Construction Intelligence Report - KSA Update
With the oil price likely to recover by most estimates to a $50 per barrel average for 2017 as OPEC implements a series of production cuts, the Kingdom is forecasting oil revenue to increase by 45% to $128Bn from $87.7Bn. This is optimistic given the fact that Saudi has to bear the brunt of the production cuts for OPEC and we forecast that the revenue target would require around $65 per barrel over 2017.
Although the implementation of the National Project Management Office (NPMO) has stalled at the awards stage, movement has been noted in the reprioritisation of projects and programmes. It is estimated that from the governments $820Bn pipeline, $168Bn is at risk of being cancelled.
With Makkah Metro not awarded in 2016, contract awards in the Kingdom trailed expectations by around $20Bn. The outlook for 2017 has subsequently increased from $27Bn should Makkah be awarded to c.$32Bn. The forecast is further predicated on another major infrastructure project being awarded by exception / Royal Decree.
With a 28% increase in budgeted expenditure for 2017 at $14Bn, the budget for expected 2016 awards would appear to have shifted into this fiscal year. As nearly 50% of this budget is running the government entities, a major infrastructure scheme looks to have been budgeted for above and beyond exceptions. The 92% increase in MOMRA budgets implies the rapid deployment of the PMO and fast tracking of several major Municipality schemes in 2017.
As the government sector looks to stabilise after a tortuous year in 2016, the private sector is finding the funding issue sensitive, as credit terms are tightening and interest rates on the loans are starting to turn northwards. Bank lending fell in 2016 and isn’t expected to recover until 2018 as global liquidity struggles and regional drawdowns increase deposit to loan ratios to close to SAMA’s 90% threshold.
With a rebalancing and reprioritisation of programmes occurring and a potential 20% cut in the governments contracting pipeline, it is hoped that the forecast 14 year horizon on government schemes isn’t extended. However, given the fiscal rebalancing, the realistic deployment of programmes would reasonably be 25 years, which would allow divestment into alternative funding such as IWPP, BOT and BOOT.
This plays well to the introduction of the NPMO and the governmental PMO’s within the ministries and government related entities. Although incredibly ambitious in their timelines and deliverables, the concept of bringing in the best international people and practices is the correct one. If this implementation generates time and cost savings of 10%, the government could negate the $168Bn of projects at risk (referenced above) through efficiencies. The timelines for implementation mean that concerns for contracting awards in 2017 may yet roll into early 2018 unless momentum is gained in the PMO roll out quickly.
Construction tender inflation officially went negative by -3% in 2016. However in real negotiations we saw discounts of 5-10% to secure work for those projects that had funding in place. There is a downward trend in labour costs while some material prices are up slightly. These factors, combined with the looming VAT roll out (Q1 2018) which will start to be priced by the industry means we now forecast inflation to be flat to 1% for 2017. In 2018, our forecast holds at 4% as the full effect of VAT is felt across the Kingdom. 2019 is expected to see the return to normal growth of circa 3% as alternative financing schemes ‘kick in’ through the government and government related sectors.