State support drives projects market in Abu Dhabi and Saudi Arabia

16 March 2010

The prospects for contract awards in the Gulf region look brighter this year as Abu Dhabi and Saudi Arabia drive major projects forward

The global economic recession that took hold towards the end of 2008 brought an abrupt end to the Gulf region’s runaway construction boom. In the months that followed, many building projects were cancelled or shelved and there was little in the way of new project awards.

But, with about $114bn-worth of construction and infrastructure projects due to be awarded over the next 12 months, 2010 is set to be a much brighter year for the industry, although the shape of the construction sector has changed dramatically.

More than $1,368bn-worth of construction projects are currently either at design stage or under way on sites around the Gulf. According to regional projects tracker MEED Projects, 52 per cent of these, together worth $714.8bn, are in the UAE.

The second most active market in the region is Saudi Arabia, with $283.8bn-worth of projects in the pipeline, or 21 per cent of the market share, while Kuwait is third, with $184.8bnworth, or 13 per cent. The UAE also has the strongest pipeline of proposals for new projects, accounting for 23 per cent of the projects planned or in the study phase in the GCC.

Project awards by sector due in 2010

Project awards by sector due in 2010

Significant markets

That the UAE is still the largest construction market in the Gulf is no great surprise, but what has changed is that the market is being driven by development projects in Abu Dhabi, while, just two years ago, it was Dubai’s real estate megaprojects that dominated the sector.

MEED’s analysis of the largest construction and infrastructure projects by value in the GCC shows that five of the region’s 10 biggest schemes planned or under way are in Abu Dhabi, including the Capital City District and Al-Raha Beach developments, the Saadiyat Island and Yas Island projects and Masdar City.

But on the other hand, more than $449bn worth of projects in the UAE have stalled – representing 91 per cent of all projects on hold in the region – and the vast majority of these are in Dubai. The shelved schemes include Dubai state developer Nakheel’s $95bn Harbour and Tower development, which, with its 1.2km-high tower, was to overtake Burj Khalifa as the world’s tallest building,  and those of its sister company, Limitless, which halted its $11bn Arabian Canal project.

“There is no doubt that the two significant markets are Abu Dhabi and Saudi Arabia,” says Charles Lever, director of UAE-based contractor Drake & Scull International. “There are a number of megaprojects coming up and we are keeping track of these and hoping to be part of them.”

Projects pipeline

Project consultants agree. “Top of the list is Abu Dhabi,” says Tim Judge, senior vice-president of strategic development at US-owned Hill International. “The Department of Transport has a lot planned. There is the rail system; the metro bid has been out for about nine months; and there are road projects linking places such as Al-Reem and Saadiyat islands and extensive development in Al-Ain and in the Western region.”

The largest project Abu Dhabi has planned is the $40bn Capital City District, which will become the new seat of the UAE federal government and home to 370,000 people. Housing will be spread over 4,900 hectares, accessed by seven boulevards.

“The Capital City District represents a once-in-a-lifetime opportunity to create a truly authentic and sustainable modern Arab capital,” said Falah al-Ahbabi, general manager of Abu Dhabi Urban Planning Council, at the launch of the masterplan in October last year.

MEED reported in December 2009 that US consultant Aecom would project manage the infrastructure for the new capital. Abu Dhabi’s KEO International Consulting is overseeing masterplanning and the first construction contract for infrastructure is expected to be awarded later this year.

US consultant Fluor is planning the transport system that will serve the Capital City District.  A 340 kilometre light rapid transit (LRT) network will link the area to the central business district on Abu Dhabi island and to the airport. A 130km metro system is also planned, to serve a wider area. In February, MEED reported that the US consortium of Parsons Brinckerhoff and Aecom was the frontrunner for the contract to conduct the feasibility study and early design work for the LRT. Aecom and Parsons Brinckerhoff, this time with German transport consultant DB International, were also named the frontrunners for the metro planning contract in September 2009, but sources say the project is likely to be delayed.

“My view is that the LRT project will go through ahead of the metro,” says Judge. “Consortiums have been interviewed and I would anticipate a decision in the next couple of months. It makes sense to fast-track the LRT, as it is quicker and cheaper to build and will make an immediate impact on the area.”

Infrastructure investment

These two rail schemes account for about a third of Abu Dhabi’s planned $68bn investment in transport by 2017. The rest will be invested in 1,500km of improvements to the road network, a $6.8bn airport upgrade and construction of the Khalifa Port Industrial Zone at Taweelah. Beyond the transport sector, social infrastructure projects such as hospitals, museums, housing and schools are also priorities, both in Abu Dhabi and the rest of the region.

“Public spending is definitely driving the market as far as the Gulf is concerned,” says Lever. “Rail, water, hospitals, universities and higher education are where we see the majority of spend is going to be in the next few years.” Consultants and contractors perceive Abu Dhabi as an open market for their services. Unlike Dubai, they say, government clients in Abu Dhabi do not tend to favour firms with which they have long-standing arrangements.

“Abu Dhabi is a lot more pragmatic about how it deals with contractors and consultants. It spreads the work around and is quite open to new companies coming in,” says Glen Thorn, head of transportation at UK consultant Halcrow, which has operated in the region for more than 50 years. “It is a more level playing field, resulting in more interest and more competition.”

However, there are fears that Abu Dhabi might suffer cashflow problems following its second $20bn bailout of Dubai in late 2009.

Bankers say the extent of Dubai’s debt problem is not fully understood, since a raft of other refinancings are expected in 2010, alongside the well-publicised problems of Dubai World.

This is causing concern for some in the construction sector. “The liquidity in the system is a lot worse than people think, therefore Abu Dhabi might have to slow down its infrastructure spend to support Dubai,” says Thorn. “If that is the case, then some of the very big infrastructure projects – the metro, the LRT, the Mafraq highway – may slow down. For us it is quite a concern.”

There may be signs of this already. In early February MEED reported that three hospital projects would be delayed as the clients – government investment fund Mubadala and Abu Dhabi Health Services Company – wanted to review the procurement strategy. Consultants say the metro is also running late and bidders for the 327km Mafraq highway say the tender process is moving slowly.

But Abu Dhabi does plan to bring in private finance to pay for some of its infrastructure. It is the first emirate in the Gulf to use publicprivate partnership (PPP) funding methods – beginning in the education sector with the new campus at Al-Ain University and the new Paris-Sorbonne and Zayed Universities in the capital. The government agrees to payments over the life of the contract, usually 25-30 years, and the contracting consortium must invest the initial capital expenditure – although the Abu Dhabi government takes an equity stake in the special project vehicle set up by the consortium. This approach gives contractors and consultants opportunities in terms of capital work and it presents an investment opportunity over the lifetime of the scheme.

Funding model

The PPP approach is also being used on the Mafraq to Ghuweifat highway, which runs through Abu Dhabi to the UAE’s border with Saudi Arabia. Consultant Ernst & Young is the financial adviser on the scheme and three consortiums are bidding for the project. Financial close is expected to be reached this year.

Abrahim Akkawi, head of infrastructure and public-private partnership advisory services at Ernst & Young, says the success of this project will lead to more PPPs in the region. “PPP is gaining interest in Abu Dhabi, where there are requests for proposals for several highways to be built under PPP, and other countries, such as Qatar and Bahrain, are looking at it,” he says.

Another state closely examining the PPP model is Kuwait, which recently renewed its commitment to its road, rail and port schemes. The cabinet approved a four-year, $102bn state development plan in January of Sabah al-Ahmed township. Led by Sheikh Ahmad al-Fahad, deputy prime minister for economic affairs, the plan seeks to address years of under-investment in infrastructure caused by political infighting.

In its first year, the government will invest $16.6bn in establishing five firms owned jointly between the state and private investors to drive through much-needed social infrastructure projects. “Kuwait is really pushing ahead,” says Thorn. “It has traditionally been very slow [to commit to spending on projects], but it is one of the few countries that does have a lot of money available. It still has a huge economic surplus each year and a large sovereign wealth fund that can support major infrastructure.

“But decisions have been delayed by the political system. There is a lot of push and pull, and it is difficult to get agreement, but it seems to have been resolved, with Sheikh Ahmad being placed in charge of a new superministry. He is really pushing for contracts to go ahead. I think Kuwait has a lot of potential over the next five years.”

To deliver its $102bn development programme, Kuwait will change its law, which currently prevents private ownership of infrastructure, and start a series of PPPs. Housing, transport and education are top of the list for investment. According to MEED Projects, three of the largest schemes are housing projects. A metro and new university are also planned, along with the long-awaited Bubiyan Port, the Failaka Island tourist development and the Subiya Crossing.

“Kuwait has to do these projects,” says Judge. “But they might take a while to get going. The country’s greatest needs are housing, social infrastructure and roads. There are plans for a metro, but I don’t see it happening for a couple of years.”

Kuwait’s transport strategy is largely dependent on the progress of neighbouring states. If Iraq stabilises sufficiently for freight to be pushed from Kuwait through Iraq and Turkey, and on to Europe, this could create a lot of business for Kuwait’s proposed Bubiyan Port.

However, the country’s proximity to Iran makes this a risky option for shipping firms, which might prefer to use the ports of Oman, UAE and Saudi Arabia, and push freight up through the GCC by rail.

Government projects

However, progress is being made on Kuwait’s road network. A series of contracts has already been awarded for a Kuwait City ring road and a new national road network is to be implemented in five phases – each measuring roughly 100km. Halcrow is carrying out the feasibility and design study for the first phase.

Other firms are also anticipating a boom in Kuwait. Drake & Scull International announced the purchase of a local mechanical, electrical and plumbing contractor – renamed Drake & Scull International for Electrical Contracting, at the end of 2009.

“The majority of the business that we are getting involved with in Kuwait is on government projects,” says Lever.

Government projects are also driving the Saudi construction market, where $283.8bn of schemes are under way, with a further $100.3bn on the drawing board. Transport, housing and education are key priorities for the kingdom and rail is more advanced in Saudi Arabia than in any other Gulf state.

The 450km Haramain high-speed railway between Mecca and Medina is under construction and the long-awaited 980km Landbridge project, connecting Jeddah with the east coast via Riyadh, is likely to get started in 2010. Previously a build, operate, transfer project, the scheme was restructured in 2009 to follow a public procurement model and will be one of the region’s largest contracts when it is eventually awarded.

“We are certainly looking at some huge projects in the rail sector, particularly in Saudi Arabia and the UAE,” says Lever. “We are looking at the prospective consortiums and where we might fit in.”

Saudi Arabia’s investment in its education sector is also creating opportunities for the construction industry, particularly its university building programme, estimated by MEED Projects to be worth about $20bn. On the real estate side, Saudi Arabia has a housing shortage and high-quality office space is still in demand. “One of its most important real estate projects includes the King Abdullah Economic City [KAEC] in Jeddah,” says JP Grobbelaar, director for research and advisory services at property consultant Colliers International. “This project will continue to be one of the most important real estate projects in the kingdom this year.”

KAEC is scheduled for completion in 2025.The $35bn mega project includes a $6bn port. “Due to its strategic location on the Red Sea, the port, when developed, is likely to create a regional logistics hub that will stimulate the Saudi economy with employment and investment opportunities,” says Grobbelaar.

Across the GCC, state-backed infrastructure projects are expected to drive the region’s project market in 2010. Irrespective of the market, some new trends are expected to emerge in the year ahead. In particular, more due diligence is to be expected, as companies become more careful about who they work for.

“The market is becoming more mature,” says Judge. “There was previously a feeling that private sector clients were better, but then companies got their fingers burned and are going back to government clients.”

Margins will also come under pressure as contractors and consultants are being asked to review schemes with a view to achieving better value. But, despite the changing environment, the majority of projects firms remain upbeat about opportunities in the Gulf this year.

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