Presented by Cynthia Corby
Presented by Cynthia Corby
MCLS, May 2016
Regional economic outlook
GCC Powers of Construction 2016 – The funding equation
Bahrain 3.4 3.2
Oman 4.4 2.8
Qatar 4.7 4.9
Saudi
Arabia3.4 2.2
UAE 3.0 2.4
Kuwait 1.2 2.5
Egypt 4.2 4.2
Libya -6.1 2.0
Jordan 2.9 3.7
Iran 0.8 4.4
Iraq 0.0 7.1
ANNUAL GDP GROWTH (%)
2015 2016
• Real GDP growth in the GCC projected to slowdown to
2.7% in 2016, compared to 3.2% and 3.4% in 2015 and
2014, respectively.
• $165bn contracts awarded in 2015 in the GCC. Estimated
to decrease to $140bn in 2016.
• Decline in governments income - Need to diversify fiscal
income streams and prioritise spending
• Structural reforms and revenue measures (taxation and
subsidy cuts).
• Alternative funding solutions needed (PPPs, project
bonds, BOT)
• Private sector involvement
• Tough year ahead for contractors (fewer contract awards,
slower decisions, strained cash flow).
Source: IMF, Oct 2015
164,807
170,550
161,328
118,408
133,210
139,182
149,536
127,107
2015
2014
2013
2012
2011
2010
2009
2008
Drivers of the project growth in 2016 and beyond
• Diversification of the gulf economies. Enhance non-oil industries, achieve sustainability.
• Continued public spending on projects to not undermine future growth.
• Demographic pressure posing infrastructure requirements.
Job creation for a young labor force expected to drastically grow
Residential, healthcare, commercial and hospitality infrastructure
Energy and water infrastructure (stable sectors)
• Localised drivers – World Cup and Expo
• Recent announcement that GCC Countries have initiatives in place to unify GCC on political, economic, social and defense fronts.
Source: MEED Projects
Total GCC Contract Awards 2008 – 2015 ($m)
MEED forecast for 2016: $140bn
GCC Powers of Construction 2016 – The funding equation
Projects market performance in 2015
3,201
31,543
13,624
29,294
49,782
37,363
1,921
27,390
13710
28,851
58,952
42,540
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Bahrain Kuwait Oman Qatar KSA UAE
Value of awards by GCC country in 2015 ($m)
2015 Actual 2015 Forecast
• GCC project awards
forecasted for 2015 was
$172bn (which would’ve
been the largest on record)
• $165bn is the total value of
contracts awarded in 2015
• Kuwait outperformed
expectations
• Saudi and the UAE showed
a slowdown
• Qatar was in line with
expectations - major
infrastructure investments in
road and rail
Source: MEED projects
GCC Powers of Construction 2016 – The funding equation
Saudi Arabia 1,022,968
UAE 861,400
Qatar 277,830
Kuwait 256,714
Oman 187,316
Bahrain 71,956
Value of projects in pre-execution and execution
GCC Powers of Construction 2016 – The funding equation
Net sum of pre-execution and execution project values ($m)
2,020,530Pre-execution
657,654Execution
Construction 256,345
Power 67,905
Transport 165,275
Industrial 16,952
Oil 74,897
Gas 35,637
Water 25,377
Chemical 15,266
• GCC projects pipeline of $2 trillion. Construction
(52%) and transport (19%) the leading sectors.
Power, the third largest sector with 11%.
• KSA is the biggest projects market in the region with
$767bn. Construction, transport and power the
three biggest sectors by value in the country.
• The UAE with $706bn continues its plans to
become a global financial centre, aviation and
tourism hub.
• Qatar in the third place with $174bn continues to
build towards the World Cup 2022 and QNV 2030
• Oman has its focus on rail infrastructure. The
largest project is the national railway budgeted at
$15,6bn.
• The public sector dominates Kuwait’s construction
market. The larger schemes planned are rail and
road projects.
• In Bahrain, the biggest project is the international
airport expansion that will increase its capacity to
13.5 million passengers annually.
Projects pipeline
59
169
143
174
767
706
0
100
200
300
400
500
600
700
800
Bahrain Kuwait Oman Qatar SaudiArabia
UAE
Value of planned projects ($bn)
Source: MEED projects
GCC Powers of Construction 2016 – The funding equation
Saudi Arabia
King Abdullah Economic City 93
Saudi housing project 68
Jeddah Economic City 30
Jizan Economic City 30
Largest projects underway Budget ($bn)
2.2% Projected GDP growth in 2016
$660bn Saudi Arabia financial reserves
$103 2015 budget breakeven oil price
2.2% Inflation rate in 2015
April 2016 Vision 2030 reforms announced
Transport21%
Construction48%
Gas2%
Oil5%
Water3%
Power18%
Industrial2%
Chemical1%
GCC Powers of Construction 2016 – The funding equation
USD USD
256 767
billion billionValue of Value of
projects underway planned projects
UAE
Transport20%
Construction46%
Gas2%
Oil1%
Water3% Power
18%
Industrial2%
Chemical8%
2.4% Projected GDP growth in 2016
$77bn UAE financial reserves
$73 Budget breakeven oil price
3.3% Inflation rate in 2015
AED 46,1bn Dubai’s budget for 2016
Dubailand 146.8
Mohammed bin Rashid City 55
Dubai South 55
Barakah nuclear power plant 40
Largest projects underway Budget ($bn)USD USD
154 689
billion billionValue of Value of
projects underway planned projects
GCC Powers of Construction 2016 – The funding equation
Qatar
Lusail development 45
Qatar integrated rail project 40
Asghal Expresway programme 20
Hamad International Airport expansion 15.5
Largest projects underway Budget ($bn)USD USD
103 174
billion billionValue of Value of
projects underway planned projects
4.9% Projected GDP growth in 2016
$210bn Qatar financial reserves
$59 2015 budget breakeven oil price
$12.8bn Forecasted budget deficit in 2016
$81,603 GDP per capita in 2015
Transport34%
Construction
45%
Gas5%
Oil8%
Water4% Power
2% Industrial1%
Chemical1%
GCC Powers of Construction 2016 – The funding equation
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the
“Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss
whatsoever sustained by any person who relies on this communication.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their
related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide
services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network
of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they
need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.
About Deloitte & Touche (M.E.)
Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle
East region with uninterrupted presence since 1926.
Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries
with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax
Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East
Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW).
© 2016 Deloitte & Touche (M.E.). All rights reserved.
Contracting in The Middle East –
Contracting Challenges in uncertain times
Ben Hughes
Director
Capital Projects, Middle East
Contact: [email protected]
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Contracting Challenges in uncertain times
2016 Forecast
Major external factors
• Continuing low global oil prices impacting revenues
• Political and social unrest in some MENA countries
• Sluggish financial performance in many major markets around the world
• Reduction in investors from regions such as Russian and China
• Fragile economic confidence globally
• Uncertainty in local markets
• Challenges to government spending and programmes
• Cash cycle timing
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Contracting Challenges in uncertain times
2016 Forecast
What are the impacts?
• Margin erosion, or negative cash flow
• High fixed cost base, including personnel and property
• Increasing variations and claims
• Increasing risk transfer from Clients to Contractors
• Importance of correct contractual knowledge and administration
• Increasing complexity of ‘difficult matters’ and alternative negotiation models
• Lack of visibility on time and cost to complete
• Reluctance of projects to report objective bad news or early warnings!
• Disconnect between head office, regions and projects
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Contracting Challenges in uncertain times
2016 Forecast
What we are seeing across the GCC….
• Tender prices dropping further (and so are margins)
• Onerous levels of risk placed on the Contractor
• Slowing awards impacting on ‘advance payment’ culture for funding
• Growing claims and variations – uncertified, but assumed to be “bankable”
• Delay in payment and increasing “on account payments”
• Cash flow delayed (256 days av.) or stopping altogether
• Supply chain disputes
• Disconnect of the “reality” when reporting
• Increasing risk of business failure
© 2016 Deloitte Corporate Finance Limited. All rights reserved
•
Typical ‘Uncertain Market’ Dynamics
Key symptom areas
15© 2016 Deloitte Corporate Finance Limited. All rights reserved
Need for a proven
toolkit to optimise
performance of a
project / portfolio
Pressure on
margins / ROI
Increasing
project
variations
Paid when
paid strategy
and erroneous
contracts
Contingency
drawdown
Irregular
projected
cash flows
Rise of
potential
project
disputes
Supply chain
failure
Understand
contingent
liabilities?
Need to take
provisions
Volatile or
unreliable site
reporting
Project
schedule / time
variance
Cost to
complete
variances
Imbalance
between
receivables and
payments
Project
pipeline and
funding
Improved
commercial
strategy
Work out solutions
Emergency
Intervention and
turnaround
Case Study:
EPC Contractor
“But this could equally be a
Developer, Government Agency
or General / Civils Contractor”
The situation
• An Abu Dhabi/UAE based, family-owned EPC contractor, specialising in power and water projects, was experiencing a period of sustained operational and financial underperformance.
• Despite adequate project financing, the extent of margin erosion from poor operational delivery, coupled with a high fixed cost base, resulted in negative cash flow for the Company.
• In order to remain in operation, the resultant funding requirements were bridged via a number of substantial equity injections by the Shareholder.
• Faced with increasingly challenging market conditions, the Company required support to limit further losses and turnaround performance in order to limit any additional equity injections from the Shareholder.
UAE based EPC contractor
Case study – technical & financial support
17
Negative cash
flow
“Red flags”
Project delivery
failure
Challenging
market
conditions
Shareholder
equity injections
Contracting
High fixed cost
baseMargin erosion
Sustained
under-
performance
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Our approach
PHASE 1 – DIAGNOSTIC ASSESSMENT
• Undertook a diagnostic review to identify the root causes of underperformance, not just the symptoms.
• Considered both operational and financial aspects in parallel, at the project sites and head office.
• Concluded our findings over a focused period of three weeks.
UAE based EPC contractor
Case study – technical & financial support
18
Lack of
individual
accountability
Key issues
Operations and
Finance
disconnection
Capability
deficiencies
Poor quality
information
Indecision
Demotivated
employee base
Widespread
inefficiencies
Ineffective
policies and
procedures
OUTPUTS
• Brief, Deloitte branded, PowerPoint style report, summarising our findings.
• Implementation roadmap detailing priority activities, resource requirements and estimated timescale.
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Our approach
UAE based EPC contractor
Case study – technical & financial support
19
OUTPUTS
Activity Company
programme
Revised
programme
Variance in
Weeks
Mobilisation Works Complete 30.03.15 30.03.15 0
Engineering Works Complete 06.09.15 30.08.15 1
Procurement Works Complete 06.11.15 31.10.16 1
Construction Works Complete 27.10.15 18.01.16 (12)
Final Completion 26.12.15 20.03.16 (12)
Revised construction programme with realistic milestones
Apr-15, 293.55 May-15, 293.55 Jun-15, 293.55
Jun-15, 374.3
Apr-15, 344.58
May-15, 348.45 Jun-15, 356.02
240.00
260.00
280.00
300.00
320.00
340.00
360.00
380.00
Apr-15 May-15 Jun-15
Mill
ion
s (A
ED)
Final Budget PMO Gross FCAC Site Gross FCAC
Revised cost to complete estimate based on accurate data and stage of completion assessment
Monthly project status reporting
Fourteen day look forward
activity planner
Recovery programme to reduce
overruns
Risk and opportunity register
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Our approach
UAE based EPC contractor
Case study – technical & financial support
20
OUTPUTS
200
220
240
260
280
300
0
5
10
15
Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15
Mill
ion
s (A
ED)
Mill
ion
s (A
ED)
PMO Forecast per Month Site Forecast per Month
Actual Received per Month PMO Forecast Cummulative
Site Forecast Cummulative Actual Received Cummulative
Improved invoicing accuracy based on reliable forecasts and construction programme
(200,000)
(150,000)
(100,000)
(50,000)
-
50,000
100,000
150,000
AED
m
Cash flow forecast to completion
Total inflows Total outflows Closing cash Closing cash inc. AED 50m claimSource: Management inf ormation
Accurate cash flow forecast through to project completion
Weekly, all party invoicing
meetings
Thirteen week, short term cash
flow forecast
Medium term, Company business
plan and Shareholder return
analysis
Claims and contract
management strategy
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Our value impacts
UAE based EPC contractor
Case study – technical & financial support
21
Focused on most
critical issues
Wins
Rapid “buy-in” from
Company personnel
Integrated team of
finance and
operational
professionals
Robust project
reporting
Considered trusted
members of the team
Improved operational
management and
control
Transparency of cash
position
Flexibility and
adaptability in
approach
Strategic options for
the ShareholderHeadcount reduction
Successful claims
position
Streamlined
operating structure
and procedures
© 2016 Deloitte Corporate Finance Limited. All rights reserved
Contracting Challenges in uncertain times
2016 Forecast
Summary thoughts to leave with you…
• Build resilience and accuracy into your business reporting
• Embed clear processes and controls to mitigate risk and drive best performance
• Administer the contract correctly from the outset – entitlement and notices
• Deal with ‘difficult matters’ as a priority – don’t ignore “problems”
• Be vigilant on cash flow management and updates
• Focus on supporting communication and clear reporting
• Reduce the “distance” between head office, regions and projects
• Be prepatred to step in / intervene to arrest issues
• Take competitive advantage of the market – there is huge opportunity!
© 2016 Deloitte Corporate Finance Limited. All rights reserved
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the
“Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss
whatsoever sustained by any person who relies on this communication.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their
related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide
services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network
of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they
need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.
About Deloitte & Touche (M.E.)
Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle
East region with uninterrupted presence since 1926.
Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries
with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax
Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East
Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW).
© 2016 Deloitte & Touche (M.E.). All rights reserved.