Construction: The Iraq effect

04 April 2003
The wait appears almost over for the Middle East construction sector. After 13 years of covert visits and boardroom discussions, company executives are gearing up for what has been described as the biggest building prospect in the region for 25 years: the long-awaited reconstruction of Iraq.

So far, however, the proposed reconstruction programme has been very much an American affair. Even before war broke out on 20 March, reconstruction was dominating the minds of US government agencies and a select band of US contractors. The only tenders to date have been issued by the US Agency for International development (USAID) and the US Army Corps of Engineers (USACE) and have been limited to the likes of Bechtel, Fluor Corporation and Kellogg, Brown & Root, the heavyweights of the US construction industry.

Inevitably, the American dominance has raised strong criticism from their competitors overseas and fears that history is about to repeat itself. In the aftermath of Saddam Hussein's eviction from Kuwait in 1991, US companies mopped up all the prime Kuwaiti reconstruction contracts, leaving local firms and a handful of European contractors to battle it out for subcontracts.

Non-US contractors draw other lessons from the Kuwait experience. In the run-up to liberation in February 1991, wildly differing figures, ranging from $20,000 million up to $200,000 million, were bandied about for the estimated cost of repairing the damage wrought by the Iraqi occupiers. The estimates fuelled expectations that a flood of reconstruction work would be awarded. It never materialised. The final repair bill came in well below even the most conservative estimates, leaving many contractors deeply frustrated at the experience.

Iraq will certainly be a very different case to Kuwait. Its population is 10 times bigger, its land mass 20 times greater and, even before the first bombs fell on 20 March, its infrastructure, having had to endure 13 years of sanctions, was in a dire state of disrepair. Nevertheless, those who saw their inflated hopes dashed by the Kuwait reconstruction programme remain cautious. Says one veteran regional contractor: 'How can people seriously talk about $200,000 million being required for the Iraq programme? The bombs are still falling and no-one knows how long all this will continue, let alone who will be in charge of reconstruction, who will pay for it or who will be in power in Baghdad.'

Many contractors in the Middle East have adopted a wait-and-see approach to Iraq. 'We are obviously closely monitoring the situation, but we are not actively chasing work at the moment. It is simply too early,' says a leading international contractor based in Dubai. Others are acutely aware that the bombardment of Iraq is deeply unpopular across much of the region and to be seen scouting for reconstruction work so soon could be a public relations disaster. The fear is that 'ambulance chasing' in Iraq will seriously damage business prospects elsewhere in the Middle East.

'It is a very sensitive situation,' says a leading Arab contractor. 'Public opinion in the Middle East is very much against this war. So to talk of reconstruction and to put yourself in a position where it can be construed that you are benefiting from the tragedy in Iraq is tantamount to commercial suicide.'

In any case, contractors based in the region have far more immediate issues to address. The onset of war may have had fewer repercussions on the construction market than it did in 1991, but it has still had a major impact on activity in the frontline states. Hardest hit has been Kuwait. With restrictions being placed on the movement of civilians, ongoing construction has ground to a halt in the north and around the oil town of Ahmadi. Virtually all the international companies and many local firms have scaled back their operations and repatriated staff to safer havens. Some new projects such as the Umm al-Maradem coastguard development have been put on hold, while many others, such as the $900 million Ahmadi oil storage scheme, have suffered extensive delays in bidding. Says a local contractor: 'The decision-making process has always been slow here. But now that the war has started, it has stopped altogether. Put simply, no-one wants to make any decisions or commitments in such uncertain times.'

Bid extensions and a near absence of major contract awards have also been evident in Saudi Arabia, Jordan and Syria in recent months. 'We will not be putting out any major tenders until the situation calms down in Iraq,' says a spokesperson for a major public body in Damascus. Further afield, construction was temporarily suspended in late March on the Hidd port development in Bahrain on security grounds. In Egypt, a market that has been in recession for three years, the Iraq crisis and concerns about the health of the economy have dashed hopes of an imminent recovery.

For those looking for better news, the lower Gulf has provided it. In the region's two hottest markets - Qatar and the UAE - the outbreak of hostilities to the north has had only a marginal effect. Although there have been signs of a slight slowdown in tendering, a steady stream of contract awards have been made in both markets. Qatar Petroleum (QP) has recently awarded Geneva-registered Archirodon Construction (Overseas) a $60 million contract to build new berths at Ras Laffan. In Dubai, the municipality contracted Athens-based Consolidated Contractors International Company in late March to carry out a $187 million tunnel project.

Activity is expected to rise sharply over the coming 12 months in Qatar, as the 2006 Asian Games infrastructure programme and the government's major building projects move into the construction phases. Any lingering doubts of the government's commitment to such projects were removed on 29 March, when it announced its budget for 2003/04, revealing a 40 per cent increase in the allocation for major projects to $1,690 million.

In Dubai, currently the building capital of the Gulf, major construction tenders continue to be issued. In mid-March, the biggest contract so far was released on the Dubai International Airport project. Worth an estimated $400 million, the structure package covering concourse 2 and terminal 3 will require about 2 million cubic metres of concrete.

With a host of other real estate projects out to tender and more to come, the law of supply and demand is increasingly coming into play in the emirate. Over the past six months, the price of cement has risen by 35 per cent and rebar by 50 per cent. 'Material prices are continuing to edge up and the danger is that they could go through the roof,' says a local analyst. 'Projects like the airport have the potential to drain the market.'

Already, the sharp rise in material costs are evident in bid prices. When the Dubai Textile City scheme was retendered late last year on the same scope of works as the previous bid round 10 months before, the low bid came in at $67 million. That represented a hike of $18 million on the original quote.

The volume of work planned in Qatar and the UAE helps to explain why many contractors working in Doha and Dubai express only passing interest in the much-touted Iraq reconstruction programme. For those working elsewhere in the Middle East, Iraq - and in particular the war - figures much higher up the agenda.

'The market can absorb two-three months of disruption caused by the war,' says the regional contractor. 'But if it goes on much longer than that, hopes of a swift recovery in activity can certainly be put to one side.'

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