Late payments have hurt GCC contractors in 2017
Overcoming – and discouraging – late payments should be a priority for the Gulf’s civil and MEP contracting sectors next year, Neha Bhatia reports
Late payments appear to have been a thorn in the side of the Gulf’s contractors this year, and the impact of delayed dues is visible in the financial performance of regional organisations.
In a missive issued to the Muscat bourse this November, Galfar Engineering and Contracting stated it had been “significantly affected by the delays in receiving its dues on [...] projects” this year. The contractor and its subsidiaries recorded consolidated revenues worth $575m (OMR221.5m) for the third quarter of this year, 14% lower than consolidated revenues worth $668.6m (OMR257.5m) in the corresponding period of 2016.
Revenues for Galfar’s parent company amounted to $543m (OMR209.1m) in Q3 2017, a reduction compared to corresponding 2016 revenues worth $637.5m (OMR245.5m). In its financial statement, Galfar said that its parent-level revenues were “significantly impacted by reduced levels of activity in public infrastructure”.
While Galfar confirmed that it had a “solid work pipeline” to look forward to despite “challenging conditions”, company chairman, Majid Salim Said Al Fannah Al Araimi, said that payment delays had affected the financials of the contractor, which was also awaiting payments for “already completed projects”.
Financial pressures were also felt in the schedules of payments that Galfar owed to its suppliers and sub-contractors, Al Araimi explained: “Due to this situation [of late payments], the ability of the company to meet its commitments is dependent on the ability of our clients to make project payments without delay, as and when they are due going forward. [For instance], the expected settlement of Muscat Expressway did not materialise in the reporting period.”
Similarly, Saudi Arabian contractor, Abdullah A M Al-Khodari Sons Co, also cited payment delays as one of the factors that led to a 41% decline in its Q3 2017 revenues, even as the company narrowed its third-quarter net loss by 57%, from $14m (SAR53.2m) in 2016 to $6.1m (SAR22.8m) this year. The listed contractor’s revenues for Q3 2017 amounted to $29.8m (SAR111.8m), 41% lower than Q3 2016’s revenues of $50.6m (SAR190m).
In a missive issued to the Saudi bourse, Tadawul, Al-Khodari said the 41% decline in its revenues was caused by slow progress on project works, in addition to the “decline in new project awards, significant liquidity challenges facing the contracting industry due to delay in payments, reprioritising of projects by the government, and [an] extended slowdown in the construction sector”.
Another aspect of late payments in the regional construction sector relates to employee salaries. Construction firms were among the latest payers in the UAE during 2016, with payment delays of up to four months, it was reported this February.
Research conducted by credit insurance organisation, Coface, found that, on average, the amount of time that UAE companies had to wait to receive payments doubled in 2016, according to local daily, The National. The newspaper added that approximately 800 firms exited the UAE last year due to an inability to settle their debts.
This year has seen regional construction experts express similar concerns about how low fluidity may impact the local mechanical, electrical, and plumbing (MEP) sector. Indeed, the lack of high-quality MEP contractors is being felt by project developers in the UAE, an expert told Construction Week this July (Construction Week #662), adding that cash constraints amid low market fluidity were driving down the number of MEP contractors in the UAE’s construction sector. Niall McLoughlin, senior vice president at Damac Properties, said the number of MEP contractors in the market was lower than main contractors.
He continued: “MEP is a heavily cash-driven business, [and is especially] driven by advance [payment]. MEP contractors have to invest in equipment, send it to site, and start work – only then might they receive some income from the main contractor.”
Typically, this arrangement would require MEP contractors to be financially comfortable so as to deliver projects “on proper terms”, McLoughlin said.
“Most MEP contractors have been through a very difficult time between 2009 and 2013,” he explained.
“It came with financial burdens, which is why you will find that some MEP contractors [ended] their operations locally.”
More recently, Praveen Sarapure, group director and chief executive officer of Brayan Group, told Construction Week’s sister title, MEP Middle East that “good quality manpower and payments are still the major challenges [in the MEP sector]”, adding: “There is no security for an MEP contractor.”
Sarapure said that while MEP works tended to be implemented only towards the end of a construction programme, financial precautions must be deployed from the start: “That’s how we are picking clients – if there is no bank finance, we will not even touch that project. So the challenge is getting payments at the right time.”
Sarapure said that in addition to the 1,500 staff his company directly employed, the firm also had “manpower contractors to put together on-site works, so close to 3,000 people may work with us at any given time”.
He continued: “Good quality is a big issue. Price is still a concern and competition is tough, but I think that now, no more big players are operating [in the market]. Competition might reduce in 2018, and margins will definitely improve.”
Clearly, the challenges caused by delayed payments cannot be overlooked, and their impact is multi-faceted – overdue funds not only reduce vendor liquidity, but also add to an organisation’s costs if litigation is pursued. Commenting on how late payments may contribute to legal costs, Fernando Ortega, an independent legal consultant based in Dubai, explained: “The most common causes of construction disputes for the last two years continue to be non-payment and wrongful termination.
“The low oil-price environment has led to many projects being deferred or cancelled. This has produced many claims and the initiation of formal dispute resolution.
“Existing legislation in the region supports dispute resolution by resolving disputes quickly and efficiently, while minimising costs. The more the rules are clearly set out and followed by the local courts, the more a contractor would be comfortable to operate in the relevant jurisdiction,” Ortega added.
While predicting future market trends is difficult, it is undeniable that the Gulf’s contractors will have to focus their business acumen and resources on overcoming these financial roadblocks in the new year.