Builders urged to broaden financing

Companies in the construction sector that can bring finance sources such as export credits to tender bids could enjoy a brighter year in 2017, but those heavily exposed to Saudi Arabia and Qatar are likely to face continued constraints, according to a panel of experts.

Speaking at a British Business Group event in Dubai last week, Thomas Riordan, Arabtec professor of civil engineering at Higher Colleges of Technology in Dubai, who has spent a year advising the UK’s department for international trade, said: “The key trend at the moment is alternative revenue sources.

“A lot of developers, a lot of government entities are told: ‘we don’t have money from oil – please go out and get alternative revenue sources for these projects … We want your contractors and developers to be more proactive.'”

He said that the UK Export Fin­ance initiative, which provides funding for projects in which there is a significant British involvement, is a powerful tool in helping them to secure projects.

“That is a game changer,” said Mr Riordan. “UK Export Finance has something like US$2 billion on the table at the airport and $1bn at the Expo 2020. That will be an opportunity for a lot of people to win key contracts on those projects.”

He also said that Britain was not the only country whose government was offering export credits to enable its contractors to secure work.

“You’ve got the Chinese getting more involved in that, you’ve got the Italians and the French coming here and talking about financing projects.”

Public Private Partnerships (PPPs) were discussed as another potential way of contractors securing work – especially in Dubai, which passed its PPP law in November last year. Ben Hughes, a director of Deloitte’s Capital Projects team in Dubai, said that although “there hasn’t been the avalanche of PPPs that one might naively have expected”, this is likely to change next year with Expo 2020 presenting a pressing deadline.

“I think 2017 is probably the time when PPP really kick-starts in Dubai and really takes off.”

Outside the UAE, contractors are still facing acute cash flow pressures in Qatar and Saudi Arabia, where capital spending programmes have been scaled back and, in the latter, payments from government clients have been on hold.

“In Saudi Arabia, we’ve advised clients where they are simply not being paid by the government,” said Mr Hughes. “If the government is unable to pay and the contractor is still obligated to maintain the supply chain they’ve got, then they are in a fairly invidious position where no money is coming in and it’s all flowing out.”

Jed Savager, a partner at law firm Pinsent Masons, said that relationships between main contractors and their suppliers are becoming more adversarial as the amount of money in the supply chain dries up.

“If you look at the last 12 to 18 months, there has undoubtedly been a huge upswing in disputes, many of which are entrenched. The supply chain is distressed.”

A report published last week by BMI Research, part of the Fitch group, said that the downturn in Saudi Arabia’s construction market is likely to continue throughout next year.

The report said that Saudi Arabia’s construction sector had shrunk in size by 1.9 per cent in the first quarter of this year, then by 3.1 per cent in the second quarter.

“While we believe the industry will have improved marginally over the second half of the year, the issues which have dogged 2016 will roll over into 2017,” it said.

Although the government recently pledged to repay outstanding bills to contractors by the end of next month, the fact that it has withheld payments for more than a year has had a dramatic effect on staffing, the solvency of subcontractors and the backlogs of existing projects.

It has downgraded its growth forecast for Saudi Arabia’s construction sector to 0.5 per cent this year and 1.9 per cent next year, and predicted that growth above 5 per cent – commonplace in recent years – is not likely until 2019.