzannah Fairbairn Bishoy Azmy Managing Director CEO of Dubai Airports President and CEO Partner at Dentons’ Associate at Dentons’ CEO and Executive of Multiplex ME of CSCEC ME Dubai Office Dubai Office Director of ASGC

Dr. Zain Tahboub Mr. LIU Fangjiang Sheldon Morris Chief Advisor at Dubai MENA President of Vice President of El Aviation Engineering SEPCOIII Seif Engineering Projects Contracting

82 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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83 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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