Middle East Update - May 2024

Saudi Arabia's Vision 2030: Recent Reports of Potential Changes in Project Delivery Serve as a Reminder to Ensure That Parties Invest In a Developed Claims Strategy. With so much of Saudi Arabia's Vision...
Saudi Arabia Government, Public Sector
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Saudi Arabia's Vision 2030: Recent Reports of Potential Changes in Project Delivery Serve as a Reminder to Ensure That Parties Invest In a Developed Claims Strategy

With so much of Saudi Arabia's Vision 2030 being facilitated by the development of the well-publicized "giga-projects", the spotlight remains on how, and when, those extraordinary projects will be delivered. Recent press coverage suggests that what can feasibly be achieved by 2030 in relation to projects currently in the construction phase is a matter under active consideration by the relevant developers and authorities.

In an area of the world where the funding of major projects is so reliant upon fluctuating oil prices, it is not uncommon for changes to be made to project delivery strategies during the construction phase. However, such changes can frequently result in significant variations to design and scope (including de-scoping), corresponding revisions to project scheduling, or both, as projects are recalibrated. This can act as a catalyst for substantial time and money claims which, if not properly advanced and resolved, can themselves have adverse consequences for project delivery.

Recent press coverage

As the Kingdom moves closer to its 2030 deadline, positive signs are starting to emerge. One of the first giga-projects to be announced, Diriyah Gate, recently confirmed that it was on course to complete by 2027. Red Sea Global recently opened two luxury hotel resorts on the Red Sea coast as part of its role in delivering Vision 2030. It was also confirmed that Trojena, the mountain resort within NEOM, would complete by 2027 in advance of hosting the Asian Winter Games in 2029.

However, the multitude of challenges faced in delivering this unprecedented vision were recently brought further into relief in April 2024 when Bloomberg first reported an alleged decision by the state-backed developer, NEOM, to scale back what will be completed by 2030 of the first phase of its flagship 170 km long development, "The Line". The unconfirmed report claimed that original plans to have 1.5 million people living in the development by 2030 as part of its first phase, have been reduced to just 300,000 people residing there by that date, within a 2.4 km section of the build. There were also reports that NEOM's budget had not, at that point, been approved for the present year.

Reports of potential funding issues were perhaps allayed for the time being by an official announcement that NEOM had secured a SAR 10 billion (c. US$ 2.7 billion) revolving credit facility from a group of nine Saudi-listed banks, which NEOM advised would support its short-term financing requirements. The suggestion that the project had been downsized was rejected by the Saudi Arabian Minister of Economy and Planning, in an interview given to CNBC at the World Economic Forum event in Riyadh in late-April 2024, when he confirmed that, "for NEOM, the projects, the intended scale is continuing as planned. There is no change in scale...it is a long-term project that is modular in design". As to changes being made more broadly to projects under development across the country, the Minister maintained that all of the "anchor projects...will be delivered to their scale and in a manner that in terms of priorities suits the needs of the projects, the returns of these projects, and the economic impact."

That focus on the economic impact was placed further into context by the candid remarks of the Saudi Arabian Minister of Finance who, also speaking at the World Economic Forum event, was reported to have said, "There are challenges... We don't have ego. We will change course, we will adjust, we will extend some of the projects, we will downscale some projects, we will accelerate some projects".

Genuine claims arising from changes in delivery strategy will need to be addressed expediently

The review and adjustment of project delivery strategies to suit fiscal objectives is not surprising, particularly in circumstances where one of the primary goals of Vision 2030 is to increase economic growth and diversity through non-oil related industries. Nonetheless, experience has shown that such adjustments can quickly act to the detriment of projects and increase potential heads of claim in both scope and value, if the parties do not have and implement robust claims strategies to ensure that resulting claims are sought to be actively resolved at the project level.

That will not be possible in all cases and each matter will turn on its merits. However, a failure by contractors to invest in the proper formulation and substantiation of a claim at that stage, all too often leaves an owner's professional team with no choice but to reject it. Aside from delaying recovery of what may otherwise be genuine entitlement with the corresponding effects this may have on project progress, the failure to properly invest in claim strategy at an early stage can also lead to issues when the time comes to forensically plead the case for the purposes of formal dispute resolution. That is particularly so where earlier attempts to advance the claim are not prepared with those later requirements in mind, notwithstanding that they are essentially the same threshold against which the owner's professional team, properly advised, will also be assessing potential liability.

Similarly, there can sometimes arise a failure or reluctance to expediently address entitlement, with claims left to accumulate for resolution on a global basis at a later stage. There may be many legitimate reasons driving that as an approach. However, it often renders the delivery of the project contingent on an assumption that later agreement will be possible. Otherwise, the failure to maintain cash flow by recognizing genuine entitlement can and frequently does cause the relationship between the parties to break down, with corresponding effects on progress, as bargaining positions and competing interests evolve during the project lifecycle, and deadlines move closer.

As a result, how claims are presented, analyzed and responded to, can take on an exponentially greater significance where issues do arise following a change in project delivery strategy.

Traditional procurement and the adoption of an adversarial approach

The recent press coverage also highlights various challenges which were raised during a panel discussion in January 2024 at Quinn Emanuel's construction disputes symposium in Riyadh. The panel included representatives from a number of the leading owner/developer and contractor entities in the country who are at the forefront of delivering key projects as part of Vision 2030. They very kindly shared with the audience details of the issues which they face.

What was striking about the discussion was the fact that the issues identified are not new to the region, or the industry. They are the same issues which Quinn Emanuel's construction disputes team has litigated and arbitrated extensively in neighbouring countries who have gone through significant redevelopment over the last few decades. Whether the issues stem from a shortage of skilled staff and labour, a scarcity of equipment and materials, incomplete or poorly defined design and specifications, unsuitable contracting models, unachievable and unrealistic scheduling, draconian risk allocation, cash flow and change management, or otherwise, these are all issues which have had to be previously grappled with in one form or another.

Underlying all of those issues was the well-known fact that so much of what tends to go wrong with construction projects in the region stems from failures arising during the procurement process. Yet, other than in respect of some very limited examples, traditional procurement has remained the preferred procurement route of choice, with contracts awarded to the lowest priced technically compliant bids.

The rush to award contracts over recent years, in combination with a traditional procurement approach, has inevitably led to a highly competitive market, but also a contracting environment which risks fostering, out of commercial necessity, an adversarial approach given the prevailing market conditions. Again, while each case will turn on its merits, opportunities may need to be actively taken by contractors to better any less than optimal commercial positions which have been adopted in order to win the bid. When one adds to that mix any post-award uncertainty as to the timing, extent and funding of a project, or the instruction of significant variations as part of an amended delivery strategy, it can lay the foundation for extensive and complex construction disputes when such scope and corresponding time-related claims do materialize. In those circumstances, how the parties approach the advancement and resolution of claims can be as relevant to project delivery as any change in broader project delivery strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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