10th Edition A new normal for a new decade Deloitte GCC Powers of Construction 2020 10th Edition | Deloitte GCC Powers of Construction 2020

We have become accustomed to living in a time of constant change, with the Fourth Industrial Revolution having completely transformed the way business is being done across countries. Yet no one could have predicted the impact that the coronavirus (COVID-19) could have had in such a short amount of time. In a matter of a few short months, entire countries have been on full or partial lockdowns, closed off borders, stopped all non-essential businesses, entire industries have been severely impacted, including air travel, tourism, trade, and food and beverage with some stating that recovery would take years to reach pre-coronavirus times.

Yet as many businesses deal with the “respond” phase of the COVID-19 crisis, others have reached the “recover” phase, and some are even looking to enter the “thrive” phase. It will be interesting to see the impact of COVID-19 in the next few weeks, months and years on these sectors. This thought leadership publication has been written to reflect the situation at the time of publishing, with the caveat that times are fast-changing and unprecedented, which could render the information provided in this report inaccurate or no longer applicable.

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Foreword

We are pleased to present our 10th annual establish mechanisms and procedures contracts, with the goal of attaining edition of the Deloitte GCC Powers of to prioritise cash disbursements and standardized Construction contracts that Construction publication, and what changes understand the contractual implications. fairly balance the risk and reward between we have witnessed in these 10 years. Our the employer and the contractor, and, as a publication aims to analyze current trends As the regional Construction industry moves result, reduce the extent of cost overruns and provides insights into the marketplace. into the Recover phase, it is essential to adopt which benefits the developers and the This edition draws on data and opinions a strategic view. Here, the focus should be contractors and eliminates unnecessary from external sources, as well as leveraging on the effective execution of projects and overspend which is otherwise called waste. Deloitte Middle East expertise. payments to contractors being made in a timely manner to ensure the much-needed Going forward, the importance of tech to the Like all sectors across the world, liquidity to complete the projects under sector has never been greater. Not only does Construction has not been immune to the execution. An equal focus should be placed tech – such as drones, robotic Construction impact of the global COVID-19 pandemic. on resolving any long-overdue unapproved processes and AI - deliver advantages in Already, pre-COVID-19, the Construction claims and variations, which continue to terms of driving cost optimization, but it can industry in the region was facing several disrupt cash flow and project progress which also help to minimize other risks associated challenges including low margins, increased ultimately impacts the overall cost of the with any second wave of COVID-19 or future competition, significant delays in projects asset being built. pandemics. as well as a significant volume of change orders and lower awards in projects despite Amid the pandemic, future projections have Longer term, in addition to working towards significant plans in the GCC to invest in been revised, with recent industry forecasts building long-term enhancements to cash infrastructure and capital projects, all leading indicating that approximately US$83 billion flow management and contractual terms and to significant pressure on liquidity. With the worth of contracts could potentially be conditions, Construction companies should additional challenges posed by COVID-19, awarded this year across the region, a be seeking to establish a better foundation contractors’ liquidity circumstances have reduction from the original project award for the future through creating a new level been exacerbated as most organizations forecast of US$127bn. However, if the current of engagement and collaboration with turned to cash preservation measures, which rate of project awards were to continue to employers for the overall benefit of the wider resulted in further delays of payments to the end of the year, then estimates indicate economy. contractors and their supply chain. that approximately US$61 billion worth of contracts could be signed, representing a fall We hope that this 2020 edition of the Deloitte The Construction industry’s response to of 52% on the original forecast project award GCC Powers of Construction provides you COVID-19 went through the three distinct prediction1. Such a scenario would continue with in depth insights on how the industry phases of Respond, Recover and Thrive. to add pressure across the industry, with can come together in this ‘new normal’ to In the early Respond phase, the industry’s further potential repercussions felt across create a future in which everyone thrives and natural focus turned to ways to effectively the supply chain. waste is eliminated and capital projects are and safely execute projects at the pace built at a cost that is both reasonable and and scale required to minimize social and As stakeholders grapple with the ‘new economically viable. economic damage and to contain costs while normal’ that COVID-19 has presented, they focusing on cash preservation. This called for also face an opportunity to rethink the Cynthia Corby – Partner and Regional an emphasis on cash flow visibility by project way they used to work and discover new Construction Industry Leader, Deloitte and at an organisational level and scenario opportunities to change the status quo Middle East planning, quantifying the impact of COVID-19 collectively. This should be addressed in on project costs and cash flows, and applying the Thrive phase. High on the agenda will short-term measures to reduce costs and be creating enhancements to Construction

1. MEED (Middle East business intelligence) Coronavirus Executive Brief (17 June 2020) 03 10th Edition | Deloitte GCC Powers of Construction 2020

Contents

06 10 13 17 The GCC Projects Middle East Real Estate Construction industry Financing contractors market outlook performance survey: the Chief through crisis and beyond Executives’ view in the pre & post COVID-19 business environment

19 22 25 28 Renegotiating Unlocking Shaping the future Digital Capital Projects: Construction Contracts Project liquidity reducing the risk of for COVID-19 cost overruns by taking back control of data and transforming project reporting

31 33 37 40 Waste is suffocating the Reducing the cost of capital How to be clever about Constructing the future Construction industry projects smart design of Saudi Arabia

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43 46 49 52 China’s Belt and Road Adaptability: the key The next steps for VAT and the Construction Initiative and the to truly sustainable, the Kingdom of Industry: Deconstructing Middle East: aspiring future-proof cities Saudi Arabia and the key VAT issues towards a win-win impact of the Public partnership Investment Fund

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The GCC projects market outlook

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The GCC Construction industry has Total MENA Contract Awards, April 2015-20 ($m) weathered a number of storms through the years. The events and aftermath of 9/11, the 18,000 real estate crash of 2008/09, and the halving 16,000 of oil prices in 2014 all had a dramatic 14,000 impact on the market and its fundamental 12,000 dynamics. 10,000 8,000 Yet, arguably nothing has come close to the 6,000 recent double whammy of the COVID-19 4,000 pandemic and collapsing oil prices. 2,000 Combined, the two sudden events threaten 0 to completely alter the market’s outlook and create a whole set of new challenges for 2015 2016 2017 2018 2019 2020 project companies to overcome. Source: MEED Proects

The latest data speaks for itself. In April, the first full month of the coronavirus impact, just $4.1bn worth of contracts were awarded in the GCC, close to 40% Known GCC projects delayed, suspended or cancelled due to COVID-19 lower than the $6.2bn worth of contracts in the same month last year, according to 350 45,000 the MEED Projects tracking service (www. 300 40,000 meedprojects.com). The wider MENA region 250 35,000 as a whole, recorded a slightly steeper 25,000 200 decline of 42% year-on-year as clients held 20,000 150 off on awarding new deals in the face of 15,000 such uncertainty. 100 10,000 50 5,000 Similarly, there has been a sharp rise in 0 0 projects either under execution or planned that are being put on hold or even cancelled Bahrain Kuwait Oman Qatar Saudi Arabia UAE as a result of deteriorating conditions. More Number of proects impacted Value of proects impacted ($m) than 550 projects, worth over $60bn, are Source: MEED Proects known to have been suspended or delayed since 1 March in the GCC alone as clients take stock of the situation.

These figures include close to 15% of all Known GCC projects delayed, suspended or cancelled due to COVID-19 by sector active water projects, totaling $9bn, and more than 11% of all transport projects, 250 30,000 5.0 worth more than $23bn. Conversely, some 11.7 25,000 200 sectors appear more immune to short-term delays and postponements; only 2.5% of oil 20,000 150 7.4 schemes have been impacted, for instance. 15,000 100 14.4 Saudi Arabia has been the worst hit GCC 10,000 2.5 50 4.5 4.5 state with just under 300 projects put on 3.8 5,000 hold, followed by the UAE with 115 pending 0 0 projects. However, it should be noted that both countries have proportionally a Chemical Industrial Oil Gas Power Water Transport Construction much larger number of projects than their Number of proects impacted Value of proects impacted ($m) % of active proects neighbours. Source: MEED Proects

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As the market slows, project companies The result of these cutbacks is likely to be adjust their spending habits. For instance, now face two distinct challenges. In the a sharp fall in the expected value of work when announcing Emirates Airline results immediate short term, they have to adhere awarded in 2020. MEED Projects at the on 10 May, Group Chairman Sheikh Ahmed to contracts and maintain Construction start of the year forecasted the total value bin Saeed al-Maktoum said that he did not output while at the same time meeting the of projects to be awarded in 2020 at about see air travel returning to normal for at least requirements for social distancing among $127bn. This was about $22bn up on the another 18 months. staff and transporting them to and from site. 2019 total of $105bn1. The economic slump that follows the In parallel, there is anecdotal evidence However, COVID-19 has necessitated a pandemic is set to compound the situation. of payments slowing and cashflow revision of the original forecast. MEED The UAE, for example, with its majority deteriorating, while falling building material Projects now predicts that if the pandemic expatriate population, may actually production also threatens to disrupt project results in a three-month lockdown of experience depopulation as people schedules as the availability of key supplies economic activity, forecast spending for the lose their jobs and return to their home like mortar, brick and plasterboard becomes year will instead reach $107bn, about 15% countries. In this scenario, it is hard to more limited. down on the initial $127bn forecast. If the see anything but a further contraction in virus were to have a longer lasting six-month property prices and consumer spending in Beyond these immediate operational economic impact, then the forecast is for the region. issues, firms have to face up to the potential just $87bn work of contracts awarded. of a shrinking market as plummeting This would mark the worst projects market Equally uncertain is the future of crude oil. crude prices and declining output compel performance for the GCC in at least a As with other sectors, the oil industry could authorities to pare down expenditure. For generation. potentially emerge from its current crisis example, Dubai’s Department of Finance in a very different guise. It will undoubtedly in early April told all government agencies While this year’s spending outlook is now recover some of its recent price falls as to cut capital spending by 50%, delay bleak, it may only be the start of a prolonged demand recovers. But no one can claim with new projects, and reduce spending on downturn. any certainty that it will definitely reach $50 ongoing construction projects, according to a barrel anytime soon let alone the $70-plus Bloomberg. Beyond the immediate issue of cutting back most economies in MENA require to balance on capital expenditure, all of the six GCC their books. Some have already acted. On The same month in neighbouring Abu nations are revising their long-term visions 10 May, Saudi Arabia took the dramatic step Dhabi, MEED reported that Adnoc asked its to reflect what may be a very different world of tripling VAT to 15% while simultaneously suppliers and contractors for “cost savings”, once the pandemic has passed. removing a cost of living allowance for public and canceled $1.6bn worth of contracts on sector employees. The move was made to its Dalma field development project just For a start, it is becoming apparent that help cover a potential budget deficit of more three weeks after their signing. some sectors and industries, such as than SR200bn as crude revenues slump. aviation, retail and tourism, may inexorably Oman’s state-run companies were told change or at the very least take years to Others have acted less overtly but with the to cut expenditure by 10% and to stop return to their pre-virus norm as people same intent. The UAE’s Prime Minister and the implementation of all new projects, according to Reuters, while Bahrain went further and insisted on a 30% cut in costs. Forecast projects spending 2020, GCC ($m) Qatar said it was going to postpone some $8.2bn of un-awarded capital projects in its 140,000 7 April bond prospectus. 120,000

100,000 In Saudi Arabia, the region’s largest projects 80,000 market, Finance Minister Mohammed Al-Jadaan warned in an interview with 60,000 Bloomberg in early May that some projects 40,000 under the Kingdom’s Vision 2030 will be 20,000 “postponed and extended to next year and 0 to the year after”. Media reports on 12 May suggested Riyadh was planning some $8bn Bahrain Kuwait Oman Qatar Saudi Arabia UAE Total in cuts to projects in 2020. 2019 Actual Original 2020 forecast Revised 2020 forecast (3 month lockdown) Revised 2020 forecast (6 month lockdown) Source: MEED Proects

1. It is worth noting that this 17% increase was based in part on approximately $20bn of exceptional contract awards on the Qatar LNG expansion program. Without this one-off item, spending would have been more or less flat year-on-year.

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Dubai Ruler Sheikh Mohammed bin Rashed From a new market perspective, Sub- al-Maktoum in May challenged his cabinet Saharan Africa states represent a growing Saudi Arabia has in a three-day meeting titled “Preparations opportunity, given their infrastructure for the post-coronavirus, COVID-19, period,” requirements and high economic growth. been the worst hit urging it to adopt new ideas and stating “our But targeting new countries is both GCC state with just national priorities need to be reviewed to costly and risky, and rewards are not cope with the post-COVID-19 world.” guaranteed. A case in point is Egypt. While under 300 projects the construction market in the country Faced with lower client expenditure is booming thanks to high population put on hold, followed and a radically changing economy, firms growth, it is difficult to access because local dependent on projects spending cannot firms are so well entrenched and highly by the UAE with afford to stand still. competitive. International companies wishing to enter the market would need to with 115 pending For an industry that was already struggling have a compelling proposition in order to under declining project activity, cashflow and be successful. projects. However, payment issues, decreasing margins and it should be noted increased competition, many companies Finally, it is always worth remembering that now face an existential challenge. Those the future pipeline of projects in the region that both countries that embrace innovation and technology will remains considerable. At more than $2.5 be better equipped to prosper in this new trillion, even if the pipeline were to halve, it have proportionally a environment. would still represent a very sizeable market opportunity. much larger number Many have already adapted by trimming workforces and adopting more efficient And what COVID-19 and the oil price fall of projects than their processes. Investments in new and have done is served to focus minds on the emerging construction technologies, such as need to accelerate economic diversification neighbours. BIM, 3D printing, Big Data, digital twinning, and movements toward each country’s and the Internet of Things (IoT), can help national vision. From that at least many speed up development and reduce costs. major new opportunities will emerge. The companies which can pre-empt and grasp In parallel, companies have also followed these changes will be those that will be more traditional approaches, such as best-positioned to face the challenges diversifying into more resilient sectors of ahead. the market and entering new geographies. Solar power, water and wastewater by Ed James – Director of Content & Analysis infrastructure, and offsite modular at MEED Projects construction are good examples of sectors to have bucked the trend and witnessed strong growth in the past half-decade.

Value of planned and un-awarded GCC projects ($m)

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Source: MEED Proects

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Middle East Real Estate performance

10 10th Edition | Deloitte GCC Powers of Construction 2020

Dubai Residential sales price index for Dubai, Jan 2003 to Jan 2020 350 Real Estate sector performance in Dubai continued to be impacted by oversupply in 300

2019, which resulted in falling capital and 250 rental values, particularly in the residential sector of the city. Meanwhile, COVID-19 has 200 caused significant disruption across all Real 150 Estate sectors and the magnitude of the impact due to travel restrictions and lockdown 100 measures will depend on the shape and pace of recovery. 50

0 The average sales price for residential property across Dubai declined by approximately 7 percent between Q3 2018 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 and Q3 20191. Meanwhile, increasing supply Source: Reidin also impacted rents, which declined by approximately 9 percent over the same period. . Which asset class in Dubai has the most potential in 2020? Notably, the UAE government put in place certain initiatives, such as the Higher Industrial 75% Committee for Real Estate which was formed /Logistic in September 2019 and aimed at mitigating Hospitality 15% the imbalance in supply and demand in the medium term. Meanwhile, Dubai has become more affordable to a wider audience and Residential 4% the key to success will be translating this into sales and lettings and permanent residence Office 4% opportunities. Retail 1% In 2019, Dubai continued to retain its position as one of the most attractive tourism 0% 20% 40% 60% 80% 100% destinations in the world, in terms of the total Percentage respondents number of international overnight visitors. Source: Deloitte 2020 Real Estate Predictions Survey However, average daily rates (ADRs) and occupancy rates experienced downward pressure from increasing supply and minimal Real Estate sector performance in Dubai demand growth. continued to be impacted by oversupply in For commercial assets, oversupply in select locations and a limited number of new 2019, which resulted in falling capital and occupiers were among the key factors for rental values, particularly in the residential sluggish activity in 2019. The primary demand was for Grade A properties, such as DIFC. sector. Meanwhile, COVID-19 has caused Looking forward, the outlook for the Real significant disruption across all Real Estate Estate sector is tied to macro-economic factors and to related recovery measures for sectors and the magnitude of the impact businesses from COVID-19, including actions from the Central Bank and policy makers. It due to travel restrictions and lockdown remains to be seen whether the pandemic will result in structural shifts in the real estate measures will depend on the shape and sector2. pace of recovery.

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Kingdom of Saudi Arabia (KSA)

Diversification efforts, social reforms This additional supply is expected to Approximately 7,600 keys are expected and government-led investments in exert further downward pressure on to be completed by 2021, representing Infrastructure, Entertainment and the both occupancy rates and ADR as supply a 60 percent increase to existing supply, Tourism sector will be key to the Real Estate continues to outstrip demand, which has although some projects may face delays or sector’s recovery and growth in the long been severely impacted by the COVID-19 suspensions. term. outbreak and counteracting measures. Makkah Market performance3 The announced infrastructure developments Occupancy rates in Makkah increased by 10 and the dramatic transformation in the percent year-on-year to reach 68 percent in Riyadh Entertainment and Leisure sectors are the first half of 2019. However, the supply Average occupancy levels in Riyadh rose by expected to help diversify the city’s tourist increase continued to exert pressure on 5 percent in the first half of 2019 compared base and increase demand within these ADR, which declined by 8 percent over the to the same period in 2018. However, sectors in the long term. same period. This resulted in an increase of increasing supply and competition led to 1 percent in RevPAR. declines in average daily rates (ADR) by 10 Jeddah percent over the same period. This resulted Occupancy levels remained stable in Jeddah Approximately 1,489 keys were delivered in an overall decline in revenue per available during 2019, but increasing supply and during the first half of 2019, including room (RevPAR) by 6 percent. competition continued to drive reductions Millennium Makkah Al Naseem and the in ADR and consequently RevPAR. The latter Doubletree By Hilton Makkah Jabal Omar. An Approximately 850 new keys were handed declined by approximately 11 percent in additional 20,100 keys are expected to be over in Riyadh during the first half of 2019, the first half of 2019, compared to the same delivered until 2021, mainly located in bringing existing stock to 14,874 keys. This period last year. proximity to Al Masjid Al Haram. included key offerings such as the Marriott Hotel and Marriott Executive Apartments During the first half of 2019 approximately by Oliver Morgan – Director, Head of Real Riyadh Diplomatic Quarter. 556 keys were handed over in Jeddah, which Estate Development, Deloitte Middle East, included Adagio Aparthotel Jeddah Malik Dunia Joulani – Head of Travel, Hospitality Approximately 4,500 additional keys Road and Ibis Jeddah Malik Road. and Leisure, Deloitte Middle East, Manika are scheduled to be completed by 2021, Dhama – Assistant Director, Real Estate assuming there are no project delays or Development, Deloitte Middle East suspensions. International overnight visitor spending, global top five destinations, 201 Diversification efforts, social 30.02 19.2 19. 1.2 1.2 reforms and government-led investments in Infrastructure,

Entertainment and Visitor spend (US$bn) the Tourism sector Dubai Makkah London Singapore Bangkok will be key to the Real Estate sector’s Source: Mastercard Global Destination Cities Index recovery and growth 1. Reidin, Q3 2018 vs 2019 YOY average sales prices. 2. Deloitte Dubai Real Estate Predictions 2020, a survey of 100 leading investors and developers in the long term. 3. Data from STR

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Construction industry survey: the Chief Executives’ view in the pre & post COVID-19 business environment

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Deloitte conducted two surveys of Chief disruption to global supply chains and work sector has continued to be cautious Executives from the GCC Construction delays, all amounting to an increased cost with new Construction awards, in light industry. The initial survey, conducted in on these projects, and further deterioration of economic and geopolitical pressures. early 2020, was to gain insight into market of liquidity and cash flow. Almost half of the Consequently, there was a downturn in sentiments on a range of topical issues respondents have experienced a delay or optimism among respondents about future impacting the construction industry across termination of works, or have had to notify awards. the GCC region. We then conducted a employers under the force majeure/change follow-up survey in June 2020, to reflect on of law clause in their contracts in an attempt Prior to the pandemic, 33% of the how these sentiments have changed as a to recover these additional costs and respondents were optimistic about their result of the COVID-19 pandemic. protect themselves from potential liquidated future financial prospects relative to the damages. preceding 12 months. This compares with Even prior to the pandemic, respondents 56% of respondents in 2018 who were more had a grim outlook on their businesses’ To counter these challenges and alleviate optimistic about the future. It comes as no future financial prospects relative to some of the liquidity pressures, businesses surprise that the pandemic has eroded this the preceding 12 months. The added in the sector are implementing self-help already declining optimism with oil prices at uncertainty of the pandemic world has measures. All respondents confirmed the level they are. further impacted sentiment among the that their business took some action in respondents. a bid to ensure business continuity and Cash deprivation cash preservation, with some businesses Consistent with prior years, the majority The outlook on future financial prospects implementing more than one measure; 31% (2019/2020: 87%, 2018: 72%) of respondents was driven primarily by external market of respondents implemented temporary or believe that there is greater pressure on drivers, such as the global and local permanent salary reductions, 31% reduced contractors to help fund projects due to economy, increased competition, and headcount, and 38% implemented a delays in payments. During 2019/2020, 28% increased pressure on liquidity. reduction in both salary and headcount. of respondents have seen increases in their bank borrowings to fund the Construction The following is a summary of the key of ongoing projects. findings. The need for additional funding can be The impact of the pandemic on GCC attributed to the growing cash conversion construction cycle for contractors, i.e. the time taken 31 The pandemic has drastically impacted from when work is performed on site to the future outlook on financial metrics of being certified and then being paid the cash. companies around the globe, and the GCC To determine the average cash conversion 3 construction sector is no exception. The cycle of contractors in the region, we asked respondents expect that their key financial respondents about the average time for metrics will perform negatively in the conversion of ‘work done (uncertified WIP) to coming 12 months, as would be expected receivables’ and the average ‘collection time in such unprecedented times. Decreases of receivables’ once certified. On average in are expected in revenue, operating margins, 2019 it took 35 days longer than in 2018 to 31 operating cash flow and hiring, along receive payments for work done, with this with increases in average receivable days, increasing substantially in 2020 by a further uncertified work in progress (WIP) days, and 73 days as result of the pandemic. This has bank borrowings. Salary reductions left contractors having to fund a further Headcount reduction 108 days of working capital compared to 18 In addition to the impact on financial Both months ago, with the cash conversion cycle metrics, the sector has also encountered Figure 1: Self-help measures implemented by business in the now averaging at approximately 1 year for significant operational issues in its battle construction sector in-progress contractual cashflows. against the pandemic. The industry Optimism downturn was deemed ‘key’ in many jurisdictions The Construction market was challenging It should be noted that the above collection and largely continued to operate during for many contractors even prior to the timeframe assumes there were no legal/ the various lockdowns enforced by pandemic. During 2019, oil prices remained contractual disputes. Respondents governments to contain the spread of the at a standstill with no clear signs of recovery, indicated that when there is a dispute pandemic. However, many businesses have thus weakening economic growth in the with the employer, the collection period faced operational challenges including GCC. This continued to have an impact on is substantially longer, and this further labor productivity, surplus labor, health the timing of the award of Government increases the financing requirements of the & safety challenges for onsite personnel, construction projects. Similarly, the private business.

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Contractual disputes 80% When asked if the level of contractual 70% dispute activity had increased over the 60% past 18 months, either in terms of number 50% of disputes or the value of those disputes, 40% 40% (2018: 61%) of respondents agreed. 30% 20% Given the dispute activity, contractors still 10% feel they have little choice but to enter into 0 dispute resolution proceedings to recover 2015 2016 2018 2019 2020 their costs. Approximately 80% (2018: 83%) of respondents are currently involved Optimism Average oil prices in some form of contractual dispute, whether due to unapproved variations, Figure 2: % of respondents optimistic about future financial prospects correlated to average oil prices (in US dollars contractual claims, project cancellation or per barrel) other reasons, with 60% of respondents Average oil price source: https://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/ not recognizing any revenue associated with these disputes until they are resolved. This therefore negatively impacts their performance for their financial year as all 2016 83 days 85 days 168 days the contract costs need to be recognized against no revenue, given the uncertainty 2018 114 days 129 days 243 days of the revenue.

2019 179 days 99 days 278 days Dispute resolution Based on the survey results, the average 2020 216 days 135 days 351 days dispute resolution time appears to have increased by almost four months (2019: 35 months, 2018: 31 months). 0 50 100 150 200 250 300 350 400 These are significant timeframes when considering that the contractor (and the WIP to receivables Receivables to cash employer) will be incurring additional Figure 3: Average time taken to receive payments for work done legal and professional advisor fees during the dispute resolution process, further impacting margins and cash flows and putting further pressure on funding 2016 748 days requirements.

2018 923 days The majority of respondents believe that the pandemic has caused further unknown 2019 1056 days delays to the current dispute resolution process. It is too early to able to estimate the extent to which the dispute resolution Figure 4: Average time to resolve contractual disputes time will increase, but any additional delays to this already protracted process are likely to strain contractor resources even further.

Financing availability There is increasing pressure on contractors to help fund projects during construction, which is primarily due to the increasing cash conversion cycle (currently averaging at approximately one year) and dispute resolution time (currently averaging at approximately three years). As a result, similar to prior years, the majority (2019:

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87%, 2018: 76%) of respondents are ways, including but not limited to delayed When respondents were asked when experiencing greater pressure to fund repayments on loans and an increase in activity is expected to rebound for the projects relative to 12 months ago. the availability of credit facilities. When construction sector, 76% believe this will respondents were asked if they have not be earlier than Q1 2021, with half of Given the increased need to fund projects, been able to access any of the stimulus these expecting it to take even longer. respondents were asked about their measures introduced by their respective experiences regarding availability of Central Bank, only 15% said yes, while the However, with a future rebound, 70% of finance. Based on the survey results of remainder were either not able to access respondents believe that the pandemic will 2019/2020, there was an improvement in or not aware of how they could access the give the sector the much-needed push to the availability of finance to contractors, relief announced. reshape the GCC Construction industry. with only 20% of respondents finding it hard to get financing for their business, Future outlook Note to reader: This was a “pulse survey” compared to 33% in 2018. Given the continuing challenging conducted to ascertain the views of C-Suite environment for the construction sector industry leaders. It is not, nor is it intended In these unprecedented times and and the unprecedented challenges that to be, scientific in its number of challenging business environments, the contractors are experiencing as we respondents, selection of respondents, or GCC governments have taken rapid and emerge into a new post-pandemic world, response significant actions to support businesses it becomes even more important for rate. which are impacted by the pandemic contractors to efficiently manage cash flow. through the introduction of stimulus by Jaimi Raikundalia – Audit Partner, packages. These packages were designed Deloitte Middle East, Pavan Kumar – Audit to offer relief to businesses in a variety of Manager, Deloitte Middle East Even prior to the pandemic, respondents had a grim outlook on their businesses’ future financial prospects relative to the preceding 12 months. The added uncertainty in the new pandemic world has further decreased optimism among the respondents.

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Financing contractors through crisis and beyond

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The social and economic disruption caused negatively affected the viability of so many Under this model, banks will make sure to by the coronavirus (COVID-19) outbreak will contractors during these difficult cycles. extend all possible support to allow the shape the UAE construction industry for project to complete, which will result in the years to come. There are segments that are While the industry has a lot to address, one return of the performance guarantees and stressed simply because of their dependency observation lenders focused on during the rundown of exposure. Banks will support on either labor or imports at a time where financial crises of 2008 and the existing project financing if the source of repayment movement is an issue! Everyone is still figuring pandemic is, “Contractors who ring-fence the is secure and identified; they will support out what the real medium term impact of cashflows of their projects are likely to fare more if payment is assigned to the bank COVID-19 is, and how to approach it. The better and raise finance for those projects and paid into the project ring-fenced bank extent of its impact can be mitigated by faster”. That’s where the “contracting finance account. accelerating long-overdue reforms to the way model”, a term used by lending banks, comes the Construction industry operates. into the picture. This arrangement also helps contractors and their finance teams to maintain the It is imperative for the region’s Construction The model is dependent on the “What”: discipline of ring-fencing projects cashflows industry to lead the world in terms of quality, and avoiding the malaise of using a specific productivity and safety. In the UAE alone, • Initial project cashflow project’s funds to shore up other struggling there are major projects planned, so there is projects, which ultimately leads to failure. clearly a lot at stake here. Then, there is the • Project execution plan When the cashflows reduce these projects heightened scrutiny of the value of public suffer tremendously due to a shortage of sector spending, where every Dirham spent • Legal contract defining scope, time, cost and new inflows to cover the earlier withdrawals now needs to deliver value. This is increasingly responsibilities outside the project cashflow. apparent in the region’s Projects sector, where late delivery and greater-than-expected costs Once the “What” is analyzed, “the How” Therefore, it is an ecosystem that needs are draining large sums of money. Technology is assessed for the required financing to exist if we are to protect and enhance would be one area that can provide a instruments and these will be structured the performance of this crucial industry. solution for the many challenges faced by around: All parties need to realize that no one the Construction industry in the region. In can operate in isolation, and a failure by essence, UAE’s Construction companies need • Contractual warranties that need to be any party to uphold their contractual to better plan their long-term investments to provided by the contractor (performance, responsibility will result in a failure of the sustain the transition towards a technology- advance payment and retention bank project. driven Construction landscape, however, first guarantees) there needs to be a change in mindset! Where do we go from here…? • Procurement requirements, be it materials However, first there or equipment (documentary credit) Now is the time to set this discipline to ring- fence each projects cashflows and work needs to be a change • Temporary cashflow deficits, which arise with the industry to facilitate, and maybe due to the timing of incurring cost and the mandate, the assignment of project proceeds in mindset! receipt of payment from the project owner to the bank that is issuing the performance as per the terms of the contract (short term guarantees. It is also time for us to reconsider This change in mindset goes down to the loans or overdrafts) what burdens we place on the contractor; core issue of the culture in the industry, unbalanced risk and reward contracts, where clients look to complete projects as For the ring-fencing project finance to work, delayed certifications and the size and tenure quickly and cheaply as possible. Tenders are all payments made or received should be of project bank guarantees all need to be still awarded to the lowest bidder and there within a specific bank account that is only used addressed. is very little thought given to the long-term for the purpose of completing this project. sustainability of the project stakeholders. This Upon completion of the project, the account This is an easy, conscientious decision we undermines sustainability and is damaging in will cease to operate. Such arrangement will need to make, which will allow us to start the long-term- an evident example of mindset require the contractor to assign the proceeds addressing the real issues constraining the that needs to change. to that account held with the lender, and evolution of this industry; writing fair the project owner to recognize and accept contracts, promoting the use of technology, To add to industry’s multiple issues, a lack the same and make sure the payments are building sustainably… Now is always the best of financing and accounting discipline by only made to the project-specific account. time to change! contractors in general compounds their The rejection of some project owners to struggle to secure financing during the accept project proceeds makes it difficult by Mohammad Al Shouli – Executive Vice difficult times. The infamous “need to for contractors to source the right cashflow President Global Head of Contracting Finance, borrow” generally with no clear structure has financing from their banks. Mashreq

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Renegotiating Construction Contracts for COVID-19

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The Construction landscape before some commodity prices, such as steel, something in return that may ease its COVID-19 was one where inequitable may have reduced in price, the broad financial difficulties, the most obvious risk allocation had eroded industry profit expectation is that COVID-19 related events consideration is cash flow. This could be margins, late payment had created a cash will have increased the contractor’s cost of considered in terms of the below: flow crisis, and an unparalleled level of delivering a project as a result of delay and scope changes by employers resulted in a disruption, meaning that the most likely A request to increase the frequency culture of chronic cost and time overruns, outcome would be the contractor raising of interim applications, payments two disputes, and mounting financial losses. claims for additional payments under this weeks in advance and two weeks in and other contractual provisions to recover arrears, and/or a shorter payment period. COVID-19 has brought with it a few more its losses. Whilst there is a cost to it, consider a challenges: social distancing requirements project bank account to protect against and safety measures on site and in delayed payments. This also has the labor camps, a shortage of labor, plants With no contractual justification to require advantage to the employer of ensuring the and materials, travel restrictions and a reduction in the contract price, does the subcontractors get paid and the money is quarantine rules, all causing delay and contractor have to reduce its price? No. The spent on its project. disruption to projects. contractor is entitled to rely on the agreed contract price. But is it desirable for the Ceasing the withholding of retention. But perhaps most significantly, COVID-19 contractor to reduce the contract price? has resulted in uncertain demand for Possibly. A reduction in performance security (and projects already underway. thus cost of maintenance): performance The contractor may be at risk of bonds are usually linked to the contract termination or finding itself with no further price so it would follow that the bond is In an environment work on the project. Where turnover reduced proportionately as a minimum. is crucial to survival, this risk may be of inequitable risk unacceptable for the contractor. Against Settlement of any existing claims for time this alternative a price reduction may be and cost. allocation, it was more desirable. inevitable that the An amendment to the contract will need to Is it a real risk? It may be. If either party be drawn up in writing and consideration response of some gave notice of force majeure and the will need to be given as to how the other execution of substantially all of the works terms will operate to avoid any unintended employers has been is prevented for a prolonged period of consequences, in particular: time (84 days in the 1999 FIDIC contracts), it is likely that either party will have a to tell contractors to • What is the revised time for completion? right to terminate. Employers, in any event, typically have a contractual right to reduce their prices. • Are the provisions for extension of time terminate for convenience. Even without and additional cost still appropriate? Contractors are asking if legally they must that right, employers could fall back on the approach favored in the global financial comply and employers are asking how they • Does the provision for delay damages can use the contract terms to justify such a crisis to “de-scope” the remainder of need amending if intended to be a demand. project works in order to remove the percentage of the contract price? contractor. It should be noted that while the unamended forms of FIDIC prevent Assuming that the contract price is a • Are programs and BoQs still reliable/ traditional lump sum, there is unlikely to be these actions where the intention is to relevant for the purposes of assessing any contractual mechanism entitling the award the works to another contractor, in interim payments? employer to require the reduction of the this region that clause is usually removed. contract price without also decreasing or • Does insurance need extending in time changing the contractor’s scope (such as In these circumstances the contract usually or coverage to meet the new conditions? omitting works or changing the types of entitles the contractor to payment for the works carried out to date (and costs installations). • Who is to cover the cost of any plant or incurred in contemplation of completing material which has suffered deterioration The only exception is where the contract the rest) but not loss of profit. during any slow-down or suspension? contains a provision for adjustments The cost of expired manufacturers by which there is a reduction to the Faced with this possibility a contractor warranties? Re-mobilization? contractor’s costs (eg, GC-13.8 of FIDIC might be minded to consider reducing the Red Book, if utilized). However, whilst contract price. If so, and if able to negotiate

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• How will a second wave of COVID-19 (or margin could be agreed and the employer other coronavirus) be dealt with? would benefit from any gains arising from lower commodity prices. • Are the suspension and termination provisions still appropriate? Again, any changes will need to appropriately documented in an • Do the subcontract and supplier amendment to the contract and contracts need to be amended to reflect consideration will need to be given to changes in the main contract (eg. in impact on the other contract clauses. relation to pricing or the provision of information/forecasts to feed into the main contract applications for payment)? It is in everyone’s

The contract amendment must be signed interest that our by someone with the express authority to bind the company to new contracts and industry survives. to enter into settlement agreements on Renegotiating behalf of the company. contracts will be a However, the existing key part of that tight margins call for survival. If there was a more sophisticated ever a time to turn to solution than simply a fair, collaborative reducing prices. approach to Before the COVID-19 pandemic occurred, construction the industry said it was almost at breaking point. The GCC had a reputation for being contracts to drive a notoriously difficult market in which to make a profit. International companies success, it is now. were leaving the market, main contractors were experiencing the insolvency of four by Suzannah Newboult – Partner, DLA or five suppliers and subcontractors on Piper each major project, and developers were complaining of delivery risk with main contractors on the edge of insolvency. A simple reduction in contract price will intensify these issues.

Resilience will come in the form of a more collaborative approach to the project post-COVID-19. Consider for example, value engineering on certain aspects of the scope in order to bring the price down whilst still more or less respecting the originally intended overall scope and quality of the project. Project bank accounts would offer security for all. Switching to a cost reimbursable contract would give the employer more confidence in the contractor’s ability to deliver and promote transparency. A modest profit

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Unlocking project liquidity

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Unlocking project liquidity Profits, however small, may still appear on and the early procurement of long-lead It’s no secret that Middle East contractors paper. Therefore it’s understandable that items through the contractor supply are feeling the squeeze in a highly the greatest daily challenge for contractors chain, advance funds are regularly being competitive environment fueled by a in the current market is liquidity utilized against costs and delays of other decreasing supply of new projects in the management. Cash is not only a product projects – potentially starving the intended construction market. As bid teams battle of the business but the “blood” that drives recipient project of cash from the outset. it out over a lower volume of project it – and projects. Over the last year we have This leads to cash challenges on one awards, developers are naturally pressing seen a number of contractors seeking to project contaminating the rest of the contractors harder on project commercial raise new debt or negotiate new terms projects and business, potentially giving terms. with not just banks but sub-contractors rise to a host of stakeholder challenges (i.e. and suppliers. Contractors therefore have multiple customers and creditors) as the The “new normal” is an awakening for a lot more to consider when bidding and whole contracting business rather than a contractors forced to accept not only lower entering into new contracts. particular project is put at risk, including project margins but a decreased volume performing projects. of projects - a compounding reduction Plan and negotiate your project cash on gross profits. Project contract risks profile not just your margin An understanding and monitoring of the are inherent and omnipresent, but in When bidding, aligning project receipts actual cash profile of each project on an unfavorable market environment of to cash outflows is key; so too is a standalone basis in addition to their reduced supply and tighter margins, it management of advance payments. The combined outcome is therefore critical. becomes more important than ever for Middle East construction sector has Only then can robust cases be put to contractors to remain operationally and historically benefited from significant clients for further cash advances or to financially diligent to manage these risks advance payment terms of typically speed up the collection of receipts, or can a and achieve the forecast margins. 10 to 25 percent of the contract value. case be demonstrated for further equity or Whilst intended to support mobilization debt funding. An understanding and monitoring of the actual cash profile of each project on a standalone basis in addition to their combined outcome is therefore critical.

Liquidity management best-practice - tactics to employ

Cash receipts – debtor management

Tactic

Align receipts to project cash needs (or sooner) This may include agreeing earlier payments for contractors’ committed spend and not just costs materials off-site.

Rapid submission and vigilant follow-up of Too much emphasis on delivering the project can detract from important efforts to certifications, claims and variations substantiate robustly the value or works and cash entitlement, as well as potentially accelerate spending.

Client/project credit worthiness and sources of Understanding clearly how a client expects to fund contractors and the clients’ sources funding and quantum of financing made available for doing so, can influence whether to bid.

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Cash payments – cost reduction and trade creditor management

Outsourcing of works to reduced fixed cost If decreased project volumes lead to decreased utilization of fixed cost employees, aligning base to the new normal and employing variable costs allows greater flexibility to adapt to a volatile volume of projects.

Strategic procurement to drive enhanced Centralization of procurement and advance procurement planning can enable pricing and terms procurement divisions to manage fewer orders of higher volumes with pricing reductions and rebates. Similarly, fine-tuning the timing of procurement can smooth the cash flow profile.

Capital governance and project control

Selective bidding and enhanced focus on risk Enhance the bid process for tender approval, focusing on risk allocation and suitability allocation based on the working capital profile.

Project-wise and enterprise cash planning and Bottom-up, ring-fenced, cash flow planning gives visibility over the drivers of cash flow analysis and the pinch points where careful management is required to inform decision-making.

Avoid gaps in data sharing and client Claims knowledge and data can be lost during times of high staff turnover, making it management challenging for others to pursue. Ensure documentation is robust, updated and secure at all times.

Establish a cash mind-set in commercial and A cash focus should be cascaded down to project teams, to ensure they remain vigilant in project managers regard to receipts and payments and their net cash position.

When does a project need bank support? is critical for regional contractors. From Contractor bonding in favor of clients has The bank’s view: a bank perspective this only heightens been a mainstay of the industry, in particular A tough message for many to acknowledge their risk allocation of the Construction performance bonds. Contractors should is that with the appropriate cash planning, sector, pushing up interest rates, and bond seek to price the cost of these into their bank financing of contractor operations collateral requirements, making debt not tenders, as well as any other finance costs. is typically low and restricted to projects only harder to attain but also less attractive Demonstrating a focus on liquidity with significant time between milestone as a significant source of cash. management can also reduce the cash payments. Furthermore, where cash collateral required to secure these. requirements may be temporary over the Despite this, overall banking sector liquidity profile of a project, contractor bank support is at comfortable levels, with a desire to by David Stark – Partner, Restructuring, may not even be necessary at all times. deploy. However, demonstration of the Deloitte Middle East, Thomas Bullock – following is key: Director, Restructuring, Deloitte Middle East However, the story on-the-ground appears different. Regionally, and based • A clear purpose and requirement for debt - on a sample of listed peers, contractors not to fund project losses or overheads with debt to equity ratios in excess of 1x are not uncommon. By comparison, • First-ranking repayment security in the global counterparts typically have debt form of pledged receivables or fixed assets to equity ratios of less than 0.3x. These in excess of borrowings highly leveraged positions erode long-term shareholder value and dividends. This To raise debt at a corporate level (as is further demonstrated by interest to opposed to a specific project) in addition EBITDA ratios of close to 1x, against a 0.2x to the above the contractor would typically global benchmark. To unlock any long-term require a much larger portfolio to absorb the value from this position, reducing debt risk of any loss-making contracts.

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Shaping the future

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Deloitte Middle East talks to Mr Ahmad Al Matrooshi, Managing Director, Emaar Properties PJSC, about Emaar’s strategic plans and the digital transformation journey.

What defines Emaar and its culture as Real Estate market? through a robust execution and delivery a key regional Real Estate developer Sheikh Mohammed bin Rashid Al Maktoum, strategy of digital solutions. From building and what would you ascribe Emaar’s Prime Minister and Ruler of Dubai, outlined our first 3-D printed home to the recent success to? an optimistic view of our shared future and partnership with Xiaomi for Emaar Smart Emaar was founded on the vision to shape one we share here at Emaar. Home, Emaar is leveraging the potential of the future through integrated master- innovative digital technologies across all planned communities. Over 22 years later, The United Arab Emirates is advancing aspects of operations, with a digital-first we have set an impressive track-record at unprecedented speed; adopting and customer-first strategy. in developing and delivering world-class technologies and putting in place the right property, malls, and hospitality projects legislation to support future growth. To put What innovative construction in countries around the world, creating it simply, we are preparing for tomorrow, technologies have you used when thriving lifestyle communities while today. An important part of this journey, as building your most recent projects? contributing to the local economy. Better a country and as a business, is the ability Dubai’s first 3D printed home is an yet, we provide innovative and memorable to adjust and change course when faced Emaar project, can you tell us more lifestyle experiences that enhance the with external challenges. As His Highness about this and how this may feature everyday life of our residents. said, we are a country that faces facts and in your future strategy and where reviews calculations. Agility is the recipe for you see the opportunities and the As we continue to grow and innovate ahead success and will contribute to the success challenges with 3D construction in the of the curve, our ongoing investment in of both Emaar and secure the future of the future? How do you see this impacting customer-centric innovation across our UAE. the home of the future? business results in continued interest Offering several benefits, including from foreign investors in both residential There appears to be a large pipeline more flexibility in design, 3D printing is and commercial developments. Today, of infrastructure projects for the also ‘greener’ with sustainable home Emaar’s positioning in the global forthcoming years, how does this construction techniques significantly development landscape is the result feature in your future strategy? lowering waste and noise pollution during of that single-minded vision, and the We are primed for growth and redefining wall construction. focus on long-term value creation for the landscape of Dubai remains at the core stakeholders that has consistently been of our business. Upcoming projects, such In early 2019, Emaar launched a global delivered. Emaar’s performance in 2019 as The Valley, encapsulate the next chapter competition, in which the world’s leading was robust, maintaining growth within a of Emaar. Our ambitions are nested in the 3D printing technology providers challenging market. This is a testament to future trends of the property market and participated to 3D print a model home in our innovative concepts and products, and are focused on modern living – core to the Emaar’s Arabian Ranches III residential the people behind them. Emaar does not development of building premium Real development. Following the competition, simply look to the future — we build it. Estate. an international 3D printing technology company and a UAE-based contractor were How have you adapted your strategy Can you tell us more about Emaar’s awarded the contract. The construction will to respond to the changes in the Real ongoing digital transformation journey be facilitated using a local contractor and Estate market? and how this is being applied in your locally sourced printing materials with the Our strategy is and remains to build developments as well as your day-to- goal of building in-country competencies in premium real estate assets for regional day project management? 3D printing for the property sector. and international markets. As a business, From efficiency and productivity, to we remain resilient and agile to market connectivity and customer-centric services, Starting with 3D printing of the home’s conditions. We are prepared for the technology is raising the standard of walls, this signifies a nascent crossroad, complexities of our operating environment expectation across the industry. As we with rapidly evolving technology that will and aim to meet the demands of an ever- come to be defined by the agility, flexibility continue to advance over time. Emaar’s changing environment. Transformation is and responsiveness to the demands of 3D-printed home, printed on-site in just 72 ingrained in the fabric of Emaar and is a customers and a shifting market, the hours is the first step towards our ambition mindset that helps us to secure long-term opportunity to significantly enhance the to become a leading adopter of advanced and sustainable growth. value of our assets and properties sits construction technologies, allowing to print within the technology sector. at scale and ultimately creating a future in What are your views on Sheikh which customers can design, download and Mohammed’s New Year letter and the Emaar is committed to implementing print their own homes and communities. initiative announced to rebalance the continuous, seamless transformation

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Tell us about Emaar’s partnership with industry. Connected equipment, mobile by Ahmad Al Matrooshi – Managing Xiaomi as part of your roll-out of the apps, autonomous equipment, drones and Director of Emaar Properties Emaar Smart Home? augmented reality are readily available and As the first developer outside of China to being used across the world. The future of enter a strategic partnership with Xiaomi construction rests on the ability to adopt The United Arab for a smart home experience, the MoU innovations and invest in big tech. This reflects our shared commitment to the is the future of our industry and should Emirates is advancing creation of communities that meet the be the front of mind for construction at unprecedented demands of tomorrow. The partnership companies the world over. adds a new dimension to Emaar’s diverse speed; adopting portfolio of products offering customers At Emaar, our ambition is to be a leading greater convenience and next generation adopter of advanced construction technologies and living. technologies. Our plans to embrace 3D printing of homes is a key part of our putting in place Emaar Smart Home features an exclusive digital-first approach. In doing this, we set of digitally-enabled residential are not only positioning ourselves as the right legislation developments, powered by Xiaomi and an early adopter of technology, but also controlled via a voice-enabled app. demonstrating the advantages of such to support future technology, including a more efficient growth. To put The Emaar Smart Home, featuring one- use of materials and a higher level of of-a-kind smart home experiences, is sustainability. it simply, we are equipped with a set of pre-installed smart home and IoT products, offering a new level The adoption of technologies like 3D preparing for of comfort and connectivity for customers printing helps support the vision of our with Xiaomi’s smart home solutions. leadership to build smart and sustainable tomorrow, today. cities, helping to accelerate the innovation The roll-out plan for Emaar Smart Home ecosystem in Dubai, inspiring start-ups to revolves around launching locally, with contribute towards advanced construction the concept potentially being brought into technology. Emaar’s international markets. How can employers like Emaar and What other innovations are you contractors collaborate differently in currently adopting to improve your the future to ensure a common goal business? Why is it important for to deliver projects on time and on Emaar to innovate and invest in budget, with a key focus on eliminating modern technologies and what are waste (materials and time), so ROI can the key benefits this can offer? How be achieved for owners? will this influence the Middle East Collaboration across industries is essential construction sector? in project delivery. Collaboration leads to Technology and innovation sit at the core benefits, including innovation, time and of everything we do. We are committed cost-saving and added value for the client. to adopting construction technologies to In practice, however, working together advance our ambitions which allow for presents its own set of challenges. better, faster and more efficient delivery. Technology can provide working solutions including the implementation of project Just take 3D printing as an example: this management tools to ensure timely access technology will create more efficient to information. The introduction of construction and Emaar is bringing this technology solutions with a view to technology to Dubai’s residential market increase communication has positively for the first time with Emaar’s premier 3D impacted construction. Smartphones, to printed home. cloud-based project management software, have made it easier to manage What changes do you think are construction projects and are and will be required in the construction sector to key to driving collaboration to ensure embrace technology effectively? projects are delivered on time and on Technology is reshaping the construction budget.

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Digital capital projects: reducing the risk of cost overruns by taking back control of data and transforming project reporting

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The digital capital project percent of large mega projects have been The objective of project reporting is A “digital capital project” is a project that shown to experience typical cost overruns to provide all management layers with places data at the heart of its delivery, along of 50 percent1, which increases further each accurate, timely, clear and relevant with information processing capabilities year that a project is delayed. The financial information from which to make decisions. and related technology. For project owners consequence of getting project controls Current approaches to reporting on major willing to invest, the digital capital project and reporting wrong, for a typical mega projects fail to meet these objectives of the future will be safer, designed and project worth $1bn, is estimated to be and create waste within project delivery built with reduced CAPEX cost, and delivers between $100m to $150m. organizations and supply chains. greater value in operations. Cost overrun on The traditional reporting environment a typical mega The data-driven approach of digital capital $100m comprises internal and external project project due to poor projects fundamentally reshapes the way in - management functions and suppliers project controls which projects are delivered. Placing data $150m providing large volumes of disparate at the heart of delivery enables improved and performance reports to senior leadership teams for use of project information. The digital reporting review. Multiple unsubstantiated versions of capital project embodies fundamental project performance are produced during improvements across the entire capital This cost overrun is primarily driven by reporting cycles that are often misaligned. project lifecycle, with significant savings a lack of visibility and understanding As a consequence, project performance possible for those who invest with a “data of project delivery issues, before or information lacks clarity, reports are likely from the outset” approach. For example, immediately after they occur, resulting in to contradict one another, and data may be a 10 to 30 percent reduction of hours delays to critical decision-making. When between four to six weeks old when finally during the planning and design phases decisions are made, they are often based reviewed. can be achieved by drawing on project on data with questionable integrity. These performance data from previous projects costs are avoidable through an alternative, Perhaps the greatest tragedy with the and by adopting a truly collaborative and digital and data-driven approach to project traditional approach is that engineering virtual design environment, in a cloud- performance reporting. and construction expertise is diverted hosted platform. away from complex problem-solving for Traditional project reporting is not fit the construction to the production of The importance of data for purpose superfluous reports that are rarely read in Capital projects need to build digital The project reporting status quo in the GCC their entirety. Senior engineers and project capability in phases. A “data from the often fails to provide utility to the owners managers may dedicate anywhere between outset” approach allows subsequent and stakeholders of capital projects. 20 to 40 percent of their time collating investment in technology to have much project information and producing reports. more significant impact. Project owners must take control of their data and digital strategy and not wait for the supply chain to act, since they are in the best Emerging • Augmented reality, modular construction, robotics position to integrate data across projects Technology • AI-driven diagnostics for design, construction & and programs. Developing a digital data operations platform represents the logical first step Phase 3 • Full use of digital twin across the asset lifecycle for most project owners and provides Fully Digital • Advanced physical tools, managed by an integrated a foundation for future phases, with digital team technology that can provide further time and resource savings as well as additional Phase 2 • Physical tools and 3D asset visualizations (“digital twin”) benefits (Figure 1). Improved • Digital roles and responsibilities

The consequences of poor project controls Phase 1 • One project data platform to support project controls and reporting One area where immediate benefits of Foundation • Begin to build digital capability and “digital mindset” establishing a project data platform can be Figure 1- Digital capital project maturity realized is project controls. Poor project controls have been cited as a significant cause of failure for projects and can lead to serious financial consequences. Ninety

1 Flyvbjerg, B. (2011). Over budget, over time, over and over again: Managing major projects. The Oxford Handbook of Project Management. Oxford University Press. 321-344.

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Digital capital project reporting between source system ‘data lockdown’ and Firstly, the vision and requirements for In contrast to the traditional approach, digital report production is significantly reduced, digital reporting should be defined. Then an project performance reporting leverages meaning decisions can be made based on assessment of the current digital capability interactive visualizations of integrated ‘real-time’ data that is clear and relevant. and reporting environment should be project controls data to provide clarity on undertaken to understand gaps to be performance and drive accountability across Leveraging the integrated database, addressed and create an implementation major projects and programs. At its core is dashboards can be structured in a way that plan for the new digital asset. a single, reliable, integrated project controls engages users with the information and database (Figure 2). provides ease of navigation across projects Secondly, in the design and delivery phase, the integrated project controls database must be established. The digital project Senior Leadership Team performance dashboard can then be piloted and implemented with supporting data analytic capability to maximize value. Finally, Project performance once operational, projects are managed and dashboard and visualizations controlled using enhanced digital reporting capability and continuously improved to maximise operational efficiency and facility management can be more predictive rather Integrated project than routine. controls database

Summary The digital capital project embodies fundamental improvements across the

Project data source owners entire capital project lifecycle, seen across cost, time, risk, quality, health and safety and the environment. By focusing on data, organizations can maximize efficiency savings Cost Schedule Risk QHSE Commercial across the lifecycle of a capital project. Source Source Source Source Source System System System System System An immediate opportunity centers on establishing an integrated project controls Figure 2- Digital capital projects reporting database and digital reporting assets to By establishing an integrated project and functions. Visualizations and data manage and control projects more controls database, digital project structures facilitate data ‘drill-down’ through effectively. Such a solution can reduce the performance dashboard solutions (Figure projects and across functions, as well as likelihood of cost overrun on projects and 3) can be developed to facilitate timely and engaging non-project functions within provide a springboard for the effective decision-making on major capital organizations, such as Finance and Internal implementation of other digital capital projects and portfolios. A typical digital Audit. project capabilities and technology. dashboard provides: by Paul Hirst – Infrastructure and Capital • Interactive visualizations of integrated Projects Lead, Deloitte Middle East , performance data Matthew Hanson – Senior Manager, Infrastructure and Capital Projects, Deloitte • Shortened and simplified reporting Middle East processes

Figure 3- Digital project performance dashboard One area where • A single source of truth for project and portfolio data Getting there immediate benefits of Digital transformation of capital projects Senior leadership are immediately able reporting, as with other types of digital establishing a project to challenge the accuracy of project adoption, should be undertaken in stages. data deriving from source systems (and data platform can data owners) to promote continuous improvement of processes and greater be realized is project accuracy of performance data. The period controls.

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Waste is suffocating the Construction industry

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We are currently facing an epidemic in preambles are often not clear, outdated and aligned contracts with an open environment the construction industry, which will very contradict one another, resulting in more of collaboration and with clear responsibility likely result in the demise of many long- waste of time and more effort to gain clarity. for everyone. Appoint the right-minded standing competent stakeholders if not Multiple layers of approvals and inspectors consultants, pay them well (this is money properly addressed. We need to collectively further delay the execution of the works. well spent), and make the consultant fully take urgent action to reverse the current All the above results in management responsible for delivering an efficient downward spiral of inefficiency taking place being sucked into multiple meetings and design that allows construction to progress in our industry. In addition, we should workshops, which are all-consuming, further seamlessly in the right sequence on collectively work towards eliminating waste distracting the stakeholders from managing program. Rewrite the specifications so they throughout the lifecycle of designing, and successfully executing their own works. are simple and clear and reflect the latest constructing, and operating assets. This results in onerous delays, excessive technologies and products available (for letter writing, and contractual positioning example, don’t specify an iPhone 5 when Imagine a Martian landing on Earth, climbing by all parties. With these multiple ongoing the latest product is an iPhone 11). We need out of his spaceship with the intent of distractions, the contractor cannot plan all stakeholders to resolve issues fast and executing a development on the planet. the works effectively and is forced to work create a winning culture on projects. Work The Earthlings would then try and explain unproductively and out of sequence. as a collective team with a common goal and to the Martian how we currently go about Variations are issued on an ongoing basis have open direct communication. Create delivering a project. The confused Martian, and the contractor struggles to receive an environment for all to succeed, remain in disbelief and struggling to understand fair compensation and payment for the friends beyond the project, and move on to the inefficient delivery process, would then change. The works are further delayed, the next project wiser and smarter. asked the Earthlings: “So how many projects and the contractor and sub-contractors do you finish on time, within budget, and are blamed for not performing. The client The greatest opportunity facing our industry with all stakeholders succeeding?” The is not satisfied and receives the project late is to create these winning environments Earthlings would reply, “Very few”. The and over budget. Consultants, contractors that allow overall project and stakeholder Martian would then wisely decide to get and sub-contractors experience losses success. back in his spaceship and return to outer on the project for which they are not fairly space to develop a project with minimal compensated. The waste taking place in our industry is waste on a better planet – and who could worth billions. This is a serious situation blame the Martian for leaving! The billion-dollar question is how do we that needs all our focus and attention. We change the current scenario to an improved need to wake up, take note, and rectify the Currently, waste can take many shapes and formula that allows delivery of projects on current situation and only then could we forms, but ultimately we need to find a new time, within budget, with overall stakeholder proudly invite the Martians back to Earth formula and model that results in everything success, and with zero waste? The answer and show them a project delivery model being performed at optimum levels with the might be that we need to hit ‘Ctrl Alt Delete’ that allows success for all on all projects. clear objective of achieving zero rework. and start with a fresh page. We need to raise awareness of the current The current situation is that we are in The way forward inefficiencies and pave the way forward to an industry riddled with inefficiency. The client plays a critical role in creating a transform the construction industry to an The process starts with the client, project environment that allows all parties efficient and sustainable future for all who is responsible for establishing the to succeed. It starts with a clear project succeed. environment in which everyone will coexist brief, an efficient, lean structure with and function. Currently, this relationship is decisive competent people, having fair, by Kez Taylor – Chief Executive Officer, ALEC often defensive and confrontational with unclear responsibilities among the parties. Constant change of the project brief and We should collectively work towards excessive variations result in additional costs/reworks and delays. The client is also eliminating waste throughout the lifecycle the paymaster, but payments are often late and undervalued, resulting in stress of designing, constructing, and operating for the entire supply chain. We find that the projects. design is also a challenge, as it is often late and incomplete, which requires redesign and reworks. This results in multiple resubmissions to get the design to a point that allows the contractor to progress with the works. The drawings, specifications, and

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Reducing the cost of capital projects

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Introduction What, then, should industry participants in key project management and control Even before the challenges introduced do in order to remain competitive, deliver areas. Similarly, renegotiating contracts by COVID-19, the Construction industry value and remain profitable? only delays inevitable disputes and causes continued to face the significant pressures disenfranchisement within the supply chain. of tightened liquidity in the private sector We believe that the answer is to identify coupled with reduced government spending and remove waste and cost leakage across Cost inefficiencies can occur across the and contract awards. Fewer guaranteed all aspects of project delivery functions. lifecycle of a capital project as a result opportunities in the market, lower margins Such exercises should be undertaken in of a poorly established and fragmented due to cost increases from inflation a structured and methodical way that go operating model. A more holistic approach and increased competition, operational far beyond a simplistic and unplanned to reducing capex delivery costs could inefficiency and new regulations have left headcount reduction or contract review therefore be followed, such as the use of a many businesses looking to drive out cost in approaches. capital projects cost optimization framework. their capital projects in order to be profitable. Such frameworks can identify up to 30 ‘value Capital projects cost optimization tree levers’ for cost efficiencies to be realized Such transformations can be particularly framework across the project lifecycle and throughout an challenging given the industry’s structural While measures such as renegotiating organization’s operating model (Figure 1). deficiencies, which include inequitable contracts and reducing headcount may risk allocation, adversarial contracts, late alleviate cash flow pressure and reduce payments, scope changes and overruns. costs in the short term, they often do not These issues are compounded by regional result in sustainable long-term change and factors such as stress on contract prices, can negatively impact the delivery capability working capital and cash flow, which hurt of organizations. For example, a reduction regional and international players in the GCC in headcount can be counterproductive, Construction sector. as capabilities are significantly reduced

Portfolio & program management Feasibility Procurement & Construction & & engineering contracting handover

Standardization of design Contract management Timely and accurate capability performance reporting Governance Reference class atadriven decision forecasting Incentivizing collaboration making

akeorbuy engineering Procurement and epertise contracting strategy Shared services adoption Process Internal planning and penbook risk Process automation and design capabilities management lean construction

uildability and Collaborative contracting Internal and eternal sustainability focus models resource reallocation Organization Portfolio riskcontingency Integrated delivery testing alue engineering management and commissioning plans

Leveraging I and Strong governance and Change management parametric design processes focus Data & Reporting Front load effort on Leveraging data to drive Standardized eecuting projects procurement decisions monitoring and control processes esign management Commercial strategy and igitizing handover policies and procedures dispute avoidance processes Technology Reuirements igital and datadriven management contract management Lessons learned capture

igure Capital Projects Cost ptimization framework

34 10th Edition | Deloitte GCC Powers of Construction 2020

Operating model: the platform for Cost levers across the project lifecycle actively manage supplier performance driving cost out of capital projects With the right operating model in place, the while pro-actively avoiding engaging Experience in infrastructure and capital benefits of tactical solutions and initiatives in expensive and resource-sapping projects has confirmed that the most can be maximized across an organization’s disputes. More collaborative sustainable savings accrue by having the portfolio. In the short term, and particularly procurement and contracting right target operating model as an enabler for poor performing projects, tactical approaches, that encourage risk sharing to continuously identify and remove waste interventions can still be implemented to and ‘open-book’ workshops for example, throughout project and portfolio lifecycles. drive cost out of projects as they progress should also be considered, given their through the lifecycle. ability to deliver major cost savings. Given the increased number of mega/giga and complex projects in the GCC pipeline, a. Feasibility and engineering c. Construction and handover there is an urgent need to build strong Experience shows that projects with The application of lean construction internal capability with which to manage inadequate front-end planning have a management techniques can help to projects to budget and drive the most value greater probability of incurring large cost reduce resource wastage and streamline from the supply chain. Organizations should overruns. During the early project phases, Construction management processes. look to optimize costs through considering proposed specifications and design This includes the use of digital tools for the following within their operating model: standards should be carefully assessed simulating complex building processes, and challenged by project teams to make-ready planning, and resource • Enabling quick and transparent decision- ensure they satisfy user requirements, optimization. Organizations should making through well-defined governance are buildable and provide the greatest incentivize the supply chain to use these arrangements, and fit-for-purpose value for money across the asset lifecycle. principles and technologies during reporting, to meet tight deadlines and Using collaborative and advanced digital implementation to benefit from increased satisfy audit requirements technology for optioneering and multi- productivity and quality of execution. disciplinary design optimization (such • Placing collaboration at the center of as value engineering using BIM) can Strong project controls processes and procurement and contracting strategies also facilitate the identification of cost- by-exception reporting that is accurate, and develop design and execution saving opportunities before (and during) timely and clear is essential in supporting processes to reflect this approach construction. decision-making to save costs on projects. Poor project controls practices on • Re-assessing the costs and benefits b. Procurement and contracting projects lead to a limited understanding between in-house and outsourced Developing a tailored program-wide of how a project is performing against capabilities and ensure organizational procurement strategy that defines plan, which in turn leads to delayed structures are tailored to best support and optimizes procurement routes decision-making, ineffective governance project delivery for individual project elements is a and wasted capex. fundamental prerequisite for obtaining • Enhancing data management systems to the best value from sourcing activities. As the project reaches the handover improve clarity of project performance and This should take into consideration phase, having a structured and data- support senior management making data- project-specific factors such as cost, driven asset handover process is critical driven decisions schedule, quality, supplier relationships, to eliminate inefficiencies during the risk allocation and management commissioning and handover of assets • Leveraging the right systems and capability. Clients should place equal and ultimately then in the maintenance of technology to reduce operational costs importance on establishing strong the assets for the owners. and catalyze collaboration contract management capability to

Cost inefficiencies can occur across the lifecycle of a capital project as a result of a poorly established and fragmented operating model.

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Optimizing costs in capital project A capital projects cost optimization organizations framework can help organizations reduce To secure long-term and sustainable cost capex throughout the project lifecycle in the savings, organizations should look for short, medium, and long-term. By focusing efficiencies in the way they operate in order on reducing waste and driving innovation to thrive in a challenging market. This should throughout their target operating model, begin with the review and prioritization organizations can realize significant cost of projects within the portfolio to help savings and position themselves for a understand where efficiencies can be made profitable and successful future. on live projects, as well as ensuring future projects are delivered as efficiently as by Matthew Hanson – Senior Manager, possible (Figure 2). Infrastructure and Capital Projects, Deloitte Middle East , Mohamed Abdullah – Senior Consultant, Infrastructure and Capital Projects, Deloitte Middle East

Medium – long term

Comprehensive and operating-model-focused Canceling projects changes that deliver greater savings, covering:

• Operating model transformation Cost saving

• Streamlined and effective De-scoping projects governance frameworks

• Delivery and procurement strategies

“uick wins” Low Priority initiatives • igital tools and systems

Time Resources reuired

Tactical lifecyclefocused interventions to save costs on in-flight projects

Figure 2 - Portfolio prioritization of cost-reduction initiatives

36 10th Edition | Deloitte GCC Powers of Construction 2020

How to be clever about smart design

37 10th Edition | Deloitte GCC Powers of Construction 2020

As we enter a new decade, the Middle more than by addition — given that what are becoming integrated destinations East is seeing an increased demand we know today might turn out to be wrong comprising hospitality, retail, leisure, for infrastructure development that but what we know to be wrong cannot turn entertainment and commercial activities. enhances connectivity, efficiency and out to be right, at least not easily.” 3 Business models such as co-working people’s wellbeing. With mega projects spaces have blended the workplace with in the construction industry underway, Following this philosophy of “trimming hospitality. Shopping malls are also being industry players have the opportunity to down” problems instead of “adding up” mixed with other typologies, and even share knowledge, key learnings and best solutions, clever design has a key role to super-specific types like arenas and stadia practices towards creating smart design play in creating a well-orchestrated, core are moving towards hybrid programs. and sustainable built environments. structure that efficiently balances all the myriad aspects that influence “great living”. Hybrid buildings provide an opportunity Globally, the last two decades were to reduce the inherent challenges of dominated by the “smart” agenda. Smart Human-Centrism repurposing and giving existing projects City 1.0 focused on the use of advanced One of the challenges facing the evolution a second life, thereby reducing the cost technology to enhance viability and of Smart City 4.0 is the ability to move for owners and the environmental impact control over public spaces, such as sensor away from over-obsessing about the latest of building brand new structures. One implementation for utility management. technologies and thinking bottom up: example is the transformation of London Smart City 2.0 relied on the Internet ensuring we understand human needs first 2012’s Olympic Park, where Atkins worked of Things (IoT) and using data more and pose the right questions and in the alongside the London Legacy Development proactively and in a more predictive right hierarchy of importance. And most Corporation (LLDC) to transform the manner to enhance productivity and importantly, that we come up with design Queen Elizabeth Olympic Park from games address environmental challenges. The solutions that directly address these needs venue into vibrant, new districts in London. latest iteration, Smart City 3.0,1 aims in an effective manner. Expo 2020 Dubai is another great example at creating cities that are platforms for that demonstrates the benefits of flexible interaction and co-authorship amongst the Taking mobility as an example, strategies design. Following the six-month World city itself and its citizens. often look at increasing mobility options for Expo, District 20205 will be repurposing citizens through new road infrastructure, over 80 percent of the Expo’s built One of the challenges the term “smart transit-oriented development, multi-modal environment to create a vibrant, integrated city” poses is the fact that incorporating public transport infrastructure, smart community for people to live, work and the latest technology into an urban setting electric vehicles, and smart ridesharing. play. does not necessarily mean that a city Nevertheless, as an example, building will become by default “smart”. Another more roads will lead to increasing traffic. Homogenous distribution of challenge is the point of confluence A paper published by the Transportation Heterogenous Offer between the digital and the human, which Research Record found that for every Overspecialization in buildings can lead lately has given priority to the digital realm One percent increase in highway capacity, to evolutionary dead-ends and missed over ensuring a balance between nature, traffic increases 0.29 to 1.1 percent in the chances in terms of effective use of humans and the built environment. long term (about five years out), and up resources plus a decrease in efficiency to 0.68 percent in the short term (one or and losing the valued “two for one” As societies and technologies continue to two years)4. Therefore, the real question opportunities. A great part of achieving evolve, how can we define the ethos behind is how to design living environments that everyday happiness is based on the ability Smart City 4.0, or perhaps, more fittingly, eliminate the root problem: citizens being of humans to execute their daily chores clever2 cities? too dependent on constant long-distance and routines in an efficient, expedient transportation in order to conduct their manner. The practical applications that IoT An overarching philosophy that can daily lives. and technologies can bring to everyday life help re-shape the industry approach to in terms of helping us use our time more developing smart cities and trim down Sector hybridization efficiently need to be complemented by all the excess baggage that transforms There was a time when airports used to be clever design that physically helps people smart projects into dead-end endeavours quite simple and utilitarian. Today, airports to fulfil their daily tasks in an efficient is “via negativa”, from Latin, meaning the negative way. It proposes that in a complex scenario with uncountable variables, The main question that we need to think understanding what to avoid is of a greater value than constantly searching for new about as designers and urban planners is solutions. Lebanese philosopher Nassim Taleb, the author behind this concept, says: how to create buildings and structures that “Knowledge grows by subtraction much put people at the heart of every design.

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manner. Designing and distributing a a clear example of this approach. As of While cities can benefit from the use of diverse catalogue of offer for all citizens January 2018, Portland had installed 1,927 technological advancements in the digital based on distances which can be managed Green Streets along extensive parts of era, without the need of transport is a great its sidewalks to create a flood mitigation starting point. network.6 The program incorporates blue- Smart technologies are a great cherry on green infrastructure such as bioswales in top, but smart cities designed with variety, In the same manner, designing “sponge- a small but highly distributed manner to flexibility and balance as a solid foundation like” cities with well distributed blue-green enhance citizens’ quality of life and mitigate are the whole cake. infrastructure to create clever climate flooding risks in most parts of the city. mitigation systems and enhance people’s by Edward McIntosh – Regional Design wellbeing is also a way to address climate In conclusion, as British architect Cedric Director, Atkins Middle East challenges and add value, without having Price said in 1966: “Technology is the to implement costly solutions down the answer, but what was the question?”. line. Portland’s Green Streets Program is

1. Definition of Smart City evolution from “Smart Cities, a Toolkit from Leaders” published by the Wharton School of Business, University of Pennsylvania: http:// d1c25a6gwz7q5e.cloudfront.net/reports/2018-12-10-Smart%20Cities%20Report-TCS-FINAL.pdf

2. The Difference Between Smart And Clever Is The Difference Between Winning And Losing, published by Business Insider: “Clever takes smart a step farther, adding insight and a dash of the unexpected. Clever people evaluate a situation, determine the smart thing to do, and then go a step farther to determine an often-surprising way to capitalize on an opportunity”- Jeff Haden

3. https://www.businessinsider.com/smart-isnt-enough-in-business-2012-12

4. Antifragile: Things That Gain From Disorder is a book by Nassim Nicholas Taleb published on November 27, 2012.

5. The Science Is Clear: More Highways Equals More Traffic, published by USA Street Blog: https://usa.streetsblog.org/2017/06/21/the-science-is-clear-more- highways-equals-more-traffic-why-are-dots-still-ignoring-it/

6. District2020, Dubai, UAE: https://www.district2020.ae

7. Green Infrastructure Distribution in Portland, Oregon, published by Reed College: https://www.reed.edu/es/assets/ES300-2018-project-Green-Infrastructure- Distribution-FINAL.pdf

39 10th Edition | Deloitte GCC Powers of Construction 2020

Constructing the future of Saudi Arabia

40 10th Edition | Deloitte GCC Powers of Construction 2020

The Kingdom of Saudi Arabia has Prior to the COVID-19 outbreak, it was Under this, the government is planning accelerated its transformation agenda, reported that the infrastructure and Saudi Arabia’s economic, educational and which has seen an increased focus on construction industry in Saudi Arabia related wholesale reforms with the aim of diversification, strengthening international was amongst the largest in the Gulf innovating and diversifying the Kingdom’s relations, increased regulation, and a Cooperation Council (GCC) region, with landscape. To accomplish these goals, continued focus on Saudization. With more than USD825 billion worth of planned the government has created the National the country being the only G20 member and un-awarded projects. The industry Transformation Project (NTP), an action in the Middle East, it continues to drive had seen growth in the contracts awarded plan to improve three overarching and influence in global markets and attract – from USD11.2 billion in 2016 to USD14.6 important pillars of the country: economic foreign interest, particularly as access to billion in 2018. However, given the volatility enablers, standards of living for its citizens, the market eases. experienced around the world as a result and governmental operational excellence. of the recent pandemic and the fluctuating Economically, the country remains focused oil price, the forecast for construction Vision 2030 and the NTP provide the on driving growth, despite the recent output growth has been revised from foundations underpinning the integration challenges as a result of the reduction 4.6% to 2.9% in 20203. This forecast is of sustainable development goals into in oil prices and the economic impact of based on a positive scenario that the the national planning process. One of the COVID-19; based on the latter, it has been market will return by the third quarter of key programs of Vision 2030 – Life Quality reported that the budget deficit is expected 2020, with eased travel restrictions which – is directly linked to the sustainable to widen to SR229 billion ($61 billion)1, will aid international mobility into the development goals. At the heart of all however this is expected to decline in 2022- Kingdom. However, if this mobility forecast this sits Saudi Arabia’s infrastructure and 23 if non-oil income expands. The fiscal should alter, then there may be a further construction industry. account is expected to move into surplus downgrade expected to the output growth in 2024, aided by an expected rise in projections, which are dependent on With ongoing investment and technological hydrocarbon production. In line with Saudi international infrastructure specialists and advancements, the country is investing Vision 2030, there is increased investment government support. in diverse projects. The aim of such and focus on driving industry growth large-scale initiatives is to provide access within financial services, construction, With increased focus from both the to housing opportunities for lower- infrastructure and education to further private and public sector, the need income groups, create new employment support the diversification plans of the for infrastructure and construction opportunities, and further diversify the Kingdom and to safeguard the future. development will continue to grow in line economy. Saudi Arabia is planning to invest with Vision 2030. As the Kingdom further approximately USD1 trillion in the country’s With one of the youngest populations opens the leisure and hospitality market, non-hydrocarbon sector by 20305. Some of in the Middle East, the increased need the ease of travel to the Kingdom will the key projects include Neom, the Red Sea for urbanization and infrastructure continue to drive growth in the hospitality Project, Qiddiya Entertainment City, King development continues to be pivotal in sector. This has seen an increase in the Abdullah Financial District and Amaala, to driving the transformation agenda to number of rooms being built, leading to name a few. ensure the country is future-ready. international hoteliers having an increased construction and development need to These substantial infrastructure The government has continued to focus drive their growth ambitions, supported investments are the foundation on which on gradual economic liberalization, by foreign direct investment. Although this the Kingdom is envisioning its new future. with an emphasis on the private sector has seen a recent marginal slowdown as Along with these ‘giga-projects’, Saudi and developing emerging industries, in a result of the impact of COVID-19, activity Arabia is also investing in many social and addition to the dominant oil & gas sector. is expected to return with Saudi Arabia urban development projects, such as the The Saudi Arabian General Investment having the largest pipeline of rooms under Sakani housing program, further illustrating Authority (SAGIA) reported an increase of development in the region with approx. the country’s commitment to driving 54% in 2019 of the number of new foreign 210 projects that aim to deliver over 69,000 development using smart tech. companies establishing operations in the rooms4, which is in line with the Kingdom’s country2. One of the keys to achieving strategic vision to transform the country to In order to further enhance mobility the country’s large-scale diversification further aid future stability. in the Kingdom, the government is program is the transformation of Saudi investing in expanding the transportation Arabia’s Public Investment Fund (PIF). The Powering the construction sector infrastructure through city infrastructure capital injection from the fund continues Saudi Arabia has embarked on a journey projects, such as the USD22.5 billion to be invested in large-scale project to undertake a large-scale economic Riyadh Metro and Riyadh Rapid Bus Transit development, benefiting the infrastructure overhaul, which has seen both private System6. and construction industry. and public sector companies focused on reforms, further supporting Vision 2030. Reflecting the changing times, Saudi

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Arabia’s infrastructure and construction delivery. The use of prefabricated building The infrastructure and construction industry continues to be driven techniques, such as those used by the industry remains crucial to the by technology adoption, dynamic Ministry of Housing with 3D printing, government’s plan to overhaul the approaches to construction delivery reduces the construction time, provides Kingdom’s economy, more so now as post and implementation of new operating standardization, improves quality and COVID-19 actions are being planned, taking standards, which further fuel infrastructure is less labor intensive than traditional into account the economic challenges the and construction growth in the country. techniques whilst adding agility and pandemic presents. With giga-projects addressing continued demand. incorporating a mix of technology and Technology adoption sustainable development elements, the With mega-projects such as Neom, the Implementation of new operating government is trying to engage not only Kingdom’s PropTech market is expected standards marginalized communities but the young to gain further traction. Approximately To incorporate the sustainable demographic as well. The Kingdom has USD2 million7 in seed funding has been development goals into existing processes, ongoing support from some of the largest allocated to home maintenance services the Saudi government is actively working funds in Saudi Arabia, which continue to startups such as B8ak, FalconViz, Ajeer, towards investing in green buildings and invest in key projects, such as the recently and Muqawiloon. PropTech is disrupting standardizing the building rating system. launched real estate company ‘Roshn’ led and improving the way transactions of The Ministry of Housing developed a by PIF, which will specialise in developing residential and commercial properties take new standard for rating buildings, known integrated urban neighbourhoods place, changing the traditional ecosystem. as the Mostadam Standard. Referring containing residential communities across Alongside this and in the post-COVID-19 to the Saudi Building Code (SBC) and the country; this, coupled with an optimistic era, the need to drive technology adoption designed to comply with existing legislation sense of improvement in the global trade in construction with the use of AI, robotics while reflecting regional building rating environment, is further empowering the and 3D printing will become more requirements, the Mostadam Standard Kingdom to usher in a new era led by digital important to meet future demand in a was launched in 2019. The government transformation and emerging industries, changing world. remains conscious of the need to develop which will positively impact both current sustainable buildings in order to reduce the and future generations. Dynamic approach to construction impact of buildings and construction on delivery energy usage and CO2 emissions. by Anwar Hadidi – Senior Executive Technology adoption is expected to Director, Deloitte Middle East, Nav Dulay – continue to transform construction Senior Manager, Deloitte Middle East

With one of the youngest populations in the Middle East, the increased need for urbanization and infrastructure development continues to be pivotal in driving the transformation agenda to ensure the country is future-ready.

1. Saudi Arabia’s budget deficit forecast to widen to 61bn on virus oil rout, Arabian Business, 21 March 2020

2. International companies in Saudi Arabia up by 54% in 2019, Saudi Gazette, 19 Jan 2020

3. Coronavirus (COVID 19) Projects Impacts: Saudi Arabia, MEED, 29 April 2020

4. Middle East opens just seven hotels in Q2 2020, reveals report, Hotelier Middle East, 25 Aug 2020

5. Saudi Arabia Infrastructure, Construction and Real Estate 2020 report, extracted from EMIS through Intellinet on 14th Feb 2020

6. Riyadh metro mega-project to be fully operational by 2021, The National, 8 Mar 2018

7. Saudi home maintenance services startup B8ak raises $2 million in seed funding, MENABytes, 12 June 2018

42 10th Edition | Deloitte GCC Powers of Construction 2020

China’s Belt and Road Initiative and the Middle East: aspiring towards a win-win partnership

43 10th Edition | Deloitte GCC Powers of Construction 2020

Bilateral trade and investment between stood out as the sector of most significance. Strong positive momentum aside, for China and the Middle East has been growing Nearly half of the construction contracts Chinese companies eyeing infrastructure steadily over the past decade. Since 2009, for Chinese companies have been energy opportunities in this region, commercial China has been the world’s largest consumer related ($51.28bn over the decade), followed success does not come easily. Usually there is of energy and the largest buyer of Saudi by real estate construction at $30.21bn, a hefty price tag for those less prepared. oil. Booming energy markets have created transportation at $25.82bn and utilities at a string of opportunities in infrastructure $11.1bn. As emerging economies, the business development, both as a response to environment, as well as legal frameworks facilitating energy trading and as a result The new normal of a low-price oil and practices of most countries in the of energy-led growth and wealth creation environment has added a new dimension region, tends to be more complex. Market among regional economies. to this increasingly interconnected bilateral participants without local know-how and relationship between China and the Middle networks face significant disadvantages The scale of these opportunities fits nicely East, two of the world’s most important when it comes to winning bids, hence it is with the goals and objectives of the Belt and emerging markets. With a main revenue crucial to align with strong local partners Road Initiative (BRI). Positioned to bridge source significantly reduced, governments early in the process. It is worth noting that Chinese investments mostly with emerging in the Middle East now have a stronger the scale of opportunities also produces a economies and countries with potential incentive to seek new sources of investment fiercely competitive environment. Therefore, socio-economic synergies, the BRI has a in order to help them balance their national it is critical for entrants to understand the focus on economic growth via infrastructure accounts and fulfill promises to their market dynamics of this region, and carefully development. This involves not only physical citizens, whether in employment, welfare adjust their strategies as well as resources, in construction of oil and gas pipelines, provision, social development or economic order to ensure lasting success. facilities, roads and railways, but also aims diversification. Saudi 2030, UAE 2021/Abu to promote greater financial inclusion, the Dhabi Economic Vision 2030, Kuwait 2035, There is no straightforward formula for internationalization of China’s renminbi (RMB) and Oman Vision 2040 are such national making successful investments in the currency, and software infrastructure in the development programs that require region. Careful consideration and timely form of an information Silk Road linking IT- significant budgets to be implemented. management of multiple levels of interests related technology networks. (e.g., locals, investors, governments, etc.) With mega project investment opportunities, are thus required, particularly when it Many Chinese companies offer some of the Chinese companies arguably have a involves multi-billion-dollar infrastructure most competitive one-stop-shop solutions competitive edge. In addition to their projects. Early discussions with the state- in their fields. These enterprises are natural comprehensive engineering credentials, they funded China Export & Credit Insurance partners with Middle Eastern countries also benefit from the financial resources Corporation (Sinosure) regarding political planning or executing transformational mega available to them through the BRI. Among the risk insurance coverage in Middle Eastern projects, thanks to their strong Engineering, various regional financing platforms focusing countries will benefit Chinese investors Procurement and Construction (EPC) on the BRI, the AIIB ($100bn) and Silk Road with a clear financing strategy and mitigate credentials, project delivery capabilities and Fund ($40bn) have been the most active. future political risks for large infrastructure price competitiveness. As a result, Chinese The former counts KSA and UAE as founding investment projects. As new players, Chinese companies have been expanding their members with five approved projects (three companies could gain immensely from footprint in the regional infrastructure space in Egypt and tw in Oman); the latter has been external advisors with deep knowledge dramatically over the past few years. involved in signature regional power projects and relationships, able to guide them in and also recently acquired a 49 percent stake navigating the local environment. AEI’s China Global Investment Tracker has in ACWA Power’s Renewable Co. recorded a dramatic surge in the value of MENA oil and gas projects being awarded to Chinese contractors. The value of energy deals has more than doubled from The new normal of a low-price oil $10.58bn in 2009 to $22.93bn in 2018. In the GCC alone, business has increased environment has added a new dimension from $6.77bn in 2009 to $12.55bn in 2018. During the past decade (2009-2019), Chinese to this increasingly interconnected bilateral companies have been the most active relationship between China and the Middle in the Kingdom of Saudi Arabia KSA with a combined contract value of $28.45bn, East, two of the world’s most important followed by the United Arab Emirates (UAE) at $22.42bn, Egypt at $19.79bn, Algeria emerging markets. at $16.34bn, Iraq at $11.05bn, Kuwait at $9.16bn, and Qatar at $6.39bn. Energy

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A number of considerations are essential in • Address practical challenges when they The common challenges can be summarized this journey. wish to leverage their global supply chains in the following table. and resources to deliver efficiently on local First of all, given the sheer efforts that go projects into a winning bid, it is important to: Challenges • Invest time to identify and understand the • Insufficient knowledge of the • Focus resources on robust projects and differences local investment and business transactions that benefit from political as environment, including visibility well as financial support • Invest resources to reconcile the of opportunities, the contracting frameworks, and risk allocations. differences and structure the bid in line • Lack of risk control mechanisms • Be selective with local requirements and experience in management and operations related to engineering, contracting and greenfield • Have full knowledge of the project Other than local market know-how and investments.

background and investment opportunity, support networks, another challenge Investment Greenfield • Ambiguity in the long-term Operation Contracting and including: for Chinese companies comes from investment strategy. • Immature PPP bidding strategy. financing. Although the focus of the BRI on • Visibility with regard to the track record of infrastructure developments has lent strong • Inadequate access to comprehensive due diligence prior the off-taker or procurer financing support to Chinese companies to M&A. operating in the Middle East infrastructure • Lack of post-merger integration • Credit support arrangements market, one needs to be realistic about how capabilities and management. • Inability to realize the business

great a competitive advantage this would Overseas M&A synergies arising from M&A. • Political buy-in offer Chinese companies to secure project wins. • Heavily reliant on Chinese financing Secondly, given the different business with full corporate guarantee. • Unfamiliar with project financing. environment, it is nearly impossible to fully For projects supported by bilateral • Inadequate talent with regard to navigate the opportunities in the market agreements, Chinese contractors could Financing global financing knowledge. without a professional partner and/or benefit from having financing support from advisor. Considering the scale of efforts Chinese Financial Services Institutions. that go into project bids and transactions, a However, unlike the other key infrastructure In the foreseeable future, the Middle East company could benefit from: market - Africa - where Chinese will continue to be an important region for infrastructure offerings of capabilities and China’s Belt and Road Initiative. With the • Support from external resources with financing have been taking over the market Middle East providing 44 percent of China’s strong technical expertise as well as local via G2G arrangements, the Middle East overall oil imports, energy security remains credentials infrastructure and construction market is a a critical issue for the country. Strategically, lot more diverse. Competition is strong, and China has the motivation to step up • Better visibility of opportunities in advance commercial feasibility as well as technical cooperation and partnerships with key know-how would clearly differentiate a Middle East countries to ensure minimal • Access to comprehensive due diligence to winning bid. disruption to maritime transportation ensure returns on investments through the Strait of Hormuz, the world’s For most projects in the region, Chinese most important oil chokepoint. Although • Structuring/guarding the investments financing might not come with the most less visible in the region’s security affairs, with appropriate risk control mechanisms competitive rates or the most efficient China’s economic development-led based on international best practices process. It is not uncommon to see Chinese approach to ensuring peace and prosperity tailored to the local business environment companies trying to bring Chinese finance could be a valuable addition to the existing to the opportunity, yet the lengthy process regional framework for stability, with Thirdly, Chinese infrastructure players need to get credit approvals compromises infrastructure development serving as a to take into consideration the local market their chances of winning. For Chinese foundation for further growth opportunities. standards while putting together their companies, it boils down to whether they This is what the BRI aspires to facilitate, from bids. This is not surprising given that the take the developer role and seek alternative which all market participants across the region has long benefited from the British financing arrangements from international region could potentially benefit. contractual framework and delivery system, financiers active in the region or partner which is manifested in building codes, with other strong regional developers by Derek Lai – Partner, Global Belt and equipment standards and practices. When with capabilities to structure the financing Road Leader, Deputy Chairman of Deloitte competing in an environment with British or competitively and then act purely as an EPC China, Patrick Fung – Partner, Global other equivalent American and European contractor. Financial Advisory Belt and Road Leader - standards, Chinese companies need to: Infrastructure, Nick Prior – Partner, Global Head of Infrastructure & Capital Projects

45 10th Edition | Deloitte GCC Powers of Construction 2020

Adaptability: the key to truly sustainable, future-proof cities

46 10th Edition | Deloitte GCC Powers of Construction 2020

Once considered a novelty in urban design human-centric global ecosystem will The physical infrastructure and built and planning, sustainability has become an have a sharp focus on helping to diversify environment are designed to be human- imperative as societies recognize the need Dubai’s economy through innovation and centric and pedestrian-orientated. This for greater environmental responsibility. collaboration. These efforts will be directed is made possible through interconnected Architects, designers and planners across toward industries and technologies key pedestrian pathways that encourage the world are setting frameworks and to Dubai’s future economic growth and walking and cycling, complemented by an guidelines for the sustainable development play an important role not only in driving abundance of natural, environmentally- of cities, urban spaces, and communities. the city’s economic resilience, but also in friendly spaces, such as shaded open As a result, sustainable design and creating a future-proof community that can areas, green public parks and event areas construction has become part of the ‘new grow, evolve and provide value to residents to encourage collaboration and connection. normal’ among developers. and visitors for decades. Forming part of a wider transport strategy Building on a bedrock of sustainability Carrying the impact forward that emphasizes clean mobility and low Sustainability is at the heart of our planning In order to be future-proof, the ecosystem emission travel, District 2020 will feature for Expo 2020, and life beyond. From the needs to be adaptable and comprise autonomous vehicle (AV) routes, as well very beginning, our mandate included a flexible infrastructure that enables District as a direct link to Dubai Metro. These drive to host one of the most sustainable 2020 to respond to changing trends components help District 2020 limit World Expos in history, one that integrates in how cities operate. Future-proofing emissions and meet strict air quality the principles of sustainability not only in must also consider the inevitable arrival standards. its design and operations, but also in its of new technologies and how they can impact and legacy. be incorporated seamlessly within the The inevitable role of technology wider environment to serve residents and Naturally, another crucial element of When it opens its doors on 1 October visitors. our responsible masterplan was the 2021 – after being postponed for a year integration of advanced technologies. The due to the COVID-19 pandemic – Expo 2020 Adaptability and flexibility are deeply role of next-generation technologies will will bring together the world’s greatest engrained in District 2020’s blueprint. The be paramount in allowing District 2020 minds from 192 countries as well as global most notable example of adaptability is to adapt in unison with the changing corporations, educational institutions, the fact that 80 per cent of Expo 2020’s demands of our residents, partner tenants and multilateral organizations. It will infrastructure will be repurposed in District and the innovation-driven economy of highlight a new era of exciting ideas and 2020. This allows us to gain maximum value the UAE. Such technologies will allow transformative solutions to overcome from Expo 2020’s investments, long into us to create an innovative, collaborative the world’s most pressing challenges and the future. ecosystem for local and global companies shape a better future for our planet. while simultaneously reducing our carbon The purpose of retaining Expo’s existing footprint. We recognize that responsible infrastructure provides two vital development is not a one-off investment, advantages. Firstly, District 2020 can In the early planning stages, we which is why it is deeply embedded in the expand in phases and spur sustainable considered how we would integrate vision for Expo 2020, and will be showcased economic growth for years to come smart technologies, such as 5G and via the best examples of collaboration, as an innovation-focused ecosystem. the Internet of Things (IoT). These innovation and cooperation from around Growth across key industries, nurtured technologies are crucial in creating an the world. within District 2020, will also support adaptable environment because they will the diversification of the UAE’s economy. continuously evolve to influence the ways We will continue to carry this vision forward Secondly, retaining Expo 2020’s modular that people choose to live their lives. We when the Expo 2020 site transitions to architecture – characterised by low-rise are already seeing their impact through District 2020, which will emerge shortly buildings – will allow us to repurpose various smart city operations, including after Expo 2020 closes on 31 March 2022 buildings for virtually any application, smart mobility and autonomous driving with a mandate to support growth across from offices and commercial to retail and technology, the automation of security and industries. residential. housing systems. Other sectors, such as virtual education platforms, the evolution District 2020 is integral to our commitment Helping communities to live of healthcare and agricultural farming to stimulate sustainable, long-term sustainably methods, are also being impacted through economic growth and create new jobs, Our interpretation of sustainability this technology. well beyond the six months of Expo 2020. extends further to wellness and the Carrying forward momentum from Expo manner in which District 2020 will An underlying ICT infrastructure (Telecom, 2020, and with sustainability central to encourage a responsible and balanced Network & Data Centre) will allow us to its approach, District 2020’s curated and lifestyle among its future community. fulfil green practices that are central to

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a flexible city. Buildings fitted with smart IoT operating system, MindSphere, will sensors for Expo 2020 will be inherited, connect, monitor and control buildings Architects, designers providing precise analytics of resource across the site, powering the collection consumption at District 2020, including and analysis of data for intelligent and planners across water and energy. These smart elements decision-making and action. Through this the world are will constantly grow in sophistication collaboration, Expo 2020 will be a test to improve the quality of life for both bed for future innovation and a model for setting frameworks residents and workers. future smart cities, enhancing the Expo 2020 visitor experience and the lifestyle of and guidelines for A collaborative effort District 2020 residents. District 2020’s adaptability, longevity and the sustainable value are not possible without the vital Our collaboration with German contribution of our tenants. Our partners multinational Merck KGaA will see the development of will constantly add value to our ecosystem creation of a Sustainability Center at and will be central to its evolution and District 2020 to address the world’s most cities, urban spaces, growth. They will be the job creators and pressing sustainability challenges, through and communities. innovators that respond to the changing innovation in science and technology. We market, driving industries forward locally continue to engage with innovation-driven and regionally through their ongoing businesses and forge other partnerships collaboration, research and development that will each play a role in advancing our facilities. vision for a forward-looking, smart and sustainable community. As part of our sustainability mandate we have been looking to attract tenants which Ultimately, while every community or have innovation and responsible business city-within-a-city will be shaped in the at the front of mind. The partnerships we developer’s own vision, we believe that all have already formed with several global truly sustainable, future-focused organizations are testament to this. As developments must incorporate one Official Partner for Intelligent Infrastructure characteristic when planning for the and Operations for Expo 2020, Siemens – long-term – ‘adaptability’. Life never stands one of our anchor tenants – will support still, and neither should the environments the creation of a blueprint for a smart and we choose to live and work in. future-proof city. by Nadimeh Mehra – Vice President, Siemens’ digital solutions, enabled District 2020 and digitalized by their cloud-based

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The next steps for the Kingdom of Saudi Arabia and the impact of the Public Investment Fund

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General description new “PIF program” in order to strengthen District and others which were led The Public Investment Fund (PIF) was the Public Investment Fund, in line with predominantly by domestic companies. established in 1971 as the sovereign wealth the Saudi Vision 2030. The PIF program Looking forward, PIF is now one of the key fund of the Kingdom of Saudi Arabia. PIF’s will derive its funds through a range of sponsors/managers of projects totaling objective is to provide financial support funding sources, i.e. capital injection from almost US$1 trillion, including Amaala, for projects and investments aligned with the government, transfer of government Qiddiya, The Red Sea Project, and largest the strategic expansion of the Kingdom’s assets, loans and debt instruments, of all, NEOM. In order to meet the expected economy through the expansion and international investments, giga-projects standards, PIF has been actively investing creation of new sectors. and retained earnings. in the construction sector, either through acquisition or through the formation PIF is currently the 10th largest sovereign The objectives are: of joint ventures with international wealth fund (SWF) globally, and holds • The growth of PIF assets: To grow the construction firms. assets worth approximately US$300 fund into one of the largest SWFs, billion; these are expected to increase maximizing the value of under-utilized PIF’s impact across the wider KSA dramatically, targeting US$400 million by government assets and investments community 2020 and US$2 trillion by 2030. The fund PIF currently invests 25-30% of its assets has a multi-sector investment approach, • Unlocking new sectors: To stimulate the into overseas opportunities, whilst a with a number of key investments in new necessary actions to achieve economic significant portion of the remainder is and leading technologies across the globe diversification by launching new sectors, invested in strategic domestic projects; and also major infrastructure both within i.e. creating new ecosystems, large-scale these assets have included a significant the Kingdom and major international infrastructure and real estate projects portion of the monies raised from the cities. PIF is one of the rarer types of listing of Saudi Aramco. The recent SWF, typically described as a strategic • Building strategic economic partnerships: appointment of PIF’s director, HE Yasir Al- development sovereign wealth fund. Focused towards developing PIF’s assets Rumayyan, as the chairman of the board of in international markets. International Saudi Aramco highlights the strategic links Alignment with Vision 2030 assets are likely to reach 25% of its total between these two entities and likewise the “The 2030 Vision outlines the reduction by assets in 2020 importance of PIF to the KSA economy. the Kingdom on the reliance of the energy industry by boosting the private sector.” • Localizing edge technology and Socioeconomic impact knowledge: To encourage organizations Saudi Arabia currently has US$1.15 trillion PIF’s strategy is directly aligned to the in Saudi Arabia to expand their R&D of future projects in the pipeline with 2030 Vision, enabling strategic and efforts. The fund will Invest US$55 billion construction and infrastructure, and sustainable diversification, through both SAR210 billion in advanced technology transportation being the biggest future the establishment of new sectors and sectors and R&D, both locally and sectors. The PIF program plans to be an supporting the expansion of existing internationally, creating 11,000 new direct active investor in order to maximize PIF’s business sectors. high-skilled jobs assets, drive growth and improve the performance of projects. Moreover, KSA General description The PIF program is also undertaking is making huge developments, aiming The fund has six key areas of investment numerous steps to achieve its objectives ultimately to become a global tourism – Saudi equity holdings, Saudi sector with 30 initiatives spanning: hub, for which PIF is developing a series development, Saudi real estate & of giga-projects which will have a vast infrastructure development, Saudi giga- • Local initiatives – To boost and support socioeconomic impact on the economy. projects, international diversified pool, companies in KSA The idea behind such large investments and international strategic investments. in the tourism and hospitality sector is In 2015/2016 PIF initiated a number of • International initiatives – To increase to attract a share of the US$20 billion high profile investments that highlighted revenues by investing in global projects that Saudi nationals spend outside Saudi the new investment strategy to the Arabia. This vision is heavily reliant on the global financial community, including an • Institutional initiatives – To raise PIF’s five giga-projects below: investment in Uber and the announcement profile and promote it as an institution/ that it would be a major investor in the investment fund • NEOM, a new region in NW KSA, which SoftBank Vision Fund over the next five will be built as a living laboratory, is years, with plans to invest up to US$45 Driving projects forward & PIF’s impact focusing on developing a number of billion. on the KSA Construction sector industries, and is expected to contribute Since 2015, Crown Prince Mohammad bin over US$100 billion to GDP based on 1 In April 2017, the Council of Economic and Salman has highlighted a list of projects million residents. (Approximate project Development Affairs (CEDA) introduced the including the King Abdullah Financial budget SAR 2 trn)

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• The Red Sea Project, a luxury tourism families, as well as allocating 39,332 – Phase I involves capability building. It resort, anticipates one million tourists under Construction housing units to commenced in 2018 and will finish by per annum by 2035. By the end of phase increase the national rate of home the end of 2020. This phase includes two, it is likely to create 8,000 housing ownership, aiming to serve 300,000 new clinical systems improvement, capacity units and 10,000 hotel rooms, and is families by 2020. and capability building and preliminary expected to contribute SAR 22 billion institution building annually to GDP. PIF plans to phase this • Additionally, PIF has also partnered with project in an innovative partnership with South Korean and Chinese firms to build – Phase II will include developing foreign investment. (Approximate project a million low-cost homes in the coming autonomy and value, and will see the budget SAR 50 billion) five years and with US-based contractor re-purposing of the Ministry of Health Katerra to build 4,101 homes across the to implementing health in all policies, • The Qiddiya Project is a new city close Kingdom, to increase home ownership starting in 2021 and to be completed to Riyadh, focused on entertainment and expand mortgage financing by 2025 sports & culture, likely to see 17 million visitors per year by 2030 and is projected Increased government initiatives under – Phase III is expected to commence at to contribute SAR 17 billion to GDP and Vision 2030 and progress on giga- the beginning of 2026 and run until 57,000 new jobs. (Approximate project project developments will create new the end of 2030. This will include budget SAR 45 billion opportunities in the Kingdom. KSA is the extension of the National Health undertaking initiatives to change its Insurance Scheme (NHI) to all citizens, • AMAALA, a high-end luxury resort, is conservative image to attract investment, residents and visitors focused on culture and well-being, with lure foreign visitors, create jobs, and 2500 hotel rooms to be completed by improve life quality. Below are some of the • Transportation: Public transportation 2028 (Approximate project budget SAR further key opportunity areas: represents a major opportunity through 12 billion programs like the Saudi railway network, • Entertainment: The Kingdom is focusing Riyadh and Jeddah metro and the new • King Abdullah Financial District (KAFD) on the untapped sector of entertainment bus network and metro system being is a new mixed-use development, now with the intention of attracting business, developed in Saudi’s holy city, Mecca, overseen by PIF, which on completion talent and investment through events. intended to bring major construction will house 45,000 people in a live-work The government is eyeing numerous projects delivering social benefits environment. (Cost over SAR 35 billion) sports, events and exhibitions, such as NBA basketball and Spanish-style • Localization: The Kingdom has PIF has also undertaken initiatives in running of the bulls. Such events are undertaken measures to support its real estate and infrastructure projects, likely to bring together developers, localization ambitions. For example, in generating economic, social and financial researchers, businesses, and designers communications and the IT sector, the returns. It launched a real estate refinance – opening significant retail opportunities Saudi government has launched a company, the Saudi Real Estate Refinance (known as ‘shoppertainment’) in KSA. program to nationalize 14,000 jobs. Company, to inject liquidity into the The development of the retail sector property market with the aim of growing is expected to create 1 million jobs for by Neal Beevers – Partner, Consulting, the rate of home ownership to 52% by Saudi nationals by 2030 Deloitte Middle East, James Hewitt – 2020. Other initiatives include: Director, Sovereign Wealth Fund, Deloitte • Healthcare: Saudi Arabia’s healthcare Middle East • The Sakani housing program is offering transformation outlined in Vision 2030 free land to 90,000 families and pre- will take place in three phases fabricated housing units to 117,748 PIF is currently the 10th largest sovereign wealth fund (SWF) globally, and holds assets worth approximately US$300 billion; these are expected to increase dramatically, targeting US$400 million by 2020 and US$2 trillion by 2030.

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VAT and the Construction Industry: Deconstructing key VAT issues

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Out of the six Gulf Cooperation Council • Retention payments become due to the (“GCC”) Member States, three have now supplier after 1 January 2018 Contractors introduced a Value Added Tax (“VAT”) should assess the regime in the country. United Arab • The supply of services was completed Emirates (“UAE”), Kingdom of Saudi Arabia before 1 January 2018 VAT treatment of (“KSA”) and Kingdom of Bahrain (“BH”) have all implemented local VAT legislation and • The supply is not considered to be transitional retention compliance with the legislation is the top completed until retention is signed off priority for businesses operating in these payments on countries. From the above, in order to assess the VAT liability of payments received under a case‑by‑case basis As the VAT regime matures in each of the contract, it appears imperative to these countries, several guides have been establish the point of completion of through an analysis published by local Tax Authorities to help services provided. For example, whether of the contract. taxpayers in different sectors apply the the services are considered complete when legislation to their specific businesses. the taking over certificate is signed off or is completion only after the contractors However, there are several issues across may need additional information in such obligations under the contract, including different industries that still need resolution cases in order to confirm the JV’s status defects liability, are over. An additional and the VAT treatment to be applied in as a taxable person that can be registered consideration is whether the completion of specific scenarios remains unclear. In such separately from the JV Partners. As such, the services is dependent on release of the a situation, it is key to follow a process JV setup should also be considered from retention payments. to establish the VAT treatment for each a VAT point of view prior to clearly establish transaction and document that treatment in reporting requirements. order to demonstrate good governance and In view of the above, contractors should remain compliant. assess the VAT treatment of transitional retention payments on a case‑by‑case Where these JVs are to be registered for VAT, their compliance obligations should be Bringing the focus to the construction sector, basis through an analysis of the contract. considered as well. Generally, with regards our experience from across the industry has to common issues, it is observed that at highlighted a number of concerns. We have Joint Venture and other similar project times invoicing for the projects may still done discussed a few here to provide a perspective structures by the JV partners themselves as opposed on industry issues and also broadly consider It is common practice to setup separate to the JV or payments to sub‑contractors how businesses can continue to remain Joint Ventures (“JV”) entities to deliver are made by the JV partners on behalf of compliant with local VAT laws. a Construction projects. As such, consideration should be given as to how the JV and then recharged back. In such cases, there can be several VAT touch points Retention payments under these JVs are setup and whether they for the JV itself, for example, the invoicing transitional contracts – long‑term will be able to register for VAT purposes. contracts spanning VAT Registration requirements for VAT purposes arrangements should be clearly established implementation in the UAE in the UAE can pose some concerns for between all parties to ensure that the JV Where long‑term Construction contracts registering unincorporated JVs that do not is correctly issuing valid tax invoices to its span the implementation of VAT in the have separate legal entity status. The FTA customers, reporting output tax in the country and there are payments including retention received under these contracts post the introduction of VAT (transitional Registration requirements for VAT purposes contracts), establishing the VAT liability for these payments can be difficult and as the in the UAE can pose some concerns for contract values are generally quite high, the exposure to penalties for incorrect registering unincorporated JVs that do not reporting can be significant. have separate legal entity status. The FTA The Federal Tax Authority in the UAE has issued guidance on how to treat retention may need additional information in such payments received post 1 January 2018, cases in order to confirm the JV’s status that relate to contracts signed prior to this date. It provides the following as a taxable person that can be registered criteria whereby such payments may be considered outside the scope of VAT: separately from the JV Partners.

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correct tax period and also recovering VAT 1. Whether the accommodation provided correctly. Contractual arrangements are is an employee benefit or whether also fundamental in such cases to clearly the employer can be seen as making establish the supplier and recipient of goods a supply of accommodation to the and services under the contracts, especially employee instead where multiple parties are involved, in order to clearly understand the VAT reporting 2. Is the accommodation residential or requirements for each party. would it meet the criteria for a serviced accommodation, depending on the Labour accommodation – amenities of the accommodation building Considerations for recovering VAT It is common practice for construction The VAT on costs incurred to provide business to be involved in providing labour labour accommodation can be a significant accommodation to its employees and at value and the specific circumstances need times, to external staff as well. VAT recovery to considered to establish firstly, if there on labour accommodation has been the was a taxable or exempt supply made by subject of much debate over the last two the accommodation provider, and secondly, years and currently we see varied practices to what extent can the VAT on costs be in the industry. There are even businesses recovered by the business, if any. that adopt a prudent approach and do not recover any vat costs associated with their The importance of keeping proper records labour accommodation, significantly adding cannot be stressed enough in each of the to the cost base of the business. cases above.

There are several questions that need to be by Nurena Tarafder – Director, Indirect answered before the VAT implications for Tax, Deloitte Middle East, Sabeka Arshad – providing labour accommodation can be Manager, Indirect Tax, Deloitte Middle East established, primarily:

The United Arab Emirates, Kingdom of Saudi Arabia and Kingdom of Bahrain have all implemented local VAT legislation and compliance with the legislation is of the utmost priority for businesses operating in these countries.

54 This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

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