New construction projects offer private investment opportunities in Oman

 

After several years of slower growth, Oman’s construction sector looks set to bounce back as the government continues investment in infrastructure, tourism, housing and energy extraction. Strong private sector activity in the retail market is also creating a promising pipeline of construction work on shopping malls and other commercial properties, while plans to build further integrated tourism complexes (ITCs) have created a raft of contracts for both local and foreign construction and engineering firms.

Structure & Oversight

Construction in Oman is overseen by several government bodies charged with determining sector strategy. The Ministry of Commerce and Industry (MoCI) is the principal governing body. It holds broad supervisory powers, and is tasked with drafting legislation and creating policies designed to promote investment and a strong business environment. The MoCI is also responsible for overseeing the development of the country’s multiple industrial estates and free zones.

Beyond the MoCI, several other government bodies play auxiliary roles in the sector. The Ministry of Manpower governs the country’s workforce, enforces occupational health and safety, develops labour laws, conducts vocational training programmes and monitors Omanisation quotas. Meanwhile, the Public Authority of Small and Medium Enterprise Development, also known as Riyada, runs programmes supporting small and medium-sized enterprises (SMEs). Contractors are represented by the Oman Society of Contractors (OSC), which supports the interests of the building community, and works with the government to address challenges such as vocational training and low levels of Omanisation.

Strategy

As construction regulation often occurs at the municipal level, the Oman National Spatial Strategy (ONSS), an initiative of the Supreme Council of Planning, aims to ensure that public and private construction works in each governorate align with the national objectives laid out in Vision 2040, the country’s long-term economic roadmap. Following consultations with stakeholders across Oman, the ONSS is expected to develop a set of governorate-specific strategies aligned with the national vision, and intended to provide a comprehensive guide to societal, economic, environmental and cultural development through to 2040. Key areas of focus include housing for a growing population and the integration of basic infrastructure, such as roads, public transport, electricity, water and sewage.

Performance & Size

The construction sector continues to be one of the largest non-oil sectors in Oman and an important driver of economic diversification. The sector grew by 10.4% in 2018 and 11.5% in 2019, and market researchers Mordor Intelligence forecast that between 2019 and 2024 it will increase by a compound annual growth rate (CAGR) of 6%.

However, general government budget cuts, due in part to economic uncertainty, have slowed construction activity in recent years. As of 2018 building and construction accounted for 6.4% of Oman’s GDP, down from 7.7% in 2017, according to the National Centre for Statistics and Information (NCSI). Total value added to GDP by the sector stood at OR1.9bn ($4.9bn) in 2018, down from OR2.1bn ($5.5bn) in 2017 and OR2.3bn ($6bn) in 2016.

Despite this downward trend, economic diversification plans and investment in the country’s industrial estates have created a solid pipeline of construction projects. “Industrial construction activity in Oman is experiencing rapid growth, as multimillion-dollar projects are opening in several free zones and industrial cities,” Muhammad Al Salmy, managing partner of Hoehler & Al Salmy Architects and Engineers, told OBG. “The construction of date and soya food-processing plants, as well as developments within the meat, poultry and fisheries industries, has in particular guided this momentum in industrial zones.”

In 2018 there were around 2400 construction projects active in Oman with a combined value of $188bn. This included 1840 projects in the urban segment worth $61bn, and 70 projects in the oil and gas sector worth $39bn. This was followed by transport infrastructure developments (150 projects, $32bn), utilities provision (230 projects, $29bn) and the industrial sector (110 projects, $27bn). Adding to this, a further $12.3bn worth of construction projects were awarded in the third quarter of 2019 alone, according to industry platform ProTenders.

Budget

The government allocated OR1.2bn ($3.1bn) for infrastructure projects and OR2.5bn ($6.5bn) for development-related projects in industrial estates in the 2019 budget. “Construction activity in the industrial hubs will increase through larger budget allocation by the government, as well as more flexible taxation measures and Omanisation quotas,” Indi Johal, managing director of local civil contracting services firm MPI Construction, told OBG.

While in recent years public infrastructure spending in the country has come under pressure from decreased oil revenue, in 2018 the government set up the $1bn Rakiza Fund, which is backed by the State General Reserve Fund, Oman’s sovereign wealth fund. Following a public-private partnership (PPP) model, the Rakiza Fund focuses on attracting investment in strategic areas such as renewables, oil and gas, utilities, telecommunications, and transport and logistics.

Nevertheless, the economic slowdown has had a major impact on some private sector players. Speaking about some of these issues, Kousthuba Raja, executive director of Abu Hatim Group, an Oman-based engineering and construction company, told OBG that the current market was challenging due to the wider economic recession, which has led to significant delays in government payments to contractors. “Previously, we used to only work on government projects such as ministries, buildings for the Royal Oman Police and the Royal Court of Affairs, as well as mosques and restoration projects,” she said. “Now, however, we have pivoted towards the private sector, where we are working on a diverse range of projects. Looking ahead, we are hoping for a balance of private and public sector opportunities, as well as for an overall improvement in the economy.”

Building Materials

Despite challenging global economic conditions and concerns about building materials dumping from overseas, domestic steel and cement output continues to rise. According to a report by Omani investment firm Ubhar Capital, total demand for cement in Oman stands at around 9m tonnes per year, of which 55-60% is met by local production. Encouraged by a strong construction pipeline, this is expected to rise to 11m tonnes per year by 2023, while cement sales are forecast to increase by a CAGR of 4.9% in 2018-22.

Still, the recent financial performance of Oman’s two largest cement producers, Salalah-based Raysut Cement and Muscat’s Oman Cement Company (OCC), has been weak amid challenging global economic conditions. Profit after tax in the first half of 2019 at Raysut stood at OR511,871 ($1.3m), a 27% yearon-year (y-o-y) dip on OR702,732 ($1.8m). Financial data from OCC told a similar story, with profit after tax falling by 52% y-o-y from OR4.8m ($12.5m) in the first half of 2018 to OR2.3m ($6m).

Despite this, both companies are investing in expansion projects to increase their output and focusing on long-term positive prospects. OCC, for example, is developing a $212m integrated cement plant in the Duqm Special Economic Zone, which will have a daily production capacity of 5000 tonnes. In September 2019 OCC announced it had appointed a leading consultancy to spearhead the project (see analysis). Meanwhile, increases in domestic steel output are feeding into the local construction sector, boosted by significant government and private investment in industrial zones. As of 2018 steel production stood at around 2m tonnes per year, whereas capacity was 3m tonnes, suggesting significant room for an expansion in output, according to the World Steel Association. Two greenfield steel production projects due to come on-stream in Sohar and Salalah by the end of 2020 should add further capacity (see analysis).

Permits

Builders in Oman must obtain several permits and approvals before beginning construction. Although new government initiatives are aiming to reduce the often lengthy and complex process, developers still need to gain permission from 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. According to the World Bank’s “Doing Business 2019” report, Oman ranked 66th out of 190 countries for the ease of dealing with construction permits indicator, with a score of 72.05 points. This indicated a slip of six places on 2018’s 60th ranking and 13 places on 2017. Nevertheless, Oman ranked above the MENA regional average of 59.17 points. According to the 2019 report, acquiring the construction permits for a warehouse requires 14 steps and takes 172 days to complete; registering a property takes an additional two steps and adds an average of 16 days; while connecting buildings to the electricity grid requires six steps and 62 more days.

Government authorities have been working to make the permit application process more efficient and user-friendly by reducing the number of procedures and creating online application platforms. Muscat Municipality has been leading the way in this regard. By January 2018 the process to obtain a construction permit in Muscat had been reduced to seven procedures, and since October 2017 construction companies have been able to begin, modify and submit their applications online via an e-platform.

Labour Force

The construction industry remains the single largest employer in the country. In 2018 there were 621,478 people employed in private construction, of which 561,981, or 90.4%, were foreign workers. In 2018 the private construction segment shed 54,279 jobs, according to the NCSI. This loss is largely attributable to a slowdown in construction activity in the country. Expatriates working in the construction sector make up around 35% of the total foreign workforce in the country.

The government is seeking to boost the employment of nationals in the industry by providing more technical roles; however, low levels of Omanisation have remained a major challenge for the sector. In November 2017 the government banned the recruitment of non-Omanis in more than 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, although penalties for missing Omanisation targets in the construction sector are rarely enforced. Aside from punitive measures, there are also incentives for companies to hire more nationals. Construction companies that achieve the Omanisation quota of 30% receive a green card, the benefits of which include preferential treatment by government bodies. By comparison, as of 2018 the average Omanisation rate for the sector stood at 9.6%. In 2017 the OSC proposed a staggered approach, starting at 10% for that year and rising to 15% in 2020.

While some see Omanisation as a challenge, others see it differently. “Omanisation should be viewed as an opportunity and benefit, not a penalty or taxation,” Marco Malpiedi, managing director of Oman for global design, engineering and project management consultancy Atkins, told OBG. “The challenge is finding Omanis that not only have the ability to do the job, but also have a solid attitude and enjoy a good challenge. There is great demand for Omanis with 10-15 years of experience to fill mid-level positions, but the mindset is often lacking, so we take fresh graduates from a large pool of potential candidates, and look to nurture their talent with a focus on both technical development and work accountability.”

Small Contractors

Unlike many countries, local construction companies are not given preferential treatment when it comes to bidding on projects, and large-scale infrastructure projects are open to foreign companies without the need to find a local partner. That said, in 2019 the Ministry of Finance and the Ministry of Legal Affairs issued a new standard form construction contract, replacing the previous document from 1999. The contract provides standard non-negotiated provisions for major government-led infrastructure works. Among several amendments, there is an option for the contractor to engage Omani SME contractors as suppliers and subcontractors. Although the new standard form construction contract does not enforce local procurement requirements, the change could still boost SMEs.

Local SMEs working in the construction sector are also set to benefit from increased funding opportunities. In April 2019 Bank Nizwa, Oman’s first Islamic financial institution, and Al Badi Investment Group signed a memorandum of understanding to offer tailored credit facilities to construction SMEs looking to purchase heavy equipment and machinery. This forms part of wider government efforts to support small business by promoting strategic relationships with larger firms and improving access to finance.

PPP

The government has turned to PPPs to plug infrastructure gaps. In July 2019 a new PPP law set regulations for the financing and procurement of public works, and provided a strong institutional framework for the delivery of public-private infrastructure. Having recognised the use of PPPs as a cost-effective vehicle for infrastructure development, the law is expected to attract investment in strategic projects, reduce government costs and help sustain broader economic growth. Plans are under way to attract higher levels of private investment in infrastructure through investment holding firms, which will facilitate joint ventures with the private sector.

PPPs have been used as a successful model for infrastructure, utilities and housing developments since the mid-1990s, but this has been mostly limited to water and power generation plants. “PPP models in the utilities sector have proved to be more effective,” Jai K Salvi, vice-president of business development at local construction firm Galfar Engineering & Contracting, told OBG. PPP opportunities outside of utilities have also emerged. For example, in October 2018 the foundation stone-laying ceremony for a 1000-home affordable housing development was held in the city of Barka, around 60 km north-west of Muscat, marking the first mixed-use residential development built under a PPP model in Oman.

Roads, Ports & Airports

Transport upgrades are the current focus of the sultanate’s infrastructure expansion plans as the government focuses on emerging industrial zones. Under Vision 2020’s ninth five-year development plan for 2016-20, the government attached major importance to infrastructure development to ensure optimum utilisation of resources and investment opportunities. Developing a modern road network to link the country’s ports, industrial free zones, airports and ports has been key to achieving this. In June 2019 the Ministry of Transport announced that it was undertaking the study and design of 10 new road projects that will add around 300 km to the sultanate’s network of paved roads. At the time of the announcement there were already OR900m ($2.3bn) worth of projects in progress to build more than 650 km of new road.

Sizeable foreign and local investments are being directed towards various ongoing port and airport expansion projects. The first phase of the waterfront expansion project at Sohar Port and Freezone began in December 2018. The joint venture between Belgium’s Dredging International and the UAE’s Earth Moving Worldwide will add 210 ha to the industrial port, increasing the facility’s total size to 2210 ha.

Over the last few years Oman has also been expanding its airports, with the start of operations at the new Salalah International Airport (SLL) in June 2015, the opening of the new Muscat International Airport (MCT) in March 2018 and the opening of the new passenger terminal building at Duqm Airport in September 2018. Further projects at MCT and SLL are slated for 2019 and 2020, and will include the construction of air cargo terminals and aircraft maintenance facilities. Per the country’s Logistics Strategy 2040, planners want to transform Oman into a major transport and logistics centre through investment in infrastructure and technology to upgrade ports, airport facilities and new road links.

Tourism & Retail

Transportation links will also play a critical role in the Oman Tourism Strategy 2040, which aims to establish the sultanate’s reputation as a global tourist destination (see Tourism chapter). Included in the strategy are goals to attract 11.7m international and domestic tourists by 2040, provide 80,000 rooms and create 535,574 jobs.

The country is home to several ITCs that include high-end hotels, marinas, entertainment venues, shops and restaurants, as well as villas, townhouses and apartments available for freehold purchase by non-Omanis. One such example is Little India, a $750m ITC that is centred around luxury seafront homes, a five-star hotel, marina and commercial zones in Duqm. Construction on the 15-year project is under way, and essential infrastructure, chalets, a resort and beach-front properties are expected to be in place by 2020. Upon completion, Little India will significantly enhance Duqm’s appeal to foreigners, who will be eligible for Omani residency visas if they purchase property in the development.

Meanwhile, with Oman’s retail industry forecast to grow from $10.3bn as of 2018 to $11.3bn by 2023, retail developments are popping up all over the country. In a vote of confidence for the retail sector and the broader economy, major retail giants, including the UAE’s Majid Al Futtaim and LuLu Group, and Oman’s Al Jarwani Group are pressing ahead with multimillion-dollar expansion plans. These groups are building malls, hypermarkets and supermarkets in Muscat, as well as several secondary and tertiary cities. One of the most significant developments is the OR275m ($715m) Mall of Oman project in Muscat, a 145,000-sq-metre retail space with 250 outlets currently under development by Majid Al Futtaim. Over 50% of construction has been completed, and the mall is slated to open in 2021.

Madinat Al Irfan, a 45-ha smart city next to the Oman Convention and Exhibition Centre, is under construction and will be built in multiple phases, the first of which will be completed in 2023. Developed by a joint venture between the Oman Tourism Development Company (Omran) and Majid Al Futtaim, the mixed-use development will include commercial, residential, entertainment and hospitality plots.

Another mixed-use complex is the Mina Sultan Qaboos Waterfront, a $2bn integrated tourist port and lifestyle destination under development by Omran. It will feature hotels, residences, dining, retail and leisure facilities. Once completed, it will be the largest waterfront destination in the region.

Energy Infrastructure

The Omani hydrocarbons sector has underpinned the local economy for decades and still accounts for over 70% of government revenue. According to a report by GlobalData, an analytics and consultancy company, due to significant government investment, energy and utilities sector works are forecast to account for 37% of the construction industry’s total value by 2023.

It is therefore no surprise that it is also a major driver of construction activity. In 2019 the government signed a raft of agreements with multinational energy companies BP, Royal Dutch Shell and Eni to develop gas resources. Output from Oman’s gas fields is expected to overtake crude oil by 2023 with projects such as the Khazzan-Makarem gas field located in the Al Dhahirah governorate emblematic of this trend. The $16bn Khazzan-Makarem project includes the construction of 16 sites for 100 wells, a gas pipeline and export system, and collection and related facilities. At any one time the project has around 5000 construction workers on site. Upon completion in 2021, the field will produce around 500m standard cu feet of gas per day (see Energy chapter).

Other major energy-related infrastructure projects are also in the works. In August 2017 the $7bn Duqm Refinery saw contracts awarded to six companies, including Italy’s Saipem, South Korea’s Samsung Engineering and Spain’s Técnicas Reunidas.

Residential

For its part, the residential construction market is forecast to grow by a CAGR of 7.6% to 2023, driven by public and private investment in new buildings to meet the demand for affordable and high-end housing, two real estate segments that are under-supplied. Major projects include the Barka integrated project, which once complete in 2021 will have 1000 homes over 350,000-sq-metres in the north.

Meanwhile, the first phase of contractor work on the 2.2m-sq-metre Muscat Bay tourism complex was completed in 2019. The development is a joint venture between Omran and Jordanian real estate developer Saraya Holdings, and contractors are set to start the second and third phases of the project in 2020. When completed, the $600m waterfront area will house 435 high-end properties and two five-star hotels run by global luxury chain Jumeirah Group, as well as restaurants and supermarkets.

Outlook

Construction continues to be a major contributor to growth in Oman’s non-oil GDP, offering solid prospects for economic diversification. While government investment in infrastructure and other projects drives much of the construction activity, private investment flows are maintaining their upward momentum. Meanwhile, with the anticipated implementation of the new PPP law, opportunities for the private sector are expected to expand further.

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The Report: Oman 2020

Construction chapter from The Report: Oman 2020

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