Competition time: With a slew of developments in the planning stage, contractors are continuing to enter the market

With the construction industry in Qatar expecting several big changes in both the short and long term, contractors and developers are anticipating a steady increase in projects in the second half of 2012 and into 2013. It has been more than a year since the country was awarded the rights to host the FIFA World Cup in 2022, but the market has remained subdued. There has been little in the way of substantial new contracts so far, yet Qatar’s resilience to the global economic crisis, supplemented by its headline-grabbing bid and development strategy, has brought a flood of interest from new contractors looking to expand operations onto the peninsula.

WAITING GAME: By and large, it has been a tough past two years for the construction industry as a whole. However, the start of developments aimed at fulfilling the country’s commitments for hosting the World Cup should offer ample reward for contractors that have waited out the lull and are ready to join in the coming sector expansion.

The underlying factors that have brought new contractors to the peninsula remain in place. Doha is an attractive proposition for many contractors within the larger region, especially given that it is still in the early stages of its development.

The capital city, and the country more generally, continue to have significant potential for expansion. This is not only the case when it comes to residential real estate, but also, equally importantly, when it comes to primary infrastructure. For example, while Dubai opened its public mass transit system in September 2009, Doha’s QR130bn ($36bn) metro is in the planning stage. As such, the market, alongside Abu Dhabi and Saudi Arabia, is being eyed covetously by the construction industry.

DEMAND DRIVERS: The attention being paid to Qatar is not only a product of the dearth of projects elsewhere, but also because the demand drivers are in place for solid and deliverable growth in the sector over the coming two decades. Perhaps the most obvious indicator of Qatar’s potential is the pronounced demographic growth experienced on the peninsula in recent years. The population of the state has more than doubled from 774,000 people in the 2004 census to 1.69m in the 2010 census.

While this is expected to slow somewhat over the next decade, it will still outpace the numbers seen in many developed countries.

According to the Ministry of Municipality and Urban Planning, the state’s population is expected to reach 3m people by 2026. In the medium term it is forecast to grow by an average of 2.1% from 2011-16 to 1.9m, according to the National Development Strategy (NDS) Qatar 2011-16.

Under the NDS, the government is seeking to increase the share of small and medium-sized enterprises in the economy (which currently stands at 15%), develop special economic zones, foster research and development (investing 2.8% of GDP in research), and expand the offerings of the country’s financial services sector.

Several reforms have already been enacted to promote such development and lessen a current economic dependence on hydrocarbons. These include the introduction of a flat corporate tax rate of 10% (against the previous variable rate of up to 35%) at the beginning of 2010 and a February 2011 regulation allowing foreign investors to own 100% of capital in Qatar-registered companies active in certain sectors. All these plans and regulations will have an impact on the construction sector, stimulating demand for office, residential and industrial space, as well as concomitant infrastructure.

A SPORTING CHANCE: The award of the World Cup should also bolster the sector’s figures and provide a raft of new opportunities of which contractors should be able to take advantage. All segments of the industry should prosper from the added demand for residential, office and retail space, as well as the upgrade and expansion of key infrastructure. While question marks may remain over the chances of future demand absorbing the expected increase in supply of projects, the government’s commitment to its development strategy, and its financial muscle to execute it, should assuage any doubts about tenders coming to market.

“The commitment to the World Cup is political, not necessarily economic, but they will have to do it,” said Ammar Ammar, the business development manager at local construction firm Al Jaber & Partners. This commitment is not simply to build nine new stadiums, but also to provide hotels, housing, offices and a network of roads and mass transit rail lines.

SPENDING POWER: This is an ambitious project pipeline, but the government’s ability to deliver seems assured. The country recorded a fiscal surplus of QR44.5bn ($12.2bn) in 2011-12, on the back of a 25% spending increase in 2010-11.

Given the high oil price and continuing strong demand for liquefied natural gas (LNG), particularly from Japan, Qatar’s production level of 77m tonnes per annum of LNG has given the government great financial flexibility. According to the NDS, gross national savings are expected to remain above 40% of GDP through 2014, providing the government with a strong platform to spend directly on strategic projects and to raise capital for the purpose.

The government plans to spend QR130bn ($35.7bn) through state-owned companies on construction-related schemes up to 2016, while Qatar Petroleum will spend a further QR88bn ($24.2bn) on energy developments in the same period. Direct infrastructure spending is also likely to exceed $67bn, and in January 2011 the government issued a QR50bn ($13.7bn) bond to local banks to raise more money for further such developments.

This financial power and spendthrift approach has led to cautious optimism in the sector. According to Atul Bharadwaj, the senior project manager at Al Balagh Trading and Contracting, “The potential is there. There will be infrastructure development, the railway will bring a lot of work, and there will also be a lot of government projects.”

INFRASTRUCTURE: Many of the initial government-funded ventures are likely to come in the primary infrastructure sector, and specifically in the transport network. “The general trend in Qatar is moving away from the oil and gas sector and heading towards infrastructure,” Adnan Al Mubarak, the general manager of Black Cat Engineering and Construction, an engineering, procurement, installation and commissioning contractor specialising in hydrocarbons, told OBG. “The few opportunities available in oil and gas are in the hands of Qatar Petroleum. Unless Qatar has further ambitions of increasing hydrocarbons production, business is going to be very scarce.” Indeed, it seems that the moratorium on further development of the huge natural gas reserves in the North Field until 2014 at the earliest signals its contentment with the current revenues garnered from the upstream sector and broader strategy.

TRANSPORT: Consequently, officials seem to be now turning their attention to the country’s transport network, which will be crucial for the long-term sustainable development of the state. The headline-grabbers are New Doha International Airport and the New Port Project, which will cost $11bn and QR27bn ($7.41bn), respectively.

Doha’s new airport will be able to handle 24m passengers and 750,000 tonnes of cargo a year upon its full completion. The first phase is expected to be open by the beginning of 2013. The port will have an annual capacity of around 6m 20-foot equivalent units on completion in 2016.

However, the less glamorous land transport network is perhaps even more crucial for the government’s development plans than these high-profile projects. Improving such infrastructure is already becoming a critical issue, given Qatar’s high traffic density. The country has 78 vehicles per km of road, according to a 2011 report by Kuwait Financial Centre (Markaz). While this may be below levels in the UAE (339 per km) and Kuwait (233), it is still significantly above many developed countries, such as the US (38 in 2008, according to data provided by the World Bank) and France (39).

With the country’s strong population growth, the staging of the World Cup and the government’s 2030 development strategy, this situation would be set to worsen if the government had not created plans for the expansion and improvement of transport and transit networks on the peninsula. As such, there is there will be significant contracts in this domain in the short and medium terms. Indeed, according to Markaz, Qatar had $3.8bn worth of road projects at the end of June 2011, comprising 22% of the GCC total in this category and second only to the UAE, with 42% of the total value.

This is only likely to expand. In November 2011 Authority (Ashghal) had signed deals for QR40bn ($11bn) worth of infrastructure projects, including six new contracts for local roads and drainage. In total, the government is planning to spend $50bn on transport infrastructure up to 2016, with $20bn going to the road network, according to Yousef Hussein Kamal, the minister of economy and finance. This infrastructure drive will be coordinated by Ashghal. The body has divided its plans for infrastructure development throughout Qatar into a total of five zones, with each having a general engineering consultant that will provide design and construction oversight for a designated five-year period.

In November 2011 it was announced that the lead programme management consultant, with supervisory oversight for all five zones and engineering consultants, will be Parsons Brinckerhoff. The company will manage the supply chain and the contractors for QR30bn ($8.2bn) worth of local roads and drainage development over the next five years.

CHANGING STANDARDS: The process of delivering government projects has improved significantly in recent years. Ashghal was set up in 2004 with the task of developing the country’s infrastructure, but initially experienced difficulty in getting many of the necessary projects moving forward.

“One of the main things that had to be altered was the contract process. It used to be time-consuming, as to sign contracts usually took up to 12 months,” Haitham Saleh, the general manager of Parsons Brinckerhoff Qatar, told OBG. “The contract process has now been revamped and this has been a huge step in becoming more efficient and getting a lot of the necessary work done.”

The purple patch of contract awards in the second half of 2011 is testament to this. However, said Balagh Trading and Contracting’s Bharadwaj, “As Ashghal announced its last tender is out, I think most major tenders will be out in 2013. In 2012 the government will be concentrating on major rail works.”

RAIL: The $31bn rail project will be developed in four phases, with phases 1A and 1B, the Doha city metro lines, expected to be complete in time for the 2022 World Cup. Phases 2 to 4 will extend the network to suburban areas of Doha, on to the rest of the peninsula and then connect with the $30bn GCC rail network via a planned bridge connecting the country to the UAE, the proposed Bahrain causeway and the land route to Saudi Arabia.

The first phase of the network will extend some 52 km and include 26 stations, with the majority of the track laid underground. Geoff Brian Mee, the deputy CEO of Qatar Railway Company, a joint venture between Qatari Diar (51%) and DB International that will oversee the development of the network, told Gulf News that “the railway system has a key role to play in population distribution and the creation of new population centres.”

While the rail network should provide a sizeable batch of projects for the construction industry, its importance to the sector will go beyond this. The announcement of the rail route and the first tenders for the network should prove a catalyst for other public and private sector developments. According to Jed Wolfe, the associate regional director at real estate brokerage and consultancy firm Asteco: “I think it’s down to the rail. We won’t see any significant changes in the market until these plans are in place. Serviced apartments and hotels have done reasonably well and all businesses involved in this segment will fix their resources around the rail network. Once this is finalised we’ll see a different market and the road network will fit in around it.”

PLANNING: As the primary infrastructure begins to materialise and the plans for the transport network become clear, a second spate of contracts in all segments of the sector should arise. However, there are still some concerns among developers that the planning and strategy for urban development on the peninsula remains ad hoc and opaque.

“We have a lack of master planning and we are unclear what the land uses are and where the densities will be defined,” said Mohammed Ahmad Al Emadi, the general manager of Barwa Al Sadd, a Barwa Real Estate development. However, with the Urban Planning and Development Authority charged with drawing up master plans for each urban area in Qatar, this situation is likely to be remedied.

REAL ESTATE PROJECTS: Indeed, commercial and residential real estate projects are likely to expand, with a number of large-scale works already on the cards. Several government-backed developers, from Qatari Diar to Barwa Real Estate, are bringing large projects to the country. One of the most prominent is Lusail City, a $5.5bn conurbation located north of Doha on the peninsula’s east coast. First announced in 2005, the new city being developed by Lusail Real Estate Development Fund, a subsidiary of Qatari Diar Real Estate Investment Fund, will be home to 200,000 residents in 19 commercial, residential and entertainment districts when it is completed within the next decade. The city will also house Lusail Iconic Stadium, which will host the opening and final games of the 2022 World Cup. Infrastructure for the development is expected to be in place by the third quarter of 2015, according to Bloomberg.

Another important development is Msheireb Properties’ redevelopment of the Doha city centre in the form of the QR20bn ($5.5bn) Msheireb Downtown Doha project. The developer, owned by Qatar Foundation, will build more than 100 buildings containing commercial, cultural, community and living spaces on a 31-ha site by 2016. As a key step in the project, In December 2011 Msheireb awarded a QR2.37bn ($651m) contract to a consortium of Carillion (Qatar) and Qatar Building Company (QBC) for the substructure and superstructure construction of phase 1B of the project, which will comprise 15 buildings, including a Mandarin Oriental Hotel, office buildings, an underground car park and residential apartments.

Such upmarket developments will also be supported by a number of low- and middle-income residential projects. The key developer in this regard is Barwa Real Estate, which brought Masaken Mesaimeer and Masaken Al Sailiya to the market in 2010. This project involved 62 residential buildings on a 400,000-sq-metre site with affordable residential units for lease to low- and middle-income groups.

Such large-scale developments suggest there should be a great number of contracts on offer within the country’s construction sector. Majed Fatfat, the contracts and procurement manager at QBC, told OBG that “The mega-projects will have a big impact in terms of contracts.”

However, some contractors continue to downplay the current environment and prospects for future operations in the country. Many believe that it will be some time before they reap the benefits of the government’s development plans and its obligations as host of the 2022 World Cup. According to Nishad Azeem, the founder and CEO of Coastal Group of Companies, “Optimism is still very premature. The major work is not going to start for years. Stadiums, especially, won’t be built until at least a few years before the tournament. This is so that buildings are not outdated, and it also allows for time for technology to develop.” The World Cup buzz, therefore, is unlikely to be a game changer for the country’s contractors in the short term.

COMPETITION: Qatar’s prospects have attracted an increasing number of competitors seeking work in one of the few markets where tenders are on offer. Indeed, in the past 18 months a number of new entrants have picked up work in the market, including Consolidated Contractors Company, Saudi Bin Laden, Sino Hydro and China Harbour.

This influx is having a significant impact on the market. According to Ammar, such additional competition has tightened margins considerably. “It means people who don’t know the market are pricing the market. It’s way below what it should be. They don’t know the market in terms of regulations. They don’t know the difficulty of accessing materials and other things that affect the price.”

The view that margins have been dramatically reduced in Qatar is echoed by many construction firms and analysts. Bashar Al Natoor, the director of Fitch Ratings EMEA Corporates team in Dubai told Reuters in January 2012, “In Saudi Arabia and Qatar, infrastructure spending continues to be strong but with lower margins. During the construction boom, MENA region contractor margins have remained higher than international peers. However, with the recently increasing competition, contractors have started to go for lower margins and Fitch expects this to remain the case over the next few years.”

IN THE BOX SEAT: With a large number of firms bidding for every tender, the position of clients, from government authorities to private developers, is strong. According to Bharadwaj, “Conditions of contract in Qatar are absolutely against the contractor.” One manifestation of this is the predominance of lump sum deals, a basic contract in which a contractor is paid a specified amount without a cost breakdown, rather than cost-plus contracts, in which an additional fee beyond expenses incurred is worked into the agreement for a contractor’s profit. According to Fatfat, “As they are lump sum contracts, a lot of risk is transferred to the contractor.”

Without any built-in fee for the contractor, the profits they can expect in such an ultra-competitive market are therefore going to be limited. As Bharadwaj said to OBG, “The situation has become so bad that contractors are lowering their overheads and profits. Now contractors are going for very small margins and are still not getting projects. With some tenders, I don’t see how our competitors are getting any profit.” Bharadwaj estimates that for some large contracts from big government entities, contractor margins have been below 5%.

This may have predominantly affected smaller subcontractors that have proliferated in the market, but the bigger firms, with a larger pot of capital but also larger overheads have also suffered. According to Ammar, “We’re more exposed than the smaller players. We could be paying QR25,000 ($6900) for a tender document and there’d be 32 companies buying the document.” Retendering of projects and delays in payment have also had an impact on the operations of both small and larger firms with debt obligations and high overhead.

However, the environment within Qatar itself seems to be improving for contractors. Ammar stresses that the company has had no problems with payments in the Qatari market and that tenders are being awarded on schedule. Indeed, many government bodies have brought tenders to the market in the past 12 months, with the Qatar Foundation accounting for the biggest share at 28%, said Ammar.

LEARNING THE LESSONS: Furthermore, there are early signs of a shift in the requirements laid out in tenders, from an emphasis on cost to greater priority being placed on quality and technical skill. According to Serkut Akdeniz, the senior quality assurance and health, safety and environment (QHSE) manager at QBC, “The government has learnt a lot of lessons from Dubai and its previous experiences. The changes we are seeing on health and safety, quality and the environment are substantial.”

Pandra Sudhir, the regional manager for the Middle East for quality control firm Velosi, agreed that the government’s priorities are changing, particularly in public works. “There is a lack of regulation with civil infrastructure,” he said. “However, it is very much expected that the Civil Defence Department is going to tighten regulation for QHSE, which will in turn help to further spur business development.”

A prime example of this is a greater emphasis on the technical bid for tenders awarded by public bodies. Furthermore, in December 2011 the Ministry of Environment released the fourth edition of the Qatar Construction Specifications, which outline standards for building in the country, from environmental regulations and worker conditions to the quality and composition of materials used. The specifications will be mandated for public bodies, while private developers will be rated on their adherence by the Ministry of Municipal Affairs and Urban Planning.

Ensuring that there will be quality living conditions for the newly arrived workers needed for such projects is important as well. “A huge number of people expected to come to Qatar in order to carry out the work required. It is imperative that there is a support structure already in place to support the living of these people,” Azeem told OBG. “The country needs to ensure there are enough schools, accommodation, leisure facilities and so on; otherwise, there will be a struggle to attract the high-level skilled labour required to sustain the development.”

Steps have already been taken to address this challenge, including a new “workers’ city” being developed by Barwa Real Estate that will be able to house 53,000 workers on the outskirts of Doha. The government is also seeking to address the sponsorship, or kafala, system, which mandates that foreign workers must have a sponsor to be employed.

OUTLOOK: These developments suggest another step forward for the construction industry, and may signal a shift towards larger and more experienced contractors that can bring quality to the market. While it has been a difficult 24 months for the industry, with excessive competition driving down prices and limiting the availability of work, prospects for the market look good. Ashghal’s activity in 2011 has provided a taste of what should be coming over the next 18 months, with many infrastructure projects scheduled to be offered for tender. This should bring a new confidence to the broader sector and lead to construction activity across a wide range of segments. Although the excitement surrounding the World Cup has brought few tangible benefits to contractors yet, optimism may return in the year ahead.