The GCC construction industry has been hit hard by the fall in oil prices since 2014.

Construction and infrastructure projects account for the biggest proportion of project spending in the region. But cutbacks in capital spending by government and private sector project sponsors and construction clients have led to a sharp decline in contract awards in the GCC from a peak of $114.3bn in 2013.

Construction project contract awards in the GCC totalled about $63bn in 2017, 21 per cent down from the $76.5bn of contracts signed during 2016.

In terms of project contract awards, 2017 was the worst year for the GCC construction industry since 2012.

GCC project contract awards versus average oil price

Source: MEED Projects

Cash flow crisis

The reduction in new project opportunities has increased competition for contracts, forcing contractors to lower tender bid prices in order to win work, thereby eroding profit margins.

At the same time, the fiscal adjustments being made by governments has led to lengthening delays in contract payments.

Together, the lack of new opportunities, reduced margins and payment delays are causing severe cash flow difficulties for contractors and their suppliers.

One consequence has been a severe contraction in the GCC construction industry, with companies downsizing and restructuring their operations in the region.

Some international players have chosen to leave the region. There has also been a rise in corporate failures.

Turning point

But the market is changing and, at the start of 2018, the outlook was improving rapidly for the GCC construction industry.

The catalyst for change has been the pickup in oil prices since the middle of 2017 as a result of the agreement between Opec and non-Opec oil-producing countries to place a cap on oil production until the end of 2018.

This is boosted further by the announcement of new megaprojects, particularly in Saudi Arabia as part of its Vision 2030 economic restructuring programme, but also in Abu Dhabi and Dubai.

Construction and transport project activity is set to increase significantly across the GCC in 2018, with the return to spending on construction projects in Saudi Arabia in particular lifting activity.

But many things are changing. We are seeing the emergence of major new construction clients in the region, such as Saudi Arabia’s Public Investment Fund (PIF). And also new forms of project procurement and finance such as public-private partnerships (PPP).

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In GCC Construction Outlook 2018, MEED assesses the prospects for the construction market in the GCC over the coming two years.

It analyses the emerging project opportunities for contractors, consultants and suppliers across the region’s six markets. And it examines the many challenges and risks facing construction companies in the region.

• About $715bn of construction and transport projects were under construction, or at the design or tendering stage in the GCC at the start of April 2018.
• About $393bn-worth of construction and transport projects were under way across the GCC at the start of April 2018. A further $322bn-worth of projects are in the pre-execution phase (excluding study).
• Construction and transport project contract awards in the GCC totalled about $63bn in 2017, 21 per cent down from the $76.5bn of contracts signed during 2016.
• In terms of project contract awards, 2017 was the worst year since 2012.
• Construction was the most active segment of the GCC projects market in 2017, accounting for 41 per cent of the $117.6bn-worth of main contract awards made across the region. Oil and gas followed with 26 per cent, while transport projects accounted for 12 per cent of main contract awards.

Bahrain

In Bahrain, projects worth $1.8bn have main contracts out to tender and are set to be awarded during 2018. A further $6.5bn-worth of projects are in the design or prequalification phases. Money from the Gulf Development Fund, sovereign wealth fund Mumtalakat and the country’s pension fund is enabling Manama to continue spending.

Kuwait

Kuwait expects to spend about KD2.5bn ($8.3bn) of its 2018 budget on the development of infrastructure, road networks, its new airport and power generation. It remains to be seen whether Kuwait will be able to continue with the pace of spending seen prior to 2017.

Oman

In December 2017, Muscat released a budget statement projecting spending of RO12.5bn ($32.5bn) for 2018. This is almost 2 per cent lower than the actual expenditure in 2017. The actual expenditure in 2017 exceeded the projected budget by about 9 per cent.

Qatar

The transport blockade imposed on Qatar in June 2017 by other GCC countries has been hindering the execution of projects in the country.

Construction and transport contract awards are expected for projects related to the Fifa World Cup as the government continues its policy of prioritising projects linked to the football event.

In the 2018 budget, the sports sector and World Cup projects secured a total allocation of QR11.2bn ($3.1bn). This spending is primarily focused on the completion of the Lusail, Qatar Foundation, Al-Rayyan, Al-Wakrah and Al-Khor stadiums in addition to other sport projects. Apart from this, QR42bn ($11.5bn) has been allocated for infrastructure and transportation projects.

Saudi Arabia

Riyadh says it expects to almost double its public spending on infrastructure and transport to $14.4bn in 2018, compared with the previous year’s estimated spending of $7.7bn (the allocated budget was $13.9bn).

The kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), has been slowly taking over the development of major infrastructure projects. Its portfolio includes the development of Entertainment City, Jeddah Waterfront, the Medina development, Neom City and other turnkey projects.

UAE

More than 23 Expo 2020-related construction contracts worth more than $2.5bn are expected to be awarded by the end of this year. The emirate is set to be the best-performing market again in 2018, although the window for delivering projects in time for the Expo is now closing.