Bypassing woes to continue Middle East growth

The recent debt woes of Dubai World have heaped more misery on the emirate’s once-booming building industry but Arup, the multidiscipline engineering and construction conglomerate, has not given up on the region.

The privately owned company set up a base in Dubai in 2005 and is on the hunt for new opportunities across the Middle East.

Unlike the banking sector, construction companies have been gradually reducing their exposure to Dubai over the past 18 months following the evaporation of the unparalleled profit margins and soaring demand the industry had enjoyed.

Industry figures are quick to point out that if the Dubai World troubles had occurred a year ago, the emirate would have caused the same turmoil in the construction industry as the collapse of Iceland caused in global financing.

“We have exposure to Dubai World and, like a lot of others, we are still owed some money, which the events of last week make look less likely of coming through,” says Philip Dilley, Arup’s recently appointed chairman.

“But, anyone who was out there knew the bubble would burst and so we have been diversifying across the Middle East,” he adds

Arup – which recently worked on the expansion of Dubai airport – estimates it is still waiting for about £5m in payment by Dubai World, a tiny proportion of the $40bn (£19bn) that the emirate holding company owes to its creditors.

Echoing other senior figures in the UK construction industry, Mr Dilley explains that the group will have to reconsider its commercial behaviour in the emirate following the recent events.

But Arup, which has turnover of almost £900m, was an early mover in the industry exodus from Dubai and into other parts of the region to take advantage of oil wealth and an urgent desire to improve infrastructure.

During the past five years Dubai’s neighbours have built an estimated $1,300bn in oil earnings, much of which they are now keen to plough into improving transport, schools, hospitals and housing.

Abu Dhabi is well on the way to usurping Dubai as the cash-rich heart of the Middle East’s construction industry, with $105bn of state-funded projects being planned and already in progress in the United Arab Emirates’ capital.

Arup is working on the new Guggenheim Museum in the UAE capital, due to be completed in 2012 and commissioned after it built a namesake in Bilbao, Spain, also designed by architect Frank Gehry.

Qatar, where Arup became the first foreign company to register following a change to the country’s laws in 2006, is also going through a purple patch.

According to a recent report by Deloitte, construction in the country is set to increase by 17 per cent in 2010, almost entirely fuelled by investment on large-scale infrastructure – the type of work to which Arup is weighted.

Arup also has a strong presence in China, where the Birdcage stadium – the centrepiece of last year’s Olympic Games – is part of a long line of illustrious projects.

It is keen, however, to keep extending its roll throughout the Middle East.

Although only 200 of the company’s 10,000 staff are based in the region, the Middle East accounts for 10 per cent of total revenue – or the equivalent of about £500,000 per employee.

“Like a lot markets, it’s not what it used to be in terms of growth, but we are confident that the Middle East will continue to be an important world region,” says Mr Dilley.

Finding growth markets is a preoccupation for much of the UK construction industry, particularly those companies heavily reliant on infrastructure work.

With swingeing cuts expected to follow next year’s UK general election as the next government grapples with debt levels, some of the nation’s largest construction companies are looking for ways to make up for the shortfall in work.

“In spite of the shadow the Dubai World incident has cast over the region, there are still plenty of opportunities in the Gulf for those companies able to take them,” says Jonathan Hook, global leader for engineering and construction at PwC.

Mr Dilley emphasises the strengths of Arup’s unusual ownership structure – with its equity held in trusts that distribute profit among employees – in freeing it to focus on the future without being hampered by concerns over short-term market volatility.

He is even confident enough to declare: “If we were PLC, I wouldn’t be issuing a profit warning any time soon.”

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Stable structure behind landmark building design – and bras

Arup Group’s trust ownership structure makes it unusually stable in the volatile construction sector but also means that, unlike many of its rivals, it is unable to go to existing investors to raise new cash.

The Ove Arup Partnership Employee Trust owns all the equity, with the profits distributed to the 10,000 staff twice yearly.

The allocation is based on a formula that factors in years of service and annual salary.

It was devised after its founder Sir Ove Arup – born in Newcastle upon Tyne to a Danish consul and his Norwegian wife – handed all the equity in the group to be held in trust. It bears similarities to the retailer John Lewis Partnership.

Arup chairman Philip Dilley says the group is reluctant to introduce any individual performance-driven pay structure, which it feels would create divisions between staff and damage office co-operations globally.

In a speech in 1970, Mr Arup set out his vision for the group he founded in 1946 – and reading the transcript is a prerequisite for any Arup employee.

Living up to the legacy of the founder as one of the foremost engineers of his day, Arup is diverse in the type of work it does, ranging from landmark projects such as the Sydney Opera House, to project management, city planning, advising on the procurement of maintenance for finished buildings – and even, in 2001, bra design.