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Infrastructure Report
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Published by BUSINESS MONITOR INTERNATIONAL LTD
Including 5-year industry forecasts
© 2009 Business Monitor International. All rights reserved.All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.
All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.
Business Monitor InternationalMermaid House, 2 Puddle DockLondon EC4V 3DS UKTel: +44 (0)20 7248 0468Fax: +44 (0)20 7248 0467email: [email protected]: http://www.businessmonitor.com
United Arab Emirates InfrastructureReport Q3 2009 ISSN: 1750-5550
Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: [email protected] Web: http://www.businessmonitor.com
© 2009 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher.
DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
United Arab Emirates Infrastructure Report Q3 2009 Including 5-year industry forecasts by BMI
Part of BMI's Industry Report & Forecasts Series
Published by: Business Monitor International
Publication date: June 2009
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 2
United Arab Emirates Infrastructure Report Q3 2009
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CONTENTS
Executive Summary .........................................................................................................................................5
Market Overview...............................................................................................................................................6
UAE ............................................................................................................................................................................................................................ 6 Global......................................................................................................................................................................................................................... 8
Steel Prices Remain Depressed In The UAE.......................................................................................................................................................... 8 Global Overview.................................................................................................................................................................................................. 10 Table: Infrastructure Stimulus Plans List, 2009-2010 (US$bn) ........................................................................................................................... 11
SWOT Analysis...............................................................................................................................................17
United Arab Emirates Infrastructure Industry SWOT.......................................................................................................................................... 17 United Arab Emirates Political SWOT ................................................................................................................................................................ 18 United Arab Emirates Economic SWOT .............................................................................................................................................................. 19 United Arab Emirates Business Environment SWOT........................................................................................................................................... 20
Major Infrastructure Developments And Key Projects...............................................................................21
Transport Infrastructure Overview ........................................................................................................................................................................... 21 New And Ongoing Projects.................................................................................................................................................................................. 23 Airports................................................................................................................................................................................................................ 23 Ports .................................................................................................................................................................................................................... 24 Roads................................................................................................................................................................................................................... 24 Railways .............................................................................................................................................................................................................. 25 Other Transport Developments............................................................................................................................................................................ 26 Table: United Arab Emirates – Major Infrastructure Projects – Transport......................................................................................................... 27
Energy And Utilities Infrastructure Overview........................................................................................................................................................... 29 New And Ongoing Projects.................................................................................................................................................................................. 34 Power Plants And Transmission Grids ................................................................................................................................................................ 34 Oil And Gas Pipelines.......................................................................................................................................................................................... 35 Water ................................................................................................................................................................................................................... 36 Table: United Arab Emirates – Major Infrastructure Projects - Utilities ............................................................................................................ 38
Construction Overview ............................................................................................................................................................................................. 40 New And Ongoing Projects.................................................................................................................................................................................. 41 Residential Construction...................................................................................................................................................................................... 41 Commercial Construction.................................................................................................................................................................................... 43 Table: United Arab Emirates – Major Infrastructure Projects – Construction.................................................................................................... 45 Tourist Construction............................................................................................................................................................................................ 48
Industry Forecast ...........................................................................................................................................49
Table: Economic And Construction Data ............................................................................................................................................................ 49
Business Environment ..................................................................................................................................50
Middle East Infrastructure Business Environment Ratings....................................................................................................................................... 50 Table: Regional Infrastructure Business Environment Ratings............................................................................................................................ 52 Limits Of Potential Returns.................................................................................................................................................................................. 53 Risks To Realisation Of Returns .......................................................................................................................................................................... 53
Project Finance Ratings: Outlook For Middle East.................................................................................................................................................. 54 Table: Design And Construction Rating .............................................................................................................................................................. 56 Table: Commissioning And Operating Rating ..................................................................................................................................................... 57
United Arab Emirates Infrastructure Report Q3 2009
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Table: Overall Project Finance Rating................................................................................................................................................................ 59 Foreign Direct Investment ................................................................................................................................................................................... 59 Labour Force....................................................................................................................................................................................................... 60 Legal Framework................................................................................................................................................................................................. 62 Property Rights.................................................................................................................................................................................................... 63
Macroeconomic Economic Activity..............................................................................................................64
Table: United Arab Emirates – Economic Activity .............................................................................................................................................. 66
Political Outlook .............................................................................................................................................67
Company Monitor...........................................................................................................................................70
Dutco Balfour Beatty Group ................................................................................................................................................................................ 70 Al Habtoor Leighton Group................................................................................................................................................................................. 73 Veolia Water........................................................................................................................................................................................................ 76 Emaar .................................................................................................................................................................................................................. 79 Nakheel ................................................................................................................................................................................................................ 82 Mubadala Development ....................................................................................................................................................................................... 85
BMI Forecast Modelling.................................................................................................................................87
How We Generate Our Industry Forecasts ............................................................................................................................................................... 87 Construction Industry .......................................................................................................................................................................................... 88
Sources ..................................................................................................................................................................................................................... 88 Business Environment Ratings.................................................................................................................................................................................. 89 Ratings Overview...................................................................................................................................................................................................... 89
Table: Infrastructure Business Environment Indicators ...................................................................................................................................... 90 Project Finance Ratings Methodology...................................................................................................................................................................... 90
Design & Construction Phase.............................................................................................................................................................................. 92 Commissioning and Operating Phase- Commercial Construction....................................................................................................................... 94 Commissioning and Operating Phase - Energy and Utilities............................................................................................................................... 96 Commissioning and Operating Phase –Transport ............................................................................................................................................... 98
United Arab Emirates Infrastructure Report Q3 2009
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Executive Summary
In an effort to cushion the blow to their economies governments of the region, including the UAE’s, have
bolstered investments in infrastructure. In Dubai, Dubai Electricity and Water Authority (DEWA) has
embarked on a multi-billion dollar capital expenditure programme, while the government of Abu Dhabi is
pushing ahead with its transport master plan.
As the dust settles, there is increasing optimism coming from the Gulf region on the momentum behind
infrastructure projects, which seems to have been sustained in spite of the global financial turmoil. True,
projects have faced delays and sponsors have departed (see, for instance, the case of Concourse 3 at the
Dubai Airport), but the speed that infrastructure projects managed to get back on track is noteworthy
(after just one month the Concourse 3 project had a new contractor). Therefore, we have significantly
revised our outlook this quarter, adopting a more optimistic forecast for industry value growth in 2009
onwards. The investments Abu Dhabi is making in infrastructure, in transport especially, and also
ongoing infrastructure investments in Dubai, such as the metro, have not only survived the downturn, but
have attracted the attention of international majors, which are seeking a safe haven in the UAE’s (and
certainly the wider Gulf region’s) infrastructure markets. Such investments we believe will grease the
wheels of the industry and propel it towards growth in 2009.
In BMI’s Q309 UAE Infrastructure Report we forecast that the industry value real growth for 2009 will
be 6.8%, compared with our previous forecast of 0.9%. As such, we forecast that industry value will
reach AED86.7bn (US$23.6bn). A similar level of growth is expected for 2010, with value climbing up to
AED95.9bn (US$26.1bn).
In addition, the positive effect of lower raw material prices cannot be overestimated. As raw material
prices decline, developers in infrastructure and general construction may become more confident about
long-term cost estimates, which in 2008 were constantly being revised as prices of steel and cement
reached new heights.
However, we also stress that most of the developments in the infrastructure sector of late have been
overwhelmingly government backed. As such, we maintain our assessment that that government-backed
infrastructure spending will sustain the construction sector growth at a time when private investments are
expected to decline. We anticipate that bridge loans will become the modus operandi for the majority of
the project-financing arrangements as investors take a much more circumspect approach to long-term
commitments, at least while uncertainty is the state of play in the global financial markets.
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Market Overview
UAE The International Monetary Fund (IMF) estimated in a study released in early March 2009 that US$201bn
will be invested in infrastructure in the UAE, the daily journal Emirates Business reported, though did not
specify a timeframe for investments. The UAE’s share of the investments in infrastructure will amount to
one-third of the total for the entire Gulf Co-operation Council (GCC) region, which amounts to an
estimated US$605bn. According to BMI’s database of infrastructure projects, from 2007 to today, at least
US$33bn have been pledged for transport infrastructure projects and US$60.9bn in energy and utilities.
The construction sector has been a primary beneficiary of the almost decade-long oil boom and surge in
investments in the Emirates. Although not the largest oil exporter in the region, the UAE has optimised
the process of turning oil windfalls into investments for diversification of its economy. For this reason the
UAE accounts for the bulk of ongoing and planned infrastructure projects among the Gulf Co-operation
Council (GCC) countries. The crisis in financial markets and the global macroeconomic instability are
taking their toll on the UAE’s infrastructure sector, however. Low oil prices, higher interest rates, a
potential correction in real estate prices and dented investor confidence will reduce growth in the
construction sector for 2009 and we believe for 2010 as well. The evidence of an abrupt correction taking
place is mounting. The journal Middle East Economic Digest reported in early January that the value of
construction contracts awarded in the UAE in Q408 were worth US$14.4bn, a decline of 85% year-on-
year (y-o-y).
We reiterate that the long-term fundamentals that will support infrastructure growth in the Emirates are
still strong. Adequate infrastructure development is the backbone of the UAE’s growth. Investments in
transport and utilities are pouring in, but they follow decades of underinvestment and assets that are now
struggling to keep up with the rapid pace of construction. For the first time, the governments of the
emirates are opening up sectors to private investments, in an effort to draw in as much expertise and funds
as possible and respond to rising demand.
In utilities, the Dubai Electricity and Water Authority (DEWA) is planning the financing for
infrastructure investments, while the partial divestment of Abu Dhabi’s integrated water and power plants
(IWPPs) has given several investors the opportunity to enter the utilities market in the UAE. In addition,
the Department of Transport in Abu Dhabi unveiled a five-year plan for the development of the emirates
transport network. The highlight of the plan was the proposal to build the country’s first high-speed
railway between Dubai and Abu Dhabi. The continued involvement of the private sector and a clear
regulatory environment for public private partnerships in the UAE have ensured that the country has the
highest levels of foreign direct investment (FDI) in the region, much of which is diverted toward
infrastructure development.
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In a May 2007 report by Gulf News, the IMF Director for Middle East and Central Asia said that the
‘private-public partnerships are working perfectly well in places like Dubai and gone are the days of
inefficient public undertakings gobbling up resources’. We are particularly bullish about the future
growth of emirates other than Dubai, where new investment opportunities are becoming more abundant
as the governments follow in Dubai’s footsteps. Being the largest among the emirates in the UAE, we
anticipate that Abu Dhabi will continue to be at the forefront of ongoing efforts to diversify the economy
away from oil revenues and boost the manufacturing and services sector. The Khalifa port is one such
example. According to Emirates Business, the government is planning infrastructure projects worth close
to AED1trn (US$272bn) in the next five to seven years. We anticipate that such initiatives will become
even more popular in the Emirates as the various governments attempt to shore up economic growth
through stimulus plans, which will place significant emphasis on infrastructure projects as a means to
boost demand levels in the ailing construction sector.
Dubai’s 2009 budget was released on January 10 and encompasses government expenditure of
AED37.7bn (US$10.26bn), a 42% increase y-o-y. This will send the fiscal balance into negative territory
of 1.3% of Dubai’s estimated GDP for 2009, or AED4.2bn (US$1.14bn), on an average oil price of
US$45.0/bbl. According to BMI forecasts, there will be a sharp decline in the fiscal balance in the UAE
for 2009, which is much in line with the anticipated movement of oil prices, clearly indicating how
volatile the economy is to oil price fluctuations. With the new budget announced, the risks to the fiscal
balance forecasts are to the downside.
The finance ministry is planning to funnel money into social and transport infrastructure, and public
authorities and public projects such as the Roads and Transport Authority, the Dubai metro project and
the Dubai Ports Authority. No other specific details have been released yet, but major projects already
under way include the new tramline in Dubai, the Dubai metro, the Parallel Roads project and a possible
expansion of the Jebel Ali port.
We maintain our view (strengthened by new spending announcements) that spending on infrastructure
projects will sustain the overall construction sector in positive territory, particularly in the short term,
when private investments (especially in residential and commercial construction) will decline as even the
majors (Nakheel and Emaar, for example) show caution in taking up new ventures.
Of all the sectors, we are most optimistic about the growth potential of the utilities sector. We anticipate a
continuous stream of investments – public mainly, but also private in some flagship projects – as the
fundamentals of population and economic growth will be strong in the emirates. In addition, the utilities
companies are racing to respond to rising demand for more water services, power generation and power
transmission infrastructure, coming from new residential and mixed-used developments. We forecast that
the utilities industry value will rise by nearly 90% between 2007 and 2012, a figure that highlights the
growth opportunities in the sector.
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The three main areas of construction activity in the UAE are Abu Dhabi, Dubai and Sharjah, all of which
have distinct infrastructure-spending programmes. Abu Dhabi is at the centre of the construction sector
boom, with projects worth AED37.32bn (US$10.16bn) already in various phases of completion. One of
the initiatives in place is the overhaul of the road infrastructure in the western region of Abu Dhabi, as
part of an AED98bn (US$26.6bn) development plan unveiled in August 2007. The Western Region
Development Council, established in 2006 to supervise new social and economic infrastructure projects,
estimates that the proposed private development projects will be worth close to AED20bn (US$5.4bn).
The Dubai government has plans to invest AED300bn (US$81.67bn) in the development of its aviation
sector as part of its Strategic Plan 2015 (announced February 2007) to develop Dubai as a leader in
aviation and logistics. Last but not least, Sharjah and Ajman present some very interesting prospects with
deregulation and FDI initiatives, following in the footsteps of Dubai and Abu Dhabi.
Although real estate is outside the scope of this report, in the UAE the property sector is a main barometer
of investor confidence. Fears over the strength of the property market are intensifying. Despite bullish
statements from local developers, property stocks speak for themselves – Dubai's Emaar is down 60.9%
since the start of 2008 and Deyaar Development is down by 56.8%. Two of Dubai's largest mortgage
lenders, Amlak Finance and Tamweel, are currently in merger talks, suggesting financial weakness.
Both firms have denied funding difficulties, but their stocks’ decline since January 2008 illustrates the
market's plunging confidence. With sentiment negative and funding in short supply, debt-laden property
firms will struggle to raise new capital, putting future construction projects in doubt. Already, Nakheel,
the semi-state owned property developer, has been forced to halt construction on some of its projects.
In a regional context, the country remains the most attractive market in the Middle East and Africa
(MEA) region. Low levels of political risk, a sound regulatory environment, healthy sector growth and
strong demand for infrastructure projects are key variables for the infrastructure sector. For these reasons
the UAE ranks first in BMI’s Middle East and Africa business environment ratings.
Global Steel Prices Remain Depressed In The UAE
According to the CEO of RAK Steel Ajay Agarwal, as cited by Emirates Business in February 2009, the
demand for steel in the UAE is expected to decline by about 50% in 2009, compared with 2008.
Consumption of rebar in the UAE last year was approximately 5.5mn tonnes and the fall in demand is
attributed to a slowdown in the construction sector. Reuters reported that the demand for steel from the
Gulf states' construction industry could drop up to 35% in 2009.
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The UAE government decided to re-impose customs duty on imported cement and steel in early April
2009. This move was welcomed by the UAE's traders and manufacturers who believe that customs duty
will save local manufacturers and will also discourage oversupply in the market, according to reports by
Emirates Business. Earlier, the UAE government had eliminated the 5% customs duty on steel and
cement to help boost the UAE construction industry. As a result, Danube Building Materials noted that
there was an increase in the price of steel, from US$430 to US$500.
According to The Abu Dhabi Department of Planning and Economy (DPE), local steel prices plunged by
38% in December 2008. The DPE added that the drop may be due to declining domestic demand caused
by a continuing downward trend that began in September 2008. The fall – a byproduct of the global
financial crisis – is the largest domestic decline in steel prices since the trend began.
Steel prices in Abu Dhabi declined in September by up to 20% for the second consecutive month, the
DPE said. The decline is attributed to fears of global demand destruction as a result of the worsening
macroeconomic environment. However, this is a small decline in light of the 90% rise witnessed during
the first half of 2008.
According to the government's data, Turkish spiral steel dropped approximately 20% month on month
(m-o-m) in September; it had previously declined by 15% m-o-m in August. In July, the price of Turkish
spiral steel was AED6,150/tonne and, according the DPE, this dropped to AED4,438/tonne in September.
The price of Korean angled steel declined by 11% to AED4,725/tonne, and the price of rebar slipped by
8% to AED4,950/tonne.
These figures follow news on October 6 that Saudi Arabia's Sabic, the region's largest steelmaker, was
reducing rebar prices for the third time since September in light of declining demand. This is a
remarkable change in attitude that comes as a result of a weak third and most likely fourth quarter of the
region's steel industry, which up until September was positive that demand for steel would remain robust.
We also held the same view, although in our latest analysis on the steel markets in early September (see
Global Steel Market Calls For Nerves Of Steel In The Middle East, September 4 2008) we did caution
against the risk of deceleration of global growth causing demand destruction – this is in addition to
surplus stockpiles of iron ore in the major producers around the world, which will also forced prices
down. Both our risk scenarios materialised only a month later.
In a move that prima facie seems contradictory, on October 13 Sabic also announced that it is planning a
capital expenditure programme to triple its steel production output to 17mn tones by 2020. However,
according to a report by TradeArabia, the company anticipates demand to resume in 2009 and, until then,
it is looking to expand through a series of mergers and acquisitions of smaller companies while prices are
falling.
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There is a consensus among traders and market players in the UAE that fears of shortages, followed by
fears of demand destruction since October 2008, overshadowed demand and supply fundamentals during
the past six months. According to the report, most estimates see prices in the UAE stabilising at around
AED2,500 (US$680). Turkey increased steel prices by US$200, causing prices in the UAE to rise to
AED2,200 (US$600) from AED1,800 (US$490).
Global Overview
Governments To The Rescue: The Global Surge In Infrastructure Spending
The proliferation of infrastructure-geared fiscal stimulus plans across the world, led by multi-billion-
dollar pledges from the US and China, breathed some life into the sector, which has been suffering from
the credit crunch and investors' risk aversion. Governments and multilateral organisations are stepping in
and stepping up public finance allocations for infrastructure projects to help their economies and cushion
the blow.
China announced a US$586bn stimulus plan, with grand plans for transport infrastructure. In the US,
President Barak Obama announced in early December that government spending on infrastructure will be
the largest the country has seen since the Highways Programme of the 1950s, arguing that fiscal prudence
is not a priority at this point. France, Germany and Australia have all announced multi-billion-dollar fiscal
stimulus packages, with significant provisions for infrastructure works. The European Commission,
through various mechanisms and EU schemes, is also channelling funds for infrastructure projects, the
latest being the EUR1.7bn for railways under the TEN-T programme. In emerging markets, South Korea,
Peru, Israel and Argentina are just some
of the countries that have announced
stimulus plans to boost economic activity
though large public-works projects. All
of these projects will significantly boost
the infrastructure sector, especially the
transport segments, and go some way in
meeting rising demand from emerging
markets for new and improved
infrastructure
According to data available at the time of
writing, BMI estimates that the stimulus
plans announced globally amount to a
combined total of approximately
US$2.4trn, which amounts to 4.3% of global GDP in 2009, which according to BMI forecasts will be
US$55.4trn. Approximately US$480bn (20%) is earmarked for infrastructure spending programmes in
Asia To Lead Demand For Infrastructure Five-Year Investment Needs Estimates For Emerging
Markets (US$bn)
355
140
500
660
150
165
890
500
3360
0 1,000 2,000 3,000 4,000
Latin America & Caribbean
MENA
India
China
Sub-Sahara Africa
East Asia (exc. China)
South East Asia
Central & Eastern Europe(exc. Russia)
Total
Source: Deloitte Research, Goldman Sachs, World Bank, PriceWaterhouseCoopers, BMI
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2009 and 2010. BMI's is among the more conservative estimates of the infrastructure allocations, which
vary between US$430-US$680bn. Though the numbers may change significantly as more governments
announce new projects or increase their existing pledges, BMI has estimated the infrastructure allocations
based on the minimum amount announced by governments thus far, which have also clearly stated the
value of funds that will go towards infrastructure.
Table: Infrastructure Stimulus Plans List, 2009-2010 (US$bn)
Country Total stimulus package Infrastructure allocation
US 787 98
China 586 263
EU 254 6.1
Japan 250 na
Italy 105 15.77
Germany 103 22.3
France 33.8 12.7
Argentina 32 21.2
Canada 30 12
UK 29 4.1
Australia 27 3.12
Russia 20 na
Malaysia 16.2 na
Spain 14.45 8 (public works)
Singapore 13.6 3
South Korea 13 1.9
Mexico 8.2 na/NIP in place
Indonesia 7.5 5.7
Netherlands 7.5 na
Hungary 6.9 na
Vietnam 6 6
Israel 5.5 2.5
Taiwan 5.2 1.7
Chile 4 0.7
India 4 na
Bulgaria 3.66 na
Czech Republic 3.3 na/small amount
Norway 2.87 0.386
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Table: Infrastructure Stimulus Plans List, 2009-2010 (US$bn)
Country Total stimulus package Infrastructure allocation
Sweden 2.8 na
Portugal 2.2 na
Lithuania 1.65 na
Slovenia 0.8 na
Slovakia 0.332 na
Brazil na Growth acceleration programme (PAC) in place
Saudi Arabia 126.7 (stimulus budget) 18 (including telecoms and agriculture)
Total 2,386.5 480.2
Source: BMI
The infrastructure deficit globally runs in
the trillions of dollars. For developed
states the needs are in maintenance and
repairs, with the US needing an estimated
US$2.2trn in repairs alone over the next
five years, while for developing countries
greenfield projects in transport, energy
and utilities are necessary to promote and
sustain growth. This is especially so for
the BRIC (Brazil, Russia, India and
China) economies, whose infrastructure
needs will increase parallel to their
population and growth levels.
We reiterate however, that the
momentum the private sector was
creating, by participating in infrastructure programmes through the proliferation of public private
partnerships, was a key thrust behind the investments made in infrastructure projects before the financial
crisis.
Not only was there a much larger pool of funds made available for new projects – currently locked in the
credit markets – but efficiency levels were also much higher, and targets for projects (from budgets to
timescales) were better adhered to.
Annual Needs Of Developed States Infrastructure Needs For Sample Of Developed
States* (US$bn per year)
90
60
70
75.7
40
440
775.7
0 200 400 600 800 1000
Germany
Italy
France
UK
Spain
US
Total
* Calculated using 2007 US$ converted GDP data. US data only is from the 2009 USSCE Report on US Infrastructure. Source: US Society of Civil Engineers, Deloitte Research, BMI
United Arab Emirates Infrastructure Report Q3 2009
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We highlight the inherent time-lag effect of these plans. Decisions on fund allocation, feasibility studies
and planning are processes that can take up to 12 months. Adding to that the bureaucracy associated with
public bodies assuming significant responsibilities for implementing large-scale capital expenditure
programmes, the time-lag between the decision and the actual implementation increases. It is therefore
highly possible that many of the projects envisaged by governments will take years to materialise, and
possibly at a much higher cost than initially estimated. Hasty decisions are going to backfire in the long
term if governments, in an effort to speed up the creation of new jobs, embark on white-elephant projects.
Though we anticipate that government investment will be a cushion to soften the blow for industry
players and the wider economy, we believe that the long-term capital requirements of meeting rising
needs lies in the cooperation of the public and private sectors and the proliferation of well implemented
PPPs.
Having briefly assessed the potential benefits and shortcomings of the infrastructure provisions within the
fiscal stimulus plans, what follows is an overview of the major infrastructure-geared stimulus plans from
each region.
Americas
US stimulus plans were announced in February, with the signing into law of a US$787bn package, which
includes US$48bn for transport infrastructure and US$50bn for energy projects. The allocations will
boost investment into infrastructure, one of the areas that has historically hindered the US's infrastructure
business environment. In early 2009, the American Society of Civil Engineers released a report on the
country's infrastructure that rated it at a D-grade, defined as poor, and noted that US$2.2trn needed to be
invested over the next five years to bring it up to scratch.
Argentina published one of the most comprehensive stimulus packages, which earmarked US$21bn for
public works projects. However, we are most concerned about Argentina's plans, as the government has
shown minimal fiscal prudence in dealing with the crisis. We believe that any efforts will be short lived
and will not be enough to avert a potentially much deeper crisis in the economy.
Chile announced a smaller US$4bn package, with US$700mn allocated for infrastructure. Chile is one of
the best-placed countries in the region to sustain this level of government spending owing to years of
prudent fiscal policies, resulting in a budget surplus.
Colombia has announced a US$37.8bn spending on infrastructure to 2010. However, it is not well placed
to follow through on this, with a budget deficit forecasted at 3% in 2009.
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Brazil, one of the largest economies in the region, has announced commitments to its pre-existing growth
acceleration programme (PAC), including a boost allocated in February 2009. In total, it expects to invest
BRL642bn (US$291bn) in infrastructure projects between 2007 and 2010. This includes around 1,200
projects.
Mexico's US$141bn five-year infrastructure plan (starting from 2007) is not so secure, however. With the
multi-billion-dollar Punta Colonet port project having being suspended already and a reduced FARAC II
road tender floated, BMI is wary of more cancellations to come.
Asia Pacific
China's fiscal stimulus plan dominates the region, owing to its scale of US$586bn, which represents 12%
of GDP, the largest in the region. The breakdown of the funds earmarked for infrastructure is as follows:
45.0% of the CNY4trn package to be spent on railways, highways, airports and power grids, 25.0% to be
spent on post-disaster reconstruction and 9.3% on rural development and infrastructure.
Japan's government has launched a record fiscal stimulus of JPY15.4trn (US$154bn). The package will
be the third initiated by Prime Minister Taro Aso since he took office last September, and will take the
cumulative total to JPY25trn (US$250bn), representing 5.5% of the country's GDP. The fiscal stimulus
plan does not contain any specific provisions for infrastructure projects, or at least none have been
announced.
Australia's infrastructure stimulus plan represents a risk to the upside of the country's infrastructure
market score. Though we do not see risks to the upside for 2009, 2010 may see the industry recover on
the back of the US$27bn fiscal stimulus plan, which allocates US$3.12bn for infrastructure expenditure.
Singapore has made one of the largest pledges for fiscal stimulus investments in the region with
US$13bn allocated, accounting for 8% of the country's GDP. Provisions for infrastructure amount to
approximately US$3bn. The abrupt contraction in Singapore's economy as a result of the financial crisis
led to an equally abrupt deterioration in the industry value outlook, which halved the country's
infrastructure market score for 2009, and as a result Singapore remains at the bottom half of the table.
However, the risks are heavily to the upside. One of the largest projects in the pipeline is the Marina
Coastal Expressway.
Indonesia has pledged US$7.5bn for its fiscal stimulus plan, with US$5.7bn allocated for infrastructure.
Though this represents an upside potential for Indonesia's infrastructure sector growth, we believe that
deep structural problems in Indonesia such as corruption, a weak legal framework and an opaque
tendering process will continue to weigh down the country's overall score.
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Vietnam has similar problems. The country has seen a massive influx of investment in infrastructure in
recent years and the government's US$6bn infrastructure stimulus plan is aimed at sustaining the
momentum in the sector. However, regulatory hurdles, inefficient government procedures and
bureaucracy pose risks that the already ill-defined stimulus plan may face a difficult implementation.
South Korea’s government has announced that it will allocate KRW1trn (US$661mn) in special loans
for private infrastructure construction companies. According to AFP, it is prepared to take on up to 80%
of loan repayments in the event of an abrupt rise in rates. In addition, it will provide KRW2trn
(US$1.32bn) in debt guarantees for private-sector companies involved in the construction of
infrastructure.
Taiwan's government has been forced to step in to try to offset the demand void, and this has taken the
form of a four-year, TWD500bn (US$14.7bn) fiscal-stimulus package including, among other things,
subsidies, tax cuts/refunds and infrastructure spending. Preliminary information for infrastructure
provisions indicate allocations of approximately US$1.7bn.
Europe
France’s president, Nicolas Sarkozy, announced a EUR26bn (US$33bn) stimulus package in December
2008 to boost the country's economy. Under the scheme, state-owned companies will increase investment
by EUR4bn (US$5.1bn) in 2009 and the government will supplement this with a further EUR4bn for
high-speed rail projects, dams and canals, university campuses, road maintenance, and other projects.
Sweden, Slovenia, Slovakia and Lithuania have all announced smaller fiscal stimulus plans, though
specific infrastructure provisions were not available at time of writing.
Spain's infrastructure and construction sector is probably the one most in need of an infrastructure
stimulus plan, and already tangible progress has been made in some major projects, such as the Madrid-
Valencia high-speed railway. The government has pledged US$13bn for infrastructure projects.
Portugal, Spain’s Iberian neighbour, has unveiled plans for EUR18bn (US$28bn) to be invested in
transport infrastructure projects over the next decade. Portugal's public works minister, Mario Lino, said
that of the EUR18bn, EUR9.15bn (US$14.3bn) will be invested in high-speed rail projects, EUR3.31bn
(US$5.16bn) will go towards the construction of a new international airport, and EUR3.12bn
(US$4.86bn) will be used for Portugal's road network. In the short term, the government has pledged
US$2.2bn.
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Germany and Italy have announced two of the largest plans, of US$103bn and US$105bn respectively.
Germany has allocated US$22.3bn for infrastructure, while according to a report by Reuters, Italy's plans
are mostly a 'recycling' of existing funds.
The European Commission (EC) has announced a US$254bn fiscal stimulus plan. Approximately
US$6.1bn has been pledged for energy and transport investments, but in reality we expect this to be much
higher through loans for various programmes such as the Trans-European Networks and the European
Investment Bank loans.
Industry Keeping Its Fingers Crossed
An infrastructure stimulus plan has never been done before on such a global scale before, so expectations
of the effects of the plan vary. Industry participants, such as infrastructure and construction majors and
energy and water utilities, are clearly
pinning their hopes on government
infrastructure spending. As far as the
industry is concerned, these stimulus
plans are the silver lining of an otherwise
bleak outlook for 2009. This is why, in
all annual reports thus far, companies
across all infrastructure sectors and from
all over the world have highlighted the
expected benefits from the stimulus
plans.
Major players in the sector have
advocated caution in their outlook for
2009 and have trimmed down their
expectations for revenue and profit growth this year. A common theme was the reduction in capital
expenditure programmes and a focus on organic growth for companies whose balance sheets were
suffering from declining activity in the sector. According to a report published in early April 2009 by
ratings agency Fitch, the economic downturn will have a delayed effect on European infrastructure
majors, culminating in declining revenues and reduced cash flows.
Negative Outlook For 2009 Global Construction Industry Value Real Growth,
2009-2013 (%)
-3.752
2.365
4.854 5.076 5.490
-6
-4
-2
0
2
4
6
2009f 2010f 2011f 2012f 2013f
Global Construction IndustryValue Real Grow th (%)
f = forecast. Source: National Statistical Agencies, BMI
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SWOT Analysis
United Arab Emirates Infrastructure Industry SWOT
Strengths Government-supported infrastructure spending in transport and utilities will intensify as a means of boosting demand levels
Clear regulatory environment and governing private investments in infrastructure creates a favourable investment climate
Demand for better transport and utilities infrastructure will continue as population figures rise and new developments increase the size of cities
Government-backed infrastructure investments will support construction sector growth, which we anticipate will falter in 2009/2010 as investors brave the storm of global financial markets
Weaknesses Rising unemployment is a result of the contraction in the sector
Project finance operations are onerous while the credit markets remain clogged
Rapid growth of the residential and commercial construction sectors has not been matched by an equally rapid growth in the local utilities sectors. This has resulted in new buildings not having access to power and water, potentially for years to come, making them unusable
Opportunities The record high raw material prices have subsided
The construction industry remains one of the largest sectors after oil and gas in the UAE. With plans to develop Dubai as a regional business and manufacturing base, this growth is set to continue
Government willingness in Dubai and Abu Dhabi to allow private participation in infrastructure still seems to be high
Threats Limited supply of credit on the global financial market impacts project finance
Demand destruction as a result of the global macroeconomic volatility
The main threat is to the political stability of the region as a whole. Recent terrorist attacks elsewhere in the Middle East have caused a reduction in the number of tourists visiting the region. However, tourism has continued to thrive in the UAE, but this could change if terrorism threatens the UAE more directly
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United Arab Emirates Political SWOT
Strengths Standards of living are high for nationals, which has dampened any demands for greater political representation
The monarchy enjoys strong support nationwide
Weaknesses Lack of democracy poses long-term risks given trends towards greater popular participation elsewhere in the region
Sheikh Khalifa bin Zayed assumed the presidency after the death of Sheikh Zayed al-Nahayan. He is equally conservative and is unlikely to make concerted efforts to address constitutional issues
The succession lineage is somewhat opaque, raising concerns about longer-term stability
Opportunities The UAE co-operates closely with other GCC states in security and economic policy
The UAE is typically a 'dove' within OPEC, sympathetic to the needs of consumer states, which is good for its relations with the West
Dubai enjoyed a smooth political succession following the death of former ruler Sheikh Maktoum bin Rashid al-Maktoum in January 2006, with new ruler Sheikh Mohammed bin Rashid al-Maktoum welcomed by most of the public
Threats There is a long-running territorial dispute with Iran, which continues to affect bilateral relations
Relatively poor living conditions among some foreign workers have led to strikes and demonstrations. Given the size of the expatriate community, this poses some threat to domestic stability
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United Arab Emirates Economic SWOT
Strengths The UAE is a member of the Gulf Co-operation Council, which, as well as being a common market, is targeting a common currency by 2010
The UAE has one of the most liberal trade regimes in the Gulf, and attracts strong capital flows from across the region
In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy, making up for the otherwise small workforce
The UAE is progressively diversifying its economy, minimising vulnerability to oil price movements
Weaknesses The UAE's currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure
The state's location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and Iranian WMD programmes could affect investor perceptions
Opportunities Oil prices are expected to stay high (by historical standards) over the forecast period
Economic diversification into gas, tourism, financial services and high-tech industry offers some protection against volatile oil prices
The construction, tourism and financial sectors are growing rapidly, driven by domestic and foreign investment
Threats Heavy subsidies on utilities and agriculture and an outdated tax system have contributed to persistent fiscal deficits in the past, although rising oil revenues have masked the problem in recent years
Some bottlenecks have been forming in the construction sector and there is a chance of delays in several high-profile construction projects
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United Arab Emirates Business Environment SWOT
Strengths The UAE is a member of the Gulf Co-operation Council, a six member common market, and has been a member of the WTO since 1996
The state has invested large amounts in infrastructure, and will continue to do so over the next 10 years
The UAE's diversified economy reduces risks from volatile oil prices
Weaknesses Due to the state's federal nature, regulations can vary considerably across the emirates
The regional economy is oil-dependent. This has historically been very cyclical, which increases risks for long-term projects
Opportunities Large number of free trade zones offering tax holidays and full foreign ownership
Comparatively relaxed rules on expatriate employment
The UAE's social stability and relative prosperity means that there is far less concern for security than in some other Gulf states
Threats The state is bureaucratic relative to regional peers
Strong oil prices have massively increased liquidity in the region. This has resulted in strong financial inflows, increasing risks that projects of lower investment potential are currently being funded
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Major Infrastructure Developments And Key Projects
Transport Infrastructure Overview
The rapid pace of the UAE’s expansion is putting pressure on transport infrastructure. Abu Dhabi, in
particular, suffers from chronic congestion problems, as the city’s population now far exceeds the original
population expectations of its designers and it has not developed its transport infrastructure as rapidly as
Dubai.
The Abu Dhabi government plans to launch a long-term investment programme to upgrade its airports,
seaports and public transportation system. Some of the projects it announced are the construction of a
US$7bn international airport, to be completed between 2010 and 2012, and a new seaport facility at the
Khalifa Port and Industrial Zone, located in Al Taweelah. ‘Plan Abu Dhabi 2030’ outlines a major
transport infrastructure overhaul to cater for a growing population, estimated to reach 3mn by 2030. Plans
for the metro, high-speed rail with Dubai, freight rail corridor and new roads are all taking shape. In
January 2009, the Abu Dhabi Department of Transport was expected to announce the final route and
construction is due to begin immediately after that, with view to be completed by 2015.
The end of 2008 also saw the first public-private partnership (PPP) scheme in Abu Dhabi’s transport
sector. Abu Dhabi’s transport department is planning an overhaul of the UAE-Saudi Arabia highway. The
works have been divided into four phases, each of which will be tendered as a separate contract under a
25-year concession to build, operate and transfer (BOT). One of the frontrunners for two of the contracts
is Italian construction and infrastructure major Salini Costruttori, which told the journal Arabian
Business that it is bidding for the contracts for phase one and phase three to build and operate a 80km and
105km stretch of the highway, respectively.
The Abu Dhabi Transport Authority announced several major road projects in July 2008, with an
estimated cost surpassing AED12bn (US$3.26bn). In addition to the UAE-Saudi Arabia highway, which
will be the flagship road project in the emirate, others include a new highway to Al Ain in the eastern part
of the country, new roads around the industrial city of Mafraq, and new highways between the major
towns of Al Gharbia, including the Ghayathi-Madinat Zayed road construction.
In March 2008, the RTA’s chairman told reporters that the roads and transport authority has earmarked
AED10.5bn (US$2.86bn) for investments in transport every year for the next five years. The RTA’s
chairman further said that the RTA is not looking to borrow money for the projects, thus refuting earlier
reports that the transport authority was considering tapping the international debt markets to fund
investments in transport infrastructure. The government of Dubai and the RTA will fund the projects, the
chairman said. Specifically for 2009, the chairman of the board and executive director of the Dubai Roads
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and Transport Authority (RTA), Mattar Al Tayer, stated that the organisation will spend AED2.5bn
(US$0.68bn) on road and transport projects in 2009. He added that the RTA's work has not been affected
by the global economic slowdown and that 40-50% of road projects in Dubai are complete, with primary
phases of projects scheduled to be finished after two years.
Currently, the emirates have 1,088km of road networks and BMI forecasts that road haulage will grow
5.9% per year (2008-2011). Furthermore, car ownership is forecast to rise in the country. Interestingly,
however, the share of roads in freight transport is going to decline (marginally) between 2006 and 2011.
Of course, share of roads will still be more than half of all freight, underlying the road system’s
importance to the UAE’s economy. However, with more investments going into ports and airports, we
believe the new transport infrastructure will slowly but steadily alter the modal transport balance and as a
result achieve the desired aim of decongesting the road system.
Airports are also at the forefront, with the largest airport in the world currently under construction in
Dubai. The UAE has eight international airports.
As the emirates grow, both in terms of population and in terms of physical infrastructure, the need for
more advanced transport becomes increasingly pressing. Dubai was the first to introduce rail as a means
of public transport and has now become a model for the neighbouring emirates, which are eager to reap
the benefits of rapid mass transit systems, such as metros and trams. On a regional level, the increasing
importance of rail networks is evident from several projects that introduce rail travel not only within
countries (for instance the north-south line in Saudi Arabia) but also between them, like the GCC Railway
– a project in planning since 2005, which will, if completed, integrate the railway systems in the Arab
Peninsula.
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New And Ongoing Projects
Airports
Dubai
In late April 2009, Dubai Airports CEO, Paul Griffiths, disclosed that the opening of the new Al-Maktoum
International Airport, which was scheduled for June 2009, will be delayed by a year. Griffiths has stated that
the number of planned runways had been reduced from six to five.
The contract to build Dubai Airport's Concourse Three, which was awarded to the Al Habtoor Leighton -
Murray & Roberts - Takenaka (HMRT) Joint Venture, was cancelled in mid-April 2009, due to inability to
finalise the terms of the contract with the contractor, Dubai Civil Aviation Authority (DCAA). The
AED4.9bn (US$1.3bn) contract for construction of a new concourse at Dubai International Airport was
awarded in December 2008. For Murray & Roberts, this is the fourth contract to be terminated in the region in
the last six months and brings the company's total cancelled order book to ZAR20bn (US$2.2bn), according to
Engineering News. However, the contract was picked up just a month later by UAE-based international
construction company Al Jaber Engineering and Contracting. The work on the new concourse is estimated
to finish in the first half of 2011.
Airports
Q1 2009 Ajman
According to online news source Emirates Business 24/7, the Ajman government has received
preliminary approvals for the Ajman airport project and is in the process of obtaining final approvals
from the General Civil Aviation Authority (GCAA) to carry out its AED2.2bn (US$600mn) project. The
airport will be constructed in two phases, and is due to start operating in 2011. The new air hub for
the emirate will have capacity for 1mn passengers per year and this will rise to 10.4mn by 2046. The
airport will be located 3.5km from Al Manama.
Abu Dhabi
A second runway and a third terminal were completed in March 2009 as part of the ambitious
AED25bn (US$6.8bn) redevelopment and expansion programme at Abu Dhabi International Airport,
according to Abu Dhabi Airports Company (ADAC) as cited by TradeArabia News Service. The
project has been planned to extend the total capacity of the airport to over 20mn passengers
annually.
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Ports
Ports
Q1 2009 Ras Al Khaimah
The customs and ports department of Ras Al Khaimah (RAK) commenced construction on the third
phase of a project to expand and modernise the Ras Al Khaimah Saqr port. The cost of the contract
is expected to total AED14mn (US$3.8mn). The third phase is expected to be completed by May
2009. The earlier two phases of expansion work are already under way at the port and will see 12
deepwater berths added, with draughts of up to 15.3m, enabling the port to cater for larger vessels
classes. The port is the biggest bulk port in the Middle East with an annual handling capacity of 40mn
tonnes of bulk and general cargo.
Q3 2008 Abu Dhabi
The CEO of Abu Dhabi’s Ports Company announced during a speech at the Abu Dhabi Chamber of
Commerce and Industry that the Khalifa Port and Industrial Zone, now under development, will most
likely be completed ahead of schedule in 2028 because of very high investor interest and activity that
has accelerated operations and construction. Abu Dhabi is investing AED88bn (US$24bn) in its
industrial port and city project. The project will be implemented over several phases. The first phase
will comprise the beginning of Khalifa Port and is expected to be completed in 2012, while the other
phases will focus on industrial sectors, such as petrochemicals. The port is to be managed by Abu
Dhabi Terminals (ADT) and DP World. For the first phase, the government has awarded contracts
worth AED3.5bn (US$953mn) and according to stated plans it is looking to award a further
AED24.5bn (US$6.67bn) in total for the rest of the project. The project was announced in 2006 and
works began on the port in February 2008, with Archirodon Construction SA, Boskalis Westminster
Middle East and Hyundai Engineering commencing the dredging works.
Roads
Roads
Q1 2009 Abu Dhabi
In early February 2009, Impregilo SpA, MTD Capital, China Harbour Engineering Company and
Macquarie Capital Group, Consolidated Contractors Company of Greece, Bouygues Travaux Publics,
and Strabag Societas Europaea were shortlisted by the Abu Dhabi government for a highway project
worth AED10bn (US$2.7bn) that will link Abu Dhabi to Saudi Arabia. The tender is for the
construction of the 325km Mafraq-Ghweifat highway, under a built, operate and transfer scheme. The
project is the first PPP scheme in the transport sector of the emirate. The concession is for a period
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Roads
of 25 years. The new road will be fully operational by 2011.
Q4 2008 Dubai
In October, the Roads and Transport Authority (RTA) of Dubai awarded an AED86mn (US$23.4mn)
contract to Al Wasit Co for the construction of roads in the Nad El Sheba area of the city.
The RTA awarded the fifth contract for the Parallel Roads Project to South Korea’s Sungwon. The
contract is worth US$463mn. This section of the road will run 108km to the outskirts of Abu Dhabi. It
will include the construction of 30 bridges.
Railways
Abu Dhabi
In late May, bids were submitted for the Abu Dhabi metro consultancy tender. In February 2009, Abu Dhabi's
Department of Transport (DoT) sought tenders from local and international firms to work as consultants for the
emirate's new metro and rail project. The selected bidder will conduct a feasibility study, create a concept and a
preliminary design, and perform other works for the project. The metro is due to begin operations in 2015.
According to a senior official at the Abu Dhabi Department of Transport the plan is for the metro to eventually
extend for 130km.
Railways
Q1 2009 Dubai
In January 2009, Dubai's minister of pubic works, Shaikh Hamdan Bin Mubarak Al Nahyan, noted
that tenders for the trans-emirate Dubai-Sharjah rail network would be released in 2015. The rail links
are being fast-tracked in order to tackle traffic congestion on the Dubai-Sharjah road.
Also in January, a Dubai transport chief announced that the Alstom-Besix Consortium has started the
initial work for phase one of the Al Sufouh Transit System project. The project will serve residents in
Al Sufouh, Dubai Marina and Jumeirah Beach Residence. The tram project, which is projected to be
commissioned in April 2011, will expand 14km along the Al Sufouh Road. Phase one of the project
includes the construction of a 9.5km-long track beginning from Dubai Marina up to the mall of the
Emirates Station.
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Railways
Q4 2008 Abu Dhabi
In early December local press reported that tenders for the construction of an 800km railway project
to connect Dubai with Abu Dhabi and the northern emirates have been issued. The first part of the
project, expected to be completed by 2011, will extend for 573.5km. The second part, involving a
246km-long track, will be completed by 2015.
Dubai
In October, Middle East Business Intelligence (MEED) reported fundamental disagreements between
the RTA and Dubai Airports on the financing structure for the construction of the Purple Line, which
will run between Dubai International Airport and the new Al-Maktoum International Airport. MEED
reports that Dubai Airports is looking to finance up to 25% of the project, while the RTA is asking for
Dubai Airports to have a much larger stake in financing. The costs of the project have more than
doubled to AED40bn (US$10.9bn) since 2006, when the project was first announced and the tender
for the construction contracts has been pushed back to Q109.
Other Transport Developments
Other Transport Developments Q4 2008
Dubai
The transport infrastructure that is being developed in Dubai World Central – a logistics and tourism
hub twice the size of Hong Kong – is estimated to cost a total of US$33bn. The latest project to be
announced will be a light rail system that will link through to the Dubai Metro. It will have a total of 10
stations. Light rail is becoming a very popular transport mode in Dubai, mainly supplementing the
metro system, with new projects in Palm Jumeirah and downtown Burj Dubai.
Q3 2008 Sharjah
In September 2008, Emirates Industrial Cities awarded Sharjah General Contracting a contract worth
US$11mn for the expansion and improvement of road infrastructure in and around the Emirates
Industrial City project.
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Table: United Arab Emirates – Major Infrastructure Projects – Transport
Project Project value,
US$ mn Company name(s) Timeframe Status
Airports
Al Maktoum International Airport 3,300 Dubai Airports 2008
delayed- Mid-2010 opening
Sir abu Nu'air Airport 68 Sharjah Department of
Aviation 2007- Announced May
2007
Abu Dhabi International Airport expansion 6,800
part financed by Abu Dhabi Government 2007-2010
First works to be completed in March
2009
Ajman International Airport 600 na na
Preliminary approval granted in March
2009
Dubai International Concourse 3 1,300
Al Jaber Engineering and Contacting 2009-2011 Contract re-awarded
Ports
Construction of new industrial port in Abu Dhabi 7,623
Archirodon Construction SA,
Boskalis Westminster Middle East and
Hyundai Engineering 2008-2012 (first
phase)
Industrial zone and port to be completed
by 2028
Construction work on Terminal 2 project at Jebel Ali port 68.06
Hyundai Engineering and Construction
Company 2005-2008 Completed February
2009
Mega Max container terminal in Jebel Ali Port na DP World 2007-2030
Phase one of first stage completed
Khalifa Port 1,365 Abu Dhabi Ports
Company 2006-2028
Currently under way – will possibly be
completed ahead of schedule
Ras Al Khaimah Saqr port 3.8 RAK Customs and Ports Department 2008-2009
Expected to be completed in May
2009
Roads
Abu Dhabi-Al Guwaifat highway concession 2,700
five international groups shortlisted 2009-2011
Firms short listed in February 2009
Nad El Sheba roads- Dubai 23 Al Wasit Co. 2009 Contract awarded in
October 2008
Parallel Roads Project 5th contract 463 Sungwon 2008- na
Shahama-Saadiyat highway, Abu Dhabi 1,480 na na na
Improvements to the Sheikh 188 Dutco Balfour Beatty 2006-2009 Second phase 50%
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Table: United Arab Emirates – Major Infrastructure Projects – Transport
Project Project value,
US$ mn Company name(s) Timeframe Status
Zayed road complete
Phase three of Dubai bypass road 78.68 na na Contract awarded
Construction of 10 bridges and other works, Dubai 175.6 Chimozo 2007-2009 At planning stage
Ras al Khaimah road network 600
Funding split between the Emirate and the Federal government 2008-
announced January 2008
Phase IV of Parallel Roads Project, Dubai 490 RTA 2008-
permission granted in May 2008
Railways
Abu Dhabi Metro na Abu Dhabi Department
of Transport 2009-2015 Tender under way
Dubai Light Rail Transport project 4,220
Mitsubishi Corporation, Mitsubishi Heavy
Industries, Obayashi Corporation, Kajima
Corporation, Yapi Merkezi 2005-2010
Due to be completed in
September 2009
Al Safooh tramline, Dubai 786.2 Alstom, Besix and
Serco 2007-2011 Phase one under
way
Bridge
Shams Abu Dhabi bridges 60.71 Nurol Construction and
Trading 2007-2009
Expected to be complete in the autumn of 2009
Abu Dhabi city-Saadiyat Island bridge 191.3 Strabag 2006-2009
To be completed in December 2009
Other
Marine Public Transport Network 500 RTA 2007-2020
First phases already in operation
na = not available. Source: BMI
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Energy And Utilities Infrastructure Overview
The UAE holds 10% of the world’s proven oil reserves, with daily production estimated at 2.95mn b/d in
2007, according to the BP Statistical Review of World Energy. The majority of this oil, however, goes to
exports, with the emirates consuming just 1.4% of the oil it produces.
Electricity in the emirates overwhelmingly depends on natural gas. Almost all the natural gas produced in
the country (an estimated 52bn cu m in 2007, according to the BP Statistical Review of World Energy) is
also domestically consumed.
Revised forecasts on power generation indicate a more intense use of gas-fired power generation than
expected a year ago. Accordingly, BMI now forecasts that gas-fired power generation will climb to
98.6TWh to 2013, from 77.4TWh in 2009, representing 97.5% of total generation by 2013. The rapid rise
in demand is increasing the need for more imports. The UAE currently imports approximately 9bn cu m
of its gas from Qatar though the Dolphin gas pipeline.
Over the long term, demand is expected to grow. Industrial consumption should increase in tandem with
new activity, albeit there may be a decline in household demand from Dubai as the numbers of expat high
skilled workers leave the emirate. Nevertheless, we believe that this will be muted, by the rise in demand
that will come from transport infrastructure, namely railways. Dubai’s and Abu Dhabi’s new metros and
the UAE’s new railways (eventually to be part of the GCC railway) will burden the power sector in the
years to come.
In an unexpected move, Ajman announced in July 2008 that it will invest in a coal-fired power plant, the
first such plant in the Gulf. The choice to add coal as a fuel within the UAE’s power sector is an unusual
one. The country has no coal reserves and therefore will be forced to import the fuel. Due to the high
carbon emissions associated with the burning of coal for power, most countries are in fact trying to
diversify their power sectors away from using the ‘dirty’ fuel.
Ajman’s move into coal has been followed by one of the other smaller emirates, Ras Al Khaiman, which
announced in March 2009 that it will have a new coal-fired power plant within two years. According to
the Ras al Khaimah Investment Authority (RAKIA), the plant will initially have a 400MW or 500MW
unit and this may be extended to 1000MW in five years. In fact, the Ras Al Khaimah Minerals and
Metals Investment (RMMI), a mining venture of the emirate of the same name, was issued a licence in
late March 2009 to construct a US$600mn railway project in the province of East Kalimantan in
Indonesia. The railways will be used to transport coal to a jetty it is also building, to transport coal back to
the emirate for use in the new power plant.
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The major re-orientation in UAE’s energy mix is the plan to adopt nuclear power for electricity
generation. France and the UAE agreed to jointly develop the UAE’s nuclear power sector during French
President Nicholas Sarkozy’s visit to the Gulf States in January 2008. Although all GCC states are
considering the adoption of nuclear power (minus perhaps Saudi Arabia), the UAE is the first country to
agree to a nuclear co-operation accord.
The GCC countries have made significant headway in their plan to link up on a common power grid and
implement the US$1.25bn first phase of the project. The GCC instigated the project to connect the power
grids and share electricity in 1998 (although construction began in 2005) in an effort to ensure the
necessary infrastructure will be in place to support the region’s economic development. The GCC
Interconnection Authority (GCCIA) estimated the total cost of the project at more than US$3bn. Under
the first phase, an 800km, 400 kilovolt (kV) overhead line will link Kuwait’s Al-Zour station with Doha,
and a 400kV submarine line will link Saudi Arabia with Bahrain. The first trial operations were due to get
underway during the first quarter of 2009 and the grid will be inaugurated in May. The project includes
the establishment of six transformer stations and a control centre, and the setting up of a converter on the
Saudi network. Saudi Arabia will meet 40% of the first phase cost, while Kuwait will provide 36.5%,
Qatar 13.5% and Bahrain the remaining 10%. The second phase will link the UAE with Oman. The
resulting two mega-grids will be joined in the final phase.
The local water and electricity authorities in the meantime are raising capital investments into their
emirates infrastructure. In March 2008, DEWA was looking to issue bonds to secure long-term funding
and is currently seeking short-term and medium-term loans. The global credit crunch reportedly
hampered efforts to issue bonds in late 2007 and according to Al Tayer, any renewed efforts would take
place after June 2008. According to Gulf News, DEWA is planning to invest around US$16bn in
generation, distribution and transmission projects in the next five years. Because of the difficulty the
authority faced last year in raising cash from Islamic and conventional bonds due to the credit crunch, it
has been using internal cash flow to fund its projects so far. The utility is planning to spend AED13bn
(US$3.5bn) in 2009 on new projects.
In light of DEWA’s AED70bn capital expenditure plan to 2012 onwards – which will see power
generation capacity triple to 22GW in 2017 and water desalination capacity also triple to 913mn gallons
per day – Moody’s expressed concern in December 2008 over the availability of financing for these
programmes. However, the fact that DEWA was able to refinance a US$2.2bn Islamic loan, which was
due to mature in April and which was cited as a key concern for Moody’s outlook, is a positive sign for
the Dubai utility. The new US$2.2bn loan was granted by 18 international, regional and local banks. The
lead coordinators in the agreement are Emirates NBD, Dubai Islamic Bank, National Bank of Abu
Dhabi and Standard Chartered Bank. The loan had a three-year maturity and a paid margin of 300
basis points (bps). In addition, the company posted a profit of AED4.24bn (US$1.5bn) in FY08,
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 31
compared with a loss of AED744m (US$263.2mn) in FY07. The profit was mainly attributed to higher
revenues and a decline in generation and distribution costs in FY08.
The utility is implementing a AED57bn
(US$15.5bn) capital expenditure
programme that will increase water
production by 20% by the end of the year.
According to DEWA’s official data, its
operating margins between installed
capacity and peak demand in both
electricity and water have been growing
smaller each year. Regarding water, the
fastest-growing and largest segment of
demand is coming from the residential
sector. Water consumption in Dubai grew
by 57% between 2001 and 2006. In terms
of electricity consumption, the emirate’s demand grew by 75.5% during the same period, with the
commercial sector representing the largest consumer. The residential sector has caught up, reducing the
difference between them to 42% and 39%, respectively. DEWA’s CEO maintained that the utility
anticipates power consumption growth of 15% and water consumption growth of 12%, based on an
assumption of economic growth in the emirate of between 6% and 11%. BMI believes that this is an
overly hopeful assessment of macroeconomic growth. We forecast the UAE to show a significant
contraction to 0.08% in 2009. The tender for the construction of the US$8.6bn Hassyan power and
desalination plant has been deferred until the August/September 2009.
The UAE has one of the highest water consumption levels in the world due to climatic conditions and
high per capita income. Water supplies usually come from two sources: ground water and desalination
plants. Residents of the UAE consume on average 550 litres per day. The authorities are trying to reduce
this to 350 litres per day over the next few years, through rationing water supplies as much as possible, in
addition to adding new capacity.
The value of investments in water projects in the UAE has increased by 20% from US$11.62bn in 2007 to
US$14bn in 2008, research firm Proleads estimates. While the rise partially reflects increased
construction costs, it also highlights efforts to compensate for years of under-investment at a time of rapid
economic and population growth. Abu Dhabi Water and Electricity Agency (ADWEA) projects account
for about 26% of the new generation capacity, with US$1.3bn invested in expanding five existing
desalination plants. ADWEA projects that demand for water in the emirate will grow by 43% in the next
five years and has therefore set targets to increase production from the current 626mn gallons per day to
969mn gallons by 2013. In Dubai, nearly US$7bn is being spent on projects, with the Dubai Electricity
Operating On Tight Margins
0
10
20
30
40
50
60
70
80
90
2004
2005
2006
2007
e
2008
f
2009
f
2010
f
2011
f
Electrcity Consumption (tw h)Electricity Generation (tw h)
f=forecast. Source: BP Statistical Review of World Energy, June 2007; BMI
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 32
and Water Authority (DEWA) spending US$335mn on water projects, with further projects likely by the
end of the decade. Investments in power and water in other emirates is also high: Sharjah is currently
spending US$1.17bn, Ajman US$357mn and Furjairah US$856mn. It should be noted, however, that
according to the director of privatisation in ADEWA, one of the major obstacles to the development of
the water and IWPP sectors is the scarcity of experienced engineers and project managers at the scale
necessary to meet growing demand.
The government has reportedly approved plans to sell all electricity and water plants owned by the
DEWA, either through an IPO or private sales. Government-owned DEWA delivers electricity to about
240,000 customers and water to almost 195,000 customers across the emirate of Dubai. In 2006, installed
generating capacity was 4.6GW, via six power stations aimed at meeting peak demand of 4.11GW. There
are 1,180km of overhead transmission lines, plus 1,935km of underground cables.
In addition, the partial divestment of Abu
Dhabi’s integrated water and power plants
(IWPPs) has given several investors the
opportunity to enter the utilities market in
the UAE. ADEWA disclosed in late
March 2009, that AED60bn (US$16.3bn)
worth of investments are taking place in
the desalination, power generation and
waste water as a direct result of the
privatisation programme.
For large companies in the international
market, such as France’s Veolia and Suez SA, and Japan's Marubeni Corp, establishing an MEA base in
the UAE is highly desirable given the stable business environment. Investor interest in the UAE market
remains strong, especially as forecasts in the utilities market point to rising demand and therefore ample
opportunities for investments in the sector. Nevertheless, although the demand risk is very low, the
engineering and operational risks are rising proportionally with new demand. In an interview with
Reuters, the director of privatisation in ADEWA said: ‘The challenge is engineering, procurement and
construction contractors. There is too much competition in the market with too many projects coming up.’
The divestments of the power sector and the venture into nuclear power mark significant changes for the
emirate’s utilities sector and highlight the severity of a potential power crunch. In fact, the there have
been reports coming from Ajman and Sharjah that several new developments remain idle because there is
simply not enough power and water to provide for all the new buildings going up. In a report in the
Business Spectator, an expert writing on the issue said that the threat to Dubai’s economic ambitions may
indeed come from ‘the simple failure to provide enough affordable power and water’.
Value In Utilities
0
5
10
15
20
25
30
35
4020
05
2006
2007
e
2008
f
2009
f
2010
f
2011
f
2012
f
0
1
1
2
2
3
3
Electricity, gas and w ater industry output, AED bn Industry as % of GDP RHS
f=forecast. Source: Ministry of Economy, BMI
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 33
According to BMI’s new electricity, gas and water industry value forecasts, the industry’s value in the
UAE will see nominal growth of 86% between 2008 and 2013. These figures highlight the challenges that
state-owned utilities in the region face, which is why we do not foresee any reversal in plans to develop
IWPP projects in the Gulf. At the same time, the demand projections also highlight the significant scope
(and need) for private sector participation for the rapid development and management of more such
facilities.
In a report published in December 2008, ratings agency Moody’s expressed optimism for Dubai’s power
and water sector long-term growth. Moody’s argued that because DEWA has a fundamental role to play
in the emirate’s future growth it is highly unlikely that it will not receive support from the Dubai
government. According to Moody’s senior vice president for the Middle East, there are strong political,
operational and strategic ties between DEWA and the government of Dubai that will ensure the continued
investments in Dubai’s water and electricity sector.
We share Moody’s optimism and add that this assessment can be extended to the other emirates as well.
More than once we have highlighted the strong fundamentals in the UAE market, driven by population
and macroeconomic growth to sustain the interest of investors in the utilities sector. In addition, half a
decade of unprecedented oil windfalls almost guarantee that investments in vital infrastructure will be
sustained in the states of the Gulf, if nothing else then to boost growth levels, even if private sector
interest falters in the short term.
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 34
New And Ongoing Projects
Power Plants And Transmission Grids
Fujairah
UAE-based energy company Abu Dhabi National Energy (TAQA), announced in May that it will acquire a
90% in Fujairah Water and Electricity for AED1.11bn (US$302mn) from the Abu Dhabi Water and
Electricity Authority. TAQA will make the payment in instalments. Fujairah Asia Power, in which Fujairah
Water and Electricity holds a 60% equity interest, owns the Fujairah 2 power and water desalination plant in
the UAE.
Power Plants And Transmission Grids Q1 2009
Dubai
Spanish daily Cinco Dias reported in March 2009 that Spain’s utilities major Ibedrola, together with
Abengoa and ACS, have been pre-selected for the concession to build the largest solar thermal
power plant in the world in Dubai. The final selection will take place in May the report said, without
citing sources.
Also in March 2009, DEWA commissioned the construction of two transmission stations. The first will
be located at Warsan, with a total estimated cost of US$110mn, and the second will be in the
Gardens, with a total estimated value of US$178mn. They will have a combined capacity of 400kV.
Greece-based Portland Group said that it is looking to develop wind and solar energy in Dubai. The
company’s CEO told Gulf News in March that the company will begin with an initial investment of
EUR100mn and plants with capacity of 20MW.
International water treatment, desalination and wastewater treatment expert Metito and the DEWA
signed a US$10.4mn turnkey project agreement in February 2009. The project involves design,
construction and augmentation works in the Jebel Ali Power Complex.
Abu Dhabi
Indian engineering conglomerate Larsen and Toubro (LT) was awarded two contracts worth
AED848mn (US$231mn) in Abu Dhabi in February 2009. The first contract was received from Al Ain
Distribution, valued at US$164mn, to construct seven electrical substations in Al Ain. The second
contract was from Abu Dhabi Distribution for expansion of a 33KV power transmission network in the
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 35
Power Plants And Transmission Grids west of the emirate, for US$67mn.
Abu Dhabi's alternative energy initiative Masdar disclosed in January that construction is in progress
for an on-grid 10MW solar power plant, which is projected to generate 17,500MWh annually. The
plant will primarily generate electricity to support the continuing construction activities of Masdar City.
The Masdar Sustainable City will be completely reliant on renewable sources for its power needs,
including solar and wind. It will also be completely car-free as the aim is to produce no greenhouse
gases.
Japan’s Ministry of Economy and Trade said on January 19 that it has signed a Memorandum of
Understanding with the Abu Dhabi government for co-operation in the nuclear power generation
sector. The co-operation pertains to the preparation and planning for the development of a nuclear
power plant, training for staff and the handling of nuclear waste.
Q4 2008 The Emirates Nuclear Energy Corp. (ENEC) awarded US-based programme management,
engineering, construction and operations firm, CH2M Hill, a 10-year contract to manage UAE's
planned civilian nuclear power programme through all phases. CH2M Hill would be in charge of
selection and supervision of key contractors, planning of the master programme, licensing and
ensuring adherence to International Atomic Energy Agency (IAEA) recommendations. French
companies Areva, Suez and Total will have exclusive rights to be part of Abu Dhabi’s civil nuclear
power project, by providing two third generation pressurised water reactors, which is Areva’s
expertise.
Q3 2008 Ajman
The UAE and a unit of Malaysia Mining Corp Bhd (MMC) – an investment holding company with
interests in transport, logistics, energy, engineering and construction – have signed a US$2bn deal to
build the Gulf’s first coal-fired power station. The 1,000MW plant will be located in the emirate of
Ajman, and will take 40 months to complete. Feasibility, technical and environmental studies are set
to take place over the next six months. MMC Utilities will set up a concession company that will
manage and operate the power plant for the next 20 years, with the Ajman government to purchase
electricity throughout the concession period.
Oil And Gas Pipelines
The start-up of the planned 320km oil pipeline from the Habshan fields to the port of Fujairah in the United
Arab Emirates (UAE) has been delayed by two years, according Dieter Blauberg, the director of the project.
The project was originally due to come on-stream in 2009. Blauberg has attributed the delays to the current
'market conditions', without giving further details. The pipeline is aimed at bypassing the Strait of Hormuz and
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 36
could allow the UAE to transport most of its oil exports, permitting it to significantly reduce its reliance on
having to transport oil exports through the strategic shipping chokepoint. In early December, China National
Petroleum Corporation (CNPC) was awarded the US$3.29bn project to build the major oil pipeline. CNPC
will construct a 400km (250 mile) pipeline to Fujairah port from the Habshan oil field in Abu Dhabi. The
pipeline, having a maximum capacity of 1.5mn barrels of crude oil per day, which could be increased to 1.8mn
b/d at a later stage. The pipeline will provide an alternative route to the Strait of Hormuz, which connects
Persian Gulf oil producers to the Gulf of Oman, and beyond that to the world's main ocean tanker routes.
Water
Ajman
In late April 2009, the Federal Electricity and Water Authority (FEWA) unveiled plans for three new water
desalination plants in the UAE. One plant will be established in emirate of Ras al-Khaimah, which is scheduled
to be operational during 2011. The remaining two plants will be established in emirate Ajman. The first Ajman
plant will start operation later this year and the second one will be operational by 2011. The capacity of the
three plants will be 10mn gallons of drinking water daily each.
Abu Dhabi
GDF Suez was negotiating in late March the sale of half of its 40% stake in the Shuweihat 2 IWPP to Japan’s
Marubeni Corp. This potential partnership was prompted by the Japan Bank for International Commerce
(JBIC)'s involvement with the project finance arrangement, which requires a Japanese partner with a minimum
20% stake. Abu Dhabi's Water and Electricity Authority owns the other 60%. Marubeni has ongoing IWPP
projects in Abu Dhabi, Qatar, Saudi Arabia and Turkey. In Abu Dhabi it is involved in the Fujairah 2 IWPP,
due to be completed in 2010 and the Taweelah B.
Fujairah
In late March 2009, international water desalination and wastewater treatment company Metito secured an
AED10mn (US$2.72mn) deal to for a demineralisation plant in Fujairah. According to the press release, the
plant will treat desalinated water, which will then supply the Qidfa power plant in the emirate.
Water Q1 2009
Dubai
The tender for the construction of the US$8.6bn Hassyan power and desalination plant has been
deferred for eight months, DEWA said in February 2009.
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 37
Water Q4 2008
Abu Dhabi
In November 2008, GDF Suez Energy International was finalising a bridge loan agreement with a
consortium of six banks to finance the initial phases of construction of the Shuweihat 2 Independent
Water and Power Project in Abu Dhabi. The consortium of six banks that will arrange for the
US$900mn bridging loan are Standard Chartered, Natixis, National Bank of Abu Dhabi, Kreditanstalt
fuer Wiederaufbau, Caylon and Bayern LB, Middle East Business Intelligence (MEED) reported.
Accordingly, the loan will be priced at 150 basis points above the LIBOR rate. The initial project
financing was for US$2.6bn, for which a 23.5-year financing agreement was underway when the
deterioration in the global financial markets prompted caution and eventually preferred exposure to a
smaller loan.
Sharjah
SEWA announced in October the commissioning of the Khor Fakkan desalination plant. In its initial
phase the plant will produce 2.5mn gallons per day, increasing to 5mn gallons per day when the
second phase is complete. The cost of building the plant was AED90mn (US$25.5mn).
The director-general of Sharjah municipality, Salah Al Haj, said in early October that the government
of Sharjah has allocated AED1.24bn (US$340mn) for improvements and completion of sewage
treatment and road projects. The funds will be allocated to projects included in the emirate’s
infrastructure plans for the next 20 years, which will be reviewed every five years.
Q3 2008 Abu Dhabi
In August, Belgium construction group BESIX, which is 50%-owned by Egypt’s Orascom
Construction Industries (OCI), announced that it won a EUR525mn (US$817.69mn) build, own,
operate and transfer (BOOT) contract for two wastewater treatment plants in the UAE, planned for
the cities of Abu Dhabi and Al Ain. BESIX was awarded the contract in a joint venture with UK-based
water supply company Veolia Water. ADWEA awarded the latest deal, which will run for 25 years.
The wastewater plants will have a capacity of 300,000m3 and 130,000m3 respectively, and will
generate water to be used predominately for irrigation.
In July 2008, France’s Veolia Water signed a contract with the ADEWA for the construction of two
wastewater treatment plants in Abu Dhabi and Al Ain. The projects will be implemented as a PPP
scheme, with Veolia designing, financing, building and operating the two plants for 25 years.
Construction will take two and a half years and Belgium’s BESIX will be responsible for the civil
engineering projects. The Abu Dhabi plant will have capacity to treat 300,000m3 of water per day,
while the Al Ain will have capacity of 130,000m3 of water per day.
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 38
Table: United Arab Emirates – Major Infrastructure Projects - Utilities
Project Project value,
US$ mn Company name(s) Timeframe Status
Oil And Gas Pipelines
320km Abu Dhabi-Fujaraih oil pipeline 3,290
China National Petroleum Corporation -2011
Start-up delayed by two years
Oil storage terminal in Fujairah 5,500
Gulf Petrol Supplies and Chemoil Energy na
Likely to be operational by January 2009
Gas processing facilities, Abu Dhabi 7,000
Abu Dhabi National Oil Company 2009-
Investments planned
Power Plants
IGCC plant, Dubai 6,000
Sino Global International, Samena
Power & Energy Ltd, Skyline Services Group 2008-
MoU signed in February 2008
Jebel Ali power plant 10 Metito 2009- Contract awarded in
February 2009
Dubai thermal solar power plant na na na
Tender to be completed in May
2009
Warsan and Gardens transmission stations 288 DEWA 2009-
Construction commissioned in
March 2009
Solar and wind power projects, Dubai 130 Portland Group na At planning stage
Al Ain Substations and power transmission network expansion 231 Larsen and Tourbo 2009-
Contracts awarded in February 2009
Hassyan IWPP 8,600 DEWA na
Tender deferred to October/November
2009
High-voltage grid power station on Reem island 142 ABB na Contract awarded
Solar power plant in Abu Dhabi 350
Future Energy, Abu Dhabi Water & Electricity
Authority na To be operational in
2009
400kV transformer, Dubai 59 Hyundai Engineering
and Construction 2006-2008 na
Water
Shuweihat 2 IWPP 5,600
GDF Suez- Doosan/Siemens/
Samsung (EPC Contract) 2009-2011
Bridge loan (US$900mn) agreed
in December 2008
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 39
Table: United Arab Emirates – Major Infrastructure Projects - Utilities
Project Project value,
US$ mn Company name(s) Timeframe Status
Wastewater and brackish water treatment plants 18 and 15.6 Veolia Water 2008
Contract awarded February 2008
Desalination plant in Dubai 563 Impregilo na Contract awarded
ADEWA sewage network tunnel system 1,090 na 2008-
Tender to be officialy launched in
November 2008
Ras Al Khaiman desalination plant na FEWA 2009-2011
FEWA unveiled plans in April 2009
Ajman two desalination plants na FEWA
2009/ 2009-2011
First plant due to begin operations by
year-end 2009
Al Khawaneej and Al Barsha sewage and rainwater drainage lines 143.5 na 2008-2010 Contract awarded
Other
Mastar City, Abu Dhabi 22,000 Masdar Initiative 2008-2016
Construction commenced in February 2008
na = not available. Source: BMI
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 40
Construction Overview
Steel prices in the UAE have been declining since August and we anticipate that raw material prices will
remain depressed, heralding an easing of costs for contractors. However, the decline in prices comes as a
result of feared demand destruction,
indicating that the construction sector in
the UAE has – as we have been expecting
– entered uncertain territory.
The booming UAE construction sector has
not been able to avoid the impact of the
financial crisis and global macroeconomic
instability. Appetite to take on costly
projects is decreasing. In addition, the
decline of the oil prices, the government’s
main revenue source, is a sign that the oil
windfalls will quickly wither. Oil
windfalls have been a major source for
infrastructure funding as they have been re-invested in transport, energy and utilities projects that have
fuelled the infrastructure boom in the emirates. Having said that, government spending on infrastructure,
particularly in Abu Dhabi, will be the bright spot in the sector. Dubai’s government has said that it is
willing to go into its first deficit in order to sustain growth through government spending. In addition, we
have revised upwards our forecasts for government capital investments, which are due to increase as the
government attempts to boost demand through injecting money into infrastructure projects.
We have significantly revised our outlook
this quarter, adopting a more optimistic
forecast for industry value growth in 2009
onwards. The investments Abu Dhabi is
making in infrastructure, transport
especially, and also ongoing infrastructure
investments in Dubai, such as the metro,
have not only survived the downturn, but
have attracted the attention of
international majors, which are seeking a
safe haven in the UAE’s (and certainly the
wider Gulf region’s) infrastructure
markets. Such investments we believe will
Slowing Down, But Stability On The Horizon
0
50
100
150
200
250
2008
e
2009
f
2010
f
2011
f
2012
f
2013
f
2014
f
2015
f
2016
f
2017
f
2018
f
02468101214161820
Construction industry value, AEDbn, LHSConstruction industry real grow th (%) RHS
e=estimate, f=forecast. Source: Central Bank of UAE; BMI
Government Intervention
0
2
4
6
8
10
12
14
16
2007
2008
e
2009
f
2010
f
2011
f
2012
f
2013
f
2014
f
2015
f
2016
f
2017
f
2018
f
Gross Fixed Capital Formation Real Grow th (%) LHSGovernment Capital Investment, % of total spending
e=estimate, f=forecast. Source: BMI
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 41
grease the wheels of the industry and propel it towards growth in 2009.
In BMI’s Q309 UAE Infrastructure Report we forecast that the industry value real growth for 2009 will
be 6.8%, compared with our previous forecast of 0.9%. As such, we forecast that industry value will
reach AED86.7bn (US$23.6bn). A similar level of growth is expected for 2010, with value climbing up to
AED95.9bn (US$26.1bn).
In an effort to respond to the plethora of challenges in the construction sector that have compounded
recently in the UAE’s and the wider Gulf’s construction sector, developers and contractors are entering
into long-term partnerships in an effort to share risks and costs. The partnership between Al Habtoor
Leighton Group, Tameer Holdings and Murray, Roberts and Al Rajhi is among the first partnerships of its
kind in the UAE.
New And Ongoing Projects
Residential Construction
Abu Dhabi
In October, Dutch firm Van Oord was awarded a contract for dredging and marine works for the Nurai project
by UAE-based luxury real estate developer Zaya. The Nurai project is an AED3bn (US$820mn) property
development that will include beach-front estates on a natural island off the coast of Abu Dhabi. The project is
expected to be completed in December 2010.
Dubai
In April 2009, South Korean construction firm Samsung C&T stated that Nakheel, has cancelled the
KRW1.38trn (US$1.04bn) construction contract for Palm Jumeirah Village Centre. The project included
construction of apartments, shopping malls and other commercial structures by October 2013. The Palm
Jumeirah Village Centre was to be a mixed-use development project, which included the construction of
120,000m2 of retail space and 150,000m2 of residential space.
Dubai-based property developer Limitless in November dismissed reports that it would delay the sale of its
US$61bn Arabian Canal properties and said instead that it is reviewing the pace of developments.
Also in November, Al Madar Investments launched construction on the Suhail Tower residential property
project in the Madinat Al Arab area in the Dubai waterfront development. The project will be completed in
2011 and the estimated cost is AED1.4bn (US$381mn).
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 42
In October, Consolidated Contractors (CCC) won an AED400mn (US$108.9mn) contract from Dubai-based
property developer Plus Properties for the construction of two major waterfront projects in Dubai. Under the
contract, CCC will build Wave Residence 1 and Pixel Tower in Madinat Al Arab.
Residential Construction Q3 2008
Abu Dhabi
In September, Australia’s Leighton UAE subsidiary, Al Habtoor Leighton Group, finalised an
agreement with Abu Dhabi developer Tameer Holdings for the construction of a US$2bn multiuse
property project. Al Habtoor’s share of the project is worth approximately US$670mn. Al Habtoor has
entered into a joint venture with local contractors Murray, Roberts and Al Rajhi for the development of
the project. The project will comprise of four residential towers, a five-star hotel, an office tower and a
marina. Construction on the residential units was due to begin in September 2008 and will be
completed in June 2011. The hotel and office towers will be completed six months later.
Q2 2008 Abu Dhabi
Two major companies from Abu Dhabi and South Korea announced their strategic partnership in
April 2008. Abu Dhabi’s National Projects and Construction LLC (NPC) and South Korea’s
Ssangyong Engineering and Construction Co said that under the terms of their new alliance they will
share expertise and equipment to jointly develop projects in the UAE, mainly in Abu Dhabi. Both
companies have portfolios of projects in real estate ventures, including projects in Abu Dhabi’s Al
Reem Island for NPC, and Emirates Tower Hotel in Dubai for Ssangyong. Although NPC has focused
on opportunities in the UAE, in Dubai and Abu Dhabi in particular, Ssangyong has established a
strong presence in Asia and the Middle East. Ssangyong is a much more diversified group than NPC
and has been involved in large infrastructure projects alongside its property developments.
It was announced in May 2008 that Aldar Properties is looking to launch a US$1.1bn real estate fund
in 2009 for investments and acquisitions in the United States and Europe.
Dubai
In early April 2008, local property developer Damac announced that it was pulling out of its Palm
Springs beachfront development, part of the larger Palm Jebel Ali manmade island project being led
by Nakheel. The Palm Springs development was already severely behind schedule – construction
had not even begun at the end of March 2008, despite an original completion deadline of December
2007. The decision provoked consternation and anger among investors; a group of almost 60 UK-
based investors reportedly gave Damac until April 11 to change its mind regarding the cancellation or
face legal action. The ultimatum appears to have worked: on April 16, the company announced that it
had reversed its cancellation decision.
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 43
Commercial Construction
Ajman
In November, Imad Dana, chief executive of Al Zorah Development, stated that the construction of the
US$60bn Ajman city project in the UAE will slow down due to the global economic crisis, which is hitting the
Middle East's grand development plans.
Abu Dhabi
The status of the US$1.6bn Tameer Towers project in Abu Dhabi looked uncertain in March 2009, after
Murray & Roberts Holdings, the joint venture partner in the project, declared that the contract had been
terminated. However, Al Habtoor Leighton Group has denied reports of the termination of the joint venture
(JV) construction agreement, stating that the project has been suspended, not terminated.
Australian project development and contracting group Leighton Holdings Ltd (LEI) has stated that its Al
Habtoor-Murray and Roberts joint venture has secured a contract from Abu Dhabi-based Mubadala
Development Company to design and develop the new Zayed University campus. The AED3bn
(US$816.6mn) project will be on a 75 hectare plot in Abu Dhabi, and the construction area itself is 200,000m².
Work will begin now, and the campus is set to be completed in July 2011.
Dubai
In January 2009, Dubai-based real estate major Nakheel PJSC delayed the project for the construction of the
world's tallest tower, planned to reach a height of 1km, following the impact of the global downturn on the
property market in the emirate. Construction will be delayed for 12 months.
In the end of December, South Korea’s Samsung C&T Corporation announced that it has received a
US$1.04bn order from Nakheel for the construction of apartments, shopping malls and other commercial
structures by 2013.
Pearl Dubai, a leading real estate developer in the UAE, has offered an AED8.9bn (US$2.4bn) contract for the
construction of its Dubai Pearl project to the Al Habtoor-Leighton Group. The construction is expected to start
in January 2009. The deal is one of the leading single contracts of its type in the region and possibly one of the
largest real estate projects worldwide.
United Arab Emirates Infrastructure Report Q3 2009
© Business Monitor International Ltd Page 44
Commercial Construction Q4 2008
Dubai
Work is set to start on the Arabian Canal, after it was announced in early October that Abu Dhabi-
based Tristar Transport and Contracting had been given the first of 10 contracts to be awarded for
the US$11bn first phase of the canal’s development. The construction has been split into two phases.
The entire project will cost a massive US$61bn. The first phase is for the construction of a 75km
waterway, 150m-wide and six metres deep. The canal will flow inland from near Palm Jumeirah in the
north to the Dubai Waterfront near Palm Jebel Ali. Tristar’s contract involves excavation and land
reforming, which will include moving more than 200mn m3 of earth, which will be used to create the
banks of the canal, including hills up to 200m high. This part of the project is expected to be
completed in three years. The second part of the massive project is for a US$50bn waterfront city,
which will be built along a 33km inland stretch of the canal. The development, located near the new
Al Maktoum International Airport, will cover 20,000 hectares and will include marinas, residential
communities, hotels and office space.
Q2 2008 Dubai
In May 2008 it was announced that Al Jaber Engineering and Contracting (ALEC) won the
development contract for the first phase of the Dubai Trade Centre District. The contract is worth
AED3.35bn (US$912.1mn) and was awarded by the Dubai World Trade Centre. The Dubai Trade
Centre District will become an integrated commercial/business destination in the area of the Dubai
International Convention and Exhibition Centre.
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Table: United Arab Emirates – Major Infrastructure Projects – Construction
Project Project value,
US$ mn Company name(s) Timeframe Status
Residential
Abu Dhabi residential housing fund 5,500
Abu Dhabi Commercial Properties 2008-2012 At planning stage
Bristol Towers 408 Deyaar 2008- At planning stage
La Vista Residence, Dubai 68
Zahrat Al Safa Construction and Al
Qandell Contracting Co. 2008-2009 Construction to begin
in 2009
Abu Dhabi central business district towers 735 Arabian Construction 2007 Currently under way
Al-Salam City project 8,300 Tameer Holdings 2007-2009 (for the first phase)
Emirates Roads Contracting awarded
first phase of construction package
Final phase of Palm Jebel Ali 350 Samsung 2007-2010
Construction under way to build bridges to connect with the shore
Residential development, Dubai Silicon Oasis 422
Dubai Silicon Oasis Authority -2010 na
Emirates Gardens-1 48 Al Awatan Contracting 2007-2009 Planned to be
complete early 2009
Dana Gardens in Dubai 554 Dana Property Development 2007 At planning stage
Noor al-Ain 544.52 Aldar Property 2007-2009 Construction is under
way
Shuaib Residential development 435.65 Nakheel 2006-
Construction is under way
Zone B, Marina Square Plot 1, Al Reem Island 1,360
Tamouh Investments and China National Overseas
Enginnering 2006-2009 Construction is under
way
Al Reef Villas, Abu Dhabi 816.7 Manazel 2006-2009 Construction is under
way
Commercial
Dubai Industrial City Infrastructure 15,000 Tatweer 2008
Construction is underway
Ajman Al Helio City 4,000
Real Estate Investment Est. and DSEC
International 2008-2012 Construction to
commence in 2008
G-Tower, City of Arabia 269.6 Belhasa Engineering 2008-2010 Construction is under
way
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Table: United Arab Emirates – Major Infrastructure Projects – Construction
Project Project value,
US$ mn Company name(s) Timeframe Status
The Universe 3,000 Nakheel 15-20 for
completion At planning stage
Arab Canal Project 11,000 Limitless 2008-2011
Construction under way since January
2008
Sharjah Maritime City Infrastructure 140 na 2008
Projects to take place in 2008
Fashion Island na Infinity Holdings 2008 Construction to begin
at the end of 2008
Formula 1 circuit, Abu Dhabi 371 Cebarco-WCT -2008 Contract awarded
Dubai Trade Centre District 912
Al Jaber Engineering and Contracting 2008-
First contract awarded in May 2008
Onyx 490 Ishraqaf and Zaharan
Group 2007-2010 Currently under way
Fifty One @ Business Bay 81.6 Deyaar 2007-2009
Construction due to be completed in Q309
Shaikh Hamdan Awards Complex 77 Dutco Balfour Beatty 2007-
Construction is under way
Emirates Flag development in Ras Al Khaimah 1,900
High Rise Real Estate, Dream Industrial Park,
A&A investment and Ras Al Khaimah Free Zone
Authority 2015
Construction of first phase to be complete
in 2009
Construction of an Exhibition City, Dubai 2,170 na 2006-2009
Bids for phase one evaluated
Gemini 136.1 Omniyat Properties 2006-2009 To be completed in
Q209
Industrial
Belgium Aluminium and Glass Industries Plant 21.7
Belgium Aluminium and Glass Industries 2008
To be completed in May 2008
Fluorides complex, Abu Dhabi 544 Gulf Fluor -2009 At planning stage
Steel-making complex, Fujairah 95.3 Star Steel International na At planning stage
Single-site aluminium smelter, Abu Dhabi 6,000
Mubalada Development and Dubai Aluminium 2006-2010 Phase one planned
Construction of a steel complex in the capital’s Mussafah 300
Al-Nasser Industrial Enterprises 2005-2007 At planning stage
Hotels
Capital Centre five star hotel 272.00 NCT&H 2008-2010
Construction under way
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Table: United Arab Emirates – Major Infrastructure Projects – Construction
Project Project value,
US$ mn Company name(s) Timeframe Status
Carlton Hotel Group three new hotels, Dubai 54.00 Carlton Hotel Group 2008-2009
Hotels to be complete in 2009
Gulf Hotel, Abu Dhabi 272.00 na na At bidding stage
Hotel for Emirates Airline 715.00 Multiplex na At planning stage
Burj Dubai hotel, Dubai 500.00 Emaar Hotels and Resorts 2007-2009 Construction under
way
Danat area hotel 163.40 Planet Goup 2007-2009 Construction under
way
Ritz Carlton, Dubai International Financial Centre na Union Properties 2007-2008 Due to open in 2008
50 Isthmar hotels 400.00 Isthmar Hotels 2007-2013 Construction to take
place until 2013
Four-star hotel at Expo Centre, Sharjah 40.83 na 2007-2009 At planning stage
Abu Dhabi five-star hotel 217.80
Al Fahim Group and the Tourist Development and
Investment Company 2007-2008 Construction under
way
Dubai Park Square Tower 1,200.00
Bonyan International Investment Group 2007-2010
scheduled to be completed in 2010
Lake view hotel 200.00 Emaar Properties 2007- At planning stage
Resorts
Oqyana development, Dubai World 3,500.00 Investment Dar 2008-2012
Construction to begin in 2008
Festival City Dubai 4,770.00 Al Futtaim-Carillion 2007-2013 scheduled to be
completed in 2013
Falcon City of Wonders, Dubai 1,500.00
Pauling Middle East /Salem al-Moosa Group 2005-
Construction under way
five star hotel, Mina Al Fajer Real Estate 163.40 Mina Al Fajer Real Estate 2007-2009
Construction under way
Rezidor Hotel Group resort 175.00
Atlas Group and Tourism Development and
Investment Company 2007-2010 Construction under
way
Palm Jumeirah Village na Nakheel 2008-2012 Cancelled
na = not available. Source: BMI
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Tourist Construction
Abu Dhabi
In November, the Ritz-Carlton Hotels and Aldar properties singed an agreement to develop hotels in Abu
Dhabi, to be managed by the hotel group.
Tourist Construction Q2 2008
Abu Dhabi
Australia’s Leighton Holdings announced in late April 2008 that its joint venture (JV) with the UAE’s
Tourism Development and Investment Corp. had won contracts to develop tourism assets in Abu
Dhabi. The contracts are worth US$435mn and include projects like a tourist village, hotels, resorts,
golf courses and office space redevelopment.
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Industry Forecast
Table: Economic And Construction Data
2008e 2009f 2010f 2011f 2012f 2013f 2014f 2015f 2016f 2017f 2018f
Construction industry value, AEDbn 75.6 86.7 95.9 108.7 123.1 134.5 146.1 158.7 172.3 187.0 202.9
Construction industry value, US$bn 20.58 23.60 26.11 29.60 33.52 36.62 39.79 43.21 46.91 50.92 55.25
Construction industry, real growth, % y-o-y 18.61 6.82 6.14 9.37 9.25 5.75 5.64 5.61 5.57 5.54 5.51
Construction industry, % of GDP 7.68 10.40 10.20 10.02 9.94 9.95 10.46 10.94 11.29 11.75 11.92
Total capital investment, AEDbn 189.6 214.7 235.6 264.6 297.2 323.0 349.3 377.8 408.5 441.8 477.9
Total capital investment, US$bn 51.6 58.5 64.2 72.1 80.9 87.9 95.1 102.9 111.2 120.3 130.1
Total capital investment, % of GDP 19.26 25.75 25.07 24.38 24.00 23.89 25.00 26.03 26.78 27.76 28.08
Capital investment per capita, US$ 40,224 46,008 49,487 53,446 57,722 60,310 62,120 63,983 65,903 67,880 69,916
Real capital investment growth, % y-o-y 15.00 5.00 5.00 8.00 8.00 5.00 5.00 5.00 5.00 5.00 5.00
Government capital investment, AEDbn 20.51 21.39 22.07 22.77 23.52 24.30 25.12 25.98 0.00 0.00 0.00
Government capital investment, US$bn 4.90 5.15 5.36 5.58 5.82 6.01 6.20 6.40 6.62 6.84 7.07
Government capital investment, % of total spending 10.44 10.06 9.78 9.53 9.29 9.12 8.97 8.82 8.68 8.54 8.41
Electricity, Gas and Water, AEDmn 14.22 12.08 13.39 15.19 17.07 18.48 19.04 19.70 20.62 21.43 22.80
Electricity, Gas and Water, US$mn 3.87 3.29 3.65 4.14 4.65 5.03 5.18 5.36 5.61 5.84 6.21
Electricity, gas and water, real growth, % y-o-y 2.37 -1.51 2.04 2.75 2.22 4.30 4.47 4.44 5.00 4.20 4.55
Electricity, gas and water, % of GDP 1.44 1.45 1.42 1.40 1.38 1.37 1.36 1.36 1.35 1.35 1.34
e=estimate, f=forecast. Sources: ILO, UNCTAD, Central Bank of UAE.
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Business Environment
Middle East Infrastructure Business Environment Ratings
The Middle East region is fairly homogenous in terms of business environment with the one exception
being Yemen. Indeed, apart from that country, the ratings have a relatively limited spread of fewer than
20 points between the highest and the lowest scoring countries in the group.
The Middle East is defined for the most part by its oil and gas industry, with the majority of the
economies in the region dependent upon revenues from the sector. With the price of oil in decline
following global demand destruction for the commodity, oil revenues have declined significantly, thus
limiting the ability of the governments in the region to re-invest excess surplus in major infrastructure
works. Though most governments have pledged to continue with their planned investments in
infrastructure and indeed increase the budget allocations for such investment, they will be doing so from a
less comfortable position as far as availability of funds is concerned. As a result we have revised down
our industry value real growth forecasts for most states, as there will be less capital expenditure, and
therefore less infrastructure spending. This has had a knock-on effect on the business environment
ranking for those countries most dependent on oil windfalls for infrastructure expenditure.
Regional integration in the Middle East is quite strong, with the Gulf Corporation Council (GCC) linking
the UAE, Qatar, Oman, Saudi Arabia, Kuwait and Bahrain. The GCC is initially a trade bloc, with a
unified economic agreement between the countries, and plans for a joint currency. Their other common
characteristic (though certainly not restricted to the GCC states), is the regime structure, all based around
the royal families of the countries, which bodes well in terms of policy continuity, so long as their rule
remains unchallenged. As a result, all the six GCC states achieve a score in the 70s and 80s.
Transport
Transport infrastructure in the region is heavily reliant on roads. Rail is a fairly new addition to the modal
mixture and many countries still do not have any rail network to speak of. As a result, investment has
traditionally been in the road sector. However, rail is now receiving attention with plans under way to
develop the rail sector regionally and opportunities for international players to get involved. This is
predominantly through the proposed GCC pan-Gulf rail network. The 1,940km rail link will connect the
six GCC states, and possibly in the future Yemen. The project is estimated to cost in the region of
US$14.3bn and will be operational in 2016.
Turkey is also adding to its railway infrastructure. One example is the Marmaray project, now under
construction, which will run under the Bosporus, connecting via rail Asia and Europe. The second major
project also under construction is the high-speed railway between Ankara and Istanbul.
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Energy And Utilities
With vast reserves of oil and gas, the region's power sector is well established. During 2007 a total of
692TWh of electricity was generated in the Middle East, according to the BP Statistical Review. The
largest power producers in the region are Saudi Arabia (27% of the total) and Iran (28%). Unsurprisingly,
the main source for electricity generation is gas, with oil also featuring prominently. The renewables
sector is in its infancy in the region, although there is vast potential for solar power, and BMI expects to
see the industry grow.
As in the distribution and transmission sector, the GCC countries are working to establish regional links
in the power sector. This involves the GCC electricity grid, estimated to cost US$1.2bn, which will allow
the transfer of electricity across the GCC states in order to divert excess supply and maximise efficiency.
The GCC South Grid, connecting the UAE and Oman, has already been completed as a side project, and
the first phase of the project, GCC North Grid, is due to be completed in May 2009 and involves
connecting Kuwait, Saudi Arabia and Qatar via subsea cables. The final phase will connect both the north
and south grids and is due to be completed in 2010.
Oil and gas pipelines also feature heavily on the region's infrastructure plans, with large-scale investments
in the pipeline. One of the largest projects currently at the planning stage is the construction of the
MedStream pipeline between Turkey and Israel, which will not only carry oil and gas, but also water and
optical fibres. Turkey itself is seeking to extend its role as a transit corridor in the Eurasian region. Major
energy pipelines such as the Baku-Tbilisi-Ceyhan and Blue Stream are currently in operation and the
government is considering various new projects including the Nabucco natural gas pipeline and an
expansion to the Blue Stream.
The supply of water is a growing issue, with reports that the Middle East and North Africa region will
likely face severe water shortages in the coming years. The region has only 1% of the world's ground
water resources but contains 5% of the world's population. As a result, the development of desalination
plants in the region has been championed of late. The majority of these are combined with power plants
and are tendered out to private companies as Independent Power and Water Projects (IWPPs). The
growing number of IWPPs in the region is presenting numerous opportunities for international majors to
get involved.
Business Environment Ratings
Following the update of the ratings table, based on the revised Business Environment indicators from
BMI's Country Risk team, as well as revised forecasts for the infrastructure sector, there have been some
changes in the table.
Qatar remains at the top of the table, achieving the highest score in the infrastructure sub-rating. Not only
will the country have the highest industry value growth in 2009 according to our forecasts, but natural gas
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revenues will provide the government with the necessary funds to spend for new major projects.
However, this is where Qatar's only advantage lies. Oman, second in the table, scores better than Qatar in
terms of the County Structure (financial infrastructure and labour market), Market Risks (number of
players in the market and the transparency of the tendering process) and Country Risk (corruption, policy
continuity and structure of the economy).
Israel breaks the GCC continuity in the table, coming in at third place. The country's sophisticated
financial infrastructure, highly skilled work force and institutional infrastructure bolster the country's
business environment credentials. These offset the low score it receives for industry value real growth.
Yemen remains at the bottom of the table because of very poor scores in areas that result in limits to
potential returns for investors. The country structure is inferior, having a very poor financial infrastructure
and a contracting construction industry. Risks are also high, the legal framework and economic structure
are deficient and corruption is rife, cementing Yemen's position at the bottom of the table.
The other non-GCC countries, Turkey, Iran and Egypt, all fall in the latter half of the table, scoring in the
50s in part due to relatively high levels of country risk.
Table: Regional Infrastructure Business Environment Ratings
Limits of potential returns Risks to realisation of returns
Infrastructure
Market Country
Structure Limits Market
Risks Country
Risk Risks Infrastructure
BE Rating Regional Ranking
Qatar 67.5 54.8 63.0 75.0 75.0 75.0 66.6 1.0
Oman 55.0 68.5 59.7 82.5 78.3 80.0 65.8 2.0
Israel 55.0 73.1 61.3 75.0 71.0 72.6 64.7 3.0
Bahrain 47.5 70.6 55.6 77.5 73.5 75.1 61.4 4.0
Saudi Arabia 45.0 67.2 52.8 80.0 62.9 69.7 57.9 5.0
UAE 45.0 59.7 50.2 80.0 71.9 75.1 57.7 6.0
Kuwait 40.0 78.6 53.5 55.0 75.3 67.2 57.6 7.0
Egypt 50.0 57.8 52.7 75.0 59.8 65.9 56.7 8.0
Turkey 40.0 50.7 43.8 70.0 56.4 61.8 56.0 9.0
Iran 45.0 56.5 49.0 55.0 59.5 57.7 51.6 10.0
Yemen 25.0 27.0 25.7 55.0 42.4 47.5 32.2 11.0
Source: BMI. Scores out of 100, with 100 best. The Infrastructure BE Rating is the principal rating. It comprises two sub-ratings 'Limits of Potential Returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting respectively. In turn, the 'Limits' Rating comprises Infrastructure Market and Country Structure, which have a 65% and 35% weighting respectively and are based upon growth/size of the Infrastructure industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating comprises Market Risks and Country Risk,
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which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industry regulatory and competitive issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report.
Limits Of Potential Returns
Infrastructure Market
The medium term outlook for both capital investments/gross fixed capital formation is relatively strong,
which bolsters the UAE’s infrastructure market score. Expectations that the industry value will register
stronger growth than initially anticipated, represent a risk to the upside for the UAE’s infrastructure
market score.
Country Structure
UAE’s performance is rather average in terms of its labour market and financial system. The construction
industry is currently facing a shortage of labourers due to the outbound movement of its illegal workers
under a government policy of amnesty. On the financial front, UAE provides good opportunities. There
are a large number of free zones, primarily located in Dubai, which offer tax holidays and relaxed
conditions on foreign ownership. However, the nation needs to strengthen its financial system to fully
leverage the opportunities presented by new projects and companies.
Risks To Realisation Of Returns
Market Risks
The UAE has one of the most open business environments in the region. It has actively supported foreign
investment in both the hydrocarbon and non-hydrocarbon sectors. The market is friendly to foreign
contractors and has no significant barriers to entry. However, foreign firms need to be represented by a
local partner.
Country Risk
The UAE has some of the best physical infrastructure in the Gulf region and combined with its relatively
open economy and low tariff regime, it has established itself as a major trade hub. The low levels of
corruption are highly conducive to a sound business environment.
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Project Finance Ratings: Outlook For Middle East
BMI's Project Finance Rating (PFR) provides a globally comparative, numerically based assessment of
the risks facing the projected cash flows of major infrastructure projects in the energy and utilities,
transport, and commercial construction sectors. Specifically, it evaluates the degree of uncertainty facing
projects that are generally characterised by the following: long construction period, high construction
costs, difficulty in redeploying project assets (e.g. power station) to other uses, earnings generated only
after construction completed over a long period of time.
BMI's PFR is best used for evaluating the breadth and depth of risks a major infrastructure project may
face during its lifecycle, which will in turn affect the source, availability and cost of finance. Thus, in the
current environment, characterised by a limited pool of financial resources and growing demand from
competing projects coming to market, the PFR provides a leading indicator for the cost of financing major
projects and the pace at which infrastructure development will occur in each state.
We have created two different tables aiming to better identify, analyse and assess broad categories of
risks that sponsors and/or companies may encounter during the project's lifecycle. The two tables are
composed – very broadly – first of the design, engineering and construction phase, and second of the
commissioning and operation phase. The two final scores for each country are then combined to yield the
overall project finance rating.
We have revised the PFR methodology this quarter in an effort to provide a more comprehensive overall
score from the interplay of the different indicators used to yield the final results.
First, we have adjusted the weightings of each indicator and each group of indicators (inputs, regulatory,
market risks, etc.) to reflect their relative importance, and thus the relative risk level, they pose for
sponsors and equity holders. Whereas previously all indicators assumed the same relative importance for
the overall score, through the revised methodology, certain factors (or indicators) are given higher
importance, thus providing a more realistic final rating.
Second, we have added a new indicator on the level of security threats/risks facing a country. This
indicator has been imported to the PFR from BMI's Country Risk ratings and it will play a central role
henceforth in the PFR. Infrastructure assets (such as energy pipelines, bridges and transmission networks)
are highly vulnerable to security threats, as they are primary targets of non-state actions during an
insurgency campaign or terrorist hit, and militaries during wartime. Iraq and the Niger Delta are examples
of the former, while one need look no further than the Russo-Georgian war of August 2008 and the
devastation of Georgia's infrastructure to gauge the effects of military campaigns on infrastructure.
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Design And Construction Phase
The design and construction table encompasses indicators such as inflation and long-term currency
volatility (henceforth referred to as inputs), which at this stage primarily affect the cost of raw materials.
Additionally, it includes legal and regulatory risks that the company or sponsors may encounter and that
can delay commencement of construction and pose regulatory (red tape) obstacles. Closely related to the
legal and regulatory risks are the risk factors within the wider political framework, encompassing political
risk indicators such as the level to which the rule of law is enforced and respected, internal and external
security threats, and the long-term policy continuity and consistency of government policies over the
years. Last but not least is the financial risk component, composed of domestic economic stability and the
international availability of finance.
The new PFR methodology, in addition to updates in BMI's County Risk Business Environment Ratings,
has affected the rankings of this table, compared with our last Middle East PFR analysis. While
previously all the dollar-pegged GCC states were at the top of the table, Kuwait has gained ground, while
Saudi Arabia and Qatar have fallen from fourth to fifth place and from fifth to sixth place respectively.
Kuwait's score has been bolstered by low levels of external or internal security risk and a perfect score in
terms of policy continuity, given the secure rule of the government.
For the sake of our analysis we can distinguish three broad groups of countries, or bands, in the design
and construction table. At the top of the table, achieving the highest score of 69.1, is Bahrain, whose
overall score in boosted by a perfect score in the inputs sub-rating. However, it has lost its top score in
Economic and Financial Risks. Instead, the UAE achieves the highest score in this section, which
encompasses the level of domestic economic stability and availability of finance, two pivotal factors that
determine the initial stages of project financing operations. We said previously that risks in this category
are to the downside as, due to declining oil prices – and consequently oil revenues – and illiquid global
capital markets, even the cash-rich GCC countries are tightening their purse strings. It should be noted
that the scores of all the Middle Eastern states have fallen from the previous mid-70s in this category to
the mid-50s, validating our expectations that the risks to the region's economic stability were to the
downside.
Although it achieves high scores for its legal, political and economic environment, Israel's score continues
to be weighed down by the inputs sub-ratings, especially in terms of the shekel's volatility ratings, which
are among the lowest in the region. An additional factor subtracting from Israel's score is the high security
risk facing the country. However, Israel certainly holds an advantage, as the country has a highly
sophisticated banking and financial sector, which facilitates project financing operations, which ease the
risks of the currency volatility.
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At the bottom of the regional table we find Turkey. The country achieves above-average scores for its
regulatory sub-ratings, but the lira's volatility is strong, dragging its overall score down, thus giving
Turkey the riskiest profile for the initial stages of a project's lifecycle.
Table: Design And Construction Rating
Inputs Legal/regulatory
risks Political environment
and security risk Economic/
financial risks Total
Bahrain 100.0 62.7 67.7 56.0 69.1
Oman 83.2 61.1 72.3 56.5 66.7
UAE 64.0 61.9 71.3 57.8 63.2
Kuwait 62.4 61.3 71.3 56.8 62.5
Saudi Arabia 83.2 49.4 61.1 57.0 61.7
Qatar 52.0 63.7 70.5 57.3 60.8
Israel 56.0 60.8 69.0 55.8 60.2
Yemen 46.0 45.8 49.2 47.9 47.4
Egypt 40.0 37.9 54.2 51.8 47.3
Iran 32.0 50.5 43.6 50.2 45.0
Turkey 6.0 58.0 54.4 50.1 43.9
Scores out of 100, where 100 is best. Source: BMI Research
Commissioning And Operating Phase
The table that identifies potential factors that influence the levels of risk during the commissioning and
operation of a project has been broken down into three categories: transport, energy and utilities, and
commercial construction. The aim is to reflect the different levels of risk a power plant has from a toll
road or a stadium for instance during the operational phase of the project's lifecycle. The aim was to add a
degree of separation between sub-sectors in infrastructure, and although the sub-categories in the table are
similar for all three sectors, the scores are different for each country in each sector, which allows us to
gauge the different levels of potential risk and the potential breadth of the financial impact they may have.
The picture here is not much different from above, with Bahrain achieving the overall highest score,
though our fears of a downside risk to the score have been verified, with Bahrain's score slipping from the
previous 78.5 to 70.7. Egypt, Iran and Turkey are in the bottom half of the table, for different reasons
though. While Turkey's inflation potential and currency volatility present the biggest risks for the long-
term viability of the revenue stream of a project, Iran's opaque institutional infrastructure and potentially
arbitrary or politically driven intervention in operations of an infrastructure project present the highest
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risks for the operating and decommissioning stage of a project's lifecycle. Egypt slipped to penultimate
position, with its score falling from 50.8 to 45.7.
Table: Commissioning And Operating Rating
Commercial/business
construction Energy and utilities Transport
Inputs Outputs Total Inputs Outputs Total Inputs Outputs Total
Saudi Arabia 86.6 59.1 67.3 89.1 59.1 68.1 88.8 59.1 68.0
Oman 71.6 64.3 66.5 89.1 64.8 72.1 88.8 64.8 72.0
Bahrain 80.0 60.5 66.4 97.5 62.3 72.8 100.0 61.1 72.8
Qatar 61.0 61.8 61.5 73.5 60.6 64.5 68.0 59.5 62.0
UAE 62.0 61.2 61.5 79.5 61.2 66.7 76.0 61.2 65.7
Kuwait 48.7 60.6 57.0 68.7 60.6 63.0 61.6 60.6 60.9
Iran 61.0 50.4 53.6 58.5 50.4 52.8 48.0 50.4 49.7
Yemen 53.0 51.8 52.2 70.5 53.5 58.6 64.0 52.9 56.3
Egypt 60.0 41.3 46.9 60.0 41.3 46.9 50.0 40.2 43.1
Israel 40.5 46.6 44.8 55.5 47.8 50.1 44.0 47.8 46.6
Turkey 28.0 37.0 34.3 25.5 37.0 33.5 4.0 37.5 27.5
Scores out of 100, where 100 is best. Source: BMI Research
Overall Project Finance Rating
Combining the scores of the two tables we have distilled the overall project finance rating, which thus
takes into account all of the above sectors and sub-categories.
For the six GCC states, safety lies in numbers, and we once again find them occupying the top six
positions at the table validating our previous expectations that even after future revisions to our ratings
the GCC states would continue to top be on top of the table. The counties of the Gulf Cooperation
Council mitigate risks to investors in infrastructure throughout a project's lifecycle through their peg to
the US dollar and a politically stable environment that promises policy continuity for the foreseeable
future, as the grip of the ruling families on power does not seem likely to abate.
What is more, the GCC common market, inaugurated in January 2008, is a strong foundation and safety
net for all six states, facilitating flows of capital and people throughout the region and creating a relatively
level playing field for investors. We believe that by belonging to this wider framework of the GCC
common market, and eventually adopting a common currency (without Oman, which decided to opt out
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from the scheme), the states will have an advantage in terms of reduced risks to project financing
operations in the future.
Israel follows the six GCC states. Israel's infrastructure investments have heavily relied on the private
sector participation as a source of funding. Israel certainly holds an advantage, as the country has a highly
sophisticated banking and financial sector, which facilitates project financing operations. For this reason,
the design, finance, build and operate model has been gaining ground as a means to implement large-scale
infrastructure projects, which sets a strong precedent for the country and for the project finance of the
infrastructure industry, thus lowering potential risks.
However, although the ranking of the states in the overall project finance rating table did not change
dramatically, nor do we expect it to do so unless there are major structural adjustments in one or more
countries in the region, the effects of the financial crisis in the region is evident by the significantly lower
score all countries now achieve. This means that risks did in fact increase as the crisis deteriorated, and
there is scope for further drops in scores if the crisis deepens and spreads.
Turkey As Low As It Seems?
Notwithstanding significant challenges that remain in Turkey's business environment and potent risks
facing developers, sponsors and investors in infrastructure, we feel that the ratings table does not do
justice to Turkey's infrastructure sector potential, by placing emphasis on the long-term currency
volatility that is the main drag on the country's score, followed by high inflation expectations. Though
these are important considerations, with potentially devastating effects on the net operating revenues of
investors, BMI maintains its core view that Turkey's infrastructure sector remains one of the most
attractive in the region for investors, buoyed by a growing population that will sustain demand and a
government that is actively seeking private sector participation in infrastructure. The relative success of
the privatisations of the electricity distribution networks and the gas distribution network to consortiums
including foreign energy majors indicates that appetite to get involved in Turkey's infrastructure remains
high.
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Table: Overall Project Finance Rating
Design and construction Commissioning and operating Overall
Bahrain 69.1 70.7 69.9
Oman 66.7 70.2 68.5
Saudi Arabia 61.7 67.8 64.8
UAE 63.2 64.6 63.9
Qatar 60.8 62.7 61.8
Kuwait 62.5 60.3 61.4
Israel 60.2 47.2 53.7
Yemen 47.4 55.7 51.6
Iran 45.0 52.0 48.5
Egypt 47.3 45.7 46.5
Turkey 43.9 31.7 37.8
Scores out of 100, where 100 is best. Source: BMI Research
Risks And Limitations To BMI's Project Finance Ratings
It should be noted that although we believe that the resultant scores are a reliable guide to project finance
risks, the PFR assesses broad industry risks through macro and micro proxies, rather than individual
projects. This has several implications. First, there will be instances where the risk profile – for example,
the supply of inputs – of particular projects is markedly different from the general risks prevailing in the
industry. Second, the PFR will not take into account measures by private sector project participants to
mitigate risk when structuring finance – for example, by securing a substantial equity involvement from
the sponsoring agency or government.
Foreign Direct Investment
The UAE's investment climate is becoming more clement for foreign direct investors: the federal
government, led by Abu Dhabi, has made significant headway in the past five years in increasing the role
of the private sector. Yet the overall legal framework continues to favour local over foreign investors – a
fact that partly reflects the benign macro environment in light of the country's substantial oil revenue
windfall. This has endowed local and regional Gulf investors with substantial liquidity, disincentivising
the search for new FDI sources from outside the region.
Change may be on the way. In June 2007, the government said a new companies' law would open some
areas within the services sector to full foreign ownership while also allowing greater foreign participation
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in other areas – up to 100% – such as financial services. This is likely to be enacted in 2008.At present,
foreign shareholders may only hold up to a 49% equity interest in limited liability companies; indeed, all
companies established in the UAE are required to have a minimum of 51% national ownership, although
profits may be divided differently. In the insurance sector, companies must be 75% owned by a UAE
national or 100% by a UAE corporation.
Full foreign ownership is generally only allowed within economic free zones. In order to do business in
the UAE outside the free zones, a foreign business must usually have a UAE national sponsor, agent or
distributor, which once chosen, has exclusive rights. In order to bid for federal projects, a contractor must
be at least 51% owned by UAE nationals, and tenders must be accompanied by a bid bond – an
unconditional bank guarantee for 5% of the value of the bid. However, government tendering practices do
not live up to international standards and re-tendering is common.
On the positive side, the absence of income tax compensates for the restrictive investment environment.
FDI figures remain difficult to verify, though data from UNCTAD claims that FDI inflows totalled
US$8.4bn in 2006, with much of it attracted to the booming real estate and construction sectors. The UAE
is now the Gulf's second biggest FDI destination after Saudi Arabia. Perhaps even more impressive, given
the massive investments made by UAE firms and individuals outside the emirates, the country has more
inward FDI stock by foreigners than nationals' outward FDI stock in foreign countries. According to a
Dubai Chamber of Commerce & Industry report in 2007, during 1997-2006 the average net inward FDI
flows as percentage of gross fixed capital formation was 17% per cent for UAE.
Abu Dhabi is preparing to offer international oil companies access to its gas deposits for the first time. In
2007, Abu Dhabi National Oil Corporation announced plans to set up a new operating company in
partnership with IOCs to extract, process and supply some 3bn cubic feet a day (cf/d) of onshore sour gas.
Until now, the main destinations for FDI have been ICT and software, tourism and textiles. The main
sources of FDI are the UK, the US and India.
Labour Force
The total population exceeded 5mn in 2007. A census has been carried out which will determine the
actual size of the labour force, but estimates put it at about 60% of the total population.
Exact data on the number of foreign workers in the UAE is not available from the Federal government,
but it is estimated that more than 80% of the UAE workforce is expatriate, with as much as 98% of
private sector workers thought to be non-UAE nationals. Most UAE nationals seek employment
opportunities in the public sector, due to the higher salaries, greater benefits, shorter working hours and
job security on offer. The construction sector is a major employer of foreign labour, mainly from the
Indian sub-continent.
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In recent years, the federal and emirate governments have implemented a number of measures to increase
the cost of hiring expatriate workers, as part of an effort to bring more UAE nationals into the private
sector. 'Emiratisation' of the UAE workforce is a government objective, though less rigorously enforced
than in other Gulf States. Compulsory hiring of nationals has been limited to sectors such as banking
(which has a 4% quota), insurance (5%) trade (2% for companies employing 50 workers or more). In
2006, the government added Emiratisation requirements that all secretaries and PR officers must also be
UAE nationals.
The government continues to try and regulate the labour market, granting in mid-2007 a three-month
amnesty to illegal expatriate workers and their employers to either adjust their status or leave the country
without incurring penalties. By mid-July, 74,800 people had applied for the amnesty. Calls for reform of
labour laws, including the right to create trade unions, are growing louder. The US insisted on this during
negotiations over its free trade agreement with the UAE. The current law does not specifically give
workers the right to engage in collective bargaining. Neither do labour laws cover government
employees, domestic servants, and agricultural workers.
Industrial unrest grew during 2007, particularly amongst construction workers, the vast majority of whom
come from the Indian subcontinent. In November 2007, nearly 40,000 labourers working for the country's
largest construction firm Arabtec went on strike, in a high-profile protest. However, protests have eased
since, and with unemployment likely to rise in 2009, we expect a net loss of foreign workers, particularly
those on short-term contracts, who will be unable to renew their residency permits without a firm offer of
employment from a UAE-based firm.
In the wake of those protests, the Labour Ministry drew up new laws, which came into force in early
2008. These include the mandatory use of electronic payment systems for unskilled workers, increased
fines for companies found to be employing illegal workers, and compulsory health cover, which is
already in place in Abu Dhabi but will be extended to the other emirates. The Ministry has also drawn up
a series of standards for worker accommodation to cover all industry sectors. It is unclear whether the
new rules will extend to domestic servants and agricultural workers. The former currently face
considerable difficulty in negotiating employment contracts because mandatory requirements in the
labour law do not apply to them.
Nevertheless, the Minister of Labour, Dr Ali bin Abdullah al-Ka'abi, has ruled out any possibility of
expatriates being awarded citizenship, no matter how long they have worked in the emirates or their level
of expertise in their field. Furthermore, the UAE is one of the main supporters of the 3+3 labour law that
will be discussed by the Gulf Cooperation Council (GCC) in 2008. The law proposes that expatriates'
term of residency within any GCC country be limited to three years, with a possible three-year extension.
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Legal Framework
The UAE legal system is based on civil law concepts and common law principles – such as adopting
previous court judgments as legal precedent – are usually not recognised.
The legal system follows the federal structure of the UAE, but the constitution acknowledges the right of
individual emirates to opt out of the federal court system, which Dubai and Ras al-Khaimah have done.
These two emirates have their own court systems, which are not subject to the federal Supreme Court.
There are three main branches within the court structure: civil, criminal and Shari'a law. The court
structure comprises the following:
The Court of First Instance – which includes the Civil Court, the Criminal Court and the Shari'a Court.
This hears all claims, including commercial matters. Commercial disputes involving foreign parties tend
to come before the civil courts, although Shari'a law is applicable in all kinds of cases, involving both
Muslims and non-Muslims.
The Court of Appeal.
The Court of Cassation – whose judgement is final. Dubai has its own Court of Cassation.
The 1971 constitution established the independence of judiciary. However, in practice, independence is
minimal as all judges are appointed by the government. The five judges of the Federal Supreme Court, for
example, are appointed by the Supreme Council of Rulers, while other judges are appointed by the
Ministry of Justice. Furthermore, judges' decisions are subject to review by the executive, meaning that
any politically unpopular rulings can be overturned.
Commercial disputes involving foreign companies are usually heard before the federal civil courts, with a
panel of three judges presiding. All cases involving banks and financial institutions must be heard by civil
courts. In Abu Dhabi, all non-arbitration commercial disputes are first taken to the Abu Dhabi
Conciliation Department and if the parties cannot settle, they start legal proceedings in the court of first
instance.
With the UAE now firmly established as a regional business hub, arbitration is the preferred mode of
dispute resolution involving foreign companies. Yet dispute resolution can be an arduous and uncertain
process and enforcing arbitration judgments can be difficult since court certification is also required. The
judicial process can sometimes take years to conclude. Some companies are reportedly unwilling to resort
to arbitration out of concern that it could affect their future business opportunities in the UAE.
In 2006, the UAE ratified the 1958 New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards – one of the last countries in the region to become a signatory to the convention.
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This enables UAE courts to enforce arbitration decisions made in a foreign country. However, the federal
Supreme Court says that a foreign arbitration clause in a registered commercial agency agreement is
invalid since the Commercial Agency Law states that UAE courts have jurisdiction over commercial
agency disputes. Nevertheless, smoother arbitration should ensure that disputes are handled faster than in
the court system.
Property Rights
Although investment laws and regulations are undergoing a period of evolution and becoming more
conducive to foreign investment, at present, the regulatory and legal framework still favours local over
foreign nationals. Foreign ownership of land and stocks is restricted, although specific rules vary between
emirates. Dubai and Abu Dhabi have opened up some areas for freehold and leasehold property
investments. Ras al-Khaimah also offers freehold land to offshore companies in designated areas. In Abu
Dhabi, non-GCC nationals can own buildings in certain investment areas but cannot own the land.
However, investors should be aware of impediments to the exercise of rights over property. In Dubai, for
example, foreign owners of 'freeholds' cannot register titles with the Dubai Land Department, which
would allow them access to the full range of legal protections and transactions that property ownership
requires. Freeholds are a new phenomenon in Dubai and very few court precedents exist, so there is still
considerable ambiguity concerning property rights and inheritance laws.
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Macroeconomic Economic Activity
Downturn Raises Employment Questions
BMI View: We are forecasting recession for the UAE in 2009, with lower oil prices and reduced
investment spending two of the key culprits. The downturn will bring employment regulations to the fore,
as the government balances the need to encourage continued immigration while protecting the
employment of UAE citizens.
While recently released figures from the Ministry of Economy confirmed the UAE's strong economic
expansion in 2008, we believe that government bullishness regarding the effectiveness of its fiscal rescue
package is somewhat misplaced. We remain bearish regarding the country's growth prospects this year;
indeed we are now forecasting an outright recession, with the economy expected to contract by 1.7%. In
our view, government spending will limit the downside and stave off job losses in key sectors, but will
not be sufficient to fully counteract the contraction in trade volumes, the slowing of consumer spending
on the back of population losses, and the severe cutting back of investment plans.
Good Times Are Past
A recent statement by Sultan bin Saeed al-Mansouri, the UAE Minister of Economy, put real GDP
growth at 7.4% in 2008, slightly above our 6.9% estimate for the year. While we are still awaiting a full
breakdown of GDP by expenditure from the ministry or the central bank, the minister's statement
confirmed a number of key trends that we were following throughout the year. Most important of these
was the surge in oil revenues as prices peaked in the middle of the year. Overall, the contribution of the
oil sector to GDP rose from 35.9% in 2007 to 37.9% in 2008. The second trend was the sharp upswing in
investment spending, much of which was ploughed into real estate developments.
Both these trends have already witnessed a sharp reversal. On the oil front, we recently raised our forecast
average annual price to US$45.50/bbl for the OPEC Basket in 2009, up from our previous figure of
US$39.50/bbl. However, this is still less than half of the 2008 average of US$95.40/bbl. Oil prices are
likely to creep up again as global demand recovers in the second half of this year and from 2010 onwards,
but we a return to 2008 levels is unlikely in the foreseeable future. Even by 2012, we are forecasting an
average price of US$71.50/bbl, broadly on a par with 2007.
Lower oil prices, combined with stricter lending requirements by banks and greater caution among
investors whose fingers have been burned (or are still getting burnt) by the collapse in real estate prices
will also translate into less exuberant investment plans. We see real growth in gross fixed capital
formation (GFCF) remaining in single digits over the next two to three years, rather than the rates of 15-
20% (or likely even higher in 2008) seen over the past three, as plans for many real estate projects are
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shelved, others are scaled back and the government begins to play a more central role in infrastructure
development.
Acknowledging The Problem
While the economy ministry is painting a bullish picture, comments from elsewhere in the ruling elite
suggest that the government does recognise the magnitude of the challenges facing the UAE economy this
year. In mid-March, the central bank governor, Sultan bin Nasser al-Suweidi, admitted that growth was
likely to slow to low single digits, or could even turn negative, this year. He promised interest rate cuts to
stimulate growth, although as is the case around the world, the real problem is translating central bank
cuts into lower market rates for consumers and businesses. At the time of writing, the UAE interbank
offered rate (AEIBOR) stood at 2.9188%, compared with a central bank repo rate of 1% .
Another key area where the government is sitting up and taking notice is population growth. We have
long argued that a steady expansion of the population is essential to the UAE's growth plans.
Immigration, by both highly skilled white collar workers and unskilled labourers, has fuelled the country's
recent boom. Highly skilled migrants have brought experience and expertise in key non-oil sectors such
as financial services and construction, while labourers from south Asia have provided the manpower for
the bulk of construction projects. On top of this, steady population expansion has driven increases in
consumer spending and fuelled demand for housing, particularly in Dubai, the first Emirate to allow
foreign ownership of property.
With many construction sites now lying untouched, large numbers of labourers have lost their jobs, and
redundancies have spread to office workers in the real estate and financial sectors. With most visas for
foreign workers tied to employment, those that lose their jobs often have only a few weeks in which to
find new employment before being forced to leave the country. The scale of recent emigration is
unknown; the ministry of labour has insisted that thousands of new work permits are still being issued,
although it is not clear what proportion of these are simply renewals of existing permits.
In 2009, we are currently forecasting a 1% contraction in the total population to 4.67mn. However, the
government is reportedly re-examining its immigration regulations, with a view to making it easier for
unemployed expatriates to remain in the country while they search for new jobs. Without changes to the
current system, Dubai – probably the Emirate most reliant on foreign labour – has little chance of
achieving its 3% workforce growth target in 2009 (even with these changes, we think this figure is
optimistic).
Employment Nationalism
But at the same time as it tries to retain foreign workers, the UAE is also keen to shield its native
population from the impact of the economic downturn. Dubai recently launched another 'Emiratisation'
drive, aimed this time at increasing the proportion of UAE citizens employed in the public sector
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(previous initiatives have tended to focus on encouraging private firms to take on more local staff).
Recent research by the UAE University found that among over 120 private firms surveyed, less than 1%
of their employees were Emirati. Figures were much higher in the public sector, but still not high enough
according to Sheikh Mohammed bin Rashid, ruler of Dubai and the UAE's prime minister. Just 25% of
staff at federal authorities, and barely more than half of those employed in ministries, are UAE citizens.
The poverty that often accompanies unemployment is not such an issue in the UAE - the government has
always provided its citizens with a generous range of welfare benefits, ranging from free education and
healthcare to subsidised land and loans for house building. That said, with a young population, providing
enough jobs is still a concern, and job losses among Emirati staff will always be unpopular, particularly
when there are still large numbers of foreign workers still employed in the UAE. However, until now the
government has tried to tread carefully. Rules on emiratisation have not been strictly applied, as the state
recognised the trade off between boosting domestic employment levels and remaining competitive.
Table: United Arab Emirates – Economic Activity
2005 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
Nominal GDP, AEDbn 1 485.5 624.6 729.7 984.4 833.8 939.8 1085.4 1238.2 1351.9
Nominal GDP, US$bn 1 132.20 170.10 198.70 268.10 227.00 255.90 295.60 337.20 368.10
Real GDP growth, % change y-o-y 1 8.2 6.6 5.2 6.7 -1.7 3.9 4.8 3.9 5.3
GDP per capita, US$ 1 32,197 40,218 44,254 56,858 48,643 53,753 59,694 65,480 68,740
Population, mn 2 4.10 4.20 4.50 4.70 4.70 4.80 5.00 5.10 5.40
Notes: e BMI estimates. f BMI forecasts. Sources: 1 UAE Central Bank/BMI. 2 Ministry of Economy
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Political Outlook
Domestic Politicals
Damage Control: Cushioning The Recession's Impact
BMI View: While public statements remain bullish, the UAE government appears to accept the severity
of the economic challenges facing the country. We anticipate an increase in measures to protect the local
population from the effects of the downturn, including greater demands for private firms to employ
Emirati staff.
Despite the traditional bullishness of the UAE authorities, we believe that the severity of the current
global downturn will bring about a more realistic appraisal of the economic situation facing the country.
Not that this will necessarily result in any major policy shift, particularly on the political front. Indeed, the
government appears as determined as ever to safeguard the living standards of Emirati citizens and shield
them from the impact of recession. As such, measures such as encouraging private firms to employ more
Emirati workers (and making it harder to fire them), are likely to multiply over the coming years. That
said, we do not expect the UAE to go as far as some Gulf states, namely Kuwait, and bail out individuals
who have lost money on private investments.
Traditional Optimists
The UAE is renowned for its optimism in the face of adversity. Indeed, Dubai in particular prides itself on
defying the pessimism of others and achieving the seemingly unachievable. Local authorities like to cite
its previous successes – building a city in the desert, creating a regional tourism hub and attracting major
sporting events to the Emirate – as evidence that Dubai can exceed foreign expectations.
Abu Dhabi and the eastern Emirates have been less ostentatious in their development, but state authorities
throughout the country have remained bullish as the global financial crisis has intensified. In defiance of
any predictions that government infrastructure spending would have to slow in the face of lower oil
prices, the Abu Dhabi government recently unveiled plans for a huge new government and economic
development, to be known as Capital City District, which officials have hailed as a 'once-in-a-lifetime
opportunity' to create a modern and sustainable Arab city.
Growing Realism
That said, we are seeing signs of greater caution and pragmatism among some sections of the
government. In Dubai, ruler Sheikh Mohammed recently announced that the worst of the financial crisis
was over and declared that talk of Dubai's demise was greatly exaggerated. Yet the fact that he felt
compelled to respond to rampant media speculation about the state of the Emirate's financial health –
Sheikh Mohammed rarely speaks directly to the media – suggests rising concern within the government
about recent damage to Dubai's image.
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Furthermore, the language used in statements made on his website implied a tacit admission that the
Emirate did indeed face acute pressures. 'The measures we have undertaken so far have shifted the UAE
economy from crisis mode to solution mode,' he said, adding that action plans currently being
implemented by the state were designed to 'ensure recovery'. The ruler also admitted that economic
growth would be lower than in previous years.
There are also signs that the central bank is making a realistic appraisal of the economic outlook for 2009.
In mid-March, the central bank governor, Sultan bin Nasser al-Suweidi, set out the possibility that the
economy could contract during 2009. Although he maintained that the bank's core scenario was for low
single-digit growth, the fact that he even raised the possibility of recession is, in our view, significant
(although we do not believe that his realism goes far enough – we are forecasting a contraction of 1.7% in
real GDP this year). Officials have also sought to downplay the IMF's recently released bullish forecasts
for 2009 growth; the fund is projecting a 3.3% expansion this year.
Managing Expectations
The generally more downbeat tone struck by officials so far this year suggests an attempt to manage the
expectations of a population that has enjoyed a period of economic boom. Foreign workers will
undoubtedly feel the brunt of the current downturn, given their higher propensity to work in the private
sector (exposing them to a higher risk of redundancy), their more precarious legal situation (residency
permits are almost always linked to employment contracts) and their lack of access to any form of safety
net, such as unemployment benefits or free health care.
That said, there will certainly be some knock-on effect on the Emirati population. On the employment
front, the collapse of the property sector has led to job losses, among local workers as well as foreign
nationals, while reduced trade and slower demand for tourism services will also hurt employment in those
sectors, with many small, locally-owned firms expected to feel the pinch. The government has responded
by stepping up its 'emiratisation' agenda – a drive to prioritise employment of Emirati citizens over
foreign workers.
To date, rules on the proportion of Emirati employees that private firms are supposed to retain have not
been widely enforced, largely as a pragmatic move by the authorities to maintain the UAE's attractiveness
as an investment destination for foreign firms. As a result, the percentage of Emirati workers in most
private sector industries is very low – a reported 1% in the tourism sector for example. However, the state
now appears ready to enforce rules more vigorously, and a government-level conference on the issue is
planned for late April. In addition, it also appears likely that new employment regulations will be
implemented, making it harder for private firms to sack Emirati workers, in order to protect them from the
worst effects of the downturn.
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Investments Collapsing
Aside from employment, the collapse of the housing and equities markets is likely to have a negative
impact on local incomes. True, the housing boom, particularly in Dubai, was largely driven by speculative
activity by foreign buyers. However, locals also got involved, buying properties in new developments off-
plan, as financial investments or to rent to foreign workers. A recent survey by property consultancy
Colliers International claimed that average property prices fell by 40% in Dubai in the six months to mid-
April, with rental prices falling by 20-40%. In the equities arena, both the Dubai and Abu Dhabi stock
markets have staged some recovery recently, but are still down 72.3% and 49.3% from their respective
peaks.
Risks To Outlook
Despite our fairly gloomy outlook for the economy, we are not anticipating a major upswing in political
risk in the UAE. The country still has one of the highest scores in the region in our short-term political
risk ratings (75.8) and there is no obvious challenge to the hegemony of the Emirates' various ruling
families. Rather, we expect the government to stick with its traditional policies - restricting the rights of
foreign workers in order to ensure a high standard of living for the native population, including free
education, healthcare, subsidised housing and preferential access to well-paid public sector jobs - in order
to maintain the social harmony that has proved so supportive to recent economic growth.
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Company Monitor
Dutco Balfour Beatty Group
SWOT Analysis
Strengths
Local and international expertise allows Dutco to appeal both nationally and internationally
The company has a well-established reputation as a local company, but through Balfour Beatty it has the expertise and funding of an international company
Weaknesses
Dutco mostly operates within the Gulf region, with most projects in the UAE, which limits growth potential
Opportunities
The decline in raw material prices can help contractors re-adjust project cost estimates
The Gulf region is one of the fastest growing infrastructure markets, with a wealth of projects funded by oil rich economies. Therefore, Dutco, as a well-established company, is well located to benefit from this growth.
Threats
The economic downturn in Europe and the US could effect Balfour Beatty since most of its projects are located here, therefore threatening financing for Dutco
The finance climate may impact Dutco’s ability to gain funding for the large and expensive infrastructure projects on its books
The financial crisis hitting the UAE real estate and tourism market impacts the company because it relies on the sector for large-scale contracts
Overview
The Dudco Balfour Beatty Group was created in 2002 after the merger of
Dutco Balfour Beatty, Dutco Construction, Dutco Tunnelling, and BK Gulf. The
UK’s Balfour Beatty is a 49% shareholder and Dutco (the Dubai Transport
Company) owns 51%.
Strategy And Evaluation
Dutco claims to have a strategy of long-term investment in technology and
human resources, and put its success in the United Arab Emirates’
infrastructure sector down to these aspects. With its investment in technology,
the company has tried to ensure it is at the forefront of the infrastructure
industry, making it competitive. Furthermore, its investment in human
resources means the company has a large skill pool, having combined
international expertise with local knowledge.
Notably, Dutco has been involved in some of the largest and most prestigious
infrastructure projects in the UAE. The Mina Jebel Ali is perhps the company’s
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flagship projects. Other more recent projects include the Burj mall, the Tiger
Woods Golf Complex and the Trump Tower (through BK Gulf), highlighting the
presence the company has in the region.
Over the past year Dutco has shown strong growth. According to the Dutco
website, 2007 revenue was US$578mn; according to Balfour Beatty the 2008
revenue will be more than US$1.26bn, therefore signalling an almost 50%
increase in revenue. Although Balfour Beatty noted that Dubai alone was a
key thrust behind growth in 2008, attributing to the emirate the 25% leap in
2008 half-year profits, the abrupt deterioration in the Dubai construction sector
prompted a statement by Balfour Beatty in March 2009, saying that the market
has slowed considerably and that revenues will be negatively affected from
that market in 2009.
The company’s strategy is to expand across the Gulf region, with Balfour
Beatty aiming to take Dutco from its existing base in the UAE to a major
regional business. This is undoubtedly to take advantage of the buoyant
infrastructure market in the region, and avoid falling foul of the international
downturn in infrastructure that is effecting many companies in the sector.
Balfour Beatty believes it will be shielded from the downturn as a result of its
many infrastructure projects for government and utilities companies, which
have a legal obligation to be carried out. With considerable growth already in
the first half of 2008, Dutco is hoping to continue on this success, and BMI
believes that the outlook is positive.
Recent Activity And Projects
August 2008
Dutco Balfour Beatty Group was awarded three major projects in the UAE.
Dutco Balfour Beatty wsa awarded a US$272mn road construction project for
two major interchanges by Nakheel. BK Gulf, Dutco’s electrical and
mechanical division, was awarded two contracts worth a total US$190mn for
the Marina Hotel in Abu Dhabi and the Trump International Hotel and Tower
project in Dubai.
March 2008
Dutco Balfour Beatty was awarded a contract to build a new Novotel complex
in Al Barsha, Dubai, worth US$229mn. The complex is due to be completed in
October 2010.
Company Data
Dutco Balfour Beatty had revenues of AED2.125bn (US$578mn) in 2007,
according to the company’s financial statement.
Balfour Beatty’s annual report listed revenue for the Middle and near East at
GBP247mn. The report categorises Dutco under Balfour Beatty’s civil and
specialist engineering sector, reporting a 2007 profit of GBP86mn (up from
GBP47mn in 2006), and 2008 half year pre-tax profit of GBP44mn, up 69%
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over the same period in 2007.
According to the full year 2008 preliminary report, however, the Middle East is
going to weight negatively on growth for 2009 as Balfour Beatty expects a
significant slowdown in the market.
According to a report in the UAE daily The National, Dutco Balfour Beatty’s
order book was valued at AED2.5 billion (US$681 million) in May 2009, down
from AED4bn (US$1.089bn) a year ago.
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Al Habtoor Leighton Group
SWOT Analysis
Strengths
The merger with Leighton Group transformed Al Habtoor into a major player in the Gulf region
Strong order backlog. According to the CEO total order book stood at AED26bn (US$7bn) in the end of May 2009
Weaknesses
Little diversification across the region. According to the company’s strategic plan, 80% of the 2010 revenues will come from the UAE, of which 70% will be from Abu Dhabi
Badly impacted by the downturn in Dubai, two of its flagship contracts have been aborted as a result
Opportunities
Infrastructure investment is expected to remain at high levels. The Dubai and Abu Dhabi governments are looking to expand spending on infrastructure to boost economic activity through demand
Spending on transport and water projects in the capital cities will provide a solid base for increased activity levels
Oil rich countries in the Gulf are spending their oil windfalls accumulated over the past few years to invest in infrastructure projects to sustain employment and demand
Threats
The financial crisis hitting the UAE real estate and tourism market impacts the company as it relies on the sector for larges-scale contracts
Overview
Al Habtoor Engineering is the founding member of the diverse Al Habtoor
Group and was founded in 1970. The company is involved in the construction
of airports, civil works, commercial and residential buildings, hospitals, hotels,
shopping malls, palaces and cinemas.
The company has a presence in Jordan, Lebanon, Egypt, Qatar and Bahrain
in the Middle East. One of its most prestigious projects is the Burj Al Arab,
which was completed as a joint venture with South African firm Murray &
Roberts.
The company is 45% owned by Australian contractor Leighton Holdings, and
since the acquisition the combined company has became one of the Gulf
region’s largest multi-discipline contractors. The Leighton Group is a division
of German construction giant Hochtief’s Asia Pacific operations.
Strategy And Evaluation
The Al Habtoor Leighton Group identifies three key areas of growth. These
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are: sustained growth in its three core markets, Abu Dhabi, Dubai and Qatar;
selective expansion into new Middle Eastern and North African regions; and
further development of associated business, including steel fabrication, piling,
M&E, interior fit out and services.
In May 2009, the company said in the context of a diversification initiative, that
it is waiting for contracts it has bid for in Kuwait during the past 18 months to
materialise by the end of 2009. The managing director, David Savage, also
said that Al Habtoor Leighton Group’s total order backlog stands at AED26bn
(US$7bn), which guarantees it work for the next two years.
A strategy of diversification in the wider MENA region has consistently been a
stated strategic priority of the company, though with the exception of
establishing a presence in Qatar, it has not been forcefully pursued. Most
attention has instead been focused on the UAE. The cancellation of the
US$790mn contract to build the Trump Towers commercial complex and the
cancellation of the contract to build the third concourse at Dubai’s airport seem
to have prompted the plans for geographic diversification to materialise.
In spite of the steps the company has taken to diversify abroad, the core of its
operations still lies in the UAE. However, though Dubai has been a sour point
lately, it is in fact Abu Dhabi that contributes most in terms of revenues.
According to Savage, 80% of revenues in 2010 will come from the UAE, of
which 70% will come from Abu Dhabi. This is good news for the company.
Though the real estate market in Dubai has imploded, Abu Dhabi has in place
several large-scale infrastructure projects to sustain the activity of the
infrastructure and construction sector of the UAE. Examples include the
transport master plan that encompasses projects including the metro, as well
as the Mafraq-Ghweifat highway, which is the first public private partnership
transport project in Abu Dhabi and if successful will pave the road for future
projects. And this is just the transport sector. The government is also looking
to channel funds towards social infrastructure projects, a sector that Al
Habtoor Leighton also has a presence in.
Al Habtoor Leighton was reportedly planning to sell up to 40% of its shares in
an IPO in May 2009, but no updates on this initiative have been released. The
company is reported as stating that the IPO will not be undertaken to raise
capital, but because ‘it would benefit from the structure and demands that
come with being a publicly traded company’.
Recent Activity And Projects
In May 2009, managing director, David Savage, disclosed that the company is
seeking to become more actively involved in the infrastructure sector in Kuwait
and North Africa, Arabian Business quoted him saying.
The AED4.9bn (US$1.3bn) contract for construction of a new concourse at
Dubai International Airport was annulled in April 2009. The consortium of Al
Habtorr and Murray and Robers walked away from the agreement with the
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Dubai Department of Civil Aviation citing failure to reach an agreement. The
contract was originally awarded in December 2008.
In early December that Nakheel implemented a 12-month delay in long-term
infrastructure work on some of its projects, including the Trump International
Tower and Hotel, which is being constructed by Australia's Leighton Holdings
for US$790mn.
In September 2008, a subsidiary of the company, Al Habtoor Engineering,
entered into an alliance contract worth approximately AED6.4bn for the
construction of a major mixed-use development in Abu Dhabi of Tameer
Towers.
In July 2008, Al Habtoor Engineering was awarded an AED2.25bn contract for
the Al Bustan mixed-use development in Abu Dhabi for the Al Hamid Group.
The project includes a four-star, 385-room business hotel; a 30,000m2 office
tower; a tower of 250 serviced apartments; and two residential towers with a
total of 450 apartments. It is expected to be completed in October 2010.
In the same month, Al Habtoor Leighton Group was awarded AED740mn
Olgana and Hilliana Towers in Dubai. Construction began in July 2008 and is
expected to complete by July 2010.
In May 2008 the group gained an AED1.55bn contract for the construction of a
major mixed-use development in Dubai for Muzoon Holdings, which was due
to start construction the following month. Completion was set for June 2011.
Financial Data
In September 2007, Leighton Holdings acquired a 45% stake in Al Habtoor for
US$750mn (40% cash) and merged its Gulf operations with Al Habtoor. The
combined company had work in hand of US$3.7bn at end-2007, of which
US$1.5bn was gained from Al Habtoor’s projects.
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Veolia Water
SWOT Analysis
Strengths
JV with Abu Dhabi’s state investment company Mubadala Development strengthens the company’s position in the UAE market
Its branches in Abu Dhabi and Israel confirm Veolia as a long-term presence in the region
Veolia Environment is a diversified conglomerate, with companies operating water, waste, energy-optimisation and transportation activities worldwide. This broad base reduces dependence on a single sector
Weaknesses With just two branch offices across the Middle East (ME), the group’s local presence in the region is
immature Opportunities
Shortage of local sophistication in water engineering in the region presents significant opportunities for companies such as Veolia to export know-how and expertise
The ME’s economy is expanding, and the governments are calling for investment on a broad sector base.
Much of the ME still requires desalination technology, and demand is set to grow. By 2015 it is estimated that desalination capacity will have to double
New economic cities in desert land will require water technologies
The population in the ME is set to grow; in the Saudi Arabian city of Riyadh, for example, the population will grow at an estimated 4% very year
Already-present technical faults in the ME’s water system will require upgrading so as to prevent leaks, etc
Threats
A global slowdown or drop in oil prices will impact on the amount of investment in the ME.
This will also impact on the continued construction of new cities, and therefore on the growth of the population.
Overview
Veolia Water AMI (Africa, Middle East and Indian Subcontinent) provides
water, wastewater and electricity services to almost 9mn people and is a
subsidiary of Veolia Water, one of the world’s biggest water and wastewater
companies, whose parent company is French multinational Veolia
Environment.
In the Middle East, Veolia is present in Bahrain, Oman, Saudi Arabia and the
UAE. The company’s main subsidiaries are Moalajah FZD-Ajman (UAE),
Sharqiyah Desalination Company SAOC – SPC Sur (Oman), Bahwan Veolia
Water – O&M Sur (Oman), Seureca Overseas, and Metito (Saudi Arabia).
Strategy & Evaluation
Address
Veolia Water Middle East Al-Hamed Building # 7th floor - Al Fatah Street Abu Dhabi United Arab Emirates
Tel.: (+971) 2 64 27 550
www.veoliawater-middle-east.com
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On March 30 2008, Veolia Water AMI opened a new branch office in Abu
Dhabi. BMI reported on the opening, which was Veolia’s second branch in the
Middle East after Israel. We saw this as a sign of Veolia’s strategy to cement
its presence in the region, following the winning of tenders and implementation
of major projects in Bahrain, Oman, Saudi Arabia and the UAE. With figures
that show nearly 10% of total turnover from ME and Africa, Veolia is acting to
continue expanding in the region, and more broadly, to achieve its aim for
global visibility.
In response to disappointing 2008 yearly results, Veolia Environment SA, the
parent of Veolia Water, said that it will decrease investments by 44% in 2009,
or by EUR1.6bn, and increase asset sales. Reuters reports that this marks a
U-turn on the company’s aggressive strategy of acquisitions over the past
three years. The Middle East may be a source of growth for 2009 as demand
in developed markets declines.
Our view is consolidated by forecasting that that demand for water will
increase in the Middle East, leading to a necessity for an increase in
desalination capacity. According to MEED, desalination capacity in the region
will have to double by 2015 in order to meet need. According to a report by
Metito, Veolia's subsidiary in Saudi Arabia, water and wastewater investment
in the region is expected to reach AED441bn (US$120bn) over the next
decade; this figure underlines the potential opportunities.
Veolia Environment’s figures show that the group’s water business grew by
14.8% from 2007 to 2008, and from that, business accumulated in the Middle
East and Africa expanded by 14.1% at constant exchange rates.
The Middle East remains a target region for Veolia. Its positive demographic
outlook and booming construction sector fuel the need for desalination
technologies. Forbes reports that Veolia plans to invest at least EUR5bn in
2008, and BMI would not be surprised if growth continued to come from the
ME. Veolia also emphasises the value of sustainable water solutions, as well
as research into and the development of new technologies. In BMI’s view, this
long-term outlook will guarantee the company’s long-term presence in the
region.
Recent Activity And Projects
May 2009: The company singed a contract with the Doha municipal
government for the operation and maintenance of two waste water treatment
plants for sever years. The activities are estimated to yield EUR40mn over the
course of the contracted period.
October 2008: Veolia Water finalised a JV with the Abu Dhabi’s state
investment company Mubadala Development. The new jointly owned company
will focus on water production and waste water collection and treatment in the
markets of the Middle East and North Africa. Veolia Water will own a 51%
stake, and Mubadala the other 49%. The company will seek to get involved in
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municipal concessions and public-private partnerships.
July 2008: Veolia Water signed a contract with the Abu Dhabi Water and
Electricity Authority (ADWEA) for the financing, design, construction and
operation of two new wastewater treatment plants in the cities of Abu Dhabi
and Al Ain. This is the biggest contract to date signed for wastewater in the
Middle East.
The project covers a 25-year period, and will contribute an estimated
EUR364mn to consolidated revenue After the initial construction period, which
will take two and a half years, Veolia Water will operate the two wastewater
treatment plants for 22 and a half years.
April 2008: The company won Saudi Arabia's first ever outsourced
performance contract in the water sector for water production and distribution
and wastewater collection in the capital, Riyadh. Under the six-year contract,
Veolia Water will gain a total estimated cumulative revenue of EUR40mn
(US$60mn) on the basis of an incentive system linked to performance and
savings achieved.
March 2008: Veolia opened a new branch office in Abu Dhabi, UAE.
January 2008: The company won two contracts in Dubai for wastewater and
brackish water treatment and recycling installations, worth a total of
EUR22.4mn. The contracts were awarded for the Palm Jumeirah Island and
the Burj Dubai Tower.
Company Data
Veolia saw its 2008 net income fall by 56% to reach EUR405mn. In response,
Veolia said that it will decrease investments by 44% in 2009, or by EUR1.6bn,
and increase asset sales. Reuters reports that this marks a U-turn on the
company’s aggressive strategy of acquisitions over the past three years.
In 2007 Veolia AMI gained revenues of EUR739mn.
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Emaar
SWOT Analysis
Strengths
Emaar has experienced rapid growth over the past decade, and as such is able to rely on the reputation of the brand in order to continue to grow. Large press-worthy projects, such as the construction of the Burj Dubai, also support this aim
The company diversifies its projects, which include industrial, commercial, residential, retail and financial builds. Responsible for the massive King Abdullah Economic City in Saudi Arabia
Emaar diversifies its sector base, expecting, for example, its Islamic banking and finance branch to profit from the Middle East’s wealth
Weaknesses
The company’s international focus means that it is vulnerable to global trends
Costs are therefore dependent on currency fluctuations
Still, 80% of its projects in Dubai that is severely hit by the financial crisis
Opportunities
The company places extra emphasis in the domination of two main markets, Saudi Arabia and India, where economic expansion fuels demand for construction
Windfalls from oil have prompted Saudi Arabia to reinvest in other sectors in order to develop their economic base. This increases demand for infrastructure projects
Threats
Fears of a slowdown in the construction industry have already impacted Emaar’s share prices as confidence levels fall
Financial crisis presents an obstacle to the company’s financing operations
Overview
Dubai-based Emaar Properties has developed into one of the largest real
estate and property development companies in the world. The company has
an international portfolio with their main business in real estate and tourism
(hotels and resorts), but has been expanding into industrial construction,
infrastructure, education and healthcare. It is a Dubai-based Public Joint Stock
Company and the Dubai government owns 32.5% of the company.
Strategy And Evaluation
The company’s strategy, called Vision 2010, is two-tier: first, geographical
expansion, and second, business segmentation and diversification. Hitherto,
both aims seem clearly within reach for Emaar. The company has grown and
expanded outside the UAE and has operations in 17 markets with total
investments worth US$65bn. Furthermore, it has created six different business
segments, with a total of 60 active companies, in its efforts to venture into new
business sectors. Reuters states that Emaar has US$100bn worth of projects
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under construction.
The obvious risk of its strategy is the deterioration in the financial and credit
market, which Emaar is dependent upon to finance its rapid growth. In
addition, with the exception of the fourth quarter of 2008, raw material prices in
the UAE – and the wider Middle East region where Emaar has a presence –
reached record highs, inflating estimated costs and eating into company
revenues and profits making 2008 a difficult year.
The company’s financial results for the first nine months of 2008 reflected the
latter point. Revenues declined by 1.6% y-o-y to AED12.52bn for the nine
months that ended in September 2008 and by 4.5% y-o-y to AED4.32bn for
Q308. Profits for the first nine months were marginally higher ( 0.4%) y-o-y
reaching AED4.84bn for the first nine months of 2008, while they have
declined by -2.2% y-o-y to AED1.51bn in Q308. According to analyst
consensus estimates, the company can still make the 3.5% profit growth for
2008. The losses in third quarter profits were due to an AED750mn write-down
in its US home-building subsidiary, John Laing Homes.
The outlook for 2009 is not as promising, according to financial analysts. Most
recent developments suggest further signs of stagnation. The company’s
share price declined 94% between 27 January 2008 and 25 January 2009,
highlighting the loss of investor confidence in the sector and consequently the
major players in Dubai. However, this trend is industry-wide, with a global loss
of confidence in the construction boom. Other Gulf companies have also
experienced slowing growth. Due to Emaar’s broad international portfolio in
particular, the deceleration in growth and share price value is to be expected.
The company’s chairman said in October 2008 that he believes that
fundamentals in MENA and South East Asia will remain strong, thus re-
affirming Emaar’s internationalisation strategy.
Outside the UAE, Emaar’s subsidiary in India, Emaar MGF Land Ltd.,
postponed its planned February US$1.64bn IPO, due to instability in the Indian
stock market and poor investor demand.
Recent Activity And Projects
The Burj Dubai Tower in Dubai, which is going to be the world’s tallest
building, is due to open in September 2009. The tower will primarily be a
residential and commercial development, but also comprise hotels and act as
a tourist attraction. According to financial analysts, its opening will boost
Emaar’s annual revenues.
Emaar is also the main developer of the King Abdullah Economic city in Saudi
Arabia. Building the new city in Saudi Arabia is perhaps the main project that
the company has undertaken, as the city incorporates all aspects of an urban
infrastructure, including a residential area, business district and an industrial
zone, which is the largest part of the city. The total cost is estimated close to
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US$27bn.
In April 2008 Emaar Education announced it is expanding its presence in
China after the company signed a MoU with a Chinese company. It is now
exploring opportunities in Shanghai and Beijing in the fields of healthcare,
education and real estate. The company had previously announced in January
2008 that it has earmarked US$1bn to build between 20 and 30 schools in the
Middle East and South Asia.
It was announced in January 2008 that Emaar plans to develop four projects in
Algeria worth an estimated US$5.5bn. The projects are for the construction of
an education city, a healthcare city, a tourist resort and a mixed-used
waterfront development in the capital Algiers.
In October 2007 Emaar and Bawadi, a subsidiary of Tatweer, announced a
joint venture through which the companies will develop a mixed-used
commercial, business and tourism project, on 60mn sq ft of land. The
investment needed is US$16.3bn. Emaar will invest US$1.05bn
Company Data
The company incurred a net loss of AED1.77bn (US$481mn), compared with
a net profit of AED1.74bn (US$473mn), in the fourth quarter of 2008.
According to the median estimate of four analysts surveyed by Bloomberg, the
company was expected to earn a profit of AED1.31bn (US$356mn) during the
quarter. The company has incurred losses due to writedowns at its US unit
and the drop in property prices.
For the first nine months of 2008 revenues declined by 1.6% y-o-y to
AED12.52bn for the nine months that ended in September 2008 and by 4.5%
y-o-y to AED4.32bn for Q308. Profits for the first nine months were marginally
higher (0.4% y-o-y reaching AED4.84bn) for the first nine months of 2008,
while they have declined by -2.2% y-o-y to AED1.51bn in Q308. According to
analyst consensus estimates the company can still make the 3.5% profit
growth for 2008.
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Nakheel
SWOT Analysis
Strengths
The company operates across many sectors, including marinas, hotels, retail and asset management
The projects that it is building are internationally recognised, boosting the company’s international reputation
Weaknesses
Nakheel mainly operates in Dubai, and although it has set targets to operate internationally, it has not achieved major advances in this
Very exposed to the Dubai real estate market that is set to witness a major contraction, especially as the credit squeeze intensifies and oil revenues decline with lower oil prices
Opportunities
The company is well placed to take advantage of the major boom in developments in Dubai, especially residential and commercial buildings in which Nakheel specialises
Threats
Financial crisis presents an obstacle to the company’s financing operations
The international downturn may present obstacles to Nakheel’s growth, as many of the residential projects are sold as second homes to European, especially British, customers, who may no longer be able to afford them
Overview
Nakheel is a private commercial enterprise owned by Dubai World, the Dubai
government’s sovereign wealth fund. The company is based in Dubai and is
one of the world’s largest. It has developed many internationally recognisable
projects in Dubai, including the Palm trilogy, three man-made palm shaped
islands: Palm Jameirah, Palm Jebel Ali and Palm Deira, and The World – 300
islands in the shape of a world map.
Strategy And Evaluation
Nakheel is leading development in Dubai and will undertake 50% of all
development in the emirate over the next 10 years. The company’s name is
attached to many of the projects that are shaping the development, and
indeed the geography, of the emirate. The company’s Waterfront City
development will provide residential accommodation for more than 92,000
people, with the Waterfront Development as a whole providing office space
and accommodation for 1.5mn people.
Although currently focused in Dubai, 10 months ago Nakheel developed a 10-
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year strategy to expand internationally, with a target of 65% of assets in Dubai
and 35% internationally, according to the Australia Business News. Over the
past year, the company has followed up on this strategy to an extent, investing
in 50% stakes in hotel resorts in Miami and Mexico. However, the company’s
assets are still predominantly in Dubai.
The downturn in global financial markets and the construction and real estate
sector in the UAE and particularly in Dubai have forced the company to re-
evaluate projects. Nakheel surprised investors and analysts in December
when it announced that it is delaying some flagship projects. Because of the
size of the company and its portfolio, it acts as a bellwether of current market
trends. That announcement, coupled by a declining share price, revealed the
true scale of the deterioration of Dubai’s once dynamic market. This
contraction in the market also compromises the company’s long-term growth
strategy.
Recent Activity And Projects
March 2009
Nakheel announced that it will suspend construction on the Nakheel Tower for
one year.
December 2008
In early December, Nakheel announced a 12-month delay in long-term
infrastructure work on some of its projects including the Trump International
Tower and Hotel, which is being constructed by Australia's Leighton Holdings
for US$790mn. Other projects include Frond N villas and Gateway Towers.
November 2008
The company cut 15% of its workforce.
August 2008
Nakheel entered a partnership with US speciality food retailer Balducci’s to
open its first stores in the Middle East. The first store will be located in the
Dubai mall, with further locations in Dubai and the rest of the Middle East to
follow.
July 2008
Nakheel formed a joint venture company called HyperCorp LLC with French
company Auchan. HyperCorp will develop five hypermarkets across Dubai
located in Nakheel’s developments.
June 2008
Nakheel and Dubai Islamic Bank formed a joint venture company called
Tashyed LLC. In total AED2bn has been invested in Tashyed, which will
undertake real estate developments. The first two projects will be in
International city and Jumeirah Heights in Dubai.
Nakheel signed an agreement with Arabtec Construction LLC to build 1,500
homes at its Al Furjan development in Dubai. The deal for AED3bn is to build
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villas and terrace houses starting in August 2008, to be completed by the third
quarter of 2010.
April 2008
Nakheel invested US$537mn with Fontaineblueau Resorts LLC for a 50%
stake in the Fontainebleau Miami Beach Resort. The resort will undergo a
US$500mn renovation.
Nakheel announced a plan to develop five shopping malls in Dubai by 2012, at
a cost of more than US$3bn.
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Mubadala Development
Overview
The Abu Dhabi-based Mubadala Development is an investment vehicle of the
Abu Dhabi government, mandated to invest in the establishment of new
companies and the acquisition of strategic holdings in companies in the UAE
and abroad, to promote the economic well-being of the emirate in a financially
sound manner. The company was formed in 2002 and has been active in
energy and utilities, healthcare, property and real estate, aerospace and
infrastructure investments. Mubadala acts both as a developer and investor.
The company’s infrastructure and services unit is subdivided into three
investment categories: first, capital developments, which include the provision
of facilities and operational solutions such as universities, schools, military
bases and hospitals; second, transport developments, particularly in the
aviation and maritime fields; and third, services, such as defence solutions,
fleet management and leasing and aviation training capabilities. Based on the
company’s project history, the focus of the group has been on the services
and capital developments segments, with a variety of projects in education.
Mubadala owns 100% of Abu Dhabi Terminals, the operating arm of the Abu
Dhabi Ports Company, which manages the operations in Port Zayed.
The company is the sole owner of Abu Dhabi Future Energy Company and
Abu Dhabi Terminals, in transport and utilities, and owns a 40% stake in Abu
Dhabi Ship Building and a 47.5% in Barka Power Plant.
Some of the company’s recent investments include an agreement between
Mubadala’s wholly owned subsidiary Liwa Energy and Royal Dutch Shell
Algeria, for Liwa to buy a 20% stake in the company’s exploration and
production projects.
In January 2008, a joint venture between Mubadala and Dubai Aluminium
Company Limited signed a MoU with Emaar Economic City, the developer of
King Abdullah Economic City in Saudi Arabia, for the construction of an
aluminium smelter complex in the economic city. The cost is US$5bn and the
factory will have capacity to produce 700,000 tonnes of aluminium per year.
Mubadala and Dubai Aluminium have co-operated in several projects in
developing aluminium smelter production facilities. A month earlier, in
December 2007 the two companies announced another such project in
Algeria, in partnership with Algerian Sonatrach.
In August 2007, it was reported by Gulf News that Mubadala was leading a
consortium that was to develop and integrate international city development in
Malaysia’s Iskandar Development Region. The initial phase of the project is
estimated to cost US$1.2bn and it will be developed over 20 years.
Address
12th Floor, ADNIC Building Khalifa Street Abu Dhabi, UAE
Tel: +971 (2) 616 0099
Fax: +971 (2) 616 0098
Web: www.mubadala.ae
Key Statistics
No. of Employees: 250
Key Personnel
CEO and managing director: Khaldoon Khalifa Al Mubarak
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In May 2007, Dubai Aluminium, Mubadala and BHP Billiton signed a joint
venture to set up an aluminium production facility in Guinea, worth US$3bn.
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BMI Forecast Modelling
How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric regression modelling. The precise form of model we use varies from industry to
industry, in each case being determined, as per standard practice, by the prevailing features of the industry
data being examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views
and encourage the use of objective views, uses a ‘general-to-specific’ method. BMI mainly uses a linear
model, but simple non-linear models, such as the log-linear model, are used when necessary. During
periods of ‘industry shock’, for example a deep industry recession, dummy variables are used to
determine the level of impact.
Effective forecasting depends on appropriately selected regression models. BMI selects the best model
according to various different criteria and tests, including, but not exclusive to:
R2 tests explanatory power; Adjusted R2 takes degree of freedom into account
Testing the directional movement and magnitude of coefficients
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)
All results are assessed to alleviate issues related to auto-correlation and multi-collinearity
BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s
industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that
analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely
mechanical forecasting process would not.
Within the infrastructure industry, this intervention might include, but is not exclusive to, new
investments across sectors, or projects getting cancelled; general investment climate and business
environment changes; domestic or regional trends changing; macroeconomic indicators; and regulatory
changes.
Example of Construction Value Model:
(Construction Value)t = β0 + β1*(Gross Fixed Capital Formation)t + β2*(Lending Rate)t + β3*(Percentage
Change in Government Expenditure)t + β4* (Inflation)t + β5*(Percentage Change in Population)t +
β6*(Construction Value)t-1 + εt
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Construction Industry
A number of principal criteria drive our forecasts for each construction and engineering variable:
Construction GDP And Infrastructure Spending
Figures for construction GDP and infrastructure spending are based, where possible, on national accounts
as published by the relevant central banks, as well as primary government/ministry sources and official
data. Where these are unavailable, construction GDP estimates are based on a range of variables
including:
Stated infrastructure and development programmes
Likely increases owing to related urban or industrial sector developments
Political factors (such as an electorally motivated public works programmes)
Construction as a percentage of GDP is calculated using BMI’s own macroeconomic and demographic
forecasts.
Employment Within The Construction Industry
These figures are forecast based on:
The growth or otherwise of the real gross fixed capital formation
Company results and expansion plans
Sources Sources used in construction reports include UN statistics, national accounts, housing and economy
ministries, officially released company results and figures, trade bodies and associations and international
and national news agencies.
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Business Environment Ratings BMI’s Infrastructure Business Environment Ratings (IBER) provide a numerically-based evaluation of
prospects for the infrastructure sector in each state that we cover. BMI has revised the methodology of its
Infrastructure Business Environment Ratings. Our approach has been threefold. Firstly, we have redefined
the risks rated in order more accurately to capture the operational dangers to companies operating in this
industry globally. Secondly, we have attempted, where possible, to identify objective indicators that may
serve as proxies for indicators that were previously evaluated on a subjective basis. Finally, we have used
BMI’s proprietary Country Risk Ratings (CRR) in a more nuanced manner in order to ensure that only
the aspects most relevant to the industry have been included. Overall, the new ratings system – which is
now integrated with those of all 16 industries covered by BMI – offers an industry-leading insight into
the prospects and risks for companies across the globe.
Ratings Overview Conceptually, the new ratings system is divided into two distinct areas:
Limits of Potential Returns: An evaluation of sector’s size and growth potential in each state and also
broader industry/state characteristics that may inhibit its development.
Risks to Realisation of those Returns: An evaluation of Industry-specific dangers and those emanating
from the state’s political/economic profile that call into question the likelihood of anticipated returns
being realised over the assessed time period.
For each category and sub-category, each state is scored out of 100 – 100 being the best, with the overall
IBER a weighted average of the total score. Importantly, as most of the territories that are evaluated are
considered by BMI to be ‘emerging markets’, our IBER will be revised on a quarterly basis. This will
ensure that the IBER draws upon the latest information and data from across our broad range of sources
and the expertise of our analysts.
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Table: Infrastructure Business Environment Indicators
Indicator Rationale
Limits to potential returns
Market structure
Construction expenditure, US$bn
Objective measure of size of sector – the larger the sector, the greater the opportunities available.
Sector growth, % y-o-y Objective measure of growth potential – rapid growth will result in increased future opportunities.
Capital investment, % of GDP Used as a proxy for the extent the economy is already oriented towards the sector
Government spending, % of GDP
Proxy for extent to which structure of economy is favourable to infrastructure/construction sector.
Country structure
Labour market infrastructure Rating from BMI’s CRR to denote availability/cost of labour. High costs/low quality will hinder company operations.
Financial infrastructure Rating from BMI’s CRR to denote ease of obtaining investment finance. Poor availability of finance will hinder company operations across the economy.
Access to electricity Rating from BMI’s CRR. Low electricity coverage is proxy for pre-existing limits to infrastructure coverage.
Risks to potential returns
Market risk
No. of companies Subjective evaluation against BMI-defined criteria. This indicator evaluates barriers to entry.
Transparency of tendering process
Subjective evaluation against BMI-defined criteria. This indicator evaluates predictability of operating environment.
Country risk
Structure of economy Rating from BMI’s CRR, to denote health of underlying economic structure, including seven indicators such as volatility of growth; reliance on commodity imports, reliance on single sector for exports.
External risk Rating from BMI’s CRR, to denote vulnerability to external shock – principal cause of economic crises.
Policy continuity Subjective rating from BMI’s CRR, to denote predictability of policy over successive governments.
Legal framework Rating from BMI’s CRR, to denote strength of legal institutions in each state – security of investment can be a key risk in some EM.
Corruption Rating from BMI’s CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete.
Source: BMI
Project Finance Ratings Methodology
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The PFR
BMI’s Project Finance Rating (PFR) provides a globally-comparative, numerically-based assessment of
the risks facing major infrastructure projects in the Power, Transport, and Commercial Construction
sectors. Specifically, it evaluates the degree of uncertainty facing projects that are generally characterised
by the following: long construction period; high construction costs; difficulty in redeploying project
assets (e.g. power station) to other uses; earnings generated only after construction completed.
The PFR draws on BMI’s broad analytical expertise. Indeed, the methodology incorporates our industry-
leading Country Risk Ratings, thereby drawing on our 24-year expertise in assessing political, economic
and business operational risk, as well as our in-depth knowledge of the infrastructure industry globally.
However, while we believe that the resultant scores are a reliable guide to project finance risks, it should
be emphasised that the PFR assesses broad industry risks, rather than individual projects. This has several
implications. First, there will be instances where the risk profile – for example, the supply of inputs – of
particular projects is markedly different from the general risks prevailing in the industry. Second, the PFR
will not take into account measures by private sector project participants to mitigate risk when structuring
finance – for example, by securing a substantial equity involvement from the sponsoring agency or
government.
Consequently, the PFR is best used for evaluating the breadth and depth of risks facing major
infrastructure projects, which will in turn affect the source, availability and cost of finance. Thus, in an
environment of limited global finance for such projects, it provides a leading indicator for the cost of
financing major projects and the pace at which infrastructure development will occur in each state.
Ratings Overview
To fully reflect the life-cycle of infrastructure projects, the PFR is conceptually divided into two distinct
sub-ratings:
Design and Construction Risks: This evaluates risks within the broad assumptions underpinning
construction cost projections. Specifically, it assesses uncertainty within the political, economic and
regulatory environment, and also input cost volatility.
Sector Operational Risk: This evaluates risks within revenue projections during the operational period of
any project. Specifically, it assesses uncertainty regarding the supply and cost of inputs, and sale of
outputs – including the regulatory, market and political environment.
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Ratings Components
The following indicators have been used. Overall, the rating uses 10 subjectively-measured indicators,
and around 40 separate indicators/datasets.
We have revised the PFR methodology this quarter (Q309), in an effort to provide a more comprehensive
overall score from the interplay of the different indicators used to yield the final results.
Accordingly, we have adjusted the weighting of each indicator and each group of indicators (inputs,
regulatory, market risks, etc), to reflect their relative importance, and thus relative risk level, that they
pose for sponsors and equity holders. Whereas previously all indicators assumed the same relative
importance for the overall score, through the revised methodology, certain factors (or indicators) are
given higher importance and thus providing a more realistic final rating. The relative influence of each
indicator and each group of ratings to the final score can be found in the columns below. The score next
to the Group indicates how much the group influences the final rating, whereas the score next to each
indicator, shows each indicator’s influence in the group.
Design & Construction Phase
Indicator Definition Rationale Weightings
Inputs 20% (Group)
Domestic – Inflation
Ave. consumer inflation 2002-2009 adjusted for its
standard deviation
High, and uncertain, inflation increases risks to
input cost projections 60%
International – Long Term Currency Volatility
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Currency volatility increases risks to cost projections of
imported goods 40%
Political Environment 25% (Group)
Market Orientation
Measure of government intervention in economy,
using data for govt. expenditure; govt. revenue
from state-owned enterprises; ave. trade tariff
rates; tax levels; trade bureaucracy and history of
FDI flows.
Governments with strong commitment to free markets
are likely to refrain from sudden changes to the
investment/trade regime 20%
Security Risk
Measure of the level of security threat; external and
internal, facing a country.
The higher the security risk the higher the risks to
infrastructure assets, in terms of physical security (as they tend to become targets) and in terms of 20%
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Design & Construction Phase
Indicator Definition Rationale Weightings
potential levels of insurance premiums which rise along
with security risk levels, increasing the costs to
sponsors.
Long Term Policy Continuity
BMI evaluation of level of broad governmental policy
consistency over past decade
Strong policy continuity between elites (within same
party or across parties) minimises risks that new
legislation will alter the business operating
environment 20%
Characteristics of Polity
BMI evaluation of system of government and
constitutional framework against ideal type
Democratic governments with strong, independent
institutions are less prone to sudden policy shifts 20%
Rule of Law
Evaluation of breadth and depth of government’s
ability to protect individuals and property
Strong rule of law reduces direct threats to assets
during construction 20%
Legal/Regulatory Risks 20% (Group)
Corruption Subjective measure of level
of corruption
Transparency is essential to predictable planning of
input delivery and cost and the predictability of officials’
decisions 50%
Contract enforceability
World Bank Index of cost, procedures and time taken
to recover a bad debt
Confidence in the legally binding nature of contracts
is essential to minimising domestic counterparty risk 50%
Economic/Financial Risks 35% (Group)
Domestic:
Economic stability
BMI’s Long Term Economic Rating, which incorporates 20 indicators to assess risk
of an economic crisis
Economic stability reduces risks to project activity (e.g.
via financial problems at suppliers) 30%
International: Availability of finance
US and Eurozone ave. interest rates, adjusted for
Chicago BOE VIX index
Project finance is principally raised internationally, so price and availability will
depend on US and Eurozone interest rates and
investor risk appetite (proxied by VIX). This is a
global, rather than country-specific, indicator. 70%
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Commissioning and Operating Phase- Commercial Construction
Indicator Definition Rationale Weightings
Inputs 30% (Group)
Domestic
Inflation, % Ave. inflation 2002-2009
and its standard deviation
High, and uncertain, inflation increases risks to
input cost projections 30%
Power, imports as % of consumption
As stated; power used as proxy for all utilities
Supply of utilities are essential to functioning of
asset and revenue generation per se 25%
International
Long Term Currency Volatility
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Currency volatility increases risks to cost projections of
imported goods 45%
Sale of Outputs
Regulatory 20% (Group)
Supply Risk
BMI subjective view of the transparency of
government planning policy
Clarity regarding future market supply is essential to forecasting demand for
asset 20%
Price Risk
BMI subjective view of the transparency of
government policy regarding price of service
related to asset
Clarity over policy/regulations covering
price are essential to projecting income 20%
Contract enforceability
World Bank Index of cost, procedures and time taken
to recover a bad debt
Confidence in the legally binding nature of contracts
is essential to minimising domestic counterparty risk 60%
Market Risks 30% (Group)
Economic stability
BMI’s Long Term Economic Rating, which incorporates 20 indicators to assess risk
of economic crisis
An economic crisis would cut – potentially
substantially – projected demand
Long term currency stability
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Sharp currency movements introduces risks to value of
income in international currency 50%
Political Risks 20% (Group)
Market orientation
Measure of government intervention in economy,
using data for govt. expenditure; govt. revenue
Governments with strong commitment to free markets
are likely to refrain from sudden changes to the 10%
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Commissioning and Operating Phase- Commercial Construction
Indicator Definition Rationale Weightings
from state-owned enterprises; ave. trade tariff
rates; tax levels; trade bureaucracy and history of
FDI flows.
investment/trade regime
Security Risk
Measure of the level of security threat; external and
internal, facing a country.
The higher the security risk the higher the risks to
infrastructure assets, in terms of physical security (as they tend to become targets) and in terms of
potential levels of insurance premiums which rise along
with security risk levels, increasing the costs to
sponsors. 40%
Policy continuity
BMI evaluation of level of policy consistency over
past decade
Strong policy continuity between elites (within same
party or across parties) minimises risks that new
legislation will alter the business operating
environment 10%
Rule of Law
Evaluation of breadth and depth of government’s
ability to protect individuals and property
Strong rule of law reduces direct threats to assets 40%
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Commissioning and Operating Phase - Energy and Utilities
Indicator Definition Rationale Weightings
Inputs* 30% (Group)
Inflation Ave. inflation 2002-2009
and its standard deviation
Volatile inflation will risk unanticipated cost
increases that it may not be possible to pass on to asset
users 30%
Crude price costs
BMI Brent crude forecasts for next five years, adjusted
for standard deviation of prices over past 3 years.
Gas and other fuel prices correlate closely with oil.
Price stability is desirable, as are expected future
trends. This is a global, rather than country-specific
risk. 25%
Long Term Currency Volatility
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Currency volatility increases risks to cost projections of imported goods or goods bought in US dollars (i.e.
fuel feedstock) 45%
Sale of Outputs
Regulatory 20% (Group)
Demand Risk
BMI subjective view of government energy policies
and their implications for industry demand
Transparency regarding government energy policies
is essential for evaluating demand 20%
Price Risk
BMI subjective view of the transparency of
government policy regarding power prices
Clarity over policy/regulations covering
price are essential to projecting income 20%
Contract enforceability
World Bank Index of cost, procedures and time taken
to recover a bad debt
Confidence in the legally binding nature of contracts
is essential to minimising domestic counterparty risk 60%
Market Risks 30% (Group)
Economic stability
BMI’s Long Term Economic Rating, which incorporates 20 indicators to assess risk
of economic crisis
An economic crisis would cut – potentially
substantially – projected demand 50%
Long term currency stability
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Sharp currency movements introduces risks to value of
income in international currency 50%
Political Risks 20% (Group)
Market orientation Measure of government
intervention in economy, Governments with strong
commitment to free markets 10%
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Commissioning and Operating Phase - Energy and Utilities
Indicator Definition Rationale Weightings
using data for govt. expenditure; govt. revenue
from state-owned enterprises; ave. trade tariff
rates; tax levels; trade bureaucracy and history of
FDI flows.
internally and internationally are likely to refrain from sudden changes to the
investment/trade regime
Security Risk
Measure of the level of security threat; external and
internal, facing a country.
The higher the security risk the higher the risks to
infrastructure assets, in terms of physical security (as they tend to become targets) and in terms of
potential levels of insurance premiums which rise along
with security risk levels, increasing the costs to
sponsors. 40%
Policy continuity
BMI evaluation of level of policy consistency over
past decade
Strong policy continuity between elites (within same
party or across parties) minimises risks that new
legislation will alter the business operating
environment 10%
Rule of Law
Evaluation of breadth and depth of government’s
ability to protect individuals and property
Strong rule of law reduces direct threats to assets 40%
* no distinction between internal and domestic risks. This reflects BMI’s view that all projects would have fuel feedstock contracts in place prior to construction.
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Commissioning and Operating Phase –Transport
Indicator Definition Rationale Weightings
Inputs 30% (Group)
Domestic
Inflation Ave. inflation 2002-2009
and its standard deviation
Volatile inflation will risk unanticipated cost
increases that it may not be possible to pass on to asset
users 40%
International
Long Term Currency Volatility
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Currency volatility increases risks to cost projections of
imported goods 60%
Sale of Outputs
Regulatory 20% (Group)
Demand Risk
BMI subjective view of government regulation and
its record in supporting substitutes etc.
Transparency regarding government policy is
essential for evaluating demand 20%
Price Risk
BMI subjective view of the transparency of
government policy regarding price of service
related to asset
Clarity over policy/regulations covering
price are essential to projecting income 20%
Contract enforcibility
World Bank Index of cost, procedures and time taken
to recover a bad debt
Confidence in the legally binding nature of contracts
is essential to minimising domestic counterparty risk 60%
Market Risks 30% (Group)
Economic stability
BMI’s Long Term Economic Rating, which incorporates 20 indicators to assess risk
of economic crisis
An economic crisis would cut – potentially
substantially – projected demand 50%
Long term currency stability
The standard deviation of the moving average of the
past 12 months of data on a monthly basis, plus the
standard deviation of the moving average.
Sharp currency movements introduces risks to value of
income in international currency 50%
Political Risks 20% (Group)
Market orientation
Measure of government intervention in economy,
using data for govt. expenditure; govt. revenue
from state-owned
Governments with strong commitment to free markets
are likely to refrain from sudden changes to the
investment/trade regime 10%
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Commissioning and Operating Phase –Transport
Indicator Definition Rationale Weightings
enterprises; ave. trade tariff rates; tax levels; trade
bureaucracy and history of FDI flows.
Security Risk
Measure of the level of security threat; external and
internal, facing a country.
The higher the security risk the higher the risks to
infrastructure assets, in terms of physical security (as they tend to become targets) and in terms of
potential levels of insurance premiums which rise along
with security risk levels, increasing the costs to
sponsors. 40%
Policy continuity
BMI evaluation of level of policy consistency over
past decade
Strong policy continuity between elites (within same
party or across parties) minimises risks that new
legislation will alter the business operating
environment 10%
Rule of Law
Evaluation of breadth and depth of government’s
ability to protect individuals and property
Strong rule of law reduces direct threats to assets 40%