GCC projects in numbers

15-20per cent: Shortfall in construction contracts awarded in the GCC this year, compared to 2009

$43bn: Total value of contracts awarded so far this year in Saudi Arabia

$26bn: Year-to-date project spend in Abu Dhabi

Source: MEED Projects

At the beginning of 2010, the regional contracting community could have been forgiven for entering the new decade cautiously optimistic. After a year when the global economy faced the worst recession in more than half a century, the regional projects market appeared to have weathered the storm remarkably well. Indeed, the total value of contracts awarded in 2009 exceeded that recorded during the previous three years. With the oil price remaining above $75 a barrel and a large pipeline of projects still to come, the hope was that 2010 would be just as fruitful.

Contracts dwindle in the Gulf

However, as of late-November, 2010 has not lived up to expectations and initial forecasts. Just under $118bn-worth of contracts have been awarded in the GCC in the year to date – some $40bn less than the $159bn awarded in 2009, according to regional projects tracker MEED Projects.

Kuwait has almost doubled its capital project investment as it [pushes] ahead with its $100bn five-year plan

Even accounting for the fact that many contracts are due to be awarded in the final month of the year – 2009 saw more than $25bn-worth of contract awards in December – the final figure looks set to be about 15-20 per cent lower than that recorded last year.

At first glance, a fall in contracting activity in 2010 would appear to be out of step with the recovery in the region’s economies. Throughout the year, the Gulf region has steadily posted improved economic figures as it emerges from the impact of the world recession. At the same time, each of the six GCC states budgeted for $35bn more capital spending this year compared with 2009, while the average oil price for the year was some $15 a barrel higher.

GCC contract awards
($m)
2009 159,747
2010 107,894
Source: MEED Projects

So if spending is up, the oil price is still high and the economies are improving, why is there set to be a fall in contract awards in 2010? And will this be a trend that continues into 2011 and beyond, indicating a slowing down or even an end to the region’s five-year capital projects investment boom?

To answer these questions, it is necessary to look more closely at the data, both for the contracts that have been awarded, and those due to be let over the coming two to three years. One of the first things to recognise is that the 2009 figure includes the $20bn contract to build the region’s first nuclear power plant in the UAE. If that one-off deal is taken away, then the 2009 figure would be slightly lower than the $141bn-worth of contracts awarded in 2008. It would also make the ultimate 2010 total contract value much more in sync with the trend over the past three years.

Total value of GCC contracts awarded, 2005-10 ($m)
2005 107,573
2006 154,170
2007 151,329
2008 141,935
2009 159,747
2010* 117,894
Source: MEED Projects

It is also not just a straight case of reduced capital spending. Taking the GCC as a whole, investments in the industrial, metal, gas production, petrochemicals, power and water sectors were all stable or actually up on the previous year. It is only really in construction – 15 per cent down on the previous years – and in infrastructure – 38 per cent lower – that there was a marked decrease in contract awards. Thus, for the projects market community in a number of sectors, business has been in line with the historical trend over the past half decade.

This is not surprising given the drivers underpinning the utilities and industrial sectors. Whereas real-estate and associated infrastructure spending over the past five years has been a function of speculation, especially in Dubai, other sectors are based on long-term supply and demand trends driven primarily by indigenous population growth and government efforts to diversify the economy.

The other notable aspect is the divergences between countries. Saudi Arabia has been the most surprising factor in 2010 to date. The region’s largest economy was expected to build on the $57bn-worth of contracts it awarded in 2009 and overtake the UAE as the biggest projects market in the region. In the event, only the latter has occurred, at least so far in 2010. The total value of contracts awarded year-to-date is $43bn, slightly higher than the UAE total but still far lower than the previous year.

GCC state spending

Admittedly, Riyadh is expected to award up to $10bn of contracts in the final month of the year and a large amount of its capital spending is on smaller-scale contracts in the $10-50m range, but nonetheless it has still failed to pick up on its 2009 total. Meanwhile, the water and power sectors have seen an uptake in contract spending during 2010 as the kingdom strives to keep up with surging utility demand, but this has been negated by a nearly 50 per cent fall in real-estate spending.

The steep fall in contract spending in the UAE is less of a surprise given the continuing fall-out from the collapse of the Dubai real-estate sector and the financial constraints placed on the emirate. Project spending in the city has been just $11bn so far in 2010 – the same level as in 2009 and far below the $46bn peak reached in 2008.

Market analysis of Gulf state spending

The most interesting aspect has been the decline in contract awards in Abu Dhabi. The UAE’s largest emirate, and its most wealthy, was expected to offset the collapse of the Dubai projects market as it geared up its own capital investment programme in line with its 2030 Vision. In the five years to 2009, it had gradually increased its project spending, hitting a total of $65bn last year ($45bn excluding the nuclear deal), which was greater than Dubai at its peak.

But spending in 2010 has so far hit just $26bn – a considerable fall on the 2009 figures and equivalent to the 2007 total. A closer examination of the data reveals that the decrease in contract awards is primarily due to considerably lower spending in the oil and gas sector. In 2009, Abu Dhabi pushed ahead with a number of hydrocarbons megaprojects, including the integrated gas development and new Ruwais refinery, whereas this year has not seen nearly so much investment in the sector. On the other hand, real-estate spending is practically the same as the previous year, bucking the regional trend.

While Saudi Arabia and the UAE have so far failed to live up to their projects potential in 2010, the smaller projects markets of Oman, Qatar and Kuwait increased the value of awarded contracts. Kuwait, in particular, has almost doubled its capital project investment as it seeks to push ahead with its $100bn five-year plan. After failing to live up to its potential over the past five years, the oil-rich state is finally looking like it will be a major projects market in the near future.

Perhaps the most important factor to consider in evaluating the projects market performance in 2010 and beyond is that, unlike 2008-2009, when more than $500bn-worth of projects in the region were put on hold or cancelled, the principal reason for the slowdown in project spending has been delays in awarding contracts. With a couple of notable exceptions, such as Mubadala’s football stadium, the Qatar-Bahrain causeway and the Tawam Hospital, the vast majority of major contracts due to be awarded in 2010 are still active. Rather than being awarded this year, the likelihood is that they will instead be awarded in the first half of 2011. Naturally, this bodes well for the medium-term future of the regional projects market and should ensure that, at the very least, it maintains 2005 and 2006 spending levels over the next five years.

It is true that there is a fair amount of hesitancy in the market on the client side, especially around the demand for real estate. The construction sector is beset both by the lack of purchases of off-plan or completed property and by the uncertainty of long-term population trends. This has acted as a stumbling block to awards on many projects in the infrastructure and real-estate sectors. In other instances, bureaucratic issues, such as in Kuwait and Saudi Arabia, have played a role in delaying schemes.

But the fact that most clients remain committed to their schemes should be encouragement enough for the projects market community to face 2011 with confidence, despite the challenges posed by 2010. With so many schemes due to have been awarded in 2010 now set to be contracted in the early months of 2011, there will be many who are quietly optimistic that activity can return to 2009 levels.

A comprehensive analysis of the regional projects market will be the subject of the second of a series of half-yearly reports by MEED Insight, the research and analysis arm of the MEED group. On the back of its best-selling GCC Projects Forecast & Review 2010, the 2011 version will be available in the first quarter of 2011. For more information on the report, email insight@meed.com