Joint construction ventures remain attractive for foreign firms in Qatar

Although Qatar’s construction pipeline is valued at $200bn, the industry faced challenges in 2015 as falling global oil prices and international volatility affected government revenues and expenditure. Despite the huge array of opportunities on offer, foreign construction companies have faced challenges. This presents a number of new opportunities for domestic firms, many of which have partnered with foreign contractors to develop larger infrastructure projects, including the Doha Metro and major roadworks. These local firms offer first-hand knowledge of the Qatari market, while they benefit from knowledge transfer which supports growth of domestic human capital, as emphasised under the Qatar National Vision 2030 (QNV 2030) development plan.

Slowdown In 2015

Despite remaining one of the busiest countries in the GCC in terms of construction activity, budget cutbacks have delayed a number of major planned projects in Qatar. The Sharq Crossing, for example, is a planned $12bn bridge and underwater tunnel connection comprising three bridges linked with two immersed tunnels and a marine tunnel interchange that will traverse Doha Bay. Delays to projects such as the Sharq Crossing lend a less-than-rosy outlook to the state’s soaring construction sector, which has attracted dozens of foreign firms in recent years. At the same time, government revenues have fallen in the wake of plummeting global oil prices, with exports falling 31.5% year-on-year in the fourth quarter of 2015 and 33% by March 2016, almost entirely due to lower energy prices.

Stakeholders at all levels have been affected as a result, with Reuters reporting in June 2015 that the Public Works Authority (Ashghal) had issued just four consultancy tenders in the first half of 2015, compared to 25 between February and December 2014. According to a December 2015 report in Qatar Construction News, QR89bn ($24.4bn) worth of construction projects were on hold as of August 2014.

World Cup Factor

Although 2022 FIFA World Cup projects account for at least $4bn of the state’s $200bn development programme, a rising government emphasis on completing critical infrastructure in time for the tournament, during which an estimated 1m visitors will come to the country, can partially account for the shift away from lower-priority projects. “We see the same thing with any major sporting event in any country, from the 2012 London Olympics to other World Cup events – there is a finite deadline to finish certain projects, and you can’t be late to the party,” Peter Blackmore, partner at law firm Pinsent Masons, told OBG.

As such, projects including the Doha Metro, eight planned World Cup stadia and thousands of new hotel rooms required for the anticipated surge of tourists are likely to take higher priority in the lead-up to 2022. Indeed, in unveiling the state’s 2016 budget, Ali Shareef Al Emadi, the minister of finance, said the government’s main priority in 2016 would be to “ensure the completion and implementation” of major projects in key sectors, as well as World Cup projects, with infrastructure receiving 25% of total 2016 expenditure, or QR50.6bn ($13.9bn), as the government moves to keep projects on track.

Delays

Despite these promising indicators, the dual challenges of delayed projects and increased frequency of delayed payments – the Qatari Civil Code does not include provisions for contractors to charge interest in the event of late payments – has been a challenge for many foreign contractors.

Delayed projects and payments are challenges faced by construction firms across the GCC. According to a 2014 survey conducted by Pinsent Masons, 62% of respondents reported longer payment periods and cash flow concerns as the biggest operational challenge in the GCC region’s construction sector. Yanick Garillon, CEO of construction company QDVC, told OBG, “Projects are being scaled in as opposed to being done all at one time. Clients have also now taken additional time to settle payments, often requiring more approvals than previously. This has a knock-on effect, as the greater the deferral in payment, the longer it takes contractors to finish projects, further delaying project completion.”

A 2014 report published by Brussels Invest and Export found that in Qatar “long delays in payment are common on most types of projects”. These challenges are particularly pressing for state-funded projects, where international firms may only apply if the project is worth more than QR200m ($54.9m).

Standards & Visas

Unclear and ambiguous construction contracts have also presented challenges. For example, clauses in some contracts can make consultants financially liable for several years after the project has been delivered.

This was the case following a freak rainstorm that caused extensive flooding across Doha in late November 2015. The government launched an investigation into contractors responsible for five projects which experienced leaks and flooding during the storm, with media reports later indicating that the contractors had been barred from leaving the country until the investigation is complete. Although the government has also sought to address these issues through the issuance of new construction standards in mid-2015 (see analysis), contractors have increasingly lobbied for changes to the tendering process which would allow higher-priced bids a better chance of success, improving project quality and longevity.

Human Resources

Lack of available labour also poses a significant challenge for contractors in Qatar, with the current visa system setting quotas based on nationality, which can be difficult to fulfil as many countries do not have workers who are interested but are qualified. “You’ll have allocations for 400 workers from Serbia or 250 from South Africa, which is not terribly realistic given that the majority of our blue-collar workers come from South Asia,” Mohamed Abdel Aziz, CEO of CEG International, told OBG. “Sourcing the necessary labour is always a challenge.”

Domestic Advantage

As a result of these challenges, partnerships between foreign and domestic contractors are likely to remain the most viable option for foreign firms operating in Qatar, with QNV 2030’s emphasis on national development enabling Middle Eastern companies and local joint ventures (JVs) to thrive as a result of their perceived long-term investment in the country. Indeed, in a June 2015 interview with Reuters, Jalal Salhi, infrastructure affairs director at Ashghal, said the authority prefers to work with companies which will stay in the country for longer than one project. JVs are also attractive because they can reduce cash flow constraints – local partners generally employ roughly 90% of the workers and receive 60% of the money, while international contractors provide the more expensive employees.