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Testing times: David Clifton, Faithful+Gould

David Clifton is regional development director, Middle East, at Faithful+Gould, an integrated project and programme management business and a standalone organisation within the Atkins group. He has experience of working on major GCC transportation infrastructure schemes – aviation and rail – and been heavily involved in the hospitality and retail sectors with clients such as Emaar.

What is the initial view on Saudi Arabia’s National Transformation Plan (NTP) & The Vision 2030 which was released at the end of last month?

A lot of the NTP vision was well telegraphed through to the media prior to the announcement. The NTP needs to happen and it is vast in its attempted scale. We’re really lacking some major details as to the how and priorities within the document and also what mechanisms will be used to deliver the vision.

There are some concerns as far as I can see. For example turning the Public Investment Fund (PIF) into a $2 Trillion investment fund would mean you’ve monetarized Aramco, which isn’t the case as only around 5% will be in an IPO. How is the rest of the money going to be generated to give to PIF? The fact would appear that this isn’t actually diversification as the money would still be coming from oil in the short to mid-term. Also, the new military organisation to be government owned and given an IPO at the end of 2017 could be an oddity. If the entity only trades with the Saudi government, then nothing has altered. However, should these two entities have regional and global reach there could be a mid to long term diversification for the fund and release some of the reliance on the Aramco cash generator.

How are the reforms likely to impact the construction industry?

We’re going to see a massive reprioritisation of projects and programmes with all of the major ministries including transportation and housing. The Mecca Metro will be reshaped and refocused because it was probably slightly bigger than was required, but it’s got feasibility because of the scale of the pilgrimages. I think there will be delays in the metro in Jeddah and a very big delay in Dammam. You’ve also got serious question marks over the heavy rail going through not just Saudi Arabia, but the whole GCC rail network is likely to suffer serious delays.

In Saudi Arabia we’re starting to see reprioritisation of what’s truly important. We saw 18 months ago that plans for Aramco to build ten 45,000 seat football stadiums came and went. You see from this year’s budget that defense has gone up while the transportation budget was slashed by 62%. When you consider that nearly half the budget in Saudi Arabia is salaries, benefits and running offices, transport isn’t going to be doing a lot in the short term.

The interesting one to look out for is how they are going to address the housing crisis and this is where a white land tax comes in. The housing issue isn’t going away and the problem is getting bigger by 3% per year in terms of the population growth of Saudi nationals. There is obviously a social contract that exists in this region that you don’t have elsewhere and that drives certain priorities. In times of economic difficulty in places like the UK, the government veers towards building revenue generating assets whereas social housing really isn’t going to be a revenue generating asset – it’s an incredible cost – but it’s a priority because of the social contract.

If it wasn’t for the private sector Saudi would have struggled even further in Q1 this year in terms of construction awards but this presents the private sector with a first mover opportunity in many respects because you know that you’ve got a white land tax coming and contractors with capacity across the region right now. Thus, there is the capacity to get your job done. I’ve seen a lot of our private sector clients having very serious conversations around the implications around moving now because a lot of them want to avoid the land tax. I’m not sure if it’s going to drive the social housing agenda because the private sector is generally not looking at that. It’s looking at retail, hospitality and a variety of different things that in practice probably isn’t addressed in the government priorities but it’s going to be useful for the market but maybe not for the NTP unless there is some sort of direct incentivisation there. However, the private sector motivation through initiatives such as the land tax will spur a level of diversification and generate employment opportunities for Saudis in the private sector in construction, operations, maintenance and end user organisations.

So we can expect to see more incentives for the private sector in KSA?

It’s got to be that way. The only way you can diversify your market is by engagement in the private sector especially if you’re looking to wean the country off of just working for the government. How they incentivise that will be interesting to see. The detail has yet to emerge, but with the ‘green card’ system, there could be a motivation for investment along with the potential for foreign investors to own 100% of their business – similar to the free zones seen in the UAE.

Are there any plans to introduce a PPP law?

They’ve done PPP in exceptional cases. There’s been a trade mission over to the UK from Saudi Arabia because the PPP is a very popular British funding model over recent years. They will be looking to implement something around all of this alternative financing but there’s quite a lot of governance and legal structure that they’ll need to develop. In Saudi Arabia  the procurement law for the government is ‘pass technical, cheapest price wins’ which, if you’re looking at PPP which is much more driven around a whole life cycle and value, that isn’t going to work particularly well because to build the assets may only be 20 to 30% of the entire life of the development.

There needs to be a bit of a mindset change. If you look at the NTP you’re going to have to take a long term view because the organisational and behavioural change doesn’t happen overnight. The temptation to revert to type and do what you’ve always done is so easy. Not many people really like change and the culture of the Kingdom is that much more conservative.

What about the recruitment situation? Does the Saudisation drive make it more challenging for companies?

A lot of people have been educated in the UK and US under the King Abdullah overseas education programme and have been exposed to other ways of doing things. We’re employing people to develop a career with our group, so whether they are Saudi or other nationalities, they are going to get given the tools to do the job and we will train them to develop as professionals. I don’t think recruitment is as bad as some people think, certainly not from a consultancy perspective. Educated people generally want to look at developing their career, so chances are the work ethic is there. The thing I’ve seen with a lot of contractors in Saudi and Oman is that they just pay people to be on their books and all they’re doing is adding bottom line costs to the development and not aiding the social agenda, nor creating a sustainable business in these countries.

Recruitment is somewhat challenging , but we’re facing a global slowdown so there’s not as much work around as some people think and so the premium for Saudi Arabia isn’t as big as you’d think. It adds a level to the cost but in other areas you can make that up. There is always going to be interest in working in Saudi because of the scale of some of the projects and the fact that these are CV defining. We’re involved in the Riyadh Metro which a project that’s like doing half the London underground in one hit. You’re not going to work on a project like that anywhere else on the planet.

Is that project impacted by the NTP or is it too far ahead?

There is some reassessment and reevaluation of that scheme and they are looking at areas to save costs. You don’t necessarily need stations designed by Zaha Hadid!

Is Saudi receiving much in the way of foreign investment? From China for example?

Whether or not the NTP will attract major overseas investment is hard to tell. One of the things it needs to take care of is addressing some of the opaqueness. Liquidity tends to follow the route of most suitable return but also having a level of transparency. I haven’t seen an awful lot of Chinese money piling in there. They use Dubai as a platform for Africa and that seems to be where their interest is.

What might the reemergence of Iran do for the construction sector in the region?

Iran has got a good skill set of engineers and they can do 90% of what it wants to do in house – certainly from a consultancy and main contractor’s perspectives. And if you look at what people get paid in Dubai you’re certainly not going to get paid that in Iran. You can’t go into Iran and charge them a lot more money for a job that they can do themselves. But it needs money so for those bringing capital to the table there are plenty of exciting opportunities and also for the top 5 – 10% of the skillsets that are missing from being shut down for so long.

Is it the case that Dubai is still driving developments in the region?

Dubai has awarded a significant amount of contracts. They have liquidity which has been locked in over the past couple of years and that’s being expedited in terms of construction contracts. There is a bit of concern in terms of maintaining that. Regionally banks are having money taken out by governments because of the oil price and there is tighter regulatory reform at international level so they are having to back up their balance sheets and they are not seeing as much new cash deposits going into them.

In terms of construction contract awards we’re rolling a little better than I expected to be honest. A few schemes have popped up that I really wasn’t expecting. Dubai is propping the UAE market up. But Abu Dhabi has always been good at keeping capacity stacked up in the market. You’ve got drivers there like ADNOC. Just their civil engineering division does a huge volume of work and it’s good work. But Abu Dhabi is reining that in at the moment and is almost doing its own reassessment. It will be interesting to see what happens with a lot of the schemes there.

Dubai is still a popular tourist destination and that isn’t going to change. There is a bit of an issue because of the strong dollar which makes it expensive but mid-range hospitality offers an opportunity. Dubai likes to be high end but not everyone can afford to stay in the Armani hotel for three weeks so there’s a bigger potential market downstream. But the real dynamic driver of this market is Al Maktoum Airport just because of its scale. Nothing can touch it. It will suck up capacity. And Emirates is so phenomenally successful and that doesn’t look like changing anytime soon. If you look at the masterplan, Expo 2020 itself is tiny by comparison to Al Maktoum. It can feed the development industry in Dubai for many years to come. They’ve got a couple of billion dollars-worth of export credit funding going to it from Britain and I’ve got no doubt others are interested in some shape or form. Whether it costs $32bn or $24bn it’s still big enough to support the local market especially when combined with Emaar’s aspirations for Dubai Creek Harbour – where F+G are Programme Managers.

What about the UAE’s recent push towards building theme parks?

Theme Parks aren’t going to make massive amounts of money by themselves but they will attract people here and shopping malls and hotels will be built as a result. As well as the projects that Dubai is building Abu Dhabi has got Ferrari World, Yas Waterworld and is doing the Warner Bros theme park. So this could become an integrated blended tourism offering for both Abu Dhabi and Dubai. It helps to build brand UAE.

A huge percentage of the world lives within a few hours flying time from here so it’s got a phenomenal catchment area. Look at how busy Orlando and Los Angeles still are with foreign tourists and a lot of them come from very far away – although there is a large US audience. But they don’t have to come from so far to come here. The issue you have with family tourism here is the relative lack of affordable hotels. They’ve got to work out how to put everything together as a package for tourists so that people can buy a family holiday that has these things incorporated into it.