New strategies to survive the construction slowdown

Published April 6th, 2010 - 08:58 GMT

The financing of major multi-billion dollar infrastructure projects such as roads, railways, electricity, water and universities in the Middle East is likely to be driven in future by increased use of public-private partnerships, according to industry observers.

“The fact is that international investors are finding it tough to secure traditional infrastructure project funding in today’s new world economic climate,” says Graham Wood, Group Director of CityBuild Abu Dhabi, a new trade show for the region’s building and construction industry from 18-21 April 2010 at the Abu Dhabi National Exhibition Centre.

Since 1995, project finance deals have been completed around the world totaling more than $1.5 trillion but global activity dropped by 40% in 2009 as funding costs made long-term finance scarce and expensive.

“The construction boom may have slowed down within the Arabian Gulf, now with a more considered approach to development, but there are still about $114  billion worth of construction and infrastructure projects due to be awarded over the next 12 months,” Wood added. “In addition, the market is being driven by projects in Abu Dhabi. Presently the UAE capital accounts for more than half of the top ten infrastructure projects by value, in the Gulf.”

CityBuild Abu Dhabi will bring together industry suppliers, manufacturers, distributors, architects, engineers, importers and procurement decision makers and is being staged alongside Cityscape Abu Dhabi, the international real estate investment and development event. As part of the Construction Summit at CityBuild Abu Dhabi speakers will address the challenge of developing strategies for surviving the construction downturn, as well as maximising competitiveness and utilising alternative funding models.

“Abu Dhabi is already leading the way in private financing to pay for infrastructure,” said Wood. “It is using public-private partnership (PPP) funding methods with the new campus at Al-Ain University and the new Paris-Sorbonne and Zayed Universities in the capital.”

PPP funding works on the basis of the government agreeing to payments over the life of a contract or 20 or 30 years with the contracting consortium investing initial capital expenditure – though in this case the Abu Dhabi government has taken an equity stake in the special project vehicle set up by the consortium.

“The PPP approach is also being used on a highway through Abu Dhabi to the UAE’s border with Saudi Arabia and other Gulf countries such as Qatar and Bahrain are looking at the using the system,” he added.

“In addition, a whole range of new trends are emerging in the region’s construction sectors as businesses assess the impact reduced client finances are having on budgets, tenders and supplier criteria. Margins are under pressure with contractors and consultants being squeezed to achieve better value and there is tighter due diligence than before as organisations attempt to reduce risk.”

Industry advisers are also urging a back to basics risk management approach when it comes to project financing. “The inherent risks faced by construction firms in the Gulf region over the past three to four years demonstrate how important a risk management plan is to a contractor,” said Cynthia Corby, Audit Partner, Construction Industry Leader, for Deloitte in the United Arab Emirates, in a recent report.

“In the current economic environment, it is important to get back to the basics of risk management by focusing on understanding the project owner’s requirements and resources, cost management tracking systems and cash flow management and thereby focusing on the fine balance between risk and reward.”

The founding sponsor of CityBuild Abu Dhabi is Kludi RAK. The Summit’s sponsors include; BASF’s Construction Chemicals and KNAUF Drywall Systems division. The event is also supported by the Chartered Institute of Business (CIOB), Building Smart Middle East, Donate a Brick, Emirates Environmental Group, the Middle East Drymix Mortar Association and the UAE Contractors’ Association.

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