Spending on Middle East capital projects expected to rise in next 12 months

06 June 2018 Consultancy-me.com

PwC Middle East has released its biennial ‘Capital Projects and Infrastructure Survey.’ The report charts the shape of the industry in 2018, highlighting increased optimism for future spending, and growing favourable sentiment towards private capital investment.

Capital projects and infrastructure megaprojects like roads, bridges, and tunnels are vastly expensive projects generally financed by governments – partly because they are incredibly expensive, and partly because of unease over private firms owning and restricting public access to infrastructure.

In an environment where many Middle East nations’ budgets have been constrained by lower oil prices since the middle of the decade, spending on hugely expensive mega projects has decreased. However, oil prices are rebounding, perhaps contributing to some optimism for the future in the region’s capital projects industry.

In this setting, Big Four firm PwC has released its biennial ‘2018 Capital Projects and Infrastructure Survey.’ The report surveyed capital projects and infrastructure executives and stakeholders – owners, developers, contractors, external advisors, and financiers – to determine industry challenges, priorities, and outlook.

Industry outlook in next 12 months

Surveyed executives are more optimistic about the outlook for capital project spending over the next twelve months. In 2016, only 21% thought spending would increase; in 2018, 49% of respondents think capital projects spending will increase over the next 12 months. While not up to the unbounded optimism of 2014 – when 75% of respondents expected spending to increase, this year’s results nonetheless offer an impression of rebounding industry sentiment.

Today, project management of major infrastructure projects in the Middle East is outsourced to consultants in 80-90% of cases. Sentiment seems to be turning against the status quo, with 46% of respondents saying that fully in-house project management was the most effective way to complete projects. Among contractors specifically, 79% said this was the best way to get the job done. PwC surmises that this means clients are currently unhappy with the outcomes of outsourced project management in the industry.

Preferred partnering model for project delivery

The report also relates that another major priority for change among respondents is improving the accuracy of forecasting and budgeting. With pressure on public spending increasing in the Middle East because of lower rents from oil, the issue of poor or over-optimistic projections on capital projects has become a more critical issue. With tighter budgets, accurate forecasts become more important.

Respondents also were interested in technology investments to increase efficiency. However, PwC relates that this a minority concern, as low-cost labour is a cheaper option than investing in longer-term productivity gains. As such, tech spending in capex lags far behind other areas.

Pressure on contractors’ profit margins

Slowdown in spending on capital projects in 2017 made its effects felt throughout the construction supply chain. PwC reports that the biggest challenge facing contractors in 2018 was payment delays by clients, while availability of funding ranked second.

Pressure on margins is also widespread because of cost inflation in labour, materials, and equipment – though 29% of respondents said their margins actually increased. The report speculates that this may be a reflection of better performing contractors benefitting from the financial collapse of rivals. However, 36% said that their margins did shrink; yet these are likely to be more leveraged, smaller firms.

To let off some of the increasing pressure, 48% of contractors are focusing on improving productivity and performance – their most important internal challenge. The ability to actually invest in productivity enhancing initiatives is limited, especially among smaller firms. This was especially tough in 2017 with fewer advance payments as a result of fewer commissioned projects.

How will infrastructure projects be funded over the next year?

With more constrained public finances, there is the growing sentiment that more private capital will be involved in mega projects – especially with numerous governments seeking private sector involvement in capital projects across the region. Almost half of survey respondents expect infrastructure projects to be a mix of private sector and government funding. According to the report, a typical response on the topic was “The public sector cannot continue financing all the required developments. Private sector financing is the only alternative to achieve sustainability.” As such, eight of ten respondents said private sector financing is important for major projects in the Middle East in the long term.

Despite the enthusiasm, however, private sector projects and Public-Private Partnerships (PPPs) face a number of challenges in the region. According to PwC, the industry has historic problems with poor budgeting, risk management, and supplier collaboration that dissuades the influx of private capital. So far, the spread of PPPs in the Middle East has been slow outside of the utilities sector. The report says that a lack of key capabilities in the public sector, along with inefficiencies in planning and public investment form barriers to greater private sector involvement in the industry.

Profile

Do consultants have a legitimising effect in the Middle East?

19 April 2019 Consultancy-me.com

Do the often kowtowing international consultants operating in the Gulf simply grant legitimacy to local rulers? The answer’s not so simple says regional expert Calvert Jones, who has conducted a fascinating research study on the local consulting industry.

Now valued at $3 billion annually in the GCC alone, the Middle East management consulting industry has exploded since the global financial crisis, growing at a heady 20 percent clip up until 2014 when the dive in global oil prices and attendant austerity measures briefly applied the brakes; ‘brakes’, in this context, meaning growth which at its lowest point in 2015 dropped to around 6 percent.

The slow-down was brief. With the plummet in oil prices spurring regional governments to act on economic diversification – captured in a range of ambitious national transformation agendas – together with the emergence of a range of digital advances now sweeping the public and private sectors, fresh impetus was given to the local consulting market; this year forecast to return to double-digit growth.

Of that $3 billion consultancy price tag – with close to half of it handed over in Saudi Arabia – the public sector accounts for approximately a third of the take, the vast majority of that paid to foreign consultancies and in particular the advisory wings of the Big Four and global strategy giants such as McKinsey and BCG. Scrutiny of these practices – especially in the wake of the Khashoggi killing – has also increased.

Copping much of the media flak, McKinsey for its part has backed itself as a force for good in the region, contributing greatly toward local economic, education and healthcare development. But the question remains, even if making a positive difference, do international consultancies confer legitimacy on authoritarian governments – “helping to prop up and even strengthen repressive, illiberal regimes?”Does the Middle East consulting industry have a legitimising effect?One person well-placed to address that question is Calvert W. Jones, an Assistant Professor in the Department of Government & Politics at the University of Maryland and author of ‘Bedouins into Bourgeois: Remaking Citizens for Globalization’. Jones spent 19 months between 2009 and 2017 conducting field research in the region, including into the consulting industry and the notion of conferred legitimacy.

According to Jones, some of the consultants she interviewed themselves expressed this concern, particularly when due a range of market factors they may have grown less inclined over time to voice too strong of an opinion. Yet, whether this is indeed the case is not so clear. Among other findings and areas of research, Jones conducted several experiments on the subject of legitimacy at universities in Kuwait, involving some 650 students.

“Conventional thinking about experts in politics suggests not only that experts rationalise governmental decision-making, but also that they confer legitimacy – meaning that the public may be more likely to support government initiatives when experts with the relevant knowledge, training, and experience are involved. In the Gulf, both experts and ruling elites tend to think along these technocratic lines,” she states in an article for the Harvard Business Review.

Experiments

While not addressing potential international legitimacy or other geopolitical or business and trade issues, Jones sought to test the idea of conferred legitimacy as to public opinion in the local polity. For the experiments, she asked participants to imagine that their country’s leaders were launching a major reform to improve either education or infrastructure, exposing them to a variety of mock news articles outlining the likely benefits from the government initiative.

In the first experiment, half of the reports featured reference to a team of top international experts assisting with the hypothetical reform, including their credentials and extensive experience elsewhere, with this detail absent from the remaining half. She found that subjects who read that experts were involved were far less likely to support the reform – indicating the ‘involvement of experts’ may have led to a significant drop in legitimacy. The results, however, are somewhat murky.

In the second experiment, Jones explored the impact of nationality on opinion, with otherwise identical reports on expert-advised infrastructure reform referring to either American, Chinese, or Kuwaiti advisers. She found two surprising results. Support for the reform did not differ significantly whether led by Chinese or Kuwaiti experts, but did however for the American-led reports, with subjects expressing significantly lower support.

The Chinese were also considered far more capable than their American counterparts, which may in itself provide a clue. “It’s not necessarily evidence of profound anti-Americanism, let alone a new love for Chinese experts,” Jones cautions; “Most likely, it reflects Kuwaitis’ longer experience with American experts, which includes their frustration with the lack of progress on various reforms.” The Kuwaitis, she suspects, are just far less familiar with Chinese consultants.

“This experimental evidence raises doubts about the ability of experts to rationalise and legitimise authoritarian rule,” Jones concludes. “Indeed, my research suggests that international experts can actually undermine legitimacy, potentially reducing domestic support for autocrats and weakening their regimes… In my experience, residents of these countries are increasingly critical of their governments paying hefty fees to foreign experts and consultants for little in return.”