Significance of construction in Saudi Arabia is accentuated by key transport and mobility schemes
An Asian labourer looks on as he works at the construction site of a building in Riyadh, Saudi Arabia. Image for illustrative purposes.
REUTERS/Faisal Al Nasser
By Seban Scaria, ZAWYA
Construction activity in the Middle East and North Africa (MENA) region has been relatively sluggish and is forecast to grow at 3.3 percent in 2019.
However, after a lacklustre 2019, construction growth in the region is forecasted to steadily improve in the next four years, to reach 4.9 percent by 2022-2023, data and analytics company GlobalData said in its Global Construction Outlook report.
Government revenues in the Gulf countries have been affected due to low oil prices. Assuming oil prices stay relatively high, large-scale investment in infrastructure projects – mostly related to transport – will be a key driving force behind the growth in the region, the report said.
Saudi Arabia remains the largest regional construction market in the Middle East, despite a contraction in construction in the kingdom in recent years. Construction output is forecast to recover in 2019, growing by 2.6 percent, before posting average growth of 3.8 percent in 2020-2023, the report said.
Yasmine Ghozzi, Economist at GlobalData, said: “The construction market started on a positive note in Saudi Arabia in 2019, growing by 1.3 percent year-on-year in Q1 in real value-add terms, attributed to rising oil prices and a surge in the non-crude sector.”
“The significance of construction in Saudi Arabia is accentuated by key transport and mobility schemes such as Riyadh Metro; social infrastructure developments such as the Ministry of Housing’s Sakani programme; and energy megaprojects such as the state-owned Aramco’s Berri and Marjan oil fields,” she added.
The report pointed out that construction boom in Qatar, that began almost a decade ago, seems to have run its course as major projects are largely completed. Construction output decreased by 1.2 percent year-on-year in Q1 2019, a sharp deceleration after years of rapid expansion.
“The Qatari construction sector will slow relative to previous years, in general, but the turnaround will come from the North Field Expansion (NFE) project where Qatar Petroleum announced its aim to increase Qatar’s LNG production from current 77mtpa to 110mtpa within five years and has assigned Qatargas as the operator of the project. Meanwhile, work on the Hamad International Airport and New Doha Port will support growth in the airport and port sectors,” Ghozzi said.
However, one of the region’s brightest spots will be Egypt, where GlobalData predicts that construction will expand by an annual average of 11.3 percent between 2019 and 2023.
“Egypt’s economy is forecast to expand at a relatively rapid rate over the next two years, driven by sustained growth in natural gas production and a recovery in tourism. Delivering an ambitious renewable energy program is a priority for the government. Construction activity is also being driven by Cairo’s urban development program, which could involve building 23 new cities,” Ghozzi said.
The pace of growth in sub-Saharan Africa will be particularly strong, averaging 6 percent a year in 2019–2023, Global data said.
According to the report, construction activity in Nigeria will accelerate steadily, supported by government efforts to revitalise the economy by focusing on developing the country’s infrastructure.
But Ethiopia will be Africa’s star performer, with its construction industry continuing to improve in line with the country’s economic expansion, but the pace of expansion will ease back to single-digits, it said.
Governments in developing economies often lack the capacity to conduct thorough reviews of proposed capital projects. A streamlined approach can identify those ready for funding.
By Rima Assi, Nicklas Garemo, and Arno Heinrich studying an issue of vital importance for all developing countries, came up with the following essay.
They addressed the most likely to be affected which are the oil-exporting countries of the MENA region as impacted by the volatility of their earning capacities. In the recent past, and before 2014, when free-flowing budgets allowed development without such restrictive measures, governments that get about 90 per cent of their revenue from oil exports did not bother about such issues. However plunging oil prices could mean budget cuts for major exporters like the GCC countries, but these are not expected to be large enough to stop growth, hence the need still of what is proposed by Mckinsey’s people here.
In developed economies, policies and practices for balancing diverging interests in public infrastructure spending are well established. South Korea, for example, established the Public and Private Infrastructure Investment Management Center in 1999 to conduct feasibility studies on large public investments and expanded its mandate to include appraising and managing public–private infrastructure partnerships in 2005. Since then, the center has reduced project overruns by 82 percentage points. Similar units include the United Kingdom’s Infrastructure and Projects Authority, Germany’s Bundesrechnungshof, and Australia’s Infrastructure Australia.
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But in developing markets, many governments have yet to build a capacity for conducting extended project reviews and feasibility studies, because talent is scarce or internal priorities conflict. As a result, these governments often end up funding ill-prepared, poorly designed capital projects, whose scope often diverges from real demand. Overlaps between projects are not uncommon—and actual project costs often exceed forecasts. In fact, nearly 40 percent of the money devoted to global investments around the world is spent ineffectively as a result of bottlenecks, a failure to innovate, or market failures. In developing economies, these ineffective expenditures amount to over $1 trillion a year.
It may be too much to ask that every proposal get a full-scale, in-depth evaluation that takes months to complete. Even in developed markets, that’s not always possible. But it is possible for finance ministries to conduct more streamlined financial assessments of the preparedness and design of projects in only days or weeks. Indeed, we have seen developing countries in the Middle East and Africa embark on such programs by adapting centralized control units and the required level of governance to their own circumstances.
The initial assessment of project preparedness
As a first step, a government must ensure that all projects have been thought through at a sufficient level of detail. This may sound obvious, but projects that fail to describe their rationale properly, don’t evaluate alternative solutions, or lack detailed budget plans are hardly uncommon. What’s more, implementing ministries often lack strong capabilities in project planning, and rely instead on the private-sector organizations that design and implement such projects to review their own work. The resulting incentive structures, far from optimizing costs, tend to inflate the scope and specifications of these projects.
When the finance ministry in one African country reviewed proposals to build new roads, for example, it found a number of them significantly exceeded benchmark costs—often coming from design firms that consistently produced designs with higher costs. When a more thorough evaluation isn’t feasible, a streamlined one- or two-day review can help. Typically, an oversight body would pose a series of straightforward questions assessing how clearly a problem is defined, along with a capacity and demand analysis and a consideration of alternative solutions. This kind of evaluation would examine a proposal’s financial aspects, like planned budgets and cash-flow requirements. It would also probe the operational elements: a realistic implementation plan, compliance with regulatory requirements, and interdependencies and overlaps with other projects. Knowing that it lacks this capability, the government of the country in the example is now setting up an in-house unit to oversee contracts with design companies and challenge their products.
The impact can be considerable. One government in another developing economy took this approach with more than 250 projects in its portfolio and found that only a quarter of them were adequately prepared. Most frequently, project owners failed to quantify the capacity–demand analysis and alternative ways of meeting future demand. As a result, they were granted only enough of their requested budget to conduct studies to increase their preparedness.
A deeper review of project design
Once the initial assessment—often of hundreds of projects—narrows down the pool, finance ministries can conduct a more thorough review of each project’s overall design. That, too, can be streamlined. The finance ministry of the country in the example developed a way to conduct reviews that lasted just two weeks. In that time, it identified opportunities to reduce costs by an average of 20 to 40 percent, without reducing outputs. During the reviews, which will now be a standard part of the annual budgeting process, the cost-review unit of the finance ministry met with owners of projects and tested their design through a series of questions aligned with the initial assessment exercise above. These included the following:
·Public priorities. Does the scope of a project focus on services and features that people really want? Is there evidence that the project is truly needed and meets the country’s socioeconomic objectives?
·Capacity and demand. Does capacity match future demand? Are the expectations for demand realistic? Can alternative solutions reduce demand?
·Costs. Do unit costs reflect benchmark levels? Can costs be cut by adjusting a project’s time frame (to reduce the need for tight deadlines) or by calibrating the schedule to the availability of capital?
·Productivity. Could existing assets improve operations?
·Funding. Are the funding requirements realistic? Are there any opportunities for private-sector funding? Will the assets generate revenues that could fund the project? Can implementation be deferred or slowed down to stretch out the need for funding?
These project reviews can be significant: a two-week review of a public convention complex, for example, identified $1.7 billion in potential savings (Exhibit 1). Elsewhere, one ministry of health’s $300 million request for additional beds for intensive-care units (ICUs) was nearly halved after reviewers considered benchmark utilization data. They found that the proposal’s assumptions about the average length of stay per ICU bed were twice as high as the benchmark, mainly because facilities lacked intermediate beds and had nowhere to send discharged patients. As result, the ministry of health was advised to procure lower-cost intermediate beds and fewer ICU ones.
A two-week capital-expenditure review of a public convention complex identified $1.7 billion in savings.
Or consider a proposal by another country’s housing ministry to develop affordable housing. In-depth reviews found that the proposed design included features—such as skylights, longer driveways, and larger bedrooms—that increased costs but would not necessarily be valued by residents. The optimized design featured more bathrooms, but (unlike the original proposal) with showers instead of tubs; more but smaller bedrooms; and shorter driveways with less internal parking. These homes were better aligned with the expectations of likely residents, but cost 15 percent less—so the ministry could build more homes on its $4 billion total budget.
Trending ambitious projects in the Gulf countries Dubai and Abu Dhabi in the UAE, Doha in Lusail, Qatar, Manama in Bahrain have always been competing one another for commercial limelight. These days despite all oil related exports revenues these have not been witnessed to slumber somehow so they seem to be projected out by the local media. The first thing that one would notice is not only the size of investments but the unconventional nature of the extraordinary schemes that are shaping up certain areas of each of the above. Doha, for instance launched its $ billion Lusail urban development in early 2000 as a government inspired private public partnership operation that is eventually to foreign and non-resident ownership. The construction industry in the Gulf countries has always been served and serving the national private citizen and organisations alike. Dubai being the precursor in starting to allow some freehold to go to foreign and resident investors stayed at the forefront until joined by almost all of the others member countries of the GCC.
Deira Island project in Dubai
Doha News published this ‘pictures and text’ report of the work still in progress that is republished here with our thanks to Shabina Khatri, Executive editor and co-founder of @dohanews with some sort of unavowed intent to help spread wide and far the word of the country whilst undergoing a blockade from its neighbours is nevertheless in need of builders.
Construction on the swooping structure of a twin-towers project in Lusail Marina is expected to start soon, with the launch this week of tenders for a main contractor. Katara Hospitality opened the application process for a contractor to build the 36-story, crossed-swords design Katara Towers. The towers’ curves are inspired by the crossed swords of the seal of Qatar, and were designed by German civil engineering and design firm King Consult.. When complete, the complex will house two hotels, luxury apartments, restaurants and entertainment and recreation facilities, according to the notice on its website and in local media this week.
Katara Hospitality first launched the towers project in May 2012, and at that time aimed to finish by 2016. At the time, the total budget for the project, covering a 300,000 sq m area, was QR2.2 billion. Since then, progress on the project has been stop-start, and subsequent deadlines have come and gone.
Enabling and piling works got underway in late 2013, and in December 2014, Katara Hospitality tendered for subcontracting and basement works packages. According to its website, the towers are now scheduled to open in 2020.
The state-funded hospitality group said it is currently looking for a Qatar-based contractor, or a joint venture with local official representation. They will be tasked with building the above-ground structure and facade and to handle the MEP works.
The successful bidder will also be appointed as main contractor for the rest of the works to the project until it is finished, the notice states. Eligible bidders should have done at least three similar projects in the last six years, each valued at QR2 billion or higher.
They must also show experience in constructing projects of a “similar size, character and complexity” in the Gulf or MENA region in the last five years, the notice said. The deadline to apply is Oct. 15.
What to expect
Once completed, the towers will be among Lusail City’s landmark buildings. It is located in the marina district, which is still under construction. It is already home to the multi-colored Marina Twin Towers, among other buildings.
According to the latest tender notice, Katara Towers will house two hotels — a “luxurious premium” hotel for business travelers, and a “five-star deluxe hotel.”
There will also be permanent apartments as well as “a variety of suites, restaurants and state-of-art entertainment and recreation facilities.”
Previously, an artificial beach island was planned, to be linked to the towers’ promenade by bridges. It was slated to host aquatic sports, restaurants and contain water parks, Katara Hospitality previously said. However, there was no mention of the beach island in the latest notice.
Some 20km to the north of Doha, Lusail is being built from what was empty desert. The aim is to eventually house nearly 200,000 people by 2022, and half-a-million residents when it is fully complete.
Lusail City rendering. Credit: SCDL
At that time, visitors to the “city of the future” will be able to get around via light rail, water taxi or through a cycle and pedestrian network. Construction on the marina district has been underway for years, and a number of towers and other projects are already complete, although progress in some parts has been slow. Lusail will also be home to Qatar’s showpiece stadium when it hosts the World Cup in 2022.
A Qatari-Chinese JV was announced late last year as the main stadium contractor. But the design for the arena — being undertaken by British architectural firm Fosters + Partners — has yet to be publicly revealed.
Among the stops on the light-rail is Place Vendôme. The QR4.6 billion mixed-use, Parisian-inspired development will have a shopping center with up to 500 retail outlets in a 1 million square meter area.
Place Vendôme — Lusail. Credit: United Developers
Scheduled to be finished next year, it will include a a hypermarket, entertainment zones, restaurants and two five-star luxury hotels and serviced apartments.
3D printing has been pioneered in the GCC region for some time now especially in the building industry generally but more specifically in a skyscraper as recently reported in Dubai. The local media reported that a ‘quarter of buildings in Dubai will be based on 3D printing technology by 2030 under a new strategy launched by Sheikh Mohammed bin Rashid Al Maktoum’. Indeed, 3D printing of building combines mobile robots with existing construction methods to make the construction processes faster, cost-effective and possibly sustainable.
The GCC media elaborated at length on how 3D printing could decrease construction costs and shorten delivery timelines making it, in the future, easy for developers to propose affordable housing hence decreasing all risks of delayed delivery and above all costs overruns.
The only snag is that of the current legislation having been set for conventional building methods and developed by reference to the traditional approaches to construction and materials procurement would have to be revisited so as to allow a full extent of this technology in the future. This would objectively be an interesting road to go down on especially for the heavily populated regions of the MENA such as those of North Africa.
In any case, and if 3D printing as a construction method were to be widely adopted notably in the affordable housing segment, it would certainly give rise to new business models and contractual relationships between the different regions of the MENA.
Meanwhile, an interesting article of the World Economic Forum written by Alex Gray, Formative Content and published on Thursday 30 March 2017, illustrates well this new model of business and is reproduced here for hopefully our viewers’ appreciation.
House-building can be an irritatingly slow process. In the US it takes six months on average to construct a home. But now a robot can assemble the basic frame of a house — foundations, floor, walls and roof — in a single day.
Image: Apis Cor
The San Francisco start-up behind the robot, Apis Cor, says that it is the first company to develop a mobile 3D printer able to print entire buildings.
Here’s their first home going up on a site in Russia.
At 400 sq ft (38m²) the house is cosy but proves the point that fast turnaround home-building is now possible.
Image: Apis Cor
The cost of construction is about $10,000. And the buildings can be any shape, a potential boon for architects.
Such technology could help in areas with drastic housing shortages. And one American NGO, Field Ready, thinks that 3D printing could be deployed directly to disaster zones.
According to local media, the Saudi Construction & More Boom not only remain unabated , 2 years on from the oil price drop but is to the contrary getting to know some kind of spurt growth. So much so that the Saudi consultative (Shoura) council in a bid to rid the country of certain crimes, all presumably related to, has targeted non-Saudis who do not own Saudi and / or non-Saudi companies so as not allow them buying property in Makkah, Madinah or Riyadh.
The ban is also aimed at protecting as they put it, the two holy cities from corruption and severe punishments will be handed to violators, the council added.
All at the same time, the Saudi authorities are reportedly considering plans to introduce a new mechanism that will compare all the countries 10.4 million number expats’ remittances to their respective income.
In the meantime, the hotel sector mostly owned by multinational chains is part and possibly the main actor of the current construction boom in Saudi Arabia will evidently be affected by the above mentioned pieces of legislation in the making.
Construction generally and that of the hotel in particular is being led by Makkah, according to a new report of TOPHOTELPROJECTS that was commissioned by The Hotel Show Saudi Arabia 2016 with the Abraj Kudai large development in Makkah.
The Report held that the development is of some 24,133 rooms with Riyadh coming next with 10,053 rooms and Jeddah with 6,890 rooms with a majority of rooms forecast to open over the next five years. It adds that Makkah is ranked second in the MENA behind Dubai which currently has 43,714 rooms at some stage of development.
In Makkah, the Abraj Kudai scheduled for opening in 2019 will remarkably add on its own some 10,000 new rooms to the market. The Carlson Rezidor Hotel Group amongst numerous others are also involved as one of the top 10 international brands with the most projects currently under development throughout Saudi Arabia.
Meanwhile the $1.3 billion Saudi-UK offer for three hotels in London and New York has as lately reported by the media as a bid valuing the assets below market price. The bid for the London’s Grosvenor House Hotel together with a majority stake in New York’s Plaza and Dream Downtown hotels owned by the jailed Indian businessman was made by a consortium of Saudi and UK family wealth funds last July 27th.
All media reported that the owner’s representatives were unhappy with the offer because they found it disrespectful and lacking in seriousness and that they stand within their rights to reject this bid.
Middle East top firms’ CEOs change, highest in the world.
The local media reported early this week that the Middle East CEO’s change highest ever rates in the world were in 2016, a report of Strategy&, PwC’s strategy consulting business said. 21% of the 62 largest corporations in the region saw a new CEO. that is more than in any of the previous 16 years.
This trend was found to be above the global average of 17% of the largest 2500 public companies, as highlighted in the CEO Success Study of Strategy&. Also 84% of the appointees are from outside the company and this is according to the study to the result of above average CEO transition rates of Saudi Arabia. Per-Ola Karlsson, partner with Strategy& explains :
“This growing trend is mostly due to recent political and economic movements, including a recent change in the country’s leadership and ongoing oil price volatility, which has led to a shift in how Saudi Arabian leaders think about, approach and successfully execute the new agenda of the country and where several private sector CEOs have taken on Ministerial or other senior roles in the government.”
58% of all CEOs in the Middle East have been outside hires, up from 33% in the previous four year period. PO Karlsson commented: “These high succession rates, coupled with a need to improve regional corporates’ leadership development practices, limit companies’ ability to fully develop internal leaders to their full potential, enabling them to effectively take on the CEO role.”
Over the past several years more big companies have been deliberately choosing their new CEO from outside of the company as part of a planned succession, an indication that hiring an outsider has become more of an intentional leadership choice than a necessity.
Outsiders accounted for 22% of all CEOs brought in via a planned succession between 2012 and 2015, up from 14% in the previous period of 2004 to 2007
Almost three-quarters of all outsider CEOs were brought in during planned successions during that same period, up from 43% in 2004 through 2007
The majority of companies have continued to promote insiders to the CEO position and Strategy& team think this will remain the preferred succession-planning practice with 77% insiders as opposed to 23% outsiders in 2015.
“Hiring an executive from outside a company to serve as chief executive officer used to be seen as a last resort,” said PO Karlsson.
“That is not the case anymore with the disruptive market-related changes that companies are facing today. While an internal CEO candidate may have an excellent record of achieving the business goals the company has pursued in the past, boards are recognizing that this candidate may lack the skills needed to lead the company through the changes necessary to win in the future,” he added.