Uprisings in the Middle East provide projects windfall

07 June 2011

Government spending on social infrastructure set to revitalise projects market

The past three years have been hard for the region’s contractors. Having endured the collapse in 2009 of Dubai’s real-estate sector and the subsequent scramble to find new markets, the outbreak of civil unrest in across the Middle East and North Africa region this year has created a new round of challenges.

Even in countries worst affected by the political upheaval, there is room for hope

Already facing increased competition and falling margins, many contractors must have felt the protests were the last straw as they were forced to evacuate personnel from projects in places such as Libya, Bahrain, Egypt and Syria, leaving behind expensive equipment and materials.

“We had to leave everything behind,” says the chief executive officer of a major Turkish contractor working on several projects in Libya. “Thankfully, we got everyone out. But we are still going to face a revenue blow from the loss of the work.”

Projects stimulus in the Middle East

But while the uprisings caused major disruption to projects under way today, they are set to give the sector a much-needed boost in the coming months and years. 

Concern about the spread of the protests has stimulated increased and more rapid state spending as governments race to head off discontent by investing in social infrastructure projects in order to address to the frustrations of their people. Combined with developments, such as the award of the 2022 Fifa World Cup to Qatar and improved political stability and security in Iraq, there is reason for contractors to be cautiously optimistic about their prospects, at least in the medium to long term.

In Saudi Arabia, the region’s biggest projects market, Riyadh has announced a series of eye catching extra-budgetary spending commitments that are little-disguised attempts to address long-standing social issues. Chief among them is a $67bn plan to build 500,000 housing units for local nationals, coupled with initiatives to make it easier for them to obtain mortgages.

Riyadh has not been alone in reacting. In the face of protests in Oman and Bahrain, their four GCC neighbours created a $20bn fund for them to tap into to help finance various social infrastructure schemes. In Algeria, where long-simmering discontent has been rising, the cabinet in early May unveiled a 25 per cent increase in public spending. Even in the trouble-free UAE, the authorities allocated $1.8bn for an infrastructure stimulus programme for the poorer northern emirates.   

Not all the announced spending plans will result in direct spending on construction. Salary increases, land acquisition, and bureaucratic expenditure will account for undefined portion of the increased spending. But the figures are indicative of the pressures governments are facing.

Less tangible is the impact the political unrest will have on project delivery rates. But there can be little doubt that government departments will be urged to approve projects and budget allocations at a faster pace than before.

Demographic growth means that getting projects built quickly is a priority for the region’s governments.

Pressing needs

The total population of the Middle East is expected to more than double to reach 650 million individuals by the middle of the century. Saudi Arabia and Yemen are expected to grow almost fourfold by 2050, from 30 million to 91 million, and from 25 million to 71 million, respectively. Egypt and Iran are predicted to have populations of more than 100 million in 2050.

If governments are to avoid repeats of this year’s Arab uprisings, they must address the urgent need to create jobs, build schools, universities, hospitals and houses, and install an adequate transport infrastructure.

The region’s oil exporters are well placed to fund increases in spending. The surge in oil prices since the protests began has boosted crude export revenues, enabling governments to increase public spending.

The US’ Energy Information Administration is currently forecasting that world energy consumption will jump to 739 quadrillion BTU by 2035, from 495 quadrillion BTU in 2007, indicating that demand, and by implication prices, for oil and gas will continue to rise.

Unlike the Dubai-driven projects boom of 2005-08, which was underpinned primarily by off-plan real estate speculation, future projects activity in the region will be driven by necessity. This in itself will ensure that the pipeline of schemes over the coming years will be inherently more stable than the previous boom, enabling all firms involved in the projects supply chain to plan with a higher degree of certainty than in the past.

Across the board, state budget expenditure is forecast to increase substantially. The Washington-headquartered IMF predicts that annual public spending for the six GCC states will hit $564bn in 2016, up from $374bn in 2010. For the other major economies in the region, the figure will rise to $572bn, from $337bn today. Again not all of this will be directed towards project expenditure, but it is nonetheless an indicator of the direction in which the market is likely to move.

Even in countries worst affected by the political upheaval, there is room for hope. Much of Libya’s downstream oil infrastructure has been destroyed and will likely need rehabilitation running to billions of dollars, when peace eventually returns.

In Egypt, any new government will be keen to attract foreign investment and improve infrastructure for a newly empowered, but poor, electorate. It may take time, as seen in Iraq, but it does offer the hope of new markets opening up in the not too distant future.

Iraq is fast becoming one of the major projects markets in the region. After averaging less than $5bn-worth of contracts a year in 2005-09, it awarded more than $26bn-worth of contracts last year. Given the huge amount of infrastructure work required, combined with increased revenues as a result of rising oil production, this figure is likely to grow.

Qatar is in a similar position. Having been awarded the World Cup, it now faces a race against time to ensure the required infrastructure, including stadiums, hotels, and transportation networks, are in place for the event. While many of the projects were already planned prior to the World Cup award in December 2010, the event has added impetus and certainty to them.

Despite shrinking since 2008, there is cause for optimism for the projects market as a whole. MEED Insight, the research division of MEED, forecasts in its latest report – The Middle East Projects Forecast & Review 2011 – $130bn-140bn of contract awards will be made in the GCC in 2011 and $65bn-70bn in the wider Middle East, reflecting the short-term challenges created by the current unrest.

However, the pipeline of projects, combined with the market drivers, should ensure a stronger 2012, with GCC contracts reaching $150bn and those in the wider region hitting $85bn. Longer term, these could well grow further, particularly outside the Arabian peninsula, where there is greater scope for growth.

Competition looms for firms wanting to work on World Cup projects

That is not to say it will necessarily get easier for contractors. Competition has substantially increased since 2005, with many new contractors having entered the market. For example, a recent road tender in Qatar attracted 42 bids as companies seek to gain a foothold for the World Cup market. There may be additional opportunities in future, but competition will be fierce and profit margins likely lower.

At the same time, it should be recognised that future growth markets may not be ones that are easily accessible. The vast majority of contracts in Saudi Arabia and Kuwait, two of the best growth states, are won by local contractors – in most cases because they are the only ones invited to bid. Local contractors in Qatar will be keen to ensure the government allocates a portion of work to them, and carrying out work in Iraq will continue to be fraught with security and logistical risks.

It may be difficult today for many contractors to see the light at the end of the tunnel. But those that remain committed to market may find themselves reaping the reward in the years to come. 

MEED Insight’s latest report, The Middle East Projects Forecast & Review 2011, is out now. For more information click here.

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