Time for Change CONSTRUCTION IN THE GCC REACHES A TIPPING POINT FOREWORD Foreword There are two sides to construction in the GCC. One is an industry that is known around the world for delivering some of the most ambitious and ostentatious projects ever seen. The other is an industry that has developed a reputation for being notoriously difficult to work in. Inequitable risk allocation has eroded industry profit margins; late payment has created a cash flow crisis; and an unparalleled level of scope variations by employers has resulted in a culture of chronic cost and time overruns, disputes, and mounting financial losses. These growing pressures, combined with an ongoing By encouraging greater collaboration amongst recession in the region’s major projects market, have participants, together we can bring about the change created an unsustainable situation that has pushed the necessary to successfully deliver on the enormous GCC construction industry towards a tipping point. opportunity that the region presents for the construction industry. Change is no longer optional, it is inevitable. We hope you enjoy our report. DLA Piper and MEED are delighted to bring you Time for Change, a report that examines the key pressures shaping the GCC construction industry; the underlying Suzannah Newboult factors driving change; and the ways we expect change Partner, DLA Piper to materialise over the coming years. [email protected] The report is the outcome of a series of interviews and discussions with senior executives from the region’s leading developers, contractors, government bodies, financiers and consultants. Colin Foreman Deputy Editor, MEED In publishing Time for Change, we hope to continue to [email protected] highlight the challenges that exist within the industry whilst introducing fresh ideas and potential solutions for further debate and discussion. 2 3 TIME FOR CHANGE: CONSTRUCTION IN THE GCC REACHES A TIPPING POINT EXECUTIVE SUMMARY • A more mature funding tendering procedures and Tighter legislation and environment: Increased better contract terms. This stricter enforcement on the reliance on external and will foster more collaborative construction industry over international funding and productive working the coming years is inevitable. Executive will bring a greater level relationships between With changes expected to of sophistication to the employers and contractors. the law in areas such as contracting process and We expect to see an increase worker welfare, modern Summary delivery of construction in two-stage tendering for slavery, health and safety projects in the region. niche areas of construction and corruption, barriers to Employers will need to show a and landmark developments entry will increase. It will be Some $3.1 trillion worth of projects are planned or greater return on investment but continued one-stage more difficult for lower-cost resulting in a shift in priorities, open tendering for other contractors to pre-qualify for underway in the GCC, giving rise to renewed optimism away from “lowest price”, government funded work and projects, which will result in for a return to growth for the regional projects market. towards quality workmanship more standard developments. improved standards and a and requirement to meet In addition, the need for move level playing field for Behind this optimism, however, the GCC construction realistic completion dates. By quality will continue to drive international contractors. industry is an industry under pressure. leveling the “playing field” for investment companies • Moving forward with tenderers with more realistic and developers to secure quicker fixes: Whilst not contract prices and terms, resources by taking stakes changes that we can expect Tightening liquidity in the private Key Findings and contractors are mounting. we will see an improvement in construction companies. to see in the short to medium sector and reduced capital spending Contractors are becoming more in payment conditions and Developers will continue • Five key pressures are shaping term, as the industry matures, by governments has resulted in selective, with many choosing a reduction in the volume of to lock-in resource from the GCC construction industry: it would benefit from the fewer contract awards. This has to exit the market. The GCC disputes. specialist subcontractors in introduction of mechanisms significantly increased competition • Ambitious agenda: The is under increasing pressure order to increase efficiency in • Global standard contracts, such as statutory adjudication levels amongst contractors; construction industry plays a to meet global standards and procurement and ensure the for global standard projects and legislation that outlaws reducing order books and eroding vital role in the delivery of the expectations. Both contractors timely delivery of projects. and locking in of resources: pay-when-paid provisions. profit margins. At the same time, GCC’s economic vision. and employers acknowledge that For large, complex schemes, • Game changing legislation, Such mechanisms would help interim payments are slowing and • Tightening liquidity: change is needed. the industry will be forced improved standards and to protect cash flow in the project costs and time overruns Fluctuating oil prices have • Whilst it will not happen to adopt more attractive increased barriers to entry: supply chain. are escalating, squeezing cash flow continued to strain the entire overnight, change is materialising and leading to a rise in disputes. In construction supply chain. in several ways: such challenging market conditions, • Payment delays: Payment it is increasingly difficult for the delays, variations and • Increased impartiality of GCC construction industry to deliver overruns resulting from contract administrators, projects efficiently. a liquidity squeeze are project managers and increasing. engineers (“consultant”): The industry has reached a tipping • Low barriers to entry: Lower The role of the consultant is point and the message is clear - it is cost players are challenging expected to evolve. We will time for change. international contractors. see greater differentiation • Lack of innovation: There in the execution of those is a continued reluctance by duties for which the the industry to change its consultant is purely an agent procurement and project of the employer and those delivery methods. duties which see it act in a determinative capacity. • Industry participants have Greater clarity in the new realised that the boom days in the FIDIC contracts will assist lead up to the 2008 financial crash in the recognition of these are not returning. Adversarial differing duties. tensions between employers 4 5 TIME FOR CHANGE: CONSTRUCTION IN THE GCC REACHES A TIPPING POINT GROWING TENSIONS An ambitious agenda GCC population growth vs world average Growing The construction industry holds a strategically vital position in the GCC 10 economy. 5 tensions Pcent SOCIO-ECONOMIC FACTORS 0 DRIVING INFRASTRUCTURE 2011 2012 2013 2014 2015 2016 2017 The GCC construction industry is rich in opportunity INVESTMENT Year With the exception of the UAE, the and ambition. The drive to meet the needs of a rapidly W age Bahrain Kuwait region’s populations are growing O Qatar S Aabia growing population, coupled with the implementation at a faster rate than the world UAE average and after three years of of strategic initiatives by governments to diversify their reduced spending on projects, the Source: MEED Projects economies away from oil, has seen over $951 billion of infrastructure deficit has widened. STRONG REGIONAL AMBITION • The Red Sea Project, a 34,000 contracts awarded in the GCC over the past five years. The low oil prices since 2014, square kilometre luxury island Governments in the region know has renewed the economic focus resort project; that critical infrastructure is required on diversification away from to improve the lives of their citizens • The $3 billion New Taif Project, a Currently, some $3.1 trillion worth of capital spending by governments are further compounded by a lack of hydrocarbons revenues to stimulate and to support investment and job mixed-use development including projects are planned or underway in has resulted in fewer project innovation in procurement methods non-oil GDP growth. creation. an airport; and the region. The volume of projects awards. This has significantly and the emergence of a two-tier together with the improving outlook increased competition levels market with low barriers to entry. The new diversification drive can be • The $2.7 billion Al Qiddiya Project, They also know that capital for oil prices has given rise to among contractors, reducing seen most clearly in the economic a 334 square kilometre cultural, investment in projects will drive renewed optimism for a return to order books and eroding profit With such challenging market visions, strategies and initiatives of sports and entertainment city long-term economic growth. growth for the regional projects margins. At the same time, interim conditions, it is increasingly difficult each country. market, after three years of decline. payments are slowing; squeezing for the GCC construction industry These socio-economic drivers were DESERT VISIONS cash flow. Certification of variations to deliver projects efficiently and The largest and most recognised in the 2018 budget Long-term economic strategies Beneath this optimism the GCC and extensions of time are being effectively. comprehensive vision