State spending plans for Qatar construction boost contractor confidence

08 February 2009
Contractors are targeting Qatar as a big growth market in 2009, thanks to the government’s commitment to developing infrastructure schemes, which is fuelling an ongoing construction boom in Doha.

Contractors in Qatar are cautiously optimistic about 2009, and their outlook appears justified. State infrastructure spending continues to drive the development of the country’s megaprojects, and the difficult global credit conditions have had little impact. Doha’s ability to invest is underpinned by a current account balance that stood at more than $50bn in 2008.

“There is still a great deal of opportunity,” says Bob Hope, director for the northern Gulf at UK-based consultant Atkins. “We are encouraged by the government’s comments on infrastructure investment and there are also further opportunities at Lusail [City] and Energy City. We still see this as a market where we are targeting growth in 2009.”

According to Gulf project tracker MEED Projects, Qatar’s construction sector is worth $119bn. Projects include the $4.2bn, 45-kilometre Friendship Causeway linking Qatar and Bahrain; the 35-square-kilometre Lusail City real estate project; the $2.3bn Sidra Hospital at Education City; and the $10bn Energy City, the Gulf’s first hydrocarbons industry business centre, work on which is 70 per cent complete, with the centre due to open in 2010.

While neighbouring Gulf states are reining in their spending , the most pressing issue for Qatari clients and developers is how best to take advantage of falling materials and labour costs, which have been dropping since hitting their peak in the summer of 2008. With this in mind, construction contractors are expecting progress on projects to slow, as local clients seek to secure lower prices on projects by negotiating, renegotiating or retendering contracts.

Seeking savings

“We are less impacted here than other parts of the world, but projects are slowing as developers adopt a wait-and-see approach moving into the first and the second quarters of 2009,” says Kerry Galbraith, Qatar-based head of the structural department at KEO International Consultants. “Rebar [reinforcement steel bar] and cement have fallen, so tender prices are falling. Clients will sit and wait, and possibly retender projects.”

Other contractors confirm that clients are seeking savings. “In general there is a slowdown, which is a reaction to the economic situation,” says Jenoe Rulff, general manager of construction formwork (concrete mould) provider Doka. “The pricing on some projects was done last year [2008] and by now they should have started, but clients are retendering.”

Severe cement shortages in Qatar drove price inflation to 16 per cent in 2008, the highest in the Gulf. An absence of local production capacity, poor distribution networks and soaring domestic demand led to the creation of a black market for cement.

Reports of contractors paying QR60 ($16.50) a 50kg bag, compared with the QR12.50 price set by the government, were common as demand peaked in the summer of 2008. But falling demand in neighbouring states and a ramp-up in local production have combined to lower prices.

“Materials and labour prices now mean clients can get 50 per cent more for their dollars. This then creates more confidence for the private sector firms, which get the benefits [of new infrastructure] for nothing,” says Hope. “This adds impetus to their plans.”

Galbraith says the process of renegotiating prices is already having an impact on the progress of projects. “Some 12-18 months ago, contractors were saying no to work, but they are saying that a lot less now, and pricing is more competitive,” he says.

The wait-and-see strategy being employed by clients is leading to a noticeable slowdown on project sites, says Rulff.

“For a long time, sites have been going 24 hours a day, seven days a week, but when I walked through some sites on Friday, no one was working. Moving from project to project there are different reasons - at one it is about financing, at another it is about materials.”

Wherever the need to save money comes from, consultants are being asked to work with clients to identify savings. “We can make a difference to the overall sustainability of a project,” says Hope. “Every few per cent we can save a client makes a big difference in the current climate; more than it can make in boom conditions.”

The wait-and-see strategy also means that clients have more time to thoroughly assess developments. “It is giving people a time-out,” says Hope. “We can work more closely with developers to look at how we can phase things, so that the development is sustainable. So many were simply charging forward and not addressing this robustly.”

However, there are still concerns over the length of time clients could choose to delay a project. Contractors expecting imminent contract awards will face delays, which is an expensive proposition for those who have already begun mobilising. But contractors seem convinced that schemes will still go ahead, albeit more slowly than originally envisaged, thanks to a combination of falling construction costs and wider optimism about Qatar’s economy.

At the same time, competition for work in Qatar is increasing. As the Dubai construction sector slows, contractors, consultants and other suppliers are seeking to increase their operations in other Gulf markets.

A buyers’ market means increasing competition, and not just from firms in neighbouring states. International firms are also working harder to break in to markets such as Qatar.

“There is a lack of European and US work, so a lot of firms are moving in to compete with us,” says Rulff. “We have to see this and react. We have to look very carefully at our strategy. Is it still valid? We have to reconsider our pricing and look at securing payment.”

With financing becoming more difficult to obtain, cash flow is increasingly important to construction companies, making payment delays even more critical. “In the future, we may not have access to the same level of borrowings,” says Rulff. “We have to carefully check a client’s ability to pay.”

All firms in the market are adapting to the changing credit conditions, but remain encouraged by the Qatari government’s policy of putting infrastructure at the heart of its economic development plans.

Leveraging influence

At the same time, the state has been leveraging the influence gained from its energy wealth to position itself as a regional centre for diplomacy by hosting Middle East peace talks.

By building the Qatar National Convention Centre in Doha, it hopes to become a centre for international conferences and summits.

“Hopefully Qatar will [continue to] go in this direction,” says Rulff. “It has the money to build the infrastructure and other facilities.”

Major projects such as the airport, road upgrade programme, Qatar-Bahrain Causeway and New Doha Port will all improve accessibility to the state, further encouraging business visitors. “I have been all over the world and worked in construction since 1979,” says Rulff. “I have to say that I am definitely in the right place at the moment.”

Building tall in Doha

Doha’s shortage of office space is well publicised, with occupancy rates of 95 per cent and residential occupancy even higher, at 99 per cent.

Population growth in the state has been more conservative, and is related to the growth of the energy sector rather than the construction boom, which means any expected drop-off in growth is expected to be less severe than in neighbouring states.

Although there is expected to be some drop-off in planned real estate schemes moving through to construction, Kerry Galbraith, Qatar-based head of the structural department at KEO International Consulting, says more tall buildings are set to appear in the West Bay area once the city’s new airport is completed.

Building heights are currently capped at 470 metres to allow flight clearance for planes landing at Doha airport, but the new coastal airport, New Doha International, means planes will no longer have to fly over West Bay.

“Height in West Bay has been restricted by the airport flight path,” says Galbraith. “New Doha International diverts flights away from there. The question is, how high can we go? The tallest building planned so far is the Convention Centre Tower, at 570 metres.

“Super tall is 70-80 storeys and there are probably no more than half a dozen [buildings of this type] planned. Super-tall buildings require a lot of design gymnastics. They tend to be mixed use - residential, hotel, office and retail space all vertically stacked. The challenge is providing an efficient vertical transport system.”

Galbraith says there are savings to be made from using more sophisticated procurement strategies. By installing and testing the foundations early, and tailoring the design to the tested loads achieved, the size of the foundations can often be reduced. This is instead of drilling boreholes, measuring the ground conditions then working out theoretical requirements for foundations.

“It gives a greater confidence than just soil-sample lab tests,” says Galbraith. “It does require better planning as you need the foundations subcontractor to come in early. With super-tall buildings, there is such loading and extensive foundations that you might save 10 per cent on piling.”

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