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With industrial and infrastructure projects taking centre stage the construction industry is facing unprecedented growth
Mayank Singh

If you start driving from Muscat towards Dubai, after an hour’s drive you see the land levelling and due diligence work in progress on the US$15bn Blue City project in Al Sawadi. A couple of hours more on the road and the fast changing expanse of Sohar looms large. The activity on the ground is remarkable – Sohar Aluminium Company working overtime on completing its US$2.4bn smelter project, Sohar Refinery Company building its installations, Oman Methanol – a 1,000,000 tonne per year methanol plant, a joint venture between Ferrostaal and Omar Zawawi Investment Company – nearing completion. Sohar Power Company, a consortium of six companies led by Tractebel Electricity, is building its power and desalination plant. The list can go on and on.

The same exercise from Muscat towards Salalah would see one coming across Oman LNG's Train 1, II and III plants at Sur. A few more hours and the preliminary work on the dry port work in Duqm catches one's attention. And finally one comes to Salalah, where work on the Free Zone is in full swing. Crisscrossing the country also throws up work on umpteen roads, bridges, highways, water transmission lines and desalination projects in progress.

Though the sultanate has seen bursts of construction activity in the past like the preparations for the Gulf Cooperation Council meet during the early eighties, the ongoing phase stands out for three reasons. One, the pace and scale of infrastructure and industrial projects are unlike anything witnessed in Oman. Second, growth is not just limited to Muscat and its adjoining areas but is geographically spread all across the country. And lastly, housing colonies, schools, offices and hospitals which dominated construction scenarios in the past have given way to industrial and infrastructure projects.

And the biggest beneficiaries of this thrust have been construction companies. “Today, if a company has the ability to take on multiple jobs and execute them, then it is there for the taking. There has never been such a comfort zone for construction companies," says John Steele, general manager, Douglas OHI.

Changing scales
With hospitals and buildings giving way to big ticket projects, the financial scales have changed completely. "While earlier a RO1mn project was a big job now a number of companies would not even tender for such projects," says Upali Marasinghe, commercial manager, Al-Turki. As the size of projects multiplied, so have the numbers. One hears of figures, which only existed in the realms of fantasy earlier.

And these hold true for finances and the scope of projects. Hasan Juma Backer Trading & Contracting has been awarded the biggest water supply project in the country for a value of RO66.2mn. The project entails the laying of a water transmission network to carry potable water from the Barka desalination plant to Al Rustaq, Al Awabi, Nakhal, Wadi al Maawil and Musannah Wilayats.

"The size of projects have gone up as the government’s allocation for priority sectors (roads, waterworks, power, bridges, oil and gas) has increased," says Krishnakumar Taori, group managing director, Hasan Juma Backer Trading & Contracting. Galfar Engineering and Contracting is constructing the RO127.90mn Southern Express Highway, which involves construction of 182km of roads. Meanwhile, Carillion Alawi has started work on the RO10.55mn Seeb Airport Interchange (Road) Project.

And it is not just the government but the private sector too which is contributing to the trend. Says David Skinner, general manager, Carillion Alawi, "The government is investing a lot in improving the country’s infrastructure and industrial development in pursuance of its diversification objective. Private investors are putting in money to develop the retail, tourism and residential sector." The company is working on the RO18mn expansion of Muscat City Centre.

Nothing exemplifies the upturn better than the growing demand for power. Says R S Mani, general manager, civil operations, Bahwan Contracting Company, "Most power plants earlier were in the 30MW range but these have now gone up to anywhere between 550MW-800 MW." The change in scale has led to a demand for bigger machinery, so if 25-30 tonne cranes were the norm a decade ago, companies are now placing demands for 1,000 tonne cranes.

Rising topline
Multiple projects and bigger numbers are leading to better price realisations for most companies fattening their topline. Larsen and Toubro's turnover has grown from US$50mn in 2004 to US$85mn in 2005 and to an expec-ted US$125mn in 2006. Hasan Juma Backer expects to clock a revenue of RO40mn in 2006, up from RO28mn in 2005.

Al-Turki has grown from RO5mn in 1986 to RO50mn in 2006, most of the growth coming in the last few years. If companies were gro-wing at 20 per cent in the late 90s, the rate of growth has jumped to 50 per cent lately. “The market is not as cutthroat as it was some years back, when the price of projects were capped to the bone. Now most tenders are bid at a reasonable price as companies are confident that even if they lose a bid they will get another project in a few weeks as against the earlier wait of two to three months,” says Skinner.

As the number of projects increase so has the demand for human resources – from civil engineers to project managers to construction workers. Most companies have expanded their HR base at a blistering pace. BEC has grown from 3,500 to 10,000 people in the last three years, Douglas OHI has seen a 100 per cent jump from 600 people to 1,200 during 2004-06 while Hasan Juma Backer has grown from a 1,000 member team to 3,500 in the last two years.

The changing economics of the business has made this possible. "The purse strings have loosened since 2005. There was a lot of price undercutting and bargaining earlier but now clients want quality work and are ready to pay for it," says Ajit Limaye, projects director, Al-Turki.

There are instances when companies have refused to go in for a second round of price negotiations, confident about their ability to get work in the market. The sluggish years of 1993-96, with too many contractors chasing a few jobs seems like a distant dream.

The equation seems to have tipped decisively in favour of contractors as clients have to ensure that their partners have the whe-rewithal like plant, machinery and managerial ability for projects to deliver quality work on schedule. Says C K Khanna, general manager - corporate, Bahwan Engineering Company (BEC), "The biggest challenge for clients today is to choose the right partner or companies which can increase their capacity in a short period of time as there are only four or five companies which can handle mega projects."

This may change soon as a number of companies in the sultanate get a chance to work with the best international names in the business. BEC is working as a sub contractor to Bechtel on the aluminium smelter project. Douglas OHI worked with Scott Wilson on the US$30mn Oman International Container Terminal in Sohar Port. Working with the best in class companies is sure to be a learning curve for the construction sector in Oman. And the benefits are not limited to the sector. Says Georges E Dabbas, business development manager, Consolidated Contractors Company (CCC), "The growth in the construction industry is leading to more merchandise coming in from ports, and as more people travel on business there is increasing traffic helping the aviation and hotel industries."

Problems of plenty
While there is no disputing the upturn, unprecedented growth has led to its set of challenges. Most companies are sweating it out to find the requisite manpower. With the Asian subcontinent and countries in the region like Qatar and the UAE witnessing robust growth, companies in the sultanate face stiff competition in attracting talent.

Khanna spells out three factors. "With the Asian continent booming, there are better opportunities which give people better job satisfaction. Secondly, the salary levels have improved and thirdly the expectations of the new generation are different."

Adds Limaye, "Three years ago when we advertised for jobs in India we had serpentine queues of people, but now the number of applicants has fallen drastically. The people who are available have less experience and greater expectations."

India has for years been a happy hunting ground for low-end semi-skilled workers. As India goes through a period of robust econo-mic growth, not only have salaries improved but there is more work on hand, making it difficult to attract masons, painters and workers. Explains M K R Sai, contracts manager, Douglas OHI, "A mason would get paid around RO2 per day and a painter RO2.5 per day in Oman. The big difference earlier was that while he got ten days of work in Mumbai or Delhi, here he had work for 30 days a month giving him better earnings. Now with the pace of economic activity picking up in India, the same mason or painter finds works 30 days a month in India and gets something like Rs325 per day (approximately RO3), making it difficult to lure him to Oman."

Something similar is true for civil engineers. With improved pay packets (RO300-RO400) in India and heightened competition from Qatar, Saudi Arabia and Dubai, recruiting them is proving to be an onerous task for companies. "The demand from Dubai, Qatar and Saudi Arabia is unbelievable. Apart from these, there is a growing demand for oil and gas wor-kers in the CIS countries and Eastern Europe," says Mani.

In a fast-track job, the cost of a project engineer leaving midway through work can be disastrous, as the learning curve of a new person can lead to huge losses. The loss of a team leader can make a huge difference to the experience, leadership and planning of a project.

A short supply of human resources is forcing companies to rethink their HR policies. For a start, salaries in the industry have gone up by 30 per cent across the board in the last two years. Thus an engineer who would have been paid RO400-450 earlier, gets paid RO600-700 now. Instances where a manager's salary has been doubled overnight are also not unheard of.

There is also a greater stress on retaining existing employees by giving them better perks. Al-Turki which used to provide accommodation to senior and mid-level staff has
lately started offering houses at the entry level too. Carillion Alawi has lowered the grade at which family status and transportation facilities are provided for its staff. Companies like L&T and CCC, which have a presence across different countries, are using their extended labour pool to draw talent for new projects. CCC, which has 7,000 people on its payroll in Oman, can shift them to other countries in the region where they have work in progress. Similarly, L&T uses its workforce in India on a case-to-case basis.

Escalating costs
The other big problem area has been the spike in the prices of commodities like cement, steel, zinc and copper. Steel prices have climbed from RO100 per tonne in 2004 to RO240 per tonne in 2006.

Cement has gone from RO13-14 per tonne to RO27 per tonne in a year's time. Copper prices have doubled from RO1,550 per tonne to RO3,100 per tonne from 2004-06. Zinc has also zoomed 230 per cent in the last one and a half years.

If these were not enough, a 40 per cent rise in diesel prices in 2005 has added insult to injury. At times prices of inputs have doubled from the time that a project is bid for and by the time a company gets it. Says Taori, "The rise has hurt the industry badly. So while our topline may be growing, our bottomlines have been impacted adversely."

Industry estimates peg the cost increase on existing contracts to be anywhere between 30 to 40 per cent. Is there no way that companies could have foreseen this rise? Says Khanna, "Even though we do a risk management analysis, this can predict a rise only in a reasonable range (like ten-12 per cent), but it is virtually impossible to predict a 100 per cent rise."

Being part of the global rise in commodity prices, local companies can do little about it. The situation can be gauged from the fact that global steel prices which used to be valid for a month's time two years ago are now traded on prices which change every day.

Unlike countries like India, Egypt and South Africa where contracts have a built-in escalation clause, in Oman no such provision exists. "We have no choice but to swallow the knife," says an industry executive. But as the industry starts to hurt, moves are afoot to ameliorate the pain. Construction companies are putting final touches to an 'Oman Society of Contractors'. The society is expected to take up the industry's concerns with authorities.

And it is not just a rise in prices which is a cause for concern. A mismatch in demand and supply for products like readymade concrete mix is adding to their woes.

Says Sai on the situation, "While the increase in prices is a concern area, the erratic supply of products is a bigger issue." For example, conc-rete mix which used to be available at a day’s notice two years ago now requires at least a week’s notice along with an advance payment to guarantee supplies.

Companies like Hasan Juma Backer have invested in their own batching plants (which mix concrete) to take care of erratic supply. The company has set up four plants at Ibra, Sinas, Rusayl and Wadi Sah. However, with a batching plant, along with transit mixers and pumps, costing over RO1.25mn, this remains an expensive way out.

Sustainability issues
Despite the problem areas, the industry is having a dream run. And the industry is upbeat about the trend holding for the next few years. Says Khanna, "The pace of activity will continue for the next five years as the momentum gained in the last few years is going to be difficult to stop." The confidence stems from the fact that government spending would continue in the coming years. Says M V Satish, chief manager, Larsen & Toubro (Oman), "Enhanced government spending remains the biggest trigger of this spurt. The sultanate's GDP grew by 21.7 per cent in 2005 (to US$30bn), lea-ding to a growth rate of 8.7 per cent (at current prices) during the sixth plan. The Seventh Five Year Plan goes a step further envisaging industrial investment to the tune of RO5.03bn (US$13bn)." Moreover, the industry expects to ride the next big wave of tourism related projects like Blue City, Yitti Project, and The Wave.