UAE construction sector gets some maneuver room with revised Bankruptcy Law
This will be quite visible in how the Arabtec liquidation is played out
At the beginning of this year, the outlook for the construction market was already fairly bleak, with falling oil prices, tighter margins and increased competition resulting in substantial declines in pipeline and contract awards.
Contract awards were down almost 40 per cent year-on-year, according to the MEED Projects tracking system. And this was pre-COVID-19, which then delivered a real hammer blow to an industry already in decline.
All six GCC countries reduced project expenditure, putting projects on hold and reviewing their long-term plans to reflect changing realities. Looking specifically at the UAE, the aviation, hospitality and tourism sectors have clearly taken a massive hit forcing the government to reconsider its strategy, which is something we should all be doing.
This is a brave, new world with changing priorities and economics - those best able to adapt are most likely to come out the other side in a position to capitalise on opportunities.
Putting their own funds in
Liquidity issues have been biting for a while and the fact is that contractors have been unwittingly funding projects to some extent due to delayed payments. A recent survey in the Deloitte GCC Powers of Construction 2020 showed that the cash conversion cycle – being the time taken between work done and receiving payment – now averages approximately one year.
If we take this one step further, formal partnering could make sense. The reality is that contractors are often providing de facto funding. So, if we were to take a collaborative and transparent approach to the problem, there could be a middle ground that works for all.
Consider a more equitable split on risk, improved value engineering, varied pricing models, leveraging technology, proper planning on feasibility and engineering.
Arabtec wind down
With these liquidity issues, what does the Arabtec liquidation mean for the industry? Firstly, this is a very brave decision by the shareholders and one which should be applauded. Arabtec’s liquidation is likely to be a very public affair and of interest to all commercial enterprises in the region.
If the liquidation is handled well then it will highlight the UAE’s bankruptcy framework as a plus for business.
While this may be the first high-profile liquidation, it is not the first local company to experience financial problems. It is not uncommon to see companies with regular turnover of management and large books of receivables who struggle on, year after year, suffering ever increasing losses.
The bankruptcy system, particularly with the recent amendments, provides a system that offers protection to creditors. In addition, it now offers protection to companies where they can obtain 12 months’ protection from bankruptcy in the event of “emergency situations” such as the ongoing pandemic.
This could potentially enable loss-making companies to reassess strategies and address some of their inefficiencies while under the protection of the bankruptcy regime. Will we see Arabtec rely on the protections under the new amendments rather than go straight into the liquidation process?
Will we see a phoenix rise from the ashes of a liquidated Arabtec? Either way, the process presents an opportunity to assess the inefficiencies and loss-making elements within the company and - hopefully - come out the other side in a much better place with an opportunity to grow once again.
Stock taking
In summary, while these are undoubtedly unprecedented and tough times, there are reasons to look positively to the future. The GCC construction market remains a huge marketplace.
The UAE now has a bankruptcy system in place that should offer protection to investors and creditors; and the government has recognsied the need for some form of corporate protection through the recent amendments. We are already well into the Fourth Industrial Revolution and those that can embrace technology and adapt should be well-placed to take advantage when we come through the other side of this pandemic.
Some sectors have shown consistent growth - solar energy, water and wastewater infrastructure and modular construction. So there are opportunities.
It is time to take stock and assess your strategy for the new norm. Industry players should work together to ensure a bright future for the industry and a transparent approach will allow the needs of the many to prevail over the avarice of the few.
- Scott Hutton is Legal Partner at EKP.