The government is by some measurements the largest source of demand for construction services in Oman. In recent years the sultanate has wholeheartedly embraced competitive tendering, encouraging private and international firms to participate as much as possible. Almost all public sector procurement is conducted under the Tender Law, promulgated by royal decree in 2008 and amended twice in 2011.
The law sets out the basic principles of transparency, equality and freedom of competition, aiming to ensure a level playing field for bidders, both foreign and local. In most cases, platform documents are governed by the Oman Standard Conditions of Contract, according to legal information services firm Practical Law. The conditions cover civil and building works along employer design-contractor build formats, while plant, mechanical and electrical projects are tendered on contractor design-build or engineering, procurement and construction models. The latter management format is the most commonly used for projects in the hydrocarbons sector.
At the time of writing, the government was in the process of drafting reforms to the standard conditions. The Oman Society of Contractors (OSC), an industry representative organisation, says that the current rules are outdated and can be ambiguous, and issue areas like the responsibilities of site engineers and payment schedules must be clarified.
Payment & Costs
Project payment tends to be by fixed-price lump sum, with instalments at various stages of completion, or via traditional measure and value, with the payment established by certification of measured quantities of work completed. Unlike elsewhere in the GCC, escalation clauses in public contracts are rare, meaning that contractors have limited ability to increase the charging price after the contract is signed. This creates an element of risks to margins.
“While we are forced to cut prices due to competition, costs are escalating year by year,” Barun Banik, deputy manager for estimation and tendering at Al Watanyiah United Engineering & Contracting, told OBG. “Inflation is running at 5-6%, so there’s not much room to lower costs, and lump-sum contracts do not provide flexibility.” The government is considering introducing escalation clauses, and has shown flexibility in raising fees to contractors working on public projects affected by increases in the minimum wage for Omanis.
The government supports the local building material manufacturing sector by requiring that contractors for public projects source inputs from domestic producers, unless imported alternatives are 10% cheaper or more. As this applies to all companies equally, it puts none at a particular disadvantage, and local supply chains for many products are well developed, so sourcing the inputs is not a problem.
When domestic companies bid for big government contracts, they tend to form unincorporated joint ventures with other firms, including local subsidiaries of global players, to pool risk and strengthen their competitive advantages in terms of economies of scale, expertise and capital. Many local contractors are too small to take on large and complex projects on their own. “Joint-ventures allow companies to share risk while simultaneously consolidating in a competitive construction sector,” Vedat Koca, regional representative at STFA, a Turkish conglomerate involved in constructing the new Duqm Port, told OBG. “It is a necessity and should be done more often in Oman.”
Many of the projects currently under way and on the drawing board are so substantial and complex that they require the participation of international players with specialist expertise and scalability to take on big schemes. In public-private partnership (PPP) concessions and projects operating under similar models, particularly in the power and water sectors, the government and its associated bodies form special purpose vehicles for project procurement.
For big PPP projects, funding is usually obtained through limited-recourse financing. This is usually conducted according to guidelines established by the Loan Market Association, a London-based organisation that supports the development of the syndicated loan market, and involves a syndicate of lenders, often with international financial institutions, as local ones are not always able to provide the capital needed.
Given the mutual benefits of PPPs, there is wide support for the model to be used more often in developing infrastructure, as well as utilities. PPP schemes have so far been most widely used in power, water and wastewater projects. “Infrastructure development is the most heavily invested segment of Oman’s economy,” Fawzi Al Harrassy, executive director of the Teejan Group, an Omani conglomerate, told OBG. “Encouraging more PPPs would allow both sides to share knowledge and experience, and finish projects in a timely manner.” Public works projects are usually government-funded, but this may change in the future, such as with road construction, for example. Oman could deploy build-operate-transfer and build-operate-own schemes for roads, with investors recouping much of capital outlay from tolls.
While Oman’s 2004 Privatisation Law set out the parameters for the country’s privatisation programme, including concessions and sell-offs of stakes in publicly owned companies, there is no comprehensive law for PPPs. Instead, PPPs are governed by individual sector laws that rule projects in specific industries. The most prominent is the 2004 Law for the Regulation and Privatisation of the Electricity and Related Water Sector, commonly known as “the sector law”.
While the first private initiative in the power sector came in 1996 with a build-own-operate-transfer deal for a power plant in Manah, and private investors were invited to invest in Salalah’s power system in 2002, the first full privatisation scheme took place under the new sector law in 2006, with the sale of 100% of Al Rusail Power. The sector law is now being used for the construction of new plants as well, and, less than a decade after the promulgation of the sector law, power generation is almost entirely in private hands. A prime example is Oman’s largest power plant, a 2000-MW gas-fired station at Sur, expected to become fully operational in 2014, though it has been subject to delays. The plant is fully funded, constructed and operated by non-government players (private and foreign). But even Sur could soon be overtaken; in November 2013, Oman Power and Water Procurement Company announced plans for a new greenfield 3000-MW independent power plant (IPP) to be fully operational by 2018.
Typically, IPP and independent water and power plant deals involve the government guaranteeing power (and water) purchases for 15 years, renewable for a further 15. While no independent plants have yet reached this age, several will in the coming years, and they are expected to be renewed, taking the facilities to the end of their 30-year lifespans, Zoher Karachiwala, CEO of the private United Power Company, told OBG. Under the sector law, the utilities owners are also obliged to offer a minority stake of the plant company on the Muscat Securities Market, further opening opportunities for private investors, including individuals.
The Tender Law established the Tender Board, which takes the lead in running and regulating public sector tenders. The law also includes provisions on tender advertising, types of bid submission, and the timetable and evaluation process for bids. The process of tendering usually has two stages: prequalification and final bidding. While transparent and competitive to a level not typical of emerging markets, Oman’s public tendering process is often criticised by contractors who complain that prequalification conditions are insufficient, leading to the involvement of too many firms without the requisite expertise, capital and capacity able to participate. The government’s tendency to select the lowest bid has meant that such companies have won major contracts, and then proved unable to execute them as quickly and effectively as promised. “The tendering process is the sector’s biggest weakness,” Ghassan Shammas, deputy general manager of UAE-based construction firm Target, told OBG. “There were approximately 120 tenders awarded in 2012 compared to 45 awarded by mid-2013. There are far too many delays when awarding tenders.” This view is widespread in the industry. An example often cited is construction of the $1.8bn new terminal at Muscat International Airport, which has been subject to various delays.
The volume of bids is part of the problem. “The amount of firms bidding on projects has grown so substantially that it has slowed the tendering process,” Koca told OBG. “The use of a benchmark for high-quality, capital-intensive projects would benefit the sector. There are too many smaller, unqualified firms bidding on projects out of their professional capability.”
Jaikumar Salvi, vice-president for business development and tendering at Galfar, Oman’s biggest contractor, told OBG that the board is painstakingly thorough at examining tenders, but weak prequalification standards mean that it can be overwhelmed with bids. He suggests tighter assessments of capacity, including examining their track records at home, and better technical studies before the commercial opening of tenders.
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