30 May 2016
DOHA: The new economic reality of lower oil prices will constrain the amount of funding available to the Gulf Cooperation Council's (GCC) governments to finance capital and infrastructure projects in the region.

These governments will hence have to make tough choices such as cuts in public spending and introduction of structural reforms.

"Spending in the region will need to be better prioritised in order to ensure it meets social and economic development. Governments will have to seek the private sector involvement, innovate and find alternative funding sources to fund their project requirements," said Cynthia Corby, (pictured) Audit partner and Middle East Infrastructure and Capital Projects leader at Deloitte.

According to the Deloitte Middle East Powers of Construction report, the announced country budgets for 2016 outline cuts on spending imposed by low oil prices, but in a measured way, as well as the introduction of new income sources. Saudi Arabia is planning to reduce spending by 11 percent this year to $227bn. As part of its Vision 2030 plan, the country aims to increase overall non-oil government revenue from SR163bn ($43.5bn) to SR600bn by 2020, and to SR1 trillion by 2030. Privatization of government services to encourage private sector investments - both local and international - in healthcare, housing, finance and energy sectors were announced as a key focus area for KSA. The country has gradually cut energy subsidies and increased energy prices to raise income.  The UAE, the most diversified economy among the GCC countries, is set to register the first current account deficit in decades, which is expected to widen to AED129bn this year. The IMF has urged the UAE to pursue growth-enhancing reforms and advance economic diversification. In 2015, fuel subsidies were eliminated which has produced significant savings.

Qatar is intending to reduce its spending, prioritize projects and has also implemented subsidy reforms. All GCC countries plan to introduce a value- added tax by 2018 to raise non-oil revenues, and are considering taxes which are even more unusual to the GCC, such as corporate and income taxes which may become more real prospects.

The pressing need to adjust budgets might have a negative impact on the projects market resulting on slower tender processes, slower decisions and payment procedures. The pipeline of projects planned in the GCC as of May of 2016 amounts to $2 trillion with Saudi Arabia and the UAE as the biggest project markets, with construction and transport being the two leading sectors with shares of 52 and 19 percent, respectively.

The forecast of contract awards for this year is at is at $140bn, about a 17 percent decline compared to 2015. Saudi Arabia has been the most impacted market and the forecast is a $10bn fall in contract awards to $40bn, though it continues to be the largest project market and the biggest spender among the GCC countries. The forecast of contract awards in the UAE is set to be stable and mainly driven by the robust construction market in Dubai. There is a substantial amount of projects to deliver in Qatar such as stadiums, hotels, rail and roads in order to enable the World Cup and the forecasted value of contract awards stands at $22bn. Oman is expected to remain stable with values around $13bn. and Kuwait has a strong amount of planned activity for this year in the construction and transport sectors.

"There is a huge amount of project investment due to take place between now and the end of this decade. A growing population in the region will demand improved infrastructure for the cities to function and grow as planned. At a time where governments are facing budget deficits, their ability to adjust to the new environment, innovate and find alternative funding solutions to bridge the funding gaps required for ongoing investment will be key to the long term diversification success," Corby said.

© The Peninsula 2016