These are changing times in the construction markets of the Middle East. A far harsher business climate has descended on the region over the past two years as lower oil revenues have started to have an impact on government spending power. This year’s budgets from the six GCC states confirmed the impression created by the payments delays and project postponements of 1994. Capital budgets have been frozen or subjected to even deeper cuts and the funds allocated to public works will have to stretch further than ever in 1995.

Saudi Arabia’s budget announcements are notoriously short of detail but spending is projected to fall by a further 6.25 per cent in 1995, having been slashed by 18.8 per cent in 1994. Some of the cuts proposed in key areas of construction activity are far more severe than the average spending reduction. The 1995 allocations for water development are down by 14.6 per cent; spending on infrastructure, industry and electricity has been reduced by 53 per cent.

Saudi contractors are among those worst affected by the payments delays that were used as an instrument of policy to keep the deficit within bounds in 1994. Despite signs that the worst payments problems are now being addressed, the outlook for the kingdom’s largest contractors has not improved appreciably. Domestic conditions will remain depressed and many of the leading firms are now searching outside the kingdom for a lifeline (see page 30).

Saudi Arabia is in desperate need of new power capacity and electricity is one sector that will keep international suppliers active if adequate funds are forthcoming. Bids have been delayed until mid-May for the 2,400- MW expansion of the Ghazlan power station amid signs that funding could pose problems. Saudi Consolidated Electric Company for the Eastern Province (Sceco-East) has still to inform the five prequalified companies whether they will be required to submit financing proposals for the project or not. The growing assumption is that the four regional generating companies, which lost $870 million in the 12 months to June 1994, will need all the help they can get to fund expansion and distribution projects.

Electricity tariffs were raised in the 1995 budget but it remains to be seen how much extra revenue can be collected. How the revenue will be distributed to the regional utility companies to invest in new capacity is another question. Several strategies for speeding up the power programme have been explored: export credits, build-operate-transfer (BOT), deferred payments to contractors, and advanced payments by consumers. Nothing has come of the proposals yet and the government is reluctant to provide the guarantees that are considered commonplace in other markets (Saudi Arabia, MEED Special Report, 10:3:95).

A shortage of funds for infrastructure projects is by no means unique to Saudi Arabia. Kuwait cut its non-oil project budget by 25 per cent in 1994. The spending target for the 1995/96 budget year has been cut by another 3.3 per cent, with the project budget targeted for a further 5 per cent reduction on top of last year’s savings. Some construction schemes, notably a public housing project for 5,000 new homes, will continue although the pace of work may be slower. It is a similar story in Qatar, Bahrain and Oman.


The UAE offers a stark contrast. The federal budget has been frozen for the past three years but infrastructure spending by the governments of Abu Dhabi and Dubai remains remarkably robust. In mid-1994, Abu Dhabi made some economies and postponed a series of major road projects in the interior which were not urgent. However, no delays are allowed to affect essential infrastructure projects. Consultants are expecting an invitation to bid this spring for a project to expand the Taweelah A power and desalination plant in Abu Dhabi and construction bids are also due for the Al-Awir power station in Dubai. Contractors are also busy with a big portfolio of private projects ranging from corporate headquarters to hotel, leisure and retail developments.

Policy-makers are exploring the potential for drawing the private sector directly into public works projects, particularly the provision of water, electricity and wastewater services. Privatisation can take many different forms and the Gulf states are relative late comers to the independent project development market. The partial contracting out of services is already well-established but the sale of government assets to the private sector is not being considered. However, project finance structures involving a private sector ownership element are being fully explored. BOT projects would seem to offer an attractive solution, tapping new sources of funds and providing a new outlet for local and international investors.

Oman has been the trend-setter for independent projects in the Gulf. The $218 million Manah power station project broke new ground in 1994 when a deal was reached between the private investment group and the authorities. Export credit agreements are now being finalised (MEED 10:2:95, Oman). The project is small and will add only 90 MW of new generating capacity, but it provides a model for other independent projects to follow. Oman has already gone on to award the 30-year concession to build, own and operate the Salalah sewage system to a private consortium. And, three groups, combining local investors and a strong contingent of international companies, are bidding for a similar deal to expand and manage the Muscat wastewater system (MEED 6:1:95, Oman).

Buoyed by support for these first initiatives Oman is planning a far bigger power and desalination scheme at Barqa as an independent project. The full project aims to deliver up to 1,800 MW and 56 million gallons a day of desalinated water by 2010. Bids for the first phase of the project are due to be submitted in April.

Bahrain has adopted a similar approach to power and water projects and is negotiating with British Gas (BG) which is sponsoring a 360-MW combined- cycle scheme. The long negotiations between Bahrain and BG highlight the complex issues at stake: reaching a power purchase agreement; developing institutions to handle the new relationship; offering security to investors; defining obligations; and ensuring transparency. The hurdles are huge but Oman has demonstrated that they can be overcome given sufficient determination. BG hopes that the main agreements will be reached by the end of March (MEED 2:12:94, Bahrain).


New industrial projects and the oil and gas sector offer the best prospects outside core infrastructure. Some involve significant civil works but many are expansions of existing facilities with most of the project value going to the plant supplier. In Saudi Arabia, five affiliates of the Saudi Basic Industries Corporation (Sabic) have major petrochemicals and metal projects planned for this year. Sabic made profits of more than $1,000 million in 1994 and is in a strong position to raise funds for expansion. National oil company Saudi Aramco is also expected to invite bids for four projects later this year.

It is a similar story in Kuwait where the western oil field gathering centres and projects for Petrochemical Industries Company (PIC) offer the largest opportunities for international contractors. Energy-based projects are also the main driving force in Qatar where the Rasgas project and a third gas train for Qatargas are the leading prospects. The estimated $500 million contract for Qatargas will go to Japan’s Chiyoda Corporation which built earlier phases of the liquefied natural gas (LNG) scheme.