Few places in the world today are seeing a construction frenzy as dynamic as is happening in the six Gulf Cooperation Council states in the Persian Gulf. In a region that failed to fully capitalise on the last oil boom 30 years ago, the current scale of development would almost defy belief if it was not so visible.
While the flag is being flown by crane-festooned Dubai and Abu Dhabi, with new mega developments continually flowing from the other United Arab Emirates countries, the GCC’s oil-soaked senior partner Saudi Arabia plans to spend more than $US1 trillion alone on infrastructure projects over the next 10 years. The GCC countries already have about $US1.5 billion worth of projects either planned or underway.
Saudi Arabia, the largest construction market in the Middle East, has staggering plans to build six new economic cities. Construction has already started on the biggest of these at Rabigh – the $US53 billion King Abdullah Economic City, which will cover 168 square kilometres and provide housing for 1.5 million residents.
In contrast to the 1970s oil boom, where investments were sunk into the West, much of the wealth from current high oil prices is being pumped back into the region to build more sustainable, non-oil-related economies and regional assets.
Today, the GCC region boasts a well-developed construction industry with local property development groups, financial institutions, investment houses and manufacturing industries underpinning a brave new future.
The extent of its success is demonstrated by the many multinational companies choosing the region to set up branches of their building and construction-related operations.
The latest Directory of Major Construction Projects in the GCC, compiled on the ground by the state governments of Victoria, New South Wales, Queensland, Western Australia, South Australia and the Australian Trade Commission, lists some 85 Australian companies with offices in the GCC and more than 50 others that either supply specialist services from Australia or products through local agents.
The list is led by companies in engineering (17), building materials (14), architects/designers (11), facilities management (6), landscape architects/contractors (5), interior design/furnishings (5) and construction (4).
It is not an easy market to break into, but the pickings are good. Latest figures from the Middle East Economic Digest put the total value of projects planned or underway in the GCC at about $US1.5 trillion. Just over three years ago, that figure stood at $US277 billion.
Of that $US1.5 trillion, the lion’s share – 44% – is happening in the UAE, followed by Saudi Arabia (25%), Kuwait (17%) and Qatar (9%).
Late last year, the UAE had 850 building and construction projects “on-the-books” worth about $US515 billion, of which around $US59 billion worth were under construction. 75% of those projects were in Dubai.
Underpinning this activity is sustained high oil prices expected to deliver a combined aggregate GCC budget surplus of about $US500 billion over the next five years, providing the view among analysts in the region that construction activity will remain strong well into the next decade.
Analysis in the Australian-produced GCC major projects directory notes that on the back of three years of unprecedented economic and population growth, the GCC states’ utilities, road and transport authorities have been struggling to ensure supply meets demand.
The directory says three states – UAE (especially Dubai, Sharjah and Ajman), Saudi Arabia and Kuwait – are particularly at risk. “Elsewhere in the Gulf, the situation may not be so tenuous, but it is still urgent,” it notes.
History is likely to show that the summer of 2007 was the point at which the Gulf States came closest to a full-scale energy crisis, the directory says. An odd contradiction for such an oil-rich grouping, but brought about by a chronic lack of rapid expansion-induced infrastructure.
The crisis is being addressed via a significant increase in announced investment from governments, developers and financial institutions in urban infrastructure, energy and water provision, road and transport systems, social and healthcare reform, education facilities, high-tech industries and linked academic institutions.
The MEED estimates more than $US100 billion will be invested just in power generation across the Middle East over the next eight years.
In the GCC alone, it is estimated the civil construction spend will rise to about $US360 billion in the next three years. The next biggest sector expense will, not unnaturally, be the oil sector with a little under $US100 billion being spent over the next three years.
The key driver to project growth in the GCC countries continues to be the autocratic family-controlled governments/sheikdoms/monarchies. They have, collectively and individually, set themselves on spending paths over the next 10 years to create major globally influential economic centres (banks, investment houses, tourism, transport and manufacturing), along with big urban infrastructure (communications, water, power, utilities, rail, road, energy) projects, and office and residential accommodation to keep up with the expected population and business growth.
While the GCC states are publicly united on most issues, there is no doubt individual races are gaining momentum, such as those between Dubai, Abu Dhabi, Qatar and Bahrain for supremacy in the strategic financial, transport and tourism sectors.
Witness Abu Dhabi’s recent $US7.5 billion investment in Citigroup, giving it a 5% stake in the US’ biggest bank; its $US1.35 billion for 7.5% of the world’s second-largest private equity firm Carlyle Group; Qatar’s 24% stake in the London Stock Exchange; joining Dubai with its 28% of the LSE, while the latter finalises its 20% of the giant US Nasdaq exchange.
All of which sees Dubai and Qatar capital Doha starting to overshadow Bahrain’s traditional position as the Persian Gulf’s financial hub.
On the tourism and transport fronts, the multi billion dollar battle is on between big spending leader Emirates Airlines out of Dubai, Abu Dhabi-based Etihad Airways and Qatar Airways.
While Dubai is shooting for 15 million tourists by 2015, Abu Dhabi is looking to double by then to more than 3.4 million visitors, attracted by the $US29 billion Abu Dhabi Cultural District that will house Guggenheim and Louvre art centres, maritime museum, performing arts centre, national museum and a biennial park.
The region’s dramatic growth has been built on a wave of cheap labour, mostly from the Indian sub continent and parts of Asia, particularly the Philippines. The worker influx is expected to see Saudi Arabia’s population almost double in the next 20 years to more than 40 million. Over 70% of the population is under 30.
Those sorts of numbers are the same for the other GCC countries and are resulting in a massive shortfall in affordable, general housing.
The UAE and Saudi Arabia will each require about 150,000 new housing units a year until 2020, making land development and construction the fastest growing sectors in those regions.
Given the enormity of the overall task, governments are looking to spread the burden, the directory says. To that end, they have started to engage the private sector, including Australian and other international companies, by letting large numbers of contracts for freehold projects and government-assisted housing developments for middle income families and workers.
Massive residential complexes the size of suburbs are being built and planned adjacent to industrial and free zones, educational precincts and public transport infrastructure. Many exceed the $US500 million mega-project threshold.
Commercial, retail, residential, hospitality and leisure components are being combined in large multi-use developments supporting residential developments in excess of 100,000 people.
The focus has switched to creating a range of livable environments for the business community, tourist resorts and urban residential developments – an obvious opportunity for urban planning, infrastructure and utilities.
To meet the burgeoning demand, clients and contractors are forming new alliances to secure the resources they need, to spread the risk and offer project owners a one-stop-shop approach for planning, design, construction and landscaping. For smaller projects, this has created an opportunity for small to medium enterprises to enter the GCC market.
Newcomer to the region, Emirates Sunland Group, spawned from the Australian Sunland Group, identified local resources as its primary concern when planning its $US400 million Versace Hotel and D1 Tower projects in Dubai in 2006. It formed a joint venture with the local Arabtec Construction in what is widely viewed as the region’s first partnering agreement.
Such rapid expansion is not, however, without its problems and resultant opportunities.
In the construction sector, the leading and more established contractors now have little spare capacity to take on additional work.
A 2007 MEED survey of the top 20 contractors in the Gulf showed the top 10 posted an average 45% increase in the value of contracts, the overall average being 24%.
In the mechanical, electrical and plumbing sector, contracts have also become considerably larger, as clients seek one company to undertake all the specialist packages.
The Australian-compiled project directory notes that “it seems that if you are an established MEP contractor and supplier in this market, then you call the shots”.
But MEP contractors are being increasingly caught between impatient clients wanting projects delivered in record time and opportunistic suppliers demanding inflated prices. In the UAE, Saudi Arabia and Qatar, the cost of cement, ready mix concrete and steel reinforced bar has increased 50-100% since 2006.
However, the directory notes that as buildings become more technologically advanced and more are completed, facilities management services are poised to become a booming sector in the GCC region.
In Dubai last year, contractors started to complete the mass of projects awarded in 2004 and 2005. So the challenge now is to find new projects to move resources to before they become redundant.
There is also a growing consensus that the Dubai market has reached, or is near, its peak in terms of construction activity, but few expect much of a downturn.
The simple fact is the GCC’s retail real estate market is the fastest growing in the world, with more than 16.35 million square metres of gross leasable area expected to be completed by 2010, according to Colliers International. The increase represents a massive 565% growth since 2000, with the UAE and Saudi Arabia contributing the highest increase of 44% and 30% respectively by the end of the decade.
While the oil boom has made the Gulf one of the best places to do business, galloping inflation is rapidly making it one of the most expensive to live and there are strident calls for a revaluation of the UAE dirham, which has been pegged against a falling US dollar since the UAE’s independence in 1971.
The actual UAE inflation rate is difficult to quantify due to the lack of official financial information, a fact that has brought plenty of criticism from the International Monetary Fund. The Dubai Chamber of Commerce and Industry puts the figure at “over nine percent,” which is seen in most analytical circles as extremely conservative. Indeed, independent surveys suggest that UAE inflation is running at an annual 15-20%.
Inflation is not increasing uniformly across GCC countries, but it is rising and showing no signs of slowing – Saudi Arabia's inflation rate hit a record 4.89% late last year and Oman’s rose to a 16-year high of 7.09%.
The rapidly rising cost of living, combined with a shortage of key and even basic skills, has led to steep increases in labour and professional costs.
The Gulf economies remain dependent on foreign workers, not helped by last year’s UAE workers amnesty, which is likely to see over 300,000 illegal workers sent home.
The massive inflow of cheap labour from India, which supplies 70% of the GCC’s workforce, is being seriously jeopardised by rising wage rates in a strengthening Indian economy.
All of which points to tumultuous times ahead for the Gulf States to maintain the breakneck development pace of the recent past.
This article first appeared in the February edition of Contractor magazine
