College of Environmental Design

Construction Engineering & Management Department

CEM 520: Construction Contracting & Administration

Group Project: (Group No. 1)

Potential Impact of WTO on Saudi Construction Firms

(Thesis Summarized)

By

Ali Al Fardan

Faisal Siddiqui

Sami Murtada

Ali Al Otaibi

Tuesday, May 26, 2007TABLE OF CONTENTS

1.1. Introduction

1.1. Introduction

1.1Saudi Arabia became WTO membership to 149

1.2Objectives of the Research

2.Historical Background

3.Objectives and Functions of WTO

4.WTO Agreements

5.General Benefits of Joining WTO/GATS

6.GATS

6.1GATS Main Objectives:

6.2GATS Services Classification:

6.3GATS Services Commitments:

7.WTO & Saudi Arabia

8.Case Studies of Two (2) WTO Members

8.1Oman’s Experience

8.2UAE’s Experience

9.SWOT Analysis

10.External Factors Analysis (Opportunities and Threats)

11.Internal Factors Analysis (Strengths and Weaknesses)

12.Research Methodology

13.Results and Discussion

14.Proposed Strategies

14.1General

14.2Major (SWOT) for Saudi’s Construction Firms

14.3Possible Strategies for (SWOT)

14.4Application of Proposed Strategies

15.Conclusion

16.Recommendations

16.1Recommendations for the Construction Industry

16.2Recommendations for Further Studies

Appendix A: Questionnaire Appendix:B thesis critique

LIST OF FIGURES

Figure 1: Key Agreements Establishing WTO

Figure 2: Major Steps in SWOT Analysis

Figure 3: Basic SWOT Diagram

LIST OF TABLES

Table 1: C&E Services Division as per UN-CPC

Table 2: Schedule of Commitments

Table 3: Budgeted Construction Spending of Oman (2001 - 2005)

Table 4: Oman's Schedule of Specific Commitments

Table 5: Key Facts about UAE Construction Market

Table 6: UAE Schedule of Specific Commitments

Table 7: A Typical SWOT Matrix

Table 8: Summary of External Factors with GATS Article No. Reference

Table 9: Summary of Internal Factors (Strengths/Weaknesses)

1.1. Introduction

The World trade Organization (WTO) is an international organization positioned at Geneva, Switzerland, the WTO was set up in 1995, replacing another international organization known as the General Agreement on Tariffs and Trade (GATT). GATT was formed in 1948 when 23 countries signed an agreement to reduce customs tariffs.

The WTO has a much broader scope than GATT. Whereas GATT regulated trade in merchandise goods, the WTO also covers trade in services, such as telecommunications and banking, and other issues such as intellectual property rights.

Membership of the WTO now stands at 150 countries. China formally joined the body in December 2001 after a 15-year battle. Russia wants admission, but must first convince the EU and US that it has reformed business practices.

1.1Saudi Arabia became WTO membership to 149

On 11 December 2005; Saudi Arabia becomes the 149th Member of the WTO. It is the world's 13th largest merchandise exporter and the 23rd largest importer.

The current process of globalization of services trade liberalization can occur bilaterally, regionally, and multilaterally, in the GATS Framework of Liberalization (GFOL), bilateral liberalization between two Members is automatically converted into multilateral liberalization by virtue of the MFN principle of the GATS (Zutshi, 2000).

The Saudi construction firms will be braced with new opportunities and challenges. GATS Framework of Liberalization (GFOL) is expected to bring both disadvantages and advantages for the large Saudi construction firms. For instance, on the one hand, it allows overseas firm’s access to the domestic market, but on the other hand, it opens opportunities for domestic firms in overseas markets.

1.2Objectives of the Research

The specific objectives of this research are:

To explore features of the WTO and the GATS which are likely to impact the Saudi construction industry

To investigate the impact of the economic globalization and GATS Framework of Liberalization (GFOL) on the Saudi construction firms as a result of Saudi Arabia joining the WTO

To discuss the pertinent issues identified and synthesize appropriate conclusions

To identify the suitable strategies for Saudi construction firms in the post-WTO environment

To recommend areas of further research

Literature Review Contents

Literature review is explained in the following 10 Sections:

  1. Historical Background
  2. Objective & Functions of WTO
  3. WTO Agreements
  4. General Benefits of Joining WTO/GATS
  5. GATS
  6. WTO & Saudi Arabia
  7. Case Studies of two (2) WTO Members
  8. SWOT Analysis
  9. External Factors (Opportunities/Threats)
  10. Internal Factors (Strengths/Weaknesses)

2.Historical Background

Although the trading system of WTO is almost 50 years old, it was established on 1 Jan, 2005. The fundamental philosophy of General Agreement on Tariffs and Trade (GATT) e.g., non-discrimination, transparency and predictability etc. and World Trade Organization (WTO) are similar. General Agreement on Trade & Services (GATS) is the most important agreement dealing with trade in services including construction & related engineering services.
About twenty eight (28) countries are lining up to acquire seat in WTO and there are one hundred and forty-eight (148) current members of WTO. At start, more than sixty (60) countries made specific commitments in the construction & related engineering services, the remaining members will liberalize their respective construction sectors soon.

3.Objectives and Functions of WTO

Main objectives of WTO are:

  1. Promote free and fair trading environment
  2. Help trade flow smoothly, freely, fairly & predictability via continuing & imposing the provisions of trade laws and conventions
  3. Ascertain complete employment
  4. Increase living standards of people

WTO achieves the above objectives by implementing the following functions:

  1. Administering shard and mutually gainful trade agreements
  2. Acting as Trade Negotiations Central
  3. Settling trade conflicts
  4. Reviewing national trade policies
  5. Expanding trade in goods and services
  6. Cooperating with the other international organizations like World Bank etc.
  7. Assisting developing countries in trade policy issues thru technical assistance & training programs.

4.WTO Agreements

The Marrakesh Agreement establishing the WTO consists of sixteen (16) articles and four (4) annexes. Various agreements establishing the WTO with special emphasis on GATS is shown below in Figure 1:

Figure 1: Key Agreements Establishing WTO

5.General Benefits of Joining WTO/GATS

GATS have become real and unavoidable practice by any country through out the world. The primary benefits of joining the WTO include:

  1. Governments defense from lobbying and narrow interest groups
  2. Inspiration of economic growth and national incomes
  3. Appropriate settlement of trade disputes and peace among trading nations
  4. More choices for products/services and qualities for users
  5. Greater certainty and clarity about the trading conditions
  6. Most-favored nation and national treatments
  7. Technology and managerial skill transfer
  8. Greater transparency and predictability
  9. Augmented Foreign Direct Investment
  10. Reduced costs of living for general public
  11. Reduced corruptions
  12. Faster innovations

6.GATS

GATS is the premier set of multilateral and legally enforceable rules that cover global trade in services including construction and related engineering services. All WTO members must sign GATS agreements as well. Many terms used in GATS are taken from GATT agreements which are already tried and verified for trade in goods. However due to uncommon nature of trade in services, GATS is much more complex.

6.1GATS Main Objectives:

  1. Assuring transparency and predictability of rules and conventions concerning the trade in services
  2. Acting as a body for reciprocal trade negotiations and enforcement of trade agreements
  3. Maintaining progressively higher level of liberalization
  4. Bring down the principles of Most-Favored-Nation and national treatment
  5. Continuing the economic growth of all trading partners
  6. Protecting the development of developing countries
  7. Empowering the least-developed countries with special treatments keeping in mind their economic situation and financial needs trade in services

6.2GATS Services Classification:

Services in GATS are divided into twelve (12) core sectors of economy and about one hundred and sixty (160) sub-sectors. All members must present their schedule of specific commitments for each of these twelve (12) service sectors which includes “Construction and Related Engineering” service as well.

Moreover, since GATS comply with the United Nation’s Central Product Classification (CPC) series, the “Construction and Related Engineering” service is further classified into nine (9) groups (CPC 515-518 and CPC 8671 – 8674) as follows in Table 1:

Construction & Related Engineering service division into nine(9) groups as per UN-CPC
S # / CPC Codes / Group Name
1 / CPC 512 / General Construction Work for Buildings
2 / CPC 513 / General Construction Work for Civil Engineering
3 / CPC 514, CPC 515 / Installation and Assembly Work
4 / CPC 517 / Building Completion and Finishing Work
5 / CPC 511, CPC 515, CPC 518 / Other Construction Services
6 / CPC 8671 / Architectural Services
7 / CPC 8672 / Engineering Services
8 / CPC 8673 / Integrated Engineering Services
9 / CPC 8674 / Urban Planning &Landscape Architectural Services

Table 1: C&E Services Division as per UN-CPC

6.3GATS Services Commitments:

Concessions in GATS are selective unlike GATT concessions. GATS concessions apply only to sectors and sub sectors in which concessions were made.

In GFOL, by including a service sector or sub-sector in its national schedule, the country mainly points out that it will apply to trade in the services sector market access and national treatment obligations.

GFOL contains not only a set of agreements and annexes thereof, but also contains the specific commitments’ schedules, and MFN exemptions for each member.

The above principals clarify that KSA will commit a certain level of market access and national treatment and undertakes not to impose any new measures that will be binding on the Saudi Construction Firms. In case KSA wants to withdraw/modify its commitments in future, it will need to face compensatory adjustments with affected countries.

Although KSA cannot withdraw/modify the specific commitments before three (3) years after the GATS membership, yet modifications of horizontal commitments can be further enhanced at any time based on bilateral or multilateral negotiations.The schedule of commitments, Table 2, primarily consists of following four (4) distinct individual columnsfor horizontal and specific commitments:

S# / Commitments
1 / Sector or sub-sector
2 / Limitations on market access w.r.t. their four (4) modes
3 / Limitations on market access w.r.t. extent of national treatments thereof
4 / Additional commitments that don’t subject to market access/national treatment sch.

Table 2: Schedule of Commitments

7.WTO & Saudi Arabia

Local construction firms in KSA presently enjoy several benefits which will probably be reduced / eliminated if KSA joins and implements WTO.

Some significant concessions include the following:

  1. No custom duties on construction materials, equipments, machineries, tools and plants
  2. Restriction for foreign construction-related firms to own only minority shares (less than 5 %) in KSA
  3. Plots of lands for the domestic construction firms are provided on nominal rates for individual projects and developments
  4. Low rates of utility services (electricity, water, etc.) for domestic firms

In the last few years, KSA has taken some noteworthy economic and legal reforms such as:

  1. Establishment of a supreme economic council
  2. Opening of stock market to foreign investors
  3. Privatization of several vital sectors like power, telecommunication, transportation, operation and maintenance in industrial and power sectors, urban developments, buildings, and docks related facilities
  4. Approval of a new Foreign Direct Investment Law
  5. Approval of a new Saudi Labor Law
  6. Amendment of the real estate law to allow foreign ownership
  7. Establishment of the new policy bodies such as the Saudi Arabian General Investment Authority (SAGIA), the Supreme Tourism Authority, and the Supreme Council for Petroleum and Mineral Affairs
  8. Establishment of regulatory bodies for telecommunications, electricity, stock market, and investments in industrial parks

8.Case Studies of Two (2) WTO Members

Following case studies provide the experiences of two selected WTO members (Oman & UAE) in the construction sectors. They joined prior to KSA and have some resemblances to KSA in one way or another:

8.1Oman’s Experience

KSA & Oman have several commonalities. Both countries are member of the following organizations:

  1. Both are members of Arab Monetary Fund (AMF)
  2. Gulf Co-operation Council (GCC)
  3. Arab League
  4. Organization of Arab Petroleum Exporting Countries (OAPEC)

Oman joined WTO on 9th November, 2000 thru accession process. The potential of Oman’s being a profitable construction market is quite evident from ongoing landmark construction projects such as new ports, industrial zones, free trade zones, roads etc. The budgeted construction spending of Oman (2001-2005) can be seen in Table3 below:

S# / Ongoing Projects (2001 – 2005) / Allocated Funds
1 / Low Cost Public Housing / US$ 42 Million
2 / Utilities and Municipal Services / US$ 650 Million
3 / The Palace / US$ 210 Million
4 / RoadBuilding / US$ 380 Million
5 / Total Spending on Construction / US$ 1282 Million

Table 3: Budgeted Construction Spending of Oman (2001 - 2005)

Oman’s schedule specific commitments for construction and related engineering services under GFOL appear in Table4 below:

Sector / Limitations on Market Access / Limitations on
National Treatment / Additional Commitments
Construction and Related Engineering Services / Mode I: None
Mode II: None
Mode III: None
Mode IV: Unbound (except as indicated in the horizontal section) / Mode I: None
Mode II: None
Mode III: None
Mode IV: Unbound (except as indicated in the horizontal section) / ---

Table 4: Oman's Schedule of Specific Commitments

The Government of Oman has undertaken various steps to face the challenges of the WTO and globalization including introduction of a special training course on strategic planning and economics in cooperation with the Arab planning Institute of Kuwait. Foreign construction firms are increasingly allowed to participate in Oman’s ongoing major construction projects beyond a value of OR 250,000. Construction firms from several member countries including India, Egypt, Lebanon, UK, and others are already operating in Oman. However, foreign construction firms need to makejoint venture agreements with some suitable local partners.

8.2UAE’s Experience

UAE is one of the 51 original members of GATT. It formally joined the WTO on 10thApril, 1996, just five days before the end of accelerated membership process and the consequent beginning of strict WTO’s accession process.

Key facts about the significance of UAE Construction market are shown below in Table 5:

S# / Key Facts / Remarks
1 / Size of Construction Market / $15 billion (Approx.)
2 / GDP Contribution / 7-10%
3 / No. of building projects
(first six months of 2002) / 1,142: 792 villas, 350 industrial or service buildings including 15 hotels and 141 multi-storey apartments
4 / Cost of building projects (first sixmonths of 2002) / $3 billion
5 / No. of multi-story building projects under construction in 2004. / 337
6 / Landmark projects / 1. The world’s largest man-made islands: The Palm Islands-the eighth wonder of the world(Completed)
2. The world’s first seven-star hotel, Burj Al-Arab (Completed)
3. The 705-meter high Burj Dubai tower (Ongoing): going to outstrip by more than 250 meters the current contender, PatronsTowers in Kuala Lumpur. This skyscraper will house a hotel wing, apartments, offices, entertainment centers, restaurants, one of the world’s largest malls (the Dubai Mall with over two million square feet of retail space), and an old town that will make it a city within a city.

Table 5: Key Facts about UAE Construction Market

The recent trend of GDP contribution of UAE construction sector has been in the range of fifteen (15) to sixteen (16) thousand millions of UAE Dirham (7 to 10 % of the UAE national GDP). In addition, the UAE construction sector provides employment for approximately two-hundred and fifty thousand to three-hundred thousand employees (17 to 19 % of the total UAE workforce).

While joining WTO, the Government of UAE made specific commitments only in six services sectors out of twelve major services sectors under the GATS. The specific commitments of UAE construction and related engineering services are shown in Table6below:

Sector / Limitations on Market Access / Limitations on National Treatment / Additional Commitments
Construction and Related Engineering Services / Mode I: None
Mode II: None
Mode III: None
Mode IV: Unbound (except as indicated in the horizontal section) / Mode I: None
Mode II: None
Mode III: None (except as indicated in the horizontal section) / ---

Table 6: UAE Schedule of Specific Commitments

The relevant sectors wherein UAE made specific commitments include architectural services, engineering services, urban planning, and landscaping services. The UAE negotiated a 10-year exemption from several WTO obligations thatexpired in Jan 2005.

9.SWOT Analysis

SWOT is short for Strengths, Weaknesses, Opportunities, and Threats. SWOT Analysis is a structured approach that helps strategists to imagine systemically about strategic issues. It is suggested that SWOT Analysis is the most suitable in circumstances where the intention is to gain a better understanding of strengths, weaknesses, opportunities and threats. Strength and Weaknesses are internal factors. Weaknesses and Opportunities are external factors.

SWOT analysis involves three major steps as shows below in Figure 2:

Figure 2: Major Steps in SWOT Analysis

Analysis of External Factors (Opportunities and Threats) aims at revealing the external factors due to the prospective environmental changes (Saudi Arabia joining the WTO in this case) that forces the firms to alter their strategies. For instance, the imminent GFOL in Saudi Arabia would alter the way the Saudi construction firms do business today and would create a paradigm shift.

Analysis of Internal Factors (Strengths and Weaknesses) is used to separates strengths and weaknesses of a firm and to assess their internal capabilities. The criteria for determining the firm’s strengths and weaknesses should be in comparison with existing as well as impending key players.

Matching the Internal and External analysis and proposing SWOT strategies is carried out once the consensus is reached concerning the contemporary strengths, weaknesses, opportunities, and threats. This stage of strategies formulation needs brainstorming among the concerned people.

Typical SWOT diagramsare shown in Figures 3 and Figure 7. SWOT diagram is a two-way matrix.Strengths (S) and Weaknesses (W) constitute the first dimension while the Opportunities (O) and Threats (T) constitute the second dimension. Thus it consists of four cells: