Qatar's construction sector buoyed by energy prices, defence spending, World Cup

Driven by government infrastructure spending related to Qatar National Vision 2030 and the upcoming 2022 FIFA World Cup, Qatar’s construction industry has flourished over the past five years to become a key engine of the economy. The laying of new rail and metro lines, a growing airport and port, and a rapidly expanding road network have generated double-digit growth rates and made the Gulf state a construction hotspot.

Although activity remains robust, the wider economic squeeze brought about by the 2014-16 oil glut has been felt in the sector, as the effects of lower oil and gas revenue trickled down to impact government expenditure and investor confidence, resulting in some project cancellations and delays. A narrower project pipeline – particularly in some subsectors – and increased competition for contracts has forced contractors to cut margins and take on greater risk.

Nonetheless, with the 2022 FIFA World Cup just three years away, a partial rebound in energy prices, and the government turning its attention to new developments in the energy and defence sectors, industry figures are hopeful that 2019 will see activity pick back up. “Given the status quo in regional dynamics, Qatar is now more open to the world, being greatly connected to new markets and potential partners,” Bader Mustafawi, director of Qatar Building Company, told OBG. “The private sector has thus adapted accordingly with a more efficient and effective supply chain management, which means the opportunities for growth down the line will be very significant. In turn, the overall economy will become more solid and robust,” he said.

Economic Weight

After expanding by a factor of 11 between 2000 and 2014, Qatar’s economy was hit hard by the period of low energy prices that began in mid-2014. With over 50% of GDP coming from the minerals sector – which includes the oil and gas industries – prior to 2014, the fall in prices saw Qatar’s GDP drop from a 2014 high of over $206bn to $152bn within two years. The situation was then exacerbated by the mid-2017 imposition of an economic blockade on Qatar by several countries including Saudi Arabia, the UAE and Bahrain.

In spite of these challenges, Qatar has adapted to this new environment. According to Ullatil Achu, general manager of Dyarco, “The construction sector is still quite relevant for Qatar’s economy, although the opportunity for business growth here lies more heavily in supporting and servicing the existing infrastructure.”

In addition, the country’s construction sector has boomed in recent years, driven by government infrastructure spending. The “National Accounts Bulletin 2018”, published by the Planning and Statistics Authority (PSA), shows that between 2013 and 2017 the construction sector recorded average annual growth of 24% to reach QR91.1bn ($25bn) in 2017. This represented 15% of Qatar’s GDP of QR607.9bn ($167bn) in 2017, making the industry the largest non-minerals sector in terms of contribution to overall GDP. Construction was valued at QR78.8bn ($21.6bn) in the third quarter of 2018, which also represented 15% of the first nine months’ GDP of QR518.6bn ($142.2bn).

Construction is also the largest sector when it comes to job provision: 847,759 people, or 41.2% of Qatar’s 2.05m-strong labour force, worked in construction at the end of 2017, according to the PSA’s 2017 “Chapter II Labour Force” report. The previous year’s report denotes a marginally lower figure of 847,252 as working in the sector as of the end of 2016.

Money Talk

These encouraging growth figures mask a difficult couple of years for the industry, with lower state revenues leading to a number of cancellations and delays of big-ticket works. From a peak of QR75.6bn ($20.8bn) in the FY 2014/15, the country allocated QR42bn ($11.5bn) to transport and infrastructure in the 2018 budget. This declining expenditure is reflected in sector growth, which stood at a five-year – albeit very healthy – low of 18.2% in 2017. The trend of lower growth has continued: in the third quarter of 2018 the sector recorded a 15.9% year-on-year expansion.

In a phenomenon that mirrors the situation across the region, a narrowing project pipeline has brought about a highly competitive bidding environment, leading contractors to cut margins in an attempt to win work, according to Chakib Nayfe, general manager of Medgulf Construction. “We all have the same access to the same opportunities at the same prices, so it becomes a matter of how you price a job and how much risk you are willing to take on,” he told OBG.

Risk has been rising due to delayed payments from governments in the region, according to the “GCC Powers of Construction 2017” report by global financial services firm Deloitte. Such delays are putting some contractors in an extremely difficult position. This was the case with one of Saudi Arabia’s top construction firms, Saudi Oger, which shut down in 2017 citing a slowdown in the sector and delayed government payments due to lower oil prices.

Near-term Growth Prospects

After Qatar saw slower years in 2017 and 2018, 2019 promises greater opportunities for contractors. A general recovery in energy prices has boosted government revenue, although the sharp drop in the last quarter of 2018 shows that energy markets remain unpredictable. The improved fortunes for the energy sector is reflected in a 17.6% increase in budgeted spending for transport and infrastructure in 2019, which is expected to be QR49.4bn ($13.6bn). This includes expansion at Hamad International Airport and Hamad Port, further development of road and drainage networks, and increased outlay on oil and gas and defence infrastructure.

“Public sector spending continues to be the main driver of growth for the construction sector, and we have seen a slower-than-usual 2018 in terms of market activity,” Omar Bahgat, vice-president and regional manager at the Qatar branch of Engineering Consultants Group, told OBG. “Nevertheless, there is room for growth going forward, particularly in new segments such as defence – an area in which spending has increased significantly in recent times.”

Planning & Procurement

Construction in Qatar is predominantly governed by agencies within the Ministry of Municipality and Environment. Local municipalities are responsible for granting planning permission and approving design, while responsibility for checking that new buildings conform to specifications and urban development plans falls to the Urban Planning Department’s Building Permit Complex. According to Osama Hadid, CEO of Al Jaber Engineering, key to increasing competition within the construction sector is streamlining registration processes. “Efficiency gains are a clear focus for Qatar moving forward, and in this sense, progress has been made on the ease of registering a business and getting approvals and licences, which in turn will help bring more competition to the market,” he told OBG. Similarly, Dafer Mustafa Hallawa, CEO of local conglomerate Tadmur Holding, believes that improving approval processes would greatly benefit the industry, “There is a lot of support for investment in manufacturing, but the government will need to ensure that this is also reflected in approval processes,” he told OBG. “By focusing on reducing the time required to establish a new factory, obtain a manufacturing licence or even purchase new land, for example, the authorities can really help local companies to expand.”

Indeed, the market has already changed significantly, and there is now greater competition, according to Philippe Tavernier, CEO of construction firm QDVC. “In the second half of 2018 a number of companies entered the market, particularly from countries with which Qatar has strengthened bilateral ties, such as Turkey,” he told OBG. “This has increased the level of competition in the sector, and thus efficiency gains have become an important aspect for construction companies in the market.” A vital part of urban planning is ensuring works are aesthetically pleasing in addition to being structurally sound, requiring real estate developers to create spaces that people enjoy living and working in. “Landscaping is an integral part of any development and includes not just what is visible on the surface, but the underground infrastructure and lighting,” Ghassan Oueijan, managing director of local contractor Nakheel Landscapes, told OBG. “Due to the environmental challenges of the Gulf region, here is where you find the world’s largest landscaping companies.”

Public Works Authority (Ashghal) is responsible for the design, construction, delivery and asset management of all infrastructure projects and public buildings of national importance in Qatar. Design and construction of the ’s new airport, port and rail network falls under the remit of the Hamad International Airport Expansion Steering Committee, Hamad Port Project Steering Committee and Qatar Rail, respectively. Since June 2016 public procurement has been overseen by the Ministry of Finance. Companies hoping to bid on government contracts must obtain a certificate of classification from the ministry’s Government Procurement Electronic System. All tenders are announced and bid on through an online portal, ensuring a transparent and fair process. Due to the impact large-scale public developments can have on the environment, sustainability should be at the heart of planning. “As Qatar moves forward on key building works, it is of utmost importance that local companies focus on sustainability and apply environmentally friendly policies, such as completing the LEED certification process,” Hallawa told OBG. “Such measures will not only increase companies’ margins over the long term, but will help raise the country’s international profile as a centre for environmental sustainability and efficient resource management.”

Building Costs

At the height of the construction boom in 2016 Netherlands-based design, engineering and consulting company Arcadis ranked Doha as the most expensive city for construction in the MENA region. Speaking to OBG, Neyfe attributed this ranking to Qatar producing very little construction materials locally. “All raw materials used to be imported, which led to higher costs, while indirect costs related to living expenses also had an impact on the market,” he said. With a large proportion of imports historically coming from the UAE, the economic blockade has compelled Qatar to develop its own production capacity, while also tapping other source markets. In February 2019 Qatar National Cement Company announced that a new 5000-tonne-per-day clinker production line had been completed, bringing the company’s total capacity to over 5.5m tonnes per annum (tpa). With Al Khalij Cement, another cement producer, possessing a similar output, Qatar’s domestic production capacity now comfortably meets local demand, which was estimated at 5.7m tpa in 2017. Furthermore, state-owned Qatar Primary Materials Company is active at a gabbro quarry in Oman, which will supply Qatar with up to 7m tonnes of gabbro per year. Such initiatives will help reduce costs in the medium to long term.

Reduced demand for building materials due to the slowdown in the sector since 2016 has lowered construction costs as well. Inflation of key building materials remained low between 2016 and 2018, according to UK construction services firm Turner and Townsend. For example, the cost of 30-megapascal concrete for a 1500-cu-metre job rose from $83 to $84 over the twoyear period, while the cost of 16mm reinforcement bar for a 120-tonne job dropped 11% from $922 to $820. Turner and Townsend’s “International Construction Market Survey 2018” shows that these prices nevertheless remain significantly higher than those secured in the neighbouring UAE, where the same products cost around $63 and $490, respectively.

Oil & Gas Projects

The coming years should see the welcome return of large-scale investment in the oil and gas industry after several years of relative quiet, which will benefit construction companies that build upstream and downstream infrastructure.

In 2017 Qatar lifted a 12-year moratorium on development of its 62% share of the South Pars-North Dome gas field, which it shares with Iran. This was followed by Qatar Petroleum announcing in September 2018 that it intended to raise its liquefied natural gas production capacity from 77m tpa to 110m by 2024. To do so, it plans to build four 7.8m-tonne-per-year liquefaction trains at the Ras Laffan Industrial City. Qatar Petroleum has stated that it will make a decision whether to partner with international firms on the project by mid-2019 ahead of a final investment decision by year end. Qatar Petroleum’s subsidiary North Oil Company has also begun issuing necessary contracts for the second development phase of the 300,000-barrel-per-day Al Shaheen offshore oilfield. In 2018 it awarded an estimated $300m contract to a subsidiary of PetroVietnam Technical Services Corporation for the construction of three wellhead platforms and three bridges.

In addition, in January 2019 industry media reported that the operator called for expressions of interest for a project to ease congestion of a pipeline in the oilfield.

World Cup Progress

The building of stadiums and associated infrastructure for the 2022 FIFA World Cup – a key driver of construction growth since 2013 – is coming into its final stages, bringing about a shift in preparation. “The next two years will see a slowdown in new tenders, as the key infrastructure projects for the World Cup have already been tendered,” Tavernier told OBG. “However, we expect to see a rise in lower-value tenders related to the finishing stages, which will create opportunity for smaller players.” Overseen by the Supreme Committee for Delivery & Legacy (SC), Qatar is readying eight stadiums and multiple training venues for the four-week international football event at an estimated cost of roughly $6.5bn.

The first game-ready stadium is the Khalifa International Stadium. Having first opened in 1976, the stadium reopened in 2017 after undergoing a renovation that took its seating capacity to 40,000. The remaining stadiums are at various stages of completion, with the SC stating that they will all be finished by the end of 2020. In January 2019 local media reported that construction of the 40,000-seat Al Wakrah Stadium is almost complete. A joint venture (JV) between Midmac, Six Construct and the Qatar subsidiary of Austrian firm PORR is the main contractor for the project, the design of which evokes the hulls of pearling dhows (traditional sailboats). Completion of the tent-inspired Al Bayt Stadium, which will have a capacity of 60,000 and is being jointly developed by Galfar Al Misnad and Italian firms Cimolai and Salini Impregilo Group, is similarly imminent.

Meanwhile, early 2019 saw the SC announce that the roofing support cables for the Education City Stadium had been installed. The complex, which is currently being developed by a JV between four affiliates of Cyprus-based companies, is scheduled to be completed by around the end of the year.

The three remaining stadiums are all expected for 2020 delivery. At 80,000 seats, the golden-shelled Lusail Stadium is the planned venue for the World Cup final. Designed by Pritzker Prize-winning British architect Norman Foster, the main contract for the stadium went to a JV between local HBK Contracting and China Railway Construction Corporation. A JV of Al Jaber Engineering and Tekfen of Turkey holds the main contract for the 40,000-person Al Thumama Stadium, which was designed by local architect Ibrahim Jaidah to resemble the Qatari gahfiya (traditional woven cap). The last stadium, Ras Abu Aboud, which will have capacity for 40,000 spectators, is the stadium at the earliest stage of development. Overseen by HBK Contracting, work on the foundation was ongoing as of January 2019.

Hospitality

The economic blockade has hit the hospitality sector particularly hard, with 30% lower visitor numbers in 2018 compared to 2016, resulting in an 18% drop in hotel room rates over this period. This in turn led to a slowdown in hotel construction in 2018, as delivery of more than 1000 rooms was pushed back to 2019, according to consulting company Valustrat.

However, the run-up to the 2022 FIFA World Cup will see activity take off again as Qatar prepares to welcome around 96,000 visitors per day during the 28-day event. Real estate services firm DTZ estimates some 15,000 rooms at various stages of planning or construction will be delivered by 2022, which will bring Qatar’s hotel room supply to over 41,000 if all come to fruition. In the biggest hospitality award of 2018, the second phase of construction works for the $500m Katara Towers hotel in Lusail was handed to HBK Contracting.

Transport & Defence

Another key target for delivery by 2022 is the passenger terminal expansion at Hamad International Airport, which will take the airport’s capacity from almost 30m passengers per year in 2018 to 53m by the start of the World Cup. Various tenders for the 500,000-sq-metre project were issued in 2018, with the engineering and design contract going to Singapore-based Meinhardt. Construction of additional cargo terminals that will bring the airport’s annual capacity to almost 3m tonnes by 2020 and to over 4.5m tonnes by 2021 is also under way.

“There are a number of large projects that are expected to be tendered in 2019, including the airport expansion,” Hadid told OBG. “At the same time spending on defence-related projects is expected to increase, balancing out reduced spending in other areas.”

In the defence space, 2018 saw Qatar announce plans to expand the barracks at the Al Udeid Air Base by developing 200 housing units for officers and their families; the base is home to some 10,000 US service personnel. In January 2019 the US signed a memorandum of understanding with Qatar on the plans, suggesting that the project would receive the green light in the near future. Similarly, in August 2018 it was announced that the country planned to establish another air base named after the current amir, Sheikh Tamim bin Hamad Al Thani.

Meanwhile, a new naval base is under development on a plot adjacent to Hamad Port. Building of the base, which will accommodate 6000 personnel and support Qatar’s burgeoning navy, is due to start in early 2019 and wind up in 2022. US-headquartered engineering firm AECOM is providing project management for the development, while local Generic Engineering Technologies won an $800m contract from the Ministry of Defence in November 2018 to construct 169 buildings and other infrastructure at the base.

Having begun operations in December 2016, Hamad Port itself is about to undergo its second phase expansion. In late November 2018 QT erminals, the operating company that oversees Hamad Port, announced that it had received the go ahead to begin work, which will see the construction of a second container terminal begin in early 2019. A third phase providing for another container terminal is expected to boost the port’s capacity from 2m containers in 2018 to 6m per year.

Health & Education

In 2018 Ashghal worked to deliver four primary health care centres at a cost of almost QR600m ($164.8m) and there are currently six health centres and the National Health Laboratories under construction. The 2019 budget allocates QR22.7bn ($6.2bn) to the health sector, which is 11% of the total expenditures for 2019. Ashghal’s public building work also includes education facilities, with the government agency developing 73 schools and 37 kindergartens between 2013 and 2018. In January 2019 Ashghal and the Ministry of Education announced a developing plan to build another 45 public schools in the next five years through public-private partnerships (PPPs) at an estimated cost of approximately QR4bn ($1.1bn). Under the mechanism, which will represent the first time PPPs have been employed in Qatar for social infrastructure, the private sector will design, construct and manage the schools in return for a 25-year payment commitment from the Ministry of Education. Having issued a call for expressions of interest in January, Ashghal is expected to launch building for the first tranche of eight schools in the first quarter of 2019, with delivery due ahead of the 2021 academic year.

Workers’ Rights

Over the past decade, the treatment of blue-collar migrant workers in GCC states has been the source of considerable negative press, with human rights groups and the Western media citing faults in the living and working conditions of these labourers. In the case of Qatar, a spotlight has been on the country’s construction workers since it received football’s nomination to host the 2022 FIFA World Cup.

One effort the government has made to address such concerns came in December 2016, when it announced a new labour law abolishing the kafala (sponsorship) system of employment. The law introduced grievance committees to which workers could turn if their employers denied them permission to leave the country or change jobs, as well as fines of up to QR25,000 ($6870) for employers who confiscated their workers’ passports. Additional reforms included establishing a minimum wage in late 2017 and granting foreign workers the right to leave without permission from their employer in September 2018. The government is working with the UN International Labour Organisation to further improve migrant workers’ situations.

Outlook

Despite a tough 24 months for contractors, the mid-term outlook for construction remains bright. Higher energy prices should allow the government to continue implementing its infrastructure development drive, while growing local production capacity for building materials and improving labour standards will contribute to the sector’s long-term sustainability.