Public spending on roads and bridges eases the strain on contractors

01 February 2009
As billions of dollars worth of private real estate schemes in the Gulf are shelved, along with the infrastructure projects that would serve them, increased state investment offers respite for contractors.

Gulf states are ready to spend big on bridge and road infrastructure to keep their economies ticking over in 2009. The injections of public spending that were announced at the end of 2008 - Dubai alone said it would increase public spending by 42 per cent to AED37.7bn ($10bn) this year - will provide welcome relief for road and bridge contractors and consultants who have been hit hard by the drying up of infrastructure work from private residential developers.

While the property sector continues to experience falling demand for new housing, an upsurge in public spending on infrastructure is being seen as the antidote to the economic slowdown. The infrastructure in many Gulf cities is in need of repair or replacement because of the strain put on roads and bridges by their fast-growing populations.

Infrastructure planning

“There have been a lot of [infrastructure] projects on the table all over the Gulf states for a long time now, and more infrastructure projects will come forward in Saudi Arabia, Kuwait, Abu Dhabi and Oman in particular,” says Muhammad Ali, a consultant working with Denmark’s Cowi on the proposed Friendship Causeway between Qatar and Bahrain, and the delayed Subiya Causeway project in Kuwait, a 37-kilometre-long bridge linking the City of Silk project with Kuwait City.

The Saudi government has the biggest public spending plans in the region. The government announced an expansionary fiscal policy in late December 2008, revealing expenditure in 2009 would be SR475bn ($127bn). For the 2008 fiscal year, planned expenditure was SR410bn.

This Gulf-wide surge in public spending is expected to lead to some massive road and bridge infrastructure projects starting this year. The most spectacular development to start on site is expected to be the 45km Friendship Causeway, which will include a 22km bridge linking Qatar and Bahrain.

A consortium led by France’s Vinci Construction Grands Projets was due to start on the project in January. However, the contractor is working with Cowi on redesigning the project, and Qatar’s Emir Sheikh Hamad bin Khalifa al-Thani is expected to formally announce the redesigned project next month.

The six-lane highway crossing is now expected to include a rail crossing for both passengers and freight, adding an estimated 30-50 per cent to the original $4.2bn budget.

Under the original proposal, a suspension bridge high enough to make the channel navigable would not be able to accommodate a rail line. This is because the gradients needed for a train to ascend to the suspension bridge and then down again would be too steep. The design team is therefore considering replacing the suspension bridge with an immersed tube tunnel, or keeping the bridge but routing the rail link through a separate tunnel.

“The team has been instructed to prepare an outline design to include a rail scheme,” says Glen Ford, Middle East transport director at UK consultant Halcrow, which has been appointed to manage the Friendship Causeway project along with US consultant KBR. “That could include a widening of the bridge elements to take heavier loads, but we would also potentially look at two structures side by side. It will significantly alter the design of the crossing. The contractor is coming up with suggestions.”

However, Ford predicts the project will go ahead as soon as possible to take advantage of current low materials costs. “On a structure of this size, lower materials costs would be a major benefit,” he says. “They would be wise to go ahead if they have got the money.”

The other long talked about bridge project is the Subiya Causeway. Bid deadlines for the project have been delayed for years - bidders were originally prequalified in May 2006. The cost of the project is also thought to have more than doubled to KD1bn ($3.7bn), from an original estimate of $1.5bn. But with building costs falling, the client, [Kuwait’s] Public Works Ministry, is understood to be keen to push ahead with the project despite dwindling interest from bidders.

Four of the eight prequalified bidders, including France’s Bouyges and Vinci Construction Grands Projets, bidding in separate consortiums, are expected to put in bids to build the crossing.

In the roads sector, there is good and bad news for contractors. The good news is that some big projects are coming forward in 2009. These include a network of road schemes in the north and east of Saudi Arabia, which has an underdeveloped road network. A 120km expressway linking the towns of Uqair and Salwa is planned by the Saudi Transport Ministry, as well as a series of dual carriageway upgrades to existing roads.

There is also an active roads programme in Qatar, where progress is urgently needed as the population grows rapidly and congestion increases. The government allocated $3.72bn for new road projects in 2005, and several of these are expected to be completed this year. The first stage of the Salwa international highway, the Umm Birkah road, a 16km highway extending from Zubarah Interchange to Ras Laffan, and the Dukhan road project are all due to be finished in 2009, according to the Public Works Authority (Ashghal).

Private developers

However, the bad news is that many road projects connecting new developments with cities, and funded by developers, have been put on hold along with the development schemes.

The majority of road and bridge work in the region has been initiated by the private developers that need it to serve their residential developments. But much of this work has been postponed indefinitely because of the slump in demand for new housing. The expected rise in public spending on infrastructure will not compensate for the loss of this work.

“We have heard that governments will increase public infrastructure spend but we have not seen any evidence of that yet,” says Jesper Demgaard, managing director of Cowi.

“There is so much private infrastructure development currently under review for which the public sector work will not compensate,” says one source at Hyder Consulting.

If the market begins to recover in the second half of 2009, developers are expected to commission infrastructure works for their developments to take advantage of lower materials costs. “A lot of developers in Abu Dhabi are coming back to us and asking us to retender previously delayed schemes to take advantage of the reduced cost of materials,” says Halcrow’s Ford.

Abu Dhabi is committed to funding its major road and bridge infrastructure through private finance models. The Transport Department has already sought out private investors to come forward to fund a programme of highway building.

Under the first tranche of its public-private partnership (PPP) highway programme, the department has released tender documents for the 320km-long Mafraq-Ghweifat highway, including 13 interchanges, stretching from Abu Dhabi city to the Saudi border. The contract is expected to be tendered as a 30-year design-build-finance-operate project, but the terms of the contract could change to attract more bidders.

“There is a lack of money at the moment,” says Ford. “It is not an easy market. The prequalification documents were submitted before the credit crunch, when it was really a different atmosphere. The contract could be made more flexible. The banks may take a dim view of things if the terms are too restricted.”

However, Ford says that while the availability of project finance is at an all-time low, hence the talk of direct public investment, the current economic squeeze could attract wealthy individuals into the private finance initiative (PFI) market.

“Certainly there will be fewer banks with the appetite to go for this type of project, but it may attract other types of lenders,” he says. “We are talking to a few industrialists in the Gulf who are looking for somewhere to put their money. They do not want their money to sit in the bank at the moment with low interest rates.”

Most road and bridge work will continue to be procured in the traditional way under fixed-price contracts, according to International Financial Services London, a trade association that has recently been advising Jeddah municipalities on a possible PFI programme.

“We get a lot of enquiries from Gulf states on PFI but very few of them come to fruition,” says Wayne Evans, director of the association. “A lot of countries in the region are still centrally controlled and have not got away from the old approach to infrastructure - built and run by state companies. And with the high oil price, there has been less need to look at PPP.”

The return of bank lending is the crucial ingredient that is missing in the PPP market. Once liquidity returns to the market, there could be a rush to put infrastructure projects out to tender. In the meantime, the Middle East’s road and bridge projects will remain under government control.

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