The outlook for the Gulf projects market

The Confederation of Danish Industrys Middle East Day, Copenhagen

7 December, 2011
Angus Hindley, MEED Research Director

MEED Insight
MEED Insight is a bespoke research service brought to you by the MEED group (www.meed.com). Providing tailor-made research, data and analysis, MEED Insight draws on our data-rich archives and unique relationships with key business decision-makers across the Middle East.

OUR EXPERTISE

SELECTED REPORTS
GCC WASTEWATER 2009

INDUSTRY & SECTOR SCOPING

MARKET SURVEYS

EVALUATION & FORECASTING

MARKET ENTRY STRATEGY

PROJECT OVERVIEW & COMPETITIVE ANALYSIS

POWER & WATER IN GCC

For information on MEED Insight, please contact angus.hindley@meed.com

Agenda The impact of the Arab spring The drivers for capital investment in infrastructure The opportunities, challenges and procurement trends The recent performance of the Gulf projects market Closing remarks

2011, the year of the Arab spring

Revolution and regime change Political reforms announced Serious civil unrest Minor demonstrations Syria Serious civil unrest Kuwait

Political reforms announced Tunisia

Morocco Libya

Egypt

Jordan

Bahrain Saudi Arabia Oman Revolution and regime change Revolution and regime change Minor demonstrations Yemen

Minor demonstrations
Serious civil unrest

In the GCC, serious political unrest has been confined to, and contained in, Bahrain. In the rest of the Middle East and North Africa, regime change has taken place in three states and civil war in two more

The carrot and stick approach in the Gulf

GCC troops sent into Bahrain in March 2011 to effectively seal the island state, in a move accompanied by a $10bn aid package Massive pay increases announced for government employees across most of the GCC

Major spending programmes announced to remove any potential flashpoints

- Saudi Arabia launches 500,000 unit housing programme and new employment rules to create 1.1 million jobs by 2014

- Oman unveils anti-corruption drive and pledges to create 40,000 jobs a year
- the UAE pledges to improve infrastructure in the northern emirates, which is well below the standards in Abu Dhabi and Dubai

The high oil price has bankrolled higher spending

The oil price, 2010-12
120

115

$ a barrel

Despite downward revisions, oil prices are expected to remain above the GCC breakeven point of $80-85 a barrel

110

105

100

95

90 2010 2011 2012

Source: Deutsche Bank

The economic impact of the Arab spring

Outside the regime change states of Egypt, Tunisia and Libya, economic growth will rise in 2011 due to increased public spending and higher oil prices
GDP growth in selected MENA countries, 2010-12
20 18 16 14 12 % 10 8 6 4 2 0 Egypt Iraq Jordan Kuwait 2010 Oman 2011 Qatar 2012
Source: IMF

Saudi Arabia

Tunisia

UAE

The drivers for increased public expenditure

Population growth in selected MENA states, 2010
12

10

All MENA states have high demographic rates, most notably in Qatar where the population doubled in the five years to 2009

0 Iraq Kuwait Libya Oman Qatar Saudi Arabia UAE

Source: IMF

The need for new capacity

Installed and required power capacity in selected Gulf states, 2010-19
90,000 80,000

In addition to meet increasing demand from expanding populations and economies, there is a growing need to decommission infrastructure which is now at the end of its life having been built in the 1970s and 1980s.

70,000 60,000 MW 50,000 40,000 30,000 20,000 10,000 0 Saudi Arabia Oman Dubai Kuwait Qatar

Installed capacity, 2010

Required total capacity, 2019 Source: MEED Insight

Abu Dhabi

Bahrain

Iraq

The need for new capacity

Planned water and wastewater spending in the GCC, 2010-20
35,000 30,000

Over $60bn will be required in the water and wastewater sectors to meet demand, increase capacity and expand network coverage with about half of the investment accounted for by Saudi Arabia

25,000 $m 20,000 15,000 10,000 5,000 0

Water

Wastewater
Sources: MEED Insight, GWI

The need for new capacity

Planned transportation projects by GCC state ($m)
Aviation Bahrain Kuwait Oman Qatar Saudi Arabia UAE 4,900 3,389 12,604 15,246 Rail 7,900 14,000 2,500 36,875 Roads 1,217 8,159 9,992 7,167 Ports 860 2,660 7,928 11,474 Total 14,877 28,208 33,024 70,762

19,567 8,732

40,656 17,498

4,132 25,831

9,100 3,783

73,455 55,844

Source: MEED Projects

Over $275bn of transportation projects are planned with rail accounting for the largest share of the total at $120bn

The procurement options

New power capacity procured from the private developer market, 2007-11

2011 has been a record year for power capacity contracted from the private developer market, despite only three projects being concluded

Source: MEED Insight

The procurement options

Outside the power and desalination sector, the prospects for private procurement are very mixed

Successful PPP type projects have been few and far between in the last two years with the notable exceptions of the Al-Muharraq STP in Bahrain and Medina airport in Saudi Arabia
Abu Dhabi has effectively abandoned the approach for its social infrastructure programme, as well on flagship transportation projects such as the midfield terminal and Mafraq-Ghuweifat highway Kuwaits Partnerships Technical Bureau (PTB) has over 30 large-scale infrastructure projects planned as PPPs but much will depend on how the AlZour north IWPP proceeds National Water Company (NWC) is revisiting the BOT model for its $30bn capital investment programme, with the aim of tendering its first project in 2013

Issues facing private procurement

Projected budget surpluses in selected GCC states, 2010-11 ($bn)

GCC governments are cash rich, having benefitted from 10years of rising oil prices The global credit crunch, and subsequent Eurozone crisis, has hit the GCC project finance market The perceived high cost of PPPs against conventional procurement The often lengthy time taken to deliver a PPP

35
30 25 20 15 10 5

0
Kuwait Qatar 2010 Oman 2011 Saudi Arabia

Source: MEED Insight

The recent performance of the Gulf projects market

Major contract awards in the Gulf, 2010-11* 2010* Bahrain 2.4 2011* 1.3

Iraq
Kuwait Oman Qatar

8.4
10.1 4.4 10.5

24.2
7.8 4.7 10.9

Saudi Arabia
UAE
* first nine months Source: MEED Projects

35.7
30.1

47.1
16.8

Saudi Arabia has maintained its position as the largest projects market in the MENA region in 2011 while Iraq has seen the biggest growth

The challenges facing the Gulf market

Intense competition for new work, driven by the downturn in the UAE and companies entering the region for the first time

Lower margins and potentially rising subcontractor and equipment costs in selected markets

Slow decision-making in some markets particularly in Abu Dhabi

Increased risk being placed on the shoulders of contractors

Growing pressure to be local, especially in Oman and Saudi Arabia

The opportunities on offer in the Gulf

Planned and unawarded projects in the Gulf, November 2011 ($bn)
300 250

An estimated $1.1tn of project work is at the planning, design or tendering stage in the Gulf

200
$bn 150

100
50 0 Iraq Oman Qatar Bahrain Kuwait Saudi Arabia UAE

Source: MEED Projects

The opportunities on offer

Planned and unawarded projects in the Gulf by sector, November 2011 ($bn)

130

Infrastructure and construction projects will account for the majority of future work in the Gulf followed by oil and gas

217

467

330

Oil & gas

Construction

Infrastructure

Others

Source: MEED Projects

Closing Remarks
The outlook for the Gulf construction sector is reasonable, considering the Arab spring, the global economic downturn and the European financial crisis The engine of growth will be infrastructure, which will be largely government-financed, provided oil prices remain above the critical $80 threshold Saudi Arabia will be the most important market, with Iraq and Kuwait having potential for strong growth Competition for new work will remain intense and bureaucratic, localisation and security/political issues will have to be overcome in some markets Keys to contractor success will be a long-term commitment to the region, competitive pricing and a willingness to go increasingly local

For more information on this presentation or any MEED services, please contact: Angus Hindley, Research Director, MEED Mob: +44 7918 166446 angus.hindley@meed.com