The big MEP rebound

Senior research analyst Vivek Vijayakumar talks about Frost & Sullivan’s latest research report on the MEP sector in the GCC.

How has the economic crisis impacted on the MEP sector?

MEP services are an integral part of building activities, and the most demanded services within the construction sector, as it is required to keep building functions fully operational. So any impact on economic growth will directly impact the growth of the construction sector – which, in turn, will impact the growth of MEP services.

The growth rate of MEP services in the GCC over the last three years was around 19%, a period when there was a boom in the construction sector and oil prices were soaring. However, the growth rate showed a slight dip in 2008, and tumbled to almost 5.5% between 2008 and 2009 due to the sluggish economic and financial outlook, thereby reflecting the reduction in construction activity.

We expect the market to grow at a compound annual growth rate of 11% during the next five years, showing a gradual incline in growth during the end of 2010 or at the beginning of 2011 till 2013 owing to higher investments in real estate and infrastructure projects, mainly because of the GCC’s significant market characteristics and resilience.

You state the sector was valued at US$13.53 billion in 2008. What are the criteria for this figure?

The criteria are based on the comments and estimates from major market participants on the overall market size across GCC countries; their perceptions and expectations on the current and future market have also been taken into consideration. Finally we summed up their revenues using a bottom-up approach to estimate the market. We also considered the overall population of small, medium and large companies in each of the six GCC countries and the percent share they account for based on the revenue bracket they fall into through considerable sample-size coverage.

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The market is fragmented and highly competitive mainly because of the presence of many small and medium scale companies at the local level, which have capabilities to do either one or two of the three types of services by competing directly with other contractors or by sub-contracting with top companies, thereby providing more opportunities for the growth of local players.

We have noticed that many civil contractor companies/real estate developers are trying to enter the MEP services market with their in-house technical capabilities in order to maintain their profit levels. Many international companies are entering/expanding into the market either through tie-ups (with existing and established civil or MEP contractors) or solely into potential markets such as the UAE, Saudi Arabia and Qatar. Apart from this there is not much consolidation happening in the GCC market in terms of MEP services.

MEP service providers are trying to get into the FM services business as a value-added resource (aftersales services) mainly to streamline their profit levels and to maintain their sustainability levels in order to offer a comprehensive, one-stop service solution and to balance the risk involved in both businesses.

Have the entry barriers into the MEP sector changed significantly as a result?

Due to the reduction in construction activity, increase in construction material and labour costs, players are likely to assume higher risks and finally end up with lesser profits, thereby resulting in limited or lesser entry into this market currently, which may likely change in the future once MEP costs go down. These are some of the barriers that are likely to impinge the entry of global, regional and local players.

The sector ‘is likely to take off in 2011’?

Yes, the reason is an increase in investment from both the public and private sectors in real estate and infrastructure, which is expected to boost the market further during the end of 2010 or at the beginning of 2011. The factors that could impinge on this take-off are:
• Delay in the commencement of construction projects due to lack of availability of funds;
• Lack of investor confidence;
• Decrease in oil prices;
• Volatility in exchange rates; and
• Higher inflation costs and construction commodity prices etc.

Has the downturn brought to light any structural problems or deficiencies within the MEP sector?

The following structural problems or deficiencies are prevalent within the MEP sector:
• Higher attrition rates is a major problem during the downturn, as emerging economies are drawing labourers away from the region, posing a threat to manpower;
• Reluctance of existing players to take on large-scale projects that require a high level of technical expertise and innovation and involve a high risk due to the increase in construction commodity/material prices and labour costs;
• Delay in payment to the contractors due to insufficient fund reserves, which result in stoppage/postponement of projects;
• Volatility in exchange rates and material prices, which tends to result in the rescheduling of projects/tenders;
• Higher inflation costs are affecting project development directly by a delay in commencement or sometimes even the stalling of projects. In light of this, contractors are instituting a two-stage tender process, which will allow them to keep a project moving without stalling, thereby removing risks as well as enabling efficient management of pricing and price inflation.