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GCC powers ofconstruction 2012Five lessons to learn from

2 | Deloitte GCC powers of construction 2012 | Five lessons to learn from

Deloitte GCC powers of construction 2012 | Five lessons to learn from | 3

Contents

4 Introduction

10 Reflect:- For contractors in the GCC, opportunitiescontinue to beckon- PPP's in 3D- Abu Dhabi – a real estate perspective Scratch the surface... and then scratch again

22 Review:- Overrunning the mark … a brief insight into cost overruns- Hotel development in the GCC – is it over?- Construction e-discovery – following the digital paper trail

30 Refocus:- The majlis – mediation, Middle East-style- Changing dynamics – how to assess the swing in balance?- Buy once and buy well

42 Reinvest:- Going nuclear – massive power investment in the Middle East- Stuck – Cement in the GCC- A dirham saved is a dirham earned – Howproactive developers are effectively managingtheir contractor claims in the current financialenvironment

56 Rebound:- Where is the exit?- Kuwait – gaps for optimism- Saudi Arabia – the giant awakens

The story for 2012In 2011, the story for public and private sector entitiesinvolved in construction in the west was in fact notmuch of a story at all. Seemingly forever stuck in themire of stagnant economic growth, there was nothingto tell, nothing to grab headlines, when the only newsto be heard would have been regarding a continuedreluctance to invest in new major capital projects. Thenews in the GCC, however, told a different tale – wewoke up every morning teased with glimpses of aneconomy with indications it was well into recoverymode. Whilst western economies grapple with issuesranging from unemployment, unsecure securities, legacydebt and grid-locked liquidity, in the GCC it has becomecommonplace to drink your daily coffee while learningof eye-widening announcements regarding the plannedinfrastructure spend justified by the global demand foroil and gas. While the types of projects, location and themethod for procurement may have changed, thespending through different GCC governments continueseven today. Not surprisingly, this has quite simplycaptivated – with great fascination - every majorbusiness involved in construction from east to west.

The other storyWhat is truly fascinating however about the GCC is the ‘other’ story - that in the midst of plans to spendUSD 100 bn in Qatar following the 2022 World Cupannouncement, or the Kingdom’s capital spendprogram approaching USD 400 bn over the next 10years alone, we have also learned of government-backed bailouts that stretch into the tens of billions ofdollars that – quietly – we know are for unviable andcommercially challenged projects that were launchednot too long ago. These projects did not just marginallyexceed their planned budgets, they blew through themwith authority. I recall a time not that long ago when webelieved the opportunity for those operating in theconstruction sector in the GCC was unparalleled. But infact, it is not the size of the opportunity for thoseinvolved in the construction sector hat is unparalleled,but the dichotomy itself – a massive opportunityassociated with huge construction spend coupled with the debt ridden and illiquid projects – that isunparalleled. The challenges that Middle East businesses have had to understand, analyze, manage andovercome in the past few years is, quite simply,unprecedented. And for those of us that work and live in the GCC, we have all been witness.

Cash is kingBut what has been invaluable about witnessing evenparts of this story, whether you are an owner, developer,contractor, consultant or operator, are the efforts wehave exhausted and lessons we have learned to betterprepare our businesses for the future. The samecontractor that has multiple outstanding clientreceivables in the millions of dirhams can also at thesame time be bidding for projects in the billions ofdirhams, even further challenged by a market withentrants that are increasingly competing just to survive.


Introduction to the GCCpowers of construction 2012

The challenges that Middle Eastbusinesses have had to understand,analyze, manage and overcome in thepast few years is, quite simply,unprecedented

Many commercial decisions come to mind: Whichprojects should I develop? Which ones should I bid for?Is now the time to invest in my infrastructure andembrace new technology? With limited bandwidth andcapital, what should my timetable for delivery andserious returns be? How can I possibly exit myinvestment? The lessons we can take away areextraordinary – whether you are responsible fordeveloping, building or funding these projects, yourpreviously anticipated returns will be a challenge toachieve in the short term. What is therefore certain, isthat there are many more pages to read in this story,until you get to the ending you envisioned when youopened your book. And the conclusion remains thesame – cash is king!

It is remarkable to think that the challenges we haveovercome that were once believed insurmountable – anexample such as Dubai World comes to mind – weredominating the market only a couple of years ago. Themarket didn’t discriminate – it did not matter whetheryou were a developer, owner, contractor, subcontractor,consultant, bank or investor – it threw us all to theground. But as project partners we had to collectivelygather ourselves, brush the sand off and get back onour feet, together. But in 2012 for those mired in debtand cost overruns, this very shortly had the effect of‘quicksand’ – unless we worked our way out, we wouldget pulled right back in and success would become evenmore distant – and then it would simply become amatter of survival.

Five lessonsWhen our valued clients needed to understand whythey got knocked down, we helped them reflect. Whenthey needed to understand where they were as abusiness, we helped them review. When they needed

someone to remind them what they can do to be theirbest, we helped them refocus. When it came time togenerating income, we reminded them how they caninvest in themselves by controlling costs. When it cametime to move ahead in the market, we were there,proudly, to show them how and where to rebound. Bystanding shoulder to shoulder with all of our clientsthrough each chapter, Deloitte has helped our clientswrite the stories they want to share. It is in this spirit we are pleased to share with you ‘RE-5’: 1. Reflect; 2.Review; 3. Refocus; 4. Reinvest; and 5. Rebound.

1. Reflect We have been through an unprecedented globaleconomic crisis. If it didn’t bring us to our knees, ourlegs were certainly shaking. Despite our wishful thinkingin late 2008 that the crisis may bypass the GCC, wewere harshly reminded shortly thereafter that the GCC is not immune to global market dynamics. The returnsand margins we anticipated through construction arenot only impossible to realize now, we learned thatthrowing money at projects to rush them to market only exacerbated our inability to achieve the returns weprojected in our initial business models and feasibilitystudies. Public Private Partnerships may be part of theanswer, but it has taken time for the market to

And with a few years under our belt,the market has now shown us what istruly considered to be a bankableproject over the long term



understand the magnitude of the fit of this concept inthe region. And with a few years under our belt, themarket has now shown us what is truly considered to bea bankable project over the long term. The constructionvalue chain – from owner developer, subdeveloper, JVpartner/investor, debt equity investor, contractors, andsubcontractors, to consultants – experienced valueleakage throughout each relationship. And once thetaps of liquidity are forced to be closed, the constructionvalue chain is locked. The interrogation and fingerpointing begins, the walls go up and a sense of selfprotection and survival sets in, and the whole premise of partnership to deliver a project was lost. Philosopherswill tell you the rains of adversity and hardship can alsobring the seeds for a stronger future. This truth is nomore self-evident than in construction, but we mustrecognize our scars and reflect on why this transpired.Only by accepting the past can we cement thefoundation for a brighter future.

2. Review Once the value chain locks up, a realization can set inthat our project partners – those that we are dependentupon, whether contractually or otherwise - may nothave the solution. Or worse yet, they may not have theknowledge and wherewithal to correct the situation thatall parties involved have succumbed to. Why are myprojects costing more than I thought? Even if mybusiness does not operate in the hospitality sector, with tourism being a major driver for the region’s GDP,

how will the tangential and related construction spendbe impacted? How can we utilize technology to help us simply answer the question – what happened? When we finally ask ourselves the tough questions and consider all of the relevant data, only then can we truly execute on the right answers that will save our businesses.

3. RefocusWhen our current operating model is not conveying a solid picture for success, the time comes to embracechange and modify our perspective – in strategy, in commerciality, and in investment. Considering ways to resolve commercial matters by leveragingrelationships can potentially open opportunities notavailable in non-GCC markets. With developmentprojects being led by the private sector taking big hits in certain markets in the GCC, how can one capitalizeon increasingly limited opportunities? We also have toremember what it is that our business and our businesspartners do well to maximize value and returns with a long-term view.

4. ReinvestIn yourselves. In your people. In new markets. Intechnology. In governance. Only then can one trulycapitalize in new markets. With over USD 130 bnplanned for the nuclear energy sector in the MiddleEast, and massive continued government spend ininfrastructure, the economic indicators appear right tojustify investment to capitalize on this planned growth.However we must remember that even though we areseeking new income streams, it’s important to controlcosts as well – a dirham saved is a dirham earned. If wecannot achieve our annual turnover of a few years ago,let’s at least invest every effort to maximizing ourpotential returns, receivables and claims and enhancingour systems by embracing technology to improve ourability to more efficiently deliver projects and drive value.

Only by accepting the past canwe cement the foundation for abrighter future

5. ReboundAlthough opportunities for development arefundamental to the growth of the economy, there arecertain factors which are restricting the fruition of theseplans. Macro-economic instability, rising unemploymentand inflation all play a pivotal role in shaping the GCCeconomy as a whole. Despite these underlying factors,there exist projects which are in the pipeline, either intheir initial planning phases or those that havepreviously been suspended, which are now beingresurrected. But how do I manage my investments thatare stuck in development, when I am reliant on themarket for funding to complete and investment to exit?Although there are indications that such projects mayslowly be re-emerging into the market, invariably my eyefor opportunity will turn to stronger markets with oil-and gas-based economies that will inject spend inindustry and infrastructure to ensure we don’t miss thenext wave. It is this planned spend that continues toinstill high confidence in the GCC in the economies ofthe Kingdom of Saudi Arabia, Qatar and Kuwait.

Therefore what Re5 shows us is that our very definitionof success has changed, with the simple acceptancethat there is no ‘magic pill’ solution to addressingchallenges in the current construction market. The onlymedicine is the age-old remedy of strong businesssense, a need to be responsive to the market, andstretching every last riyal, dirham and dollar to besuccessful, taking a long term view to each decision.

The relevance to the GCC – this is not the first time for Re5 Historically, from the 1900s up until the mid-1990s, theworld domination for the tallest buildings and towerswas in the US, Canada, Malaysia and Taiwan. Other Far-East Asian countries, along with Dubai and the wider Middle East, started taking over the skyscraper

‘titles’ from 2000. It has become an interesting shift in design, location of resources such as cranes, sheerambitions for height, and capital expenditure for thesetowers from West to East in the last 20 years, with the next wave being taken over by China and GCCcountries, including, for example, Saudi Arabia with the announcement of Kingdom Group’s one kilometer tall Kingdom Tower in Jeddah.

We very recently celebrated the completion andoperational opening of yet another achievement formankind which is the world’s tallest skyscraper – Dubai’sBurj Khalifa. Launched in 2003 and completed in 2009(after the latest global economic crisis in 2008), it yetagain demonstrated that skyscraper developments aretypically announced during the late phase of a boom inthe business cycle. But we have seen elements of thisstory before - another well-known example is withrespect to the construction of the Empire State Buildingin New York in 1931, which for much of the 1930s wasreferred to as the ‘Empty State Building’ when the city'sreal estate market crashed after a boom decade leading


There is no ‘magic pill’ solution toaddressing challenges in the currentconstruction market. The onlymedicine is the age-old remedy ofstrong business sense.


up to The Great Depression. Bringing this story back tothe GCC, with the announcement that construction isnow underway for the Kingdom Towner that is carryingthe momentum of the current economic growth in Saudi Arabia, are we beginning to see elements that areforeshadowing another economic dip?

One manner in which to compare this is to confirmwhat the economy looks like through the planning andstart of construction of a landmark skyscraper. Theshape of the economy during this time is usuallybuoyant demonstrating strong growth, lowunemployment, low interest and strong liquidity. Duringthe course of construction, the boom period endsfollowed by a sharp downturn in financial markets,which leads to an economic recession and all associatedchallenges e.g. rise in unemployment, high interestrates, etc. that limit the commerciality of a skyscraper asbusinesses will not need additional space, and residentswill be more mindful of paying a premium or to incurcosts to move, etc. The skyscraper is then usuallycompleted during the early phase of the economicrecovery, or elsewhere may even be terminated

depending on the advanced stage of the project –which in fact occurred once with the Kingdom Holdingtower master development in 2008. Andrew Lawrence’sSkyscraper Index theory postulates this best, but in theGCC we face a greater and unique challenge where weare dealing with the large skyscrapers not able toachieve their complete commerciality, while hugeinvestment spend continues elsewhere in constructiontackling projects such as decreasing unemployment andproviding essential services to nationals and residents.

What is therefore as clear as the reflection of the sun offthe shiny spandrels of the Burj Khalifa tower is that thetime for us to reflect and learn is once again now uponus. In such a rapidly moving and linked GCC economyfull of diverse government initiatives, for businesseslooking to move ahead, the window of time to reviewand refocus is extremely tight. If businesses don’t actpromptly, and with the eyes of construction industryparticipants the world over focused squarely on theGCC, they will be left behind. The time to reinvest andrebound is - without a shadow of a doubt – right now.

We hope you enjoy our perspectives on the 2012 GCCconstruction industry.

Rizwan ShahManaging DirectorLeader, Capital Projects Advisory Middle EastDeloitte Corporate Finance Limited

Are we beginning to see elementsthat are foreshadowing anothereconomic dip


For contractors in the GCC,opportunities continue to beckon

In the last three years we have witnessedunprecedented events triggered by LehmanBrothers, followed by the Global Financial Crisis orthe “GFC”, which is now a commonly used verb! Inyear of 2011 alone we have lived through the ArabSpring, the tsunami in Japan, the Eurozone debtcrisis and the continuing forecast of a double diprecession. How do business leaders meanderthrough all these challenges to drive theirbusinesses forward and to take advantage of thegrowth in the Middle East region?

We are fortunate that the GCC countries havesignificant trade surpluses which they are planning toinvest in order to diversify their economies’ dependenceon oil revenues and also to develop their countries andsatisfy the demands of their people following the ArabSpring. As we know the focus continues to be oninvesting in infrastructure, including power, rail, roads;education; health and low cost housing. As can be seenfrom the graph below, the region certainly is expectedto continue to offer a lot of opportunity for contractors.

Reflect

Bahrain

0

10000

15000

20000

25000

30000

35000

40000

45000

$millions

Comparison of project activity 2006 - 2015

Kuwait Oman Qatar Saudi Arabia

UAE

50000

Value of contracts awarded 2006-10

Budget value of contractsto be awarded 2011-15

Source: MEED Projects

Spotlight

Cynthia Corby interviewed Laurie Voyer, CEO andManaging Director of Al Habtoor Leighton LLC, to gethis views on what he has learnt about the region in thelast two years he has been here and how he plans togear up for growth in the future.

Given that you have now been in the Middle Eastand running Al Habtoor Leighton Group for almosttwo years - looking back how would you summarizethe position when you arrived?I arrived in the middle of the GFC so it has certainly been a challenging time. At the time our activities weredominated by Dubai and Abu Dhabi and our work waspredominantly building. I’ve been working hard to

change that profile so that we are better positioned for the future.

What has surprised you about your businessspecifically since you have taken the helm, andperhaps others in the market? I have been surprised with how quickly the market has changed. This is primarily due to the GFC, but it felt as though the Gulf – and Dubai in particular, was hit harder than most. I’ve also been surprised at theapparent desperation of some contractors, who appearto be trying to win work at any cost. Some of the pricing has been crazy and I don’t think it is sustainablein the long-term.


What are some of the challenges that are unique to the Middle East market?There is no doubt that contracting is different in this part of the world. We are faced with a number ofchallenges including:• Delays in awarding projects• Increased competition• Slow payments• Poor contract documentation• Contractual conditions placing a disproportionate level of risk on contractors

• Impact of Arab Spring

What have been the priorities for you over the past two years? Changing the profile of our business such that we are aregional company with a predominantly infrastructureworkload, and improving our operational standards toensure we become a performance-driven company.

Are there any tools or technological advances thatyou are embracing in your organization as you lookto the future?One that comes to mind is the increased use of BIMtechnology. We’re increasingly using this on projects toidentify potential design issues and produce betteroutcomes for us and our clients. We are also introducinga new cost management system and are utilizing newperformance monitoring tools.

What changes have been put in place to improve your business from an operational andcommercial perspective?We have really been working on the fundamentals ofour business. We’ve been focusing on our approach tosafety and housekeeping, as well as our quality andproductivity. We’ve been working hard to minimize re-work and have adopted a “right first time” approach.Commercially we have applied greater focus on riskmanagement, and this has included a more rigorousproject and client selection process.

Are you exploring any innovative or creativemethods to manage your historical and futurecommercial challenges? Have you achieved theseand how? We continue to work closely with our clients to try andreach outcomes suitable for both parties. Weunderstand that many clients have experienced cash-flow challenges and we have to take this intoconsideration. Going forward, we are spending a greatdeal more time and effort in our client selection. We’realso taking a more rigorous approach to riskmanagement.

How would you describe the current market statusfor the industry and what do you think the keychallenges are and will continue to be? The market is probably best described as challenging.The challenges we’re facing now, as described above,will remain for the foreseeable future. However,significant opportunities still exist – particularly in Qatar,Saudi Arabia and Iraq – and for those who are able todemonstrate that they can deliver to an internationalstandard, the region can still be an area of growth.

Where do you see the major opportunities for contractors going forward and how does this feature in your strategy for the Group going forward?The major opportunities for us going forward willcontinue to be in Abu Dhabi, Qatar, Saudi Arabia andIraq. Large-scale infrastructure projects, particularly social and transport infrastructure, will offer tremendousopportunities, as will oil and gas.

How can contractors change the way they dobusiness – if at all – to protect themselves from theissues they have faced in the region over the last 2to 3 years? Diversification is the key. If a contractor is a builderoperating only in Dubai, then there is unlikely to be any future for them. However, those contractors like us, who are able to diversify through both the type of


From our vantage point as advisors and auditors toseveral of the large regional construction companies wewould certainly echo Laurie’s view on being able toembrace the opportunities in the GCC, and gear up totake advantage of the continuous talks around themove from west to east as growth rates in maturemarkets continue to pose challenges. Companies reallyneed to strengthen their governance on contracts andensure that the information the executives receive istimely and accurate in order to be able to proactivelymanage employers and hence their contracts in thefuture. This is the only way to ensure that the contractsawarded generate a profit for the business.

I would also add to that, a key to being able to moveforward is to successfully deal with legacy projects which continue to take a significant amount ofexecutive management time. These legacy projectscontinue to plague both contractors and employers andthe only way forward is to think of innovative solutionswhich means that the contractors and the employersreally need to be engaged to find a solution for both.

Going forward with new projects I also believe a keychange in the way contractors and employers engage atthe tender stage will make a significant difference tomanaging costs and getting the project right from theoutset. Contractors need to be better engaged inassessing the design and the specifications before thetender to ensure that any design challenges can bepriced in or dealt with prior to finalizing the contractprice – the key here is for employers and contractors to engage and for the selection process applied by the employers to focus on quality and price rather thanjust price.

That said, whilst confidence in the industry hasimproved year on year, business leaders remain cautiousabout the prospects given the delays in project awards.We know the investments will be made, the onlyquestion is over what time frame.

Cynthia CorbyAudit Partner and Head of Construction for the UAE

work they undertake and geographically, will continueto prosper. Contractors also need to improve theircommercial management skills in order to ensure theyprotect themselves commercially.

How will you differentiate HLG in tenders given that the bids are very competitive? Where clients are only looking for the cheapest optionavailable, we are probably unlikely to be interested. Weare targeting clients who value quality and certainty ofcost and delivery. We differentiate ourselves by the

quality of our solutions, and by our demonstrated abilityto deliver. We are also able to offer design and constructsolutions, something that not all our competitors arecapable of.

Any other advice for other participants involved in the construction sector? Don’t expect to grow your business by doing the samething the same way you have always done. Thingschange here very quickly, and you need to be preparedto change with it.


PPP’s in 3D

The latest fad is 3D, with 3D movies and 3D TVs,but does anyone understand this evolution? In asimilar vein, the concept of the Public PrivatePartnership (PPP) seems to be the hot topic in theGCC, but again, does anyone understand thisevolution?

A PPP is used by a government as a ‘procurement tool’to engage with the private sector for large cost-intensiveinfrastructure projects. Therefore the suggestion thatPPP is in itself an industry is somewhat misleading.

Although typical infrastructure-project procurementfeatures numerous stakeholders, stages and objectives,it is important to focus on the three key elements thatdrive every project, namely government sponsorship,opportunity evaluation and partner selection.

Governments in the region are increasingly focused onbeing more efficient with their capital and on managingtheir risk. The PPP procurement methodology allows forgreater transparency, longer-term relationships andlarger deals.

At this point you might be thinking this all makes logical sense, and you would be right. The point iswhether the market (i.e. the bidder community) is ready to bid for these complex opportunities. Do bidders know the opportunities and risks of engagingwith a regional government body? Are they aligned?And, most importantly, are bidders evaluating theopportunity correctly?The trick is ensuring all stakeholder expectations arealigned. Governments often have a 20-year non-profitfocused aim on a project, as it may feature as part of awider government strategy.

Private-sector partners, however, have a short-termprofit focus and much tighter timelines within whichthey have to perform. Therein lies the complexity ofPPPs, and why we feel this evolution is not, as othershave claimed, a ‘gold rush’.

The process requires sensitive stakeholder management,intensive financial modeling, delicate planning and,most importantly, a dynamic private sector tocomplement the process.

Deloitte, as the first PPP advisor to the RTA, has had thebenefit of working with an astute leadership team,motivated client and dynamic transport regulator.Together we have worked through every aspect of thefirst PPP, drawing on our collective financial, technicaland legal experiences to run Dubai’s first transport-focused PPP process.

Governments have the will and motivation, as well asthe acumen, to drive the evolution in procurement toassist in reaching its objectives, especially when it comes

Reflect

Governments have the will andmotivation, as well as the acumen, todrive the evolution in procurement toassist in reaching its objectives,especially when it comes toinfrastructure


to infrastructure. Whether it is a PPP, privatization oreven a long-term concession agreement, governmentsare working with industry specialists to prepare, evaluateand run a transparent partner selection processes. This is indeed an evolution, and one that should beembraced intelligently.

The opportunity is significant for bidders/partners, butone must tread carefully, as this path is new and stillriddled with legacy issues.

For example, unclear RFPs often result in the addition ofrisk premiums from experienced bidders, or ‘suicide’ bids– that is, unfeasibly low bids that disrupt and destabilizeprojects. Experienced advisers can bridge whatotherwise might be a wide expectation gap.

In conclusion, the use of PPPs is more of a tool tostimulate a dialogue, rather than an ‘industry’ fororganizations to work within. It is a method by whichgovernments can evaluate opportunities and private-sector bidders, and to help develop nations by sharinglong-term risk and reward.

PPP is by no means a ‘gold rush’, as there have beenmany successes and casualties, so take care when usingthis tool, and make sure you select the right advisor toguide the path.

Jesdev SaggarManaging DirectorGovernment & Infrastructure AdvisoryCapital Projects Advisory Services


Abu Dhabi - a real estateperspectiveScratch the surface...and then scratch again

For the past 12 months the property developmentand investment markets in Abu Dhabi have beenconsistent only in their transition; global andregional events have left their mark, dampeningenthusiasm for recovery but conversely highlightingthe UAE’s perceived “safe haven” status, whilst theimmediate market place is facing over supply withina constantly restructuring environment.Time is needed to allow Abu Dhabi to work throughthis period of consolidation and change; in themeantime the Emirate needs support and directionto manage the restructuring, re-establish investorconfidence and to plan for the future.

BackgroundUp to the end of 2008 the creation of the “icon” tookprecedence over commercial training and instincts – not exactly at any cost, but scant regard was played to the bottom line; that changed overnight, andinstantly swung to the far end of the pendulum, where it has stayed.

At a macro level, this has created a quandary for AbuDhabi: the non-oil economy comprises only 10% ofnational income, but it’s the face of the city and thereason visitors may choose to stay a couple of daysrather than making their way to the transit lounge;through all of the restructuring, redundancies, cautionand slowing down, Abu Dhabi needs to be cognizantand responsive to the original game plan of creating agenuine alternative to a hydrocarbon economy.

The hardest part is knowing when to re-start thediversification program, whilst ensuring the lessons arelearnt and the future growth is controlled.

Whilst these problems will persist, it is important toremember the Abu Dhabi Economic Vision 2030, aseminal document published by the Government in2008, which remains a very real driver for theGovernment, investors and developers; along with the2030 Urban Structure Framework Plan and theintroduction of the Urban Planning Council, this hasprovided a solid grounding for structured growth. Cynicsmay change the date to 2040, but the rationale andbasis for the future is in place, and it will play animportant role over the coming years.

Market overviewDuring the regional unrest, the UAE has remained themodel of stability, and oil sits (for now) above theestimated USD75 break-even threshold; Governmentexpansion policies have been targeting infrastructureand a renewed Emiratization employment and housingprogram, and talk of the diversion of Government fundsto support the Northern Emirates is commonplace.

Publications like Jones Lang La Salle’s “Real EstateInvestor Sentiment Survey” issued in June highlight thebrighter mood, in which 75% of respondents plannedto increase their level of investment in the region, with amajority having secure funding in place.

But, looking beneath the macro layer, headlinescontinue to capture the tangible lack of tenant demandand reducing rents, the delay and cancellation ofprojects, and the projected 2013 supply which, whilstslowing, grows inexorably larger. This is particularly thecase for residential, where rents and sale prices will dropfurther as completions occur.

Reflect

For both office and residential asset classes there is acurrent “flight to quality” trend for existing tenants,seeking to take advantage of the low rents to upgradetheir accommodation, but speculative development forthese uses will remain limited for the foreseeable future.

Nevertheless, it is generally accepted that certain assetclasses have capacity for expansion, including retail and industrial; the former taking advantage of theregional spending power and the lack of quality retail floor-space, and the latter fueled by Governmentcommitments to infrastructure, renewables and natural resources.

Projects have continued, albeit the original scheduleshave long been forgotten. Equally, for every successthere is a headline delay, with master-plans and smallerprojects alike either stalled pending rethink or onindefinite hold; MEED identified the “growing trend ofcancelling projects” in July, highlighting the constructionindustry’s nervousness of the cost of tenders withlimited chance of a decision, let alone a successfuloutcome. This is hardly new news - the difference thistime is the slenderness of the order books.

Behind the scenesScratching deeper still, we find that the operational anddelivery machinery for property in the Emirate is in needof attention. This includes transparency andaccountability, consistent resource and expertise, legalinfrastructure, and build and management quality, allfactors which directly impact on investor sentiment.

These issues have been prevalent for some time, but the pure volume of activity from 2003 to 2008 paperedover them; however, they have come to the forefront as investors take a more cautious approach to themarket place.

Transparency and accountabilityAn established and long-running concern has beensimply knowing what is going on, from the financialregulation, accountability and decisions of State Owned Entities, through to ground-level paucity andaccuracy of raw market data, all of which undermineinvestor confidence.

Consistent resource and expertiseExpatriate workforce and demography is critical for real estate demand and expansion, both in terms ofdelivery and demand for property; but the incentivesneed to be in place. Job security for the expat hasdropped significantly within the last year, with furthercuts predicted; likewise the short visa period creates anaturally transient population with limited inducementto remain in the country for the long-term.

Efforts to retain skilled resource within projects shouldbe reinforced to establish and maintain quality in theproperty industry.

Legal infrastructureWholesale reform is required in the Abu Dhabi realestate legal infrastructure; there are many areas in need of attention to provide comfort to institutionalacquisition of investments as well as tenant and start upbusiness / relocations taking place within the Emirate.Examples include lease terms and enforceability, thelimitations of the Musataha and Usufructdocumentation, and the potential for large-scalechanges such as the introduction of Strata Law.


Projects have continued, albeit theoriginal schedules have long beenforgotten


Build and management quality2007 through 2008 was an extraordinary time to be inthe region: construction inflation hit 20%, concrete ranout, steel prices reached an historic high, an incredibleUSD6bn worth of projects were awarded across theMiddle East in June 2008 alone...the statistics continue,but the simple truth was the resource, organizations,labor and oversight were inadequate, insufficient and illequipped to begin to manage the volume.

The aftermath of the recession has exacerbated this;whilst the number of projects has been cut, so has themanagement, with severe reductions in the projectmanagement, QS and construction managers needed tocontrol the contractors, to ensure quality is maintainedthrough to completion and to manage liabilities to avoidunnecessary claims.

Additionally, the importance of planned propertymanagement and the real cost of looking after theseincredible structures that have been created is nowbeing appreciated and accepted; the challenge isensuring the management continues for the long-term.

ConclusionDespite all of the issues facing the Emirate, Abu Dhabi isfundamentally prepared to weather the on-going globalcrisis; further, the national drive to create an economywith less dependence on oil is still in place, albeit withan extended schedule.

That said, adequate investment in project managementand monitoring is paramount to protect the propertylegacy; a key fall-out of the cost reduction initiatives andthe distractions of restructuring include falling buildquality, lax safety standards and diminishing reputations.

The return and maintenance of investor confidence rests on the continued promotion of the City as a safehaven from the regional difficulties as well as limitingexposure to the extremes of the boom period, ensuringtransparency and delivering the right product at the right price.

Lastly, as the investment stock comes on stream, theprovision of quality maintenance is critical to retaintenant demand, guard values and revenue, and to act ras a catalyst for future development commitments.

Robert HarrisCapital Projects Advisory

Despite all of the issues facing theEmirate, Abu Dhabi is fundamentallyprepared to weather the on-goingglobal crisis

Reflect


Rizwan Shah interviewed Sami Asad, Chief ExecutiveOfficer of Aldar Properties to get his views on theindustry’s focus for the future.

What have been some of the keys for the success ofAldar’s development program historically?Aldar’s role is the development of first classinfrastructure to support the economic diversification of the Emirate of Abu Dhabi. We are doing this bycreating a quality product across the full developmentspectrum – residential, commercial, retail, leisure,education, and health.

Since the company was formed in 2005, it has been ourcommitment to delivering quality across our residential,retail, commercial and mixed use projects that has beenthe cornerstone of our development success. We mayperhaps be best known for major deliveries like the YasMarina Circuit ahead of the inaugural Formula 1TM

Etihad Airways Abu Dhabi Grand Prix in 2009, but weare particularly proud of the delivery of high qualitycommunity developments like Al Bandar, Al Zeina and AlMuneera at Al Raha Beach, which are making asignificant contribution to the fabric of Abu Dhabi.

Looking forward, project management for thegovernment and other major Abu Dhabi companies willbe important and we will continue to deliver major

infrastructure works, as well as significant third partyprojects on behalf of Abu Dhabi companies such asMubadala. Aldar is building a reputation for high qualityproject management.

A prime example of this is Al Falah, an almost 5,000home development for UAE nationals that we aredelivering on behalf of the Abu Dhabi Government. With six major contractors for both the villa andinfrastructure development, this is one of the mostsignificant projects in progress in Abu Dhabi at this time.

When Aldar looks to launch a new scheme ordevelopment, what are some of the keyconsiderations?The simple rule is that we will only develop projects thatrespond to Abu Dhabi’s needs, following comprehensiveappraisal of market requirements before movingforward. We see particular opportunities in a number ofsectors, including education, healthcare, low/middleincome communities, specialist retail and affordableleisure facilities.

What are some of the key advances and technology that Aldar has embraced in its businessand operations, and is looking towards integratingin the future?One major area of focus for Aldar is sustainability. Aldarrecognizes the importance of long-term maintenance of the environment and aims to minimize the risk ofcausing harm through design, specification and use ofmaterials and the reduction of waste, energy and waterconsumption in the construction and maintenance of itsbuildings. The installation of a natural gas network fordomestic use, a vacuum based waste managementnetwork and a range of home automation systemswithin our residential communities are all contributing to this aim.

Spotlight


New technologies also allow us to make our productmore affordable for our customers in the long term. Thisalso creates a benefit for us as we look to lease, sell ormanage in challenging market conditions. Value is notjust about the initial rental or sale cost but also theongoing operational costs.

In terms of a specific example within our portfolio, ourTrust Tower commercial office building has beendeveloped with a focus on offering our corporatetenants efficient and flexible space. We provide aCategory A fit out, which leads to a significant reductionin capital expenditure and fit-out time for the tenant.Trust Tower also has market leading occupationaldensity, which means that tenants can take smaller office space for their needs. The building alsoincorporates a ventilated facade and integrated blindand light systems that help reduce operational costs andconsequently the service charges.

From an operational perspective we are also using anIntegrated Workplace Management System, which is aplatform to manage, automate, and record all processesacross Aldar corporate departments and joint ventures.

When Aldar undertakes a new project, what are your key requirements for contractors,subcontractors, designers, vendors, suppliers and other consultants?In the last few years, Aldar has developed a successfulprocurement model to ensure that major issues orchallenges are mitigated before they arise and we nowhave a well structured bidders list and a qualified list of major subcontractors. All of our contractors arethoroughly vetted from a technical capability standpointbefore they are even requested to submit a commercialproposal and as such, given the opportunity to workwith us on our developments.

This approach allows us to filter out many of thetechnical issues way in advance of the work starting onsite and thus minimizing potential frictions with ourcontractors. On the commercial front, we also ensurethat our developments’ briefs and scopes are welldetailed and comprehensive, thus greatly reducingambiguity in our requirements.

When has been the key for Aldar successfullymanaging its contracts and contractors?The relationships between developers and contractorsare much improved these days and we feel there is areal understanding between two parties who appreciatehow challenging the market has been. Everyone needsto earn a living and we certainly want to support andreward high quality contractors who follow through onwhat they promise.

However I do feel the operational focus that is a keypart of Aldar under my leadership means we are willingto have tough conversations earlier on in the process toensure the deal is fair for everybody. That can only leadto more open and transparent dialogue - which is agood thing.

What has Aldar learned during the course of itsdevelopment history that will benefit its future?Everyone involved in the development of Abu Dhabiover the past six years has experienced incredibleprogress and we have experienced some greatsuccesses. The financial crisis has had an effect on theworld’s confidence, which naturally has had a knock-oneffect for many organizations involved in development.

These market conditions have dictated that efficiency,value for cost, financial viability – essential aspects in anydevelopment decision – become even more important.Combined with the rigorous assessment of contractorsand subcontractors we are able to ensure quality

Reflect


delivery on time and on budget. By getting these areasright, we can continue to focus on delivering projectsthat help Abu Dhabi develop into a major economic andsocial hub and doing this on a platform that is socially,environmentally and economically sustainable.

When there are fluctuations in the globalconstruction market in terms of escalation,materials, labor, contractors etc, what impact doesthis have – if at all – on Aldar’s operations at themoment? Future plans?Again, I think by focusing on efficiency, value for costand financial viability, whilst making sure that all projectsare delivered to the highest quality and meet the realneeds of the people of Abu Dhabi then we can avoidthe impact of these fluctuations. The additional pointhere is that a commitment to fair dealing with allcontractors and suppliers also helps mitigate again costissues as development progresses.

What advice does Aldar have for contractors orother project participants who wish to work withAldar in the future?My advice to contractors would be to be realistic in theirapproach and demonstrate a commitment to workingclosely with us towards a common goal of deliveringprojects on time, on budget and to the best possiblequality. We are continually searching for new partnerswhile focusing on strengthening our relationships withour existing ones.

Your views on 2011?From our perspective, despite challenging marketconditions, 2011 has been a good year for Aldar froman operational standpoint. Strategically we aredeveloping into a focused developer who is building atrack record for the quality of our residential, retail,commercial and mixed use projects. The past has notbeen without its challenges but we are seeing a fittercompany emerge.

Operationally there has been good progress acrossAldar’s portfolio that includes commercial developmentssuch as Central Market, Al Raha Beach, Yas Island,MotorWorld and Al Bateen Park, as well as governmentprojects such as the Al Falah Emirati housing project.

During the year we opened three new schools – twoprimary schools in Abu Dhabi and Al Ain and Al BateenSecondary School, an incredible new facility in AbuDhabi. Aldar Academies now operates six schools acrossthe Emirate which is an incredible achievement.

We have also started the handover of Al Zeina and AlMuneera, two communities at Al Raha Beach at thegateway to Abu Dhabi. They join Al Bandar as some ofthe most exciting new residential developments in AbuDhabi. We are confident that quality will remain a keydifferentiator in demand and Al Bandar has been a greatexample of this, where rates continue to outperform the market.

Sami Asad was appointed Chief Executive Officer ofAldar Properties PJSC in November 2010.

In his previous role as Chief Operating Officer, Sami wasresponsible for Aldar’s significant portfolio across the fulldevelopment spectrum, ensuring the successful deliveryof projects such as the first phase of Yas Island ahead ofthe inaugural Formula 1™ Etihad Airways Abu DhabiGrand Prix, the Souk at Central Market and Al Bandar,the first residential community at Al Raha Beach. He alsoplayed an integral role in the expansion of Aldar’s thirdparty project work capabilities.

Sami joined Aldar in 2008 as Technical Director and waspromoted to the role of Chief Operating Officer in thesame year. Before joining Aldar, he held the position ofDeputy Vice President of Projects at Dolphin Energy forfive years and has occupied various managerial positionsat ADNOC during his 37 year career.


Overrunning the mark… a briefinsight into cost overruns

If anyone has dealt with a multi-million dollarconstruction project in the Middle East, they aremore than likely to have experienced misseddeadlines, contractual breaches and cost overruns.There is no denying the fact that underestimating ofprojects and erroneous forecasted budgets willeventually result in the stark reality that eventuallydrastic action will be required unless measures areput in place from the outset to avoid such pitfalls.

IntroductionHistory has shown that all too often capital projects areunderestimated and go over budget, particularlylandmark projects which contain some technical ‘firsts’.When Boston’s ‘Big Dig’ tunnel construction project wascompleted, the project was a staggering 275%(USD11bn) over initial budget estimates. More closer tohome, the 73 storey Infinity Tower - Dubai Marina’slandmark twisted building which was due to becompleted in 2008, has suffered major delays due tocost overruns and lack of liquidity and is now expectedto be completed in December 2012. Kareem Derbas,CEO of Cayan, the developer behind the tower has beenquoted as saying, “The more money you have, the fasteryou can build it”. The general mood overshadowing thesector particularly in the GCC is that the constructionindustry seems to have lost its integrity in that projectparticipants almost expect overruns and delays to be thenorm during delivery of all major construction projects.

Stakeholders know full well they are likely to encounterdelays, variations and incorrect contract administration,all of which create an ideal environment for claims. Thisgoes a long way in demonstrating that the latent risks

and pitfalls surrounding the potential of cost overrunscontinue to exist despite the fact that contractors pricethis in as a risk in their rates, and ultimately this will haveto result in increased rates that are passed on to the end user.

Cost assessment and managementCost assessments are a fundamental way of determiningreasons for and the magnitude of potential costoverruns. These are usually implemented periodicallythroughout the project lifecycle and act as a form ofreconciliation of all costs incurred on a project to date.The resultant output of cost assessments can result in the implementation of robust cost managementprocedures or the identification of gaps in current cost management.

What has happened in the market? The market trend has demonstrated that the rate ofoverruns in projects has generally increased between2005 and 2010 with a peak in 2009, shortly after theglobal financial crisis. This provides a clear indicationthat overall there has been an increase in the number of projects experiencing cost overruns since 2005.Deloitte’s experience when working with top developerswithin the UAE has taught us that projects routinelyexperience cost overruns on a contract level. In an effortto avoid project cost overruns and to respond to marketdynamics, developers often resort to de-scoping projectsto offset contract cost overruns. Unfortunately, this isnot an effective means to reduce costs and seldomresults in “Dollar-for-Dollar” savings. Recently, a majordeveloper de-scoped 40% of their projects, a moveresulting in only 13% savings on the project cost. Inaddition, project de-scoping invariably leads to a lessattractive product, and dissatisfied end-users.

Review


Reasons for cost overrunsThere are many different reasons as to why costoverruns occur.

Steve Coates, Head of Program, Cost and Consultancyfor Davis Langdon in the UAE, recently stated that, “Toachieve a successful outcome for a construction projectyou need to start with the end in mind. An initial unclearbrief and lack of disciplined approach from initialbusiness case through to occupation and use, change,lack of appropriate clarity and understanding across allparties to the project life generates unnecessary change,waste and frustration. All of which leads to costoverruns and reduced return on investment”. KrishnaSubramanian, Chief Financial Officer at Limitless,explains further that, “Due to poor understanding of thescope of works, a majority of the projects experiencecost overruns and result in increased project cost that istransferred to end users”.

In addition to the above, Bassam Samman, Chairman,Chief Executive Officer and Founder of CMCS, opines,“Most cost overruns are due to the lack of completeanalysis of project risks and not allocating the funds to mitigate or transfer their impacts, as well as notallowing the reserve for either accepted or unknownrisk”.

These points of view underlie our experience that themain reasons for cost overruns include:• Poorly defined roles for project participants(contractors, consultants, project managers, etc);

• Claim orientated contractors;• Inefficient contract administration;• Inadequate project budgeting / base-lining;• Unclear scope / project risks unidentified;• Ineffective supervision services provided byconsultants;

• Design changes

The market trend has demonstratedthat the rate of overruns in projects hasgenerally increased between 2005 and2010 with a peak in 2009

Construction Projects over-budget in the UAE

Val

ue (U

S$ m

illio

n)

Cou

nt4500

4000

3500

3000

2500

2000

1500

1000

500

0

9

8

7

6

5

4

3

2

1

02005 2006 2007 2008 2009 2010

Note: Due to their relative budget revision values and categorial distinction, Nakheel Harbouc & Tower and Dubai Properties Dubailand Projects were NOT included in the calculations.

Source: MEED Projects

Aggregate value of budgetary overrun

Number of projects over-budget

Impact of cost overrunsThe impact of cost overruns affects not only thecontractor and the customer but other parties includinginvestors and lenders who all have a vested interest inthe project. • Contractors face risk of non-payment and reducedprofit;

• Customers face increased interest costs, reducedROI/IRR, insufficient CAPEX, de-scoping and generallyget less than what they bargained for;

• Lenders face covenants not being honored.

The customer could lose significant revenues if theproject is not completed by its due delivery date andcould therefore be open to claims from its investors suchas banks who have not been repaid their due amountsand as a consequence the customer could incur penaltycharges for failure to repay or for late payments.

The capital expenditure and operational expenditure can also be affected by cost overruns and on someoccasions can severely impact the overall project costand completion / delivery date. For example, if a projectis to cost approximately USD100m over a period of fouryears, and in the first year it accounts for USD35m yetthe project incurs a cost of USD50m within that year,then your operational expenditure has increased byUSD15m whereas your overall capital expenditure hasincreased to USD115m already after the first year. Thisusually has a knock-on effect on future years and canlead to a project being cancelled, re-assessed and de-scaled which incurs variation costs or to sell the asset asa going concern.

SolutionsWe have supported a variety of our clients dealing withsuch cost overruns at any part of the project lifecycle.We have worked on a broad spectrum of projectsadvising some of the most respected organizations inthe Middle East with a view to understanding theirsensitivities and nuances. With cost overruns havingbecome part and parcel to the construction industry,cost certainty is most definitely required to restoreintegrity to the market. This can only be done if plansare implemented at an early stage of a project,preferably prior to its inception, which are scrutinized ingreat detail with a view to accurately forecastingprojected budgets.

Malcolm LandmanCapital Projects Advisory


With cost overruns having become partand parcel to the construction industry,cost certainty is most definitelyrequired to restore integrity to themarket

Lenders

Customers

Contractors


Hotel development in the GCC – is it over?

During the past 10 years, the GCC witnessedphenomenal growth in hotel development andperformance. This was driven by both a) a touristappetite to visit the GCC that resulted in occupancy and average daily rate levels that far exceeded thoseof other world regions and b) a bank appetite tofund hospitality products with ‘cheap’ rates. Theresult, as always in real estate - oversupply. Whilethere are some notable exceptions, the majority ofthe GCC markets are phasing, or will phase in thenear future, an oversupply situation.

Many commentators use the term ‘flight to quality’ - inessence back to the fundamentals - as the fundamentalsof any investment, including hotel investments, thatmust ‘stack up’ otherwise it’s not a good investment.The same applies to today’s GCC hotel industry. From ahotel perspective the fundamentals include:• Location• Brand/positioning• Price• People

LocationVery simply - location is and always will be one of the critical attributes of a hotel. It determines thesegmentation of the hotel – who stays at the hotel.Simple rule – a good location will always outperform a mediocre location. In boom times this may beinsignificant, but in tough times it often makes thedifference between survival and bankruptcy. The onlychallenge is - what if a good location is very expensive?

PricePrice is a complex issue. It reflects both the price that adeveloper would pay to construct, or purchase, a hotel(development/acquisition cost) and the price that aguest would pay to stay at this hotel (average daily rate).Of course the two are linked.

If the development/acquisition cost is too high, thefinancials will not be attractive to a risk adverse investor(someone that wants to make a proportionate return tothe investment). One of the main development costs isthe land cost. Land cost often represents 20-25%+ ofthe total development cost. If the land cost is too high,the financial fundamentals of the project don’t work.The other major development cost is the constructioncost. This is heavily affected by design (a ‘box’ is cheaper to build) and finishing (furniture, fittings and equipment). If the construction cost is too high, the financial fundamentals don’t work. A highdevelopment cost does not always translate to highaverage daily rates!

Branding/positioningIn the GCC the branding of the hotel is critical to itssuccess. While there are a few exceptions to this rule,they are the exceptions. The choice of the hotel’sbranding/positioning is primarily driven by the hotel’slocation and secondarily by the hotel operator/brandthat manages the hotel. The operator/brand drives thepositioning of the hotel, which drives the hotel’sperception, distribution channels and ultimately itsrevenue generation ability. A good brand will alwayscommand a premium over the competition.

Review

PeopleThe GCC has some of the best hotels in the world.Some of the most recognized architects from aroundthe world have designed hotels across the GCC. Someof the hotels are truly iconic, such as the Burj al Arab(the self proclaimed only seven star hotel in the world).The ‘who’s who’ of hotel management companies arehere too, and those that are not are trying to comehere.

But how do these hotels compare in terms of serviceoffering against other more service oriented regions?Accepting that even the most innovative and shinyhotels eventually will begin to look slightly tired, when

this shine begins to fade away, it is the service offeringthat will bring hotel guests back. A good brand has inplace the necessary recruitment and training policies toensure acceptable standards.

In conclusionHotel development in the GCC is not over. Developers,however, will need to look harder to find the right deal.The land location needs to be great, but a reasonableprice. Development costs need to be driven by themarket conditions, average daily rates, rather than ego.Selecting the right operator is more important than ever.Those developers that can achieve all of the above willget great returns on their investment!

Dr. Costas VergenisTHL Leader, Middle EastDeloitte Consulting


The GCC has some of the best hotels inthe world


Construction e-discovery –following the digital paper trail

Electronic disclosure and the construction industry –establishing firm foundations for dispute resolution.

In the mid 1990s, it was not uncommon for aconstruction dispute to involve the collation and reviewof all relevant hard copy letters, memos, change orders,timesheets, invoices, etc making up hundreds and eventhousands of lever arch files of documents. To try to dothis manually became increasingly challenging andexpensive. Consequently, construction disputes havebeen one of the major forces behind the application oftechnology and services to manage documents.

These days, e-mails, word processor files, technicaldatabases, design files and accounting data havereplaced the hard copy lever arch files. These electronicdocuments are easier to create, circulate and duplicatebut the ease with which they can be produced hascontributed to the exponential increase in the volume ofinformation that may be relevant in the context of aconstruction dispute.

Dependent on which statistics you choose to believe,the average ‘custodian’ of documents will hold anythingfrom 2 gigabytes to 10 gigabytes of data; each of thosegigabytes containing on average anything from 5,000 to15,000 documents, meaning an individual could holdanything from 10,000 to 150,000 electronic documents.And that’s just one person; a typical dispute couldinvolve several individuals and potentially millions ofpages of documents.

The task of collating, reviewing and disclosing thisnumber of documents can be made even morechallenging in the Middle East by, for example:• General lack of focus on contract administration;• Loose, undefined lines between those administeringthe project, from contractors, subcontractors, projectmanagers and consultants

• Information existing in different languages;• Data privacy and protection considerations; and • The on-going use of many different legacy systemswhen businesses are acquired

It is therefore becoming increasingly important forconstruction companies, whether contemplatinglitigation or not, to ensure that they are aware of theexistence of business critical information on PCs,Servers, Back-up Tapes, Document ManagementSystems, CAD/CAM systems, Project ManagementSystems etc.

In addition, it is necessary to identify the physicallocations of the data and systems (i.e. on-site, in-country, held internationally etc). Furthermore, ascorporates begin to consider moving their systems to‘Cloud’ IT service providers, determining the exactlocation and legal context of electronic data will become even more challenging.

Review

It is therefore becoming increasinglyimportant for construction companies,whether contemplating litigation ornot, to ensure that they are aware of the existence of business criticalinformation

Given the potential myriad sources of data available tocompanies today, the volume of information that mayrequire searching and reviewing, and the potential costsinvolved in managing electronic documents, litigationpractices s have been significantly amended in countriesincluding the UK, US and Australia to better define theelectronic disclosure process to ensure it is undertakenin an efficient and proportionate manner. A greateremphasis is now placed on early discussions betweenthe parties and the sharing of information so that aninformed assessment can be made as to the likely issuesthat both sides may have in identifying, collecting,processing, reviewing, producing and exchanging theelectronic material that falls under their control. As thelitigation process continues to develop in the MiddleEast region, it is expected that it will need to follow suitto remain a competitive destination in which to pursuelitigation. And with the volume of project issuescurrently it is making great strides in this direction.

Specialist electronic disclosure technologies and servicescontinue to evolve to keep pace with the explosion indata volumes and to ensure that your advisors are ableto review the potentially relevant documents in acollaborative, efficient and proportionate manner.

Specialist technologies now allow:• the conceptual grouping of documents to gain aninitial sense of the key themes and issues contained inthe document set etc;

• the analysis of lines of communication between thevarious individuals involved in a dispute; theidentification and removal of duplicate and near-duplicate documents;

• the filtration of documents using keywords, date-ranging and file types; and

• the identification and translation of differentlanguages, including Arabic.

All of these technologies assist in providing a higherquality, quicker and more proportionate review ofelectronically stored information. That said, whiletechnology should not and cannot drive a dispute, it canprovide highly effective support to the parties and theirlegal teams.

The ever increasing volumes of electronic informationwill ensure that construction disputes will remain as oneof the major sources and drivers of electronic disclosureexercises for the foreseeable future.

Rick Barker Forensic & Dispute Services


While technology should not andcannot drive a dispute, it can providehighly effective support to the partiesand their legal teams


The Majlis – mediation, Middle East-style

The industry known as ‘dispute’ has many tentacles,operating under different guises across manycountries, representing thousands of unassumingclients towards that ultimate goal of a ‘solution’.The challenge in this industry is staying focused onthe goal, with costs, time, tactics, procedure anduncertainty clouding the solution. As a result,people, organizations and even governments areturning to ‘mediation’ which brings the parties backon track, focusing on a solution. This method ofmediation is known locally in the Middle East as‘Majlis meetings’.

A Majlis acts as an age-old Middle Eastern method of‘sorting things out’ and has worked for generations,providing certainty where the law and lawyers cannot.This Majlis/Mediation is the process in which two partiesagree to conclude a matter using a mediator to achievea solution, often in one day. This solution is bound by anagreement and confidentiality, to bring focus back tothe objective at hand, not ‘win’ or ‘lose’ butcompromise to reach a solution. The history ofmediation actually stems back over 1,000 years withearly cases recorded in Phoenician commerce. Thepractice then further developed in Ancient Greece, thenin Roman civilization. Some early cultures regarded themediator as a sacred figure, worthy of particular respect;

and the role would overlap with that of a prominentwise men or tribal chief. The similarities between theearly forms of Mediation and its current local guise ofMajlis mediation mirror the same maxims ofconfidentiality and commercially focused solutions.

In today’s world of miscommunication with badcontracts, misaligned expectations all amplified bydifficult market conditions, the process of mediation isincreasingly becoming the solution of choice by partieswho have lost faith in the legal process and simply wanta ‘result’ and move on. Mediation can take many formse.g. from bringing two warring nations to a point ofagreement, to a neighbor’s overgrown hedge intrudingin another garden.

For parties across the Middle East that have exhaustedbilateral discussions and feel that a third party processwill aid them in reaching a solution, the process ofmediation could be considered first, rather than thecostly and non-commercial approach of Arbitration oreven litigation. But two key steps for success are, quitesimply, trust and respect – a concept that continues tofunction incredibly strongly in some business circles inthe Middle East.

The genius of mediation is its simplicity, the opportunityto draw parties into a platform of negotiation andtherefore a commercial agreement i.e. not a legal one.Mediation is about finding a middle ground, not aboutwinning and losing. It acts as a reliable process in whichparties trust to move issues into settlement and get onwith their business. The challenge is finding the rightmediators in the right regions with the right experience.A mediator not only needs to understand the disputebut the industry it is related to. The Middle East,although seasoned in the process of mediation throughthe Majlis system, has very few accredited mediators.That is now changing in construction for example withthe first RICS-accredited Mediation program, which hasjust graduated the first batch of trusted professionalsthat can help.

Refocus

But two key steps for success are, quitesimply, trust and respect – a conceptthat continues to function incrediblystrongly in some business circles in theMiddle East

The mediation process is easy and relatively cheap and,if nothing else, it acts as a great way of understandingthe claimant and respondents issues. Just like a Majlis,the mediation is a process by which an equitable resultis sought to often complex issues. That fairness sits atthe heart of the Majlis system and often decisions andsettlements do not accord with the legal principles thateach party feels protect them; it is, as mentioned before,a commercially driven process.

Mediation is often referred to as a form of ‘alternativedispute resolution’. It has a structure that other forms offormal negotiation lack. Mediators use varioustechniques to open, or enhance, dialogue betweenparties and a lot depends on the mediator's skill andtraining. The ‘art of articulation’ is key and often silenceacts as the best method of getting parties to talk. It is therefore not just the process but the personmediating that adds to the success of the platform.

The code of conduct for mediation experts acts as the unregulated constitution by which all professionalsagree to act. Although accreditation by specificorganizations such as the Royal Institution of CharteredSurveyors (RICS) has added to the formality andregulation of the process, it still remains fundamentallyunregulated and open to anyone becoming a mediatorwithout external challenge. The code therefore acts as asilent regulator ensuring mediators:• make participants understand the process• highlight any potential conflicts of interest.• conduct the mediation in an impartial manner• do not offer legal advice• focus on practicing in those fields where they have expertise

Mediation as a professionally-run process is gainingmomentum around the world and institutions areformalizing the structure, format and offering training toensure accredited mediators operate in a professionalmanner and not simply as a ‘leader of tribes’. Mediationis fundamentally:• Cost-effective• Quick• Easy to execute• Confidential

And that is why parties – that have trust - areincreasingly turning to this form of dispute resolution.

Mediation is used in many ways to resolve an array of issues for parties. One such method of use is ‘workplace’ mediation and this is where the growth ofthe process has stemmed from. Where partiesdemonstrate irreconcilable differences, mediation canserve as a mechanism to engender communication andinteraction. The second most commonly employedmethod of use is by Governments who use mediation to inform and to seek input from organizations andcountries as fact-finding and policy-making. Mediationmay also act to prevent disputes rather than assist tosolve them. There are of course a number of types ofdisputes that can result in mediation e.g.:• Family:- Separation- Divorce- Elderly care issues- Family businesses- Adult sibling conflicts- Disputes between parents and adult children- Estate disputes

• Workplace:- Wrongful termination- Discrimination- Harassment- Grievances

• Public disputes:- Environmental- Land-use


Mediation is about finding a middleground, not about winning and losing

• Disputes involving the following issues:- Landlord/tenant- Owners' associations- Builders- Contractors- Contract- Partnership

The most significant industry in this region afterhydrocarbons is construction and real estate. Thisindustry has suffered significantly in the last three yearsafter the collapse of the financial markets and overallsystem globally. It is regaining its feet but only afterconsiderable restructuring and debt reorganization. Theprocess of mediation, although used infrequently, hasassisted this industry in the region via the Majlis methoddiscussed earlier. Billions of dollars have been spent by amultitude of organizations operating in this sector overthe last three years and whenever there is a ‘change instrategy’ and money is not the compensator for change,a dispute often arises.

The construction dispute industry itself has growninversely to the market, as more projects go on hold and stakeholders are left holding meaningless liabilities,the option of dispute resolution often becomes the onlyoption for those stakeholders, looking for recompense.The construction market is projected to increase incountries like KSA and decrease in the UAE, bothstimulating the need for dispute resolution. The mostcommon method is Arbitration but it is clear in the rightcontext and business environment that mediation can be used to achieve the same objective. The challengeremains uncertainty - that neither party knows, or isaware, of this option and what it means as the legaladvisors that operate in the market steer their clientstowards costly Arbitration, circumventing the option of Mediation.

From oil rigs to villas and apartments, the gambit ofmediation support is widening every day and with allstakeholders sitting in a ‘Mexican standoff’ and puttingprogress on hold until someone makes the first move,mediation can be that non-confrontational move.Avoiding confrontation, particularly for long-termbusiness health in this region, is important. The issue ofa dispute itself does not accord with local principles andtherefore the quicker the issue can be resolved, withpublic attention, the better. The culture of the MiddleEast is not to ‘fight’ or ‘argue’ and the Arab nations,contrary to popular belief, are peace loving countriesmade up of mixed race nationalities operating theirbusinesses in the knowledge that disputes are few andfar between and that if such a dispute is unresolved,that the Majlis process will come to the aid.

In summary, all parties, in a dispute, should be aware oftheir options and Mediation should act as the first portof call for any dispute that has gone beyond bilateralnegotiation and needs third party assistance. Mediationdoes force a result and sometime that is all parties need– a simple alignment of objectives - even if one partyfeels that the result is not necessarily in their bestinterest, it is a result and that is ultimately what thoseparties want. Find the right forum, Mediator andorganize your counterpart to join you in seeking asolution to your dispute in a confidential andcommercial manner - without opening each other’swounds in public - move on as there is no time/cost towaste; there is always a solution/process to your issue, itis up to you to seek it.

By Jesdev SaggarManaging DirectorCapital Projects Advisory


Avoiding confrontation, particularlyfor long-term business health in thisregion, is important

Changing dynamics – how toassess the swing in balance?

In the UAE, specifically Dubai, there has historicallybeen a severe shortage in residential, commercialand retail units. The shortage, coupled withastronomic economic growth and a speculativemarket in a short period of time, created a falsesense of demand and supported various developers’ambitious development plans. The ‘build it and theywill come’ phenomenon was in full force just acouple of years ago, and developers were in a raceto deliver a product that is absorbed by consumersthat had easy access to finance from banks thatoffered favorable terms and relaxed lending policies.This extreme trend has experienced a completechange in dynamics, swinging the balance of whatwas and is now considered to be a commerciallysound business strategy.

The real estate bubble in Dubai abruptly burst in 2008and brought debt overhangs and tightened liquidity,causing a number of projects to get cancelled due to alack of finance, increasing default rates due to negativegross development values and ultimately breaking thecash cycle that was fueling the real estate boom. Theprimary break in the cycle began with banks, customersand developers. Banks tightened their lending criterialimiting liquidity in the market, customers/investors weredefaulting on their payments to developers as theirinvestment was no longer attractive with tanking marketprices, and ultimately developers were unable to deliverthe product due to the lack of funds to pay theircontractors leading to an uncertainty of payments –and the future.

The tipping point – Understanding your project realitiesToday, developers will have more than one project thatis on hold with limited cash resources. The decision torestart or cancel a project is a crucial decision forsurvival. Developers must conduct a thorough tippingpoint analysis to examine the cost/benefit of eachproject. The diagram below shows that the decision isusually based on a commercial decision that is focusedon minimizing cash outflow for the developer.


Banks

Other public entities

Sub-contractors

Contractors

Consultants engineers PM’s

Developers

Customers• End users• Investors• Speculators

Cash requirement to continueEstimated collectionsOnly on currently contracted sales, adjusted for adverse market movements

Less

Costs to completeBased on revised mater plans

LessRententions to be repaid to contractors

PlusAdvanced reclaimedfrom contractors

Cash requirement to deferCustomer liabilitiesstage payments received from customers which would be repaid if projects were abandoned

Plus

Contractor termination liabilitiesObligations due to contractorss if projects were abandoned

Only on currEstimated colto continue

equirash rC

stage payments rustomer liabilitiesC

deferequirash rC

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Refocus

The different categories that need to be considered fordecision-making processes may be easily quantified byreviewing contractor agreements, the project budgetand negotiating claims. However, the future cashcollections are subjective and may vary depending onindividual judgment. In order to accurately estimatefuture collections, a customer profile analysis must beconducted on a case by case basis to assess theprobability of default while considering the profile ofeach customer. The following questions should be keptin mind to assess the risk profile of each customer;• What was the unit sold for?• How much has the customer paid so far?• How did the customer pay for the unit?(Cash/Mortgage)

• What is the remainder to collect?• What is the current market value of the unit?

Once the risk profile of all the contracted sales has beenidentified the developer will have a better view oncontracted sales collections. Customers with a high riskof default can then be negotiated with to mitigate therisk and if unsuccessful the unit goes back intoinventory, re-priced according to current marketconditions and sold on the market again.

Pricing decisions – Know your customerThe oversupply and increased competition in the marketresult in favorable conditions for the buyer and allow fora wider variety of products to choose from. When re-pricing the remaining inventory on a project, developersmust consider the site location and comparables, knowtheir target market key considerations and aim todifferentiate the product to compete with the existingand future stock.

Consumer Key ConsiderationsCost of ownershipPotential home owners for example, consider the totalcost of ownership and compare it to the leasing marketand other comparable properties. Typically homeowners are incentivized to own if the monthly mortgagerate is less than or equal to the current/future expectedmarket rent and capital appreciation and Investors willconsider yields that can be generated from owning aproperty. The market has witnessed some misalignmentas developers in the region have decreased their rentalrates to reflect market conditions but have not alignedthe lease and sale rates to reflect market yields.

The cost of ownership does not stop and whenpurchasing the property, buyers will consider ongoingcosts like service charges. The charges levied on somebuildings are too high and therefore when calculatingthe owners’ monthly installments i.e. (mortgage +service charge), it might be greater than the current rentfor the same property and ultimately not a viable option.For example, over the past two years villas in Dubai havebeen more popular than apartments as they have amuch lower service charge due to the manner in whichinfrastructure services were commercially structured, andtherefore owners’ monthly installments could in fact belower than a much smaller residence, increasing theirattractiveness and value proposition.


In order to accurately estimatefuture collections, a customerprofile analysis must be conductedon a case by case basis

Amenities/CommunitiesA large number of projects have been de-scoped or have been delivered without the initial amenities andlandscaping which negatively affect the community feel that buyers today look for. Mechanisms must beadopted by developers to ‘package’ deals in order toentice the customer to buy or rent the property.Customers are likely to ‘fish around’ to ensure that they get the best available deal on the market especiallyin what has now been restored to a buyer’s market.Accordingly, certain factors are key to ensuring that the inventory becomes a more attractive proposition.Amenities within the area and the property itself are key factors to consider.

Ultimately, particularly in an oversupplied market,developers should constantly survey shifts in the realestate sector, closely monitor their sales plans with aview to bringing them in line with current marketconditions, aim to differentiate their inventory and theymust continue to base the development decisions basedon realistic collections that are derived by consideringthe product on offer and matching the end userconsiderations in real-time.

Yazan Al ShoulyCapital Projects Advisory


Project location

Value / Price

Servicecharge

Interest rate

Amenitiesand community

Residencyvisas End user

Key considerations

Developers should constantly surveyshifts in the real estate sector, closelymonitor their sales plans with a viewto bringing them in line withcurrent market conditions

Refocus


Rizwan Shah interviewed Khalid El Malik, ChiefExecutive Officer DPG (Dubai Properties Group) to gethis views on the industry’s focus for the future.

1. What have been some of your keys for success of DPG’s development program historically? Our organization has strong leadership led by of coursehis highness Sheikh Mohammed and we have been veryblessed as a company, with our location in Dubai andour positioning in a good market. We have developedthe right strategic locations Dubai which was key andcontributed to our success for projects for example suchas JBR, Business Bay, Executive Towers and Shorooq.

From an operational perspective, we have been veryfocused in the area of cash management. We were verysuccessful in selling projects off-plan which helped ourliquidity to continue to fund our projects.

From a development perspective, it was the designcomponents of our projects. For example at JBR wehave the beach supported by strong residential, retailand commercial areas. In Business Bay we have a verystrong master plan and in the Villa and Mirdiff projectswe have very high occupancy because it is the bestdestination for families.

2. When DPG looks to launch a new scheme ordevelopment, what are some key considerations?Today what is most important are the market conditionsand looking at the growth in economies. One must lookat all market and economy indicators in terms ofpopulation growth, hospitality, tourism, etc. For exampleif economic growth is projected at 2-3%, you must planaccordingly and real estate is no different. You mustalways balance different factors, for example qualityversus price versus type of tenant and consider high,medium and low income demographics. You must look at timing both now and in the future. You musthave the right partners, in terms of contractors andconsultants. And you must consider that different laws apply when looking at leasing product to clientsversus sales.

3. What are some of the key advantages andtechnology DPG has embraced in business andoperations, and is looking towards integrating in the future?We have related dependency on Dubai municipality andRERA which have their own systems that we depend onfor information which we also need to be consistentand accurate with. Internally, with respect to ouroperational requirements and engineering, we aresatisfactory but we remain ambitious to reach a level of100% automation of management, operations andproperty engineering and development. In the comingthree years DPG will be investing heavily to reach thisvision of best in the world.

Spotlight

4. When DPG undertakes a new project, what are the key requirements for contractors,subcontractors, designers, venders, suppliers and consultants?We try to ensure they have excellent technical andfinancial capability. We also classify them by puttingthem into structure for comparison and we rely uponstatistics which are available to support the decisionmaking process. We can no longer rely on just a namewhich the market has shown to sometimes be differentthan reality.

5. What has been key for managing contractors and contracts?

A full and detailed understanding of all documentsIn the past in the industry this has generally not beendone properly. Proper process should be in place andimproved contract management is now in place as aresult of the economic crisis.

Relationship managementKeeping a close eye on contractor and on site, and weneed to be heavily involved and have a presence on site.All parties involved are critically responsible for hundredsof millions of Dirhams.

Issues related to financial managementPaying in accordance with contracts and knowing thatsome contractors could be working on some otherprojects, therefore being wary not to pay more thanthey deserve. We also depend highly on subcontractors.If we have all three aspects covered, then your risks aremanageable. However, each could bring damage to theother and vice versa.

6. What has DPG learnt from its developmenthistory that will benefit its future?It is a dependent industry. Do not separate this industryfrom other dependent industries. The real estateindustry supports others as it is an enabler and onecannot isolate it from the rest of the market.

People.Growth does not mean you hire like crazy. When youbring in talent, one really good person can be as goodas five.

Cash flow management.We have learned it's not howmuch you sell, it is how much you can liquidate.

PlanningIf you plan something, you should stick to it.

Sustainability“Efficient sustainability" means good margins plussustainable revenue which will help you survive.

7. When there are fluctuations in the globalconstruction market, such as escalation, materials,labor, contractors etc. what impact does it have onDPG's operations or future?After signing of the contract, escalation is something wemonitor in all contracts where this is not addressed. Wenow watch reliability on our current projects and what isautomatic in terms of the contract. We also rely uponregular market reporting and information and issuedaily, monthly and quarterly reports to our organization.


Refocus


8. What advice does DPG have for contractors topartner with DPG in the future?They need to comply with our requirement, and theyshould be very professional in their treating a contractfor strong relations should not spoil one other. Theyshould be very professional in their management whichextends to contract management, their codes, reportingcontract information, regular meetings, and bringing inthe right subcontractors to deliver projects on time.

As the Group CEO of Dubai Properties Group, Khalid AlMalik is responsible for directing DPG’s strategies ofdelivery, growth and operations within the UAE, andworks on behalf of all DPG entities to expand newbusiness markets. He joined DPG in July 2009 havingbeen CEO of Tatweer, a Dubai based conglomerate, with diverse portfolio interests including DUBAILAND®,Dubai Healthcare City, The Tiger Woods Dubai andDubai Industrial City.

Prior to this, Mr. Al Malik held senior government posts.As Senior Vice President Industry & Knowledge, he wasresponsible for the development of Dubai Industrial City and Moutamarat. As Director of Operations at theDubai Development and Investment Authority, hespearheaded initiatives such as the Dubai GovernmentExcellence Program and the Quality, Health, Safety andEnvironment Committees.


Buy once and buy well

Why cheaper real estate may cost investors, tenantsand owners more in the long term throughinefficient design, and higher through-life costs.

As new projects continue to come online in 2011 acrossthe GCC, wary investors are seeking to, ‘buy once andbuy well.’ Many new properties are marketed as thefrontrunners in original and bespoke design; however,investors find value diminished when hasty constructionwas the builder’s priority. While the market dictates that location may be a dominant factor in determiningproperty prices, an investor needs to seriously considerthe build design and quality in order to fully understandthe building life-cycle costs. Having experiencedfirsthand the inflated ongoing costs and significantinconvenience associated with poor quality and badly designed buildings, investors and tenants alike are realizing that substandard design results in significant facility management (FM) costs to undertakeeven the most mundane procedures. They are alsoacknowledging that a higher capital outlay cansignificantly reduce ongoing costs improving economicreturn over the life of the building.

Whole life cost analysis, a method increasingly used todetermine relative economic returns, considers not only the initial build cost and residual value of theinvestment, but also energy consumption, facilitiesmanagement, maintenance, replacement andrefurbishment costs, financing and where possible other non-monetary benefits.

With the significant reduction in property prices sincethe financial crisis many believe it may be a buyers’market. This buyers’ market may appear lucrative, butinvestors should cautiously perform due diligence onlifetime costs and not just the relative value of the initialpurchase price.

Quality – the cornerstone of a sound investmentHigh build quality is a pre-requisite to ensure economicefficiency of a building over the longer term. Not onlywill low quality building and material specification leadto higher spend on maintenance and FM over the life of the investment, it may also result in outcomes moredifficult to quantify such as tenant dissatisfaction andreduced user productivity, all of which can result inlower rental yield and higher tenant turnover.Undoubtedly these costs will be to the disadvantage ofthe investor and tenant, and place downward pricingpressure on rental and leasing contracts and sales.

During times of weak real estate demand or oversupply,poor quality buildings in any given location are the firstto be left vacant and their developers the first to be outof business. For developers attempting to raise financefor new projects, reputation can be crucial in bestowingconfidence. Those developers who damaged their brandimage, pursuing a strategy of high volume/low costduring the economic boom are now finding it difficultto change perceptions.

Every owner wants a cost effective building, butwhat does it actually involve?Whilst quality is important, the impact of build designshould not be underestimated when consideringongoing cost requirements associated with the building.In the GCC, where costs such as Heating, Ventilationand Air Conditioning (HVAC) can account for the largestsingle ongoing cost, a superior design can significantlyinfluence overall economic efficiency.

Kevin Brennan, Head of Service Assurance at EmcorFacility Services, notes that one of the keys to asuccessful and efficient design is the involvement offacilities management specialists from the outset. Thispractice has long been followed in the West and FarEast; however, it still does not represent normal practicewithin the GCC. Many developers do not appreciate therequirement for FM specialists during the design phase,or the extent to which cost savings can be made.However, Brennan notes that early involvement can veryquickly highlight inefficient areas within the design thatare likely to give rise to higher ongoing FM costs.

Refocus


The recent trend for GCC developers to compete for themost aesthetically pleasing design has produced ageneral disregard for ongoing efficiency, with theassociated life-cycle cost well above traditional designs.Huge atriums, which allow hot air to accumulate andrise to higher floors result in significantly increasedcooling costs, glass facades that span the entire face ofthe building heat up the inside like a greenhouse, and alack of attention to accessibility issues can renderwindows impossible to clean and anti-aircraft collisionlights extremely difficult to replace.

Sustainability, an energy and cost effectiveinitiativeThe concept of sustainability has never been foreign tothe Middle East. However, sustainability and energyefficient initiatives in the GCC are relatively nascentcompared with the full-fledged programs of somedeveloped nations. A period of unprecedented andunabated construction has also brought awareness ofthe idea that energy efficiency will be key to futuredevelopments. An ongoing sustainable development,Masdar City, is currently being constructed in the UAE.Masdar City, promoted as a “zero-carbon” emission city,relies completely on renewable energy sources and isexpected to complete Phase 1 by 2015. With “green”initiatives seen frequently across an ever increasingnumber of advertisements, we have to ask ourselves,“does energy efficiency equate to cost efficiency?”

The short answer is “it depends”. What we do know isthat designing a building from the outset with energyefficient initiatives is more cost effective thanretrospectively trying to implement such a program. “Too many times we see developers trying to implementa specific program three to five years into a project,”says Bill Jolly, Head of MEP KEOIC. Implementing anenergy efficiency program late in the building processonly complicates an extremely complex process thatalready has tight deadlines. When a program is put intoplace retrospectively, everyone from the designers,builders and sub-contractors may have to change plans,thus impacting critical path milestones and causingdelay which can result in a substantial increase in cost.

Anyone who wants to implement real cost effective andsustainable solutions should approach the task througha well thought-out process. Jolly notes that his companyprovides a Sustainability Selection Matrix that aids thisdecision making process. The matrix has five factors;capital cost, environmental performance, timelineimplications, pay-back periods and maintenance issues.Each factor is assigned a weighted point score to allowmultiple investment options to be compared amongsteach other. The most cost effective energy efficientoptions are usually the most simple to implement. Jollynotes that there are two types of initiatives available,active and passive solutions. In order to be costeffective, “design engineers need to maximize thepassive solutions and minimize the active solutions,” saysJolly. Passive solutions to energy efficiency andsustainability require little to no maintenance oncecomplete. The design should emphasize constructing abuilding with the appropriate angle to the sun, windowpitch, reduced glass exposure and an increase in thermalefficiencies. These subtleties are cost effective becauseimplementation begins from the onset of the projectand these modifications do not necessarily cost morethan conventional building plans. Passive solutionsreflect only a fraction of the cost when compared withthe total cost of active solutions to sustainability issues.

A period of unprecedented andunabated construction has alsobrought awareness of the idea thatenergy efficiency will be key tofuture developments

Active solutions are generally complex systems thatincrease your initial capital outlay and require a higherlevel of servicing throughout the life of the equipment.Nevertheless, there are different solutions for the priceastute investor. Simple active solutions include timers,sensors and valves that limit the flow of a resource.These include automatic light sensors in hallways, timersthat shut off hot water heaters not in use and stopvalues to limit water flow to a leaky faucet or runningtoilet. Some examples of more active solutions includesolar water heating systems, photovoltaic panels andwind turbines. As the complexity of the solutionincreases so does the price tag. The biggest stumblingblock for builders is the consideration placed on theinitial capital outlay and the payback period of theoption. Builders want to know if the investor is willing topay if there are extra costs involved. Some solutionshave a payback period of as little as a few years, whilemore capital intense solutions can take decades torecover the initial investment.

The key to pushing energy efficient initiatives forwardwill be government regulation. Authority directives willhelp standardize and develop sustainability programs inthe GCC. The UAE has spearheaded the market with theformation of the Emirates Green Building Council andthe green building agency, Estidama, translated as“sustainability” in Arabic. Other GCC countries includingQatar have formed their own respective sustainablebuilding councils and Bahrain has undertaken various“green” construction projects including the BahrainWorld Trade Center.

Improper design of a building or inadequateconsideration to the structural and facilities installation islikely to cost the investor more in total through lifecosts. Simple designs can effectively reduce monthlyutility bills, reduce carbon emissions, and promotesustainability awareness within our community. Theconcept ‘Buy Once and Buy Well’ will surely require athorough due diligence on any property. A smartinvestor will consider more than the initial investmentamount as a comprehensive understanding of futuremaintenance and refresh costs will be key to calculatingan investment’s return.

Declan HayesManaging DirectorTransaction Services


The key to pushing energyefficient initiatives forward willbe government regulation

Refocus

Going nuclear – massive powerinvestment in the Middle East

The Middle East region is largely unaffected in thearea of infrastructure and remains a dynamic andemerging new build market place. In the nuclearsector, the UAE, Saudi Arabia, Jordan, Egypt andTurkey are all developing and delivering theirnuclear new build proposals. The United Kingdomhas plans to develop between 8 to 13 new nuclearunits,(depending on technology) . The combinedMiddle East projected nuclear new build programrepresents three times this amount, a USD160bninvestment in the region. To successfully deliver anuclear construction program, the region mustovercome some constraints and complexity thatfaces all pioneering countries.

Global nuclear electricity generation in 2010 totaled2630 TWh (IAEA source), representing a 2.8% increasefrom that generated in 2009 The energy availabilityfactor of the plants operating in 2010 was 81%, upfrom 79.4% in 2009. New reactors in China, India,Russia and Korea, amounted to 3722 MWe net.

The accident at the Fukushima Daiichi nuclear plant inMarch 2011 resulted from a natural disaster of profoundeffect. Japan has many older units off line and faces aclean up operation unprecedented in that region,Germany announced plans to close their nuclear plants ,Switzerland and Italy placed their new build plans onhold . The North American and European countries tooka more considered approach, requesting their regulatorsto review and report on lessons to be applied. Globally,initial findings suggests that whilst some countrieswithin certain seismic regions e.g. Korea, may makesome design changes to their existing units, the majorityof the new build countries with an intent to deliver the gen three and three plus designs, remain unaffected.

The ME region faces many challenges as nuclear newbuild is a highly sensitive, complex , highly regulatedprocess which demands strict compliance tointernational standards and requires a huge amount offinancial commitment , supply of suitably qualified andexperienced resources. Each plant requires a constructionworkforce of 6000 staff, each power plant requires anoperational staff count of 600. The developer andintelligent client requires around 300 dedicated staffdepending on the contracting methodology.

Some of the challenges and key issues facing the future construction of nuclear power in the region arenoted below:

International treatiesMany countries within the region have agreements withdeveloped nations (USA, France, UK, Russia etc).

Government supportThe strategy for nuclear power is based upon a nationalstrategic intent, supported by applicable law.

Nuclear safeguardsThe region accepts international safeguard requirementsregarding the front end fuel fabrication and back endspent fuel waste, however a long term regionalrepository may be agreed eventually.


Nuclear electricity production

3000

2500

2000

1500

1000

500

TWh

1970

1980

1990

2000

2010

Reinvest


FinanceThis is a very difficult period to secure finance,nevertheless most of the ME countries have internalfinancial resources available for these strategic projects.

Public supportThe public must be engaged in an open and transparentmanner throughout the planning phase andconstruction phase; at least 54,000 man years ofemployment opportunities will be created.

Nuclear regulationThis remains a major challenge since many countries donot have any or sufficient regulators in place. However,sufficient international resource could develop anddeliver local regulatory programs and grow internalexpertise. Many countries underestimate the demandson the regulator in terms of process, time scale andquantity of data and documentation requiring approval.

ScienceRegional science and technology centers and universitieswill be at the forefront of tomorrow’s nuclear program.

Local supplyWithout doubt the first nuclear technology will beimported; however, general construction and nonnuclear qualified materials and scope can be deliveredwithin the region, employing and supporting local andregional business.

Technology transferAvailable, however it would depend on the size of thefleet versus the strategic intent to develop an in-countrysupply chain. The regional standard of quality isreasonably high based upon its oil experience.

ResourcesThe region does not have sufficiently qualified andnuclear experienced resources. Nevertheless, workforceplanning will ensure that future operational resourcescan be delivered locally through in-country universitiessupported by overseas technology providers.

Organization developmentMost countries apply IAEA guidelines and seek supportto organize and deliver an effective Nuclear EnergyProgram Implementation Organization (NEPIO) . Nuclearexperienced expatriate staff will be resourced to ensurethat the regulatory and site license requirements aredelivered whilst regional staff is fully trained. Many newbuild organizations globally underestimate the staffnumbers and the process requirements and thedemands on the staff to meet the regulatory process,prior to construction. Core organizational functionscannot be outsourced.

Operational developmentIt takes many years to develop and deliver experiencednuclear operators. In the meantime countries within theregion can gain operational support from the nucleartechnology vendor or from a utility partner with nuclearoperational capability. It is expected that the region cantake lessons learnt from the development of the oilindustry in the region. In particular, blue collar nonnuclear operators and maintenance staff require shortertraining periods and can take training support similar tothe regional oil and defense industry.

Technology selectionProven (road tested) technology is being deployed in theUAE. However, a first of a kind technology is beingconsidered in Jordan. Regardless, specific designchanges will be required from experienced referenceplants to meet the regional and site specific demandse.g. seismic loading, cooling water temperature, outsideair temperature, sandstorms and dust and change in theelectrical frequency (Hz) - late design changes couldimpact construction schedule.

SitesMany sites within the ME region offer coastal locations,some close to transmission networks and away fromlarge populations. However, some areas require highseismic design considerations and may well be inland,bringing additional logistical and cooling challenges.t


Construction schedulesMany ME countries have similar target CommercialOperation Dates (COD) of around 2020, together withaggressive construction schedules, which may beimpacted from late design changes, high demand onexperienced construction numbers, application of higherthan normal (nuclear ) quality requirements within thenuclear island. The detailed schedules themselves willinvolve two hundred thousand lines of activity.

Construction complexityThe construction of the plant itself requires siteinvestigation, earth works, off shore tunneling (on costallocations) and major on shore excavation involving theremoval of millions of tons of sand. The region isdifficult and the nuclear plant footprint is large. Anefficient delivery and construction team will be critical tothe program.

Nuclear New Build – ConsiderationsProject developers have taken a very sensible approach,recognized within the nuclear sector, in structuring theirprogram in light of international (IAEA) requirementsand selection of professional organizations andcompanies specific to needs of the task to beperformed. We remain very optimistic that the MEregion will be successful in its program and that Deloittewill be well placed to provide insight and support.

Chris HarropDirectorDeloitte Consulting, UK

Human resources

Nuclear regulation

Site selection

Technology selection

Design changes

Transmission

Public acceptance

Security / Safeguards

International support treaties

Transfer of technology

Localization

Operational support

Finance

Supply chain

Middle East

“Stuck” - Cement industry canbind the GCC

One of the primary drivers and – not coincidentally,one of the market indicators in the GCC – is thecement industry. The regional cement industry isprincipally influenced by construction activity, which not surprisingly has witnessed declinesfollowing the global financial crisis. Similar to thestories of many other global industries, this has ledto a drop in demand for cement, which coupledwith excess production capacity, has causedsignificant price declines.

In addition to reduced revenues due to lower cementselling prices, cement producers have also had theirprofitability margins impacted by higher energy and fuelcosts (notably coal). This has resulted in many cementproducers in the region (especially those experiencingover capacity, such as the UAE) reporting net incomelosses.


110

100

90

80

70

60

50

2Q09

Cement price

3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Coal price

Trend in regional cement prices and cost of coal (4Q 2010 index = 100)

Source: International Monetary Fund, Global Investment House

40

60

80

100

USD

/ t

on

10%

0%

-10%

-20%

-30%

-40%

-50%

KSA UAE Oman Kuwait Qatar GCC average

Price trends and change over the period (2008 – 2011)

Regional snapshot

Source: Global Investment House

FY08

FY09

FY10

FY11

Change

7%

-45%

-20% -20%-14%

-22%

Regional market snapshot

Source: Global Investment House, MEED, Deloitte analysis

IraqCement capacity: 16mtpaConstruction GDP: USD 8.4bn

KuwaitCement capacity: 25mtpaConstruction GDP: USD 2.5bn

BahrainCement capacity: 0.5mtpaConstruction GDP: USD 1.0bn

United Arab EmiratesCement capacity: 33.8mtpaConstruction GDP: USD 20.4bn

QatarCement capacity: 6.2mtpaConstruction GDP: USD 8.2bn

OmanCement capacity: 6.2mtpaConstruction GDP: USD 5.0bn

Saudi ArabiaCement capacity: 52.8mtpaConstruction GDP: USD 21.3bn

Reinvest


There is high disparity in price declines betweencountries in the GCC as a result of different factors:

UAEThe UAE led the construction boom in the GCC resultingin soaring cement prices and consumption between2005 and 2008 leading to an expansion in cementcapacity from c. 18mtpa in 2008 to c. 30mtpa atpresent. Sharp declines in the UAE construction industryresulted in a drop of over 45% in cement prices over thepast three years with majority cement producers in thecountry unable to turn a profit at current depressedprices.

OmanWhile Oman did not experience the sharp build up anddrop in cement prices like the UAE, the countryexperienced declines in prices in 2011 mainly due toexcess capacity exports to the country from the UAE.The country continues to import cement to fulfilldomestic needs given infrastructure spending by thegovernment. Pioneer Cement in the UAE was also thesubject of a takeover by Raysut, Oman’s largest cementproducer by market value.

Saudi ArabiaSaudi Arabia is the only country in the GCC to witnessincreasing prices due to continued demand from largescale infrastructure projects. Nonetheless, as a regulatedand subsidized market, prices are relatively lower in theregion due to lower costs of production and highercapacity.

KuwaitKuwait experienced a decline in 2009 after being hit bythe global financial crisis but prices have since remainedstable as the country is a net importer of cement and isincreasing infrastructure spending. The country has justtwo integrated cement players resulting in the countrycommanding the highest cement prices within the GCC.

QatarQatar's prices have also recently stabilized and areexpected to rise given infrastructure spending and theuplift from hosting the FIFA world cup in 2022. Atpresent the company is a net importer of cement butmomentum is building up with local and regionalcompanies beginning to invest heavily in theconstruction industry.

What does this mean for the future?The GCC region is on track for a recovery from theglobal crisis. Growth accelerated to 4.8% in 2010,mainly driven by increasing oil prices. For 2011, IMFprojects a 7.8% growth in GDP for the GCC. Overallconstruction projects market size in the GCC region atthe end of 2010 stood at USD 207bn. Saudi Arabiastood out with a 52% share (USD 107.4bn) followed bythe UAE accounting for 21% (USD 43.2bn).

Simply, there is a dire need to increaseinfrastructure to keep apace with thegrowing and increasingly urbanizedpopulations

Cement remains a highly cyclical industry with globalprices experiencing peaks and troughs over an eight tonine year cycle (although these have been becomingshorter in recent times).

Reinvestment has become the theme in the cementindustry as producers seek to consolidate and targetspecific countries with the most potential. Investment isexpected in net importing countries such as Kuwait,Qatar and Iraq which are struggling to keep up withdemand while at the same time cement producers incountries such as UAE are seeking regional partnershipsto tap into export markets to offset low consumption inthe UAE. The key driver for growth is large scaleinfrastructure spending announced by regionalgovernments following political unrest in the widermiddle east and north African region.

In summary, the prospects for new construction awardsin the GCC are positive. Growth rates in the GCC regionremain high for the medium-term, both in terms of GDPand construction sector growth. With over USD 2.9tn ofplanned infrastructure projects announced by the GCCregion’s governments in the second quarter of 2011,many contractors are well positioned to benefit from theregion’s robust bidding pipeline.

Fawad Tariq-KhanCorporate Finance Advisory


The longer term outlook is that theArab Spring has provided a shot in thearm and will positively influenceinfrastructure investment

USD

/ t

on(In

flati

on a

djus

ted

to 1

998

pric

es)

Global historical cement prices

Source: US Geological Survey

140

120

100

80

60

40

20

0

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

1960 - Peak 34% rise from troughover 14 year cycle

1999 - Peak 20% rise from trough over 6 years

1993 - Trough 45% decline from peak over 14 years

2003 - Trough 13% decline from peak over 4 years


1970 - Tough 24% decline from peak over 10 years


Reinvest


A dirham saved is a dirham earned - how proactive developersare effectively managing theircontractor claims in the current financial environment

Are contractor claims part of a routine contractualprocess? A necessary business evil? Or are they abane in the revival of a company looking toovercome its current financial problems? In the lastfew years, contractor claims have started beingtreated as the elephant in the room. We have heardclaims being classified in many terms, some muchworse than the ones noted here. Our experienceassisting clients in the GCC with their claims andliability assessments made us conclude that helpingour clients understand the claims lifecycle is apivotal step in refining their strategic vision forrevival. Our clients’ net position after Investing timeto generate one dirham of income is the same assaving one dirham of cost. The exam question thenbecomes this: what really is holding back developersfrom dealing proactively with their claims?

Fear of the truth?The finance professionals we routinely deal with are notshy about indicating that having to deal with claimsmeant that an even riskier picture might emerge thanthe one being reported. As a result of the economiccrisis, the majority of the commercial response has beento focus on resources devoted to income generatingsources rather than having to deal with claims fromcontractors. The reality is whether you earn one dirhamor save one dirham, your net position will still improveby the same degree.

With the financial crunch being faced by both sides, and the gap between collections and commitmentswidening, most contractors became willing to settle ata few cents on the dollar just so they can meet theirown commitments. Cash has always been King but now became more of a precious and extremely rarecommodity. In some instances this has resulted indevelopers once again reacting quickly and rushing tosettle claims without proper/detailed assessments thathave resulted in overpayments, and worse sometimeswithout any detailed planning or analysis on whethersufficient cash was even coming in to pay off thesettlements being negotiated! Hindsight is 20/20 butanyone with a Finance 101 degree can predict that thiswill not end well. True enough, no sooner wereagreements signed and MOUs finalized, developersstarted defaulting on their agreements. But this time, the signed MOUs were enough to demonstrate that thedeveloper had admitted the amount of liability whichcould be upheld in any court of law.

So how can proactive managers and developers goabout ensuring they could avoid being in such apredicament? By admitting their limitations – only whenone admits they have a problem can there be a solution.By realizing they had lost a deep rooted knowledge basethrough poor contract administration or governance,further challenged by the fact that the staff that hadremained was not sufficient or technically competent toidentify to upper management in a timely manner thebarrage of problems brewing silently. They also realizedthey needed expert help in not only understanding thesituation, but guiding them through a potential financialstorm. And the first lesson we provided our clients withwas a deeper understanding of the claims lifecycleprocess which allowed our clients to not onlyunderstand what had transpired, but their strategyaround what they could expect going forward.

Ghaz Shah

Ketan Bhoola


Claims lifecycleLike any liability, the evolution of a contractor’s claimcan be attributed to various stages which in turn formthe lifecycle the claim can potentially undertake. Froman accrual to becoming an accounts payable, thejourney each claim takes can vary, but the stages willhold true for the majority of claims. Within theconstruction industry, the amount of documentationrelating to submissions and assessments will eventuallydetermine which of the following seven stages a claimcurrently falls under:• Stage 1 – Submission: The act of the claim beingsubmitted by the contractor

• Stage 2 – Assessment: The claim is assessed by thesite Engineer, Project Manager, and/or the Developer.

• Stage 3 –Talks: Initial talks with the contractor areinitiated to determine accuracy of the claim and setthe stage for negotiations to follow.

• Stage 4 – Availability of Cash: How detailed andreliable is the company’s cash inflow analysis?

• Stage 5 – Negotiations: Formal and informalNegotiations for settling the claim are commenced.

• Stage 6 – Settlements: Assuming negotiations aresuccessful, settlement agreements are formally agreedand signed.

• Stage 7 – Monitoring: Are the settlement plans being monitored?

At this point the possibility of a claim going into disputeor litigation is not being considered from a commercialperspective.

We have also purposefully ignored the vital startingpoint of how a claim is created, prepared, and finalizedbefore being submitted to a developer. This is a detailedand technical topic by itself and something we believerequires to be discussed separately. For the purposes ofthis article, we have only focused on what transpiresonce a claim is submitted to a developer.

Stage 1: Submitting a claim – Is it really thatsimple?As any person familiar with claims will tell you, the actof submitting a claim (and receiving it) are rocked withtheir own complications. Some of the more key points to consider are:• How was the claim submitted?From documented binders, letters, or faxes, a claimcan be submitted in any and every way possible. Ourexperience has shown numerous instances where aclaim that was not clearly marked, gathered dust asnormal mail or on someone’s desk until it wassubsequently identified.

• Has the claim been received by the appropriateparties?More often than not, a claim is dropped off at theproject site and a copy of the claim is not submitted tothe developer as it may not be required by the termsof the contract. In numerous instances, the claim isrejected in its entirety by the site engineer or projectmanager without any intimation to the developer. Ifthe engineer or project manager is subsequentlyterminated by the developer, the developer will onlybecome aware of these claims at the time of projectclose-out or restart.

• Is the claim complete?Has an assessment of the completeness of the claimdocumentation being submitted been conducted bythe developer or its representatives?

The act of submitting a claim (andreceiving it) are rocked with theirown complications

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• How are claims organized?How adept is the documentation control system? Howrobust is the claims register being maintained? Theanswer to this usually goes back to how proactive adeveloper is in dealing with its claims.

• Quantification? Regardless of whether it is the quantification of theindividual claim being submitted by a contractor, orthe quantification of all collective/potential claimsreceived by a developer, accuracy and completenesshas generally been found wanting.

Similarly, when we asked the simple question to theupper management of numerous developers of theirestimate of how much it would cost them to settle ALLtheir claims, there was typically no response. Thereason; mainly because they were either focusing onlyon their top contractor claims, or lacked a (complete) claims register.

Stage 2: Assessing a claim – How was itassessed? Was it even assessed?The mass redundancies in light of the aftermath of the2008 financial crisis exacerbated the problem of havingtechnically sound and competent people with the

knowledge base to deal with claims. Developerssuddenly found themselves with fewer competent staffable to deal with technically assessing the validity andquantification of the high volume of claims beingsubmitted. Proactive developers needed to address thequestions below before formulating their strategy goingforward: • Competency of staff? Have you lost most of theknowledge base familiar with the project and itsvariations? Are they even competent in technicallyassessing a claims merits and quantifying it accordingly?

• Were any discussions conducted by the developer’sstaff with Engineers or the Project Manager? Is the staffeven aware of any assessments made by the engineersor project managers prior to being terminated?

• Is upper management aware of the time lag betweenthe submission of the claim and the first properassessment of the claim being made?

• Is it purely a claim submission or does the submissionalso include value of works done?

Stage 3: Talking to the contractor – Havediscussions with the other parties been initiated?A simple process of keeping the line of communicationopen with all parties involved is critical in ensuring theclaim is settled amicably, quickly and quietly. Developersneed to keep their staff focused on addressing thefollowing questions so as to ensure parties involved arecomfortable that their concerns are being addressed.• How conducive is the environment for talks? Have youreached out to other parties to initiate the process andindicate that lines of communication are open?

• Are you speaking to someone with authority?

Cash strapped parties are looking to settle for way lessthan the amount submitted as they have their owncommitments they need to honor. But does that meandevelopers should be settling for a few cents on thedollar without fully understanding their positions?

The mass redundancies in light ofthe aftermath of the 2008 financialcrisis exacerbated the problem ofhaving technically sound andcompetent people with theknowledge base to deal with claims


Stage 4: Involving your Finance department –what finances are available for payment plansand settlements?Working with companies through the financial crisis,one of the most bizarre yet key detrimental findingsobserved was the fact that internal departments werenot sharing information between them and functionedas very fractured and overly complex and administrativeoperationally. For any developer to maneuver themselvessuccessfully through this financial storm, theircommercial/contracts and finance departments shouldbe working hand in hand to address the followingquestions for upper management:• Can current or potential financing sources/collectionsbe easily identified?

• How detailed are the company’s cash flow analysis? • Do they take into account the current market analysisof customer collections?

• Are customers even classified in different tiers basedon their probability to pay for the properties?

• How accurate is the company’s business plan? Has itbeen reviewed/critiqued by an independentprofessional firm?

• Does your staggered cash flow allow you to evenmake the commitments you are intending tonegotiate for an easy (discounted) settlement?

Trying to settle quickly without having detailed inputfrom the finance department can lead to an even biggerproblem down the road. Getting professionals involvedearlier on can help mitigate many issues the developermight face down the road as they know what to expectand be mindful of.

Stage 5: Negotiating with concerned parties –can detailed negotiations commence? Have youdone your homework before even sitting downto negotiate? There is a misconception that the art of negotiating isdependent upon how good the developer’s staff is inbringing down the settlement number. On the contrary,the real challenge stems from the fact of how wellprepared the developer’s negotiating team is evenbefore sitting down to negotiate. If they have correctlyaddressed the questions within stages 1 through 4above, they should be in better shape to evaluate theposition of all concerned parties.• How receptive are the other parties? • Will an independent third party be more conducive forcertain negotiations? Might an independentassessment be more beneficial for the negotiationespecially when it comes to larger claims?

• Do you have a specialized negotiation department? Ifnot, who handles negotiations?

For any developer to maneuverthemselves successfully through thisfinancial storm, theircommercial/contracts and financedepartments should be working handin hand

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• Is the finance department actively involved in thenegotiation process? Is the legal department?

• Are all the relevant internal departments workingcohesively to achieve the most optimal beneficialresult for all concerned parties and the developer?

• How involved is senior management? What is thefrequency and detail of reporting to them on thestatus/options being negotiated?

• How quickly can senior management’sinput/suggestions be included within the negotiationprocess?

The key message we keep reiterating to our clients isnot to make settlements for the sake of makingsettlements especially in an environment when otherparties may be prone on settling for a lower amount aslong as it means access to cash now for them. This is aslippery slope and without proper planning, detailedground work, and involvement at all levels, this maylead to a substantially bigger payout down the road.

Stage 6: Settling the claim – How amicably can(working) settlements be reached? Developers should also be cognizant of the followingadditional key considerations so as to be fully preparedand demonstrate their commitment during this highlysensitive and critical stage:

• How actively involved is the developers legaldepartment during this process?

• Is there a plan in place? Is there a plan B in place?• Form of settlement being considered? MOU or otherforms of settlement?

Experts can play an important role in helping developersmaneuver this tricky path where any errors prove to bemore costly with the passage of time. The need forgetting experts involved as early as possible will alwaysresult in a positive yield for the developer, no matter how the cost-benefit analysis is run!

Stage 7: Monitoring the settlement – are theterms of the settlement being acted upon?Congratulations. You have managed to settle your claimand, if you followed the steps mentioned earlier, youprobably were able to negotiate at a discounted amountagreed and beneficial to both parties. But does it endhere? As any financial advisor will tell you, the real hardwork begins now! All the hard work done up to thispoint might be meaningless if relations are notmaintained once a settlement is reached/signed.Adhering to the terms of the settlement need to notonly be followed but also actively monitored to ensureterms are not breached. We have advised our clients tobe aware of certain key considerations during this stage:• Is there a threat you might fail to honor the terms of the agreed settlement?

• Are the settlement terms being actively/routinelymonitored to ensure they aren’t being breached?

• Who is responsible for monitoring? Has thisresponsibility even been delegated to a department or officer?

• What mitigating factors have been put in place toavoid such instances?

The need for getting experts involvedas early as possible will always result ina positive yield for the developer


• What mitigating factors have been established tohandle relevant parties in case a breach occurs? Howinvolved is the legal department in helping monitorbreach of contracts?

• How timely is senior management apprised of howsettlements are being acted upon? Is this somethingthat is even reported to senior management?

More often than not when we are asked to help ourclients evaluate their financial condition, we haveobserved that once a settlement is signed, it is as if it is almost forgotten! On one such example, ourindependent review to senior management identifiedthat the developer was defaulting on almost 85% of allthe agreements we reviewed, some of them with quitesubstantial penalties upon breach. As you can imagine,this was an eye opener for senior management who,until our review, had been informed by their contractmanagers that everything was going according to plan,even though the financial department may have beenmanaging their operational cash flow. Even at the risk of offending the developer’s project managers, we knew the importance of emphasizing to our client howcritical this stage of the claims lifecycle is by identifyingrisks that weren’t even on their radar! Experts knowwhere to look and are used by proactive developers to provide their senior management with the truepicture, the picture their internal departments may be afraid to provide.

What happens when all else fails?Developers find themselves often in a situation where,having failed to address the questions above, they arefaced with the reality of having to go to formal disputeresolution or arbitration. Commercially speaking,arbitrations are by and far a lose-lose situation for all

parties concerned. For example, by the time a claim issubmitted, statement of claim filed, experts brought onboard, analysis conducted, preparation for hearing andthe hearing itself, and awaiting a decision, legal andtechnical costs incurred, combined with the potentialuncertainty of the award and subsequent enforcementand taking the attention of management’s time – asimple NPV analysis will demonstrate that a reducedstarting position resulting in a quicker agreement forresolution is more sound commercially.

Seek expert advice and seek it earlyThe value of soliciting expert advice as early as possiblecan help developers get a head start in proactivelydealing with their claims and how they should behandled. The following chart (developed by Deloitte)demonstrates how the various stages of the claimslifecycle impact not only the cost of dealing with claimsat different stages of their life cycle, but also the time,energy, and resources required if the claim is nothandled in a professional/proactive manner.

On one such example, ourindependent review to seniormanagement identified that thedeveloper was defaulting on almost85% of all the agreements wereviewed

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As the chart demonstrates, asking the right questions ateach stage of the claims lifecycle allows developers theopportunity to proactively settle their claims amicably,timely, and at an amount beneficial to both parties. Themore delays occur, or parties fail to engage one another,the cost of settling the claim keeps on increasing towhere the environment becomes more hostile and the

cost of settling the claim is substantially higher. We haveadvised our clients to avoid such a situation at all costs,helped them ask the right questions at each stage of theclaims lifecycle, address fears of the truth, and when allelse fails, help them be better prepared for what toexpect during arbitration/litigation.

Actual costs of arbitration/litigationOur experience has shown that most of our clients werenot aware of the actual cost and time it requires toprepare for arbitration, let alone the actual act of goingto arbitration. A simple review of our client’s documentretention and documentation management systems issufficient to demonstrate their lack of ‘arbitrationreadiness’. We have found that it is imperative toemphasize that each argument in court needs to bebacked by documentation i.e. what can be proved withtangible evidence. Simple questions like the ones notedbelow have never been asked, let alone addressed:• Have detailed assessments been conducted? How canthis be demonstrated?

• What is the caliber of the people doing theseassessments?

• Have these assessments been documented, and if so,can they be found?

• Have these assessments been independently verified? • How complete is the documentation to back-up anyarguments for inefficiencies or unapproved variations,delays etc., on part of the contractor? Can they evenbe located?

• Has the company conducted an internal financialassessment to determine whether it can even pay forthe costs of a prolonged arbitration?

Cost to involved parties

Time

Submission

Assesment

Talks

Negotiations Settlement Monitoring

Breakdown of negotiations

Failure of meeting settlement covenants

Finance and legal departments to be actively involved during these stages

Arbitration/Litigation

The claims lifecycle

Potential savings by proactively handling claims

Our experience has shown that most ofour clients were not aware of the actualcost and time it requires to prepare forarbitration


Optimistic conclusionBesides all the pundits doom and gloom prophecies forDubai and the GCC region in general, our experienceassisting our clients makes us quite optimistic of thefuture. Having worked with proactive developers,contractors and companies within the GCC region, werealize that most astute senior management are awarethat they can’t do it alone. They realize they need expertfinancial advice when it comes to the built environment,their business plans, having independent assessments ofthe cost to complete analysis for their majordevelopments, getting an accurate handle on not onlythe quantum of their projects liabilities but also howtimely and accurately they are being reported, assistancewith handling their claims with not just simple basicassessments but also how they impact their businessplan, project liabilities and estimates of cost tocomplete, etc. We have provided all these services tomajor developers, contractors and companies within theGCC region who were proactive enough to admit theirlimitations and seek expert advice earlier on. Thesecompanies are now not only better positioned to handletheir current situation, but are aware of what to expectgoing forward, and have become sufficiently financiallystable to even start considering investments! And asimple understanding of the various stages of a claimslifecycle is a start.

In short, our view upon observing these proactivecompanies is that they will continue to weather thecurrent storm, become financially stable, and will bebetter positioned to emerge as champions/pioneers to capitalize on the revival when it returns to the GCC region.

Ghaz Shah and Ketan BhoolaCapital Projects Advisory

Having worked with proactivedevelopers, contractors and companieswithin the GCC region, we realize thatmost astute senior management areaware that they can’t do it alone

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Where is the exit?

We have seen many developers, at corporate and atshareholder / investor level, consider and revise theirmedium to long term corporate strategies as aresult of the much maligned impact of the globalfinancial crisis on the Gulf Cooperation Council(“GCC”) real estate and construction industries. Wehave also seen major restructuring exercises in theGCC region over the last couple of years, notablyDubai World, which have prompted developers toevaluate their exit strategies at a project and at acorporate level. Regardless of the aim of thesestrategies, from increasing liquidity to managingoverall corporate risk, developers are now forced toconsider various exit strategies.

Exit options for a developer of a capital projectResidential and commercial property prices in the GCChave fallen by an average of 40 to 60 percent in somemarkets, and combined with liquidity drying up in the

region, many capital projects have been put on hold,delayed or cancelled. The total value of cancelledprojects in the UAE reached USD170 bn in 2011, up 13 percent since July last year, according to a CitiGroup’s Mena Construction report. Citi’s Menaconstruction project tracker reveals “The UAE accountsfor 56 percent of total cancelled and delayed projectsfor the main markets. Unsurprisingly, cancellations in theUAE relate predominantly to real estate.”

Saudi Arabia, the largest construction market in MENAwith USD630 bn of projects planned and underway,recorded a project pipeline drop of nine per cent toUSD200bn. These market conditions have leddevelopers to revisit their project strategies, and wehave seen many developers consider the followingstrategies for troubled projects:• Continue to develop the asset with minimal effort andcost, with the intention to enhance value in the longterm (Option 1); or

• Liquidate or conduct a fire sale of the assets (Option 2).

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The implications of each are considered below:

Option 1 Option 2

• If the developer chooses to initiate minimumdevelopment, there will be a need to closely managethe following areas:

• Project cost to complete assessment;• Assessment of current liabilities and impact ofunwinding on operating cashflows;

• General and administration cost management /reduction;

• Review of sales collections;• Valuation of residual land bank; and• Assessment of current financing structure and net funding to complete the project.

• The developer will need to assess all these factorstogether to develop an optimal strategy that willpreserve cashflows and enhance asset value in the long term.

• Liquidation or a fire sale of the assets is likely to be the “last resort” for a developer, however, the option will typically involve the following:– Wind down of project operations;– Assess how claims and liabilities will be fundedthrough liquidation of assets; and

– An assessment of the current liabilities of thebusiness, which may include a detailed review of:- Current payables – certified and invoiced;- Uncertified payables; and- Potential claims.

Implications Implications

• The potential implications of this strategy are:• Appreciating land value;• Typically allows for financial obligation to be metmaterially, with potential to meet full obligationsdepending on future market conditions;

• Achieve a higher sales value for raw land surroundingdevelopment area;

• Establishes market credibility and confidence;• Removes “distressed seller” perception;• Positive financial impact on profit and long termcashflows; and

• Open doors to other financial exit options that are notcurrently available.

• The typical implications of a liquidation are:• Results in loss of investment;• Immediate cash release to fund working capital /funding requirements and ongoing operations ofcompany;

• Risk that a fire sale may be unable to meet financialobligations;

• Land and project severely undervalued by market asdeveloper currently viewed as a “distressed seller”;

• May cause reputational damage; and • Negatively affects surrounding comparable properties.


Exit options for a shareholder / investor of a developer or a construction businessOften a shareholder’s investment appetite changes as a result of shocks to the economy or an industry. Somemay simply have a desire to dispose of capital intensiveand risky investments, or there may be a need to free up liquidity.

Times like these make it even more important – the factis, right now might not be the right time to sell. Mostconstruction companies did not have a good year lastyear, which translates to a buyer who will look to pay aprice based on a multiple of those depressed earningsfrom last year, even though the company could turnaround tomorrow, and begin making earningsconsistent with historical profits.

However, there are typical exit strategies open to ashareholder of a construction business or a developer,which in reality are not different to any other business.Exit options available to a shareholder include:• Trade and financial sales;• Private placements; and• Initial public offering (“IPO”).

The chart below details the number of exits by type inthe GCC from 2005 to 2009. Trade sales and IPOs werethe most common exit paths over the past five years inthe GCC.

During 2005 to 2009, twelve IPOs and trade sales wereexecuted in the GCC, according to Zawya’s PE Monitor,however, trade sales dominated in terms of value duringthe same period (USD2.8 bn)

Since a majority of the businesses in the MENA regionare family-owned, most of the historical investmentsrepresent minority stakes. In fact, traditional buyoutswith outright control are few and far between.

Based on our experience, the major challenge posed tolong and established family owned businesses in theregion will be to rebalance the ownership structures tocompete in the open markets.

However, Trade / financial sales typically offer thefollowing benefits:• Relatively quick process compared to an IPO;• Offers the vendor an opportunity to negotiate pricewith potential buyers;

• Less risk of price volatility;• Fewer obstacles to overcome e.g. listing regulatoryrequirements; and

• If the business is in a distressed state, PE opportunitiesmay be a viable option.

The fact is, right now might not be theright time to sell

Number of exits in the MENA region during 2005 to 2009

12

10

8

6

4

2

02005 2006 2007 2008 2009

Source: Public information and Zawya PE Monitor

Trade saleFinancial sale

Private placementPublic market


Private Placements have the benefit of offering ashareholder:• An exit opportunity on their investment; or• An opportunity to engage with a strategic partner inthe development of the business (assuming theshareholder decides against exiting).

Private placements can be organized through raisingshares or bonds to selected investors, and some of thebenefits of private placements include: • Highly flexible with regards to the targeted amount to be raised;

• Ability to determine the type and nature of investorsand choose suitable ones whose vision matches withthe company;

• Fostering continuous growth of the company withoutaffecting its liquidity or sustaining other financial risks; and

• Relatively quick process compared to an IPO.

Some businesses are prone for an IPO, especially matureones with the capacity of paying regular dividends whileothers have a longer growth trajectory.

Capital raising / IPO activity in the MENA region peakedduring 2004 to 2008, while recent activity hasplummeted. Volumes remained depressed in 2009 and2010 as risk appetite dried up for other emergingmarkets. In fact, the USD2.5 bn of new listings in 2009represents only 16-17% of the IPO volume at the peakof the market. In 2010, the average IPO raised USD115million compared to USD360m-USD470m at the peak ofthe market. Importantly, the average capital-raise in2010 was smaller than in any period over the past sevenyears.

In 2012, listing activity appears to be picking up -Construction Products Holding Co (CPC), Saudi Arabia'slargest manufacturer of building materials and a unit ofBinladin Group, is planning an IPO. We are also seeingother construction companies, particularly in SaudiArabia, exploring strategic routes with an IPO high ontheir list.

Although the pipeline of companies looking to list onthe Tadawul exchange (and other GCC exchanges) issaid to be sizeable, unfavorable market conditions have meant that the number of IPOs launching has been limited.

Therefore, as developers look at exit options, equitymarkets will remain a popular source of funding forcompanies, given the nascent bond markets and aslowdown in bank lending. This is likely to draw anumber of large private companies to list as they look to fund expansion plans, but timing – as it is for allbusinesses – will be key.

Rajeev PatelCapital Projects Advisory

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The residential property sector is,however, expected to do well for theforseeable future, rooted primarily inthe fact that there is strong demand forhousing from Kuwaiti nationals


Kuwait – gaps for optimism

During the early 2000s Kuwait’s real estate sectorexperienced phenomenal growth on the back ofhigh oil revenues and a robust economy.Restructuring exercises by the companies inattempts to de-lever their balance sheets havefaced challenges from the absence of liquidity and depressed prices in the real estate markets.Future optimism is rooted in gaps resulting from a shortage of residential property which continuesto experience buoyant demand from both Kuwaitinationals and expats, and an infrastructure gapbeing filled by massive government infrastructureinvestment through the Kuwait Development Plan.

The construction and real estate sector as a percentageof GDP steadily declined between 2007 and 2009. This decline can be attributed to delayed governmentinvestment and the financial crisis of 2008 which had a huge impact on the sector. Key features whichnegatively impacted companies in the real estate sectorwere: huge accumulated debt, limited bank lending,declining asset prices and regulatory constraints intrading residential property.

The outlook, however, is far more promising for thefuture. BMI forecasted real estate sector growth of 2.5% in 2011 in real terms. This optimism is fueled by anticipated growth in residential property whichcontinues to experience buoyant demand from both Kuwaiti nationals and expats and governmentinfrastructure investment through the KuwaitDevelopment Plan. Access to capital has been eased as banks have resumed lending albeit on a stricter basis. Government has also played a part in loweringtender guarantees and increasing upfront payments to contractors for public construction projects.

ResidentialThe supply of residential property is essentiallycontrolled by government. The Kuwaiti governmentowns the majority of the land and releases small tractsfor development infrequently. KFH estimates that only3%-7% of Kuwait’s total land mass is developed. In2008 the government passed a law which restrictedshareholding companies and establishments frombuying, selling or mortgaging residential properties. Afurther law enacted pressured companies to dispose oftheir residential real estate investments within a three-year timeframe. The reasoning for these laws was tocurb inflationary pressures and dampen the exponentialgrowth in property prices.

Property developers have been unanimous in theircriticism of these laws. Questions have been raisedabout the effectiveness of the legislation dampeninginflationary pressures. It has been argued thatgovernment’s restricted supply has actually caused anincrease in prices as the strong demand could not bemet. Actual evidence has showed otherwise – accordingto the Kuwait Financial Center, in 2009, some suburbscloser to Kuwait City experienced a price drop of 20-30% whilst some others further from Kuwait Cityexperienced a 50% drop in prices.

The residential property sector is, however, expected to do well for the forseeable future, rooted primarily in the fact that there is strong demand for housing from Kuwaiti nationals. This demand stems from thelegislated right of every Kuwaiti citizen to a house. Thereare no signs of this demand tapering off in the mediumterm as the Kuwaiti population is relatively young withwell over 70 percent under the age of 40. The PublicAuthority for Housing Welfare, which is the governmentdepartment tasked with providing housing to Kuwaitis,has over 90,000 applications to process currently.According to Global Investment House, the residentialdemand is worth a minimum of KD10.4bn.


Government has also taken steps in the recent past toease supply of residential developments by targeting thebuilding of 70,000 homes by 2015 and releasingadditional land for private sector development.According to NBK Capital, 215 loans equating toKD10.7m were approved by Savings and Credit Bank inJuly 2011. This provides a strong indication of demandactivity and investment in the residential market.

CommercialThe last five years has seen significant institutionalinvestment in office and retail projects. This was spurredby the economic boom leading up to 2007 and easyaccess to capital markets during this time. Estimates ofadditional +500,000 sq meters in office space areexpected to come to market in the near future. Theeffects of this huge supply are already being felt asoffice rentals have decreased from KD12-13 per sqmeter to around KD7-8 per sq meter for offices in thecity. The lower rental yields have been impactingoperational cash flows of investors. To counter thefinancial strain of the large real estate players, KuwaitInvestment Authority has announced plans to injectKD1bn into the commercial property sector. Thisinjection is likely to help companies repay their banksborrowings rather than spur further build in thissegment. This segment is likely to remain unattractiveuntil economic activity improves translating to realdemand for space.

InfrastructureAmong the GCC states, Kuwait infrastructure investmentas a percentage of GDP has been the lowest to date.Government’s plan to diversify and encourage non-oilsector growth has had parliament approve the KuwaitDevelopment Plan, which is a four year KD37bninfrastructure investment plan. The investments covervarious sectors including power, water, transport (roadsand a metro system), housing, and healthcare. The Partnerships Technical Bureau is mandated tomanage the bidding process for build-own-operate-

transfer (BOT) and public private partnership (PPP)schemes and help boost private sector involvement ininfrastructure projects. The private sector is primed toplay the lead role in developing the Kuwait urban metro;electricity generation projects; the tourism developmentat Failaka Island, the redevelopment of Kuwait airport,Post office project and establishing mixed use areas likeSilk City, etc. The downside risk to the constructionindustry is the delay in implementing the plan as hasoccurred with previous projects in the past.

ConclusionWhile the market has gone through a phase ofrestructuring exercises and realignment, the oil and gasdriven industry will support the funding gap resultingfrom committed major infrastructure programs and aneed for housing and social infrastructure for nationals.This will create a positive gap for optimism for thosewho are involved in the Kuwaiti construction market.

Ashraf DadaCorporate Finance Advisory, Kuwait

To counter the financial strain of thelarge real estate players, KuwaitInvestment Authority has announcedplans to inject KD 1bn into thecommercial property sector

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Saudi Arabia – the giant awakens

In 2010, the Government approved a five-year SAR 1.44 trillion (USD384 bn) developmentplan to develop human resources, education,housing and transportation infrastructure as thekingdom seeks faster economic growth, continueddiversification of its economy away fromhydrocarbons, and to create jobs and socialdevelopment. It is the biggest investment packageannounced by any of the G20 nations as apercentage of GDP, and for many involved in theGCC construction sector, this can be a massivewindfall for their continued success in the largesteconomy in the GCC.

The Kingdom of Saudi Arabia (KSA) is by far the largesteconomy in the GCC. Its 27m population makes up c.70 percent of the overall GCC population, its USD622bn GDP is almost half of the overall GCC GDP. It is thelargest oil exporter in the world and holds about 20percent of the world’s proven reserves.

On the back of strong oil prices, KSA has shown veryimpressive compound GDP growth in the last sevenyears (averaging about 4.1 percent) which is expected tocontinue in the coming years. IMF has estimated growthof 6.5 percent whilst some local experts have put thefigure at almost 7.5 percent. Furthermore, to ensure amore resilient and sustainable economy, it has made aconcerted effort to diversify its economy away from oil(which now comprises less than half of the overallnational GDP).

GCC population

807,0001,696,563

2,905,000

3,051,000

4,707,000

37,136,977

Source: CIA

Saudi Arabia KuwaitKuwaitKuwaitKuwaitUAE

GCC GDP

29.71150.6

75.84

136.5

246.8

622

Source: CIA

Saudi Arabia KuwaitKuwaitKuwaitKuwaitUAE

0

2

4

6

8

10

2004

7.66%

2005

5.27%

2006

5.55%

2007

3.16%

2008

2.02%

2009

4.23%

2010

0.6%

2011

4.1%%G

row

th

Source: Trading economics

GDP Growth Saudi Arabia

CAGR 4.1%

Main Infrastructure InvestmentsHowever, in terms of GDP per capita, KSA has the lowest in the GCC region. It also has one of the highestunemployment rates of almost 10.5 percent.

The Government has recognized these challenges andhas initiated massive investments since. In 2010, theGovernment approved a five-year SAR 1.44 trillion(USD384 bn) development plan to develop humanresources, education, housing and transportationinfrastructure as the kingdom seeks faster economicgrowth, continued diversification of its economy awayfrom hydrocarbons, and to create jobs and socialdevelopment. It is the biggest investment packageannounced by any of the G20 nations as a percentageof GDP.

The Government plans to increase the schoolingcapacity to 5.3 million, university capacity to 1.7 millionstudents by 2014, build 25 new technology colleges and50 vocational schools during the five-year period. Also,the government plans to construct 1 million houses bythe end of 2014 at a cost of SAR 250bn, and raise themortgage value provided to nationals by the country’s


GCC GDP per capita

0

40

60

80

100

120

140

160

180

200

2024.2

49.6 48.9

25.6

179

40.3

SaudiArabia

Source: Riskandforecast

UAE Kuwait Oman Qatar Bahrain

US

dolla

rs (T

hous

ands

)

GCC unemployment

0

4%

6%

8%

10%

12%

14%

16%

2%

10.5%

4.3%3.1%

0.5%

15%

3.6%

SaudiArabia

Source: CIA

UAE Kuwait Oman Qatar Bahrain

Une

mpl

oym

ent

rate

Government spending in the GCC

0

10

15

20

25

30

35

40

45

50

5

Source: IMF

Saudi ArabiaUAE

KuwaitBahrain

QatarOman

% S

pend

ing

2011 2012 2013 2014

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Real Estate Development Fund to SAR500,000 from SAR300,000. King Abdullah announced in 2011 a series oflarge scale affordable housing schemes and economicsupport valued at up to USD130 bn. A breakdown ofthe overall investment package is shown below:

Furthermore in an effort to provide KSA’s entirepopulation with integrated and comprehensivehealthcare, the Five-Year Plan allocates USD73 bn(SR273.9 bn) to various initiatives. Measures include theconstruction of 117 hospitals, 750 primary healthcarecenters, and 400 emergency centers.

The Government’s investments in the transportationsector are already underway. The Kingdom is investingmore than SAR 46bn (USD12.3bn) to overhaul its threeinternational airports in Riyadh, Jeddah and Dammamuntil 2020 and plans to turn these airports intoeconomic hubs . The General Authority for Civil Aviationhas also pledged improvements to another 31 airports.

With regards to railways, the country is constructing aUSD6 bn Haramain High Speed Rail link in addition to theUSD5.3bn 2, North South Railway which is scheduled tobecome operational this year. The Landbridge projectestimated at USD7bn is also planned and a procurementapproach expected to be announced shortly.

The government has also announced a SR2.3 bn(USD613 million) package for all the nine ports includingsignificant enhancements at the largest KSA port,Jeddah Islamic Port (JIP), on the Red Sea.

Main infrastructure investments effect ofdevelopment and government spending

The construction industry is expected to be at theforefront of the capital programs and will benefitsignificantly in the short term from the large scaleinvestments. The relaxation of home financing andeconomic support will also see large private sectorhousing initiatives.

The multiplier effect of these programs should result instimulating growth in the wider construction materials,machineries, utilities and related services as well as retailopportunities. Indeed, already a number of privatesector projects have been announced – the mostnotable one being the ‘Kingdom Tower’- planned to bethe tallest building in the world.

Development Sector Allocations (USD Bns)

Share (%)

Human Resources 195 50.6

Social and Health 73 19

Economic Resources 60.7 15.7

Transportation andCommunication

29.6 7.7

Municipal and Housing Services

26.8 7

Total Expenditure 385.1 100

%G

row

th

Source: Economy watch

GCC forcasted Real GDP Growth

02011

Saudi ArabiaUAE

KuwaitBahrain

QatarOman

2012 2013 2014

2

4

6

8

10

12

14


The strategic investments in long term infrastructureshould improve KSA’s economic competitiveness in themedium to long term. This should create new industriesand new economic hubs adding to the opportunities forthe construction and maintenance industries over amuch longer period.

Opportunities for international contractorsAlthough KSA has some of the largest contractors in theregion as well as the largest banks and funds, the scaleand depth of the investments means the localcontractors are unlikely to have the capacity or expertiseto meet the demand.

This provides significant opportunities for internationalcontractors. Furthermore, contractors that were recentlyfocused on markets such as the UAE, Europe andelsewhere now have the capacity to focus on the KSAmarket. Indeed, already a variety of new companies hasentered the KSA market ranging from GCC and MENAcontractors to US and European contractors as well asChinese and other Asian contractors. It remains and willcontinue to be one of the key markets for contactors inthe world.

ChallengesThe immediate challenge that KSA faces is how toimplement the various capital investment programs andto ensure efficient delivery whilst containing inflationarypressures. The low global demand for constructionproducts together with foreign companies shifting focusto countries such as KSA should provide some bufferagainst inflationary pressures.

The medium term challenge for KSA remains the priceof oil. KSA remains highly dependent on oil revenues inspite of its diversification efforts. In the medium to thelong term the international price of oil coupled withKSA’s own demand for oil will put pressure on budgets.Planning and funding of the ongoing operating andmaintenance costs could therefore come underpressure. This will create opportunities for quality FMcontractors which provide specialized and efficientlifecycle maintenance solutions.

SummaryThe KSA market is by far the biggest in the GCC – bothin terms of population and GDP. The Government, onthe back of high oil revenues, is undertaking massiveinvestments (almost USD400bn in five years). Theseinclude building schools, hospitals, universities, houses,airport expansions, new railway infrastructure and roadimprovements. The investments are also expected tolead to a private sector boom. The construction marketis therefore expected to be one of the most buoyant inthe world.

Greater integration across the Kingdom will promoteeconomic stability, job growth and ultimately benefit thereal estate markets in KSA. Progress in the real estatesector reflects long term growth potential for KSA'seconomy. New demand drivers, for example, theimprovement of transportation systems andinfrastructure projects, will create investmentopportunities and increase the connectivity andattractiveness of the market.

Although local Saudi contractors are some of the largest in the region, given the size and range ofprojects planned in the next few years, there remainsignificant opportunities for international contractors toenter the market.

Tahir RabaniCapital Projects Advisory, Kingdom of Saudi Arabia

The immediate challenge that KSAfaces is how to implement the variouscapital investment programs and toensure efficient delivery whilstcontaining inflationary pressures

Rebound


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