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Crunch time?
As the global economic crisis continues to deepen, Alison Luke investigates the impact on the region's MEP sector.
The global economic downturn is the hot topic of the day. Open a newspaper or turn on the news channels and the main headlines scream economic crisis, as they have been virtually every day for the past few months.
From financial institutions closing and companies going into administration, to the entire country of Iceland facing bankruptcy, the effects of the problem are becoming more widespread daily.
The construction sector has already suffered due to the downturn and, with the demand for residential properties in particular grinding to a halt, further losses in terms of both projects and personnel are expected worldwide over the coming months.
With the MEP sector intrinsically linked to new-build construction, an impact on those involved in the profession is inevitable, but just how badly will those operating in the Middle East be affected?
Middle East market signals
The effects of the economic downturn have been felt in Europe and the US for some months now. And while the first signs of the crisis beginning to hit the Middle East did not become evident until close to the end of 2008, the impact has been hard and fast.
Within a few short weeks, numerous projects within the region have been cancelled, prolonged or put on hold indefinitely. Among these are several very high-profile jobs, including the Trump International Hotel & Tower, which was underway on Palm Jumeirah; an expansion of Dubai Festival City; and parts of Dubailand.
"It is a big problem. There are three scenarios: a lot of projects have been cancelled; some are on hold; and some are being prolonged, whereby they were meant to be finished in two years, but will now be run over three or four years," explains Prakash Khatri, Trans Gulf Electro-Mechanical director and managing partner. "This is affecting projects across the board - small, medium and large," he adds.
How badly the region will be affected overall by the downturn is yet to be seen, but to date the Dubai market appears to be suffering more than most, according to those within the MEP sector. "Nowhere has been spared - Kuwait and Saudi have also been hit, but not like Dubai; there are too many big projects [underway] here," states Khatri.
Abu Dhabi and Qatar are reportedly among the least hard hit to date, with positive news being attributed to both markets. "In Abu Dhabi, all projects are going ahead as planned, and there are more tenders coming," reports Al Habtoor-Specon MD Thrasos Thrasyvoulou.
"Qatar is in better shape than Dubai currently; there is no big effect there yet, but nobody knows [what will happen] ... the construction industry has been affected and a lot of people are worried," he adds.
The reduction in available work is already hitting those in the MEP sector, but to varying degrees, depending on aspects such as the company size and spread of work.
"For us only one job has been shelved [to date], but [in the industry] in general there is a lot of work that was at design and tender stage that has been cancelled, and some jobs cannot be finished due to lack of finances," reports Thrasyvoulou.
Sensaire Services has also avoided any major loss of work to date, reports contracts manager Alan Hart: "We have had one project reduced by 20% in volume; that is the only impact we have been hit with," he states.
Khatri reports more serious losses of work, resulting mainly due to Trans Gulf working predominantly in Dubai. "We have been told three projects are on hold indefinitely, and [the developers] are not saying when the will be restarted. These are projects that were underway - one was 70% and one 80% complete," he states. "We also had two district cooling plants for which we were at final negotiations, and these are now on hold," he adds.
It is not simply cancellation of contracts that is affecting MEP firms in the current economy, however. As contractors and developers tighten their belts and reassess the health of their business in order to counteract the downturn, those further down the contractual food chain are being stretched. "The effect [of the economic crisis] on us is from cash flow in Dubai," explains Thrasyvoulou. "We are seeing a delay in payment; the payments are very slow in coming," he adds.
"People are not paying," confirms Khatri. "Even if they have been paid, they are not paying [down the line]. They are using excuses about cash flow. They are using our money to get over their own problems - this is happening from the main contractors," he stresses.
The reassessment of contracts is also playing a part in the sector, with developers reportedly asking for new prices to be submitted for projects underway. "Prices [of some equipment] have gone down, and developers are taking advantage of this," reports Hart.
"We have one project that is 80% complete, and the owner has asked for a reprice for the remainder of the job," he adds. As many MEP plant items must be ordered on long lead times, the prices paid by contractors may not always have fallen, however.
Operating in changing times
With uncertainty over the severity and longevity of the effect of the global downturn on the Middle East's construction sector, how are MEP firms preparing for the period ahead?
With less projects set to progress from the design stage, the tender process is one area where many firms are set to make changes. "We have to be very careful about tendering for jobs ... we have to look at pricing very seriously and aim to meet our costs," stresses Khatri.
"In Dubai we are being more selective and more cautious," adds Thrasyvoulou. "We are examining who the client is ... and we want assurances that we will get paid," he states. "We have got to be [more selective], and we have got to be aware of people's bank balances," adds Hart.
"The economic downturn has affected the construction sector, just like it has affected every other sector in the UAE," states Drake & Scull International chief corporate affairs officer Zeina Tabari.
"These challenging times are a test where experienced companies that have done their strategic planning and market research are the ones with a much better chance of survival. It is survival of the fittest," she stresses.
"Our tender process has not changed really. What has changed, however, is the timeframe of projects, which allows us more time to plan and to mobilise our resources. As time passes, we are expecting less competition during the tender process, as not as many companies will be able to sustain their current levels throughout the crisis, and certainly will not be able to take on any further projects," states Tabari.
"[The MEP sector] will get very competitive," predicts Khatri. "Small companies that are not strong enough and do not have their own money will be casualties ... the cash flow is not there [to support them]," he stresses.
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