Uncertainty delays construction schemes in the Middle East

07 March 2011

Social unrest and changes in leadership will hinder progress on major construction projects planned in the Middle East and North Africa region

The region’s construction industry and real-estate sector is particularly vulnerable to a slowdown in activity as a consequence of the recent unrest. This is the case in Egypt, where a widespread crackdown on corruption is focusing on land deals agreed under the previous government.

Across the wider region, the general increase in insecurity is also set tot delay contract awards and tender announcement, in particular in Tunisia and Bahrain, where projects are already being placed on hold.

The situation could not have come at a worse time for the industry, which has been seeking to diversify into markets such as Libya and Egypt following the Dubai real-estate crash of 2009. In particular, they saw great potential in the Libyan and Egyptian construction sectors, where large populations, underdeveloped infrastructure and massive oil revenues, offered the perfect conditions for a new construction boom.

We still don’t know how long a delay we face now because of the changes in the [housing] ministry

Source close to Bahrain’s social housing project

In 2010, the government in Tripoli announced plans to execute 477 major projects worth a total of $500bn by 2020. This would have made it the biggest construction market in North Africa and the third largest in the Middle East and North Africa, behind Saudi Arabia and the UAE. Under the spending plan, the government pledged to allocate $130bn for infrastructure development in 2010-13.

Libya infrastructure delays

A key focus for development was housing. In 2007, US-based Aecom was appointed to manage Tripoli’s Housing and Infrastructure Board (HIB) programme, including consulting on a nationwide initiative to modernise every urban centre across the country. Under the HIB programme, Libya planned to develop 26 large-scale housing projects, providing an estimated 115,000 units to house about 625,000 people.

But since anti-governments protests begin in mid-February, Aecom, like the majority of international companies operating in the country, has evacuated all its expatriate workers from Libya.

In addition to large-scale housing and energy initiatives, the state’s other planned investments include a $22bn rail and port project, $5bn-worth of industrial developments and a multibillion-dollar modernisation of Tripoli’s existing transportation network. Libya currently has three major airport expansion projects, worth a combined $2.5bn, under way in Sebha, Tripoli and Benghazi. The turmoil has caused work to stop on all three schemes.

A lot of people are holding back at the moment to see what happens over the next few months

Bahrain-based consultant

As part of plans to improve road links around the country, Italian contractor Saipem was in February awarded an $800m contract to build a highway between Tripoli and Benghazi. But 10 days after signing the deal, the contractor was forced to evacuate its 120 members of staff.

One of Libya’s most ambitious construction projects is also likely to have been affected by the unrest. The $25bn Great Man-Made River, which was first conceived in the 1960s, is being executed in five phases. When complete, the river, which transports water from the southern Libyan desert to urban areas in the north, will provide 5 million cubic metres of water a day for the next two centuries. In November 2010, Canada’s SNC Lavalin was awarded a $450m contract by the local Great Man-Made River Authority to develop the Al-Kufra wellfield. The project is part of the fourth phase of the water supply project.

Construction projects - risk assessment 
 SectorBudgetChance of major delays
Tripoli to Benghazi highwayInfrastructure$800mExtremely high
Zawara, Ragdaleen and Al-Jamail infrastructure projects by the Housing and Infrastructure BoardInfrastructure$392mExtremely high
Tripoli housing project Housing$800mExtremely high
Sebha housing project Housing$300mExtremely high
Swani Hospital projectHealthcare$204mExtremely high
Nile Corniche DevelopmentReal Estate$1bnHigh
Park Avenue at Cairo Alex Desert RoadReal Estate$300mHigh
Rod el-Farag highwayInfrastructure$1bnHigh
Alexandria HospitalHealthcare$118mHigh
New Housing SchemeReal Estate$500mHigh
Jeyoun villasReal Estate$70mMedium
Amwaj Islands phase IReal Estate$50mMedium
Source: MEED

At the beginning of 2011, just weeks before the demonstrations started, John Paolin, vice-president of marketing and corporate communications at US-based Hill International, told MEED: “Libya is booming just now. The whole North Africa area is booming.”

However, with the protests looking likely to develop into a civil war and international sanctions once again imposed on the North African state, it will be a while before activity resumes in Libya’s projects market. Much of the $500bn spending plan laid out for the coming decade is also likely to go unrealised.

Egypt infrastructure setback

As in Libya, the uprising in Egypt came just as the state was preparing to make sizeable and long-overdue investment in the country’s infrastructure. Concrete plans had been drawn up to develop education, healthcare, utilities and transport projects. New legislation was being put in place to facilitate private-public partnerships (PPPs) to enable the country to benefit from international expertise and external funding.

Although the violence in Egypt has now abated, these plans face significant disruption. The mass demonstrations and lack of security caused construction projects to grind to a halt. Work has ceased on the majority of government-backed schemes and it is uncertain when these will resume, as it could be up to six months before a new government is elected.

Egypt has about $15bn-worth of PPP schemes in the pipeline and several were already being tendered. The body managing them, the PPP Central Unit, has said it wants to delay the bidding schedule for up to five projects and devise a new strategy for a further 38 schemes.

The five projects immediately affected are the Rod el-Farag highway (bids for which were due to be submitted in May); two hospital projects in Alexandria (for which the bid deadline was March); the Abu Rawash and the 6 October wastewater schemes; and the Dariut power project.

Private sector real-estate projects also stalled when the protests began in late January. Work initially stopped as looting threatened the safety of construction workers and their equipment. But developers are saying work has yet to restart on many sites because the interim leadership is investigating land deals signed by the former regime with private investors.

Corruption investigations in Egypt

In perhaps a sign of things to come, a judicial panel in Cairo concluded on 1 March that land had been unlawfully sold to local developer Palm Hills Development as the purchase price was below the true market value.

Despite the promise offered by the Arab world’s most populous country, the expected construction boom in Egypt could be a long time coming. Developers fear the possible election of a socialist-leaning government and a subsequent rise in nationalism could prevent many of the privately funded projects planned for the country being implemented.

The region’s smallest projects market, Bahrain, which has been the scene of a violent crackdown by government forces, has also been impacted. Although the ruling monarchy has not been overthrown, projects in the planning and construction stage have stalled due to the uncertain political environment.

“The difference in the market at the moment is really apprehension,” says a consultant based in Bahrain. “People that were about to start projects are just putting the brakes on at the moment to see what happens. There has certainly been a slowdown in new starts and a lot of people are holding back at the moment to see what happens over the next few months.”

Key government projects are facing delays, including the social housing programme, which aims to build 20,000 units over the next few years. The programme is the first PPP social housing scheme to be procured in the region. Contracts for the construction of 5,000 housing units were tendered last year, before the protests began. MEED reported in March that a preferred bidder for the first phase of the scheme had been selected, and that the consortium had started negotiations with the Housing Ministry about moving forward with the development of the project.

But towards the end of February, as part of a cabinet reshuffle designed to appease protesters, Bahrain’s King Hamad bin Isa al-Khalifa replaced Housing Minister Sheikh Ebrahim bin Khalifa with former Labour Minister Majeed bin Mohsen al-Alawi.

“We still don’t know how long a delay we face now because of the changes in the ministry,” says a source involved with the project. “So far, they have not communicated with us.”

Several other projects in Bahrain could also be affected by the reshuffle, which included creating a new energy ministry, combining the oil and gas ministry and the Electricity and Water Authority (Ewa). Ewa is currently working on two wastewater projects at Muharraq and Tubli.

Sources close to the Muharraq project say it is continuing to progress towards financial close and has not been affected by the changes at Ewa. As the Tubli scheme is at a much earlier stage, the sources say it is unclear whether it will be affected by the ministerial changes.

Elsewhere in the Gulf, a cabinet reshuffle in Oman on 26 February failed to prevent small-scale protests spreading from the capital city Muscat to Sohar and Salalah. On 27 February, up to six people were killed in clashes between demonstrators and security forces.

With no signs of an uprising big enough to unseat ruler Sultan Qaboos bin al-Saeed, Oman is unlikely to see regime change in the near future. But the unrest has had a minor impact on the country’s construction market. Italian contractor Saipem has withdrawn all its expatriate staff with families from Sohar. No disruption to projects has been reported, however.

Immune construction markets in the Gulf

The major construction markets of Abu Dhabi and Qatar have so far been immune to the protests sweeping across the region.

Despite being run by hardline ruling families, the high levels of subsidies directed towards local people mean the countries lack the socio-economic conditions that have triggered uprisings in other parts of the region. Both states are continuing to tender and award substantial contracts and contractors will increasingly focus their attention on these stable markets. Abu Dhabi is implementing its 2030 vision and Qatar is starting to build the infrastructure needed to host the football World Cup in 2022.

With the recent announcement of a five-year $385bn state-funded development plan, Saudi Arabia - the region’s biggest projects market - also offers clear opportunities for construction firms. But anti-government demonstrations planned for 11 March mean the kingdom’s positive outlook is far from assured.

After several lean years brought about by the economic recession, the region’s contractors face more difficulties in the months ahead. In the long term, the protests may lead to greater investment in infrastructure and a more active private sector. But uncertainty in the short term could leave some without work and cause competition for contracts to intensify further.

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