Making market moves

How easy is it for new players to enter the Middle East's MEP sector? As Australian contractor Hastie International begins work on its first contract in Dubai, chief executive officer Michael Boufarhat talks to Alison Luke about the challenges it has faced and its long-term plans for operating in the region.

The pricing methods used by suppliers in the Middle East are putting undue pressure on contractors when bidding for contracts states Bourfarhat.
The pricing methods used by suppliers in the Middle East are putting undue pressure on contractors when bidding for contracts states Bourfarhat.

The continued growth of the Middle East's construction industry is attracting increasing numbers of companies to the region seeking work. And with the number of available MEP tenders on the rise, competition from international firms in the sector is rising.

Australian contractor Hastie International is one such firm that has seized the opportunity to expand its operations with a move into the Emirates. The firm set up its first Middle East office in Dubai in late 2005. Heading the operation is chief executive officer Michael Boufarhat.

Dubai was chosen as the Middle East headquarters due to the relative ease of setting up operations in the city. “Dubai is very systematic,” Boufarhat explains. A Lebanese national, Boufarhat had several years of experience working in the region prior to joining Hastie last year to set up its Middle East operations. This has helped to ease the firm’s transition into the market, but there are still inevitable challenges to be overcome.

Getting the market to accept a new, albeit internationally successful, firm was something for which Boufarhat was prepared. He believes that this natural nervousness can be overcome with the completion of projects. “If you’re new in the market there is always the question ‘will you disappear?’ I think that after we do the first job and the market sees we’ve been successful that will be less of an issue,” he reasons.

“Definitely there is difficulty for people to say ‘okay you came in yesterday from Australia, here’s a contract, sign here’,” he states. “You have to convince them that you’re here to stay, that you’re establishing and you’re serious about the market. And they will question you about how are you going to do it.”

After studying mechanical engineering at the American University of Beirut Boufarhat’s career saw him working in Lebanon and Saudi Arabia before moving to Australia to work in 1989.

He left his now adopted homeland of Australia for a spell in Papua New Guinea before returning to Sydney with AHW Consulting Engineers. It was through his work with AHW that he found himself returning to the Middle East in 2003.

The company merged with UK-firm Waterman Group in 2002, being renamed as Waterman AHW Consulting Engineers, with Boufarhat a partner and the md. “The intent of [the merger] was to expand in Asia and the Middle East,” he explains. In 2003 he oversaw the establishment of the Middle East operations of Waterman Emirates, before leaving in 2005 and subsequently joining Hastie.

Hastie had carried out a feasibility study on the Middle East market in 2004 and was seeking a suitable person to head a division in the region at around the same time as Boufarhat resigned from Waterman Emirates. “It just happened with coincidence,” he says, “I had been planning to set up my own business until Hastie approached me.”

Boufarhat and the firm knew each other well as in his consultant engineering role he had worked alongside the contractor on several large projects in Australia. This gave the firm a level of confidence that is vital when setting up in a new country.

In summer 2006, Hastie announced that it would be undertaking contracts under a joint venture partnership with Al-Futtaim Engineering. “I knew the people there, so when I came here with Hastie we started talking with them,” explains Boufarhat. “We have now done a lot of design work [under the joint venture] and we’re looking forward now to projects that we can do in construction work with them very soon,” he adds. Much of this work is concentrated on, but not limited to, the Dubai Festival City site.

The firm has worked under several joint venture arrangements on large projects in Australia and it is a system that Boufarhat believes works. “There’s always benefits to a joint venture. If the two companies have something to offer each other and the project then it gives them a better chance to win it and do it more efficiently,” he states. “With Al Futtaim it is a longer-term joint venture, it isn’t just for one project,” he adds.

Hastie is also seeking contracts outwith the joint venture arrangement. “When there is a common benefit we look first at whether we should do it as a joint venture,” explains Boufarhat. “If it is yes and both firms are agreed then we will [tender] as a joint venture. If the other is not very interested in the contract then one of the partners has the right to take it alone,” he adds.

The firm recently signed its first independent contract for a project on Dubai’s Sheikh Zayed Road in a deal worth around US $40 million (AED147 million). This includes the installation of air conditioning and associated electrical and hydraulic works on two 50-storey towers, one the Japanese Airline Hotel, the second a mixed-use office and residential development.

Site preparations have already begun on the project and Hastie is scheduled to complete the majority of its work in 2008. This is what the firm hopes will be the first of many projects in the region and it is in the final negotiations for at least one other project in Abu Dhabi.

“We are tendering other jobs, so yes we are going to try to grow the market here,” states Boufarhat. “We have started in Dubai and Abu Dhabi and we intend in the next financial year to target other areas [in the Middle East] like Oman and Qatar depending on the opportunities.”

The firm overall is undergoing a rapid expansion, with a turnover in 2006 of around $480 million, up from around $330 million in 2005. Of this total, 61% was attributable to air conditioning installations, with a further 14% from the maintenance of the systems.

Over the past year Hastie has also made several acquisitions, the most recent of which being the Heyday Group, the largest East Coast electrical business in Australia, which itself has an estimated $100 million turnover. “We are a listed company so we are looking always to grow,” explains Boufarhat.

The UAE operation is expected to make a significant contribution to the firm’s bottom line in 2008. Target figures will be announced to the Australian Stock Exchange in January and expectations are high: “We’re very positive about next year,” Boufarhat smiles.

Boufarhat’s previous experience in the region are easing the transition into the market and most of the management staff were also recruited on the basis that they were UAE or Saudi-based and have worked in the Middle East for several years. This experience was deemed essential due to the differences in the market and working practices between Australia and the UAE.

One of the significant areas of difference comes when dealing with suppliers Boufarhat reports: “[In Australia] you get a quotation then negotiate this to a certain level, which may be 5% different [from the original quote]; here you get a quotation from a supplier and you can negotiate it down by 30%. What’s the usefulness of this first quotation?” he asks.

“I don’t know why they do it,” he exclaims. “If you cost a project on quotation prices at tender stage then you might be well away from reality and it’s very hard for us to make a decision based on whether I can squeeze this price by 20 or 30% – it’s high-risk,” he warns.

“It’s a challenge, but that’s the way it works here,” he states. “All the suppliers in town know it and all the contractors in town know it, so why don’t we all get together and say ‘why don’t we get more serious here and get real figures instead of these fictional figures?’”

The firm’s preference is for design and build contracts, explains Boufarhat. He cites two main benefits to this type of contract: more accurate pricing and faster delivery times. “What normally the MEP contractor would do is have a few designers inhouse and subcontract the design if [the project] came to them, whereas it is integrated into our preparation and we have designers on site. With this method we can give the maximum guaranteed price at an earlier stage. That’s saving our client the risk of going over budget, where they won’t know about it until they go to tender,” he explains.

In a market where construction times are continually being pushed, the ability to reduce the tender process is to everyone’s advantage says Boufarhat: “The major advantage is that [traditionally] you know, contractually speaking, the contractor will wait for the consultant to produce a document and then will find the gaps in the document and put variations to the client. By putting the two together there is no scope for that. So the client or developer is at less risk; he knows exactly what he’s getting from day one, at what price, without variation,” he states.

Hastie’s Australian background means that it’s designers will naturally opt for more energy efficient systems when involved in a design and build contract reports Boufarhat, but market forces will depend on the choices made for other projects. “If we are not the designers and we have to compete we can present those other alternatives, it depends on the developers to take them,” he explains.

“In Australia there are much more energy ratings and we have to be very environmentally friendly – it’s now required by law,” states Boufarhat. “Here it is less stringent, although for example the Dubai Municipality’s requirement for facades is quite good, but there are a lot of other measures from an energy saving point of view that we can implement.”

Experience in other countries has demonstrated that an important factor in the move towards energy efficient buildings is a pressure for change from building users. “There isn’t yet enough emphasis from the end-users,” he comments. “There has to be two pushes: one from the users to compare the [energy rating of the] building they are occupying or buying; second from the Governments to put more rules in place to be more environmentally friendly.

“In Australia you get a tenant now who wants to rent the office and he will have a questionnaire asking what environmentally each system is doing and they put scorings and points on it,” explains Boufarhat. “Then they compare buildings… and the developers are aware of this. The users are saying ‘your building here would cost me so many W/m2 and this building needs to be 20% more efficient’ and [the developers] take that into consideration. They want their building to be rated at a higher score so they do invest in some measures,” he states.

One of the biggest problems that Boufarhat has found in Dubai is not directly related to the MEP sector, but is starting to have a profound effect on firms operating here: the availability and cost of office space and staff accommodation.

Hastie is currently spread across two office areas in Sheikh Zayed Road and a third office on site. With several hundred more staff due to arrive in Dubai in the first quarter of 2007, the firm is seeking a large office space to combine the resources in one location.

“I want to rent around 1000m2 somewhere in Dubai, but where do I find it?” exclaims Boufarhat. “When I did my business plan that got approved from the board in 2005, the rate was AED800/m2, but because I’d been involved with Dubai for two to three years before I added a safety margin and put 1000/m2,” explains Boufarhat. “By the time we took the first office it was 1400/m2 and now it is AED2400/m2 – in one year. What do you put in your business plan for the office space?”

Add to the issue the limited availability and rising costs of labour camp accommodation also and the increased pressure on contractors’ costs is hitting profit margins and raising tender bid prices. “A labour camp room now in Jebel Ali and Al Quoz is between 2,800-3,000 Dirhams. I looked to the border of Sharjah and Dubai and it’s nearly the same price,” states Boufarhat.

This is having a definite effect on the local construction market he reports. “Everybody’s costs are going up. I think that the expansion of Dubai came so quickly that the infrastructure has yet to follow,” he stresses.

Despite the challenges, Boufarhat is confident about Hastie’s future in the region and is keen to emphasise the long-term plans the firm has for the market. “Hastie Group is here for the long-term, that’s our intention and that’s been the strategic move,” he assures.

“We’re not here just to gain one or two projects then to disappear again. We would like to expand in the region as opportunities appear; that’s our longer-term strategy,” Boufarhat adds. “But the first step for me is to find 1000m2 to put my people in,” he laughs.
 

Michael Boufarhat: Up close and personal

MEP: Where are you from?

I’m originally from Lebanon, but now I’m an Australian, from Sydney. I currently live here in Dubai Marina.

MEP: What attracted you to Australia?

I love everything about Australia: the country, the weather, the people, it’s the best place in the world. It’s now my home.

MEP: Who’s in your family?

I have a wife and three sons. One is at school here in the Dubai American Academy. The other two are men now. One has a degree in telecommunications engineering and is doing a Masters degree in electrical engineering at the University of New South Wales, Australia. The second has just finished the third year of a mechanical engineering degree and has one year of his course to go.

MEP: How do you spend your free time?

Free time? I have heard that word before! I do love holidays. I used to make a break for holidays every three months in Australia; it was a good habit. I lost it when I came here and I plan to recover from that! My wife’s relatives live in Los Angeles, so we do go often to the United States of America and to Europe – I love travelling. There are so many places to visit and it’s especially a good advantage to being in Dubai. This is the only disadvantage of Australia – it takes seven hours to just reach the first country.

 

"It's very hard for us to make a [tender] decision on whether I can squeeze [an original quotation] price by 20 or 30% - it's high risk"

 

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