The past 12 months have presented some of the most challenging conditions Gulf construction firms have ever known. From a booming market driven by real estate development, the global economic crisis has resulted in a dramatic slowdown, with the stalling and cancellation of projects across the region.
Figures from MEED Projects reveal the full extent of the damage. A total of $253bn worth of projects are currently on hold throughout the GCC region. The vast majority are in the UAE, where a total of $232bn of construction projects are on hold.
“Many projects that were shelved in the second half of 2009 are now coming back on the table for 2010”
“Everyone got hit by a perfect storm. It has been a hell of a difficult year,” says Kez Taylor, managing director of Abu Dhabi-based Al-Jaber Engineering & Contracting.
The scale of Dubai’s economic crisis was highlighted on 25 November, when the government announced its largest holding company, Dubai World, was asking for more time to pay back the $25bn it owes its creditors.
In its statement, the Dubai government said it will restructure the debts held by Dubai World, which owns real estate developer Nakheel and the ports operator DP World, among others.
Nakheel is at the forefront of Dubai World’s problems, with a $3.5bn sukuk (Islamic bonds) due for repayment on 14 December.
The list of projects now on hold in Dubai includes the $95bn Nakheel Harbour & Tower project. On a site next to Ibn Battuta Mall, the scheme planned to feature a 1-kilometre-tall tower, which would be the world’s tallest.
Construction has also slowed on Dubai World subsidiary Limitless’ $10bn Arabian Canal. The tender for the second package of the excavation work is on hold and Limitless has instructed the contractor to slow down on the first earthworks package.
No one knows the full implications of Dubai’s latest shock to the Gulf construction sector, but it could take the shine off what elsewhere in the region has remained a relatively healthy sector.
Saudi Arabiahas just $3.8bn of construction projects on hold, Bahrain $8.7bn, Kuwait $2.9bn, Oman $1.7bn and Qatar $3.6bn.
If Dubai’s problems can be contained within the UAE, these other markets may yet experience an improvement in 2010. Indeed, Taylor believes the hard times endured could yet benefit some firms in the Gulf construction sector. “I think people who will come out stronger from this period will be those who reacted the fastest,” says Taylor. “Those that had the ability to deal with a shift from a rapidly growing market to a rapidly shrinking one.”
In particular, firms that are able to absorb the cost of late payments and become more flexible in terms of project deadlines are those likely to benefit next year.
The GCC construction market still offers huge scope for contractors, particularly for those willing to seek work beyond the UAE. Saudi Arabia’s construction market has $21bn worth of projects at the execution stage. These include projects such as the multi-billion-dollar redevelopment of King Abdulaziz International airport in Jeddah and the $3.7bn King Abdullah Financial District in Riyadh.
“The past year was okay for us,” says one Jeddah-based contractor. “But we are dealing mostly with the public sector.
“In fact, we are experiencing something of a boom in construction,” he adds. “There is a lot of work, mainly infrastructure and airports. The private sector is still quite bad but we expect 2010 to be better.”
The imminent award of some major contracts in Saudi Arabia is adding to the sense of optimism, but contractors are also facing an increasingly competitive market.
In 2010, the engineering, procurement and construction (EPC) contract for one of the biggest projects in Saudi Arabia, the $15bn Kingdom Tower, is expected to be awarded. The tower is planned to be more than 1-km-tall and will form part of a wider development north of Jeddah on the Red Sea coast.
In September, three bidders, South Korea’s Samsung Corporation with Dubai-based Arabtec Construction, Australia’s Multiplex and the Saudi Binladin Group, were shortlisted for the design and build contract.
However, in November the developer, Kingdom Holding, approached more contractors in the hope that they will offer a lower price. With construction material prices still falling in Saudi Arabia (see chart), clients are hoping this will be reflected in contractors’ bids.
Aside from Saudi Arabia and the UAE, Qatar represents the largest construction market in the GCC, with construction projects under execution currently worth $17.8bn. It is followed by Oman with $10.2bn, Bahrain with $8.2bn and Kuwait at $6bn.
One Kuwait City-based contractor says 2009 was difficult, but is confident the sector will pick up in 2010. “A lot of projects were stalled in the third and fourth quarters of 2009 but next year looks promising,” he says. “The Public Works Ministry has been issuing a lot of tenders for roads, refineries and other infrastructure projects. That is the sort of work now coming up, which was previously on hold.
“Many projects that were shelved in the second half of 2009 are now coming back on the table for 2010,” he adds. “We are targeting the [Kuwait City] ring-road projects, the Bubiyan Island port, all these are going to be major contracts to target.”
Kuwait’s Public Works Ministry has extended the bid deadline for the marine works on Bubiyan Island to 22 December. The original closing date was 28 July. The design-and-build contract covers the construction of a container terminal on the island, four berths and a 1.3-km-long quay wall, as well as port buildings and utilities, digging and soil improvement work, and site levelling.
The ministry is also preparing to issue a tender for dredging work at the port and the contract for the $3.7bn Subiya Causeway is due to be awarded in the fourth quarter of 2010.
These developments are in line with the expectations of senior industry figures canvassed during MEED’s Arabian World Construction Summit (AWCS) in early 2009 about the likely direction of the region’s construction market in the following 12 months.
Executives expected Saudi Arabia and Qatar to deliver the strongest growth in construction activity in 2009-10, leading two-thirds of them to say their operations in the GCC would shift away from Dubai towards other GCC markets.
It was also anticipated that there would be a regional drive to develop schools, hospitals and affordable housing, particularly in Saudi Arabia and Abu Dhabi, with 22 per cent of companies saying public sector building projects provided the best opportunities for the Gulf construction industry in the year ahead.
For contractors based outside the UAE, Dubai’s construction slowdown also represents a threat to their own markets.
The Nakheel Harbour & Tower project is among $232bn worth of schemes that are now on hold in Dubai
“Our only fear now is that contractors in Dubai will start migrating to Kuwait,” says the Kuwaiti contractor. “There are people coming to us – and we are talking big international firms – asking if there is any work they can do for us. So our workload may expand or decline, but it is dependent on how Dubai behaves in 2010. The landscape here could get more competitive, which is a worry.”
Taylor argues that firms should not be too concerned by competition if they deliver a good service. “Generally the market is going to get more competitive,” he says. “This will bring lower margins but if it is a good quality contractor you should have no trouble securing work.”
He adds that forthcoming work in Abu Dhabi should be enough to keep local firms secure for the coming year, which could reduce the competitive pressure in other GCC markets. “There is still a shift from Dubai to Abu Dhabi. It is not just infrastructure work, it is all tied into the [emirate’s economic masterplan, Abu Dhabi] Vision 2030 and includes residential and hotel work for example. There is a lot of work coming up in the emirate, particularly if you look at Saadiyat Island, such as the Louvre, Guggenheim and the Sheikh Zayed museum construction projects.”
In late November, Abu Dhabi’s Tourism Development & Investment Corporation (TDIC) received bids from contractors for the piling and foundation works for the Louvre Abu Dhabi Museum. This came one month after TDIC had prequalified contractors for the $1bn main construction contract for the museum. Firms expect it to issue tender documents before the end of the year.
However, many other contract awards and tenders that had been expected to be issued by the end of the year may be delayed as companies wait to see how the Dubai World restructuring affects the UAE and the wider Gulf economies. Any default by Nakheel on its $3.5bn sukuk could yet lead to hopes for a wider recovery in the sector being postponed for even longer.