Optimism from GCC construction firms slips in 2015

The drop in positivity may partly be explained by ongoing geopolitical concerns and the fall in oil prices

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A snapshot of opinion from the GCC’s construction sector – the majority of which are involved in larger projects with a value of over $27mln – has indicated that optimism among the construction sector has been tempered over the last year.

Pinsent Masons’ Annual GCC Construction Survey, which was presented to representatives from the industry at the international law firm’s recent Annual Construction and Engineering Law Conference, held in Dubai, suggests that the industry remains overwhelmingly optimistic about 2015 – with 77 percent of respondents stating they were optimistic. However, their optimism has fallen by 13 percent from last year.

The drop in positivity may partly be explained by ongoing geopolitical concerns, the fall in oil prices, a highly competitive market with a softening in the level of increased order books, and the cost of accessible capital. This year’s survey indicated that 33 percent of respondents were expecting an upswing in their order books of 10 percent or more, which compares to over 40 percent last year expecting that level of growth.

The tempering in optimism may also be related to the industry’s more measured view about the positive impact Expo 2020 will have on the sector. Less than 10 percent of respondents thought that the UAE’s Expo project between 2014 and 2016 would provide a dramatic upswing for construction companies. This compares to last year, when 26 percent of firms believed Expo would provide a major boost between 2016 and 2020.

Saudi Arabia (40 percent) followed by the UAE (33 percent) and Qatar (14 percent) are expected to be the strongest performing construction markets in the MENA region next year, according to those surveyed. The expectations for Saudi Arabia are particularly encouraging as they are now starting to align with the industry’s perception around the ease of doing business in the country. 23 percent of the responses stated that Saudi Arabia was the easiest regional market to do business with, which compares to just 10 percent of respondents last year.

The survey indicated that Oman is perceived as the second easiest market to do business with, but the UAE, at 96 percent, is by far the industry’s easiest market work with. Oman also showed a significant increase in expected market opportunities – more than in any other previous survey.

Transport (69 percent) followed by real estate (48 percent) and power (46 percent) were considered to be the strongest sectors in terms of opportunities for the year ahead.

It is clear from the results that stakeholders believe the regional sector needs to do much more to rebalance contracts to a sensible risk profile. Aligned to this, the results raised a very real concern as to the efficient and effective administration of contracts in the sector as compared to other regions of the world.

Commenting on the results, Sachin Kerur, Managing Partner, Gulf Region at Pinsent Masons, said: “These results offer an insight into how the GCC construction market is shaping up for the year ahead. Optimism clearly remains high, but there is a marked cooling compared to last year when Expo fever was at its height.”

“Construction firms have long perceived the opportunity in Saudi Arabia as being the most promising in the region. But, in the past, the challenge of doing business there has meant opportunities haven’t always come to fruition. This situation now seems to be changing, with the ease of doing business starting to improve. This suggests we may see more opportunities converting within The Kingdom in the years ahead, which chimes with the more open sentiment emerging from the Saudi authorities.”

Sixty one percent of responding construction companies said that they had been involved in fewer disputes in 2014. That’s encouraging for businesses. However, we are not surprised to see a real concern around the administration of contracts. The regional sector would do well to acquire a more sensible attitude in promoting risk equilibrium in construction contracts and to take a more collegiate approach in the delivery of major capital assets. This is an issue that has rumbled on for many years and needs an enlightened approach to solve.

“Following last year’s survey results we expected to hear more about public-private partnerships (PPPs) becoming an increasing part of the financing mix. However, PPPs have yet to take off across the board as a primary method to fund major projects in the region. We expect this to change.”

This article was first published in Saudi Gazette on Dec. 9, 2014.

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