Tough year ahead for contractors

13 January 2016

While projects are still being planned, the challenge will be making progress

Fewer contract awards and tightening cash flow were the two main themes for construction companies in 2015 as clients adjusted their capital expenditure plans in the wake of the drop in oil prices.

Payment delays have forced contractors to secure loans from banks to cover monies owed

So far during 2015, there have been $56bn of construction contract awards in the GCC, down 27 per cent on the $77bn awarded in 2014, according to data from regional projects tracker MEED Projects. There was also a 27 per cent drop for transport, which has had $27bn of contract awards this year, down from $37bn in 2014. Oil has seen $18bn of awards this year, down 38 per cent from the $29bn awarded during 2014.

Cash flow

Payment delays have forced contractors to secure loans from banks to cover monies owed, and in some cases cut costs and headcount.

In November, Athens-based Consolidated Contractors Company (CCC) raised $350m as the contractor builds a cash cushion against growing payment delays from its clients, amid slumping oil prices. The company expects payment delays to worsen and is in talks with more banks to raise additional funds as it looks to beef up its cash buffer.

Also in November, Saudi Binladin Group, the largest contractor in Saudi Arabia, moved to lay off 15,000 workers. This was the third batch of staff retrenchments in its architecture and building construction division. It is not known how many the company had already laid off in previous phases.

Other firms are also cutting costs. Dubai-listed interior fit-out firm Depa said in December that it is reducing its global head count, and the Oman Society of Contractors is reported to have warned that up to 55,000 jobs could be lost in the sultanate as construction activity wanes.

The worsening market conditions have caused a significant drop in sentiment. UK-headquartered law firm Pinsent Masons’ annual GCC Construction Survey, which surveys companies involved in projects with a value of more than AED100m ($27m), found that just 32 per cent of respondents are optimistic about the year ahead, down from 77 per cent who were looking forward to 2015 last year.

Major GCC projects expected in 2016
ProjectOwnerCountryValue ($m)Main contract award
Jeddah Metro: Orange and Blue linesJeddah Metro CompanySaudi Arabia8,000Oct-16
Thakher City in MeccaThakher Real Estate InvestmentSaudi Arabia7,000Nov-15
Mecca Metro: package 3Mecca Mass Rail Transit CompanySaudi Arabia3,547Feb-16
Jeddah Metro: Red LineJeddah Metro CompanySaudi Arabia3,500Oct-16
Dar al-Hijrah in MedinaDar al-Hijrah CompanySaudi Arabia3,000Feb-16
Mecca Metro: package 1Mecca Mass Rail Transit CompanySaudi Arabia2,653Feb-16
Security forces housingSaudi Arabia Ministry of InteriorSaudi Arabia1,883Feb-16
National railway segment 4AOman RailOman1,760Aug-16
National railway segment 2Oman RailOman1,753Aug-16
King Abdullah Medical City expansionSaudi Arabia Ministry of HealthSaudi Arabia1,730Jan-16
North and East regional highwayKuwait Ministry of Public WorksKuwait1,687Jan-16
Qasim-Mecca highway (Mecca)Saudi Arabia Ministry of TransportSaudi Arabia1,560Feb-16
Fadhili residential campSaudi AramcoSaudi Arabia1,500Jan-16
Jeddah Metro: Green LineJeddah Metro CompanySaudi Arabia1,500Oct-16
Jeddah Light RailJeddah Metro CompanySaudi Arabia1,500Oct-16
Sheikh Khalifa Medical CityMusanadaUAE1,500Nov-15
Atlantis resort extensionInvestment Corporation of DubaiUAE1,400Dec-15
King Fahd Naval AcademySaudi Arabia Ministry of Defence & AviationSaudi Arabia1,380Mar-16
Source: MEED Projects

UAE awards

Despite the drop in the value of awards and worsening sentiment, new work is moving ahead. The worst hit market in 2015 has been the UAE, and after a slowdown in awards during the start of 2015, there are signs that large government-backed projects are being driven ahead.

In early December, the Roads & Transport Authority (RTA) awarded the local Wade Adams Contracting the AED474m contract for the second phase of the extension to Academic City road. The transport agency is preparing to award contracts on other road projects totalling about AED2bn.

The RTA’s largest single project is the new metro link connecting to the Dubai Expo 2020 site. Contractors are preparing to submit bids for the design-and-build contract on 10 January.

For other clients in Dubai, the local/Belgian Bel Hasa Six Construct submitted a low bid of AED1.32bn for the contract to build the second phase of the Jebel Ali sewage treatment plant for Dubai Municipality.

The municipality is also planning to build a deep-sewer tunnel network in the Deira area of the emirate, similar to the Strategic Tunnel Enhancement Programme (STEP) under way in Abu Dhabi. It is also planning tunnels to take storm water from the Dubai World Central and Al-Maktoum International airport area in Jebel Ali out to the Gulf.

Atlantis expansion

For building work, the most high-profile project to be tendered in 2015 was Investment Corporation of Dubai’s Atlantis resort expansion on the Palm Jumeirah, and an award was expected by the end of 2015. Other upcoming building projects that are at an earlier stage and should be tendered in 2016 include Wasl Tower, Burj 2020, the Museum of the Future and Zabeel One.

In Abu Dhabi, contract activity has been more subdued, with only a few awards. There are signs that this may start to change. In late November, Musanada invited companies to bid by 13 January for the design and build of a crossing connecting Reem Island with Umlifaina Island.

There are hopes that further into the future – probably in 2017 – transport projects in the UAE capital will start to move ahead after the Department of Transport appointed the UK’s Arup to update the city’s surface transport masterplan.

The study, which is expected to take one year to complete, will involve updating the masterplan and strategy for all of Abu Dhabi’s surface transport. The largest transportation scheme planned for the capital is the Abu Dhabi Metro and Light Rail.

Saudi slowdown

In Saudi Arabia, Riyadh has been forced to scale back its project ambitions in 2015. The 11 stadiums that Saudi Aramco planned to build this year have stalled. Construction work on ongoing infrastructure schemes, such as the Riyadh Metro, is being scaled back and, in October, the Finance Ministry instructed government agencies not to award any more contracts this year.

The question now confronting policy-makers is which projects should move ahead in 2016. A range of major construction schemes are at the tender and prequalification stages.

For the largest planned projects, the authorities are close to awarding contracts for the construction of more metro lines in Mecca, and firms have been invited to express interest in and prequalify for construction work on a metro and light rail network in Jeddah. An urban rail network is also planned for Medina, although this project is at a much earlier stage.

These rail schemes require significant volumes of funding, and will test the kingdom’s commitment to infrastructure spending in 2016.

Airport PPP

Perhaps the most interesting upcoming scheme is Taif International airport, which is being developed on a public-private partnership (PPP) basis.

There is a precedent for PPP airport developments in Saudi Arabia. In June, the expansion of Medina airport opened, which was developed by Tibah Airports Development Company, a special-purpose vehicle created for the project when it secured the 25-year airport concession in 2011.

Using the private sector to fulfil infrastructure development commitments will be considered increasingly if oil prices remain depressed during 2016.

The Qatari construction market is more robust as its World Cup 2022 preparations enter a new phase. After three years in which road and metro contract awards dominated, stadiums have been awarded. In July, a joint venture of Italy’s Salini Impregilo, the local Galfar Engineering and Italy’s Cimolai won the $850m contract from the local Aspire Zone to build the Al-Bayt stadium in Al-Khor.

Construction companies submitted bids in May for the Al-Wakrah stadium. It is understood two groups have been shortlisted for that contract. They are: Austria’s Por with the local Midmac Contracting; and the Netherlands’ Bam with the local UrbaCon.

Other stadiums are also to be tendered. Qatar Foundation is preparing to invite bids for the contract to build its 2022 World Cup stadium at Education City. Construction firms have also submitted expressions of interest to the Supreme Committee for Delivery & Legacy for the contract to build the 40,000-seat Al-Rayyan stadium.

The largest new stadium at Lusail is at an earlier stage after the UK’s Foster+Partners was appointed to design the flagship facility in early March of 2015.

Another major project due to be tendered soon is the regional rail network that will link Doha and other centres in Qatar to the GCC rail network at the Saudi border.

Kuwait projects

In Kuwait, the public sector continues to dominate the construction market. The Ministry of Public Works is taking the lead on the majority of the upcoming tender awards.

Building new roads is its main focus. In August, the ministry received bids for road construction contracts totalling more than $1.7bn. Other ministry projects include the Bubiyan port scheme, which is officially known as Mubarak al-Kabeer, and various hospital developments.

Longer term, the burden of project delivery in Kuwait will be shared by the private sector. The government has established a new body, the Kuwait Authority for Partnership Projects (KAPP), to proceed with projects on a PPP basis.

Two of the largest schemes planned are the multibillion national rail road and the metropolitan rapid transit system.

New focus

Oman’s projects market is traditionally dominated by infrastructure schemes.

Over the past five years, the focus has been the expansion of Muscat International airport, the Batinah Expressway and, to a lesser extent, the Oman Convention and Exhibition Centre.

Over the coming years, the focus will shift to rail. The national railway project is the largest upcoming scheme in Oman. With an expected budget of $15bn, there are at least eight segments that make up the planned 2,135-kilometre national railway.

Prospects will ultimately depend on the commitments governments make to capital expenditure

Contractors submitted bids earlier this year for the first segment, which comprises a 127km rail link connecting Sohar and Buraimi. Italian contractors Saipem and Salini are the two frontrunners for that deal. The project client, Oman Rail, is also prequalifying contractors for subsequent packages.

Other upcoming projects include a liquids terminal at Duqm, a new hospital, a cultural centre, road works and a naval base.

Bahrain’s construction market is traditionally the smallest in the GCC. The biggest contract to be awarded there is for the estimated $815m expansion of the international airport. In late October, at least nine groups submitted bids for the project, which is being funded by the Abu Dhabi Fund for Development.

With government clients bearing the brunt of the projects that are planned, the prospects for upcoming schemes will ultimately depend on the commitments governments make to capital expenditure when setting budgets before the end of the year. With few expecting oil prices to rebound soon, progress will be difficult rather than swift.

At $56bn, the value of construction deals awarded in 2015* is down 27 per cent on the $77bn awarded in 2014

*=At the time of publication. Source: MEED Projects


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