The GCC projects market has gone through an unprecedented period of growth over the past decade. Buoyed by rising oil prices, a growing population and booming economies, the region has seen more than $700bn-worth of contracts awarded across all sectors since 2003. The result has been a radical transformation of the region. City skylines have risen almost overnight, vast petrochemical complexes in the desert now produce a range of new plastics and coastlines are crammed with five-star hotels.
The uprisings across the Middle East look set to drive project investment up in the medium term
The investment in ambitious projects has had an impact on the region’s economic and social fabric. The Gulf region is now a financial, leisure and industrial hub of growing international importance. It has always been relevant politically and is now also viewed by other emerging markets as a model for economic development.
The reason for the massive growth in projects activity is no secret; a sharp rise in oil prices has been at its heart. In 2003, the price of crude averaged just $23 a barrel. Today, it is well over $100 a barrel and shows no sign of coming down soon. The economic impact this has had on government revenues has been staggering. In 2003, the combined current account surplus of the six GCC states was $50bn; in 2011, it was $279bn, a more than fivefold increase. Oil revenues have allowed governments to spend billions of dollars on upgrading their physical and social infrastructure.
Growth in the projects market has not only been about increased government expenditure. Dubai’s 2002 decision to open up ownership in its real estate sector to non-GCC nationals acted as a catalyst for a private sector-led real estate boom that was the largest driver of the projects market until late 2008. While the Dubai real estate crash has taken some of the steam out of the market, construction is still a strong sector that saw close to $50bn-worth of contracts awarded in 2011.
It is not surprising that growth in demand for construction and building materials has come with the substantial increase in activity. The need for cement, aluminium products, reinforcement bars, glass and steel has soared over the past five years and existing producers have at times struggled to keep up with demand.
The question everybody in the projects industry is asking today is whether the market can attain the same levels of activity. This is particularly pertinent given its performance in 2011, when just $129bn-worth of contracts were awarded in the GCC. It was by far the worst year for the market since 2005, primarily as a result of the drop in activity in Abu Dhabi and the continuing fallout from Dubai’s credit crisis. As the market has contracted from its 2009 high of $169bn, fears of an oversupply in construction materials and contracting capacity in general have grown.
Prices have dropped in the wake of the decrease in project activity, and compounded by an increase in supply of materials as new local manufacturing facilities have come on stream to serve the boom. For example, more than a dozen cement production plants have been built over the past 10 years, with an overall production capacity exceeding 15 million tonnes a year. New capacity across other building materials is also coming online just as demand is at risk of falling away.
The problem is mirrored within the contracting community. Over the past half-decade, dozens of new contractors have entered the region to take advantage of the boom. The potential result of these combined factors will be an ever-increasing band of contractors and suppliers chasing an ever-decreasing number of projects.
The question of whether the market can return to pre-2009 levels is therefore critical to the fortunes of many firms. The good news is there are plenty of signs that indicate a long-term return to health for the market.
Firstly, it is important to note that with the exception of off-plan property sales, the factors that have driven project market growth to this point remain. The price of oil is still well above $100 a barrel and looks set to stay there for the foreseeable future. The US’ Energy Information Administration forecasts that world marketed energy consumption will rise from 495 quadrillion BTUs in 2007 to 739 quadrillion BTUs by 2035. While not all of this increase in energy demand will be met by oil, demand for crude is still expected to increase substantially over the next two decades and this will push prices upwards.
There are no signs that either population or economic growth will fall away. The US-based Population Reference Bureau forecasts that the Middle East and North Africa (Mena) region’s population will rise to more than 600 million by 2030, from about 350 million today. Growth is important because it is the main driver behind investment in utilities, such as power, desalination and wastewater, as well as social infrastructure, such as housing, healthcare and schools. Equally critical is the fact that when faced with increased demand in these sectors, governments have little choice but to make investments.
Continued high oil prices and expanding populations bode well for economic growth. The Washington-headquartered IMF predicts that gross domestic product (GDP) growth rates in the GCC will continue to hover around 5 per cent a year, and 4-6 per cent in the wider Mena region. It forecasts that by 2016, Mena GDP will be $3.6 trillion, compared with $2.4 trillion in 2010.
These factors mean there is no reason the region’s projects market cannot bounce back from its 2011 low. This is especially true given the paradoxical impact of the political unrest that began in Tunisia in December 2010. Rather than deter project investment, the uprisings across the Middle East look set to drive up spending in the medium term. The direct result of the upheaval has been extra-budgetary investment among the GCC states of more than $100bn, much of which will go towards social infrastructure, such as schools and, especially, social housing.
On a market-by-market level, there are localised reasons to be optimistic. Abu Dhabi’s failure to move ahead with its project plans last year conversely means that many of its schemes should proceed throughout the course of 2012 instead. The government announced in February that it plans to resume its projects programme. This has provided the market with some optimism that the emirate will soon return to better times.
In neighbouring Dubai, there are also indications of a pick-up in activity. The award of the $875m Concourse 4 project at Dubai International airport, announcements about the new $515m Habtoor Palace scheme and a major new cultural district next to Burj Khalifa, along with the finalisation of financing for the Al-Sufouh tram have all raised hopes that life is returning to a market that has been moribund since 2008.
The prospect of a return to progress in the UAE comes at the same time as a decrease in the number of cancelled construction projects region-wide. In 2010, 229 projects due to be awarded were cancelled; this number fell to 137 in 2011. It is down to 109 this year and is set to drop to about 30 in 2013 as developers commit to more commercially viable schemes.
Saudi Arabia’s potential
Whatever happens in the UAE, it is likely to pale in comparison to the spate of future activity in Saudi Arabia and Qatar. The latter has more than $100bn-worth of infrastructure projects in the pipeline after winning the right to host the 2022 Fifa World Cup. Doha has to work under a very tight timeframe, which will ensure a large number of megaprojects, such as the stadiums, rail and metro schemes, are developed in under a decade.
Even more work is planned in Saudi Arabia. In 2011, Riyadh awarded close to $70bn in signed contracts, more than all the other GCC states combined. This is not surprising given that the kingdom has the region’s largest economy and population, but it is evidence that the country is finally living up to its potential after under-achieving until 2009. With the government committed to increasing expenditure as part of its ninth development plan and the additional spending announcements following the region’s unrest, the kingdom’s projects market can only grow in the short to medium term.
Project professionals can be relatively optimistic about the Gulf’s potential. MEED’s research division MEED Insight forecasts that the GCC projects market will award $135bn-140bn-worth of contracts in 2012 and potentially $150bn in 2013, based on the current pipeline of planned and tendered projects. And while it is true that increased competition will have an impact, most contractors and suppliers in the market can be confident of a pick-up in activity.