Presented by Cynthia Corby. MCLS, May Presented by Cynthia Corby

Transcription

1 Presented by Cynthia Corby MCLS, May 2016 Presented by Cynthia Corby

2 Regional economic outlook ANNUAL GDP GROWTH (%) Bahrain Oman Qatar Saudi Arabia UAE Kuwait Egypt Libya Jordan Iran Iraq Real GDP growth in the GCC projected to slowdown to 2.7% in 2016, compared to 3.2% and 3.4% in 2015 and 2014, respectively. $165bn contracts awarded in 2015 in the GCC. Estimated to decrease to $140bn in Decline in governments income - Need to diversify fiscal income streams and prioritise spending Structural reforms and revenue measures (taxation and subsidy cuts). Alternative funding solutions needed (PPPs, project bonds, BOT) Private sector involvement Tough year ahead for contractors (fewer contract awards, slower decisions, strained cash flow). Source: IMF, Oct 2015 GCC Powers of Construction 2016 The funding equation

3 Drivers of the project growth in 2016 and beyond Diversification of the gulf economies. Enhance nonoil industries, achieve sustainability. Continued public spending on projects to not undermine future growth. Demographic pressure posing infrastructure requirements. Job creation for a young labor force expected to drastically grow Residential, healthcare, commercial and hospitality infrastructure Energy and water infrastructure (stable sectors) Total GCC Contract Awards ($m) , , , , , , ,550 Localised drivers World Cup and Expo 2015 Source: MEED Projects 164,807 Recent announcement that GCC Countries have initiatives in place to unify GCC on political, economic, social and defense fronts. MEED forecast for 2016: $140bn GCC Powers of Construction 2016 The funding equation

4 Projects market performance in 2015 Value of awards by GCC country in 2015 ($m) 70,000 60,000 58,952 GCC project awards forecasted for 2015 was $172bn (which would ve been the largest on record) 50,000 49,782 42,540 $165bn is the total value of contracts awarded in ,000 30,000 31,543 27,390 29,294 28,851 37,363 Kuwait outperformed expectations 20,000 13, Saudi and the UAE showed a slowdown 10, ,201 1,921 Bahrain Kuwait Oman Qatar KSA UAE 2015 Actual 2015 Forecast Qatar was in line with expectations - major infrastructure investments in road and rail Source: MEED projects GCC Powers of Construction 2016 The funding equation

5 Value of projects in pre-execution and execution Net sum of pre-execution and execution project values ($m) Saudi Arabia 1,022,968 UAE 861,400 Qatar 277,830 Kuwait 256,714 Oman 187,316 Bahrain 71, ,654 Execution 2,020,530 Pre-execution Construction 256,345 Power 67,905 Transport 165,275 Industrial 16,952 Oil 74,897 Gas 35,637 Water 25,377 Chemical 15,266 GCC Powers of Construction 2016 The funding equation

6 Projects pipeline Value of planned projects ($bn) GCC projects pipeline of $2 trillion. Construction (52%) and transport (19%) the leading sectors. Power, the third largest sector with 11% KSA is the biggest projects market in the region with $767bn. Construction, transport and power the three biggest sectors by value in the country The UAE with $706bn continues its plans to become a global financial centre, aviation and tourism hub. 400 Qatar in the third place with $174bn continues to build towards the World Cup 2022 and QNV Bahrain Kuwait Oman Qatar Saudi Arabia Source: MEED projects GCC Powers of Construction 2016 The funding equation UAE Oman has its focus on rail infrastructure. The largest project is the national railway budgeted at $15,6bn. The public sector dominates Kuwait s construction market. The larger schemes planned are rail and road projects. In Bahrain, the biggest project is the international airport expansion that will increase its capacity to 13.5 million passengers annually.

7 Saudi Arabia USD USD billion billion Value of projects underway Value of planned projects Largest projects underway Budget ($bn) King Abdullah Economic City 93 Saudi housing project 68 Jeddah Economic City 30 Jizan Economic City 30 Water 3% Power 18% Industrial 2% Chemical 1% 2.2% Projected GDP growth in 2016 Oil 5% $660bn Saudi Arabia financial reserves Gas 2% Transport 21% $ budget breakeven oil price 2.2% Inflation rate in 2015 Construction 48% April 2016 Vision 2030 reforms announced GCC Powers of Construction 2016 The funding equation

8 UAE USD USD billion billion Value of projects underway Value of planned projects Largest projects underway Budget ($bn) Dubailand Mohammed bin Rashid City 55 Dubai South 55 Barakah nuclear power plant 40 Water 3% Power 18% Industrial 2% Chemical 8% 2.4% Projected GDP growth in 2016 Oil 1% Gas 2% Transport 20% $77bn UAE financial reserves $73 Budget breakeven oil price 3.3% Inflation rate in 2015 Construction 46% AED 46,1bn Dubai s budget for 2016 GCC Powers of Construction 2016 The funding equation

9 Qatar USD USD billion billion Value of projects underway Value of planned projects Largest projects underway Budget ($bn) Lusail development 45 Qatar integrated rail project 40 Asghal Expresway programme 20 Hamad International Airport expansion 15.5 Gas 5% Oil 8% Water 4% Power 2% Industrial 1% Chemical 1% 4.9% Projected GDP growth in 2016 $210bn Qatar financial reserves $ budget breakeven oil price Constructio n 45% Transport 34% $12.8bn Forecasted budget deficit in 2016 $81,603 GDP per capita in 2015 GCC Powers of Construction 2016 The funding equation

10 This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte network ) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte s more than 200,000 professionals are committed to becoming the standard of excellence. About Deloitte & Touche (M.E.) Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle East region with uninterrupted presence since Deloitte is among the region s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW) Deloitte & Touche (M.E.). All rights reserved.

11 Contracting in The Middle East Contracting Challenges in uncertain times Ben Hughes Director Capital Projects, Middle East Contact: 2016 Deloitte Corporate Finance Limited. All rights reserved

12 2016 Forecast Contracting Challenges in uncertain times Major external factors Continuing low global oil prices impacting revenues Political and social unrest in some MENA countries Sluggish financial performance in many major markets around the world Reduction in investors from regions such as Russian and China Fragile economic confidence globally Uncertainty in local markets Challenges to government spending and programmes Cash cycle timing 2016 Deloitte Corporate Finance Limited. All rights reserved

13 2016 Forecast Contracting Challenges in uncertain times What are the impacts? Margin erosion, or negative cash flow High fixed cost base, including personnel and property Increasing variations and claims Increasing risk transfer from Clients to Contractors Importance of correct contractual knowledge and administration Increasing complexity of difficult matters and alternative negotiation models Lack of visibility on time and cost to complete Reluctance of projects to report objective bad news or early warnings! Disconnect between head office, regions and projects 2016 Deloitte Corporate Finance Limited. All rights reserved

14 2016 Forecast Contracting Challenges in uncertain times What we are seeing across the GCC. Tender prices dropping further (and so are margins) Onerous levels of risk placed on the Contractor Slowing awards impacting on advance payment culture for funding Growing claims and variations uncertified, but assumed to be bankable Delay in payment and increasing on account payments Cash flow delayed (256 days av.) or stopping altogether Supply chain disputes Disconnect of the reality when reporting Increasing risk of business failure 2016 Deloitte Corporate Finance Limited. All rights reserved

15 Typical Uncertain Market Dynamics Key symptom areas Project schedule / time variance Cost to complete variances Contingency drawdown Work out solutions Understand contingent liabilities? Need to take provisions Volatile or unreliable site reporting Irregular projected cash flows Rise of potential project disputes Supply chain failure Need for a proven toolkit to optimise performance of a project / portfolio Imbalance between receivables and payments Project pipeline and funding Improved commercial strategy Pressure on margins / ROI Increasing project variations Paid when paid strategy and erroneous contracts Emergency Intervention and turnaround 2016 Deloitte Corporate Finance Limited. All rights reserved 15

16 Case Study: EPC Contractor But this could equally be a Developer, Government Agency or General / Civils Contractor

17 Case study technical & financial support UAE based EPC contractor The situation An Abu Dhabi/UAE based, family-owned EPC contractor, specialising in power and water projects, was experiencing a period of sustained operational and financial underperformance. Despite adequate project financing, the extent of margin erosion from poor operational delivery, coupled with a high fixed cost base, resulted in negative cash flow for the Company. In order to remain in operation, the resultant funding requirements were bridged via a number of substantial equity injections by the Shareholder. Faced with increasingly challenging market conditions, the Company required support to limit further losses and turnaround performance in order to limit any additional equity injections from the Shareholder. Red flags Negative cash flow Project delivery failure Contracting Sustained underperformance Challenging market conditions Shareholder equity injections High fixed cost base Margin erosion Deloitte Corporate Finance Limited. All rights reserved

18 Case study technical & financial support UAE based EPC contractor Our approach PHASE 1 DIAGNOSTIC ASSESSMENT Undertook a diagnostic review to identify the root causes of underperformance, not just the symptoms. Considered both operational and financial aspects in parallel, at the project sites and head office. Concluded our findings over a focused period of three weeks. Key issues Lack of individual accountability Operations and Finance disconnection Indecision Ineffective policies and procedures Capability deficiencies Poor quality information Demotivated employee base Widespread inefficiencies OUTPUTS Brief, Deloitte branded, PowerPoint style report, summarising our findings. Implementation roadmap detailing priority activities, resource requirements and estimated timescale Deloitte Corporate Finance Limited. All rights reserved

19 Millions (AED) Case study technical & financial support UAE based EPC contractor Our approach OUTPUTS Revised cost to complete estimate based on accurate data and stage of completion assessment Jun-15, Apr-15, May-15, Jun-15, Monthly project status reporting Apr-15, May-15, Jun-15, Apr-15 May-15 Jun-15 Final Budget PMO Gross FCAC Site Gross FCAC Risk and opportunity register Revised construction programme with realistic milestones Fourteen day look forward activity planner Activity Company programme Revised programme Variance in Weeks Mobilisation Works Complete Engineering Works Complete Recovery programme to reduce overruns Procurement Works Complete Construction Works Complete (12) Final Completion (12) Deloitte Corporate Finance Limited. All rights reserved

20 AED m Millions (AED) Millions (AED) Case study technical & financial support UAE based EPC contractor Our approach OUTPUTS Improved invoicing accuracy based on reliable forecasts and construction programme Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 PMO Forecast per Month Actual Received per Month Site Forecast Cummulative Thirteen week, short term cash flow forecast Site Forecast per Month PMO Forecast Cummulative Actual Received Cummulative Medium term, Company business plan and Shareholder return analysis Cash flow forecast to completion 150, ,000 50,000 - (50,000) (100,000) (150,000) (200,000) Weekly, all party invoicing meetings Claims and contract management strategy Accurate cash flow forecast through to project completion Source: Management information Total inflows Total outflows Closing cash Closing cash inc. AED 50m claim Deloitte Corporate Finance Limited. All rights reserved

21 Case study technical & financial support UAE based EPC contractor Our value impacts Wins Focused on most critical issues Rapid buy-in from Company personnel Considered trusted members of the team Flexibility and adaptability in approach Integrated team of finance and operational professionals Robust project reporting Improved operational management and control Transparency of cash position Strategic options for the Shareholder Headcount reduction Successful claims position Streamlined operating structure and procedures Deloitte Corporate Finance Limited. All rights reserved

22 2016 Forecast Contracting Challenges in uncertain times Summary thoughts to leave with you Build resilience and accuracy into your business reporting Embed clear processes and controls to mitigate risk and drive best performance Administer the contract correctly from the outset entitlement and notices Deal with difficult matters as a priority don t ignore problems Be vigilant on cash flow management and updates Focus on supporting communication and clear reporting Reduce the distance between head office, regions and projects Be prepatred to step in / intervene to arrest issues Take competitive advantage of the market there is huge opportunity! 2016 Deloitte Corporate Finance Limited. All rights reserved

23 This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte network ) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte s more than 200,000 professionals are committed to becoming the standard of excellence. About Deloitte & Touche (M.E.) Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is the first Arab professional services firm established in the Middle East region with uninterrupted presence since Deloitte is among the region s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW) Deloitte & Touche (M.E.). All rights reserved.