GCC construction outlook to improve with oil prices recovery and implementation of reforms
Dubai - Despite spending cuts and a 33% decline in project contract awards in 2016, the construction market in Gulf Cooperation Council (GCC) countries is expected to improve in 2017, Middle East business intelligence service MEED stated.
A MEED report, “Outlook for GCC Construction 2017,” noted that the region offers significant opportunities for construction companies despite the slowdown in project spending. The recovery in oil prices and the implementation of reforms indicate that things will improve this year.
The report warned, however, that fewer opportunities, less certainty about project timelines and increased competition could cause the construction market to harden.
It said the region’s strongest markets over the past 12 months were Dubai, Kuwait and Bahrain. The latter saw its second-best year for awards since 2007, thanks to the financial support of its GCC partners through the Gulf Development Fund.
The approval of a major contract award to expand Kuwait’s airport took the country’s market to an all-time high in 2016, when it registered $12.2 billion in project contract awards. The United Arab Emirates registered an increase in awards in 2016, thanks to work leading up to Expo 2020 in Dubai.
Projects in Dubai accounted for 72% of all construction and transport deals in the country. Project spending fell sharply in Abu Dhabi.
Elsewhere in the region, the fall in oil prices since mid-2014 has had a profoundly negative effect on markets. With government revenues halved, ministries and other client bodies imposed strict limitations on capital spending. The most affected countries as seen from contract awards were Saudi Arabia, Qatar and Oman.
Richard Thompson, editorial director of MEED, said the partial recovery of oil prices eased some financial pressure on governments but was not expected to trigger a significant pick-up in construction activity in 2017.
“I expect to see a strong pick-up in GCC construction activity in 2018 as governments increase spending to stimulate growth and as we begin to see some of the privatisation and public private partnership (PPP) initiatives taking hold,” Thompson said.
He said that all Gulf countries are considering PPP to finance major projects and government services but each was at a different stage of readiness to implement the model.
“I am looking at Saudi Arabia for the biggest rise in PPP opportunities. It is by far the biggest market with the biggest needs but, through its Vision 2030 programme, Riyadh has made a huge public commitment to delivering privatisation and PPP in the kingdom. It has been very aggressive in setting up new structures to deliver these reforms,” Thompson said.
“As ever, Dubai will be very bold in using new financing mechanisms and I think Bahrain and Kuwait will also see progress in housing and utilities through PPP projects.”
Thompson contended that Riyadh wants to manage spending carefully to ensure that it is getting value for money from its investments. “By establishing a National Programme Management Office (NPMO) it set up the frameworks and systems across the entire Saudi government to plan, manage and deliver major projects. It is a mammoth task to roll out such wide-ranging civil service reform that could take three years to set up,” he said.
“Riyadh has a tricky juggling act to perform to allow some projects to proceed in advance of the reforms being completed and holding back projects to wait for the new systems to be in place.”
The construction market in 2016- 17 was not as satisfactory as the industry players had expected it to be. Several construction companies, including big ones, experienced a tough time due to increased competition.
However, the China State Construction Engineering Corporation (CSCEC), LLC Middle East, a multinational active in the region, was among those not badly affected, having been awarded five building projects and one infrastructure project totalling $1.2 billion in value.
CSCEC President Yu Tao said that, while tight budgets and depressed market conditions due to low oil prices were among challenges facing the sector, prospects were good.
“We believe that the coming Expo 2020 and expanding tourism can bring more opportunities to construction, including residential, hospitality, retail, health care, offices, infrastructure facilities, etc,” he said.
CSCEC Middle East has completed several projects for clients on schedule this year, including Viceroy Palm Jumeirah Dubai, Al Amal Psychiatric Hospital, Dubai Water Canal and Dubai Park Flyover, Tao said.