The outlook for the Gulf projects market

The Confederation of Danish Industry’s 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 & MARKET EVALUATION & SECTOR SURVEYS FORECASTING SCOPING

PROJECT MARKET OVERVIEW & ENTRY COMPETITIVE STRATEGY ANALYSIS

POWER & WATER IN GCC

For information on MEED Insight, please contact [email protected] 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 Serious civil unrest regime change

Political reforms Minor announced Political reforms demonstrations announced Tunisia Syria Serious civil Morocco unrest Jordan Bahrain

Revolution and Revolution and regime change regime change Minor demonstrations 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 The high oil price has bankrolled higher spending

The oil price, 2010-12 120

115

Despite downward revisions, oil 110 prices are expected to remain above the GCC breakeven point 105

of $80-85 a barrel $ a a barrel $

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 Jordan Kuwait Oman Qatar Saudi Tunisia UAE Arabia

2010 2011 2012

Source: IMF The drivers for increased public expenditure

Population growth in selected MENA states, 2010

12

10

All MENA states have high 8 demographic rates, most notably in Qatar where the

% 6 population doubled in the five years to 2009 4

2

0 Iraq Kuwait Libya Oman Qatar Saudi UAE Arabia

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 70,000 demand from expanding populations and economies, 60,000 there is a growing need to 50,000

decommission infrastructure MW 40,000 which is now at the end of its life 30,000 having been built in the 1970s and 1980s. 20,000 10,000

0

Iraq

Qatar

Dubai

Oman

Kuwait

Bahrain

Abu Dhabi Abu Saudi Arabia Saudi

Installed capacity, 2010 Required total capacity, 2019

Source: MEED Insight 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 25,000 the water and wastewater 20,000 sectors to meet demand, increase capacity and expand $m 15,000 network coverage with about 10,000 half of the investment accounted 5,000 for by Saudi Arabia 0

Water Wastewater

Sources: MEED Insight, GWI The need for new capacity

Planned transportation projects by GCC state ($m)

Aviation Rail Roads Ports Total

Bahrain 4,900 7,900 1,217 860 14,877

Kuwait 3,389 14,000 8,159 2,660 28,208

Oman 12,604 2,500 9,992 7,928 33,024

Qatar 15,246 36,875 7,167 11,474 70,762

Saudi Arabia 19,567 40,656 4,132 9,100 73,455

UAE 8,732 17,498 25,831 3,783 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

. Kuwait’s Partnerships Technical Bureau (PTB) has over 30 large-scale infrastructure projects planned as PPPs but much will depend on how the Al- Zour 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 35 rich, having benefitted from 10- years of rising oil prices 30

. The global credit crunch, and 25 subsequent Eurozone crisis, has hit the GCC project finance 20 market 15 . The perceived high cost of PPPs against conventional 10 procurement 5 . The often lengthy time taken to deliver a PPP 0 Kuwait Qatar Oman Saudi Arabia

2010 2011

Source: MEED Insight The recent performance of the Gulf projects market

Major contract awards in the Gulf, 2010-11*

2010* 2011*

Bahrain 2.4 1.3

Iraq 8.4 24.2

Kuwait 10.1 7.8

Oman 4.4 4.7

Qatar 10.5 10.9

Saudi Arabia 35.7 47.1

UAE 30.1 16.8

* first nine months

Source: MEED Projects

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

200 An estimated $1.1tn of project work is at the planning, design 150 or tendering stage in the Gulf $bn

100

50

0

Iraq

UAE

Qatar

Oman

Kuwait

Bahrain Saudi Arabia Saudi

Source: MEED Projects The opportunities on offer

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

130

Infrastructure and construction 467 projects will account for the 217 majority of future work in the Gulf followed by oil and gas

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 [email protected]