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Mixed fortunes

What are the prospects and what are the key issues for the Middle East construction market in 2009? NCE asks the region’s leading professionals, and surveys local civil engineers.

Engineers working in the Gulf give mixed opinions on what is in store for the region’s construction industry in 2009. But they are united on one point – it is going to be a tough year.

Almost all engineers contacted by NCE predict continued growth in markets and say that workloads in infrastructure remain strong. But many also predict, that Dubai’s commercial property market will continue to suffer with firms folding and clients withholding payments. "Word on the street is that some companies have already gone to the wall and unfinished buildings will stand as tombstones to this period for a long time. A recession on this scale is new to the region and many new players will be unable to sustain their position," says one Dubai based engineer.

However, it is not all bad news. "Recessions are a good thing in that they weed out the unsuccessful projects and leave the projects with least risk to carry on in what would otherwise be a glut market," he says. Halcrow regional managing director, Middle East David Yaw says that a correction in the Dubai market was to be expected. "The rate of construction and the exponential increase in projects was not sustainable – not only in terms of delivery, but also in terms of absorbtive capacity. How deep will it go? I don’t think anyone knows," he says.

Consultants do not expect the same level of downturn in other markets and predict steady growth in locations like Abu Dhabi, Qatar and Saudi Arabia, will absorb some of the staff now coming onto the Dubai market. "All other markets are holding up strongly," says WSP global development director Tom Smith. "This situation gives us the chance to redeploy staff to where we were not growing as quickly as I would like. We have moved 12 senior directors to Abu Dhabi and Doha."

What has surprised companies most is the speed of the Dubai downturn. Some say this is a good thing as a swift adjustment means that the market can quickly correct and then continue to grow at a more sustainable rate. Gross domestic product in the United Arab Emirates is expected to continue to grow at around 4% in 2009. This rate is lower than in 2007 and 2008 when growth peaked at around 11%, but is still better than most of Europe and the United States.

In the short term there will be casualties, especially in the contracting sector, says Interserve managing director for international business Keith Ridgway. "I think the short term impact will be extremely dramatic in Dubai. Over recent years there has been a substantial increase in construction capacity with growth by established contractors and entry into the market by many new contractors. The predicted scale of the reduction in the volume of work available will lead to substantial price cutting." Ridgway says that this coupled with an inevitable slowdown in payments, will ultimately lead to bankruptcies. "I would also expect a number of developers in Dubai to be unable to meet their commitments to contractors."

Consultants agree that cash management will be a key issue in the year ahead. "Margins will be under pressure and every client will be under pressure to trim costs," says Yaw. One of the issues he says is the fast pace at which client organisations have been changing internally. "There is real metamorphosis and churn within clients. Over the last quarter our working capital has been eroded slightly. We have a commercial director here who focuses on getting this debt cleared. Will we be 100% successful? Probably not, but we are in better shape and we will redouble our efforts in 2009."

One advantage of a cooling market is that salary inflation will level off. But on the downside this could mean too many staff and too little work. "The key challenge is adjusting to the new level of activity without reducing staff or making loss," says one local engineer questioned by NCE. "We will be more selective on recruitment," says Scott Wilson regional director Eddie Foster. "In the last few years there was a desperate shortage and now that has turned around. I hope we don’t have to lose anyone."

Most firms expect staffing levels in 2009 to remain the same, although some, such as WSP and Aecom, say they will continue recruiting. "At the moment we are not forecasting significant staff level changes either way," says Hyder regional director Kevin Jones. "We have 1,700 staff now, from 800 three to four years ago. We are predicting pushing out £10M to £15M in fees to other parts of the world." What will be more difficult, says Yaw, is ensuring that company values are not eroded. "It will be harder for all of us to maintain our values but it is even more important that we do. Staff in the region will be experiencing uncertainty and we must show leadership. A classic example is when times are tough, firms slash training, development and marketing budgets. Well – we can’t do that."

Looking ahead, firms are seeking to grow in other, less saturated, markets. "We have six projects in Saudi Arabia that we carry out from Dubai," says Smith. "We need to look at strategic alliances to gain more work and become more indigenous," he says. For some firms, Smith says, this means a change in philosophy. "Many consultants will need to arabise their businesses. Dubai is international but doing business in Doha, Oman or Jordan is different and requires different skills sets. The first way to do this is to educate our staff."

North Africa is another major focus with a renewed interest in Libya, as the country adjusts to its new-found international freedoms and its oil-backed spending power. Consultant Aecom is currently project managing an enormous £33bn housing and infrastructure investment programme. "The most important client is the office for development of administration centres," says Pell Frischmann director Peter Miller. "Education is Libya’s main focus right now and demonstrates the country’s determination to take a long term view. This is pretty much what Saudi Arabia did." mproved relationships between Libya, Syria and the West make both countries potential growth markets and Yaw says politics and security will be key drivers in 2009. "We have 100 people in Syria at the moment and it is comforting to see [foreign secretary David] Miliband visiting. There are signs of thawing relations."

Most firms are well aware of the potential that Iran and Iraq offer in terms of their infrastructure needs, but serious changes must happen before companies can begin seeking more work there. "The contracts we have in Iran were won before sanctions were in place and we don’t walk away from them despite the day to day difficulties. We plan to hang in there and hope Iran’s relationship with the West improves," says Yaw.

Overall the message is clear. Dubai might be suffering but that is not necessarily a bad thing as inflation and unsustainable price rises had created an unstable market. The rest of the Middle East is experiencing strong economic growth and has made infrastructure as a spending priority. "There had been a definite rise in interest from companies and individuals wanting to come and work in the Middle East," says Yaw. "But I looked outside this morning, and the streets were not paved with gold."

2009: A tough year?

KEITH RIDGWAY
INTERSERVE
INTERNATIONAL MD

Key challenge: "Cash management. We must successfully deliver the projects we have, manage cash, be careful who we work for, tighten our belts and sail through the storm."

KEVIN JONES
HYDER
REGIONAL DIRECTOR MIDDLE EAST

Key challenge: "Keeping an eye on the market and responding quickly, which means having a structure that allows the business to be nimble."

TOM SMITH
WSP
GLOBAL DEVELOPMENT DIRECTOR

Key challenge: "To date clients and consultants have managed their businesses during very good times. The challenge for 2009 is to manage businesses in a different way, in a tougher, more discerning market, with increased competition"

DAVID YAW
HALCROW
REGIONAL MD, MIDDLE EAST

Key challenge: "Maintaining the company’s position as a values based organisation going into a more difficult market environment"

EDDIE FOSTER
SCOTT WILSON
REGIONAL DIRECTOR, MIDDLE EAST
Key challenge: "Refocusing the business to concentrate on markets with stronger growth."

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