OPPORTUNITIES AND CHALLENGES IN GCC CONSTRUCTION.
After two deacdes of expansion, the GCC construction industry is at a turning point in its development and many companies are becoming concerned about where the next opportunities will come from.
With $63.4bn worth of construction and transport project contracts awarded in the GCC in 2018, the civil engineering and building sectors accounted for 61 per cent of project spending in the region in 2018. Despite this, 2018 was the worst year since 2012 for GCC construction. Awards were 8.4 per cent down on 2017. And far below the $111.8bn of awards in 2014, the best year on record.
Cutbacks in capital spending by government and private project sponsors have seen a collapse in contract awards since 2014. The lack of new project opportunities has forced contractors to lower tender bid prices to win work eroding profit margins. At the same time, fiscal tightening by governments has led to lengthening delays in contract payments. Together, the lack of new opportunities, reduced margins and payment delays are causing severe cash flow difficulties for contractors and their suppliers.
One consequence has been a severe contraction in the GCC construction industry, with companies downsizing and restructuring their operations in the region. Some international players have chosen to leave the region and there has been a loss of skills. There also has been a rise in corporate failures.
Over this period, Dubai has been the primary driver of construction activity in the Gulf. Boosted by infrastructure spending in advance of Expo 2020, Dubai’s property market surged forward. The emirate has accounted for almost 26 per cent of all construction spending in the GCC since 2014. But faced with an oversupply in the property market, momentum in Dubai’s construction cycle has slowed. The value of contract awards has fallen at the same time as the value of projects being completed is rising.
There is a huge pipeline of future construction and transport projects planned in the GCC, with Saudi Arabia in particular offering major long-term opportunities. But many things are changing and construction companies must think more strategically about their next moves. We are seeing the emergence of major new construction clients such as Saudi Arabia’s Public Investment Fund. And also new forms of project procurement and finance such as Public Private Partnerships.
The main focus now is Saudi Arabia, which has huge infrastructure development plans. But Riyadh’s aim of delivering these plans through the private sector is only beginning to build momentum. In the short term, many of the best prospects lie in the oil and gas sector, where investment in downstream projects is accelerating, or in the power and water sector, where private finance is more forthcoming.
The catalyst for change has been the pickup in oil prices since the middle of 2017. This is boosted further by the announcement of new megaprojects, particularly in Saudi Arabia as part of its Vision 2030 economic restricting programme, but also in Abu Dhabi and Dubai.