There are not many international contractors that can match Costain’s unbroken record in the Middle East. Fewer still can point to projects completed in so many countries in the area. The company first set foot in the Middle East 60 years ago and, in developments that began earlier this year, seems set to take up permanent residence in the region. The news that Kuwait’s Mohamed Abdulmohsin Kharafi & Sons had acquired a 13 per cent stake in the UK group has confirmed the strength of its reputation in the Middle East. It also promises to deepen its regional involvement. Company managers are already looking with increased interest at new project opportunities in this highly competitive market.
Costain’s involvement in the Middle East dates back to 1935, when it started work on the trans-Iranian railway project. Since then, its part in creating several of the region’s landmarks – including the construction of the Gulf’s first liquefied natural gas plant (LNG) at Abu Dhabi’s Das island and the Port Rashid development in Dubai – has contributed to an impressive project portfolio. ‘The important fact is the number of countries where we have worked, and where we are present,’ says Michael Minassian, managing director of Costain Middle East. ‘It means that Costain can walk into almost any Middle East country and be recognised.’
For the group’s contracting division, the Middle East is a critical business area, accounting for about a third of total international turnover of $400 million a year. It has a staff of 3,000-4,000 employed in the area and operates offices in eight Arab states, including six in the Gulf. To underline the significance of the area, a new holding company, Costain Middle East, opened for business in Dubai in April. Its remit will be to oversee all the company’s regional operations. Headed by Minassian, the management division aims to create a self-sufficient structure and liaise closely with the autonomous country offices. ‘Our goal is also to raise Costain’s visibility and profile in the market,’ Minassian says.
One of the main attractions of the Middle East market is the opportunity it provides to employ the services of Costain’s four core business disciplines: building, marine civils, process engineering and civil engineering. At the same time, by having a wide geographical and technical spread, Costain is in a better position than most to ride out the highs and lows in this notoriously cyclical industry. ‘It means that if the cycle is down in a particular sector or country, we can rely on other areas for our turnover,’ Minassian says.
The competitive character of the Middle East demands that Costain is selective about what it prices. The company tends to steer well clear of the mass construction market, preferring instead to focus on projects which demand a high degree of engineering expertise. ‘What we say is that we would like to be able to offer engineering solutions to construction problems,’ the managing director says.
Back to basics
The strategy is well illustrated by the current order book. Costain is building a seawater pump house at Ras Laffan in Qatar and work is well under way on a three-year maintenance contract for the Das island liquefaction plant in Abu Dhabi. In Oman, it is executing the civils package on the Ghubra 5 power station. Then there are the smaller, run-of-the mill jobs. Says Minassian, ‘Because we are recognised as one of the local companies, we don’t only get large contracts, but also a lot of day-to-day works.’
Outside the Middle East and its core contracting business, the Costain group had its fair share of difficulties in 1994, however. Due to heavy losses in the US mining and property divisions group profits nose-dived. Total losses reached $276 million, despite profits of $15 million generated by the engineering and construction division.
The performance has persuaded the company to get back to basics. The group has started divesting its non-core business interests to reduce debt and will concentrate fully on its engineering and construction activities. The decision helped to reassure the group’s bankers and creditors, who have extended credit lines for a further two years. It also paved the way for Kharafi’s acquisition.
The Kuwaiti company’s decision to buy into the group is seen as a vote of confidence in the long-term prospects of the UK contractor. ‘Do you think that Kharafi, which has been around for over 100 years, is going to be interested in a lame duck?’ Minassian asks. ‘They can see that there will be significant returns in the long term as well as short-term gains in market sectors.’
The move also opens up some new horizons for both businesses. Says Minassian, ‘One of the reasons why it is such a positive development is that there are very few areas where we conflict with each other. Our marine, construction and process engineering capabilities complement their expertise in areas such as the electro-mechanical, pipeline construction and general contracting. Together there will be plenty of opportunities to address the market…and I am certain that their presence in certain sectors will be helpful to us in some where we are not particularly strong.’
Plant is one division which could reap substantial benefits from the new association. ‘In this business, plant can make or break your bid. If we decide to bid together for a road contract for instance, the combination of our plant holding and theirs could give us a significant competitive edge,’ Minassian says.
Nevertheless, such links as do develop between the two companies will be assessed case-by-case and be determined by strict commercial criteria. ‘The trick is not to get involved with each other just for the sake of it, but to work on projects where it makes commercial sense to both parties.’
In addition, Minassian stresses that any ties between the two sides will not create preferential pricing practices. ‘You cannot afford to give the impression that you are not operating independently as it will alienate the market.’ Such a policy is already used by the various divisions of the Costain group when bidding for work in the UK.
While the full implications of the Kharafi connection will take time to become clear, Costain is continuing to chase new project opportunities on its own. It has recently won two concrete repair contracts in the UAE and for two Etisalat headquarters’projectss in Ras al-Khaimah and Fujairah. The contractor is closely monitoring developments on the Faisaliya commercial complex in Riyadh and the planned Oman LNG project, as well as planning to increase its activities in Egypt, Jordan and Lebanon.
Costain was a pioneer in Middle East contracting 60 years ago and it is now seen as one of the most local of international contractors in this market. The appearance of Kharafi as a minority shareholder seems set to enhance Costain’s reputation as an international operator with deep local roots. ‘Perhaps the best way to view our relationship with Kharafi is as members of an extended family,’ Minassian explains. ‘We have brothers and sisters in the UK and now we have cousins in Kuwait.’