Covid reveals need to re-examine project delivery

22 December 2020
Fundamental rethink is essential to spur post-pandemic renewal of regional contracting, says Hamad Sulaiman al-Ghanim Group CEO Mohammed al-Ghanim

Low oil prices and Covid-19 have had a profoundly negative impact on the Gulf construction sector in 2020. The fall in new project opportunities, increased competition and lengthening payment delays have put stress on contractor cashflow and profit margins.

The challenging conditions are set to continue into 2021 as the region’s petrostates slash budgeted capital spending plans and economic recovery remains fragile – hinging on progress against Covid-19 and the availability of anti-coronavirus vaccines.

While the Gulf construction industry faced many challenges long before the emergence of Covid-19, the pandemic has revealed the need for a fundamental rethink of how construction projects are delivered in the GCC.

“These challenges are a result of the structure that this industry is based upon, rather than the opportunities available for the sector,” says Mohammed al-Ghanim, CEO of Hamad Sulaiman al-Ghanim Group of Companies in Kuwait.

WATCH the full interview with Mohammed al-Ghanim, CEO of the Kuwait-based HS Al-Ghanim Group of Companies, here

Kuwait’s projects market has been particularly hard hit by Covid-19, with significant cuts to capital spending on projects in 2020, even in the once-unshakable oil and gas sector. 

With oil revenues making up more than 90 per cent of the country’s revenues, Kuwait’s government has had to wrestle with the economic and social demands of the pandemic and at the same time try to maintain control of the nation’s finances while facing a significant fall in its income.

Lowering risk

Al-Ghanim says that the region’s construction industry will continue to face tough challenges in the coming 24 months. For the foreseeable future, the economic climate means that contractors are going to have to “continue to deal with clients that are under financial duress”, he says. 

“We are going to have to find ways to deal with this cash gap,” he adds.

Al-Ghanim says there are two phases of reform that need to be implemented in order to improve growth prospects in the Gulf’s construction industry.

The first, he says, is for construction clients to take steps to mitigate project and contractor risk by identifying the major pockets of fragility that exist in the project industry’s supply chains.

For instance, transportation disruptions caused by Covid-19 in 2020 are set to delay projects well into 2021, translating into likely time and cost overruns for contractors. In such situations, Al-Ghanim calls for a contractual recourse that ensures there is “room for us to take these potential downtimes into consideration”.

Where contractual conditions are difficult to amend in running contracts, negotiations between contractors and clients will be essential as ongoing projects unfold, he adds. 

There has to be a mechanism with which the procurement process is looked at from a holistic perspective

Structural change

Over the longer term, the experiences gained during the peak of Covid-19 lockdowns and business disruptions in 2020 can be used to guide the industry’s response to the structural challenges facing Gulf construction, and to prepare smarter, leaner construction project frameworks that help extract greater value for money.

“There has to be a mechanism with which the procurement process is looked at from a holistic perspective,” says Al-Ghanim. “It is high time for us to introduce new technology in terms of supply chains, and understand that globally, there will be [greater] reliance on innovation in terms of material production and procurement.”

Advances in construction materials and production processes, such as the use of prefabricated components, can improve labour productivity and drive efficiencies, he says. However, it is also important that the public procurement process enshrines flexibility from the outset to encourage innovation in not only how the project is delivered, but also how it is set up and operated.

Value proposition

Al-Ghanim says that now is the time for contractors to transition from being ‘project deliverers’ to ‘solution providers’ for clients, and to modernise the traditional way of executing projects.

The industry must also make an effort to distinguish between ‘cost’ and ‘value’, and to ensure that project budgets cover the entire project life cycle, including both capital and operational expenditures. This will become more important as infrastructure spending gaps expand in the aftermath of the pandemic, says Al-Ghanim.

Attracting private sector spending, whether through direct investments or public-private partnerships (PPPs), will require greater alignment of project stakeholders.

Globally, past public sector failures have led to reluctance to pursue PPP projects on a long-term basis, but these frameworks are evolving in this region. “There have been some changes in Kuwait, the UAE and Saudi Arabia, where many of the potential risks have been, to a degree, mitigated,” he says. “That being said, we are still a long way from having a clear PPP model [in the region].”

The GCC certainly is our backyard, but we're not shying away from looking at opportunities in other countries too

Funding gap

Funding the gap between the required level of investment in Middle East infrastructure and the government funds that are available could be reduced through the development of engineering, procurement, construction and finance contract models, which Al-Ghanim says are already being successfully utilised in Egypt.

“We are seeing a lot of multilateral funders, green funds and export credit agencies that are beginning to get involved in studying how to cover the financing required [in Egypt],” he says. “There are also several construction and engineering, procurement and construction firms that are in a position to negotiate more favourable terms in order for them to deliver the higher value standards [now needed].”

While I do believe that the outlook is going to be difficult over the next two years, I think that's more of a structural issue rather than a demand issue in the market

Future appetite

Al-Ghanim is excited about the potential for alternatively funded projects to drive change in terms of efficiency and productivity in the contracting sector. Investments in power and water projects on a PPP basis, with easier regulatory requirements, could help to raise financiers’ appetite for involvement in the Middle East – particularly since the demand risk on the investor is lowered.

Prevailing regional agreements involving governments as offtakers, or those based on energy or water production “should increase the appetite of financiers, developers and contractors” to work on such schemes, says Al-Ghanim.

“While I do believe that the outlook is going to be difficult over the next two years, I think that it is more of a structural issue rather than a demand issue in the market,” he says.

Al-Ghanim’s market optimism will also drive his company’s expansion into emerging regional infrastructure hubs such as Egypt and Algeria in the years ahead.

“The GCC certainly is our backyard,’ he says. “But we are not shying away from looking at opportunities in other countries, too.” 

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