Dubai’s construction sector is in a bit of a dilemma — while all signs point to an upturn in new contracts, cash for contractors seem to be in short supply. Or at least is getting delayed in reaching them.
While there were enough signs of payment delays last year, things took a turn for something much worse this year. So much so, six-month delays are turning out to be the norm as against the 90-120 days when the going was much better for the overall economy.
“While six-month credit terms are not being embedded into contract arrangements, the practice of late payments is becoming an epidemic in some parts of the sector, placing additional pressure on contractors,” said Sachin Kerur, Head of Pinsent Masons M. E. “Due to the nature and structure of the industry, contractors do tend to bear challenging contract arrangements, often to the detriment of their business.
“However, if a contractor has a sensible and collaborative relationship with a project owner, even tough contract conditions can result in successful projects.”
So, what was the worst thing the contractors endured this year — fewer projects going around or having to work without a clear idea of when they might get paid for services rendered? According to Kerur, “I think it is fair to say that both issues are creating challenges for the industry at the moment. However, as cash is the lifeblood of the industry, any constraint in this regard would be a monumental concern.”
The industry as well as the government have been working to come up with solutions. The PPP (public private partnerships) formula has been suggested as the best option in the circumstances and one that will have its uses down the road as well.
“Developers/contractors are better off looking at other funding mechanisms such as joint ventures, BOOT (build-own-operate-transfer) projects or PPPs,” said Sanjay Bhatia, Managing Director of Alpen Capital (M.E.) Ltd. “Banks also need to look at innovative structures to support developers/contractors, and they are willing to lend, provided the project cash flows support the payouts.
“The construction sector is faced with cash flow constraints and the payment woes have been further amplified by the introduction of wage protection schemes for workers. To meet these commitments, contractors need incremental funding from financial institutions. The equity markets seem to have limited appetite as they are in a state of flux given the fall in oil prices.”
To ensure their ongoing projects do not get affected, construction firms are relying on debt financing to make ends meet. In the current low-interest rate environment that is still a workable short-term solution. But any mismatch in their fund flow could leave them pretty vulnerable.
“Cash flow is thus the key — the contractor should not allow a project to get to a stage where they are reliant on debt to finance it,” said Niall Greene, Managing Director — Middle East at Linesight. “This could be very high risk ... unless of course there is a separate agreement with the client for a lump-sum deferred payment based on sales.”