Legal Eagle

October 03, 2017

undefinedSachin Kerur – head of Middle East Region at law firm Pinsent Masons – speaks to Jason O’Connell about the recent rise in construction disputes, the potential for alternative project finance models and the growing use of technology in the construction sector.

Disputes have always been a feature of the construction sector in this part of the world, but the number of cases has been rising in recent years as the industry has encountered a series of roads bumps. No one is better placed to confirm this trend than Sachin Kerur, head of Middle East Region at Pinsent Masons, probably the world largest construction law firm. Sachin has spent the best part of a quarter of a century focused mainly on the infrastructure sector, and has been in the Middle East for around half of that time.  

According to an annual report by Arcadis, in 2015 the Middle East overtook Asia as the region with the highest value of construction disputes. Failure to properly administer the contract was highlighted as the main cause, followed by poorly drafted or incomplete contracts and unsubstantiated claims. The 2017 edition of the Middle East Construction Disputes Report confirmed the rise in the number of disputes but noted that swifter resolution is happening, helping to ease the liquidity issues that have blighted the market in recent years.

Sachin Kerur confirms that litigation in the construction sector is helping to keep Pinsent Masons busy these days and says colleagues at other firms have also noted an upswing in dispute related work.

“Not all disputes end up in a trial or in arbitration,” Kerur says. “There might just be contentious issues that need to be dealt with as opposed to things that end up in formal legal proceedings, but there’s definitely an upswing in that type of work caused by certain conditions in the market.”

Tight liquidity is often cited as a key symptom of construction market woes in the past few years, one that tends to have a major knock on effect throughout the industry due to its impact on cash flow and a company’s ability to pay its bills on time. But Kerur says the general attitude towards contracts in this part of the world also leaves something to be desired.

“Liquidity is an issue but it’s not the only one. In many ways it goes back to the way contracts are administered in the region. The attitude is often, ‘if we pay it will only be when we’re pushed to the wall’ which is not a particularly sensible approach and is too prevalent in the market,” he says.

“You’re not getting the natural stakeholder approach, where all parties are buying into a project and it’s aspirations. It’s still very adversarial here. Even where liquidity isn’t an issue you’re still getting problems, so it can’t just be about liquidity.”

Towards private finance?

Question marks over liquidity in the market naturally give rise to discussion of alternative finance models that could potentially encourage more involvement from the private sector. In particular, there’s been a lot of talk about Public Private Partnerships (PPP) gaining more traction as economies in the Gulf mature. But achieving that is easier said than done, Kerur says.

“There’s certainly a lot of private money out there but a lot of that money isn’t moving into projects as fast as we thought. That’s primarily because of geopolitical issues that have arisen over the last six months. It could also be because private investors are worried about the fact that governments aren’t spending as much as before.”

He adds: “But it’s also generally just because they are shopping around. A lot of private money, even if it’s regionally based, might look for better opportunities in other markets. So it’s not descending on the market as quickly or in the volume we’d hoped but it is out there. There’s much more liquidity in the market than one might assume.”

One of the challenges to attracting private investment in this region is the general perception of risk. Governments can facilitate the process by signaling their strong backing for new schemes.

“If you have a well defined rigorous PPP programme, where the private sector is effectively asked to take the lead, then that’s the sort of thing that heralds a wave of investment,” Kerur says. “It doesn’t have to be PPP. That’s just one example.”

However it also helps if there’s a strong pipeline of work to entice investors, Kerur says. “No one’s really going to come and invest on a one off basis. If you think about the mammoth development costs you need to put into these sort of projects, you’ll need to see a treadmill of this stuff coming through that alerts people to the opportunities that you have here.”

Kerur points out that the power and water sectors in Oman and Saudi Arabia have for many years seen a healthy injection of private money through the Independent Water and Power Project (IWPP) programme. You might think that would easily translate into other sectors, but that hasn’t been the case due to the perceived lack of bankability of projects.

“You think particularly of transport,” Kerur says. “Are these projects really going to derive the returns that can support a debt financed regime? Dubai Metro, for example, was initially conceived as a PPP programme and then there were questions over the bankability of it. Would people be using it? Would it get the revenue and therefore the debt service? When it was concluded that probably wouldn’t be the case it became a straightforward government project.”

Some sectors of the industry will be ripe for private investment while others will ultimately prove more difficult. Building a regional rail project on a PPP basis would be very tricky, Kerur says, but there’s a stronger case for its use on smaller projects.

Another finance model that could potentially become more common is export credit. In July it was announced that UK Export Finance (UKEF) is providing over $600mn to support UK construction firms to deliver major projects in Dubai. UKEF is guaranteeing $455mn for British contractor Kier to carry out its role in the construction of the 17,000-seater Dubai Arena. And British-Emirati joint venture Al Futtaim Carillion is building the latest phase of ‘One Central’, Dubai World Trade Centre’s new mixed-use development. The joint venture has already delivered the first and second phases of the development, and this new contract that will see them construct two new office towers thanks to UKEF support of $180mn.

“Post Brexit there’s been a rush to prove Britain’s export credentials, which is interesting,” Kerur says. “In pure dollar terms it doesn’t rival the Japanese or Koreans but what is interesting is that pre Brexit we would not have seen this pace of support. And if you’re an owner or developer here and your contractor comes armed with that kind of support, it’s quite attractive.”

Technology revolution

While the infrastructure and energy sectors provide Pinsent Masons with the bulk of its work, technology is becoming increasingly prominent in the firm’s thinking as more companies in the construction space evolve into tech providers.

“An airport, for example, is effectively technology, a very complicated bit of engineering. You’re asking construction companies to provide turnkey solutions with a lot of technology involved so our role involves advising on the technology side of that,” he says. “We now have tech lawyers sitting beside our construction lawyers. In the past when owners and developers procured technology they did it using inferior procurement techniques. Now you’re seeing more innovative procurement in that space. Companies are rethinking the way they operate so that’s a big area for us.”

Sachin Kerur on….

VAT

“There will be a steep learning curve and the construction industry will be at the brunt of that because it will be passing through the supply chain and therefore everybody will need to be on top of how it works.”

“It will bring a short term pressure on the market because it’s a cash flow tax. Recoverability of the VAT paid will be possible but if you’re already being stretched on your own payments and then you’re stretched by VAT, a number of subcontractors will be concerned but they’ll just have to manage their business.”

Regional Outlook

“I’m a glass half full person so I’m optimistic around regional opportunities. Expo does underpin some activity but it’s a one of development. 2021 is the 50th anniversary of the UAE then there’s the 2022 World Cup so you’ve got three years of intense activity and procurement.”

Saudi Arabia

“Saudi Arabia will come out of its discussion phase soon and we’ll know whether or not it will implement what has been discussed. I personally think it will.”

The UAE

“They’ve got to be thinking about the drivers for consistent growth outside of hydrocarbons. What will encourage population growth and therefore the need for services and generation of income?”

Bio:

Sachin Kerur has lived in the Middle East for over 13 years. He advises Government and the private sector on privatised and publicly procured infrastructure and development works, particularly across the Middle East and India. He has advised on some of the most important airports, road and rail networks, power plants, commercial and residential developments, oil and gas facilities, water supply plants, hotels and education facilities in the Middle East and Sub-Continent.

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