The financing of major multi-billion dollar infrastructure projects such as roads, railways, electricity, water and universities in the Middle East are likely to be driven in future by increased use of public-private partnerships, according to industry observers. This was the observation made during CityBuild Abu Dhabi, a tradeshow for the region’s building and construction industry, held from 18-21 April at the Abu Dhabi National Exhibition Centre. The event brought together industry suppliers, manufacturers, distributors, architects, engineers, importers and procurement decision-makers, and was staged alongside Cityscape Abu Dhabi. As part of the construction summit, speakers addressed the challenge of developing strategies for surviving the construction downturn, as well as for maximising competitiveness and utilising alternative funding models.

“The fact is that international investors are finding it tough to secure traditional infrastructure project funding in today’s new world economic climate,” said Graham Wood, Group Director, CityBuild Abu Dhabi. “The construction boom may have slowed down within the Arabian Gulf, now, with a more considered approach to development, but there are still about $114-billion worth of construction and infrastructure projects due to be awarded over the next 12 months.”

Wood observed that the market was being driven by projects in Abu Dhabi. Presently, the UAE capital accounts for more than half of the top 10 infrastructure projects by value, in the Gulf.

“Abu Dhabi is already leading the way in private financing to pay for infrastructure. It is using public-private partnership (PPP) funding methods with the new campus at Al-Ain University and the new Paris-Sorbonne and Zayed Universities in the capital,” he elaborated.

“The PPP approach is also being used on a highway through Abu Dhabi to the UAE’s border with Saudi Arabia, and other Gulf countries, such as, Qatar and Bahrain are looking at using the system,” he added.

Saying that a whole range of new trends were emerging in the region’s construction sectors, as businesses assessed the impact reduced client finances are having on budgets, tenders and supplier criteria, he concluded that margins are under pressure with contractors and consultants being squeezed, to achieve better value, and that there was tighter due diligence than before, as organisations attempted to reduce risk.

Industry advisers also urged a back-to-basics riskmanagement approach. when it came to project financing. “The inherent risks faced by construction firms in the Gulf region over the past three to four years demonstrate how important a risk-management plan is to a contractor,” said Cynthia Corby, Audit Partner for Deloitte in the UAE, in a recent report.

After a particularly challenging 2009, the regional construction industry is poised for renewed and sustained growth that will essentially be based on servicing the real needs of a progressive Middle East, rather than speculation.

This was the observation made by the panelists at the opening session of the third Arabian World Construction Summit (AWCS) that took place in Abu Dhabi, as part of the Arabian Construction Week, from May 24 to 26. ‘Growing in a Challenging Market’, was the central theme of the Summit.

According to the organisers, the Summit was designed to look at strategies to win new work and beat the slowdown in current projects.

The opening session featured two panel discussions that saw government and public sector officials, regional CEOs, as well as executives from the private sector discussing the trajectory the regional construction industry was taking in the aftermath of the global economic crisis.

Panelists included Her Excellency Fatima Obaid Al Jaber, COO of Al Jaber Group; Mustafa Sani Sener, President and CEO, TAV; Tahir Sharif, President of buildingSMART ME; Johan Beerlandt, CEO, Besix Group, Dr Faysal Alaquil, Director of Business Development and Administration Affairs, Construction Products Holding Company; Riad Kamal, Chairman of Arabtec; Samer Khoury, EVP Operations of CCC, and Dr Ali Al Zahrani, Director, Corporate Planning, General Authority of Civil Aviation, Saudi Arabia.

During the course of the discussion, Her Excellency Fatima Obaid Al Jaber said: “The impact of the real estate downturn was felt most by Dubai, but far less by Abu Dhabi and other countries in the region. 2010 is seeing the markets return to cautious optimism.”

Pointing out that one of the foremost challenges for the sector is to achieve diversity in the contracted projects undertaken, she said: “We need to think not just real estate, but also infrastructure, utilities, energy, healthcare and education. We need to expand our geographies of operation, as well. A lot of local companies can go regional and benefit mutually from common synergies.”

While Saudi Arabia was identified as the country where a bulk of the contractual opportunities were being made available, other countries such as Kuwait, Qatar, the UAE, Iraq, Algeria and Libya, too, were noted as having immense market potential due to significant governmental expenditure on various infrastructure projects.

Dr Alaquil, commenting on the Kingdom’s healthy trend, said: “Saudi Arabia is representative of the forward momentum and the opportunities that exist in the region. Not only is it the largest GCC country by population, but also, close to 50% of the Saudis are below the age of 30. The national government is committed to meeting the needs of the people and considerable investment is being made in projects in the energy, utilities, transport, healthcare and education sectors.”

Said Khoury, “In the oil and gas sphere, Iraq is expected to become a hotbed for contracting activity within the next decade. Algeria and Libya too show huge potential.”

Johan Beerlandt, COO of Besix Group, which joined hands with Arabtec in the building of the the Burj Khalifa, said: “It is vital today for construction companies to form strategic alliances with corporate peers, as this is the realistic way forward to ensure long-term growth.”

David Barwell, CEO, AECOM Middle East, who was part of the panel discussion on the first day of the conference, said: “This was an ideal opportunity to discuss a wide range of issues, including how you ensure that your business remains strong in the face of the downturn, and how we have responded to increased competition, whilst still effectively managing costs and investing for growth.”

Examining the challenges that remain in the region, the panelists concurred that the biggest concern was the ability of the financial sector to fund construction projects.

The Al Jaber Group, CPC, Unibeton/Al Fara’a Group, TEKLA, Aconex, Dynamic Staffing Services, TAV Construction, Volvo Construction Equipment and Zurich Global Energy were the key sponsors of AWCS 2010. The event was supported by MEED.

Saudi Arabia and Qatar have better prospects for MEP services among their peers in the Gulf Co-operation Council bloc. Not only their exposure to global financial market has insulated these two economies from the credit crisis, their governments’ increased spending on infrastructure projects also made them more attractive to contractors engaged in mechanical, electrical and plumbing services.

Ventilation control panels: Mechanical services accounted for 37.6% of the overall 2008 MEP market in the Gulf

“The infrastructure sector is set to benefit from the portion of this spending,” says the research and consultancy firm, Frost & Sullivan. “Hence, these two markets are emerging as better growth prospects for MEP services among the GCC countries in the future.”

MEP services will grow marginally until 2013 and generate revenues of $22.45 billion after an estimated gradual pick up from next year following last year’s decline. This translates to a compound annual growth rate of 10.6% from 20008, when the market was placed at $13.54 billion, according to a 2010 report released by Frost & Sullivan.

Titled “Strategic analysis of the mechanical, electrical and plumbing services market in [the] Middle East”, the report said the mechanical services accounted for 37.6% or $5.09 billion of the overall MEP market while the electrical services made up 43.2% ($5.85bn) and, plumbing, 19.2% ($2.6bn).

Accounting for 72.6% of the 2008 MEP market, the commercial, residential, hospitality and infrastructure segments were the major end-user of services while the industrial, institutional, government and other buildings held the remaining 27.4% market share.

Being closely associated with the construction sector, the MEP work makes up 25-30% of total project costs, stresses the report authored by Vivek Vijayakumar, Frost & Sullivan’s research analyst on environment and building technology practice for South Asia and the Middle East. It remarks, “MEP is mandatory and considered as the ‘serviceon- demand’ within the construction industry.”

The boom in the construction industry, coupled with economic expansion and population growth, makes the UAE, Saudi Arabia and Qatar the key contributors to the growth of MEP in the Gulf. These economies account for a combined share of 88.2% of the regional market while Kuwait, Oman and Bahrain share the remaining 11.8%.

In the UAE, it’s Abu Dhabi that is expected to drive the demand for MEP services, owing to the slowing of construction sector in Dubai. These two emirates, however, are still the country’s leaders with higher margins and growth opportunities. The other emirates have the advantage of lower business costs and limited competition but are less profitable.

With the construction boom, many new entrants are now trying to make their mark in a market where there is a dearth of quality contractors and where some of established contractors are struggling for profits. “The competitiveness is believed to be sustained only if a company has a substantial operating history, proven track record and reputation in the market,” the report says. “In the future, the competition could be encountered by new entrants, who are into diversified business segments attempting to consolidate into MEP contracting services market.”

The future also looks bright on various development projects to be undertaken by governments, the report notes. “The global financial crisis has halted/postponed/ cancelled many projects in the private sector; therefore, government spending in residential, commercial, hospitality and infrastructure projects [is] likely to drive the demand for MEP services market in the future.