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