The GCC is undergoing another wave of big construction, with the hope that this one is more sustainable than the last. Finbarr Bermingham reports.
Basic physics tells us that particles move faster when they’re heated. It’s a theory that’s worth bearing in mind when considering the speed with which buildings make their way skyward in the white-hot GCC region. For even now, when many involved in the construction sector say things have slowed down, structures still seem to be flying up with remarkable velocity.
The Dubai crash of 2009 reverberated around the region and the Emirate has spent the intervening years trying to mend its reputation on the financial markets. In January, the property developer Nakheel, which, as part of Dubai World, was responsible for some of Dubai’s most extravagant projects, agreed early repayment of half its bank debt (around US$1.1bn), indicative of a wider move among Dubai companies there to pay down the overall US$140bn debt. Seemingly in recognition of these efforts, the Abu Dhabi government refinanced US$20bn of Dubai’s outstanding bailout repayment at a quarter of the original cost.
The feeling is that while the construction projects across the region continue to startle in terms of their scale, cost and ambition, they’re being handled on a slightly more sensible basis. Part of this is due to the relative absence of international finance – many are being financed centrally and, arguably, more securely. And where Dubai’s mantra was ‘if we build it, they’ll come’, the theme in places like Abu Dhabi and Doha seems more concerned with what will happen after ‘they’re’ gone.
“When I first got to the region in 2007,” says Andrew Jeffrey, director of infrastructure and capital markets at Deloitte Middle East, “Dubai was providing tower blocks, but the road and power infrastructure wasn’t able to catch-up. Qatar has the same thing – there are substantial malls that run off generators. That’s a cocktail for disaster! Now though, both in Doha and in Abu Dhabi, they’ve spent a lot of money on the road and power networks. They have lots of roads feeding lots of parts of the city. There’s still desert between the roads, but as a developer at least you know that you can reach the site, you have power and water.”
Doha is often likened to the Dubai of 10 years ago, with US$285bn worth of projects in the pipeline and a host of international events on the horizon. Some of the plans afoot – the US$3.8bn seaport, the US$2.3bn bridge linking Qatar with Bahrain, the US$35bn new city of Urguan – are impressive, but seem to have more grounding in reality than some of the headline-grabbers emanating from Dubai a few years ago. The scandals over what is essentially slavery in Qatar’s construction sector have seen it burnt by the glaring eyes of the world. Those practices need to be halted immediately, and new, acceptable standards for all workers installed. But those within the sector suggest that it is much more mature than Dubai was at this stage of its development.
“The pace of development is extreme,” Rod Stewart, managing director of the Qatar operations of design, engineering and project management giant Atkins tells GTR. “But there’s been a growing-up period in the region which is notable. Ten years ago it was an immature, confrontational place to do construction work. The past decade has seen a move towards more efficient and collegial practices.”
The view is that Dubai up to 2009 was built off the back of international interests, namely European, American and Japanese. French and Spanish banks, for example, followed their contracting compatriots into the region, incurring huge liabilities on real estate and infrastructure projects that were sometimes ill-conceived. Construction workers in Dubai 10 years ago were likely subjected to similarly awful conditions to those now building in Qatar, and conditions here are much improved.
But the faces behind the development have now changed. There is more Asian interest in the region. There’s a huge Korean and Chinese presence in the construction sector. Dubai remains “a bit more live and die hard”, says Jeffrey, but the region in general is seen to be less ‘flash in the pan’ as in years gone by.
“It’s important to understand the big macro-political environment in the Middle East. This is the UAE, the safest place to do business, to keep money and because of the ports, it’s an ideal crossroads between east and west. You’ve got a growing middle class in India, two hours away, which views this as a place of opportunity and which they have easy access to. It does very well through the transfer of money from the likes of Egypt and Cyprus, which had previously been safe havens to store wealth but which now aren’t. There’s a huge increase in Korean contractors, all the Chinese banks are here. It’s recognised as a place where they will build cautiously. It’s the best option in a 7,000km radius and I think it’s certainly sustainable.
Banking the build
Last year’s Sadara and Jeddah South power plant megaprojects in Saudi Arabia were led by a host of western lenders, backed by ECAs. But they are viewed as the exceptions that prove the rule. Such banks are happy to finance projects in the energy and petrochemicals sector, simply because they are so secure. But they’re less visible on other sorts of constructions, and the finger-burning exercise of four years ago is only part of the explanation.
“Western banks have had their issues here, but elsewhere too,” says Debbie Barbour, a projects partner in DLA Piper’s Abu Dhabi office. “The French banks used to be very active here but they’re not so much anymore. Even the UK banks… RBS used to be a huge project finance lender, they dominated 10 years ago, but they sold their projects book to BTMU [in 2010 for £3.9bn] and pulled out of the projects space. They can’t do them, anymore. It’s our experience that the credit committees of international banks require a lot more detail than they did previously. In the past people were happy to lend to Nakheel on the basis that it was a quasi-sovereign entity – and then it was discovered that it wasn’t. There’s a lot more diligence around that kind of thing now.”
Western banks are now said to be seeking shorter-term, pure trade finance deals, instead of long-term and volatile project financing. The likes of RBS, Barclays and HSBC are still huge regionally, and Barbour says that banks such as these have an easier time justifying trade finance facilities to their credit committees.
It’s opened the door to cash-rich local banks, most of which are government-backed, perhaps most notably in Qatar. In June 2012, Qinvest acted as financial advisor and bookrunner on the QAR3.7bn (almost US$1bn) Doha Festival City project. Barwa Bank and Commercial Bank of Qatar joined as mandated lead arrangers, with Ahli Bank, Doha Bank, International Bank of Qatar, Al Khalij Commercial Bank, Qatar International Islamic Bank and Qatar National Bank all joining as arrangers.
In October 2013, Mashreq Bank, Barwa Bank, the Qatar Islamic Bank and Union National Bank combined to finance the construction of the Red Line North of Doha Metro. Unlike Doha Festival City, though, the borrower here was not the sponsor, but the contractor. It was the internal costs that required the funding, as opposed to the project itself – contractors on projects of this size often require additional capital. It’s Stewart’s view that this might become a regular model for financiers hoping to get involved on a debt basis.
Other common ways in which banks are involved in the construction sector are import financing and receivables financing. “The biggest form of bank facilities we’re seeing is in the letter of credit (LC) space,” says Barbour. “On construction projects you’re required to post performance bonds, so you’ll see a lot of LC facilities going through banks, where the borrowers will be on a soft rate for the issuance of the bond and have a counter-indemnity, providing cash collateral on the back of that. For suppliers, you’ll see a lot more general trade finance: shipping, documentary credits, import financing, because not a lot of the building materials are manufactured in these countries.”
Unsurprisingly, export credit maintains a strong presence in the market. Kexim and Cexim, the Korean and Chinese ECAs, respectively, have followed their contractors to the GCC, with Kexim being most dominant. Perhaps its most high-profile transaction to date has been the US$10bn loan to Abu Dhabi’s nuclear project in 2010, which followed huge contracts awarded to Korea Electric Power Corporation (Kepco).
There is a suspicion, though, that as the decade grows older, a return to international commercial markets in earnest might be on the cards. The Dubai Expo 2020 and the 2022 football World Cup in Qatar will bring billions of dollars’ worth of construction projects online, the financial capacity for which might not exist locally.
“If you add all the local banks together and work out what it will all cost, at some stage external finance will have to come back in again. There’s just not enough here,” says Jeffrey. “For the Expo, Dubai is spending Dh5bn (around US$1.4bn) just developing the site. As well as that, there are golf courses, residential buildings, retail complexes, logistics parks. Qatar has the same, times three or four, for the World Cup. Liquidity is good at the moment, but there’ll be a time when the real cost starts. Employing consultants is a cheap game, there’s not a lot of cash in that. Once you get major contractors working at breakneck speeds, that’s when the money is an issue.”