History repeats itself with Dubai Metro low bid

07 March 2016

In 2005, the winning bid was 40 per cent lower than the competition

In late February 2005, Dubai’s construction sector was stunned when a consortium led by Japan’s Mitsubishi Corporation submitted the low bid for the contract to deliver the first phase of the Dubai Metro.

The price, which was some 40 per cent cheaper than the second-lowest bid, was at the time considered by other bidders to be too low and impossible to deliver. Despite the concerns raised, Dubai Municipality, which was handling the project before the Roads & Transport Authority (RTA) was created, went ahead and awarded the team the contract.

Just over 11 years later and history is repeating itself, with Dubai receiving another bid for metro work that is significantly lower than the competition. On 6 March, the RTA opened commercial offers for the deal to design and build the new metro link connecting to the Expo 2020 site.

A team of Turkey’s Nurol, Italy’s Astaldi and Spain’s Construcciones y Auxiliar de Ferrocarriles (CAF) has submitted the lowest commercial offer for the contract, with a price of about AED7bn ($1.9bn) and no alternative offer. The offer is about 29 per cent less than the second-lowest bid, which is about AED10bn.

The RTA says it will conduct a three-week clarification process to levelise all the bids to make sure the prices are directly comparable.

In the meantime, just like there was in 2005, there is scepticism about whether the deal can be delivered for that price, and the market is awash with explanations as to why the pricing variance is so large.

The first and most obvious explanation is that the pricing is not comparable and the 29 per cent discrepancy will be removed during the clarification period. The problem with this argument is that it does not explain why the offer was not rejected during the technical evaluation period.

Another explanation could be the memory of the past. Although the first phase of the Dubai Metro opened with great fanfare on its scheduled opening date of 9 September 2009 (9/9/09), the final stages of the scheme were hindered by the 2008-09 financial crisis.

Those memories of 2009 will still be recent for Mitsubishi and may have been shared by the three other bidders, who also chose to price the deal with a margin to cover any potential repeat of 2009. With the four other bids within 5 per cent of each other, it appears a similar approach has been taken to pricing.

The Nurol/Astaldi/CAF team may simply be less risk-averse and have chosen to price the scheme without this cautionary buffer. If that is the case then the RTA has the opportunity to save about $800m. Dubai proved in 2005 that such an offer was too good to turn down.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications