With oil suffering a 60 per cent fall in price since last summer, many expected 2015 to be a tough year for the Middle East’s projects market. To date, that contraction has not materialised, although a slowdown is expected if oil prices remain low. Work has continued on schemes that were under way, or where money had been secured, but there are concerns the market will begin to contract next year.

Yu Tao, president and CEO of China State Construction Engineering Corporation (CSCEC) Middle East, says that with oil prices being such a major factor in the region, especially for countries such as Saudi Arabia, the UAE and Kuwait, if the situation drags on for too long, it will affect the construction industry. “At the moment we don’t really feel [the impact],” he says.

“Normally the government will feel the pinch first, and start to reduce its budgets, then after one or two years the contractor will feel the same type of pressure,” he adds.

History of success

CSCEC has been historically successful in the UAE market, working on several major projects, particularly in Dubai. Past projects included building 286 villas on the man-made Palm Jumeirah in 2003, in a contract worth $165m, architecture work worth $47m on the grandstand at the Nad al-Sheba racecourse and a number of road and interchange developments.

The [UAE] government has… put in place higher thresholds for developers. I believe this is a very healthy move

Current work includes acting as the main contractor on phase two of the Roads & Transport Authority’s Dubai Canal, in a contract worth $105m. Work is under way, with completion scheduled for late 2016, and includes building several bridges, including the Jumeirah Road Bridge and the Al-Wasl Road bridge, along with ramps, flyover links, diversion works and associated facilities. “The client is very demanding and we have to complete the project in a short time span,” says Yu.

In Abu Dhabi, CSCEC is the main contractor for infrastructure works at the international airport, building roads and bridges. It also bid for the $2.9bn contract to build the the Midfield Terminal at the airport, but that was awarded to a consortium of the UAE’s Arabtec, Turkey’s TAV and Athens-based Consolidated Contractors Company in June 2012. It did, however, win work as a sub-contractor for the steel structure and the mechanical package on that scheme.

The company is also active in other GCC states, and is committed to the region for the long term, says Yu. “To develop here, it’s going to be for the long term,” he says. “We’re not trying to be a hero for a year or two, we have to really commit ourselves, deliver quality products on time and still remain competitive.”

CSCEC has doubled its management-level workforce in the region over the past year, and tripled the number of workers. If projects in the pipeline come through, he expects to further increase the number of people working at the company in the Middle East across a range of job levels. And he expects that to continue, in spite of lower oil prices.

“Our strategy is trying to sign big contracts with big clients in a big market,” says Yu. The company has identified Kuwait and Oman for further expansion in the GCC. It is tracking the planned $15.6bn Oman national railway development and has bid on several planned projects in Kuwait, including the new airport terminal, a university and a hospital. 

“We have been working in Kuwait for a few years,” says Yu. “Currently, we are trying to finish the Central Bank of Kuwait [headquarters], and we are participating in a lot of tenders.” The contract for the 240-metre-high
central bank building, which it is building in partnership with the local Mohammed Abdulmohsin al-Kharafi & Sons, is worth $406m.

Yu says commitment to the region includes operating in stable business environments. He points to the UAE and the rules and regulations in place, which, he says, make operations in the country easier.

Mature market

“The UAE has more comprehensive laws and regulation, and developers here are more experienced, especially a lot of the consultancies that have spent years here,” says Yu. “So we believe the UAE is a more mature market for contractors.”

This regulation has given him more confidence that, if the projects market is squeezed due to the oil price downturn, the problem of non-payments for work done is less likely to return. It was a major problem in the region, particularly in Dubai, during the financial crisis of 2008-09, and some contractors worry it could happen again.

But both the country and individual companies have learned from that downturn, and Yu does not think it will happen again, particularly not at the government level. “As a contractor, we have to be responsible to deliver, and without cash flow it’s impossible,” he says. “As a main contractor, we carry a lot of liability on behalf of the client. For sub-[contractors] and suppliers, we are their paymaster.

“So we may end up caught in between; where we don’t receive payment, but we have to honour our commitment to subcontractors and suppliers. We don’t want the same kind of situation [as in 2009]. It was not constructive, and it’s just a waste of time. But currently, I haven’t seen the kind of potential risk in the market.”

Of the UAE, Yu says lessons were learnt. “Clients have learnt a big lesson and have become more cautious. The government has introduced more regulation and has put in place higher thresholds for developers. I believe this is a very healthy move. ”

The market is still weighted towards conventional contracts, with clients arranging the finance. International firms have talked about the desire to see more design-and-build contracts being signed in the market. These place more responsibility and risk on the main contractor, but can streamline the construction process, with fewer parties involved in the project, and be more financially attractive. But such contracts can be more expensive to bid on.

In a recent interview with MEED, Mark Andrews, Middle East managing director of the UK’s Laing O’Rouke said: “It’s a model not used very much in the UAE at the moment. We believe it’s the way forward.”

Yu says he is seeing more contracts under build, operate, transfer (BOT) and public-private partnership (PPP) arrangements, and would like to see more design-and-build developments in the region. “What we are trying to do is bring in project finance for the client, or sometimes we join the client to invest together,” he says.

CSCEC’s previous attempts in the region to push through developments under a PPP model were unsuccessful. “It’s always a challenge,” says Yu. “Whenever we talk about PPP we are talking about mega-sized projects. For a small project, nobody is asking for PPP. To strike a balance between the interest of the developer, government and… the contractor requires wisdom. [They need to] understand each other’s interest and to make it mutually beneficial.”

Balancing interests

Getting vested interests to meet in the middle can be difficult with PPP projects, requiring experience on both sides. If clients want a partner to join them in a deal, that partner has to “at least have something to bite”, says Yu. “If you eat everything, who is coming to join you?”

He describes design-and-build deals as a more practical option than PPP since it can be difficult to align the many parties working on a job. For clients, managing many different parties on a major development can be a burden.

While design-and-build is used, but not typical in the region, it is a contract model attracting more interest. Having a single entity managing a development is simpler for the client, and can be a financially attractive option for main contractors. It “pushes a lot of responsibility to the capable contractor”, says Yu. “If the contractor is doing well, [clients] will have most of the benefit. If the contractor is messing up [they] must be responsible. So it’s much simpler.”

“If the market becomes more mature, the clients understand the benefit of this business model and if the contractor is capable, I believe this could become the future of the GCC market.”