Friday, April 24, 2009

Not paying bills

I posted back at the beginning of the month about the biggest factor of the economic crisis which companies here are facing.

It's not the much talked about lack of credit available to them from banks but the much simpler and more basic problem that they are not being paid.

As I said at the beginning of the month: "Talking to people over the past few weeks it's obvious that the biggest problem companies are facing is the non payment of invoices by their clients, especially our largest organisations."

In Dubai the companies placing the biggest orders are what are known as 'government linked' and they have placed orders worth billions. If they don't pay their bills on times the effect on so many other companies is disastrous, with predictable ripple effects throughout the economy.

If they do pay their bills on time all those billions flow through all the other companies to their subcontractors and suppliers, to their staff in salary and wages, through them into the wider retail and service economy. This means the good ripples spread naturally through the whole economy.

It's all blindingly obvious, simple, basic stuff, there's nothing difficult about it.

At the same time as I wrote my post the UK Financial Times ran an article on the situation, which included:

Over the next two weeks, the emirate will start disbursing emergency loans to distressed government-linked companies, encouraging them to use the funds to pay local invoices and give the economy a significant fillip.

Then a week later the FT ran another article about the visit to the UAE by Lord Mandelson, the UK Secretary of State for Business:

"Lord Mandelson has raised concerns about the failure of developers in the United Arab Emirates to pay British contractors, and has sought reassurances from local rulers that financial commitments will be honoured."

Now in this week's edition of the UK's Institution of Civil Engineers' magazine 'New Civil Engineer' there's a story headlined "Consultants fight Dubai clients for unpaid fees."

They report: Analysts claim state backed property developer owes UK engineering firms £200M.

Thanks to KippReport by the way, which is where I found the story.

New Civil Engineer names Nakheel as being the tardy payer to UK firms, the amount being more than a billion dirhams. In the local market too, their accounts payable department doesn't have a reputation for prompt payment of invoices.

Given the opportunity to deny the claims or to give the company's side of the story Nakheel was true to Dubai PR culture and declined to comment.

An anonymous comment left on my original post complained about governments bailing out private companies, especially financial institutions/banks.

In response I said: I'm not talking about banks or financial institutions. The point is that, as the FT article points out, the majors are government linked companies, or government owned. They're the companies which have given out the big contracts.

If their lack of cash is causing the blockage, as anecdotally it is, then surely putting more working capital into them (called 'loans' in the FT article) makes more sense than putting bail-out money into privately owned companies and banks.

If these organisations paid their invoices their suppliers & sub-contractors wouldn't need to apply to banks for overdrafts.


That really is my point, why not go straight to the heart of the problem to solve it quickly.

If a company needs more working capital then putting that working capital directly into the company is a one-step solution. To me it makes far more sense to do that as a priority rather than making government 'bail-out' money available to banks who in turn can loan it to companies. That just delays the flow of the money into and through the economy.

What's happening is bad for the economy, bad for individual companies, bad for confidence in doing business with and in Dubai, bad for Brand Dubai.


New Civil Engineer story.

13 comments:

Anonymous said...

the reputation has already been tarnished and is not limited to nakheel. RTA , Dubai holdings, DCA and Emaar has commited the same mistake. its interesting to see how they will attract foreign companies once thing improve

the real nick said...

Unfortunately true, true and true, and of course it's not just British consultants who are not getting paid, but contractors too.

The question posed by anonymous above ^ is irrelevant, though. We as consultants and contractors are and always have been at the mercy of the government and locals. The standard FIDIC contracts are a fucking joke, biased in favour of clients, and so is the legal system.
When the going is good, you work and hope for payment. Payment ethics in this part of the world were always bad. During bad times it's simply worse, but nobody has the luxury to just turn his back on the potential rewards of working in a developing market.

Seabee said...

Not just this part of the world unfortunately Nick, I've had the same problem in every country I've worked in. It infuriates me more than anything in business. As far as I'm concerened the deal is that the client orders something, the supplier produces it on time and the client pays for it on time. Anything else is dishonest.

the real nick said...

Seabee, I can onnly tell you about the difference in consultants' and construction contracts used in the UK and Europe and here. Example: Under a typical 'JCT' contract in the UK you are guaranteed payment within a certain period. This is a legal provision under contract, referring to something called the Housing and Regeneration Act. There is no way around it (unless you strike it off which nobody would dare do). If a client feels he's been wronged by incompetence, non-performance, delays etc. he still has to pay up first, and then revert to litigation afterwards to claim damages.

Here, nothing of sorts. Contracts are not worth the paper they are written on. On the other hand, clients are very quick to impose 'penalties'.

Anonymous said...

yea it might be true nick, you have to do business anyway. but you see there is no protection against these companies not paying. i.e you cant go to court and if you can then you are sure its not gonna be easy to fight a case against the government linked companies.

Anonymous said...

It's not just Nakheel who aren't playing fair. Go ask Mitsubishi how much they've been paid by the RTA so far for the Dubai Metro.

Word on the ground from a lot of contractors is that once they've wrapped up what they're currently doing in Dubai, they're never coming back here again, because believe me, the city has been rumbled. In a very bad way. We won't being seeing much built here after 2010.

Anonymous said...

Seebee - ever considered the possibility that the Dubai government just does not have the funds to inject into the real estate developers?

Anonymous said...

A friend of mine runs a company that supplies sand, gravel, ballast etc - all essential for producing concrete. He is now only taking cash on delivery for orders - no 30 day invoicing any more because of failure to pay. Therefore when contractor has no cash (due to non-payment by government-linked company) No cash = no sand and ballast = no concrete = no construction. The whole place is gridning to a halt.

Seabee said...

Anon@7.14, that's a myth. The Dubai Government raised $10 billion with a bond issue in February, with another $10 billion to come later in the year. It's to inject liquidity into the economy, but it's being distributed via the banks. My point is that it would get into and through the economy much faster and more effectively if the required amount was put directly into the government-linked companies (on condition that they bring all their outstanding payments up to date).

Anonymous said...

Seebee

Question 1: So what would have happened to the relevant banks had the proceeds of the bond issue been pumped directly instead into the government-linked companies? Are you saying that the banks in question (and their customers) required no funding in addition to what they had available prior to the Dubai government’s allocation of the proceeds of the bond issues to such banks? And if they did require funding, where would that funding have been sourced had the proceeds of the bond issue not been available for this purpose?

Question 2: had the Dubai government done as you suggested and pumped the proceeds of the bond issue directly into the government-linked companies, do you think that such companies would have delayed and/or cancelled all/as many of the over ambitious, commercially non-viable real estate projects that they have now been forced to do and made the painful staff retrenchments that they have now been driven to make?

Question 3: You say that the Dubai Government raised $10 billion with a bond issue in February. Who subscribed for the bonds, pray tell? Was it the debt markets? If not, why not?

I think the answer to the third question informs us that "bailed-out" rather than "raised" is a more appropriate verb to describe what has occurred and, accordingly, what you call a myth is actually closer to reality than you might wish to think.

Seabee said...

Anon@7.09 you're misrepresenting, or misunderstanding, what I said.

Q1. I did not say that the banks needed no funding, nor did I say that the entire $10 billion should go to the government linked companies.

I said that the government linked companies should have more working capital, from the $10 billion, so that they can pay their bills.

Q2. I do not suggest that money is given to companies without conditions and restrictions, which I would have thought is so obvious it isn't worth spelling out. The US is a good example of what disasters giving money with no conditions causes.

Q3. The first $10 billion was bought by the UAE Central Bank, as I'm sure you know. Why weren't the debt markets involved? Because they didn't need to be.

The fact is that the the Dubai goverment raised $10 billion).(On a pedantic grammatical point, it didn't 'bail out' $10 billion). Your original suggestion was that the government doesn't have the funds, which I called a myth. A myth it is because they've raised $10 billion with another $10 billion to come.

Anonymous said...

I unfortunately am one of those at the receiving end of non-payment of invoices by the RTA. Although we have delivered all work per our contract, we have not been paid since Jan 09. This has and is having a devastating impact on our business which is small. Word on the street is that the RTA is only paying local companies what they can and so foreign companies such as ours are hung out to dry. I have heard numerous stories from people in similar situations. So much for the integrity of the Dubai Government. Hopefully companies large and small will not be sucked in by the promises and misinformation spread by such Dubai in the future. Quite honestly, I have no sympathy for the RTA or Dubai generally. I hope they learn a very painful financial lesson and in the process lose the ego. Bigger is not better. Sustainability and honesty will get them a lot further in the coming decades. "Bleeding but not yet finished no thanks to the RTA"

Anonymous said...

Given the current dishonest behaviour of Government Linked companies, perhaps it's time to name and shame them all. Most astute expat companies perform due diligence (especially now) and seeing greater exposure of Dubai's non-payers will either get their intention, or place them is an unattainable position of bankrupcy (though lack of service / product provision).

I would certainly like to start the ball rolling with Zabeel Properties, whose only excuse for non-payment of completed works is that 'they don't have to pay right now'!? Imagine an Expat saying that and trying to stay out of jail!?

As for Lord Mandelson's visit, it has done NOTHING to rectify the lack of payments to British firms.

Saudi Arabia adopted the same position a decade ago and learned a hard lesson of paying highly inflated prices in the current marketplace. If Dubai is to survive being replaced by an ever generating Abu Dhabi, it needs to act now.

Shame on you Dubai!