The New MENA markets: be careful

Political uncertainty brings risks, but rewards can be great as well

Anita Hormis
Anita Hormis

The recent unrest in Bahrain and Egypt has highlighted yet again that instability in some parts of the Middle East continues.

This is of real concern not only to contractors who are exposed to those markets directly, but to others who are now reflecting on which MENA markets are most viable.

At the other end of the spectru,m there are contractors who view the same situation as a golden opportunity to make strides into growth markets with relatively little competition, and to gain the experience necessary to repeat the success in other difficult regions.

A recent construction industry survey conducted by international law firm Pinsent Masons in the Middle East, showed that Saudi Arabia and Iraq are considered to be among the strongest markets to deliver growth in the construction sector in the MENA region. However, only 11% of those surveyed perceived Saudi Arabia as a simple place to do business, with Iraq even less appealing at just 2%.

The obstacles perceived by contractors in the MENA region are many and varied. The most obvious is the continuing uncertainty following the Arab Spring and the political and security risks that brings with it.

In addition to these risks, there is also a perceived lack of transparency in the awarding of contracts, difficulties in obtaining timely payment, and concern over the ability to enforce a contract in difficult jurisdictions.

Even if a country is politically stable, there is no guarantee that the forecast growth will materialise. This is most vividly illustrated by the build-up to the FIFA World Cup to be staged in Qatar in 2022.

The sheer scale and volume of construction necessary to support such a venture caused some to jump into the market with what has now transpired to be over-enthusiasm. Major contracts have not been tendered at the rate expected, with the lack of adequate enabling infrastructure cited as the major reason for the slow growth.

In a market such as Qatar, which has little funding difficulties and is keen to make an impression on the world stage, this was unforeseen by most. This was also reflected in the Pinsent Masons survey which revealed that the overwhelming majority (81%) of respondents found Qatar to be a disappointing market in 2012.

Projects in politically unstable countries face different challenges. If works are suspended or the parties end up in dispute during a regime change, contractors can face unique logistical, financial, contractual, and political issues.

These can range from being unable to retrieve plant from site, dealing with an employer which is backed by the outgoing despotic regime, being unable to move funds to finance work or to repatriate profits due to the imposition of sanctions, the difficulty of convening a dispute resolution tribunal in what amounts to a war zone, and being able to define when the situation qualifies as 'force majeure' to trigger contractual remedies. These are only the commercial issues.

We have also seen recent unfortunate events in the MENA region where the safety and liberty of the contractor's workforce have been seriously impacted, with the tragic loss of lives on occasion. For a contractor operating in unfamiliar territory, these challenges cannot be underestimated.

As in any arena of business, there are no easy answers. New markets such as Libya and Iraq may be full of opportunity but ultimately the decision for contractors is whether the potentially bountiful rewards are outweighed by the very real, and ongoing, risks.

About the author
Anita Hormis is an associate at law firm Pinsent Masons LLP

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