Oman enjoys construction boom

Although political unrest caused delays to some projects, increased government spending fuelled by high oil prices is ensuring contractors have plenty of work in Oman. Published in MEED, 6 February 2013

Oman might be a relatively small construction market compared to most of the GCC, but these days it is a thriving one.

“There is a boom in the Oman construction sector,” says Behram Divecha, chief executive officer (CEO) of Oman Holdings International (OHI). “I would say the whole of Oman is a construction site. Wherever there are people, there is construction and it’s going to grow.”

Overall, there are $125bn of projects planned or under way in the sultanate, according to regional projects tracker MEED Projects, ranging from new healthcare facilities such as the $1bn International Medical City in Salalah, to the expansion of industrial facilities at Sohar and a national rail system, which will form the southern end of the GCC rail network.

There is also a series of projects for the rest of the transport sector, including new airports at Duqm and Sohar and the expansion of Muscat International airport, an extensive road-building programme, a new cargo terminal for Salalah port and a network of fishing ports at smaller sites around the country.

Promising pipeline

In addition to the transport schemes, Oman’s power and water networks are being upgraded, work continues to develop oil and gas facilities, and tourism developments are seen as a critical element of the economy.

“The opportunities are across the board,” says Matthew Squires, Oman managing director for the UK’s Atkins. “With the number of programmes, the pipeline looks promising. There seems to be a large number of projects currently ongoing in both the private and public sectors. The majority of work is through the public sector, but that gives confidence to the private sector to go ahead with their own developments.”

The reason for all this activity is simple enough: the sultanate has both the means and the motivation. To start with, Oman has been earning large amounts from oil sales. The government had budgeted to earn RO8.8bn ($22.9bn) in 2012, but it actually brought in RO14bn, thanks to oil prices averaging $109 a barrel, compared with the $75 a barrel estimated in the budget for the year. This year’s budget calculations include revenues of RO11.2bn, but as that is based on a price of $85 a barrel, it is more than likely to be easily exceeded once again.

Much of the money earned from oil sales is being ploughed back into infrastructure development, often in pursuit of economic diversification and job creation. A fast-growing population is driving demand for infrastructure and new employment opportunities, and the government has been forced to respond. Since 1995, Oman has been following its Vision 2020 development plan via a series of five-year programmes. The current five-year plan, which runs from 2011 to 2015, involves investment of $78bn, with a particular focus on transport and social infrastructure.

The government is expected to maintain the pace of spending this year. At a press conference in Muscat on 2 January to outline the budget for the coming year, the minister responsible for financial affairs, Darwish bin Ismail al-Balushi, set out a long list of projects that are due to get under way in 2013.

The most important of them include the RO270m Khasab-Lima-Dibba road on the Musandam peninsula, RO200m-worth of wastewater projects in Muscat and Salalah and RO104m of projects being pursued by Oman Tourism Development Company (Omran). Not everything Al-Balushi spoke about was costed, but the total for all the projects for which he did provide a figure was more than RO1.1bn.

It is not just the sultanate’s own revenues that are funding this spending spree. Oman is due to benefit from $10bn in handouts from richer GCC states over the coming decade, at the rate of $1bn a year. The funding was agreed in March 2011 at the height of regional concerns about the stability of some countries, following the revolutions in Tunisia and Egypt, and was designed to bolster the position of the Omani monarchy. A similar aid package was announced for Bahrain at the same time.

The funds coming to Oman have been earmarked for several major infrastructure projects that should benefit the construction industry. While the list has yet to be finalised, Al-Balushi said that among other things the aid will be used to finance the railway project; the Batinah express road from Muscat to the border with the UAE at Khatmat Malaha; electricity and water projects; and infrastructure in the industrial estates at Duqm and other sites around the country.

“The projects [for which] the financial aid is going to be utilised are currently being identified,” he said. “All these projects … lead to economic integration, serve the unified GCC market and facilitate the flow of trade and the movement of citizens among the GCC countries.”

Project delays

Such statements give the impression that everything is running smoothly. However, there have been some problems in recent years. Few awards were made in 2011, for example, a year when the unrest in North Africa encouraged protesters to take to the streets in Oman. In response, Sultan Qaboos bin Said al-Said replaced the National Economy Minister Ahmed Macki as part of a series of changes to how the country was run.

More recently, the Transport & Communication Ministry decided in September to retender the contracts for the first phase of the rail project, which will link Muscat to the border of the UAE at Khatmat Malaha via a 475-kilometre line. At the time of writing, consultants were still waiting to see the request for proposals for the retendered project. Until further details emerge, it will not be clear how much of a delay there will be to the overall project, which has in any case been moving very slowly. Firms first submitted prequalification documents for the design package in May 2010.

Some local construction firms have been affected by delays to other projects. OHI, for example, reported a 7 per cent fall in revenues to RO48.2m and a 44 per cent fall in pre-tax profit to RO896,000 in its most recent set of results for the six months to 31 September 2012. Maqbool Hammed al-Saleh, chairman of the group, said at the time that “while the macroeconomic policies in the sultanate involve significant spending on capital infrastructure projects, the companies in the OHI group experienced delays in awards [and] also contract commencement confirmation from its clients. This impacted the group negatively.”

State spending

OHI is a well-diversified holding company, but about 30 per cent of its revenues and profits come from the construction sector, according to Divecha. “Government spending is the main driver of the economy,” he says. “There were changes in the government here and this meant decisions didn’t get taken. But now decisions are being taken and work has commenced.”

Galfar Engineering & Contracting, which claims to be the largest construction firm in Oman, also suffered a decline in revenues in 2012. Its results for the first nine months of the year saw revenues down 2 per cent compared with the same period in 2011, to RO235m. It did manage to increase pre-tax profits, however, from RO3.9m to RO5.1m over the same period.

While contractors look forward to a revival of government tenders and contract awards, the landscape is becoming increasingly competitive in Oman. Despite the large revenues flowing into public coffers, executives say pricing is a key issue when it comes to winning a contract and can play a more important role than quality at times.

“Price is one of the key factors in awards,” says Squires. “It sometimes overly influences the decision to make an award; it’s not necessarily the quality.”

That in turn is putting firms working in the construction industry under pressure. Peter Hall, CEO of the local Al-Hassan Engineering Company, talks of “ever increasing levels of competition” and says “the various efficiency improvement and cost optimisation programmes we have been running throughout our business will continue to be key”.

Overall, despite all the spending planned by the government, the construction sector has not been keeping pace with the growth in the wider economy in recent years. The proportion of gross domestic product (GDP) accounted for by construction activity has shrunk from 6.7 per cent in 2009 to 4.8 per cent in 2011, according to the Central Bank of Oman.

That is still higher than in Saudi Arabia where the equivalent figure was 4.1 per cent for 2011, according to the Saudi Arabian Monetary Agency (Sama), but far lower than in the UAE, where the construction sector accounted for 10.3 per cent of GDP in 2011, according to the Dubai Chamber of Commerce.

Positive outlook

Nonetheless, the prospects for the industry still look promising. Long-term growth in the construction sector is expected to be 6.3 per cent a year, according to international professional services firm Deloitte. The key question for the economy is whether the oil price will remain high enough to continue funding all the projects that are currently planned and how reliable the public sector will be as a client. As long as those two elements are working in favour of the construction sector, the industry should have little to worry about.

“I think spending will go on for rail and other infrastructure,” says Divecha. “I think it will still be going for at least another 10 years.”