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Shelter from the global storm

Financial collapse in Dubai has grabbed all the recent headlines in the Middle East but elsewhere across the region construction workload continues to boom as focus shifts from glamorous property development to vital infrastructure. Antony Oliver reports.

The last couple of years have been, without question, a tricky time for most firms and individuals working in the Middle East. For many it remains so.

The catastrophic property collapse in Dubai left clients with eye-wateringly large, multi-billion dollar debts, unfinished buildings and unfinishable projects. Meanwhile the construction supply chain of contractors, designers and suppliers is still facing a raft of unpaid bills and potential multi-million dollar losses.

But, as delegates heard at last month’s Arabian World Construction Summit (AWCS), in Abu Dhabi hosted by NCE sister magazine MEED, the Gulf region as a whole is very far from depressed as investment in vital infrastructure continues.

“We are now living in a more realistic world,” said chief executive of contractor Besix Group, Johan Beerlandt.
“It is nice to return to a world of turning dreams into reality rather than creating nightmares. We are now back on track for a new growth path.”

Abu Dhabi-based contractor Al Jaber Group, chief operating officer, Fatima Obaid Al Jaber, agreed. “We have managed to stay at the same level as 2008,” she said. “It is stable at the moment. There have been a lot of tenders and we are just waiting on decisions from government.”

Over the last decade there has been a period of unprecedented growth across Dubai, Abu Dhabi, Qatar, Kuwait, Bahrain and Oman which together comprise the Gulf Cooperation Council
(GCC) states.

According to MEED Projects, some $720bn (£490bn) was spent on capital projects between 2000 and 2008 in Saudi Arabia and the GCC.

And while United Arab Emirates (UAE) which includes Abu Dhabi and Dubai was a clear hotspot, activity in Qatar and Saudi Arabia has been building since 2005 with development driven largely by real estate investment and speculation.

This property boom was kickstarted by Dubai’s decision in 2002 to let non-GCC nationals buy property, a strategy which has been followed to a lesser extent by other states.

In parallel, we also saw investment in the transport, energy and water networks required to serve a growing population, although the traffic, power supply and water distribution difficulties experienced particularly in Dubai indicate that this remained well behind the levels needed.

Then came the crash. While there was fall-out from the global economic downturn across the GCC, the major casualty was Dubai and its over-heated, hugely speculative property market. Hindsight is a wonderful thing of course, but for many it was only a matter of time before the collapse struck.

Outside Dubai, high oil prices continue to drive GCC major project activity. Nation building continues and so requires these undeveloped regions to build the infrastructure to sustain the anticipated continued population growth over the next decade.

While the value of projects on the go or in planning across the GCC has fallen from around £1.8 trillion in March 2009 it is still worth a staggering £1.3 trillion. Speakers at the AWCS explained that the GCC region has felt little of the global downturn’s impact.

“Spending on strategic sectors remains relatively stable or has even increased”

Ed James

“[Outside UAE] it is largely business as normal,” explained MEED head of Insight Ed James. “Spending on strategic sectors remains relatively stable or has even increased and in power and water we are seeing an upward trend - if you are a contractor in these sectors you will have seen relatively good times.”

And continued population growth, high oil prices and increased demand for vital utilities means that there really is no indication that spending is going to fall.

While spending on real estate continues across the region, there is also huge growth in investment in utilities such as power, water and transport.

In the UAE, Abu Dhabi is now the key market. It has cancelled £33bn worth of projects, but this is relatively small compared to the £200bn of work cancelled in Dubai.

Headline projects in Abu Dhabi include the £27.2bn Capital District project, the £25.1bn Yas Island development, the £4.8bn metro project, the £4.6bn airport midfield development and the £1.8bn Mafraq to Ghuweifat public private partnership highway project. It has also just signed a £13.5bn deal with a Korean contractor to construct four nuclear power stations so it can solve its impending power crisis and move away from fossil fuel reliance.

“We are witnessing increasingly fierce competition as companies try to get a foothold in Abu Dhabi”

Riad Kamal

Meanwhile contractors are exiting Dubai and heading for more fertile ground.

“We are witnessing increasingly fierce competition as companies try to get a foothold in Abu Dhabi,” said Arabtec chairman Riad Kamal. “We cannot afford to just take on work for the sake of continuity. There has to be a concerted effort [by clients] to say ‘enough is enough’.”

Al Habtoor Leighton Group chief executive Laurie Voyer agreed. “There are too many contracts and they are very competitively bid,” he said. “I agree that the way forward is a challenge but we remain bullish. Diversity is clearly the way forward - 2010 will be better year than 2009 but our challenge will be to establish ourselves outside the UAE
This need to look across the whole GCC region and beyond to the rest of the Gulf is shared by other contractors.

Although the number of projects coming up is big, it is not enough so we are looking outside the GCC,” contractor CCC’s executive vice president, operations Samer Khoury told AWCS delegates.

Al Jaber’s Obaid agreed: “There has been concentration in one small area - the key now is to think regionally.
“It is a challenge and people need to look at the risks.”

In terms of projects in the pipeline, Saudi Arabia is the new leader with some £299bn announced compared to £272.6bn in UAE. Kuwait has another with £170bn slated for construction.

The difference is that compared to UAE and Kuwait, the Saudi market is set for continued growth with particular emphasis on building infrastructure and social housing.

Ali Kolaghassi, vice president of contracting giant Saudi Oger highlighted the scale of the plans in place in the Kingdom. These cover the rail, power generation, water, oil and gas sectors. He pointed out that the traditionally closed market would have to open up to foreign contractors.”We are working with many companies and we are looking for partners because demand is increasing and I don’t think that we can do it without help [from the international engineering community],” said Kolaghassi.

”We are working with many companies and we are looking for partners because demand is increasing”

Ali Kolaghassi

But he accepted that “just because there are opportunities doesn’t mean that it will be easy. It is always difficult for someone to come into a new market. The door is open to partnerships but it is also very import to know who you partner is.”

Like Saudi, Kuwait offers major opportunities for construction growth. It will see five times the construction activity in the next five years compared to the last. Government spending is also set to increase by 33% on last year to £38bn. This compares to public spending increases in Saudi of 14% to £98bn and in Qatar 25% to £22bn, driven largely by the high oil price.

And provided the oil price stays above $50 a barrel there is every chance that this rate of spending will continue.
Of course the Middle East extends beyond the GCC and other markets stand out as potential new markets for
international firms.Iran has projects worth £231bn, Algeria projects worth £101bn, Egypt has another £136bn or work, Libya £96bn and Yemen £105bn. All of this, given the right local partnerships and relationships, presents significant future opportunities.

Iraq is also now increasingly being seen as a realistic source of contracts for international firms with some £197bn of reconstruction work planned. Across the region the high oil price has permitted ambitious and expanding capital investment programmes. But it is significant that we see a significant shift in focus towards investment in infrastructure, transportation, utilities and hydrocarbons over the next 10 years.

But gone are the days of money being no object. The market now is less geared towards constructing fast to maximise early rental income and far more towards quality products, efficient design and construction and optimised operation and maintenance cost.

Structural specialist Tony Gee & Partners’ regional manger Malcolm Peak says this focus by clients on routinely seeking better solutions is now a real driving force for his business.

“I think that there are more and more clients asking for value engineering on projects and being aware of the need for it,” he said. “Before, there wasn’t really the time to worry to much about such issues.”

Clients are also looking for more innovative procurement methods and the use of private finance is growing across the region via vehicles such as design build, finance, operate and public private partnerships. One major example of this is the soon-to-be-let £1.8bn Mafraq to Ghuweifat highway in Abu-Dhabi which Mott MacDonald is advising on.
“PPP is going to increase but it has to get better and more efficient,” said CH2M Hill managing director and senior vice president Omur Akay.

“It is a good solution but it is still very slow now as we have to build the institutional structure around it.”

Whatever the procurement and funding arrangement it is clear that the whole region presents significant opportunities to any international firm capable of operating across multiple sectors.

Saudi Arabia

Provided the oil price remains above $50 a barrel Saudi is forecast to award contracts worth $430bn between 2010 and 2015.

In particular there will be steady growth in the power sector with some 3000MW of new power capacity required every year for the next 10 years at a cost of some £30bn to £34bn.

With a population growth of 2% to 3% a year, high per capita consumption and 1970s infrastructure being decommissioned, there is a pressing need for replacement and new build to raise the nation’s precarious 9% infrastructure capacity margin to a more comfortable 15%.

There is also huge potential in the rail market with the £1.1bn Haramain High Speed Rail project underway and the £2.3 bn Landbridge project slated.

The Kingdom is also thinking long term and, with a young and fast growing population, the government is moving the economy away from a dependency on oil revenues. Six new cities costing over $100bn will provide much needed homes and jobs for locals.

Elsewhere three major new oil refineries and the world’s largest crude increment plant are also underway plus ambitious plans to build wastewater facilities in every major city.

On top of this is the need to boost water supplies with the construction of new desalination capacity to boost current output from 4bn litres a day to 7.2bn litres a day.

However, despite on-going moves to open up the Saudi market to a wider international market it remains a very difficult market for overseas contractors to break into. Only 17% of construction and infrastructure projects were won by foreign contractors last year.

“Since the Dubai real estate collapse, regional contractors have all been targeting Saudi Arabia, but the reality is that it is hard to compete against local firms,” explained MEED James. “Contractors who want to win work in Saudi Arabia will have to team up with a local partner or look for subcontracting work.”

Kuwait

Kuwait is described as “a sleeping giant” due to the historic slow pace of development compared to the amount of potential and wealth available.

However, development is now poised to get going with a five-year £68bn investment programme in place.

Major schemes include the £2bn Subiya Causeway, the £1.3bn airport expansionprogramme, the £2bn Kuwait University Campus, the £2bn development of Failaka, the new £2bn Bubiyan Port and the £8.1bn Al Zour oil refinery.

Like Saudi Arabia, Kuwait remains a very difficult market for international contractors and consultants to break into. Non-local contractors can only bid for the largest projects. However the scale of the planned activities across Kuwait means that there are still opportunities.

Iraq

After decades of war and international sanctions Iraq is set to become a hotbed of contracting activity over next five years.

Despite an average of more than 30 terrorist incidents a day the region is now seen as a less hostile environment than before and is rapidly becoming a realistic market for international consultants and contractors.

Certainly there is no shortage of work across all sectors, and on a truly massive scale. Rebuilding the electricity generation an distribution network, will require £18.3bn by 2016 including £6.8bn to add 10GW to generating capacity over the next five years.

Multiply this rate of expenditure across sectors such as transport, railways, petro-chem icals, water supply, sanitation, housing and education and you quickly see a market worth way in excess of the currently slated investment of £197.2bn.

Key to delivery will be finance from oil revenues. Permits to develop 10 major oilfields were ecently awarded permits to International Oil Companies. These projects will soon elevated Iraq to become a major oil producer with Baghdad producing more than 6M barrels a day. Oil revenues will fund reconstruction and development and provide the income to secure the country’s long term future

But local contracting capacity is limited so international expertise is required. Parsons Brinkerhoff country manager and program director for Iraq Jeff Larkin says “the scope and scale of this effort is enormous”.
“It is possible to operate safely in Iraq provided you take the necessary measures,” he said. “Security remains an issue, as do the commercial and financial environments.

“But (there are) many opportunities for those willing and able to operate effectively in this environment.”

Overall, the feeling is that, while Iraq remains embryonic in terms of its potential for international firms.
It will inevitably soon become a key market in the Middle East for the simple reason that there is money being spent and too much competition in most other countries.

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