Building confidence

Crisis? What crisis? With the rest of the UAE reeling in the wake of Dubai’s recent debt concerns, Arabtec’s charismatic CFO Ziad Makhzoumi is betting on his firm’s sound financials to see it through the downturn and beyond.

“In this climate there should be no such thing as blank-cheque management”
-Ziad Makhzoumi

Given the building (not to mention financial) excesses witnessed in the emirate over the last few years, it is refreshing to hear a Dubai-based senior executive at a major construction firm extolling the virtues of a measured approach to construction. And that is exactly what Ziad Makhzoumi, Chief Financial Officer at UAE contracting giant Arabtec, believes has enabled his company to weather the worst of the storm.

Since it first opened its doors for business in 1975, the firm's successful execution of a vast array of major projects has forged its reputation as one of the industry's most respected players. Today, its diverse portfolio spans the sectors of high-rise developments, hotels, residential, commercial and industrial, airport developments, stadiums, villa communities, mixed developments, entertainment and offshore oil and gas installations. Drawing on a multinational workforce of over 70,000 employees, as well as state-of-the-art plant facilities and equipment, Arabtec is uniquely qualified to tackle even the most complex and iconic of projects - including the recently completed Burj Dubai, the world's tallest building, on which it was the main contractor.

Indeed, Arabtec shrugged off a difficult year that included ongoing payment disputes with developers and controversy over living conditions at its construction worker camps (claims vehemently denied by the firm) to finish 2009 strongly with a rise in its share price and the signing of several new contracts in locations such as Russia, Saudi Arabia and North Africa. And with a sound financial base in place, Makhzoumi hopes for more progress in 2010.

Obviously the last 12 months have been tough for everybody in the industry. What have been your key areas of focus over that period - both as a company, and in your role as chief financial officer?
Ziad Makhzoumi. Well, there are two issues. We were planning for a downturn from the end of last year. Around the end of the first quarter of 2008 we expected things to get worse, and we started planning for them then. But, like most companies, no one could have predicted how fast it would hit, how severe the crisis was going to be, and what impact it would have. Nonetheless, we're in reasonable shape for two reasons. First of all, we concentrated on managing our cash - our receivables and payables - very well, and are trying to balance those as much as possible. We talked to our banks and confirmed that there wouldn't be any restrictions on the movement of cash or extra credit facilities - not that we needed any. So we prepared ourselves from the point of view that you have to be liquid to be able to meet your financial obligations. We talked to our suppliers and we came to an agreement with them in preparation for harder times, and we also talked to the developers and other parties about payment terms. So that was a function of my role as CFO to manage the present situation and the expected downturn.

On the other hand, we knew that Dubai was going to come to a standstill for many reasons. We have a big backlog of work that will keep us going for another two years here, but we're lucky in the sense that we're not looking for more work in Dubai. We knew we won't get any more major projects for the foreseeable future, and we had in fact already taken steps to expand our business during the previous year in Qatar and Abu Dhabi, and we have long been planning for a move into Saudi Arabia. We had previously delayed our expansion there because the Saudi market was not as open as it is now and we were too busy on the numerous projects we were working on in Dubai, but now the timing is perfect for that move. So, these are the two things that really helped us in coping with the disaster that hit the market.

Do you think the slowdown in the property market has allowed developers and contractors to refocus on the infrastructure side of things?
ZM. I'm sure it did. The margins were higher on the residential side because people wanted their projects finished yesterday and were ready to pay a premium to get things done quickly. They wanted the cash to build bigger, more expensive projects, and that led to the frenzy that caused the prices to go up. At one stage, we were working on many sites seven days a week, three shifts a day. So I think it did lead many firms to focus on the residential sector.

Now everybody thinks they can get into infrastructure. It is not easy, however; you need to be qualified for the job and you need to be specified by the government, as most infrastructure work, unless it's a private development, is government-backed. You can't just go in as a foreign company and say, 'I want work'. It doesn't happen that way. You cannot go in if you're not specified in Abu Dhabi and bid for work. You have the same issue in Saudi Arabia. So it's not as easy as just moving the people over from residential to infrastructure projects, because you need the right background skills and qualifications. But having said that, there was definitely a movement towards a greater focus on infrastructure and the concentration is on that sector now. Oil and gas projects are also seeing a renaissance. When the price of oil was less than $30, lots of countries held back on spending on maintaining/upgrading their oil and gas projects, offshore platforms and so on. That is moving again, so we see a lot of potential in that, too.

Obviously, financials are having a huge impact on the way construction firms are operating through this downturn. So how do you see the role of the CFO changing, and how are you effecting that change at Arabtec?
ZM. The CFO can no longer be just a bookkeeper. They have to be a planner, they have to be a strategist, they have to be a supplier of resources. Money is a commodity, it's not something that grows on trees, so you have to manage it exactly the way you manage your stock, exactly as you manage your receivables. People assume it's virtual, but it's not. It's physically something that can make things better or worse, one way or another. And the reason I was brought in was because of my experience in that department.

We are going in the right direction. We do have more sophisticated financial systems that probably were not needed two years ago, but that have put us on a sound financial footing. Now we are expanding, we have to prepare to export that control system to other countries and deal with taxation, import duties, etc. that we didn't face before. That is the challenge.

The CFO also has to act as an advisor or a chief of staff, to tell the board and the CEO whether a project or a decision is viable. Not just because of regulatory reasons, although of course that is one important dimension, but also in terms of what you can afford and what you cannot afford; you need to advise the board on the best way of achieving your goals as a company. So the role of the CFO has to go beyond just historic data reporting. It has to be about planning, it has to be about control, it has to be about governance. It has to be all these issues that we are talking about. That's how I see it.

Do you think it will also involve a greater knowledge and understanding of the technical and engineering sides of the business, and how they impact on the financial side?
ZM. Definitely. These are business issues and project-related issues. I believe a CFO has to have more actual hands-on business experience and knowledge, and not just behind-a-desk experience of business. We are a public company. I have to communicate with the media, so not only do I have to be a very good numbers man, I have to be a good communicator and I have to be a strategist. Because running in parallel to the commercial strategy is the financial strategy, and you cannot implement one without the other. In this climate - in any climate - there should be no such thing as blank-cheque management. We have to manage our balance sheet. We have to report to our shareholders. We have to follow the regulators. We have to manage the whole process. So, it's not just an accounting function anymore. It's more of a leadership function, a specialist function, a creative function, to be able to cope with the challenges and obstacles and find ways around them. In some cases, CEOs have not faced such a crisis before, and it is a financial crisis, nothing else. And unless you have that knowledge, you have a problem.

On that note, there's been much in the news recently about various disputes between contractors and developers. What has been your experience with that issue in the past 12 months, and how have you managed that process to minimise the impact?
ZM. Of course, when things are going well no one gets angry or goes into dispute. And when things are bad, one of the ways of resolving that dispute is go for arbitration or litigation of some sort, in the hope that an official body will arbitrate and try to resolve the issue. And those type of incidents have gone up in the last year or so, because people are panicking about getting their cash - if you don't get paid, you can't pay your employees or your suppliers. Your suppliers might then sue you or your workers might go on strike, and then you're in a difficult position. There is a series of actions that are dependent on the flow of money.

I think some of the most recent events highlight the fact that we possibly need more clarity on regulation, or even more regulation. I'm not a person who likes more red tape just for the sake of it, but there needs to be some clarity in terms of what-if scenarios. And there are some cases that will test the system that we want to see the outcome of; hopefully it'll be positive because it'll add to the image of Dubai as a fair and open and transparent place to work, to live and to do business.

You also mentioned about the importance of people in the construction business. So how are you really driving that culture of people development?
ZM. I'll give you an example. If you pay $90 million for a jet plane but you don't have a pilot, it's just a very expensive piece of junk. So you have to have the right people who will take your assets and maximise their revenue. Yet in many businesses - not in Arabtec, because we value our people very highly - people are not considered as an asset. This is a mistake. People are the most important asset you have as a company, because it is them that implement the strategy; after all, you can't do everything on your own. We have 70,000 employees, so we can't go in and make decisions for each one of those workers. They have to make those decisions on how to build the buildings, how to deliver work on-time, how to be safe. We want to ensure that they follow procedure and so on, but unless you train them well and you work with them and incentivise them in a way that will produce that, you will not achieve your aims.

And we believe we're one of the better companies. I'm sure we can always improve. We've been in the press recently for the wrong reasons - unfairly in my view, because following all the negative publicity we invited the press to visit our labour camps and they came and saw that much of the stuff mentioned in the programs was untrue, incorrect and out of context. However, this doesn't mean we cannot improve. We are always improving. We follow the labour laws and go beyond them. But, we also need guidance. And when you're growing as quickly as we are - up to 70,000 people from less than 20,000 four years ago - you're bound to miss some things and not get everything perfectly right.

As a result, we always review our processes, and we always talk to our people. My staff have an assessment meeting every three months. We talk and discuss targets. They have access to me whenever they want. We have a hierarchy, accept our responsibilities and are very active in putting things right. Our CEO, Riad Kamal - who is a brilliant and visionary leader, as well as a great communicator - is trying to push that culture all the way down through the organisation. We are close. But, we also accept that everyone must take individual responsibility for what happens in the organisation.

So you have quite an open culture in terms of lines of communication between members of the management team, but what about communication between senior management and those people on the lowest rung of the corporate ladder? Is there an opportunity for those workers to have a voice?
ZM. There is an official process for that, of course. But in addition to that, every month we go and visit the camps and have dinner with our workers. For instance, we had a big Indian night last month where there were 5000 people, including myself and other members of the management team. And we do talk to them: sometimes they say thank you and sometimes they complain, but we're always open. Sometimes they have a genuine grievance, and sometimes they don't. It's like a big family, and there are brothers and sisters and cousins; not everybody is happy with everything all the time, and there's jealousy, there's all sorts of disputes. But there's also respect, and we try to keep that culture going. We're always improving, and I hope we can always get better at what we do. And as I said, there are bound to be some mistakes made when you are trying to please 70,000 people. You learn from it, and you hope that it will not happen again.

And so, going forward, what will be your key areas of focus in the short term?
ZM. As a company we have to keep the momentum going and maintain our current business, while at the same time looking at expansion into other areas - be that geographically or in different sectors - which we are doing. We need to excel in certain areas that we're very good at to ensure that we keep that uniqueness about us, that we deliver quality in everything we do. As a CFO, I need to make sure I support that expansion and give it all the resources I can. It's not only people; on a strategic level people are extremely important, but to implement the strategy successfully you need resources, and one of them is money. And that's my job.

We're expanding outside Dubai. And we're going to areas where they're many years behind Dubai, like Libya, Algeria and Russia. These are new economies that are oil and gas dependent. They need the infrastructure and they need the skill, so I think for the coming 10 years we're quite well set. Hopefully, by then, we'll have new strengths and new skills and new opportunities, and we'll create new sectors.

Room to grow

Ziad Makhzoumi outlines Arabtec's expansion plans for Saudi Arabia, Qatar and Abu Dhabi.

These are three very different markets in the sense that their dynamics are different to Dubai. For one thing, Dubai is more dependent on foreign investors buying property. In addition, the scope and the ambition of the projects in Dubai is so huge. It has the world's tallest building. It has a metro where no one else in the region has. They're talking about building a rail system from scratch. They are already building a new airport, extending the seaport, and so on. And it even has clusters of new islands that have redefined the shape of the coastline.

Abu Dhabi is different. The government there is more conservative in its views. Abu Dhabi's population is growing and there is a shortage of dwellings there, so building affordable housing is increasingly important. A few years ago, people who used to live in Abu Dhabi would come to Dubai, but now it's the other way around; they live in Dubai and travel to Abu Dhabi. Rates are still higher in Abu Dhabi, because there is a housing shortage, but what is different is that demand is coming not only from external investors or buyers, but also from the people who actually live and work there. So that more conservative attitude to investment has helped. Abu Dhabi is also one of the biggest producers of oil in the world, so they have an income that can support those projects and that expansion. Plus, the infrastructure work that they're doing is helping. If you look at Abu Dhabi, there are many projects. There are six hospitals that we are aware of being built. You've got two museums that are being built. You've got universities being built. There's also the expansion of the airport, the seaport, the new downtown that they're talking about. So, the new UAE construction market is Abu Dhabi - and how fast or how slow that grows is a function of how fast the government wants to go. And of course, that will be triggered by the surplus of cash generated by oil prices.

Saudi is a completely different story, because they do not build at all for foreigners. Very few people are going to buy a holiday home in Saudi. One the other hand, it's a very big population and a very big country, and is in greater need of infrastructure development. And it's not necessarily just roads and airports, although they're looking at renovating both. We're talking about universities. We're talking about developing more opportunities for a sector of society that wasn't previously as active: women. The government also wants to be a centre of excellence for information technology, so they're pushing that in Jeddah. You've got the development of the economic cities that are happening. So, the market there is completely different, and in theory, it will be much bigger than the whole of the GCC put together. We think that Saudi will be, eventually, the biggest market for us - or any contractor in the GCC.

Qatar is in a unique situation in that is has gas, and is the third biggest producer in the world. Again, they are trying to emulate Dubai, but I think that is going to slow down as a result of the current confidence in the market. I don't think growth there will be stopped, but it'll be slowed down. So, instead of finishing projects in two years, they might finish in four years or five years. As far as we're concerned it doesn't matter, because somebody has to finish those projects and we are there to help them. And plus, with all the infrastructure work that they need on the gas side, there will be plenty of work.

North Africa is also big for us. Libya, we think, is a very important market. We're pursuing some projects there. Algeria is a very big market. Egypt has always been interesting, but only if there is a specific project where we have a competitive edge; we can't compete on price because the locals will be cheaper. We have projects in Syria and I think, again, that's a very interesting market for us. We have a project in Jordan, but I think that will be affected by the economic recession and the political situation in the area. Plus we have a major project in Russia, which we were invited to bid for and were awarded the project because of our experience and reputation. So, we have a brand name. We have credibility. We have a very good product and service that we can build on, and that was basically our strategy for extending our operation outside Dubai.

An icon in the making

Burj Dubai is the centrepiece of Emaar's Downtown Burj Dubai, a $20 billion, 500-acre downtown development billed as the most prestigious square kilometre on earth that has provided a number of major construction challenges.

The tower has been designed to manage the effects of wind and seismic movements, with a super-structure made up of high-strength concrete supported by large reinforced concrete mats and piles. The 80,000 square feet foundation slab and 50-metre-deep piling are waterproofed and feature cathodic protection. The steel bars that reinforce the structure weigh a total of 31,400 tonnes, and if laid end-to-end would stretch more than a quarter of the way round the world. The concrete used is equivalent to a 1.5-metre wide pavement over 1200 miles long, and is equivalent to the weight of 100,000 elephants.

Primary materials of the exterior cladding system include reflective glazing, aluminium, textured stainless steel spandrel panels and vertical stainless steel tubular fins that accentuate the height and slender design of the tower.

The structure also poses a number of challenges in terms of energy efficiency. At peak cooling time, for example, the tower will require 10,000 tonnes of cooling per hour, equivalent to the capacity provided by 10,000 tonnes of melting ice in one day. Meanwhile the tower's water system will supply an average of about 946,000 litres of water per day, the building's peak electricity demand is roughly equivalent to 360,000 100-watt bulbs all operating at the same time, while its condensate collection system will provide around 15 million gallons of supplemental water a year, equivalent to nearly 20 Olympic-sized swimming pools, which will be pumped into the site's irrigation system for use on the tower's landscape plantings.

New horizons
As Dubai's construction industry continues to falter, Arabtec has strengthened its position by enhancing its portfolio in alternative markets.

Okhta Social & Business Centre
St Petersburg, Russia

Situated in St Petersburg, the old imperial capital of Russia and its second biggest city, the project comprises a 400-metre high tower taking the shape of a flame (resembling the logo of its client, Russian gas giant Gazprom), three podium buildings as well as massive underground structures and special external works. The tower will feature office space for the client and its subsidiaries, leisure and entertainment facilities, as well as a library and sports centre.

Nation Towers
Abu Dhabi, UAE

Located on the Abu Dhabi Corniche seafront, the award-winning Nation Towers is a mixed-use development project covering a total built-up area of over three million square feet that is expected to be commissioned by the end of 2011. It features a 64-storey residential tower, a 50-storey luxury hotel and office tower and a retail podium. A sky bridge at the 48th level will connect the two towers while an underground tunnel will link the tower to a beach club.

Lamar Towers
Jeddah, Saudi Arabia

The SAR2 billion Lamar Towers project is an important strategic high-rise luxury project on the Jeddah Sea Front Corniche consisting of two towers of 60 and 68 floors respectively, and incorporating residential and commercial units as well as a shopping mall. The main investor in the project is Zahran Real Estate Company while the main developer is Cayan Investment & Development Company. The project represents a joint venture with Al Saad Contracting.