Contractors are required to provide bid bonds for about 5 per cent of the total value of a project in Qatar
With more than $60bn-worth of infrastructure projects planned for Qatar’s 2022 World Cup, banks and financial institutions are set to play an increasingly important role in the country’s construction sector in the coming years.
As the world’s largest liquefied natural gas (LNG) producer, Qatar will have no problem financing the construction programme. But while the government has adequate resources to cope with the massive financial undertaking of hosting the world’s biggest sporting event, the developers building the infrastructure will face a series of hurdles as they look to acquire the required guarantees and finance.
“We don’t worry about the paymasters, we worry about the contractors,’’ says one banker in Qatar.
One major challenge for contractors hoping to compete for work is arranging bond financing. When bidding for and undertaking construction work in Qatar, contractors need to provide several bonds, which can total up to 30 per cent of the value of the project. This may prove difficult for smaller or international firms with no track record in Qatar’s construction sector.
It is not just the borrowers that will face challenges. Local banks will also be under pressure to ensure they have the capacity to support the construction sector and are able to ensure that finance and bonds are easily available ahead of scheduled deadlines.
When bidding for work in Qatar, contractors are required to provide bid bonds for about 5 per cent of the total value of a project. After the conclusion of a tender, clients ask the winning contractor to provide advance payment bonds, performance bonds and often retention bonds.
“Bid bonds are the easiest things that contractors can get from banks. Performance bonds, advance payments and retention bonds are the hardest to get,’’ says a banking source in Qatar. With advance payment and performance bonds typically 10-20 per cent of the total value of the project, contractors will have to receive some high-value bonds for some of the ambitious projects planned in Qatar in the run up to 2022.
“The bonds can come to very a large amount, especially for multibillion-riyal projects,’’ says the banking source.
A vital part of entering the Qatari market for the World Cup construction windfall for international firms will be proving to local banks that they are creditworthy.
There are three main factors that banks will take into consideration when offering finance to construction firms as bonds for projects. In addition to the size of the project under tender and the financial position of the company bidding for the work, banks will look at the track record of construction firms in Qatar and the GCC. It is important that contractors have expertise in the work they are bidding on.
“Track record is important. Let’s say a company is specialised in civil works, we will not support them if they are doing a stadium for example. They need to have a good track record in the area of work they are talking about or bidding for,’’ says a banking source in Qatar.
For large international contractors already established in the Gulf this will not be difficult. With proven track records and corporate guarantees from larger entities in their own country, local banks will have little reason not to issue bonds. Smaller firms with little experience in the region will find it more difficult to receive finance through bonds.
“If a company is a small or new player in their own country – essentially an unknown entity – they will have problems bidding alone for projects because we won’t know this company, so the risk is unjustified,’’ says a banker in Doha.
One way in which foreign firms can attain guarantees from Qatari banks is by obtaining a guarantee from lenders in their own country. Another way is for international firms to form partnerships with local contractors already established in Qatar’s construction market.
Foreign contractors joining forces with local companies is something that banks expect to see more of in the run up to 2022.
“We do expect to see more joint ventures in this field. This has already started. For instance, we have seen major international construction companies such as [France’s] Vinci and [Germany’s] Hochtief creating joint ventures with Qatari Diar,’’ says George Nasra, managing director, International Bank of Qatar (IBQ).
International contractors already involved in Qatar stress the importance of local partnerships in successfully penetrating the market.
“Good relationships with local connections such as sponsors and agents is very important. It helps save a lot of time with banks and clients,’’ says one international contractor based in Doha.
“For some of the more complex tenders, it is essential to form joint ventures. For example, for the metro project, the client has specified that it wants bidders to be in consortiums.’’
With the vast amount of construction work planned and many international firms expected to request bonds, lenders will face significant pressures in the run up to the World Cup. Local banks have already seen an increase in requests for bid bonds since Qatar won the right to host the World Cup in December 2010.
“There has been a marked increase in requests for issuing bid bonds this year. We estimate the increase in the first eight months of this year is in the region of 30 per cent to 40 per cent compared to the same period last year,’’ says IBQ’s Nasra.
With Qatar set to undertake a construction programme of unprecedented size, it is vital that lenders are able to offer finance in a timely manner. This is something that Qatar’s financial institutions have not always managed to do.
“Banks are a little bit slow, especially in the past year – financing is taking longer,’’ says one contractor based in Doha. However, local banks feel they are up to the challenge. “The banks are well capitalised, liquid and ready to finance viable projects. We believe that the Qatari bank system has the capacity and the resources to finance the Fifa World Cup-related projects,’’ says Nasra.
Other banks are positive about the ability of Doha’s financial institutions to support the upcoming development work, but acknowledge that a streamlining of processes is required. “The banks have the capacity to support the governments’ projects. What needs to be improved is coordination between paymaster and banks,’’ says one banking source in Doha. “Maybe clients can do something to support contractors to get finance from banks.”
The impending World Cup construction programme is set to create significant opportunities for both the construction and financial sectors. Ultimately, it will come with challenges. Good relationships between the two sectors and government clients will be vital if Qatar is to successfully complete its ambitious infrastructure plans.