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Top 5 challenges for the GCC construction industry in 2016

25.01.2016 | News
While the GCC remains one of the busiest locations for construction in the world, it isn’t without its challenges. This week, we take a look at what we believe are the Top 5 challenges the GCC construction industry will face in 2016.

Uncertainty over oil

It may sound unfair that the biggest challenge for the GCC construction industry is one that they can have no hope of influencing, namely the price of oil. In 2016, contractors and consultants will watch from the sidelines as oil prices fluctuate, and there are well-grounded fears that the black gold will continue its descent. Saudi Arabia is flooding crude into the market, frackers in the US continue apace, while Iran is also expected to ramp up production; meanwhile, China, the world’s largest importer of oil, is racked by economic travails. The severe drop in oil prices since mid-2014 has already cost the GCC governments dearly in terms of lost revenue; the IMF estimated that lost export earnings from oil and gas for GCC governments would amount to $300bn in 2015.

Nevertheless, regional governments remain bound to high spending levels in order to continue growing the private sector and create new jobs. Recently announced budgets across the region have committed plenty of spending in areas such as infrastructure, health and education, which are vital to ensuring delivery of key services to their populations. That’s despite a number of government projects having been cancelled such as football stadia in Saudi Arabia, while many large projects are also expected to be mothballed or delayed.

A further drop in the price of oil could force governments to rethink their spending strategies. According to analysts at Morgan Stanley, don’t be surprised if the price for crude drops below $20 a barrel. If that happens, Gulf governments - especially those with less room to move fiscally, such as Oman and Bahrain – may take an extra hard look at their budgets and look for additional ‘fat’ to cut, meaning possible project delays and cancellations. If that happens, even the best laid plans of construction firms may be thrown into disarray.

Managing the skills shortage

As architects design ever more elaborate buildings, and as new technologies are integrated into all steps of the construction process, finding the right person to do a difficult job is more important than ever. Skills shortages are an issue in any industry, especially as companies’ transition to new technology or working styles. For the construction sector, one major change taking place is the need for many companies to integrate Building Information Management (BIM) into their workflow, meaning extra demand for BIM-skilled engineers. But problems finding the right employee are found in more than just the high skilled jobs. A report by Ventures Onsite in September found a shortage of workers especially in the mid-level skill gap. This is especially true as construction companies continue to grapple with policies for nationalisation of labour forces. In Saudi Arabia, recent crackdowns saw many migrant workers exit the country and resulted in outright shortages of labour. Meanwhile, in Qatar the availability of visas has been an issue for construction firms, running the gamut from skilled engineers to labourers. Operators of construction machinery are also in short supply in the Gulf, forcing some companies to turn to the more expensive option of renting machines supplied with an operator. With many labourers arriving in the Gulf with little or no training in the construction field, companies are also having to take it upon themselves to provide basic training.

Delayed payments

Slow payments are a perennial problem in the Gulf construction markets, and 2016 will be no different – or if anything, worse. According to Deloitte’s Powers of Construction 2015, the collection cycle – from completing work to collecting the cash – can typically take around 225 days for a company in the construction sector. So it’s no surprise that 86% of companies polled by Deloitte identified collection of receivables and work in progress (WIP) recovery as a key priority for their business (including collecting legacy receivables) in the year ahead. As governments cope with reduced oil revenues, contractors may even face longer waits; in October, Bloomberg reported that a number of government agencies in Saudi Arabia were delaying payments to contractors working on infrastructure projects by as much as six months, a practice which may continue in 2016. If that wasn’t bad enough, companies may also have to contend with reduced enthusiasm from banks to write new loans, as overall GCC bank liquidity falls due to lower public sector deposits. Couple that with expected interest rate rises in 2016 that will mean high borrowing costs, and the year is facing up to be the perfect storm of delayed payments and scarcity of working capital.

Profitability

While in most of the Gulf construction markets the outlook runs a spectrum from ‘cautious optimism’ to outright pessimism, there is one exception to this rule. Qatar’s construction sector is widely expected to continue to grow strongly, given the major volume of works needing to be completed in time for the FIFA World Cup in 2022, and then the fulfilment of the National Vision in 2030. But before deciding to expand your Qatar office and mobilise resources that aren’t being utilised elsewhere, here’s a few facts to consider. First, Doha is the most expensive city for construction in the Middle East, according to Arcadis’ recent report on construction costs. With US$150 billion anticipated to be spent on the likes of roads, railways, stadiums and ports, as well as hospitality and social infrastructure over the next ten years in Doha, the frenetic pace of concentrated construction could force up the costs of raw materials, logistics, and staff wages, eroding profit margins. In short, while Qatar is certainly a booming construction market, when it comes to reaping profits, don’t expect it to be a cakewalk.

Extra scrutiny over safety and quality

As the Gulf construction markets mature, there’s more demand from regulators and citizens for improved safety, better quality, and sound environmental practices within the industry. The disastrous crane accident in Makkah last year, on a site operated by Saudi Binladin Group, thrust construction safety into the spotlight, and municipal authorities are taking a harder look at safety planning on job-sites, especially when it comes to cranes. In Dubai, fires in the Torch tower in early 2015, and then the New Year’s Eve blaze at the Address Hotel, have brought the issue of combustible cladding into focus. How this will play out, and whether there will be any repercussions for the industry, the combustible aluminium cladding panels (ACP) have been used across the GCC, remains to be seen. Meanwhile, in the Western media there is ongoing scrutiny of labour practices and on-site safety, especially in Qatar in the lead up to the football World Cup. One thing for certain is that maintaining a good reputation on these matters is more important than ever before. Rather than waiting for regulators or the media to uncover safety violations or poor quality work, or an accident to occur, construction companies need to take the lead and audit their own practices, as well as looking at the actions of their supply chains where relevant.

Good work may be rewarded - Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, the Crown Prince of Dubai, has unveiled a scheme to rate construction companies based on the welfare of their workers. Companies are invited to submit an application for the Taqdeer Award, and those showing that receive the best ratings. Either a four or five star rating will enjoy a competitive advantage in government and other tenders for new projects.

Conclusion

If you are a construction professional who currently works in the Middle East, we’d like to hear your thoughts about our list and your prediction on the top 5 challenges in 2016.

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