Taking the partnership approach

25 April 2008
Faced with growing pressure on resources, contractors and developers are increasingly forming joint ventures as they struggle to deliver the region’s ambitious megaprojects.

For some time, construction in the Gulf region has been characterised not only by unprecedented growth in investment, but also by the ambition of the projects under construction.

Ten years ago, projects such as the UAE’s Burj al-Arab and the Emirates Towers were enough to illustrate international ambition and put Dubai into the international spotlight.

Now, projects being unveiled across the Middle East, from Saudi Arabia’s $27bn King Abdullah Economic City (KAEC) to Kuwait’s $77bn City of Silk or $27bn Sabah al-Ahmed Future City project, dwarf the original super-projects and typify a new mindset.

Such developments are also aimed at establishing the Gulf region as an internationally competitive force. It is this attitude that will result in the world’s three tallest buildings be constructed in the region: Nakheel’s Al-Burj in Dubai, the Mubarak al-Kabir in Kuwait City and the Mile-High Tower in Jeddah, Saudi Arabia.

These projects, however, put unprecedented demands on the contracting sector at a time when economic factors have pushed inflation to record levels, and the Gulf construction boom is placing a premium on raw materials and skilled labour.

Record inflation

Inflation in Saudi Arabia reached a 27-year high of 8.7 per cent in February, driving up prices across the board. As a result, state industrial giant Saudi Basic Industries Corporation (Sabic) announced on 8 April that it was increasing the cost of rebar (reinforcement steel bars) by SR825 ($220) a tonne, representing an increase of 25-30 per cent overnight and making budgeting difficult. Consequently, some bids from contractors are coming in at up to 40 per cent more than expected by clients.

Being a contractor during such times is a mixed blessing. There is certainly a huge amount of work available, but how these super-size projects are approached is challenging. “These projects are of such a scale that it is difficult to imagine how you would approach them,” says one contractor based in Kuwait, who highlights the much-vaunted City of Silk as one reason why contractors face a particularly challenging period.

Despite being launched in 2005, the project only received approval from Kuwait’s Council of Ministers in November 2007, and there has been little tangible progress on it to date.

“There is no information on it at the moment,” says the contractor. “This is a project that has been around and in the papers for a few years. But I do not think anything will happen for a number of years yet.”

According to one Jeddah-based contractor, the amount of work being announced has had no impact on the firm’s approach, although it remains flexible. “Strategies keep changing with the nature of the business,” he says. “There is no fixed strategy and no fixed approach. Joint ventures are becoming the name of the game these days, as it enables you to pool resources. There is always an advantage in having a joint venture and joint efforts, especially when it comes to budgets. The only drawback would be the need to co-ordinate decisions.”

This approach has most notably been seen in Emaar’s tie-in with Saudi Binladin Group on KAEC and the Eight Gate project in Damascus.

Increasing popularity

“I believe that a greater number of contractors will pursue this link with developers,” says the Kuwait-based contractor. “It helps in certain aspects. Developers will understand-ably try to have a secure and experienced outlet, and contractors would like some kind of secure business. This is especially true on huge projects.”

This approach has been replicated in various formats for other economic cities in the region, with developers pursuing joint ventures with major companies in a bid to bring expertise to the project and drive development forward.

In January, Jebel Ali Free Zone Authority (Jafza) International, the global free zone operations arm of Economic Zones World, part of Dubai World, signed a memorandum of understanding with Saudi Arabia’s Rakisa Holding for the development and management of Rakisa Economic City at Hail.

The agreement will involve both parties exploring investment opportunities to jointly develop Rakisa Economic City, which is also known as Prince Abdulaziz bin Mosaed Economic City. Spread over 15,600 hectares, the estimated $8bn project will be the second-largest economic zone in Saudi Arabia, targeting investment in the transport and logistics sector.

In a related move in April, DP World and Emaar, The Economic City, announced that the companies would develop and operate the sea port at KAEC. One of the six key components of the 168 million-square-metre city, the sea port will be the largest in the Red Sea and one of the top 10 ports in the world, with capacity to handle 20 million 20-foot-equivalent units (TEUs).

Traditionally, Saudi Arabia’s construction sector has been dominated by a handful of family-run firms that have procured the most prestigious work. These include Saudi Bin-ladin Group, Saudi Oger, Al-Arab Contracting Company (ACC) and El-Seif Engineering & Contracting. However, some observers suggest there could be a subtle shift in this balance as the market matures, and the more established players face greater competition from both regional and international firms.

“Yes, family firms do dominate, but we are seeing a change in mentality, and this change is being reflected in businesses operating in the kingdom,” says the Jeddah-based contractor. “I think this change will occur at a more rapid pace as time goes on, because people are becoming more educated and used to the medium of business. With the volume of work suggested, we can expect international players to turn up because it requires extra support.”

However, the idiosyncrasies of operating in the kingdom may prevent this international surge materialising any time soon, he warns. “The legislation hinders people,” says the contractor. “It can certainly be a barrier that scares people out.”

Growing competition

Samer Arafa, director of Riyadh-based ACC, disputes the view that more international firms will operate in the kingdom, and suggests that an established company with historical links to the country will always have an advantage over smaller or foreign companies attempting to break into the market.

“Most of the projects being launched or developed are megaprojects,” says Arafa. “Unfortunately, small contractors cannot be used - they do not qualify to bid, to cost or to price. So this puts more pressure on the bigger contractors. [Saudi] Binladin has been here [in Saudi Arabia] for 50 to 60 years, [Saudi] Oger more than 30 years, and ACC and El-Seif for 25 years. We have market information, we have a deep understanding of the process and I don’t think it is easy for a foreign contractor to jump into Saudi Arabia. It is not like Dubai, it is a different set-up, [with] different market requirements, and a different environment, competition and clients.”

Consequently, Arafa says, firms such as ACC are in a far stronger position to fill any potential gaps in the market. “We are more ready to provide capacity, as opposed to someone new coming in and having to understand the environment,” he says.

This has not stopped ACC having to prioritise and ascertain exactly what changes need to be made to ensure it does not suffer as a result of increased demand coupled with spiralling inflation. “There is definitely a big shortage,” says Arafa. “It is like Europe. We are also struggling to get quality partners, subcontractors and high-end people.

“What we normally find, especially in these times, is that it is important to procure good material and systems suppliers as our subcontractors. And with some projects, we need team members, a consortium in a joint venture, or dedicated subcontractors. Essentially, we need a bit of everything. We need more teamwork from everyone in the value chain.”

As a consequence of this, Arafa explains, the company is taking a measured approach to ensuring that the people it employs can deliver strategic growth efficiently. “We are working more on securing middle management and higher management of the company,” he says. “This way, you can expand from the top and not from the bottom. You do this not by adding 10,000 people, but by recruiting 30 competent engineers who can plan, manage and execute the work properly.”

At the same time, Arafa says, the current economic climate will force companies to streamline their operations and curtail peripheral business interests. “Maybe in less serious economic times companies can diversify what they offer, but now is the time to focus and cate-gorise what they do.”

What is clear is that contractors operating in the Gulf region, be it Kuwait or Saudi Arabia, are facing unprecedented growth and challenges to which they are having to adapt. The challenge for contractors is not just the physical act of construction - and designs and concepts are only going to become more demanding as the proposed Mile High tower will testify - but also the need to deal with the underlying economic factors.

This, coupled with the increasing demand for resources, may be the region’s biggest challenge in the coming years.

Key fact:

Kuwait’s City of Silk remains the region’s largest project at $77bn.

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