Is the contracting market becoming less saturated?
If global construction firms continue to pare back their operations in the Gulf, opting instead to focus on traditional competencies, the market could become less saturated
Last week saw the latest high-profile departure from the Middle East’s construct community. Balfour Beatty announced that it would exit the region after agreeing terms to sell all shares in its local joint ventures.
The UK-headquartered construction company signed a deal with its local partner, Dubai Transport Company (Dutco Group), to offload its shares in Dutco Balfour Beatty and BK Gulf for $13.7m (GBP11m).
As part of the transaction, which remains subject to regulatory approval, the local partner will assume responsibility for Balfour Beatty’s guarantees of bonding obligations in the joint ventures.
In truth, the development was not wholly unexpected. In addition to the Middle East, Balfour Beatty has pulled out of the Indonesian and Australian construction markets since the beginning of 2015. The company says that this strategy will enable it to focus on its chosen markets of the UK, the US, and the Far East.
Leo Quinn, group chief executive of Balfour Beatty, commented: “We will continue to simplify the group and strengthen the balance sheet through our Build to Last programme.
“As a result, Balfour Beatty enters phase two of its transformation with a solid foundation for long-term, profitable growth.”
The British construction giant is not the only international outfit to have reconsidered its overseas operations during the past 12 months. In Q3 2016, Murray & Roberts announced that it intended to dispose of its global construction business as part of a broader strategy to concentrate on markets that offer opportunities related to natural resources.
The move spelled the end of the South African contractor’s operations in the Middle East, where its infrastructure and building business had traditionally been busiest. Murray & Roberts had worked on a selection of landmark projects in the region, including Dubai’s Burj Al Arab and Abu Dhabi’s Sorbonne University. Nevertheless, it took the decision to withdraw its civil engineering and general contracting offering, choosing instead to focus on its core competencies of oil and gas, metals and minerals, and power and water.
And in this issue of Construction Week, Drake & Scull International’s (DSI) chief executive officer, Wael Allan, explains why his company plans to limit its civil and general contracting activities to the UAE (page 24). Allan is confident that DSI will achieve greater success by focussing on its core mechanical, electrical, and plumbing (MEP) operations in markets like Saudi Arabia, where competition within the general contracting segment is fierce.
At first glance, such stories may seem like bad news for the Middle East’s construction sector. That numerous international outfits have opted to pare back their regional offerings is not a glowing endorsement when it comes to the health of the industry.
However, I would argue that this is, in fact, a positive trend. One of the primary drivers behind these decisions has been market saturation; in many segments, the sheer volume of players bidding for work is making it financially unviable for companies to try to compete. In turn, this has had the effect of driving down margins.
Fewer bidders could lead to a renewed appreciation of value over price among clients, allowing the remaining players the breathing room they need to improve and grow their businesses, rather than simply stay afloat.
At this point in time, it’s difficult to predict whether any other international contractors will choose to follow suit. But ultimately, a leaner construction market with less overlap between companies’ service offerings could serve to benefit everybody’s bottom line.