Government investment in the transport sector drives growth

Since the global slowdown of 2008, the Saudi authorities have committed huge sums in infrastructure spending to spur demand in the economy. The government’s strategy has focused on improving transport infrastructure, with unprecedented levels of investment in rail, aviation and port facilities. With oil prices falling, the government is once more stepping in with spending to boost the economy, and a fresh round of investment in transport is in the offing.

A SLEW OF PROJECTS: According to government sources, the transport sector is currently the target of some $141bn of investment in rail and public transport alone, with an estimated $90bn of spending forecast on capital investment and $51bn on operating expenditure. The money is set to be allocated across a total of 14 different projects, with three large projects – the north-south railway, the Haramain HighSpeed Rail Project and the Riyadh metro – already under construction. Combined investment on just these three projects is expected to reach $42.9bn.

These initial projects represent just the tip of the iceberg, however. By 2025 another four citywide metro systems will be built (including Jeddah, Makkah, Medina and Dammam) with a total investment of around $64.9bn, while a further $14.4bn is to be invested in inter-city rail lines and $8.7bn in bus projects.

Beyond these investments in multi-modal land transport, the Saudi Arabian General Investment Authority (SAGIA) anticipates a further $28bn of investment in ports and sea transport, and around $23bn in aviation, bringing total investment in the transport sector through 2025 to an anticipated $190bn.

GROWING NUMBERS: With so much money under investment, keeping track of the rolling total can be difficult. However, industry sources quoted through Saudi Logitrans, a transport, logistics and freight exhibition based in Riyadh, estimated the current total of announced projects to be $81.6bn. This figure would suggest there remains over $100bn of investments to be made in the transport sector in the coming decade; if spread out on an annual basis, this would represent a boost of around 1.3% of GDP per year.

As a share of GDP, the Saudi transport sector accounts for 2% of economic activity as per 2012 figures; by contrast, in Turkey the transport sector accounts for 6.3% of GDP. None of the Kingdom’s cities currently features public transport beyond basic bus networks (with the partial exception of the recently completed pilgrim railway in Makkah), while rail density is 0.05 km per 1000 population, as compared to 0.72 in the US. SAGIA estimates the current round of spending on rail projects will raise this figure to 0.2, contributing an additional $86bn to the economy.

VITAL INVESTMENT: Moreover, when the Kingdom’s transport sector is weighed against international benchmarks, it is equally clear such investment is necessary. SAGIA estimates that the current GDP share of transport is 50% below what it should be, while employment in the sector (0.9% of total) is some 40% below benchmarks. SAGIA has identified the rail sector in particular – 30% below benchmarks and ranked 47th by the World Economic Forum in its 2013 infrastructure survey – as having the greatest potential for high-impact investment.

Indeed, the Saudi government’s current plans for the railway sector amount more or less to the creation of an entire national network from scratch. Two national railway companies were created to share responsibility for overseeing the works: the Saudi Railway Company (SAR) and the Saudi Railways Organisation (SRO). Each is currently working on a flagship project: in the case of SAR, the 2750-km north-south railway (which will run from Riyadh to Al Haditha on the Jordanian border, with a spur connecting the bauxite mines of Al Zabira with Ras Al Khair on the Gulf coast); and in the case of SRO, the 450-km Haramain High-Speed Rail Project (which will connect Makkah and Medina via Jeddah and the currently under construction King Abdullah Economic City). The combined investment in these two projects is roughly $20bn.

A third project yet to begin construction is the Saudi Landbridge, which aims to connect Jeddah with Riyadh, from where – thanks to existing lines operated by SRO which are soon to be upgraded (including a high-speed link) – passengers and freight will be able to reach Dammam on the Gulf coast.

The estimated cost of this 950-km railway is in the region of $7bn, and construction will be supervised by SAR. Project management consultancy contracts have already been awarded to Fluor Corporation and Parsons Brinckerhoff, and pre-qualification recently began for the construction supervision contract. “The Saudi Landbridge Project is set to connect the Jeddah Islamic Port (JIP) with two stations. This railway will ease the traffic of containers and increase trade flows,” Sahir Tahlawi, director-general of JIP, told OBG.

Once this initial spine of the Kingdom’s railway infrastructure has been completed, the government’s strategy calls for additional investment in two further phases – 2026-33 and 2033-40 – to bring the Kingdom’s total track to 9900 km. These additional projects will take the form of extensions along the Red Sea coast further north and south, reaching Duba and Jazan, while spurs from Medina will link that city with Hail and Buraydah. There are also plans to build a railway link to Bahrain for $5bn, as well as the Saudi tranche of the GCC railway ($1.5bn).

PRIVATE SECTOR STEPS IN: All of the Kingdom’s current railway projects are being fully funded by the government, with private sector participation through tendering followed by limited-term operation and management (O&M) concessions once facilities have been completed. The authorities had previously hoped to fund some of the current infrastructure drive through public-private partnerships (PPPs). The Saudi Landbridge in particular was considered as a flagship for this approach, with the Tarabot consortium initially selected in 2008 as the preferred bidder among a shortlist of four. The PPP contract would have consisted of a 50-year build, own, operate, transfer concession; however, following the global financial crisis industry insiders suggested the consortium was no longer willing to take on the risks of such a substantial project. Thus, in 2011 the project was resurrected under the auspices of the governmentowned SAR, and will proceed along the same lines as the Haramain and north-south railways.

Thus far the only project in the transport sector to be financed through the PPP model is Prince Mohammad bin Abdulaziz International Airport in Medina, which has recently been completed by a consortium composed of Turkey’s TAV Airports and two Saudi Arabian companies, Saudi Oger and Al Rajhi Holding Group. Three lenders – National Commercial Bank, Arab National Bank and Saudi British Bank – provided a total of $1.2bn in funding for the project, which has been implemented through a build, transfer and operate model. This variant of the more established build, operate and transfer model will enable the General Civil Aviation Authority (GACA) to maintain ownership of the infrastructure, while the consortium will take on passenger demand risk and share revenues.

FINANCING SCHEMES: Following the successful conclusion of negotiations for the Medina airport, GACA announced in May 2014 that it would be pursuing a similar model to finance a new international airport in the city of Taif, near Makkah. GACA is currently working with the International Financial Corporation, the private sector arm of the World Bank, to prepare the tender process for a build, finance, operation, maintenance and transfer contract, which it hopes to award during 2015.

Given the Kingdom’s more extensive experience with the aviation sector, airports represent a natural starting point for PPP investments, enabling private investors to better judge the demand risks involved in financing such projects. Nonetheless, the Saudi authorities are hoping that the major capital investments they are currently making in the rail sector can be leveraged further, and encourage economic diversification through localisation programmes.

LOCAL FOCUS: Chief amongst these is a plan for some $30bn of component manufacturing for the Kingdom’s various train and metro programmes. SAGIA has identified nine components that it believes offer the greatest potential for local production, and is keen to attract global investors willing to partner with Saudi businesses in helping the local components industry progress up the value chain. Speaking at the two-day GCC Rail and Metro Conference, held in Oman in January 2015, Mohamed Khaled Al Suwaiket, the general president of SRO, called for a Gulf-wide initiative in the component sector. One option discussed by Al Suwaiket would entail the establishment of a common integrated localised manufacturing unit for the procurement of the main components, with Gulf states committing to the services and products of that unit.

Whatever the specifics, there can be little doubt that with so much capital under investment, the authorities have a major opportunity to promote knowledge transfer to local companies and workers.