Omani construction sector weathers external forces to continue posting solid growth

Faced with public investment cutbacks and a broad economic slowdown in the wake of lower oil prices, Oman’s construction sector continues to grow at a brisk pace, bolstered by state-led diversification efforts, high income levels and relatively low labour costs. The building industry grew by a robust 10.4% in 2016, up markedly on the two previous years, latest official full-year data show as of January 2018, with sector investment staying buoyant at 5.5% growth. In 2017, however, the sector faced challenges related to the lower oil price environment, not least of which included payment delays. “Payments by government bodies for already concluded projects would help to alleviate cash flow concerns in the contracting and design sectors,” Kevin Ellis, general manager of Majan Engineering Consultants, told OBG. As the largest segment of the non-oil economy at roughly 45%, construction remained a pillar of government efforts to steer the country’s productive industries away from hydrocarbons under its medium-term ninth five-year plan, which covers the 2016-20 period, and long-term blueprint Vision 2040.

Year Ahead

The challenge in 2018 will be maintaining this strength in the face of external pressures. Oil prices edged as high as $69.71 per barrel by mid-January 2018, but have remained low enough for the authorities to continue their efforts to rationalise spending. Regional unrest has boosted short-term demand for Omani exports such as cement (see analysis), but also fuelled uncertainty and deflated budgets among some foreign buyers. In any case, long-term forecasts suggest the days of $100-plus oil prices are over, and that, like its GCC neighbours, the country will have to continue adjusting outlays and finding new ways to optimise costs, with big implications for construction. “A lot of the middle-scale industries have been affected by the economic slowdown for the last two years,” Sudarshan KV, general manager of Gulf Stone Company, told OBG. “The outlook for 2018 remains positive; however, companies will have to become more efficient and minimise operational expenses in order to remain competitive.” Therefore what authorities do internally is vital. As monetary tightening across the developed world raises competition for investors’ liquidity, reforms affecting construction could provide vast new opportunities for private firms, lure foreign direct investment and reduce unsustainable dependence on the public sector. “Every large project now has major foreign investment: that is the way forward,” Sreejith Kesavan, operations manager at The Oman Construction Company, told OBG. Regulators could also draw new investment if they pass proposed changes to labour laws and follow through with a pledge to expand use of public-private partnerships (PPPs) in public works (see analysis). The trick lies in balancing cost constraints against traditional notions of Oman’s social contract.

Size & Performance

In 2016 Oman’s construction sector was worth OR2.29bn ($5.9bn) at current prices, or 8.9% of GDP, per the latest full-year data from the National Centre for Statistics and Information (NSCI). This was up from the previous two years, from OR2.07bn ($5.4bn) and OR1.9bn ($4.9bn), or 7.8% and 6.1% of GDP, respectively. In real terms, over 2014-16 the sector posted annual growth rates of 6.6%, 8.9% and 10.4%, even as the effects of low oil prices extended into the public budget and broader economy. More recently, in the first half of 2017, the sector recorded a fall of 7.1% year-on-year, to OR1.05bn ($2.7bn) at current prices – a result of oil-price-related cutbacks in both the public and private sectors. Its true economic impact, however, is larger than this. In 2016, aside from the above OR2.29bn ($5.9bn) figure, which accounts for gross value added, the sector also drove intermediate consumption worth OR3.84bn ($10bn) and employee compensation worth another OR915m ($2.4bn) at current prices, according to the NSCI. This implies a comprehensive GDP contribution of over OR7bn ($18.2bn). The construction sector is considered a bulwark of diversification, making up 44.5% of the non-oil economy in 2016, ahead of manufacturing (42.1%); utilities (10.7%); and mining (2.7%), according to the Central Bank of Oman.

Investment

Levels of investment have stayed robust even in a low oil price context. Gross fixed capital formation from construction in 2016 was OR5.56bn ($14.4bn) at current prices, nearly three-quarters of the country’s total, with a real growth rate of 5.5% that year, down from 8.9% and 6.6% in the two previous. Investment in a related category, machinery and equipment, fell by 27% in both 2015 and 2016, compared with an average of 12.6% in the previous four years, while that of intangible fixed assets saw a fall of 2.9% and gain of 12.7% in those two years. These broad up-trends recorded in recent years have made the sector a key contributor to overall investment.

Spending

In 2016 the state cut spending on public works from OR3.27bn ($8.5bn) to OR2.9bn ($7.5bn). Of this, 36.6% went to infrastructure, down from 43.8% in 2015, with the majority going to roads, OR389m ($1bn); education, OR242m ($628.4); and airports, OR192m ($498.6m). Meanwhile, 9.5% of the allocation, down from 10.2% the year prior, went to service production projects, mostly in housing, OR148m ($384.3); water, OR112m ($290.8m); and tourism, OR9m ($23.4m). Banks have granted a substantial amount of loans to the sector in recent years. In 2016 total credit issued reached OR2.27bn ($5.9bn), up 8.8% on the previous year and 28% on 2014. The industry also made up the second largest chunk of total bank lending at 11.5%, after consumer credit with 40%. This put it above services (8.6%), manufacturing (7.7%) and import trade (5.8%). However, “financing costs have gone up in the past year due to higher interest rates, which has put more pressure on contractors,” Ghassan Shammas, general manager of local contractor Target, told OBG.

Labour Force

In line with the pattern across the GCC, workers in Oman’s construction sector are overwhelmingly expatriates. As of the latest NSCI data set from November 2017 in a country of 4.6m, the industry’s labour force counted 56,034 Omanis and 630,012 foreigners. The former were 80% male while the latter were an overwhelming 99.8%. One reason for the predominance of expatriates in the industry’s workforce is “there is little interest among Omanis to work in the construction sector,” Bassam Addada, area general manager of Consolidated Contractors Company Oman, told OBG. As for their share of private sector employment, expatriates consisted of 36.4% of the construction sector in 2016, down from 39.1% the previous year but still well above the ratios for wholesale, retail and repairs (13.8%), manufacturing (12.3%), domestic servants (10.9%), hospitality (6.3%) and real estate (5.1%). Overall, however, with regulatory changes under way “a more flexible labour market would generate economic activity, which would in turn create more jobs for Omanis,” Alex Clark, CEO of Omani construction firm Special Technical Services, told OBG.

Regulation

Construction in Oman is regulated by state agencies whose mandates overlap with various spheres of sector activity. The chief entity is the Ministry of Commerce and Industry, which exercises broad supervisory powers over the sector, has authority to develop legislation and policies, is responsible for providing services that enhance investment, and has a hand in ensuring a healthy business environment. It also oversees Oman’s industrial estates – including those built or being built at the three main port cities of Sohar, Salalah and Duqm, and those inland such as Nizwa, Samael and Al Rusayl – and directs the development of infrastructure to facilitate investment and expand the estates’ ability to help diversify the economy. Other agencies have auxiliary roles. The Ministry of Manpower, founded by royal decree in 2001, governs the country’s workforce, enforces occupational health and safety, develops labour law, conducts vocational training programmes and administers Omanisation quotas. The Public Authority for Small and Medium Enterprises Development runs programmes supporting small and medium-sized enterprises, of which construction has tens of thousands. For foreign investors, the country’s Invest Easy portal, set up in the early 2000s before transitioning to an electronic window in 2006, serves to ease commercial registrations and the processing of government documentation.

Non-State Actors

A founding member of the GCC, Oman is part of the GCC Council of Ministers of Labour and Social Affairs, which coordinates the bloc’s policies to ensure labour law is in line with global standards. It also has an active role in the Arab Labour Organisation, the manpower arm of the League of Arab States. The country joined the International Labour Organisation by royal decree in 1994 and has since participated in annual technical committees held in Geneva. In 2007 the Ministry of Social Development approved the establishment of a public body called the Oman Society of Contractors to represent the interests of the building community and tackle brainwork on some of the sector’s biggest challenges, such as vocational training and enticing more Omanis into the industry. Recently it has become known for its work on labour laws, notably its policy proposals aimed at making Omanisation targets more flexible for businesses. “The current mandate of 30% is unrealistic: the actual level now is around 8%, so full compliance would imply creating 210,000 jobs for Omanis overnight,” its CEO, Shahswar Al Balushi, told OBG. “Our proposal is based on the idea that Omanisation is not about numbers but quality. The ideal system would use a combination of direct hiring, vocational training and government waivers exchanged for a fee that is then routed into training more Omanis.”

Land Ownership

The Land Law (Royal Decree 5/1980) declared all land with no provable title as state property, and there is a general prohibition on foreign holdings of absolute title. However, the law broadly recognises corporate ownership of real estate in various forms, albeit with some key restrictions. Limited liability companies, to be entitled to freehold land rights, must be wholly owned by Omanis or GCC citizens, while public joint stock companies must be at least 30% Omani-controlled, following the relaxation of the previous quota of 51% in 2010. Use of such land is restricted to purposes of administrative offices, warehousing, staff accommodation or “as a special-purpose premise for achieving the company’s objectives,” according to local law firm Curtis, Mallet-Prevost, Colt & Mosle. Real estate developers, however, are granted an exemption to build and resell residential and commercial units, and GCC-owned entities are permitted to purchase real estate for investment purposes, though they are then required to develop vacant plots within four years.

Foreigners & Land

Foreign companies from outside the GCC have three main options. First, if ineligible for outright ownership, they may be granted usufruct – “use and enjoyment”, or stewardship – rights that are tantamount to freehold ownership, allowing them to use land for projects that contribute to economic or social development. Though temporary, such arrangements are often made for 50 years, and are typically renewed upon expiry if the activity carried out on it is productive and complies with applicable laws. Second, a foreign firm may hold 100% ownership of companies whose local operations reside within areas specified as freezones or special economic zones (SEZs); firms may gain usufruct rights to land in SEZs. Lastly, following a royal decree in 2006, foreigners can own land or build units in areas called integrated tourism complexes (ITCs). These areas, usually required to comprise commercial, residential and tourism components, entitle foreign firms to buy units from a developer.

Setting

The backdrop for 2018 forecasts is one of cautious optimism. The fall in oil prices that began in 2014 had a big impact on Oman’s budget in 2016, squeezing state spending and causing many projects to be cancelled or postponed. This began to change at the end of 2017, however, and in January 2018, oil prices rose again up to $70 per barrel. According to MEED, the recovery has eased the pressure on state finances in the GCC, and the pace of recent economic reforms should boost confidence and expand use of the PPP model, though capital spending will remain restrained.

Recent Activity

In this context, a substantial project pipeline continues to move forward. Active construction projects in Oman reached a total value of $195bn in December 2017, according to calculations from BNC Network, a digital intelligence platform that tracks this activity across the Middle East, now tallied regionwide at 28,500 projects worth $3.4trn. One mainstay of this activity is public procurement. At its latest meeting held in August 2017 – its seventh that year – Oman’s Tender Board approved another 15 construction contracts worth OR5.7m ($14.8m), following the previous two meetings whose contracts were worth a combined OR20.6m ($53.5m) and OR61m ($158.4m), respectively. These spanned multiple government ministries and ranged from building roads and dams to office buildings and housing complexes – and tendering of public works projects is expected to continue at a similar pace in 2018. “In 2018 contract activity will likely be concentrated in hospitality, health care, industrial construction and consolidation of public buildings,” Kevin Ellis, general manager of Majan Engineering, told OBG, “But the environment is very cost-conscious: it is a buyer’s market and contractors are bidding low.” All told, Oman currently accounts for 10% by number and 9% by value of all active construction projects in the GCC, according to BNC. Five Omani projects stand out for their complexity, long-term nature and size, with a combined cost of nearly $48bn.

Natural Gas Operation

The first of these is the Khazzan natural gas project, a long-term oil and gas development that will comprise over $15bn in investment and has made significant progress, recently starting production on phase one and now gearing up for phase two. Granted exploration rights under a production-sharing agreement signed in 2007, BP confirmed over the next six years the existence of substantial tight gas resources in Block 61 – a desert site 350 km south of Muscat which contains the Khazzan field, home to an estimated 10.5trn cu feet of recoverable gas resources. Phase one of development, commissioned in 2013 and ratified by royal decree in early 2014, officially commenced first production in September 2017.

The project has been a fillip for the construction sector: phase one required building 56 km of roads, thousands of metres of power lines and broadband networks, and a 60-km water pipeline, as well as foundations and structures for the gas processing plant. This is in addition to supporting infrastructure that had to be built, including a water treatment plant, waste management area, an electrical power substation and accommodation units for 12,000 construction workers. Khazzan has been a boon to local contractors: BP says 38% of total contract spending has gone to domestic firms. Drawing from 200 wells to feed a dual-train processing plant, first-phase output is expected to plateau at 1bn cu feet per day, making it BP’s largest project to commence production in 2017 – which according to BP was switched on “ahead of schedule and under budget”. This bodes well for phase two, known as Ghazzer, which will expand output to 1.5bn cu feet per day, fed by another 100 wells to be drilled over the field’s lifetime. To allow this, an amendment to the original licensing agreement of November 2016 has expanded Block 61 by another 1150 sq km, from 2700 sq km, creating further potential exploration and building opportunities.

Industrial City

The second major project is the $10.7bn Sino-Oman Industrial City being built in Duqm. Led by a consortium of six Chinese companies called Oman Wanfang, the industrial city is set on 11 sq km in the Duqm SEZ and will be dedicated to light manufacturing, heavy manufacturing, and mixed-use development. There is much building still to be done: the city’s 35 planned projects include an oil refinery, methanol plant, automobile assembly plant, solar panel factory, oil and gas equipment-making plant, centre for distributing building materials, petrochemicals complex, concrete plant, steel smelter, glass factory and aluminium plant.

To support this, the city plans to build accommodation for 25,000 people, schools, offices, a hospital, a sports centre and a tourism zone with a five-star hotel. Having signed a deal in May 2016 for 50 years of development rights, Oman Wanfang broke ground in April 2017, pledging to finish 30% of its planned projects by 2022, implying big contracts ahead for both domestic and foreign firms. According to the consortium’s chairman, Ali Shah, Chinese banks are financing the city’s infrastructure, with individual companies funding their own facilities within it. Many of the initial contracts have already been awarded throughout the SEZ. In November 2016 the zone’s regulator, the Duqm Special Economic Zone Authority (SEZAD), signed a deal worth OR107.3m ($278.6m) with a joint venture between two foreign contractors – Turkey’s Serka and Portugal’s MSF – for a large infrastructure package called IP2, an important precursor to the operation of Duqm’s four planned commercial terminals. In February 2017 it awarded contracts worth OR84.7m ($219.9m) to build roads, stormwater drains, and dams in the SEZ.

In April 2017 some 10 agreements worth $3.2bn were signed by Chinese firms alone to build the hotel as well as plants for water desalination, power generation, synthetic pipes, building materials, bromine, automobiles and equipment for the energy sector. More deals look set to follow: in September 2017 Oman Wanfang signed a memorandum of understanding (MoU) with the Chinese Petrochemical Industries Federation to its network of private firms to build petrochemical plants, oil storage structures and other facilities in Duqm.

Tourism Complex

The third large project is an ITC called Little India to be built in the port city of Duqm. At a cost of OR288m ($747.8m), the mixed-use development will be located in the Duqm SEZ and include beachfront villas and apartments, commercial offices, a marina and five-star hotel, restaurants and theatres. As of late 2017 SEZAD had signed an usufruct agreement allocating 600,000 sq metres to the master developer, also called Little India. According to the firm’s managing director, Pradeep Nair, construction of phase one will start in early 2018 on a $12m initial investment from the developer comprising the 25-unit Village Resort to be run by the Marriott hotel chain, and 96-unit apartment building, with the former to finish in September and the latter in February 2019. Further phases are to be built over the next 10-15 years. In December 2017 the firm signed a MoU for securing financing with Bank Muscat.

Water Grid

The fourth project notable for size is Oman’s portion of the GCC “common water grid” project, designed to link the water supply markets of these countries as a way of managing shortages. The intent is to lay water pipelines stretching more than 2000 km along the coast from Oman to Kuwait, connecting large desalination plants on the Gulf of Oman to the rest of the GCC. Expected to be developed in three phases at a cost of $10.5bn, the first phase will see pipelines laid connecting all six countries at a cost of $2.7bn, the second will see a desalinisation plant built in Sohar for $4bn, and the third will see a similar plant constructed in Ashkhara at a cost of $3.8bn. Announced by GCC heads of state in 2012, but put on hold after the oil price drop, the project has already undergone a feasibility study and saw further intra-bloc discussions in 2016.

Though no new announcements were made in 2017, the grid seems likely to move forward in the medium term as it is considered essential to managing future water supply. A study by US-based research firm Booz & Company has warned that the GCC faces a “serious water supply shortage” in the future driven by its “excess water consumption” of 364 litres per day per capita, more than 82% above the global average. Water desalination in the region is relatively expensive at $1 per cubic metre on average, Booz said, and accounted for 10-25% of the bloc’s energy consumption despite a five-fold efficiency improvement in desalting processes over the past three and a half decades. It concluded that the region would need to spend more than $100bn to build up its water infrastructure in the coming years.

Rail Network

The fifth major project is the Oman National Railway, a network of 2135 km to be built across the country, virtually from scratch. The prime aim is now to speed up transportation of freight from the country’s mining and mineral assets to its top intermediary destinations for export abroad. Billed at an estimated cost of around $11bn, its main arteries will connect Muscat to border crossings with the UAE and Yemen as well as the country’s three main three ports – Sohar in the north, Salalah in the south, and Duqm in the centre – with tendrils linking the network to key mining assets in Ibri, Ibra and Thumrait, and key oil and gas fields in the country’s central desert hinterland. The project is designed as a double-track, standard gauge system capable of supporting double-stack container trains with axle loads of 32.4 tonnes. If successful, the project could see the tendering of a number of large contracts over the next decade: according to Rail Journal, an industry publication, construction of the network will include 12,000 km of rail line, 35 km of tunnels, 132 km of bridges, and 245 over- and under-passes, requiring 23m cu metres of ballast, 10m concrete sleepers, 41m fasteners, 8000 wagons and 300 locomotives. Government commitment to the project has survived several ups and downs. With planning in the works since at least 2010, in June 2014 the state-owned enterprise Oman Rail was founded to lead the project. Its ownership was later subsumed in 2017 under a new state-owned transport holding company called Asyad (see Transport chapter). First designed as part of the proposed regionwide GCC rail network – with the possibility of upgrading for passenger-carrying capability at a later stage – the Oman railway continued to move forward even when the former project was paused in 2016 during the oil price crash, particularly after the UAE’s Etihad Rail suspended its tender for railway links to Oman. Work on the first segment, a 207-km stretch from the UAE border at Al Ain to Sohar, was due to start in 2018 and reach completion 2020, though delays to analyses have led to a further postponement. In May 2016 the Ministry of Transport nullified a $149m consultancy contract under way with Spain’s Tecnicas Reunidas “to avoid extra costs” while giving assurances the project itself had not been cancelled so much as delayed. Feasibility studies and design work continued in 2017 as the government adjusted its models to fit a more commercially-driven system based on expected mining developments. In a positive sign, a royal decree issued in mid-July 2017 announced that Oman Rail had completed initial design work and prepared tender documents for a 655-km segment of railway from Haima to Thumrait, which will require nine bridges, two road crossings, 11 loading stations and 10 rail maintenance facilities (see Transport chapter). “Our design for the domestic Mineral Line is fit for purpose and is ready pending the current study of mineral resources and reserves,” Philip Marquis, operations manager at Oman Rail, told OBG. “The Mineral Line will be built and operated on a purely business case without state subsidies. This project has an edge given it is greenfield and avoids the costly retrofits and upgrades normally associated with such a development.”

Oil & Gas

These five mega-projects aside, the construction sector pipeline has continued to see dozens of other contracts move forward. Some of the largest are in oil and gas. The state-owned oil firm Petroleum Development Oman (PDO) is building the $1.25bn Rabab Harweel Integrated Project, which is expected to be finished in 2019 and produce 6m cu metres a day of sweet gas and 60,000 barrels a day of crude, as well as the $900m Yibal Khuff project set to be switched on in 2020 with a daily output of 5m cu metres of associated gas and 10,000 barrels of oil. In July 2017 UK-based oil services firm Petrofac signed a 10-year extension to its three-year deal with PDO for providing management support in engineering, procurement and construction (EPC), including for the two projects mentioned above. In August 2017 phase one of the $7bn Duqm oil refinery project – itself secured just four months earlier in a partnership between Oman Oil Company and Kuwait Petroleum International – saw three multibillion-dollar EPC contracts awarded. These were Spain’s Tecnicas Reunidas and South Korea’s Daewoo for main processing units; to Petrofac and Samsung for utilities and offsite facilities; and to Italy’s Saipem International for a product storage and export terminal, an 80-km oil pipeline linking the SEZ to Ras Markaz, and eight storage tanks at the latter location.

Industry

Large industrial complexes have also been active of late. In March 2017 an Omani-Indian joint venture called Sebacic Oman awarded a $163m contract to Al Duqm Global Construction to build the country’s first sebacic acid plant in Duqm with a capacity of 30,000 tonnes per annum. In November 2017 a $600m, 1021-MW solar thermal facility called Mirrah, which will be used to recover heavy oil reserves in the southern Amal field, announced near completion of phase one and plans for a phase two expansion in 2019. The country’s two main cement producers formed a joint venture in mid-2017 to build a new plant in Duqm (see analysis). Additionally, a $1bn, 1700-MW solar power plant is being built in Sohar by the state-run Oman Power and Water Procurement Company under a PPP model (see analysis) with three foreign firms. In April 2017, the plant was confirmed as being on track for switch-on in January 2019. Lastly, the government’s National Water Sector Master Plan plans to spend OR2.5bn ($6.5bn) to expand its water distribution network, while for electricity it plans to build OR769m ($2m) in new PPP solar plants capable of producing 1 GW of power in Duqm.

Retail & Tourism

Public facilities are also seeing a raft of new building. Dubai-based developer Majid Al Futtaim broke ground on the OR180m ($467.4m) Mall of Oman in March 2017, to be completed by 2020 with 350 stores covering 157,000 sq metres. Four months later the groundstone was laid on the Salalah Grand Mall project in Dhofar, part of a mixed-use development led by a joint venture of Al Madina Real Estate Company and the Ministry of Defence Pension Fund. That same month, the Ministry of Tourism announced it would build 17 tourism “stations” around the country, each comprising an information centre, hotel, restaurant space, petrol station and prayer rooms.

Meanwhile, at the country’s five new ITC projects now under way, the government plans to build some 5000 dwellings open to purchase by foreigners. Elsewhere, Vision 2040 outlines plans to spend OR80m ($207m) a year on affordable housing to close the country’s housing gap. “Most of the main residential projects currently under way are being built under PPPs,” Hilal Al Balushi, managing director of Oman-based architectural firm Corduff, told OBG. “In 2018, however, competition will increase as the government will issue fewer project tenders: sectors that are still receiving major investment include tourism, health care and education.”

Roads, Ports & Airports

Transport infrastructure projects also continue. According to the Ministry of Transport and Communications, as of mid-2017 there were 118 road projects under way, including 77 interchanges, 41 bridges, 23 flyovers, 67 underpasses and 34 pedestrian bridges throughout the sultanate. Among the largest were the Mirbat-Hasik rehabilitation project, a $500m road stretching 200 km between Bidbid and Sur, and the 283-km Al Batinah Expressway – all set for completion by the end of 2018, the ministry said.

Meanwhile, in mid-2017 Omran, a state-owned tourism developer, picked Dubai’s Damac Properties as its joint venture partner to develop its $1bn Port Sultan Qaboos Waterfront project, set to transform the old port area of Muscat into an integrated tourist complex with hotels, residences and retail space. Another noteworthy project is a new 580,000-sq-metre terminal at Muscat International Airport. First scheduled for 2014 – but thwarted by delays due to technical difficulties – neared the end of construction in December 2017 with the Oman Airports Management Company conducting a large-scale trial, for which thousands of members of the public posed as passengers to test its operating processes in order to generate feedback. Although the first test flight took off on December 23 2017 and the terminal’s official opening was expected soon after, it remains unconfirmed at the time of publication.

Outlook

Oman’s chief strengths – including its hydrocarbons wealth, political stability, detailed diversification plans and a strategic location between the vast markets of Europe and Asia – look likely to continue driving growth in its construction industry in the short to medium term. US-based research firm BMI forecast the sector would grow by 10.1% in 2017 and by an average of 10.7% per year through to 2022. Legal reforms for PPPs and labour law, if passed, could easily increase this. In an age of tight budgets, clarity in terms of strategic planning and priorities will be a key factor in drawing foreign and private investors.

To meet this need, in November 2017 the Supreme Council for Planning announced its steering committee for a national spatial strategy would also work to devise a nationwide plan for construction, tailoring investments to each individual governorate according to its specific needs. The Supreme Council for Planning further elaborated, “For investors, it is important to know what the spatial policies are for the long term.”