Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Deloitte GCC Powers

of Construction 2017
If it’s fundable it’s feasible
Deloitte GCC
| A Middle
PowersEast
of Construction
Point of View2017
- Summer
| If it’s2017
fundable
| it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Contents

4 10 14 18
GCC’s construction Interview with Marcus Investing in innovation in VAT implementation
industry outlook Truscott, Managing the world’s largest airport What does it mean for the
Director at Multiplex construction industry?
Middle East

22 28 32 38
Real estate development KSA’s engineering & IFRS 15 disclosure Interview with Mr. LIU
funding squeeze construction sector 2017 requirements Fangjiang, Vice President
Myth or reality? Who dares wins Are contractors ready & MENA President of
for it? SEPCOIII Electric Power
Construction Corporation
Delivering power
construction solutions
fit for the region

44 48 52 56
What’s happening in the UAE Causes of construction The evolution of Interview with Bishoy
construction market? disputes in the Middle construction Azmy, CEO and Executive
East How building information Director at Al Shafar
modeling and lean General Contracting (ASGC)
management are
transforming the industry

60 64 72 76
Why is construction Interview with Mr. YU Tao, Emerging risks, trends Leisure and entertainment
productivity so low? President & CEO of China and risk management investment and economic
State Construction mechanisms related to diversification in the GCC
Engineering Corporation third parties A long-term play
Middle East (CSCEC ME)
How CSCEC ME is leveraging
technology to add value to
construction projects and
pushing the boundaries of
what is feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

GCC’s construction
industry outlook

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Some of the key Whilst business conditions are tougher Fiscal adjustment will need to continue
today and project activity has been over the medium-term with measures to
strategic initiatives slowing down since 2015, the increase revenue, such as further energy
construction industry in the Middle East price reforms or the value-added tax in
which governments are region will sustain its workflow going the GCC, and controls on public
grappling with involve forward. This will be driven by economic spending. The International Monetary
and demographic needs, initiatives Fund (IMF) predicts that as a result of the
the private sector taking associated with the Saudi Vision 2030, oil price recovery, lowered spending, and
a more active role in the Abu Dhabi Economic Vision 2030, Dubai the reforms implemented on energy
Plan 2021, and Qatar National Vision prices, the overall GCC deficit is expected
economy, job generation 2030, as well as tourism related projects, to reduce in 2017 to 4 percent of GDP,

for a rapidly growing and the commitment from governments

towards infrastructure investment.
from 10 percent of GDP in the past two
years. The fiscal balance in the GCC has
labor force, increased been negative since 2014, but the deficit
Regional governments remain focused on could be reduced to less than 1 percent
localization, and changing their development models and of GDP by 2022 if the implementation
attracting foreign pursuing fiscal adjustment policies, while of reforms is sustained, according to
ambitious national transformation plans the IMF.
investors through to strengthen economic resilience are
updated laws and the work in progress. Some of the key Project activity declined in 2015 and
strategic initiatives which governments further decreased in 2016 to $117bn
easing of restrictions. are grappling with involve the private of project awards. In 2017, the value of
sector taking a more active role in the contracts awarded was $108bn, led by
economy, job generation for a rapidly the UAE with $43.5bn and Saudi Arabia
GCC fiscal balance (In % of GDP)
growing labor force, increased with $24bn. The projects market has
localization, and attracting foreign underperformed across different sectors
2015 2016 2017e 2018e investors through updated laws and and geographies except for Dubai, and in
0
the easing of restrictions. particular on the real estate side, where

-5
-4 GCC project awards 2014-2017 ($bn) GCC project awards in 2017 ($bn)

-6.5
200 50
-10
-9.4
40
-12 150
-15
30
$bn

$bn

Source: IMF 100

20

50
10

0 0
2014 2015 2016 2017 UAE Saudi Kuwait Oman Qatar Bahrain
Arabia

Source: MEED Projects

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

developers have the financial capability

to fund projects and are less reliant The region needs to adjust to, and
on government budget spending on
infrastructure. When looking at the understand the need to, assess the
market sentiment amongst contractors,
there is consensus that Dubai is still the whole life cost of assets for PPP to be a
bright spot compared to the rest of
the GCC markets, where there are viable partnership and result in more
significantly fewer construction
opportunities. pragmatic assessments of return on
A number of multibillion dollar schemes, investment on all infrastructure and
including various metro systems, have
contributed to the increase of total capital project investments.
contract awards in the region over the
past years, and these will likely stabilize
to lower levels in the foreseeable future The regional projects pipeline appears Projects pipeline in the GCC by industry, as
solid with over $2tn of projects currently of December 2017 ($m)
as various social infrastructure projects
conclude over the next few years. Various in the planning stage, indicating there is
59.01%
GCC governments intend to have the still a need and demand. Construction,
private sector supporting the provision the largest sector with more than $1tn
of costly traditional government projects of projects in the pipeline, is followed by
through the use of public-private transport with $447bn, and power with
$224bn, according to MEED Projects. 1.16% $2,444,680m
partnership (PPP), build-operate-transfer 2.21%
(BOT) or other financing models, which Dubai and Qatar, focused on Expo 2020
2.89%
will have a positive impact on sector and the World Cup, will continue to be 3.22%
activity. PPPs, however, still seem to event-driven markets, whilst a number of 4.03%

generate a certain level of skepticism large-scale mixed-use developments are 18.32%

9.17%
within the market, outside the power being planned in Saudi Arabia.
and utility sectors which have a more Construction Chemical
established model. Supporting Transport Gas
regulations and project bankability, and Power Water
hence feasibility, should aim at further Oil Industrial
strengthening the legal framework and
Source: MEED Projects
build up confidence for PPPs to gain
some traction. The region needs to adjust
to, and understand the need to, assess
the whole life cost of assets for PPP to be
a viable partnership and result in more
pragmatic assessments of return on
investment on all infrastructure and
capital project investments.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

There are significant affordable Kuwait, the strongest financially in the

region, has a focus on public-private

housing requirements across the partnerships, particularly due to the

benefit of bringing in private sector

region, and more specifically in Saudi expertise. The major projects being
planned are in the construction and

Arabia, Kuwait, and Bahrain, where transport sectors. Kuwait Authority for
Partnership Projects is planning to

housing schemes are being planned develop a metro system within Kuwait
City, as a PPP type of project that will cost

to build a large number of new units. around $7bn. On the construction side,
the Public Authority for Housing Welfare
(PAHW) plans to build a $14bn residential
city with 35,000 housing units and other
The outlook for Abu Dhabi is slow, with
services, including clinics, banks, and
potentially two transport projects coming
commercial malls.
back to market, the Abu Dhabi Metro and
Etihad Rail Network, which were put on
There are significant affordable housing
hold in early 2016. Other projects in the
requirements across the region, and
study phase in the emirate are ADNOC
more specifically in Saudi Arabia, Kuwait,
gas developments and power generation
and Bahrain, where housing schemes are
plants. Dubai, a market underpinned by
being planned to build a large number of
building a tourism Industry and delivering
new units.
Expo 2020, with growing population
demands, still has a solid level of project
In Qatar the government continues its
activity. The announced 2018 budget is
policy of prioritizing projects related to
the largest ever; 21 percent of it has been
World Cup 2022, including the roads and
allocated to infrastructure investments as
public transport networks, stadiums and
the emirate prepares for construction
other commercial developments, such as
projects related to Expo 2020. Transport
Lusail City. Transport projects expected to
projects in the planning stage are the
be awarded by mid-2018 are the metro
expansion of Al Maktoum International
connection to the airport terminal, phase
Airport being awarded in different more
2 of Doha Metro, which comprises the
manageable package sizes, as well as
extension of four lines, and Hamad
extensions to the Dubai Metro and Dubai
International Airport’s main terminal
Tram to further connect the city and
extension. The Lusail City mixed-use
serve a growing population. Dubai
development is currently under
Harbour, Dubai Creek Harbour and
construction and will see some sub
Dubai Holding’s Marsa Al Arab near the
packages awarded next year.
Burj Al Arab hotel are some significant
ongoing and planned mixed-use
Both Oman’s and Bahrain’s project
construction projects that will comprise
markets are relatively small in size. Oman
residential areas and tourist attractions.
has been substantially affected by the

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

oil price drop, but the one key ongoing space designed to increase the capacity As we know, GCC geographies differ in
project is the airport expansion. Due to for pilgrims and visitors to the Grand their infrastructure needs, and their
be awarded in 2018 are an industrial Mosque. Saudi Arabia’s Public Investment stages in development and investment
economic zone budgeted at $10bn, Fund (PIF) is planning a project in the in key infrastructure and social
phase 1 of the Omagine mixed-use north-western region called NEOM, which infrastructure. All of the countries have
development comprising residential aims to develop nine key economic state-led economies, where governments
and commercial buildings, and a water sectors, including biotech, energy, are reliant on natural resources which
desalination plant, a project funded by mobility and digital science. The Ministry they remain focused on diversifying.
the GCC to meet the growing needs of of Housing is studying a project funded
water consumption in the Gulf countries. by the government to build 100,000 GCC governments, conscious that the oil
Bahrain’s government is planning the housing units over the next seven years dependent model is not sustainable,
construction of a 115km light rail network in Riyadh. Transport projects due in the continue to implement reform agendas
in the country connecting different cities next couple of years are other Jeddah with various initiatives to lower the
and aiming to ease traffic congestion. metro lines, and the high-speed rail burden on public budgets and transition
The project is expected to be awarded connecting Riyadh to Dammam with a to a diversified economy with a more-
towards the end of this year. Two mixed- $14bn cost. There is a lot of large-scale skilled workforce.
use schemes due to be awarded in 2018 opportunities for the Kingdom to be
are Marsa Al Seef and Bander Al Seef, delivered in the foreseeable future, once The privatization of some key state-
with respective budget values of $2.5bn the government will have completed a owned entities, such as the plans to issue
and $2.7bn. Both will include residential review and reprioritization of key projects. an initial public offering (IPO) for part of
buildings and various other amenities. Aramco and more recently ADNOC, is a
phenomenon that most economies go
Saudi Arabia has undergone significant The privatization of some through as they start to mature and
reforms during the past two years. Saudi change to a more private sector-led
Vision 2030 comes with a broad set of
key state-owned entities, economy. Fundamental to the success of
objectives to wean the country off its such as the plans to this transition will be the private sector
dependence on high oil prices. The involvement. The use of public-private
Kingdom aims to increase the issue an initial public partnerships, attracting foreign direct
contribution to GDP from the private offering (IPO) for part of investment and privatization of state-
sector to 65 percent from the current owned assets are key elements to
40 percent. There is a plan to privatize Aramco and more achieve the GCC leaders’ visions for
a number of public entities in the
healthcare, services and energy sectors,
recently ADNOC, is a socio-economic reform and fiscal
balance.
as well as privatizing projects and having phenomenon that most
them delivered on a PPP basis. by Cynthia Corby, Audit Partner and
Construction of mixed-use schemes is economies go through Infrastructure & Capital Projects Leader,
being planned in the Kingdom, some of as they start to mature Deloitte Middle East
which are The Heart of Jeddah, a major
economic development with business and change to a more
and residential areas and commercial
private sector-led
facilities in the north of Jeddah. Rou’a Al
Haram and Rou’a Al Madinah, each economy.
valued at $10bn and part of Vision 2030,
will include residential and commercial

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Marcus

Truscott, Managing
Director at Multiplex
Middle East

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Multiplex is a leading international change happening towards the end of collaborative approach with clients and
contractor with more than 55 years of 2018, when market conditions are likely project management consultants (PMCs.)
building experience and significant to improve and all participants, including Multiplex believes that consultation and
presence in the Middle East since 1997. employers, contractors and funders will collaboration significantly improve the
At a time when the region and the contract in a more measured way. progress and quality of projects, and, as
industry have been subject to significant such, they work together with their clients
change, the company has performed When speaking about the company and delivery partners from the outset,
solidly and completed more than 50 and their goal, he says they are not just including them within the team. This
major projects since their establishment limited to on-time and on-budget delivery usually gives them a clearer
in the region. Projects include the W of projects but exceeding clients’ understanding of clients’ objectives,
Hotel in Doha, Emirates Towers expectations, adding genuine value to makes it easier to anticipate challenges
(commercial tower), The Index and Gate projects by leveraging their experience and remain flexible to deal with complex
Buildings in DIFC, JW Marriott Marquis and knowledge from their global network. and dynamic situations.
Hotel and the Address Boulevard in On each project, appointing dedicated
Dubai, Eastern Mangroves and the team leaders who think like owners, Over the past five years they have looked
Westin Golf Resort & SPA in Abu Dhabi. champion the project and guide at diversified projects, such as schools
Multiplex operates and delivers in all progress. “When others say it cannot and malls, and continue to play to their
aspects of the property cycle, and be done, we deliver.” strengths that reside in commercial
continues to play to their strength, which construction. They are selective in
is major commercial construction. With He believes key to their success to date choosing the projects to bid for and will
an established presence both in the UAE is taking a long-term view, partnering only proceed where they believe the
and Qatar, the company continues to with clients and communities to create project will be profitable, whether small
pursue opportunities in other GCC enduring benefits for all stakeholders. or large scale. Over fifty percent of their
countries. Multiplex has a proven ability to deliver contracts are design and build (D&B),
large-scale and complex landmark being this their preferred delivery route
We spoke to Marcus Truscott, Managing buildings and commercial structures. as they have proven over time that their
Director at Multiplex Middle East, who design teams spend more time on build-
shared his views on the industry at He thinks their clients choose them only projects.
present, some of the key challenges for their innovative excellence, with the
being faced and the future outlook. key being that innovation and creative On industry challenges, he mentions the
Marcus expects to see some positive thinking are usually the result of a major ones are delayed certifications,
delays in approvals of variations and

He believes key to their success to date

claims, and significant changes to design
that continue to occur in the construction

is taking a long-term view, partnering

phase. The requirement of unconditional
performance bonds by project employers

with clients and communities to create

continues to present a key risk to
contractors, and often meaning that the

enduring benefits for all stakeholders.

contractor manages this risk whilst
dependent on supply chain performance

Multiplex has a proven ability to deliver

to ensure milestones are met and
projects delivered.

large-scale and complex landmark When asked about the company’s

buildings and commercial structures.

strategy and long-term focus, Marcus
said they are focusing on three areas:

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

concentrating on every stage of the

project life-cycle, upstream control of Contractors are happy to be pushed
critical elements through rigorous
analysis of risks and opportunities, and on time and delivery, but need to be
closing the gap between concept and
work process amidst the variability of backed up with timely approvals of
behavior and performance within the
industry. Marcus recognizes the value of variation orders and a sensible
planning every phase of a project, and
the importance of tempering the focus assessment of the time and cost
based on both the client and project
needs in order to minimize risk and impact of changes.
maximize value.

One of Multiplex’s strengths lies in Their corporate governance processes modelling (BIM) on every project several
appropriately applying these principles are robust and encompass local and years ago. They have also developed a
into a fully integrated management global credit committees, client due bespoke ‘jump formwork” system, which
system known as ‘BOS’ – the Multiplex diligence and the PMCs. It is key in this has increased the speed of construction
Operating System. This system economic cycle to assess the feasibility of significantly. Multiplex is also committed
encompasses not only key certified the project in order to appraise the to looking for sustainable ways to work
systems but also those disciplines that paymaster’s ability to raise capital and and deliver projects and are using bio
are the cornerstone of their business, funding, and hence secure timely fuel instead of diesel and more recently
including customer relations, operations payments for the contractors. Marcus solar energy for power & water
(design, programming, logistics) also highlights the importance of regeneration projects.
marketing, people, accounting, safety and cooperation amongst PMC’s, and says
sustainability. Multiplex has all of these that a good PMC has the drive to Multiplex remains focused on their
systems working cohesively, meshing as complete the project, is proactive, approach, their diligence and their
appropriate in order to deliver efficient, collaborative, and focuses on progress building systems working cohesively, in
consistent, and seamless high- and delivering on time. Contractors are order to deliver efficient, consistent, and
performance outcomes for clients. happy to be pushed on time and delivery, seamless high-performance outcomes
but need to be backed up with timely for their clients in this demanding
A highly-skilled staff base also gives them approvals of variation orders and a economic environment where demands
the ability to better deliver their projects sensible assessment of the time and cost revolve around acquiring more for less.
with a loyal workforce which reduces the impact of changes.
learning curve and builds critical skills Marcus Truscott, Managing Director
across all jobs. The senior management In a rapidly changing technological of Multiplex ME
team members have been in the environment, the construction industry is
company for over a decade, and the one step behind many others in terms of
labor force is trained in training camps technology adoption. On this arena,
the company has set up to ensure all Marcus thinks 3D printing will shape the
labor develops the requisite skills to industry in the future and mentions thin
maximize productivity and efficiency. margins to be an inhibitor towards
They also provide long service incentives technological advancement. The
to their staff and a labor education fund company promotes innovative building
for their dependents, which they believe methods, which have provided very
improves productivity and loyalty to the efficient and effective building processes.
company. They introduced building information

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Investing in innovation
in the world’s largest
airport

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

At Dubai Airports having a long-term view 2018 traffic across both of our airports, passengers. Current legacy thinking
is an absolute necessity and each DXB and DWC, is projected to exceed has also produced a series of vertical
progressive year gives us the opportunity 91 million. In the long-term Dubai’s solutions for our customers to pass
to track progress and reaffirm our geocentric location, open skies policy, through horizontally – during which they
strategic approach. While we are mindful which promotes traffic expansion, and are massed together into queues. This
of short-term fluctuations to regional and the city’s continued emergence as a is not modern thinking. Today’s most
global traffic volumes due to socio- leading center for trade, commerce and successful companies start with the
economic factors, we must also consider tourism will continue to spur traffic customer. Examples of this abound.
macro-economic factors and emerging growth. By 2025 we will see passenger Uber, Amazon, Facebook and eBay all
trends that will shape our world 10 years traffic levels rise to 120 million. take what customers hate about taxis,
or more from today. All of these elements shopping, communication and selling
are ultimately factored into the Accordingly, we are solidifying plans to things – and eliminate all the hassle
investment strategy which ensures the accommodate increased passenger from their chosen industry.
provision of timely capacity to numbers and growing cargo volumes.
accommodate growth. That in turn While we continue to invest sufficiently As an industry, we need to foster
enables the continuation of the sector’s in cost-effective connection services and an environment which is genuinely
significant contributions to the local GDP infrastructure, scale cannot and will not collaborative. An environment that
and employment levels, which are be our sole focus going forward. Our DXB uses a common language, has common
estimated to rise to $53.1 billion or Plus program, for example, is designed to objectives and does not hide behind
37.5% of GDP and 754,500 jobs or 29.5% generate capacity of an additional 28 boundaries. We need to eliminate weak
of employment by 2020, according to million passengers per year without links. The most intrusive processes in
Oxford Economics. building anything. Technology and travel revolve around documentation,
process will boost DXB’s capacity to 118 validation and security. And these occur
As a case in point we can look at 2017 million by 2023. In a nutshell, we are multiple times during the course of a
results where we achieved some 89 investing in innovation to extract optimal single journey. The processes on the
million passengers despite numerous value out of our most important asset. ground are the weakest part of the
challenges to growth, including laptop Historically the industry’s approach to aviation supply chain. Legacy thinking
bans, visa restrictions, geo-political capacity expansion has been all about would lead to the conclusion that the
issues and the resulting fluctuations in investing in bigger and bigger facilities industry must strengthen the weaker
consumer confidence and demand. In to accommodate more and more links. Forward thinking would suggest
that we eliminate them all together.

Our DXB Plus program, for example, The power of the customer to select the
most convenient components of their
is designed to generate capacity of end-to-end journey must drive the design
of airport infrastructure, processes and
an additional 28 million passengers technology. The definition and adoption
of global industry standards for initiatives
per year without building anything. such as a single biometric footprint will
transform the customer experience, by
Technology and process will boost enabling a one-time capture of data
which can then be used at multiple
DXB’s capacity to 118 million by 2023. points in the customer journey in a
seamless and non-intrusive way.

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Imagine an airport with no check-in, no

immigration, and discrete, non-intrusive Personal mobility is also in the midst
security, all enabled by a single identity
database, securely held in the cloud and of a revolution. Fast airport links will
available to those who currently need
physical evidence of our identity as we no longer be part of a mass transit
travel. The possibility then emerges to
re-order the entire travel process around system. Pods will be able to take
customer service rather than around the
convenience of everyone else in the customers from their chosen point
supply chain. And if we extend our
thinking around making the links of entry directly to their plane in a
between ground and air more efficient,
then maybe we don’t need an airport matter of a few minutes – without
terminal at all. The prospect of
eliminating that infrastructure and the leaving their seat.
capital investment required is another
example of the value an integrated
approach would bring. In Dubai, we have a unique opportunity
to take the next step in the evolution of
Why not make the start of that journey the airport experience with our shared,
at multiple points of convenience near connected customers. So, as we review
where people live or work? Why not last year’s progress and this year’s
disaggregate the airport terminal and projections, the long-term aspirational
build multiple smaller, convenient entry goal of revolutionizing the travel
points into an airport transit system that experience continues to propel us
can take customers from their homes or forward ever mindful of the service
places of work directly to their plane? It improvements and return on investment
would enable the bypassing of all the this would bring.
changes of mode, baggage issues,
queues, multiple documentation and by Paul Griffiths, CEO of Dubai Airports
security checks and long walking
distances – all the things we hate when
we travel.

Personal mobility is also in the midst of

a revolution. Fast airport links will no
longer be part of a mass transit system.
Pods will be able to take customers from
their chosen point of entry directly to
their plane in a matter of a few minutes –
without leaving their seat. A seamless,
door-to-door solution will make the
entire journey experience faster, more
relaxing and more efficient. It lies within
our grasp.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

VAT implementation
What does it mean for the
construction industry?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

With its unique practices and latter may benefit the customer, it can persons only if they are unable to recover
arrangements, the construction industry also cause problems for commercial VAT in full, such as because they also
faces a number of challenges and relationships. perform exempt or non-business
complications with respect to the activities. Suppliers should be sensitive
application of VAT in the GCC. Saudi Arabia has introduced some to this during price negotiations.
grandfathering provisions that allow zero-
With a significant focus being on rating to continue for contracts entered In the context of commercial leases,
development in the region, and with into before May 30, 2017 but only until landlords may wish to consider different
large-scale commercial, residential, and the contract expiry or December 31, incentives for tenants that make exempt
infrastructure projects ongoing, it has 2018, whichever occurs first. The UAE has supplies (e.g. financial institutions). That
been critical for the authorities to indicated that it will allow businesses to said, many larger institutions that make
develop specific rules to ensure that the charge VAT in addition to the price in significant exempt supplies can employ
VAT system is fit-for-purpose by the time cases where the contract is silent about other strategies to address the blockage
of the introduction of VAT on January 1, VAT and the customer can recover VAT on VAT credits. For example, they might
2018. With this objective, however, come in full. Obviously, there are terms and incorporate separate taxable supplier
special rules to benefit the industry, and conditions for both, but it provides entities to act as the landlord in respect
with special rules, comes a complexity some relief. of property used by the exempt supplier
that creates an environment of risk that so that they can manage the timing and
needs to be mitigated through the In Saudi Arabia, any contracts agreed cash flow impacts of the VAT as a cost to
adoption of appropriate controls and after May 30, 2017 are obviously still at them.
processes. risk, as the transitional provisions will not
apply. The same is true for contracts that While this does not have the effect of
With the deadline for the introduction were signed prior to May 30, 2017, and ridding them of the VAT burden
of VAT in Saudi Arabia and the UAE which will continue. So a major area of altogether, it can have the effect of
having recently passed, and while for potential risk still exists for any contracts altering or delaying the timing of the
other GCC member states it is still agreed before the implementation of VAT negative effects of VAT on businesses
looming, we look at the main challenges but which will be executed or delivered that cannot recover VAT as an input tax
for this transitional period, and beyond it, after it. credit.
below, with some suggested options for
addressing them. Barter and incentive transactions
The UAE has indicated Property transactions often involve
Lead times on major projects
Lead-in times for major construction
that it will allow considerations other than, or in addition
to, money and this can cause complex
projects can be extremely long and a businesses to charge VAT VAT problems. For example, an exchange
large number of the major projects due of property interests such as the
to be delivered over the next few years
in addition to the price in surrender of an old lease in exchange for
will not have had VAT factored into them cases where the contract the grant of a new lease, or a sale and
on the cost, revenue, or commercial leaseback transaction, may take place
side. A significant number of contracts is silent about VAT and without a clear exchange of money.
understandably do not include VAT
the customer can These are barter transactions and it is
clauses designed to protect the supplier important to analyze the VAT implications
and/or customer, where ideally these recover VAT in full. for each party and to ensure there are
would be expected in jurisdictions no unexpected VAT costs. Failure to
where VAT is in place. Property developer commercial recognize these transactions could result
challenges in penalties.
As a result, parties to such contracts are For reasons apparent below, we have
faced with few options. Either they rely on dealt with residential real estate Issues often arise when the two parties
any transitional provisions that may be development separately from commercial either ignore the transactions, as they
included in the relevant domestic VAT law, real estate. do not go through the accounts, or they
or they renegotiate their agreements to account for them at different values. This
put an appropriate clause in place, or The development and charging of VAT is an easy target for the authorities in
the supplier is forced to take a hit to the on the supply of commercial buildings such situations.
profitability of the contract. While the creates an additional cost to taxable

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Similarly, it is relatively common for for work completed – the date of the What is clear from the above is that the
property developers, particularly in the original invoice, the date of certification, ability for a construction company to
retail, office, and industrial markets, to or the date of the amended invoice, pass on the full impact of VAT to property
offer rent-free periods and other based on the values certified. As services developers depends on whether
incentives to prospective tenants. This are usually required, for VAT purposes, developers will be able to claim a full
can trigger a VAT liability for the tenant to be accounted for when completed, VAT credit. A developer’s VAT recovery
and the landlord if it is determined that we would generally suggest that this is position will be determined by reference
something additional has been supplied treated as when the work is certified, to the VAT treatment of the real estate
in return for the incentive, for example, and the final invoice is issued, rather than transactions that the developer enters
building works. when the initial invoice/claim is made, for into.
the simple reason that it is only at this
Furthermore, some jurisdictions seek to stage that the ‘completion’ of services is Cash flow
deem a market value for rental during a confirmed. One of the biggest concerns for the
‘rent-free’ period, requiring the landlord whole property sector will be planning
to account for VAT, especially if it is not a Residential property its cash flows. The sector, which often
lease between arm’s-length parties. This The development, construction, and operates on thin margins, could be
is regardless of whether the ‘rent-free’ supply of commercial, industrial, and under pressure in terms of meeting
period is effectively subsidized by the retail properties and infrastructure is the additional requirement of paying 5
higher rental received during the subject to VAT at the standard rate. The percent VAT on the purchase of goods or
remaining term of the lease. treatment of the supply of residential services each month or quarter on an
real estate is different for a variety of accruals basis.
Mixed-use properties policy factors.
For companies engaged in the supply of Conceptually, this should be offset by
both exempt (residential) and taxable In the UAE, the first supply of residential claiming refunds of such VAT from the
(commercial) properties, the impact could premises is zero-rated if it occurs within relevant government where the net
be significant, as there will typically be three years of completion of the amount of VAT due payable/refundable
complicated calculations for the recovery premises. As long as that first supply is a dictates. However, the payment of
of proportionate input tax credit for each sale, this allows the VAT incurred during those refunds, in practice, could take a
accounting period. Any mistakes in the the construction process to be recovered substantial amount of time, which will
calculations will make VAT an additional and the VAT has no impact on the costs still impact on cash flow.
cost for the business, impact its of construction. As a result, the VAT
competitiveness, and may give rise to passes through the chain to be deducted Hopefully, by now businesses will have
penalties. by the developer. performed a comprehensive impact
assessment to determine the additional
The development, Where the first supply is a lease, every cash flow requirement and the impact
subsequent supply, whether a lease or on working capital to identify additional
construction, and supply sale, will be treated as exempt. The funding if necessary.

of commercial, industrial, developer is not able to recover VAT

incurred during the construction, as Conclusion
and retail properties and there are claw-back provisions on the It is clear that this article is only
VAT on the construction costs. Instead, scratching the surface of the complex
infrastructure is subject the developer needs to recover the practical, technical, and commercial
to VAT at the standard additional cost of the VAT as well as its issues facing the construction industry.
margin if possible when the property is
rate. sold or leased. This makes it essential It is essential that developers and
that the first supply be by way of sale construction contractors seek assistance
Construction work rather than lease. in navigating their way through the
The provision of construction services, process, as there are many competing
including materials, will be subject to VAT In Saudi Arabia, in contrast, the supply of objectives and outcomes that could trip
at the standard rate. Subcontractors are residential real estate is standard rated, up the unwary.
also likely to be impacted because of the and it is simply the supply by way of lease
manner in which construction contract that is exempt. This means that VAT will by Bruce Hamilton, Partner Indirect Tax,
work is usually certified prior to payment be a real cost for enterprises that lease Deloitte Middle East
being made. This can cause confusion as residential property, and this needs to
to when there will be a need to account be factored into their returns.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Real estate
development
funding squeeze
Myth or reality?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In the UAE, whilst there In the current economic environment, In the UAE, whilst there may be isolated
there is a prevalent notion that bank cases of individual banks facing liquidity
may be isolated cases of lending has been constrained from both shortages, the overall picture is of a

individual banks facing a real estate development perspective

and general corporate lending landscape.
banking system which has experienced
increased deposit taking from both the
liquidity shortages, the The recurring themes typically revolve public and private sector. The central
around a perceived credit squeeze and bank data below (Figure 1) reflects asset
overall picture is of a lack of liquidity in the bank market. This build-up in line with deposit growth over
banking system which article seeks to understand the extent of the last three years.
any liquidity constraints in the GCC’s two
has experienced largest real estate development markets, In Saudi Arabia, the bank market is far
increased deposit taking namely the UAE and Saudi Arabia. more robust and liquid; although the
Government sapped liquidity levels
from both the public and Loans and deposits data trends in the through bonds placed with local banks,
UAE and KSA seem to depict a picture it later replenished deposits by way of
private sector. which is at odds with some of the international bond sales. Whilst overall
anecdotal viewpoints. lending activity has tapered slightly (see
Figure 2), banks have added an estimated
Figure 1. UAE loan to deposit levels (AED billion)
SAR 200 billion in assets to their balance
1,650 sheets since the beginning of 2015.
1,592
1,600
Indeed, central bank data suggests that
1,550 the overall bank market in both countries
1,500 is capable of maintaining and building
1,444 deposit levels as well as deploying much
1,450 1,494
1,400 of this liquidity back into the market.
1,400 Notwithstanding this banking liquidity, it
is clear that the investment appetite of
1,350
GCC economies is currently subdued,
1,300 and investment into local real estate
1,250 markets by government, private local
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 developers and international investors is
cautious and less aggressive than before.
Total Deposits Actual Loans
Source: UAE Central Bank
Banking credit policies
In order to appreciate the full extent of
the impact of the general liquidity and
Figure 2. KSA loan to deposit levels (SAR billion)
macro environment on the behavior of
1,700 1,628
banks, we need to consider the credit
1,578 1,603 policies employed. The following table
1,600 1,521 is a brief overview of the real estate
1,500 development financing credit policies that
banks were implementing during the era
1,400
of $100 per barrel of oil in the UAE and
1,300 KSA.
1,200

1,100

1,000

900
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Total Deposits Actual Loans

Source: SAMA

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Business Plan • Fully funded business plans (equity + debt

required = total capex, contingency provisions and
project working capital)

Land purchase • To be paid out of equity in full prior to loan

approval and or drawdown

Loan to construction value • Limited to 65%-70%

Debt servicing during construction • Must be serviced during construction from

either additional equity contributions or
unencumbered cash flows from operations
outside of the particular development project

Recourse • Yes, to project owners in the form of personal

and or corporate guarantees

Security • At least 100% cover of the loan amount

• In some cases, especially in KSA, lenders
required between 1.25x and 2x cover depending
on the nature of the development and loan
request

Pricing • Typical margins above interbank rates ranging

from 380 basis points to 450 basis points during
construction
• Stepping down to an average of 350 basis points
during the amortizing period of loans

Tenor • 5 years through to 12 years including

construction periods

Source: Deloitte Corporate Finance Advisory Limited

The reality is that the same table also Most common areas where borrowers
applies to banks today. Indeed, in times fall short are:
of higher market risk, one would
reasonably expect credit committees to 1. Requesting much higher loan to
require (1) lower loan to construction construction values
values (2) additional security (3) tighter 2. Requesting banks finance part of
tenor profiles and (4) more aggressive the cost to purchase land
margins. 3. Project business plans are not fully
funded – reflecting potential future
Our experience is that, whilst there is an funding shortfalls during construction
overall heightened level of caution when 4. Proposals not having the required
appraising lending opportunities, overall equity commitment levels and/or
credit terms are largely the same in the alternative unencumbered cash flow to
current environment for well-structured service debt until the particular project
and appraised credit applications. is in a position to generate its own
cash flow and meet covenants
Where most borrowers fall short
We often see potential borrowers failing In the last twelve months, both in the
to secure funding because they do not UAE and in KSA, we have assisted
meet the above lending policies. borrowers in attaining approval for

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Bank debt is not the only funding requests (circa AED 3 billion deal • There are a limited number of quality
flow) that are on better terms than the lending opportunities in the market;
form of debt that is general credit policies stated above due • Borrowers expect banks to take equity
to the commitment, transparency and risk with minimal, if any, commitment
available to borrowers; overall “deal readiness” that was coming from borrowers themselves;
there are other forms of forthcoming from these borrowers. and
• Loan pricing requests are typically
debt that cost more than We have witnessed bilateral deals for reflective of AA rated investment grade
bank debt and if used loan amounts that would typically be returns rather than the actual risk that
financed by a club or syndicate of banks loans are requested to fund.
correctly can help and in some cases with much higher loan

borrowers fund their to construction values than are the norm. Bank debt is not the only form of debt
that is available to borrowers; there are
projects. Our experience is that lenders are other forms of debt that cost more than
competing heavily with each other to bank debt and if used correctly can help
secure good quality, well-prepared borrowers fund their projects.
business plans, borrowers and mandates.
Critically, very few borrowers understand
Indeed, lenders typically have a number the risk and cost allocation across the
of complaints, which we feel are a different stacks of capital. The below
recurring theme: table is a basic overview of this risk and
cost allocation:

Annual cost Risk profile

Bank debt – senior lenders 4%-6% • Typically fund mature operating businesses
with steady cash flows.
• Repaid in priority and rank to other forms of
capital, with security in place. Do not enjoy
equity upside.

Higher yielding non-bank debt 7%-10% • Repaid only after senior lenders are repaid.
• Carry a second charge on security behind
senior lenders.
• More flexible terms compared to banks with
regards to amortization and debt servicing
requirements.

Mezzanine debt 12%-18% • Fund gaps between equity and senior debt
requirements.
• Often with limited security but with noted
share pledges.
• Enjoy limited, contracted equity upside.
• Very flexible terms compared to banks, such
as minimal or no amortization and flexible debt
servicing and/or interest roll-ups.

Equity +20% • Repaid only after all other forms of capital

have been paid/ serviced.
• Makes the highest return as this form of
capital takes the highest risk.

Source: Deloitte Corporate Finance Advisory Limited

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

All too often we see potential borrowers

for real estate development projects fall Our experience is that there is appetite
short of either the prerequisite equity
commitment levels, or they do not from banks to lend to real estate
provide banks with the tangible comfort
that lenders require. The result is that development projects that are well
banks are, more often than not, being
asked to take equity risk at senior debt structured from a funding perspective.
cost of capital. Indeed, other credit terms
(e.g. security, amortization, tenor etc.)
that borrowers ask for are not usually reclassify corporate loans that are
aligned to the risk/return profile banks secured by real estate assets as “real
are designed to satisfy and the role they estate sector” loans, which might hinder
are expected to play in the capital some local banks from taking more
structure. exposure to the local real estate market.

International lenders Conclusion

This article is focused on local banks We started this article by posing a
and their ability to support funding local question around the state of the current
real estate development. There are local bank lending market. Our
international banks that have supported experience is that there is appetite from
local borrowers in the past directly or banks to lend to real estate development
against Export Credit Agency support projects that are well structured from a
mechanisms backing importation of funding perspective.
foreign capital goods and employment
of foreign construction companies. Our view is that borrowers need to
Western as well as Asian banks have approach their business plans, funding
taken such exposure in the past, and requirements and ambitions with realism
may still support certain transactions and suitable levels of equity commitment
in the future. to ensure there is sufficient “skin in the
game”, so as to allow senior lenders to
Importantly, international banks are satisfy their role in the capital structure.
generally less competitive in local
currency loan pricing than the local by Kosta Georgiadis, Head of Debt
banks, and are usually more conservative Advisory, Deloitte Middle East
than local banks with respect to local real
estate exposure and credit policy.

Potential future tightening of credit

policies
Some local banks are already carrying
high levels of real estate-related
exposure, and may allocate surplus
liquidity to other sectors moving forward.
New accounting standards that are
planned to be implemented in the near
future may require local banks to

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

KSA’s engineering
& construction
sector 2017
Who dares wins

28

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

29

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The Kingdom of Saudi Arabia’s international markets, and that the contracting culture. The market was
engineering & construction (E&C) sector foreseeable trend will have an ever characterized by very poor project
is in the throes of a once-in-a-generation increasing number of major stakeholders delivery performance, which was often
disruptive change which is precipitating exploring ways of leveraging leading accompanied by wasteful and very costly
radical innovation. The long-term industry practices to gain competitive actions of dispute.
sustainable future of many major business advantage.
businesses within this market segment is The failure of the Channel Tunnel Project
being shaped by their ability to create This is hardly surprising when one (10 workers killed, 80 percent over
new and modern built-asset solutions considers that the major economic and budget, two years late) created a major
that customers want to buy and/or invest social drivers guiding the KSA markets industry inflection point and contributed
in whilst optimizing the operational search for improved project delivery significantly to the British government’s
performance and efficiency with which performance, in many ways echo decision to demand change.
such products and services are delivered. historical conditions in other parts of
It could be said that the essence of the the world. Of particular consequence With the support of the country’s
Kingdom’s Vision 2030 plan has well and is the extent to which these conditions construction industry leaders (Sir John
truly taken root, and that the race to precipitated a complete cultural and Egan – Rethinking Construction, 1998 and
establish market relevance under a systemic step-change in the way these Sir Michael Latham – Constructing the
revised demand and supply compact is markets elsewhere went about correcting Team, 1994) a new order was ordained
most definitely on. the inefficiencies of their outdated capital which realized a fundamental step-
project delivery and contracting change in the overall approach to capital
Few would disagree that the basic approaches. project delivery.
economic fundamentals that underpin
KSA’s E&C market remain sound, albeit
temporarily constrained, and that the It could be said that the essence of the
sector has a major role to play in
contributing significantly to the overall Kingdom’s Vision 2030 plan has well
growth and prosperity of KSA as a nation
whilst extending and diversifying its and truly taken root, and that the race
economic activity in neighboring and new
markets alike. However, many would to establish market relevance under a
acknowledge that the successful
realization of any future strategic revised demand and supply compact is
ambition will undoubtedly depend on the
rate and pace at which the industry can most definitely on.
realistically modernize and transform
itself, or more pointedly normalize to a The E&C sector in KSA maintains a rather What became known as the ‘Egan &
level of competitive parity with similar traditional composition, which in many Latham era’ produced a new philosophy
international markets. ways resembles that of Britain up to the that incorporated the tenets of enhanced
mid to late 1990s. During this period the partnership, smart procurement & supply
KSA’s rapid transition to a competitive market was severely depleted of chain management, collaborative working
market paradigm is being led by one adequately skilled resources due to arrangements, integrated data
unescapable reality, that the traditional decades of underinvestment in management practices, equitable risk
rule book for capital project delivery infrastructure, economic pressure, and sharing, and ‘open-book’ contracting with
within the Kingdom is being progressively poor industrial relations, which in itself performance-based incentives.
superseded by modern standards that supported an environment of predatory
have become commonplace within many tendering accompanied by an adversarial

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Equally, this era saw the rapid challenges can be simply overcome delivery teams, active risk management, a
advancement of technology enable through the reconfiguration and/or focus on early scope definition supported
project delivery systems, which sought to upgrade of existing enterprise resource by robust change control, and a
help bridge the capacity and capability planning (ERP) and enterprise consistent requirement to work with best
gaps through the deployment of program/project management (EPPM) of breed delivery partners with proven
sophisticated digital platforms. The rather technology platforms is flawed. Complex capability.
unfortunate side effect, and continued capital projects demand significant
legacy, of this widespread technology financial resources, and require The KSA E&C sector is primed and ready
adoption is that many of the available significant contributions from all critical to take advantage of the lessons learned
solutions are often directed at a data- business dimensions, e.g. policy, from other global centers of excellence,
centric rather than information-centric standards, people, processes, systems, and the first adopters who are able to
agenda, which to this day continues to tools, etc., all of which need to be package these solutions for the domestic
frustrate the industry, to the extent most expertly guided by a strong and credible market will undoubtedly have the upper
of the recognized technology providers leadership – a holistic challenge that hand in what will become an increasingly
have not yet cracked the proverbial nut requires a holistic solution. competitive industry. Suffice to say…who
as far as the E&C sector’s core data dares wins!
objective is concerned i.e. reliable
Credible, trustworthy
knowledge that supports decision- by Sheldon Morris, Vice President of
making. information is a El Seif Engineering Contracting

A further extension of this precedent is

prerequisite for the
that many industry stakeholders continue successful delivery of any
to maintain the belief that mass
automation will allow a discreet cost- major capital program or
effective team of skilled, often project, and without it
inexperienced, resources to successfully
deliver substantial portfolios of extremely failure is guaranteed.
complex pieces of built-assets – the net
result being that these organizations Over the past at least 15 years there have
deploy significant resources to develop been a number of stand-out examples of
equally complex enterprise and project successful mega-projects (Heathrow
management technology platforms with Terminal 5, London 2012 Olympics,
associated applications that are poorly London Crossrail, National Highways
designed, configured, and implemented. Agency, etc.) that have set new global
This provides senior management with benchmarks for capital project delivery.
an array of confusing and in many cases The distinguishing characteristics of all
conflicting statements on the overall these exemplar projects is a prioritized
performance of their capital project agenda that places significant emphasis
portfolio – quite often speeding up the on well-articulated vision statements with
rate at which bad news is delivered. clear executable objectives, accompanied
by robust delivery strategies supported
Credible, trustworthy information is a by sound policy, strong and accountable
prerequisite for the successful delivery of leadership empowered to make decisions
any major capital program or project, and based on reliable data, transparent
without it failure is guaranteed. The governance structures that avoid
notion that complex project delivery authority bottlenecks, well integrated

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

IFRS 15 disclosure
requirements
Are contractors
ready for it?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The disclosure objective of IFRS 15 is to extensive, and in some cases,

commercially sensitive disclosures in

establish the principles that an entity their financial statements.

These comprehensive disclosure

shall apply to report useful information requirements were the International

Accounting Standards Board’s response

to users of financial statements to to criticism that IAS 11 and IAS 18

revenue recognition disclosures were

understand the nature, amount, timing inadequate. The disclosures

requirements under the new standard

and uncertainty of revenue and cash will impact all entities – including
contractors. IFRS 15 is effective for

flows arising from a contract with a annual reporting periods beginning on or

after 1 January 2018.

customer, including qualitative and The disclosure objective of IFRS 15 is to

quantitative information. establish the principles that an entity

shall apply to report useful information to
users of financial statements to
Everyone demands transparency. In understand the nature, amount, timing
business, transparency is pivotal for an and uncertainty of revenue and cash
effective decision making. And in an flows arising from a contract with a
industry like construction, the bases of customer, including qualitative and
the significant estimates and judgments quantitative information. However,
are almost always left undisclosed to the greater transparency may be perceived
users of the financial information as the differently by different users – whilst
current accounting standards do not shareholders, lenders and competitors
require a significant level of disclosure in get greater insights into the contractor’s
these areas. business, the information may be
considered commercially sensitive by
In May 2014, the International management.
Accounting Standards Board (the “Board”)
issued IFRS 15 Revenue from Contracts In the table below, we have reproduced
with Customers to replace the current the significant disclosure requirements
standards on revenue recognition, and also highlighted some of the key
including the construction industry’s challenges we believe contractors will
“accounting manual”, IAS 11 Construction face in collating the information and the
Contracts. The standard introduces a 5 possible commercial sensitivities that
step model to revenue recognition from may arise as a result of this disclosures in
Contracts with Customers, which to a an industry where this level of
certain extent is more prescriptive transparency is commercially very
compared to previous requirements. It sensitive and would be a new concept.
also requires entities to provide

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Significant disclosure requirements1

Disaggregation Contract balances Performance obligations Transaction price allocated to

of revenue the remaining performance
obligations

Entities shall disaggregate revenue Entities shall disclose: Entities shall disclose: Entities shall disclose the
recognized from contracts with (a) the opening and closing (a) when the entity typically satisfies significant accounting estimates
customers into categories that balances of contract assets its performance obligations and judgments made in
depict how the nature, amount, and contract liabilities; (b) the significant payment terms; determining the transaction price,
timing and uncertainty of revenue (b) revenue recognized in the (c) types of warranties and related allocating the transaction price to
and cash flows are affected by reporting period obligations. the performance obligations and
economic factors. - that was included in the determining when performance
contract liability balance at the obligations are satisfied.
beginning of the period; and
- from performance obligations
satisfied (or partially satisfied)
in previous periods.

Potential challenges

Contractors should exercise Have contractors considered Have contractors considered Contractors should exercise
judgment to categorize their the current capability of their whether their contracts include a judgment and be able to
revenues. Some of the categories accounting systems? Is the significant financing component, demonstrate the viability of their
can include, but not limited to the system able to extract the paying particular attention to forecast on when they expect to
following: quantitative information unusual terms in the contract in recognize the revenue related to
- market or type of customer required? relation to advance payments and unsatisfied or partially unsatisfied
(i.e. government or private) collection of certified amounts? performance obligations.
- type of contract (i.e. fixed-price Have contractors considered the This consideration is likely to
or re-measurable) need to upskill their existing require significant judgment and Do contractors have written
- geographical region (i.e. country finance function? a greater collaboration between policies describing:
or region) tender, project and finance teams - the methods used to recognize
in order to obtain the relevant revenue (description of the
Have contractors considered the information to assess this output or input methods used,
current capability of their requirement. how are these methods
information systems? Are they applied)?
able to monitor their contracts - how variable consideration is
based on the applicable category estimated and whether this is
to facilitate the disaggregation constrained or not;
process? - how highly probable revenue will
be defined and described to
comply with the requirements
for recognizing variable revenue;
- how obligations for warranties,
decennial liabilities and other
similar obligations are
measured;
- the judgments made in
evaluating when a customer
obtains control of the project?
Have contractors considered the
current capability of their
accounting systems to facilitate
the extraction of this information
considering the number of
contracts maintained?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Potential commercial sensitivities

Does the requirement expose the Does the requirement highlight Will the disclosure of significant Does the requirement expose the
contractors’ market share to the information that could allow financing components included contractors’ budgets, targets and
readers of the financial readers of the financial within contracts hinder any future future cash flows related to its
statements, including its business statements to decipher the negotiations with customers and ongoing and confirmed projects
strategy while on the other hand amount of excess billing financers? Furthermore, will this in pipeline (excluding cancellable
allowing key stakeholders insights compared to the performance provide competitors with insights wholly unperformed executory
on how the business is being obligation satisfied as at reporting into the entity’s business model? contracts) to the readers of the
managed? date and long-outstanding financial statements?
satisfied performance obligations * Disclosures on unsatisfied
not yet billed or collected? performance obligations should Will this requirement provide a
not be confused with the order benefit to the stakeholders by
book, as these two can actually informing them if the entity will be
differ (for example, IFRS 15 able to continue to operate in the
disclosure may exclude foreseeable future due to the
cancellable executory contracts disclosed expected revenue on its
as per IFRS 15 paragraph 12, or existing contracts?
IFRS 15 disclosure will reflect
constrained revenue, which may
be markedly lower than what is
really expected). Some entities
may choose to make separate
“order book” disclosures, which
should be reconciled to the IFRS
15 disclosures.

Sources: https://www.iasplus.com/en/standards/ifrs/ifrs15

With the advent of the effective date of standard will have on the opening 1. This article provides a summary of the key
disclosure requirements in IFRS 15 Revenue
IFRS 15 on 1 January 2018, there is balances as at 1 January 2018 to realign
from Contracts with Customers and provides
currently no room to deliberate. the existing accounting policies with potential challenges and possible commercial
Contractors have much to consider IFRS15 as well as determining the future sensitivities. However, this article does not
including: accounting policies and preparation of cover all the required disclosures either by IFRS
15 or any other standards. Therefore, this
• the capability of its current information the information required to meet the
article should not be taken as a replacement for
systems to support the new accounting disclosure requirement in its next a need for any accounting consultation nor
and disclosure requirements, financial statements. For contractors that should be treated as accounting advice.
• the need to upskill finance and have taken unapproved variations and
operational employees and enhance claims to book under IAS 11, where they by Jaimi Raikundalia, Audit Principal,
their collaboration could meet the threshold of “probable” Meanne Rose Franco, Audit Principal,
• the commercial impact on the choices it now have to reassess if these claims and and Jonathan Mandon, Audit Manager,
makes on disclosures requirements variations meet the threshold of “highly Deloitte Middle East
• the transition choices it elects to adopt probable” under IFRS 15. Such an
assessment could lead to material
For contractors that have not yet adjustments to revenue on transition to
assessed the impact of IFRS 15 on their IFRS 15 which is required to be disclosed
contracts, there is much work to be in the current year financial statements.
undertaken to assess the impact this

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Mr. LIU

Fangjiang, Vice President
& MENA President of
SEPCOIII Electric Power
Construction Corporation
Delivering power construction
solutions fit for the region

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In light of slow economic In light of slow economic recovery on a includes those of thermal, nuclear, gas
global scale, there has been a lack of and oil-fired, hydro, wind, solar and
recovery on a global growth in the electric power sector biological power plants. It has
globally, marked with a slowing down of distinguished itself with strong
scale, there has been a project awards overall, and subsequently capabilities across the power industrial
lack of growth in the intensified competition among chain to deliver tailored solutions as an
engineering, procurement, and EPC contractor, or a variety of forms that
electric power sector construction (EPC) contractors. This is include EPC+Operation, Built-Own-
globally, marked with a particularly the case in the Middle East Transfer (BOT), Built-Own-Operate (BOO)
region, where the new normal of and Project-Management-Contract (PMC)
slowing down of project sustained low oil prices has led to fewer basis. In the Middle East and North Africa

awards overall, and funded projects being launched in the

market. Yet at the same time, the region
(MENA) region, the company has been
delivering power plant projects since
subsequently intensified itself remains a market of potential in the 2008, starting with Jordan before
eyes of many international power EPC expanding into multiple markets across
competition among contractors, underpinned by factors such the region including those of Saudi
engineering, as population growth, urbanization, Arabia, Oman, Kuwait, Egypt, Iraq and
industrialization, and low electricity Morocco. Currently SEPCOIII is a leading
procurement, and prices; moreover, with China’s Belt and power contractor among its peers, with
construction (EPC) Road Initiative featuring the region the largest unit capacity under
prominently, a growing number of construction across the region.
contractors. Chinese power contractors are now
joining this already crowded market, Although long a well-known brand among
making it even more difficult for other Chinese power sector companies, the
power contractors to stay alive and company’s foray into the MENA region
thrive. wasn’t easy and it took nearly nine years
of dedicated efforts to reach the market
Considering the immense challenges recognition it enjoys today.
facing such contractors, we reached out
to Mr. LIU Fangjiang, Vice President and Looking back at where they started in
MENA President of SEPCOIII Electric 2008, Mr. LIU recalled their MENA
Power Construction Corporation, to get journey in a three stage development
his views on market opportunities and path familiar to many international
risks of relevance to his company and contractor peers operating in a new
other international EPC contractor peers, market full of opportunities and
as well as what it may take for a power associated risks. SEPCOIII’s first phase
contractor to stay competitive amid spanned 2008 to 2012, with a focus on
sluggish market growth. understanding the local market
regulations, requirements and pricing
As one of the first globally active power mechanisms, via a number of pilot
EPC contractors from China, SEPCOIII projects in key markets. This was followed
Electric Power Construction Corporation by a second phase from 2012 to 2015,
is a wholly-owned subsidiary of during which the company started to be
PowerChina group, specializing in power more active in bidding for and winning
related construction and installation that projects in these markets, leveraging its

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

acquired experience and knowledge of update. Such ambiguity inevitably led to In consideration of market requirements,
the local operating environment. Then, inconsistent enforcements, and the company focuses on project delivery
during the third phase from 2016 until subsequently room for rent seeking in select markets to build solid
today, the company has built a large behavior and an arbitrary approach credentials and let its track record speak
pipeline of achievements via continuous towards market participants, which could for itself, which then paves the way for a
wins and consistent project delivery, and be prohibitive for foreign companies who sustainable business expansion across
benefits from its strategic partnership lack the market experience and know- the region with continuing collaboration
with reputable developers, which include how to navigate such conditions. with existing project owners as well as
ACWA, Marubeni, Mitsui and NG. Competition-driven pricing pressure is building a growing network of strategic
another area Mr. LIU brought up as an partnerships with key international
Speaking about his experience in growing important consideration for power financial institutions, design agencies and
the business, Mr. LIU highlighted the contractors. He noted that, during the equipment providers. Such an approach
challenges associated with market past year, the average price level had has landed the company repeated
requirements, regulatory ambiguity and decreased by 10 percent compared to contract wins with key market project
competition-driven pricing pressure. the previous year. This is largely driven by owners across a broad spectrum of
the limited number of independent power mandates, including Noor II/III
On market requirements, the main power producer (IPP) projects in the Solar CSP power plant (Morocco),
regional markets, in particular the GCC market, and too many companies joining IBRI/Sohar/Salalah natural gas power
countries, tend to adopt American and the competition. Despite these plant (Oman), Yanbu Power and Water
European standards when it comes to challenges, Mr. LIU stressed that the project III (KSA), Samara Phase IV (Jordan.)
equipment as well as infrastructure company has adopted measures to
building practices and codes. This ensure their interests are protected and In dealing with regulatory ambiguity,
presents practical challenges when lessons learned. Mr. LIU mentioned that over the years
SEPCOIII wishes to leverage its global they have learned the lessons from first-
resources to deliver efficiently on local
projects. The company has to invest time
in identifying the differences between
Chinese standards and the market-
Regulatory ambiguity is another area
required American/European standards,
and it also needs to invest resources to
which Mr. LIU felt had significant
reconcile the differences and tailor its
overall solution to meet market
impact on how they do business in the
requirements. This comes in addition to
demonstrating to local developers that
region. Unlike mature markets, many
the company has the capability to deliver
on standards as per their request.
of the laws guiding the industry tend to
Regulatory ambiguity is another area
be less precise and government/legal
which Mr. LIU felt had significant impact
on how they do business in the region.
procedures less linear; at the same
Unlike mature markets, many of the laws
guiding the industry tend to be less
time regulatory measures associated
precise and government/legal
procedures less linear; at the same time
with laws are often subject to constant
regulatory measures associated with laws
are often subject to constant change and
change and update.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

For highly technical hand working experience in target a workforce owning the right mix of
markets, and have gradually developed skills. For highly technical aspects of
aspects of the project, an approach to best protect their the project, such as high pressure pipe
business from associated risk factors. welding, electrical equipment debugging,
such as high pressure Measures have been taken to ensure SEPCOIII usually sends its well-trained
pipe welding, electrical relevant considerations be factored into workers from China to lead the work,
its project tenders and contracts. For this, whereas for civil work and steel
equipment debugging, the company enlisted support from structures, the company will leverage
SEPCOIII usually sends professional consultants and legal the competitive subcontractors locally
advisors. During the project to deliver the work.
its well-trained workers implementation process the company

from China to lead the hires local talent extensively for its
project management team across
Speaking about the importance of
funding in recent years, Mr. LIU
work, whereas for civil regional markets, and partners with acknowledged the increasing role that
quality local subcontractors, to ensure funding capabilities play in securing
work and steel a smooth execution on the ground. project wins and getting projects started
structures, the company across the region. For traditionally
Addressing the competitive pressure, resource-rich countries like the GCC,
will leverage the Mr. LIU acknowledged that SEPCOIII shrinking public funding as a result of
competitive is facing fierce competition from all sustained low oil prices has led to an
directions – companies from mature increasing willingness of governments to
subcontractors locally markets, such as Europe, the US, Japan embrace private sector participation in
and Korea, with a strong reputation, satisfying the demands of power
to deliver the work. technical capabilities, and strong funding infrastructure developments. For
support, as well as companies from China countries with a shortage of resources,
willing to undercut competition on price such as other MENA countries (Jordan,
and competing with similar sources of Egypt, Morocco among others),
Chinese financing. Mr. LIU emphasized governments are eager to tap into
that for SEPCOIII the importance is to additional financing to get the much
play to its own strengths, in particular, needed power projects off the ground.
a well-balanced solution combining With China’s Belt and Road Initiative
world-class technical capability and focusing on this region, SEPCOIII, as a
highly efficient project execution skills. state-owned enterprise, has the natural
Compared to other Chinese contractors, advantage of financial backing from
SEPCOIII is well versed in the most Chinese FSIs as well as its parent group
advanced international technology and PowerChina. However Mr. LIU is more
standards in its space, having worked on realistic about how much leverage it will
complex overseas projects and partnered allow SEPCOIII in terms of project wins.
with leading global power developers for For projects supported by bilateral
years across many high-end markets. government agreements between China
Compared to other international EPC and target markets, Chinese contractors
contractors, SEPCOIII has demonstrated could benefit from having such financing
stronger on-site project management support from Chinese FSIs. However, for
capability, with a reputation for timely other projects on commercial terms,
delivery. This is achieved by having rates offered by Chinese FSIs don’t always
assembled efficient on-site project teams compare competitively against European
with experienced management staff and or Japanese FSIs in the international

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

project finance market. In such cases,

SEPCOIII prefers to partner with other In the renewable energy space, the
reputable developers while taking the
EPC mandate only. company is putting more efforts
In order to differentiate itself from around concentrated solar power
competition in the MENA region, SEPCOIII
is focusing more on making selective (CSP) power projects, where the
decisions about where to play, leveraging
its credentials in relevant areas while barrier to entry tends to be much
further building such credentials in the
regional market. For example, in the higher than Photovoltaic (PV) projects,
conventional energy space, SEPCOIII has
solid credentials, having completed hence less prone to competing on
18450 MW total installed capacity in gas-
fired combined cycle power plants to price only.
date. In the renewable energy space, the
company is putting more efforts around contractor to have secured a place
concentrated solar power (CSP) power among Saudi Electric Power Company
projects, where the barrier to entry tends (SEC)’s qualified EPC contractors, after
to be much higher than Photovoltaic (PV) solid delivery on the Rabigh power plant
projects, hence less prone to competing project in the KSA. This qualification
on price only. The Noor II/III Solar CSP further opened doors to a number of
projects, where SEPCOIII plays the role of subsequent contract awards in KSA and
the main EPC contractor, are the world’s access to more opportunities in the
largest and most advanced CSP power high-end GCC markets, mostly using
plants. Such experience helped SEPCOIII American/European standards. It has
credentialize itself in preparation for also made steady progress into the
growing demand in this space. In operations and maintenance (O&M)
addition, SEPCOIII has also stepped into space, building upon strong project
water desalination with the Salalah and delivery on two of its EPC contracts in
Rabigh projects in Oman and KSA KSA and Morocco respectively.
respectively. This is consistent with the
company’s regional project mix: out of Despite the challenges and risk factors
SEPCOIII’s 12 ongoing projects in the associated with carrying out projects in
MENA region, nine are conventional gas- the region, Mr. LIU is optimistic in terms
fired power plants, with another two in of what the MENA market has to offer:
renewables and one being a coal-fired the market potential is enormous
power plant. compared to many other countries in
the world, and such potential is firmly
All these efforts are consistent with supported by population growth and a
aligning SEPCOIII’s vision and strategy still developing economy in need of
with realities on the ground, making its efficient energy.
regional expansion plan more
sustainable and viable. The company Mr. LIU Fangjiang, MENA President of
is the first and only Chinese power SEPCOIII

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

What’s happening in the

UAE construction market?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Summary • More parties are trying to terminate because employers are using it as a
Like much of the UAE, the construction their contracts as a result of all these tool to get contractors to carry out
industry is being affected by an uncertain payment issues. However, termination additional work. Similarly, employers
economic climate and in particular the in these circumstances is always difficult are refusing to sign off the end of the
drop in the oil price. For the construction and sometimes the process is not defects liability period because they
industry, this means a lack of cash and administered correctly, which in turn are anxious not to relinquish potential
liquidity across the supply chain. As a can have significant effects on leverage over contractors and do not
result, projects are slowing down, being contractual rights (and payment) post- want to release retentions.
suspended or not completed at all. termination.
Employers are increasingly seeking to rely What’s happening in the legal
on their contractual rights and remedies
to avoid having to pay or to delay
The DIFC Courts have market?
• The DIFC Courts have launched a
payment. Meanwhile, contractors feel launched a new new Technology and Construction
that they have no choice but to initiate Division (the "TCD".) This is a positive
claims to get paid. All of this leads to a
Technology and step and shows an appreciation of the
very active disputes market. Construction Division importance of the construction industry
in the UAE. However, we are yet to
What's happening in the (the “TCD”.) This is a see how effective this will be in a new
construction market?
positive step and shows jurisdiction and, in a region that favors
• Contractors are seeing greater arbitration (largely due to its
competition for fewer contracts. This an appreciation of the international focus), the TCD's success
means they are reducing their margins is likely to rest on the specialist
in order to win work and the project is
importance of the construction expertise of the judges it
started on a tight budget, with little construction industry can attract.
room for contingency. This tends to
mean that parties are less likely to in the UAE. • The threat of potential criminal
work collaboratively to overcome any sanctions for bias is reducing the
changes and issues that (inevitably) • Bonds are being held by employers UAE’s attractiveness for experienced
arise during the project. Instead, both against contractors, and also by arbitrators and experts. The
parties have a tendency to focus on contractors against subcontractors. amendment to Article 257 of the UAE
payment and enforcing their strict Until recently, bonds were thought of Penal Code imposes the possibility of
contractual rights, often at the expense as being a "last resort" if there was no imprisonment on arbitrators and
of the longer-term needs of the project. other way to ensure performance of experts if they fail to perform their
a contractor/subcontractor (such as duties in accordance with objectivity
• Employers and/or contractors are liquidation.) However, it is becoming and integrity. Anyone accused of a
unable to finish the work because more common for bonds to be used criminal offence may have their
they run out of cash. This results in to put significant pressure on passport confiscated whilst the
some projects being abandoned mid- contractors/subcontractors. We are allegation is investigated. This is leading
way through. We are seeing some increasingly seeing employers or to some arbitrators, and even some
contractors still trying to get paid for contractors refusing to release a bond experts, declining instructions in the
legacy projects from 2008-2010 or at the end of a project. This compounds region. Some arbitrators are, instead,
earlier. the issue of decreased margins and insisting that the arbitration is held
makes the successful resolution of outside of the UAE - although this is
• Employers are not paying their disputes between the parties less, unlikely to help as they still need to be
contractors for variations, not paying rather than more, likely. physically present in the UAE to sign the
them on time or, in some cases, not award (otherwise the award itself may
paying them at all. This, in turn, is • Taking over certificates are not being be unenforceable.)
passed down to subcontractors and granted, as employers are worried that
suppliers; affecting the entire chain. contractors will then disappear without
completing the snagging and/or

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

• The long-promised Arbitration Law is market. There are lots of negative Communication is key.
still awaited, but is it just around the indicators including: the unpredictability
corner? With numerous drafts issued of Donald Trump, the nuclear threat from Being honest and open
over the years, the new Arbitration Law North Korea, continuing issues with
is highly anticipated. When it finally neighboring Qatar, and potential
early on in a project, and
arrives, the new law should provide a instability caused by Iran. fostering a collaborative
singular legislative framework for
arbitrations in the region and is However, it is not all doom and gloom, relationship (both up and
expected to be based on the well- and there are a number of positive things down the chain), can
respected UNCITRAL Model Law and on the horizon: The region has seen an
influenced by Egyptian arbitration law. increase in solar power projects (with really help to identify
The introduction of a domestic
arbitration law ought to be welcomed
Abu Dhabi announcing plans to build the
world's largest solar power plant in a
issues early on and find
by the construction sector. project worth $870 million.) Dubai is an amicable way to deal
gearing up for Expo 2020 and Qatar is
• Contractors and suppliers in the gearing up for the World Cup in 2022,
with them.
region need to register for VAT. A new both of which are causing an increase
all the difference if issues are escalated
law put into effect on January 1, 2018 in developments and hope to produce
to a formal dispute. One particular
will require all those who supply goods significant income for the region (as well
issue we are seeing is where
and/or services to register for VAT. as, hopefully, some cash flow in the
contractors feel unable to rectify
Given the current low margins and the construction market.)
meeting minutes. Although not ideal,
value and volume of contracts that
an accurate and detailed internal
contractors have in place at any one In recognition of the continuing issues
record setting out why the meeting
time, "sticking VAT" could become a real surrounding the oil market, we are seeing
minutes cannot be amended will assist
burden for them. the UAE diversifying from the oil industry
in a dispute.
with projects such as the Emirates Global
• The Judicial Tribunal (JT) continues to Aluminium’s $3 billion Al Taweelah
3) Escalate issues for a prompt
assert its dominance. The JT has alumina refinery, Abu Dhabi Ports’ Khalifa
resolution – waiting rarely, if ever,
emphatically confirmed that the DIFC Industrial Zone Logistics Park (which
helps. Problems tend to continue
cannot simply be used as a conduit involves the construction of 100
escalating throughout a project, with
jurisdiction for the recognition and warehouses), and Abu Dhabi Industrial
each party becoming more and more
enforcement of domestic or City (where hydrocarbons-intensive
entrenched in their own position. If the
international arbitral awards in onshore industries have been one of the major
problem can be dealt with early and
Dubai. Whether or not the DIFC Courts areas of growth.)
head-on, then this can avoid it
can still be used as a conduit
becoming a much bigger problem
jurisdiction for enforcing foreign court What should parties do? Top 3 tips:
further down the line. Seeking advice
judgments is yet to be resolved. We Communication, records and
early on can help you avoid disputes
anticipate that it will be resolved in the escalation
rather than becoming embroiled in
next 12 or so months, so watch this 1) Communication is key. Being honest
them.
space. and open early on in a project, and
fostering a collaborative relationship
by Alastair Young, Partner and
So what’s next? (both up and down the chain), can
Suzannah Fairbairn, Associate, both
It seems that the oil price is unlikely to really help to identify issues early on
members of the Construction and
rise significantly and there is a risk that it and find an amicable way to deal with
Dispute Resolution Team in the Dentons’
will drop further. Either way, this will them. Even if problems cannot be
Dubai office
mean a continuation of the issues solved immediately, it will prevent
outlined above, with potential worsening them escalating to the point where
over time as the lack of cash flow they are out of control.
continues to bite.
2) Accurate record keeping. Whilst
While the UAE is stable, the wider keeping accurate records can seem
instability of the geopolitical climate will like an additional administrative
have an effect on the UAE's international burden during the project, it can make

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Causes of
construction disputes
in the Middle East

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The economic slowdown caused by low Firstly: Poor contract drafting • Ensure that all known risks are
oil prices has negatively impacted the and risk allocation addressed in the contract with a clear
construction industry in the Middle East Proper contract drafting and a balanced and balanced allocation of risks
over the past years. Government risk allocation are the first steps towards between the parties
spending has decreased across the dispute avoidance. A sound construction • Ensure that clear consequences are
region, giving rise to various challenges contract reduces the potential of defined for the identified risks (e.g.
amongst construction companies and disputes to a great extent by addressing What would happen if a contractor
reducing the pool of available work for as many potential risks as possible. identified a discrepancy in an
the construction sector. The These are ideally drafted by experienced employer’s design? Would the
consequences include many contractors lawyers and/or contract specialists. contractor be liable to propose
having experienced delayed payments, Whatever the reason for not achieving solutions or should he wait for a
stronger negotiations over contractual sound contracts may be, the impact can resolution, and what happens if he
conditions and risks, lower profit margins be significant and is often felt during the doesn’t meet the agreed obligation?)
and other challenges. Claims have completion stages of projects.
therefore become a real method to Experience, continuous learning, and There are a number of major risks in the
generate revenue, not necessarily to development for commercial managers Middle East that should be dealt with in
increase profits, but to reduce the extent are needed when considering the various new construction contracts given their
of losses on some occasions. obligations and liabilities of the parties frequency and impact. These include
Disputes arise when claims are not related to a construction contract. agreeing on the delay analysis method in
resolved through the contractual There are some simple steps that can be extension of time claims, the criteria of
mechanisms agreed by both parties (i.e. taken to mitigate risk and ideally avoid demonstrating concurrency and its
an employer and a contractor.) Even disputes, namely: consequences, and the measurement
when these mechanisms are sound, • Apply a recognized standard techniques of prolongation, disruption
disputes may still arise due to lack of international form of construction and acceleration. These, among others,
proper application. Claims management contracts (e.g. forms issued by the could be potentially controlled, if
in general can best be described as International Federation of Consulting reasonably and clearly addressed at the
immature in the Middle East, which is Engineers or “FIDIC”) contract drafting stage, reducing the
reflected by the poor quality of claim • Use caution when making additions or probability of disputes.
documentation. Our experience shows changes to the adopted form of
that there are three main causes of contract and ensure that the full impact Secondly: Poor contract
disputes frequently seen in the Middle of the changes is understood administration and claims
East construction market, as further • Ensure that there are no conflicts with management
explained below. the applicable laws including, but not A review of construction claims in the
limited to, labor laws, health and safety, region suggests that the majority of
etc. claims are poorly substantiated and
prepared due to poor internal contract

Proper contract drafting and a and claims management. The matter

here is not necessarily related to poorly

balanced risk allocation are the first drafted contracts; in fact, the contracts
could still be well drafted but not well

steps towards dispute avoidance. A administered. Poor contract

administration and claims management

sound construction contract reduces occurs due to several reasons, including

insufficient resources, lack of associated

the potential of disputes to a great experience, and budget constraints, all of

which could impact the main elements of

extent by addressing as many potential a successful claim, such as the availability,

quality and management of records.

risks as possible. Instances where contractors report

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

sudden significant losses near to the

Sound contracts are This opportunistic behavior can be linked
completion of a project are becoming to poorly drafted contracts as well as
more common, whereas the causes of designed to make clear weak contracts and claims management
loss are sometimes not fully practices, since opportunities could arise
comprehended by the senior
perspectives on risk from contractual flaws and procedural
management. These can be largely allocation between the non-compliances, as well as lack of
attributable to a lack of records to contractual knowledge. Sound contracts
substantiate claims, misreporting, poor parties, and experienced are designed to make clear perspectives
contract administration, poor cost specialists are able to on risk allocation between the parties,
management, etc. They can also be and experienced specialists are able to
attributable to unrecognized revenues, properly administer properly administer contracts and deal
pertaining to missing entitlements under
the contract, which can potentially lead to
contracts and deal with with contractual matters as they arise,
and therefore, the probability of
time and/or cost compensations. The lack contractual matters as opportunism occurrence should be
of proper claims management can affect diminished.
the perspective of what is a win and what
they arise, and therefore,
is a loss, by actually not realizing the probability of Conclusion
contractual entitlements and therefore In summary, the simple solution for
not claiming them. opportunism occurrence reducing the probability of projects falling
should be diminished. into dispute is to ensure that sound
When it comes to settlement of claims contracts are in place from the very start,
and disputes, it is likely in the region that, a contracts and claims management
opportunistic party can actually harm the
due to poor claims management, claims strategy is set at the early stage of a
other by unfairly transferring a risk to
and disputes are settled through project, and qualified/experienced
another to secure additional profit.
amicable negotiations based on a specialists and consultants are appointed
Opportunistic behavior in the Middle East
percentage of the total submitted value to administer the contract.
can occur in many forms and due to
of claims. The level of analysis and
various factors, such as language
method of applying these discounts are These measures can reduce the impact
barriers, communication skills, lack of
usually shallow and based on subjective of claims and disputes, and lead to
experience between the parties and lack
views. This mainly occurs when a benefits, such as:
of proper contractual understanding.
submitted claim is a “global claim”, • Maintaining the planned financial
These factors usually appear in the early
meaning that it does not include a cause position of the stakeholders and
stages of dispute resolution prior to any
and effect analysis and therefore there is avoiding surprises at the end of projects
official resolution methods such as
no certainty over whether the identified • Enabling claims to be dealt with as they
arbitration and litigation. An example of
heads of claim have actually led to the arise, allowing more certainty over the
this can be seen where a negotiator uses
alleged impacts or not. Whilst business impact, following good industry practice
complex terms to overwhelm others and
relationships can be an effective factor in • Allowing mitigation by the time a risk
win arguments unrightfully in a
claims negotiation, knowledge of the full event arises, rather than dealing with its
settlement meeting. Another example
and complete extent of entitlements impact at the end of a project
can be where an employer uses their
through applying sound methods of • Maintaining good relationships between
power, as the project sponsor, to benefit
quantification can be an effective tool the stakeholders and avoiding
from a contractor with poor contractual
when it comes to recoverability of claim opportunistic behaviors.
knowledge, or vice versa, where a
values.
contractor submits a claim with
by Amr Ibrahim, Manager, Real Estate &
unrealistic contractual risk events and
Thirdly: Opportunistic behavior Construction, Deloitte Middle East
unsubstantiated costs in order to take
Opportunism is the act of one party
advantage of an uninformed employer.
taking an unfair advantage over another
as an opportunity presents itself. An

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The evolution of construction

How building information
modeling and lean management
are transforming the industry

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

There is no secret as to the challenges Examples of early adoption Further afield, in the Netherlands, the
that face the construction industry and Recent local and international examples world’s first 3D printed bridge was
specifically the delivery of capital projects. demonstrate the direction in which the opened to the public in October of 2017.
As the dozens of reports on the sector’s construction industry is traveling. For The bridge spans eight meters and was
productivity suggest; capital projects take example, the Dubai Government’s 3D made with 800 layers of reinforced, pre-
too long, cost too much and often fail to printing strategy has an objective that stressed concrete by printing machinery
fully meet the requirements of the 25% of every new building in the Emirate that only deposits concrete where it is
customer. should be 3D printed by 2025. The needed. The contractor commented that
strategy aims to “reduce labor by 70%, 3D printing the structure produced far
However, construction is on the brink of a reduce cost by 90% and reduce time by less waste than traditional concrete
transformation which will provide benefits 80%” across the construction, medical casting methods.
to industry stakeholders and society alike. and consumer product sectors.
If fully embraced, two new methods of With regard to BIM, the Dubai
working can deliver the sustainable Municipality mandated its use on all
productivity the global economy needs in
As the dozens of reports governmental projects in 2015, pre-
order to address rapid urbanization and on the sector’s empting the UK Government’s mandate
scarcity of resources. in 2016. Take-up in the region is
productivity suggest; beginning to accelerate, with early
The first is the digitization of assets capital projects take too adopters noting positive client feedback
through Building Information Modeling and huge improvements in the way it
(BIM). In short, BIM is the collaborative long, cost too much and accelerates and improves the design
production of a 3D representation of an
asset (containing geometric and non-
often fail to fully meet the process. Clients can now visualize and
understand the asset, in a way that was
geometric data) that is used to manage requirements of the not possible in the past. There are
this asset throughout its lifecycle. The numerous examples of projects that have
second is the application of lean
customer. adopted BIM in the region, most notably
management principles to construction. the award-winning Etihad Museum in
The principles originated from the This commitment is being backed up by Dubai.
automobile manufacturing industry and action. The Dubai Future Foundation’s
focus, among other things, on ‘just in time’ offices, opened in 2016, were 3D printed Delivering better value and efficiency
production, reducing waste and the use and assembled on site in less than three for all stakeholders
of stable and standardized processes that weeks. The structure cost $140,000 in One of the core principles of BIM and
are continuously improved. One example labor, plant and materials costs, which is collaborative design is that it shifts the
of how this is manifesting itself in estimated to be half the cost of a greatest effort level to earlier in the
construction is the use of modern comparable structure built using project lifecycle. Designers, contractors,
construction techniques, such as 3D traditional construction methods. The owners and operators are all involved
printing and modular, prefabricated Road and Transport Authority and the during the concept (or ‘scheme’) design
building products. Dubai Electricity and Water Authority stage by reviewing and optimizing a 3D
have also both made commitments to model of an asset before it is built. As the
Both methods will provide a much developing and implementing 3D printing design is finalized, its architectural,
needed increase in construction in their businesses. structural, mechanical and electrical
productivity as well as cost and time elements are integrated, reducing the
certainty that the construction industry In addition, across the GCC, governments need for costly changes on-site in the
needs in order to retain stakeholder are starting to emphasize and incentivize construction phase.
confidence and meet the needs of the use of modular, pre-fabricated
society. They represent a paradigm shift building products in order to boost the Based on this collaborative approach,
from the view that construction should construction sector and deliver affordable some of the benefits BIM can provide to
provide ‘more for less’, to ‘much, much housing to their citizens. clients and contractors are as follows:
more for the same’. • Ensures design integration is completed
before work begins on-site and

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

facilitates communication between the

client, end user, and supply chain. The barriers to the evolution of
• Provides fixed and indisputable
construction materials data – allowing construction are, by and large, not
quantity surveyors to perform ‘take-offs’
(for tendering purposes) with far greater technological. They are more linked to
clarity than the current drawing-based
methods. a behavioral resistance to change that
• Facilitates time-related construction
planning and site management by has long been prevalent in the industry.
combining the project schedule with the
3D model (4D BIM).
building components, thus reducing It leads to more expensive projects as
waste and enabling processes to be un-coordinated design and gaps in scope
The traditional construction methods and
continuously improved. rear their head later in the construction
processes are well established with the
phase of projects. Traditional methods of
vast majority of production taking place
Barriers to implementation construction, while providing flexibility,
on-site using a variety of skilled and
The barriers to the evolution of consistently lead to increased costs
unskilled trade labor, a flexible but time-
construction are, by and large, not without a corresponding improvement in
consuming process delivered at low
technological. They are more linked to a quality.
margins.
behavioral resistance to change that has
long been prevalent in the industry. The adoption of BIM and lean
The design fixity and certainty, as
management principles are just two
delivered through collaborative BIM
This typically comprises a reluctance to let ways the construction industry is moving
design and the adoption of lean
go of traditional methods of construction forward and delivering projects more
management principles, can
and fear of the unknown (“better the devil efficiently. Further investment in skills
subsequently enable more efficient
you know…”), skills-gaps in both and research and rewiring contracts to
methods of construction, such as new
technology and lean management accommodate collaborative working, will
materials (e.g. modular, 3D printed
principles and processes, and an further support the proliferation of new
products) to be utilized on projects. This
entrenched ‘lowest price wins’ methods and technology.
brings the construction process closer to
construction business model.
manufacturing and will ensure a higher
Early adopters, be they client
quality output for clients with less waste.
Specifically in regard to BIM adoption, organizations or the supply chain, who
awareness of the benefits and a common embrace and invest in these areas, are
New methods of construction include
understanding of what BIM is (i.e. a tool to likely to reap rewards in the future by
advanced automation (3D printing and
construct, operate, maintain and manage delivering more work with greater value,
robotics) and modular construction
the asset throughout its life) are key certainty and profitability.
(panels and volumetric components for
challenges. The main challenge currently
repeatable areas such as kitchens.)
experienced by suppliers is a lack of by Matt Hanson, Assistant Director, Real
Adopting lean management principles
informed clients who typically request Estate & Construction, Deloitte Middle
and new methods of construction has
that a project “be delivered in BIM” rather East
been shown to:
than setting out what their asset
• Achieve a higher quality of output -
information requirements are.
components are manufactured in a
factory, then assembled efficiently on
Conclusion
site;
The current established practice of
• Require less on-site labor and greatly
awarding architectural, structural,
reduce construction duration – bringing
mechanical and electrical packages based
financial benefits to clients; and,
on an un-coordinated, paper-based,
• Provide standardized and repeatable
outline design is unsound.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Bishoy

Azmy, CEO and Executive
Director at Al Shafar
General Contracting
(ASGC)

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The UAE-headquartered construction Your main focus market is the UAE. organization, is implementing changes in
company Al Shafar General Contracting Do you have plans to expand your how we operate in almost every aspect of
(ASGC) was named ‘Contractor of the services across the region? our being. We have more than 30 live
Year’ at the Construction Week Awards We have a small set-up in Egypt which we projects at this point, and we use the
2017. With more than 16,000 staff and an are looking to grow, and are currently technology offerings of some of the best
annual turnover of approximately $1bn, looking at some specific countries in companies out there, including Oracle,
the group has maintained its leading Africa. Microsoft and IBM.
market position through the quality of its
operations, an extensive service offering, Big data is becoming Big data is becoming relevant in
sound client relationships and by construction. There are millions of data
demonstrating best practices. We asked relevant in construction. points or facts around us which we can
Bishoy Azmy, CEO and Executive Director, collect easily. If we analyze those, we can
to share his thoughts on the company’s
There are millions of data make better inferences about our
strategic plans and the future of the points or facts around us decisions and this affects our future
construction industry, generally. behavior. Different software now assist
which we can collect the construction process, ranging from
ASGC has been named ‘Contractor of easily. If we analyze estimation programs and e-procurement
the Year’ at the Construction Week to labor tracking and asset IOT
Awards 2017. How do you think ASGC those, we can make connectivity.
distinguished itself from the
better inferences about
competition and how have you Dubai aims to 3D print 25 percent
managed to develop to being a our decisions and this of its buildings by 2030. What do you
prominent home grown contractor think are the limitations posed by
that now competes with
affects our future 3D printing construction and how
international contractors? behavior. should this technology evolve? What
By focusing on our clients – how we can innovation initiatives is ASGC using
serve them better in all respects. We try or developing for the future of
and put ourselves in our clients’ shoes What is the strategic direction you construction?
and imagine what is important to them have set for ASGC for the next five 3D printing is certainly going to be
rather than be focused on what is years? become relevant to the future of
important to us. By doing that we • Organic growth buildings, globally and in Dubai. But
generally succeed in having their • Targeting even more complex, special, currently the lack of codes and proper
satisfaction and appreciation even if we challenging projects research on its safety and strength for
slip in some area which is not so crucial • Entering the infrastructure space mainstream construction is curtailing its
to them. • Expanding into Africa entry into mainstream construction use.
• Evolving use of technology
You delivered a number of The construction industry is making
prestigious projects in 2017. Are How is the group developing in steps towards sustainability and
there any projects which you are terms of systems, procedures and green building. Have you
particularly proud of, or which you technology adoption? Does your implemented any sustainable
feel were a new challenge for ASGC internal supply chain still give you an practices?
in terms of capability? advantage in terms of delivery as a Yes, we have. From the selection of
Delivering the country’s national museum main contractor? materials, to the usage of resources, to
celebrating the formation of the UAE, the We are adopting a lot of new initiatives the handling of waste. We have been ISO
Etihad Museum, is something we are very using technology. This is already starting 14001 certified for almost a decade but
proud of. Also Citywalk has turned out to to bear fruit. We have a chief information that is only the beginning of this
be the new destination for the city’s officer (CIO), who, along with the IT team important journey.
trendy pedestrians. and the various stakeholders across the

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The GCC needs more infrastructure

and social infrastructure to replace
older networks, enable newer more
efficient human and business
connectivity, and to cater to a growing
and increasing young population.
What is your assessment of the international contractors we have heard
construction industry in the GCC, about recently as well as local listed ones
and what are the sectors that you in the region.
think offer the greatest opportunity
for contractors in the short term and Given the liquidity concerns in the
will continue to attract investment? market and the continuing focus on
The GCC needs more infrastructure and a large pipeline of developments in
social infrastructure to replace older the GCC, how do you see the
networks, enable newer more efficient opportunities around Public-Private
human and business connectivity, and to Partnerships (PPPs) developing to
cater to a growing and increasing young provide the much needed funding
population. required?
I think this model will become more
How would you characterize the relevant and more common in this region
current market situation for over the coming few years. Primarily this
contractors – opportunities and is a vehicle governments resort to for two
threats? reasons – it allows them to tap into
There are certainly both. private funding sources and embark on
infrastructure expansion beyond their
The growing young population and the current capital budgeting limitations and
direction of the governments to remain it shifts the onus of successful design,
at the forefront of business and urban construction, operation and maintenance
relevance and their drive to diversify their to private sector players with skin in the
economies means there is plenty of work game which may mean higher
to be done in various fields of efficiencies.
construction.
Bishoy Azmy, CEO and Executive
The never relenting emphasis on Director of ASGC
competitive pricing is leading to
contractors succumbing to take on
projects with either very little or no
margin, which ultimately does not bode
well for the industry because these
companies eventually fold, such as some

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Why is construction
productivity so low?

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

It is important to observe The Department of Economic 1. Labor-intensive: construction has yet

Development in Dubai recently published to utilize more mechanization,
that construction “The Economic Report 2017 for Dubai”. automation and use of
Following the report’s approval by His smart/intelligent systems.
productivity is low not Highness Sheikh Hamdan Bin Improvement could be two-fold;
only in Dubai or the Mohammed, Crown Prince of Dubai, reducing labor intensity and
newspapers gave their front pages to the improving the productivity of the
region, but rather that it story “Innovation and High Productivity remaining labor force. This will require
is a global problem. With are the Focus”. From analysis of the data a deep review of the execution
related to the productivity of the processes, material handling,
the construction industry construction sector, locally and globally, automation, methods and

employing 7 percent of we find that in the past few years the

growth rate of labor productivity in the
production/construction techniques.

the world’s labor force construction sector has been negative. In 2. Physical: the more physical the
one sense, this says that the growth in nature of an industry, the lower the
and construction activity the value of the output is less than the productivity is, and, simultaneously,
representing up to 13 growth in cost and/or efficiency of the the more the opportunities for
construction labor force. This does not improving productivity through
percent of the global say that the total (labor, material and incorporating e (electronic),
Gross Domestic Product capital) productivity in construction is virtualization (e.g. models),
negative, yet, since construction is a applications (IT, Smart, BIM) and
(GDP), the size and labor-intensive industry, the effect of creating value virtually. Apparently,
labor productivity is significant. It is this cannot be the case in all aspects
importance of the important to observe that construction of construction, however, there are
problem makes it, at the productivity is low not only in Dubai or many examples where this concept
the region, but rather that it is a global applies. For example, when hard disk
same time, equally problem. With the construction industry drives (HDD) in computers became
compelling and, if solved, employing 7 percent of the world’s labor solid state drives (SDD), a big jump in
force and construction activity efficiency and speed, and reduction in
potentially rewarding. representing up to 13 percent of the size, temperature and noise resulted.
global gross domestic product (GDP), the
size and importance of the problem 3. Sequence-dependent: construction
makes it, at the same time, equally is a highly sequence-dependent
compelling and, if solved, potentially industry. As such, delay at any stage
rewarding. could propagate to affect the rest of
the activities. Again, labor costs
Needless to say that productivity, either money whether it is active or not.
of labor or as a total, has grown at a
faster rate in other sectors. The question 4. Inflexible: a study of many aspects of
is: “Why is construction productivity low the construction industry will reveal
and not growing as fast as other that, relatively speaking, little change
industries?” The obvious answer is that has taken place over the years in:
the development rate of the construction a. Contracts
sector is much slower than other sectors. b. Materials
So why is this? The answer lies in some of c. Methods
the sector’s current characteristics, which d. Requirements
could be addressed. For example: e. Standardization (vs. customization)

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

f. Skills and competencies

g. And many other construction Many functions are lacking or are at an
aspects
In total, the rate of change in these inadequate level in construction,
aspects is not helping in improving
productivity. especially in contractor organizations.
5. Data, information and knowledge: Some of the important ones are
the accuracy of data, information and
knowledge applied and necessary in research and development, innovation,
construction has not improved,
unfortunately, as much as desired. knowledge management, systems
Incorrect information, lack (or late
availability) of important data, and engineering, industrial engineering,
uncertainty still result in significant
variations, delays and cost. engineering management and others.
6. A man’s world: other industries have 8. Integration of IT: other industries 10.Project organization: classically, work
benefited from the inclusion of have integrated modern IT in all its can be organized around a project, a
women in management and aspects more than the construction product or a process. It is well known
supervision. The edge of women’s industry has done. Compare for that project organization is the least
competencies in planning, multi- example, a modern manufacturing productive of the three types of
tasking and follow up, as well as other facility with CAM (computer aided organization. The question is can
advantages has led to improvements manufacturing) robots, AGVS construction projects benefit from
in productivity in other industries. This (automated guided vehicle system), product or process organization, i.e.,
has yet to happen for construction. AS/RS (automated storage retrieval can we embed organization for
systems) to a construction site with process, product or a combination of
7. Standardization: construction, zero or very little automation. the same into a construction project?
almost globally, is customized. Each The answer is definitely, yes.
project differs from the other. While 9. Modern technology: yes, there have
some components are standardized, been some developments in In conclusion, there are other
the majority are not; foundations, construction, however, much more is characteristics that affect the productivity
structure, and concrete work are possible and desired. For example, of construction, however, these
highly project-specific, and material handling on site, internet of characteristics together predict that
consequently not standardized, things (IOT), design/construction improving construction productivity is
resulting in lost opportunities for integration (just like CAD/CAM possible and attainable, rewarding and
improving productivity. Elsewhere, in integration) automation and others. not risky. The opportunity is big. Some
the manufacturing industry, a major Many functions are lacking or are at estimates for the gains from productivity
productivity improvement was gained an inadequate level in construction, improvement worldwide for the
by standardizing production especially in contractor organizations. construction industry are in the order of
processes, standardizing products, Some of the important ones are trillions of dollars, equivalent to the sum
using special purpose machines, research and development, of GDP for many countries in the region:
ensuring repeatability and innovation, knowledge management, is this rewarding enough to strive for?
interchangeability. In construction, systems engineering, industrial
this is an open opportunity for engineering, engineering by Dr. Zain Tahboub, Chief Advisor at
improvement. management and others. Dubai Aviation Engineering Projects

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Interview with Mr. YU Tao,

President & CEO of China State
Construction Engineering
Corporation Middle East (CSCEC ME)
How CSCEC ME is leveraging
technology to add value to
construction projects and pushing
the boundaries of what is feasible
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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Construction, as one of the world’s oldest the outlook is an almost 20 percent

traditional industries, is not generally reduction in total life-cycle costs of a
known for being the most advanced project, as well as substantial
when it comes to adopting new improvements in completion time,
technologies. The fragmented nature of quality, and safety.”
the industry has made any efforts to roll
out innovative solutions much more As a fully-owned subsidiary of the world’s
difficult and time-consuming. In an largest construction and real estate
ecosystem of numerous small conglomerate in terms of revenue, CSCEC
subcontractors operating at varying levels ME has the full support of its
of maturity, embracing technology and government-owned parent – the CSCEC
building new capabilities at scale seems Group – both in terms of technological
almost naïve if not entirely impractical. expertise sharing and financial backing.
The Middle East, as elsewhere, is no Over the years the company has built
exception to this. comprehensive capabilities through its
experience in undertaking building works
However, there is also a strong incentive as well as civil and infrastructure facilities
for market participants to embrace construction in the region. It is no
technological advances, especially in light stranger to technology adoption in the
of mounting issues currently contributing Middle East market, having pioneered
to stagnating the industry, including large many technological advances here,
project overruns, declining productivity, including undertaking the task of putting
as well as low and volatile financial together the world’s first fully functional
returns for contractors. As per the World 3D printed office in Dubai, among other
Economic Forum article ‘What’s the future areas.
of the construction industry?’, the upside is
too attractive to overlook: “Wherever With this in mind, we spoke with Mr. YU
the new technologies have properly Tao, President & CEO of CSCEC ME, to
permeated this fragmented industry, hear his thoughts on the role of
technology in pushing the boundaries

Automation in construction is made

of what is feasible in the industry; the
technological advances he considers of

possible by advances in digitalization,

relevance to the local market; how his
company has been making technology

disruptive technologies and building

work as an integral part of the business;
what challenges remain ahead and what

techniques, such as the emergence of

the future holds for market participants.

building information modeling (BIM),

What are the trends and
technologies that will shape future

3D printing, AI, advanced building

construction projects?
Speaking of technological advances

materials, and their respective

shaping the future of construction, one
key concept that drives such efforts, as

application along the whole

in many other industries, is the idea of
automation, and the benefits this would

construction project life cycle.

bring to the whole industrial value chain,
from improving workplace safety, to

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

AI (Artificial Intelligence) is another currently available technological

advances being introduced,

promising direction with the potential experimented with or adopted, with

varying degrees of popularity. This is

to define the future of the industry. partially a result of technology inventors

and suppliers finding it very attractive to
target key stakeholders in this region, be
enhancing quality and productivity, to consistency and scale challenging to it developers, consultants or contractors.
making the industrial process more achieve via traditional methods. However, It is also driven by the market dynamic
proficient and sustainable. currently the technology is constrained and associated challenges: given the
Automation in construction is made by the grade of printing materials, which sheer volume of works underway, there is
possible by advances in digitalization, lacks strength to be viable for a multi- a relative shortage of skilled manpower;
disruptive technologies and building story building without the need for the extreme weather conditions during
techniques, such as the emergence of additional steel reinforcement. Thus, summer further affect manpower
building information modeling (BIM), 3D new materials need to be developed in productivity. All these factors have
printing, AI, advanced building materials, order for the technology to be more contributed to making the market here a
and their respective application along the widely adopted. frontrunner compared to other regions in
whole construction project life cycle. terms of technological adoption.
Improvements brought by such advances AI (Artificial Intelligence) is another
can be seen in many different aspects, promising direction with the potential to Having said that, being a China-based
from the design stage where define the future of the industry. At the company, we are part of a construction
implementation of BIM technology helps moment, it is still in its infancy, yet there tradition with thousands of years’ history,
automate the design conceptualization are already automated robots being used which has had its share of continuous
and review process, to the engineering in laying bricks, digging, and painting, technological advances over time. Many
stage where shop drawing preparation among other functions. AI can be utilized of the drivers of such advances are very
could be digitized, up to the operations to improve safety and efficiency on a similar to those in the local market here,
stage, where critical records including construction site by having it perform hence we can easily relate to the
certification, specification, supplier info, repetitive and dangerous tasks. The same development of the industry here and
and the warranty are all centralized on can be applied to assist inexperienced its ever changing dynamic.
BIM, making operations and maintenance workers in handling complex tasks and
(O&M) management much easier to to improve consistency in working Based on our understanding of the
handle. performance, which can be very helpful local market, we are bringing in new
in an industry that’s experiencing technological practices, in particular
Besides automation in the engineering increasing difficulty in sourcing highly those we believe to be the well-tested
process, the more important changes skilled workers. best practices from China’s construction
have been brought on by automation market – one of the largest and most
during the actual construction phase, What is the level of technological complex in the world; we do so only
either through off-site precast and advancement in the construction after having revalidated the optimal
prefabrication of building components, industry in this region compared to implementation of such practices here,
or onsite through the facilitation of 3D other markets that you’ve and having ensured their consistency
printing technology in the process, which experienced? And what is CSCEC ME’s with local market requirements and
is now a promising area of the industry. plan for staying ahead of its peers in regulations. Such access to deep industry
Precast and prefabrication could this area? expertise and local know-how is what
significantly improve efficiency, although The GCC market in general, and differentiates us from the competition.
at the moment this comes with a high particularly the UAE, is widely considered
price tag; 3D printing could produce as one of the most active construction
modular building components – markets in the world, with many large-
especially those complex, curved ones scale projects underway. In this market
that are used in modern buildings, with one can arguably find most of the

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In terms of how we do Has your company adopted business efficiency. For example, we
innovative approaches over the past foresaw the importance of BIM in
business, we are actively years to improve the business? construction at a very early stage, and
We are fully committed to innovation started implementing BIM in our projects
diversifying our business as a way to continue our business even without it being a specific
model from general success, and we look at innovation in a requirement from the client.
broad spectrum of areas, including an
contracting to financing innovative approach around how we do We also were the main contractor to
and investment-driven business, and in terms of how we manage and complete the world’s first
leverage cutting edge technologies to fully functional office using 3D printing
engineering, improve our business. In this regard, technology in the Middle East – the

procurement and we have the full support of our parent

company with its strong research and
“Office of the Future” for Dubai Future
Foundation. Despite all the challenges
construction (EPC), development (R&D) capabilities and associated with such projects as a
proprietary techniques. prototype, we strongly believed in how
utilizing our strong such technology could change the
capability in bringing In terms of how we do business, we are construction industry, and hence we
actively diversifying our business model decided to take the risk. We were heavily
in a competitive holistic from general contracting to financing involved, not only in terms of project
solution including and investment-driven engineering, management but also through
procurement and construction (EPC), investments in research and technology
finance/investments, utilizing our strong capability in bringing development through our in-house
in a competitive holistic solution including research and development center in
design and construction finance/investments, design and China, of which we brought a local branch
services to our clients. construction services to our clients. to the Middle East for the project. As an
To help our clients capitalize on the ongoing effort around this leading
increasing demand for development technology, we are currently in the
opportunities in the region, CSCEC ME process of setting up the first local
can properly assist them in getting the laboratory for 3D cement printing
much needed funds to ensure project research in the Middle East.
success. We were successfully awarded
the Five Palm Jumeirah Dubai Hotel In addition to pioneering the 3D printing
Project and Five Jumeirah Village Dubai initiative, at CSCEC we are also highly
Project by adopting such an approach. It experienced in constructing
was a major breakthrough for CSCEC ME megastructures such as super-high-rise
to diversify our business from general buildings, with a number of innovations
contracting to an alternative business under our belt. We have built more than
model. 90 percent of super-high-rise buildings in
China (buildings higher than 300 meters),
In addition, since we first came to the and 50 percent of super-high-rises in the
local market in 2003, CSCEC ME has world (buildings higher than 500 meters).
always been introducing unique solutions We pride ourselves on having a
for the construction challenges facing our comprehensive offering in this regard,
industry. We always believe in the value including the relevant expertise and
of technology in construction, and have experience, the complete team, the latest
been pioneering a number of technology and the right equipment.
technological adoptions to improve

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

In building such megastructures, CSCEC

Group has developed a range of Efficiency will be achieved through the
innovative construction technology and
solutions to make the construction dual effort of improving productivity
process more efficient, which includes an
integrated smart platform, a crane while reducing abortive works. That is
slewing system, a circular elevator for
vertical transportation, ultra-high mainly what technology has to offer.
concrete pumping, and a magnetic safety
escape device, among others. on top of the integrated platform for meters per second (90 meters in one
super-high-rise projects. It can host minute.) The device is now being further
The integrated smart platform is a holistic multiple cranes of different scale and refined and tested for use on
solution, considered an industry-leading swiftly rotate 360 degrees around the construction sites.
innovation dedicated to super-high-rise center of the system to allow full
construction projects. It functions as a coverage of the high rise under As one of the world’s leading
moving megastructure manufacturing construction, as well as utilizing each construction companies, we are
powerhouse, with construction crane’s capacity for varying types of committed to spending a lot of resources
equipment such as tower cranes, a installation tasks. and funds on R&D of new technologies.
construction elevator, concrete spreader Five years ago our headquarters set up a
and work station, steel structure and To address the logistic challenge of separate fund to study super-high-rises
other facilities such as formworks, a transportation up and down super-high- of above 1,000 meters. This year we are
material storage yard, equipment rise construction sites, CSCEC came up in the running to build these kind of
warehouse, temporary water tank, labor with the circular elevator for vertical buildings. Every year we start new
welfare area, and lavatories all installed transportation, which can remarkably projects and go from strength to
on-site; in addition, the platform is fully increase the transporting capacity of a strength, for which R&D is a critical
equipped with a smart alert system, construction site elevator and reduce driving force. China is developing rapidly
offering live monitoring of stress levels, operation space. CSCEC was the first in today in terms of new technology
wind, temperature, and surface evenness the world to use this system, which runs developments and applications, and we
etc., to ensure safety. The platform is several lift cages circularly on a single benefit a lot from having access to such a
designed to allow working on four floors track, so that one circular elevator can be pool of resources. For example, we use
simultaneously, and can bear thousands as effective as several traditional BIM technology and our company is
of tons of load while resisting windstorms elevators. spending lots of money on refining it and
amid a severe tropical cyclone at implementing it throughout our business,
Beaufort wind force level 14, i.e. at 86-89 CSCEC has also mastered ultra-high to ensure we make it work for us to stay
knots, which is stronger than a hurricane concrete pumping in the case of super- ahead of the competition. Our company
(Beaufort wind force level 12). Adoption high-rise construction, which won us a is also currently building the world’s
of the platform has proven to significantly Guinness World Record in 2015 for longest bridge over water, a 55 km-long,
improve efficiency and reduce waste in concrete pump delivery up the Tianjin Y-shaped span linking the three cities of
super-high-rise projects, as evidenced in 117 Tower at 621 meters, with a concrete Hong Kong, Zhuhai and Macao, for which
the recent six cases where it was grade of C60. As a recent example of we overcame one of the most complex
adopted for building towers above 400 CSCEC’s continuing efforts around challenges ever to confront engineers,
meters, for which the construction innovation and improvements in and incorporated the latest engineering
duration was shortened by three to six workplace safety, the company’s R&D technology and design, to build a
months on average. team successfully tested the magnetic structure capable of withstanding an
slow down safety escape device, which earthquake, typhoon and potential strike
A crane slewing system is a 20m-high weighs 10kg and allows the safe by cargo vessel.
structure designed as an X-shaped evacuation of workers in cases of high-
spatial truss, which usually gets installed rise emergencies at a speed of 1.5

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

With 3D printing The industry is calling for more the improvements in quality, as reducing
efficient ways to complete the human interference will, by default,
technology, only one construction projects. How can new automatically reduce the associated
technology such as 3D printing human error, and ensure consistency
copy needs to be contribute to this, if at all? in the quality of construction output.
produced – thereby Efficiency will be achieved through the The third aspect is the contribution to
dual effort of improving productivity while environmental preservation and
minimizing and reducing abortive works. That is mainly sustainability. With 3D printing
eliminating most what technology has to offer. By technology, only one copy needs to
leveraging advances in the digital space, be produced – thereby minimizing and
construction waste. strict control of the construction process eliminating most construction waste.

Moreover, the can be achieved. Computerized systems

leave little room for compromises in
Moreover, the technology allows the
use of local available materials, hence
technology allows the quality, or for time delays which directly requiring less transportation to get the
impact productivity. work done, and thus making it greener
use of local available to execute. Last but not least, it also
materials, hence Therefore, utilizing BIM in different stages opens new areas for designers to
of design and coordination will ensure experiment. 3D technology is removing
requiring less the early detection of clashes and the limitations of the need for repetition
transportation to get the accordingly reduce the time costs related associated with the precast and
to delays or abortive works. As a result, conventional construction due to
work done, and thus efficiency of the construction process molding and reuse, therefore one can
will be improved. This also goes for 3D make every piece a unique one.
making it greener to printing. When we reduce human error
execute. in the process and minimize several Regarding the cost factor, any new
elements of false works, the overall technology will be more expensive than
efficiency can be improved. Such are the conventional technology. This is simply
ways that technology can add significant due to the limited number of suppliers
value. and the risks associated with initial
testing to eliminate misapplication.
The world's first 3D printed office However, once the technology has
building opened in Dubai last year, proven itself through on-site application,
which your company helped put its cost will gradually drop to the break-
together. What advantages does this even point with conventional methods.
technology offer versus traditional At that time the advantages gained from
construction methods, and how is it using the new technology will gradually
relevant to the industry? become known and will eventually
The 3D printing application in result in the complete displacement of
construction has several aspects of conventional methods. This is a common
added value to construction activities. trend and is what we believe will happen
The very first aspect is the improvement with 3D printing technology as well.
in the safety of workers. Taking certain
elements of dangerous and risky What are the limitations and
activities traditionally carried out by challenges posed by 3D printing
laborers and replacing them with construction, and how do you see
machine and 3D-printed prototypes will this technology evolving for the
no doubt make the built environment improvement of the whole industry?
safer for workers. The second aspect is The current limitations for 3D printing

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

technology applications in the local be produced which maximize the value

construction market can be listed of the technology.
as follows:
• The availability and use of higher Dubai aims to become the global
strength ‘inks’ (currently in the center of 3D printing and print 25
equivalent strength of C20 to C30) percent of its buildings by 2030. In
require more research on material a city of high-rise buildings it is
development. This is exactly what we difficult to see how this technology
are currently doing in our in-house will satisfy demand. What are your
R&D center. views on this?
• Further tests for fire resistance, The application of 3D printing technology
durability and the long-term behavior of has several forms, but unfortunately the
the material. This would require further common perception of this application is
testing and involvement of reliable only limited to structural printing. In fact,
testing agents, so that new testing 3D printing technology is currently
methodologies can be developed to applied in 3D printed buildings more as a
better anticipate the long-term method of concrete construction without
performance of the material. the need for formwork, and it could have
• Additional tests for raised health a broad range of applications in the form
concerns over fiberglass, which is used of architecture, ID works, landscaping,
in the ‘ink mix’ to prevent shrinkage fixed or moveable furniture, etc., i.e.
cracks. This also requires specialists creating specialized components for the
from the field of health and safety to built environment, which tend to be
investigate the impact and provide an difficult to fabricate via other means.
assessment to confirm if those
concerns are actually warranted. If so, All these applications add up to 25
are further mitigation measures percent of the building works. Setting
required or are they unfeasible and such a target and formalizing it as an
can be dispensed with? aspirational goal could act as a catalyst
• Improvement of the printing head and for change, a clear invitation and a strong
speed to create thinner layers (currently signal to all market specialists to
20mm) with a smoother appearance. collaborate and do their part, which
This is something we are seeing develop without doubt would receive a positive
gradually, but for the moment it is still response. The aspiration is a visionary
not very satisfactory. one, and what remains to be done is for
• Attaining international code/standards key market participants to respond by
recognition and building authorities’ aligning their internal strategy with the
approvals, which I believe is currently overall vision of the Emirate. Such an
being worked on by the authorities. We alignment should be done based on a
will be waiting for their official release. real understanding of the objectives
• The preparation of design guidance for behind this target and appreciating how
general use in the construction industry. it will be beneficial to everyone in the
This is crucial in order to get the best future.
out of the technology, as the
architectural and structural designs Mr. YU Tao, President and CEO
need to consider the utilization of the of CSCEC ME
technology during their early stages.
Accordingly, custom-made designs can

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Emerging risks, trends

and risk management
mechanisms related to
third parties

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Development and construction providing services to development and opportunities to improve operations
companies in the world and in our region construction companies. The next and/or identify needs for further risk
are increasingly relying on third parties to question on everyone’s mind is: “What mitigation plans. Without this right to
run their daily activities and operations are those risks arising from third parties audit, there is an increased risk of loss
and reach their short/long-term goals. and how can businesses be better of reputation, fines, litigations and
Although historically third party prepared to deal with such risks?” financial losses, business interruption,
relationships occurred as a result of cost or cash flow issues.
reduction measures, third parties have In this article we set forth the emerging
become an integral part of the business third-party risks and also introduce • Inadequate compliance
network of development and potential detection and mitigation Contracts between the contracting
construction companies, as they provide measures. organizations and their business
flexibility, insight, increased manpower, partners can create risks to both
enhanced quality, and specialization. The ability to audit third parties. Contracts should be reviewed
by appropriate legal experts to ensure
As per a 2016 Deloitte Global extended parties can also provide that the proper terms and conditions
survey on Third Party Governance and
opportunities to improve are included.
Risk Management (TPGRM) across
different industries (Financial Services, operations and/or • Poor labor and human rights
Real Estate, Construction, Energy & considerations
Resources, Manufacturing and Public
identify needs for further Labor rights and human rights have
Sector, amongst others), “73.9 percent risk mitigation plans. been some of the hot topics within the
of respondents [from 170 senior members real estate and construction sector for
of management from a variety of the past couple of years – whether it
organizations] said they believe third parties Emerging third party risks relates to workers' pay, benefits, or safe
will play a highly important or critical role • Insufficient collaboration and working conditions. Although the
in the year ahead, up from 60.3 percent the communication with third parties control does not always rest with
previous year.”1 This goes to show that Cross-functional teams not working in development and construction
organizations will increasingly rely on tandem, leading to disputes between companies, they almost always suffer
third parties in conducting day-to-day the collaborating parties. from negative media coverage and
activities/operations. In addition, the reputational risks that might unfold
survey highlighted that 87% of • Inability/Inadequate audit which lead to litigation, fines,
respondents faced a disruptive incident of third parties suspension of operations and almost
with third parties in the previous two to Organizations doing business with third always to reputational damage.
three years, 28% of which faced a major parties sometimes include provisions in
disruption and 11% a complete third- the contract that allows the contracting • Unreliable third parties
party failure. organization to conduct audits. These Failure to select appropriate third party
audits can help ensure that contract service providers and monitor their
In the Middle East and the GCC, reliance requirements are met and that business activities may result in delays,
on third parties and related risks has also practices with the third parties do not dependency, and customer
increased in recent years, with some risks conflict with the culture of the dissatisfaction.
materializing in major disruptions/ contracting organization. The ability to
complete third-party failures when audit third parties can also provide

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Effective risk management

of third parties Contracts should be reviewed by
Globally, for the above risks and others
to be mitigated, organizations are appropriate legal experts to ensure
increasingly taking steps to enhance
the maturity of their TPGRM programs that the proper terms and conditions
and are spending more on new
technologies to help mitigate third party are included.
risks. However, and as per the
abovementioned 2016 Deloitte Global A more innovative detection control
extended survey on TPGRM, gaps are not increasingly used in development and
entirely bridged with the introduction of construction companies, relates to data
technology, as “94.3 percent of respondents analytics (DA). With the increasing
have only low to moderate levels of reliance on technology, data analytics –
confidence in the tools and technology used which is the process of examining data
to manage third party risk and 88.6% have in order to make conclusions and guide
a similar level of confidence in the quality of a more informed decision-making – is
the underlying risk management processes, helping organizations control costs at
despite significantly higher levels of an early stage, which in turn helps
confidence in organizational commitment management with the early detection
and governance frameworks – creating the of cost overruns and excess payments.
execution gap.”
by Khalil Balaa, Manager, Risk Advisory,
Thus, technology and tools to curb third Deloitte Middle East
party risks have to be accompanied by
other detection and mitigation controls 1. “Third party governance and risk management: The threats are real.”
(2016). Accessed at
that could span from traditional all the http://www2.deloitte.com/content/dam/Deloitte/uk/Documents/audi

way to innovative. t/deloitte-uk-third-party-gov-risk-management-2016-printable.pdf on

May 30, 2016.

Amongst the more traditional detection

controls is the reliance on an established
and strong internal audit function to
perform risk-based internal audit reviews
that will allow contracting organizations
to detect process and excess payment
issues. Contract compliance and contract
management reviews could also help
contracting organizations recover a
percentage of the excess unjustified
payments, which could be material in
some cases.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Leisure and entertainment

investment and economic
diversification in the GCC
A long-term play

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Almost all GCC countries The fall in global oil prices has resulted in All key cities in the GCC have experienced
a tightening of national budgets across this decline in performance, with Medina
have identified the the GCC and put pressure on experiencing the lowest decrease in
government expenditure, resulting in RevPAR of 0.1%.
tourism industry, which economic diversification becoming more
encompasses the critical now than ever before. Almost all The region continues to be impacted by
GCC countries have identified the global economic headwinds in key source
travel/transport, hotel, tourism industry, which encompasses the markets, such as the UK and India, in
entertainment, leisure travel/transport, hotel, entertainment, addition to regional geopolitical tensions
leisure and other sectors, as a key pillar and foreign currency fluctuations.
and other sectors, as a of economic diversification. Although in Despite the relatively moderate fall in

key pillar of economic different stages of development, a

significant amount of investment has
performance, Dubai continues to be
one of the best performing hospitality
diversification. been made and is planned in the leisure markets globally. Previously positioned
sector across the respective GCC states as a luxury destination, a reduction in
to further strengthen their respective average daily rates is expected as hotel
positioning and support economic supply evolves to cater to the mid and
diversification. budget market segments, and as it looks
to attract the targeted tourist volume
Two key segments within the wider needed to sustain the desired growth.
tourism sector are the hospitality sector
and the leisure sector. Below we highlight Hospitality is a key sector in which
the differences and also the inter- diversification efforts are generally
relationships of investing in both sectors. perceived to have been successful.
The sector has a high economic
Hospitality performance in the GCC multiplier effect, and while there are
Performance in the GCC hotel market significant variances from city to city, the
softened in 2017 compared to 2016 sector is viewed to be less dependent on
across all key cities. Revenue per available government spending when compared
room (“RevPAR”) declined by between to other sectors. The leisure and
0.1% – 17% over the first nine months of entertainment sector, which is often
the year compared to the same period of viewed as supporting tourism
the previous year, as shown in Figure 1. “infrastructure”, continues to be highly
dependent on government spending.

Figure 1. Change in RevPAR: YTD 2016 vs. 2017

-17.1% Doha Central

-2.2% Kuwait

-4.3% Sharjah

-16.4% Al Khobar/ Dammam

-15.8% Riyadh

-11.0% Jeddah

-0.1% Medina

-14.3% Makkah

-10.3% Abu Dhabi

-4.3% Dubai

-18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

Source: STR Global

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Investment in leisure and Figure 2. Existing entertainment and leisure facilities in the GCC
entertainment in the GCC
In order to support the goal of economic
diversification, GCC governments are
investing in leisure and entertainment
facilities, for both the domestic and Iraq
international target markets. Key
investments include IMG World of Jordan Kuwait
Adventure and Dubai Parks & Resorts,
which have recently opened in Dubai, the 4
Botanical Gardens in Riyadh, and Al
2 Bahrain
Bahra

Shaheed Park in Kuwait City. Each 1 Qatar

Q tar
Riyadh 3
country has adopted a different strategy
5 12
and is at different stages of development, KSA
as illustrated in Figure 3. The UAE’s 4
emphasis has been on water and theme
parks and other integrated destination
Oman
offerings, while KSA has historically
focused on sporting facilities, religious 2
tourism and adventure.
Yemen
The leisure development pipeline in the
GCC is significant, with $25.4 billion of
investment having been announced in
leisure parks and $26.0 billion in sports-
related facilities, according to MEED
Figure 3. Project status of GCC non-sport leisure projects pipeline
Projects.

UAE 22% 8% 7% 23% 3% 37%

Leisure investments are
a long-term play Qatar 7% 38% 30% 2% 10% 13%
While these types of projects are likely
Saudi Arabia 5% 4% 80% 1% 11%
to ultimately benefit and support the
tourism industry and hotel sector Kuwait 38% 4% 6% 27% 25%

through a strengthened destination Oman 3%1% 23% 55% 18%

offering, they require major capital
Bahrain 100%
expenditure and, as such, are
unlikely to generate meaningful 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
commercial/investment returns in
Complete Execution Contracting Design & Study On Hold Cancelled
the short term.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The relationship between Hotels can generally be expected to both global and national economic
reach stabilization in three to five years, factors. Dubai’s top source markets
the hospitality and while leisure facilities and theme parks, (India, KSA and the UK), are all facing

leisure sectors is both in particular, typically have significantly

longer stabilization periods of closer to
national challenges, such as the recent
demonitization in India, the lower oil
cyclical and symbiotic. ten years. While well-conceived and price and the subsequent reduction in
appropriately located hotels are able government spending affecting KSA, and
Once a destination and to generate investment-grade returns, Brexit in the UK. Regionally, the removal
its hotel market have leisure facilities and tourism of subsidies, the downturn in the oil and
infrastructure, which serve as a catalyst gas sector, growing inflation, and the
grown beyond infancy, a for tourism and support hotel introduction of VAT are all likely to lead to
stage is reached where development, often need to be perceived lower disposable incomes in the GCC
in a different way. market, and, as such, these economic
additional investment in challenges call for a review of national
Due to the high capital investment and diversification strategies.
tourism infrastructure is relatively fixed operating cost profile,
required to grow and theme parks in the region are not A symbiotic relationship
generally as profitable or lucrative as The relationship between the hospitality
enhance demand. investments in the shorter term. and leisure sectors is both cyclical and
However, their economic impact extends symbiotic. Once a destination and its
beyond just the facility and supports the hotel market have grown beyond infancy,
development of the greater tourism offer a stage is reached where additional
of a destination. Studies1 show that the investment in tourism infrastructure is
development of theme parks has a required to grow and enhance demand.
measurable impact on the hospitality The phasing of this infrastructure
and broader tourism industry (through provision is key, and the ‘build it and they
increased employment and increased will come approach’ is generally not
tourist spending), and in some examples effective in this regard.
has led to longer lengths of stay.
The lifecycle of destination development
Leisure and entertainment investments typically starts with the initial hospitality
must also be reconsidered as long-term development coupled with rudimentary
place-making investments instead of entertainment provision on a small
purely commercial ventures. Economic scale. As the hotel market matures, it
impact studies are likely to be a better generates a higher requirement for
tool of measurement, as opposed to tourism infrastructure, typically
gauging success through the profitability including transport, retail and
of the facilities on a stand-alone basis. leisure/entertainment. In order to
support the scale of the required tourism
While leisure and entertainment infrastructure, the destination will require
attractions have the ability to induce demand growth across additional market
demand in certain economic climates segments. One key trend includes the
(usually in immature markets), they are evolution of the demand profile to lean
not able to counter broader global more heavily towards families, tour
economic trends/realities that affect groups and their accommodation
travel purchasing decisions. Key source requirements. Hotel supply thus evolves
markets for the GCC are currently facing to meet these market requirements.

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

The government will continue to

serve as key enabler, and leveraging
inexpensive but effective strategies,
such as tax incentives and visa
permissions, will further bolster the
sector.
We can see this trend in the Dubai hotel A shift in perspective and strategy
market, which 10 to 15 years ago was In conclusion, a perspective shift
primarily positioned as a luxury regarding the investment returns of
destination, with attractions, such as leisure products is required. While
Aqua Adventure, Wild Wadi, and Dubai investment grade returns are not always
Aquarium, developed later on to support likely, efficient operations are critical to
and grow hotel demand. In recent years, ensure that the fixed cost profile of these
we have seen investors targeting more facilities is well managed and capital
mid-market, family-oriented and budget expenditure is well phased to match the
segments. In order to support and likely demand profile/market lag. These
complement this sector, attractions, such investments and facilities are critical for
as IMG Worlds of Adventure, Dubai Parks the continued growth and appeal of a
and Resorts, and more retail destinations destination but must be phased and
are being planned and delivered. There coordinated with the supporting
is, however, a lag between the provision of hospitality products.
investment, the opening, and market
demand being realized to reach the scale by Robin Williamson, Partner and Head
required to support this tourism of Real Estate & Construction, Deloitte
infrastructure. Middle East

1. Milman, Ady & Okumus, Fevzi & Dickson, Duncan. (2010) The
A balancing act contribution of theme parks and attractions to the social and
Thus, the efficient allocation, phasing, economic sustainability of destinations. Worldwide Hospitality and
Tourism Themes Crompton, John. (2010) Measuring the Economic
and sizing of capital resources are critical Impact of Park and Recreation Services. National Recreation and
Park Association
to ensure that both investment goals and
market needs are met. Balancing the two
is challenging, with value engineering,
dynamic marketing, and phasing being
the primary tools for achieving a
balanced and successful destination. The
government will continue to serve as key
enabler, and leveraging inexpensive but
effective strategies, such as tax incentives
and visa permissions, will further bolster
the sector.

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

Contributors
Cynthia Corby Robin Williamson Bruce Hamilton
Audit Partner and Partner and Head of Partner
Infrastructure & Real Estate & Indirect Tax Services
Capital Projects Leader Construction brucehamilton@deloitte.com
ccorby@deloitte.com rwilliamson@deloitte.com

Kosta Georgiadis Jude Rodrigues Jaimi Raikundalia

Head of Debt Advisory Audit Partner Audit Principal
kgeorgiadis@deloitte.com jurodrigues@deloitte.com jraikundalia@deloitte.com

Meanne Rose Franco Jonathan Mandon Madeleine Chen Todd

Audit Principal Audit Manager Manager
mefranco@deloitte.com jmandon@deloitte.com Chinese Services
Group
mtodd@deloitte.com

Amr Ibrahim Matt Hanson Khalil Balaa

Manager Assistant Director Manager
Real Estate & Real Estate & Risk Advisory
Construction Construction kbalaa@deloitte.com
aibrahim2@deloitte.com mahanson@deloitte.com

External contributors

Marcus Truscott Paul Griffiths Mr. YU Tao Alastair Young Suzannah Fairbairn Bishoy Azmy
Managing Director CEO of Dubai Airports President and CEO Partner at Dentons’ Associate at Dentons’ CEO and Executive
of Multiplex ME of CSCEC ME Dubai Office Dubai Office Director of ASGC

Dr. Zain Tahboub Mr. LIU Fangjiang Sheldon Morris

Chief Advisor at Dubai MENA President of Vice President of El
Aviation Engineering SEPCOIII Seif Engineering
Projects Contracting

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 Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

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Deloitte GCC Powers of Construction 2017 | If it’s fundable it’s feasible

This publication has been written in general terms and therefore cannot be relied on to cover specific
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