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03 QUARTER 2011 / WWW.ICONREVIEW.ORG
INTERNATIONAL CONSTRUCTION REVIEW
OPPORTUNITIES AND RISKS INSIDE Managing exceptional events (like Libya) Will bust follow China’s skyscraper boom? Regeneration in Romania
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CONTENTS
06
IN THIS ISSUE
10
12
24
28
06 GLOBAL ROUND-UP
12 SAUDI ARABIA 2011
28 SERIOUSLY SMART
Hill International wins $1.5bn Iraq residential job; India’s Commonwealth Games chief jailed; Chinese contractor removed from Polish road job; New anti-bribery law carries 10-year prison term; Arup teams up with Chinese giant
Our 12-page report explores the opportunities and pitfalls of working in the Gulf’s biggest economy, focusing on client priorities and behaviour, spending plans, the viability of the planned new cities, how to break into the market and the risk of social upheaval and terrorism
A firm of Kuwaiti architects redesigned an office and residential tower’s nervous system so that its owners could generate whole new revenue streams
10 CHINA’S SKYSCRAPER BOOM
Could it turn into a bust? 200 tall buildings currently under construction there are due to complete just as some predict a sharp correction in the Chinese economic miracle. However, Xianfang Ren says a soft landing is probable
24 ROADS TO NOWHERE
A new study by the World Bank shows that corruption is deeply ingrained in road construction all over the world, in poor countries and rich ones alike, and proposes some radical solutions
32 COOL IN A CRISIS
Experts from Hill International offer advice on how to make a safe, hasty exit and protect your commercial interests when civil war and revolution break out 34 EYEWITNESS
Engineer Matthew Tucker’s one-man regeneration mission to Romania
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LEADER
THE RIDDLE OF SAUDI If it isn't already, Saudi Arabia will soon be on the radar of any construction firm intent on expanding overseas. With domestic markets stagnant or shrinking across the developed world, the Kingdom stands out in terms of the vast scale of its development ambitions, its will to realise those ambitions and the cash to foot the bill. While its oil reserves may be vast, far more limited is its home-grown pool of procurement, design, planning and delivery capabilities. In short, it needs help. And yet there are many contradictions wrapped up in the Saudi proposition, as those who have have been burned there know. Driving its development programme is a cluster of pressing needs: to halt the expansion of the oil-funded welfare apparatus, to grow a diversified economy, and to provide jobs, homes and higher living standards for a swelling population of young people. In the wake of the uprisings that have besieged other regimes in the region, this government sees development as key to survival. Stability is, in the estimation of one analyst, “probable, not certain” thanks in no small part to the House of Saud having kickstarted the stimulus drive well before the Arab Spring. The problem is, the big plan to generate real business hasn't worked yet. Casual observers can be excused for losing track of how many new 'cities' have been announced, under all manner of labels – economic,
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industrial, sport and knowledge – let alone whether any of them are getting built. Some are, but progress is slow and the expected private-sector investment is proving elusive, in part because of the financial crisis but also because a lack of infrastructure and regulatory clarity has put would-be investors off. A shift in focus last year away from real estate towards industry has borne some fruit, but Saudi's grand 'cities' scheme remains untested. Still, construction activity is steady and will increase. While the retail and commercial office sectors are flat due to oversupply, the government has been busy commissioning transport and other infrastructure and is about to start on hundreds of thousands of new homes to meet a dramatic shortfall. It has allocated billions to rapidly expand the education and health care estates. That's the upside. The downside is that procurement is characterised by a bottleneck at the top, a demand for speed that some will find unrealistic, and relatively inexperienced procuring bodies. Projects are announced and then disappear like desert mirages. Corruption and an unreliable civil justice system remain headline risks. Opaque, rich, changeable, wary of outsiders and yet in need of all kinds of assistance, the Kingdom remains a riddle – one many companies rightly feel is worth trying to solve.
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DISCLAIMER: The views expressed in this publication do not necessarily reflect the views of the Chartered Institute of Building.
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GLOBAL ROUND-UP IRAQ RECONSTRUCTION
Hill International wins $1.5bn in work on major Iraq housing project for Korean developer HILL International and its subsidiary HillStone have won a major slice of work on a project to build half a million homes in Iraq. The contracts, each for three years, are worth approximately $200 million to Hill and $1.3 billion to HillStone, a supplier of patented, low-cost home building systems. HillStone is 51-percent-owned by Hill International. Hill will provide project and construction management while HillStone will supply building structural systems to the scheme’s client, TRAC Development Group, a South Korean real estate developer. The award, for the first phase of the US$35-billion development, includes construction of 100,000 housing units plus related infrastructure. The total development of 500,000 housing units was granted to TRAC by the National Investment Commission of Iraq.
Work is expected to begin in the fourth quarter of 2011 and be completed by the end of 2014. Other companies expected to be involved in the development include South Korea’s Hyundai Development Co. as general contractor and Texasbased Nucor Steel and Illinois-based Louvres LED International as suppliers. Announcing the deal on June 2, TRAC’s Chairman, Chong Min Mun, said: “With extensive experience in Iraq, Hill and HillStone will provide construction technology and cost-efficient methodology to be implemented in the project.” Also in June Hill announced that its subsidiary Engineering S.A. received a $2.9-million contract expansion from New Energy Options Geracao de Energia to provide construction management services on Phase 2 of the Alegria Wind Farm in Brazil. iCON
CORRUPTION
Indian Commonwealth Games organiser Suresh Kalmadi jailed on corruption charges POLICE have arrested Suresh Kalmadi, chief organiser of India’s Commonwealth Games, on corruption charges after finding evidence of irregularities in the awarding of contracts. Kalmadi, who is also a member of parliament for Pune, has been in New Delhi’s Tihar Jail since his arrest on April 25 on charges that he had conspired to give an inflated contract to a Swiss firm that provided timing equipment for the games. Investigators said the games organising committee awarded a $33 million contract to the Swiss firm, even though the actual cost should have been roughly a third of that. The $6 billion Commonwealth Games turned into a source of national embarrassment for India because of missed construction deadlines and corruption scandals. Kalmadi has been charged with conspiracy, forgery, misconduct and under provisions of the Prevention of Corruption Act. Eight other officials from the organising committee have been named as accused by India’s Central Bureau of Investigation (CBI). They include:
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Lalit Bhanot, key Kalmadi aide and former Secretary General; VK Verma, former Joint Director General; M Jeychandran, Treasurer; Surjit Lal; Deputy Director General (Procurement); and ASV Prasad, Joint Director General (Sport). The CBI claimed that the contract for the timing system was awarded by “wrongfully restricting and eliminating competition” from other suppliers. It accused the organising committee officials of inflating the cost of contracts, resulting in a loss of over US$21m to the exchequer.
India has been rocked by corruption scandals, from the staging of the Commonwealth Games to the allocation of the 2G telecommunications spectrum. On February 16 Indian prime minister Manmohan Singh, who has a reputation for probity, told a news conference that the scandals were the greatest regret of his term in office. Urging the media not to focus exclusively on the negative, he said that “an impression has gone out that we are a scamcrippled country and that nothing good is happening.” iCON
CHINESE CONTRACTOR REMOVED FROM POLISH ROAD JOB CHINA Overseas Contracting Group Co. (COVEC) has had its contract to build a 50-km stretch of Poland’s new A2 motorway linking Poland to Germany cancelled after work halted in May amid protests by subcontractors over nonpayment. The contract awarded in 2009 to COVEC, a subsidiary of China Railway Group (CREC), made headlines because it was the first major public project won by a Chinese firm in Europe. COVEC’s winning bid was reported to be just under half the US$1bn budgeted for the job. In May Polish subcontractors went on strike, claiming they hadn’t been paid. COVEC announced June 6 that it was stopping work and wanted to renegotiate the project, saying the price of materials had risen high above predicted levels. COVEC also claimed the Polish government had delayed payments and had treated it unfairly. The Polish road agency rejected COVEC’s claims and terminated the contract on June 13. The agency is also seeking around US$270 million in compensation from the Chinese firm. Polish Prime Minister Donald Tusk had promised that the highway would be finished well before the 2012 European Football Championships, co-hosted by Poland and Ukraine. The job will now need to be retendered. “Chinese enterprises should try to become familiar with international law and the market environment in foreign countries when expanding abroad,” commented Zhang Xiang, spokeswoman for the China International Contractors Association, in The People’s Daily newspaper. iCON
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Leighton success in Singapore
ASIA TRANSPORT
Australian heavyweights win A$130m Singapore rail project AUSTRALIAN contractor John Holland, in a joint venture with Leighton Asia, has been awarded a A$130 million contract to deliver the Downtown Line Stage 3 MRT project for the Singapore Land Transport Authority. The JV will construct the new Sungei Road Station, a four-level station box with a platform, mezzanine, concourse and linkway, along with comprehensive civil, structural, architectural, plumbing, drainage, landscaping and reinstatement works. Twin tunnels approximately 770-metres in length between Sungei Road
Station and Bencoolen Station will be constructed using two tunnel boring machines. “Today’s award builds on our recent success in Hong Kong and reflects the strength of the partnership between John Holland and Leighton Asia, which brings together Leighton Asia’s local construction knowledge with John Holland’s specialist skills in underground construction,” said Glenn Palin, John Holland’s Group Managing Director. Construction was scheduled to begin in June 2011, with an expected completion date in 2017.
John Holland is wholly-owned subsidiary of Australia’s Leighton Holdings. Meanwhile Leighton Holdings announced in May a loss after tax (unaudited) of A$382m for the nine months to 31 March 2011 from total revenue of $13.8bn and expects to report a loss after tax of $427 million for the 2010/11 financial year. Chief Executive David Stewart said the result is “extremely disappointing” but that the company is “acting decisively to deal with all its issues” and “is now well positioned to return to more normal growth and earnings in 2011/12 and beyond”. iCON
BRIBERY
NEW UK ANTI-BRIBERY LAW CARRIES 10-YEAR PRISON TERMS LEGISLATION aimed at making it easier to prosecute companies who make corrupt payments abroad came into force July 1. The Bribery Act overhauls existing laws dating back to 1889 and creates offences that carry prison terms of up to 10 years and unlimited fines. It makes it illegal to offer or receive bribes and to fail to prevent bribery. Both British and foreign companies are covered, provided they have some operations in the UK. The act also
applies to individuals. The new act creates offences of offering or receiving bribes, and a tough new offence of “failing to prevent bribery”. If a company is prosecuted for that, its only defence is if it can show it has “adequate procedures” in place to stop bribes. “Adequate procedures” may include providing anti-bribery training to staff, carrying out risk assessments for the markets being operated in, or carrying out due diligence on the people being dealt with.
The legislation was due to come into force in April 2011, but it was delayed over business concerns about whether corporate hospitality could be seen as a bribe. Government guidance says that corporate hospitality that is reasonable and proportionate will not be seen as a bribe. A survey released in June 2011 by the consultants KPMG suggests that a third of UK companies have not yet conducted an anti-bribery
and corruption risk assessment. The survey also found that 71% of companies believed there are some places in the world where business cannot be done without engaging in bribery and corruption. Transparency International UK has published extensive guidance on its website to assist companies in complying with the Bribery Act. iCON
‘USING WOMEN IN A FRONT LINE PITCH CAN BE PROBLEMATIC’ RRSAUDI ARABIA 2011, PAGE 12 03 QUARTER 2011
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GLOBAL ROUND-UP
CREC Vice President Hui Liu (left) and Chairman of Arup’s Board of Trustees Terry Hill, signing the MoU
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COMPANIES
ARUP TEAMS UP WITH CHINESE GIANT TO TARGET EMERGING MARKETS ARUP has joined forces with one of the world’s largest civil engineering groups, the China Railway Group (CREC), to target emerging international markets with a combined design and build offering. The companies say the partnership combines Arup’s design engineering expertise with the scale and experience of the Chinese engineering and construction giant. They will bid for major projects in the Middle East, Africa, South America and South East Asia. The two parties signed a Memorandum of Understanding (MoU) in London in the presence of the Chinese Premier, Wen
Jiabao, and the British Prime Minister, David Cameron, during Wen Jiabao’s UK visit in June. Comprising 31 separate enterprises, stateowned CREC is one of the biggest engineering conglomerates in the world, and is keen to expand outside China. CREC’s International General Manager, Chen Zhigong, said “this agreement will create a new and powerful partnership as we aim for further global growth in the years ahead.” Chairman of the Arup Group Board, Philip Dilley, said: “CREC is a very well-known and highly
respected company, so we are delighted to be able to work with them even more closely, combining our knowledge and expertise to exploit new business opportunities in fast-growing markets around the world.” Arup’s chairman of the Board of Trustees, Terry Hill, said: “Their experience in major projects, particularly in rail, is a great fit with our successful record in providing integrated solutions on major infrastructure works and will help us to open up many opportunities in fast-growing markets around the world.” iCON
PROJECTS
Unique feat of collaboration as San Francisco’s Bay Bridge is made in As iCON was going to press, the last four, huge, steel segments for San Francisco Bay’s new suspension bridge were making their 22-day journey by ship across the Pacific from Shanghai, where they were manufactured, to be lifted into place. The steel modules will join 24 other sections already shipped and installed to form part of the world’s longest single-tower, self-anchored suspension bridge, stretching 2.2 miles from Yerba Buena Island in the middle of San Francisco Bay to the Oakland shore. The structure is part of the Bay’s new US$6.4
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billion East Span, due to open in 2013, which also includes a 1.2mile viaduct. Shanghai Zhenhua Heavy
Industries Company was contracted in 2006 to manufacture and ship the components by the American consortium building the bridge, a joint-venture between American Bridge Co. and Fluor Corp. In addition to the 28 steel deck sections, which comprise a 624metre curved segment at the easternmost end of the span, Shanghai Zhenhua manufactured the 525-foot tower that holds the whole structure up. Bloomberg reported that the client, the California Department of Transportation, saved US$400m by outsourcing the section to China.
According to Bloomberg, Shanghai Zhenhua paid its steelworkers US$12 per day, better than the Chinese average but a fraction of what American steelworkers get paid. Company chairman Zhou Jichang also told Bloomberg that welders gained US qualifications specifically for the work. The company employed as many as 2,500 workers at peak on the project, including 1,000 welders. Prestige, not profit, was the company's motive for bidding to do the job for only $250m, Mr. Zhou said. “Making money wasn’t the first priority for us,” he told
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HEALTH & SAFETY
Construction supervisors acquitted over Deutsche Bank blaze deaths in New York A FORMER Bovis safety manager and two other construction supervisors have been acquitted of manslaughter charges in connection with the blaze that killed two firefighters in New York’s Deutsche Bank building, close to Ground Zero, in August 2007. Jeffrey Melofchik, site safety manager for the project’s construction manager, Bovis Lend Lease, plus two men employed by Bovis’ subcontractor The John Galt Corporation, Mitchel Alvo, director of abatement and foreman Salvatore DePaola, were acquitted in June and July this year after a long trial in New York’s State Supreme Court. The judge did find the Galt corporation, which no longer exists, guilty of reckless endangerment. The fire department was hampered in fighting the blaze at the building, which was being demolished, by a broken standpipe that was meant to carry water to the upper reaches of the building. The firefighters were in the building for 61 minutes before water was available. Despite admitting that city agencies and the fire department itself were partly responsible for failing to identify and manage the risk of the damaged standpipe, prosecutors indicted only Melofchik, Alvo and DePaola, plus the Galt corporation. Defence lawyers successfully argued that their
Melofchik (center) leaves Manhattan criminal court with wife Audrey and attorney Edward J.M. Little, June 29 clients had been made scapegoats for the deaths. They said the men either had not known that a section of the standpipe was missing or that they did not have the expertise to know the significance of the standpipe. The defence also stressed failures of the fire department, which failed to conduct regular inspections on the building, and of federal, state and local regulators who also had responsibility to flag up the issue. iCON l Full background on this story can be found on the iCON website: www.iconreview.org
‘I ARGUED WHY PARKING CHARGES WOULD BE GOOD... I DON’T THINK I WAS VERY POPULAR BY THE END’ RRROMANIAN REGENERATION, EYEWITNESS, P34
made in China and shipped across the Pacific Bloomberg. “We want to build a name for ourselves in a new area.” Mr. Zhou claimed his company completed its work five months ahead of schedule. The first of the sections arrived in California in January 2010. In total, it used 43,000 tons of steel on the project. Another Chinese company, Shanghai Pujiang Cable Co. made the 1-mile-long main cable for the bridge, Mr. Zhou said. The collaboration is being hailed as an example of how Chinese engineers are expanding overseas and winning contracts for complicated projects in the
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developed world, where freemarket conditions reign. As previously reported in iCON, China's CSCEC is already active in the US, where it is building a major casino in Atlantic City and has won contracts to renovate New York's subway system, build a new metro platform near Yankee stadium, and refurbish the Alexander Hamilton Bridge over the Harlem river. “Chinese engineering companies’ expertise has improved rapidly, thanks to their heavy investments in research and development,” Hou Yankun, analyst at Nomura International Hong
Kong Ltd., told Bloomberg. “They realise they can’t be competitive in the long term just by making lowskill products.” The new span, featuring two parallel roadways with five lanes each, will replace the current eastern section, which was damaged by the 1989 Loma Prieta earthquake. The viaduct that will link the suspension bridge to Oakland consists of 452 deck sections fabricated in Stockton, California. The structure, called the skyway, sits on 28 columns that are supported by piles driven 300 feet into bay mud.
‘SAUDIZATION’ COULD SEE 90,000 FILIPINOS MOVE TO QATAR, SAYS ENVOY IF Saudi Arabia’s new scheme to get its citizens working in the private sector is strictly enforced, up to 90,000 Filipinos working in Saudi are likely to flock to Qatar, Philippine Ambassador to Qatar, Crescente Relacion, has said. Nitaqat (Arabic for “ranges”) is the Kingdom’s latest attempt at “Saudization” – making foreign and Saudi privatesector firms hire Saudi nationals. Nitaqat ranks companies according to how many Saudis they employ relative to their size and sector. Companies who don’t employ enough Saudis will not be able to renew the work visas of their expatriate staff. If Nitaqat is enforced companies who don’t comply will find themselves starved of talent. Saudi Arabia is currently the largest employer of Filipinos in the Gulf, Relacion told Qatari newspaper The Peninsula. As well as menial work Filipinos do engineering, technical and managerial jobs. However 90,000 of them could be displaced under Nitaqat, he warned. According to Relacion, Qatar will be the biggest beneficiary of the new scheme, as Filipinos flock to the gas-rich state to take advantage of the construction boom. Nitaqat is causing concern among private sector firms in Saudi, where unemployment is high and only one in 10 private-sector jobs is held by Saudi citizens. “The initial shock of Nitaqat, if enforced with vigour, could lead numerous smaller businesses to shut down, shake already feeble foreign investor confidence in the economy, and further stall the private sector’s recovery,” wrote Banque Saudi Fransi chief economist John Sfakianakis in Arab News, June 15. iCON l For more on Nitaqat and other Saudi issues see our special report, “Saudi Arabia 2011”, page 12
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BRIEFING CHINA’S ECONOMY
THE SKYSCRAPER BOOM THAT COULD END IN BUST China’s eye-popping skyscraper drive could turn out to be a curse, says Xianfang Ren, as the record number of towers started in recent years top out between 2012 and 2014 – just when many predict a sharp correction in the Chinese economic miracle
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hina has embraced a skyscraper culture with great enthusiasm. Now the country has the largest number of tall buildings in the world, a manifestation both of economic success and excess. The record build-out in the recent stimulus cycle has mirrored the escalation of a capital-intensive and construction-led growth strategy, as Chinese policymakers try to pull the national economy out of recession. Despite all the risks, a soft-landing is the most probable scenario for the Chinese economy, given all the government policies deployed and the strong potential domestic demand. The latest most complete skyscraper statistics for China have been compiled by a local online-based publishing house called Motiancity which specialises in information on skyscrapers. According to a skyscraper report released recently by Motiancity, China (including Hong Kong) currently has over 200 skyscrapers under construction, which already exceeds the total existing skyscrapers in the United States. In the next three years, one skyscraper will be completed in China every five days, and five years from now China will have 800 skyscrapers, four times as many as that in the US today, according to the report. The skyscrapers included in the data are defined as high-rises with a height above 152 metres (or over 500 feet). The report also shows that Shanghai has the largest number of skyscrapers in mainland China, 51 as of now, compared with 58 in Hong Kong. The other Chinese cities with the largest number of skyscrapers are Shenzhen (46), Guangzhou (44), Nanjing (23), Chongqing (18), Tianjin (15), Wuhan (13), Beijing (13) and Dalian (11). More eye-popping is that even some small and lower-tier cities are implementing quite ambitious skyscraper plans. Guiyang city, provincial capital of the impoverished Guizhou province, has planned 17 skyscrapers, the fifth largest skyscraper plan in the country, even though the province’s per capita GDP is just one-third of the national average. In another underdeveloped province, Guangxi, Fangchenggang city is planning a 528-metre skyscraper – one of the tallest in the country – even though the city has a population of less than a million.
THE SKYSCRAPER CURSE The skyscraper report has drawn wide attention as its release comes amid growing anxiety around the world about possible boom-and-bust risks for the Chinese economy. Indeed, some researchers have found a close correlation between the construction cycle of skyscrapers and the boom-bust cycle of the economy. One famous theory was put forth by economist Andrew Lawrence back in 1999, whose skyscraper index shows that the world’s tallest buildings have normally risen on the eve of major economic downturns—the Great Depression, for instance, set in around the time when the Chrysler Building and the Empire State Building were completed. Interestingly, Shanghai’s Global Financial Centre, currently the tallest tower in mainland China and the third tallest in the world, was completed in August 2008, when the global financial crisis struck. Quite ominously, the two future tallest buildings on mainland China, one in Shanghai and the other in Guangzhou, are scheduled for completion in 2014, a time around which many economists have predicted a sharp downturn of the Chinese economy. Most of the other towers will be completed around 2012-13. OUTLOOK AND IMPLICATIONS Skyscrapers are regarded as important symbols of China’s economic success. By the end of 2010, five of the 20 tallest buildings in the world were located in mainland China, the largest number boasted of by any country or region. Along with the rise of the skyscrapers is the rise of the Chinese 03 QUARTER 2011
DEFLATING THE HOUSING BUBBLE In a bid to curb rampant property speculation Shanghai passed a law last October limiting families to the purchase of just one new apartment. Beijing introduced the same measure the previous April. House prices have soared in China. According to the China Academy of Social Sciences (CASS), reported by Xinhua news agency, average home prices rose 25.1 percent year on year in 2009, outpacing the annual income growth of urban residents by 15.3 percent. Coupled with the rise in property values is a vacancy rate of up to 25 percent, according to some analysts, as property investors sit on empty homes waiting for the right price. China has taken dramatic steps to cool the market, suspending bank loans for third home purchases, stipulating a 30 percent down payment for first-time buyers, and introducing heavier property taxation throughout the country.
economy, which overtook Japan last year to become the world’s second largest economy. Skyscrapers are also trademarks of China’s investment and capital-intensive growth strategy, associated with the country’s aggressive industrialisation and urbanisation drives that have hit surprising new levels even since 2000. As such, skyscrapers, which are extremely capital-intensive and steel-intensive, are also manifestations of potential pitfalls with the Chinese economy, which has been increasingly leveraged with bank credit and is heavily reliant on external mineral and energy resource inputs.
GUANGXI IS PLANNING A 528-METRE SKYSCRAPER – ONE OF THE TALLEST IN THE COUNTRY – EVEN THOUGH IT HAS A POPULATION OF LESS THAN A MILLION The acceleration of the skyscraper construction since the start of the post-global-financial-crisis stimulus cycle has exactly mirrored the escalation of such a growth strategy as Chinese policymakers try to pull the national economy out of recession through a large injection of capital, which has necessitated the intensive use of steel and cement. A big question now for China is whether there will be a major correction ahead as policymakers unwind the stimuli injected in 2009 and 2010, and as the imbalances in the economy, such as overcapacity and a real estate bubble, have been made even larger by those stimuli. Basically, in order to resolve the bubble that loomed from 2000 to 2007, the government created a larger bubble in 2009-10. Bubbles mean corrections and, as such, a bump should be down the road for China. The only question is: will it be a soft or a hard landing? For now, a soft-landing looks the most probable scenario. Efforts are already under way to cut overcapacity in an orderly and government-controlled way under the 12th Five-Year Plan, and quite drastic moves have been or are planned for the clean-up of local government debt and the resolution of supply-side problems with the housing market. These combined with the fact that China has very limited external borrowing as well as the huge domestic demand potential make it possible for the government to engineer a softlanding, in the absence of any drastic external shocks. iCON l
Xianfang Ren is senior economist at IHS Global Insight
AIMING FOR PRUDENCE The People’s Bank of China (PBOC), or the central bank, announced July 4 that it would continue to implement a prudent monetary policy amid high inflationary pressures, official news agency Xinhua reported. The bank said the country faces a complicated economic and financial situation, with fragile global
recovery and other uncertainties. The government will try to make monetary policy “more stable, targeted and flexible” and will use “multiple monetary tools to check liquidity and keep the money supply at a reasonable level”, a statement said. The country’s consumer price index, a main gauge of inflation, accelerated to 5.5
percent in May, the highest level in 34 months and well above the government’s target ceiling of 4 percent. This year, China has made curbing inflation a top priority and implemented a prudent monetary policy. The PBOC has increased the bank reserve requirement ratio six times this year and interest rate twice.
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SPECIAL REPORT SAUDI ARABIA 2011
BIG PLANS Saudi Arabia’s development plans are huge, but will they actually work? To appease its people the government is willing to fund massive new-build programmes for homes, schools, hospitals and transport. But to move from being an oil-funded welfare state to a diversified, modern economy – which is the vision behind the ‘economic cities’ springing from the desert – it needs private investment followed by a major expansion of the private sector. As Kristina Smith discovers, the missing ingredient is still missing.
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audi Arabia has a big challenge: how to find jobs for the 60% of its population currently under the age of 20. Already unemployment stands officially at around 10%, while the real figure is likely to be higher. It has long been on the Kingdom’s agenda but the unrest in the region caused by the Arab Spring makes the problem all the more pressing. The big plan to tackle this problem sees Saudi Arabia diversifying its economy to reduce its reliance on oil, attracting foreign firms and investors to provide jobs for the country’s ever-growing population. Construction has begun on four vast new ‘Economic Cities’, which will each incorporate commercial and industrial space, housing, health care and education facilities. Linking these new cities with the rest of the Kingdom and the region will be new rail connections, new and extended airports and sea ports. What this all adds up to is a huge number of projects in the development pipeline with opportunities in almost every sector (see box). In August 2010, the Saudi government announced a SR1.44 trillion ($385bn) development fund for the following four years, its largest ever and 67% greater than its investment in the previous four-year period.
NATURAL DEMAND FOR RETAIL, OFFICE AND HOUSING Saudi Arabia is changing. Society has become more consumeristic with higher expectations across the board, from homes, schools and hospitals to leisure and goods. In the last decade the retail sector has boomed, with shopping malls updating the traditional Arab souk by providing cool, luxurious places for people to shop, socialise and be entertained. Mall after mall appeared around the main cities until the market was saturated. “Retail has really suffered from oversupply in the last few years which meant that the banks have turned the tap off on credit for new malls,” says John Harris, co-head of Jones Lang LaSalle in Saudi Arabia. But the good news is that the lack of new malls being built means the pendulum is now starting to
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swing the other way. “We are now poised to see recovery,” says Harris. “The planned new communities in the four Economic Cities will all need retail once they begin to take root.” Another change for Saudi Arabia was its admittance – after years of negotiation – to the World Trade Organisation (WTO) in December 2005. “By joining the WTO, Saudi Arabia was required to relax its commercial licences and regulations to make it easier for foreign companies to set up their own subsidiaries without having local partners,” says Harris. The result was an influx of international firms, who required a different type of office space to what had previously been required. Until this point, family firms dominated; there are 20 to 30 merchant families who have made their fortunes by forming partnerships with multinationals such as Toyota or Mercedes and who tended to operate from their well-appointed residences, supplemented by the low-grade office space available. “At that time, there were only a couple of Class A buildings around which had not done very well until then,” says Mike Williams, senior director for CB Richard Ellis in the region. “So everyone started ploughing into local Class A type product.” Again, the result is oversupply. “Demand is really strong but supply has been much stronger,” says Harris. The capital Riyadh predictably has the most office space – and the biggest development pipeline. Rental rates are down, according to CB Richard Ellis, and demand will be weak for the next two to three years. In Saudi Arabia’s other main cities for office accommodation, Jeddah, Al Khobar and Ad Dammam, rents have also fallen due to oversupply. One of the biggest boosts to space in Riyadh will come from the $2bn King Abdullah Financial District, due to come on stream starting in 2012. With ambitions to be the new financial centre of the Middle East, construction of the shells and cores of the buildings are well underway, but there will still be fit-out opportunities to be had. With Saudi Arabia’s lack of legal transparency it
is difficult to see how the new financial district will compete with Bahrain, which has been regulated by the Bank of England for 25 years. However its Financial Plaza area has already attracted major financial institutions including Samba, Tadawul and CMA and the top-end office space will offer many businesses in Riyadh the chance to upgrade their accommodation. “It’s going to be a fabulous opportunity for businesses out here because they will get the kind of environment that is very tough to find here,” says Harris. One of the most pressing needs for Saudi Arabia is for housing. HSBC has estimated that over one million homes will be needed by 2014. Most housing developments in Saudi Arabia are high end. And most are small-scale, between five and 10 units. There are bigger projects underway, but these too are at the top end. There is a huge gap in the market for housing for the middle-income Saudis who are in rented accommodation but would like to own their own properties. Unfortunately, there is a very good reason for that gap. Current mortgage regulations based on Sharia law protect the borrower to such an extent that no lenders will take the risk of lending; only employees of government departments or companies can currently get mortgages. A new mortgage law has been in discussion for over a decade and although it looks as if it could finally be approved imminently, experts warn that it will take years for its impact to be felt on the market. “This has been rumbling on for 13 years,” says Williams. “The new mortgage laws have still not been achieved – and when they are they will need to be tested before lenders have the confidence to start lending.” The government is pumping money into affordable housing: $67.5bn for the brand new Ministry of Housing, created recently from the General Housing Authority, to build 500,000 units and $1bn in the Real Estate Development Fund which provides loans for housing and for some commercial real estate projects. It’s not just the locals who need housing: the expat community, which diminished during the
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Islamist terror campaign of the Noughties, is now growing again and has difficulty finding places to live. There is growing demand for new, gated communities where expats can live behind heavily guarded walls, and for hotels and serviced apartments in the main cities.
ELUSIVE PRIVATE INVESTMENT Saudi’s ambitious development plans have not translated quite yet into a new construction boom, however. The demand for skills has been consistent over the past few years, says Neil Morris, director of recruiter Digby Morris: “Although you read about the billions committed to spending, it’s not like the Klondyke, there is no gold rush,” he says. Current construction activity is driven by residential, industrial and infrastructure, both for transport and for services for the new cities. Exactly when all the ambitious plans will translate into construction activity remains to be seen. The problem is, the government’s plans to diversify away from oil have yet to bear fruit and there are question marks over whether the desired private sector investment will ever be forthcoming. (See “The trouble with KAEC”.) According to a May 2011 report from Banque Saudi Fransi entitled “Holding back: State spending focus restrains private sector, diversification”, by pumping so much money into megaprojects the government is actually deterring private investors, who can afford to sit back and wait to see how the economy progresses, investing perhaps a couple of years down the line. The ready cash may also deter the developers. Loans from the government, such as that made recently to the developers of King Abdullah Economic City, come on the loosest of covenants: if they were never paid back it wouldn’t really matter. It raises the question: does this make developers complacent about going after the private sector? The private sector’s health in the Kingdom has improved little in the past two decades, says Banque Saudi Fransi (BSF). Its contribution to nonoil GDP in 2010 was 66.7%, only 2.3% higher than 03 QUARTER 2011
SAUDI’S PLANNED ECONOMIC CITIES King Abdullah Economic City RABIGH ($27bn to $50bn) If the government’s plans are realised, when completed in 2025 this vast new city 130 km south of Jeddah will be the size of Washington DC, 168m sq m. Authorities hope it will provide a million jobs and host a population of two million people. The seaport, which will be the biggest in the region, and huge industrial park are the key to attracting private investment, which has been slow to materialise. It will also boast waterfront resort areas and a central business district. ..................................................................................................................................................
JAZAN($27bn to $30bn) Jazan Economic City In a remote area in the southwest corner of Saudi near Yemen, 725 km south of Jeddah, on the Red Sea, Jazan (sometimes spelled “Jizan”) is one of the country’s poorest cities, with little industry and high unemployment. JEC hopes to secure 100,000 jobs and a population of 300,000. With two-thirds of JEC’s 100m-sq-m area earmarked for industry, one of its biggest selling points to date is that it has secured the government-run oil company Saudi Aramco which is going to build a $7bn refinery there. Malaysian engineering group Malaysia Mining Corporation (MMC) and the Saudi Binladin Group (SBG) won a 30-year contract in late 2006 to develop JEC. In 2008 MMC claimed that JEC had attracted $26bn in investments from Saudi, Chinese and Malaysian firms, though details were not given. Ground broke for basic infrastructure in 2009. Reuters reported June 2010 that the government had allocated $1.6bn to build 6,000 homes for people displaced from border areas after a two-month conflict with Yemeni Shi’ite rebels. .........................................................................................................................................................................................
Knowledge Economic City MEDINA ($7bn) Situated in the second most holy city of Saudi, the focus for KEC, launched June 2006, is meant to be residential and religious tourism combined with knowledge-based industry such as IT, health and education. The 4.8m sq m – city aims to create 20,000 jobs and be home to 50,000 people. The first phase will see the development of villas and apartments, schools and colleges, museums, hotel and retail space. It is worth noting that only Muslims can work in Medina. ...................................................................................................................................................................................................
HAIL ($8bn) Prince Abdulaziz Bin Mosaed Economic City (PABMEC) Launched in 2006, and located 700 km northwest of Riyadh, PABMEC, sometimes known as Hail Economic City, will cover 156m sq m, creating 55,000 jobs and hoping to attract a population of 300,000. With a new $30bn international airport planned together with expanded rail and road links, the city hopes to become the largest transportation and logistics hub in the Middle East. Developers broke ground in February 2009. So far work has concentrated on creating infrastructure. ......................................................................................................
in 1990. Having said that, government money keeps coming. There is huge political will to see these government-sponsored projects through. And oil revenues mean that government funding can continue in the medium term. But leaving aside the question of how much oil the Kingdom has left, or whether the price per barrel will stay above the break-even point of $84.5 (at current government spending levels, according to BSF), the government appears to know that oil money alone can’t ensure a happy, prosperous population. As the BSF report notes, the Saudi population expanded 182.4% between 1980 and
2010, according to the United Nations Population Division, while the global average was 56%. Such rapid growth has led to a decline in prosperity for the average Saudi. The report argues that real percapita income growth has been stagnant since the mid-1980s. “Adjusted for inflation, each Saudi resident was earning $8,550 in 2010, virtually on par with the level in 1991 and below a 1980 peak of $14,773.” This is despite government expenditure tripling since 2004. Clearly, the government must either work out how to expand forever as a welfare provider or get real business booming. iCON
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AMBITIOUS PLANS Education Over half of the Saudi Government’s $384bn development pot for 2010 to 2014 has been earmarked for human resources, with controversial plans to overhaul the Kingdom’s education system which currently focuses on Islam and morality and teaches by rote. According to Jones Lang LaSalle there are 610 schools, costing $40bn, planned; there could be opportunities for modular construction companies here. At the high end, foreign contractors could team up with European education providers for institutions in the Economic Cities. ....................................................................................................................................
Healthcare The burgeoning population will require new healthcare facilities. According to Jones Lang LaSalle, there are currently 12 new hospital or heath facilities planned costed at $18.6bn. Local contractors may not have the expertise to handle complex hospital projects. ................................................................................................................................
Housing An estimated 250,000 to 300,000 homes are needed each year between now and 2014. Current high-end megaprojects include the 40-storey AlJawarah tower in Jeddah, Emaar Properties’ 19,000unit Jeddah Hills and Dar Al Arkan Real Estate’s $13bn mixed-use residential, hotel and retail complex in Jeddah. With a million new homes needed in a few years there could be opportunities for modular specialists at the affordable end of the market.
THE TROUBLE WITH KAEC It was to be the flagship of Saudi’s planned new economic cities, attracting US$27bn in private investment, but a misplaced faith in high-end real estate, plus a lack of regulatory clarity and infrastructure provision has led to a sluggish start for King Abdullah Economic City. Kristina Smith reports
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Industrial Industrial developments are seen as the key to the country’s economic diversification because this sector can provide more suitable jobs for Saudis than whitecollar roles which don’t fit with the current education system. According to MODON, the Saudi Industrial Property Authority, 75m sq m of land will be developed on industrial estates between 2010 and 2015. There is a particular demand, according to Jones Lang LaSalle, for good quality logistics space particularly in areas providing links to sea, rail and air. .....................................................................................................................................
Hotels A healthy sector due to the government’s strategy of increasing tourism in the Kingdom and to the influx of foreign firms whose expat workers require accommodation. Opportunities for foreign contractors to come in with hotel investors or operators. ................................................................................................................................................
Airports The airport sector is already busy, with projects at every stage from feasibility through to construction. The General Authority of Civil Aviation has said that it will spend between $10bn and $20bn on developing and upgrading airports by 2020, with the private sector expected to chip in up to $10bn. A difficult sector for firms with strong anti-corruption policies. .........................................................................................................................................
Ports The Saudi Ports Authority recently announced that the Kingdom is envisaging an investment of $8bn on modernising and equipping all of its ports, with more investment hopefully forthcoming from private investors.
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audi Arabia’s new Economic Cities were supposed to be the engine powering the Kingdom’s move away from oil dependence. Like Dubai’s International Finance Centre and Dubai Internet City, the idea was they would attract private investment and create jobs for the swelling numbers of young Saudis. The flagship is King Abdullah Economic City (KAEC), and the US$27bn needed to build it was to come entirely from private investors, making it the largest private sector project in the region. Investors would be wooed, said the Saudi Arabian General Investment Authority (SAGIA) on its website, “With numerous incentives and measures in place to promote private sector participation”. So far, it hasn’t happened. In May this year the Saudi government announced a SR5bn ($1.3bn) loan to the developer, Emaar, The Economic City, to fund development through 2011 and 2012. The hoped-for private investment just hasn’t been forthcoming. It has been the same for the other three cities, too. While the global financial crisis has certainly played its part in deterring investors, other factors have led to KAEC’s sluggish start. Although the city was announced in December 2005, crucial infrastructure links – rail and energy – have only recently been agreed for it. Also, the rules foreign companies will have to play by – on everything from property ownership to building permits – were unclear until May 2010. There is also the view, privately expressed, that the scheme is divorced from sound economic logic: “It is in the middle of the desert with no drivers and no reason,” commented one planner who did not want to be named. “They have this grand vision and grand ideas in terms of timescales but it really is not that easy. They have to make a much more phased and piecemeal approach than they have done so far. They need to start working in practical terms on first phase developments, anchoring and starting from there.” Perhaps it’s no surprise then that, as iCON has learned, the authorities are looking to appoint advisers to help re-plan the first phase of the master plans for both KAEC and Jazan Economic City (JEC).
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Rail Huge plans to create new links within Saudi Arabia and with neighbouring countries include the Haramain Railway, a high-speed line linking Medina, Mecca, Jeddah and King Abdullah Economic City; the North-South railway and the Land Bridge. ..........................................................................................................................................................
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REGULATORY FRAMEWORK One of the biggest deterrents to private investment has been the uncertainty over the regulatory framework, something which Dubai had firmly in place before development began. “It’s very hard to get investors to move to remote locations if they do not know what the regulations situation is going to be,” says John Harris, co-head of Jones Lang LaSalle in Saudi Arabia. It was not until February 2010 that the government passed the Economic Cities Act which means that SAGIA will have regulatory power in KAEC and the other four cities. With its stated goal of delivering all government services within 60 minutes, on any day of the week, SAGIA now has responsibility for master 03 QUARTER 2011
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King Abdullah Economic City
THE STRATEGY HAS SHIFTED NOW FROM REAL ESTATE TO INDUSTRY FRIEDRICH FORSTNER, EMAAR
plan approval, granting licences for businesses, building permits and the land management system. This should be good news for investors. “Usually it is very hard to get licences here,” says Friedrich Forstner, head of investment and M&A for KAEC developer, Emaar, The Economic City. “It could take forever. In KAEC it will be easier, because SAGIA can give out licences.” So far around $2bn has been spent, says Forstner, who adds that the final development costs will lie somewhere between $27bn and $50bn. Phase 1, which ran until the end of 2010 saw high-end residential development at Bay La Sun with supporting infrastructure and amenities such as restaurants and supermarkets, and establishing infrastructure in part of Industrial Valley, which will eventually cover 63 sq km. “The seaport and industrial park can be considered the life blood of the city because they bring in a lot of new jobs and traffic into the city,” says Forstner. “The seaport will be in the top 10 in the world and the biggest in the region.” Forstner recently attended an investment summit in China with his CFO in a bid to tempt Chinese firms to base themselves in KAEC. “Chinese goods are taxed heavily in Europe but coming from Saudi Arabia, there would be major duty advantages,” says Forstner. “They would save between 15 and 30% on import rates due to special preferential bilateral privileges that exist between Saudi Arabia and a number of European countries.” KAEC’s Industrial Valley has already signed up some tenants: food firms Mars and Sadafco, plastics manufacturer Greif, Sanofi from the pharmaceuticals sector and petroleum firm Total. Between them the five have invested £586m. And in May this year steel giant Rajhi signed a 30-
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year lease agreement which will see it setting up a $4bn steel complex in the city. Less successful have been the real estate elements of phase 1. In June 2010 it was reported that 15% of homebuyers had defaulted on their purchases. And the office buildings in Bay La Sun stand with their shell and cores constructed, waiting for tenants. “There are five empty office buildings in KAEC,” contends Harris, of Jones Lang LaSalle. “It is 130 km from Jeddah and it did not have the full package of amenities, including affordable housing for workers. Unless there are regulatory breaks or free zones, why move there?” “There are no empty office buildings,” insists Forstner. “There are some office buildings that have not been completed yet. We are partnering with investment banks and investors to find funding and complete the projects.” Forstner outlines Emaar’s funding models for future projects including schools, health care and hotels. “Our business model is not to develop real estate projects or schools but to partner with construction companies and investors. We could provide a seed investment or take a minority stake.” Here there could be opportunities for foreign constructors who might join forces with an investor and/or operator of a school, hospital or hotel. Forstner says that he would like to see overseas firms coming into KAEC. “There are two or three major players here who have a concentration of 85% to 90% of the market,” he says. “That gives them a lot of leeway and freedom in how they do things in terms of pricing, cost overruns and delays. We are trying to shake that up in bringing in international companies. “We do speak to international construction companies, including some Chinese companies. We are trying to get them on a build of some of our developments. They are typically very time conscious and complete with minimum cost overruns.” Looking ahead Emaar will shift its focus from commercial real estate to industrial space, of which, he says, there is little of good quality in Jeddah: “There has been a fundamental shift in our development strategy,” Forstner admits. “In 2006 when we started, the focus was on real estate development at the high end. In the last year and a half we have discovered that the right way to proceed with the development was to focus on the development of the seaport and the Industrial Valley as drivers of demand.” Recently KAEC received some boosts. First, the announcement that a railway station on the new high-speed Haramain railway linking Mecca, Medina and Jeddah will be situated on the northern outskirts of the city. This will boost housing demand, says Forstner, as people who can’t afford the high house prices in the holy city will be able to visit it regularly by train if they live in KAEC. Second, thanks to the Economic Cities Act announced May 2010, KAEC is the first place in the Kingdom where foreigners can own property outright. Forstner hopes that KAEC will also become the first place in Saudi to offer private mortgage facilities for Saudis. “With the CFO I am discussing with various investment banks on how to structure a significantly sized mortgage fund or create a mortgage financing company.” Third is the agreement by the Ministry of Petroleum to provide a link to a major gas pipeline to KAEC. “This has been a major accomplishment for us. It will enable a lot of downstream development in Industrial Valley. Access to gas is of major fundamental importance,” says Forstner. Taking a step back doesn’t it seem odd that, if a gas pipeline is so crucial to KAEC, it wasn’t in place before development started? “In terms of how this all comes together it is not as structured as you would believe it would be,” admits Forstner. “The major funding which hit us recently from Ministry of Finance has increased the pace at which regulations, etcetera, are worked out. SAGIA has done a lot of work on our behalf to get things in place.” Forstner insists that the original end date of 2025 is still achievable, although press reports have recently started to quote 2029 as the completion date. What cannot be underestimated is the high-level backing for KAEC, which after all has the King’s name all over it. More ‘loans’ will be forthcoming should they be required. iCON
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WORKING THERE: OPPORTUNITIES AND RISKS Roxane McMeeken and Kristina Smith outline the opportunities for firms aiming to get a piece of the Saudi action – and the risks, such as not getting paid and having your project cancelled without warning. Foreign construction firms do succeed but most have to navigate a tricky path because Saudi Arabia plays by its own rules
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ing Abdullah Sports City was supposed to be a building bonanza on the scale of London’s 2012 Olympic Park, featuring several signature stadia, a sports medicine centre and accommodation. Officially announced in February 2009, its budget was said to be a cool US$4bn. The UK’s Arup was appointed masterplanner and big-name architects including Populous, David Chipperfield, Grimshaw and Make were signed up to design the venues. Then, without warning, in September 2010, client Saudi Aramco scaled it all back to just one stadium. The time and effort of hundreds of people at Arup and the other firms had come to nought. Days later Arup put 600 staff on notice, and within weeks Make had let go 14% of its staff – the Saudi setback was reported to have contributed to both downsizings. Another cautionary Saudi tale is provided by the China Railway Construction Corporation (CRCC). In February 2009 CRCC signed a contract worth US$1.77bn to build a 20 km rail line to carry Muslim pilgrims between the holy cities of Mecca, Arafat, Muzdalifa and Mina. The line got built but CRCC lost US$623m on the project, which amounted to almost 63% of its 2009 profit. CRCC said the loss was caused by the client, the Kingdom’s Ministry of Municipal and Rural Affairs, substantially increasing the required capacity of the
railway, changing other specifications and delaying necessary land expropriation. CRCC said this led to the need to invest large amounts of manpower, resources and capital to meet the deadline. The firm said negotiations with the ministry so far for compensation have not produced agreement. These stories highlight different aspects of the unique challenge of doing business in Saudi Arabia. The opportunities are vast as the country attempts to modernise and diversify. The Sports City was just one of an array of “cities” of various types announced in recent years. Foreign construction firms do succeed but most have to navigate a tricky path because Saudi Arabia plays by its own rules, and has tended to change those rules at will. “People are not sufficiently aware of the risks of working in Saudi Arabia,” sums up Richard Harding who, as QC at Keating Chambers, has long experience of disputes in the Middle East, including in Saudi. Here, we discuss the nature of the opportunities as of 2011, the construction working environment, and main constructionspecific risks foreign firms are likely to face.
THE OPPORTUNITIES Saudi’s development ambitions are huge. Activity is steady and increasing. Korean and Chinese construction companies have been the main
foreign players but other firms are now taking an interest. From the UK, for instance, Carillion has been assessing the market and Laing O’Rourke has reportedly just set up an office in Riyadh. Currently, two capabilities provide the key to the Saudi market: specialist skills and complex build experience. Saudi’s Big Two contractors – Saudi Oger and the Binladen Group – dominate the market but are reaching saturation point, and smaller contractors don’t have the necessary experience to tackle major projects. “The likes of Binladen and Saudi Oger are maxed out and are finding it difficult to resource new work,” says Colin Morris, who heads up consultant EC Harris’ operation in Saudi Arabia. “This is allowing other local companies in with expert support from external contractors.” “If you have a strong speciality, you can do well here,” says John Harris, co-head of Jones Lang LaSalle in Saudi Arabia. “If you can manage scale and complexity, you can do well here.” Harris also identifies big opportunities in property and facilities management. “There are going to be world-class assets that require looking after,” he says. “Financial buildings, data centres, airports.” For consulting firms, UK Trade & Investment, which helps UK firms trade overseas, has identified the following areas of opportunity: structural
Riyadh
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engineers, engineering consultants, cost consultants, master planners, project planners, design specialists, urban designers, sustainable design and creative architecture. The sectors where overseas building contractors could make a mark include health care facilities, high rise buildings, complex civil engineering structures and possibly education. “A lot of the banks and investors want to see foreign companies involved,” says Morris. Affordable housing is a huge potential market, with an estimated 250,000 to 300,000 homes a year needed between now and 2014. The opportunities here could be in modular construction which would offer a speedier solution than the traditional route which local contractors could deliver. For individuals eyeing Saudi, there is a big demand for estimators at the moment, says Neil Morris, director of recruiter Digby Morris – although he adds that all the main skill sets are required, including master planning, project management, construction management and cost consultancy. Because of the latest drive on “Saudization” (see “Bigger Picture”) he says demand is increasing for people who speak both English and Arabic, which makes people from the MENA region attractive. “They need people who can converse with the locals,” explains Morris. Also, to work in the holy cities of Mecca and Medina, you must be Muslim.
BREAKING IN But how do you enter the market? Views differ. While we found companies who seem to be getting on with a toe-dipping approach, others say it’s all-or-nothing. Davis Langdon, with parent company Aecom, has a staff of around 1,000 in Saudi. Andy Ritchie is Davis Langdon’s head of country and head of Aecom’s Riyadh office. “You cannot drop in and do a project and then leave, clients don’t like that,” he says. And opening an office will take time: six to 12 months to jump through all the bureaucratic hoops. As for location, Ritchie believes you’ll need a presence in all three of the biggest cities, Jeddah to the west, Al Khobar to the east and the capital Riyadh in the centre. “If you are going to seriously attack Saudi you must be in all three. People will be offended if they hear you’re in one area and not theirs.”
Whilst you are free to establish your company independently, the norm is to find a local sponsor. Aecom, for example, has teamed up with Saudi conglomerate Xenel. The sponsor will take a cut either of your turnover (more likely if you are a contractor) or profit (for consultants). The sponsor may not add much technically but they are essential as winning work is about contacts and word of mouth. Robert Horne, partner at UK law firm Trowers & Hamlins, warns that your partner is the first danger area. “Whilst the sponsor’s role varies hugely – some want to be actively involved in your business whilst the majority are quite passive – many look good on paper but in reality will add limited operational value.” So it’s essential to do enough research to ensure any sponsor can introduce you to the right people. Others have all the right connections but may offer poor terms. Horne says that this a particular issue with some of the big local contractors. “While it may be tempting to do a joint venture with these players as they have access to more work and bigger projects, the question is how much of a return you will get. Think about whether you want to position yourself for headline projects and turnover or do fewer, perhaps more lucrative, jobs with a smaller sponsor.”
GETTING BUSINESS Once you have the contacts, winning work is your next challenge. The key faux pas to avoid, unfortunately, is sending female staff: “Using women in a front line pitch can be problematic,” says Horne. That is not to say women are wholly excluded. Horne says some clients are comfortable working with women but it is best to give clients the option to choose whom they feel most comfortable dealing with. As with any Middle Eastern country, expect to drink a lot of coffee. “It does not necessarily take longer to close a deal but a good deal more socialising is expected throughout the negotiations.” Ritchie says the trick is to somehow be both patient and poised for action at the drop of hat: “It can take a long time for a project to get going or you might find it is rushed forward.” Either way, be ready to attend client meetings at short notice, anytime. “We are often called to dinner and you must drop everything and go – saying you are
unavailable is frowned upon.” In complete distinction from the UK, negotiations with the client start in earnest only after a contract has been signed. One woman who has worked in Saudi, Nicola Boruch, director at consultant Northcroft, says: “I quickly realised I should put everything I had learnt in the UK in a drawer.” These negotiations follow traditional Arab lines: both sides ask for more than they are really after and eventually settle somewhere in the middle. This can work in your favour as once you have agreed on the contract you can start arguing for more money. This haggling may be part of your day job too, if you are in a project management role. Boruch, who chaired meetings between clients and contractors, says: “There was a certain amount of table-thumping and asking why could this not be done yesterday. Then more money would be thrown at the problem and later the money would run out. It could get very intense and emotional.” But she adds, “we did learn how to work together”.
GETTING PAID Contracts are worth little, so getting paid, either by a procuring body or by a contractor above you in the food chain, can become a nightmare. Horne says: “Projects have gone wrong and in these cases there is little chance to pull your money out.” The typical contract is a standard form based on FIDIC 1987, which includes provisions for disputes to be settled in Saudi Arabia courts. But, as Horne says: “Local Saudi players have a remarkable success rate in the courts, but few disputes get that far.” If problems get solved, it’s usually done privately, which means that negotiation skills will be paramount. In the past 10 years some contracts have started including provisions for an international dispute resolution centre. On this, Harding’s assessment is equally stark: “No known foreign award has been enforced in Saudi.” He adds that one Keating client was owed £10m and only managed to get paid after the British government used diplomatic pressure. This took three years and was only possible because the firm was a member of a fairly expensive UK government scheme to guarantee foreign export payments (the ECGD Bond Support Scheme). A dangerous situation, says Harding, is when you are near the end of the job and do not RR
A WOMAN’S EXPERIENCE Nicola Boruch was a Northcroft project leader on the King Abdullah University of Science and Technology (KAUST) megaproject. The client, Saudi Oger, whose client in turn was developer Saudi Aramco, invited Boruch to Jeddah when the mechanical and electrical installation was about to start in order to present the project to the team about to start on site. Apart from some awkward moments, Boruch was more
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comfortable during her 10-day visit than you might expect. “I was really quite daunted,” Boruch says. “Before I went, a female counterpart at Saudi Aramco lent me her abaya and head scarf to wear and, in accordance with Saudi law, I had to arrange to have an escort from Saudi Oger with me at all times. So I felt a bit like an Edwardian travelling lady. “When I arrived on site the ratio of men to women was 4,500:1. I was chairing meetings of local subcontractors but they
were all complete gentlemen, and they listened to me, so in the end I felt relaxed. “I occasionally felt awkward doing business away from offices in the evening because we had to sit in the mixed family areas of restaurants [as opposed to gender segregated areas] or in the foyers of hotels, and this was clearly only because of me being female. “But overall I did not find it uncomfortable. The only thing I missed was not being able to wander off alone and explore, as I would have done anywhere else.”
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RR have another lined up with the client. “If the client still needs you, you should get paid. If it’s your last piece of work, though, and you don’t have a strong local partner, you may be in a weak position.” Why do clients sometimes not pay? Are they crooked? “I don’t think it is a question of being ‘crooked’,” says Robert Horne. “That approach tends to Westernise the nature of the business deal. Rather, it is a way of doing business. At its most hypothetical it is a balancing exercise of ‘this is what I have paid to date, the project is worth xamount, so the final payment will balance one against the other’.” “On the slightly more realistic level, or possibly cynical level, why would they make the payment?” Horne says. “The forcing of the issue comes as much through personal standing in the community as anything else and is part of the way deals are done. Companies not used to working in the area need to be aware of this.”
He adds that there will also be circumstances where the money is simply not available. “This is so much of a problem in Saudi where the country itself remains cash rich but getting money into the right budget, particularly if there has been an overspend – real or perceived – is still a matter of personal standing.”
CORRUPTION The government is showing signs of taking this issue more seriously now. In June, as reported by Arab News, the Saudi Control and Investigation Board (CIB) set a precedent by levelling charges against 5,534 government employees for corrupt behaviour, including bribe taking, abusing power and misappropriating funds. And the country has had a pretty good run in Transparency International’s annual Corruption Perceptions Index in the last few years, placing 80th in 2008, 63rd in 2009 and 50th in 2010. But corruption is
CLIENTS: WHO THEY ARE AND HOW THEY WORK Procurement modes are evolving as the race to build gets underway, but the client landscape in 2011 is characterised by a bottleneck at the top, a strong focus on speed as the government demonstrates its responsiveness to popular grievances, and sophisticated and qualified individuals but relatively inexperienced client organisations. Roxane McMeeken reports
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t may be a huge country with an economy bigger than the rest of the Gulf area combined but almost all construction work is funnelled through a small number of clients. British Expertise, the government organisation which promotes UK businesses abroad, estimates that 75% to 80% of construction in Saudi is under the auspices of the public sector. This in turn gets channelled through two key client bodies, which each run about 50% of public works: Saudi Aramco (originally the government’s oil company but which now does construction) and the Ministry of Finance. These two ministries are at the top of the chain but they pass many projects down to other government ministries, notably the ministries of education, health and the interior, and out to a small number of “super contractors”, such as Saudi Binladen Group and Saudi Oger. Although this pair dominates the contracting world, Al Arrab Trading & Contracting is coming up fast behind (see list). Robert Horne, partner, Trowers & Hamlins, says that these contractors act essentially as developers. “They have an immense amount of work flowing through them and they do not have the
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still very much part of the business environment. “It appears to us, one, that you can only win work from government ministries through bribery and two, these are the clients who are likely to pay late or not at all,” said one consultant, asking not to be named. “So we avoid contracting directly with the ministries.” Another said: “You normally have to pay people to get onto the tender list. The more modern government departments have anti-corruption policies in place themselves, so it’s easier to do business with them. But we wouldn’t be able to work with some of the older government departments.” Some companies see corruption as a risk that goes beyond wasted money and sullied ideals. For consultant WSP it’s about protecting an international brand. Tom Bower, Middle East MD of WSP, says: “It’s a challenging place to work and difficult to get the right people. It’s very important
manpower to handle it all in-house so they have to act like employers.” Another key client figure is the Saudi Arabian General Investment Authority (SAGIA), which is co-ordinating the construction of six giant economic cities, four of which are now underway. This construction client set-up, says Robert Horne, means that “half a dozen chief executives are running most of the work”. The upside is that there are fewer people to know but the downside is that if you blot your copy book with one, you could be excluded from a big percentage of the market. Ultimately, all clients answer to the royal family. This is because every project requires sign off from the Finance Ministry, which, although run by non-Royal minister Dr Ibrahim Al-Assaf, is understood to report directly to, and be tightly controlled by, the monarchy. This is further cemented through King Abdullah being prime minister and appointing ministers. There is some private sector activity, with a number of large Gulf developers active in the market, including the UAE’s Emaar, Limitless and Al Futtaim. These developers are getting involved with Saudi’s economic cities in particular. Once the infrastructure has gone in, under the public sector’s management, opportunities for building hotels and private housing should grow. Dominic James says: “If you look at the increasing wealth of Saudis, it’s clear they will want to live in nice houses so this will certainly fuel the private housing sector.”
POLITICS AND PRIORITIES The need for speed is driven by the pressure to “boost the economy as soon as possible”, says Alistair Robertson, who worked on King Abdullah University of Science and Technology (KAUST) for Northcroft as a project leader. This is partly about reducing the country’s dependence on oil and gas, but more urgently it is to dampen unrest by giving unemployed Saudis jobs, homes and a personal stake in the grand Saudi modernisation project, which was high on the government’s agenda even before this year’s Arab Spring. All four of the Economic Cities were announced with fanfare in 2005 and 2006, after a four-year spate of home-grown Islamist terrorism killed approximately 82 foreigners on Saudi soil. The Kingdom’s development ambitions were fuelled by the meteoric rise in revenues as oil prices soared between 2003 and late 2008. That’s why the build programme for KAUST, a half-million-sq-m project completed in 2009, was cut from four years to the breakneck pace of just two, made possible by increasing the budget at an early stage. The KAUST achievement was astonishing and clients are now in the habit of demanding a fast build programme, says Oliver Plunkett, group director of structures for the Middle East at engineer Buro Happold, which did its first project in 03 QUARTER 2011
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that, if we do set up a WSP office, it’s in line with the WSP culture. We cannot be involved in any aspect of anything that is related to bribery and corruption. That is an element of our culture. It is not just taking an opportunity at any cost.” WSP recently signed an agreement for a tranche of work at the new industrial city in Jubail for the Royal Commission for Jubail and Yanbu. Happily, Bower says, the client had the same views. “The agreement with the Royal Commission was very explicit, and they are taking a tough line on anticorruption. That’s a fairly clear message to clients. If they want to buy our skills, it has to be done in the way we are required to do business.” And for UK companies, or companies that have operations in the UK, the personal and business risk of corruption just got a lot more acute. On July 1, the long-awaited Bribery Act came into force. This makes it easier to prosecute companies or individuals who engage in bribery anywhere in the
world, and the penalties include unlimited fines and prison terms of up to 10 years. A number of megaprojects have been announced and then have come to nought with little explanation. The halving of the price of oil from $140 per barrel to $70 in late 2008 took the wind out of developers’ sails. Some projects collapsed because they were funded by UAE money, which dried up after the financial crisis in 2009. Other projects, according to reports, have come undone due to fraud. In April GulfNews.com reported that 454 projects had been stalled in Saudi after the Control and Investigation Board discovered bribery and forged documents. At King Abdullah Sports City the downsizing was not explained but sources say it was due to a combination of factors, including the original site being on disputed land, leading to its relocation to a site just north of Jeddah airport and, probably more importantly, criticism of the cost of the
Saudi in 1976. “The idea is to set a challenge and signal how ambitious they are. In reality we usually end up going faster than in the UK but probably not as fast as originally requested.” It’s sufficiently fast, though, to push procurement to start before design is complete, with the main contractor, typically on a design and build contract, having to procure some of the subcontractor packages early.
INDIVIDUALS AND ORGANISATIONS “There is a perception that clients are not sophisticated but this is wrong,” says Robert Horne, partner at UK law firm Trowers & Hamlins. “They are just sophisticated in a different way.” And above all, know that the client has the power: “Saudi clients know you want to work there and they are very strong employers so you have work on their terms.” Clients generally have a high level of construction expertise, with many being qualified engineers or architects. WSP’s Plunkett says: “Clients are terribly well informed and travelled. All the personnel at clients we deal with were educated in the West and many have worked there. They know exactly what they want and there is no shortage of clarity.” However, the procurement process is not always as efficient as in the West. David Barwell, Middle East chief executive of AECOM, which has worked in Saudi since 1974, says: “Because Saudi Arabia did not spend a lot of money on infrastructure outside the oil industry before now, each project needs lots of approvals, so the bureaucracy can take up a long time.” On the plus side for firms hoping to win work, he adds that this means clients are keen to hire project managers from overseas to help with procurement and programme management. Also, he believes procurement is improving. Expect to deal with Saudi nationals exclusively at public sector client bodies, whilst in the private sector you will be dealing with a mix of Saudis and executives from both the wider Gulf and the West. The business language of Saudi is English – “they are all good English speakers”, says Plunkett. Client meetings will sometimes shift into Arabic for a few minutes but the meeting agenda and minutes will be 100% English, he says. As for meetings with clients, Horne says you should be as well prepared as you would be anywhere else. Clients want to see very detailed tenders, so be prepared to do a lot of work without winning the job. (They want detail because they use the tender process to price the job.) SEARCH AND SELECTION As for how to win work, new jobs are often advertised only by word of mouth, so contacts – or those of your local partner – are key. Another way in can be to join a consortium of British or foreign firms bidding for work. Dominic 03 QUARTER 2011
project in the Saudi press. Richard Harding, of Keating Chambers, says all this is just something you have to live with in the Gulf. “Most projects in the region are announced way before they are ready. They like the prestige factor, and there seems to be no embarrassment in quietly shelving unfeasible ones.” Not everyone has bad experiences in Saudi. UKbased consultant EC Harris opened an office in Ad Dammam three years ago and plans to have 90 employees in Saudi by the end of this year. As well as working in the oil and gas sector the consultant has won a number of cost and project management roles on construction projects, the largest of which are King Abdullah City for Atomic and Renewable Energy in Riyadh. Colin Morris, partner and country leader at EC Harris, says: “We have had no problems. We can get paid in five to 10 days and the longest we have waited was 30 days. It is down to the clients you choose.” iCON
James of British Expertise says this is particularly useful for smaller firms without the resources to enter the market and find a local sponsor. Getting onto a tender list in the first place is largely down to your local partner, who must have the right connections to find out when contracts are coming up and to recommend your firm both to government client organisations and to the super contractors, which act as clients. If this works you may then be invited to tender. Selection is based on price and experience and the lowest bid does not always win. Plunkett says: “Sometimes they do not even open the price document until they have established your technical competence.” For the inside track on forthcoming projects, Barwell says you need a dialogue with the ministries. “Having been here since the 1970s, we are able to go into the ministries for health, transport, water and so on and talk about what’s coming up and what they’re going to need. Ideally, you don’t want to be left to reading about these things in the newspaper.” It also helps if your country manager or ideally your company has been in Saudi for a long time. Plunkett says: “Having been a consistent presence makes all the difference. Clients seem to like to recognise you or at least have evidence that you are not about to disappear.” His company Buro Happold did its first project in Saudi in 1976, opened its office in Riyadh in 1983 and now has 78 people based there.
THERE IS A PERCEPTION THAT CLIENTS ARE NOT SOPHISTICATED BUT THIS IS WRONG So how will the final fee look? James says: “It is very difficult to generalise but they do drive a hard bargain.” Those in the market say fees are nowhere near as high as they were in the boom days in Dubai or even in Saudi before the global downturn. But they are still higher than in the UK and slightly lower than what you would make in Qatar. Public–private partnerships (PPP) are emerging as a procurement route. Saudi needs both foreign investment and expertise. “Saudi knows it needs to bring in skills for the long term,” says Robert Horne, “so PPP deals, in which foreign companies will be tied in to running the facilities for at least 20 years, are ideal.” Although the first pilot deals are only being used in the power and water sectors at present, PPP is expected to expand to the construction sector. Handily for British firms, Saudi government officials are seeking advice from the UK about how to structure the nascent PPP system. This should stand UK companies in good stead for winning deals. iCON
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THE BIGGER PICTURE Rod Sweet weighs up the top risks relating to the country and its context in 2011: popular upheaval, the government’s new “Saudization” drive, domestic terrorism and road accidents
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n the face of it the Kingdom appears highly vulnerable to the uprisings that have brought down or besieged other regimes. There is a swelling population of workless young people coupled with a severe housing shortage and high unemployment. The ruling family holds a tight monopoly on political power, yet corruption is rife and a deep strain of religious extremism challenges its legitimacy and produces a steady supply of bombers and shooters. In a land where protests are forbidden, dissatisfaction does seem to boil under the surface. On January 8 this year, 250 unemployed Saudi university graduates gathered in Riyadh, demanding jobs. Other demonstrations followed around the country, including one in Jeddah on January 29 where hundreds gathered to demand better infrastructure after severe floods. Some dissent is overtly political in nature. On March 10 police used force to disperse Shia protesters in the eastern city of Qatif, a day before a “day of rage”, called for on Facebook and supported by several hundred signatories, failed to materialise. In June dozens of women posted on the Internet videos of themselves behind the wheel in violation of Saudi’s ban on women driving. But none of these examples suggest anything like a groundswell. Saudi seems as stable as ever. Why? “Outsiders need to understand just how much Saudi political and social dynamics differ from those of other nations in the Middle East,” writes Anthony Cordesman, a prolific author of books on the Middle East and scholar at the Centre for Strategic and International Studies (CSIS), a think tank based in Washington DC. In his paper, “Saudi stability in a time of change”, published by CSIS in April, Cordesman concludes that Saudi domestic stability is “probable, not certain”. The reasons he and other analysts give for this include the profound conservatism of Saudi society, the regime’s proven skills in distributing wealth and balancing societal tensions, and the personal loyalty of the security forces. Despite pockets of dissent and isolated calls for reform, most Saudi people and institutions, such as the powerful clergy, are, Cordesman notes, “deeply committed to a puritanical form of Islam” – Wahhabism. Furthermore, the ruling al-Saud
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family has succeeded for generations in casting itself for most people as defenders of this faith. “The King’s title of Custodian of the Two Holy Mosques is not a hollow honorific,” writes Cordesman, “it is the bedrock of the regime’s popular legitimacy and is far more important as such than political reform.” He adds: “For well over half a century each successive Saudi government has had to struggle with the tensions between religious and social custom and the need for change.” It has also shown that it can be highly responsive to the population’s material demands. It certainly felt the need at the beginning of this year when Arab dictatorships in the region were toppling with bewildering speed. As reported in the last issue, on February 23, after three months abroad receiving medical treatment, 87-year-old King Abdullah returned home to announce a surprise, US$36bn suite of goodies for the people, including a fund for home loans, cash for home repairs, extra welfare payouts and more money for students. Three weeks later on March 18 – four days after sending troops and armor to help quell violent, anti-government protests in Bahrain – the ailing King made a rare appearance on state television and nearly tripled his earlier largesse with a US$93bn (SR350bn) housing, job-creation
BIGGEST CONTRACTORS IN SAUDI 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Saudi Binladin Group Al Arrab Trading & Contracting Saudi Oger Al Redwan Contracting Al Latifia Trading & Contracting Saudi Constructioneers Al Mabani General Contractors HUTA-Hegerfeld & HUTA-Marine Al Rashid Trading & Contracting Freyssinet Saudi Arabia El Seif Engineering & Contacting Al Harbi Trading & Contracting
Based on contracts for building work in May 2010. Al Arrab scores well in terms of building contracts, but is not as strong as Saudi Binladin Group and Saudi Oger in other sectors. Source: Ventures Middle East and Construction Week
and general cash bonanza. US$93bn is a big spree, even to oil-rich Saudi Arabia. It is equal to some 20% of the country’s GDP and some 56% of total government spending in 2010, according to the National Commercial Bank (NCB), quoted in the Saudi English daily, Arab News. This package included even bigger home loans, unemployment benefits and, for job creation, 60,000 new police posts in the Interior Ministry, to boost security. For construction, $66.67bn was allocated to construct 500,000 new homes to address a shortage that will reach one million by 2014, according to the government, and 1.6 million by 2015, according to property analysts. This rising demand for homes came from a fast-growing Saudi population, but also from a cultural shift away from extended families towards smaller, nuclear-family living arrangements. The rapid influx of foreign workers during the boom caused by rapid oil-price increases from 2003 to 2008 caused even higher demand for rented accommodation. It is easy to cast Saudi’s largesse as a cynical attempt by an authoritarian regime to buy the compliance of its people. But this misses the fact that the government had launched a massive development and wealth redistribution drive before the Arab Spring. In the summer of 2010 the Saudi Council of Ministers approved the country’s Ninth Five-Year Development Plan, which allocated $385bn to education, transport, communications and housing projects between then and 2014, an allocation of oil money 67% higher than the previous plan. It also misses the fact that this largesse seems to work. Will it continue to do so? The best hope for domestic political stability in Saudi is the theoretically ideal scenario featuring two steady curves. Curve A is a regime that, over time, on top of maintaining its religious legitimacy, becomes more accountable, responsive and competent in wealth redistribution. Curve B is a population that feels real improvements in material equality, with demonstrably better prospects for housing, health care, education and meaningful employment. As for curve A, Cordesman argues that the alSaud ruling family has gotten better at governing. “King Abdullah,” he writes, “leads a much younger and technically competent government that has consistently pursued policies that made him a
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symbol of social, economic, and educational reform to many Saudis long before the current crisis.” He has created a process for succession which could eventually help the transition of power to the next generation of princes, now in their 50s and 60s, who have been governing for decades. He has also introduced reforms that limit payments to the thousands of members of the royal family, as well as their privileges, and has improved the civil justice system in ways that limit their ability to exploit their rank. However the King turns 88 in August. His immediate successor is likely to be one of the remaining sons of Ibn Saud, all advanced in age. As Cordesman warns, “No one can guarantee that a new king with an equal emphasis on reform will replace King Abdullah”. There are serious obstacles to a satisfactory curve B. Even though Saudi Arabia is awash with funds, sitting as it does on a fifth of the world’s oil reserves, it also sits on a fast-growing, young population with nothing to do. The total population is expected to reach 30 million in 2017, double what it was 30 years ago, according to Euromonitor International. Many of those are expats, but of the country’s indigenous population of some 18.5 million, 47% are 18 years old or younger, and their prospects for meaningful engagement with the economy are bleak: some 39.3% of 20- to 24-year-olds were unemployed in 2009, according to Banque Saudi Fransi. In the entire Middle East and North Africa (MENA) region, only Iraq has a higher youth unemployment rate than Saudi Arabia, according to BSF’s chief economist John Sfakianakis. Saudi’s regime stability depends largely on how its youth “bulge” behaves. Signs of vocal, secular and political activism are slim. The effects of social media and exposure to the world via travel and Internet are muted. There is poverty and hardship among the Saudi population, but not to the extent seen in Egypt, Yemen and other countries convulsed by the Arab Spring. The government is betting on the bulk of the bulge remaining devout and loyal, if rather bored due to underemployment and cramped as household formation outpaces
Masjid Al-Haram
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home building. If this bulge continues to be comprehensively policed and more or less content to wait for the promised homes, jobs and cash, the government’s bet looks relatively safe. Finally, Saudi stability is shored up by the nature of its security apparatus. Since the Arab Spring Middle East analysts have tried to explain why regimes toppled in Tunisia and Egypt, but not in Syria, Yemen and Libya. F. Gregory Gause, writing in the July 2011 edition of Foreign Affairs, says it’s because in Tunisia and Egypt the armed forces and police were independent institutions, separate from the dictators and their cliques. In the midst of the unprecedented uprisings, having calculated the possibility of futures for themselves in whatever order emerged, they declined to kill their countrymen and women and stood aside to let the dictators flee. In the regimes that have hung on to power, military and police are personally controlled by, and loyal to, the families in power. In Saudi Arabia, where this is the case, modern communications may have served up images of joy and exhilaration in Tahrir Square, Egypt, but also of tanks rolling into Hama, Syria, giving wouldbe Saudi revolutionaries much food for thought.
SAUDIZATION It is, says BSF’s chief economist John Sfakianakis, a “striking paradox” that the economy is booming but only one in 10 private-sector jobs is held by Saudis. “According to official data, in 2009 alone almost 674,000 new jobs were created in the private sector, and another 42,189 in the public sector,” Sfakianakis commented in Arab News on June 15. “Yet that year, unemployment among Saudi nationals rose to 10.5 percent from 9.8 percent in 2008.” Employers prefer non-Saudis in large part because of the Saudi education system. Traditionally controlled by clerics, it has come
under fierce criticism for focusing on the inculcation, by rote learning, of Islamic religious and moral precepts to the detriment of science, technology and other skills necessary for a competitive economy. The country has made huge strides forward in education and literacy since the 1970s. King Abdullah has launched major education reform packages in recent years: in 2005 he launched a scholarship programme to enable Saudi young people to study at universities abroad. Primary schooling, especially for girls, has expanded rapidly. But, as Anthony Cordesman notes, the government must tread carefully to avoid offending the conservative religious establishment, which is powerful and enjoys popular support. Comprehensive reform will take time. In 2008, a UNESCO global education quality report entitled “Education for All” ranked Saudi Arabia 86th out of 127 countries, below Belize, Namibia and Botswana. Private employers also prefer non-Saudis because they accept lower wages and are willing to do jobs that Saudis are not. The combined effect of this is that the government must rapidly expand the state apparatus to keep Saudis in work, as it did in March by creating at a stroke 60,000 new Interior Ministry posts. To give that figure some context, it approaches half the number – 143,734 – of all police in England and Wales in 2010. Despite its strong financial position the government does not see this as sustainable. It badly wants to get its people working in the private sector. But successive regulatory attempts at “Saudization” have failed, the most recent being a blanket rule that firms must ensure that 30% of their workforce is Saudi, which was not strictly enforced. Announcing its emergency gift packages in March the government promised a new Saudization thrust. The details of this began emerging in May and have caused consternation in the private sector. RR
NO ONE CAN GUARANTEE THAT A NEW KING WITH AN EQUAL EMPHASIS ON REFORM WILL REPLACE KING ABDULLAH Olaya Business Center, Riyadh
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RR Nitaqat, as the new scheme is called (Arabic for “ranges”), is much more dynamic as it ranks privatesector companies as red, yellow, green or excellent, according to their observance of new Saudization quotas relative to their size and the sector they’re in. The quotas have been set up to reflect the skills and aspirations of Saudis, so that in labour-intensive sectors like construction the Saudization quota may be as low as 10%, while for a bank it may be as high as 70%, according to Arab News. Nitaqat imposes a carrot and stick system whereby companies deemed red will not be able to renew the work visas of their expatriate staff, while green and excellent companies will be able to poach expats from red companies by taking on their sponsorship visas without their current employers’ consent. If Nitaqat is enforced with anything like the confidence and verve it has been trailed with – you can view the slick video explaining the scheme on www.emol.gov.sa/nitaqat/ – companies who don’t imaginatively engage with the thorny issue of recruiting and retaining Saudi staff will find themselves quickly starved of talent. “The initial shock of Nitaqat, if enforced with vigor, could lead numerous smaller businesses to shut down, shake already feeble foreign investor confidence in the economy, and further stall the private sector’s recovery,” wrote BSF’s Sfakianakis in Arab News, June 15. Sfakianakis went on to suggest however that there is room for private companies who may be over-reliant on cheap
Jeddah roundabout
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foreign labour to raise wages and increase efficiency. But with new unemployment benefits set at SR2,000 (US$533) per month and a monthly public sector minimum wage set at SR3,000 (US$800) – each higher than what many semi-skilled private sector employees can expect – the incentives for Saudis vigorously to compete for private sector jobs remain unclear. For construction firms the business risk of the Nitaqat regime could be significant, especially for fee-generating consultants who seek a minimum physical footprint in the Kingdom and whose success depends on high-performing individuals. Sfakianakis raises the spectre of token Saudis swelling the payroll to fake Nitaqat compliance. Under Nitaqat a company’s Saudization quota depends on its sector and size. Firms categorized under the heading “Building Materials & Construction” with a headcount of between 50 and 499 people would need to achieve a 6% Saudization score to get a green rating, according to unconfirmed reports. For a same-sized company classed in the “Consulting Services” category, a green rating requires at least 12% Saudization which, for a 50-strong firm, means six Saudis need to be employed. For a 50-person consulting firm suddenly to provide six new salaries big enough to attract and retain local people, plus the cost and effort of training them, could be enough to make the whole enterprise unattractive, if not unviable. Companies are likely to try to get around this by flying talent in and out on multiple-entry business visas and by hiring Saudis for lower-level admin positions. A few firms we spoke to had more proactive plans to set up graduate trainee programmes with Saudi universities. Foreign consultancies may be glad to learn that companies with headcounts of nine people or less are not required to fill any Saudization quotas under Nitaqat. It also appears that Nitaqat may not apply to King Abdullah Economic City. Emaar’s Friedrich Forstner told iCON: “In general it [Saudization] is not a requirement of the city. That will be up to SAGIA in using the management, in
developing a feasible threshold. At the moment there are no such binding rules in place. A foreign company can at the moment come with 100% foreign staff.”
WHAT ABOUT TERRORISM? In Saudi the recipe for terrorism has been potent. Its main ingredients were a state-sponsored ideology of hate and struggle, a deep sense of grievance and an abundance of money and willing young men. Wahhabist clerics have long controlled education. Official school textbooks in use in the academic year 2005–06 were found by the NGO Freedom House to promote hatred of and struggle against Christians, Jews and other infidels. The texts (excerpts are available for download at www.freedomhouse.org) teach that Muslims are exclusively preferred by God and that the lives of non-Muslims are of inferior value. A tenth-grade text on “Jurisprudence” teaches that the correct “blood money” price for a free Muslim male is 100 camels while for a free infidel male it is 50 camels. An infidel female is worth only 25 camels. They also promote a deep sense of vulnerability, asserting the West’s programmatic commitment to conquer and Christianise the Muslim peoples and the Jews’ ages-old programme of world domination. The officially sanctioned substitution of learning with fear- and hate-filled indoctrination has prepared the ground comprehensively in Saudi for generations of terrorists. Osama Bin Laden was brought up in this milieu, and of the 19 hijackers in 9/11, 15 were from Saudi Arabia, which was, at the time, a close political ally of America – aka “The Great Satan”. Saudi oil wealth actively funded the propagation of Wahhabism around the world, setting up schools, mosques and charities. With the Soviet invasion of Afghanistan in 1979, this export of ideology and cash found a focus in the armed jihad against the Russians, with the young Osama acting as organiser and leader of the Wahhabist contribution to the fight. A well-organised,
Masjid Al Nabawi in Medina
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transnational Islamist army was taking shape but as long as the jihad was against the Russians, the interests of Bin Laden, the Saudi government and the US were aligned. Things changed, however, when Iraq invaded Kuwait in August 1990. Bin Laden pleaded with the Saudi government not to let American boots defile the soil of the Arabian Peninsula, but rather to let his Mujahideen repel Saddam. When the Saudi government declined his offer and welcomed American bases, Al Qaeda’s mission broadened to encompass not only attacking America but overthrowing the House of Saud as well for being The Great Satan’s venal minion. Years of Wahhabist indoctrination was about to blow back in the regime’s face, both figuratively and, in 2009, quite literally. The explosions started in November 1995 with the car-bombing of the headquarters of the US–Saudi Military Cooperation Program in Riyadh. Seven people died, including five Americans, and 60 were injured. On June 25 1996 a truck bomb with 5,000 pounds of explosives rocked the Khobar Towers military housing complex in Dharan, Saudi Arabia, killing dozens of people, including 19 American soldiers, and wounding 500. Things went quiet for a while in Saudi after that as Al Qaeda concentrated on American targets elsewhere and was forced to move its base from Sudan to Afghanistan. However in late 2000 three car bombs were detonated in separate incidents in Saudi, resulting in injuries and the death of one British national. In 2001 four such attacks targeted Westerners. 2002 saw two separate attacks in which a British national and a German national were killed. The official Saudi response to the domestic terrorism during this period was deflection and denial. In 2000 Saudi police arrested six Britons and pinned the blame for the car bombings that year on them, saying it was part of a turf war in the illegal trade of alcohol, an extraordinary claim in light of what was to follow. The government’s response reflected its extreme sensitivity to charges that it had forfeited its legitimacy by failing to uphold the honour and integrity of Islam, and that it was a minion of America. Thirty years earlier hundreds of armed dissidents made similar charges when they seized the Grand Mosque in Mecca, sparking a twoweek gun battle in which more than 200 government troops and dissidents were killed. After 2003, however, the government had to put its foot down. That year killing got off to a slow start: in February a Western employee of BAE Systems was shot to death in his car in Riyadh. But then on May 12, three weeks after the invasion of Iraq, the terrorists upped their game by driving bomb-laden vehicles into three residential compounds in Riyadh housing foreign workers. The combined bomb and gunfire attack killed Saudis and foreigners from a number of countries. Reports on the victim death toll vary between 26 and 31. Nine suicide attackers also died. Following this Saudi police carried out hundreds of raids, seizing weapons and equipment. The crackdown seems to have dampened terrorism for the rest of that year, until November 8, when a truck bomb attacked another Riyadh residential compound,
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killing 17 and injuring 100. The spree carried into 2004. On May 1 at least four militants used security passes to access a petrochemical plant in Yanbu’ al Bahr, where they stormed the offices of a Texas-based firm and killed seven people – two Americans, two British, one Australian and one Saudi National Guard member. A Canadian died later from injuries. On May 29, 17 militants staged the Al Khobar massacres, scaling the fence of a residential compound for foreign oil-industry workers. Identifying themselves as “The Jerusalem Squadron”, part of Al Qaeda on the Arabian
them, working with their families, giving them jobs and helping them marry.” The risk to foreign businesses, which have seen around 82 of their employees killed in the past 11 years in Saudi, is much reduced. Foreigners’ compounds, schools and international hotels were fairly open in 2001, while now they resemble military garrisons. “You’re more likely to be killed by a car crash than a bomb,” said one consultant with long experience in Saudi. Statistically, this is not only true, but a massive understatement. According to a World Health Organisation study in 2009, 49 per 100,000 people are killed in road accidents in Saudi Arabia every year. Among a population of 27 million, that’s 13,230 dead per year, the highest road fatality rate in the world. Saudi officials dispute this, however. Col. Mohammad AlQahtani, director of the Traffic Department in Jeddah, told Arab News in May 2010 that only 6,142 people died on the roads in 2009, in 484,805 accidents. Even if Al-Qahtani is right, the road risk still eclipses the terror risk. But the terror risk is still there. Bin Laden is dead but his replacement, the Egyptian Ayman al-Zawahiri, is still at large and has re-affirmed the Al Qaeda programme of attacking the “Crusaders and Jews” and of toppling the Saudi regime. Al Qaeda in the Arabian Peninsula (AQAP) was formed in January 2009 by the merger of the Saudi and Yemeni branches of Al Qaeda. It is now based in Yemen, having been pushed out of Saudi. AQAP released a video in early 2009 announcing its formation. In the video four AQAP commanders sat side by side. Two of them, according to the BBC, were Saudi nationals released from Guantanamo Bay into the custody of their government’s deradicalisation programme. They both left the programme within weeks. In August 2009 another jihadist came in from the cold. The wanted Saudi militant Abdullah al-Asiri, living in Yemen, made contact with counterterrorism chief Prince Mohammed bin Nayef, deputy interior minister and son of interior minister Prince Nayef, saying he wanted rehabilitation. The two spoke on the telephone. “I need to meet you to tell you the whole story,” the man told the prince. A recording of the conversation was broadcast by Saudi television station Al Arabiya. Al-Asiri then travelled to Saudi Arabia and was received by the Prince in his offices in Jeddah. As the two men drew close al-Asiri detonated a bomb packed inside his body. The Prince survived with minor injuries. An interior ministry spokesman told the New York Times that al-Asiri stumbled and fell short of his target. It was the first attempt on the life of a Saudi royal in decades. The terroristic killing of foreigners in the Kingdom may have stopped for now but the struggle that caused it isn’t over. The power vacuum opening up in Yemen will give AQAP freer reign. Whether the jihad the Kingdom helped spawn comes home to roost again remains to be seen. iCON
YOU’RE MORE LIKELY TO BE KILLED BY A CAR CRASH THAN A BOMB Peninsula and swearing vengeance on “Crusaders and Zionists”, the terrorists took dozens of hostages, separated out the Muslims from among them, and murdered the rest. Three Saudis and 19 foreigners, including eight Indians, three Filipinos and two Sri Lankans were killed. In addition to these multiple-victim operations, between May and September that year eight individual civilian Westerners were targeted and killed in separate attacks in Saudi. In December militants tried to storm the American consulate. After this the insurgency on Saudi soil ran out of steam. Saudi security forces conducted raids, preemptive arrests, seizures and fought gun battles with suspected terrorists in the streets. There was also an escalation during this period in the insurgencies in both Iraq and Afghanistan, which may have siphoned terrorist cash, planning and manpower from Saudi. In July 2007, the Los Angeles Times reported that 45% of all foreign insurgents in Iraq were from Saudi Arabia. The rate of terrorist attacks slowed but didn’t stop. February 2006 saw a failed car-bomb attack on the biggest oil refinery in the world, Saudi Aramco’s facility at Abqaiq. In February 2007 a group of nine French sightseers was attacked on a roadside and four males, including a 16-year-old, were shot. All died. More police raids and gun battles followed, and by the end of 2007 security forces had arrested more than 300 suspected terrorists. There is no doubt that the government has robbed Al Qaeda of men, money and the room to manoeuvre. Anthony Cordesman points to Saudi’s education reforms and recent efforts to limit extreme elements of the clergy. The religious establishment has officially condemned terrorism. Saudi has one of the best equipped and trained counterterrorism forces in the developing world, Cordesman says. It also uses soft force. “It may hunt down Al Qa’ida activists,” he writes, “but it has one of the most outstanding programs to reeducate and reconcile young extremists in the Middle East. The Saudi government has also created a system for taking young men who have participated in AQAP [Al Qaeda on the Arabian Peninsula] or other extremist groups, reeducating
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PROCUREMENT CORRUPTION
ROADS TO NOWHERE A new study by the World Bank shows that corruption is deeply ingrained in road construction in developed and developing countries alike around the world. It damages local economies and severely impacts any society’s poorest people. David Smith reports on the findings and the radical solutions proposed
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n investigation by the World Bank has found that collusion and corruption are rife in both developed and developing countries. The report claims the impact is especially great on the world’s poorest citizens, who suffer a disproportionate loss of economic and social opportunity. Curbing Fraud, Corruption and Collusion in the Roads Sector, was prepared by the Preventive Services Unit of the Integrity Vice Presidency (INT), which offers advice on how to prevent corruption in development projects. When INT finds misconduct in a World Bank-funded project, it can bar firms from future contracts. The report’s lead writer, Senior Operations Specialist Richard Messick, said: “The two biggest forms of wrongdoing were collusion in the bidding process and overbilling during the construction of the road, or providing sub-standard materials. These are sometimes deeply ingrained in the roads sector. Short-term palliatives, such as an independent procurement evaluator, or technical auditor, may be the answer in many cases. But more drastic measures may also be required, including the use of bid ceilings, competitive negotiation, and turning procurement over to an independent agent.” INT found 29 cases of misconduct in 25 World Bankfunded roads projects over a 10-year period from July, 1999,
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to June, 2009. The three most common forms of malpractice were collusion—bidders agreeing among themselves who would win the bid; false documentation — typically, the submission of false documents to qualify to bid; and fraud in the implementation of a contract —usually overbilling, or undersupplying, materials, often with the connivance of project overseers. In many cases there was more than one type of misconduct, and in the Cambodian Provincial Rural Infrastructure Project, INT documented all three. The number of confirmed cases is small by comparison with the number of allegations. Roughly a quarter of the 500-plus projects with a Bank-funded roads component over the past decade have drawn at least one allegation of fraud, corruption, or collusion. This is thought to mirror the situation throughout the global construction industry, which Transparency International ranked as the industry most prone to corruption. The issue is especially important for the world’s poorer nations, according to Robert Zoellick, the World Bank’s President. He said: “Corruption in the roads sector is a problem for both developed and developing countries, yet the economic and social loss is more profound for poor communities in developing countries. Well-planned, properlymaintained, and safe roads are critical for economic growth and overcoming poverty. Fighting collusion and corruption in
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FAR LEFT: Road works in Scottsdale, Arizona LEFT: Road works in Afghanistan
tendering and execution of roads sector is a priority for achieving sustainable investments.” The report provided plenty of evidence for Zoellick’s view that good roads have a profoundly positive influence on poorer nations. In Ethiopia, for instance, access to all-weather roads reduced poverty by almost 7% per cent and increased consumption by 16.3%. In Bangladesh, better roads for the rural poor increased income from both wages and microbusiness earnings. Meanwhile, a World Bank-funded road project in Morocco not only boosted productivity and encouraged the planting of higher-value crops, it also improved access to health services and increased school attendances. The use of sub-standard roads in poor countries had the opposite effect. In Indonesia, the use of substandard construction materials reduced the useful life of a road and damaged vehicles. Similarly, trucking association representatives in Bangladesh reported that poorly maintained roads halved the useful life of members’ vehicles.
EVIDENCE OF WRONGDOING The World Bank lent $56 billion for road construction and maintenance from 2000 to 2010, nearly 20% of total lending. The Bank’s contracts have to be let competitively, which usually means one-stage sealed-bid auctions. Under this system, the agency responsible for the project solicits confidential bids. The lowest bidder wins. The system promotes efficiency in a majority of cases, but INT found evidence that road contract awards are not always the result of competition. In one Asian country, for example, INT found inconsistencies in costs which showed bidders had worked backwards from a predetermined price. There was more evidence of wrongdoing in an investigation in Bangladesh, which showed that companies paid project officials up to 15% of the contract value in exchange for contract awards. A Kenyan informant said “collusion was rife” in the nation’s roads sector, an allegation confirmed by the Kenyan Roads Authority and the Kenyan Anti-corruption Commission. 03 QUARTER 2011
INT’s investigations in Cambodia threw up more evidence of corruption. They interviewed several firms and government officials and concluded that “a well-established cartel”, aided and abetted by government officials, controlled the award of roads contracts. A parallel state of affairs was found in the Philippines, where: “Numerous witnesses independently informed INT investigators that a well-organized cartel, managed by contractors with support from government officials, improperly influenced contract awards and set inflated prices on projects funded by the Bank and others.” One Indonesian respondent said: “The Indonesian collusive system had been operating for 32 years, and many viewed the ‘free market’ system as counter to the cultural norm of consensus and cooperation.” This statement was consistent with reports by Indonesia’s Competition Law Authority and scholarly research. The World Bank’s evidence for collusion is reinforced by evidence from other sources. The Overseas Development Institute, for example, reported evidence of an industry-wide cartel to fix prices on roads contracts in Tanzania. In India, the Deputy Government Secretary, Sanjeet Singh, claimed cartels in the roads sector operated in various Indian states. India’s neighbour, Nepal, is also infested with corruption, according to one study, which concluded that in recent years no tender in the Nepalese construction industry has been free of collusion. The list of countries in which collusion is rife does not end there. The Lithuanian Competition Agency found strong evidence of collusion, and a 2009 World Bank study of public procurement in Armenia noted widespread reports of collusion in tendering. In 2005, the Slovakia Anti-Monopoly Office uncovered a cartel among road construction firms. Finally, at the 9th Global Forum on Competition in 2010, the governments of Columbia, Peru, Pakistan, and Turkey all reported cartels operating in their roads sector. Messick said: “It is not surprising cartels are common in developing countries. Road construction and repair markets tend to be dominated by the same few firms. Also, the ‘product’ - a road - is standardized, prices are relatively insensitive to demand, entry is often difficult, and market conditions are predictable. In addition, would-be competitors often exchange information and develop ties through subcontracting, joint ventures, and membership in trade associations. The presence of any one of these factors increases the likelihood of collusion.”
ONE STUDY CONCLUDED THAT IN RECENT YEARS NO TENDER IN THE NEPALESE CONSTRUCTION INDUSTRY HAS BEEN FREE OF COLLUSION A FIRST WORLD PROBLEM But collusion is also a major problem in developed countries. The US Department of Justice launched a vigorous effort in the late 1970s to stamp out bid rigging in auctions for state highway contracts, bringing cases in 20 states that resulted in 400 criminal convictions, fines of $50 million, and 141 jail sentences between 1979 and 1983. Only in the 1990s did cartel prosecutions begin to decline, a trend officials attributed to both the imposition of stiff penalties and changes in state procurement laws to abolish publication of contract estimates, public opening of bids, and convening of meetings where all bidders can attend. The US is not the sole rich nation where cartels are active. Representatives of Denmark, France, Germany, Japan, RR www.iconreview.org
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RR Sweden, and the UK all told a 2008 OECD forum that cartels operated in their construction industries. And in 1992, the Dutch parliament concluded that their entire construction industry was cartelized. Evidence of cartels has also been found in Switzerland and Norway. “Cartels are a common phenomenon that requires a collective global enforcement effort to dismantle,” said Integrity Vice Presidency Director of Strategy and Core Services Galina Mikhlin Oliver. “When collusion or corruption is systemic, change requires breaking the cycle of resource abuse by bringing in someone from the outside. It could be a prosecution authority, anti-corruption agency, competition law authority, supreme audit institution, or the national government.” The effect of a cartel is to raise prices above what they would be in a competitive market. An analysis of bids in Florida showed that collusion on highway contracts increased prices by 8% and a similar study in South Korea found highway construction markets 15% higher than they would have been without collusion. The Dutch Government estimated that cartelization added 20% to prices, and collusion in Japan raised prices from 30–50%. Evidence from developing countries suggests the impact is even greater there. A study of donor-funded roads projects in 29 countries estimated that collusion can increase the perkilometre cost for building a road by 40%. INT compared the winning bids on donor-financed roads projects in the Philippines against engineering costs estimates and found a 30% variance. Meanwhile, a 2003 investigation in Romania revealed that contractors conspired to mark up the price of concrete by 30%, and a Turkish government study showed that, thanks in part to cartelization, road construction costs in Turkey were 2.5 times higher than in the US. ROTTEN FROM THE TOP Another widespread problem was the involvement of powerful Government officials in cartels. In Bangladesh, foreign firms wanting to bid on roads contracts were warned by a senior roads’ agency official they would be disqualified if they undercut the prices local firms had agreed on. In India, a senior official reported that “road mafias” of contractors, engineers, local police, civil servants, “and last, but not least, local politicians” conspired to keep prices above market rates. “When government officials participate in the cartel, its durability is virtually assured. They can dictate which member will ‘win’ the bid and at what price, rejecting bids that undercut the agreed price and refusing to permit non-cartel members to bid,” said Messick. The risk of misconduct does not end with contract awards. A winning bidder may fraudulently bill for work not done and materials not supplied. INT gathered evidence on a project in Africa which showed fraudulent claims amounting to 15–20% of the bid price. An INT analysis of two contracts let under a road project in Asia found that fraud may have inflated the final price by 25%. Reports from Zambia highlighted the scope of another form of fraud - furnishing substandard materials. Zambian contractors, engineers, and government officials reported in 2008 that this was the single most “unethical” practice in their industry. A 2010 audit of 18 Zambian roads projects confirmed their view by revealing that substandard cement was supplied in all projects, while in half the concrete was weaker than required. INT found similar fraud in a contract in Indonesia, in which the road was 40% thinner than the contract specified and the contractor used 13% less asphalt than required. The presence of corrupt engineers was another important issue. Engineers have a vital role in World Bank projects, www.iconreview.org
WHEN GOVERNMENT OFFICIALS PARTICIPATE IN THE CARTEL, ITS DURABILITY IS VIRTUALLY ASSURED which use a variation on a form of contract developed by the International Federation of Consulting Engineers (FIDIC). The FIDIC contract provides that the government agency issuing the contract will hire an engineer who is explicitly responsible for the quality of the project and, therefore, the implicit guardian of its integrity. “There is evidence that engineers have failed to spot fraud or corruption, or become willing participants,” said the report. In a project in Latin America, INT investigators uncovered evidence that the engineer certified invoices for charges not covered by the contract. In Indonesia, engineers said they were bribed to ignore fraud, otherwise local officials “in on” the fraud would refuse to hire them in future. In a project in Africa, INT received information that in return for approving inflated invoices the engineer received 15% of the amount overbilled. Having amassed a great deal of evidence of corruption, the World Bank report proposed a number of solutions, although it stressed the need to look at each case individually because of the complexity of the issues. The first solutions were legal. Countries should enact laws that make bid rigging, market division, and other cartelrelated behaviour illegal. These laws need to contain “effective sanctions of a kind and at a level adequate to deter firms and individuals from participating in cartels”. Anti-cartel laws may need to be supplemented with reforms to the laws of evidence. The law needs to be backed up by testimony, which is the surest proof of a cartel. To encourage bid-rigging rings to come forward, governments should consider granting immunity to witnesses. Whistleblowers may also be offered rewards commensurate with savings realized from the breakup of a cartel. The OECD (2003) recommended granting immunity to
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the first firm, or individual, to reveal the cartel’s existence. To ensure fairness in the procurement process, transparent procedures for the award of public contracts are recommended. However, this is one area where it is essential to avoid “one size fits all” solutions. Disclosure of certain kinds of information may, on occasions, actually increase the risk that firms will fix prices.
TOP: Road works in California ABOVE: Road works in Ethiopia.
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PRE- AND POST-QUALIFICATION Another complex area is the desire to make firms “prequalify”, by documenting their financial and technical competence. In many instances this is good practice, but the World Bank recommends scrapping this requirement in some cases because it limits the number of bidders which nearly always raises the price. In Indonesia, officials were advised to abandon pre-qualification requirements on simple goods and small works. And a more recent review of World Bank-funded roads projects in Africa recommended, for larger contracts, expanding the use of “post-qualification”, where the contractors’ capabilities are assessed after the award. Post-qualification was introduced into the Bali Urban Infrastructure Project in Indonesia and is being used in the second phase of the National Roads Improvement and Management Project in the Philippines, as well as the Northern Corridor Transport Improvement Project in Kenya. Post-qualification increased the number of bidders on contracts in the Bali project, and the three Kenya tenders attracted up to four more qualified bids than the average when pre-qualification was required. Tellingly, the winning bids were below the engineer’s estimates, rare in Kenyan road tenders. Dividing projects up can increase the likelihood of prices remaining competitive. “One way to balance competing interests is to tender a larger 500-km project as ten 50-km contracts, but allow larger firms to combine segments in their bids and even submit a single bid for the entire road. Knowing that smaller companies are competing on shorter segments, the large firm will have an incentive to ‘sharpen its pencil’— that is, cut its price —to win the contract. Knowing large international firms can bid on a package can deter local firms from rigging bids among themselves,” the report said. Pre-tender meetings should be limited to one firm at a time. While one-on-one meetings increase the risk that a procurement official will tilt the procurement process, safeguards can minimize this risk. An outsider can attend, or video recordings, or transcripts, can be made and circulated. The introduction of an outsider into the tender evaluation process can reduce the risk that those responsible for policing the tendering process encourage collusion. For example, in the second phase of the Philippine National Roads Improvement and Management Project an independent procurement evaluator is working alongside the Department of Public Works and Highways. When taking on engineers, the report advises avoiding the common practice of hiring them after the contractor has started work, which puts them in “catch-up” mode. To strengthen the engineer’s role in project integrity the report recommends severe sanctions for corrupt engineers. If an engineer has been involved in corruption, he should be debarred for a lengthy period and borrower countries should be urged to cease hiring him on non-Bank-financed projects. Tanzania already does this. Where there is a risk that the engineer will be drawn into a circle of corrupt actors, it can be minimized by “guarding the guardian”. A technical auditor can periodically ascertain that materials and labour are appropriate, which is what will happen in the second phase of the Philippine National Roads Improvement and Management Project.
Non-governmental organizations (NGOs) can also be effective watchdogs. In the Philippines, a local group discovered the use of substandard cement in a provincial road construction project. A number of well-resourced NGOs are monitoring the second phase of the Philippine National Roads Improvement and Management Project. All the above measures can be effective, but the report says that no solution will succeed for long without a modern, professional road agency to manage development. “It must have appropriate powers, skills and resources, and operate within an effective framework of accountability, internal controls, and performance measurement,” said the report. Helping a country to build such an entity begins with a candid assessment of the authority’s weaknesses and identification of measures needed to address them. The second phase of the Philippine National Road Improvement and Management Project is a good example of such efforts.
RADICAL SOLUTIONS Accurate cost estimates and the ability to spot collusion are also essential. The report says: “The World Bank should become a centre of excellence for both, creating a cadre of experts on each topic who can follow developments, train country counterparts, and step in when country capacity is weak.” It is essential to earmark significant financial resources for the fight against corruption. An example of good practice is the second phase of the Philippine National Roads Improvement and Management Project, which earmarked $7.54 million for anti-corruption activities. Although these amounts seem high, the Government will spend $240 million on roads through the project. When corruption is really bad, more innovative schemes may be necessary. The report lists three. The first radical solution is to cap bids, an experimental idea being tried out in the Philippines. For each contract the procuring agency calculates a maximum price. With roads and other infrastructure contracts, regulations specify in detail how the maximum price is to be calculated. Bids over the budget are rejected and if, after two rounds of bidding, no company has submitted a price equal to, or less than the maximum, the agency “directly negotiates a contract with a technically, legally and financially capable supplier, contractor or consultant”. There are risks to this approach. Without genuine competition, the ceiling price puts a floor on the bid price, something that happened in Japan when road cartels were in existence. In addition, cost estimates can be unreliable because market conditions change and corruption may creep in. The second radical solution, when cartels are entrenched, is for policymakers to experiment with a form of competitive negotiation. The procuring agency chooses a firm to build a road and negotiates a price. If the firm will not accept the price, the agency goes to another firm. There is, however, a risk of corruption in the form of favouring one contractor over another, or negotiating too high a price. To help address such risks, the report recommends competitive negotiation should: (a) be limited to clearly defined situations, (b) be subject to appropriate safeguards, such as a prior shortlisting of firms based on specific criteria and (c) adopt transparent objectives against which to conduct negotiations with each short-listed firm. A third radical idea, when state capacity is especially weak and the involvement of high-level political officials is widespread, is to retain a foreign company to administer the entire process. The biggest drawback with independent procurement agents is that they can undercut efforts to build local procurement capacity. iCON www.iconreview.org
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TECHNOLOGY ICT
KUWAIT’S SMARTEST BUILDING At the new United Tower all the usually separate data systems are unified in a fully converged fiberoptic network allowing central, intelligent control. Besides unprecedented convenience for residents and business tenants, it means the building owner can develop revenue streams on top of rents by offering a suite of on-demand data, voice and video services. Rod Sweet reports
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t has been a long day. Driving home you activate the A/C from your phone. The house greets you and offers to read your emails and play your voicemails. You finally get the kids settled with a promise that they can read for a bit. Back in the living area the home automation system closes the blinds and adjusts the lighting to your evening preferences, calm and relaxing. You settle down on the sofa to catch up on some correspondence and research a holiday destination on the Web through your wide-screen AV display. You decide on a skiing holiday. To celebrate, you connect through the community portal and order a massage from the building health spa for tomorrow and a dessert from the patisserie right now. Soon it’s lights-out time for the children. With your wireless touch pad you lower their lights, close the blinds and ease off the A/C. While reviewing the days events on the world’s major news channels the screen alerts you to a phone call. It’s from a work colleague. It can wait until tomorrow. You select a film from your home entertainment package, and just as you’re putting your feet up the doorbell rings. You’re annoyed. Switching over to the security system, you see that it’s your friend and neighbour, holding up a bag of pastries and grinning – clearly here for a chat. With a sigh, you put the film on hold,
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select some music you both like, buzz them in and switch on the kettle – all from your touch pad as you sit on the sofa. The holidays arrive. At the airport you realise you forgot to turn the A/C down. No problem. You do it with your phone. In the Alps you turn on the lights to deter burglars, and do a visual check of the interior with roving robotic camera. You search for something to worry about, and fail. All systems, from basic sensors to high-level enterprise applications, are integrated, allowing the building to perform fault analysis and schedule maintenance on equipment while also checking available spare parts in the inventory. It’s time to switch off and have fun.
WHAT MAKES IT SO SMART? This is not a scenario of the distant future, but rather a description of what life could be like for residents of the new, mixed-use, 60-storey United Tower in Kuwait, said to be the country’s smartest building, due for completion in December. What makes it so smart is that all the data systems that are usually separate and discreet in a modern building – telephony, network, security, entertainment, broadband, HVAC, lighting and other building systems – are unified in a fully converged fiber-optic network running over Internet
Ali Daher, Chief Information Officer at SSH, the man behind the high-tech element of United Tower
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ABOVE: SSH team gets a demoof the home automation system; LEFT: View from the ground
SSH INTERNATIONAL
Protocol (IP), the same “highway” the Internet uses. It means all the sensors and controls that make a modern building work are able to communicate together, allowing central, intelligent control. On a practical level it meant for United Tower that seven separate cabling systems could be replaced by one and 17 subsystems could be fully integrated, allowing for efficiency and unification in the tower’s operational management. It also means that the client, Kuwaiti developer United Real Estate Company (URC), while providing tenants with a better standard of living, should be able to develop revenue streams on top of rents by offering a suite of on-demand services. Residential and commercial tenants are able to specify their own scaleable package choosing everything from security and entertainment through to video conferencing, telephony, even application hosting and data storage. United Tower represents an interesting evolution for its owner but also for the firm that designed it, SSH International, one of Kuwait’s top three design consultancies. The man behind the high-tech element of United Tower is Ali Daher, SSH’s Chief Information Officer (CIO). Originally Daher was hired as SSH’s IT manager to improve the company’s internal ICT systems. But Daher, formerly an ICT infrastructure
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solutions architect for companies such as IBM, Inchcape and EDS, an entrepreneur and also founder of an Internet service provision (ISP) company in Australia, wanted to do much more. “The CIO position is something I developed into,” he told iCON. “When I joined SSH in 2007 I was brought in as IT manager, to establish a functional internal IT department. Having been an ICT consultant developing solutions for clients I was keen to explore what we could offer SSH clients as part of our value added consultancy offerings. “Before, our clients would contract third party ICT consultants for the facilities we designed, but when I looked through some of the projects I found I wasn’t that impressed with what our customers were getting. A lot of it was repetitive and no one really thought about the design from an operational, value-proposition perspective. It was mostly done independently so it wasn’t fully coordinated and integrated, which meant that our clients were not getting the potential benefit of new technology and converging traditional systems over an IP network. So I worked on developing that part of the business, how we could turn ICT into a profit centre of its own.” He started active ICT consultancy with some smaller projects, such as the Airport Gateway Hotel, a five-story, buildoperate-transfer project. “There was lots to get stuck into here, from cabling, active networks, telephony, security, the hotel information management system, property management, point of sale systems plus all guest room systems including IPTV and billing.” That project didn’t go to construction but it gave the firm a taste for what was possible.
WE LOOK AT IP AS A UTILITY JUST LIKE ANYTHING ELSE “I had worked with architecture firms before as an ICT contractor so I understood the process of design,” Daher said. “I was keen to develop not just a smart building in terms of design, but to ensure that the design intent was realised in the operational phase. In 1993 I established my own ISP in Sydney, offering managed services and operating a national network operations centre. I was interested in developing models around those services in the region and exploring how they could add value to our clients and be marketed and sold as part of the building design package. “Quite often you have buildings with great technology, but the leap for us was employing the technology so the client can use it as an additional revenue stream. That is something people aren’t generally thinking about yet.” RR
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RR A UTILITY LIKE EVERYTHING ELSE United Tower treats data like other stuff that flows – water, energy and air – except that the “pipe” is fibre-optics. “We look at IP as a utility just like anything else,” Daher says. “It’s the core backbone of the building for carrying voice, data and video, which means all systems, sensors and controls can now be delivered over an IP network. In United Tower it allowed us to reduce seven different cabling systems into one.” The advantage for the owner is the ability to offer a suite of services to tenants. In “normal” buildings tenants would have to call in – and pay – third-party suppliers to provide everything from telephony and broadband to security and data storage. United Tower also allows the owners to identify new services and patch them in quickly. “For example you can put a digital signage system anywhere in the building and start streaming marketing campaigns, charging advertisers for the service,” says Daher. “It’s the same with any new services, like video conferencing. It’s very simple. You just plug it into the network, make some minor configuration, and that’s now available as a service to be offered.” LATE IN THE DAY The intention to make United Tower “smart” emerged late, after construction had already started in 2006. Client interest arose in discussions with SSH’s project manager. “Because it was late in the process we had to move quickly, co-ordinate with other disciplines and revise some designs. We had to talk to the electrical and mechanical contractors, find out what they were doing and negotiate what they would be responsible for. We looked at different schedules of potential services, your basic ICT services, data, voice, video, multi-media, building service requirements, public information services, up to high-level enterprise applications. Then we did a breakdown of work according to the different disciplines, identifying a clear demarcation of responsibilities. “It’s very difficult when you ask a client, well, what do you want? They usually are not sure about what they want. So to get the ball rolling we said this is what we recommend, and this is what it will give you. This is what has been agreed to, this is what hasn’t been, here is who would be responsible as a contractor, etc. “When you’re talking integration it’s best to minimise the numbers of parties involved because the more contractors you have the more vendors you need to work with and accountability becomes very difficult to control. So we said we’re getting a new guy on board, he’s going to be the system integrator and his role will be to provide the underlying infrastructure and integrate all these different vendors and systems together into one. We managed to pull some elements out of the other contracts and formulate a new bid pack specifically for the ICT, security and systems integration. “Then we sat with the client and went through the schedule item by item: high-speed internet, IP television, etcetera, giving a brief description of each. Mainly they were interested in the value proposition. We went through it bit by bit. It took about two or three weeks to go through all of that. What we got was a final wish list. “It actually changed their business model for the ICT services of the tower. It was originally going to be a buildoperate-transfer (BOT) but that led to concerns about where responsibilities fell for system performance and who would be the owner of the equipment and assets, which moved them www.iconreview.org
away from a BOT model and back to a traditional build-own model. We also prepared detailed financial models looking at occupancy levels and rates of adoption of technology and it was apparent that for a small additional investment, the owner would be able to return their investment many fold over a relatively short time.”
VENDOR RELUCTANCE It wasn’t all plain sailing. SSH found that its vision went against the industry grain. The building automation market is fragmented and vendors have developed proprietary systems that do not talk to each other. “When we went to the home automation vendors, they were all independent, and tended to treat homes as discreet units,” Daher recalls. “There was a need to integrate with the building-wide infrastructure already in place, but some of the vendors had difficulty with that because it meant they would have to change all their controls. We insisted, ensuring that all subsystems complied with standard, open protocols. They needed to make sure that their system protocols communicated at that level, otherwise we were just not interested in the solutions that they had on offer. “One of the vendors, a Microsoft Gold Partner, came forward and said we have this particular system but there is no way to let you control the apartment centrally. We didn’t accept that. We have a middleware layer that talks to all the different subsets, and then we have a centralised management control system that works via the middleware. Their issue was that they felt there was no way they could communicate with that middleware layer. “But I knew that based on the Microsoft operating system and platform they used, that wasn’t true. There is a way you can integrate, it’s just a matter of developing the right
ABOVE FROM TOP: United Tower, Kuwait, developed by United Real Estate Company; Widescreen TV doubles as multi-media control panel for all systems; Systems are unified in a fully converged fiber-optic network running over Internet Protocol
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TECHNOLOGY ICT
ABOVE: Residential apartment interior
protocols. We gave them suggestions. We said this is what we would want, this is what we would need to integrate, these are the read/write elements we require. They had to go back to their development team. We worked with them for about a month in defining the actual requirements. And they changed it. At the end they said they would comply. “United Networks, the system integrator, also came to the party and got their development and integration team to add some extra features in home automation. We used some third-party vendors to make that all gel together. In the end there was a lot of buy-in on the parts of the vendors to make our vision work.” SSH’s efforts demonstrate just how difficult supply-chainwide commoditisation actually is, which stands in the way of lowering cost and improving the functionality of buildings for clients.
WE HAD TO MOVE QUICKLY, COORDINATE WITH OTHER DISCIPLINES AND REVISE SOME DESIGNS
SSH INTERNATIONAL
“The industry is moving towards interoperability and internationally approved standards,” says Daher. “We’ve come a long way. A lot of these integration platforms are being built that will talk to different protocols. But you will have some vendors that are hesitant because they still believe their own systems might come to dominate.” United Tower also occasioned SSH’s first brush with Building Information Modeling (BIM). Daher says that initially project-team buy-in was low. “We started with a team of four engineers who had worked with AutoDesk Revit before,” he
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says. “We looked at what we had in terms of the 2D conceptual design and considering the shape of the building we found it would be a lot easier to build this up as a 3D model and pass it down to all the different disciplines.” Due to limitations of the tool, at the time in 2007, the 3D model tended to get exported down to the more familiar 2D model, diluting the possible benefits of BIM. “When you do that you don’t have parametric modeling anymore where, if you make one change, the ramifications cascade out to the whole model. That was down to the limitations of the tool at the time and the fact that it was the first pilot project to be undertaken using BIM. Nowadays, BIM is such an important part of our design process and we are looking at how we can integrate BIM models with the building systems and GIS to help provide real-time spatial data visualizations to the facility managers.” “We’ve come a long way,” says Daher. “Now everyone communicates using the same model: architecture, MEP, structural, landscape. Just like open interoperable standards in building systems, the software industry is also moving towards open standards in the BIM space, meaning that it no longer matters what tool you use, and that will help. It means that designers can focus on designing by working with the tools that they feel comfortable with, knowing that in the end that information can be seamlessly shared between consultants, contractors and facility managers.” Both SSH and URC hope that United Tower will bring a new era of on-demand managed services to Kuwait. They hope that tenants will see an advantage in being able to choose as much or as little of the range of services on offer – rather than each tenant procuring their own equipment, connecting their own services and paying multiple suppliers. The return on investment for URC will be a space keenly watched. iCON
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PRACTICE CRISIS MANAGEMENT
MANAGING EXCEPTIONAL EVENTS Civil war, rebellion, revolution, insurrection, riot... what’s a contractor to do? Hill International’s Jeffrey Badman and Maria Daly offer advice on making a safe, hasty exit and protecting commercial interests in a crisis
I
n the first few months of 2011 political turmoil spread across the North African States and through the Middle East. Some countries responded quickly to resolve matters whereas in other countries such as Libya, Egypt, Yemen and Bahrain peaceful protests have escalated into riots, insurrection and even civil war. In Libya, practically overnight, the country ceased to function politically and economically, with daily military action and sanctions imposed on it by both the US and the UN. The unrest has led to the evacuation of thousands of expats working in the country, abandoning local offices and construction projects, leaving foreign companies with millions of dollars at risk. The most commonly asked questions at the moments are: in such circumstances what is the best way to minimise these risks? How can a company increase the likelihood of being paid outstanding monies due and of recovering costs incurred tas a consequence of the problems? At the first murmuring of disquiet, Hill recommends its clients review their country evacuation plans to establish the designated exit routes. These should be made known to all staff, and each expat staff member should register with their respective embassy. Hill also recommends keeping in regular contact with the embassies to obtain the latest information. Hill suggests that each project has its own evacuation plan to efficiently and effectively close it down until the unrest has ceased and maximise the recovery of costs. This plan should
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include such items as set out below. The project administration processes in most cases ought to be established from the Project outset. an emergency meeting with 1. Convene Employer/Engineer/Project Manager to discuss the situation and form a plan of action. If the Works are to be put on hold due to the unrest, then it would be in the Contractor’s interest to obtain an instruction in writing or verbally (to be confirmed later in writing by the Contractor) to suspend the Works. 2. Conduct a video or photographic survey of works completed and in progress, site setup including offices and labour camp, materials on and off site, with inventory, and the Contractor’s plant and equipment. 3. Secure the site and office compounds as best able and bring plant and equipment into secure areas, disabling to discourage theft. 4. Inform subcontractors and suppliers of the situation. 5. Scan, if possible, the project documentation onto a portable hard drive (with a remote backup), if not the hard copy should be boxed up for couriering/shipping. These will be required to substantiate any future claims. 6. Check and comply with the notification requirements under the contract and any insurances which provide cover for such matters. As part of the project evacuation plan each of these tasks should be assigned to a member of the project team. Ensure
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they understand what is required so they record the relevant information and complete allocated tasks as quickly as possible. On returning to the site, the contractor should immediately carry out a video/photographic survey of the works, site set up, materials on and off site, and contractor’s plant and equipment to determine and record any loss or damage. This will assist in proving any claims that the contractor may wish to pursue. In these circumstances where do the contract risks lie? Hill has considered the provisions of a number of different types of standard form contracts: Build only, EPC and DBO. Generally these provide that, within the country, civil war, hostilities, rebellion, revolution, insurrection, military or usurped power, riot, commotion and disorder are Employer Risk items (or referred to as Exceptional Events) and relieve the parties of any further obligations (except payment) that are affected by these events. Furthermore, they provide the contractor with a mechanism for recovering its additional cost incurred due to the consequences of these events. In relation to insurances these standard forms provide that such events are excluded from any insurance cover procured by the contractor. Notwithstanding the general position, and since every contract is different, Hill recommends that its clients carefully check their contract provisions to see if any amendments have been introduced to the allocation of risk and/or scope of insurance.
RECOVERY OF ADDITIONAL COSTS Most contract conditions provide the contractor with remedies in the event of civil war, riots, insurrection, etc. These include: termination for prolonged suspension and the recovery of associated costs, extension of time and recovery of additional costs, recovery of costs incurred due to repair or replacement of the contractor’s plant and equipment, material, and the repair of damaged work or demolition and reconstruction of the works or part of the works. Again, the contractor will need to check, and comply with, any notification requirements under its contract, if any, to maintain its rights under the contract. With regard to outstanding payments due and/or matters in dispute it may be difficult to resolve any matters through the local courts or arbitration institute. Enforceability may also be difficult given any collapse of the political infrastructure. However, a party may be successful if the contract provides for International Arbitration. An arbitral award in a party’s favour may be pursued in the home country of the other party or alternatively in other countries where the other party may have assets if the countries concerned are signatories to the New York Convention 1958. Alternatively the party may be able to make use of any bilateral treaties between the two parties’ countries. As always Hill recommends that its clients in these situations also seek legal advice to establish whether there are any provisions in the governing law of the contract or national laws (if different) which may enhance or provide alternative arguments to assist the recovery of any additional costs incurred as a consequence of the unrest. Of particular concern is that at the end of the unrest the 03 QUARTER 2011
CONDUCT A VIDEO OR PHOTOGRAPHIC SURVEY OF WORKS COMPLETED AND IN PROGRESS
employer may no longer exist as a legal entity to pursue a claim or course of action against. Most construction contracts require the contractor to provide an unconditional on-demand performance bond. The concern is that the employer in the absence of the contractor presents the performance bond to the bank and receives the amount guaranteed. Hill considers that during the suspension of the works that, if possible, the contractor should continue to provide the specified insurances for the project in case matters occur that are not as result of any unrest and potentially expose the contractor to a claim. It is possible that during the suspension period warranties may expire or perhaps due to an absence of the contractor’s control of the site the specialist subcontractors and suppliers later refuse to honour their warranties. Giving due consideration to such matters and dealing with them at the time can greatly reduce risks and provide a better platform for future settlement of entitlement. Hill can provide advice and assist contractors manage their risks in situations where their projects are affected by unrest and prepare and pursue claims on behalf of the contractors to recover their additional costs. iCON Jeffrey Badman is operations Director and Maria Daly is senior consultant at Hill International
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IN CONTEXT: THE FLIGHT FROM LIBYA Until February this year Libya looked like one of the most promising places on earth for construction firms. Billions of dollars were being pumped into public infrastructure projects, hotels and commercial developments, attracting contractors and consultants from around the world. Then war broke out, and the fleeing contractors have left behind them a plethora of unfinished developments and outstanding bills. Turkey, China and South Korea have all been big players in the Libyan market. Many of the big government-funded projects were done on a joint venture basis, with the overseas partner stumping up the higher proportion of funding. Turkey had over 200 companies in Libya, most of them construction, and 25,000 citizens. Its combined business interests there are worth around US$27 billion, according to the Turkish Foreign Ministry. Turkish contractors have a project backlog of $15.3 billion in Libya, Foreign Trade Minister Zafer Caglayan said on February 21. China’s Ministry of Commerce said that there were 75 Chinese firms, 12 of them state-owned, operating on 50 joint venture projects and employing over 36,000 workers. According to the National Business Daily, Chinese contracts signed last year in
Libya were worth $1.8 billion, some of these in the energy sector. The China State Construction Engineering Corporation said in a statement that only half of its $2.68 billion-worth of residential construction projects in Libya were completed. And the China Railway Construction Corporation reported that it has left $4.24 billion of unfinished projects behind. South Korean contractors had 53 projects on the go, worth $10.7 billion according to the International Contractors Association of Korea. Major players Hyundai Engineering & Construction and Daewoo Engineering & Construction are both heavily involved in infrastructure, power station and hospital projects. Daewoo has said it expects to receive compensation for lost days. Hill International had been in Libya as well, providing design review services as part of a massive programme to build more than 25 new universities. Hill International was appointed as project manager for the pre-construction phase in February 2008, a role which encompasses design review, technical advice and commercial advice. Its initial brief was to oversee the designs to Stage D. Later, Hill’s contract would be extended to February 2013, the date when construction of all the campuses were due to end.
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EYEWITNESS ROMANIA REGENERATION
ME AND TIMISOARA Engineer Matthew Tucker joined two UK trade missions to Romania this year to advise on an ambitious, 20-year regeneration plan for the country’s second city, Timisoara. He got so immersed in the challenge he found himself arguing for parking charges on national television. Here he describes the challenges and why he’d love to open an office there
B Matthew Tucker is managing director of Nottinghamshire-based consulting engineers Morgan Tucker
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eing asked to advise on such a huge regeneration project was a massive honour – and an eye-opener in terms of what needs to be done to bring into line with the rest of Europe this beautiful city, which suffers from crumbling infrastructure and buildings. The point of the visits was to offer input to city planners and also, with local architects, developers and business leaders, to explore the potential for joint partnerships, leading to work away from recession-hit UK. The city is not as poor as I had anticipated. There are also some stunning buildings and we got the opportunity to visit the historical quarter, which is breathtaking in places and reminded me of Venice. Although there is a population of around 300,000 the city is quite compact. We were taken past some old Soviet-era blocks of flats which are causing planners real problems. When the Iron Curtain lifted in 1989 residents were allowed to buy them. Now the council wants to demolish the blocks but can’t just evict the residents as all of them, around 60 people, have to agree to sell. My main area of focus was transport and infrastructure and I saw immediately that it was going to be a major issue if they wanted to achieve their development plans. There is a very small amount of motorway, which is EU funded outside the city, but as you get nearer to the centre the roads deteriorate, as does the management of the transport environment generally. The rail network, both freight and passenger, is also in bad shape. Movement needs to improved radically across the whole city. This will be costly and time consuming, and they need input from outside to make up for the lack of domestic expertise. But it must be addressed before any
construction of buildings. There is no point building a new hypermarket if nobody can get to it. I met with the Romanian division of Halcrow to try and get a better understanding of the local market and what opportunities there might be in Timisoara for us. The guys were really helpful and we agreed that there are potential joint opportunities for us to look at, particularly some of the larger highway and infrastructure projects. It was also positive and interesting to hear that the market is more buoyant than the UK’s. I also met with a lecturer from a local university. We discussed sponsoring students to come to the UK in the summer to do a work placement with us. This is great for both parties as it helps me to forge excellent partnerships with the university and also give their students the chance to experience the kind of work we do in the UK. I met one of the main developers, Ovidiu Sandor. He told us about a sizeable hotel and residential scheme he is working on, and asked us to help him identify a UK developer to go out there, which he is willing to part-fund. Investment is a key issue in Timisoara. So is keeping young people there. There are many students but the vast majority move away to work in the EU. The state is currently the main employer but we’re told that some multinational companies such as Vodafone and KPMG are looking to open offices there, as they see the country’s potential, and that would really help reduce outward migration. Our key task during the second trip was to learn about the city and then to submit an action plan. They took this quite seriously and actually invited us to sit in on the city’s traffic commission meeting, where applicants for schemes were getting grilled by the panel. One was for a new supermarket. I was quite surprised when they wanted my thoughts on it, but I spoke my mind. Towards the end of the trip we were given three tasks by city hall. We had to look at parking strategy, development contributions and a masterplan for the northern city region. We were given one night to put the report together, which included 30 recommendations. Next day we had to do a presentation, and city hall called a press conference without any warning and we had to do it on national television! During the conference I argued why parking charges would be a good thing as car ownership is very high and most people see it as their right to park anywhere in the city centre. I said parking charges would create funding for public transport which would make the network more efficient and sustainable. I don’t think I was a very popular man by the end. There is a lot to do but I was impressed with their innovative and ‘can do’ approach. I would love for Morgan Tucker to have a Timisoara office. iCON
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