The first quarter of 2018 has seen an upward trend when it comes to the construction industry in the GCC. Key investments are being made into the diversification of the oil economy across the region, primarily witnessed through the keen development of transport and social infrastructure projects that support the various GCC states’ visions. At the same time, the industry is also experiencing a number of challenges this 2018, and addressing these challenges will further open the doors of opportunity to industry players.
What is clear is that growth is almost inevitable for the GCC’s construction economies. Looking back over the last year, GCC countries have witnessed a positive trend in the sector despite the challenging economic climate. Transactions in Dubai’s real estate sector, for example, recorded a 6% increase in value in 2017. The outlook remains favorable across other GCC states, including Saudi Arabia with projects such as The Red Sea Project, The Qiddiya Entertainment Project and the NEOM Project, planned by the Public Investment Fund, well underway.
A report by Deloitte states that the GCC region’s construction sector boasts a robust pipeline of projects primarily driven by social needs, infrastructure investments, economic transformation plans and tourism related goals. Kuwait’s Public Authority for Housing Welfare (PAHW) is addressing social needs by establishing residential cities outside the urban area that aim to create new homes for some 2.6 million people. The UAE is addressing infrastructure requirements through the development of the Abu Dhabi Metro and Etihad Rail projects, and Saudi Arabia continues to develop its infrastructure to further accommodate tourists and pilgrims through the Rou’a AlMadinah and Rou’a AlHaram projects.
While the sector has seen improvement over the last two years, concerns continue to rise among industry players, and we have identified the following challenges which should be addressed in order to improve the sector:
Establishing a Public Private Partnership Model
GCC governments have begun the implementation of Public Private Partnership (PPP) models to help absorb the costs of government projects. The region should create dependable assessment criteria to evaluate the positive contribution of PPPs to the return on investment on all infrastructure and capital project investments. A shining example of PPPs working is Dubai’s EXPO 2020 project, which is well underway in the Emirates.
Mitigating the Risks Posed by Third Party Contractors
According to a Deloitte survey, “94.3 percent of respondents have only low to moderate levels of confidence in the tools and technology used to manage third party risk and 88.6% have a similar level of confidence in the quality of the underlying risk management processes, despite significantly higher levels of confidence in organizational commitment and governance frameworks – creating the execution gap.” GCC players can mitigate these risks through the implementation of internal audit functions that perform reviews to detect performance and payment issues. In addition to this, contracts should be reviewed to ensure the inclusion of a more robust set of terms and conditions. DAMAC Properties for example uses ProTenders’ eTendering solution to mitigate sub-contractor and supplier risks and gain more control over the construction process.
The Implementation of VAT
While Value Added Tax (VAT) has been implemented in the region, the construction industry still needs to gain a better understanding of the process, and the implementation of VAT in long-term projects. One of the biggest areas of concern is planning for cashflow impacts with a major setback being the implementation of VAT for long term projects which may influence construction at the cost or revenue end of the spectrum. However, these challenges are also veiled opportunities for the industry to further explore avenues of financial innovation in the sector.
Banking and Delayed Payments
A recent survey by Pinsent Maisons explored the challenges of payment periods extending out in the region, becoming a concern for those in the supply chain. Of those surveyed, the majority sentiment was that payment periods were longer in 2017 when compared to the same period in 2016. These concerns are indicative of the hardening economic environment resulting from the ongoing low oil prices and geopolitical tensions in the region. Moreover, Central Bank data in the UAE and Saudi Arabia suggests that the investment appetite in the GCC is cautious and less aggressive than before. Having said that, the overall bank market in both countries is capable of deploying much of this liquidity back into the market.
Delays continue to be a major concern for the construction industry - this includes delays in certifications, delays in approvals and significant changes to design. These continue to occur in the construction phase of projects often halting projects or portions of projects for significant periods. To address the decreased efficiency, the sector should make use of the available technologies, which leave little room for compromises in quality and time delays. The implementation and adherence to such systems will positively impact productivity.
The industrialization of construction and the application of proven manufacturing technology and best practices will help companies drive reliable outcomes and improve margins. The industry must look to these challenges and derive opportunities thereof to ensure positive growth for the remainder of 2018 and into the future.
ProTenders offers a robust customizable eTendering solution that enables developers and contractors to mitigate risk and significantly increase transparency and efficiency within their tendering functions. This is one way that developers such as ADCE and DAMAC Properties have minimized delays through increased collaboration, reduced tender cycle times and quicker decision-making.