Over the past 60 years, the Middle East has enjoyed high levels of economic growth, driven by a combination of natural resources, population explosion, strong leadership and hard work. Founded in 1952, Consolidated Contractors Company (CCC) is proud to have played a role in helping the region develop.
Today, I see a region that is still growing and continues to offer a wide range of opportunities for contractors. The three areas offering the best opportunities concern projects that help maintain oil production, support population growth and improve connectivity.
With hydrocarbon sales still accounting for a significant percentage of government revenues, oil exporters will have to make sure they maintain their production capacity in the future, or risk being replaced in global markets by other producers.
To accommodate population growth, governments will have to invest in social infrastructure such as schools, universities and hospitals, while at the same time ensuring utilities such as power and water are universally available. To support connectivity, transportation links will have to be continually developed, which means building more airports, metros, railways, ports and roads.
While these projects will keep contractors busy for decades to come, we have to accept that the high levels of growth enjoyed in the past have now normalised and the construction sector will have to follow this trend.
In a region rich with hydrocarbon resources, the price of oil will remain the dominant factor when it comes to economic performance. The US, boosted by increases in production capacity over the past decade, now plays the swing producers role at the expense of Opec, and as a result we cannot expect an oil price higher than $60 a barrel for a long time to come.
Lower crude prices mean the oil exporters of the Gulf will have fewer funds available to spend on construction projects, and with fiscal pressures increasing, we have already seen governments going to the bond markets to support their budgets.
Financial constraints are changing the way projects are delivered. In the past, clients funded projects. Today, the majority of clients and oil companies issue tenders with no advance payments, giving negative cash flow until project completion. If a contractor does not have a strong balance sheet and good relations with banks then working in the region is no longer possible.
Other clients that do not have funds have turned to new delivery models such as public-private partnerships and build-operate-transfer. The challenge that needs to be overcome in the immediate future, if these plans are to succeed, is developing the regions legal and banking systems so they can support the privatisation of projects.
Financial pressure has also led to an increase in disputes. In the past, clients paid designers to design projects, and changes were made before contractors started the bidding process. Today, clients have no time, so they award work on a design bid or engineering, procurement and construction (EPC) basis, and introduce changes later during construction. This ends up in claims and variations disputes, and delays. Construction firms in the region now typically have at least 50 per cent of their jobs in disputes with consultants or project owners over variations and claims.
To make matters worse, it sometimes feels that clients intentionally delay resolving these issues to support their cash flow problems. In todays market, a contractor needs good legal and contract departments, as profits depends on their performance.
Sustainability is the new buzzword worldwide across many industries
Firms also now have to look not only at the engineering and construction phase of a project, but facilities management, operation and maintenance, and recycling. These new business lines provide steady incomes with lower risks, but with lower margins than construction.
Sustainability is the new buzzword worldwide across many industries. We can no longer look at it as part of corporate social responsibility; it has to be an integral part of your core business. For construction, this means recycling, reducing waste, lowering carbon dioxide emissions and using solar energy. These things have been done in other regions, but in the Middle East we are lagging behind and we have to catch up.
As the regional market matures, local content is becoming increasingly important. There are many local contractors that can execute work as well as foreign firms, and for this reason CCC has established strategic partnerships with local firms across the region to joint venture with them on projects.
We also cannot ignore the fact that unemployment is a major concern for the regions governments, and we as engineering and construction firms have to adapt our operations for the long term so that we recruit, train and develop local talent. CCC is doing this in Saudi Arabia, Oman and the UAE.
In conclusion, the Middle East has changed greatly since 1957, and it will continue to do so into the future. The challenge for the construction sector is adapting to these changes or else we shall be left behind.
Samer Khoury is president, engineering and construction, of Consolidated Contractors Company (CCC)