The Middle East is a notoriously hard market with a bad reputation for late and lack of payment. But with billion-pound mega-projects on offer, can the risks prove worthwhile? Lucy Alderson investigates.
A brief look at the history of UK contractors working in the Middle East reads a bit like a horror story.
Most recently, the inquiry into Carillion’s collapse has forced its directors to publicly air its dirty laundry relating to troubled projects in the Gulf states.
The failed company’s former boss Richard Howson said he felt “like a bailiff”, as he claimed that he visited Qatar regularly in an attempt to claw back £200m he says the company was owed by developer Msheireb Properties. The client, however, strongly rejected these claims.
Last November, cladding giant Lakesmere fell into administration, with its former bosses since revealing that the company was owed more than £6m from its Middle East subsidiaries.
Balfour Beatty meanwhile announced last February that it would exit the Gulf, where it had been operating for more than 30 years. The firm sold its stake in two of its joint ventures, Dutco Balfour Beatty and BK Gulf, as part of its aim to “simplify the group and strengthen the balance sheet”.
It is tales of trouble such as these that shape the increasingly common perception among UK contractors of the Middle East market as dangerous territory.
But are the rewards enough to outweigh the risks?
Follow the cash
A fundamental reason why international construction firms struggle in the Middle East relates to cashflow. It is notoriously difficult to get paid on time – or fully, for that matter – in the region.
Mace’s Middle East and North Africa regional director Mark Taylor has six years of experience heading up the business in this region. For him, the conservative approach of Gulf clients to handling projects can have a knock-on effect on the supply chain.
“There does not seem to be a recognition that money needs to be passed down the supply chain. This often creates hold-ups [on projects] – there can be no doubt about that”
James Williams, Acuity Legal
“The Middle East is a regulated place and clients are traditional in their approach,” he says. “Clients are very much risk-adverse and will want to pass all the risk onto contractors, which may be largely why the supply chain is perceived to be hurting: because they’re taking on too much risk for the margins.”
It would be “fair to say” that every construction firm operating in the region will have suffered payment concerns or delays over the years, Mr Taylor concedes. “We’ve seen situations around the region over the last 10 years where bonds have been pulled and there have been cashflow issues,” he recalls.
Acuity Legal partner and head of construction James Williams agrees that payment is a big issue in the Middle East.
mace doha expo 2020
Mr Williams worked as a construction lawyer in the region for six years before moving back to the UK in 2014. He says Middle Eastern clients hold a different mindset towards payments. “There does not seem to be a recognition that money needs to be passed down the supply chain,” he says. “This often creates hold-ups [on projects] – there can be no doubt about that.”
A rigorous approach and thorough understanding on exactly how payments are processed is needed to ensure prompter payment, according to Aecom UK and Ireland chief executive David Barwell. Before moving back to the UK business, Mr Barwell was Aecom’s chief executive in the Middle East from 2009 to 2016, overseeing a workforce of more than 4,500 people.
“Our return on cash and the length of time it takes us to get this is as good as it gets in many other parts of the world,” he says. “But in other parts [of the Middle East] it’s pretty hairy […] there are slow payers.”
Mr Barwell says that, while chasing payment can be frustrating, understanding the route to the cash is fundamental. “You go in knowing the process and know exactly what is going to happen to your invoice when it is submitted. You quite literally have to follow it through – by literally going to the building [where invoices are processed].”
Beware: payment rights
When issues around getting cash do arise, the rights construction companies have when claiming for money are very different in the Middle East compared with the UK.
Mechanisms are in place in Britain that mean there is a statutory right to payment: if the client has withheld money, there is a right to a relatively quick recourse and adjudication to recover funds you believe you are owed.
However, this procedure does not exist in the Middle East. “If you think you’re owed money, you will have to recover money through local courts,” Mr Williams says. “Without this statutory framework, it’s quite often the case that people skip payments.”
“I would go so far to say some of the projects we did in the early days here […] put Mace on the map”
Mark Taylor, Mace
On-demand bonds – where clients can pull money if they believe the contractor is underperforming – can place contractors in an “awful lot of difficulty” and are commonly used in the region, according to Mr Williams.
The same difficulties arise around retentions, Mr Taylor explains. Contractors and consultants have a portion of their fees held back under retentions, he says. However, this is “not always black and white” when it comes to claiming this back from the client.
Carillion: a warning
In 2011, Carillion won its first – and final – construction project in Qatar.
The contractor signed a £395m deal to deliver the Msheireb Downtown Doha project for developer Msheireb Properties. However, over the next six years the project, aimed at helping Doha prepare for the 2020 World Cup, was plagued with difficulties.
During a grilling by a joint select committee of MPs, Richard Howson claimed he was chasing payment for 18 months right up until Carillion’s collapse. He claimed the contractor was owed £200m and that this was a significant factor in its demise.
However, Msheireb has denied Mr Howson’s claims, instead accusing Carillion of withholding payment from its subcontractors.
Exactly what happened may never be fully revealed. But what this case highlights is that if you don’t have a thorough grasp of the payment process, work in the Middle East can plunge UK contractors into serious trouble.
aecom midfield terminal 2017
“Without a statutory payment framework, it’s quite often the case that people skip payments and don’t pay them,” Acuity Legal’s Mr Williams says. “You can quite easily see a situation like Carillion happening when a company is owed a lot of money through Middle East contracts, which will be difficult to get hold of.”
He points out that it is difficult to know whether Carillion was owed money or not without access to the full details of the jobs it was delivering and the contracts it signed.
However, Mr Williams describes it as “perfectly foreseeable” that Carillion could have signed major contracts in the Middle East and not been paid sums of money it was owed – adding that this would “not be unusual”.
What advice does he give to contractors to make sure a nightmare situation like this does not happen to them? “Be careful of your contracts,” he says. “Make sure you have rights to be paid regularly. Make sure you can stop work if you haven’t been paid, and make sure you don’t overcommit when buying materials.”
Take a risk, reap rewards
The Middle East may be a challenging market. But with billion-pound mega-projects on offer, it can be hard to resist work in the region.
According to Mr Taylor, around 2,100 km of railway will be constructed over the coming years until 2022/23 – including projects such as construction of the 131 km Abu Dhabi Metro rail system – and the utilities, aviation and energy sectors are also “attractive” markets.
“There are opportunities here,” he says. “We’ve had a significant amount of success in the Middle East, to the extent that I would go so far to say some of the projects we did in the early days here […] put Mace on the map.”
The key to succeeding in this region is to establish core clients and being selective about the projects the company takes on, he suggests.
“If you have a specialist niche, go in as a subcontractor to someone bigger and make sure you’re not tied up on paid contracts”
David Barwell, Aecom UK & Ireland
Mr Barwell agrees that if you get it right, the rewards of working here can be big. “We’ve done the most incredible projects and have worked on the most exciting programmes,” he says. “The experience you get and the pace and excitement […] there is nowhere else like it.”
Braver firms willing to take the plunge need to do their homework, Mr Barwell says. “Don’t go in on your own. If you have a specialist niche, go in as a subcontractor to someone bigger and make sure you’re not tied up on paid contracts.”
Working in the Middle East is risky, but the profit your company could make working on mega-projects should be taken into account, Mr Williams summarises.
“There are some amazing projects out there and these projects are so big they will bring in a lot of money for your business,” he says.
“Yes, you have to be careful, but if you are careful and manage your payments, there are rewards.”