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Rebooting stalled projects

With the construction boom in the Middle East, why is it that so many projects remain stalled?

Our director, Mathew Hazenberg, dives into some of the common causes behind this phenomenon, and the options owners have to resolve these challenges.

 

 

Drive around any major city in the Middle East and it won’t take long before you see a building site that has been abandoned part-way through construction. There are plenty of them out there. In the middle of what appears to be a construction boom (or a rebound in some cities), with investment pouring into real estate and infrastructure, how can this be?

Our clients cite several common causes:

  • Costs ran out of control
  • The project’s investment case deteriorated due to unforeseen external factors
  • Liquidity and credit tightened unexpectedly

Such situations are difficult to recover from and require bold decisions, based on rigorous assessment of the risks and opportunities. Owners have three options:

  1. Abandon the project, cut losses and dispose of the site
  2. Sell the project to another owner, typically at a heavy discount
  3. Double-down on the investment and reboot the project

Which option to take depends on some key factors:

  • The current owner’s financial position – its balance sheet and access to credit
  • The strategic alignment of the project with the owner’s business strategy
  • The current or new owner’s ability to reconfigure the project to improve the investment case
  • A realistic understanding of the costs and time to recommence and complete the project

Project owners need to determine which option is best for them and then develop a realistic plan for the way forward, whether disposing of the project or seeing it through to completion. This is often not as straightforward as when planning a new project – the remobilisation of a once mothballed project brings its own challenges. To secure funding, credit and insurance to reboot the project, owners will have to demonstrate a good grip of the associated risks.

For a start, closing out loose ends on the original contracts is usually very complex in these scenarios. Whether reengaging the same contractors, or using new ones, it’s in the interest of all parties to draw a line under events to date, quickly. And it’s rarely one-sided – we often find upsides for all parties when a project restarts, versus the full-doom scenario their boards had assumed when the project collapsed.

Other examples of problematic issues we’ve dealt with include the transfer of warranties for installed equipment, ownership of materials and plant on site, and the validity of previous authority approvals. All have required a bespoke approach to suit the specific circumstances of the project.

On the bright side, often on these projects some key threats have already been overcome. Ground conditions, for example. We have seen that this does indeed make such projects more attractive to financers.

Finally, new contract agreements will need to recognise the state in which the incoming contractor will inherit the project and deal with the allocation of risks fairly – something that will be very different to normal circumstances. This is paramount for the success of the project and to enable contractors to secure guarantees and bonds.

Timing is everything. Whilst leaving the site in limbo might have made sense when market conditions were flat, with things picking up, moving fast puts you ahead of the competition and limits the costs of downtime.

With all this in mind, we expect to see cranes, trucks and labour appearing at many of these ghost-sites soon!