The UK Construction Blog

Construction contractors in the UK who are owed an estimated £250 million by Dubai developers are still holding their breath after the Abu Dhabi bailout announcement, according to a leading industry body.

In anticipation that about $5.9 billion of the total $10 billion rescue will go towards the payment of the Gulf state’s construction and other trade debts, the Association for Consultancy and Engineering (ACE), which represents some of the UK’s largest contractors, said that the success of the handout would depend on the cash being deployed quickly.

Nelson Ogunshakin, chief executive of ACE, told The Times: “While the amount of money that should go towards construction debts is encouraging, the question is how quickly it is used and what will be the priorities for where the money will go. It is early days yet.

“We encourage payment as soon as possible. We need to keep the pressure on to ensure projects continue to go ahead. Some companies are now getting close to the point where they will be in difficulties with their own short-term financial position unless they receive payment very soon.”

UK-based construction companies including Balfour Beatty, Carillion and WS Atkins, the engineering consultancy, all have operations in Dubai, albeit scaled back over recent months.

The problem of late payments first emerged in Spring this year, according to ACE, with some contractors chasing the same debts for more than six months. The total amount outstanding owed to the Association’s members has fallen from £400 million to £250 million over the period, with around 30 per cent of all contractors still pursuing payments.

The majority of construction firms remain reluctant to discuss the problem of delayed repayments despite yesterday’s bailout, fearing that they will jeopardise future relationships with clients. However, a spokesman for Atkins said that it is “confident that the Middle East market will recover” and pledged to maintain its presence in the region as the liquidity issues are resolved.

ACE said that Dubai’s debt problems should act as a warning sign for contractors who plan to work for sovereign-backed developers in future.

Mr Ogunshakin said: “There are lessons to be learned from this situation for anyone entering into contractual relationships with quasi-sovereign backed private sector clients on how those contracts are dealt with when there are issues of default. We hope that in the future other organisations, in whatever country, bear those lessons in mind.”

British engineers, contractors and consultants are understood to have sought help from Lord Mandelson to recoup more than £250 million in unpaid bills from Dubai.

Payment periods for invoices are said to have doubled in the past year and firms have been offered as little as 60 pence in the pound for what they are owed.

The Association for Consultancy and Engineering estimates Dubai’s main arbitration body is struggling to process almost £3 billion of disputes from firms across the globe that have not been paid in full.

The association’s chief executive Nelson Ogunshakin said: “It is painful for our industry and it is a real challenge but we are not alone.

“Japan and other countries are all owed serious money. UK plc has had a long and strong relationship with the Emirates and we are mindful that the Arabs honour what is owed, but we know that it is a difficult time for them.”

The recession has seen hundreds of projects grind to a halt in Dubai after a near decade long construction boom.

Carillion has made great strides to shift its Middle East workload from Dubai to Abu Dhabi over the past 18 months.

The UK’s second largest contractor increased its Abu Dhabi turnover 17-fold from £10.9 million in the first half of 2008 to £189.7 million in the first half of 2009.

By contrast its Dubai turnover reduced from £112.2 million in the first half of 2008 to £74 million in the first six months of 2009.

Other major UK construction firms have also strived to reduce their exposure to Dubai’s debts. Consultant Atkins has cut 30 per cent of its staff across the region.

Debt problems in Dubai have thrown European markets a scare, with chunky losses seen on all the major bourses. Stocks with any connection to Dubai were punished especially hard.

Dubai stunned financial markets late yesterday when it announced that Dubai World and its subsidiary Nakheel were seeking a debt standstill ahead of a restructuring.

Concerns over debt defaults naturally made investors wary of holding banking shares and as a result banks featured prominently among the worst performers. Credit Agricole, BNP Paribas and Societe Generale fell heavily in Paris, while Deutsche Bank and Commerzbank hit the skids in Frankfurt. In Switzerland, Credit Suisse took a hit while UK banks HSBC, Lloyds Banking and Royal Bank of Scotland were also under the cosh.

Airbus firm EADS (European Aeronautic, Defence and Space), which is part owned by Dubai, was friendless while Porsche and its merger partner Volkswagen got caught in the crossfire, on fears about the 17% stake in the merged company that will be held by the sovereign wealth fund of Qatar.

Cement maker Lafarge plunged on fears that Dubai’s troubles will signal a further slow-down in infrastructure development in the Middle East.

Away from the Dubai fall-out Saint Gobain took a tumble after Goldman Sachs cut the construction materials firm from ‘neutral’ to ‘sell’.

Across the markets, the Dax slumped 188 points in Frankfurt to 5,614, while the Cac lost 129 point to close at 3,742. The Swiss market index shed 138 points to 6,342.