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Deloitte GCC Powers of Construction 2014Are you ready for therecovery?

2 | Deloitte GCC powers of construction 2012 | Five lessons to learn from

Deloitte GCC Powers of Construction 2014 | Are you ready for the recovery? | 3

ContentsForeword

4

Interviews (Roots Group, Arabtec, Msheireb Properties, Qatar Rail)

Combatting fraud in theconstruction sector

34SMARTer constructionHow the GCC’s mega-projects needto learn post-2008

40

Is your schedule right?

50

Project controlsThe heart of the successful deliveryof any capital project

60

How do you keep track of theassets you built once operational?A question of value

68

Infrastructure and socialinfrastructure spend and thechallenges around these projects

30

Plan, plan and plan againAre you a market leader or follower?

46

What does good look like ineffective project delivery?

56

Capital offenceThe need for discipline in Middle

Eastern energy and resources projects

64

4 | Deloitte GCC Powers of Construction 2014 | Are you ready for the recovery?

If we consider the fundamentals of the constructionindustry, it is certainly easy to conclude that there is a lot of positive sentiment and more recently positivedevelopments in awarding some mega and socialinfrastructure projects across key markets. Governments’spending is creating a positive comeback forconstruction, but as we all know this is dependent on oil revenues which need to be maintained above a break-even margin to allow the spending to continue.The mass social infrastructure spends are a main priorityfor most governments as a measure to curb anypotential negative government sentiment and instabilitywhich could have occurred as a knock-on effect of thesurrounding turmoil the wider region has encounteredover the past couple of years.

While oil prices provide healthy margins, strongpopulation growth continues, and many major eventsdraw nearer and long-term plans for developmentstrategies to take shape, we will see the constructionindustry confident of growth for the foreseeable future.The GCC construction industry is now valued at overUS$1.3T, with US$935B in execution including long-termmegaprojects, US$81B out to tender, US$211B in designphases and US$136B under study according to MEED.These are levels which are getting close to the pre-globalrecession years. The construction industry thereforeseems to be out of the recession and into recoverymode. The big question is: “Are you ready for theconstruction recovery?”

Looking backOver the last year the optimism within the GCCconstruction market has risen considerably and rightly so.The GCC saw US$70B worth of construction projectscompleted in 2013 with this number predicted to rise toUS$83.5B in the current year according to Ventures ME.Residential developments accounted for just over 43% oftotal completed projects, which is expected due to theregion’s rapid population growth and thus thegovernments’ increased social infrastructure spends. TheUAE and the KSA ranked in the top two positions for allsectors apart from education and healthcare whereQatar held the top spot in both.

During 2013, Dubai saw over 500 building projectslaunched, which is a massive number for one city alone.This number also does not take into account Expo 2020which was only announced in late November 2013.Since the celebrations of Dubai winning Expo 2020, wehave seen renewed confidence in the already improvingconstruction industry. In a market that relies uponconfidence and optimism, this is the much neededstimulus to create momentum for a renewed“development and economic cycle.” The largest everExpo site is set to be built in the Jebel Ali (DWC) area at a total cost of between US$2B to US$4B. The secondaryinfrastructure spend will be upwards of US$8B, and willinclude construction opportunities in the transport,hospitality, retail and commercial sectors.

Dubai’s Roads and Transport Authority (RTA) hasannounced that it will fast-track a US$1.36B expansionof the Dubai Metro’s Red Line to connect to the DubaiWorld Central. Emaar Properties announced that it hassigned a memorandum of understanding with DubaiWorld Central to develop a massive (13.63 million sqm)golf centered residential estate adjacent to the areasurrounding the Expo 2020 site. These are the first ofmany announcements regarding large-scale projectsbeing planned in the wake of the Expo win. Tourism andHospitality have been the key focus for the legacy afterExpo, as we see Emirates Airlines grow from strength tostrength and more GCC residents continue to invest inthe UAE as a safe haven.

With all this extra infrastructure spend, jobs will begenerated with some estimates claiming 30% of thepotential 300,000 jobs created by Expo 2020 is expectedto be in the construction sector alone. The governmenthas also announced that all new and existingconstruction projects are going to be fast-tracked to beready for 2020. The demand for skills and resources willof course increase and we would hope that a well-planned and phased development strategy will preventthe price for these resources and for talent frombecoming disproportionately expensive.

Meanwhile in Saudi Arabia 2013, yielded the largest evervalue of construction contracts awarded during a

ForewordReview and outlook

Cynthia CorbyPartnerConstruction Industry LeaderDeloitte Middle East


calendar year. This was largely due to the US$22.5Bawarded in three separate contracts on the Riyadh MetroProject. Because of this, transportation accounted for thelargest proportion of contracts awarded in terms of valuewith power coming in a distant second. This clearlyshows that the Saudi government still considers capitalexpenditure to be a major priority.

Looking forwardLooking to 2014 and further ahead it seems likegovernment-led initiatives will continue to drive growthin the GCC construction sector as regional governmentscontinue to focus on social infrastructure projects. Therail industry alone in the GCC could create 50,000 jobswith most nations creating or upgrading their railnetworks. These consist of the multi-nationinterconnected railway network along with metro andtram projects of which there are many, including theRiyadh Metro project, Etihad Rail, Qatar Rail and theupgrades to the Dubai metro.

According to a survey performed by Pinsent Masons,90% of companies perceived greater optimism in themarket in 2013, with 77% reporting a healthier orderbook for the next 12 months relative to the previous yearand 40% expecting their order books to increase by over10%. This emphasizes the optimism currently in themarket, but with mass optimism there needs to becaution, as we have all learnt from the past.

UAEThe UAE is seeing renewed development, with the pick-up in the Dubai real estate and tourism markets set to bereinforced by Dubai winning the right to host Expo 2020.Figures from the Department of Economic Developmentreveal the GDP of Dubai will grow 4.7% in 2014, withthe main drivers of the economy being tourism, trade,transportation and real estate. The UAE market is ontrack to reach the levels of investment last seen beforethe recession; it is also good to see that there areUS$12B of previously stalled projects within the countrywhich have now resumed construction. Looking forwardto Expo 2020 and the anticipated spend mentionedpreviously, the government has now installed a charge

which will be applicable to guests staying in all types ofholiday accommodation. The revenue received from this“tourism levy” will be used by the government to financeits significant capital expenditure.

Abu Dhabi is set to be transformed by US$100B worth of construction projects, which include housing,education, transport and other developments. As statedby Fahad Al Raqbani, director general of Abu DhabiCouncil for Economic Development, “These projects willemphasize the economic competitiveness of the Emirate,empower the role of the private sector and sustain thelocal economy’s growth in a manner that will lead toaccomplishing the objectives of the economic vision2030.”

The UAE is seeing reneweddevelopment, with the pick-up in theDubai real estate and tourism marketsset to be reinforced by Dubai winningthe right to host Expo 2020

UAE: Value (US$ Million) of contract awards by sector (all projects 2013)

1581,022

3,358

1,099

9,148

935

1,789

26,071

Construction

Gas

Industrial

Oil

Power

Transport

Water

Chemical

Source: MEED Projects


According to Jones Lang LaSalle, around 22,000 newhomes were completed in Abu Dhabi in the last threemonths of 2013 with another 22,000 expected to behanded over this year. In the transport sector, US$2.9Bwill be invested in developing a 131km metro system inAbu Dhabi to accelerate the flow of traffic and keeppace with the growing population. The other big railproject is Etihad Rail, the US$10.8B scheme that will linkDubai, Abu Dhabi and the northern emirates, and theports of Khalifa and Jebel Ali. Etihad Rail will eventuallylink up with the planned 2,177km-long GCC railway.There will also be 246km of new major roads, includinga 62km highway connecting Dubai and Abu Dhabi,scheduled for completion in 2017.

There are, however, a few potential challenges for theconstruction industry within the UAE. These include the impact of the increased competition within themarketplace from international contractors trying to gettheir piece of the construction pie, and this could have anegative effect on the local contractor’s bottom line as itdoesn’t look like the pie is growing at the same rate asthe influx of added competition. Another risk is the lackof available skilled labor as Qatar, KSA and UAE competefor these resources – all potentially impacting profitabilityand potentially also quality due to the lack of resources.

KSAAccording to MEED Projects, KSA still leads the way inthe region with over US$1T of projects either planned orunderway. The residential sector accounts for just under30% of that market spend, while healthcare comes insecond at 20% and education at 10%. This again showsthat the social infrastructure spend by the Kingdom is a

main priority. A large proportion of the high-valueconstruction contracts awarded in the Kingdom in thelast three years have been in the transport sector,particularly aviation and rail. These include the KingAbdulaziz International Airport in Jeddah and the RiyadhMetro Project. The Kingdom is also set to award furthersubstantial contracts in the transport sector over the nextfive years, with project management contracts tenderedfor both the US$7B Saudi Landbridge rail project and theestimated US$10B expansion of Riyadh’s King KhalidInternational Airport.

The Kingdom also needs 2 million new homes by theend of 2014 to keep up with a population that’squadrupled over 40 years. In March 2011, King Abdullahbin Abdulaziz al-Saud pledged to invest US$70B inbuilding new homes for Saudi nationals. Last year, theKingdom’s Housing Ministry commissioned US$1.1B of housing projects in seven cities including Jeddah,Dammam and Tabuk as part of King Abdullah’s initiativeto construct 500,000 homes.

The biggest concern in KSA due to the massive scale ofconstruction is the reality of input cost inflation and thepossibility of project delays because of the lack ofavailability of resources including construction materialsand labor. Most of the region’s cement industries arealready operating at full capacity, with sizeable clinkerimports being seen in Saudi Arabia. Another labor issueis the implementation of the Saudization (Nitaqat)program, which we saw heavily enforced at the end oflast year and which could see up to 2 million* leave theKingdom. Unsurprisingly, this has had a disproportionateeffect on the construction industry, mainly because ofshortages of local unskilled labor and through higherinput costs.

QatarIn Qatar, the government is preparing to spend in excessof US$70B, mainly on infrastructure and transport butalso on hotels and stadia, in anticipation of the 2022FIFA World Cup and Qatar Vision 2030. The Minister ofFinance allocated US$24B to key projects, an increase of16% from 2013/14; this is also the biggest infrastructurebudget in the country’s history. The Finance Minister also

According to MEED Projects, KSAstill leads the way in the region withover US$1T of projects either plannedor underway


mentioned that he expects spending on projects to reachUS$182B over the next five years. BMI also has a positiveoutlook and expects the infrastructure sector in Qatar tocontinue to have double digit growth over the comingyear.

Qatar, in common with the other GCC powerhouses,continues to focus on improving its social infrastructure.Funds have also been set aside for completing theHamad International Airport, the New Doha Port Project,the rail and metro projects, and the roads program. Amajor part of the spending will be on the Qatar Railproject, which is expected to cost around US$45B tobuild.

Lusail City has started receiving its first residentsfollowing the completion of the bulk of its infrastructureand the town will be fully ready at the end of 2014according to Qatari Diar. When completed, it is designedto have over 200,000 people living within it and have avalue of around US$45B.

Again the major cause for concern is the risingconstruction costs, from materials to labor. The Qatarigovernment is aiming to keep these costs in check bytaking a hands-on approach. It is looking to regulatecommodities by creating a single buying source toimport into the country run by a government subsidiarywhich will then sell on to the contractors. Meanwhile,the government has attempted to increase the supply ofcertain commodities by raising production levels withinthe country again by creating government subsidiarieswhich own these commodities and can stockpile thembefore prices escalate.

Rest of the GCCWork is picking up in Kuwait and Bahrain, both of whichhave had their own problems over the last few years, butit is Oman that is the one to watch outside UAE, KSAand Qatar looking forward. Oman has budgeted forcontinued strong spending on its infrastructure andtourism sectors. The country announced US$15.5B ofspending on rail at the end of 2013 as well as theconstruction of a new town in Duqm.

Among the pan-GCC projects, the GCC rail network is byfar the largest project with a combined value close toUS$200B. Construction of the network, which will linkOman in the south to Kuwait in the north through theUAE, Qatar, Bahrain and Saudi Arabia, is scheduled to becompleted by 2018. Meanwhile, the contract for a newcauseway linking Saudi Arabia and Bahrain is scheduledto be completed in 2014. When completed, these shouldassist in regional and international trade, with the use ofa world-class logistics network connecting all GCCnations.

So make sure you are ready for the upturn and do notforget the lessons of the past – conduct feasibility studiesto support the business case for the spend, and controlthe costs through efficient and effective design to ensurethe assets that will be built to provide a sensible returnon investment for the end users. It is only in so doingthat we can create a sustainable market place withworld-class infrastructure and social infrastructure tosupport the local populations.

* http://www.theguardian.com/world/2013/nov/29/saudi-arabia-foreign-labour-crackdown-migrants

GCC: Value of projects 2014 to 2020 (all sectors)

Water

Industrial


Transport

Gas

Power

Construction

Oil

Chemical

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

Val

ue (U

S$ M

illio

n)

Bahrain Oman Kuwait Qatar SaudiArabia

UAE Dubai Abu Dhabi


Msheireb PropertiesinterviewDevelopingcommunities whichencourage socialinteraction, respect forculture and achievesustainable livingMsheireb Properties is a real estate company and asubsidiary of Qatar Foundation. The company wasestablished as a commercial venture to support theFoundation’s aims and the Qatar National Vision 2030that aims to develop Qatar into an advanced societycapable of sustaining its development and providing ahigh standard of living for all of its people. Its mission isto change the way people think about urban living andimprove their overall quality of life, through innovationsthat encourage social interaction, respect for culture,and greater care for the environment. MsheirebProperties spent three years researching Qatariarchitecture and numerous approaches to urbanplanning all over the world with the most respectedexperts in the industry – in order to realize anarchitectural language rooted in the best of the pastthat may be preserved for and by future generations.


The company is guided by the progressive vision of HerHighness Sheikha Moza bint Nasser. Her Highnessestablished the company with a mandate to address agap in the architectural history of Qatar and rediscover a unique form of Qatari urban development. MsheirebProperties aims to understand and implement how thebest of the past and modern, innovative technologiesand thinking can blend to create a new architecturallanguage in Qatar that is unique to the region.

The company’s name, Msheireb, means ‘a place to drinkwater’ (in Arabic) and is the historical name of thedowntown area of Doha.

We spoke with the Chief Executive Officer of MsheirebProperties, Eng. Abdulla Hassan Al–Mehshadi, whoshared his views on their vision, new projects and thefuture of development in Qatar.

Msheireb Downtown Doha is the flagship developmentof Msheireb Properties that aims to revive, regenerateand conserve the historical downtown of the Qataricapital, Doha. The US$5.5B project was launched in2010 in partnership with global industry leaders andexperts, to align the architectural learnings of the pastwith the latest in eco-friendly technologies that paystribute to Qatar’s tradition and embraces the future. Torealize a language that is relevant, enriching and trulyQatari.

Msheireb Downtown Doha (“MDD”) will be the first ofits kind complete smart city in the region, incorporatingstate-of-the-art technologies to create a better livingenvironment for all. It will feature extensive retail outletsincluding a mall, designed to transform the area into anunparalleled retail, leisure and entertainment hub. TheGalleria is a closed, air-conditioned shopping mall whichwill comprise approximately 100 stores set across fourlevels of shopping and entertainment space. Spanningapproximately 48,000 square meters of gross leasablespace, the Galleria forms a major part of the retailoffering at MDD. The Galleria will comprise an anchorsupermarket on the lower ground floor, a multi-retailspace and a six-screen cinema. The mall will also featurea dedicated entertainment zone for young audiences,involving both educational and physical activities wherechildren of all ages will be entertained in a safe andfriendly environment. MDD is set to create a locationwhere all sections of the population can enjoythemselves; the development features a variety of otherretail offerings which will not only attract visitors andtourists, but will also serve the thriving communitywhich will soon be living and working in MDD. Sikkat Al Wadi, the development’s largest pedestrian street,running the entire length of Downtown Doha will alsoprovide a wide range of shopping options, includingflagship stores in addition to fashion boutiques,restaurants, and cafes. With a special focus on features

“The Msheireb project creates a true tangible link between vernacular, tradition and thefuture of construction in the Region. The way in which Msheireb took on board theunderstanding of historical placement of buildings and façade designs to create passivecooled environments is a testament to the Qatari vision to deliver in excellence. The needsof a modern mixed use development often has no place for the culture of the past, butMsheireb has shown that the vernacular past of the likes of Souq Waqif can be translateddirectly into the modern context of a mixed use city and create a successful fusion betweenthe old and the new and set a precedence of sustainable excellence that has been seen as acatalyst for sincere design. It is truly a remarkable effort by Qatar and the Msheireb Team”

Nigel Eckersall


that add to the safety and convenience of all includingthe disabled, the project has been designed toaccommodate the entire community.

Unique to the Msheireb development is its blend ofcasual and high street shopping, stylish plazas andcommunity spaces. It will also host the region`s largestshaded open-air square, Al Baraha, a family destinationwith restaurants and cafes featuring events and largescale shows, with special cooling devices ‘cool pools’, to refresh visitors at the hottest times of the year.Pedestrian friendly access from the main streets of thecity and an underpass connection to Souk Waqif willfurther enhance the shopping experience making it afun and enjoyable trip for all.

Mr Al– Mehshadi confirmed that for Msheireb Propertiesthe key priority and the definitive target is to make surethat project phases One through Three are completedby 2016. Thirty percent of the project will be completeby the end of 2014. Discussing the usual challenges ofmanaging changes in a project this vast, we asked MrAl–Mehshadi how he has controlled the design changesand variations to the plans to ensure these do notdisrupt or delay the project significantly. He replied that their “focus was to ensure that the designs werecomplete and therefore any changes that occur are only those that are vital due to technological or criticalchanges required in the project and as such they haveminimized the changes which could disrupt the workplan and affect overall schedules.”

Complementing this array of exceptional retail offeringswill be the project’s efficiently planned infrastructureand transport system. Host to Qatar’s largest metrostation, Msheireb has an integrated road networkconnecting the Downtown area to the rest of the city.Retail will greatly benefit from parking provisions ofwhich there will be 11,000 spaces within three to fiveunderground basement levels, spanning the entire

length of the development, a first of its kind allowingthe public to move freely across this vast car park spacefrom one end of the development to the others. Tomaximize the use of space, MDD plans to install anumber of power stations underground and it recentlyenergized a 66KV power plant, which is another first forQatar. All utilities are completed as planned to date withthe District Cooling Plant commissioned as well.

The photovoltaic* solar system in MDD is an advancedPV system installed in buildings within phase 1A of theproject. The installation of the solar panels reflectsMsheireb Properties’ ongoing commitment tosustainable development in line with Qatar’s NationalVision for 2030. The roof-mounted photovoltaicmodules will supply a portion of the electricity needs of the buildings within Phase 1 of this landmarkdevelopment.

Adopting advanced clean technology such as solarenergy in addition to traditional methods of climatemanagement is a hallmark of the Msheireb projectwhich, on completion, will have one of the largestconcentrations of LEED-certified (US Green BuildingCouncil) buildings in the world. “When MDD iscomplete, the project will comprise 5,200 solar panelsacross a total of 8,400 square meters of onsite energyproduction in the form of both electricity and hot water.

Adopting advanced clean technologysuch as solar energy in addition totraditional methods of climatemanagement is a hallmark of theMsheireb project

*Photovoltaics (PV) is a method of generating electrical power by converting solar radiation into direct current electricity using semiconductorsthat exhibit the photovoltaic effect.


Each year, the solar PV system will reduce totalgreenhouse gas emissions by 568 metric tons which isequivalent to 241,000 liters of gasoline consumed”,commented Al–Mehshadi.

The six consortiums currently building MDD have beenspecifically chosen by Msheireb after a thoroughassessment of the contractors’ expertise, financialstability and technical capability, which was extensivelyinvestigated by Msheireb prior to finalizing the tenderprocess. An important aspect of each consortium’s bidwas an assessment of the consortium’s deepunderstanding of how to operate in Qatar, a criticalsuccess factor for the winning bids. Msheireb alsoinsisted on all consortiums being a combination of alocal Qatar contractor and an international contractor.This helped ensure that the consortium represented asymbiotic relationship where knowledge transfer is key,helping local contractors learn international processesand systems that will benefit the Qatari constructionindustry, while the international contractors learn thenuances of the construction sector within Qatar. “A newmeasure put in place by the Government of Qatar was arequirement for each entity in the consortium to sign a100% performance bond, not the usual performance

bond signed by all and shared as a joint liability – hereeach consortium partner takes a 100% performancebond risk for the total project value. This is a progressivestep in challenging the local contractors to ‘step up’ tothe same level as their international counterparts, with asignificant risk then acting as the incentive to ensurecooperation between the consortium parties to deliveron budget and on schedule. This was a strategic moveby the Government to offer international contractors acertain level of comfort and assurance in expecting thelocal contractors to be fully committed to the project,financially and otherwise.”

Looking at the medium-term horizon, Mr Al– Mehshadiconfirms that there will be an influx of internationalcontractors and consultants, and that the concerns over Qatar’s vast development requirements have beenmitigated by a significant investment in planning forQatar’s construction boom. Among the concerns is thelarge demand for labor, both skilled and unskilled, as the development in Qatar gains momentum andincreases in the lead-up to the FIFA World Cup 2022and Qatar Vision 2030. He says that the authorities areproactively exploring various options to be able to easethe requirements and restrictions around visas to helpaddress the potential lack of labor in the future. At thepeak of construction at MDD there will be 45,000construction workers on site.

A further concern was around the roads, ports andairports being ready and available to cope with therequirements that this vast construction phase willdemand. “There are regular meetings held between all these stakeholders to ensure that the port and thefirst phase of the airport will be ready when these initial projects will peak to cope with the sourcingrequirements and getting the required materials to the projects on time.”

Among the concerns is the largedemand for labor, both skilled andunskilled, as the development in Qatargains momentum and increases in thelead-up to the FIFA World Cup 2022and Qatar Vision 2030


As with every construction boom, the cost of materialsis a concern, specifically around the cost escalation ofthe primary commodities. As such the Qatar Governmenthas created two additional cement companies and alsoQatar Steel, which will create a single source fordistributors to buy from and hence control the cost ofthese primary commodities; in the long term, this will ensure that a viable ROI is generated on theseinvestments.

All these measures should give International playersconfidence to operate in Qatar and look at it as apromising and viable destination for conductingbusiness.

With Msheireb Downtown Doha, the company isdeveloping a blueprint for sustainable urbanregeneration, and believes in sharing the knowledge,experience and best practices to benefit the industry.MDD expects to fulfill its reputation to be a reliabledeveloper that delivers high quality, sustainable projectson time.

Abdulla Hassan Al-MehshadiChief Executive OfficerMsheireb Properties

Nigel EckersallSenior Design ManagerShapoorji Pallonji

Interviewed by:Cynthia CorbyPartnerConstruction Industry LeaderDeloitte Middle East

The Qatar Government has created twoadditional cement companies and alsoQatar Steel, which will create a singlesource for distributors to buy from andhence control the cost of these primarycommodities

Project factsheet

Project cost US$5.5B (QR 20B)

Land area 310,000 square metres (76 acres)

Project name Msheireb: means ‘a place to drink water’ in Arabic

Typology GFA (SqM) Percentage (%)

Commercial & governmental offices 280,000 36.8%

Retail 94,000 12.4%

Hotel 117,000 15.4%

Residential 222,000 29.2%

Community, cultural, school, mosques, museum

47,000 6.2%

Total 760,000 100.00%


Arabtec interviewA market overview:opportunities andchallengesArabtec Holding is the biggest listed constructioncontractor in the UAE which has just recorded a triple-digit growth rate (149%) in net income for 2013 and itsshares are at the highest level since August 2008. Wespeak to the Managing Director, Mr. Hassan Ismaik,about this rapidly expanding group, which hasundergone significant change since March 2013, aboutthe opportunities and challenges that lie ahead forArabtec and the construction industry.

The construction industry has seen a marked increase inlarge-scale projects in the GCC and wider Middle Eastregion recently. This can be attributed to a return ofconfidence following the economic downturn and anincrease in demand, particularly for residential andcommercial properties, mega infrastructure projects inroad, rail and aviation sectors, social infrastructure, and hydrocarbon infrastructure. There is increasedconfidence in the UAE economy, with the trade,logistics, tourism and retail sectors delivering increasedgrowth. This will be supported in the longer-term asDubai moves to deliver the Expo 2020 and as Abu Dhabi executes on its well-published multi-billion-dollarinvestment program to deliver the Abu Dhabi 2030 plan.


New Central Bank regulations, including the mortgagelimit of 85 percent of a first property’s value for UAEnationals and 75 percent for non-nationals, are part ofthe measures put in place by the UAE government toreduce the risk of a speculative bubble, giving long-termproperty investors and end-users greater comfort. Takingall this into account, it is evident that a number ofbusinesses have an optimistic view on the currentmarket backdrop which market participants view asexcellent prospects for growth, with continuedgovernment investment and commitment from theprivate sector.

With this positive outlook for the industry, ArabtecHoldings is diversifying its business through variouspartnerships and joint ventures in critical sectors in theindustry. The oil and gas sector will continue to growand we have made good progress on expanding intothis sector with acquisitions of subsidiaries such asTarget Engineering, which has extensive experience inthis area. We have also formed a joint venture withSamsung, enabling us to take on mega oil and gasprojects. This is part of our ongoing growth strategyinto other sectors, which includes infrastructure. Ourcredentials and capability in this regulated marketedhave been strengthened through the agreement tooperate a joint venture with GS Engineering andConstruction. This joint venture strengthens ourcapability in heavy infrastructure sectors, as well as oiland gas.

The Middle East construction market has a perception of being a difficult market to participate in, which isunjustly so. We have a longstanding track record in theregion, and our backlog has more than doubled in thelast 18 months. We understand what it takes tooperate in the region, and where we are looking tobuild other capabilities we partner with establishedglobal players to deliver complex projects to the highestpossible standard. The Middle East presents a wealth ofopportunities, particularly in light of the recent growthwitnessed in the GCC. This is why our growth strategycontinues to gain momentum in critical growth sectors,such as oil and gas and infrastructure.

In 2013, Arabtec set out its strategy for growth byexpanding its business in segments of the market thatcomplement its strong presence in the areas of high-risebuildings and airports. We are expanding our footprintin growth and complex higher-margin constructionsectors such as oil and gas, infrastructure and power. In order to achieve this, the group successfully raisedUS$650M through one of the Middle East’s largest everrights issues that was three times oversubscribed.Following on from the rights issue, two separate jointventure agreements were formed with SamsungEngineering and GS Engineering as mentioned above.These strategic joint ventures with Samsung and GSEngineering will enable us provide more high-quality,complex projects by enhancing our skills and expertise in all aspects of the construction process. We continuallylook for other potential joint venture partners to helpbuild our expertise in other areas.

The critical success factors for operating any jointventure in this region rely on Arabtec’s extensive localknowledge and firm links with stakeholders. The successof these joint ventures can also be measured by ourdiversification into new higher-margin sectors such as oiland gas, power, and infrastructure, increasing Arabtec’sskills and expertise whilst keeping our roots firmly inconstruction.

In order to strengthen its drive into new higher-marginsectors, Arabtec acquired the remaining stakes of twoother important subsidiaries, Target Engineering andEmirates Falcon Electromechanical Company (EFECO).

The critical success factors foroperating any joint venture in thisregion rely on Arabtec’s extensive local knowledge and firm links withstakeholders


Since the remaining stakes were acquired, bothcompanies have been awarded substantial contractsacross a number of projects. This demonstrates thevalue that Arabtec has been able to add since thetransactions.

Of course there are challenges that are unique to thisregion. The Middle East has many complex projects andthere is significant construction activity happeningacross the region. Scaling up the workforce to deliver on the project pipeline is one of the most interestingchallenges we have. Arabtec’s capabilities and know-how in delivering complex projects is proven and stemsfrom decades of experience and understanding – it ishow we transition this know-how to a larger work forceto deliver consistently on a much larger scale that willform a primary focus area for us.

To prepare for our growth we need talented people. Werecently announced that we will be hiring thousands ofpeople from across the UAE, GCC and MENA region.This drive will target particularly high caliber andambitious nationals who express a desire to contributeto their country’s growth and development by joiningArabtec. Arabtec Holding is fully focused on ensuring itmaintains a strong, enthusiastic workforce. As one ofthe higher payers in the construction industry in theUAE, Arabtec continues to ensure working conditionsare of the utmost high standard for its employees.Arabtec Holding’s growth and expansion relies onsourcing and retaining a world-class workforce. Arabtechas recently established a new HR division specificallyfor laborers. In addition, it has implemented newmeasures in order to raise the working and livingconditions for laborers.

Arabtec is very keen to increase its internationalpresence. The company has well-established operationsacross the GCC region and now operates further afieldin Egypt, Jordan, Kazakhstan, Syria, Saudi Arabia,Palestine and Russia. We are engaged in newopportunities in markets that include Iraq, Algeria andthe Balkans. We have announced our intention to open a regional headquarters in Belgrade, capital of Serbia, to drive Arabtec’s expansion into the Balkan region. Weexpect our regional headquarters will be operational in

Q2 2014, and will serve as a launch pad for Arabtec’splanned expansion in the wider Balkan region. Arabtecis already in advanced discussions with developersregarding projects in the Balkan region where there aresignificant opportunities for the group that are fully-aligned to our growth strategy.

Additionally, we are in the process of opening an office in the Iraqi capital, Baghdad, to capitalize on thecountry’s high potential, particularly in oil and gas andinfrastructure. The office will serve as a platform forexpansion by Arabtec Holding’s joint ventures andsubsidiaries, in what is expected to become the region’smost lucrative construction market. Arabtec is already inadvanced discussions with a number of clients in Iraq forlarge-scale projects in its target sectors. A major drivebehind Arabtec Construction’s expansion into Iraq is topave the way for our newly formed joint venture withSamsung Engineering and the soon to be completedjoint venture with GS Engineering and Construction totap the huge potential the Iraqi market presents in EPCand infrastructure sectors.

Arabtec is well placed to deliver on its internationalexpansion and will only undertake projects that arecommercially profitable and align with our growthstrategy. We are a strategic company and undertakeprojects when we know we have sufficient capital andconfirmation of funding from investors, as well as theability to recruit the necessary staff with the requisiteskills to deliver the project.

The GCC’s infrastructure sector is one of the key driversof long-term economic growth in the region. Over the

As one of the higher payers in theconstruction industry in the UAE,Arabtec continues to ensure workingconditions are of the utmost highstandard for its employees


next six years, over US$600B of investment is planned in infrastructure projects in the GCC, of which overUS$220B will be in rail infrastructure projects. Socialinfrastructure, such as hospitals and education facilities,as well as physical infrastructure such as airports, arevital for GCC countries to develop. Arabtec hasparticipated in this type of social infrastructure, such as the joint venture with Greece’s Terna S.A, to build the Aldara Hospital and Medical Center, a 105-bedhospital in the Saudi Arabian capital, Riyadh.

In addition Arabtec recently announced a joint venturethrough its subsidiary, EFECO, to carry out mechanical,electrical, and plumbing work at the new Abu DhabiInternational Airport Midfield Terminal Building (MTB).

Government investment is an indicator that the UAEcontinues to offer excellent prospects for growth. TheGovernment of Abu Dhabi announced in 2013 that ithas earmarked US$129B for infrastructure developmentbetween now and 2030 with US$8.1B ring-fenced fordevelopment for Expo 2020. Furthermore, DeutscheBank estimates that the addition of private sectorprojects could see as much as US$43B being spent in preparation for Expo 2020.

In Abu Dhabi, for example, tourism, infrastructure andreal estate will have the largest areas of growth. Arabteclooks forward to participating in development andconstruction for all these sectors.

We recently announced our largest ever contract interms of value and the largest in the real estate sector in the region for 36 mixed-use and residential towers forAabar Investments in Abu Dhabi and Dubai. Althoughthis is our largest project, we approach all our projects in the same way - with clearly defined deliverables andoutcome; this is essential in order for us to recruit theresources we need and maintain our reputation offinishing complex projects on time and in the most costeffective way. The project includes eight mixed-usetowers in the Tomouh City of Lights development in Abu Dhabi, with a total plot area of 900,000 sq.ft and abuilt area of 14,000,000 sq.ft. In addition, Arabtec willconstruct four mixed-use towers in the Reem Islanddevelopment.

We have reorganized our business extensively over the past 12 months to ensure that we are adequatelyprepared to scale up our business and take advantage of the many opportunities in the boom of the next fiveyears. Arabtec Holding is well positioned to deliver onthe various development and construction projects it has been awarded across all of its subsidiaries. Weunderwent a re-organization of our core businessactivities in 2013, which has meant we now havestronger governance and significantly enhanced systemsand processes. This has led to a number of strategicdecisions being taken, as well as building on ArabtecHolding’s existing reputation of delivering to a highstandard, and enhancing its skills and expertise throughnew partnerships. We see the vast amount of projectscoming on-line as a positive move and look forward tobeing a part of the delivery of these projects.

Over the years, Arabtec has proven its leading positionthrough a significant track record of delivering complexand challenging technical projects such as the BurjKhalifa and others. We are confident that our trackrecord in the Middle East and a well-thought outstrategy and good governance will help us deliver onour large backlog and on our growth strategy.

Hasan Abdullah IsmaikChief Executive OfficerArabtec Holding




Roots Group interviewA view of the Saudiconstruction sectorfrom the materialsupply sideOusama Fansa, the CEO of the Roots Group, one of the region’s leading building materials suppliers, hasconfidence in the Kingdom of Saudi Arabia and theenduring strength of the construction sector there:“When I first arrived here 28 years ago I was told itwouldn’t last and I’ve been hearing the same every year since. Yes there are challenges and risks and thelandscape will continue to change, but what has been done here, particularly over the last five years, isimpressive and should give us confidence. I’ve beenwaiting 28 years for the end of the sector and I think Ihave a few more to wait yet.”

Like many forward-looking organizations in the sector,the Roots Group does not see the relative dominance ofgovernment in the construction sector as a never-endingsource of opportunity. “We’re not facing dropping off acliff here: the underlying demand for infrastructure andother investment is too great. We are expecting,however, a tapering off of the major programs in themedium term. Our role as leaders in the constructionsector and as key participants in the Kingdom’seconomy is to ensure that our own organizations aregeared up to reflect this. We have to be ready toreposition ourselves for the different demands of adifferent primary customer base.” Ousama is a strongadvocate for the local skills and expertise that he sees


evident in the Kingdom’s building materials supplyindustry. Outside of labor-intensive items such as carpetsand furniture, his goal for his Saudi manufacturingoperations is not to compete with Egyptian-sourcedmaterials, where price becomes the predominantconsideration. His own organization already exportssignificant amounts of material throughout the region,including North Africa. This reflects in part the growingappreciation of quality in procurement and specificationdecision-making – a theme he comes back to often.When pushed on what government could do tofacilitate the development of this sector, Ousama seesremoving the regulatory blockers and considering thefinancial incentives such as the FTZs used in the UAE aspotentially more impactful than the major permanentway freight lines, into which the Kingdom is investing.

Ousama retains confidence in the fundamentalrobustness of the Saudi market. He notes that theheadlines created by Expo 2020 and the soccer WorldCup coming to the region create an immediate focus on a deadline driven by events, albeit it with strongattention on the legacy investments this creates forthese countries. In contrast Saudi continues to focus onits longer-term plans to develop the country and theeconomic and social infrastructure required to meet theessentially demographic and resident-expectation drivendemands in the Kingdom.

Ousama is quick to note that the Saudi constructionindustry is far from without its challenges. Lack ofpredictability in project initiation and delays in paymentare well rehearsed themes in the Kingdom. Interestingly,Ousama’s view is that government clients probably getmore bad press in this regard than they deserve. Henotes that delays in payments in particular, notinfrequently between six and nine months, are often as a result of blockages that reside with the contractorsas opposed to the government. Those delays that are attributable to the client are often the result ofinexperienced staff or consultants not able or empoweredto approve work or procurements as they are bound byspecifications or procedures they are not able to adapt.

While Ousama embraces the employment of localnationals under the Saudization drive, he notes that for the sector this, and the associated cornerstones of government policy such as limiting visa availability,presents real challenges. The Roots Group as anorganization has been able to achieve 17% Saudizationof its staff in the Kingdom so far. Ousama notes,however, that he has been able to move this forwardprincipally in back-office functions. Here he has built astrong and highly regarded team of Saudi women to beresponsible for many functions including design. Forfront-line technical staff, in his own words, they havefurther to go with bringing Saudis into the workplace –a problem caused principally by the lack of appropriatelyskilled Saudi engineers, trade and technical people. Forconstruction firms, these roles are the core of the business and their impact includes wage inflation andskills shortages, putting at risk cost, quality and programcertainty. Ousama notes that these constraints come ata time when the sector is being asked to respond toprojects of a scale 10 or 20 times those they faced adecade ago. This creates, in his view, a fundamentalincompatibility between what the sector is being askedto deliver and a central, and to date relatively inflexible,national policy.

In contrast Saudi continues to focus onits longer-term plans to develop thecountry and the economic and socialinfrastructure required to meet theessentially demographic and resident-expectation driven demands in theKingdom

On the relative dominance in the market for majorprojects of the limited number of local contractors,Ousama notes that this in part reflects the commitmentand investment that these firms have made in theKingdom. This is both financial investment but also therole that they play directly in local materials andemployment markets. “Each of these firms is entwinedwithin Saudi Arabian society at multiple levels, fromcommunity up to national government – it is onlynatural that this is going to give them a presence andopportunities above other firms, top flight internationalorganizations or otherwise, who can view theirengagement in the Kingdom on a largely project byproject basis.” Ousama does bemoan the loss of manyof the high quality small to medium size contractors inSaudi. For many of these organizations the increasingcosts and complexity of business brought by regulationand greater requirements such as bonding (which hasboth a direct cost and lock-up facilities) has madeinvolvement in the sector untenable.

On issues such as sustainability Ousama is generallypositive. While holistic LEED-type standards andmentality regarding design and construction are not yetthe norm, there is increasing awareness of sustainabilitystandards in specifying materials. Similarly whilehistorically any analytical consideration of whole lifecosts and long-term facility performance were verymuch secondary to the imperative to build, there isgrowing recognition of the criticality of this in thedesign and specification phases. This reflects an overalltrend that Ousama identifies in government contracting.Over the last five years there has been a consistentraising of the standards of many Saudi governmentclients. Organizations such as the Ministry of theInterior, Aramco, and the National Guard amongst manyare backing up progressive visions for their constructionprograms with strong in-house or embeddedengineering skills. This is being reflected in a progressiveincrease in the quality of work and materials specifiedand the rigor through which delivery is assessed. Inmany cases Ousama considers the standards as thehighest within the region. While there are still clearly

some variations in the standards achieved betweenclients, the overall trend is positive. Furthermore,Ousama sees the bar-raising effected by governmentclients as being reflected more widely now in the privatesector. As yet integrated supply chain management andthe specification of optimal materials based a structuredand holistic assessment are not the norm. They are,however, becoming more evident and as theconstruction sector begins to position itself for the post-government funding boom, Ousama Fansa is not alonein retaining cautious optimism.

Ousama FansaChief Executive OfficerRoots Group

Interviewed by:David BrazierDirectorInfrastructure & Capital ProjectsDeloitte CorporateFinance limited


The increasing costs and complexity ofbusiness brought by regulation andgreater requirements such as bondinghas made involvement in the sectoruntenable


Qatar Rail interviewTransforming Qatar’spublic transportationsystem to world-classlevelsQatar Railways Company (Qatar Rail) was established in2011 to design and implement an integrated world-classrailway system in the state of Qatar. Qatar Rail will bethe owner and manager of Qatar’s rail network and will be responsible for the design, construction,commissioning, operation and maintenance of theentire rail network and systems. Qatar Rail will consist of Metro, Long Distance and Light Rail Transit. We hearfrom Mr. Saad Ahmed Al Muhannadi, the ChiefExecutive Officer, who gives his insights and thoughtson the future of the transport sector within Qatar.

Qatar Rail was established to design, implement,operate and oversee the construction of a world-class,environment-friendly, technologically advanced andintegrated railway network in Qatar - making the latteramong the biggest railway projects in the world. Qatar’sintegrated railway network developmental programencompasses three vital projects: the Doha Metro, theLong Distance Passenger and Freight Rail, and the LightRail Transit project in the city of Lusail.


The Qatar National Vision aims to transform Qatar intoan advanced country by 2030, capable of sustaining itsown development and providing for a high standard ofliving for all its people for generations to come. Theplanned railway systems will support this vision. QatarRail will develop a world-class, efficient publictransportation system which will provide an attractiveand competitive alternative to private transport, capableof achieving a significant share.

Over the medium term the significant public investmentprogram should continue to drive growth. Theseinvestments are mainly related to the pioneeringinfrastructure projects to support the FIFA World Cup2022, the new sea port, the mega airport and the state-of-the-art railway network. There is also a keen focus onthe tourism industry. These investment projects willboost the non-hydrocarbon sector growth and facilitateeconomic diversification. The biggest challenge willsimply be the on-time delivery and completion of thesemajor projects we are undertaking. They require the set-up of huge infrastructure and the deployment ofadvanced technologies.

The Doha Metro network consists of four lines (Red,Gold, Green and Blue), extending to 354 kilometersacross the Greater Doha area, connecting the City’s two central points with larger commercial, residentialand dynamic areas in Downtown Doha, and operatingunderground in busy areas, and on and above theground levels in the suburbs. Moreover, the metronetwork will cover over 90 stations, serve Qatar’s twomillion people, most of whom are residing in Doha andsurrounding areas. The Doha Metro project will beconducted over two stages: the first, scheduled to becompleted in 2019, entails the set-up of 37 stationscovering 84 kilometers in total length. The project’ssecond phase, extending to 152 kilometers in totallength, and encompassing nearly 56 stations, will bedelivered by 2026.

Qatar Rail’s integrated railway network projectconstitutes not only one of the largest such initiatives inthe region, but more importantly, one that will work onconnecting the GCC’s railway infrastructures together,allowing for seamless and developed transport solutionsfor GCC residents commuting from one membercountry to the other.

Qatar’s railway network project will see a US$35Binvestment that includes plans to extend Qatar’srailways by 325 kilometers, and its rail networks tothose of other GCC countries. The investment fallsunder a wider vision of creating a united and integratedeconomic regional trade market through projects thatwill connect GCC countries via land and railwaytransport. The railway network project connecting GCCcountries will be equipped with the most advancedsystems, and extended to around 2,000 kilometers.

Qatar’s railway network project will seea US$35B investment that includesplans to extend Qatar’s railways by 325kilometers, and its rail networks tothose of other GCC countries


In this regard, Qatar Rail’s Long Distance Passenger and Freight Rail Project will consist of three differentcategories: a shuttle service for GCC transit passengersand travelers, transportation services for locals, andfreight transport services for international and domesticroutes.

Meanwhile, the Light Rail Transit project in the city ofLusail, which has already reached advanced stages, iscomposed of four lines extending to 30.5 kilometers intotal, a fleet of 34 trains, and 37 stations; more than 50 % of the structure, which is slated to be officiallydelivered by 2017, has been set up.

We are advancing at great speed with our projects, andwith the support of the groundbreaking technologieswe are employing, and the worldwide strategicpartnerships we have secured, we expect to rise to the challenge of delivering the projects as planned and scheduled.

An example of some of the partnerships Qatar Rail hascreated is in the opportunity to create the requisitetunnel boring machines required for the projects and weare very focused on continuing this trend. To achievethis we recently paid a visit to German manufacturer ofTunnel Boring Machines (TBM) HERRENKNECHT’s factoryheadquarters in Germany to learn about Lebretha, thefirst TBM manufactured for the Doha Metro project and slated to be delivered to Qatar in May 2014.HERRENKNECHT finalized the manufacturing of theLebretha TBM three weeks ahead of schedule. The 15TBMs that will be received by Qatar and deployed intothe Doha Metro projects rank among the best in theworld, having been tailor-designed for the State ofQatar’s geographic characteristics, nature, and areas.

We expect the next 12 months to bring about similarmilestones for our projects, and hopefully, similardeliveries that will be made ahead of schedule.

The priority is to successfully award the remainingdesign and build contracts in a timely manner and thento ensure that all contracts are managed as planned.This will be achieved through a well-structured bidderevaluation process and putting in place the prudentcontrols and management systems that will ensure thatall projects are performing as per plan. Managing theconstruction progress to ensure we deliver on time isparamount, which is why all our contracts are designand build to avoid any issues with incomplete designs at the time of construction.

Qatar Rail’s bidder selection is based on a combinationof technical and commercial criteria. A determination ismade that the technical solution proposed by a bidder is feasible, deliverable and robust, that it is based onreliable technologies, meets all minimum technicalrequirements set and that the costs and financialstructure are consistent with the technical solution. It isalso important to confirm that the bidding consortiummust come across as a cohesive entity rather than just acollection of companies put together purely for biddingpurposes.

Qatar Rail’s projects are aligned to the state’s NationalVision 2030, reflecting Qatar’s growing interest in majorinfrastructure projects; the integrated railway networkproject falls under the developmental and growth plansQatar is undertaking across various fields, including the

The 15 TBMs that will be received byQatar and deployed into the DohaMetro projects rank among the best inthe world


set-up of modern and efficient transport solutions. We,at Qatar Rail, are supporting the National Vision’s fouressential pillars: economic, social, human, andenvironmental development; Qatar Rail’s project willrevitalize growth across the state’s sectors contributingto its economy, creating economic and investmentopportunities, and being highly beneficial for thecountry’s environment through the reduction ofcongestion and carbon dioxide emissions.

The projects we will undertake will work in fullintegration to connect Qatar’s key areas with each otherand with their vital extensions – whereby, the DohaMetro will link the capital’s inner and outer areas suchas Lusail city, the New Doha International Airport, theEducation City, and the West Bay area.

We are also keen on having our projects make a positivedifference in the everyday lives of Qatari people, andbringing about a real shift for the State of Qatar, placingit among the world’s most developed and advancedcountries in the transport field, and equally rankingQatar Rail’s project among the most pioneering,ambitious, and innovative integrated railway projects in the region.

The State of Qatar will be undertaking several majorprojects pertaining to the hosting of the FIFA World Cup2022, and more importantly, in line with its NationalVision 2030. These projects require a slew of world-class

transport equipment and logistics solutions that arecapable of timely delivery; ones that we are heavilyinvesting in for all our projects and developments.

We are fully aware of the potential that a world-classproject like Qatar Rail has to offer. The mega projectwill act as a catalyst and provide an opportunity forQatar to promote the development of the private sector.

We have identified unique business opportunity clustersacross key industry sectors. These business opportunitieswill generate value for Qatar and are sustainable beyondthe construction of the rail network. Qatar Rail isworking with the business community and holdingroadshows to showcase these business opportunities,which can be captured both by Qatari entrepreneursand multinational companies.

Obviously there is significant pressure on us all to deliverquality on time to fulfill the Qatar 2030 Vision – this iswhy it is critical to evaluate and assess the longevity,reputation and technical expertise of all our partners.The Government is also assessing the need to createlaws which allow international companies to operatemore effectively in Qatar, which is very positive andcritical to achieve the end Goal!

Saad Ahmed AlMuhannadiChief Executive OfficerQatar Rail


The State of Qatar will be undertakingseveral major projects pertaining to thehosting of the FIFA World Cup 2022,and more importantly, in line with itsNational Vision 2030



The projected level of investment in infrastructure acrossthe GCC states in the coming decade is enormous. The challenges for government and the private sectoralike in delivering the planned pipeline are significant.Large, time-critical and competing programs across theGCC will likely place pressure on the procurement of allinputs necessary for achieving a successful project, fromspecialist items of machinery such as TBMs and HVequipment, to labor (skilled and unskilled) and materials.This heightened demand not only places upwardpressure on prices, but also places delivery schedules atrisk. Port and logistics bottlenecks loom large in certainjurisdictions, further compounding these risks. Fundingis also likely to be a challenge. Aside from the Kingdomof Saudi Arabia, where credit is plentiful, debt maybecome scarce and the cost of debt, particularlycommercial bank debt, is likely to increase.

In this dynamic environment, ripe with opportunity, butreplete with risk, private market participants will need tomake astute decisions around the deployment of capitaland resources. These decisions are set to become evenmore challenging due to the resurgence of demand inother developed economies such as the United States,which may be perceived as providing a more establishedframework, and hence a safer haven, for capitalinvestment.

Infrastructure andsocial infrastructurespend and thechallenges aroundthese projects


With this in mind, we think it is possible to make somepredictions for infrastructure development in the MiddleEast, which may constitute useful sign-posts fordecision-makers:• Public Private Partnerships (PPP) will continue to beused extensively in the power, water and wastewatersectors. The GCC International Power Project (IPP)model is well established, with reasonably limitedjurisdictional variations. New IPP/IWPP markets such asDubai will provide good opportunities for developersand contractors familiar with that model;

• Beyond power and water, the favored procurementmethodology for infrastructure (that is not plant) willstill be direct procurement under fixed priceconstruction contracts based on the FIDIC suite ofdocuments. The procurement and delivery of theseprojects will continue to be managed extremelyaggressively by employers (both public and privatesector). Little ground will be given in response tocontractor requests for deviations during theprocurement process, and contractors will again beasked to stake considerable cash collateral to winprojects. Resilient and enterprising contractors may be able to increase profitability in the fixed priceenvironment if demand begins to outstrip supply;

• Some fairly large social infrastructure projects (notablyschools and health projects) will be delivered under aPPP availability payment model. Where the sponsorsare independent from the procuring entity, participantscould reasonably anticipate delays around projectclosings and higher than usual transaction costsconsistent with a fledgling, rather than mature,market. Furthermore, there may be a lack of fundingappetite for these projects, as there is less scope forexport credit support for non-plant based PPP;

• A resurgent real estate market in the UAE andelsewhere will provide government with theopportunity to subsidize the cost of PPP in the housingand accommodation sectors through the grant oflong-term leases, or the transfer of land plots, forprivate and commercial real estate development.While recent regulatory reform in the UAE has easedsome risks for investors in the sector, the currentinflationary signals in this market should leadcontractors to investigate the financial health of theproject sponsors in this sector (whether private orpublic) and to ensure that there are adequate non-realestate assets available from which to satisfy any debts;

• Elsewhere, user fees for most government-providedservices (such as roads or metro transport) willcontinue to be too low to support concession projectswith a significant element of revenue or patronagerisk. In a sense the GCC will avoid some of themistakes made elsewhere in relation to theformulation of such projects;

• There will be a trend towards more sustainable,greener and better maintained infrastructure,especially in the UAE. Renewable energy (solar/PV) willcome into its own as an important source of capacity.Specialist O&M contractors will play an increasinglyprominent role, particularly in the transport sectorwhere improvements in the operational efficiency ofmature infrastructure assets can be derived throughthe experience of private sector operators operatingacross a range of jurisdictions;

While recent regulatory reform in theUAE has eased some risks for investorsin the sector, the current inflationarysignals in this market should leadcontractors to investigate the financialhealth of the project sponsors in thissector


• GCC governments will continue their push for greaterinvolvement of their nationals in all aspects of thedelivery of infrastructure projects, as part of theirpolicies for achieving higher participation by GCCnationals in the private sector workplace overall.Private sector organizations that recognize this trendand which are able to seize upon it as an opportunity,rather than treating it as an obstacle to overcome, arelikely to achieve better outcomes;

• GCC governments will (astutely) take advantage ofliquidity sources in the Far East in particular by seekingcontractor-sourced finance for major "hard"infrastructure projects. Contractors will need to becareful to ensure that the portion of the outstandingcontract price representing principal becomes payablefrom a hard-coded date or that completion tests areachievable and documentation is unambiguous.Some contractors may view the contractor financemodel as closer to "business-as-usual" than appearson paper, given the historical need to self-finance theback-end of most projects in the GCC as a result ofthe culture of disputes that has developed in theregion, and the relatively poor payment record ofmost employers outside the NOCs and international oil majors; and

• GCC governments will continue to take a hard-nosedand sophisticated approach to major procurement.The increasing use of thinly capitalized procurementvehicles will mean that developers and contractors willneed to be alert to sources of recourse if projectsunravel. Political risk will need to be considered in thebroadest possible sense and not simply in the contextof state failure or blatant expropriation. The demandfor legal services relevant to the delivery ofinfrastructure projects in the public and private sectorwill rise as a result.

None of the above constitutes particularly new ororiginal thinking. While that may not satiate thoselooking for exponential economic growth through rapid

change, we think that it does reflect the fact that theGCC is becoming an increasingly mature market. Assuch, it will still provide excellent opportunities forprofitable growth as it has in the past, but with agreater focus on building economies which aresustainable and resilient. We are consistently surprisedby the clear thinking and foresight of the community ofleaders who, having now clearly established this regionas important for the rest of the world, are looking tobuild a lasting legacy for the benefit of their nationalpopulations.

Simon HarveyPartnerInfrastructure –Transactional Pinsent Masons

Bill SmithPartnerInfrastructure –DisputesPinsent Masons

Political risk will need to be consideredin the broadest possible sense and notsimply in the context of state failure orblatant expropriation


Combatting fraudin the constructionsectorA high-risk fraud environment is typified by heightenedpressure and opportunity. When these factors areconsidered on an industry basis, the construction sectorrates highly, particularly in the procurement cycle. Fromaward to execution, employees and external parties(agents, suppliers, and competitors) have significantopportunities to commit fraud.

In the Middle East, these risks are heightened by thesheer scale of capital projects, a propensity to cashdealings, the involvement of myriad connected parties,and a transient and low-paid workforce.

“Corruption can add up to 10% to the total cost ofdoing business globally, and up to 25% to the cost ofpublic procurement in developing countries.”

The absence of properly structured and executed fraudcontrols in construction projects acts as a vacuum intowhich fraud opportunity, and persons susceptible to thetemptations, are drawn together. In the below casestudies, you will see that the simplest of controls wouldhave prevented the fraud, or at the very least detected itmuch earlier.


Case study #1“A number of managers involved in the construction ofa major power project received large cash payments andgifts from colluding with vendors to award lucrativesupply contracts. Some of these same managers thenwent on to establish companies through proxies to actas agents in the supply of a wide range of materials tothe Plant. The syndicated nature of this scheme meantthat the segregation of controls of duties in theirprocesses was circumvented. The fraud took placeprogressively over a period of years. By the time awhistleblower came forward, the quantified leakageexceeded US$2M and involved 285 separate fraudincidents. The investigation discovered that there wasno active price checking outside of provided bids orexisting supply contracts. An examination of vendorregistrations and HR files would have identified thesuspicious links between suppliers and employees.”

Case study #2“Following allegations of misconduct involving thegeneral manager of a regionally-based constructioncompany, an investigation revealed a significantdiscrepancy between the quantity of high-value scrapmaterials that were removed from site and the

payments received for the scrap. The general managerwas found to have directed the sale of these materialsfor his own personal benefit. The schemes employedincluded the disposal of usable materials as scrap, saleof scrap below market value, and general theft anddiversion of scrap and consumable materials. Theposition of the individual allowed for the circumventionof internal controls, including diversion of staff fromtheir normal role, and placing undue pressure on-sitesecurity personnel to effect the movement of materialsfrom the sites without documentation. Calculated lossesexceeded US$1M; however, the true impact is likely tohave been significantly higher.”

Numbers do not tell the full storyThat last point in the above study is something thatreaders will see in many cases of fraud. This is quiteunderstandable, as these activities are mostly identified‘after the fact’ through investigations and post-construction audits. Full quantification of loss is asignificant exercise, and rarely do companies wish toinvest further funds to put a true number to the losswhen they have already weeded out the offendingpeople and practices. Only in circumstances where thereis a reasonable chance of recovery from the offendingparties or from insurers would such a detailedquantification be palatable.

Fraud and supply chain integrity awarenessRegionally, much is being done to address the specter offraud, bribery, and corruption. Recent efforts in Oman,Saudi Arabia, and the UAE have placed companies onnotice that the ‘old’ ways of cornering business throughunder-the-table inducements are no longer acceptable.The recent spotlight has been on tendering andawarding. There are of course many other areasthroughout the four stages of the supply chain wherefraud and misconduct can occur. The following tablelists some of the fraud risks at each stage of the cycle,aligned against where that risk resides.

Recent efforts in Oman, Saudi Arabia,and the UAE have placed companieson notice that the ‘old’ ways ofcornering business through under-the-table inducements are no longeracceptable


Awarding Procurement Inventory Execution

Employee only • Improperperformance bondwaiver

• Exclusion ofqualified vendors

• Phantom vendors• False invoices• Invoice mark-up/alteration

• Redirection ofdelivery

• Theft of inventory• Fraudulent orimproper inventorycapitalization

• Inventory write-off(lost, obsolete,scrap)

• Inaccurate/falsified forecast of raw materials,or spare parts

• Theft of rawmaterials, finishedgoods or scrap

• Personal use ofinventory or assets

Employee andexternal party

• Conflict of interest• Improperagreement toapply variationorders post-award

• Bribery ofgovernmentemployees

• Technical scopemanipulation

• Bribery/kickbacks• Collusion withthird party advisors

• Unnecessary/excess orders

• Bribes fromsubcontractor

• Invoices for goodsnot received

• Collusion withtransporters

• Improper releaseof retention

• Payroll - irregularcompensationpayments

• Bribery ofgovernmentemployees

External party:Supplier/competitor

• Collusion/supplierCartel – Bidrotation andcomplementarybidding

• Phantom bidding• Defective pricing• Leackage ofconfidential bidinformation/tender

• Bribery of thirdparty

• False or misstatedinvoices

• Overstatement of businessexperience

• Suppliersmisrepresentingtheir financial,technical or ethicalposition

• Bribery ofsubcontractors

• Inflated orfictitious invoices

• Short shipments• Productsubstitution

• Invoices for goodsnot received

• Unqualifiedconsultants

• Misrepresentationof technicalcapability and/orcapacity bysuppliers/vendors

Table 1: Supply chain fraud risk matrix


Fraud, in all its guises, has at its center a breach of trust.In a project environment, trust is essential due to thesegmented expertise that each party brings to the table.Accordingly, it is critical to ensure that the trust awardedis based on substance, and subjected to some level ofverification and cross-checking.

Prevention is better than cureThe most common of sayings – prevention is better thancure – is, however, a resounding truth when it comes tofraud. Too often, construction companies have beencaught out with an ‘eyes on the prize’ mentality, andhave neglected the core planning processes that mayidentify questions that need to be asked to other partiesin the project, while also neglecting to ensure that thesupply chain policies and procedures are clear,transparent, and properly segregated.

Whilst the risk of fraud can never be fully eliminated,companies can implement controls to mitigate thelikelihood of such risks occurring, and help detect themearlier to reduce the impact to the project, and to thecompany. Consider the following checklist forpreventing procurement fraud for example:1. Due diligence and background checks on partners/master contractors/sub-contractors. At a minimum,you should have confidence in the following factorsa. Capabilities to contracted tasksb. Financial stability and ultimate beneficiaries ofpayments

c. Reputation in the market2. Overt stance on fraud, bribery and corruption:a. Fraud Risk Management (FRM) frameworkb. ‘No bribes’ policyc. Business code of conduct, with specific conflict ofinterest and gifts and entertainment provisions

d. Whistleblowing facilitye. Fraud Response Plan (FRP)f. Ethics and fraud awareness training for your staffg. Supplier code of conduct for your suppliers,and their sub-contractors

h. Rotation policy on high risk parties (e.g. buyers)i. Enhanced employee screening for high riskpositions

j. ‘No bribery’ clause in all supplier agreementsk. Right to audit clauses in all supplier agreementsl. Debarment policy to exclude suppliers andcontractors that have participated in any illegalor unethical activities

3. Independent oversight to test and challenge yoursupply chain procedures and processes: a. Internal audit reviews b. Data mining to look for hidden red flags

The dynamic nature of construction projects shouldcompel continual vigilance throughout the life of theproject. Never lose sight of the fact that efficiency andperformance issues can at times be indicators that aparty is not being true and trustworthy in theirresponsibilities in the project. Robust and continualvigilance will greatly improve your chances of weedingout the fraudsters.

Neil HargreavesManaging DirectorForensic & DisputeServicesDeloitte CorporateFinance Limited

Stephen CroweDirector Forensic & DisputeServicesDeloitte CorporateFinance Limited



SMARTerconstructionHow the GCC’smega-projects need to learn post-2008The 2013 Cityscape exhibition, in the eyes of manycommentators, marked the return of Dubai and the GCC as a whole for conceptualizing and then deliveringmega-projects once more. Whether they are actuallydelivered is arbitrary – it is the sentiment and optimismin the market that is the important point here; theprojects will follow in one form or another regardless.

So are mega-projects back, and has Dubai returned toits pre-2008 development boom? As in many aspects of life, one has to look back in order to look forward.


Figure 1 below provides stark reading. In the yearsleading up to 2008, development activity across theGCC, but in particular the UAE, was marked by anescalating upward trend. Between December 2004 andDecember 2008, the value of live projects rose fromcirca US$80B to a recorded high of US$1.3T.

Late 2008 and early 2009 saw a dramatic drop in liveprojects in the UAE, from US$1.3T to US$800B in oneyear, with a further systemic decline in the followingyears, reaching a low of circa US$500B in December2012. The phrase “boom and bust” is often used whenreferring to the UAE’s sharp rise and fall in activity, andthe scars of failed or abandoned developments can stillbe seen today when driving around the city.

What is interesting is that Bahrain maintained its moremodest momentum in terms of development activity,whilst other GCC countries remained static, and newercontenders emerged for the largest growth indevelopment activity, notably Iraq.

So does this represent a valuable lesson in “measuring”capital expenditure rather than being driven purely bymarket sentiment and the all too familiar rivalry of whohas the tallest, the biggest or the shiniest of buildings?Probably not is the answer.

It could be argued that the sheer draw of Dubai, andthe UAE as a whole, is always likely to be reflected inthis type of development cycle, although theannouncement of Dubai’s successful Expo 2020 bid islikely to perpetuate the latest cycle for some time yet. Itis also hoped that lessons have been learnt from thepast by addressing demand with supply rather thanfeeding supply without any underlying need or want for some of these developments.

With an upward trend already evident in other GCCcountries, such as KSA, Kuwait and Iraq, it is clear thatlessons should be learnt from the 2008 “crash.” Andwhilst much of the expenditure in these peripheralmarkets is predominantly on infrastructure investment,there are some valuable checks and balances that needto be put in place to ensure a similar situation does notarise once again.

SMARTer constructionSo how does the industry as a whole ensure thatgrowth is sustainable, thus ensuring mega-projects arenot a mere by-product of an economic cycle? Thenotion of SMART, a mnemonic aimed at settingobjectives (Strategic, Measurable, Attainable, Realisticand Time-bound) is one which people are familiar withthrough training courses, project management andemployee objective setting. But can this be appliedacross an entire industry?

$1,400,000

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

UAE

Iran

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Iraq

Figure 1: Project values (USD Billions) from December 2004 to December 2013



Whilst each project or capital expenditure program has its own criteria of what defines success, be thatmaximization of return on investment, sustainabilitycredentials or simply being “the tallest”, what is evidentis that a system-wide framework of measurability wouldgreatly enhance the industry’s ability to keep itself incheck.

Strategic: Development tends to happen here in theGCC based on an assumed need, e.g. “Let’s build theworld’s largest mall because people will come.” Thistype of ideology of building to create demand has tostop, as it is unsustainable. Emaar recently announced ahuge, 13.6 million sq.m development near Dubai WorldCentral. Does Dubai need a development this large, andis there currently demand to fill it? The short answer isprobably no, but given Emaar’s enviable track record indelivering projects, it is expected that this developmentwill be supported by the inevitable influx of people onthe back of a property cycle or boom.

Measurable: As evidenced earlier in this article, the“boom and bust” mentality of previous cycles must be eradicated to ensure sustainable development and economic growth. Whilst all mature economiesinevitably succumb to “cycles” of one form or another,the polarity of the peaks and troughs in the UAE’seconomic cycle over the last 10 years has to serve as a clear warning to avoid history repeating itself. Withthe scars of the past so evidently clear across the UAE(Dubai in particular), and the issues so well publicized, a more measured approach to development needs to be implemented. What does this mean? Ensuring thatthere is demand for a particular development use-typeor attraction would be a good start. A solid businesscase/plan with the requisite level of research andanalysis will not guarantee success, but it will almostcertainly provide context to influence a business decisionregarding capital expenditure.

Figure 2 below evidences the rate of developmentacross the GCC as at February 2013.

With the scars of the past so evidentlyclear across the UAE, and the issues sowell publicized, a more measuredapproach to development needs to beimplemented

41%

11%

Figure 2: Development activity across the GCC, February 2013

6%

9%

3%

30%

Saudi Arabia Qatar Oman

Kuwait Bahrain UAE



As can be seen in figure 2, the majority of developmentwas in Saudi Arabia with the UAE following behind with30% of overall development activity. Post Expo 2020announcement, we expect that the UAE’s share of thepie chart will be significantly greater, and it is thereforeimperative that a measured approach to development isadopted.

Attainable: The attainability of land, debt finance orgovernment-backed funds across the GCC has nothistorically been an issue per se. Even taking intoaccount the UAE “crash” of 2008, as can be seen fromFigure 1 earlier in this article, capital expenditure wasstill evident across the region and in large sums.

So the attainability in this context means somethingelse. It is the attainability of the right mix of demand,supply, the right ambition and the right team to deliver.Ensuring that the business case stacks up is only onepart of the equation. A developer may have a strongambition to deliver a particular project, have all of thefunds needed to deliver the project allied with demandfor that type of development, but without the skills todeliver and impartial advice to guide, it could still failspectacularly.

Realistic: Realism is linked to the preceding paragraphson attainability. Many of the failed projects in Dubai are not just simply a by-product of finance beingwithdrawn. They are a culmination of poor planning,appointing the wrong team to deliver and not havingobjective advice at crucial points in the developmentcycle. We often refer to the preparation of a businesscase as the initial “gateway” before a development istaken forward. Whilst this does not guarantee asuccessful outcome, if done properly, it can provide aclient with an “expected outcome.” What is abundantlyclear is that many of the UAE’s failed projects back in2008 and leading up to the “crash” did not have thislevel of detailed planning or foresight.

Time-bound: The phrase, “Timing is everything,” isnever more applicable than here in the GCC. And whilstthat applies at a macro level, it also applies equally at amicro level. Throughout this article, we continue to referto “planning” of projects or developments, ensuringthat they are sustainable in terms of demand, supply,operation, etc. The time factor is equally significant, asdelivering a project to meet a particular milestone orevent can often be the fine line between success andfailure. But what about allocating enough time forprojects to physically be delivered? Across the GCC,there is an abundance of unskilled/semi-skilled resourceswho are willing to work 12-hour days, 6-day weeks forprolonged periods and with low levels of pay. So itwould be relatively easy to assemble a very largeworkforce quickly. But in doing so, does that mean thatprojects across the region are being delivered at a pacethat inevitably affects quality, all to ensure that they areoperational within a particular timeframe? This iscertainly true for some developments that have beendelivered in the recent past.

Post Expo 2020 announcement, weexpect that the UAE’s share of the piechart will be significantly greater, andit is therefore imperative that ameasured approach to development isadopted

Allocating enough time to deliver a quality product hasto be a better, long-term strategy for success than theimmediate, instant, overnight approach that haspreviously been adopted. If enough time is allocated tothe delivery of a project, allied with the right skills mixand the objective, impartial advice we referred to earlier,then it is more certain that a project or development willbe a long-term success than a failure.

ConclusionThe fact that much of the anticipated developmentacross the UAE will be debt-financed will ring alarm bellswith many, particularly those who are not based in theregion or who do not know the region particularly well.The world has, however, in economic terms turned asignificant corner, something the GCC, and in particularthe UAE, wants to drive forward to renewed economicprosperity.

Elsewhere across the GCC, expenditure on capitalprojects continues unabated. In developing economieslike Qatar, KSA, Kuwait and Iraq, infrastructureinvestment is huge. Developing urban metro systemsand bus/rail networks appears to be the order of theday, and with this it is likely that complementarydevelopment will take place, further driving economicdevelopment.

So, whilst there is an air of positivity across the GCC in terms of market confidence, in particular the UAEfollowing the Expo 2020 award, adopting the “SMART”principles discussed may ultimately help avoid aneconomic downturn of the magnitude experienced in2008 and beyond.

Ben HughesAssistant DirectorInfrastructure & Capital ProjectsDeloitte CorporateFinance limited

The fact that much of the anticipateddevelopment across the UAE will bedebt-financed will ring alarm bellswith many, particularly those who arenot based in the region or who do notknow the region particularly well



Plan, plan and plan againAre you a marketleader or follower?As the rest of the world emerges slowly in 2014 fromfive years of unprecedented downturn, what can theGCC take from this period and how are GCC clients,contractors and consultants learning from recent historyand preparing themselves for growth? In summary, areyou prepared for growth and will you be a marketleader or follower?

ReflectThe last five years have demonstrated it is essential,whether a client, contractor or consultant, to haverobust but flexible business plans and strategies alignedto the GCC market, which is one of the most dynamicand fast-moving markets in the world. The idea that aone-off plan, such as an annual business plan or one-offdevelopment feasibility study for a new project, issufficient to guarantee success needs to be quicklyconfined to the garbage bin. Instead, we should seethese as more iterative and dynamic processes of check,review, revise, check, review, revise… constantly seekingto move into new space as it arises – a true marketleader trait.


By being flexible and developing various scenarios,organizations will be much better able to ‘flex’ theirresources, whether capital or manpower, to takeadvantage of the upturn being witnessed across theGCC markets. This in turn will give first mover advantageand a differentiated competitive edge.

More mature and predictable Western economies showhow often the path out of recession can be very quick,with great opportunities presenting themselves early tothose ‘looking’ for them – market leaders. Often thoseleft sleeping are left to feed with the masses on thescraps.

For the GCC Infrastructure & Capital Projects sector,those who reflect recent times but develop wellconsidered market entry strategies for emerging markets(such as Libya, Iraq, etc.) will be better placed tomaximize opportunities, understand the risks and howto mitigate them. Whilst fortune does favor the brave, it will be more sustainable if augmented with a robustplan. Knowing when to do something, and moreimportantly what to do if x, y or z happens, needs to beat the heart of all businesses that want to grow and besuccessful.

Whether you are a client, contractor or consultant, timeis running out if you want to be a leader not a follower.The next few years, up to and post the recently awardedExpo 2020 to Dubai, will see unprecedented investmentinto infrastructure and capital projects and thecharacteristics of the new market leaders will be thosewith robust business strategies and marketunderstanding (how to operate within marketsincreasingly reliant on JVs, blurred territories, increasedbonding need, access to strong supply chains in anincreasingly resource hungry region, etc.).

Making a mistake is often excused as a common humanfailure. As GCC markets continue to grow, making thesame mistake twice needs to be inexcusable and lessonslearnt over the last five years should and must preventthis. This should be the ‘only’ reason to refer to the past!

RefocusAnother factor in an expanding GCC market is thegrowth and strength of competitors at all levels ofclients, contractors and consultants. From talent toresources, land to industry market segment, allorganizations need to choose their targeted marketspace and defend it with all their might. Take a market-leading client developer; they will increasingly faceproduct and price competition as more entrants comeinto their space. The market leaders that will be mostsuccessful will be those who can, for instance, adapttheir product, from say purely five-star residentialdevelopments to four-star mixed-use developmentsdesigned to meet the ‘current-now’ market need, notthe need appraised two years ago when the schemewas conceived and the business case signed-off.Market-leading consultants will provide high value,differentiated professional services that give improvedoutcomes for their client: leading contractors deliverquicker, cheaper and lower defect projects to clientsconsistently.

The next few years, up to and post therecently awarded Expo 2020 to Dubai,will see unprecedented investment intoinfrastructure and capital projects

Wherever you sit in the chain, this can only be achievedby talent rich organizations that are well organized,trained, led and supported, constantly focused onmaximizing the economic or social benefits of theprojects they deliver from residential to publictransportation, hospitals, schools, etc.

By adopting a refocusing and rebalancing approach,leading organizations will continually appraise whichattributes of their business offering drive their own‘client value’ and remove those that do not.

Again history shows us that out of economic downturncome opportunities as well as casualties. The questionwill be; which category will you fall into?

Re-organizeOne of the most critical areas in the whole process ofmoving forward to face the future is reorganizing to beable to meet ‘new’ needs, not old ones. Business shouldlook at professional sport as its inspiration in this arena.In sport, say a football team, season goals are definedregularly, coaches appointed and players bought, soldand swapped through the transfer process – all to aligncapability with plan, i.e. to win the cup. Unfortunately,our industry is slow to change and often old players tryto learn new ways of playing, with variable success.Clients similarly suffer with teams playing to outdatedrules, formations and ways.

Wherever you are in the industry community andwhatever role you have or aspire to, your alignment tothe “new market” needs must be understood and fullysupported by the right product, offer and capability asbuyer’s choice increases across the region over thecoming years. Admittedly the process of reorganizingand restricting can be a painful one, needing specialistsupport insight and skills but like pruning a tree,

businesses need to choose between erratic growth orvociferous and controlled growth after careful andprofessional pruning. Choosing the right advisor withdeep market and ‘relevant’ sector insight will be thecatalyst to growth.

As we look back on the last five years and celebrate the‘recession is dead’, certainly things do appear on the up.The question is how much and how soon? Will you leador follow?

Andrew JefferyDirectorInfrastructure & Capital Projects Deloitte CorporateFinance Limited


One of the most critical areas in thewhole process of moving forward toface the future is reorganizing to beable to meet ‘new’ needs, not old ones


Is your scheduleright? Achieving project completion on time and within budgetat specified quality standards is the core criterion ofproject success and the backbone of good projectmanagement. However, according to research publishedby the US-headquartered consultancy IndependentProject Analysis (IPA) in October 2013, a total of 65percent of the GCC’s megaprojects are destined to fail,in terms of budget and schedule overruns1.

“As these projects are tendered and awarded, Qatar will become the center of attention for the region’sconstruction companies. Concerns are already beingraised about the prospect of an overheated market withrampant cost inflation and unrealistic deliveryschedules.”2

Tight schedules and squeezed margins followed byrushed mobilization is normally how the story oftenbegins, potentially setting projects up for failure beforethey have even commenced.

From our experience of working with the region’s topcontractors, it is apparent that due to the growingcompetitive market, they are striving to win work to filltheir order books and accordingly estimating teams areresponding to virtually all received Request For Proposals(RFPs) without following a clearly defined process forbid/no bid assessment.


Some clients are limiting the contractors with strict timeschedules and inadequate periods for preparation andsubmission of tenders, resulting in an improper andincomplete assessment of the associated technical,contractual and commercial risks. These in turn canoften lead to incorrectly understood scope of works andinaccurate time assessments, i.e. not testing whethermajor milestones are achievable within the advisedcontract deadlines.

Once the contract agreement is signed, a kick-offmeeting takes place where the tendering team handsover all the pre-contract documentation, assumptionsand correspondence to the site construction team.Again with insufficient time set aside, more often thannot the proposed high level schedule of works is oftenbased on poor construction methodology, poorschedule logic, ambitious or inadequate allocation ofresources and/or variable productivity rates.

Here is the big dilemma. At the time of greatest pressureto ‘get on with things’, project managers are expectedto endorse the tender schedule before commencementof work; in most instances ‘only’ after developing the

Project Execution Plan (PEP) and based on the existingconstraints. These will include the time needed forobtaining the required permits, right of way acquisitions,environmental requirements, required approval cycles,resource availability, delivery periods of long lead itemsand subcontractors’ procurement/capabilities.Additionally, the project manager needs to verify thatthe contractual duration is achievable - our experiencedemonstrates that often things are too late, the ‘startgun fired’ and many project managers lament that thetime and costs are unrealistic and the contractualcompletion dates unachievable.

Attempting to resolve the issue, the project managers,with the assistance of the planning engineers,commonly start numerous trials of ‘crashing thedurations’ to keep the schedule within the allowedcontractual period. The outcome of this ‘folly’ is anunrealistic baseline schedule of works with illogicalsequencing, excessive activity overlap, and open-endedrelationships. These are in addition to the loss ofproductivity resulting from the unsupported increases inresource levels, which is often restrained by the logicaldependencies between activities and accessibilityrequirements.

Although the purpose of creating a baseline schedule of works is so that it can be used as a tool for projectcoordination, progress monitoring and control andperformance measurement, forecasting and reporting,we have observed that in many instances it ends upbeing used merely as a paper-work exercise submittedto meet client reporting or contractual obligations.

If the above methodology is adopted, hurriedcommencement results in projects experiencing majordelays resulting from, but not limited to, errors indesign, lack of coordination on site, inaccurate rates ofproduction, extended material delivery periods, poorperformance of subcontractors, inadequate qualitycontrol, increased defects, re-work, etc.

Some clients are limiting thecontractors with strict time schedulesand inadequate periods for preparationand submission of tenders, resulting inan improper and incompleteassessment of the associated technical,contractual and commercial risks


Month after month, what often can follow is thedeviation from the baselines that starts incrementallygrowing to a point where the accumulated delayscannot be recovered. This issue can accumulate tosevere client dissatisfaction and subsequent notices ofdelays, disputes and, in the worst cases we have seen,warnings of termination.

Added to this, the number of scope changes during theexecution of the projects in the region acceleratesworsened by the lack of integrated project systems.Contractors are usually unable to reliably capture, track,manage and accurately assess the impact of thesechanges on the baseline schedule of works, which leadsto inaccurate progress measurement and scheduleforecasting – just when the contractor needs control ofits project to be able to develop and implementturnaround/mitigation measures.

Such a poor planning process leads to projectprolongation, cost overruns, exposure to delay damagesand major reputational damage, which are usuallyaccompanied by low morale and job insecurities thatdrastically affect the progress of works and thesuccessful completion of the project.

Our advice for taking early control Our in-depth project experience working for many ofthe region’s leading contractors tells us that the rootcauses of all the aforementioned pain points can beavoided by considering the following recommendationsduring the tendering stage:1. Develop a clearly defined process for bid/no bidassessment;

2. Include the necessary qualifications related to theschedule of works in the contract agreement;

3. Conduct qualitative and quantitative assessment ofthe technical, contractual, schedule and commercialrisks associated with the scope of works;

4. Allocate adequate schedule contingency to cover forthe risks of project prolongation and consequentlypotential exposure to delay damages; and

5. Engage the project managers at initiation stage of theproject (if possible).

Moreover, in order to achieve effective and robustoperational standards in line with best industry/leadingpractice, all contractors should consider the followingrecommendations post contract award:• Allow a reasonable period for the project managers toprepare a realistic baseline schedule of works in linewith the project execution plan to be endorsed byhigher management;

• Ensure that the baseline schedule of works meets thefollowing requisites:- Comprehensive work breakdown structure thatincludes 100% of the scope;- Alignment of the work breakdown structure with thecode of accounts;- Any existing constraints, necessary permits,regulatory changes, right of way acquisitions, severeweather conditions and special environmentalrequirements are accounted for;- Major project milestones are well defined;

A poor planning process leads toproject prolongation, cost overruns,exposure to delay damages and majorreputational damage, which are usuallyaccompanied by low morale and jobinsecurities


- Construction methodology, dependencies betweenactivities and sequence of works are logical andachievable;- Activity durations are based on contractualquantities, realistic production rates and resourceallocation;- The critical path is logical and reflects the longestpath of planned activities for the completion of theproject;- Overlaps between activities are not excessive andopen-ended activities are non-existent;- Adequate durations for submission and approval oftransmittals are allocated;- Delivery periods of long lead items are supported bysuppliers’ quotations;- Planned packages are replaced by detailedsubcontractors’ schedules which are integratedwithin the baseline schedule; and- The baseline schedule of works is resource(equipment, material, labor) and cost loaded.

• Develop a standardized and consistent approach toplanning and scheduling, progress measurement,earned value calculations and key performanceindicators (i.e. SPI, CPI) to be followed by projectmanagement staff and consultants, subcontractorsand suppliers;

• Appoint an adequate number of skilled projectcontrols resources;

• Update the baseline schedule of works on a timelybasis to reflect the actual progress of works;

• Prepare a revised schedule whenever the baselineschedule of works becomes unrealistic and does not reflect the actual sequence and progress of works on site;

• Assess the impact of scope changes regularly on thebaseline schedule; and

• Submit interim claims for extension of the time forcompletion (when applicable) and retain a clear auditof the supporting documents for substantiation.

Randa Al Sayegh ManagerInfrastructure & Capital ProjectsDeloitte CorporateFinance Limited

Endnotes1. Two thirds of region’s megaprojects 'destined to fail'article published on Meed on 1 October 2013, 10:12GMT | By Kevin Baxter

2. Qatar construction boom starts article published onMeed Issue 16 20-26 April 2012

Time Now

Earned Value(EV)

Planned Value(PV)

Actual Costs(AC)

SVCV

Performance MeasurementBaseline(PMB)

BAC

Time

Cos

t



What does good look like in effectiveproject delivery?It is very easy for us to define a successful constructionproject as a built asset completed safely, on time, for the contract price, with the contractor achieving areasonable profit in return for performance of its work.It is also easy for us to agree that the unforeseen risksand pressures faced in the construction industry make itvery difficult for a construction project to be delivered inline with this definition. In reality, many projects will facea series of failures that, when combined, impact theproject to an extent that it cannot be considered asuccess. In other words, projects are not deliveredeffectively. What does effective project delivery look like?

To better understand this, it is helpful to consider aproject that was not delivered effectively, for instance:the Sydney Opera House in Australia.

The iconic Sydney Opera House is one of the mostinstantly recognizable buildings in the world.Unfortunately the construction of the Sydney OperaHouse was plagued by difficulties. The project that wasoriginally scheduled for four years at a budget ofAUS$7M, ended up taking 14 years to complete at acost of AUS$102M! It is hard to imagine what couldhave gone wrong to have such a large impact on thisprestigious project; however you may be surprised tofind out that the issues faced on the Sydney OperaHouse are not unfamiliar to the issues commonly faced today.


Firstly, the project was not very well defined at theoutset. This resulted in numerous changes to theproject’s design requirements after constructioncommenced (as an example, the original design had twotheaters, and this was later changed to four). These latechanges contributed to delays and cost overruns, andbecame an obstacle to the project.

Secondly, the project’s cost was underestimated fromthe outset. When the updated estimate was reported tothe client, the cause of the increased costs was notproperly understood and the perception was that thecosts were spiraling while the progress was slowing. Theclient resorted to withholding payment to the architectwho was acting as the project manager. This led to adispute which ultimately resulted in the architectresigning from the project. New parties took over theproject, and numerous unforeseen complicationsresulted, further delaying the project and adverselyimpacting the costs.

It is clear the Sydney Opera House project would havegreatly benefitted from attributes commonly consideredcrucial to effective project delivery:• Efficient and timely client decision-makingEnsuring that the timeframes and procedures forappropriate decision-making processes are clearlycommunicated, followed and ultimately that they areconcise in their nature to aid their effectiveness.

• Significantly lower numbers of changes introducedduring the construction phaseAs already mentioned, change is a staple of theconstruction industry and its projects; however,through best practice methodologies you canminimize those changes and their subsequent impacton the timely delivery and final out-turn cost of theproject.

• An integrated project management methodology,including guidelines and toolsClear and concise procedures which can providesnapshots to key stakeholders on the performance ofsuch projects; allowing for risk items to be flagged asearly as possible and to increase stakeholderawareness of the status of such projects and avoid“surprises” to key decision-makers.

• Systematic use of Key Performance Indicators (KPIs) tomonitor the delivery of the project.

• Increased access to performance data on projectsAllowing for benchmarking and status reviews, tounderstand the performance trajectory of projects andlarger programs.

None of these attributes are new concepts. However, itis common to find that few of the tools and techniquesrequired to achieve these attributes are implemented inorganizations responsible for delivering projects,including:• Project readiness assessments whereby the level ofdesign, estimation, risk and project planning isassessed prior to construction commencing.

• Using a project steering committee that is familiarwith the project’s goals and constraints, to assess andlimit changes.

• Using integrated project management techniques toassess unforeseen events and understand the possibleimpact of risks so that these can be effectivelymanaged.

Through best practice methodologiesyou can minimize those changes andtheir subsequent impact on the timelydelivery and final out-turn cost of theproject


• Using integrated project controls and KPIs to provideearned value and project performance index date.

• Independent validation and reporting of budgetvariances and projects – To ensure that the fullinformation guiding the budget status is clearlyconveyed with as little ambiguity as possible. A peerreview type role can dramatically improve the accuracyand transparency of the information being reported,which ultimately can assist with making informeddecisions.

The Expo 2020 and Qatar 2022 events have created anexciting environment where both the UAE and Qatar aregearing up to deliver major capital programs toimmovable deadlines. One only has to look at theconcerns over Brazils’ readiness to host the FIFA 2014 World Cup, or the difficulties faced in India during the2010 Commonwealth Games, to understand theseriousness and impact of not delivering projectseffectively. Now is the right time for the organizationstasked with project delivery to assess their ability todeliver projects effectively.

Scoping issues, incomplete design, poor estimating, and the lack of integrated systems are all too commonpitfalls faced today. Whilst none of these issues are too complex or difficult to avoid through using goodpractices, the right talent to manage and maintain thesegood practices and to effectively deliver projects.Coupled with this is the possible use of independentoversight to periodically monitor projects and advise on when the triggers of project failure are becomingapparent, and when project intervention may berequired.

So what does good look like in effective projectdelivery? The answer is: a project driven to completionby a multi-talented team who have experience andunderstanding of good project control practices,supported by an integrated project management systemthat provides accurate performance data, andempowered by a decisive project steering committee.

Malcolm Landman Assistant DirectorInfrastructure & Capital ProjectsDeloitte CorporateFinance limited

The Expo 2020 and Qatar 2022 eventshave created an exciting environmentwhere both the UAE and Qatar aregearing up to deliver major capitalprograms to immovable deadlines


Project controlsThe heart of thesuccessful delivery of any capital project In my younger days, I was working on the design andbuild of a shopping center. I was part of the team ofarchitects on the job. I vividly recall a cold winter’smorning, standing on site with the team that includedthe “finance guy”, as we called him. He wasunderstandably worried because he had to deliver adifficult message to the project manager and the projectowner. The message? The project had run out of cash.The project manager was infuriated but all he could dowas throw his hands in the air and walk off the site.Someone in our team said sarcastically, “so much for our project controls!”

What exactly are project controls? What do they do andwhy are they so important? In fact, in my experience, Ihave found that if you were to ask many people thatquestion, you may be met with a few puzzled stares.However, the truth of the matter is that project controlsare probably the most important element of anysuccessful capital project delivery.

Project controls have much to do with monitoring all themetrics of a project. This can include quantities, time,cost, cash flows, risk reporting, etc. The simpledefinition in my book is that project controls are all theactions you would take to ensure that your project isdelivered on time, on budget and in accordance withthe project’s design specifications. This of course meansthat project controls cover the entire life cycle of theproject - from its initiation, to the planning, execution,monitoring and control and even at the project close-out phase.


Deloitte was recently engaged by a leading developerwho was in the process of completing one of the largestprojects in the GCC. We were required to assist with thedeveloper’s project controls on their project portfolio.

We assumed that the concept of project controls wasnothing new, but we were soon surprised that thedeveloper had not recognized the value of projectcontrols at the outset of the project. What was evenmore surprising was that this was not unique to ourclient. We soon found that many developers in theregion did not previously recognize the value of projectcontrols in the delivery of their capital projects.

Based on our experience, as advisory partners to manyleading developers in the region, I have summarizedbelow what project controls we would expect to see inplace on capital projects. This summary is by no meansall inclusive, but will go a long way towards delivering aproject successfully.

1. Stage gate approvals As the project moves through the lifecycle frominitiation, planning, executing, monitoring and controlto close-out, we would expect to see formal sign-offfrom senior management and the key stakeholders.These stage gate approvals do not allow the project to proceed without the required formal documentedapprovals in place.

2. Policies and proceduresWe have seen the use of detailed policies andprocedures leading to improved project deliveryfunctionality, from pre-development through tohandover, leading to better decision-making, greater

accuracy of forecasted spend and the capability todeliver on budget, thus limiting cost overruns. Inessence, defining all the actions needed to be taken in a detailed policies and procedures document providesguidance to your team, makes their tasks predictableand ultimately, limits surprises.

3. RACI matrixA Responsible, Accountable, Communicated andInformed (RACI) matrix describes the level ofparticipation by the various roles in completing tasksand the project. This simple yet effective tool can bevery useful in clarifying roles and responsibilities acrossthe various departments/functions within the team.

4. Delegation of authority matrixIn most cases, we have observed the incorrect use of adelegation of authority matrix. Entities have moved toextreme cases where either too much or too littleauthority has been placed on the project team. The neteffect allows variations to be carried out outside themandate of the delegated authorities. In many of thesecases we have also observed the use of retrospectiveapprovals being obtained when the Variation Order isprepared. Having key personnel with the adequate levelof authority and accountability is key to project delivery.

5. Project reportingDaily, weekly and monthly reporting can provide a goodmechanism to ensure projects are being accuratelyreported on. A report produced for the sake of reportingis meaningless. Below are examples of good practicesthat should be considered:

5.1 Forecasting and variance analysisMonthly forecasting and variance analysis is essentialto project reporting. The use of variance analysis on“actual” versus “budget” and “forecasted cost” dataprovides the where did we plan to be, where are wenow and what is the expected final cost of the project.

5.2 KPI and project specific KPIs The project team should meet with senior managementand the board at the start and during the project todevelop, track and enhance the KPIs. This is the perfect

Entities have moved to extreme caseswhere either too much or too littleauthority has been placed on theproject team


opportunity to ensure all stakeholders are aligned, andthe required KPIs are in place.

We recently reviewed the monthly reporting of a leadingcontractor and observed that the contractor did notreport on “Paid to date.” The project team did not feel itwas their responsibility to report on this metric as theyfelt that it was up to the finance team to report onpayment related issues. We challenged the Board ofDirectors and senior management on the lack of inputfrom other departments including finance andprocurement departments in the monthly reports. Westressed the importance of including finance andprocurement KPIs in the monthly reporting. This wouldalso ensure they are measured accurately and in linewith the needs of the business.

5.3 Absence of Early Warning Notices (EWNs)This is essentially management looking out for anythingon the horizon that would affect the delivery of theproject. We work closely with senior management andthe project team to develop and identify EWNs, so thatproblems are avoided and projects are successful indelivering the expected value for their owners and otherstakeholders.

5.4 Work-in-progress (WIP) managementA recent client had completed his mega project and washappy that his project was delivered on time. While theproject was slightly over budget, he believed that hehad successfully delivered the project. In the monthsthat followed, to his horror, he became aware of thefact that over 20% of the project value was still “work inprogress” and had not been certified and accounted forbefore. To his disappointment, he began to realize his“accruals” and “WIP management” system was almostnon-existent.

5.5 Earned value or value of work doneLike WIP management, the value of work done andearned value methodology needs to be closelymonitored. The project team and consultants should beable to demonstrate a robust methodology to measureand communicate the real physical progress of a projecttaking into account the work completed, the time taken

and the costs incurred to complete that work. If donecorrectly it should allow for effective managementdecision-making, which helps evaluate and controlproject risk.

5.6 Risk management functionIn our experience, we have seen a worrying trend wherewe find no evidence to support the fact that our clientsidentify risks, prioritize them, establish mitigatingstrategies to deal with these risks and then monitor theeffectiveness of these strategies. In other words, wecannot effectively say that the majority of our clientshave a robust risk management culture in theirorganization.

While the previous metrics may seem daunting to a project control office that is still in its infancy, it isimportant to realize that the aim of these is to provideuseful information to management so that a projectmay be delivered successfully. Most organizations areencouraged to use metrics that work for them. Forexample, during the course of our advisory work, wehave assisted leading clients with the development anduse of a one-page project dashboard report. This “one-pager” would ideally be provided to executivemanagement to help them provide the correct oversighton projects. This “one version of the truth” has allowedsenior executive management and the project teams tobridge any gaps and ensure project success.

In hindsight, it would have also helped our littleshopping center back in the day!

Ketan Bhoola Assistant DirectorInfrastructure & Capital ProjectsDeloitte CorporateFinance limited


Capital offenceThe need fordiscipline in MiddleEastern energy andresources projectsOther industries make large capital investments. But, inthe energy and resources sector, which is in a muchriskier, more rapidly evolving business environment thana number of other industries, delivering capital projectson time and on budget is proving more difficult thanever. There is a large exposure to oil, gas, power andrenewables projects in emerging markets, particularlythe Middle East, and this can make many aspects ofproject execution more difficult.

Projects are also larger, and commodity markets and thebroader macroeconomic environment within which theyare expected to be executed are more volatile anduncertain. Then there is a shortage of experienced talentin an industry which is more labor-intensive than manywould imagine. This is because de-manning has finitelimits without causing serious HSE issues. Finally there is a toughening but also more uncertain regulatoryenvironment adopted by governments at national and at energy sector level.

Perhaps as a result of these factors, many commentatorshave supported our own experience that a largepercentage of energy and resources projects in theMiddle East have not been completed on time and onbudget. There are a number of reasons for this,particularly poor coordination between the corporateplanning and project management functions. This poor


coordination results in “sandbagging” the initial projectbudgetary estimates so that the project is nevercompleted over budget. We came across an amusingbut worrying example of a project which was completedon budget, but two years behind schedule!

The overall effect of this poor project discipline issignificant capital inefficiency where far more capitalexpenditure is allocated than really necessary and otherprojects are not started or suffer during execution as aresult. The value at risk and the cost overruns resultingfrom poor execution will run into billions of dollars. Sothere is real value in enforcing discipline in energy andresources capital projects. How does that disciplinemanifest itself? There are several aspects to this, and wediscuss these below.

We find that disciplined capital projects have fewerchanges made to them during the construction phase.Strong, up-to-date information and analytics allowproject managers to control projects, if not in real timethen on a daily basis, to help them meet internal targetsfor cost, schedule, quality and the delivery of reliableproduction capacity. The transition from a capital projectto an operating asset is also effectively managed due tomore (and more rigorous) upfront planning as well asthe efficient transfer of engineering data, informationand assets from the project phase to startup operations.

In the energy and resources sector, well-managedprojects use HSE and operational key performanceindicators to apply not only to the company’s ownproject employees but also to their contractors, toensure consistency of objectives. Such projects also havein place strong portfolio and project governance policiesto manage risk and uncertainty more effectively.

At the start of a project, a number of assumptions arealways made around key areas such as work planning,availability and mix of manpower, logistics, pricing andsourcing of materials and fabrications, as well as the useof technology. Well managed projects have theseassumptions updated regularly across the project, toaddress and correct problems at the outset. This timelyintervention requires regular flows of information duringrather than at the end of the project.

We have noticed that well run projects also have preciseand well thought through definitions of projectorganization roles and responsibilities that are consistentwith their business unit and corporate strategies as wellas with their enterprise’s appetite for risk. They havepolicies, methodologies and above all a culture thatsupports collaboration and good governance across allstakeholders, particularly joint venture partners,contractors and suppliers.

Our experience is that successful capital projects havemore discipline and thorough initial project planning,and innovative, flexible contracting strategies that clearlydefine the project, from capital project to operatingasset stages. These strategies assign risks appropriately,and ensure that all stakeholders understand their rolesand what the company expects them to deliver.

A successful capital project will leverage its supplier basevigorously and effectively without endangering thecompany-supplier relationship reputationally, or thesupplier financially. Suppliers will be asked to makegreater contributions to offset rising asset constructioncosts, and the project management office will pay moreattention to supplier capacity, as well as levels of qualityall the way down the supplier “food chain”.

A successful capital project willleverage its supplier base vigorouslyand effectively without endangeringthe company-supplier relationshipreputationally, or the supplierfinancially


Capital projects that perform well will look through theproject phase to a future value-producing asset byfocusing particularly on end-to-end resource planningand governance, progressive engineering and projectdata handover (to enable asset commissioning), andproduction ramp-up, maintenance and improvementactivities.

There will also be smooth data and document handoverprocesses in place at an earlier stage of the project thanconventional wisdom may deem necessary. Theseprocesses will address an appropriate handoverprocedure, with data and documents in the sameformats and using the same systems across EPCcontractors, suppliers and joint venture partners. Insteadof a one-time data handover at the end of the project,there will be a progressive handover to enable the assetowner to use the information as soon as it is needed.The overall objective here is to bridge the gap betweenthe project itself and ongoing operations.

Whilst supply chain optimization is quite a catchphrasethese days, there is no doubt that good supply chainoperational readiness is the sign not only of a successfulproject, but also of its transition to operational start-up.The workforce will be properly managed not only duringthe project but after it, to develop and transitionworkers from project execution to start-up support andperhaps asset operation, whilst managing temporarymanpower needs and requirements to satisfy localcontent. There will be in place an effective model torecruit and retain the talent to deliver capital projects ontime and within budget. This means balancing internaland external workloads during a project’s multi-yearlifecycle.

Then there is the degree of automation envisaged forthe project. This is perhaps the most contentious issuearound capital projects. Our view is that too muchautomation, often driven by the IT function andsupported by overzealous technology consultants, is the sign of a capital project that is doomed to fail. Thephrase that “to a hammer, everything looks like a nail” isparticularly apt here. It is tempting to seek automation

as a default solution when the real benefits enjoyed by asuccessful capital project will come from gaining apainstaking understanding of those business processeswhich may (or may not) be automated. Even when anappropriate balance is struck between automation andnon-automation, the real benefit will only be derivedwhen teams on the ground embrace automated or non-automated processes that people actually want to(rather than have to) use.

This is not to deny the need for integrated informationsystems and processes; far from it. But such systems andprocesses must enable project managers to do theirwork more efficiently, rather than dictate to them howsuch work should be done. To enable this harmony tooccur, project managers must have an active voice in thedesign of the many different systems responsible forcost and schedule management, engineering,procurement, contract management and humanresources, as well as health, safety, security andenvironmental obligations.

In summary, the capital projects which the energy andresources sector are tasking themselves to deliver in thenext few years are of increasing technical difficulty. Togive just one example: the Shah and Bab gas projects inAbu Dhabi are amongst the most challenging in theworld, with deep, tight gas reservoirs, high sulphurcontent, limited terminal space in the case of Bab, andremote location in the case of Shah requiring significantinfrastructure. The last thing which energy and resourcesprojects around the Middle East with this level oftechnical difficulty need to encounter is poor capitaldiscipline through inefficient project management. Itwould be a Capital Offence to allow this to happen!

Kenneth McKellarPartnerEnergy & ResourcesLeaderDeloitte Middle East


How do you keeptrack of the assets youbuilt once operational?A question of valueUntil very recently, Fixed Assets Registers (FAR) wereperceived to have only an accounting value and to berequired in terms of compliance and financial reportingpurposes. All organizations had to perform fixed assetsaccounting as per International Accounting Standardsand were required to maintain a register to enable suchaccounting. In most cases, the FAR resided in theaccounting department or as a feature in the accountingsystem of companies, and accountants merely madeupdates whenever the fixed asset accounts were used inan accounting transaction.

The post-Sarbanes-Oxley (SOX) environment, however,has emphasized greater corporate and Company Officer(CO) accountability, and both US GAAP and IFRS haverequired an enhanced transparency. Fixed assets, whichgenerally represent the biggest line item of a company’sbalance sheet – are under greater scrutiny today thanever before. The importance of an accurate and well-documented fixed asset record is important, butmaintaining a reliable fixed asset inventory is a challengeand labor-intensive task for any enterprise, public orprivate.


Inaccurate fixed asset records can be detrimental to anorganization, raising financial, operational and strategicrisks. Some of the implications include:1. Inaccuracies in financial reporting2. Difficulties in annual capital budgeting3. Lack of accurate fixed asset details required duringmergers or acquisitions

Establishing and maintaining a fixed asset accountingsystem is an important task for both the public andprivate sector. A FAR must be kept in order to be incompliance with legislation governing corporations,companies, etc. It allows a company to keep track ofdetails of each fixed asset, ensuring control andpreventing misappropriation of assets. It also keeps track of the correct value of assets, which allows forcomputation of depreciation and for tax and insurancepurposes. A FAR also allows a company to keep track offixed assets that are not under simple, direct control ofthe company. This means owned and leased assets,assets under construction, and imported assets.

Question of management controlPossibly the FAR has gained more value whenorganizations grew either organically or inorganically toestablish a multi-location/country presence and therebybuilt a fixed asset base substantial in value. Custodydefinition and physical verification processes havebecome key to establishing the desired level of control.It no longer is a question of a mere accounting updatebut also management control over assets is critical.Companies recognize the need to put policies andprocedures in place to decide the responsibility forcustody of assets and updating fixed assets records.

Importance of asset lifecycle managementAs assets become more valuable to organizations, it is important to manage these assets in terms of theirmaintenance and upkeep. Whereas this was alwaysdone by corporates in the past, there was no real way of knowing whether all assets have been maintainedoptimally given the quantum of assets that need to bemaintained.

The advent of asset management systems has helpedaddress this to a large extent. The features of a standardasset management system have helped corporatesitemize their assets to the most granular level,componentizing larger assets to a level whereby eachcomponent could have a different maintenance lifecyclewhich could be individually as well as collectivelymanaged. These systems capture all relevantspecifications and history of the asset, and managementcan access the asset details at the click of a button.

From a bottom line management perspective, the assetmanagement systems have also helped account for thecost of maintaining each such asset. For those who usethese systems, the implementation of these systems hashelped:1. Create a comprehensive asset database2. Optimally utilize all assets3. Manage costs of asset maintenance 4. Ensure maximum useful life of these assets5. Manage timely replacements wherever required

Interestingly, FARs prepared from an accounting point ofview could not provide the above benefits, even thoughcustody and asset protection were key objectives.

New uses of the asset registerThe financial meltdown of 2008 changed the way assetbase and asset records were perceived. Assets definedas collateral security for debts provided by bankssuddenly lost their economic value or had justdisappeared. In some cases, assets were put as collateralfor multiple debt transactions – presumably because noone knew which asset exactly was being listed.

A FAR also allows a company to keeptrack of fixed assets that are not undersimple, direct control of the company


In reaction, financial regulators and governments havestarted putting in increasingly stiff requirements onassets put on as collateral securities. It is now requiredfor the financial institutions/banks to track the status ofthe asset and its recoverability at all times of the debtservicing period.

As banks increasingly re-design their process for sellingtheir debt products, they are increasingly insisting oncorporates to demonstrate more accurate details of theassets that are being provided as collateral.

In addition, the period between 2008-2013 has seen alot of companies either being acquired or merged withothers to achieve efficiencies and economies of scale.During such transactions, having a well maintained fixed asset record has been an imperative to ensure the correct valuations of these companies. Similarlycompanies looking to raise external debt financing orconsidering an IPO will increasingly need an integratedFAR platform to provide third parties with the financialassurance they will undoubtedly seek in consideration of such transactions.

Hence, it is only natural that the importance of the asset register has been established. It has becomeimportant that assets tagged for such collateral andtheir respective asset custodians are increasinglyrequired to report on the status of the assets at thevarious stages of the entire asset lifecycle.

The way forwardThe need for a well updated asset register is no doubt well understood. What is, however, not so well appreciated is the need for putting in systems and processes that can ensure such an updated asset register on a real time basis. The mindset to view assetregisters from an accounting point of view and assetmanagement systems as another point of view needs to be merged as it is no longer possible for one to have a comprehensive asset register without integrating the two.

It is important to understand that while the assetdatabase would be a single one, the way one looks atthe data could be different. Auditors, the banks and themaintenance teams could revert to such well-maintainedsystems to extract information as may be required. Forachieving the same, there must be processes andsystems that need to ensure that all data elements in theintegrated asset database be updated at all times, witheach information stakeholder having a role. Awarenessof the need for all stakeholders needs to be createdamongst all. Finally, reporting mechanisms need to beput in place for all to be able to access the integrateddatabase the way they need to, in order to meet therequirements of their respective owners and move to anintegrated asset management and accounting solutionfor their respective company’s needs.

With asset value becoming increasingly important todrive business value, leading companies need to ensureat their heart is an integrated Fixed Asset Register (FAR)platform that is dynamic and not passive to underpinbusiness performance and development.

Thomas John Assistant DirectorInfrastructure & Capital ProjectsDeloitte CorporateFinance Limited

It is now required for the financialinstitutions/banks to track the status ofthe asset and its recoverability at alltimes of the debt servicing period

David BrazierDirectorInfrastructure & Capital ProjectsTel +966 11 288 [email protected]


Our contacts

Cynthia CorbyPartnerConstruction Industry LeaderTel +971 4 376 [email protected]

Lloyd EvansConstruction Advisory AnalystTel +971 4 376 [email protected]

Andrew JefferyDirectorInfrastructure & Capital ProjectsTel +971 2 408 [email protected]

Kenneth McKellar PartnerEnergy & Resources LeaderTel +971 2 408 [email protected]

Ben HughesAssistant DirectorInfrastructure & Capital ProjectsTel +971 4 506 [email protected]

Thomas JohnAssistant DirectorInfrastructure & Capital Projects Tel +971 4 506 [email protected]

Ketan BhoolaAssistant DirectorInfrastructure & Capital ProjectsTel +971 4 506 [email protected]

Malcolm LandmanAssistant DirectorInfrastructure & Capital ProjectsTel +971 4 506 [email protected]

Stephen CroweDirector Forensic & Dispute ServicesTel +971 4 506 [email protected]

Neil HargreavesManaging DirectorForensic & Dispute ServicesTel +971 4 506 [email protected]


GCC Construction sector overview 2014

Deloitte provides a detailed construction sector overview including forecasts, mega project details, and macro-economic data.

For more information, please visit www.deloitte.com/construction/gccpoc2014


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