Construction Intelligence Report by ME Consultant

Supported by

onstruction Intelligence Report

Foreword

s the UAE construction industry continues to enjoy a resurgence, with a total value of $315 billion in announced and planned projects in the last year, it is clear how much of an impact a mega-event can have on the fortunes of a country. UAE, in general, and Dubai in particular, were thrilled to have won the bid to host Expo 2020 and we are delighted to see how the construction industry has flourished in the wake of the announcement. Developers, contractors and consultants have embraced the ideals of the Expo and are leading the way for sustainable development in the MENA region. The municipalities of Abu Dhabi and Dubai spearheaded the process by providing minimum standards that must be adhered to and it is heartening to see that many developers are going above and beyond what is required, and in the process, setting the bar for others to follow. With the UAE government investing heavily in vital transport and infrastructure projects like ‘Etihad Rail’ and the construction of nuclear power plants, the scope for continued growth is huge. Meanwhile, Dubai continues to show its vision and leadership with ambitious construction plans like the ‘Dubai Canal’ and ‘the Mall of the World’. At the Dubai Economic Council (DEC), our stated aim is to improve the country’s economic performance, enhance the business environment and increase productivity. Most of our board members are leaders in the construction sector in Dubai and the UAE; however, we do believe that the sector will continue to be a benchmark for the rest of the economy in this regard. Accordingly, the brand-new CPI Media Group’s Construction Intelligence

Report and the well-researched and documented information across its pages could be perceived as a critical toolkit for all stakeholders in the construction industry in the UAE and the region who are passionate to bring about a paradigm shift to their businesses. We will continue our support for initiatives such as CPI Media Group’s new Report, simply because it will only help the progress and development of the economy and country, and we look forward to many more editions to come.

Hani R. Al Hamli Secretary-General Dubai Economic Council

contents

01 Charting an industry

elcome to the Construction Intelligence Report, an annual report designed to be an authoratative source of information for construction professionals and associated entities. Providing an overview of national construction markets in the GCC’s, as well as the industry’s most important sectors, the CiR is designed to help construction professionals hone their business strategy, make critical decisions, as well as provide ‘bigger picture’ perspective on the challenges and opportunities for the industry in 2015 and beyond. The CiR presents our in-house survey data, with analysis of growth of salaries in the construction sector, forecasts for market growth from industry members, and the industry’s perspective on Building Information Modelling (BIM). Reports from our knowledge partners provide forecasts on major country markets, expertise on operational matters including sustainable construction sector growth and contract disputes, as well insights on sectors that include infrastructure and hospitality. Meanwhile, contributing editors and reporters from CPI Media Group’s range of construction-related publications – Big Project Middle East, Infrastructure Middle East, BGreen, Middle East Consultant and Construction Machinery Middle East – provide in-depth reports on each GCC country, as well as major business sectors within the construction industry, including finance, infrastructure, hospitality, sustainability and facilities maintenance. The vision for the CiR is to provide construction professionals with easy access to regional and industry metrics that can help them hone their business strategies, to make their own forecasts for construction sector growth, as well as to identify areas of risk for their business. While the construction sector in the GCC has grown steadily in recent years, in the post-Global Financial Crisis (GFC) it’s safe to predict that some volatility will be a feature of all the markets. With this in mind, it’s fair to say that the publication of the Construction

CiR survey

Intelligence Report couldn’t have come at a better time. Ever since the GFC roiled the global markets, causing the construction sector in Dubai and in other regional markets to take a dive, we have witnessed major changes in the macroeconomic climate. Following the economic crisis, northern Europe was the first to recover, while the United States struggled. Now, in early 2015, the American economy is ascendent, and Europe seems on the verge of faltering. Closer to home, and the second half of 2014 saw a dramatic drop in the price of oil. To say that no-one saw this coming is no exaggeration. The IMF, in their May 2014 regional economic outlook for the Middle East, showed a tidy graph of the price of oil declining slowly to $100 a barrel by the end of 2015. More telling than the forecast was the fact that the graph’s vertical axis, representing possible price ranges, didn’t go below $60 a barrel. The exact consequences of the drop in the price of oil on the construction sector remain to be seen, but we begin 2015 with regional governments adamant that the major construction programmes across the GCC – vital to the economic and social interests of each nation – will continue to move forward. As we outline in the CiR, the construction sector is closely linked to the major aspirations of regional governments, which are focused on diversifying their economies beyond petroleum, providing topquality social services for their citizens – including education, health, transportation and affordable housing – as well as providing rewarding and challenging employment opportunities. The Construction Intelligence Report provides industry insight to help construction companies and professionals chart a course that will reward their own efforts, as well as contribute to the built and natural environments of the wider community. Dominic De Sousa Group Chairman and Founder

SURVEY

08 Salaries: Most saw raises in 2014 SURVEY

Markets: Public entities picked for growth

Country focus DATA

The GCC in figures

SAUDI ARABIA

Saudi Arabia: the drive to diversify

INTERVIEW

Zahid Group’s Amr Khashoggi

EUROMONITOR INTERNATIONAL ANALYSIS

Construction in Saudi Arabia: 2015-18

UAE

Brisk business in the UAE

FROST & SULLIVAN ANALYSIS

Expo 2020: quantifying the opportunities

QATAR

Qatar: Eyes on the ball

KUWAIT

Kuwait turn-around?

OMAN

Oman’s steady progress

BAHRAIN

Bahrain gets a boost

EGYPT

Optimism on the Nile

DELOITTE ANALYSIS

52 Supported by

Knowledge partners

Analyst partner

SMARTer Construction – How the GCC’s mega-projects need to learn post-2008

PROJECT MANAGEMENT

Delivering the Dubai Metro

contents

02 EC HARRIS ANALYSIS

Global Construction Disputes Report - Middle East

DISPUTES

60 Region getting on top of disputes EC HARRIS ANALYSIS

Avoid and resolve construction disputes

DISPUTES

Evolving market for claims

Sector focus INFRASTRUCTURE

GCC mega projects

INFRASTRUCTURE

Mega projects by value

INFRASTRUCTURE

Infrastructure hotspots

RAIL

Rail’s expanding network

ISLAMIC FINANCE

Sukuk on the rise

FINANCE

Opinion: The right time?

HOSPITALITY INTERVIEW

80 MDP’s Mahnaz Liaghat DELOITTE ANALYSIS

Hotel economics in Dubai

CiR SURVEY

BIM: Adopters see advantages

BIM

The challenges of BIM

SUSTAINABILITY

Regulations drive sustainability

INTERVIEW

EmiratesGBC’s Saeed Al Abbar

SUSTAINABILITY

Benchmarking the FM industry 07

survey

Salaries: Most saw raises in 2014 Most construction professionals around the GCC saw their salaries rise in 2014, nevertheless for many the increases were small

mployee pay packets are a good indicator of a industryâ&#x20AC;&#x2122;s health - as businesses grow, they headhunt experienced employees from other companies, while existing employees can leverage their experience and increased responsibilities for higher wages. With growth in the construction industry in the GCC robust, but by no means meteoric, the Construction Intelligence Report survey paints a picture of modest growth in salaries for some, while larger increases occurred for only a minority. With 24.9% of respondents saying that their salary had not grown at all in the past calendar year (the survey was carried out November 24 - December 10), this means that 75.1% of the industry saw some movement in their salary.

What was your base annual salary at the end of 2014?

Unsurprising was a strong correlation between larger salaries and higher age in the construction sector in the GCC, with the trend for construction professionals being that older workers are better

remunerated. In the age group of 20-29, more than two thirds (67.5%) declared they were paid less than $40,000 per annum as a base salary, while more than half declared annual bonuses and benefits of less than $1,000. Among those aged 30-39, less than one third earn $40k or less per annum, indicating most employees can expect to cross this barrier once they enter their thirties (if they have not already done so). Likewise, the number of professionals earning above $100,000 rises steadily with age: our survey found that for the 40-49 age bracket, 41.9% earned above $100k; amongst those aged 50-59 it rises to 45.5%, while among those aged 60 and above, the figure was exactly 50%. Nevertheless, while younger workers are earning less, their salaries are rising

By what percentage has your total salary increased in the last year?

How much did you receive in annual bonuses and benefits in 2014?

The largest group of those who received a raise also saw rises in the smallest range, with 125 of the 405 respondents receiving a rise of only 5% or less. A significant group, almost one quarter, saw their salaries rise between 5-10%, suggesting that salary rises are by no means uncommon in the industry, while a further 21% of respondents reported a salary rise greater than 10% in the past 12 months. Only one person reported that their salary had been reduced. Age pays, but youth dynamic

Under $40,000

27.90%

24.94%

Under $1,000

34.42%

$40,000-59,999

18.52%

0.1-5%

30.86%

$1,000-4,999

18.27%

$60,000-79,999

11.11%

5-10%

22.96%

$5,000-9,999

15.80%

$80,000-99,999

10.62%

10-15%

11.11%

$10,000-29,999

14.07%

$100,000-149,999

16.54%

15-20%

4.69%

$30,000-49,999

7.41%

$150,000+

15.31%

20%+

5.19%

$50,000+

10.12%

It has decreased

0.25%

survey

While most professionals saw an increase in their pay packets, the cost of living is rising quickly in some cities in the GCC.

Almost half of all respondents intend on changing companies in the next three years

Living costs rise Salary expectations need to be matched with living costs, especially for professionals who are not on an all-inclusive package. While the UAE was judged in the CiR survey as having the most competitive salaries, both Abu Dhabi and Dubai have seen a significant rise in rental costs in the past 24 months. Local media have featured many reports with anecdotal accounts of the outcomes of this rise on expat professionals and their families, including the impact of higher rents on professional couples who receive a fixed accommodation allowance, but who have been unable to negotiate increases in line with rising rents. While many expat professionals can still afford to live, the portion of their income they are able to save has dropped. In Mercer’s 2014 Cost of Living survey, both of the UAE’s major cities saw a big jump in their survey rankings, with Dubai rising 23 places from the previous year to become the 67th most expensive city globally, while Abu Dhabi rose 11 places to become the 68th most costly city in the world.

010

at a faster rate. 25% of professionals aged under 30 reported that their salary had risen by more than 10% in the past year. Amongst those aged 30-39, nearly 30% reported the same annual rise. Older workers were less likely to report large annual salary increases, with just 15% of those aged 40 and above reporting increases of more than 10%. Though with higher salaries on average, older workers don’t see necessarily see big pay jumps when considered as a percentage gain, but a modest raise will still add considerablely to their monthly pay cheque in dollar terms. Project size matters

Project size was also a good indication of salary, with those involved in larger size projects (and therefore likely to be employed by larger companies),

Which GCC country offers the most competitive salaries?

more often earning larger salaries. For those professionals who indicated that the typical value of individual projects worked on over the past 12 months was $100 million or more (the largest project amount option in the survey), 50% earned a salary above $100,000, a huge increase on the average reported figure of 30%. By comparison, of those who reported that the typical value of individual projects worked was less than $1 million (the smallest project amount in the survey), just 18.2% earned more than $100,000 per year. UAE judged most competitive

Perhaps reflecting the strong performance of the construction sector in the emirates, the UAE was judged to have the most competitive salaries in the GCC, with an overwhelming 60% of professionals picking it as best for wages. Qatar was the second-most favoured market, though trailing with 18.5%, followed by Saudi Arabia on 17.5%. The place of the remaining three nations was Kuwait (1.7%), Bahrain (1.2%), and Oman (1%), meaning that cumulatively the smaller GCC nations were picked by less than 4% of the

How long do you expect to remain working at your current company?

UAE

60.00%

Less than 12 months

20.49%

Saudi Arabia

17.53%

1-3 years

28.15%

Qatar

18.52%

3-5 years

17.53%

Oman

0.99%

5+ years

33.83%

Bahrain

1.23%

Kuwait

1.73%

What construction sector professionals earn Annual salary (range)

Annual bonuses (range)

Entry-level professional

Under $40,000

Under $1000

Mid-level professional

$40,000-80,0000

$1,000-$4,999

Manager/team leader

$60,000-100,000

$10,000-$29,999

Director/department head

$80,000 - 150,000+

$10,000-$49,999

Managing director/CEO

$100,000 - 150,000+

$30,000-50,000+

professionals who completed the survey. While the UAE may have the most competitive salaries, the perception is likely boosted by the number of international construction firms and related companies who have regional headquarters in Dubai or Abu Dhabi, meaning that many higher-paid jobs may have their base location in Dubai, with much of the actual work carried out in other markets. The high ranking of the emirates may also be a reflection of the survey’s bias, with 62% of survey entrants coming from the UAE. The second best represented markets in the survey were Saudi Arabia, with 16%, and Qatar, with 10%, followed by Kuwait and Oman. When it comes to bonuses and benefits, Qatar may have the edge, with 25% of respondents from Qatar reporting bonuses and benefits of $50,000+ in the past 12 months, far high than the survey’s average of 10.1%. And by comparison, Saudi Arabia may not be

the place to go for those hunting out big bonuses, with only one person reporting bonus and benefits above $50k.

loyalty or other long term interests. But the good news for companies is that many employees are loyal, and when asked ‘How long do you expect to to remain working at your current company?’, the largest group of respondents (33.8%) said five years or more. This indicates that there are rewards to be had for companies which invest in employee training programmes and up-skilling. Nevertheless, there remains the risk of investing in employees who may then leave to work for the competition, or exit the Gulf entirely. The survey results suggest that the employee turnover in the GCC will remain high, with 20.5% telling us they expected to leave their job within the next twelve months; and with a further 28.2% telling us that they intend to leave in the next 1-3 years, that means that almost half of all respondents intend on changing companies in the next three years, while in total, two-thirds intend on doing so within the next five years.

Employee loyalty

Employee turnover is typically higher in expat job environments, with many professionals focused on their mediumterm interests and looking to maximise their opportunity for remittance and savings, rather than prioritising company

The UAE was judged to have the most competitive salaries in the GCC, with an overwhelming 60% of professionals picking it as best for wages

011

survey

UAE, Qatar, and KSA are picked as the best markets for new opportunities in 2015.

Public entities picked for growth Results from our CiR survey indicate growth is expected in the three largest GCC markets, while public entities are expected to continue to drive new projects

his year’s Construction Intelligence Report survey included questions related to market conditions. Respondents were asked to choose the locations that offer the best opportunities for new business in 2015, with the GCC powerhouses of UAE, Qatar and Saudi Arabia again standing out from the rest. With new projects coming to the market and mature instruments for delivery, it’s no surprise that the UAE came out on top, gaining 34.7% of the total votes (respondents could pick up to three options) and with 73.8% placing it inside their top three. If market sentiment is anything to go by, this could see the UAE edge out Saudi Arabia as the biggest construction market in the GCC in coming years.

Qatar was second placed, with 24.0% of the total votes, while slightly over half placed it within their top three. Saudi Arabia was close on its heels, with 22.0% of the total votes. Nevertheless, less than half the respondents placed it in their top three, and for a market of its size it suggests that market activity there may be waning, or that many contractors, especially those who are not located in the Kingdom, may be finding it difficult to win new business there. Oman was the fourth-placed GCC nation, with 4.1% of total votes. Meanwhile, Kuwait was chosen by less than 6% as being in their top three markets to win new business in 2015, suggesting that among the construction industry there is a perception that the country’s building sector lacks dynanism, despite

Which of the below best describes the majority of your clients?

Which areas do you expect to see the greatest growth in 2015?

012

its planned construction activity. Industry leaders consistently highlight the same three GCC countries. Speaking in October 2014, Ramboll’s Middle East managing director Richard Beard stated that Saudi Arabia, Qatar and UAE offer “plenty of work to go around” for construction professionals. In August, Atkins’ Middle East CEO Simon Moon revealed how their business is funneling resources from other areas of the GCC towards the trio of states. He remarked: “The Kuwait and Bahrain markets over the last few years have not presented any significant opportunity. There are great plans in both of those locations, but they aren’t really growing. We’ve moved a lot of those resources out of Kuwait and Bahrain into Qatar, Saudi and UAE.”

What will be the major challenge for your company in 2015?

Public entities

34.42%

Public entities

40.42%

Cost of raw materials

18.52%

Private developers

26.88%

Private developers

29.27%

Large intl. contractors

14.21%

Large intl. contractors

13.24%

Competence of sub-contractors

19.26%

Large local contractors

11.47%

Large local contractors

10.98%

Poor contract margins

22.47%

Mid-sized contractors

9.42%

Mid-sized contractors

5.57%

Non/slow payment

33.83%

Other

3.60%

Other

0.52%

Other

5.93%

Moon emphasised the wealth of opportunities in Dubai. “We’re starting to see really good property sector clients and a growing portfolio in Dubai around Emaar and Meraas. A lot of projects were put on hold during the recession and they’ve started to come back based on our long-term relationships in those areas.” Nasser A. Saeed, president of BH.NS Engineering Consultants, also noted the strength of the Dubai market. “Dubai is doing really well these days,” he commented in November 2014. “There is no need to talk, you can see this. Every single project is a sign of quality. It is not easy to market any project – you need to have reached a certain level. Dubai has reached this level and can’t go down. Everybody knows that Dubai is in need of more projects. There are not enough hotels or furnished apartments and also the rents are very high – this means there are not enough apartments. To reach normal rates we need more projects.”

Terry Tommason, partner at EC Harris, believes that the momentum in the Dubai industry will continue throughout 2015, with decisions made at a speedier pace than in neighbouring states. “In 2015 we will see some pretty major contracts being placed [in Dubai], much of which will be associated with Expo 2020,” he said. [“Developers in Dubai] are moving at a much faster pace. Qatar is still sluggish around decision-making.” However, he did note that EC

“There’s a lot of market activity. [Emaar and Meraas] are very dynamic and move very quickly indeed” Terry Tommason, eC Harris

Harris’ Qatar business has grown in the last three years, with a fluctuating level of marketing activity. “When Qatar was named as the host for the World Cup, there was a big wave of activity and opportunities in the marketplace. But it took 12-18 months to get those opportunities into contracts. There was quite a long pause.” The latent opportunities in Oman were reiterated by Terry Bain, regional operations director for Sweett Group. “It’s not a rapid growth market but it’s really steady and mature,” he commented in August. “With Oman, you can’t just flash in to do just one project – you have to bed in and get registered and find the right people.” Despite the increased turbulence in Iraq, 2.7 of respondents selected the troubled country as a market that offers the best opportunities (5.7% placed it in their top three). With the Iraqi projects market estimated at $519bn,

013

survey

Geberit HDPE drainage system

Which markets offer the best opportunities for new business in 2015?

34.69%

35% 30% 24.01% 22.04%

25% 20% 15% 10% 5%

1.04% Bahrain

2.78%

Kuwait

4.06%

Oman

as of January 2014, it remains to be seen whether intrepid construction companies will actively seek out opportunities in the war-torn country. Power to the public entities

Projects in the GCC are typically dominated by public entities, and so it was no surprise that when respondents were asked to pick the areas of greatest growth in 2015, public entities came out on top. They were picked by 40.4% of respodents, where public entities include government, local government and municipality authorities. Private developers were the second highest selection, with 29.3% of respondents predicting a growth of such organisations. A further 13.2% believe that international contractors, such as Indian giant Shapoorji Pallonji, will continue to grow in the region, while 11.0% identified large local contractors, with Abu Dhabi’s Al Jaber Group stepping up regional operations and ASGC targetting opportunities in Saudi Arabia. Only 5.6% considered that midsized contractors would be the largest growers, suggesting that the larger companies are expected to win the most new work in 2015. The prominence of public entities in the industry was shown again when construction professional were asked the question about which group make up the majority of their clients. Public entities were the largest portion (34.4%), and with the option of selecting up to two answers,

014

2.67%

Qatar

KSA

UAE

1.51%

Iraq

Iran

roughly half of all respondents picked public entities. Private developers were the second most popular pick (26.9%), followed by large international contactors (14.2%) and large local contractors (11.5%). This means that respondents picked large international contractors as having better growth prospects, as well as being more likely to make up the majority of their clients, demonstrating the internationalised nature of construction in the Gulf. Industry challenges are evolving

When asked to identify the major challenges for 2015. ‘Non-payment or slow payments by clients’ was the most common, and was picked by a third (33.8%). The issue of slow payments

“The Kuwait and Bahrain markets over the last few years have not presented any significant opportunity. We’ve moved a lot of resources out of Kuwait and Bahrain into Qatar, Saudi and UAE” simon moon, aTkins

0.46% Levant

1.97%

1.86%

N. Africa

E. Africa

2.90%

Central Asia

has long been endemic in the region, and slow cashflow can cause serious problems for many companies, especially for companies that are new to the region, and have made budgets incorporating ‘optimistic’ timelines for payments. ‘Poor contract margins’ followed at 22.5%, a topic which emerged in the competitiveness of the post-crash market, where contractors will take on jobs with wafer thin margins just to say afloat. Third on the list of challenges was ‘competence of sub-contractors’, clocking up 19.3%, another perennial issue for the industry. The ‘cost of raw materials’ received 18.5%, suggesting that contractors may be squeezed at both ends, with low contract values and high raw material costs. The write-in responses flagged up various challenges, such as ‘high competition’, the lack of ‘experience/ skilled professionals’, ‘slow movement of projects’, ‘political issues in Iran and Iraq’, ‘rising salary expectation with fixed price contracts’ and ‘petrol prices’. With the latter issue becoming increasing prominent in recent months, the varied responses signify the constantly evolving challenges in the Middle East construction industry – an expected scenario in a young and dynamic region. Yet stability is another quality that is highlighted by industry leaders and survey respondents, with the robust markets of UAE, Saudi Arabia and Qatar bolstered by strong government-backed entities.

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DATA

Country focus Saudi Arabia: the drive to diversify Interview: Zahid Group’s Amr Khashoggi Euromonitor International: Construction in Saudi Arabia 2015-18 Brisk business in the UAE Frost & Sullivan: Expo 2020 – quantifying the opportunities Qatar: Eyes on the ball Kuwait’s turn-around? Bahrain gets a boost Egypt: Optimism on the Nile Deloitte: SMARTer construction Project management & contract disputes 016

017

DATA

The GCC in figures Population, in millions 30

Source: World Bank

% Value of active construction projects 50

29.37

Source: MEED Projects

45%

30%

9.446

20 2.268

10 KSA

% Nationals

UAE

Qatar

3.479

Kuwait

3.926 1.344 Oman

100 80

Qatar

Kuwait

73.30

UAE

12%

Qatar

Kuwait

Oman

Bahrain

Source: World Bank

784.4

600 402.3

300

203.2

175.8 79.66

150 KSA

UAE

Qatar

Kuwait

Oman

Gross National Income per capita, in US$ â&#x20AC;&#x2DC;000 100

32.89 Bahrain

Source: World Bank

86,790

59,890

45,130 26,260

25,150

19,700

20 KSA

UAE

Qatar

Source: IMF

116.40

53.30

Real GDP (2013), in US$ billions

450

Bahrain

77.60

31.3% 19%

Oman

90.70 46%

KSA

018

UAE

107.50

Fiscal breakeven oil price (2015 est.), in US$

70%

120

750

KSA

Bahrain

Source: World Bank, Qatar Ministry of Development Planning & Statistics

10%

Kuwait

Oman

Bahrain

KSA

UAE

Qatar

Kuwait

Ease of doing business

Oman

Bahrain

Source: World Bank

GCC Rank

Country

Global Rank

UAE

Saudi Arabia

Qatar

Bahrain

Oman

Kuwait

Corruption perception

Source: Transparency International

GCC Rank

Country

Global Rank

UAE

Qatar

Bahrain

Oman

Saudi Arabia

Kuwait

019

SAUDI ARABIA

KAFD in Riyadh is one of the largest developments in the Middle East.

Saudi Arabia: the drive to diversify Saudi Arabia’s leaders are strongly focused on diversifying the economy beyond its traditional oil base, and construction is playing a major role whether through publicly funded projects or commercial developments

hile construction activity dropped sharply in other GCC nations across 200910, the Kingdom of Saudi Arabia was less affected, delivering major projects and replacing the UAE as the largest construction market in the region. Today it makes up the lion’s share of construction contracts in the region, estimated at 45% of total active projects. Growth in the sector in 2015 is forecast at 6.6%, at a similar level to 2014. As the largest oil producer in the world, with production at around 9.6 million barrels per day in December 2014, Saudi Arabia has used large oil revenues for its major programme of infrastructure development, as well as to build up enviable foreign currency reserves. Government spending on construction has been jointly prompted by recognition of the need to diversify the economy, and to provide expanded social services to its citizens. Demographics are a key influence driving the economy’s diversification: with an estimated 50% of the population currently under 28 years of age, job creation is a priority, and the Kingdom must cater to the growing need for social services such as education, healthcare and affordable housing. Meanwhile, major developments across the Kingdom will to contribute to diversification of the economy and provide employment opportunities for Saudis. King Abdullah Economic City (KAEC) is officially the largest construction project in the GCC, budgeted at $93 billion, which eventually will be home to 2 million people across its 168 square kilometre site, as well as containing light and heavy industry and a major sea port, in all

020

expected to provide up to 1 million jobs. Major transportation infrastructure projects are underway or planned, including including the Riyadh Metro, worth in total $22.5 billion, one of the largest public infrastructure projects in the world, which is expected to transform and revitalise the capital. Airport construction and expansion projects across the Kingdom continue apace. Nevertheless, on a global scale, the contribution of buildings and infrastructure (built assets) to Saudi Arabia’s GDP is low. In Arcadis’ Global Built Asset Index 2014, a report which evaluates the contribution of built assets to GDP, Saudi Arabia was the second lowest of the 30 countries surveyed, with assets contributing just 16% to GDP in 2013 (forecast to be 17% in 2014), compared with the UAE (44% in 2013) and Qatar (28% in 2013). The report notes that an abundance

“A deficit will occur. But what resources do you have in the country? We have no debt. We can go to the banks. They are full. We can go and borrow money, and keep our reserves. Or we can use some of our reserves” Ali Al-NAimi, SAudi ArAbiAN Oil miNiSter

of natural resources in a country, such as fossil fuels, may reduce the relative contribution of built asset wealth to supporting economic activity, as resources are attracted into the extractive industries. But with a large number of projects under construction, Arcadis forecasts that built asset performance will grow by 70% over the next decade in Saudi Arabia, the second highest growth rate in the world behind China. But for Saudi Arabia to achieve these returns it will need to deliver high quality assets. “One watch out for Saudi Arabia is the need to focus on the delivery of a high quality built environment, in particular during the construction and operation phases of an asset’s life. In the past, buildings have tended to be constructed quickly and cheaply, leading to rapid deterioration,” notes the report. “The need to create a sustainable economy is driving the adoption of international quality standards and best practice, such as programme management across the whole lifecycle of the built asset. The benefits of these approaches can already be seen in the quality of many new investments, including the Haramain High Speed Rail network. Saudi Arabia has come a long way in a relatively short time and, as it diversifies away from a carbon economy, is on course for a prosperous future supported by its built asset wealth.” The oil question

The big question in 2015 and onwards for the construction industry will be whether the government will reduce its spending if the price of oil remains low. All the signals from the Saudi government are that it intends to continue its programme of

021

SAUDI ARABIA

The Makkah region has many major projects underway.

Kingdom of Saudi Arabia Population

29.37 million

of which nationals

70%

Population aged 24 and under

46.9%

Real GDP (2013)

$784.4 billion

Gross National Income per capita

$26,260

Real GDP growth, IMF estimate

2014: 4.6% 2015: 4.5%

Fiscal breakeven oil price (2015 est.)

$90.70

economic diversification, even if it means drawing on currency reserves or borrowing. The 2015 budget announced a record spending high of $229.3bn, the first budgeted deficit since 2011. This has caused consternation among some, including HRH Prince Al Waleed bin Talal, who warned against the Kingdom draining its financial reserves. Others have seen it as proof that the Kingdom is happy to wait out the low oil price while maintaining its high spending levels. Jadwa Investment, a Saudi Closed Joint Stock Company with headquarters in Riyadh, wrote in a note on the 2015 budget that it “underscor[es] the government’s determination and ability to support economic activity despite the prevailing subdued oil pricing environment. It further highlights the strong focus on economic diversification as spending on physical and social infrastructure has been kept elevated.” There is no doubt that Saudi Arabia is capable of riding out the wave in the short term, due to its stock offoreign assets built up in recent years, wrote Jadwa. “At the end of November, net foreign assets at Saudi Arabian Monetary Agency (SAMA) stood at $736 billion. The huge stock of assets that the government can call on gives Saudi Arabia an advantage over most

022

other countries in alleviating the impact of lower oil prices. That means it can push ahead with strategic projects such as key infrastructure development including transport, housing, oil, power and water and support the private sector where necessary.” The Saudi Arabian Oil Minister, Ali Al-Naimi, in an interview with MEES, expressed a similar assessment of the Kingdom’s ability to continue its programme of diversification, despite lower oil prices. “A deficit will occur. But what resources do you have in the country? We have no debt. We can go to the banks. They are full. We can go and borrow money, and keep our reserves. Or we can use some of our reserves.” Boosting Saudi hires

Aimed at expanding employment prospects for its young and growing population, the Nitaqat scheme requires higher levels of hiring of Saudi workers by private firms.

6.7%

The Ministry of Finance estimates that construction in Saudi Arabia grew by 6.7 percent in 2014.

Nitaqat has had a signficant impact on construction firms operating in Saudi Arabia, due to the labour-intensive nature of the industry. Figures from the Nitaqat website show that construction firms were also responsible for nearly half of privatesector employment and almost a quarter of Saudi private sector employment, while also having one of the lowest Saudisation rates when the Nitaqat programme began. The impact of Nitaqat on the industry was readily felt in 2013 and 2014, with some blaming a fall in construction output on increased visa costs and an exodus of foreign workers. But while there may have been initial difficulties adjusting, it has been suggested that in 2015 the construction sector will adjust to the “new norm”, according to Jadwa Investment. They also noted that the construction sector has successfully hired many new Saudi employees, with the Saudisation rate of the sector growing from 7.2% in 2011 to 10.3% in 2013, an increase of 34%. “The higher growth in Saudi employment in the construction sector is impressive given the particularly high wage differential from non-Saudis. Saudis in the construction sector earned a monthly average of SR 3,330 in 2013, while non-Saudis earned only SR 1,029,” wrote Jadwa Investment.

Was labour the issue?

Slow progress on some projects across Riyadh, including the King Abdullah Financial District (KAFD) has been blamed on a lack of available manpower “Many projects in both the public and private sectors are pending. Various buildings under construction in the Saudi capital look abandoned because workers are nowhere in sight,” said a construction industry source quoted in Arab News in August 2014. “The price of visas is too costly, in addition to the additional SR2,400 per year for each expat. In fact, some contractors have abandoned their projects.” Nevertheless, slow progress on projects is likely to have a wider set of causes

than just labour shortages. In response, construction authorities in Riyadh have formed an independent arbitration body to follow up on stalled projects in order to prevent further delays. “To ensure success and prevent further delays in its projects, the Commission has formed an arbitration committee from outside the Commission to follow up all its projects and report on each of them regularly,” said Muzahim Al Deeb, director of roads and services for the high commission for the development of Arriyadh. Projects in Riyadh and other parts of Saudi Arabia have been stalled due to reasons such as inefficient management, inadequate resources and technical

specifications of some contractors, heavy reliance on subcontractors, and poor studies of projects, said Deeb. Fahd Al Hammadi, chairman of the national contractors committee, said that almost 40% of government projects have faced delays. Hammadi said the contractors in the country are pushing ahead with plans to “put their house in order” through the creation of an autonomous authority to handle the sector. “The Saudi contractors aim to create an authority to look after this vital sector and increase its efficiency so it will be capable of shouldering its responsibilities in executing projects on time and with great efficiency,” he said.

Progression of the Nitaqat programme

Source: Jadwa Investments

Domain

Companies (2012)

Companies (2013)

Share of total

Change (year-on-year)

Unclassified

1,714,276

1,523,193

85.6%

-11.1%

Red

67,769

17,314

-74.5%

Yellow

37,611

19,637

1.1%

-47.8%

Green

146,548

203,421

11.4%

38.8%

Platinum

12,899

15,420

0.9%

19.5%

Total

1,979,103

1,778,985

100%

-10.1%

023

interview

The Riyadh Metro will provide vital transport infrastructure to Saudi Arabia’s capital.

Amr Khashoggi

The right balance Zahid Group’s VP of Group Affairs, Amr Khashoggi, describes Saudi Arabia’s “incremental” strategy towards economic transformation

he Saudi economy and construction market is benefitting from improvements in technology, availability of information, and the drive to integrate a wider section of the Saudi population into the workforce, says Amr Khashoggi, VP of Group Affairs at Zahid Group. Khashoggi, who earned his MBA from Yale University in 1979, has witnessed first-hand the Kingdom’s multi-pronged yet “gradual” transformation into a global, modern economic power. Advances in technology and government services allow for fast decision making and better access to information about the country, says Khashoggi. “For example, in the early days, you would have problems finding accurate data about demographics, utility prices and state of infrastructure. Today, all that information and more is accessible with a few clicks on several government websites, including that of the Saudi Arabian General Investment Authority (SAGIA). Furthermore, the Saudi population

024

is very much wired and that drives greater efficiency and new opportunities to accelerate economic activity.” Technology and e-government have allowed Saudi Arabia’s government to standardise and improve the quality of services across the country like never before. “In the past, dealing with the Ministry of Labour cost us precious time, causing frustration and stress. Today, 85% of the work is done online, resulting in positive impact where our efficiency is concerned,” he says. At the same time, Saudi businesses are using technology in a bigger way to recruit employees, develop business opportunities and launch new products and services. Within Zahid, all the paperwork and workflow takes place electronically, which has improved the group’s overall business efficiency. Opportunities for the young

The adoption of technology, whether it is in government or business, is largely driven by the youth, and

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interview

Saudi Arabia remains a young country but has many achievements, says Khashoggi.

Reforming education

Saudi Arabia is no different. “Fifty percent of our population is under the age of 17,” says Khashoggi. “We constantly search for new ways to work with Generation Next, who bear the responsibility for the future of our country. We have to prepare them to meet those challenges.” But he also agrees that Saudi youth tend to gravitate towards government employment due to the job security associated with it. “Many of our young feel that a government job is more secure and less demanding. But we need to change this mind-set. Through public private partnerships (PPP), we are trying to develop programmes to attract youth to private employment and also provide them with a sense of security. Moreover, not all job seekers have the required skills to perform the tasks

026

at hand. At the Zahid Learning Centres, for example, we offer soft skills as well as three-year apprentice programmes for blue-collar workers, with guaranteed employment upon graduation.” However, not all young Saudis are chasing jobs. Many prefer to become entrepreneurs but often find it difficult to get bank loans. Zahid Group, through its subsidiary, AJIL Financial Services Company, provides asset financing to would-be entrepreneurs through its Small and Micro Enterprise Programme (SMEP). “SMEs are going to be the answer to any unemployment problem,” says Khashoggi. “Eighty percent of employment in a country is usually provided by SMEs and not by large corporations. At Zahid, we train young Saudi entrepreneurs into ‘Contractors of the Future.’ Many well-established private sector employees volunteer to be mentors, working with the

young people on business plans to help turn ideas into commercial ventures.” He also believes that it is important to encourage employers to hire persons with disability. As part of its Corporate Social Responsibility (CSR), Zahid is a founder of a non-profit called Qaderoon Business Disability Network. “We aim to catalyse employers to recruit, train, retain and include job-seekers with disabilities as equal and effective members of the workforce, through disabilityfriendly work environments and by advocating favourable government policies,” says Khashoggi. “We offer employers appropriate guidance and best practices. Employees with disability have proven to be highly productive and loyal. Hiring them will also contribute to the employment of the Saudi population.”

In the long run, it is important that the job market in the country becomes more open and transparent. “Employers should allow job-seekers to learn about career opportunities, and job- seekers should be visible and demonstrate their abilities, knowledge and willingness to work,” notes Khashoggi. But the question is whether the education system in the Kingdom is geared up sufficiently to supply the job market. In the past, the skills that were developed through the education system didn’t map with the job requirements, which meant that the country found itself deficient with regard to engineers, doctors, nurses and technocrats. However, the Zahid VP believes that the scenario is changing for the better, thanks to the reforms of the education system underway. “The reforms are addressing the weak links by raising the quality of teachers and curricula that reflect the crucial competencies needed to find a career in the Kingdom or anywhere else,” he says. “Our educational system needs to teach students to think and innovate. Teachers need to be trained and updated with the instructional best practice employed in the best schools in the world. The private sector can help by having internships, mentoring and training, and retraining, which is something that we are doing in our company.” Global Gypsum Company (3G), a Zahid Group joint venture, has initiated a programme wherein the company goes to industrial colleges across the Kingdom and interviews students in their final year to try and identify their weak areas. 3G works with the colleges to address those areas complemented by its own learning centres. Khashoggi believes that offering Saudi students scholarships to study abroad is key to giving them exposure to different ways of doing things through interactions with professionals. Scholarship students become cross-cultural ambassadors and can use their newly found relationships to forge business relations. He says: “What I am trying to work on

“Eighty percent of employment in a country is usually provided by SMEs and not by large corporations. At Zahid, we train young Saudi entrepreneurs into ‘contractors of the future” Amr KhAshoggi VP grouP AffAirs, ZAhid grouP now is to catalyse our private sector to use their special relationships with leading companies in the West to create internship and job opportunities for Saudi scholarship students with those companies. This will help our students hit the ground running when they come back to the country.” Empowering women

With regard to empowerment and employment of women, Khashoggi feels that the situation has taken a turn for the better with reforms to improve the participation of Saudi women in the workforce and other areas of civil society. Today, Saudi women enjoy greater access to education, scholarships and employment. The e-government initiative has also made it easier for Saudi businesswomen to carry out their business online and in person without the use of special agents. Meanwhile, women also have access to a greater diversity of skills and career pathways on the education front. A member of the Advisory Board of the all-female Effat University in the Kingdom, Khashoggi finds that female students are great learners and hold tremendous potential to be taught scientific and engineering skills. Making up half

of society means Saudi women should be given more opportunities for employment. “We have been doubling the number of women working in Zahid over the past six years,” he says. “They work in administration, finance, IT and HR and we are expanding opportunities for them to work in technical and engineering positions. Last summer, at our group company Altaaqa Alternative Solutions, we had four electrical engineering students from Effat University interning the whole summer in the field, and they were impressive. We hope they will join us full-time when they graduate.” He is also hopeful that Saudi Arabia’s push to transition from an oil producer to an energy producer will not only create more job opportunities but also centres of knowledge and R&D facilities. “The development of alternative and renewable energy industry will also lead to the improvement of scientific education in the Kingdom,” he notes. “We already have private sector companies funding research work at illustrious universities like King Abdullah University of Science and Technology (KAUST), whereby they are able to use many of the patents and turn them into business opportunities. A country’s economic vibrancy is measured by the level of patent applications filed, which is increasing in our universities.” Khashoggi reiterates that Saudi Arabia’s progress should be looked at in the context of the level of stability and prosperity it has achieved at a “tender age” and in relation to other countries that started out similarly. “In the past 40 years, we have accomplished a lot, owing to the visionary governance of the leaders of Saudi Arabia,” he notes. “In order to keep pace with the trends of today’s world, however, we must recognise that more ground needs to be covered and that more work needs to be done. “We are making inroads into adopting educational, professional and environmental best practices, but we should not rest on our laurels. We Saudis should never stop aiming for our nation to be greater than it was and it is. But, aggressive as we are, there is still merit in growing incrementally, which is gradually but surely.”

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ANALYSIS

Construction in Saudi Arabia: 2015-18

Number of employees vs average salary (1997-2012)

Saudi Arabia’s market for construction has prospects for steady growth up to 2018, making it the most attractive market in the Gulf region, according to Euromonitor International’s report on the country

he market for construction in Saudi Arabia enjoyed average annual growth of 10% during 2007-2012, driven by favourable demographic and economic trends. The construction industry grew as a result of significant financial stimulus from government coupled with domestic and foreign investment. Nevertheless, the industry is fragmented, being served by almost 377,000 companies with the top five generating only 13% of revenue in 2012. The industry expected to demonstrate average growth of 8% during forecast period, with Saudi Arabia continuing to have the most attractive construction market in the Gulf region. Trends

According to Saudi economists, growth for the country’s construction market is a major driving force for the country’s overall economic performance. Over 2007-2012, Saudi Arabia’s market for construction expanded at an average annual rate of 10%, amounting to SR284 billion ($75.7bn) in 2012. Due

expanded by 13% over 2007-2012 and stood at nearly 29 million people in 2012. The market’s size is distributed between capital purchases at 55% share in 2012 and business purchases at 45%. The Saudi government continues to be actively concerned with improvements in Saudi infrastructure. The government thus made huge investments in infrastructural development and maintenance during the review period. $100 billion investment is planned over the next 10 years to upgrade and future-proof the country’s transportation infrastructure. This will include multi-modal facilities in the country’s new Economic Cities focused on industrial and free trade zones, with these being the largest and most advanced in the region. The country is also investing in infrastructure projects with a social impact. For example, in 2011 the Princess Noura Bint Abdulrahman University for Women was built with a total investment of $18.3 billion and created new standards for building infrastructure in education. Demand is primarily satisfied by domestic suppliers, as imports constituted

Forecast 2014-2018 Turnover by category (SR million)

2014

2015

2016

2017

2018

Building Completion

21,365

23,488

25,649

27,953

30,408

Building Installation

193,419

209,813

226,170

243,449

261,723

Building of CompleteConstructions

71,074

76,902

82,687

88,779

95,206

Renting of Construction Equipment

39,475

42,659

45,812

49,127

52,618

Site Preparation

4,087

4,422

4,754

5,103

5,472

Total

329,421

357,285

385,071

414,411

445,427

028

440,000

700

400,000

600

360,000

500

320,000

400

300,000

300

to rapid population growth and the expansion of incomes, the supply of housing in Saudi Arabia is well below demand, leading to increasing prices for real estate and construction. The market for construction is heavily dependent on demographic trends within the country. Saudi Arabia is thus a very favourable place for construction. While being one of the richest nations in the Middle East and Africa, Saudi Arabia also boasts robust economic growth, a rapid rise in annual disposable income and expenditure levels as well as a surging population and urbanisation. The Saudi mid-income group comprised 10% of the population in 2011 and expanded steadily since 2006 with a rise of 14%, due to rapid population growth and an influx of labour. The social class A, made up of high-ranking professionals and successful entrepreneurs, also accounted for 10% of the population in 2011 or nearly 2 million people. This social class expanded by 20% during 2006-2011 due to growing income inequality and economic growth. The overall size of the population meanwhile

Output per employee vs average salary (1997-2012)

Number of employees

Average salary (SR ‘000s)

a share of just 7% of total market size in 2012. Although some projects are being carried out as joint ventures with foreign entities, it is difficult for foreign contractors to do business in Saudi Arabia. First of all, a commercial presence must be registered with the authorities and a foreign investment license must be obtained from the Saudi Arabian General Investment Authority (SAGIA). Finally, registration with the Ministry of Commercial and Industry is required. From 2013, foreign investors engaging in construction must also be organised as either an LLC or joint stock company. The Saudi Arabian construction industry recorded average growth of 10% per year during 2007-2012, reaching a turnover of SR275 billion ($75.7bn) in 2012. Players are however struggling to meet demand for housing. This is mainly due to limited bank financing and complicated ownership restrictions, which keep foreign companies away from Saudi Arabia’s real estate. King Abdullah announced a publicly-funded programme to build 500,000 homes over several years in 2011. However, due to bureaucratic delays and the difficult process of obtaining land, the programme failed to have an effect during the review period. The president of the Al-Shorouq Center for Economic Studies has however claimed that construction is receiving the greatest amount of investment of all industries in Saudi Arabia. According to the World Bank’s Ease of Doing Business 2012 survey, Saudi Arabia is the easiest country to do business in

Output per employee (SR ‘000s)

within the MENA region. The country also saw robust real GDP growth of 7% in 2011, backed by strong oil revenues. The government is committed to openness, liberalisation and privatisation, making it an attractive destination for foreign investments. Furthermore, Saudi Arabia has amongst the lowest taxes in the region and flexible labour markets, with these offering very strong advantages for its construction industry. Profitability remained relatively stable in Saudi Arabia’s construction industry during the review period. The profit margin stood at 30% of turnover in 2012 after expanding by two percentage points since 2007. Growth in profitability was however constrained by costs increasing almost in line with industry revenue. The dominant share of total expenditure is claimed by B2B costs at 91% in 2012. Towards the end of the review period, companies encountered strong cost pressures, as the government cracked down on unregistered employment of cheap foreign workers. 423,000 people were employed within the construction industry in 2012, with numbers up by 23% since 2007. Average wages declined by more than 2% during the review period, despite an increase in average productivity of 34%. Inequality between the lowest and highest paid workers is significant, with monthly salaries ranging from SR1,400-95,000. The construction industry of Saudi Arabia mainly serves domestic customers, as exports constituted a negligible share at less than 1% of total turnover in 2012.

Average salary (SR ‘000s)

Prospects

The outlook for Saudi Arabia’s construction industry is positive, as it is expected to grow at an average annual rate of 8% during the forecast period. Projects worth over SR1.6 billion were in the design, bidding or construction stage at the end of July 2013. Further growth will be fuelled by increasing demand associated with positive demographic trends and strong support from the government, especially in the form of financial stimulus packages. Additionally, the Gulf construction market is one of the most successful construction markets in the world and its hub is Saudi Arabia in its centre. Saudi Arabia is thus likely to attract strong foreign direct investment during the forecast period, with this providing the industry with the necessary capital for growth and fostering financial flexibility. Private spending aside, the government also plans to provide social infrastructure in the form of affordable housing, schools and hospitals and to gradually increase investment volumes in order to meet demand created by population growth. Other important construction projects will include metro rail lines and stations, airports, roads, ports, railways and utilities. At the population growth rate seen at the end of the review period, the country requires an additional 4.500MW of new electricity generating capacity each year. Growth for the construction industry will be sustained by strong expansion in Saudi Arabia’s economic fundamentals, primarily fuelled by oil revenues.

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UAE

Brisk business in the UAE With the awarding of Expo 2020 to Dubai and the on-going realisation of Abu Dhabi’s Vision 2030, there’s plenty of optimism in the construction sector in the UAE, though some volatility is expected

hile first-time visitors to Dubai may stare with wonderment at the skyline as they travel down Sheikh Zayed Road, beyond the glitter and the dazzle Dubai provides a blue-print for the drive to diversify national economies across the GCC. The decision made in the 1960s by Sheikh Rashid bin Saeed Al Maktoum to invest revenues from newly found oil into infrastructure such as a deep sea port, hotels, and airport, was made knowing that the oil money would not last forever, and set Dubai on course to become the regional leader in tourism, services and construction. It’s a focus that is shared across the country. Sultan bin Saeed Al Mansoori, Minister of Economy in the UAE, speaking at the World Economic Forum’s Dubai Summit last year, said that the non-oil sector will be the major driver for future economic growth in the Emirates. The country’s non-oil sector grew by 5.4 percent in 2013, and growth in 2014 is expected to be higher, continuing in 2015. “We have embarked on an ambitious economic diversification strategy that has increased the contribution of our non-oil industries to approximately 70 percent of our GDP (depending on the price of oil),” said Al Mansoori. “We are diversifying our economy by investing in healthcare, transport, logistics, hospitality, technology, tourism and renewable energy, which will drive economic development with a special focus on the knowledge-based industries with high added value.” The construction sector in the UAE is a major component of this growth, and in the main the signs are positive. In our Construction Intelligence Report survey, the UAE was picked as the market offering the best business

opportunities for the construction sector in 2015 (with 34.7% of the total votes). Abu Dhabi is investing heavily in major infrastructure, while Dubai has announced ambitious construction plans in the lead up to Expo 2020; and on a national level there are projects like Etihad Rail and the construction of nuclear power plants, important to the on-going growth and diversification of the UAE’s economy. As for property values and rents, 2014 saw growth in both Abu Dhabi and Dubai. According to JLL’s 2014 Q3 report, the Dubai real estate market saw a welcome levelling-off during the summer months. “The broad based recovery witnessed in the residential sector over the past 18 months has now slowed down, as rental prices and sale values have stabilized in most locations. All sectors of the Abu Dhabi market are now positioned in the recovery stage of their cycle, for the first time since 2008.” The Expo 2020 is expected to bring a major cash injection into the construction sector in Dubai, with United Arab Emirates Population

9.446 million

of which nationals

19%

Population aged 24 and under

34.3%

Real GDP (2013)

$402.3 billion

Gross National Income per capita

$59,890

Real GDP growth, IMF estimate

2014: 4.3% 2015: 4.5%

Fiscal breakeven oil price (2015 est.)

$73.30

Frost & Sullivan forecasting that HVAC companies alone will receive $700 million worth of business in the lead up. Abu Dhabi’s Vision 2030 provides a comprehensive plan for increasing the contribution of the non-oil sector to its economy, with investment in construction-heavy sectors including cultural tourism and infrastructure. Nevertheless, the UAE and Dubai especially are no strangers to being buoyed by false optimism in the construction sector, illustrated by the spectacular drop-off in active projects following the market peak in 2008. Since early 2013 the volume of active projects in the UAE has grown steadily, but given the lessons of the recent years, there can be little chance of a similarly sharpdrop off. Government controls including limitations on bank lending to fund off-plan residential properties has taken much of the speculation out of the market, while industry stakeholders are acutely aware of the need to grow sustainably. While the fundamentals may be generally positive, there remain factors which can impact on construction firms’ profitability or their ability to invest in expansion. Rising labour costs and higher salary expectations were both cited as major issues by UAE respondents to the CiR survey. Traditional problems continue to be a factor, including slow payments and high raw material costs. But with most contractors still in the market having survived the market drop of 2009-10, there is appreciation for the need to focus on fundamentals, including prudent management of cashflow and working with partners that have a proven track record of delivery. Given the large number of projects in the pipeline, sustainable growth is expected for the construction sector.

www.wspgroup.com 031

UAE

The Expo 2020 master plan is expected to be submitted in Q3 of 2015.

Abu Dhabi spotlight Government spending is a major driver of the Abu Dhabi market

bu Dhabi has maintained its steady and reliable growth pattern in line with their 2030 Vision. Most of the vital projects in the emirate of Abu Dhabi will be in the maturing stage such as Yas Mall, KIZAD, Abu Dhabi Midfield Terminal, Reem Island, Etihad Rail, the Saadiyat Island Museums, The Louvre and New York University at Saadiyat Island to name a few and the remainder are either already tendered, in design phases or under study. Government-led spending is likely to continue shaping the market due to a

greater focus on social infrastructure, infrastructure and utilities projects; however they are also investing billions of dollars into real estate and tourism to diversify Abu Dhabi’s economy beyond oil and help generate a sustainable demand growth. The residential market is still showing a shortage in high quality units which has helped maintain the markets growth over the last year. The hotel sector has slowed down in new supply, which has helped the recovery of the sector as occupancy rates were falling last year. The retail sector has delivered a

significant volume of space and is set to deliver even more in the coming year, which has forced developers to be more creative in trying to secure tenants. Abu Dhabi ports expect year-end spike in traffic as projects boom in the emirate. Many large manufacturing companies are increasing their capacity over the next year due to the improved import and export opportunities asa result of the new port which again will help stimulate growth in the emirate. Source: EC Harris, ‘International Focus on United Arab Emirates’ Summer 2014

Abu Dhabi is investing in cultural tourism and infrastructure.

032

Dubai spotlight Expo 2020 will be major contributor to growth in Dubai’s construction sector

fter an uprising market in 2013, Dubai is still showing prosperous signs of economic growth and a jump in project activity, pertaining to infrastructure and real estate. According to the Dubai Statistics Centre, Dubai’s economy grew by 4.5 percent in 2013, with growth expected to be around 5 percent in 2014. With a pipeline of projects developing, the effort is now on setting groundwork plans prior to the construction phase. Developers are now starting to witness an increase in costs, as the supply and demand dynamic, which have kept prices low during the economic downturn is now turning to an equilibrium with contracting organisations no longer willing to tender on reduced prices. Following the Expo 2020 win, the current focus is on evaluating existing and projected developments across the emirate. There has been limited impact so far in 2014 from the Expo 2020 win. The Expo 2020 master plan is due to be submitted in Q3 of 2015 and is expected that primary and secondary development activity will commence around that time. Passenger traffic in Dubai airport increased to 66 million people in 2013, a 15.2 percent increase from 2012. At that rate Dubai airport is expected to overtake Heathrow in 2014 as the busiest airport in the world, according to the Wall Street Journal, as the emirate’s tourist numbers increased by 10 percent to 11 million people

in 2013. Furthermore, new trade licenses recorded an increase of 12 percent while real estate transactions jumped 53 percent to over $64.3 billion. These increases reflect the strength of the UAE’s tourism and real estate sector, in addition to the surge of international investment within Dubai. The strong tourism and business demands have led to retail businesses evaluating their existing assets, with major expansion and refurbishment programmes now ongoing in several of the emirates super regional retail malls. Hotel developments continue at pace with demand for rooms remaining high – well considered and positioned hotels remain as sound revenue generating investments. Hotel refurbishments are becoming common place with several of the older hotels undergoing refurbishment

The Expo 2020 master plan is due to be submitted in Q3 of 2015 and is expected that primary and secondary development activity will commence around that time

to maintain their place in the market, as the emirate plans to double the number of hotel rooms by 2020. The Dubai Tourism and Commerce Marketing Board reports tourism accounted for nearly 20 percent of GDP in 2013 and is forecasted to increase between 7 to 9 percent through to 2020. This significant increase within the hospitality sector reinforces the industry’s need to reconsider current business cases. As the population continues to rise, the residential rental market is likely to adjust. The market has seen a significant increase in rent during the first half of the year, however is expected to remain steady from the second quarter through to the end of the year. While government spending is expected to increase as the city further develops its power, water and transport infrastructure. Many of the leading developers are now refocusing on Dubai, particularly around the mixed use residential and commercial space. As the city sees an influx of international investment locally, there will then be a higher demand for premium office space for blue chip companies given current standards. The Dubai Expo 2020 is a key contributing factor to a number of affluent economic signs, which are likely to help the UAE achieve its 2021 Vision Master plan. Source: EC Harris, ‘International Focus on United Arab Emirates’ Summer 2014

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UAE

The northern emirates have become more attractive due to rising rents in Dubai.

Ras Al Khaimah Spotlight Ras Al Khaimah is quietly establishing itself as a hub for real estate investment

he northern emirates of the UAE have long been overshadowed by the glitz and glamour of Dubai, while the most talkedabout projects in the country have historically been confined to Dubai, Abu Dhabi and occasionally Sharjah. But Dubai’s dizzying growth comes at a cost. According to a recent report by Cluttons, house prices in Dubai’s freehold areas increased by 51% in 2013, forcing tenants to examine affordable alternatives and creating opportunities for development in the northern emirates. The heating up of Dubai’s property market is leading people to seek more cost-friendly locations. “Higher rental costs in Dubai have already forced some tenants to relocate to Sharjah and now further afield to Ajman,” notes Rehan Akbar, a Dubaibased analyst in Moody’s Corporate Finance Group. This can “justify the need for further developments in the neighbouring emirates”. Ras Al Khaimah is ramping up its residential offerings, offering less expensive alternatives for investors and property-buyers. The emirate has already seen an increase in real-estate prices following a resurgence in the Dubai market, according to Barry Ebrahimy, head of Commercial at Al Hamra Real

23%

Average rise in rents for master communities in Ras Al Khaimah, between Q2 2013 and Q2 2014.

034

Estate Development (AHRED). “Dubai market conditions have had a positive impact on the real estate market in Ras Al Khaimah. As the prices increase in Dubai, investors have looked closely at options available in the other emirates.” The figures support Ebrahimy’s claim. According to a report by real estate services company Asteco, rent for master plan communities in Ras Al Khaimah rose 23% between Q2 2013 and Q2 2014. Fujairah reported an increase of 15% over the same period, while Umm Al Quwain saw only 1%. AHRED is capitalising on investor interest in RAK, revealing projects like the $164 million Falcon Island, launched in March this year, and Bayti townhomes, part of Al Hamra Village. Other developments in Ras Al Khaimah include RAK Properties’ Bermuda Villas project, part of the developer’s Mina Al Arab waterfront community. Not all upcoming projects in the emirate are geared towards the high end of the market, however, and the government is making efforts to provide homes for nationals in Ras Al Khaimah through the Sheikh Zayed Housing Programme, which will build 2,000 houses for Emiratis in the city. But is development in Ras Al Khaimah and the northern emirates significant compared to the growth in their more affluent counterparts? “The volumes are much smaller compared to Dubai and Abu Dhabi,” says Christopher Seymour, partner at EC Harris. “And that’s true in terms of GDP, their overall economy, but also the development opportunities.” Lower prices in Ras Al Khaimah relative to Dubai means it has appeal

beyond just potential home-owners. “The advantages of investing in Ras Al Khaimah, from a business point of view, are low cost of business setup and operations including low cost of living vis-à-vis other locations,” says Ravi Krishnan, principal business associate to the CEO at RAK Investment Authority. Krishnan adds that the emirate’s strategic location, ready access to sea ports and airports and “ease of doing business” all make it an attractive destination for business and investment. However, developers still face challenges when looking to expand in the northern emirates, which can pose difficulties for those seeking opportunities. For instance, while roads to the northern emirates have mostly

“The advantages of investing in Ras Al Khaimah, from a business point of view, are low cost of business setup and operations, including low cost of living vis-àvis other locations” Ravi KRishnan, RaK investment authoRity

improved, obstacles still exist in terms of supply chain and logistics, Seymour says. “For developers, the supply chain is not as sophisticated as in Dubai and Abu Dhabi. The logistics are slightly harder.” Ras Al Khaimah faces another major hurdle on the rocky road to development. Power shortages have long plagued the northern emirates, which have struggled to provide infrastructure that keeps pace with development. To deal with power shortages, there is a push from AHRED towards making their upcoming communities more sustainable and less reliant on conventional energy, Ebrahimy says, explaining that sustainability plays a key role in the Falcon Island project, with the island aiming for Platinum LEED certification,

the highest possible. The project will be completely solar-powered and sustainable. “All the energy for homes will come from solar,” he explains. “Even the district cooling for that site will be a hybrid of solar and conventional energy.” Eco-friendliness is a driving force behind the Bayti village as well, with efforts being used to incorporate green building materials into the process and procure raw materials locally to minimise the project’s carbon footprint. A focus on harnessing renewable energy will help the developer tackle recurring power shortages in the northern emirates, Ebrahimy says. Seymour concludes: “These obstacles are not the end of the road. It is not a barrier. It is more of a challenge to overcome.”

035

ANALYSIS

Development of the Expo 2020 site itself is expected to cost $2 to $4 billion.

Expo 2020: quantifying the opportunities

Preparing Dubai for 2020 Winning the rights to host the 2020 World Expo means a number of new facilities will have to be built, as well as fast-tracking of planned or existing projects. Major projects include:

Frost & Sullivan has estimated the value of projects emerging out of Dubai’s Expo2020 win, in sectors including fire-safety, lighting, and facilities management

he World Expo is held every five years on a large scale and the Bureau of International Expositions (BIE), Paris sanctions the registered exposition time slot. Dubai won the bid to host the World Expo in 2020 and it is the first time that the Expo will be held in the Middle East. The Dubai Expo 2020 is likely to attract 25 million visitors, 70% of whom will be from overseas. This calls for a surge in infrastructure and construction activities to support the influx of visitors. Preparations for the Expo are likely to result in an injection of $40 billion into the economy. The construction sector in Dubai, which was struggling with slow growth due to the economic crisis until late 2012, is now witnessing a revival. Anticipation over Government spending for the Dubai Expo has contributed considerably to this recovery. However, this is not only expected to assist Dubai’s construction market, but is also likely to help the overall construction sector and economy in the UAE. According to estimates by the Dubai Tourism Vision 2020, the emirate needs to increase its hotel rooms to around 164,000

by 2020. In 2013 alone, Dubai added about 3,000 new hotel rooms to its stock. The majority of the construction projects are likely to take place between 2016 and 2019; the Dubai Government has pledged to complete most of the planned construction activity at the site for Expo 2020 during this time.This will allow the organising authorities a full year to test readiness of systems and technologies, and safety preparedness. As building construction and infrastructure demand increases further, building technologies and services including heating,ventilation, and air conditioning (HVAC), elevators and escalators, fire safety, lighting, facilities management (FM) and energy-related services are likely to benefit from these new initiatives. HVAC: The Dubai Expo is estimated to generate more than $700 million worth business for HVAC companies operating in the UAE. Most of the business is estimated to come very close to the event itself, as most chillers are likely to be fitted in the last year of construction. Hence, a spike in demand is expected between 2017 and 2019. Majority of this equipment in demand will be

energy-efficient chillers using environmentfriendly refrigerants in order to align with the emirate’s view of having a sustainable future through green technologies. Elevators and Escalators: The vertical transportation industry is geared for the numerous opportunities and challenges that are expected to be brought in by the Expo. Industry estimates reveal that the construction aimed for the Expo could bring the elevators and escalators industry about $350-400 million of business. Demand for high capacity and energy-efficient escalators and moving walks will rise from late 2016 or 2017 onwards. High-speed elevators with added security features will be witnessing an increased demand for the high-rise commercial towers and hotels that are planned to be unveiled during the Expo. Both global and domestic companies stand an equal chance to win such projects; hence, competition is still open. Fire Safety: One of the most critical elements that the Government agencies and private companies are focusing on alike is the safety and security aspect; more precisely the fire safety procedures in buildings that will host the Expo. Global

$350m

$400m

$40bn

2017-19

2016-18

The elevator and escalator industry will see as much as $350400m of business.

Combined value of new lighting projects and building retrofits.

Expo2020 preparations will inject as much as $40bn into the economy.

The spike in demand for chillers is expected over 2017-19.

Fire safety elements need to be completed by 2016-18 for drills and testsing.

036

companies are closely watching the business that is estimated to unfold and capture a major share in the projects. Considering the volume of new constructions, the fire safety and security market alone is likely to witness announcement of projects worth $200 million and a majority of these are likely to be spent on automatic and advanced fire-fighting solutions. All these are expected to be procured and installed between 2016 and 2018, allowing the organisers to conduct mock drills and check the consistency of the systems installed. Lighting: Energy-efficient lighting and lighting solutions will witness a spike in demand during the Dubai Expo. Local companies, which are able to provide products of international standards during the stipulated time, will stand a significant chance of expanding their business opportunities through the Expo. Industry estimates suggest generation of business worth $400 million for lighting companies through the new developments planned and retrofitting the existing buildings with energy-efficient lighting.The business will witness a positive growth hike from 2017 onwards. Global companies for lamps, controls, and fixtures that are able to provide ultra-efficient products will also hold a considerable chance of winning projects for lighting up the venues. Facilities Management (FM) Services: Amidst all the building technology products,

the building services industry is also looking at a growth trajectory, thanks to the Expo. The world-class venues, designed and planned to host the visitors, would need best-in-class maintenance of until not only the Expo begins but also after it ends, as the same venue will be used as an Expo business centre in future. Simultaneously, along with the Expo Village, numerous hotels are likely to come up and they will demand professional assistance in not only managing the facilities,but also in managing the energy consumed in the premise. The local FM companies and energy service companies will reap all the benefits of these projects. Long-term maintenance contracts will help the FM companies to foster healthy order books and revenues. Although to be engaged from the early design phase of these projects, the FM and building energy services will indeed witness an increase in activity from 2019 onwards, when the venues are ready and will require maintenance. We see the Dubai Expo opening abundant opportunities for the construction and building technology industry participants. However, it also poses serious challenges as industry participants are expected to meet tight timelines and have to be cost competitive. Having said that, the Expo will bring tremendous growth in the building technologies and services market in the UAE.

Building Construction: • Jebel Ali, the proposed site for Expo 2020 will also house the Dubai Expo headquarters, construction cost for which is estimated to be $2 to 4 billion. It is also planned to encompass several hotels, retail centres, shopping malls, leisure attractions, and a business hub. • The site will also house the Expo Village – a residential development, a golf-course villa community planned to provide accommodation for the Expo staff. • The world’s tallest commercial building, ‘Burj 2020’, is to be constructed in Dubai Multi Commodities Centre. • Apart from these, a host of hotel developments and residential projects have been announced and are likely to start tendering soon. Infrastructure Construction: • There will be new infrastructure as well as an upgrade of the existing infrastructure. • Dubai Metro’s Red Line connecting to the Dubai World Central will be fast-tracked. • The new ‘Etihad Rail’ is likely to increase accessibility to new locations for businesses, retail, and residential purposes. • The Dubai Airport is estimated to increase its annual passenger handling capacity from 60 million to 90 million by 2018. • The double decking of Sheikh Zayed Road.

037

QATAR

Qatar’s construction sector will continue to grow in 2015.

Qatar: Eyes on the ball Construction is growing, but Qatar needs to upgrade its tourism offering and address housing shortages

ootball fans in the region had ample reason to rejoice when Qatar won the bid to host the FIFA World Cup in 2022. Since the announcement, however, the nation has been dogged by controversy over the mega-event, with many wondering whether Qatar was ready for it. Human rights groups have slammed the country over allegations of mistreatment of workers, while there were concerns that Qatar’s scorching summer might see it losing the right to host the World Cup altogether. But with the country’s host status looking assured, and with the National Vision to be delivered in 2030, the construction sector in Qatar is booming, as the country invests in significant capital projects and infrastructure. According to Business Monitor International, the value of the construction industry in Qatar is expected to increase by almost double to $15 billion per annum in real terms by 2021. The World Cup will fuel growth in the real estate market in the coming years, particularly across the hospitality, residential and infrastructure sectors. “In relative terms, residential and hospitality space are likely to see the most growth, with the latter in particular rising from a relatively low base to provide the required numbers of rooms to meet FIFA’s requirement for the 2022 tournament,” said Jonathan Fothergill, director of Middle East Valuations, Cluttons. Much of the uncertainty over Qatar hosting the World Cup has dissipated, he adds. “The favourable outcome of FIFA’s inquiry into the 2022 World Cup has added to the positive sentiment locally and removed most of the uncertainty concerning the staging of the tournament.” Belal Deiranieh also has a positive outlook for Qatar in 2015. “Projects

038

are moving in full swing in Qatar, in anticipation of the World Cup,” says Deiranieh, who is vice president and Qatar country director at Louis Berger, an American architecture and engineering design firm. “2014 has been a ground-breaking year with many construction contracts awarded to set the tone going forward.” The World Cup will “certainly elevate Qatar’s profile on a global front in terms of a country which hosts large-scale events in and outside the world of sports,” he says. “Qatar’s real estate transactions witnessed a 24% increase in 2014, year on year, and we anticipate that this augers well for further growth during 2015,” Fothergill says. “We anticipate that investment will remain strong in the real estate sector and should increase as the country prepares for the World Cup in 2022, in tandem with ongoing major infrastructure initiatives, major population growth, and in conjunction with the government’s 2030 vision programme.” State of Qatar Population

2.268 million

of which nationals

12%

Population aged 24 and under

25.9%

Real GDP (2013)

$203.2 billion

Gross National Income per capita

$86,790

Real GDP growth, IMF estimate

2014: 6.5% 2015: 7.7%

Fiscal breakeven oil price (2015 est.)

$77.60

039

QATAR

Construction of the major stadia will take place in the lead up to the World Cup.

Qatar most expensive GCC country for construction, report finds Qatar is the most expensive country in the GCC for construction, followed by UAE as the second costliest, according to The International Construction Cost Report 2014, released by Arcadis. Qatar ranked 17th among 43 countries surveyed for building costs. The study found that relative construction costs globally have been affected by commodity prices, currency fluctuations and rising demand for development across many recovering economies throughout 2014. Costs remain relatively modest in the Gulf region, despite high levels of spending in infrastructure projects. “Investment on social infrastructure, economic diversification investment and event-driven construction are three key trends positively influencing construction spend in the region,” said Christopher Seymour, partner and head of UAE property at EC Harris. Abu Dhabi, Qatar and Saudi Arabia seem best able to continue to fund budget commitments in the wake of falling oil prices, although the report predicts increased pressure on public spending in 2015. “Whether the recent weakness in oil prices has a short or medium-term impact on construction, spending plans will become clearer in 2015,” Seymour says, adding that low oil prices may see capital spending

040

Boosting tourism

Matthew Green, head of research and consultancy at real estate firm CBRE, is more cautious in his optimism for the future of hospitality in Qatar, noting that the sector has not grown as rapidly as those of other regional markets. “There’s a significant amount of new supply that’ll keep coming in over the next five years and really in the lead up to the World Cup. [But] that’s certainly a sector that is unlikely to see too significant growth although there has been an increase in occupancy over the past year. It’s a market where it’s growing slowly, but it’s on a very slow pace compared to many of the other Middle Eastern markets.” Although hotel occupancy rates improved in 2014 compared to 2013, with rates over 70%, tourism in the country is not as developed as in neighbours like Dubai, he says. This could be a problem further down the line, and there is a risk of oversupply of hotel rooms following the World Cup, particularly in the absence of other major leisure drivers. “The leisure side of the market is very immature at this point,” says Green. “They are trying to build Lusail with a view to creating future leisure drivers, but at this point it’s kind of inconsequential in terms of the overall number of tourists. So that’s something that they really will have to expand upon and improve upon if they do not want to be left with an overhang of properties when it comes to the end of that event,” he says. “Dubai has managed to increase its hotel numbers over the years, but that’s by expanding and improving upon the existing leisure offers. Now, Dubai’s lucky that it has some fantastic beaches and nice hotels, but Qatar hasn’t really expanded or developed that side of the offer. So there’s quite a lot that I think they need to do to be able to start to compete on more of a level playing field with the likes of Dubai or even Abu Dhabi,” he says. Investment in education and healthcare may also function to attract visitors, says Deiranieh. “Boosting in those two areas will also help fill hotel rooms. That’s already in the works but that will help fill up the country,” he says.

$15bn

The value of construction industry in Qatar is expected to increase by almost double to $15 billion per annum in real terms by 2021.

Housing shortages

Apart from giving tourism a push, Qatar has other concerns on its plate, such as addressing a looming housing shortage. With a current population of 1.2 million, the number of inhabitants in Qatar’s capital Doha is expected to rise to 1.7 million by 2018. The number of households is expected to increase from 727,000 at present to 1 million households three years down the line. But the housing stock does not seem to be able to keep up with the rising number of residents, says a report by Colliers International. The city’s housing market has been plagued by an undersupply of units for years, with a housing shortage at 37% in 2014. This number is expected to increase to a staggering 85% in 2018, Colliers predicts. As the market continues to be short on the supply side, rents have escalated with affordability becoming an issue. Apartment rental rates dropped from 2008 to 2011, but since then have increased steadily. Average rents for apartments across Doha showed a year-on-year increase of 14% between Q2 2013 and Q2 2014. High quality developments, close to necessary infrastructure like schools, hospitals, and retail outlets show the highest demand, with areas in and around the Doha Municipality proving the most popular. The Pearl Qatar has seen 11% rent increases, whereas the typically more affordable districts of Al Sadd and Old Airport have seen increases of 14%. However less costly options are also available for residents. “There’s plenty of affordable locations I would say as well. You may not be able to find affordability in the area where you want to live but there’s been obviously quite a lot of development particularly from the likes

of Barwa, who have developed a number of communities a little bit outside, certainly not in the central areas of Doha,” says Green. Despite the efforts of local developers like Barwa and Ezdan to meet the demand for mid-market housing, given the severe shortage of housing units, economic forces of supply and demand have pushed rents higher resulting in an “unaffordable housing market,” the Colliers report insists. “It is Colliers’ opinion that offering more government incentive programs, access to well-located and service land, affordable developer financing options, and Public Private Partnerships will increase the availability of housing units that are affordable to the majority of households,” the report says. Infrastructure

In line with its 2030 vision and the successful World Cup bid, the Qatari government has been investing heavily in infrastructure projects across the country. Work on the $19.2 billion Doha Metro project began in late 2013, and triggered a wave of further infrastructure awards, including the orbital ring roads.

“The favourable outcome of FIFA’s inquiry into the 2022 World Cup has added to the positive sentiment locally” Jonathan Fothergill Progress on the metro is “running full steam ahead,” says Deiranieh, whose firm is currently providing project management services for the network. The upcoming Qatar Rail project is set to consist of 750km of track and 100 stations for passengers and freight. Underway is Doha’s $7.4 billion New Port Project, with planned completion for 2020. The project will cover a total land space of 26.5 sq. km, and is expected to be one of the world’s largest greenfield port developments. With the high demand for raw materials, the new

port will provide a welcome boost to the efficiency of the logistics sector. It is infrastructure that Deiranieh says holds the most promise for Qatar in the coming years. “They’re building new cities, enhancing existing [ones]. Right now, at the moment, all the opportunity resides on the infrastructure front.” Additionally, while all eyes are on oil across the region given the plummeting prices, Qatar need not worry on account of abundant natural gas and fiscal reserves, Green and Fothergill note. “For now consumers are still spending, companies remain investing and the government continues with record spending budgets,” Fothergill says. “For the foreseeable future, it’s largely business as usual for Qatar: the country has accumulated such large fiscal reserves that they can comfortably keep state spending at high levels.” But that’s no reason for complacence, he says. “Qatar has sown the seeds for diversification, particularly in the areas of tourism, leisure and entertainment, culture, and sport,” Fothergill remarks. “But much more is needed.”

041

KUWAIT

Kuwait has the lowest fiscal breakeven oil price of any GCC country, around $53 a barrel.

Kuwait turn-around? While for years Kuwait has punched below its weight when it comes to construction activity, a new five-year plan and a loosening of restrictions on foreign investment could boost activity in the sector in 2015 and beyond

uwait has for may years been an underperformer in the Gulf construction sector, despite its large GDP and consecutive budget surpluses. But awarding of new projects, and plans to adjust its regulatory regime to make the country more attractive for foreign investors and contractors could turn this around. The Kuwaiti government had awarded more than $20.7bn worth of contracts by the end of August 2014, almost double 2013, making the country’s projects market among the fastest growing in the region. The country’s projects market is the fourth largest in the GCC with a market value of $217bn. Kuwait has also announced details of its new 2015-2020 development plan, which envisages average annual investment spending of $40.7bn over the next five years. From this, $21.7bn per annum has been earmarked for public investment in a range of strategically important projects including the Mubarak Al-Kabeer port on Boubyan Island. Kuwait plans to develop $28.2bn worth of public - private partnerships to entice investment and help fund the infrastructure build. The plan, approved by cabinet, was still waiting to be approved by parliament. But while these announcements may have been welcomed by the construction sector, there’s still plenty of room for scepticism: many of the announced mega projects in the previous five-year plan were not completed, and after the first four years the government had spent only 57% of the allocated budget. If Kuwait is determined to deliver on its plans, there is plenty of money

042

in the bank for funding these. The country has the fourth largest GDP in the GCC, $179.5bn in 2013. It also has the lowest fiscal breakeven oil price of any GCC country, according to IMF figures, at $53.30 a barrel. Nevertheless, while there may be optimism about contracts awarded, Kuwait is still seen as less dynamic than other markets in the Gulf. In response to the CiR survey question, ‘Which markets offer the best opportunities for new business in 2015?’, (with the option of selecting up to three markets) only 5.9% of respondents placed Kuwait inside their top three options; only Bahrain fared (slightly) worse, and it has a GDP one seventh the size of Kuwait. Some of the problems facing the construction industry are structural, including tough conditions for international contractors. In 2014, tendering for the long-awaited Kuwait State of Kuwait Population

3.479 million

of which nationals

31.3%

Population aged 24 and under

40.7%

Real GDP (2013)

$175.8 billion

Gross National Income per capita

$45,130

Real GDP growth, IMF estimate

2014: 1.4% 2015: 1.8%

Fiscal breakeven oil price (2015 est.)

$53.30

airport expansion was initially put on hold after international contractors complained about some of the bid conditions, including having to pay a large number of guarantees (in November, the $4.8bn project was awarded to a consortium of Kuwait’s Kharafi National and Turkey’s Limak Holding). But there are signs the government has taken that message to heart, announcing that it has decided to suspend the offset clause under which foreign winners of government contracts are required to invest in the local economy. The programme, introduced in 1992, mandates that foreign companies must invest 35% of the contract value in an approved offset business venture. The obligations apply to military contracts of a value equal to or above $10.5m, civil/government contracts of a value equal to or above $35m and downstream oil/gas contracts. Kuwait’s finance minister, Anas Al-Saleh, admitted that the scheme in its present form had become a hurdle to attracting foreign investment. A new business-friendly offset scheme is expected to be announced in H1 of 2015. Kuwait is also looking at other options to make itself more attractive for foreign investment, which would help grow construction activity. Whether Kuwait will be able to deliver on its plans remains to be seen. According to the IMF, Kuwait’s GDP is expected to register the smallest growth in 2015 of any GCC state - 1.8%. The country’s track record suggests that both the public and private sectors will have their work cut out for them if Kuwait is intent on delivering the projects it has planned for the next five years.

043

KUWAIT

Major construction projects can stretch for longer than five years.

Dangerous waters A controversial bill limiting residency in Kuwait for expats could jeopardise recent construction sector gains

hile the level of contracts of contracts delivered in Kuwait climbed strongly in 2014, there are worries in the construction industry over a controversial bill calling for the imposition of a five-year residency cap on foreigners in Kuwait, which was cleared by the parliament’s legal and legislative committee last November. The bill, which also proposes a ban on workers bringing their families into the country, has been met with strong opposition from both locals and expatriates working in Kuwait’s various industries. Introduced by the MP Abdullah Al Tamimi, the bill aims to limit the size of any expatriate community to less than 10% of the Kuwaiti population, which is now estimated to be 1.25 million. Under the terms of the proposal, no community should be larger than 125,000 people. Applying to unskilled and semi-skilled expatriates, if the bill is passed, it could have a disastrous effect on the relatively stagnant Kuwait construction industry, which has only recently shown signs of coming to life. Should the bill be passed by parliament, thousands of foreigners could be forced to leave the country. The Indian community is the largest with approximately 670,000 members. The Egyptian community is the largest among Arab nations, with around 520,000 people. Others that could be affected include the Bangladeshi, Pakistani,

31.3% Estimate of the percentage of the population of Kuwait who are Kuwaiti nationals.

044

Filipino and Syrian communities. Although highly qualified and skilled expatriates would not be included in the proposal – and GCC, European Union and US citizens, as well as consultants and doctors, would be exempted – the business community has warned of grave economic consequences should the bill be passed. Once the legal and legislative committee assesses the bill and judges it in line with the constitution and the laws of the country, the interior and defence committee will have to pass the bill. If the bill passes, it will be taken up by lawmakers, who will debate its merits in parliament. From there, should it be endorsed, it will be referred to the government of Kuwait for final approval. The bill follows calls to address the imbalanced demographics of the country. “There is a critical need to find solutions for the demographic situation in Kuwait,” said MP Khalil Abdullah. “We need to have a Kuwaiti population that is at least equal to the number of foreigners who live in the country. “Since we have 2.5 million expatriates, we need to bring the number down to 1.1 million in the next five years, which means we need to reduce their numbers by 280,000 every year.” Construction professionals point out that such a ruling could have a huge impact on ongoing construction and infrastructure projects, which need foreign labour to be completed. About two-thirds of Kuwait’s total population of 3.479 million is made up of unskilled Asian labourers, the bulk of them employed in the construction sector. “If qualified people are to arrive here and get an understanding of how the construction industry works, and if they’ve got a limited time of five years, then it’s obviously going to be difficult,” said Clive De Villiers, vice

president of Contracts and QS Services at KEO International Consultants. “Some of the big infrastructure projects last for more than five years. If you get people in, and then after five years [they leave], you lose all the knowledge and everything else on that project.” Faleh Al Ajmi, a Kuwaiti national and the head of Business Support at Ecovert Facilities Management, called the bill “short-sighted” and “lacking in vision”. Al Ajmi said that should the bill pass, it would be a massive setback to Kuwait’s plans to develop as a nation. “Without expats, we cannot build the country. I’m very happy to have expats in the country, they’re doing a good job and without them, we cannot build the country,” he said.

But the decision to push the bill forward could be influenced by a desire to nationalise the Kuwaiti economy. With the Gulf states determined to push through nationalisation, Kuwait could be following suit, said De Villiers. “This could well be a chance for the government to ensure that the ‘Kuwaitisation’ of major projects does happen. It will integrate them more into the business. So yes, in that respect, it could happen.” However, Al Ajmi said that while this was a possibility, and that he would understand the thinking behind that, he still had reservations about the decision. “The local people, they are not more than 1.1 million. We are not enough to do all the projects. And especially when

“There is a critical need to find solutions for the demographic situation in Kuwait. We need to have a Kuwaiti population that is at least equal to the number of foreigners who live in the country” MP Khalil abdullah

the local people don’t accept a lot of labour work, whether it’s construction, cleaning or being a driver – even being a receptionist in a hotel. This is normal here because of the lifestyle here, where the income [for locals] is too high. They will not accept these standard of jobs.” Despite these concerns, De Villiers remains optimistic that the bill will not pass, citing the many concerns and the inherent difficulties that will come with it. “I’d be very wary of this bill coming to fruition. It’s quite controversial, but like most government authorities, they do come up with ideas that are controversial and they put them up so that they can receive feedback and get a general reaction. But personally speaking, I don’t think it’s going to happen.”

045

OMAN

The Sohar Port project is pegged as a game changer in the Middle East’s port sector.

Oman’s steady progress Oman remains committed to a construction programme to expand its economy, with transportation and logistics playing a starring role

mongst the GCC nations, Oman’s bid to diversify its economy is given special signficance by its comparatively small oil reserves, coupled with a young population. While oil production began declining in 2000, it was able to reverse the trend with enhance recovery techniques, meaning extraction costs are higher than in other GCC countries. The Omani government has followed through with a massive works programme, looking to expand the country’s transport infrastructure, expand its education, healthcare and housing. For its five-year plan spanning 20112015, $78 billion was budgeted for spending on transport and social infrastructure, and with a number of residential and hospitality projects currently underway, the Sultanate’s construction market has been on an upswing, though growth has been steady and sustained. “The construction and projects market in Oman is in good health,” according to Sultanate of Oman Population

3.926 million

of which nationals

70%

Population aged 24 and under

50.3%

Real GDP (2013)

$79.66 billion

Gross National Income per capita

$25,150

Real GDP growth, est. 2014/2015

2014: 3.4% 2015: 3.4%

Fiscal breakeven oil price (2015 est.)

$107.50

046

a report by Dentons & Co, Oman, a law firm that has published an overview of Construction and Projects in Oman. “Bearing in mind Oman’s relatively small population, the scale of the construction and infrastructure development projects that have already been committed or are under construction is impressive,” said David CourtneyHatcher, one of the authors of the report. Logistics and transportation is a major focus for the government, and the Oman Ministry of Transport and Communications (MoTC) has a large number of planned projects, in the rail, ports, pipeline and airport sectors. Besides railway network expanding over 2,250km, worth $15bn, several other logistics and transport projects are being undertaken by the MoTC in the country, such as the Duqm, Salalah and Sohar ports, the expansion of Muscat and Salalah International Airport, and construction of airports in Adam, Ras Al Hadd, Sohar and Duqm. By developing its port infrastracture Oman is making use of its natural advantage, with the Sohar and Muscat ports located on the Arabian Sea, beyond the Strait of Hormuz, which is an oil transportation chokepoint. Sohar Port is pegged as a game changer in the Middle East’s ports sector, and has grown at a staggering 1000% ever since it welcomed its first cargo in 2007. In 2014, Sohar was expected to welcome 2,000 ships. It has an associated freezone of 4,500 hectares which has already attracted more than $15bn of investment. No let off in spending

Despite the drop in oil, and in concert with the other GCC nations, Oman has signalled in its 2015 budget that there will be no-drop off in spending, projecting a fiscal

deficit, with spending at 14,100 billion rials ($36.3bn), an increase of 4.5% from 2014, and amounting to a 22% projected deficit. In a note on the budget, KPMG wrote that “The 2015 budget comes amidst a strong reduction in global oil prices but a commitment from the Oman Government that critical projects will remain on track and that projects intended to diversify the economy, and stimulate economic growth, will continue to be supported.” KPMG also noted that scrutiny of the 2015 showed that no new taxes were announced, despite debate about additional taxes that could be used to boost government revenues as oil prices fell. One solution, which had been called for by some members of the Majlis al-Shura, the Consultative Assembly of Oman, is a 2% remittance tax, which would affect Oman’s 1.9 million foreign workers. According to figures from the Central Bank of Oman, in 2013 foreign

workers sent home 3.5bn rial ($9bn), and a 2% tax would net the state coffers around OMR60-70m per year. Nevertheless, mid-to long-term Oman needs a high price of oil to keep its budgets in the black, and it remains to be seen what measures will be taken if the price of oil remains low. Labour measures

Labour remains an uncertainty for the construction sector. Oman’s Ministry of Manpower has set an Omanisation target of 30%, compared with an estimated figure of 18% in the construction industry. The sector could face a significant labour challenge if the nationalisation of its workforce is pushed through, and there have been calls for realistic targets for the sector, such as 25% . Increasing Omanisation rates in the construction industry may be difficult, since the sector is not perceived as an attractive

employment option, due to lower salaries on average than the public sector, longer working hours and remote job locations. “The construction industry is not so comfortable. Contractors in particular work long hours and the locations aren’t exactly the most salubrious. Trying to attract [Omanis] into the industry is a little bit difficult then,” said Marco Malpiedi, managing director of Atkins Oman. “You’ve got expats working here who are working on quite low salaries. So for contractors and consultants like us, to take in someone who’s not necessarily 100% on board with putting in the extra hours and who then sees people in the public sector working fewer hours, earning more and getting pension schemes after 15 years, it’s difficult.” “It’s very difficult to persuade Omanis to come and work in the private industry, to get lower salaries and take a lot of hassle.

But at the same time, [Omanis] appreciate it because they realise that this is somewhere you can actually learn something.” However this doesn’t mean that there isn’t the desire to hire Omanis, as Malpeidi says. In fact, he insists it’s quite the opposite. “We want to reflect the country, we want not to just meet the 30% target, but make it even as much as 70%. We don’t want to bring in talent from the outside, we want to see what’s here. “The problem that we have is that we take in graduates and undergraduates, they work for us for three years and then they go because they want a higher position and we say, ‘no, if you want to build the muscles, it has to be natural, otherwise it won’t happen.’ But that just means that they can get a job elsewhere, or they can start their own company or they can go into the Ministry and get a high position, because they’ve got the Atkins stamp.”

047

BAHRAIN

Developers are realising the potential of offering ancillary developments and retail.

Bahrain gets a boost With large-scale retail developments in the pipeline and a second causeway to Saudi Arabia, Bahrain can expect to see renewed economic growth

istorically less wealthy than its GCC counterparts, the Kingdom of Bahrain has taken longer to find its feet after the global recession. However, with a few major upcoming developments and increased interest in its retail sector, the Bahraini economy can look forward to a significant boost. The retail sector in the Kingdom has been the strongest performer in recent years, with the launch of ambitious developments like The Avenues, a $93 million waterfront project on Manama Corniche. Another major project which boosted the retail sector was the $53 million Seef Mall Muharraq, a 70,000sqm development. There is also the much-anticipated Dragon City, a Chinese-themed development to be built on 115,000sqm of land with 55,000sqm of retail and wholesale area. Construction on the project began in April last year, and the mall is expected to be complete by the end of June 2015. According to real estate advisory firm CBRE, smaller-scale neighbourhood retail is yet to be serviced on a wide scale by retailers but is gaining popularity as developers recognise the risk of oversupply due to a growing number of mega-malls. Smaller scale retail developments include the 3,150sqm Segaya Plaza launched by Eskan Properties, which is fully let, and the Danat Al Madina in Isa Town, which has witnessed interest from retailers. Moreover, Cluttons predicts that the upcoming King Hamad Causeway, the second terrestrial link between Bahrain and Saudi Arabia, will significantly boost Bahrain’s residential, retail and industrial markets. Bahrain’s economy heavily relies on traffic entering the Kingdom from its larger and richer neighbour Saudi Arabia, via

048

the existing 25km King Fahd Causeway. “The current causeway has been a significant contributor to growth in the economy. The announcement of a second connection to Saudi will no doubt boost the performance of the residential and retail markets further,” says Harry GoodsonWickes, head of Cluttons Bahrain. “We have recorded a steady rise in demand from Saudi nationals seeking to purchase weekend homes in Bahrain this year. In addition, the steady level of domestic housing requirements has prompted several developers to make a return to the market to capitalise on this growing pool of buyer demand. The longer-term ramifications for the residential market are too early to judge, but there will be an obvious long-term boost to the broader market with more traffic expected to flow into the Kingdom from Saudi Arabia.” According to Faisal Durrani, Cluttons’ international research and business development manager, “The Bahraini economy, which is still working to find Kingdom of Bahrain Population

1.343 million

of which nationals

46%

Population aged 24 and under

35.6%

Real GDP (2013)

$32.89 billion

Gross National Income per capita

$19,700

Real GDP growth, IMF estimate

2014: 3.9% 2015: 2.9%

Fiscal breakeven oil price (2015 est.)

$116.40

its feet following the global downturn and unprecedented national tensions, will receive a tremendous boost from improved connectivity with the rest of the GCC. The Kingdom already serves as a critical logistics hub for the central Gulf, and the new $5 billion King Hamad Causeway will further strengthen the attractiveness for logistics and industrial occupiers looking for additional hubs in the region aside from Dubai.” Goodson-Wickes adds that the retail sector will also see a boost from the new causeway, with weekend tourist traffic into the country, particularly from Saudi Arabia. “In fact, we are already seeing Chinese and other major regional and international brands seeking out space in retail developments such as The Lagoon and Alargan Village. This announcement will no doubt drive further interest in this exciting segment of the real estate market.” Despite the positive outlook for its retail sector, Bahrain’s office market looks bleak. Adversely impacted by oversupply, the country’s commercial property market suffers from “demand levels that remain close to record lows”, causing rents to fall in most submarkets during the first half of 2014 before stabilising in the third quarter of last year, Cluttons says. CBRE did not record any improvements in the Kingdom’s office sector in 2014, due to the oversupply situation. Vacancy rates currently stand around 25% on average, with new developments close to completion, such as the United Tower and Al Baraka Bank Building at Bahrain Bay, to be added to existing prime office stock in the first half of 2015. “There is definitely a large supply of commercial projects and structures in the market, largely because they are an integral part of the master-plans loaned out for development,” says

“The announcement of a second connection to Saudi will no doubt boost the performance of the residential and retail markets further” Harry Goodson-Wickes, Head of cluttons BaHrain

Stefan Burch, director of professional services for Knight Frank’s Bahrain and Saudi Arabia operations. “In my view, Bahrain’s commercial property segment is very elastic in its supply and potential supply, and it is a risk in my opinion.” The residential sector fared better in 2014, however, with rents remaining largely the same across Manama. Cluttons recorded no change in rents during the first three quarters of 2014, despite the weak economic environment, and they are expected to remain stable over the near to medium term due to a limited supply pipeline. Areas such as Juffair and Amwaj Islands are popular with US military employees and people new to Bahrain, the CBRE report says. “Amwaj Islands, which are considered as a ‘safer’ option, continue to attract local and foreign investors alike, as the area develops as an attractive community proposition with retail, hospitality and entertainment components already in place,” says Steve Mayes, director, Middle East Research, CBRE Bahrain. Burch says that mixed-use developments will be the next big thing in the Kingdom. “Mixed-use developments appear to be the next big offering in Bahrain. Reef Island and Amwaj Islands are gaining traction in terms of attracting attention from buyers and investors,” he says. “Historically, Bahrain’s problem has been the lack of people and residents. But areas like Reef and Amwaj have responded very well to the demand from existing and new buyers; they provide more than just a place to live in. Bahrain has traditionally been a singleuse development driven market, but developers are now realising that potential residents need to be offered ancillary developments and retail support as well.” Bahrain could benefit it hosted a mega event like the Expo or World Cup says Burch, or could develop offerings that are unique to the region. Nevertheless he remains positive about the Kingdom’s future. “Bahrain is yet to figure out a clear USP, perhaps, but if the activity on developments like Amwaj and Reef is any indicator, then Bahrain is set to grow into a mature market too.”

049

Egypt

egypt

With Egypt’s young and growing population there is a huge demand for affordable housing.

Optimism on the Nile Investment from the UAE and the wider GCC in Egypt’s construction sector can promote stability in the country

gypt faces a bumpy road towards economic recovery, but there have be positive signs in 2014, both economically and politically, and investment from the GCC in its construction sector will further promote stability in the country. The Middle East’s most populous country, Egypt has a population of 83.4 million, and is forecast to reach 100 million by 2025, or even as early as 2020. The country has a young population base, with 50% under the age of 24. This creates scope for mid-range and affordable housing developments, expected to account for about 90% of overall property demand. “The demographic argument is extremely strong. Egypt has very, very strong domestic demand and that’s what makes it one of the attractive locations.” says Chris Seymour, partner at EC Harris. “The initial developments were more around the high end, but there’s certainly scope for affordable housing, and I would suggest that affordable housing is actually a need there.” Dr Theodore Karasik, a senior adviser

050

at Risk Insurance Management, says that affordable housing is in demand in Egypt. “There’s going to have to be housing for various levels of income. There has to be also housing programmes or housing constructed and built for low-income families so that everyone has an ability to have useful and healthy living conditions.” UAE and GCC investors can play a key role in revitalising Egypt’s economy by developing housing projects in the country. “Egypt’s economy seems to be moving in a positive direction. Part of that is thanks to GCC support for the economy of Egypt. The UAE particularly is in the lead in investments in Cairo and in Egypt in general,” Karasik says.

54.1%

Youth unemployment (ages 15-24) in Egypt. Job creation and construction investment will help stabilise the country.

The UAE has already demonstrated interest in Egypt’s housing market. Some of the upcoming projects include Arabtec’s $40 billion housing scheme to provide affordable accommodation in the country, with a view to building a million homes within the next five years. UAE developer Emaar’s Egyptian subsidiary Emaar Misr is also working on projects in the country, such as its Marassi and Mivida developments. Majid Al Futtaim plans to open malls in Egypt in coming months. Other countries seem to be following suit, with new investment announcements include aid, expected to support economic recovery. Egypt has also been actively trying to boost the economy. Investment in infrastructure, including the Suez Canal expansion and a large-scale road development project, is a significant part of President Abdel Fattah el-Sisi’s plan for the country’s recovery. But it’s no secret that Egypt faces multiple development challenges, understandably giving foreign investors the jitters. Security is one of the key concerns. Another

“The GCC has a vested interest in making sure that Egypt is stable. It’s a key to stability in the core of the Middle East” Theodore KarasiK, senior adviser, risK insurance ManageMenT

major challenge for Egypt is power – the country has been grappling with an energy crisis and frequent power shortages. “Egypt is facing severe issues in terms of power shortages, and there is no immediate solution in sight. [But] this crisis presents a number of opportunities, especially in alternate sources of energy that can lead to a reduction in the import bill and wasteful subsidies,” says Abhay Bhargava, associate director and regional head – Energy and Environment Practice, MENA at Frost & Sullivan. “The crisis also presents opportunities for private sector participation in the forecasted rapid increase generation capacity.” And with Egypt playing catch-up, there are good opportunities. “From an opportunity standpoint, consumption and infrastructure spending are coming off a particularly low base in 2013. This suggests a massive growth opportunity across most sectors, rendering most projects highly viable from a commercial standpoint,” Kamal says. “Clearly the country needs to be in a sense rebuilt and restructured. So capitalising on the infrastructure that

is required in, for example, electrical generation, transportation and tourism, is an important aspect of this renewal.” Power shortages also impact energyintensive industries such as steel and cement. “The knock-on effect of a rise in energy costs will ultimately be reflected in end product prices. Housing projects may experience a degree of cost inflation which may be passed on to the end buyer.”

Arab Republic of Egypt Population

83.39 million

of which nationals

99.6%

Population aged 24 and under

49.9%

Real GDP (2013)

$272.0 billion

Gross National Income per capita

$3,140

Real GDP growth, IMF estimate

2014: 2.2% 2015: 3.5%

Investment in the country’s construction sector could boost stability via job creation, says Kamal. “The unemployment issue, this of course is going to take time to fix. What is happening is that, with the advent of projects in the construction sector, there’s more opportunity to employ people, and over time this will eat away at some of the unemployment problems.” Solving unemployment would help stabilise the country. “The GCC has a vested interest in making sure that Egypt is stable. It’s a key to stability in the core of the Middle East, and it also signals the desire to make sure that all of North Africa ultimately remains stable,” Karasik adds. He seems positive that Egypt’s economy will regain momentum after the period of turmoil. “In five years, I think Egypt will be on its way to greater economic growth. It might be slow in the midterm. But it seems that with El-Sisi as president and with potential political reform and continued investment in infrastructure projects, I think we should be optimistic.”

051

ANALYSIS

SMARTer Construction – How the GCC’s mega-projects need to learn post-2008 The resurgent construction market in Dubai is a reminder that construction needs to be economically sustainable and well managed to avoid cyclic busts, writes Ben Hughes, director of Infrastructure and Capital Projects at Deloitte Corporate Finance Limited

he 2013 Cityscape exhibition, in the eyes of many commentators, marked the return of Dubai and the GCC as a whole for conceptualizing and then delivering mega-projects once more. Whether they are actually delivered is arbitrary – it is the sentiment and optimism in the market that is the important point here, the projects will follow in one form or another regardless. This was further borne by the 2014 Cityscape exhibition which appeared to add to the building momentum as a result of the UAE being awarded the right to host Expo 2020. So are mega-projects back, and has Dubai returned to its pre-2008 development boom? As in many aspects of life, one has to look back in order to look forward.

Figure 1: GCC Market Index

Figure 1 below provides stark reading. In the years leading up to 2008, development activity across the GCC, but in particular the UAE, was marked by an escalating upward trend. Between December 2004 and December 2008, the value of live projects rose from circa $80 billion to $1.3 trillion. Late 2008 and early 2009 saw a cataclysmic drop in live projects in the UAE, from a high of $1.3 trillion to $800 billion in one year, with a further systemic decline in the following years, reaching a low of circa $500 billion in December 2012. The phrase “boom and bust” is often used when referring to the UAE’s sharp rise and fall in activity, and the scars of failed or abandoned developments can still be seen today when driving around the city. What is interesting is that Bahrain

KSA

UAE

Qatar

maintained its more modest momentum in terms of development activity, whilst other GCC Countries remained static, and newer contenders emerged for the largest growth in development activity, notably Iraq. So does this represent a valuable lesson in “measuring” capital expenditure rather than being driven purely on market sentiment and the all too familiar rivalry of who has the tallest, the biggest or the shiniest of buildings? Probably not is the answer. It could be argued that the sheer draw of Dubai, and the UAE as a whole, is always likely to be reflected in this type of development cycle, although the announcement of Dubai’s successful Expo 2020 bid is likely to perpetuate the latest cycle for some time yet. It is also hoped that

Kuwait

Oman

Bahrain

Source: MEED Projects

1,200,000 1,000,000 800,000 600,000 400,000

Construction in Dubai is expected to experience a lift following the awarding of 2020 Expo, write Deloitte.

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1 Dec 2005

1 Dec 2006

1 Dec 2007

1 Dec 2008

1 Dec 2009

1 Dec 2010

1 Dec 2011

1 Dec 2012

1 Dec 2013

1 Dec 2014

053

ANALYSIS

Deloitte Case Study: Wrestling control back to the boardroom A large regional contractor with a US$ multi-billion portfolio of projects, was experiencing significant operational issues and concerns around the accuracy of reporting from the project level to the board level. Unsubstantiated forecasts for cost and time to complete the projects were causing a disconnect between the actual project’s performance, and information relied on by the board for decision-making. As a result, unexpected cost overruns and losses were reported at project close. How we helped We conducted a programme of diagnostic reviews of the company’s projects, including site visits and desktop reviews of information. The findings were captured on a one-page project dashboard, specifically developed for the client, providing an accurate overview of the project’s status in terms of cost, schedule, quality and risks. Real information around key issues was considered for the Project Control and Reporting blueprint. This involved a review of current (“as-is”) business processes related to Project Controls and Reporting, a gap analysis of “as-is” processes against industry leading practices (“to-be”), conducting workshops to identify and confirm gaps between “to-be” and “as-is” processes, and the development of a roadmap for the implementation of “to-be” leading practices.

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Results The development and use of a one-page project dashboard report provided the companies’ Executive Board with the accurate information required to regain control of their projects. This meant that the previous gap between projects and the boardroom was bridged by ensuring “one version of the truth”. Our work provided clarity around common issues encountered by projects, and recommendations for immediate improvement (“quick wins”). The company’s in-house ability to undertake diagnostic reviews of its projects was developed and more accurate reporting of current and forecast performances of projects was ensured. A roadmap was developed to align current practices with industry leading practices which DTTL will deploy and implement alongside the company’s teams. Critical Success Factors Knowing your financial position and exposure through standardised systems and processes aligned with accounting requirements. Understanding areas of commercial and technical risk so that people, processes and systems are enhanced to deal with these. And then finally, the Executive Board using real information to make high-impact decisions for the business.

lessons have been learnt from the past by addressing demand with supply rather than feeding supply without any underlying need or want for some of these developments. With an upward trend already evident in other GCC countries, such as KSA, Kuwait as well as Iraq, it is clear that lessons should be learnt from the 2008 “crash”. And whilst much of the expenditure in these peripheral markets is predominantly on infrastructure investment, there are some valuable checks and balances that need to be put in place to ensure a similar situation does not arise once again. SMARTer Construction

So how does the industry as a whole ensure that growth is sustainable, thus ensuring mega-projects are not a mere by-product of an economic cycle? The notion of SMART, a mnemonic aimed at setting objectives (Strategic, Measurable, Attainable, Realistic and Time-Bound) is one which people are familiar with through training courses, project management and employee objective setting. But can this be applied across an entire industry? Whilst each project or capital expenditure programme has its own criteria of what defines success, be that maximization of return on investment, sustainability credentials or simply being “the tallest”, what is evident is that a system-wide framework of measurability would greatly enhance the industry’s ability to keep itself in check. Strategic: Development tends to happen here in the GCC based on an assumed need, e.g. “Let’s build the world’s largest mall because people will come”. This type of ideology of building to create demand has to stop, as it is unsustainable. Emaar recently announced a huge, 13.6 million Sq.m development near Dubai World Central. Does Dubai need a development this large, and is there currently demand to fill it? The short answer is probably no, but given Emaar’s enviable track record in delivering projects, it is expected that this development will be supported by the inevitable influx of people on the back of a property cycle or boom. Measurable: As evidenced earlier in this article, the “boom and bust” mentality of previous cycles must be eradicated

to ensure sustainable development and economic growth. While all mature economies inevitably succumb to “cycles” of one form or another, the polarity of the peaks and troughs in the UAE’s economic cycle over the last 10-years has to serve as a clear warning to avoid history repeating itself. With the scars of the past so evidently clear across the UAE (Dubai in particular), and the issues so well publicized, a more measured approach to development needs to be implemented. What does this mean? Ensuring that there is demand for a particular development use-type or attraction would be a good start. A solid business case/ plan with the requisite level of research and analysis will not guarantee success, but it will almost certainly provide context to influence a business decision regarding capital expenditure. Figure 2 evidences the rate of development across the GCC as at October 2014. As can be seen from the graphic, the majority of development was in Saudi Arabia with the UAE following behind with 30% of overall development activity. Post Expo 2020 announcement, we expect that the UAE’s share of the piechart above will be heightened, and it is therefore imperative that a measured approach to development is adopted. Attainable: The attainability of land, debt finance or government-backed funds across the GCC has not historically been an issue per se. Even taking into account the UAE “crash” of 2008, as can be seen from Figure 1 earlier in this article, capital expenditure was still evident across the region and in large sums. So the attainability in this context means something else. It is the attainability of the right mix of demand, supply, the right ambition and the right team to deliver. Ensuring that the business case stacks-up is only one part of the equation. A developer may have a strong ambition to deliver a particular project, have all of the funds needed to deliver the project allied with demand for that type of development, but without the skills to deliver and impartial advice to guide, it could still fail spectacularly. Realistic: Realism is linked to the preceding paragraphs on attainability.

Figure 2: Development Activity across the GCC, October 2014 Source: MEED Projects

UAE: 30% KSA: 45% Qatar: 10%

Oman: 5% Kuwait: 8% Bahrain: 2%

unskilled/ semi-skilled resource who are willing to work 12-hour days, 6-day weeks for prolonged periods and with low levels of pay. So it would be relatively easy to assemble a very large workforce quickly. But in doing so, does that mean that projects across the region are being delivered at a pace that inevitably affects quality, all to ensure that they are operational within a particular timeframe? This is certainly true for some developments that have been delivered in the recent past. Allocating enough time to deliver a quality product has to be a better, long-term strategy for success than the immediate, instant, overnight approach that has previously been adopted. If enough time is allocated to the delivery of a project, allied with the right skills mix and the objective, impartial advice we refer to earlier, then it is more certain that a project or development will be a long-term success than a failure. Conclusion

Many of the failed projects in Dubai are not just simply a by-product of finance being withdrawn. They are a culmination of poor planning, appointing the wrong team to deliver and not having objective advice at crucial points in the development cycle. We often refer to the preparation of a business case as the initial “gateway” before a development is taken forward. Whilst this does not guarantee a successful outcome, if done properly, it can provide a client with an “expected outcome”. What is abundantly clear is that many of the UAE’s failed projects back in 2008 and leading up to the “crash” did not have this level of detailed planning or foresight. Time-bound: The phrase, “Timing is Everything”, is never more applicable than here in the GCC. And whilst that applies at a macro level, it also applies equally at a micro level. Throughout this article, we continue to refer to “planning” of projects or developments, ensuring that they are sustainable in terms of demand, supply, operation, etc. The time factor is equally significant, as delivering a project to meet a particular milestone or event can often be the fine line between success and failure. But what about allocating enough time for projects to physically be delivered? Across the GCC, there is an abundance of

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

The fact that much of the anticipated development across the UAE will be debt-financed will ring alarm bells with many, particularly those who are not based in the region or who do not know the region particularly well. The world has, however, in economic terms turned a corner, something the GCC, and in particular the UAE, wants to drive forward to renewed economic prosperity. Elsewhere across the GCC, expenditure on capital projects continues unabated. In developing economies like Qatar, KSA, Kuwait and Iraq, infrastructure investment is huge. Developing urban metro systems and bus/ rail networks appears to be the order of the day, and with this it is likely that complementary development will take place, further driving economic development. So, whilst there is an air of positivity across the GCC in terms of market confidence, in particular the UAE following the Expo 2020 award, adopting the “SMART” principles discussed above may ultimately help avoid an economic downturn of the magnitude experienced in 2008 and beyond. Deloitte Corporate Finance Limited is regulated by the Dubai International Financial Center.

055

PROJECT MANAGEMENT

The Dubai Metro is a cornerstone of the transportation network in the city.

Mark Langley

“Wise project management enabled Dubai Metro completion despite market downturn” Mark Langley, president and chief executive officer of Project Management Institute – UAE, discusses the best project management practices for public and private sector organisations What was your biggest takeaway from the recently concluded Dubai International Project Management Forum (DIPMF) 2014?

Mohammed Alabbar’s speech explained, recognised its core strengths and built an organisational structure around them.

The conference has been fantastic from a content standpoint, and one of the most significant things I heard was all the examples of how executive sponsorship has improved project management practices in organisations. Authorities like Mattar Al Tayer from the Dubai Roads & Transport Authority (RTA) and Saeed Al Tayer from Dubai Electricity and Water Authority (DEWA) are excellent examples of how the support of executive leaders within organisations can turn things around for overall project success. The same goes for Emaar Properties, which has, as chairman

What motivated your partnership with the RTA to co-host DIPMF?

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I think the RTA understood very early on that intelligent project management practices would benefit its operations, and that’s possibly one of the factors which drove chairman Al Tayer to set up the Project Management Office, headed by Ms Laila Faridoon, within the organisation. I don’t know what led him to the decision, but I can most certainly see its results. By recognising the RTA’s in-house capacities and establishing the PMO, he’s implemented what we at PMI have identified as best practices in

organisations. He’s essentially building career paths in project management by identifying the skills of individuals who can lead the allotted departments and bringing in greater standardisation. Can the local private sector replicate the successful project management practices followed by the RTA?

The failure of an organisation can often be due to the absence of executive sponsorship for greater project management standards. Various governmental agencies in Dubai, such as Al Maktoum Airport Authorities and DEWA, have recognised that working with the private sector benefits both their capacities on mega projects as well as their capabilities for better project

management. The core elements of project management are the same, but a private firm has different factors to consider while adopting any new plans and ideas. What are these factors, and how do they differ from those a government body faces?

For starters, a private sector entity may be governed by market performance if it is publicly traded. The private sector might brand their targets “strategy” or “management agenda”, whereas the government will call it a “vision”. There is immense pressure on private sector companies to consistently deliver results without letting the impacts of a strategic change in project management practices and methods affect their performance.

In such a situation, any organisation, be it private sector or public, should focus its efforts on funding and driving those operations which take it closer to its vision or strategy, and eliminate any ideas which might not directly drive growth. How do governments prioritise their operations in such a scenario?

The Dubai Metro is a great example of wisely picking your operational priorities. The Dubai government, even during the market downturn of 2008, did not stop fuelling investment into the Metro, because it recognised that the project would eventually benefit the residents of the city. The Metro was always a part of the strategic vision set in place by His Highness Sheikh Mohammed bin Rashid

Al Maktoum, and the decision to complete the Metro, launched shortly after the downturn, shows their mature capacities in the field of project management. What’s in store for project managers of the future?

Small private companies have to build their capacities, and will certainly learn to prioritise the best practices for their organisation as events like DIPMF catch up. More effort is also being invested to enhance educational channels for students to ensure they are provided precise project management studies. The PMI is working with universities and private sector firms in this regard, as it’s an area of opportunity for both to spread their expertise.

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disputes

Global Construction Report 2014 - Middle East region In its fourth annual report on global construction disputes, EC Harris, an Arcadis company and built asset consultancy firm, found that dispute values in the Middle East had dropped significantly since their high in 2011

failure to properly administer the contract remained the most common cause of dispute in the Middle East region, followed by changes imposed by the employer, which moved up from third place. One striking statistic from disputes in the Middle East was that 46% of joint ventures ended up in dispute during the year, the highest of any region covered in the report. One of the critical decisions executives must face with any new project is determining how the project will be administered in design, management and administration and selecting the best contractor/ consultant for the planned project. Selecting the method of procurement and form of contract is the first step, unfortunately the Middle East is still experiencing inappropriate forms being used for the type of project and employer’s requirements, e.g. EPC contracts are still being used despite it being known that there will be changes to the

Most common methods of Alternative Dispute Resolution used during 2013 in the Middle East Alternative Dispute Resolution 1

Arbitration

Party to party negotiation

Expert determination

employer’s requirements, design and build requirements are also being administered with a build only contract which usually results in claims and potential disputes. Some clients still seek a ‘magic formula’ that will avoid disputes by amending standard forms to what they hope will pass on even more risk and deny contractors/ consultants the ability to make claims. In our experience this usually results in ambiguities and conflicts being incorporated into contracts; a recipe for generating claims and potential disputes. Of course there are some bespoke contracts being used that are tried and tested and work very well.

All too often we are witnessing a great deal of time and effort placed in selecting, negotiating and agreeing contract terms and conditions, only for them to be placed in a dusty drawer and not implemented, by both parties. In addition employers are content in passing on all of the risk at the lowest price to contractors/ consultants who are only too willing to accept them. In summary, in answering the question that is often posed, i.e. “how do we avoid disputes?”the recommended response would be as follows: selection of the right form of contract is a crucial first step with minimal amendments in the particular conditions. Selection of the best contractor/consultant who is capable for performing in accordance with the contract, not just the lowest price, comes next. This should be followed by diligently administering the whole contract conditions by both parties from inception to close out. Passing on all of the risk all of the time to the lowest bidder does not necessarily result in value for money and achieving the right outcome.

The five top causes of construction disputes in the Middle East, from EC Harris’ Global Construction Disputes Report 2014. 2013 Rank

Cause of Dispute

2012 Rank

A failure to properly administer the contract

Employer imposed change

Employer/ Contractor failing to understand and/or comply with its contractual obligations

Errors and/ or omissions in the Contract Document

An unrealistic contract completion date being defined at tender stage

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Region getting on top of disputes The average value of disputes in the Middle East has dropped signficantly, but there are still areas for improvement, says Edward McCluskey, partner at EC Harris

s major provider of contract dispute resolution services to the construction industry, EC Harris, an Arcadis company and built asset consultancy firm, has a watchful eye on developments across the global construction disputes landscape. For the past four years the company has charted the value of construction disputes at a regional and global level. During that time, the average value of construction contracts under dispute in the Middle East has been above the global average, while in 2011 and 2012, the Middle East figures were the highest in the world. But the pleasing news is that after its peak in 2011, the average value of contracts under dispute has fallen steadily, from

$112.5m in 2011, to just $40.9m in 2013. Edward McCluskey, partner at EC Harris, says that the disputes in the region in 2010, 2011 and 2012 stemmed from the market collapse in 2009-10. According to the figures, the peak of disputes arising out of the market crash was in 2011. The timing of this peak was caused by larger disputes taking longer to reach the dispute stage. “Claims tend to have a long gestation period before coming into the formal dispute resolution forum, and the more complicated the claim the longer the gestation period tends to be. These larger disputes have gone through every possible mechanism to try to resolve it among themselves, and eventually it, if unresolved, goes to formal dispute

resolution,” says McCluskey. The fact that the value of disputes in the Middle East has stood above the global average can be attributed to the high value of construction projects taking place here, especially government spending on major projects, such as power plants. This also accounts for the high value of disputes in Asia and North America during the Global Financial Crisis. “That doesn’t mean that all mega projects fall into dispute,” says McCluskey. “The prime example is the London Olympics, where there were very few disputes, despite being extremely high in value. That could be down to the form of contract, where the risk was equally balanced between the

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disputes

Accepting a higher bid can make sense when a specific contractor can add value to a project.

$40.9m

The Middle East region saw dispute values in 2013 decrease to the lowest value since the research began at $40.9 million, down from $65m in 2012.

Is accepting the lowest bid always right? There is an obvious commercial logic to accepting the lowest bid for a tender, but the high costs involved in a project failure, dispute, or poor-delivery, means that clients may benefit from taking a more nuanced approach. But doing so may be difficult, and go against ingrained habits. “If you put a contract out to tender, and a contractor comes back with the lowest price, it’s human nature to think, ‘Well they’ve complied with everything in the tender, why should I not take their bid?’,” says McCluskey. In some cases the lowest bid may not have fully complied with the tender, they might not have been pre-qualified beforehand, so the developer or client is taking on extra risk, justifying it by believing they will save money. “The step to procuring these contracts really is to get to know who you are tendering to, make sure you know the company and that they can deliver, and then thoroughly check what is coming back to make sure they’ve not deviated from the tender.” “It doesn’t always make sense

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to accept the lowest bidder, because each of the contractors brings something unique to the project. If you’ve got a project where, for example, the flooring is of particular importance, and there’s one flooring contractor who is higher than the rest but he does the best flooring, then you’ve got a reason to go with that contractor, even if they are a higher bidder.” Knowing what is most important for a particular contract allows a developer to practise value management, and whether the emphasis is on speed, cost or quality, it allows them to put into place a value management plan. “It’s about choosing the right contractor that can deliver your project,” says McCluskey. “Yes, price may be an important consideration, but if you’ve done a cost plan beforehand, you will have a good estimate of the costs of the tender that are going to come back from in the tenderers. “If price is the driver, then you accept the lowest bidder and be prepared to manage the risks. If you’re aware of the risks, you can make a plan to try to manage them.”

employer and the contractor, and where the time scales involved were realistic.” Contracts where the time scale is extremely tight, and where the job is awarded to a contractor who has come in with an extremely low price have a higher chance of falling into dispute, says McCluskey. In these cases, the contractor is operating on a knife edge, and it doesn’t take much to tip them over into the red. In the worst case scenario, the contractor is unable to complete the project due to lack of revenue, and is unable to obtain bank loans which leaves both the contractor and employer in an unenviable position. Following the 2009-10 downturn, governments across the region took action to limit the impact, especially in Dubai. Special forums were set up to hear disputes, and many of the disputed contracts were able to be negotiated at the pre-dispute phase. In the Dubai International Financial Centre, a special tribunal was set up to hear disputes in relation to one particular developer. “Government-level measures that were taken in the Middle East were successful,” says McCluskey. There have also been permanent measures implemented, such as the introduction of the Arbitration Law in Saudi Arabia in 2012, which in part was designed to give more clarity and certainty to overseas investors. “It’s a tremendous movement from the Saudi government to recognise international arbitration, and to introduce a law that is practically common to all arbitration practitioners. There are one or two clauses that are particular to Saudi Arabia, but in the main it’s a very positive step,” says McCluskey. The industry may itself more adverse to allowing a contract to enter into a dispute, which are unpleasant

and stressful for all the involved parties. Disputes draw management resources away from their core roles, and can require hiring of specialists, whether consultants or lawyers, to search through company records and prepare the case, incurring high costs for any business involved. “Disputes are expensive and stressful - not just for the company, but for the individuals involved,” says McCluskey. “Disputes are something that really should be avoided at all costs, but unfortunately due to the large number of stakeholders that are involved in construction, they tend to happen.” Many contracts now involve multi-tier dispute resolution, so that parties are brought together at every opportunity to try and resolve the dispute amicably before any claim or difference is referred to formal dispute resolution. Relationships and dependence can also force resolution. McCluskey says that the number of disputes between main and sub-contractors is falling, since there may only be a limited number of sub-contractors in a given market, and major contractors will need to use them on future jobs. “It makes more sense to work things out as quickly as possible to preserve the relationship.” Once a contractor has experienced a dispute, McCluskey believes they will then look closely at the particular element in the contract that led to the dispute when they bid for future jobs, whether it’s an extremely tight deadline, a clause about ground conditions, or a low price.

It’s a tremendous movement from the Saudi government to recognise international arbitration, and to introduce a law that is practically common to all arbitration practitioners “They will learn from that, and they will be wary about entering a contract on the same basis that they have done before. Disputes have an impact on absolutely everybody that’s been involved, and once a contractor has been involved in one, he’s going to try his best to avoid any others in the future.” But while it’s mostly good news on the disputes front, there are also some statistics from the EC Harris report which should give pause for thought. Most startling is the revelation that 46% of joint ventures in the Middle East fail in their first year. JVs are an important feature of the construction industry landscape, and a high failure rate can impact on construction timescales as well as wasting business efforts. McCluskey says that JV failures reflect issues common in any kind of relationship failure - partners failing to understand

each other’s interests, and not getting to know each other before forming the partnership. “JVs are like a marriage: it has to be worked at, and there’s a level of commitment that is required from both sides. To do it properly there needs to be an understanding by both sides of what the other party can bring to the table, and realistic expectations from one another.” Personal differences between partners can also exacerbate situations, leading to a high rate of JV failures. “It requires the right mix of individuals. Not everyone gets on 100% of the time, so matching those that can actually work effectively together is essential.” Ignoring these basic principles is a big cause of JV failures. What the industry needs to heed is that while while the landscape for disputes is certainly improving in the region, all parties need to be proactive to avoid problems. In answering the question ‘how do we avoid disputes?’ EC Harris provides the following advice: Selection of the right form of contract is a crucial first step with only essential amendments in the particular conditions. Selection of the best contractor or consultant who is capable for performing in accordance with the contract, not just the lowest price, comes next. This should be followed by diligently administering the whole contract conditions by both parties from inception to close out. Finally, words that may be novel to some in the industry: Passing on all of the risk all of the time to the lowest bidder does not necessarily result in value for money and achieving the right outcome.

Average construction dispute values by region, from EC Harris’ Global Construction Disputes Report 2014 Region

Dispute values (US$ millions)

Length of dispute (months)

2010

2011

2012

2013

2010

2011

2012

2013

Middle East

56.3

112.5

40.9

8.3

14.6

13.9

Asia

64.5

53.1

39.7

41.9

11.4

12.4

14.3

64.5

10.5

34.3

11.4

14.4

11.9

13.7

7.5

10.2

27.9

6.8

8.7

12.9

7.9

Continental Europe

33.3

35.1

27.5

11.7

6.5

Global Average

35.1

32.2

31.7

32.1

9.1

10.6

12.8

11.8

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disputes

For a construction company, cost is not only the financial element, but also includes reputation, stress and management time.

Avoid and resolve construction disputes Experts at EC Harris provide best practice guidelines for avoiding and resolving disputes in the construction industry

rom research undertaken by EC Harris, the average value of disputes in the Middle East in 2013 was US$40.9m and took nearly 13.9 months, on average, to resolve. Given this backdrop it is submitted that mediation may be the answer avoid and resolve disputes in the region and beyond. Mediation can put aside the need for formalvcourt or arbitration proceedings, parties involved can save significant amounts of time and money and preserve or renew business relationships. More importantly, mediation enables parties to focuson finding solutions to the real underlying problems. With a success rate of approximately 80 percent, according to the International Mediation Institute it’s certainly worth investing in.

1. Be open-minded

• Challenge assumptions - Assume that people are trying to do their best. Both parties should try not to draw immediate conclusions about one another or the work involved. Instead, challenge the thoughts and options that arise to achieve the best results. • Ask questions - What am I missing? What is this really about? By asking additional questions, you are helping yourself find the answers. Often times,people may not provide enough information or context around a situation; therefore it is up to you to question with courtesy for the solution. • Get into their shoes - How would you feel if you had been treated in that particular way? Look at things

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from their perspective to gain an understanding as to why a party is acting in particular way. This could help change the way you work and improve efficiency. • Think before you act - Process your thoughts and walk more slowly. Take the time to consider your thoughts and options before you act. Perhaps you could end up answering your own question or eliciting information that you would not have otherwise attained. 2. Communication is key

• Detox the language - Being respectful and treat others the way you want to be treated – both spoken and written, is a game changer. In a diverse environment, language can come across in a different manner. Try to evaluate the situation and be considerate with how you come across. Before pressing send on that e-mail, re-read it and think how it could be interpreted. Try to focus on the positive to deflect life’s little bullets. • Listen - Listen to understand, not to respond. Take the time to soak in what others are saying rather than using the time to gather your thoughts as they speak. Listening provides an opportunity to gain new knowledge and understanding. This allows you to positively focus and build upon what you have heard. • Acknowledge capabilities and what others are saying - Organisations and teams want to succeed. To do this the individual members need the people involved to succeed in their individual

and collective roles. This means putting the right people in the right position. Try not to put people in a position to fail. Instead, cultivate the talent around you for immediate and sustainable results. • Respect local customs and language - The Middle East is a multi-cultural region and filled with people from different backgrounds. Use this opportunity to learn from others and work as a team. Be humble, flexible and respectful. After all, we all have something to bring to the table. 3. Know the alternatives and assess the impact

• What are the options for

resolving this matter? Think outside the box to consider all the possible options and outcomes. This approach will undoubtedly bring things into new a perspective. • Prepare well and have a structure - The more prepared you are, the easier it is for you to see the strengths and weaknesses of situations. Preparation saves time and allows for efficient use of planning. • Assess all the costs - Look at the cost of any settlement and nonsettlement. Cost is not only the financial element, but also includes reputation, stress and management time. • Look at the big picture - What do you

or they really need? Is it a labour issue, a small financial cost or a big impact to the business? Take a step back and evaluate the real situation. Once the needs are established then finding the solution can be worked about to achieve the needs of all concerned. Without establishing the needs one really is playing darts blindfolded. • Separate the people from the problem - Be part of the solution, not the problem. If you take people out of the equation, it will allow you to focus on solving the issue. • Help them to save face - Learn the value of humility in any state. In any situation, resolve an issue and find a

solution in a manner where you keep your reputation and respect others. Solution

From the insights above, parties can see the core focus of resolving or avoiding any dispute in the industry. In applying these simple, but easily forgotten, steps disputes can easily be avoided or resolved. The above steps are employed in most mediation which shows how mediation is derived from non-toxic communication. The mediator can act as a bridge taking the positive to each party or as a buffer filtering the negative and destructive force of toxic communication. Mediation is cost effective and can save relationships.

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disputes

Certainty of payment remains a big issue for many Western companies.

David Merritt

Construction claims evolve Interview with David Merritt, senior vice president and regional managing director Middle East and Africa for Hill International Claims Group How has the regional claims market developed in recent years?

When I first arrived in the Middle East seven years ago, there wasn’t a culture of claims – some would argue that was a good thing, while others would disagree. While it’s a cliché, dispute resolution often involved a sheesha and a coffee in a majilis – two people sorting out their differences amicably. Things are different now, particularly in the UAE. The construction industry has grown and matured immeasurably, and so have the claims and dispute resolution practices that attach to it. Construction is a risky business, wherever you are in the world, but the Middle East does pose some particular problems. Qatar is probably where Dubai was five years ago – it does not have an established claims culture, although that is slowly changing. The same can be said for Saudi Arabia, whereas Oman and Bahrain are more aligned with what is happening in the UAE.

064

Overall, the Middle East remains too risky for many risk-adverse American and European contractors who are now not as active in the region as they once were. Certainty of payment remains a big issue for many Western companies. In the United States and Europe, you have open and transparent legal systems together with established arbitral laws underpinning most commercial relationships, whereas the same cannot always be said of some GCC countries. What causes the majority of disputes in this region?

The vast scale and engineering challenges posed by some of the more iconic projects means that technical boundaries are consistently being pushed. This often means more risks are being taken and delays in construction are commonplace. Another challenge for contractors working in the Middle East is that employers not only want their unique and iconic project, but they also want it

tomorrow. I’m consistently amazed at the abridged timeframes in which contractors are required to complete projects. Contractors’ baseline programmes are often way too aggressive, with little to no float built in for the unforeseen. This means that delays are often critical and project completion dates are missed, and additional costs are incurred by all parties. I think that projects tend to come to construction too early – most projects are only partially designed when tenders are awarded and construction begins. Design development takes place during the progress of the works, which means that change and variations to the scope of works is the norm. This in turn often causes delay and disruption to the progress of the works. How do you usually work with your clients?

You normally get involved in a tense situation where big money is at stake. For instance, an employer is not going to get

his building on time and the contractor is denying any responsibility for those delays and making his own claims. Emotions are often running high when we get involved. We have to take a step back from the front line – there is a job to do and we know how to go about it. We carry out a forensic assessment and establish culpability – who’s responsible for what. This involves reviewing all the contemporary data, the contract, the baseline programme, the costs, and talking

“Qatar is probably where Dubai was five years ago – it does not have an established claims culture, although that is slowly changing”

to the relevant people. It can be quite formulaic in terms of the steps to take, but the actual issues are always different.” We’ve been involved in so many arbitrations and seen how disruptive it is to the respective businesses. It is time-consuming, stressful, expensive and probably best avoided. The whole process is not conducive to ongoing business relationships, but sometimes it’s the only resort. If we can help clients avoid arbitration, that’s always good.

065

DATA

Sector focus Infrastructure in the GCC Railâ&#x20AC;&#x2122;s expanding network Islamic finance Infrastructure investment Deloitte: Hotel economics in Dubai Interview: MDPâ&#x20AC;&#x2122;s Mahnaz Liaghat CiR Survey: BIM adoption and usage The challenges of BIM Sustainability in construction Benchmarking the FM industry

066

067

INFRASTRUCTURE

Awarding of mega-projects can lead to big fluctuations in new project values in a given calendar year.

GCC mega projects After China, if there is any other place where mega infrastructure projects are the flavour of the season, it is the Gulf Cooperation Council (GCC) region. The GCC’s infrastructure narrative is fundamentally driven by ‘national vision strategies,’ tied to long term economic and social objectives

nfrastructure project awards across the GCC were forecast to exceed $86bn in 2014, an increase of 77.8% over 2013. Figures released by construction intelligence firm Ventures Onsite in 2014 showed a dramatic increase in contract awards across the region, in every country except Saudi Arabia. Qatar will award projects worth $26.2bn compared with just $9.4bn in 2013 while Kuwait is expected to award $3.45bn, almost 10 times the previous year. In the UAE, $15.18bn will be awarded, almost five times the 2013 contracts, while in Oman infrastructure awards are expected to reach $7.4bn - up $5.5bn on 2013. Meanwhile Bahrain, which awarded $382m in 2013, is expected to award $3.4bn. Saudi Arabia’s forecasted award of $29.34bn – the highest in the region – represents a decrease

year on year; however, 2013’s total awards of $33.6bn included the $22.5bn Riyadh Metro project. Infrastructure projects make up 16% of the total construction value of GCC projects, and rail projects like the Riyadh Metro are the main beneficiary. According to Ventures, it is estimated that the rail sector is worth $200bn as the six countries aim for an integrated GCC-wide network by 2018. The value of UAE’s building construction sector stands at almost 60% of the total projects in the construction industry, followed by infrastructure, oil and gas and power and water, with total construction projects awarded in the UAE totaling $38bn in 2013. Ventures expects $46bn in awarded projects in the UAE by the end of 2014. The April 2014 report by the consultancy, titled ‘Exploring UAE’s Strong Investment Environment’, remarks that the new projects, combined

with many previously stalled projects now forging ahead, will continue to bolster the 2013 upswing into 2014. The report remarks that the UAE’s GDP for 2014 is set to grow at 4% to reach $404bn, up from $390bn in 2014, fuelled by the construction sector upturn and support from the oil and gas sector. Retail sector growth, which is forecasted to hit 33% by 2015, has emerged as a key driver of the construction market. New developments on the horizon include Dubai’s recently announced ‘Mall of the World’ entertainment and hotel district at an estimated cost of $6.8bn.Other important construction projects will include metro rail lines and stations, airports, roads, ports, railways and utilities. At the population growth rate seen at the end of the review period, the country requires an additional 4.500MW of new electricity generating capacity each year.

Estimated value of awarded infrastructure projects ($m) in GCC countries in 2014 compared to 2013 Year

Qatar

KSA

UAE

Bahrain

Oman

Kuwait

2013

9,426

33,609

2,939

1,922

382

2014

26,258

29,387

15,184

4,360

7,375

3,451

Total value of GCC infrastructure projects (in various stages) by country, August 2014 Country

Qatar

KSA

UAE

Bahrain

Oman

Kuwait

Value ($m)

103,022

163,022

95,121

14,270

32,121

32,871

068

069

INFRASTRUCTURE

Top GCC mega projects

Infrastructure hotspots

Airports

Qatar, UAE and Saudi are in the top 12 global markets for infrastructure investment Location

Budget

Status

Al Maktoum International Airport

Dubai Airports

UAE

$32bn

New

Midfield Terminal Building

Abu Dhabi Airports

UAE

$6.8bn

Ongoing

Kuwait Airport Expansion

Directorate General of Civil Aviation

Kuwait

$6bn

New

Muscat International Airport

Oman Airports Management Company

Oman

$1.8bn

Ongoing

King Abdulaziz International Airport

General Authority of Civil Aviation

KSA

$1.5bn

Ongoing

Projects

Owner

Location

Budget

Status

Makkah Mass Rail Transit

Makkah Mass Rail Transit Company

KSA

$16bn

New

Rail/Metro

Oman National Railway

Oman Railway Company

Oman

$15.5bn

New

Jeddah Metro

Jeddah Metro Company

KSA

$12bn

New

Doha Metro Phase 1

Qatar Rail

Qatar

$4.2bn

Ongoing

Abu Dhabi Light Rail – Phase 1

Department of Transportation

UAE

$3bn

New

Owner

Location

Budget

Status

Utilities Projects Al Uqair IPP Project - Phase 4

Saudi Electricity Company (SEC)

KSA

$5.2bn

New

Hassyan Clean Coal Power Plant

Dubai Electricity & Water Authority

UAE

$4bn

New

Independent Power Plants Project - 2

OPWP

Oman

$1.5bn

New

Salalah 2 IPP

OPWP

Oman

$1.5bn

New

Duba 1 Integrated Solar CombinedCycle Plant Project

Saudi Electricity Company (SEC)

KSA

$1.1bn

New

Roads, tunnels and bridges

he Middle East is the most dynamic infrastructure investment market for investors, according to the second ARCADIS Global Infrastructure Investment Index. The report findings revealed that the Middle East – Qatar, the UAE and KSA – scored in the top third of the index due to the countries’ strong business environment, healthy pipeline of development work and growing economies. “The Middle East has some of the highest investment profiles of anywhere in the globe, with average growth in the construction industry reaching double digits,” said Tim Risbridger, Partner and Head of Infrastructure – Middle East at EC Harris. “National vision strategies are driving a phenomenal peak spend in these key markets over the next four to five years, increasing investment opportunities for the private sector. Currently, almost half of the investment planned across the region’s major cities relates to transportation.” The Global Infrastructure Investment Index ranks the world’s 41 most dynamic

Top 12 infrastructure destinations

index. However, with a government which self-finances most major projects, investment opportunities are limited; other countries with major investment plans, such as Qatar and the UAE, were tipped as more promising for investors. Risbridger continued, “A key differential that we have seen in Asian and Middle East markets is that those countries that have a clear integrated strategy that ties the infrastructure development plans to business and economic objectives tend to be nearer the top of our ranking. This gives long-term clarity to investors and is something that European markets, in particular, would do well to emulate if they are to succeed in attracting more private finance into infrastructure.” The report also underlines that the key risk will be inflation in construction resources, from manpower and specialist skills to construction commodities. Despite the potential for rising inflation, the Gulf countries’ strong credit ratings and enviable taxation regimes will continue to appeal to investors.

Top five ranking falls and gains 2012-2014

Position

Country

Difference 2012

Singapore

(=)

Qatar

(=)

UAE

(+1)

Canada

(-1)

Sweden

(=)

Norway

(=)

Malaysia

(=)

USA

(+3)

Projects

Owner

Location

Budget

Status

King Hamad Causeway

Ministry of Transportation

Bahrain

$5bn

New

Sharq Crossing Project

ASGHAL

Qatar

$5bn

New

Australia

(-1)

Qatar-Bahrain Causeway Project

Qatar Bahrain Causeway Foundation

Qatar

$4bn

New

(+3)

Sheikh Zayed Road Double-Decking

Roads & Transport Authority (RTA)

UAE

$3bn

New

USA

(+3)

Masirah Causway Bridge

Ministry of Transport & Communications

Oman

$660m

New

KSA

(=)

070

countries with the greatest potential for growth and investment in their economic infrastructure. Economic infrastructure consists of the infrastructure that makes business activity possible, such as transportation, communication, distribution and energy assets. The boxes below lists the top 12 most attractive countries for infrastructure investment in 2014, with their difference in ranking from 2012 in brackets and top five gainers and losers in attracting finance. The study looked at various issues, including the ease of doing business in each market, tax rates, GDP per capita, government policy, the quality of the existing infrastructure and the availability of debt finance. Combining all of these factors provided a strong overview of the risk profile for each market and how attractive each one is likely to be to potential investors. Singapore’s integrated strategic plan linking infrastructure planning with business and social requirements helped it retain top position in the

RANKING GAIN

Owner

RANKING DROP

Projects

USA

S. Africa

Indonesia

Philippines

+3 -4

+3 -3

+3 -2

Netherlands

France

Spain

Chile Turkey

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RAIL

Saudi Arabia’s 450-kilometre Haramain high-speed railway will create a much-needed link for pilgrims travelling between the two holy cities.

Rail’s expanding network Public sector spending has breathed new life into the MENA region’s long dormant rail sector

ailways aren’t a new phenomenon in the Arab world. The 19th century railway boom in Europe and North America left its mark on the Middle East and North Africa (MENA) region as well. The first railway line in the MENA opened in 1852 linking Cairo with Alexandria; the sector reached its zenith in 1908 with the opening of the 1,300-km Hejaz railway between Damascus and Medina, made famous by Lawrence of Arabia. But intervening world wars, the discovery of oil in the Arabian Peninsula and intermittent political and economic instability led to railways taking a back seat for most of the 20th century. Ed James, Director of Analysis, MEED Projects says: “In the Gulf region, local population took to roads encouraged by new road networks and cheap fuel. At the same time, existing networks in some of the pioneers of rail travel in the region suffered from underinvestment.” However, the last 10 years has seen a sea change in the region’s approach towards rail investments. According to MEED Projects, a total of $300bn worth of rail and metro projects are planned or under execution in the MENA region. The largest market, by a huge margin, is Saudi Arabia with over $100bn worth of projects planned or under construction. Qatar has a rail and metro project pipeline valued at $40bn. The UAE, Egypt, Iran, Kuwait and Oman have $10-30bn worth of stated investments in their railway projects. “Even if only half of these projects actually materialise, you are still looking at $150bn worth of investments in the region in the next 5-10 years,” says James. A key factor behind the upsurge in rail

072

projects has been growing oil revenues, spurred by high oil prices (which only started tumbling in the latter half of 2014). Within the GCC, infrastructure sectors like ports and railways were the main beneficiaries of government spending aimed at economic diversification. Demographic growth, which is putting strain on existing transport infrastructure, is another factor. The GCC has added over 8m people over the last 10 years while the Middle East, as a whole, is expected to add 100-115m people by end-2015. This acts as a natural impetus to invest in transport infrastructure to ensure that life can continue as normal. Other factors include political desire to improve access to more remote areas and stimulate economic development, more visible in Saudi Arabia and Oman, and last but not the least the Dubai effect. “It is important not to underestimate the Dubai effect,” says James. “By pioneering the GCC’s first metro system, Dubai proved that metro projects can be successful in the Gulf.” Scale of ambition

According to MEED Insight, the region currently has 28,882km of rail networks with Egypt topping the chart at 9,633km. But there are also countries like Libya, Lebanon and most of the GCC states that have next to non-existent rail networks. “Some countries have a lot of rail while some have little or not at all but all this is changing rapidly,” says James. “Currently, there are more than 41,000 km of new rail projects planned in the region. While not all these projects may go ahead – for example, Iraq, Libya, Yemen are facing political instability – nonetheless, it is indicative of the scale of the ambition. Even if only half

of those projects ago ahead, we are still looking at 20,000km of new rail networks.” It would be correct to add that the Dubai effect is in full flow with metro and high speed rail projects getting off to a flying start, especially in the GCC, compared to mainline networks. See Top 5 largest Rail Projects in the Middle East. In 2013, Qatar awarded contracts worth $7.3bn for Phase 1 of the Doha Metro while Saudi Arabia awarded more than $22bn in contracts to three foreign-led consortia for the design and construction

According to MEED Projects, a total of $300bn worth of rail and metro projects are planned or under execution in the Middle East and North Africa (MENA) region

of the Riyadh Metro. In the case of Qatar, work on the first phase is being carried out under five separate contracts - the Gold Line, Green Line, Red Line North, Red Line South and the Major Stations packages. Four of these were awarded in 2013 while the Gold Line package, at $3.3bn the single largest contract of Phase 1, was awarded in April 2014. Late last year, Qatar Rail invited architects and building contractors to pre-qualify for the construction of architectural elements of the metro project before

moving on to freight and passenger lines. Rail projects that merit tracking in 2015 include tenders for Oman National Railway Phase 1 and the Mecca Metro, prequalification for the Jeddah Metro, tendering for the Cairo Metro and prequalification for Project Management Consultancy (PMC) services and Preliminary Design Consultancy services for the Kuwait Metro project, which has been revived as a government-funded project rather than a Public Private Partnership (PPP) as envisaged earlier.

073

RAIL

The Etihad Rail project will provide transport for many of the UAE’s major industries.

Value of MENA rail projects planned or under construction (US$M 000s)

Top 5 largest rail projects in the Middle East

Source: MEED Projects 120

100

$9.5bn

Riyadh Metro Lines 1 & 2 2013 Bechtel/Siemens/ Almabani/CCC

Algeria

074

Consolidated Contractors

Bechtel Corporation

Almabani

Cosider Groupe

QDVC

Alstom

Dubai Roads & Transport Authority

Saudi Railway Co

Bahrain Ministry of Transportation

Eastern Province Municipality

Jeddah Metro Company

Kuwait Ministry of Communications

Qatar Rail Company

Mecca Municipality

Saudi Railways Organisation

Egypt Ministry of Transport

Source: MEED Projects

Impregilo

Top 10 MENA contractors based on rail work (US$M 000s)

Source: MEED Projects

Samsung C&T

Top 10 MENA rail clients by value of projects (US$M 000s)

78.4km first phase of the main freight route two between Dammam and Riyadh. A study on a railway connecting Bahrain and Saudi Arabia is expected to be completed by the end of March. Two routes have been proposed for an 87kmlong rail link, which will link Bahrain to the GCC Railway via Saudi Arabia. Canadian engineering consultancy SNC Lavalin has been tasked with conducting a study on the Bahrain-Saudi rail link. Qatar is progressing on its segment of the GCC rail network which includes a 146km line from the border with Saudi Arabia to Mesaieed and the New Doha Port on the east coast. This first of four initial phases is due to be completed in 2018, while the second phase, connecting Doha West International station to Bahrain and the Hamad International Airport, is scheduled for completion by 2021. In the case of Oman, three consortia

Siemens

The top future rail projects in MENA are Riyadh Dammam High-Speed Rail, Alexandria-Aswan High Speed Railway Line, Dammam Metro, Oman National Railway, Mecca Metro Lines B&C, Jeddah Metro – Orange and Blue lines, Saudi Land-bridge, Abu Dhabi Metro and Qatar Integrated Railway Project (QIRP). In Saudi Arabia, tendering for the Jeddah Metro is not expected to start before the end of 2015 if not later while for the Mecca Metro, bids have been invited from the prequalified consortiums for phase 1. Saudi Arabia’s cabinet has already approved the project at a total cost of $16.5bn. In November last year, Prasarana Malaysia Berhad won the bid to be the ‘Shadow Operator’ for Phase 1 of the Mecca Metro, providing operations and maintenance consultancy services to the Makkah Mass Rail Transit Company

during the construction of Phase 1, which comprises two lines with 22 stations and spans 45.1km, including 24.9km of underground rail network and is expected to cost $6.8bn. Last year, Saudi Railways Organisation (SRO) has awarded a $1.6m contract to a consortium led by Spain’s Consultrans to study options for the highspeed line linking Riyadh and Dammam. It awarded a $104.4m contract to local contractor Al Mobty for the phase 1 doubling of tracks on the Riyadh - Harad - Dammam freight line. The contract involves doubling a 214km section of the line from Hofuf to Harad over a period of two years. The design speed of the doubled line will be 150 km/h in order to enable SRO to run passenger trains between Hofuf and Harad and then to Al Kharj at a later stage. In parallel, China Railway Construction Corporation has been awarded a contract worth $32.5m to renew

Al Rajhi Holding Group

Future projects

Bahrain

Egypt

Iran

Iraq

Jordan

– Korea Rail Network Authority (KRNA), Técnicas Reunidas and Parsons International – have been shortlisted for the Project Management Consultancy (PMC) contract, which is yet to be awarded. EPC tender for the 207km Phase 1 stretch between Sohar and Buraimi has attracted 18 bidders, and the construction contract is expected to be awarded by mid-2015. Challenges ahead

While the momentum in the MENA rail sector in general and GCC in particular is to be commended, some fundamental challenges remain. Availability of cheap fuel serves as a disincentive to switch from cars to public transport. This reluctance is compounded by the region’s high ambient temperatures, which means future rail projects have to take into account how people can move smoothly from point A to B using train, metro and tram with options to get to their final destination when they get off. Climatic and topographic conditions also pose a fundamental challenge on the cost front. For example, sand can substantially increase costs by 10-20% or more due to higher O&M burden and in safeguarding or equipping the system to cope with sand. On the topography front, apart from sand dunes, some countries also present mountainous terrain that need to be tunnelled through and wadis that need culverts and viaducts. Outside the GCC, in places like Algeria, Egypt, Iran and Iraq with long

Kuwait

Morocco

Oman

Qatar

KSA

Tunisia

UAE

established railway networks, substantial investments are required in electrification, expansion and doubling of tracks and station improvements to improve the systems and increase usage. There are also geo-political challenges facing cross-border networks in terms of border control, integration and interoperability of systems and rolling stock. In terms of specific challenges, the metro projects in Saudi Arabia, Qatar and Kuwait and the main line projects in the UAE, Oman and Saudi Arabia are all going to be built in a small area in the next five years, which is going to put enormous constraints on labour, materials and expertise, resulting in delays or escalation of costs or both. Lack of local experience in building, operating and maintaining rail systems also impacts costs. However, Oman and Saudi Arabia are looking to develop in-country talent and have put in place in-country value addition requirements to address this challenge. A medium-term challenge is the decline in oil prices, which is expected to put brakes on public funding in the region. Of course, regional governments have committed to investing in ‘strategic projects,’ irrespective of the direction of oil prices and transport ministers have gone on record reiterating their resolve to move forward with rail projects. But if the past is any indication, a prolonged fall in oil prices could force phased-out implementations with longer schedules and a highly competitive market scenario, which could encourage unrealistic bids.

$8.4bn

Haramain High Speed Rail Phase 2 2011 2011 OHL/Adif/Renfe/Talgo/ Indra/Dimetronic/Cobra/ Inabensa/Copasa/ Imathia/Consultrans/ Ineco/Shoula/Rosan

$7.8bn

Riyadh Metro Lines 4, 5 & 6 2013 FCC/Freyssinet/Alstom/ Samsung/Strukton/ Setelc/Typsa

$5.9bn

Riyadh Metro Line 3 2013 Ansaldo STS/Impreglio/ L&T/Nesma & Partners/ Bombaridier

$3.8bn

Dubai Metro Green Line 2005 Kajima/Mitsubishi/ Obayashi/Yapi Merkezi

$3.8bn

Dubai Metro Red Line 2005 Kajima/Mitsubishi/ Obayashi/Yapi Merkezi Source: MEED Projects

075

ISLAMIC FINANCE

Sukuk is a fast growing financial instrument in the global bond market.

Sukuk on the rise Countries, corporates and infrastructure projects are looking to tap sukuk for their borrowing requirements

hough relatively small compared to conventional bond markets, the global sukuk market is growing rapidly thanks to an increasing number of sovereigns, corporates, infrastructure projects and banks seeking to tap the expanding pool of Islamic liquidity. Countries beyond the traditional centres of Islamic finance are also beginning to utilise Islamic finance, in order to both raise additional capital and claim a share of the related financial services growth.. The last three years have seen the global sukuk market double, with a CAGR of 30% for the previous 10 years. A recent report by Moody’s indicated that global sukuk issuance will continue to grow this year to reach around $70bn, nearly double the amount issued in 2010. The rating agency’s expectation for 2014 exceeds 2013’s figure of around $65bn and brings the market back on track toward 2012’s record volume of approximately $82bn. It also forecasts that the majority of issuance this year will come from sovereigns, representing around $30bn. According to Moody’s, market depth is increasing with the emergence of new instruments (such as sukuk) with longerterm structures, amortising and more equity-like features, helping to drive the rise in issuance volumes. In addition, the growing base of conventional investors is also supporting secondary market liquidity. At present, the main hubs for sukuk issuance are the Gulf Cooperation Council (GCC) countries and Malaysia, with the former dominating the international market and the latter the domestic market in terms of outstanding issuance. Khalid Howladar, Moody’s Global Head for Islamic Finance, noted that sovereign sukuk issuance is boosted by a number of factors, including: (1) Growing investor comfort with Islamic instruments

076

(2) A desire for stronger investment links with economies in the Gulf and Asia (3) The increasing financing needs and leverage appetites of some Muslim countries; and (4) The efforts of the governments of Muslim countries to support Islamic banking and finance, in line with the cultural and religious affinity of their native citizens. Given their currency pegs to the US dollar, GCC countries have a much stronger presence in the foreign currency (USD) sukuk market. This trend is likely to continue, given investor demand for Gulf credit coupled with the high growth levels, public spending plans and leverage appetite of many of the region’s borrowers. Within the GCC, Saudi Arabia has the most active domestic sukuk market, owing to its more insular banking system, abundant investment liquidity and large domestic economy. The Kingdom leads its Islamic counterparts in Qatar, Indonesia, Malaysia, the UAE and Turkey in terms of Islamic banking assets, with

Total global Islamic financial assets 2013

Banking: 80% Sukuk: 15%

Inv. funds: 4% Takaful: 1%

an estimated value of about $285bn in 2013 compared to $245bn in 2012. While sukuk issuance volumes are expected to remain concentrated in regions that have a natural cultural affinity with the sector, 2014 may have marked the beginning of a new chapter, with the UK issuing its inaugural sukuk, followed by Hong Kong and South Africa. “All three are major non-Islamic countries and indicate a significant change in the potential size, depth and liquidity of this market,” said Howladar. Capital of Islamic Banking

According to a Dubai Chamber research note, sukuk will play an important role over the next decade in securing funds for the substantial line-up of new projects in the emirate. Authorities in Dubai published new legislation in 2014 to enhance the regulatory environment for Islamic finance and boost sukuk offerings, in an effort to position the emirate as a hub for the sector. To further boost Shari’ah-compliant trade flows through the city, Dubai is also seeking to establish the world’s first fully Islamic export-import bank. This institution is expected to support the investment needed in the run-up to the UAE Expo 2020. “Dubai is powering ahead with the creation of its recently announced ‘Capital of the Islamic Economy’ initiative,” said Ashruff Jamal, PwC Global Islamic Finance Leader. “A number of the building blocks of this initiative, spanning seven key pillars, are already in place as the emirate eyes the $8tn global Islamic economy, which accounts for approximately 11% of global gross domestic product. This will inevitably position Dubai as the global destination of choice for Islamic products, finance and services, encourage public-private partnership in this rapidly growing sector as well as

Within the GCC, Saudi has the most active domestic sukuk market, with a insular banking system, investment liquidity and large domestic economy attract local and foreign investments as the emirate ramps up for Expo 2020.” The Dubai Chamber research note also pointed out that global financial assets are dominated by Islamic banking assets, which accounted for about 80% of the total assets in 2013, while sukuk made up just 15% of the market. However, the good news is that sukuk bond issuance has significantly grown over the last decade. The Dubai Chamber report, citing data from Rasameel Structural Finance, shows that the issue of sukuk bonds registered cumulative annual growth rate of about 47% over the period 2001-13. The upward positive momentum is more pronounced from 2010, when the sukuk market overcame the shock of the financial crisis and had a successful run. In 2012 it crossed the $100bn mark with issues valued at about $137bn; and in 2013, it surpassed $100bn for the second consecutive year, despite slowing down 12% compared

to 2012 with issues worth $119.7bn. The slowdown occurred during the first three quarters of 2013, and was attributed to the Federal Reserve announcement in May 2013 to cut back on the US stimulus programme. The announcement had a profound effect on the global bond market, which saw prices of fixed-income instruments, including sukuk, falling sharply, with fears that reduced bond purchases would push investors to higheryielding assets in the US economy. Infrastructure sukuk

As sukuk instruments become increasingly popular as an alternative funding source, they are also being considered for infrastructure projects. What could drive this trend are the new Basel III rules, which have lowered the attraction quotient of bank financing for long-term infrastructure projects. As these projects generate revenue from tangible assets,

they are consistent with the Islamic finance rules of creating economic value and are particularly appropriate for sukuk. However, the key issue for sukuk, as for any bond-like structure, is volume. The region’s bond markets haven’t demonstrated enough potential volume to bring bond sizes to a level where they are cost-effective. In terms of issuance criteria, sukuk have similar characteristics to bonds, so that once an appropriate volume is reached, they could become a viable structure. Stable regulatory frameworks and standard debt structures and rules are needed, as are more instruments apart from widely prevalent Murabaha and Ijarah structures. According to Dubai Chamber, existing instruments also need to be refined, as some sukuk structures are yet to gain wider acceptance. The market is also struggling with legal uncertainty over regulatory disparity in different countries.

077

finance

Globally, infrastructure investment has suffered due to the financial crisis.

investment will be needed for substantial improvement in conditions and performance. However, emerging economies still have only a fraction of the public capital available in advanced economies, due to lower efficiency of public Investment. Power generation capacity per person in emerging market economies is one-fifth the level in advanced economies, and in low-income countries it is only one-eighth the level in emerging markets. The discrepancy in road kilometres per person is similarly large. Key considerations

Anoop Menon

The right time? Public investment in infrastructure could be a powerful tool to counter a weak global recovery

he International Monetary Fund (IMF) has made a strong pitch for higher public investment in infrastructure to counter the weakness in global economic recovery. Christine Lagarde, Managing Director, IMF, has said that public investment in infrastructure, together with growthfriendly fiscal policies and structural reforms, can “accelerate growth, increase employment and achieve a new momentum” instead of muddling along to a “new mediocre”. She warned that a weak global recovery, if not addressed squarely, could lead to “low growth for a long time”, as people cut back on investment and consumption today in fear of tomorrow’s lower growth potential. Other clouds on the horizon include asynchronous monetary policy normalisation; migration of new market and liquidity risk to the less-regulated, non-bank sector; and a build-up of financial sector excesses in advanced economies. According to an IMF study on infrastructure investment, published in the IMF World Economic Outlook in April 2014, in advanced economies, an increase in infrastructure investment could provide a much-needed fillip to demand,

078

and is one of the few remaining policy levers available to support growth, given already accommodative monetary policy. “The crisis has inflicted a heavy toll on both growth and investment, which remain well below their long-term trends,” said Lagarde. “As of last year (2013), we have estimated that for the G-20 countries, GDP is 8% lower than it could otherwise have been. The shortfall in investment is even higher – nearly 20% below trend.” The study notes that the stock of public capital, which reflects to a large extent the availability of infrastructure, has declined significantly as a share of output over the past three decades across advanced, emerging market and developing economies. In advanced economies, this reflects primarily a trend decline in public investment from about 4% of GDP in the 1980s to 3% of GDP at present. This has led to deficiencies in the quality of existing infrastructure stock in these countries. For example, the American Society of Civil Engineers noted in 2013 that 32% of major roads in the US are now in poor or mediocre condition, and the US Federal Highway Administration estimates that between $124bn and $146bn annually in capital

4.5%

Cost of integrating lower emission standards into infrastructure investment as part of the total spend.

The WEO study bases its recommendation of higher public investment in infrastructure on two key factors. One, real interest rates are expected to remain lower than precrisis levels for the foreseeable future; and two, higher public investment raises output, both in the short-term because of demand effects and in the long-term as a result of supply effects, as the productive capacity of the economy increases with a higher infrastructure capital stock. In a sample of advanced economies, an increase of one percentage point of GDP in investment spending raises the level of output by about 0.4% in the same year and by 1.5% four years after the increase. In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise. Thus, if done correctly, public infrastructure investment pays for itself. The WEO study notes that economies with clearly identified infrastructure needs and efficient public investment processes, and where there is economic slack and monetary accommodation, stand to benefit from higher public infrastructure investment. Apart from the short-term boost to output, monetary policy accommodation helps limit any increase in interest rates in response to the rise in investment. The study also presents evidence from advanced economies that suggests that an increase in public investment that is debt financed can have larger output effects than one that is budget neutral (by raising taxes or cutting other spending), with both options delivering similar declines in the publicdebt-to-GDP ratio. But it also cautions that this should not be interpreted as a blanket

recommendation for debt-financed public investment, as adverse market reactions – which might occur in some countries with already-high debt-to-GDP ratios or where returns on infrastructure investment are uncertain – could raise financing costs and further increase debt pressure. For those emerging market and developing economies where infrastructure bottlenecks are constraining growth, the gains from alleviating these bottlenecks could be large; but increasing public investment may lead to limited output gains, if efficiency in the investment process is not improved. Thus, a key priority in many economies, particularly in those with relatively inefficient public investment, should be to raise the quality of infrastructure investment by improving the public investment process. This could involve, among other reforms, better project appraisal and selection that identifies and targets infrastructure bottlenecks, including centralised independent reviews, rigorous cost-benefit analysis, risk costing, zero-based budgeting principles and improved project execution. The report also quotes an Fiscal Monitor article from April 2014, which found that only half of the increase in government investment in emerging markets and developing economies from 1980-2012 translated into productive capital. The same article noted that reducing all inefficiencies in public investment by 2030 would provide the same boost to the capital stock as increasing government investment by five percentage points of GDP in emerging market economies, or by 14 percentage points of GDP in low-income countries. While the scope for investment differs across countries, depending on infrastructure gaps and fiscal space, ensuring efficient infrastructure spending is crucial for all countries. In the part of her speech touching on public investment in infrastructure, the IMF chief cited the Global Commission on the Economy and Climate’s finding that integrating lower emission standards into infrastructure investment would cost only a tiny fraction (about 4.5%) of total projected spending. Efficient investment can be good for growth, good for jobs and good for the environment.

079

HOSPITALITY FOCUS

Liaghat was the director and lead designer for the acclaimed Sofitel Dubai Palm Jumeirah.

Mahnaz Liaghat

Eye for design Mahnaz Liaghat, CEO of MDP, explains why passion and knowledge are prerequisites for design greatness

“

Hospitality design is all about the user experience,” says Mahnaz Liaghat, a former partner at Mirk and lead designer of the acclaimed Sofitel Dubai Palm Jumeirah. “When we designed the Sofitel, we kept it simple, but created an environment that makes the user want to stick around for longer. The corridor introduces a huge amount of green, which changes the air and your mood.” After successfully completing the five-star resort – featuring a lush internal green wall designed by Patrick Blanc – Liaghat set up her own Dubai-based firm, MDP Interiors. Located in TECOM, the sleek yet welcoming office demonstrates Liaghat’s flair for design, a skill that the Bahrani national cultivated early in life. “From a very young age I always stood out as being more talented than others. My passion towards 3D and art was noticeable from the beginning and I won three governmental awards for design. Due to my passion I was leaping through the field,” she explains. Liaghat pursued the bright lights of the USA as an exchange student and remained in the country for 29 years,

080

setting up a company along the way. She was persuaded to return to the Middle East as director of interiors for Burt Hill in 2005 and subsequently founded Mirk A&E in 2008, with two other partners. Although her new venture MDP is firmly focused on hospitality design, Liaghat is unconcerned about the increasingly competitive marketplace, with several other hospitality design firms operating in Dubai. “I think there are more than enough opportunities for qualified interior designers,” she says. “But in my experience, quality interior designers in this region are very, very rare. We focus on quality not quantity – this is why we are exceptional. “There are so many different aspects to a building – from architecture to MEP – but the work of the interior designer is the hardest. This is because the interior is what you see. If there is a mistake with the MEP, no one will talk about it. There is so much coordination that you have to do with interiors. “You are working with public spaces that will be used by many, many people and you have to understand human psychology, the environment, as well

as the needs of the operator. I haven’t seen many interior designers that fully understand all those aspects.” She emphasises that it is integral for a project owner to hire a quality designer. “If you do your job correctly, you will ensure a return on investment for the owner, as people will want to visit the project. On the other hand, a designer that does not see the big picture will make incorrect decisions that adversely affect the operation of the building. You have to be able to understand how all the disciplines fit together.” Liaghat adds that Building Information

Modelling (BIM) is an invaluable tool for aiding designers with coordination. “I am 100% for BIM and I will push it. No matter how good someone thinks they are, there will always be some aspect of the design that has not been looked at. Using BIM will help. I think a lot of people will resist using it, especially those that never worked on a megaproject, or internationally, but to me it is worth the investment,” she says. When asked to cite great examples of hospitality design in the region, Liaghat points to Al Qasr in Madinat Jumeirah as one of the better hotels in Dubai. Yet

she is unimpressed with many other hotels in the region. “They may have pretty candles, but if you go deeper you will discover that they had many issues, such as replacing the stone, etc. For the Sofitel we really focused on quality and got away from the normal style of the region. We showed that less is more.” According to Liaghat, boutique firms like MDP offer an enhanced level of client service compared to larger consultancies. She explains: “The large companies have many projects and many, less senior, people working on them. It is not often that

the person who met the client originally will actually work on the project. In my experience, the clients in the US really appreciated a CEO that took a hands-on role. I don’t see that happening here.” Liaghat is currently selecting an elite team of designers like herself, to focus on the key markets of Dubai, Qatar and Abu Dhabi. She continues: “I am gathering a group of passionate designers that really love their job and, as a result, really take care of the client. Our vision is to be more client-focused than other companies, and to look after the projects from A-Z.” An exceptional level of client service can also protect against delayed or cancelled payments – an issue faced by many consultants and contractors in the region. “I’ve never had that experience in my life,” Liaghat asserts. “I don’t think it is down to good luck. If you treat people well, they will treat you well. Clients chase me to send invoices. It is about the service you give. If you take care of the client, and look after their assets, they will not want to lose you.” She reiterates that the key ingredients to success – particularly with hospitality projects – are passion and attention to detail. “For hospitality projects, you need to focus on every little corner and detail, right to the last minute. And if you don’t love what you do, you cannot carry it through. If you have the passion, the reward when you finish the project is something that I cannot even describe. “Most importantly, the client will benefit from a return on their investment and an increase in operational profit.”

081

ANALYSIS

Number of hotels in the pipeline

The demand side of the equation

Historical visitor growth in Dubai from 2003 to 2013 was 7.5 percent a year on average. In order for Dubai to achieve the 2020 target of 20 million visitors, the rate of growth required is almost 9 percent per year from 2014 until 2020. Over the last three years the growth in visitors has exceeded the 9 percent target and the growth in 2013 over the 2012 number was almost 10.5 percent following two previous periods of growth in excess of 9 percent, proving that these high levels of growth are indeed possible and may even be exceeded. The development of Dubai’s tourism infrastructure and the everexpanding route network of Emirates Airlines are helping to add to the number of visitors to Dubai. The average length of stay at Dubai hotels has also risen markedly from 2.2 days in 2002 to 3.2 days in 2013 whilst the length of stay at hotel apartments in Dubai has risen even more from 3.1 days in 2002

to 5.3 days in 2013, adding significantly to the demand for guest accommodation. So assuming there are no dramatic market shocks, we estimate that the demand side of the equation is not a major concern. The history of room supply growth in Dubai

In the period between 2007 and 2011 a total of 78 new hotels were added in one of the busiest and most concentrated development periods in Dubai’s recent history as shown in the chart below. At its peak the highest number of hotels delivered in a single calendar year was 26, in 2011. Much of the planning for these hotels would have begun at least four years prior to their delivery, given the typical hotel development cycle. Hotel supply target for 2020

If we focus on hotels only, the market needs to deliver approximately 283 additional hotels between 2014 and 2020 in order to meet the doubling

Additional hotels

082

2009

2010

2011

2012

2013

2014

300

233

237

248

265

2006

2007

2008

2009

2015

2016

2017

2018

2019

2020

285

311

317

2011

2012

331

371

351

407

200 100

of hotel room stock (an additional 68,000 rooms) based on the average size of hotels recently developed in Dubai. According to data provided by STR Global, there are 56 hotels under construction or in the final stages of planning in Dubai across all hotel grades. This means that approximately 227 additional hotels are required to meet the supply target by 2020. The delivery challenge

A typical hotel development cycle runs between 36 months and 48 months depending on the complexity of the project and the scale and standard of the hotel. This means that if hotels are to be delivered to the market prior to 2020, the majority of the planning needs to be completed prior to 2017 for delivery by 2020. We have compiled a simulation of how the supply of new hotels could be delivered in order to meet the requisite room supply target. At the end of 2013 there were 331 hotels in Dubai. The chart below indicates our simulated growth in supply taking into account the known/ confirmed additional hotel supply (from STR Global data) and the required future supply growth taking into account the typical hotel development cycle. Travel, Hospitality and Leisure

2008

507 457

400

New hotels

2007

627 567

500

Supplying hotels in Dubai to meet the 2020 targets will be more challenging than securing the demand, write Grant Salter, director, Travel, Hospitality and Leisure Advisory at Deloitte Corporate Finance Limited and Martin Cooper, director, Real Estate at Deloitte Corporate Finance Limited

Supply gap to meet target

600

Hotel economics

n November 2013 the Department of Tourism and Commerce Marketing (DTCM) in Dubai announced the need to raise the number of hotel rooms available significantly in order to meet the growth in tourism envisaged by 2020. The total room stock is set to double by 2020 to around 160,000 rooms from the number of rooms available in the market at the end of 2013. As part of its Tourism Vision 2020 the DTCM is targeting 20 million visitors by 2020, a substantial rise from just over 11 million visitors in 2013. The doubling of the room stock from its current base of approximately 68,000 hotel rooms and 14,000 hotel apartment rooms will present a host of challenges to the market. Most industry players have raised concerns over the ability of the market to absorb such a high rate of increase in room supply. But it is not only the quantum of rooms that is the issue as much as delivering this high number in the targeted timeframe.

Existing hotels

The previous simulation shows that in order to meet the supply of hotels by 2020, up to 60 hotels need to be delivered to market in at least two consecutive calendar years. (See chart above which shows our simulated roll-out of new hotels.)

2010

2013

2014

2015

Location, location, location

In virtually any real estate investment, the mantra “location, location, location” holds true. As Dubai has matured into a complex and varied hospitality and tourism market, location plays an ever increasing role in the performance and value of real estate investments. With an additional 283 hotel sites needed between 2014 and 2020, the selection of suitable land plots for hotel development will become critical. The high demand for quality sites will drive land prices ever higher and in so doing, reduce investor returns. Mid-market hotels are again likely to feel the brunt of this hike in land pricing further reducing their appeal to prospective investors. So what does this mean for the market?

Fortunately the profitability levels at most quality hotels in Dubai are such that there is capacity to absorb the escalation in development costs and still render healthy returns. For many years investors in Dubai’s hotel sector have seen returns above other market norms. This “normalization” of the market will actually be a good thing for the market in the longterm. Market-wide occupancies are likely to be lower in the coming years and this will ultimately result in a lowering of room rates making the destination of Dubai more attractive to a wider audience and assist in achieving the targeted 20 million visitors in 2020 and even higher beyond that. Historically Dubai has managed to deliver an average of 14 hotels per year over the last 8 years up to a maximum

2016

2017

2018

2019

2020

of 26 hotels in a single calendar year. In order to meet the target of doubling the hotel room stock by 2020, this remarkable achievement needs to double to around 60 per year for at least three years, which is likely to be quite challenging. Building the supply is not the only challenge

Not only is the physical delivery of the number of additional hotels in such a short timeframe going to be stretching the contractors’ ability to meet the target but the impact of such high demand on construction materials, labor and, more importantly, funding is likely to drive overall development costs higher. Between 2014 and 2020 the GCC region will witness significantly higher levels of construction activity. Qatar is preparing for the FIFA 2022 World Cup, Dubai is gearing up for Expo 2020 and other general growth, and Saudi Arabia is forging ahead with numerous massive projects throughout the country. All of this demand is likely to impact overall construction costs, and consequently the attractiveness of hotel developments in Dubai, where year-todate construction material costs have risen by around 5 percent between January and June 2014 alone. The mid-market sector, which is very margin- conscious, will likely be impacted the most by this higher development cost regime, thus reducing the investor appeal for this very necessary sector of the market. Deloitte Corporate Finance Limited is regulated by the Dubai International Financial Center.

083

SURVEY

BIM expertise is helping them win contracts, say users.

BIM: Adopters see advantages The Construction Intelligence Report survey asked the GCC construction industry about their BIM usage, breaking down the results to get a clear picture of levels of adoption among the industry, and what results BIM users are seeing

uilding Information Modelling (BIM) became something of a buzzword in the GCC construction industry over the course of 2014, following the introduction of the BIM mandate by the Dubai Municipality at the start of the year. The mandate’s introduction kickstarted a drive within construction to ensure that companies were up to speed with the intricacies of BIM. While most of the major contractors and consultancies in the region were already long-time advocates of the technology, the substrata were found to be severely lacking, as shown by a survey conducted for the Construction Intelligence Report over late November - early December 2014. Set within a wider survey about the general state of the construction industry, questions were asked about the industry’s capabilities and confidence in BIM. The answers have proved to be eye-opening and enlightening, highlighting some of the concerns that a large swathe of the industry has about this technology.

Early days for some

When asked whether their company used BIM when working on projects, 362

participants responded to the question (those who indicated that BIM was nonapplicable to their business were excluded), with a surprising 42.8% of participants stating that their companies didn’t use BIM at all, at least for the moment. Only 13.8% said that their firms were full suite users of BIM services. 22.7% and 20.7% said that they were beginning implementation or were moderate users, respectively. This contrasts sharply with notions about the importance of the technology. 39.8% of respondents thought that the introduction of BIM into the GCC construction environment would fundamentally change the way the industry works. A further 43.1% thought that attitudes were changing rapidly, with BIM becoming increasingly important to firms when it came to winning construction contracts. Alarmingly, despite the mandate for BIM being in place for a year, only 7.9% of respondents said that they would consider themselves as advanced users of the technology. A further 26.7% said that they would consider themselves as moderate users. Unsurprisingly, the bulk of respondents

said that they had limited or no experience with BIM (30.3% and 35.1% respectively), painting a bleak portrait for the quick adoption in the region. So what do these results mean for the construction industry? Simply put, there is a clear will amongst end users in the construction industry to adopt and use the technology extensively. There is also a clear recognition that there is no way back to the old way of doing things, and only 16.3% of those who took the survey told us they believe that the industry can continue to operate without using BIM. Another 9.6% thought that it would be irrelevant due to the constant evolution of technology. What was slightly disconcerting though was the revelation that as much as 34.3% of all respondents thought that only larger contractors and consultants would be required to use this technology. Given the determination of Dubai Municipality to push through the BIM mandate, this is a mind-set that needs to be corrected. Adoption equals adaption

When examined and cross referenced, the survey results throw up some intriguing points of interest. For example,

Personally, what is your level of competency with BIM?

To what extent does your company use BIM on a project?

50%

40%

30%

20%

10%

of those who said that their companies are beginning to implement BIM, 56.1% said that they also believed that attitudes towards BIM were changing due to the increasing importance of BIM when it came to winning contracts. 16% said that BIM competence was vital to the bidding process for projects. Another 26.8% said that BIM expertise was a useful add-on, but it wasn’t essential to winning contracts. Finally, a mere 2.4% said that BIM expertise wasn’t required. This is correlation between responses is indicative of the way the industry now views the technology. When asked to assess the impact of BIM on the construction industry, 34.1% of those who said that they were only beginning BIM implementation believed that it would fundamentally change the way the industry operates. Meanwhile, 51.2% said that only larger contractors and consultants would need to use it, which indicates that there’s still work to be done to ensure that the message of BIM sinks in. Early birds see advantages

But positivity about BIM was more concentrated among those respondents who said that they use the full suite of BIM services. Among this group, an overwhelming majority (72%) said that they believe that BIM will change the fundamentals of the construction industry. Only 6% said that the industry can function without BIM, compared with 16.3% in the general group. Heavy users were also more likely to say that BIM competence was vital when bidding for projects, with 46% saying this was the case, compared with only 16.1% in the general group. This is a huge difference, meaning that heavy users of BIM are certainly seeing its advantages when it comes to bidding for projects, potentially winning them more business. Companies that are not using BIM, or are using it less extensively, may want to ‘up their BIM game’ in order to stay competitive. Big firms are big users

No experience

084

Limited

Moderate

Advanced

Currently not at all

Beginning implementation

Moderate users

Using full BIM suite

The survey results also indicated that

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SURVEY

Do you think BIM expertise is necessary to win construction contracts?

How much impact do you think BIM will have on the Middle East construction industry?

50%

40%

30%

20%

10%

10% BIM experience is not required

A useful add-on, but not essential

BIM is becoming more important

BIM usage is more concentrated among companies with larger revenues, companies which typically are engaged in higher value projects with greater complexity. Of the respondents who said that their firms will earn more than $500 million in revenue in 2014, 35.7% said that they use the full suite of BIM services (compared with 13.8% in the general group). Still, almost 20% of this group said that they did not use BIM at all. There was a clear trend that as annual company revenue fell, so did use of BIM. For companies that had revenue between $100-499 million, 46.6% said that they were moderate or heavy users. Of those in the $50 million to $99 million revenue bracket, only 27.8% said that they were moderate or heavy users. Among companies earning $10-49 million annually, only 19% said that they were moderate or heavy users, and there was a similar figure for the smallest companies (revenue under $10m), who said that only 17.8% were moderate or heavy users. All these figures indicate that there is a high correlation between the use of BIM and positive results in the construction market. It seems that BIM rewards those companies that are embracing it. Investment in BIM is something that experts have been urging companies to do for quite some time, so as to fully enjoy the rewards the technology brings. Hopefully, the results of this survey will show that there are gains to be made by investing in BIM, while dispelling notions that it is only beneficial to the larger contractors and consultants in the market.

BIM is vital when bidding for projects

The industry can operate without it

Only larger contractors need to use it

It will soon be irrelevant due to evolving technology

First choice It will fundamentally change the way industry works

Expert comment Correct use of BIM is likely to become the industry norm in the near future, says Dr Muhammad Tariq Shafiq, BIM manager, Imirati Engineering & Consultants (IEC), Abu Dhabi Construction professionals unanimously agree that under traditional contracts, problems are discovered and solved during construction which lead to demolition, reworks, design changes, etc., which is extremely costly and time consuming. On the other hand, if problem are discovered, discussed and solved at the design stage, the cost of change will be negligible, if any. This is where BIM can revolutionise the traditional design and construction practices by allowing the construction professionals to perform design coordination and analysis upfront in a project timeline with sophisticated BIM software applications and tools. Let’s take an example from a UAE project (Post Office Towers, Abu Dhabi, $95.2 million, 2014). In this project, miss alignment of the façade and internal layout were discovered when the client visualized the 3D Model at the concept stage. This was lead to changes of design at the early stage which saved considerable cost and time if such a problem would have allowed to go

to the construction site. In addition, 18,500 clashes between Architectural, Structural and MEP Systems were discovered and solved during the design phase, this saved approximately 20 man months of management time during construction (not to consider cost and delays it may have caused). An innovative and collaborative procurement processes was adopted on this project, backed by a fully coordinated and clash free BIM model of the project, which helped the client to procure the project in 2014 at 2010 prices in a region that is witnessing at least 5% annual increase in cost. In summary, a successful BIM utilization saved approximately 3.3% of the total project cost just in design and tender stage. The client was fully committed to using BIM and played a significant role in addressing design issues by working closely with all parties using BIM models. As a result of this successful experience, the client has mandated the use of BIM on all of their current and future developments. BIM is there to stay and it will become an industry norm in near future. There is need to share local BIM experiences and case studies. This will educate and motivate client organisations and project owners in the UAE to play a leading role to drive BIM adoption in the region.

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BIM

Making BIM mandatory has led to challenges and opportunities for the industry in Dubai.

The challenges of BIM Regional experts weigh in on some of the biggest challenges for implementation of BIM in the GCC

n the wake of the introduction of the BIM mandate by the Dubai Municipality (DM), there was a considerable ripple of consternation within the mid-level and small contractor industry in the city. Despite the move being welcomed by some major players, it was clear that a large segment of the market was struggling to come to grips with the implications of the decision. That the implementation of the BIM mandate would be no easy task was clear from the start. DM is the first public authority in the Middle East to mandate the use of BIM on large-scale projects. With this decision comes a lot of responsibility, a fact that Dubai Municipality is all too aware of. Should this pilot project become a success, the implications for construction in the MENA and GCC regions could be huge. Mohammed Abdullah Tawalbeh, principal architectural design engineer from Dubai Municipality’s Building Department and Building Studies section, said his division intends to ‘layer’ the BIM mandate in a manner that has been approved by the DirectorGeneral of Dubai Municipality, Engineer Hussain Nasser Lootah. To do this, he says, his team needs the complete support of the local construction industry.

The governments of Dubai, UAE or the GCC need a strategy which will be supported with a clear roadmap and business model 088

“I know leaders from the Municipality are looking to build their own information bank to support research and development initiatives, but we need full support and data from the market to be able to do so.” The biggest challenge his team faces is ensuring the construction market in Dubai has full awareness of BIM’s many aspects – from functionality to implementation across all segments of the industry. “We first have to prepare the market to use BIM,” he says. “Many companies and consultancies lack awareness of its usage. I don’t expect more than 10% of the market to know or have any awareness about the full scope of BIM, so promoting its adoption will be a challenge for us.” Crucial to the adoption of BIM in the region is a business model that accurately defines what clients’ requirements are, says Dr Ozan Koseoglu, a BIM expert who was the former BIM leader at TAV Construction. “On a larger scale, the governments of Dubai, UAE or the GCC need a strategy which will be supported with a clear roadmap and business model. If a client has certain requirements that he needs fulfilled by the contractor or consultant, how you share the information is key (to the project’s success,” he says. “TAV has been using BIM for all the projects that they are tendering for, both in the construction and operational phases. It is a huge challenge and the key to it is creating a roadmap. We currently support projects with internal efforts in the tender and construction phases, but we now need a business model from clients and from the government. “When we hand over a project to a client, we spend a certain amount on the design, and certainly on the construction too, but the operation of the structure for decades involves a huge cost and it requires a certain business model,” he asserts.

Ahmed Balawi, BIM manager, Building Information Modelling Section, for Arabtec Construction, is another advocate of this type of business model. “Dubai Municipality’s announcement is very ambitious, and it’s good to see the government promoting technology, but as a government sector it deals with projects from design to construction to operation. However, contractors only need to be involved at a specific stage. As such, the contractors don’t see many objectives (for them) in the current BIM mandate,” he adds. Citing the UK government’s implementation of the BIM mandate, Balawai has called on the DM to define

the requirements of its mandate so contractors know what is required. To do this, Dr Koseoglu says that the government needs to bring together all constructions stakeholders to define the BIM roadmap. “We need a taskforce consisting of contractors and consultants. We have to define the roadmap together, without which, the business model cannot be made. At the end of the day, all projects have costs that somehow need to be managed. This means that clients need a clear roadmap and business model, so we need to address these requirements with all parties involved and then rollout the same for all projects,” he explains.

This approach, as idealistic as it may be, poses challenges of its own. In an environment as fiercely competitive as construction, there are significant trust issues between stakeholders. While they may be partners on one project, contractors could find themselves going up against rivals on others. As a result, there is a natural reluctance to share information and methodologies between each other, Dr Mustafa Al Shawi, director of Imarati Engineering and Consultants, says. “The technology is there, of that there is no doubt. The issue is about who’s going to provide the information to the design model? That’s why contractual issues come into play. When you talk

about departments and stakeholders working together, the question is – who is going to make them work together? “That’s the issue and that’s the difficulty. It’s not just about implementing BIM. That’s just the technology. It’s about how we can make people work together. Contracts are the main hindrance to collaboration, I would say. This is because they define clearly what the roles and responsibilities for people are. Then these people will not move outside their comfort zone, they will not take the risk,” Dr Al Shawi says. In order to get stakeholders to fully embrace BIM and the culture of information sharing, Dr Ozan Koseoglu says that it’s imperative that the benefits

089

BIM

of BIM are showcased to the supply chain and to subcontractors who may not have had previous exposure to the technology. “We really need to show the benefits to subcontractors. They currently see it as an extra obligation that requires extra effort. They see it as something that they should comply with because it’s been mandated to the main contractor, but they really need to understand the benefits,” he points out. This is where the clients and owners of projects can step in, says Dr Mohammed Tariq Shafiq, a BIM manager at Imirati Engineering and Consultants. “BIM implementation and deployment in the UAE is mainly advocated by BIM software vendors, project consultants

and large contractors, driven by their own business agenda, which more often results in non-collaborative practices or conflicts of interest while developing BIM models,” he says. “For example, a consultant’s BIM model is hardly ever transferred to a contractor to integrate construction information about the installed products that enriches a BIM model to be used by the owner for operation and maintenance tasks. On the contrary, the process of BIM development is rebooted with change in responsibility at tender stage, or even worse ‘outsourced overseas’ to create a new BIM model for the construction stage and hand over,” Dr Shafiq explains further.

“These non-collaborative practices eradicate most of the intelligence in BIM models, making it less valuable for the clients for any future use, though it may have been sold as such. Consultants and contactors are, and will always be, reluctant to share the details of these failures due to a perceived risk of reputation damage and losing future business opportunities. “If the client organisations want more useful and fit for purpose BIM models on their projects, they need to step up and take a leading role in BIM deployment. Clients need to establish a clear roadmap to transfer them from their traditional work practices to BIM based processes to be able to reap the most benefits from BIM.”

Case Study: What BIM is not While BIM or Building Information Management is winning new advocates in the infrastructure sector, there still remains a fair bit of confusion on what it actually stands for — a technology or a product or a concept? There is a general agreement that BIM is an evolving technology, which deals with new and innovative ways of approaching design and documentation information during the different stages of building. “When we say building, we refer to it as a continuous verb rather than a physical asset,” explained Nader Reslan, manager for the Rail Sector, Bentley Systems. “BIM embraces the entire lifecycle of the building process beyond the initial design phase to include build, operations and maintenance phases.” BIM is not a product, data format or vendor-specific initiative. Nor should it be confused with a massive 3D CAD model, GIS model or a hybrid of both. He said: “It is a process which must be understood by the people involved and supported by IT systems and solutions in that process.” Reslan cites Crossrail, a Bentley client in the UK, which was clear about adopting BIM as a process right from the beginning. Crossrail wanted to ensure better project performance during initial and detailed design, construction, and post-completion, have a complete BIM model in hand for

090

Operations & Maintenance (O&M). “At Crossrail, they put in the right procedures and processes and the desired standards,” said Reslan. “Of course, you do put in new processes in any new project but with BIM, you can put them into a type of framework together with the technology to control them.” In a rail project, BIM can capture all the design parameters during construction, and ensure that all the changes to the lines, alignments and stations are captured so that when the O&M stage arrives, the client has a fully enriched and informed model. In Crossrail’s case, they persuaded their entire supply chain to adopt BIM, and took steps to make the adoption as easy and affordable as possible, which helped overcome the anticipated resistance from different stakeholders and teams. By insisting on the use of BIM right from the planning stage, a project owner can ensure that the information is mobile as the project moves from one phase to another, and is available to different stakeholders within that phase.

“At Crossrail, they put in the right procedures and processes and the desired standards”

The model can also be kept up-to-date with all the information, standards and specifications and more important, the occasional changes to the original design that happen during the construction. Reslan said: “This saves them the trouble of doing re-engineering or resurveying when moving between the phases or when a new stakeholder comes into the picture or even when the infrastructure ownership changes hands. “You not only end up with the physical infrastructure but also its equivalent digital infrastructure. With BIM, you can integrate all the information in one model in one place, which is the ultimate goal for the project-owner.” In the real world, a contractor or consultant or supplier may look at BIM as a ‘client solution.’ According to Reslan, while BIM should be applied by these stakeholders during the project, the projectowner will always remain the ultimate stakeholder of this integrated model. From a top management standpoint, some of the key benefits of implementing BIM are avoiding major design conflicts, smoother management of documents, designs and models between the stakeholders, and efficient and quicker contract administration. But it is equally important that the client has the necessary set-up, to not only receive the BIM model but also utilise it to its full potential.

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SuStainability

Abu Dhabi, Dubai and Doha have become champions of sustainable development.

Regulations drive sustainability With environmental regulations becoming stricter, green buildings are gaining prominence in the GCC countries

ntil recently, the Gulf countries were not known for their emphasis on sustainability as guiding principles for their development. Regional cities still have the highest carbon footprints per capita in the world. In many ways, it is fair to argue that the model of development in many cities in the Gulf has been, in essence, the antithesis of sustainable development over the last three decades. However, this has changed in the last few years. Cities like Abu Dhabi, Dubai and Doha have been attempting to champion sustainable development in the Middle East by establishing a sustainability oriented framework for their development over the next few decades. The regional authorities are placing stricter regulations on the building sector. Eco-friendly construction was first embraced in the UAE by Abu Dhabi in 2010, with the creation of Estidama - a building and design methodology platform to promote the core sustainability principles of the Abu Dhabi 2030 master plan. As Abu Dhabi continues to realise its sustainable urban development goals through these regulations, Dubai Municipality implemented its own Green Building legislation earlier this

year. Saudi Arabia has also announced that the construction industry has five years to green up their business. Energy Efficiency

An expanding population across the GCC is putting pressure on the electrical grid – from lighting skyscrapers to powering air conditioners. Energy consumption in the Gulf countries is rated one of the highest per capita in the world. Conventional Heating Ventilation and Air conditioning (HVAC) systems are one of the dominant sources of power consumption. Buildings give out the largest amount of CO2 emissions and consume more than 40% of the total energy, of which HVAC systems can be a significant contributor. Moreover, it is estimated that people spend as much as 87% of their time indoors, reinforcing the importance of healthy indoor environments, which can only be created by an efficient HVAC system. It is believed that typically, HVAC contributes more than 60% of a building’s energy consumption and an efficient HVAC unit can reduce it by more than 25%. Further, an innovative HVAC design strategy that pairs traditional air conditioning with energy-efficient air movement can permit a substantial offset of necessary HVAC capacity and improve air quality by ensuring

that fresh air reaches the occupant. The UAE is already in the process of restricting the entry of inefficient air conditioning units and has begun a roll out of energy efficient labelling systems for window type and split type air conditioners and planning to include chiller systems for commercial and industrial sectors too. However, according to Mohammed Khaja, Product Leader – Unitary Systems, Trance, a lot depends on how strictly these green building regulations are implemented. “The new regulations in the UAE will impact sustainability in HVAC to a great extent. Similarly, Saudi Arabia is also going very aggressive on sustainability. I am a member of Saudi Standards, Metrology and Quality Organization (SASO) and we are continuously giving our inputs and suggesting new regulations to deal with sustainability issues in the Kingdom,” Khaja says. To mandate energy efficiency refurbishments of existing buildings, the Dubai Electricity and Water (DEWA) created Etihad ESCO, an energy service company which supports contract market across the sector through project development, financing facilitation, and assists in capacity building of local ESCOs. “The retrofitting market was not growing fast enough. Etihad ESCO has

The UAE is already in the process of restricting the entry of inefficient air conditioning units and has begun a roll out of energy efficient labelling systems for window type and split type air conditioners 092

093

SuStainability

Green buildings will be a major component of the Dubai Expo 2020 build.

been working towards creating a market for retrofitting in the Dubai and we do see a lot of activity now,” Stephane Le Gentil, CEO, Etihad ESCO said at a panel discussion on energy efficiency. Green materials

Green materials to be worth $23bn by 2016 Increasing government initiatives as well as greater consumer awareness on environment and health presenting ample business opportunities for green material suppliers, according to Frost & Sullivan. Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) remain top countries for investment given their booming population and pace of infrastructure expansion. The market for green materials earned $17.91bn in 2012 and is estimated to reach $23bn in 2016.

094

The GCC’s green construction products market has experienced a steady growth in the last few years. Driving forces behind this progress include changes in policies and regulations, the expansion of certification programmes for green buildings, cost reductions for eco-friendly materials and a rise in consumer demand. With buildings accounting for 33% of the world’s energy expenditure, more emphasis is being placed on sustainable construction practices and the use of green construction products, which aid not only in lowering the carbon footprint but also in reducing wastage. The global economy has laid its eyes on the GCC as the fastest developing region, with respect to construction and infrastructure. According to Frost and Sullivan, Oman, Qatar, Saudi Arabia and the UAE remain top countries for investment in green construction. Driven by the need to meet new regulations, a growing population and massive expansion in terms of infrastructure, the green materials market revenue is estimated to reach US$23bn by 2016. Driving growth in the green materials market are changes in policies and regulations, the expansion of certification programs for green buildings, cost reductions for planet-friendly materials and a rise in consumer demand. Green building is particularly popular in the residential market, led by demand for such products as cork, bamboo and

woven flooring. Concrete production from recycled materials is also a dynamic growth area within the industry, along with wood from sustainable forests, energy-efficient lighting fixtures and water-efficient plumbing fixtures. “Cement is one of the major components of reinforced concrete, however it can be harmful to the environment due its high carbon dioxide (CO2) emissions and other toxic substances released during manufacturing,” Abdullah Rafia, Assistant Director General, Dubai Municipality, tells BGreen. “Dubai Municipality will soon approve the use of the eco-friendly cementitious materials and an

Driving growth in the green materials market are changes in policies and regulations, the expansion of certification programmes for green buildings, cost reductions for planet-friendly materials and a rise in consumer demand

administrative circular will be issued to all stakeholders in construction sector to use the same. A guide book will also be published soon,” Rafia adds. Demand for precast concrete in the construction sector is increasing as developers realise how its use can speed up completion time in major projects. It is also forecast to be a major part of Dubai’s 2020 build programme for structures that can be disassembled afterwards and relocated, according to a new report. Precast concrete is becoming increasingly popular in Saudi Arabia, the UAE and Qatar, according to the report by construction intelligence consultancy Ventures Onsite. Precast concrete contributes to

green building practises in significant ways. The thermal mass of the concrete allows shifting of heating and cooling loads to help reduce mechanical system requirements. Because precast concrete is factory made, there is little waste created in the plant, thereby reducing construction waste and debris on site. Bashar Abou Mayaleh, Managing Director at Middle East Concrete exhibitor Hard Precast Building Systems, says: “Developers are attracted to precast concrete as it can greatly reduce the duration of a project as well as the cost. It provides cost and time savings to developers and governments, as well as offering significant environmental benefits.”

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SuStainability

Saeed Al Abbar

Efficiency gains The UAE is leading the way with initiatives such as the Estidama framework in Abu Dhabi and ESCO framework in Dubai, says Saeed Al Abbar, Chairman of the Emirates Green Building Council (EmiratesGBC) What should be done to rectify the energy inefficiencies in older buildings? What challenges do you foresee in achieving this?

Retrofitting and refurbishing existing buildings is one of the priority areas of Emirates Green Building Council, and most recently, we organised a Focus Day, in association with Dubai Chamber of Commerce & Industry, to discuss the opportunities and challenges on this subject. It is extremely important that we place the highest emphasis on retrofitting existing buildings, as most of them were not designed with sustainability and efficiency in mind. Even those that were designed well need to uphold high levels of operation and maintenance practices to ensure they remain energy efficient. Today, there is tremendous support from both the public and private sectors in promoting the refurbishment of buildings. There are some very basic measures that existing buildings can effectively implement including intelligent building controls, lighting

096

retrofits, and equipment upgrades. A key challenge in promoting the retrofit of buildings is strengthening awareness among building owners on the long-term value that the investment in refurbishing brings in. There are also financial considerations involved, with several building owners hesitant to make the added investment. Concerted efforts are however being taken to address these by both the public and private sectors, which is being supported strongly by Emirates Green Building Council What kind of response do you see from the developers on the new green building legislation?

Developers are enthusiastic about the new green building legislations being introduced, as most of them are aware of the long-term value that it brings to them. In fact, several developers have already made impressive strides in developing green buildings. The introduction of the legislation will encourage more fence-sitters to adopt green building practices

and techniques, which is crucial to drive sustainable development. At the moment, is the UAE at par with Europe and the US in terms of sustainable infrastructure?

The UAE has taken impressive strides in sustainable infrastructure. Initiatives like Masdar City are truly world-class and a model for the world in sustainable projects. While the US and UK had the first-mover advantage in terms of promoting sustainable infrastructure, we can confidently say that the UAE is not far behind and is in fact leading the way with initiatives such as the Estidama framework in Abu Dhabi and ESCO framework in Dubai. There is active dialogue and engagement among all stakeholders on the need to promote energy efficient, sustainable buildings, particularly following the announcement of the â&#x20AC;&#x2DC;green economy for sustainable developmentâ&#x20AC;&#x2122; vision by His Highness Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and Prime Minister and Ruler of Dubai.

SuStainability in FM ManaGEMEnt

SuStainability in FM

FM professionals can provide design inputs to improve on the energy performance of a complex.

Ali Al Suwaidi

The importance of a sustainable and benchmarked FM industry The Middle East Facility Management Association (MEFMA) is launching a new star rating system across the GCC, writes Ali Al Suwaidi, MEFMA Board Member

n the corporate sector, an increasing number of companies in Europe, the United States and Canada have started issuing annual corporate sustainability reports in addition to their financial reports so that they can fully report their annual performance. Organisations dedicated to this effort such as LEED are also gaining significance with companies worldwide. In the UAE the shift towards sustainability has been more recent in comparison to global efforts but businesses have quickly caught up with their counterparts by implementing sustainable practices that are on par with world standards. Indeed the Middle East Facility Management Association (MEFMA) is working alongside many FM companies and we have observed the rapid growth of an encouraging trend – organisations such as hotels, malls, schools, airports and office complexes are increasingly implementing cloud computing and

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remote control systems to help reduce energy output and therefore utility bills. But commendable as this is, do those same organisations rely too heavily on the work of technology to fulfil their environmental obligations and negate the work that humans can still achieve in reducing the carbon footprint? In this instance, facility management providers are best placed to advise on streamlining waste management operations. Not only can they integrate the necessary procedures for recycling but the same reputable companies can also instigate a change in mentality that ensures the occupants of any building also contribute to the reduction of waste. So if facility management consultants were brought into the construction process at the outset then architects could subsequently ensure that recycling in a building was integrated into the facility’s day-to-day management. Take the chutes for example, why not have three – one for plastics, paper and food?

Such an initiative would then be very easy for the waste management company to handle and process, as well as it being easy for the occupants to recycle. At MEFMA, we are seeing construction companies bring such providers in earlier on projects, but to come back to the beginning, it is because FM providers can improve upon the energy performance of a complex. With their knowledge of how building complexes work, they can also help to meet organisational targets that still rely on human commitment, rather than delegating to a computer in order to meet carbon emission targets. During our recent annual MEFMA Confex 2014, we unveiled our plans to launch our very own star rating system (SRS) that will benchmark buildings and facilities across the Middle East against a stringent set of guidelines and practices. This was inspired by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the

UAE and Ruler of Dubai having recently called for a star rating system against all government services offered within Dubai. From the government’s perspective, the implementation of an SRS system moves the UAE towards improving and developing government services leading to a higher level of customer satisfaction. This in a nutshell, is why we at MEFMA are looking to implement our own version of the SRS system to ensure our buildings fall in line with what is expected in today’s growing FM market. Why benchmark in FM at all?

The handling of property and facilities has changed from pure building administration to a professional and active facility management industry. Benchmarking will play an essential role in this, and contribute to the overall success. Benchmarking is not about whether a property is managed well. It examines structures, processes and standards, to track down chances for optimisation and to use these accordingly.

A recent report issued by Global Industry Analysts Inc has predicted that the global FM market will reach $397.69bn by 2017. This sort of growth can only be achieved through the implementation of best practice solutions of which benchmarking allows you to implement. Benchmarking our industry and facilities against globally recognised parameters is essential to driving up standards across our industry as a whole. As with any benchmarking initiative, there are two main reasons as to why an industry should implement this tool. Firstly, it greatly improves efficiency by filling in operational gaps; improving quality of productivity and a reduction in costs and an increase in revenues as a result. This tool will help you to assist look at design as well as operational gap during life cycle of the asset. The other facet to benchmarking is its ability to develop competence from the ground up. It does this through delivering a cultural change towards a learning organisation

so everyone managing a facility is singing from the same ‘hymn sheet’; a marked increase in the understanding of processes and a change in employee and customer behaviours and attitudes. As a result of all this, a building of which is regularly benchmarked will undoubtedly instil a culture of continuous improvement which leads to a higher level of customer satisfaction and return on investment for building owners and investors alike. While MEFMA’s SRS System initiative has initial MEFMA board approval, the backing of government entities is still early. Once approved, the programme will be applicable to any facility across the Middle East with the aim of ensuring safety, productivity, longevity and return of investment. As of now, the system is set to play an integral part in the MEFMA Challenge Award Program which will award those buildings and facilities that meet the criteria of the SRS system. We are hoping to announce the first round of winners at MEFMA Confex in 2015.

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