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Qatar's Construction Sector

Julian Pope - SNR Denton & Co

Julian Pope from SNR Denton & Co provides an insightful analysis of Qatar's construction industry.

Julian Pope

Julian Pope

Qatar is a sovereign state with a population of around 200,000 Qatari national citizens and a total population of about 1,700,000. Ten years ago many readers would have been forgiven for not knowing much about the country, but today it is enjoying high international visibility. Its rapidly growing prominence has resulted from various factors: it is now the world’s largest exporter of LNG; its sovereign wealth fund, Qatar Investment Authority, has made many high profile overseas investments (Barclays Bank; Credit Suisse; Volkswagen; Harrods; Miramax Films; Sainsbury’s; prime real estate); the very active role played by His Highness the Emir on the international political stage; the Al Jazeera broadcasting network; Qatar Airways; and of course Qatar’s success in December 2010 in its bid to host the FIFA 2022 Football World Cup.

Qatar is a wealthy country, as a result of owning the third-largest gas reserves in the world, after Russia and Iran. A 10-year intensive programme of investment in developing LNG production and transportation is this year reaching its conclusion, with Qatar having achieved its target production capacity of 77 million tons per annum of LNG.

Qatar may have a small population, but it has huge plans for infrastructure development in the next 10 years, funded by its hydrocarbon exports. At the end of March 2011, two important documents were published by the Qatari government: the National Development Strategy 2011 – 2016, and the budget for 2011 to 2012. Both are highly informative. Expectations are that GDP real growth will remain very high in 2011, reaching over 18 per cent (if oil prices are around US$70 per barrel, and higher if they exceed that), but will slow thereafter following the completion of the LNG programme and mega projects such as Shell’s Pearl GTL facility. A strong current account surplus (estimated at over 14 per cent of GDP in 2010) is expected to continue due to hydrocarbon exports.

In a recent speech His Excellency Yousuf Hussein Kamal, the Minister of Finance and Economy, announced that for the 2011 to 2012 budget, 40 per cent of spending will be allocated to infrastructure projects, an even higher amount than in the previous year. The minister said that Qatar plans to invest between US$160 billion and $170 billion on infrastructure and oil and gas projects in the next 10 years. In January 2011 projects worth US$85 billion are under development in Qatar with other projects worth US$130 billion planned for the next three years.

Many of these projects were planned before the FIFA World Cup win and are integral to realising Qatar’s National Vision 2030. The 2022 World Cup gives an added impetus for existing infrastructure plans by providing a hard date by which they must be operational.

Specific projects planned include a new national railway system, including a Doha metro, light rail, freight and high speed lines (US$25 billion) slated for completion in 2025; the completion of New Doha International Airport (US$10 billion), now nearing completion and  anticipated to open at the end of 2011 or 2012; an entire new port (US$7 billion) being constructed on a “green field” site; construction of the Qatar - Bahrain Causeway (US$4 billion); the huge Dohaland – Musheireb urban redevelopment (US$5.5 billion) in the heart of Doha; and a planned Doha Bay Crossing (US$1 billion) linking the new airport with projects in the northern part of Doha. In addition there is a major programme for building and expanding roads (US$20 billion), water and wastewater facilities. The Barzan Gas project was the subject of a recent joint venture agreement with ExxonMobil that will supply gas for domestic use. For the FIFA World Cup, nine new state of the art stadia will be built with capacities of at least 43,000 each and three existing stadia will be refurbished (US$5 billion). An additional 90,000 hotel rooms are planned.

Unsurprisingly, such a huge development programme has, and continues to, attract new entrants to the construction market, and indeed many other areas of business. Chinese contractors have been successful in winning projects (including the first huge contract to form the basin of the new port) and on price alone prove daunting competition. There has been a small but steady inflow of international law firms setting up offices in Doha.

Nevertheless, it would be wrong to think there is easy money to be made in the construction sector or to underestimate risks, particularly for new entrants to the market. Many contractors, subcontractors and suppliers were hard hit during the last three years, as payment flows dried up due to the financial crisis. Stories of contractors on large projects going unpaid for months are not uncommon and the effects are felt all down the supply chain.

The procurement approach for infrastructure projects and private sector building remains traditional, with a strong tendency to favour the lowest price rather than give substantial weighting to quality assessment of bids. Contracts tend to be lump sum. While there is some interest in newer approaches such as alliancing, early contractor involvement, and management contracting, it could not be said that they have made any meaningful impression on procurement. It is only recently that design build contracts have come into use. The FIDIC Silver Book is gaining acceptance.

While the oil and gas sector and IWPP sector have seen some very large project financings in recent years, infrastructure procurement continues to be publicly financed. Both the new airport and the port are being financed by the government. PPP has not arrived. A strong argument could also be made that this is no bad thing, given the typically lengthy and complex procurement processes and greater inflexibility in the operational phase (quite apart from the re-appraisal of PPP benefits currently under way in the UK).

The limited use of project financing means that a significant part of the construction lawyer’s fare recently has been advising on post-contract issues and dispute resolution. Qatar is a civil law country and the legal system shares the same roots as other Gulf countries. The civil law has strong French and Egyptian influences. Difficulties of translation and the absence of a readily available and comprehensive body of judicial precedent means it is often difficult to form a firm view of how the Qatari courts will apply the law to a given set of circumstances.

Arbitration is commonly the agreed dispute resolution procedure in construction contracts, particularly those involving foreign contractors (for whom it is of course the preferred option). However, the public works ministry in its standard contracts requires disputes to be referred to the Qatari courts. When arbitration is agreed, the seat is usually Doha - only rarely in neutral venues. Construction contracts, particularly in the public sector, are almost always governed by Qatar law. Qatar arbitration law is relatively undeveloped, the number of large and complex arbitrations taking place remaining small. Potential obstacles include the emphasis sometimes placed by the courts in the region on formalities of documentation. There is an automatic right of appeal to the court unless it has been expressly excluded by the parties, and wide ranging rights to set aside awards (which cannot be excluded). In the past arbitration has therefore tended to be viewed by those lawyers in general practice as adding an extra layer at the bottom of the lengthy court process, and has been avoided. Foreign arbitration awards have however been enforced in Qatar, even before it acceded to the New York Convention. There has recently been interest in alternative dispute resolution procedures, for example mediation, and CEDR has organised some training sessions in Doha (of a very high quality) for would-be mediators. Formalised mediation is still in its very early days, but early signs look promising. FIDIC Dispute Adjudication Boards have been established on one or two projects only so far.

Considering the size and complexity of the major projects under way in Qatar, the quality of contract documentation is too often poor. Inevitably this can lead to, or at least exacerbate, arguments about contract obligations and rights. Recently two new Qatari project management organisations have been established and hopefully good quality documentation will become more the norm.

At the time of writing, the Arab world is undergoing an unprecedented political upheaval, with armed rebellion in Libya and political protest elsewhere on a scale that no one could have foreseen only four months ago. So far Qatar has remained untouched by this (in marked contrast to its close neighbour Bahrain). Most observers, including investors, consider Qatar one of the most politically stable and secure countries in the region.

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