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Oil price slump brings late payment and cancelled projects to Middle East

24 November 2015

UK contractors active in the Middle East are adjusting to an environment where the oil price slump will lead to some projects being shelved, and where they will increasingly have to bring finance to the table to win future work, delegates at today’s Inspiring Construction conference will hear.

Tom Wilson, the Dubai-based managing partner of law firm Squire Patton Boggs, is giving the mixed prognosis on prospects in the Middle East in a presentation titled “Overcoming the challenges of building in a fast-changing sector”.

Although he says that Saudi Arabia, Bahrian, Kuwait, Qatar, Oman and the United Arab Emirates will continue to enjoy construction growth – fuelled by their governments’ need to diversify away from oil – the oil price slump is itself having an immediate impact on the construction sector.

Wilson will outline how governments and state-sponsored organisations across the region are continuing to back core infrastructure projects, but are reducing support for residential, educational or tourism projects, which could face being scaled back or outright cancellation.

Meanwhile, payment periods on projects currently on site are being extended – and contractors’ claims for additional costs are likely to be knocked back.

UK construction businesses active in the region include Carillion, Kier, Laing O’Rourke, Balfour Beatty and Mace.

Wilson told Construction Manager: “The collapse in oil prices which benefits most of the world economically is creating substantial fiscal challenges for the [six] governments of the Gulf Co-operation Council. Government budgets have been slashed, but that also highlights the need to diversify the economy away from oil and gas.

"The collapse in oil prices which benefits most of the world economically is creating substantial fiscal challenges for the governments of the Gulf Co-operation Council."

Tom Wilson, Squire Patton Boggs

“So governments will want to continue diversification projects, that will hedge the fiscal gap as a result of the oil price shock. There is a need to continue some projects and find ways to fund them, and projects that are less core will be cancelled or scaled back.”

Wilson said that some government clients were already delaying stage payments on projects: one of the firm's construction clients which has a project on site was recently told that funding had been suspended until spring 2016. Another was told that it would have to reduce the scope of the project by 20%. 

And he expects more state-backed clients to challenge contractors' claims for variations or additional payments. 

For forthcoming projects, Wilson said that client organisations would increasingly expect UK contractors to bring finance to the table, competing with Turkish and Chinese contractors that often brought relationships with lenders in their respective countries.

“Employers will be looking for alternatives to typical government balance sheet finance, such as private funding via PPP deals, or relationships with banks, or government project finance packages,” he said. “There will be plenty of work for many people, but those that can contribute to overcoming the fiscal difficulties will ultimately have the advantage."

Although all the countries in the region were being impacted by the oil price slump, Wilson said that Saudi Arabia’s construction sector could face particular challenges. "It has the highest volume of construction work, which is overwhelmingly government funded, and the least capacity to absorb the long term impact of the oil prices. The ratio of the annual budget to sovereign wealth is the tightest in Saudi Arabia."

He pointed out that Saudi Arabia has a population of 20 million, compared to populations of around one million in Kuwait, Bahrain, and Qatar. “Saudi has the largest economy [of the group], but it's not twenty times the size.”

A spokesperson for Carillion, which recently announced it had secured a £125m project to in the Dubai Trade Centre District (pictured above), said that the company had not been noticeably impacted by the oil price slump. 

In its most recent results, Kier said that its Middle East business had recently secured major project awards in the Middle East, including the £100m plus Bluewaters development in Dubai, two further contract awards at Dubai Parks and Resorts and a £32m primary infrastructure project for SABIC in Saudi Arabia.

Main picture: Carillion Joint Venture signs £125m contract for Phase 1A5 of Dubai Trade Centre District

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