Opportunities abound despite region's construction complications
When asked what the problems are with the region’s construction industry, the people with perhaps the best experience to judge – the international contracting giants – can often reel off a long list.
Take performance bonds, for instance. The head of a British contracting business recently bemoaned the fact that a client gets to withhold 10 per cent of a contract’s value as a performance bond, which can then be withheld at the first sign of a dispute.
“We’re operating at margins that are single-digit percentages, and virtually every client is holding 10 per cent cash retentions,” he said.
The local head of a large US consulting firm also said that as market conditions have tightened, some public-sector clients have used contractors’ cashflows to bolster their own by withholding payments.
“I think there’s a perception that cash issues right now are a fallout from low oil prices bringing pressures from revenue to the government. But I really think this is a systemic issue in the market,” he said.
With Standard & Poor’s predicting that oil prices are likely to stabilise at US$50 per barrel by 2018 and beyond, governments will have lower levels of revenue for capital spending, meaning fewer big projects. As a result, there may be chief executives of consulting and contracting giants in global headquarters in London, Seoul, New York or Toronto wondering whether the Arabian Gulf’s construction industry is worth the effort.
The RTA’s award on June 29 of the Dh10.6 billion contract to build Route 2020 – the 15 kilometre extension of the Dubai Metro’s Red Line from Nakheel Harbour and Tower to the Expo 2020 site – is a sign that it probably is.
There has been a great deal of expectation about the Expo, with many analysts and industry watchers predicting a flood of construction work after Dubai won its bid in 2013. This has not happened yet, but the Metro award is a sign that the trickle of awards this far could soon develop into a fast-running stream.
The project will create more construction activity in the areas the extended line will run through, such as Al Furjan, Jumeirah Golf Estates and the Dubai South site itself.
Moreover, the award signals that those who have pledged to deliver major contracts before Expo 2020 begins need to get their skates on.
Emaar Properties has recently appointed the UK’s Faithful and Gould to project manage its huge Dubai Creek Harbour scheme, which could result in a flurry of large contract awards in the second half of this year. The tender for a mall 30 per cent larger than The Dubai Mall is already out, and a package for the tower taller than Burj Khalifa is expected soon. With 22 hotels planned for the harbour and scores of residential towers, expect this site to become a hive of activity.
Other work likely to materialise in the not-too distant future if it is to be completed by Expo 2020 includes the first phase of Meydan One. This will include a 711-metre residential tower, another huge mall, a civic plaza capable of hosting 60,000 people and a 100-berth marina.
Also, hotel operators that have signed deals to operate large chunks of new towers will be itching to ensure these are finished at least a few months before the Expo, giving them time to bed their own operations in. Therefore, expect contracts to be awarded for other major buildings, including Meydan’s Gate Tower spanning the banks of the new canal by Al Safa Park, and Al Wasl Tower on the site of the Toyota building, where Mandarin Oriental is to open its first Dubai hotel.
Then there is Mall of The World. Morgan Parker, who was brought in as the chief operating officer for Mall of The World last year by Dubai Holding, seems to have tempered expectations about the scale and the timing of the $20bn project since his appointment. But a project as big as this is likely to require an element of international institutional funding, and what better way to encourage the lenders than to have at least part of the project open by the time the world comes to visit?
Then there’s the Expo 2020 site itself, the continued expansion of Al Maktoum International Airport and many, many others.
Working in the Middle East can be problematic for contractors, and client disputes can almost be taken as read, but the truth is that Dubai in particular, and the region as a whole, still offers an incredible amount of opportunity.
Michael Fahy covers construction for The National.