Construction Week Newsletter 11th September 2004

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By  Eudore Chand Published  September 11, 2004

Editorial Leader|~||~||~|

Singular opportunity to repay public confidence

The oversubscription of Arab Technical Construction Company by a massive 74 times is both an indication and food for thought: it is an indication of the wellness and good health of the construction industry as perceived by the investing public. And the overwhelming response is also a prod for the complacent to put on their thinking caps and analyse what this portends. It is no doubt a very welcome sign that funding of the construction sector has evolved to such a degree that, in the space of a few short years, a massive change has taken place. Just a few years ago, contracting was mostly a local family business, where finance was drawn from within family holdings. After the construction sector led dip of the mid-1980s, the conservative banking sector became very cautious about financing buildings that could stay empty. But then the sector recovered and resumed its previous growth pattern, an obvious investment opportunity for those who understood the market. The rapid growth attracted foreign majors who needing to get into the market. Joint ventures with local contractors was the result. This brought money and international techniques into the local construction sector. Then Emaar Properties glamourised the property sector, and, given the possible high returns, banks eased lending policies and provided funds for punters to buy shares. Yet, contractors themselves remained taboo. Only very recently have banks begun to finance contractors who have assured projects. Arabtec is one such contractor. However, the ATCC share issue is a watershed in funding for contractors. That it was able to garner funds across the UAE and beyond its borders, and from people from all walks of life, is an indication of what the country thinks of the health and prospects of the construction sector in Dubai. The response was overwhelming despite the fact that it came during the hot summer months, when business activity is at its lowest. People put up vast amounts of money despite the fact that ATCC is not an operating company: it has yet to make a cent of profit. In most capital markets, it is a general requirement that a company has to show three straight years of profitability and dividend payment before it is allowed to raise funds from the public. It is even rumoured that a Saudi Arabian investor had offered to buy out the entire initial public offering. Has it been a giant leap of faith by the investing public; has the average investor not looked beyond the construction hype and the real difficulties that still face the contracting sector. Between developers and contractors, the latter are still the weaker party, and developers in this market take as much advantage of thier position as they can. Despite the steel and cement shocks of the past few months, contractors still are not able to enforce the inclusion of a price escalation clause in their contracts. Design changes are endemic even after the final contract and during the life of the project. Delays and disputes and late payments are also facts of life. Bankruptcies do happen. The good news is that the investing public seems to have discounted all these factors and gone ahead and put its money where its trust lay. Now it is up to APTC and similar other companies that may follow the public share offer route to uphold that trust. Transparency is needed in all dealings when a firm is a public joint stock shareholding company. ATCC has a singular opportunity to show that it can go beyond even the levels of disclosure that the laws of the relatively young UAE require. Such a practice will engender further public confidence and that in turn will encourage other firms to come to the market, deepening the source of funds for the contracting sector. It is also essential that a means be found to redress the balance between the developer and the contractor, both for the protection of the banks that can be pursuaded to lend money to contractors and to the investing public who have entrusted hard earned cash.||**||

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