GCC powers of construction 2010 Building the future and growing stronger Eighty five years in the Middle East Contents 4 Executive summary 6 Meet the executives Murray & Roberts on partnering successfully in the Middle East 10 Meet the executives Al-Turki’s construction sector report for the Kingdom of Saudi Arabia 20 Setting up business in Saudi Arabia The frequently asked questions 24 IPO readiness in the construction sector 30 Regional restructuring 34 Changing the game: Capitalizing on BOT/PPP: a contractor’s perspective 38 Profiles 40 References 43 Contacts Building the future and growing stronger | Deloitte GCC powers of construction 2010 | 3 Executive summary It has certainly been an interesting and challenging year. We have seen the last twelve months plagued with significant challenges in closing out suspended or canceled projects to ensure contractors were paid fairly for work done and that performance bonds were safely released as well as an inordinate amount of time being spent by management in negotiations and continuous following up to collect cash for completed or ongoing projects. Cash resources have been stretched to the limit and contractors have been faced with two alternatives: signing a memorandum of understanding in which they agree to discounts and payment plans and thereby collect some cash and recoup most of their costs; or face arbitration proceedings coupled with huge costs and no certainty on the outcome and the length of the arbitration. The knock-on effect has seen contractors ultimately financing the employers due to extended and renegotiated payment terms. This, in turn, has put enormous pressure on contractors who have had to negotiate extended terms with their banks, which in itself has been challenging given the overreaction to the risk associated with the construction industry. 4 | Deloitte GCC powers of construction 2010 | Building the future and growing stronger Banks have therefore also faced this challenge and have had to balance a very delicate situation of either renegotiating terms or canceling facilities (which would Over the year a number of players have just exacerbated the already delicate economic situation). have taken the opportunity to On the up side, tenders in Abu Dhabi and Saudi Arabia expand their geographical footprint have provided opportunities for contractors, although the competition is rife, with up to 12 contractors bidding in order to capture opportunities in for the same contracts. This has resulted in employers the key markets of Abu Dhabi, asking for re-tenders to drive prices even further downward; as contractors are hungry for work they Saudi Arabia and Qatar. have been responding to the re-tender requests in order to fill their order books and meet running costs until the markets improve. This is also of course an ideal time to consolidate and Over the year a number of players have taken the realign resources, processes and work streams to opportunity to expand their geographical footprint maximize profitability, with a long term view to creating in order to capture opportunities in the key markets a well governed environment, with a focused strategy of Abu Dhabi, Saudi Arabia and Qatar. This has that addresses the lessons learnt and avoids the contributed to the increased competition not only consequential risks from the past. Contractors would from players who already existed in the GCC markets then be well positioned for a future IPO or bond issue but also from international players whose opportunities when the risk appetite of investors returns and order further afield had dried up. books have returned to reassuring levels. All these factors are creating a distinctly advantageous employers’ market, but time will tell whether these Cynthia Corby apparent “cost savings” will be at the long term cost UAE Construction Industry Leader of quality for end users. On a positive note increasing oil prices are providing some reassuring signals in these economies. For the construction industry this means that the planned government spends on healthcare, education, power, affordable housing and infrastructure should be more realistic and achievable. The difference though when comparing these times to those of the “boom” is that the opportunities exist but decisions to award tenders and roll out development plans are not so fast. On the contrary, they could even perhaps be criticized for being too slow by eager contractors attempting to build an achievable pipeline for their stakeholders. Building the future and growing stronger | Deloitte GCC powers of construction 2010 | 5 Meet the executives Murray & Roberts on partnering successfully in the Middle East the potential for significant expansion. Choosing the right partner has been the key to our success in the Middle East and we believe it is fundamental to work with a Joint Venture partner who has appropriate experience, and is influential and well respected in their markets. The skills and experience each party brings to the Joint Venture should also be complimentary and each should have a clearly defined role based on individual strengths. These attributes we believe are the hallmarks of a successful and truly integrated Joint Venture partnership resulting in commitment to a long term relationship. Of course any relationship you develop comes with certain challenges. The biggest challenge is often getting all parties to work together under the same framework for reporting, delivery and monitoring Murray & Roberts was established in the Middle East in processes and procedures. This is an area where Murray 1994 and in 1999 completed its first project, the iconic & Roberts adds value through best-in-class practices, 7-star Burj al Arab Hotel in Dubai, which firmly policies and systems in global engineering and established the company’s reputation in the region. construction. We play a vital role in the Joint Venture relationship, through implementing our well established Murray & Roberts chose to operate in the Middle East policies and procedures and good governance practices. which, as an emerging market, offered the company the opportunity to showcase its expertise on major The business model under which Murray & Roberts has projects, and which is where the Company adds value operated since inception in the Middle East ensures that and demonstrates it’s credentials on high end we provide key staff and intellectual property, and our commercial buildings. partners provide the production resource (plant and labor). This model affords the company the flexibility to Partnering successfully in the Middle East grow and down size with relatively little exposure, which Over the last 16 years, Murray & Roberts has formed is key in an emerging market where the environment strategic partnerships with the Habtoor and Nass can change rapidly. families in the United Arab Emirates (UAE) and Bahrain respectively. These relationships remain strong, Lessons learnt bolstered in the UAE by the formation of the Habtoor In a market which is constantly evolving and has faced Leighton Group and by the business diversity and the demands of a period of immense growth and now strength of the AA Nass Group in Bahrain. In 2009, significant downturn; I would summarize the areas for Murray & Roberts Middle East formed a strategic improvement as follows: relationship with Saudi Oger to work together in Saudi Arabia. This is already maturing and bearing fruit with • Contracts could be drafted in a way in which they are the award of two major projects in 2010, and with more standardized and more equitable for both the 6 | Deloitte GCC powers of construction 2010 | Building the future and growing stronger employer and the contractor. In the period of high The challenges of the economic crisis demand a project was often started where the design As a whole, the Middle East region has generally fared was still under development and subject to change. better than most global economies in 2009, with the Managing this change posed many challenges for the exception of Dubai which saw its construction work contractor including in many cases an unplanned brought to a comparative standstill, although there are substantial increase in the original contract value. This signs of recovery in 2011 and beyond. placed a huge burden on the contractor’s cash flow as The liquidity crisis will continue to affect business it takes time to settle the scope changes. The employer modeling for several years to come and a short-term was also burdened with paying these usually return to construction norms is not expected. However unbudgeted costs. the local Dubai economy is buoyed by its strong brand, it’s close relationship with Abu Dhabi, and its Gulf • To avoid an adversarial relationship between the Cooperation Council (GCC) neighbors, with oil and gas employer and the contractor, we believe it is vital to prices currently at pricing levels that will support and have a more clearly defined scope of work in the encourage infrastructure development over time. contract, where the design is approved and unlikely to change significantly. This will allow the costs to be We believe the future opportunities will be in Abu Dhabi better managed up front, which better manages and the Kingdom of Saudi Arabia, which has significant the employer’s expectations and translates into less risk investment plans to develop their infrastructure and for contractors. It will also allow for a better relationship meet their published targets. Competition in the region between the engineer