Oman's construction activity ramps up amid government initiatives

As the second-largest driver of non-hydrocarbons growth and the sector that employs the greatest number of people, construction plays a key role in Oman’s economy. While 2017 was a difficult year for the industry, forecasts suggest a return to growth in 2018 and 2019 on the back of higher oil prices and a government-supported diversification plan. For domestic contractors, high Omanisation requirements and stiff competition from international companies remain long-term concerns, though clear land legislation and efforts to streamline the permitting process are supporting the overall business environment.

Size & Performance

The sector contracted by nearly 8% in 2017, according to the Central Bank of Oman (CBO). The decline represented a sharp reversal for the industry after growth of 10.5% in 2016. Accordingly, the share of building activity in non-hydrocarbons GDP also decreased, from 42.3% in 2016 to 38.3% in 2017, with the CBO noting that these figures indicate the lagged effect of the 2015-16 economic slowdown on the sector. Nevertheless, construction continues to be the second-largest contributor to the non-oil economy after manufacturing, accounting for 7.6% of total GDP in 2017. While there is optimism regarding full-year results for 2018, the first half of the year saw a 2.1% decline compared to the same period of 2017, according to the latest data available from the National Centre for Statistics and Information. The OR1.03bn ($2.7bn) generated by the industry between January and June 2018 equated to a 7.1% share of overall GDP.

Financial Snapshot

Gross capital formation in the sector continues to account for a large part of the national total, amounting to OR5.39bn ($14bn) out of OR7.54bn ($19.6bn) at current prices in 2017. While Oman’s total gross capital formation declined by 9.2% in 2017, contraction in the construction sector was felt to a lesser extent at 7.7%. However, investment in a related category, machinery and equipment, fell by 17.5% from OR1.4bn ($3.6bn) to OR1.2bn ($3.1bn). Between 2000 and 2017 investment in building saw uninterrupted growth, when gross capital formation stood at OR457.1m ($1.2bn).

At the same time, loans disbursed to the construction sector by commercial banks fell from OR2.3bn ($6bn) in 2016 to OR1.2bn ($5.2bn) in 2017. Accounting for 9.6% of all loans issued by commercial banks, the construction sector was the second-largest destination for credit in 2017 after the personal loans segment, which comprised 40%. However, according to Shahswar Al Balushi, CEO of the Oman Society of Contractors (OSC), an independent body established to represent the interests of the country’s private construction companies, banks in Oman have become stricter in their criteria for issuing loans to the industry. “A history of payment delays stemming from government projects has meant that banks have become more reluctant to provide financing to the construction sector,” Al Balushi told OBG.

Obtaining Permits

Beyond financing, another administrative activity required of builders before beginning a project is obtaining the proper permits and approvals. To do this, a developer interacts with the Ministry of Housing, the Ministry of Regional Municipalities and Water Resources, the Ministry of Environment and Climate Affairs, and other organisations such as the Royal Oman Police and the Oman Wastewater Services Company. Although many bodies are involved in this process, the World Bank’s “Doing Business 2019” report scored Oman above the MENA regional average on its indicator for dealing with construction permits: 72.05 versus 59.17. Working from data collected in May 2018, acquiring the construction permits for a warehouse required 14 steps and took 172 days to complete. Government authorities have been working to make the permit application process more efficient by reducing the number of procedures and increasing digitalisation at various steps. By January 2018 the process to obtain a construction permit in the Muscat municipality had been reduced to seven procedures, and the launch of a building permit e-service in October 2017 now allows construction companies to begin, modify and submit their applications online. Firms can also pay the related fees electronically and print out their approval without having to make physical trips to the Muscat municipality office, a process that can save them up to three weeks.

Spatial Strategy

With the regulation of construction activity often happening at the municipal level, the Oman National Spatial Strategy (ONSS) is an important initiative that ensures works in each governorate align with the country-wide master plan. Under development since 2011 and led by the Supreme Council for Planning, the ONSS is set to include governorate-specific strategies within a single national vision, and is intended to provide a comprehensive guide to societal, economic, environmental and cultural development up to the year 2040. This will be achieved by building housing, transport networks, utilities infrastructure, and spaces through which to pursue economic diversification and job creation. While a publication date for the ONSS had not been specified by October 2018, in July 2017 it was announced that Netherlands-based Royal Haskoning was contracted to develop the spatial strategies for the Dhofar and Al Wusta governorates.

Project Pipeline

Despite the fact that the ONSS is still under development, building across the sultanate forges ahead. An April 2018 report by construction intelligence provider BNC Network stated that there were 2410 construction projects on the docket in Oman that month, at a total value of around $190bn. Of these, some 1730 initiatives worth $57bn were under tender or under construction, and 350 projects worth $71bn were in the planning stage. The remaining 330 works were on hold, and with a price tag of $61bn, these accounted for almost one-third of the total value of all projects. The BNC report forecast that many of the projects on hold will resume if the price of oil remains at the relatively high level of $70 per barrel or above, increasing government financing capacity.

Urban construction accounted for the majority of projects, amounting to 1840 undertakings worth $61bn. The rest were in the oil and gas sector (70 works valued at $39bn), transport (150 projects worth $32bn), utilities (230 structures worth $29bn) and industry (110 projects priced at $27bn).

Many of these undertakings are located in and around the free zones of Al Mazunah, Sohar, Salalah and Duqm. “Special economic zones (SEZs) will act as a catalyst for construction companies,” Madhusudhan P, executive director of local SMC Infra, told OBG. “For example, there is set to be an array of projects available in packages around the Duqm refinery.”

The steady flow of building in 2018 is being driven by the combination of more competitive oil prices – which reached $80 per barrel for Brent crude in September 2018 – and a host of Tanfeedh-backed developments. Tanfeedh is the implementation programme for Oman’s ninth five-year development plan for 2016-20, which prioritises growth in the manufacturing, tourism, transport and logistics, mining and fisheries sectors, with the construction industry being called upon to help support the economic diversification plan. “Some companies may have chosen not to participate in state projects in the past, but if a project has been identified as strategic under Tanfeedh, it is getting completed now,” Stuart Ingram, head of development and project management at Oman Tourism Development Company (Omran), told OBG. “There is a real focus on a number of strategic works, so while not every project will be pushed forward, the critical ones will be.”

State Projects

Given the central role played by state-owned enterprises and government joint ventures in developing projects in the oil and gas, transport and logistics, and tourism sectors, public procurement is a key part of the construction industry. To bid on public tenders, firms must first register with the Tender Board, the state body responsible for evaluating and awarding bids for public projects. Tenders are published on the board’s website and in local media.

As of August 2018 the board had approved tenders worth OR173.4m ($450.3m) for the calendar year. Among the largest of these are an OR14m ($36.4m) undertaking to expand and pave the road leading to Al Siffah in the Muscat Governorate, and a commission for the design and execution of intersection roads connecting Muscat International Airport with Muscat Expressway totalling OR3.9m ($10.1m). The value of public projects in the first eight months of 2018 was up 14% on the same period of 2017, when the board approved initiatives worth OR152.2m ($395.3m). This is an indication that an improved fiscal position due to recovering oil prices is increasing the flow of government-sponsored projects. “The public-private partnership model is still in its infancy, but there is definitely room for further growth,” Indi Johal, managing director of Mint Projects International Construction, told OBG.

Contractors

Unlike many countries where public construction works require the employment of a local contractor or a domestic partner, Oman government officials often award tenders to foreign construction companies due to their lower costs. “Local construction companies are not given preferential treatment when it comes to bidding on projects. The government is just as likely to choose an international company with no stake in the Omani market,” Al Balushi told OBG. While the government certainly sees benefits from this situation in the short term, some domestic contractors suggest that the economy would be better served if measures were implemented that instead prioritised bidders based in Oman. Others see a need for improvement in the tendering process itself, as well as for clearer division among sector players. “There is a need for re-classification of companies and capabilities of contractors in the sector. For any large tender, the criteria for pre-qualification should be stringent and clear. Because of the wide spectrum of qualifications, small companies try to compete with large, experienced contractors,” C K Khanna, corporate general manager of Oman’s Bahwan Engineering Company, told OBG. When it comes to quality, efforts are made to ensure that international building standards are followed for all projects, although there are still some instances of informal construction practices in Oman.

Building Materials

Once a contractor is selected, the company must secure the necessary inputs for the construction project. With manufacturing being one of the five priority sectors named under the five-year development plan 2016-20, Tanfeedh is seeking to reduce the sultanate’s reliance on building material imports by increasing domestic production of cement. Indeed, just over half of all the cement used in the country at present is imported.

Oman had three integrated cement plants as of October 2018: a facility in the Rusayl industrial area near Muscat, owned by Oman Cement Company, and two plants near Salalah operated by Raysut Cement and Dhofar Cement. Another five facilities are at various stages of development throughout the country.

A 70: 30 joint venture between Sohar Cement and the UAE’s Fujairah Cement Industries is set to begin production in Sohar near the end of 2018 and will grind cement at a rate of 240 tonnes per hour. The other four plants will be located in the SEZ. The Al Wusta Cement plant will be situated in the Heavy Industrial Zone on a plot of 500,000 sq metres and has an expected production capacity of 5000 tonnes per day. Al Wusta Cement, a joint venture between Oman Cement Company and Raysut Cement, was seeking project financing in mid-2018 to help fund the $85m development, with construction being scheduled to begin at the outset of 2019.

Also slated for development at the Duqm SEZ is a plant by Al Taj Cement, another by Hormuz Al Anwar Cement and a white cement factory. With backing from the Iraq-based Al Yamama Engineering Company, the Al Taj Cement plant is set to have a capacity of approximately 2m tonnes per annum and is expected to come on-line before the end of 2020. The Hormuz Al Anwar plant is a 40:60 joint venture between Oman’s Al Anwar Holdings and Iran’s Hormozgan Cement, with an expected annual grinding capacity of up to 1m tonnes. The structure is forecast to be operational in the first quarter of 2020, according to Tanfeedh’s Implementation Support and Follow-up Unit.

Furthermore, a feasibility study was carried out in June 2018 regarding a proposed white cement factory at Duqm which would have a capacity of 900 tonnes per day. Taking into account the fact that Oman imported 78,200 tonnes of white cement in 2017, the new plant would be able to provide for all of the sultanate’s needs while at the same time producing a remainder for export. Should all the proposed projects move ahead as planned, Oman will be able to drastically reduce its dependence on imports in the coming years.

Staffing

Cement is not the only input subject to a long-term plan. With 675,757 workers, construction employed the largest percentage of both Omanis and expatriates in the private sector in 2017, at 24% and 35%, respectively. The employee pool continues to be dominated by expatriates, who accounted for 619,744 (91.7%) of workers in 2017, while men comprised 98.2% of the total. The Ministry of Manpower (MoM) regulates employment in the sector, and is responsible for overseeing occupational health and safety, administration of the labour law, vocational training and Omanisation quotas.

Originally adopted in 1988, Omanisation policies allow the MoM to reward or penalise companies based on their employment of nationals. Companies achieving their sector’s Omanisation quota receive a green card, the benefits of which include preferential treatment by government bodies. Construction companies are struggling to achieve their quota of 30%, however, with the rate for the sector standing at 8.3% in 2017. That year the OSC proposed a staggered approach to sector Omanisation, starting at 10% and rising to 15% in 2020, though this had not been adopted by October 2018.

Omanisation

The government is seeking to boost nationals’ employment in the industry by offering more technical roles. Since November 2017 there has been a ban on recruiting non-Omanis in over 80 private sector roles, many of which are pertinent to the construction industry, such as architects, general survey engineers, civil engineers, project engineers and construction technicians. However, some in the industry believe the domestic labour pool is not yet capable of filling all those open roles, and that flexibility is needed. “Given that contractors must complete works that are often of national importance, it does not make sense to restrict their access to the human resources they need,” Alex Clark, CEO of Special Technical Services, a local multi-sector contracting group, told OBG.

Another proposal to boost Omanisation in the sector is the implementation of hire-and-fire legislation, which would liberalise current restrictions on contract termination for Omani citizens. “As things stand, companies prefer to employ expatriate workers because the legislation around terminating contracts for Omani nationals is so restrictive,” Al Balushi told OBG. “Because they have no way out if the Omani worker turns out not to be up to scratch, it is just too big of a risk for many companies to hire them.”

In addition, giving Oman-based companies preferential treatment over foreign businesses, that may only reside in the sultanate temporarily, would encourage the growth of the local workforce. “Companies based and invested here should be supported ahead of ‘suitcase companies’, who come here with three or four people to bid on a specific project but are actually based somewhere else abroad,” Peter Fischer, managing director at Doka Muscat, told OBG.

In the longer term, however, Omanisation rates may increase with the rise of less physically demanding building methods. Prefabricated structures, the elements for which are designed and manufactured in a factory using computer systems and then transported to the building site for quick assembly, are gaining popularity around the world for their lower cost and sustainable aspects. “Introducing more technology is one way to increase the appeal of construction to Omani workers,” Kevin Ellis, managing director of Majan Engineering Consultants, told OBG. “For example, the creation of a prefabricated industry would create white-collar construction jobs for nationals.”

Land Access

While securing land can pose difficulties in many countries, land legislation in Oman is relatively straightforward. The Land Law (Royal Decree No. 5 of 1980) declared all land with no provable title as state property, and foreign holdings of absolute title are generally prohibited. However, the law recognises corporate ownership of real estate in various forms, albeit with some restrictions. In order to be entitled to freehold land rights, limited liability companies 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 rule of 51% in 2010.

Use of such land is restricted to administrative offices, warehouses, staff accommodation or a “special-purpose premise for achieving the company’s objectives”, according to local law firm Curtis, Mallet-Prevost, Colt & Mosle. Real estate developers are granted an exemption to build and resell residential and commercial units, while GCC-owned entities are permitted to purchase real estate for investment purposes, although they are required to develop vacant plots within a time limit of four years.

Foreign companies from outside the GCC, meanwhile, have three main options. First, if ineligible for outright ownership, they may be granted usufruct 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 expiration if the activity carried out on the land is productive and complies with applicable laws. Second, a foreign firm may hold 100% ownership of companies whose local operations reside within free zones or SEZs; firms may also gain usufruct rights to land in SEZs. Lastly, following a royal decree in 2006, foreigners can own land or build in areas designated as integrated tourism complexes (ITCs). These areas, which are usually required to comprise commercial, residential and tourism components, entitle foreign firms to buy units from a developer.

Demand

Although the sector benefits from expansions in oil and gas, a number of large-scale, mixed-use developments are also creating sizeable opportunities. Port developments in the transport sector – a key focus of the Tanfeedh diversification programme – as well as new builds in utilities and health care are among the other stimulators of construction demand.

One of the largest projects that broke ground in 2018 was the Duqm Refinery and Petrochemical Industries Company, a $7bn joint venture between Oman Oil Company and Kuwait Petroleum Corporation. Work began in April on the 230,000-barrel-per-day facility, which is expected to be operational by 2022. The engineering, procurement and construction contract for the main processing plants was awarded to a joint venture between Spain’s Técnicas Reunidas and South Korea’s Daewoo Engineering and Construction. Meanwhile, BP has launched the second phase of its Ghazeer project in the Khazzan natural gas field in conjunction with Oman Oil Company. In 2017 Petrofac was awarded the $800m contract for constructing the central processing facility for phase two.

Infrastructure

Following the opening of the new Muscat International Airport in March 2018, port expansions at Duqm, Sohar and Salalah have become the headline drivers of construction activity in the transport realm. The largest works are taking place at Duqm, where the government has plans for a major integrated port and industrial city. Projects that are under way include the construction of a four-terminal commercial dock, a government dock, and a liquid and bulk dock at a total cost of OR439m ($1.1bn). The port continues to be operational during these additions.

In September 2018 dredging work began at Sohar Port South, in line with plans to expand waterfront capacity and eventually build additional terminals. The first phase, which is expected to be finished in January 2019, outlines land reclamation and soil stabilisation for 50 ha of usable land, and the second phase will add another 200 ha before the beginning of 2021. Meanwhile, at the Port of Salalah in the Dhofar Governorate, works are ongoing to expand and improve existing infrastructure. The $15bn multi-phase expansion that began in 2012 aims to better service the growing local mining, quarrying and cement industries by ensuring the facility and equipment can properly handle the ships that will export Oman’s products.

In the utilities sphere, April 2018 saw Oman Power and Water Procurement Company sign multiple agreements worth OR60m ($155.8m) to establish the Salalah Independent Water Project with a consortium of ACWA Power of Saudi Arabia, France-based Veolia Middle East, and Dhofar International Development and Investment Holding Company. The engineering, procurement and construction of the 25m-gallon-per-day reverse osmosis desalination plant will be handled by a consortium comprising Italy’s Fisia Italimpianti and Spain’s Abeinsa Infraestructuras Medio Ambiente. The project is expected to be completed in early 2020.

Health care is another sector driving construction activity. “We are seeing noticeable growth in the number of private hospitals with capacities of around 100 beds,” Ellis told OBG. This demand for high-quality medical facilities is likely to continue in the coming years, with investment advisory firm Alpen Capital forecasting that health care spending in Oman will grow at a compound annual growth rate (CAGR) of 9.1% through to 2022, while the number of beds required to serve the population is set to rise at a CAGR of 3.2% over the same period. The introduction of mandatory health insurance for private sector employees, expected in 2019, is one of the key factors underlining these forecasts (see Health chapter).

Outlook

After a difficult year in 2017, strong growth in Oman’s construction sector is expected in 2018 and 2019. In its “Oman Infrastructure Report”, BMI Research forecast that the sultanate’s diversification drive will lead to industry expansion that easily outpaces the MENA average, reaching 10.4% in 2018 and averaging 9.9% for the following five years. This forecast can partially be attributed to a broader macroeconomic recovery and more stable oil prices, with the IMF predicting Oman’s GDP will expand by 1.9% in 2018 after a contraction of 0.9% in 2017.

More importantly, the state’s diversification programme is enabling greater foreign direct investment via updated regulatory mechanisms, SEZs and ITCs. These efforts are expected to attract regional and international investors to projects in hydrocarbons, transport, utilities and tourism, securing the near- to mid-term health of the construction sector. “The two major projects in Oman at the moment – Madinat Al Irfan and Duqm refinery – will boost the sector as companies look towards the opportunities they present,” Ammar Aissou, CEO of Al Sulaimi Group, told OBG.