A Strategic Analysis of the Construction Industry in the United Arab Emirates

List of Contents

List of Figures

List of Abbreviations

1 Introduction

2 Preliminary Remarks
2.1 The UAE at a Glance
2.2 The UAE Construction Industry
2.3 Basic Terms and Backgrounds

3 Macro-Environmental Scanning for Opportunities and Threats
3.1 Political Analysis
3.2 Economic Analysis
3.3 Socio-cultural Analysis
3.4 Technological Analysis
3.5 Environmental Analysis
3.6 Legal Analysis

4 Conclusion and Outlook

List of Cited Literature

List of Online Sources

Declaration in lieu of oath

List of Figures

Figure 1: Real GDP Growth and Nominal GDP 2005 - 2008

Figure 2: Distribtuion of GDP by Industry Sector in 2007

Figure 3: World Inflation Rate 2008

Figure 4: UAE Population Growth 1995-2009

Figure 5: Urbanization of Dubai January 22, 1973

Figure 6: Urbanization of Dubai October 11, 2006

Figure 7: UAE Population by Nationality 2005-2009

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

The construction industry is one of the most booming industries in the world. In particular, in the United Arab Emirates this industry has experienced a constant growth over the course of the last few years. Driven by the UAE’s oil wealth, the country has witnessed an unmatched development and transformation. Oil revenues have lead to a driving construction boom and completely change the face of the state.

The construction industry is still one of the engines of economic growth in the UAE. One of the highest concentrations of cranes in the world speaks volumes about the incredible pace of construction taking place, particularly in Dubai and Abu Dhabi, but also in the other emirates. The fact that about 30,000, or 24 percent of the world's 125,000 construction cranes are currently operating in the region speaks for itself.

The UAE’s construction projects stands out clearly from building projects in other parts of the world, due to the fact that there is no constraint on constructional imagination and there is no place in the world where construction moves as fast as in the UAE. With some of the most innovative mega projects such as “Burj Khalifa” (the tallest building in the world), or “The Palm Jumeirah”, “The Palm Jebel Ali” and “The Palm Deira” (the world’s largest man-made islands) with epithets of world’s biggest, best, and tallest the UAE construction industry remains unbeaten.

The construction industry is a complex environment in which each organization is faced with numerous opportunities and threats. This academic paper provides an in-depth analysis of the fast growing construction industry in the UAE, while scanning the construction business for opportunities and threats. This thesis implements the PESTEL analysis that will be used to analyze the UAE’s construction industry. The main objective of this paper is to identify the factors in the macro-environment that might affect an organization. Having the PESTEL context, this output is used to execute a SWOT analysis. The PESTEL factors combined with external micro-environmental factors are classified as opportunities and threats in a SWOT analysis. Thus, the thesis also aims to identify the opportunities and threats in the construction business. This academic paper does not assess company’s internal strengths and weaknesses.

Through strategic analysis of the UAE’s construction business this paper creates an adequate framework that helps participants of the construction business to take advantage of opportunities while protecting them from threats.

Before profoundly analyzing the construction industry of the UAE, the second chapter gives a briefly overview of the country and its construction industry. Furthermore, this chapter provides a background on the topic by defining the strategic tools used in this paper.

Chapter three, the major part of this bachelor thesis, analyzes in detail the construction industry in the UAE by scanning the macro-environment for opportunities and threats. The effects of political, economic, socio-cultural, technological, environmental, and legal factors on organizations are discussed. This chapter is divided into six subchapters. In particular, the first chapter 3.1 covers an analysis of the UAE’s political environment, which deals with the political system and its stability, governmental intervention through investments and policy implementations, the UAE’s foreign policy and the tax environment within the country. The next chapter 3.2 examines the economic landscape, where among other things the effects of the global financial crisis are addressed. Furthermore, the UAE’s economic growth rate and the contribution of construction to the economy will be pointed out. The interest rates, foreign direct investment and inflation in the country are also scrutinized. The socio-cultural factors are evaluated in the following chapter 3.3. This chapter analyzes the UAE’s society, culture, demographics, labor immigration and education. Chapter 3.4 investigates the technological environment, where the technological readiness of the federation is explored. The penultimate chapter 3.5 outlines environmental factors. This chapter considers the environmental impact from the UAE’s construction industry. And finally the legal landscape is analyzed in the last chapter 3.6, where the legal system, labor law and legal presence is evaluated.

The conclusion summarizes the key lessons that have been learned and gives an outlook on future role and potential of the UAE construction industry.

2 Preliminary Remarks

2.1 The UAE at a Glance

The United Arab Emirates (UAE) or Dawlat al Imarat al Arabiyya al Muttahidah is a federation of seven emirates - Abu Dhabi, Dubai, Sharjah, Ajman, Ras Al Khaimah, Umm Al Quwain, and Fujairah that was formed in 1971. The UAE is ruled by the current President Sheikh Khalifa Bin Zayed Al Nahyan and enjoys a high degree of political stability. The country is located on the south-east shores of the Arabian Peninsula. The capital and biggest emirate of the United Arab Emirates is Abu Dhabi. The population enjoys a high standard of living and is around 5 million people. The Emirati dirham (Dh or AED) is the currency of the state. The UAE has a dynamic free economy, in which successful efforts have been made to diversify it away from dependence on oil and gas exports.^[1]

Two histories are evident regarding the United Arab Emirates. Firstly, the history for thousands of years before the discovery of oil, and secondly, the history of the half century after the oil boom.^[2] No nation has changed more and faster than the UAE. It has one of the most amazing rags-to-riches evolutions the world has ever witnessed.^[3] A major transformation has taken place in the country since the discovery of oil in Abu Dhabi in 1959. Since then, the Emirati and their leaders invest in the future of the UAE through intelligent and far-sighted planning.^[4] With the growing revenues from oil production a massive construction program began including building schools, housing, hospitals and roads,^[5] and it still continuous to the present time.

2.2 The UAE Construction Industry

The business dictionary defines the construction industry as a “Sector of national economy engaged in preparation of land and construction, alteration, and repair of buildings, structures, and other real property.”^[6]

Today, the fast growing construction industry in the UAE is an integral part of the country’s economy. The sector is experiencing steady growth on account of urbanization, economic development and people's rising need for improved quality of living. In general, the country’s construction sector segments can be roughly categorized into real estate (e.g. housing, industrial parks, plants, office, malls, hotels) and infrastructure (e.g. roads, rail, bridges, airports, hospitals, schools, universities).

The construction industry contribution to the country’s GDP has essentially grown during the past few years. The sector managed double-digit growth despite the adverse economic conditions. In 2007, construction is the fourth largest economic activity after oil, manufacturing and trade, constituting about 8 percent of overall GDP. With government’s commitment to diversify its economy away from dependence on oil, the construction sector attracts huge amounts of investments. Government investment in major infrastructure projects accounts for nearly Dh21.2 billion - in roads, ports, airports, water and electricity, government housing, schools, hospitals and healthcare centres, which provide a huge boost to the construction industry as a whole.^[7]

2.3 Basic Terms and Backgrounds

In deciding any course of action, it is of great importance to undertake a SWOT analysis in which PESTEL factors are investigated. By using SWOT analysis a company can assess its internal strengths and weaknesses, as well as the external opportunities and threats it faces. For a company it is important to build on strength and overcome weaknesses, as well as take advantages of opportunities and minimize the possible threats.^[8] The PESTEL analysis can help for the second two. If a construction business wants to be an effective economic unit, it is essential to have an understanding of the wider environment in which it operates. A strategic analysis of the macro-environment is of major significance.^[9] The PESTEL analysis can be used to examine a company’s environment.^[10] It is a useful strategic tool to discover market growth potential, strategic positioning, potential and direction for the company.^[11] In analyzing the macro-environment it is important to identify the factors that might affect the organization.^[12] These factors can be summarized under six categories – political, economic, socio-cultural, technological, environmental, and legal^[13] The PESTEL analysis indicates possible changes in these factors and tries to estimate the scope to which change is likely to take place and its potential consequences for the company.^[14]

Both analytic tools together build a solid foundation of business planning. However, before a SWOT analysis is conducted it may be advantageous to first do a PESTEL analysis. Once the factors of the external environment that might affect the organization are identified, it is easier to conduct a SWOT analysis on the basis of the identified factors.^[15]

3 Macro-Environmental Scanning for Opportunities and Threats

3.1 Political Analysis

Since the establishment of the federation in 1971, the United Arab Emirates enjoy an excellent degree of political stability.^[16] According to the World Bank’s report on governance, the UAE was in the 73rd percentile on the political stability and absence of violence indicator in 2008. The UAE has achieved a good position, where a 0 percentile represents the lowest rank and 100 correspond to the highest rank. It ranks slightly higher than the United States which scored 68 in this category, and lower than Germany which is in the 86th percentile.^[17] This indicator evaluates how likely it is that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.^[18]

The political system of the UAE is a combination of a modern and traditional structure.^[19] The UAE’s constitutionally-based federal system of government includes a Supreme Council, a Cabinet or Council of Ministers, a parliamentary body, the Federal National Council and an independent judiciary, at the peak of which is the Federal Supreme Court. The Supreme Council, which is composed of the rulers of each of the emirates, is the top policy-making body in the UAE. It elects the president and the vice president from among their number at five yearly intervals. The Ruler of Abu Dhabi, Sheikh Khalifa bin Zayed Al Nahyan, was elected as the first President of the UAE on 3 November 2004. The current Vice President, Sheikh Mohammed bin Rashid Al Maktoum, also Prime Minister and Ruler of Dubai, has held the post since 3 January 2006. The Council of Ministers or Cabinet, headed by the Prime Minister, is the executive authority for the federation. The UAE’s parliament, the Federal National Council has both a legislative and supervisory role. Finally, the Federal Judiciary includes the Supreme Court and the Courts of First Instance. Furthermore, parallel to the federal institutions, each emirate also has its own local government. However, these new systems of government have not replaced the traditional forms. In the UAE traditional government still plays an important role. With the institution of the “majlis”, or council, the people have free access to their rulers.^[20]

Over the last few years crucial steps have been taken to reform the structure of the government.^[21] One of the most significant steps in the reforming process includes the introduction of indirect elections to the parliamentary body, the Federal National Council. The country’s first-ever elections were held in late 2006, in which a limited number of government-approved citizens elected half of the Federal National Council.^[22] These elections, albeit limited, were considered as a first step towards democracy.^[23] But despite this progress, the UAE’s government has done little towards implementing democracy in the country. Due to this fact, the UAE has one of the lowest percentile ranks for the World Bank governance indicator of the voice and accountability. The World Bank reported that the UAE was in the 21st percentile in 2008.^[24] This indicator measures amongst other things the extent to which a country's citizens are able to participate in selecting their government.^[25] The UAE ranks low due to its still conservative attitude. Nevertheless, it is well ahead of its neighbor Saudi Arabia which scored 5 in this category.

Multinational companies that operate across international borders need to evaluate the political stability in the country of operation.^[26] Political stability is indeed an important factor for long-term success. Construction companies operating in a stable political environment are not undergoing significant changes, and if changes occur it is simple to take appropriate action. On the other hand, companies that operate in an unstable political environment are confronted with a number of risks. The environment is unpredictable and there are fluctuations in construction work and changes in project characteristics and contractual arrangements.^[27] Construction companies need to be sure that there will not be any sudden and harmful changes that might threaten their business or investments. However, the safety of the personnel could not be guaranteed, and furthermore, it would not be absolutely certain whether there is any guarantee that the infrastructure is operating smoothly. A well-functioning infrastructure is essential for the efficient transfer of goods, services, and financial resources.^[28] Companies must be ready to manage environmental forces, if not they risk going out of business.^[29]

Furthermore, the construction industry is severely affected by investments of the government.^[30] Investment in the UAE is one of the main drivers of economic growth and job creation. In 2007, the UAE government invested Dh21.2 billion in major infrastructure projects such as roads, ports, airports, water and electricity, government housing, schools, hospitals and healthcare centres.^[31] The UAE’s government encourages its economy and thus creating great opportunities for the construction industry.^[32] The government is firmly focused on stimulating the non-oil sector to strengthen its important role in the country’s economy.^[33] The UAE is known for its consistent policy implementations. Over the past few years the government has been taken significant steps in terms of creating business opportunities. Both federal and local governments recently released a number of strategic policies.^[34] The lynchpin of the government’s economic policy is its diversification effort to move away from an oil-based economy.^[35]

Abu Dhabi, with over 90 percent of the UAE’s oil reserves, presents its own plans for generating a more diversified economy.^[36] In 2008 the Department of Transport in Abu Dhabi announced its five-year strategic plan 2008-2012 in accordance with the Government of Abu Dhabi Policy Agenda 2007-2008 and Plan Abu Dhabi 2030.^[37] The five-year strategic plan 2008-2012 point out that Abu Dhabi will boost its infrastructure and support more the small and medium scale business.^[38] Furthermore, the Policy Agenda 2007-2008 includes a strong focus on transportation in terms of roads, rail, ports, and other infrastructure. Whether a worker wants to get to work on time or a company needs to move its products to the market, a highly sophisticated transportation network that will move people and materials efficiently through the Emirate is needed. Impressive industrial infrastructure including ports and industrial zones are under development. One major construction project includes the expansion of Abu Dhabi International Airport. In May 2005 plans were announced for a new international airport in Abu Dhabi with a value of approximately Dh26 billion.^[39] Although Abu Dhabi is already a leading construction force in the UAE, it shows great promise for the future. The Plan Abu Dhabi 2030 outlined the development of a world-class transport system that contains road projects worth Dh20 billion, including the network of highways, tunnels, local roads and bridges; furthermore, a light-rail metro network for everyday and commuter travel and a high-speed rail line to connect Abu Dhabi with the rest of the UAE; and large parking surfaces to mention only a few construction projects that contribute to a vast range of opportunities for the construction industry.^[40]

However, attention must also be given to Dubai, where construction activity has huge potential. In 2007, the Dubai Strategic Plan 2015 was published by the government of Dubai.^[41] Looking forward to 2015, the plan shows great promise for the future. The Dubai Strategic Plan sets out a strategic approach to focus on economic sectors where it holds a strong competitive advantage and support growth globally. Construction, for instance, is one of Dubai’s key strengths.^[42] The Dubai Strategic Plan states that the emirate will spend around Dh80 billion by 2020 on expansion of the road network and development of a mass transport system, including Dubai Metro, buses and marine transport. In detail, Dh44 billion will be spent on road development; Dh24 billion will be spent on the Dubai Metro; around Dh9 billion will be spent on a tram network; Dh2 billion will be spent on the public transport bus system; and about Dh1 billion will be spent on development of a marine transport system.^[43]

As outlined above, government spending on infrastructure and other projects, especially in Dubai and Abu Dhabi, certainly create the demand for construction companies to grow. The government’s plan of focusing on the growth of non-oil industry has definitely driven the construction sector. Hence, the new policies results in stability and growth to the economy of the UAE.

Over the last decades, the UAE has achieved constant progress to emerge as an important global player in the political area. One of the main characteristics of the UAE’s foreign policy has been the consistent development and improvement of closer international ties.^[44] The UAE has established diplomatic relations with over 60 countries, including the U.S., Japan, China, and most West European countries.^[45] The country is one of the leading political forces in the Middle East and is a member of a number of regional and international organizations. At the regional level, the UAE is a leading member of the GCC, grouping the UAE, Kuwait, Saudi Arabia, Bahrain, Qatar and Oman.^[46] Internationally, the UAE is one of the original members of the WTO and an active member of the GATT.^[47] Furthermore, the UAE participate in international organizations such as the UNCTAD, the OPEC, t he UN, and the IMF, to mention only a few.^[48] However, the UAE follows a policy to build friendly relations with other nations , both in the developing and in the industrialized world.^[49]

As a result of UAE’s participation in numerous regional and international organizations, the country is opening its market to international companies. Consequently, a number of construction companies entering into the UAE construction market. For instance, the UAE maintains active diplomatic ties with France. The two countries are strong business partners and have major commercial ties in transport infrastructure. French construction companies looking to make use of the opportunities that are offered by the Plan Abu Dhabi 2030. Various French companies are world leaders in areas such as transport infrastructure, especially railway transport networks. So they pay special attention to development projects undertaken in the UAE.^[50]

Furthermore, important benefits of these organizations are their principles that make it more efficient and simpler to operate for companies that are involved in trade or produce goods and services. For instance, the strong historical ties with the UK are still relevant today. In 2007 the UAE exported around £1 billion worth of goods and services to and imported about £3 billion from Britain. Much of the imports to the UAE are service-based such as construction-related services. But also specialist building and architectural materials are major imports from Britain. And the opportunities for British business relations in the UAE are growing.^[51]

Moreover, construction companies can benefit from lower trade barriers through negotiation resulting in reduced costs. For instance, the UAE government makes consistent efforts to improve its ties with China. The total volume of trade between the UAE and China is worth almost $20 billion a year. In 2008, Sheikh Mohammed visited China to cement business ties between the two countries.^[52] After all, cement is still one of the most important commodities in the construction industry. In the first half of 2008, the construction industry faced the biggest cost challenges with cement, where the cement prices rose by 46 percent from 1 January to the end of June 2008. The government was therefore forced to exempt cement from import duties.^[53] The visit could give a push for a free trade agreement between China and the UAE.^[54] Hence, the whole construction business benefits from UAE’s strong international ties.

One main force that also requires close attention in the UAE’s political arena is its tax environment. The UAE’s tax system does not seem to be extremely complicated, but an analysis of the domestic tax structure is needed. Understanding the tax system is essential for companies that want to operate successfully within the country. In the UAE there is no federal tax legislation, instead each emirate has its own tax laws and regulations. Although local laws of income tax have been passed in all emirates, none of these have yet been implemented.^[55] Only oil companies and branches of foreign banks are subject to corporate income tax. So, they need to file annual tax returns.^[56] Nevertheless, no corporate or sales taxes are currently imposed on companies in the construction industry. And no withholding taxes are imposed on payments made by UAE domestic companies within the UAE. Withholding taxes require special attention in the case of contracts and associated payments and fees.^[57] Moreover, there is no branch profit tax except for foreign bank branches and oil and petrochemical companies. Presently, there is no goods and service tax, but the government is working to develop a VAT. Furthermore, there are n o other taxes that might be of great interest for the construction industry.^[58] Hence, in terms of the construction industry, this tax-free environment results in a wealth of advantages. Due to this fact, that the construction companies are exempted from any taxes, they can achieve higher profits. And furthermore, the construction companies can repatriate these high profits tax-free to their home countries.

Additionally, more benefits are offered to the construction industry. In fact, to further reduce the tax burden, the UAE government has entered into several double-taxation treaties with over 40 countries around the world, including Western European governments such as Germany and France.^[59] These are aimed to make the UAE a convenient location by reducing taxes charged abroad on profits remitted out of the country by foreign companies operating in the UAE, i.e. profits are taxable only in the contracting state where the income is earned.^[60]

Notwithstanding, the construction industry is confronted with diverse fixed transaction charges for the processing of visas, work permits, notarization, vehicle registration and other services from the government authorities.^[61] But these charges by no means significant cost pressures for the construction companies.

In addition, the tax environment also attracts a lot of investors, especially in so-called free zones where there are no corporate or income taxes.^[62] In free zones investors benefit from a guaranteed tax holiday.^[63] As mentioned earlier in this chapter, the government of the UAE seeks to diversify the economy so that the non-oil sector outstrips the oil-sector. One of the most powerful pillars of the UAE’s diversification strategy is its wide range of free zones. Free zones attract remarkable amounts of foreign investment and make possible the transfer of technology in the country.^[64] The rapid growth of the economy is not only driven by the domestic investment, but also by foreign investment. The UAE is considered to be a good region for investment by international companies particularly in the infrastructure sector. Its only drawback is tough foreign competition. A government policy of deregulation has the effect of opening up markets to competition. Consequently, companies are forced to cut costs to remain competitive.^[65]

The final conclusion that can be drawn is that construction companies should not be waiting to react to the outcome of government involvement but find out the consequences of it, so that they can take advantage of government regulation.^[66]

3.2 Economic Analysis

Forty years ago the UAE was one of the least developed countries in the world. The discovery and export of oil gave the country’s economy a sudden and rapid boost. Today the state has one of the most powerful economies in the world. However, in recent times, the UAE economy was impacted by global economic developments. By the beginning of 2008, the country was threatened by a global economic downturn. For a while it looked like the Gulf region would not be affected by the global financial crisis. However, in the last quarter of 2008 mega construction projects worth trillions of dollars were postponed, with the UAE being hard hit as a number of projects halted. The financial crisis triggered a restructuring of demand in the construction industry. Dubai was significantly impacted by the crisis. In the present circumstances, Dubai is seeing a shift away from luxurious projects toward construction potential in infrastructure and industry. Therefore, many construction companies face new challenges as a result of lessons learned from the economic downturn. They will need to seriously evaluate the risks of entering new markets, managing cash flows with greater care and addressing rising finance and insurance costs, to mention only a few tasks. The economic downturn also leads to a reduction of the pace of work on certain projects. As previously mentioned, construction projects that have not yet started were either postponed or canceled altogether. This is closely connected with many economic and financial risks. In addition, the construction industry was hard hit as project financing dropped. The regional banks stopped all project financing due to lack of liquidity in the financial system. In the UAE there is especially a big threat for smaller building contractors, because the demand in recent years leads to a substantial growth in size of the small construction companies and they now will most likely shrink back to initial pre-boom levels or even disappear. Larger and more experienced contractors will need to restructure and strategically manage their way through these challenging times.^[67]

However, due to the challenges outlined above the construction industry is not unaffected by the by the global financial crisis. It will still face a number of threats which need to be overcome, but even because of the economic downturn it is possible to take advantage of the opportunities which the UAE government offers the industry. The drive to develop roads, bridges, schools, hospitals and housing should bring the most solid opportunities in the construction industry over time.^[68] Construction companies should carefully scan and monitor the environment in which they operate, so that they can successfully anticipate economic trends and prepare for them.

Nevertheless, the UAE economy managed to achieve a relatively high rate of growth in the order of 7.4 percent in 2008.^[69] The UAE’s real economic growth rate in 2007 was 5.2 percent compared to 11.5 percent in 2006 and 8.2 percent in 2005.^[70] Meanwhile, the nominal GDP (based on current prices) in 2007 reached Dh729 billion, compared with Dh624 billion in 2006 and Dh485 billion in 2005.^[71] The Ministry of Economy reported that the GDP for 2008 was around Dh934 billion.^[72] This is demonstrated in the figure below.

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Figure 1: Real GDP Growth and Nominal GDP 2005 - 2008^[73]

In comparison, the global economic growth rate contracted from 5.2 percent in 2007 to 3.4 percent in 2008. Within the group of major industrial countries, the rate of growth dropped in Germany from 2.5 percent to 1.3 percent and in the USA from 2.0 percent to 1.1 percent, during the same period.^[74]

Notwithstanding the calming down of economic growth the UAE is still one of the world’s fastest growing economies. According to the Global Competitiveness Report 2009-2010, the UAE is one of the most competitive economies in the world. As categorized by the World Economic Forum, the UAE ranks 23 out of 133 countries on the global competitiveness index.^[75] The World Economic Forum’s annual competitiveness report analyzes factors such as infrastructure, education, technological readiness, macroeconomic stability, good governance, and many others, enabling economies to achieve economic growth and long-term prosperity.^[76]

The construction and building sector is one major factor that influences the economic growth in the UAE. According to the International Monetary Fund the construction industry increased by 29.5 percent in 2007, reaching Dh58 billion, and by 28.9 percent in 2006, reaching Dh45 billion, compared to the previous years. Hence, this industry represents a significant contribution to the growth in the economy of the UAE.^[77]

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Figure 2: Distribtuion of GDP by Industry Sector in 2007^[78]

As shown in the figure above, the construction and building sector is the fourth largest sector of the UAE economy after oil, manufacturing and trade, constituting about 8 percent of overall GDP in 2007. Hence, it is still a major driver of activity in the UAE economy. It is assumed that the contribution of construction to the economy will return to levels of over 10 percent of GDP in the next years.^[79]

Given these figures, it is not surprising that the construction industry has such an enormous impact on the UAE’s economy. The UAE is a prolific environment for construction companies. After all, one of the highest concentrations of cranes worldwide speaks volumes about the unbelievable scale of construction taking place, particularly in Dubai and Abu Dhabi. Mega-projects such as “Burj Khalifa”, or “The Palm Jumeirah”, “The Palm Jebel Ali” and “The Palm Deira”, to mention only a few, are worth trillions with epithets of world’s biggest, best, and tallest.^[80] These mega-projects mean that a broad range of opportunities for construction companies exists.

Another key economic indicator that should be mentioned is interest rates. After all, credit issued to the construction sector increased by 25 percent in 2007.^[81] The strong loan growth is mainly because of increased spending on public and private infrastructure and construction projects.^[82] According to the Central Bank of the UAE, interest rates showed a downward trend from December 2007 until end of June 2008. The weighted average interest rate on lending fell from 6.82% at the end of December 2007 to 5.18% at the end of June 2008.^[83] A low interest rate environment offers great benefits for the construction industry, due to the fact that this industry is extremely susceptible to increases in the rate of interest. Any sudden and prolonged growth in interest rates can have serious consequences on industry profitability. The major key for participants in the construction industry is to borrow money at an interest rate which makes it possible to complete construction projects successfully, on budget, and on time. If there is a decrease of large-scale construction projects, as mentioned earlier in the text, mega construction projects worth trillions of dollars are postponed or even halted, this directly brings into question their financial viability. Any delay automatically increases the overall costs of the construction project.^[84]

Furthermore, investors will be extremely cautious of their investment in a project. They can invest their money somewhere else in another lucrative project.^[85] After all, FDI provides huge advantages for the construction industry. Not only new capital, but also expertise, technology and experience contributing to the enhanced infrastructure.^[86] FDI is a successful tool to provide the required capital inflow for construction projects, stimulation of domestic economy’s growth, reduction in poverty and unemployment.

High per capita income, coupled with the fact that the UAE has one of the highest population growth rates in the world, create a market with very high, and rapidly growing purchasing power, resulting in attraction of foreign investment.^[87] The UAE’s per capita income has more than doubled from around Dh76,600 in 2006 to Dh162,000 in 2007, due to the fact that the nominal GDP boosted from Dh624 billion to Dh729 billion in the same period, as noted before. Per capita income is also expected to rise further in the coming years.^[88] The UAE’s per capita income of $42,000 (2009 est.) is the 17th highest in the world.^[89] High per capita income shows a strong market for goods and services at all sectors.

Another crucial point of UAE’s economic performance is inflation. Inflation entails serious risks for the whole construction industry as described in the following text. The figures by the Ministry of Economy show that the inflation rate steadily increased to high levels, in the recent years. In 2005 the inflation rate was calculated at 6.2 percent, in 2006 it was already 9.3 percent, and ultimately 11.1 percent in 2007.^[90] According to the World Fact Book 2009 released by the CIA the UAE ranks 196 out of 222 countries, with an estimated inflation rate at around 15 percent in 2008.^[91] This inflation rate is relatively high in comparison to global standards.

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Figure 3: World Inflation Rate 2008^[92]

As illustrated on the figure above the UAE is one of the most inflationary countries in the world. With around 15 percent the UAE are only 26 places away from last place. While Germany, the U.S., Australia, and France have inflation rates below 5 percent, Ethiopia and Venezuela show the highest rates of inflation, at 44 percent and 30 percent. Zimbabwe has the most shocking inflation rate in the world at 14.9 billion percent.^[93]

The main driving force of the inflationary pressure in the UAE still remains rental costs, which recorded a 17.5 percent increase. But they not only record the highest rate of increase, they also indicate the most significant component in the basket of living costs, at 36 percent.^[94] As outlined in more detail in the following chapter, the rapid rise in population and the accompanying high demand on the housing stock have lead to some bottlenecks in the supply of housing, and thus resulting in a remarkable increase in rent. This rise has affected skilled expatriate workers hardest, in view of the fact that they make up the majority of the renting community.^[95] In turn, this will lead to the pressure for companies to pay higher salaries to foreign workers, because it decreases the value of their money. But also the unskilled workers are putting high cost pressures on the construction companies, because the housing costs are usually taken care of by the companies employing them.^[96] And since the foreign workers accounts for the largest part of the workforce in the construction sector, the construction industry will hard hit by the inflation.

But inflation has not been caused by rent hikes alone. Moreover, imported inflation has also been a factor that should be considered. The high rate of inflation was also influenced by a major decline in the value of the US dollar, to which the UAE Dirham is linked, against other global currencies.^[97] The weakening dollar has made the imports more expensive, especially from the EU, which has a 30% import share. Imported inflation had a heavier effect on producer prices. High global prices for intermediate goods such as steel rods have impacted on the cost of production in diverse sectors, particularly construction.^[98] Due to this fact, a strong increase in commodity prices also contributed to a rising inflation rate. The construction industry was confronted by enormous cost-control challenges with steel and concrete which both was showing large price hikes in the first half of 2008. In terms of this fact, where the construction industry reported very high cost increases, the government has taken a number of measures to lower inflation. For instance, the UAE authorities supported increased cement production and exempted both cement and steel from import duties. However, these efforts only solved the situation to a certain degree and costs continued to rise. According to the released report of the Abu Dhabi Department of Planning in 2008, the steel prices rapidly increased by 91 percent over a period of six month. During the same time the cement prices soared by 46 percent. Notwithstanding Abu Dhabi’s own expanding steel production, it was still importing at least 60 percent of its requirements.^[99]

In addition, also the record oil prices have encouraged price hikes. And therefore, drive the inflation in the UAE which is further boosting the increasing construction costs in Dubai and Abu Dhabi.^[100] After all, each construction machine from giant equipment such as excavators, paver-finishers or dozers, to small equipment such as vibratory plates or vibratory is powered with diesel or gasoline. But also all the trucks by land and all the construction ships by sea that move millions of tons need fuel. So, many construction companies are faced with increased risk and high uncertainties, and thus can go out of business because of the losses they incurred from inflation. However, due to the threats outlined above the construction industry is directly affected by inflation. Indeed the UAE government has taken a number of measures to dampen inflation, but the efforts only partially solve the situation. There are still difficulties in tackling inflationary pressures.^[101]

It is of great importance for all participants in the construction industry to monitor data and detecting any changes in the economic environment. The construction companies must be aware of these changes and have good plans in place for dealing with them. Construction companies that already scanning and monitoring their environment will be prepared of any threat and successfully manage their way through the challenging times.^[102]

[...]

^[1] Refer to UAE at a Glance 2009 (2009), p.p. 4-7.

^[2] Refer to King, D.-C. (2008), p.21.

^[3] Ibid., p.5.

^[4] Ibid., p.30.

^[5] Refer to UAE at a Glance 2009 (2009), p. 14.

^[6] Refer to http://www.businessdictionary.com/definition/construction-industry.html, accessed April 17, 2010.

^[7] Refer to UAE Yearbook 2009 (2009), p.p.58-61.

^[8] Refer to Fellows, R., Liu, A. (2003), p.39.

^[9] Refer to Haberberg, A., Rieple, A. (2008), p.104.

^[10] Refer to Worthington, I., Britton, C. (2006), p.7.

^[11] Refer to Krach, U. (2008), p.73.

^[12] Refer to Haberberg, A., Rieple, A. (2008), p.104.

^[13] Ibid., p.105.

^[14] Refer to Worthington, I., Britton, C. (2006), p.475.

^[15] Refer to Paxmann, S.-A., Fuchs, G. (2005), p.p.90-91.

^[16] Refer to UAE Yearbook 2009 (2009), p. 21.

^[17] Refer to http://info.worldbank.org/governance/wgi/index.asp, accessed March 17, 2010.

^[18] Refer to Kaufmann, D., Kraay, A., Mastruzzi, M. (2009), p.6.

^[19] Refer to UAE Yearbook 2009 (2009), p. 21.

^[20] Refer to UAE at a Glance 2009 (2009), p.p.21-22.

^[21] Refer to UAE Yearbook 2009 (2009), p. 21.

^[22] Ibid., p. 23.

^[23] Refer to Oxford Business Group (2007), p.24.

^[24] Refer to http://info.worldbank.org/governance/wgi/index.asp, accessed March 17, 2010.

^[25] Refer to Kaufmann, D., Kraay, A., Mastruzzi, M. (2009), p.6.

^[26] Refer to Henry, A. (2008), p.52.

^[27] Refer to Naoum, S. (2001), p.p.31-32.

^[28] Refer to Henry, A. (2008), p.52.

^[29] Refer to Naoum, S. (2001), p.32.

^[30] Ibid., p.36.

^[31] Refer to UAE Yearbook 2009 (2009), p. 60.

^[32] Refer to GCC Powers of Construction 2009: An expert diagnosis (n.d.), p.4.

^[33] Refer to UAE Yearbook 2009 (2009), p. 58.

^[34] Ibid., p. 65.

^[35] Ibid., p. 72.

^[36] Ibid., p. 72.

^[37] Refer to http://www.dot.abudhabi.ae/?sel_page=310&id=20&lang=en, accessed March 19, 2010.

^[38] Refer to UAE Yearbook 2009 (2009), p. 66.

^[39] Refer to Policy Agenda 2007-2008 (2007), p.p.49, 51.

^[40] Refer to UAE Yearbook 2009 (2009), p.p. 169-172.

^[41] Refer to http://www.dubai.ae/en.portal?topic,hm_dxbstgplan,0,&_nfpb=true&_pageLabel=misc, accessed March 22, 2010.

^[42] Refer to UAE Yearbook 2009 (2009), p. 67.

^[43] Ibid., p. 172.

^[44] Refer to UAE at a Glance 2009 (2009), p.26.

^[45] Refer to Linden, E.-V. (2007), p.79.

^[46] Refer to Oxford Business Group (2009), p.17.

^[47] Refer to UAE Yearbook 2009 (2009), p. 65.

^[48] Refer to UAE at a Glance 2009 (2009), p.6.

^[49] Refer to UAE Yearbook 2009 (2009), p. 42.

^[50] Refer to Oxford Business Group (2009), p.p.28-29.

^[51] Ibid., p.32.

^[52] Refer to Oxford Business Group (2008a), p.18.

^[53] Refer to UAE Yearbook 2009 (2009), p.p. 70-71.

^[54] Refer to Oxford Business Group (2008a), p.18.

^[55] Refer to Oxford Business Group (2009), p.226.

^[56] Refer to Shoult, A., Terterov, M. (2006), p.p.198-199.

^[57] Refer to GCC Powers of Construction 2009: GCC Countries Fact Sheet (n.d.), p.21.

^[58] Refer to Oxford Business Group (2009), p.226.

^[59] Refer to Oxford Business Group (2007), p.241.

^[60] Refer to Oxford Business Group (2008b), p.135.

^[61] Refer to Oxford Business Group (2009), p.226.

^[62] Refer to UAE Yearbook 2009 (2009), p. 97.

^[63] Refer to Shoult, A., Terterov, M. (2006), p.p.199-200.

^[64] Refer to UAE at a Glance 2009 (2009), p.45.

^[65] Refer to Henry, A. (2008), p.52.

^[66] Ibid., p.53.

^[67] Refer to GCC Powers of Construction 2009: An expert diagnosis (n.d.), p.p.4-8.

^[68] Ibid., p.12.

^[69] Refer to Central Bank of the UAE - Annual Report 2008 (2008), p.2.

^[70] Refer to UAE at a Glance 2009 (2009), p.37.

^[71] Refer to Central Bank of the UAE - Economic Bulletin June 2008 (2008), p.9.

^[72] Refer to http://www.uaeinteract.com/docs/UAE_GDP_soars_23_to_Dh934_billion_in_2008_/36962.htm, accessed March 07, 2010.

^[73] Refer to Central Bank of the UAE - Economic Bulletin June 2008 (2008), p.9.; UAE at a Glance 2009 (2009), p.37

^[74] Refer to Central Bank of the UAE - Annual Report 2008 (2008), p.2.

^[75] Refer to the Global Competitiveness Report 2009-2010 (2009), p.316.

^[76] Ibid., p.p.3-4.

^[77] Ibid., p.3.

^[78] Ibid., p.61.

^[79] Refer to UAE Yearbook 2009 (2009), p.61.

^[80] Ibid., p.p.58-59.

^[81] Ibid., p.82.

^[82] Ibid., p.83.

^[83] Refer to Central Bank of the UAE - Economic Bulletin June 2008 (2008), p.35.

^[84] Refer to Henry, A. (2008), p.55.

^[85] Ibid., p.55.

^[86] Refer to UAE Yearbook 2009 (2009), p.97.

^[87] Ibid., p.97.

^[88] Ibid., p.206.

^[89] Refer to Central Intelligent Agency (2009a): https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html, accessed March 15, 2010.

^[90] Refer to UAE at a Glance 2009 (2009), p.42.

^[91] Refer to Central Intelligent Agency (2009b): https://www.cia.gov/library/publications/the-world-factbook/rankorder/2092rank.html, accessed March 15, 2010.

^[92] Refer to http://www.mariettapa.net/images/World_Inflation_rate_2008.PNG, accessed March 15, 2010.

^[93] Refer to Central Intelligent Agency (2009b): https://www.cia.gov/library/publications/the-world-factbook/rankorder/2092rank.html, accessed March 15, 2010.

^[94] Refer to UAE Yearbook 2009 (2009), p.69.

^[95] Refer to Oxford Business Group (2007), p.37.

^[96] Ibid., p.37.

^[97] Refer to UAE Yearbook 2009 (2009), p.70.

^[98] Refer to Oxford Business Group (2007), p.37.

^[99] Refer to UAE Yearbook 2009 (2009), p.p.70-71.

^[100] Refer to Oxford Business Group (2008c), p.25.

^[101] Refer to UAE Yearbook 2009 (2009), p.70.

^[102] Refer to Henry, A. (2008), p.56.