Cost cutting on stimulus projects is a paradox

Governments have been quick to cut spending after two years of launching stimulus projects

The big challenge for the region’s construction sector over the coming year will be dealing with the paradox of government stimulus spending coupled with a drive to cut costs and project spending.

Since 2018, the region’s project pendulum has swung away from private sector real estate projects to government-funded infrastructure schemes. As the market shifted, the geographical markets with the greatest infrastructure requirements together with the ability to fund upcoming projects became the focus of attention for firms looking for new work.

The omens started to look promising in 2019 with Abu Dhabi pushing forward and awarding construction contracts on the UAE’s Etihad Rail, Qatar restarting the Sharq Crossing scheme, and Riyadh signing agreements for major infrastructure schemes such as the Saudi Landbridge rail scheme.

While the upcoming infrastructure work was not expected to completely replenish contractors’ order books, it was set to underpin a market that risked going into freefall as real estate-related construction activity slowed down.

The response of the region’s governments to the Covid-19 pandemic and the resultant drop in oil prices will derail those expectations. Dealing with the virus requires massive state spending, and with budgets that were already under pressure, governments are seeking to make capital expenditure savings this year.

Most projects in the region remain resilient and are expected to continue in the long term, but in the short term, spending will be reduced. Saudi Arabia’s Minister of Finance Mohammed al-Jaddan said on 2 May that the kingdom must reduce budget expenditures sharply.

The best example of how spending cuts might be achieved came in early April when Dubai ordered a 50 per cent cut in capital spending and ordered government client bodies to reduce spending on active construction projects by value-engineering development plans and ensuring no cost overruns occur.

While this could be viewed as an opportunity for good contractors to shine and demonstrate that they have the capability to value engineer and deliver projects more cost effectively, a more likely outcome is that costs will be cut. At a time when governments were planning to spend more to stimulate the economy, there will inevitably be questions over the effectiveness of stimulus spending if costs are aggressively cut after contracts have been signed.

Those questions may only be temporary if economies quickly rebound from the Covid-19 pandemic. If economic growth is sluggish and capital expenditure remains under pressure then the paradox of cutting costs on stimulus spending may become the new norm for the construction industry.

17 May, 2020 | .By Colin Foreman