State clients drive UAE construction market

18 April 2011

Despite a recovery in the UAE’s construction industry, big government-backed schemes in Abu Dhabi will continue to dominate the market in 2011

Last year was a period of recovery for the UAE’s construction industry. There was $25bn-worth of contract awards in 2010 – a 31 per cent increase on the $19bn of awards made during 2009, according to regional projects tracker MEED Projects.

Although it is still below the total recorded during 2008 when there was almost $38bn-worth of contract awards, it is above the $20bn signed during 2007. That year most in the industry complained of an overheated market and clients looked to secure resources with partnering agreements and strategic alliances.

With large bid lists, the winner is the one that makes the largest mistake with his price

Contractor in Abu Dhabi

But the sentiment in the current market contrasts sharply with the encouraging data for 2010. Contractors complain that bills for work already completed remain unpaid; there are not enough opportunities; and for the projects that are tendered competition is fierce, meaning margins are slim.

Payments affected

International contracting companies are now publicly releasing details of the impact of the economic crisis on their businesses in the region. Australia’s Leighton Holding, which bought a 40 per cent stake in the local Al-Habtoor Engineering Enterprises in 2007 has been one of the worst affected.

UAE contract awards ($m)
Source: MEED Projects

It says the Al-Habtoor Leighton Group (HLG) is owed about AED4bn ($1.1bn) by clients for work already completed and the Australian parent company has had to provide funding to its ongoing projects.

“As it’s been unable to collect funds from clients, HLG has had to complete jobs using working capital provided by its shareholders and banks,” says Peter Gregg, chief financial officer at Leighton Holdings. “With work still to be completed on some of these projects, shareholders will have to continue providing finance if money can’t be recovered from clients.”

Projects planned or underway ($m)

22 March 2010: 966,764

23 March 2011: 638,613

Source: MEED Projects

Al-Habtoor Leighton and Al-Habtoor Engineering Enterprises has a long standing relationship with South Africa’s Murray & Roberts Contractors in the Middle East. The two companies have worked in joint venture on many of Dubai’s landmark schemes, such as the Burj al-Arab, Dubai International airport and the Madinat Jumeirah. Like Al-Habtoor Leighton, Murray & Roberts has payment issues in the region, and together with a slowing market in South Africa after the 2010 Fifa World Cup, the firm has been forced to write off about $113m.

“The company has taken what action it deems appropriate to clean the slate in the context of current difficult market conditions in the Middle East and South Africa,” says Brian Bruce, chief executive officer at Murray & Roberts. “While the outcome of various arbitration proceedings relating to a range of complex claims on major projects is uncertain, the possibility exists of a material recovery in the future, which at this stage is not confidently quantifiable.”

The problem for contractors is that the market is not in equilibrium. In 2007 and 2008, demand and supply did not balance. Contractors were in short supply. Clients were forced to either accept higher margins or enter into long-term agreements with construction firms to ensure that their projects got built.

The real-estate crash in late 2008 reversed that trend. Today, the clients that can still afford to build are the ones that can dictate terms. “In the current market, you put in a slim margin and you are still way off the lowest bid,” says a local contractor.

“Some companies are so desperate for turnover they are prepared to work for cost. We are a business, we want to make profits, how can we compete against that?”

UAE government clients

With the ongoing paralysis of the private sector, the UAE construction market since 2008 has been dominated by government clients.

According to MEED Projects, there has been a steady decline in the value of private sector contract awards since 2009, when $12.4bn of deals were signed.

In 2010, the value of private sector contract awards was $8.8bn and so far this year, just $526m of deals have been struck.

The public sector has done the reverse. It has been steadily increasing activity since 2009 when it awarded $9.4bn of contracts. In 2010, it awarded $14.9bn of contracts and for the first two months of this year, state entities made $2.3bn of awards.

Geographically, Abu Dhabi has dominated the UAE market with a series of major contract awards. The two largest went to the local/UK Al-Futtaim Carillion and the joint venture of the local/Belgian Six Construct Abu Dhabi and South Korea’s Samsung C&T. The first is a $1.5bn deal to build the New York University campus and the second was a $1.3bn contract to build the Cleveland Clinic. The ultimate client for both schemes is the Abu Dhabi government controlled investment vehicle Mubadala Development Company.

Abu Dhabi will continue to dominate the market during 2011. The main schemes to be awarded are the midfield terminal at Abu Dhabi International airport, the first phase of the UAE’s federal rail network, the Yas island shopping mall and museums on Saadiyat island.

Transport schemes in the UAE

For the airport, Abu Dhabi Airports Company invited seven prequalified companies to submit bids by 10 July for the construction contract for the midfield terminal.

When completed, the terminal will include 27,000 square metres of retail space and will also have 65 contact gates, which will be able to accommodate the Airbus A380 aircraft. The expected capacity for the new terminal will be 27-30 million passengers a year.

“We have been waiting for the tender for a long time,” says an international contractor. “We are confident that it will go ahead, it’s crucial for the expansion of the airline [Etihad Airways].”

For the railway, the UAE’s Etihad Rail Company has invited more than 20 prequalified firms to submit bids by 4 May for the first civil engineering contract for the first phase of the $11bn federal railway. The contract is estimated to be worth AED2bn and involves civil and track works for the 265-kilometre line between the port of Ruwais and gas fields at Shah and Habshan. Once complete, the railway will be used to transport 10,000 tonnes a day (t/d) of granulated sulphur. This will increase to 20,000 t/d once the line is completed to Shah.

Although the tender has generated a large amount of interest from contractors, potential bidders have expressed concerns over the number of companies that have prequalified. Many are considering withdrawing from the tender. “With large bid lists, the winner is the one that makes the largest mistake with his price,” says a contractor in Abu Dhabi.

On Yas island in Abu Dhabi, local developer Aldar Properties is tendering the contract to build its estimated AED2.5bn ($680m) shopping mall development.

“This is a big job,” says a Dubai-based contractor. “There used to be lots of projects like this when the market was booming. It’s quite rare to get a real-estate developer tendering something so big now.”

The project involves the construction of the Yas mall, northeast and northwest decked car parks, infrastructure and associated roads. The project will also involve hard and soft landscaping works. The total built-up area, including car parks and landscaped areas, of the project will be about 1.2 million sq m.

Aldar hopes to award the contract in the second quarter of 2011 and expects the project to be completed in the third quarter of 2013.

Abu Dhabi’s cultural district

Abu Dhabi’s Tourism Development & Investment Company (TDIC) has received bids for two of the four museums it plans to build as part of the cultural district on Saadiyat island.

The most advanced is the $1bn Louvre museum. TDIC has shortlisted Australia’s Multiplex and a joint venture of the local/Australian Al-Habtoor Leighton Group with South Africa’s Murray & Roberts Contractors (Middle East) for the main package.

For the Guggenheim Abu Dhabi museum, it received bids in late March for the structural package. The museum will cover a total area of 30,000 sq m and will be larger than the existing Guggenheim museums in New York, Venice, Bilbao, Berlin and Las Vegas.

The other cultural projects due to be tendered later are the Sheikh Zayed National Museum, a maritime museum and a performing arts centre.

The question is what will follow these projects in 2012. Most of the schemes that have been awarded since 2009 have been in the pipeline for several years. That pipeline is now running dry.

“There were lots more projects planned, but so many of them were cancelled when the market crashed in 2008 and 2009,” says an international contractor in Dubai.

“I expect the market will slowly return to what it was like in the 1990s, when there was a handful of big government-backed jobs and we competed hard for them. That might sound bad when compared to the boom years [of 2003-08], but at least we had work.”

The hope is that the authorities, particularly in Abu Dhabi, will continue to invest in projects for their people.

The political unrest that has swept the region this year should reinforce this trend as the government will be keen show that it is building a better future for its people, with new infrastructure and services. 

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