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

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.

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.

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.

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.

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.