The phenomenon of surety bonds is being examined as an option instead of performance bonds in Dubai, according to the Drake & Scull International CEO yesterday, adding that he expects Dubai to "come back with a roar in the next four to five years" since it is still the best in terms of positioning and infrastructure.

The company is looking to finalise its two acquisitions in Saudi Arabia by end-2010 and is in discussions to find an "entry point to either joint venture with a company or organically grow with a family company in India", in mechanical, electrical and plumbing (MEP) and infrastructure, water and power, not the civil sector, he added.

"The situation with banks in terms of performance bonds has not eased up," said Khaldoun Tabari, Chief Executive Officer at Drake & Scull International, a Dubai-based MEP company, told Emirates Business yesterday at a media round table.

"Banks cannot be blamed but they are not lending and bonding and that is the main problem for developers and contractors. That is why people are talking about surety bonds for the first time where insurance companies are coming in instead of banks. Internationally, surety bonds have been seen as a solution for performance bonds but from an insurance company. I have not seen it as yet in the UAE but I am hearing about it. In Europe, there is a rise in surety bonds usage by 20 to 30 per cent due to the current situation. I would say that banks should be warned that if developers and contractors start understanding that surety bonds will work, then the former will lose a huge part of their income stream."

His views were echoed by Tawfiq Abu Soud, Executive Director at Drake & Scull, who said: "We have seen that a couple of clients are thinking about accepting surety bonds in Dubai. By clients, I mean major developers in Dubai. But we cannot disclose any names. The phenomenon is creeping into the market and is a good thing for the construction industry."

He added that the phenomenon is seeing a slow rise. "This has been visible from the beginning of the year in Dubai. It is a better option for the contractors in the long run," said Soud.

India and Saudi expansion

Meanwhile, the company is looking to grow in India and is eyeing three to four companies, said Tabari. "We are looking at an entry point to either joint venture with a company or organically grow with a family company in India. There are many projects coming up and we would look at it as a two-way business stream where we would probably get human resources from India for our projects in the Middle East and use our platform to do work in India. We will enter with MEP and later in the IWP sector. But we will not do civil work since it is very competitive in the latter," he said.

"We have Pricewaterhouse Coopers, Al Tamimi and Shuaa Capital doing the due diligence so that we are sure of what we are going to pay for the Indian venture but we don't have any figures as yet."

The company is pushing aggressively into the Saudi market and has recently won a contract in Saudi. "We have announced an office and have a win on a civil project on a 40 storeyed building in Jeddah, which will be announced soon. We also expect to announce another win on a MEP contract."

It has seen a delay in its Saudi acquisitions but Tabari is still bullish about the market. "We are still bullish about Saudi where we will buy an MEP company and civil company. Our MEP acquisition was supposed to take place early this year but will hopefully finalise by the early third quarter of 2010 with the civil acquisition taking place few months after that. The total value acquisitions for the two companies stands at around Dh 700 million with 50 per cent from our treasury and 50 per cent leveraged through banks. We are working with banks to put in place a financial package," said Tabari.

The company recently made three acquisitions namely in Kuwait, Qatar and Germany. "Our Passavant deal is still under reorganisation and will take time to kick in. We are involved in many projects around the Gulf and hopefully will see some business in the third quarter," he said. "We are starting up in Egypt. We started in Libya but have not got any wins yet. We are starting a company in Syria and have bid couple of jobs. We expect to announce a project in Egypt in two to three weeks."

The civil sector is the most competitive in the construction industry today, he said. "We see net margins around seven per cent in civil. The MEP sector has net margins at anywhere between eight to nine per cent while we are looking anywhere between eight and 10 per cent in terms of margins in the IWP sector," he said. "It is a very challenging market and we have seen great competition in Abu Dhabi and Saudi Arabia. Again, infrastructure projects, which took six months to start today take a year to 15 months."

Backlog up by 30 per cent

While margins will not go back to the 2008 and 2009 figures, he is bullish about the rest of the year. "Our backlog is up by 30 per cent at Dh4 billion against Dh2.7bn for the same period last year last year and will be standing at Dh5bn to Dh6bn by the end of the year. From January to date, we have won Dh1.4bn worth of work. We are cautious about the second quarter but will see projects pick up in the third and fourth quarter," said Tabari.

"Things have improved from the 120 days delay in payments. Today people do not venture without knowing where the money is coming from and developers are not starting the building without proper financing. Risk management is getting important. We are comfortable at 90 days to 120 days delay in payments given the current situation."

The backlog of Q2 will generate the revenues in Q3 and Q4, added Osama Hamdan, the new CFO at the company. "Overall receivables stand at around Dh1bn. The generation of revenue is lagging but as project start breaking ground and billing starts, revenues pick up," he said.

IWP SECTORS

"This year, our division won one district cooling scheme and one full infrastructure scheme on Khalifa City area. We have bids for tenders in billions of dollars," said Soud. "However, the time between issue of tenders to groundbreaking is 18 months. We are looking forward for a large backlog in Abu Dhabi by the end of the year. We have put bids in the range of $1.5 billion (Dh5.50bn) and are awaiting the outcome. In Dubai, we are handing over three district cooling projects this year – two in Motor City and one in Nad Al Sheba by the end of this year. These projects totalled to a combined Dh800 million at the time of the contract award."