Payment delays, lack of finance plague contractors

Dubai: Contractors in the UAE are still reeling from low profit margins on new projects, a lack of bank funding and payment delays amounting to billions of dollars, experts say.

Talking to Gulf News, two major contractors and commercial bankers from HSBC agreed that debts to contracting firms and some of the world's lowest margins still stalked the country's construction industry.

"What is scary is that the payment issue in the UAE has not turned around," said Mahendra Patel, group managing director at Geap International, who added that his firm was owed between $300 million (Dh1.1 billion) and $400 million.

"A lot of the UAE contractors are still handicapped because their funds are blocked — in some cases running into the billions of dollars."

Nicholas Levitt, head of commercial banking in the UAE, added that the payment issues in Dubai needed to be resolved. "We are seeing some of the payment issues. We need some of the issues to get sorted, and we need them to get sorted out faster," he said.

Osama Hamdan, chief financial officer at MEP (mechanical, engineering and plumbing) contractor Drake and Scull International (DSI), said the company had Dh1.5 billion in receivables in its 2011 results, but Hamdan said it was "very normal," pointing out that contractors would often have 10 per cent of their fees held back as a deposit until a project was signed off or approved.

Levitt added that low margins were a big problem for the construction industry in the UAE. "The margins in the sector continue to be very challenging, and what we are seeing is companies complaining that the margins in the Gulf are among the tightest in the world," Levitt said.

"At some stage we are going to have to see an improvement in those margins, otherwise it is just not going to be sustainable."

Bank funding, said Patel, remained an issue, with international banks unwilling to lend at a time of political instability in North Africa, Syria and Iran, and local banks still not ready to open their books to new projects. "We're going to have to be more reliant on the region's banks in order to facilitate the funding of these projects," said Levitt.

"Banks are not very keen to lend to this part of the world," added Geap's Patel.

Much of the problem, agreed Levitt and DSI's Hamdan, was that local banks do not often discriminate between contractors and developers, casting both as being real estate driven and therefore undesirable investments.

"Some of these banks have lost billions of dollars in real estate," said Hamdan. As a result, contractors are looking to government funded infrastructure projects in Qatar and Saudi Arabia, where payment issues and bank funding are less of a concern due to largely government clients.

"A lot of the contractors are very hungry, and they haven't had a lot of business over the last three years," said Hamdan.

DSI believes shares undervalued

Dubai: Drake and Scull believes that its share price is not reflective of the strength of the company, with chief financial officer Osama Hamdan branding the markets' perception of the firm as "unfair".

"We've grown 80 per cent on revenues and 40 per cent on net profit. We've expanded across the GCC and in other areas like India. We didn't just go to any market but to stable markets and areas where we can generate growth," Hamdan told Gulf News in Dubai.

"This is really not fair to us, when you ask about the stock price. Matters unrelated to DSI like the Greed debt crisis, like matters relating to the US debt issue, the choppiness during the summer with Portugal, Ireland, Spain and France, all impacted the stock price and depressing it while we were showing growth on the top line and the bottom line." He wouldn't be drawn on DSI's results for the first quarter of 2012. "We are doing good," he said.

Results

Drake and Scull posted a 36 per cent increase in profit last year to Dh220 million and last month reported contract wins in Algeria and India.

The shares have gained 31 per cent this year after declining 24 per cent last year.