Abu Dhabi adamant on project prices

February 26, 2013

Major Western European and U.S. construction companies that had hoped to benefit from the ambitious building plans of oil-rich Abu Dhabi are struggling to make it worth their while as they are repeatedly undercut on price.

Although few will say so publicly for fear of hurting their future prospects in the emirate, behind closed doors some of the United States’ and Europe’s biggest construction firms complain that they cannot compete on the “cheapest is best” policy in the capital of the United Arab Emirates.

This comes as particularly bad news for companies whose home economies are struggling. It also raises questions as to whether the lowest-bidder policy is good business or represents a compromise on quality, with some high-profile projects plagued by long delays.

“I don’t know anyone who’s been here for a long time that sees it as the land of milk and honey,” said Colin Foreman, news editor at Middle East Economic Digest (MEED), which tracks construction projects in the region.

Western European and U.S. companies enjoyed a near-monopoly on much of the Persian Gulf’s economy for decades after oil was discovered in the region. Before the onset of the financial crisis in 2007, the emirate launched a major development plan to reshape itself into a modern city. Abu Dhabi wanted to build fast and, with a construction boom already underway in Dubai, it paid well to lure firms to the capital.

Building has slowed since the boom years, but the emirate recently recommitted itself to spending $90 billion over the next five years on infrastructure including schools, homes and hospitals.

But now the emirate has more leverage over bidders, many of whom are desperate for work. “There’s less and less work now, so it’s more and more competitive,” said Tony Bratt, managing director of Rider Levett Bucknall in Abu Dhabi, a consultancy that helps companies to cost their construction work. “People are looking to just win the job and cover costs.”

With a closer eye on how its petrodollars are spent, contractors say, Abu Dhabi is overlooking some Western European and U.S. firms in favor of Asian companies that can operate more cheaply, partly because they have lower management costs.

Businesses also face competition from Arabtec — Dubai’s largest construction company, in which Abu Dhabi bought a 21.6 percent stake last year — in what some observers claim is a pattern of state money being recycled among companies in which the authorities have an interest.

Last year, Arabtec was part of the winning consortium, which included Turkey’s TAV and Athens-based Consolidated Contractors, for the $2.9 billion contract to build an airport terminal building — the biggest construction contract ever awarded in the UAE.

MEED reported that the rival bidding consortiums of South Korea’s Hyundai Engineering came in at $3.08 billion, another with U.S.-based Bechtel at $3.16 billion and another including South Korea’s Samsung at $3.24 billion. The companies declined to comment on the bids.

Bechtel’s loss was a major blow to the company and the U.S. government, which had helped to lobby for the deal.

“This lowest-price policy has not been encouraging,” said one executive at a major Western European construction firm, which is now looking more to Saudi Arabia to boost revenue.

The bidding process for the emirate’s projects includes an initial prequalification round which filters out companies deemed unsuitable to implement the plan. After that round is completed, it has become common that the cheapest bid wins.

“If we don’t award the lowest bidder, people ask why?” said a prominent Emirati businessman. “We’re not doing something abnormal.”

South Korean companies are doing well in the bidding process, particularly in energy-related construction projects. In 2009, a Korean consortium beat French, U.S. and Japanese competition to win a $20.4 billion contract to develop a civilian nuclear program for the UAE.

Some Western companies have stopped bidding for particular projects given the costs associated with formulating a bid and then losing, knowing that they are likely to be underbid, executives say. Costs spiral into the millions for companies as the man-hours and fees rack up.

And while the local media in the UAE rarely criticize project delays or have access to information on what is spent, there is some concern that the cheapest bidders do not necessarily do the best work.

Some of the UAE’s most prestigious projects, such as the Fujairah oil pipeline that bypasses the Strait of Hormuz and was built by China Petroleum Engineering & Construction, was delayed by well over a year before opening in 2012.

Another major infrastructure project, the Zayed Tunnel, an underground bypass of Abu Dhabi’s sometimes traffic-choked downtown, was at least two years behind schedule, although no explanation was given for the delay.

As one observer stung by rejection of European and U.S. companies sniffed: “You get what you pay for.”

— Financial Times

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