Sustained activity: Diversified projects have meant more work for contractors, but competition is heating up

A range of construction projects lie at the heart of Oman’s growing economic development. From infrastructure to housing and from tourism to health care, contractors and construction firms are playing a major role in facilitating economic growth in the sultanate. Much of the expansion is driven by a desire to convert Muscat into a more appealing tourist destination, which involves transferring heavy industry out of the city. Reducing pressure on the capital’s primary airport and seaport is an additional engine of construction growth.

While many projects in Muscat are focused on increasing the city’s tourism appeal, construction related to industrial and transport expansion is growing substantially in cities such as Sohar, Salalah and Duqm. About a three-hour drive up the coast from Muscat, the northern port city of Sohar is expanding its free zone and building an airport, which is expected to open in 2014. Another key economic centre outside of Muscat, the southern city of Salalah is enlarging the size of its deepwater seaport, and industrial firms are building new factories around the city. Ongoing or recently finished construction projects in the port town of Duqm include a dry dock, ship repair yard, a seaport and an airport.

Moving Forward

Although the sultanate was affected by the 2008 global credit crunch, the construction sector handled the downturn relatively well. This is partly due to the country’s cautious banking practices. The Omani government was also able to support the building industry through spending, which remains among the key component of the sultanate’s long-term economic plan, Vision 2020.

Indeed, the government continues to invest substantially in infrastructure projects throughout the country. Private construction firms are also driving the sector forward as interest rates have dropped slightly and builders are feeling more confident. “Increased competition has pushed down prices and squeezed margins, to some extent,” said B V Ravishanker, the proposal manager at KAO. “But, this has not prevented the construction sector from being a productive market in which to operate. The government is investing heavily in infrastructure projects, and we do not see the pace of development slowing down in the near future, According to the most recent statistics from the Ministry of Commerce and Industry (MoCI), the construction sector contributed over OR307m ($800m) to Oman’s economy during the first quarter of 2012; this represents more than 4% of the sultanate’s GDP during the period. The sector contributed roughly OR296m ($771m) in the first quarter of 2011, meaning that construction grew by almost 4% when compared with the first three months of 2011 and 2012. In addition, the Omani government recently projected that construction sector spending would reach around $10bn in 2012 – an increase of 23% when compared with 2011 spending, according to data from Alpen Capital, an investment bank headquartered in Dubai.

Issuing Of Permits

Five bodies are responsible for issuing building permits in Oman, each in charge of a separate jurisdiction. These are the Muscat Municipality, Sohar Municipality, Duqm Municipality, the Ministry of Regional Municipalities and Dhofar Municipality.

The Muscat Municipality, which is responsible for issuing building permits for all construction projects in the capital (with the exclusion of Ministry of Defence developments), recently reported that 2352 building permits had been issued during the first quarter of 2012. Making up 86% of the total, the vast majority of those permits were for residential construction purposes. Residential-commercial permits, a category that typically involves multi-use developments, made up the next-largest category, accounting for 7.5%. In terms of issuing building permits, the fastest growing areas of Muscat are the districts of Al Seeb and Ras Al Hamra.

Requests to build in these areas accounted for 73% of permits issued during the first quarter of 2012. Both areas are popular for villa construction.

Effect On Demand

The demand for building permits in Muscat decreased slightly from the first to the second quarter of 2012. According to data provided by the municipality, 1997 permits were issued during the second quarter of 2012. Similar to the preceding quarter, the bulk of these, almost 90%, were for residential construction projects, with residential-commercial projects being the second highest. Building in Al Seeb and Ras Al Hamra represented over 75% of construction permits issued during that time.

Beyond authorising building projects, the Muscat Municipality oversees all regulation and development rules related to construction in the capital area. One of the foremost requirements is that buildings must meet either an Islamic or Omani architectural style, although industrial buildings are exempt from this rule. Developers must submit drawings of a planned structure before obtaining approval to begin construction. The body also supervises city landscaping and roads.

Adding Efficiency

According to the Doing World Bank and the International Finance Cooperation, procuring a construction permit is easier in Oman than in most MENA countries. The report ranked Oman 83rd out of 183, while the MENA region average was 91. The time to obtain a permit in the nation dropped by 12 days between 2011 and 2012, while the cost in terms of percentage of income per capita fell by almost 6% over the same period. Notably, the cost has dropped by over 58% between 2012 and 2006.

On The Road

According to Kayson Al Omania (KAO), a local construction and engineering firm, roughly 60% to 65% of all projects floated on the government’s Tender Board are in the road sector. Efforts to develop and expand ground networks make up one of the largest categories of infrastructure projects under way in the sultanate. Much of the demand stems from an increasing population. KAO estimates that there are three to four cars for every house, resulting in some congestion challenges in denser parts of the capital area. Yet the government aims to do more than alleviate traffic congestion in Muscat; a second objective is to build road links between all of the villages in Oman.

Big Spending

To achieve both aims, the Omani government has instituted a policy of steadily investing oil revenue on roadway projects. Under the most recent five-year economic plan, which runs from 2011 to 2015, a total of OR1.2bn ($3.2bn) is allotted for road construction – the second-highest category for project spending after airports. In terms of total spending over the period, road investments will account for almost 3%.

One of the largest current projects is the Al Batinah Expressway. The government estimates the project will cost around OR250m ($652m), or 20% of planned roads investments over the five-year economic plan period.

With three lanes each way, the expressway will run from Muscat to the UAE border alongside an existing highway. The project includes six packages, two of which have already been awarded and another two which were floated as of September 2012. The remaining two packages have not been put up for tender yet.

According to Larson and Toubro, an Indian conglomerate operating in Oman for almost two decades, each package should have 15-20 bidders. However, as many of the bidders are joint ventures, there are around 30 firms involved in each tender. In March 2012 local construction firm Galfar Engineering and Contracting (GEC), won the first phase of the project. Valued at over OR138.9m ($362m), GEC should finish the construction in about three years, according to the firm.

Forging Connections

Another significant roadway project will link the Muscat International Airport (MIA) with the Muscat Expressway, which was completed in early 2011 and stretches from Al Qurum to the Al Naseem Gardens. A joint venture between Oman United Engineering Services (OUES) and Portugal-based Sociedade de Construções Soares da Costa was awarded the project in April 2012. The Muscat Municipality contract includes a network of roads, bridges and interchanges, which should increase connectivity throughout the capital, as well as reduce congestion and open up new areas for commercial property development. In particular, the new road should improve access to an industrial area in Ghala where upscale residential and commercial developments are expected.

A range of other projects are either under way or in the pipeline. Khalid Bin Ahmed and Sons (KAS), an Omani construction firm, recently won bids for two road projects. Both awarded by the Ministry of Transport and Communications (MoTC), one project is the first phase of an upgrade to the Sinaw-Mahut-Duqm road. Oman’s five-year plan has estimated that OR80m ($208m) will be spent on the entire Sinaw-Mahut-Duqm development. For the second project KAS will be constructing a bridge in the eastern Sur wilayat.

Additional road development objectives are outlined in the five-year plan. The government aims to invest OR73m ($190m) into the dualisation of the Ibri-Jibrin road, another OR250m ($652m) into the dualisation of the Nizwa-Thumrait road and OR32.4m ($84m) into a third traffic lane at the intersection of Al Mualih and Bait Al Barkah in the capital area. A further investment of OR25.5m ($66.5m) has been allocated for reducing congestion on Al Burj road in Ruwi, Muscat’s main business centre. The government also has plans to spend OR200m ($521m) on the third phase of the Al Batinah coastal road, as well as OR240m ($625.5m) on the dualisation of the Bidbid to Sur road. Internal road paving in wilayats throughout the country is expected to cost almost OR45m ($117.3m) over the five-year period, while another OR24m ($62.5m) has been set aside for road projects in the Muscat governorate, according to the current economic plan.

Laying Tracks

Key to increasing connectivity across the sultanate is the development of Oman’s rail network. As of early September 2012, nine international firms or groups were planning to bid on a design and consulting contract for the construction of the 1000-km railway. The project could be worth as much as OR60m ($156m), according to regional and global press reports. OUES estimated, however, that the entire rail development will cost around OR16bn ($41.7bn).

Due for completion in 2018, the rail will begin in the north at the town of Buraimi and run to Salalah in the southern Dhofar region. Terminals will be built in each major town on the network to facilitate cargo and passenger transport. The first phase will connect Sohar with Muscat, and the second stage will involve a coastal line from the capital to Duqm in the Al Wusta region.

On The Table

The bidders for the design and consulting rail contract in Oman include a consortium of Denmark’s Cowi & Partners with AECOM and DBI of the US; SYSTRA of France; US-based Parsons Group; the UK’s Mott MacDonald; a consortium of Italy’s Italferr SpA and Australia’s WorleyParsons; a consortium led by Korea Rail and Hyundai; and Spain’s PROINTEC Group. The enormous project is set for completion in 2017.

Further efforts are under way to upgrade Oman’s air links. The largest project focuses on expanding MIA and is to be completed in 2014. While a joint venture between COWI and locally based Larson Architects is the project’s principal consultant, several other companies are involved; a joint venture by Greece’s Consolidated Contractors Company and Istanbul-based TAV Construction won the bid to carry out the main civil construction in mid-2009. Construction of the new air traffic control tower, data centre, air traffic management centre, contingency and training building, and rescue services was awarded to Carillion Alawi, a UK construction firm. And MIA’s passenger terminal will be constructed by a consortium of Bechtel, Turkey’s ENKA and locally based Bahwan Engineering.

Improvedcargo Capacity And Runways

Upon completion, total gross floor area (gfa) of the passenger terminal will be nearly 335,000 sq metres, and the expanded airport will be able to handle 12m passengers annually, according to the Oman Airport Management Company (OAMC). Cargo capacity will increase to 260,000 tonnes per year and its current runway will grow to measure 4000 metres by 60 metres. Another identically sized runway is scheduled for construction.

Changes In Sohar

Oman’s capital is not the only site of airport construction. In Sohar, the sultanate’s third-largest city, construction has already been completed on the runway at Sohar International Airport (SOIR). Scheduled to become operational in 2014, the new airport will serve both passenger and cargo traffic and provide firms operating in northern Oman with more transport options. Sohar is already home to a growing seaport, industrial area and free zone.

While the first two phases of construction were awarded to Strabag Oman, a locally based construction firm, the third phase involving building the passenger terminal, has yet to be awarded. The project’s principal consultant is Egypt’s Hamza Associates, and the terminal will provide 9000 sq metres of total gfa, with an annual capacity of 500,000 passengers, according to OAMC. The runway measures 4000 metres by 60 metres, and OAMC expects the new SOIR will be able to handle 50,000 tonnes of cargo annually.

Additional airport construction is taking place in Salalah, where a new passenger terminal and runway are being built in order to accommodate the rising number of tourists. Salalah International Airport’s (SAIA) new terminal will stretch over 65,000 sq metres in total gfa and be able to accommodate 1m passengers each year. Its new runway will cover an area of 4000 metres by 60 metres, according to OAMC figures. Scheduled to be completed by the end of 2014, the project is being worked on by a number of firms. The same COWI-Larson joint venture working on MIA is also the principal consultant for the SAIA expansion. Another joint venture – this one composed of GEC and Laurson and Toubro – is constructing the new terminal and runway.

Still For Bid

Duqm is the site of a fourth airport project under way in Oman. Set to be operational in 2013, Duqm International Airport (DIA) will provide a 4000-metre by 60-metre runway, as well as a passenger terminal capable of handling 500,000 passengers per annum. The OAMC reports that the airport will also include a cargo terminal capable of transferring 50,000 tonnes per annum (tpa). While a contract for the construction of the passenger terminal has not been awarded, Korea’s Hanjin Heavy Industries and Construction won a bid to build the airport’s runway. In addition, Parsons Corporation was awarded a contract to become the project’s principal consultant over design, and Oman-based Ibn Khaldun Almadaen Engineering Consultants is the supervisory principal consultant.

At The Docks

Oman’s transport infrastructure projects also involve upgrading of the seaports. The Port of Salalah plans to build an additional 1200 metres of general cargo berths, which are expected to increase capacity by over 200%. Construction for the project is slated to be completed by the end of 2013. A second project aims to expand the port’s liquid bulk capacity from 1m tpa in 2012 to almost 6m tpa in 2014 – an increase of nearly 500%, according to the Port of Salalah. The MoTC awarded Netherlands-based Archirodon Construction (Overseas) Company (Archirodon) a contract in May 2012 to carry out both projects. Archirodon reported in 2012 that the contract was worth $143m.

The Port of Sohar also has significant expansion plans. Built in the early 2000s, the port is increasing capacity as cargo and container traffic is being re-routed from Port Sultan Qaboos (PSQ) in Muscat to Sohar. The MoTC and the Ministry of Tourism announced in 2011 that PSQ would become a tourism port and a large portion of PSQ’s industrial traffic is being sent to Sohar.

Major steps have already been taken to increase capacity. The port recently inaugurated the Sohar Bulk Terminal for the handling of dry materials. A temporary berth will handle a number of different bulk material imports and exports including gabbro, coal, laterite, limestone and clinker. Scheduled to be finished by mid-2014, a permanent terminal with a 3.5-km conveyor belt system will replace the temporary facility. Production capacity for the permanent terminal should reach 10m tonnes per year, according to the Sohar Industrial Port Company, which manages the Port of Sohar.

Another significant maritime construction project is taking place to the south of Sohar in Duqm. When completed, the Port of Duqm will cover 197 sq km – of which 60 sq km will be land – and provide 6000 ha of rentable port-related area, according to the port’s management. An initial eight berths with an alongside depth of 18 metres will be constructed in addition to a wide commercial quay stretching 2.25 km in length. The Special Economic Zone Authority at Duqm (SEZAD) reports that a 1-km quay for government ships and ferries is also planned. The first phase is slated to become operational in 2013 and the contract for developing access roads to the port, the nearby dry dock and related infrastructure, was won by Strabag Oman in mid-2011. Awarded by the MoTC, the contract is valued at OR81m ($211m), according to Strabag Oman.

Up And Running

While construction continues on the Port of Duqm, the Oman Dry Dock Company’s (ODC) neighbouring dry dock and ship repair facilities became fully operational in June 2012. A joint venture between Korea’s Daewoo Engineering and Contracting Company (DEC) and GEC was awarded a contract to build the dry docks in early 2008. Made up of two docks each of 14.5 metres in height, the larger dock covers an area of 410 metres by 95 metres and has a 600,000 deadweight tonnage (dwt) capacity. The second dock is slightly smaller; with a dwt of 500,000, the dock measures 410 metres by 80 metres. ODC plans to expand its facilities further with the construction of a 80, 000-dwt-capacity floating dock, according to the ODC.

Attracting Petrochemicals

With the newly completed dry dock, and a seaport and airport both due to become operational in 2013, Duqm is expected to attract more industrial projects. Downstream petrochemicals companies should be particularly drawn to the port town once construction on an oil refinery is finished. The Oman Oil Company (OOC) and Abu Dhabi-based International Petroleum Investment Company (IPIC) formed a 50/50 joint venture in June 2012 that will own and operate the planned refinery.

Known as the Duqm Refinery and Petrochemical Industries Company (DRPIC), the joint venture has begun the initial engineering design process and a contract for the front-end engineering design will be floated by early 2013. DRPIC’s project management consultant, UK-based Shaw Energy and Chemicals, is leading the preliminary engineering design phase. The refinery is scheduled to be finished by 2017, and according to IPIC, the facility should have a production capacity of 230,000 barrels per day. The project’s second phase will focus on the development of a petrochemical complex.

Although Oman’s housing market did not experience the same surge seen in other GCC countries, repercussions of the economic downturn in 2008 affected the sultanate less severely overall. One of the most important regulatory changes for the market came in 2006 when the government announced that non-GCC foreign nationals would be able to own property in so-called integrated tourism complexes (ITCs) – multi-use developments typically centred on leisure facilities. The regulatory change had a significant impact on land prices, which jumped almost 400% from OR16 ($41.70) per sq metre in mid-2006 to OR81 ($211) per sq metre two years later in mid-2008, according to Alpen Capital’s most recent report on construction in the GCC.

Market Promise

Residential construction slowed down following the global credit crunch; however, the market has picked up largely due to Oman’s growing private sector. Alpen Capital recently noted that the number of employees in the private sector had increased by over 20% between 2008 and 2010. Residential prices appeared to stabilise in 2011, and demand for housing is expected to remain robust in more well-developed areas such as Madinat Al Sultan Qaboos, Qurum, Shatti Al Qurum, and two ITCs, Muscat Hills and The Wave. A growing population in addition to increasing employment levels should help the residential construction market maintain its positive trajectory.

Roadblocks

Demand for affordable housing in Oman is particularly strong. The government announced in April 2012 that more local contractors were needed to meet rising housing demand. The shortage of qualified contractors in areas of the country has resulted in project delays. “Training and education is paramount to prepare the local population for technically related jobs in construction,” said R Chandra Sekhar, general manager of Oman United Engineering Services, told OBG.

Real estate consultancy Jones Lang LaSalle (JLL) estimated in a September 2011 report that there was a shortage of 15,000 affordable home units in the sultanate. JLL also calculated that low-income households – defined as maintaining an income of less than OR450 ($1200) per month – totalled around 300,000, around 5% of which did not include affordable homes.

Housing Trends

The lack of affordable housing is a regional trend. The 2011 JLL report noted that the major markets in the MENA region were short by 3.5m affordable homes. Contributing factors include high land values, poor access to affordable land and limited revenue when compared to other sorts of housing projects. Furthermore, developers constructing low-income housing units in Oman typically build smaller projects, thus losing the benefits of economies of scale. Building costs can also be higher in some of the more remote areas of Oman. Many Omanis prefer to remain in their current location rather than take a more affordable home in an area with lower construction costs.

The Omani government has allocated a significant portion of spending in its five-year plan to housing. Around OR49m ($127.7m) was set aside for its Housing Loan Programme, which provides soft, interest-free loans to qualifying Omani families. Another OR360m ($938) was allotted for the Housing Assistant Programme, a scheme that constructs and repairs homes for families with an income of less than OR300 ($782) per month, according to Oman’s Ministry of Housing.

Luxury Sector

Oman’s growing tourism sector is providing opportunities for construction firms. Much of the tourism-related development is carried out by Omran, a fully government-owned development, investment and asset management firm. Omran is also the master planner, developer and owner of several significant projects, including the Crowne Plaza Duqm Hotel. Scheduled for completion in the first quarter of 2012, the four-star hotel will provide 213 rooms and 19 suites. The hotel will primarily serve business travellers and is being built on a 10-ha plot of land, according to recent Omran data. The firm signed an agreement with InterContinental Hotels Group in August 2008 to develop the property. COWI won contracts to be the project’s master planner, architect and engineering consultant.

Khasab Hotel is another Omran project. Located in the northern Musandam peninsula, the three-star hotel will offer 110 rooms and cater to tourists rather than business travellers. The hotel is to be completed in the fourth quarter of 2013, and Dubai-based Archgroup Consultants was selected to be the project’s master planner, architect and engineering consultant. WSP Middle East, an engineering and design consultancy, won a contract to work as the project’s lead consultant in energy and environmental design , according to Omran.

The Oman Convention and Exhibition Centre (OCEC) is one of Omran’s largest projects. The OCEC will consist of: a convention centre with a 3200-seat auditorium; 14 meeting rooms; two ballrooms; and an open, 22,000-sq-metre exhibition area. A second component of the project is a five-star hotel. The OCEC will be located in the Bawsher wilayat of Muscat.

Well-Being

Construction is set to begin on another tourism project near Salalah. The Apex Medical Group (AMG), part of the Saudi Arabia-based Al Joaib Holding, is developing a medical tourism centre known as the International Medical City (IMC). With construction scheduled to begin before the end of 2012, the operational, market, financial and regulatory feasibility study for the IMC was completed in February 2012. A consortium of advisors including Ernst & Young, Kane Healthcare Consulting Group and UK-based engineering design firm Atkins, carried out the feasibility study. According to AMG, the new medical facility will cover 800,000 sq metres and offer a multi-speciality, 530-bed hospital. A diagnostic centre, organ transplant centre, research and development facility, luxury hotel and health care resort will also be built.

Outlook

As Oman’s construction sector expands, several challenges remain. Perhaps foremost of these is the relatively high level of competition of both local and foreign bidders. “Oman should be an open market. While it is fair to give preference to locals on products we must be careful that preference towards local contractors is not to the detriment of quality of the final construction,” Sheikh Hamid Al Yafaei, executive director of Strabag, told OBG. In the early 1990s, the maximum number of bidders on a given project was around 10. This has increased, however, to roughly 15 to 20 bids per project, according to recent KAO figures. Teejan Group, a local conglomerate involved in the construction sector, has noted that it is not uncommon for 25 to 35 companies to bid on larger projects. Much of this competition has resulted from slower construction sectors elsewhere in the GCC. “A certain level of segmentation by sector, size of company and level of expertise should be classified by the Oman Tender Board to target the most qualified contractors and reduce the amount of bidders to a healthy and competitive level,” said I Musheer Ahamed, CEO of Teejan.

Despite increased competition, the future of Oman’s construction sector appears positive, especially given recent structural enhancements. “The public procurement process in Oman is improving,” said Ali Mazhari, general manager of Kayson Al Omania. “The Tender Board has become more streamlined in its processes and has strengthened its technical support system.” Projects related to transport infrastructure represent a large part of ongoing or planned building in the sultanate, and tourism and industrial projects also present opportunities for construction firms. Furthermore, while the sultanate’s housing market experienced a period of relative inactivity following the global economic downturn, the sector is moving forward with strong demand for housing in more developed areas.

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