Recovering from a slow year

28 November 2011

Political instability and financial problems dented the projects market in 2011, but the outlook is positive

The world economy lurched from crisis to crisis in 2011. The Eurozone countries wrestled with debt problems, the US’ sovereign rating was downgraded and, by the end of the year, there were even suggestions from more bearish analysts that China’s rapid economic growth may finally start to slow down.

The global financial turmoil and the Arab uprisings have had a huge impact on the projects market

The Middle East had its own issues to deal with. Protests in Tunisia started in late December 2010 and over the 12 months that followed regimes in Egypt, Libya, Tunisia and Yemen had been ousted, while the rulers of Syria and Bahrain had sustained serious challenges to their legitimacy. Less widespread protests were seen in Oman, Kuwait, Saudi Arabia and Iraq.

The global financial turmoil and the Arab uprisings have had a huge impact on the region’s projects market, with leadership changes and uncertainty causing a dip in the volume of work awarded, even in countries that remained largely protest-free.

Project delays in the GCC

At the start of the year, MEED’s research division, MEED Insight, predicted $130-140bn of contracts would be awarded in the GCC during 2011. By November, that forecast looked unlikely to be met with $108bn of awards made, meaning an additional $22bn of work would need to be awarded in December, which seems an unlikely proposition.

The expectation among construction companies in Doha is that Qatar will become one of the most lucrative markets

The shortfall has largely been caused by project delays in Abu Dhabi, where major contracts that were scheduled to be awarded in 2011 have not been made. This has meant that the volume of work awarded in 2011 by the emirate was just $13bn, compared with $33bn the previous year and a peak of $62bn in 2009. The $13bn for 2011 is less than the $14bn that Abu Dhabi awarded in 2006, before its real-estate fuelled construction boom really began.

Abu Dhabi’s government accounts give an insight into the difficulties the emirate currently faces and why the volume of awards has fallen so dramatically. Fearing a fall in the oil price, the government is keen to control spending.

Mena projects market by status
On hold24.7
Planned and study17.8
Prequalification and tender8.2
Source: MEED Projects

Government spending more than tripled from $22bn in 2005 to peak at $72bn in 2009, before falling to $67bn in 2010, according to the Washington-based IMF. The rise in expenditure was manageable, until the end of 2008 when oil prices began to dip. Between 2008 and 2009, average oil export prices fell from $96 a barrel to $63 a barrel. Together with reduced output, this meant the emirate’s revenues fell by more than 50 per cent to $39bn, from their 2008 peak of $82bn. This resulted in a deficit of $32bn – about 82 per cent of revenues.

The problem continued into 2010, and although revenues rebounded slightly, they were still down 37 per cent at $51bn, compared with 2008, and led to a deficit of $16bn.

Looking ahead, the total value of awards in 2012 is forecast to reach about $150bn for the GCC, which is up to $20bn more than last year’s forecast and up to $40bn more than the likely total for the end of the 2011. This would mean that next year the region’s project market would have recovered from the collapse of 2008-09.

The GCC projects markets have been buoyed by oil prices that have consistently remained above $100 a barrel. In addition to the projects that were planned at the start of the year, governments have committed to additional spending in the coming years in response to the civil unrest that has swept the region.

With the largest population in the GCC, Saudi Arabia will be the biggest spender. In August 2010, Riyadh approved its ninth five-year development plan, setting out the government’s intent to spend almost $400bn on developing infrastructure until 2014. This was supplemented in February and March, when King Abdullah bin Abdulaziz al-Saud pledged more than $100bn in extra public spending.

Not surprisingly, MEED Projects shows that the kingdom’s construction sector will dominate the region as state investment directed at housing and other social infrastructure schemes, such as hospitals, schools and universities, results in contract awards for construction companies.

The government estimates that it will spend $67bn on 500,000 additional houses, $73bn on new healthcare facilities, $195bn on schools and universities, and $30bn on transport schemes such as railways, roads, airports and ports.

Construction in Saudi Arabia will be joined by investment in petrochemical and industrial projects needed to create new employment opportunities. Unemployment among Saudi nationals was about 10.5 per cent at the end of 2009, with the figure for the under 30 age group reaching a politically worrying 27 per cent.

UAE market

For the UAE, the region’s second largest projects market in 2011, a slight dip is forecast for 2012 as it continues to deal with the fall out of the 2008 property crash that forced hundreds of billions of dollars of projects to be cancelled or put on hold.

Construction and infrastructure projects are expected to remain a priority as the emirates move ahead with more housing schemes aimed at nationals and infrastructure schemes such as the later stages of the $11bn federal rail network and the Midfield Terminal complex at Abu Dhabi International airport.

Opportunities ahead

The other two GCC markets that are expected to generate the most opportunities in 2012 are Qatar and Kuwait. The past 12 months have been modest for Qatar, but the expectation among construction companies in Doha is that in the coming months it will become one of the most lucrative markets in the region as projects for the 2022 football World Cup start to be built. Planned schemes include the construction of new railways, metros, roads, stadiums and hotels over the coming decade, many of which will have to begin in 2012.

In Kuwait, the priorities are energy focused. The oil and gas sector will lead Kuwait’s projects market in 2012, with $30bn of downstream oil and gas projects expected to move ahead, including the long-awaited New Refinery Project. Contractors are hopeful that the contracts to build the refinery will be awarded next year. The scheme was previously tendered in 2008, but was later shelved due to political wrangling in the Kuwaiti parliament.

For the wider Middle East and North Africa region, MEED Insight forecasts $65-70bn of contracts will be awarded in 2012, which is roughly half the total expected for the GCC. Outside the GCC, Iraq is expected to become the largest non-GCC market as development finally starts to progress in earnest on its oil and gas projects and tendering begins on a series of power plants. Construction activity will also be significant as Baghdad continues to develop social housing. The government estimates 2 million new homes need to be built, with 1 million in Baghdad alone.

The first major housing deal was signed in May 2011 when South Korea’s Hanwha Engineering & Construction secured a $7.25bn deal to build 100,000 homes and infrastructure at a site 25 kilometres east of central Baghdad.

Looking beyond 2012, economies such as Iraq that have endured periods of violence and political instability will become increasingly important for the region’s projects market. The hope is that as stability returns to countries including Libya, Egypt and Syria, new governments will be keen to improve the living conditions of their people, and that will involve investment in social projects, all of which will need contractors to build them.

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