GERMAN construction companies are taking a fresh look at the Middle East in an effort to revive a traditional presence that has weakened in recent years. The cost-cutting of the early 1990s has produced leaner companies that can now compete better on price. German company names are again appearing regularly on Middle East bid lists, but renewed enthusiasm is no passport to instant success and many companies are struggling to transform their efforts into more frequent contract awards.
The signing in July of the $400 million Beirut airport contract by Hochtief, in joint venture with Athens-based Consolidated Contractors International Company (CCC), put the German company firmly back on the map of major Middle East contracts. The company has a regional record going back to the beginning of this century but scaled back its operations in the 1980s. The Beirut airport project illustrates the pressures German contractors have to work under. ‘We knew we could not do it on our own, so we asked CCC to join us. We discussed with them how to make the offer as cheap as possible,’ says Hochtief board member Harald Peipers.
In the event, their joint submission was the lowest offer for the scheme. Management and some technical input will come from Germany but construction equipment and machinery may be sourced from elsewhere to contain costs. ‘It is important to prove value added inside Germany to obtain export credit cover,’ Peipers explains. Some of the equipment may be supplied by Hochtief’s 40 per cent owned Turkish affiliate, Garanti-Koza Insaat. The company, already active in Turkey, is looking to export its services.
The airport contract is prestigious but it is also the only significant regional success that Hochtief has had this year. The company does have a small operation in Egypt, but is only working on small-scale projects.
Many German contractors burnt their fingers in Iran and Iraq, which were major markets in the 1970s and early 1980s. Hochtief has yet to reach a satisfactory settlement for the Bushehr nuclear power station in Iran which puts a block on pursuing any further business there. Nor is Iraq likely to generate any new opportunities when the UN embargo is lifted as Hochtief still has considerable claims over the Saddam dam project. ‘For the rest of the region, we are not yet in a position to start a grand offensive,’ Peipers says.
Other contractors are more bullish. ‘We have started a new thrust into the Middle East under our new management. We see good chances for us in the future,’ says Frank Jaburg, Middle East & India director at Dyckerhoff & Widmann. The company bid for the first reconstruction package in Lebanon, although it was not invited for negotiations. However, in the Gulf, it has prequalified for the $150 million Sheikh Zayed mosque project in Abu Dhabi and is also planning to bid for Qatar’s new airport project.
Despite the prospect of intense competition from low-cost rivals, German contractors do not want to miss out on one of the region’s largest civil contracting schemes, the Ghazi Barotha hydroelectric project in Pakistan. Several companies have prequalified: Hochtief and Strabag Bau are bidding with CCC, Dyckerhoff & Widmann and Hochtief are bidding together with three other partners, and Ed Zueblin is bidding with two international and two local partners. The other large-scale projects German companies are competing for are a $400 million hangar project in Saudi Arabia and the $700 million Izmir crossing in Turkey. Bilfinger & Berger and Philipp Holzmann are hoping to be invited to bid for both.
Contractors still rely on cash payment for most projects in the Gulf, or on German export credit financing in less affluent markets – Egypt, Turkey and Syria. Some contractors are also venturing into build-operate- transfer (BOT) schemes where they carry the risk as investors. There has been strong interest in the proposed Beirut to Damascus toll road project. Three of the four groups bidding for the BOT project are German. They are Dyckerhoff & Widmann, a German group of Walter Bau and two other investors, and a joint venture of Germany’s Wayss & Freitag and a French partner. The other contenders are French.
Philipp Holzmann already has a track record with BOT schemes in the region, albeit a chequered one. The foundation stone was laid in May 1993 for the Birecik dam, a $1,250 million project on the Euphrates in Turkey, which Holzmann won on a BOT basis with the local Gama Endustri. However, progress is delayed because the syndication of a commercial loan to part- finance the scheme has come up against lenders’ reluctance to invest in Turkey.
German contractors expect the BOT concept to gain increasing currency in the years to come, nevertheless. Regional clients already expect financing offers to accompany their bids and only the biggest companies can assemble such offers. This is one of many trends encouraging consolidation in the sector. In one such move Germany’s largest construction company, Hochtief, is trying to lift its stake in the third largest player, Philipp Holzmann, from 20 per cent to 30 per cent. If approved by the German anti-cartel authority, the two companies would be in a better position to pool their resources. Says Hochtief’s Peipers, ‘For the Middle East, it may lead to greater co-operation in the medium to long-term future.’