Construction companies are injecting more equity into the projects they build
In 2018, the 1,008-metre tall Kingdom Tower will open and become the worlds tallest tower. The event will be a double celebration for Jeddah-based Saudi Binladin Group (SBG).
The construction giant is not only the main contractor for the record-breaking scheme, it is also one of the investors in Jeddah Economic Company, which was formed in 2009 to finance Kingdom City, which includes the main tower.
SBG is not funding the project alone the other investors are Kingdom Holding Company, Abrar Holding Company and a private investor called Abdulrahman Hassan Sharbatly but it is the most high-profile demonstration of a contractor providing equity for one of its projects.
As liquidity in the region tightens and project clients look for new sources of funding, contractors have the opportunity to take a more active role in either providing or facilitating equity for the projects they work on.
If structured correctly, both clients and contractors can benefit. The client gains access to additional funding, while the contractor secures an order in an increasingly competitive market, and as an investor, is more likely to be treated favourably when it comes to payment terms or any contractual disputes.
SBG is not the only regional contracting giant that is providing equity. Investing in projects is also a strategy being deployed by Athens-based Consolidated Contractors Company (CCC). It is an investor and is working on the Omagine tourism development in Oman, as well as the Saraya Aqaba scheme in Jordan. The company is also eyeing a leisure-related development in Tunisia.
The Omagine project is being developed by a special-purpose vehicle (SPV) known as Omagine. It has three primary shareholders; the Office of Royal Court Affairs holds 25 per cent, CCC holds 15 per cent, and the remaining 60 per cent is owned by US-based Omagine.
CCC will be the contractor that builds the development. The construction contract is expected to be the largest ever awarded in Oman, with an estimated value of about $2.3bn-$2.6bn.
Power and water
Away from real estate, the company is following solar power plants on independent power projects (IPPs) and water schemes such as the second phase of the Al-Samrah sewage treatment plant in Jordan, which it is developing with Frances Degremont.
Another opportunity in Jordan is in shale oil for UK/Dutch Shell, where there is the possibility of putting in equity and building a plant if the scheme is commercially viable.
International contractors are less likely to invest, but some are playing an active role in facilitating funding with institutional support from their home countries.
Globally, this is a key strategy for Chinese construction companies that over the past decade have worked on projects in emerging markets with funding from Beijing, most notably in Africa. They have also secured work in the Middle East with funding support.
Beijing-based China State Construction Engineering Corporation formed a SPV with Dubai-based real estate and hotels group Skai Holdings for the construction of its Viceroy Dubai Palm Jumeirah and Viceroy Dubai Jumeirah Village projects.
The Industrial and Commercial Bank of China (ICBC) provided AED737.6m ($200.8m) in project financing in January 2014 to support the construction of the Viceroy hotel. China State also helped facilitate a AED1.1bn financing deal between Skai Holdings and seven local and international banks, including ICBC, Agricultural Bank of China, Bank of China, and China Minsheng Banking Corporation.
UK contractors have also been successful in facilitating funding deals. The main company using this funding support so far has been Carillion.
In 2014, the UK-based contractor, through its local joint venture Al-Futtaim Carillion, won work on at least two schemes that are being developed with UK export credit guarantees. The projects are the $181.1m Hard Rock Hotel in Abu Dhabi for Abu Dhabis Aabar Properties, and the $102m first phase of the Dubai Trade Centre District for Dubai World Trade Centre.
In 2013, Al-Futtaim Carillion secured work on The Avenues for Dubai-based developer Meraas, again with financial assistance from London.
The guarantee that supports Carillions deals comes with certain standard terms and conditions that all UK Export Finance deals must adhere to. The contract must feature at least 20 per cent minimum of UK content, consisting of goods or services sourced from the country. The guarantee will also cover a maximum of 85 per cent of the value of the loan being extended to the UAE-based buyer.
Although contractor financing, whether it be direct equity investment or facilitating funding from foreign banks, does help projects move forward, the sums are not that significant.
The sums available to contractors typically reach a maximum of about 15 per cent, says a UK consultant. That helps makes funding easier for a developer, but it does not make the difference.