Bahrain starts major infrastructure projects and enacts reforms to attract private investment

A major contributor to employment and GDP, the Bahraini construction sector has continued to expand in recent years, despite slower regional growth. This performance continued into the first half of 2018 with an uptick in activity, supported by a series of major infrastructure projects, in part financed by neighbouring GCC states. Furthermore, with demand for transportation and industrial facilities set to rise and a number of new projects in the pipeline, the sector appears set to remain busy over the coming years, despite constraints on the government’s capital expenditure budget.

Size & Performance

Against a backdrop of lower international oil prices, the GCC construction industry has come under pressure in recent years. Indeed, the overall value of contracts awarded per year in the GCC fell from $114.3bn in 2013 to $63bn in 2017. However, despite this regional trend the sector has continued to expand, accounting for 7% of national GDP in 2017 and growing by 1.7%, according to the Economic Development Board (EDB). While this figure was down from the 5.7% figure of the previous year, as well as below the country’s overall growth rate of 3.9%, the sector appears to have now rebounded, growing by 6.7% year-on-year in the first six months of 2018. Meanwhile, the number of permits that were issued for new buildings stood at 733 in the second quarter of 2018, up from 705 during the same period of the previous year, according to the Central Bank of Bahrain (CBB). Additionally, this figure was the highest since the first quarter of 2017.

Financial indicators for the sector also point to an improving picture. The construction industry accounted for 10.9% of bank lending as of March 2018 according to the CBB, up from 9.6% a year earlier. Furthermore, the industry’s non-performing loan ratio fell from 13.1% to 10.9% over the same period. This recent performance coincides with a broader regional trend, driven in particular by increased construction activity in Saudi Arabia.

Employment

At the end of 2016 there was a total of approximately 166,000 people working in the construction industry, according to latest available data from the Labour Market Regulatory Authority (LMRA). This was equivalent to 21.1% of the workforce, making the sector one of the leading employers in the kingdom. Moreover, the significance of the industry for employment has grown in recent years, with this figure up from 140,00 in 2017 and 128,000 in 2011. However, of the 2016 total, some 154,000 workers were foreign citizens and 8320 were Bahraini, meaning the sector accounted for 24.5% of expatriate employment.

The industry’s importance as an employer is likely set to expand further over the medium term. It accounted for 33% of work permits issued in the second quarter of 2018, according to LMRA figures. This placed it ahead of any other sector, including the wholesale and retail trade, which stood at second place with 17.9%. Nevertheless, it should be noted that while the industry constitutes one of the most important contributors to overall employment, the majority of these positions are relatively unskilled. As of mid-2018 the largest employment category in the industry by far was that of general worker – rather than a skilled craftsman, manager or engineer – according to the LMRA.

Building Materials

The kingdom is home to a range of building material producers. These companies include Falcon Cement, the country’s largest cement producer. The firm currently has a capacity of 2555 tonnes per day (tpd), which it plans to raise to 3400 tpd in 2019. In 2016 the Saudi Development Bank purchased a 30% stake in the company.

Nevertheless, the construction industry still remains reliant on imports for much of its building materials. Cement and cement clinker imports stood at over 2m tonnes in 2017, with the UAE being the most significant supplier. Furthermore, according to industry players this reliance on imports cause issues for the sector. “Raw materials prices are volatile and the availability of supply can depend on demand in other countries in the region, which have more clout in the market,” Mark Haikal, head of investments at Bahraini real estate developer Naseej, told OBG.

This issue can pose a particular challenge in the affordable housing segment, where margins are tight. However, in a move expected to improve supply and ease volatility, Saudi Arabia removed export tariffs on cement in February 2018.

Regulatory Changes

Bahrain has one of the most liberalised foreign investment frameworks in the region. As such, the country allows foreign companies 100% ownership rights of onshore local entities in many areas of the economy. Construction is, however, one of the industries in which foreign ownership of local operations is capped, though exemptions to this limit can be granted by the Ministry of Industry and Commerce. While this might conceivably reduce competition in the segment, Haikal told OBG that there was no shortage of high-quality contractors in the kingdom.

A number of regulatory changes affecting the sector have recently been implemented or are expected to come into effect over the short term. In April 2018 the Capital Trustees Board – which is responsible for urban planning in the capital Manama – temporarily suspended construction permits in the Suq, Naim and Ras Ruman areas of the city, as well as parts of the Hoora and Gudaibiya districts, until a new urbanisation plan has been put in place. The measure came in response to building projects that have led to higher population densities than desired by the authorities and problems such as illegal parking.

In addition to its attempts to prevent unsuitable building developments, the authorities have also sought to facilitate construction activity in specific areas. As part of an effort to boost residential construction, regulations were issued in May 2018 granting new powers to municipal authorities to issue residential building permits without having to pass applications onto the Ministry of Housing. The move also strengthens municipalities’ ability to deal with violations of construction regulations and to ensure that new buildings are in line with the architectural character of the area in which they are built. Furthermore, as part of an effort to encourage contractors to leave building sites in a good working condition following the completion of building works, the government announced plans in June 2018 to increase the size of deposits.

The local authorities have indicated that the previous deposit of BD10 ($26.50) per metre was too low, inadvertently encouraging firms to write off the payment rather than clean up their construction site. Additionally, during the same month the Capital Trustees Board introduced new regulations requiring building works to be fenced off.

Major Projects

Government-backed infrastructure projects – in particular in the energy, industrial and transport sectors – have been one of the major drivers of construction activity in recent years. According to the EDB, the total value of all building projects in the pipeline stood at $87.3bn in September 2018, marking a 3.8% y-o-y increase. In addition, $1.8bn worth of project contracts were set to be awarded in 2018. Many of these projects have yet to be tendered, suggesting there is room for sector activity to increase over the coming years.

Major projects in the energy sector include the $4.2bn expansion of the country’s sole oil refinery, which is located in Sitra. The upgrade is expected to increase production from its current level of 267,000 barrels per day (bpd) to 360,000 bpd and is due to be completed in 2022. In addition, work is under way on a $741m liquefied natural gas terminal, located 4.3 km away from the existing Khalifa Bin Salman Port. The facility, which is expected to come on-line in early 2019, is projected to have an operational capacity of 800m standard cu feet per day. Another major energy project in the pipeline is the Al Dur 2 Independent Water and Power Project, a $1.5bn gas-fired plan set to be constructed under a build-own-operate contract. The facility, which is set to have a generation capacity of 1500 MW upon completion, is expected to come on-line by 2020. The country’s Electricity and Water Authority declared the project open for bids in May 2018 and has since received offers from both the Saudi developer Acwa Power and the Japanese trading company Sumitomo Corporation.

With regards to the transport sector, the combined value of the country’s planned road construction projects stood at $2.6bn in 2018, according to the EDB. In addition, work is under way on a $1.1bn new terminal at Bahrain International Airport. The 220,000-sq-metre development is set to replace the existing facility and is currently scheduled to be completed by 2020. Turkish airport operator TAV and the Dubai-listed contractor Arabtec are leading the construction of the facility. Upon becoming fully operational, the new terminal is expected to increase passenger capacity from 9m per annum to at least 14m, depending on the level of service.

Belt Tightening

While the government is committed to the completion of these projects, it nonetheless faces budgetary constraints brought about by lower international oil prices. A new fiscal balance programme announced by the authorities in October 2018 – agreed in parallel with a $10bn aid package from Saudi Arabia, the UAE and Kuwait – is likely to involve substantial cuts to capital spending. Alexander Perjéssy, vice-president and senior analyst at the Sovereign Risk Group at ratings agency Moody’s, told OBG that the company estimated the programme would involve a reduction in capital spending of around 35% to 40%. However, Perjéssy stated this could be offset by increased disbursements from the GCC Development Fund, of which Moody’s estimated less than $1.5bn had been spent as of the end of 2017, out of a total available sum of $7.4bn. As a result, Perjéssy stated that most major infrastructure projects in the pipeline would go ahead.

Private Investment

Privately financed projects are already fairly common in the electricity generation segment, but the penetration of private investment into other sectors has been slower. However, in a move that forms part of a broader regional trend the authorities are increasingly turning to public-private partnership (PPP) models for other infrastructure works, particularly in terms of transportation. Notable projects include the King Hamad Causeway, a major new transport artery linking Bahrain to Saudi Arabia that has been under discussion for several years and which is expected to be built through a PPP. A tender for the transport link – which is expected to cost $4bn and carry both railway and road lanes – is set to be issued in early 2019, ahead of the planned start of construction works in 2021. In addition, a PPP is also expected to be used for the construction of the Manama lightrail project. The tender process for the new metro system – which is projected to cost $1bn-2bn – is expected to open in the fourth quarter of 2019.

Private investment has also made inroads into other important sectors of the economy. Indeed, the largest industrial construction project under way is the $3bn expansion of the Alba aluminium smelter facility, located in the west of the country. Alba, which is majority owned by Mumtalakat, Bahrain’s sovereign wealth fund, has teamed up with the US contractor Bechtel, which is overseeing the project to build a new pot line and a 1790-MW power station. The facility, set to be inaugurated in early 2019, is expected to increase aluminium production by 540,000 tonnes per annum (tpa) to 1.5m tpa.

The real estate segment is also helping to support construction sector activity. Social housing is a particular driver in the residential segment, with the government aiming to build 40,000 social housing units by 2022, with around 14,000 delivered in 2018 and 7000 more under tender. One of the biggest privately backed mixed-use developments is the Diyar al Muharraq project, which includes a largescale masterplanned community that is being built on 12 artificial islands off the coast of Muharraq, north of the capital Manama. Furthermore, a large project in the pipeline is the construction of a $300m exhibition centre at Sakhir. Construction bids for the venue, which will consist of 149,000 sq metres of built-up area on a site of 308,000 sq metres, were due by September 2018, with the project scheduled for completion in late 2020.

Efforts to develop the health care and health tourism segments are also providing opportunities for investors. September 2018 saw the launch of a tender for a contract to build the $267m King Abdullah Medical City on the Durrat Al Bahrain archipelago in the south of the country. The project includes a 500-bed hospital, to be built on 1m sq metre site.

Outlook

Large infrastructure projects are set to continue to drive sector activity in coming years in spite of fiscal challenges being faced by the government. Furthermore, high and rising demand for affordable housing, along with higher-end developments and industrial unit and office capacity can also be expected to boost sector activity.

Moreover, ongoing changes to the country’s regulatory framework of the sector can be expected to rationalise the market and stimulate activity in areas in which there is particularly high demand, including in the affordable housing segment. The country’s maturing regulatory framework can also be expected to support increased investment from the private sector. Private firms are already playing an increasingly significant role in the construction of transport and industrial infrastructure, along with housing, and with budgetary constraints in place the government can be expected to pursue more PPP agreements over the medium to long term.