The index was down due to the sharp decline in the value of awarded contracts through 1H16, amounting to only SR48.2 billion. April’s contract awards were valued at approximately SR9.3 billion, led by the oil & gas and power sectors. May's value of contract awards decreased to approximately SR3.1 billion, mainly led by the urban development & petrochemical sectors. June’s contract awards were worth approximately SR7.8 billion, led by petrochemical and residential real-estate sectors.
The value of awarded contracts during Q216 declined by 27% compared to Q116. The SR20.3 billion worth of contracts awarded during Q216 reversed the trend seen in previous years through 2015, recording lower quarterly values of awarded contracts in 2016. The decrease was mainly attributed to the reduction in awarding of mega-projects as a result of the fiscal restructuring by the government. However, there was a significant increase in the number of smaller contracts that focused on strengthening the country's infrastructure capabilities. After amounting to SR9.3 billion in April, the value of awarded contracts in May dipped to SR3.1 billion, which was one of the lowest values seen since April 2010.
According to the NCB, the decision to halt expansion of the Prophet’s Mosque is indicative that spending on metro projects will be scaled back or even delayed. While KSA's largest metro projects in Jeddah, Madinah and Dammam will stall in 2016, NCB says investment in oil and gas projects is continuing, as well as in power sector.
The main contributing sectors in Q216 were oil & gas, which has accounted for 32% of the total value of awarded contracts, SR6.5 billion, followed by petrochemicals at SR5.6 billion (28%), and residential real estate at SR2.9 billion (15%). The power sector witnessed a rise in the value of awards compared to the previous quarter to reach SR2.4 billion (12%).
The momentum of the value of awarded contracts has declined during 1H16. The sharp drop in contract awards activity followed the collapse of oil prices as the government tightened spending and postponed its spending plans. Approximately SAR48.2 billion worth of contracts have been awarded though the first half of 2016 compared to SAR116.9 billion worth of contracts for the same period in 2015. The project awards in the second half of the year and into 2017 will be dependent on the government’s current plan of scaling down and which projects are prioritised. An upward trend in oil prices will ease the situation, but since this is an unlikely scenario, so further decline in contract awards appear to be the most likely outcome.
The Eastern Province continues to receive the largest share of sizeable projects. Approximately 48% of the value of awarded contracts are based in the Eastern Province due to heavy investment by Saudi Aramco in the oil & gas sector. The Makkah region is second with 21% share, which was mainly attributed to significant projects in the petrochemical sector. The Riyadh region had a 17% share of the awarded contracts, mainly due to several contracts in the real-estate and urban development sectors. The Al-Qassim region contributed 8% to the overall value of contract awards after a major contract in in the real estate sector was awarded by Sulaiman Al-Rajhi College.
The main contributing sectors in Q216 were oil & gas, which has accounted for 32% of the total value of awarded contracts, SR6.5 billion, followed by petrochemicals at SR5.6 billion (28%), and residential real estate at SR2.9 billion (15%). The power sector witnessed a rise in the value of awards compared to the previous quarter to reach SR2.4 billion (12%).
The momentum of the value of awarded contracts has declined during 1H16. The sharp drop in contract awards activity followed the collapse of oil prices as the government tightened spending and postponed its spending plans. Approximately SAR48.2 billion worth of contracts have been awarded though the first half of 2016 compared to SAR116.9 billion worth of contracts for the same period in 2015. The project awards in the second half of the year and into 2017 will be dependent on the government’s current plan of scaling down and which projects are prioritised. An upward trend in oil prices will ease the situation, but since this is an unlikely scenario, so further decline in contract awards appear to be the most likely outcome.
The Eastern Province continues to receive the largest share of sizeable projects. Approximately 48% of the value of awarded contracts are based in the Eastern Province due to heavy investment by Saudi Aramco in the oil & gas sector. The Makkah region is second with 21% share, which was mainly attributed to significant projects in the petrochemical sector. The Riyadh region had a 17% share of the awarded contracts, mainly due to several contracts in the real-estate and urban development sectors. The Al-Qassim region contributed 8% to the overall value of contract awards after a major contract in in the real estate sector was awarded by Sulaiman Al-Rajhi College.
The sharp decrease in the values of awarded contracts is a trend likely to continue through the rest of the year and into 2017, the NCB said. Following the Ministry of Finance announcement to cut infrastructure expenditure by nearly 60%, cutting budgets from SR63 billion in 2015 to SR23.9 billion in 2016, progress in KSA projects has been slow.
In the medium to long term, the projects market will be relying increasingly on the private sector. However, the progress as anticipated will take some time as new legislation and regulations will need to be adopted. It appears that public-private partnerships are the most likely financing scheme for infrastructure projects.
Given the vital role the projects market plays in keeping the economy growing, a further suspension of contracts awards would have an adverse impact on the construction sector. There are strong indications of that already happening, as thousands of workers have been made redundant, and large contractors have been rolling down their debt with banks. Moreover, the GDP of the construction sector recorded -1.89% year on year in Q116. However, if it was not for the large value of awarded projects in previous years, worth over SR1.0 trillion and currently under execution, the construction sector GDP would have had a sharper decline. At the current pace of award contracts as witnessed in the first half of 2016, NCB warns that the GDP of the construction sector will continue to register negative growth, pulling other sectors down with it.
Given the vital role the projects market plays in keeping the economy growing, a further suspension of contracts awards would have an adverse impact on the construction sector. There are strong indications of that already happening, as thousands of workers have been made redundant, and large contractors have been rolling down their debt with banks. Moreover, the GDP of the construction sector recorded -1.89% year on year in Q116. However, if it was not for the large value of awarded projects in previous years, worth over SR1.0 trillion and currently under execution, the construction sector GDP would have had a sharper decline. At the current pace of award contracts as witnessed in the first half of 2016, NCB warns that the GDP of the construction sector will continue to register negative growth, pulling other sectors down with it.
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