Leading contractors working in Dubai say they are owed billions of dirhams by government-controlled real estate developers, and are calling for a state-backed financial rescue package to stop firms from going bankrupt.
MEED has spoken to 25 of the largest contractors working in the emirate and all report problems with late payment from major real estate developers, with some firms claiming to be owed more than AED1bn ($272m). Contractors say that among the worst late-payers are the state-controlled master developers, such as Nakheel, Sama Dubai, Dubai Properties, Tatweer and Emaar Properties.
“We are owed hundreds of millions of dirhams,” says one Dubai-based contractor. “It is all from government or quasi-government companies, such as Tatweer, Nakheel, Sama Dubai, Dubai Properties and Emaar Properties.”
The concerns are such that the government is now trying to assess the impact of late payments on the construction industry.
On 26 January, Mohamed Ali al-Abbar, chairman of the recently formed Dubai Advisory Council and chairman of Emaar, held a meeting with contractors to discuss the extent of the problems.
Contractors attending the meeting included Al-Basti & Muktha, Al-Naboodah Contracting, Khansaheb Civil Engineering and Arabtec Construction, all local, Al-Futtaim Carillion and Dutco Balfour Beatty, both local/UK, Al-Habtoor Leighton Group and Nasa Multiplex, both local/Australian, and the UK’s Laing O’Rouke.
It is understood that the contractors have been asked to disclose how much money is owed to them.
Contractors say the industry requires a massive injection of liquidity to prevent companies going out of business, and are comparing the scale and importance of the crisis with that faced by US car makers.
“It is a mega problem, and they have to solve it,” says one Dubai-based contractor who asked not to be named. “You do not get out of situations like this without doing something radical. The banks have been given liquidity, but that has not found its way down into the market.
“In the US, the car companies are being bailed out because they are among the country’s largest employers. Construction must account for about half the people employed in Dubai, so why do we not get any support? We are vital to the whole economy.”
The problem of late payments has developed slowly over the past four months, following the collapse of Dubai’s real estate market. Since October, developers have struggled to sell new properties and prices and transaction volumes on the secondary market have fallen sharply. This has hit revenues and created cash flow problems for developers.
The knock-on effect on contractors has only emerged recently, however, as the typical payment terms in Dubai involve 28 days for a consultant to certify that a contractor has completed its work, followed by a 60-day payment period – a total of 88 days.
“During those 88 days, you continue working, continue getting certificates, but at the end of that time you do not get paid,” says the contractor. “If the contract is then terminated, it can take four to five months of negotiations before you get your money.”
Tatweer, Nakheel, Sama Dubai and Dubai Properties all declined to comment.
A spokesman at Emaar says it is paying its contractors in accordance with its contractual obligations. “Payments for contractors and consultants are based on a credit cycle and set deliverables agreed with them,” says the spokesman. “All payments that meet the criteria have been honoured and will continue to be cleared, in line with our contractual agreements.”
Without an injection of liquidity into the market, contractors fear that companies will be forced out of business. “We are not paying our subcontractors,” says another Dubai-based contractor. “It is simple. Either we go under or they go under. We have to look after ourselves first.”
Wage bills are another major concern. At the end of January, contractors will need to pay thousands of men, and if they do not have enough cash, their workers will not be paid.
“There will be issues with non-payment of salaries,” says the contractor. “Something has to happen. There will be someone out there that will not be able to pay salaries this month. It is only a matter of time. There is going to be a huge problem.”
Construction workers in Dubai have protested before over pay issues. In 2006, workers rioted at the Burj Dubai site, and in 2007, workers went on strike as the Indian rupee depreciated against the dirham, making their remittances worth far less.
The real estate and construction sectors are vital to Dubai’s economy. US credit ratings agency Standard & Poor’s estimates they account for almost half of the emirate’s GDP.