Monday, May 11, 2009

Getting the money flowing

A subject I've been posting about recently has cropped up in the media today.

What I've been saying is that if the government-linked major developers were to bring their payments to contractors up to date it would get billions flowing right through the economy.

If they need it, as appears to be the case, an injection of cash could come from the $10 billion raised so far by the Dubai government's bond issue. Instead of going into the banks who lend it on to companies a direct injection of money would cut out bureaucracy and make the flow of money through the economy much faster.

In Gulf News there's an indication of the problem, and the amounts involved.

Arabtec say they are owed Dh2.88 billion by 'Dubai government and quasi-government entities'.

That's just one contractor, so imagine the kind of sums we're talking about in total.

Then in Arabian Business, and thanks to JadAoun for the heads up, are two related stories.

I can't give you the link to the first one because it's not working (I'll add it if they fix the glitch) but here's what the index of stories says:


Firms in construction industry being asked to accept reduced sums, or risk going completely unpaid.

I tried searching for the article, with still no success clicking on the link, and the search threw this up:

Dubai developers owe billions to construction firms

10 May '09 Construction & Industry / News
Firms working on high-profile construction projects in Dubai have revealed they are owed billions by developers, and are being asked to take reduced payments ... economic crisis .Three weeks ago the director general of Dubai’s department of finance assured construction firms that government-owned real ...

The link to the related story is working, which I've put at the end of the post.

It tells us that:

Master developer Nakheel is receiving funds from Dubai government as it looks to complete projects and pay outstanding obligations, its chief executive confirmed on Monday.

Well that's good news - I don't like this approach though:

The developer said it was also talking to its contractors and re-negotiating payments plans and contracts."Yes, we are trying to help them and ourselves through our current situation. We are at the stage of commercial settlements and negotiations. Rather than detail on percentages, it is a true statement to say that construction costs are falling and there is definitely a reduction," added O'Donnell.

I've come across this tactic more than a few times in business and I hold it in utter contempt.

Companies withhold payment for unacceptably long periods and then say basically 'if you want to be paid you have to reduce the amount owing'.

As far as I'm concerned a deal is a deal. The client orders the work and accepts the price, the supplier completes his side of the contract. Integrity and good business practice dictates that the client completes his side of the contract and pays the agreed price on time.

Dreamer that I am.

Anyway, the point is that it looks as though after an inexpicably long delay these huge amounts, discounted probably, will be paid, the contractors can pay their sub-contractors and suppliers, staff can be paid, money will flow right through the economy.

Gulf News Arabtec report.

Arabian Business Nakheel report.


Media Junkie said...

besides ethical concerns, there also one more thing. ok, so you decided to pay say X amount to said person. person buys the needed stuff at X-amount rate in the market.

the developer doesn't have the money and waits for funds. and then says he'll pay Y because the same materials now cost Y due to prices falling. It's still a loss to the person who bought the stuff because he paid X for it, NOT Y.

I hope that wasn't too confusing.

Seabee said...

MJ, not confusing at all. The contract was signed, the work done at the rates and costs prevailaing at that time. That's what's owed.

Grumpy Goat said...

Souq mentality: Ask for tenders, accept the lowest one. Then negotiate a discount ("Ten sesterces? You must be mad!") and then after delivery, demand further discounts.

It is completely not the way to do business outside negotiating the price of a carpet down the Blue Souq.

the real nick said...

Beg to differ.

Contracts have in the past few years included 'escalation clauses'. the reason was obviously that prices of commodities were going up during the construction period and the contractor should not be penalised for this.

Now, the pendulum has swung the other way. The prices current at the time of contract signing - which usually is several months before you actually buy the materials - are not current any more. It makes sense for clients to ask contractors to pass on savings.

PS: I am saying this as client (developer) as well as contractor.