Unlike many of its neighbours, Bahrain witnesses construction project boom

 

With a raft of measures aimed at improving infrastructure, industry, housing and connectivity, the government of Bahrain has a $32bn investment strategy to accelerate economic diversification in the kingdom, providing abundant opportunities for the country’s construction sector. Even against a backdrop of falling oil prices that has seen the cancellation or deceleration of infrastructure investment in some neighbouring economies, Bahrain’s construction businesses have continued to outperform most other sectors.

Some neighbouring GCC countries have stood by their 2011 commitment to finance $10bn in mega-projects in Bahrain over 10 years through the Gulf Development Fund (GDF), which has allowed construction to press ahead on some schemes despite a projected budget deficit of $4bn posted by the kingdom for both 2015 and 2016. According to the Bahrain Economic Development Board (EDB), the aggregate value of GDF projects under way by August 2016 reached $4bn. This included a $1.1bn airport expansion project.

SECURE SECTOR: Concurrently, long-term commercial loans and innovative public-private partnerships (PPPs) have been agreed to enable a number of landmark industrial projects in downstream oil and gas, as well as the aluminium industry, water and power. Also under way is a strategy to build more than 40,000 affordable homes for Bahraini citizens; individual projects are being funded by the GDF, while others are being constructed using long-term finance or PPPs. Developers are likewise building new residential blocks targeting more affluent investors and the holiday home market in certain areas of the country.

Property investment has been an attractive alternative for many portfolio holders who saw the Bahrain All Share Index decline by 14.77% in 2015, according to the Bahrain Bourse’s 2015 annual report. This downward trajectory was ameliorated only slightly by early 2017, when the bourse had fallen by 0.86% year to date, in mid-January 2017. A number of five-star hotels and flagship retail centres are set to open in 2017, driven in part by the buoyant and ongoing influx of weekend tourists across the King Fahd Causeway from Saudi Arabia. According to the Ministry of the Interior, around 12.18m travellers arrived in Bahrain over the causeway during 2016, about 3% more than 11.81m in the previous year. During the Eid Al Adha holiday alone more than 300,000 visitors arrived from Saudi Arabia over the three-day period in mid-September 2016.

EXPANSION: The range of projects under construction in Bahrain is a key driver of economic growth for the country. Data published by the EDB showed that in 2015 as a whole the construction sector expanded by 6.4%, according to the board’s September 2016 quarterly report. In the second quarter of 2016 that pattern moderated, with a 5.9% expansion of output at constant prices, compared to the same quarter a year before and by 5.4% in the first quarter.

The sector contributed 7% of GDP in 2015 at constant prices, and in the first quarter of 2016 the proportion increased to 7.2%, the highest level since 2011, and one that was maintained in the second quarter of 2016. By the third quarter of 2016 growth in this sector was steady, at around 7.08%. At constant prices, the construction sector was valued at BD810.66m ($2.2bn) for the whole of 2015, up from BD765.32m ($2bn) in 2014, according to the Information and eGovernment Authority’s Open Data Portal. In the second and third quarters of 2016 it generated BD21.37m ($56.7m) and BD240.69m ($638.4m) of GDP, respectively.

GROWING PAINS: Businesses in Bahrain’s construction sector have had to weather a double dip in activity in the last decade, with the global financial crisis in 2008 followed by civil unrest in 2011 weighing on investor confidence and in some notable examples leaving both buyers and construction firms with leaner pockets as the country’s property speculation bubble burst.

As they enter 2017 those same companies welcome the raft of new developments in the sector, but face challenges as they compete to execute a pipeline of work that might fill their order books for a decade in three to five years. “It really is our time now in the construction sector; nevertheless, I am genuinely concerned that the resources in terms of manpower, employee accommodation and transport, and equipment are not there,” David Anthony, general manager of Nass Contracting, told OBG. He estimated that the sector in Bahrain may have to hire an additional 55,000 workers to complete all projects either under way or set to start in the kingdom in 2017.

HUMAN RESOURCES: The scale of the challenge can be better understood when these figures are compared to employment data and regulations in Bahrain. According to statistics from the Ministry of Labour and Social Development and the Labour Market Regulatory Authority (LMRA), the kingdom’s workforce of 754,863 people in the second quarter of 2016 included 595,151 expatriate workers and 159,711 Bahrainis. The unemployment rate of 3.4% suggests there are 26,569 job-seekers of all nationalities in Bahrain.

LMRA rules stipulate that for every four expatriate workers, businesses must employ one Bahraini national, or else they face stiff penalties, including a ban on the issuance of new work visas. If one in five of the new building workers required to complete the new wave of construction projects in the kingdom is Bahraini, that suggests 11,000 of the 55,000 new construction jobs will be occupied by nationals.

The impact of these new job openings for citizens would appear to offer an opportunity to reduce the number of unemployed people in Bahrain by more than 40% if construction companies can find local citizens with the skills and inclination to take jobs in the industry, and if businesses are prepared to abide by the spirit of Bahrainisation laws. In May 2016 Ausamah Abdulla Al Absi, CEO of the LMRA, warned all companies in Bahrain that paying lip service to Bahrainisation quotas would not be sufficient. Speaking at a press conference, Al Absi told the local press, “There are people who just have Bahrainis on the cards in order to get permits for foreign workers. We will ensure that all the Bahrainis who are on the records are actually doing the jobs and we will take whatever necessary steps as a result of our inspections, whether that’s a fine or cancelling permits.”

In early 2016 the Cabinet approved legislation that would see companies fined BD300 ($769) for each foreign worker who is not covered by the Bahrainisation quota. The fine is the equivalent of one month’s minimum wage for a Bahraini citizen working in the private sector. LMRA data also showed that in the second quarter of 2016 the labour cost gap between Bahraini and non-Bahraini employees in target sectors, which included construction, had grown to BD308 ($817) a month, up by BD11 ($29.18) on the same period a year before. Furthermore, the LMRA has stated that, starting in April 2017, it will refuse visas to companies that break Bahrainisation rules.

LABOUR PRODUCTIVITY: Although employment quotas alone are unlikely to bring about an immediate change in the construction sector labour market in Bahrain, they may contribute to a gradual reappraisal. For decades the rapid modernisation of states in the GCC countries has been paid for by hydrocarbons wealth, but achieved using large pools of low-skilled, low-cost labour. Millions of people from India, Pakistan, Bangladesh and neighbouring countries have migrated to the GCC on short-term work visas and the majority have worked in construction. Companies often house these workers in labour camps and bus them to and from building sites during their stay in their host country. The arrangement has provided employment and saving opportunities for migrant workers, most of whom send home a sizeable proportion of their income in the form of remittances.

The system has its critics. International labour organisations have taken issue with poor treatment of many such employees and the lack of rights for workers, who are often required to surrender their passports to employers, making them vulnerable to abuses.

Economists have also begun to question the effectiveness of the cheap labour model for Gulf construction businesses and the economies in which they operate. In December 2015 McKinsey Global Institute (MGI), a think tank, published “Saudi Arabia Beyond Oil: The Investment and Productivity Transformation”. The report considered ways Saudi Arabia’s economy could change and adapt to provide rewarding private sector jobs for its growing and youthful population. It identified construction as one of eight key sectors that could generate growth and jobs for citizens, and collectively generate 60% of the growth needed to double the country’s GDP by 2030. The MGI report cautioned, however, that even if investment in the sector increased, it would not achieve its potential if existing attitudes to the sector and practices within it continued to prevail. “For the investment to be productive,” it stated, “the sector must become more efficient, adopting modern techniques and improving operational management to be able to deliver projects on time and on budget.”

STEPPING UP: The MGI study also pointed out that inefficiencies in the construction sector were related in part to the low-cost labour model, which relies on high volumes of workers with low skills and low mechanisation, and that these problems were further exacerbated by poor project planning and low-calibre project management. It estimated that labour productivity based on value added per worker in Saudi Arabia is about one-sixth of that in the US.

The extent to which cheap construction labour is used in the GCC can be seen when government data on the numbers of workers in the industry are compared to the total populations of the host countries. In Bahrain, 271,017 expatriate construction workers represent around 22% of its entire population of 1.3m; in Qatar, 783,441 such workers represented 36% of the 2.17m people in the country in 2015. The latest figures for Dubai, published in 2012, showed 464,711 construction workers made up 22% of the emirate’s population that year, while in Oman just under 15% of the 4.5m population are construction workers. In Saudi Arabia the 1.5m expatriate construction workers constitute about 5% of the country’s 31m residents.

DIFFERING VIEWS: Some construction firms see obstacles to adopting the MGI approach. While they acknowledge that investing in more advanced machinery and employing more highly skilled and expensive workers could increase productivity and result in more efficient management, they also point to commercial constraints. “It may make sense on paper,” Anthony told OBG, “but it would take a great deal of courage for an individual company to take the first step and replace a large, low-skilled workforce with a small number of higher paid and more highly skilled workers while also investing in more expensive and advanced equipment.” For Robin Walton, engineering and export manager at Arabian International Mechanical Contracting, the prospect of overturning decades of tradition is still a ways off. “In reality I think it is unlikely there will be any significant change in the short term, because tradition and economics, which dictate the use of migrant labour, are too deeply rooted here. The status quo will have to change through the governments’ review of educational policies at early levels, promoting, motivating and driving the need for local populations to contribute to building their own futures.” Walton told OBG. “As an engineering, procurement and construction [EPC] contracting company, we currently tend to recruit the skilled staff we need in South Asia. We maintain a Bahrainisation ratio of 8%, which we anticipate increasing by way of our plans to establish a local training institute for young people to acquire engineering skills in such fields as non-destructive testing.”

Labour sources are meanwhile shifting. Developer Mohammed Kooheji, COO of Kooheji Contractors, has seen growing difficulty in sourcing skilled construction staff from India. He cited three reasons: improved education for young Indian people, many of whom are no longer attracted by construction work; increased construction wages in India, which are on a par with Gulf salaries in some areas; and growth in the number of infrastructure and construction projects taking place in India itself. “In response we are looking at investing in new machinery and equipment that will enable our company to reduce its reliance on skills that are becoming increasingly scarce,” Kooheji told OBG.

Accordingly, the numbers of Bahraini professionals entering the sector has improved, according to the Bahrain Society of Engineers (BSE). “During the financial boom students were opting to study business and accounting, and some highly skilled government engineers were lured away by the private sector, but this trend has been corrected and we are seeing more young people joining engineering courses,” Masoud Al Hermi, president of the BSE, told OBG.

DEVELOPMENT FUND: A key driver of the construction sector’s growth in 2015 and 2016 has been the GDF, which has seen billions of dollars pour into infrastructure projects in Bahrain. According to the EDB, the total value of projects tendered grew from $2.2bn in the fourth quarter of 2014 to $3.6bn a year later, increasing further to $3.8bn by the beginning of March 2016. There has also been a marked increase in the number of projects where construction has started, which reached $4bn in August 2016 compared to $1.2bn a year before.

For one key project covered by the GCC fund, the Airport Modernisation Programme (AMP) for Bahrain International Airport, up to 70% of the construction cost is paid by the GDF. The main contract for the $1.1bn scheme was awarded in early 2016 to a consortium led by Turkey’s TAV and UAE-based Arabtech Construction. Further contracts for ICT systems, the air traffic control building and a maintenance and repair hangar are to be tendered in 2017. The first phase of the AMP is due to be completed by mid-2019, when the existing terminal buildings will be demolished, enabling work on the second phase to commence. When completed the airport will have the capacity to handle 14m passengers a year. Of the projects already funded by the GCC by August 2016, the EDB reported housing accounted for $1.44bn of spending, with $840m and $480m devoted to power and water, and roads, respectively. A $266m grant from the late King Abdullah of Saudi Arabia is also being used to start construction of a major new medical facility in south Bahrain. Work on the King Abdullah Medical City is set to start in 2017, with the 300-bed hospital designed by SaudConsult due to open in September 2019 under Arabian Gulf University management.

INDUSTRIAL DEVELOPMENT: Construction firms are also poised to bid for several industrial projects designed to bolster Bahrain’s energy sector and heavy manufacturing sectors. The Bahrain Petroleum Company has invited companies to bid for the EPC contract for the expansion of its refinery, which will boost capacity from 267,000 barrels per day (bpd) to 360,000 bpd and allow for a modified output mix. Reuters reported in December 2016 that the firm received bids from Japan’s JGC Corporation and Mitsui, Technip, Spain’s Tecnicas Reunidas, Samsung Engineering, Hyundai Engineering and Construction, and Daewoo Engineering and Construction, among others. Bidding was extended in late 2016, and the contract is to be awarded in the first half of 2017. The $5bn project is scheduled for completion by 2020. A pioneering PPP model is being used for the construction of a floating liquefied natural gas import terminal. This will be built on a build-own-operate-transfer structure, with a total funding requirement of $900m, including a $600m, 20-year loan financed by export credit agencies.

Meanwhile, Bahrain National Gas plans to raise a $400m loan to finance expansion of its facilities to raise processing capacity by 350m standard cu feet by September 2018. One major business relying on a steady supply of gas is Alba; in September 2016 it had received commitments worth $1.5bn from banks for its sixth aluminium potline. The entire project is to cost $3bn, of which 70% will be financed through loans. The new potline will increase Alba’s aluminium output capacity from 540,000 tonnes per annum (tpa) to 1.5m tpa. Consultancy bids have also been received for the Al Dur 2 independent water and power project, a 1500-MW, gas-fired facility adjacent to the existing one and scheduled to come on-stream by 2019. In addition, a BD280m ($742.7m) development project for the transmission grid is due to be completed by the end of 2017.

Meanwhile, in the transport sector, engineering and consultancy work is due to start on the 22.5-km Bahrain Northern Link Road, which will include both roads and a causeway around the country’s northern periphery to the King Fahd Causeway.

PRIVATE DEVELOPMENTS: Construction sites across Bahrain also look set to remain busy for several years, with privately funded projects providing luxurious city centre apartments, water-front villas, new prestigious shopping malls and mixed-use developments. Some major residential schemes will include a mixture of social housing, affordable homes and luxury properties. In 2016 momentum picked up on a number of key mega-projects built around man-made islands. According to the international estate agency CBRE, in the first quarter of 2016 new freehold apartment developments were launched at Diyar Al Muharraq, in the north of the country, Dilmunia Island in the northeast and Durrat Al Bahrain in the south. The oil price slump does not appear to have deterred developers of residential schemes aimed at Bahraini investors and the Saudi citizens living in the Eastern Province. In addition, prestigious mixed-use developments are being built. In Bahrain Bay, The Avenues Mall is due to be completed in 2017, while Gulf Holding Company has commenced work on its $150m, mixed-use Harbour Row development. The firm has also working to complete and hand over the three towers of its $700m stalled Villamar development at Financial Harbour by 2018.

REAL ESTATE LAWS: While the rate of development across Bahrain suggests a construction and real estate market sector flourishing in the face of a wider regional economic malaise, the sector is still waiting for legal measures from 2015 regarding tenants’ rights, the financing of real estate developments and the issue of stalled developments to be implemented. It has been suggested that funding of between BD300m ($795.8m) and BD400m ($1.1bn) is needed to reboot stalled projects including Marina West, Amwaj Gateway, Juffair Views and Sunset Hills. In mid-2016 it was being suggested that a consortium of wealthy Bahraini investors might be formed to complete and dispose of the properties, and in December 2016 Trade Arabia reported that Juffair Views, a 26-storey residential tower started in 2007 was sold at auction for $9.5m to the India and UAE-based Rameee Group.

In March 2016 the Bahraini stock market established a market for real estate investment trusts (REITs). REITs are common in much of the world, however, they are still a new products for much of the Gulf region. The REITs are expected to help boost foreign investment in the sector (see Capital Markets chapter).

Another legal measure introduced in 2015 was the requirement for property businesses to create escrow accounts for each project to prevent the domino effect created by developers collecting deposits for one scheme, but using those funds or borrow against them for new projects before the initial properties have been handed over. “In the long term we can see it could make business more complicated for developers, but our firm has always had separate escrow accounts for each development and so for us there is no challenge, but we would like to see the regulations made clearer so that we do not find ourselves in breach of any of the new rules,” Kooheji told OBG.

OUTLOOK: There may be some in Bahrain’s construction sector who wish some of the major projects coming on-line currently could be released consecutively to enable completion using existing manpower and resources. However, they are content and ready to face the challenges created up by the building boom.

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The Report: Bahrain 2017

Construction & Real Estate chapter from The Report: Bahrain 2017

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