The Brick and Mor­tar Story

The scale of projects in Qatar's con­struc­tion sec­tor and the chal­lengers it faces

Qatar Today - - FRONT PAGE - By Sindhu Nair

Google Qatar's con­struc­tion sec­tor and the fig­ure that jumps out is the stag­ger­ing $200 bil­lion – the to­tal value of the coun­try's in­fra­struc­ture projects in the next seven years. While there is not an ex­panse of land with­out a tower crane vis­i­ble in the Doha vista, the big­gest ap­pre­hen­sion is the oil price de­cline and re­sult­ing vein of re­straint and re­align­ment across the in­dus­tries in Qatar. Is the $200 bil­lion a re­al­is­tic fig­ure? Will the cur­rent oil prices af­fect pro­ject al­lo­ca­tion and spend? These are but some of the ques­tions that come to mind when we think of the con­struc­tion sec­tor – the sec­ond big­gest con­trib­u­tor to the coun­try's GDP.

The con­struc­tion sec­tor seems to be the only in­dus­try im­mune to the change in oil eco­nom­ics. But there are some wor­ry­ing chal­lenges. From man­power short­ages to cash flow chokes in large projects, the sec­tor is not im­mune to tri­als. Qatar To­day speaks to con­trac­tors and ex­perts to un­der­stand the fu­ture of the build­ing in­dus­try. Ac­cord­ing to the Deloitte GCC Pow­ers of Con­struc­tion

2015, the con­struc­tion sec­tor is an eco­nomic barom­e­ter for the GCC. Ac­cord­ing to MEED Projects, the forecast for projects planned and un­der­way in the GCC in 2015 is close to $172 bil­lion, the high­est on record to date. This is all against a back­drop of lower oil prices, con­tin­u­ing po­lit­i­cal un­rest and re­duced In­ter­na­tional Mon­e­tary Fund (IMF) growth fore­casts across the GCC. It is also im­pacted by the deep­en­ing re­ces­sion in Rus­sia and, as re­flected in the IMF World Eco­nomic Out­look up­date in Fe­bru­ary 2015, the pro­jec­tion for global growth in 2015 has been low­ered to 3.5%, only a small in­crease from 2014. Per the IMF, the GCC's ex­port oil earn­ings are ex­pected to de­cline by $300 bil­lion from the orig­i­nal es­ti­mate in Oc­to­ber 2014.

How­ever, as we know, the GCC coun­tries have the ben­e­fit of re­serves, which they have built up as a buf­fer and which they can con­tinue to spend to achieve their out­lined strate­gies; this has also been ac­knowl­edged by the IMF. There­fore, they are ex­pected to con­tinue to spend on in­fra­struc­ture and cap­i­tal projects in or­der to achieve their strate­gies for diver­si­fi­ca­tion.

Alpen Cap­i­tal In­vest­ment Bank (Qatar) LLC Man­ag­ing Di­rec­tor, San­jay Bha­tia says that the sec­tor looks quite bullish in the medium to long-term per­spec­tive. Echo­ing the re­cent Alpen Cap­i­tal Con­struc­tion In­dus­try Re­port, he says that the GCC coun­tries have built wealth re­serves, largely through oil ex­ports. This has en­abled them to make sub­stan­tial bud­getary al­lo­ca­tions to­wards their con­struc­tion sec­tor, with an em­pha­sis on so­cial and phys­i­cal in­fra­struc­ture.

“The ex­ter­nal at­mos­phere might not be very con­ducive from a short-term out­look,” says Bha­tia. “But the re­gion has al­ready amassed great re­serves in good times which will serve to fin­ish the planned projects.” Even the low oil price, ac­cord­ing to Alpen pre­dic­tions, is a medium-term phe­nom­ena, with re­cov­ery seen soon. The medium-to-long term per­spec­tive on this re­gion is gen­er­ally op­ti­mistic, as­serts Bha­tia. ”If you look at economies, his­tor­i­cally, there have been such shocks. But they have all bounced back.”

Even if the con­struc­tion sec­tor is not af­fected, the sen­ti­ments in the coun­try seem to be at an all-time low. With the re­cent re­trench­ment across in­dus­tries es­pe­cially in the oil and gas com­pa­nies, there is a fear fac­tor that seems to be seep­ing through to all cit­i­zens.

“When the oil price is frag­ile, the over­all sen­ti­ment in the mar­ket is al­ways weak. Peo­ple are not so bullish about splurg­ing on high-pro­file projects,” says Bha­tia. “But hav­ing said that, these eco­nomic shocks are used as a means to make sure or­gan­i­sa­tions be­come leaner and fit­ter. It is al­ways ben­e­fi­cial for eco­nom­ics to go through such phases, to keep them healthy and more ef­fi­cient. It is not a com­plete melt­down and col­lapse, as­sures Bha­tia, un­like the 2008 eco­nomic cri­sis. “We are not that im­pacted,” he says. “Though we have seen a melt­down in China, the US mar­kets have re­cov­ered. These are short-term im­pacts which will get ab­sorbed, par­tic­u­larly within the GCC economies.”

“If you look at the economies, his­tor­i­cally, there have been such shocks (low oil prices). But they have all bounced back.”

San­jay Bha­tia Man­ag­ing Di­rec­tor Alpen Cap­i­tal In­vest­ment Bank (Qatar) LLC

On a high

Mean­while it is boom time for the con­struc­tion sec­tor. Ac­cord­ing to Bha­tia, “Af­ter a lull in the mar­ket in the sum­mer months of July and Au­gust we have seen a sud­den ur­gency in ac­tiv­i­ties in this sec­tor. All the projects seem to be in full swing.”

“Most of the con­struc­tion com­pa­nies are do­ing re­ally well, fu­eled by pop­u­la­tion growth. There was a phase in the last two years when all the projects were in the plan­ning stages and the sec­tor was al­most in limbo. Not so now, when all the projects have moved for­ward to an ex­e­cu­tion stage and work seems to be com­menc­ing with­out much op­er­a­tional de­lay,” he says.

Ibrahim Mo­hamed Jaidah, Group CEO and Chief Ar­chi­tect of lo­cal con­tract­ing com­pany, Arab En­gi­neer­ing Bureau, and the coun­try's most re­spected and well-known ar­chi­tect, states that there is no lull in the sec­tor. “We are ex­pe­ri­enc­ing a slightly larger de­mand from both the pri­vate and public sec­tors. It has been no­ticed that ev­ery­one is in a hurry,” says Jaidah. AEB is cur­rently in­volved in a num­ber of large-sale projects of dif­fer­ent ty­polo­gies. “Most no­table are of course cor­po­rate and mixed-use de­vel­op­ments at Lu­sail. We en­joy work­ing at Lu­sail due to the ex­is­tence of pre-set in­fra­struc­ture and traf­fic stud­ies,” adds Jaidah.

“Gov­ern­ment en­cour­ages JVs be­tween lo­cal and in­ter­na­tional com­pa­nies as some have proven very suc­cess­ful, as was the case with HMC, Ash­gal, Al Bayt Sta­dium and some other ma­jor projects. It is wor­thy to men­tion that a high per­cent­age of Mshiereb was built by JVs.”

Ibrahim Jaidah Group CEO and Chief Ar­chi­tect Arab En­gi­neer­ing Bureau

Faith­ful+Gould, an in­te­grated pro­ject and pro­gramme man­age­ment con­sul­tancy, also vouches for the con­struc­tion sec­tor in Qatar. “Projects in­clude the on­go­ing Doha Metro de­vel­op­ment; the in­fra­struc­ture ex­press­way pro­ject; Doha Fes­ti­val City; the Shaza Kempin­ski Ho­tel, Doha Oa­sis mixed-use de­vel­op­ment, which in­cludes a high-end mixe­duse scheme com­pris­ing, residential, a re­tail com­plex, an ex­clu­sive 7-star high-rise ho­tel tower and a one-of-a kind in­door theme park,” ex­plains Camp­bell Gray, Man­ag­ing Di­rec­tor, Mid­dle East, Faith­ful+Gould about their clients and de­sign briefs.

Faith­ful+Gould is also work­ing on an in­ter­est­ing role within the Min­istry of Mu­nic­i­pal­ity and Ur­ban Plan­ning de­liv­er­ing a PPP ma­jor pro­gramme of new labour ac­com­mo­da­tion to new stan­dards de­vel­oped by the MMUP. “We con­tinue work­ing with our par­ent com­pany Atkins to sup­port Ashghal on the Cen­tral Plan­ning Of­fice (CPO), to co-or­di­nate ma­jor multi-bil­lion dol­lar trans­port and in­fra­struc­ture projects in Qatar, pro­vid­ing the pro­gramme as­sur­ance team and we're de­vel­op­ing a suite of Stan­dard Forms of Con­tract for Ashghal, the Public Works Au­thor­ity of Qatar, for its en­tire pro­cure­ment pro­gramme in Qatar that will be used for many, many years to come,” says Gray.

Ac­cord­ing to Gray there is hunger in the mar­ket and the Dubai “safety” fac­tor is still in play for con­sul­tants, con­trac­tors and sub-con­trac­tors alike. ”Some key skillsets and prod­ucts are in de­mand, but for gen­eral works, the mar­ket is over­step­ping it­self a bit as in­fla­tion in the in­dus­try is broadly in line with the CPI data,” he says.

Bring­ing in line

In Qatar, the two largest projects in pre-ex­e­cu­tion phase and ex­pected to be awarded in 2015 are from Q Rail, namely the QIRP: pas­sen­ger and freight rail, bud­geted at $15 bil­lion, and Phase 2 of the same bud­geted at $3 bil­lion. A to­tal of 400 km of main­line rail con­nect­ing Qatar to neigh­bor­ing coun­tries and 260 km of metro and light rail are planned; most of this is to be com­pleted be­fore the World Cup be­gins. This is fol­lowed by two projects, one for the new Qatar Eco­nomic Zone bud­geted at $3 bil­lion, which is one of the three new planned eco­nomic zones mainly fo­cus­ing on lo­gis­tics and air freight com­pa­nies (ex­pected to be the big­gest of the three), and Oc­ci­den­tal Petroleum Cor­po­ra­tion (Oxy) – Idd e Shargi North Dome Ex­pan­sion Phase 5, again bud­geted for $3 bil­lion. So in Qatar a clear fo­cus on in­fra­struc­ture con­tin­ues as ex­pected. This is as men­tioned by the Deloitte re­port.

Re­cently one of the de­vel­op­ers, Lu­sail Real Es­tate De­vel­op­ment Com­pany, hosted a seminar to brief con­tract­ing and en­gi­neer­ing com­pa­nies on up­com­ing ten­ders for the de­vel­op­ment of Lu­sail City. The seminar fea­tured pre­sen­ta­tions about up­com­ing ten­ders for the de­vel­op­ment of the Qatari Diar head­quar­ters, the Com­mer­cial Boule­vard, Qu­taifan Is­land's fi­nan­cial dis­trict as well as residential and com­mer­cial tow­ers in Seef Lu­sail.

In the residential seg­ment, a sig­nif­i­cant un­der­sup­ply is push­ing up rents, ac­cord­ing to Euromon­i­tor though of­fice and re­tail spa­ces show a bal­ance of sup­ply and de­mand.

With ris­ing pop­u­la­tion, there is scope for more con­struc­tion ac­tiv­i­ties in the residential, re­tail and of­fice spa­ces. Bha­tia men­tions one ma­jor pro­ject that is com­pleted and will aid in help­ing the con­struc­tion sec­tor. “One of the key is­sues for large projects in Qatar was the lim­ited ca­pac­ity of the port. The mar­ket is small in Qatar; hence the port is one of the most im­por­tant el­e­ments to help the in­dus­trial sec­tor di­ver­sify and ex­port sur­plus. With the huge Me­saieed Doha Port com­ing online, it will ease a lot of bot­tle­necks,” he says.

Cau­tion is the word

Many Dubai-based con­struc­tion com­pa­nies and other in­ter­na­tional com­pa­nies are of the opin­ion that Doha is not a safe mar­ket to re­cover money pumped into projects due to huge de­lays in pay­ments. Gray agrees that most or­gan­i­sa­tions en­gaged in Qatar are strug­gling with ef­fec­tive pay­ment. “As a con­trac­tor, this is a com­pounded is­sue that has huge reper­cus­sions on re­gional busi­ness – pri­mar­ily due to the scale of projects un­der­taken and the cash flow lock up that is ex­pe­ri­enced,” he says.

“With the con­tin­ued rise of Dubai-based projects and con­trac­tors much more risk averse than in 2007/8 and less likely to ex­pand to those lev­els of per­son­nel and sup­ply chain, the ques­tion re­mains – do I stay in home base and se­cure work to fill my busi­ness, or risk all to jump into a new high-risk mar­ket with con­strained sup­ply chain, high pay rates and un­cer­tainty around when I'll get my money,” says Gray talk­ing about the chal­lenges that the Dubaibased con­trac­tors are up against.

In the new world since the fi­nan­cial cri­sis, the an­swer to some is easy.

Jaidah feels that this is­sue goes far deeper than we en­vi­sion. “The big­gest ob­sta­cle in my opin­ion is a new process be­ing im­ple­mented by in­ter­na­tional pro­ject man­age­ment firms that are still new to Qatar. All this has added so many new lay­ers to the process, some­times un­nec­es­sary, that cause de­lays in pro­ject de­liv­ery and pay­ments. We have seen some se­ri­ous steps taken by gov­ern­men­tal en­ti­ties to pre­vent these mis­takes from be­ing re­peated.”

Bha­tia agrees about con­trac­tual de­lays. He says, “Yes, there have been de­lays in pay­ment. It is a cy­cle, where the devel­oper de­lays and then the con­trac­tor de­lays pay­ments to sub-con­trac­tors and this goes on. But this is not due to a lack of re­sources to pay for the work done. In fact it shows a lack of abil­ity to process the huge vol­umes of ad­min­is­tra­tion work to han­dle the vol­umes in­volved in the pay­ment pro­ce­dures.”

These de­lays are preva­lent in all economies, as­serts Bha­tia. Pay­ments de­lays are part of pri­vate as well as public

“We are ac­tu­ally now start­ing to see some ma­tu­rity in the mar­ket to­day in re­gard to this mat­ter, with var­i­ous clients and gov­ern­ments en­ti­ties now in­ves­ti­gat­ing al­ter­nate forms of con­tract, other than the his­tor­i­cally used tra­di­tional client-de­sign and con­trac­tor-con­struct route.”

Camp­bell Gray Man­ag­ing Di­rec­tor, Mid­dle East Faith­ful+Gould

"Usu­ally when there is a one point re­spon­si­bil­ity, there will be a lot of risk on him and hence the high cost on con­tracts. The risk should be dis­trib­uted across the par­ties in­volved in the con­struc­tion, from the stake­holder to the gov­ern­ment."

Ah­mad Jas­sim Al Jolo Chair­man Qatar So­ci­ety of Engi­neers

sec­tor projects. “It has be­come a prac­tice, un­for­tu­nately,” says Bha­tia. “De­lays have be­come a norm and this sig­ni­fies more of a cul­tural think­ing than a re­source short­age.”

As Jaidah points out, in­ter­na­tional firms should also be flex­i­ble enough to ac­com­mo­date the cul­tural dif­fer­ences and un­der­stand that the mov­ing work­forces from dif­fer­ent na­tion­al­i­ties are chal­lenges that need to be han­dled care­fully.

The new mar­ket en­trants need to be mind­ful of these re­al­is­tic work­ing con­di­tions, adapt to lo­cal norms and be com­mit­ted to the coun­try's vi­sion.

“A lot of stream­lin­ing is be­ing done in the process. A lot of ef­fi­cien­cies are be­ing no­ticed in terms of pro­ject award­ing, mon­i­tor­ing etc, since the new gov­ern­ment has taken over. The con­struc­tion sec­tor and the an­cil­lary seg­ments, like the con­struc­tion equip­ment, have all ben­e­fited from the restruc­tur­ing. All these small-and-medium in­dus­tries are boom­ing from the ac­tiv­ity in the con­struc­tion sec­tor. This will ben­e­fit the econ­omy as well,” says Bha­tia.

Ma­te­rial and labour grid­lock

Due to growth in projects in con­struc­tion and their reach­ing peak loads over the com­ing one to two years (e.g. Riyadh Metro and Doha Metro) there are up­ward pres­sures within the sup­ply chain on prices.

Gray ex­plains this in de­tail. He says, “We're fore­cast­ing an over­all GCC con­struc­tion in­fla­tion of 5% in 2015 and po­ten­tially more in 2016 / 2017 as al­ready launched projects ramp up to peak, and chal­lenges in­clude ex­pec­ta­tion man­age­ment from client side es­pe­cially around cost and po­ten­tial de­lays due to sup­ply chain stretch. This is driven

by a com­bi­na­tion of in­crease in labour (white & blue col­lar) costs – which typ­i­cally ac­count for 22-25% of de­vel­op­ment cost and hard­en­ing of ag­gre­gate prices, mostly due to sup­ply chain lo­gis­tics, not just be­cause of any global de­mand.”

These chal­lenges can be mit­i­gated through: Pro­cure­ment strat­egy, get­ting early sup­ply chain in­volve­ment to help all to plan for de­mand curve, ob­serves Gray.

Pinch in ma­te­ri­als is one of the chal­lenges that are al­ready be­ing faced by the con­trac­tors here. “There is a lot of an­tic­i­pa­tion of short­age, but the mar­ket will be able to man­age the short­age when the ports be­come op­er­a­tional and by the avail­abil­ity of ex­pand­ing the man­u­fac­tur­ing sec­tor to keep up with the de­mand,” says Bha­tia.

There is an an­tic­i­pa­tion of short­age and all the an­cil­lary ser­vices are beef­ing up oper­a­tions to meet these short­ages. Doha's two lo­cal ce­ment com­pa­nies are go­ing through an ex­pan­sion drive to be able to meet the short­falls.

Another fac­tor that, ac­cord­ing to Bha­tia, is to be mon­i­tored is in­fla­tion. “If that is kept in check, through mon­i­tor­ing rentals, the big­ger con­trib­u­tor to in­fla­tion, the in­fla­tion rise can be kept in check.”

Other op­er­a­tional hitches

Ah­mad Jas­sim Al Jolo, Chair­man of Qatar So­ci­ety of Engi­neers stated that he be­lieved the great­est chal­lenge to Qatar's mas­sive in­fra­struc­ture pro­gramme was co­or­di­na­tion amongst the var­i­ous stake­hold­ers de­spite the ef­forts of the Cen­tral Plan­ning Of­fice (CPO). The CPO which is part of the Min­istry of Mu­nic­i­pal­ity and Ur­ban Plan­ning (MMUP) was given the mam­moth task of co­or­di­nat­ing Qatar's in­fra­struc­ture pro­gramme for road, rail, metro and other in­fra­struc­ture projects. One of the tough­est chal­lenges has been iden­ti­fy­ing and re­lo­cat­ing ex­ist­ing un­der­ground ser­vices to en­able work to pro­ceed. This chal­lenge has arisen be­cause some of the records for works com­pleted many decades ago are no longer avail­able, and/or the avail­able records do not ap­pear to be ac­cu­rate.

Ac­cord­ing to Gray, “Con­tract­ing in Qatar and the re­gion gen­er­ally is quite out­dated by com­par­isons to a lot more ma­ture mar­kets and is quite ad­ver­sar­ial. We need to move more to­wards a ‘best value' cul­ture in the re­gion, but this is ham­pered at most gov­ern­ment lev­els by pro­cure­ment law that stip­u­lates that the cheap­est tech­ni­cally com­pli­ant bid

“The value of dis­putes in the Mid­dle East in­creased in value by 88% to $76.7 mil­lion in 2014.”

Al­lon Hill Head of Con­tract So­lu­tions Arcadis Mid­dle East

must be se­lected. Even if it is thought that the price isn't achiev­able over the course of the pro­ject.”

Low cost sti­fles in­no­va­tion or value ad­di­tion as there is no in­cen­tive to con­sul­tants, con­trac­tors or sub­con­trac­tors alike. “In the ME we do cost cut­ting mostly, not value en­hance­ment of the projects. This is why you can see so many splen­did build­ings that have nu­mer­ous faults,” he says.

Jolo em­pha­sised that team­work amongst all the coun­try's stake­hold­ers was im­per­a­tive, and that the in­volve­ment of the public would be to the suc­cess of these mega projects.

Jolo high­lights another per­cep­tion that the Mid­dle East con­struc­tion mar­ket is a dif­fi­cult mar­ket to par­tic­i­pate in. But echo­ing Bha­tia's op­ti­mism he says that tech­ni­cal is­sues are al­most min­i­mal as all in­fra­struc­ture and con­struc­tion pro­grammes al­ways face some prob­lems dur­ing the pro­ject's life­cy­cle. “There has been a con­certed ef­fort by some gov­ern­ment de­part­ments to re­duce prob­lems faced by con­trac­tors and con­sul­tants with some of the stan­dard gov­ern­ment forms of con­tract; these are now be­ing re­viewed and re­vised to im­prove the con­tract­ing en­vi­ron­ment in the coun­try and ul­ti­mately help re­duce con­trac­tor claims,” says Jolo, con­tin­u­ing Jaidah's ear­lier ob­ser­va­tion.

Another con­cern that Jolo high­lights is that a lot of tra­di­tion­ally pro­cured con­struc­tion projects are be­ing re­leased for ten­der with­out a clear and ro­bust tech­ni­cal spec­i­fi­ca­tion.

The re­sult ob­served in Qatar has been that con­trac­tors/ con­sul­tants now price the risk, which re­sults in the very ex­pen­sive con­struc­tion pric­ing in Qatar, as it is cur­rently be­lieved to have the high­est con­struc­tion prices in the GCC, ac­cord­ing to Jolo.

Ac­cord­ing to the Arcadis re­port on Con­struc­tion dis­putes, the Mid­dle East re­gion saw its dis­pute val­ues in­crease to their high­est value since 2011, grow­ing from $40.9 mil­lion in 2013. Over­all, the amount of time taken to re­solve dis­putes in the re­gion is creep­ing up with the av­er­age creep­ing up by just over a month in 2014.

Con­trac­tual dis­putes tend to be caused by two key peren­nial trig­gers that aren't ju­ris­dic­tion-spe­cific: dis­putes around pay­ments (ei­ther the amount or terms) or when work hasn't been con­ducted in ac­cor­dance with a con­tract or to the stan­dard ex­pected.

How­ever, Al­lon Hill, Head of Con­tract So­lu­tions, Mid­dle East, Arcadis, be­lieves that sanc­tions also have an im­pact on con­tract dis­putes. Dis­putes aris­ing out of sanc­tions be­ing im­posed are usu­ally cen­tered around the af­fected con­tracts be­ing sus­pended or ter­mi­nated as a re­sult of the sanc­tions. This gives rise to dis­putes con­cern­ing the costs in­curred by a party as a con­se­quence of the sus­pen­sion or ter­mi­na­tion or if the con­tract has not been drafted prop­erly, dis­putes con­cern­ing wrong­ful ter­mi­na­tion. A fail­ure to prop­erly ad­min­is­ter the con­tract re­mained the most com­mon cause of dis­pute in the re­gion, fol­lowed by poorly drafted or in­com­plete and un­sub­stan­ti­ated claims which demon­strates the need to get the ba­sics right. One strik­ing statis­tic from dis­putes in the Mid­dle East was that al­most half of joint ven­tures ended up in dis­pute dur­ing the year, for the sec­ond year run­ning the high­est of any re­gion cov­ered in the re­port

Top five causes of dis­putes in Mid­dle East con­struc­tion projects in 2014

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