CONSTRUCTION CLUB 6: Emerging regulations impact contracting finance

Financial regulations impact not just the banking sector, but all industries that require capital support. The GCC is home to a significant construction sector that pursues megaprojects and masterplans that need funding and investment to be successful.

The GCC construction industry has had significant exposure to the vagaries of boom-and-bust economic cycles that prevent strategic investment in innovation and talent development. The industry has also been shaped by the outmoded and highly-damaging culture of ‘lowest-price-wins’, that leads to cut-throat bidding by contractors, erodes profit margins and increases contract disputes.

There has been a tightening up of financial regulations in recent years, with the introduction of Basel III and International Financial Reporting Standards 9 (IFRS 9) globally, and value-added tax (VAT) in the GCC.

The increased capital adequacy requirements for the banking sector put pressure on the construction sector, which is subjected to greater scrutiny when it comes to credit risk. Contractors and clients have to adhere to updated risk models, in order to qualify for capital borrowing.

On 6 March 2019, the sixth Mashreq Construction Club took place at the Address Boulevard, to discuss how these changing regulations, in particular new taxation regimes, are affecting construction companies in the region.

Watch the club highlights video here as a summary of the key issues discussed at the meeting and the critical findings.

Key highlights:

• Regulations such as Basel III, IFRS 9, IFRS 15 and VAT have heavily impacted contracting finance in the past year
• Basel III and IFRS 9 were developed in response to the deficiencies in monetary regulation that came to light after the global financial crisis of 2007-2008. Both came into force globally in January 2018
• Basel III has imposed rules on banks with regards to liquidity requirements, countercyclical buffers and better Tier 1 capital
• IFRS 9 has changed the way banks calculate impairment models for financial assets; probability of default is now a vital factor in deciding credit risk
• IFRS 15 introduces complex rules about when revenue should be recognised and what distinct goods and services are being provided to the customer. The standard applies uniformly to all contracts and not just construction customers
• Construction stakeholders are now coming to terms with the intricacies of VAT. The next step is to look into dispute courts and regional tax authorities to smooth adoption of VAT across the GCC
• Industry players should voice their grievances to the central bank to ensure that financial regulation is introduced in a form best suited to a country and its industries