Paying bills on time can actually be beneficialby CW Guest Columnist on Apr 9, 2017
In early 2009 when the global financial crisis set in, the cranes came to a halt and ushered in an era of low liquidity for the Middle East’s construction sector.
Prior to the crisis, many of us in the region had experienced the luxury of available funds. In hindsight, we now know that the crash was inevitable; it was just a question of when it would happen. And now that the dust has settled, it is clear that the game has changed.
The beginning of 2016 represented a steady – if not generous – start but, during the final quarter of the year, we experienced another sobering slowdown. The paranoia of landing on Mayfair in Monopoly, with two hotels, reared its ugly head once more.
In Q1 2017, Dubai-based contractor Drake & Scull International (DSI) announced that it was seeking shareholder approval to raise $136.1m (AED500m) in a rights issue, after reporting a $214.4m (AED787m) net loss for 2016. And DSI is by no means the only regional construction firm to have been affected by liquidity challenges.
Analysts warn that construction companies’ margins in the Middle East are expected to remain slim, with the exception of contractors involved in projects for Expo 2020 Dubai and the 2022 FIFA World Cup in Qatar. What’s more, those suffering are not only the contractors, sub-contractors, consultants, and suppliers; construction is one of the Middle East’s leading industries, and many other sectors are dependent on revenue from regional projects.
The dark days of 2009 created a severe lack of trust when it came to getting paid. At the drop of a hat, and without warning, payments were withheld from the top down, fuelling a boom in the claims industry – driven by those who could still afford to pay legal experts. This can be a volatile market, and it takes time to resolve disputes. Nevertheless, construction overheads are large, and there is no such thing as an easy handout.
The lack of liquidity has resulted in the emergence of several employment trends. Towards the end of 2016, for example, there was a dramatic slowdown in some sectors, yet a mere levelling out in others. Fuelled by fear and painful past experiences, some have exaggerated the lack of hiring and contract awards on both sides of the industry.
Many restarted projects were brought to a close, and new ones were – and still are – being scrutinised down to the last morsel by certain developers. This situation has resulted in further delays.
Companies that have experienced resurgences in recent years are now witnessing a thinning market and, in many instances, this is a tactical rebalancing of overheads versus talent.
As far as Taylor Sterling is concerned, trimming exercises by larger firms are usually conducted in a bid to better compete with smaller companies, which have lower overheads.
While I’m not a master of economics, I am definitely an optimist, and I believe that the problem of low liquidity will improve in the coming years. With a series of megaprojects underway in Dubai, including the Dubai Metro Red Line extension, Jebel Ali Port’s expansion, and the development of Dubai Creek Harbour, there are reasons to be cheerful.
In December 2016, 37 projects, worth an estimated $2.2bn (AED8.08bn), moved into the construction phase in Dubai alone. But I would mention one caveat: if work is awarded to less reputable firms that submit cheaper tenders, it is only a matter of time before quality is compromised by a desire to limit costs.
Companies operating within the region’s construction sector must choose their partners carefully. By erring on the side of caution, some have created fierce price fights over gaining work from investors and developers with reputations for honouring payment schedules.
Those who survived the last global glitch are now in commanding positions; they remember the companies that did right by them in the wake of the last slowdown and, more importantly, those that didn’t.
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