CSCEC ME's Yu Tao on variations, payment delays, and Saudi Arabia
EXCLUSIVE: Chinese giant's CEO talks to CW about prevailing market challenges, opportunities in Middle East construction
China State Construction Engineering Corporation Middle East (CSCEC ME), led by 2019 Construction Week Power 100’s second highest-ranked leader, Yu Tao, needs no introduction in the Middle East. Over the years, the construction company has cemented its position as one of the UAE’s – and the Middle East’s – strongest international contractors. CSCEC ME posted revenues of $900m (AED) in the 2018 fiscal year and as of June 2019, employed more than 2,200 full-time and unskilled workers in the region, as Tao – president and chief executive officer – revealed on the eve of his inclusion in the 2019 Construction Week Power 100. However, CSCEC ME’s success to date has not slowed down the CEO’s ambitions for greater growth in the region.
Tao tells Construction Week that the last three years have been a period of growth for CSCEC ME in the building and infrastructure sectors, and the contractor has steadily increased its resources by 30% to meet growing market demand.
Any change for us is a big challenge, as we have to co-ordinate with our consultants, produce new drawings, and discuss these with our subcontractors and suppliers to ensure they adapt to the revised schedule. It is a huge exercise and it doesn’t produce much additional value.
“We have around 40 projects running concurrently, which is a big number, and requires a lot of effort to deliver and to ensure safety, quality, and standards. The challenging part is timeframes.”
In the ideal scenario, tight timelines would be a construction contractor’s only challenge, but Tao tells Construction Week that of the multitude of hurdles faced on the way to scheduled delivery, “the first killer is variations, [or instances] when a certain change has been introduced for some reason beyond our control”.
He explains: “We are always asking to stick to the original programme and to [avoid time extensions].
“Any change for us is a big challenge, as we have to co-ordinate with our consultants, produce new drawings, and discuss these with our subcontractors and suppliers to ensure they adapt to the revised schedule. It is a huge exercise and it doesn’t produce much additional value.
“As a contractor, we hope the client or consultant won’t change anything and stick to the original plan. Unfortunately, that won’t always happen – it is an ideal situation, but it won’t happen very often.”
Compounding the problem in the event of variations, according to Tao, is the relative dearth of high-quality supply chain stakeholders in the Middle East. Tao says that while many regional subcontractors boast solid credentials and track records, a comparison of the Middle East market with “Hong Kong, Singapore, and the UK [shows] the choice is very limited” in the region. Managing subcontractor output and expectations simultaneously on multiple projects is no easy feat, Tao reminds, particularly as market competition increases in key Middle Eastern construction geographies, such as the UAE.
“Competition has increased a little bit more and generally, my feeling is that in the building sector, the amount of work awarded has reduced,” Tao explains.
“However, in the infrastructure sector, the UAE Government is trying to launch more projects like Etihad Rail. We have quite a high number of projects in the building sector, which in the last year made up around 70% of our signed contracts, with the remaining coming from the infrastructure sector.
“This year, the Etihad Rail package has made us quite excited. We have spent a long time preparing for the project, and now we can start construction. I think it’s a new chapter and we are very excited.”
A joint venture of CSCEC ME and South Korea’s SK Engineering and Construction was awarded a contract for Package A of Etihad Rail in March 2019. CSCEC ME and SKEC will jointly work on the 139km Package A of Etihad Rail’s 605km Stage 2, which will connect Ruwais with Ghuweifat on the UAE border, with Saudi Arabia. Their scope of work includes design and build, and civil and track works for Package A, which is valued at $408.4m (AED1.5bn).
Etihad Rail is among CSCEC ME’s most high-profile projects at present, but the contractor is no stranger to large-scale infrastructure schemes. Over the years, CSCEC ME has delivered various projects for Dubai’s Roads and Transport Authority (RTA), including the Dubai Water Canal, Wafi Bridge Renovation, and Al Wasl Road Improvement projects. According to construction listings platform ProTenders, CSCEC ME was also engaged as mechanical, electrical, and plumbing (MEP) contractor by Dubai Airports for Concourse D of Dubai International Airport (DXB).
Saudi Arabia is probably the biggest construction market in the Middle East – we have been closely monitoring the country and we believe the market has become more mature, and we have seen some more movement.
CSCEC ME’s list of ongoing projects features equally impressive developments, such as packages for RTA’s Intelligent Traffic Systems 2020 and Al Shindagha Corridor, as well as Damac Properties’ Aykon City in Dubai, and Sheikh Khalifa Road’s extension in Sharjah for the UAE’s Ministry of Infrastructure Development.
Outside the UAE, CSCEC ME is working on infrastructure packages for Sabah Al Salem University and for the extension of 6.5 Ring Road in Kuwait, the latter of which is being implemented with the country’s Ministry of Public Works as client. Additionally, as Tao tells Construction Week, Saudi Arabia is also a geography that CSCEC ME plans to enter if market conditions permit.
“Saudi Arabia is probably the biggest construction market in the Middle East – we have been closely monitoring the country and we believe the market has become more mature, and we have seen some more movement,” he explains.
“We are participating in some of the tenders and in negotiations with some clients and hopefully we will have some breakthrough. Then maybe, we can start with one project to test the waters.”
Tao tells Construction Week that CSCEC ME has been “approached by a number of government authorities” for masterplanned projects that include infrastructure and building works. The company already has an office in Saudi Arabia, and is on the lookout for local partners with a keen understanding and experience of dealing with government entities. Tao says these partners must be “reliable contractors that have a good track record, who can deliver a project on time with good quality and safety performances”. After all, Saudi Arabia’s construction market, despite its size, can still prove to be challenging for companies debuting in the kingdom.
“I think the biggest challenge [in Saudi Arabia] is price – if the project budget is way too low, it’s just impossible for us to handle,” Tao says.
Citing resources and government approvals as equally important challenges to consider, Tao adds: “If the government authority can make the approval procedures easier to facilitate our construction and reduce programme duration, it could be very helpful.”
If there are more orders and projects than contracting capacity, then it is likely that the price of contractors’ services will increase. I think that is a good sign, because years ago, from my personal experience, the prices in the Saudi market were way too low.
Price considerations are, however, Tao’s greatest concern around entering Saudi Arabia – as he pointed out in conversation with Construction Week in September 2018, corporate survival requires that there is “a reasonable construction cost” associated with working in the kingdom. It appears that there has been some change around working in Saudi Arabia since that conversation, but Tao firmly believes a stronger business case is required to justify CSCEC ME’s full-time presence in the kingdom.
“Since the past few years, I think there are fewer contractors that are working in the Saudi market – the major contractors were somehow affected, which has left some room for other contractors [to penetrate the market],” he explains.
“Pricing is probably improving and has become a bit more reasonable. It’s a balance between demand and supply – if there are more orders and projects than contracting capacity, then it is likely that the price of contractors’ services will increase. I think that is a good sign, because years ago, from my personal experience, the prices in the Saudi market were way too low.
“It was not realistic for us to do something there. We need a reasonable budget to make it possible – not because we are greedy, it’s just a matter of fact.”
Accurate contract pricing is important for the same reason that instances of delayed payments must be reduced – after all, the contracting supply chain cannot afford to operate for prolonged periods unless companies receive their dues on time. Tao says there hasn’t been much improvement regionally in terms of delayed payments, but is optimistic that government intervention will ease the situation going ahead.
“Our focus is in construction, and one cannot continue a project if they are not getting the money back,” he says.
“It’s not because I need it or CSCEC ME needs it, but it’s for the supply chain. There are hundreds of subcontractor and suppliers under us, and they are much smaller in size, which means they have smaller financial capabilities to cope with these kind of delays. It is our responsibility to get our money back and to fulfil our contractor obligations to our suppliers.
“Some of the regional government developers are very cautious about this – they have been trying very hard to cope with contract conditions in order to pay us on-time. Some other developers have been doing something similar, which we appreciate, because we certainly don’t want delayed payments to become a trend or a common practice in the market.”
The CSCEC ME leader’s hopes are clearly aligned with government priorities for the regional contracting market. Additionally, Tao says that client expectations in terms of contracting capability and engineering excellence are on the up in the Middle East, all of which points to positive sings for the market – but he’s not complaining.
“The standard will become higher and higher,” he says.
“This is the only way that the industry should continue.”