Big spending: Rolling out project investments as part of the ninth five-year plan

The Saudi government has embarked on an ambitious spending programme that looks set to keep the local construction industry busy for years. In all facets of the sector, from large-scale infrastructure projects to new hospitals and schools, the slate of work is likely to expand in the coming years.

The government has laid out plans to improve the country’s infrastructure in a number of documents. The ninth five-year development plan of the Ministry of Economy and Planning, for example, called for $385bn in spending in the five years to 2014. While a significant portion of this is going towards developing soft skills and human resources ($195bn), there is also significant provision for spending on infrastructure in four different areas: social and health ($73bn), economic resources ($60.7bn), transportation and communications ($29.6bn), and municipal and housing services ($26.8bn). This template has been supplemented by further announcements over the last two years. For example, in November 2010, the governor and chairman of the Saudi Arabian General Investment Authority (SAGIA) told an entrepreneurship conference in Dubai that the authority would spend $500bn on investments in energy, logistics, ports and education up to 2020.

Housing Development

This was followed by the announcement of the Saudi stimulus package in February 2011. The SR135bn ($36bn) plan, which accounted for 10% of GDP, funded measures, such as interest-free home loans, that would indirectly provide a boost for the construction sector. A month later, the package was supplemented by a $67bn plan to build 500,000 new homes in the Kingdom, a substantial and direct driver for construction growth in the country. In late August, the ministry of housing invited contractors to bid for the first package of this plan, a project for 7000 new homes in the capital, Riyadh. Such government-led spending plans are already having a noticeable effect on the construction industry. In the first nine months of 2012, bank loans to the building and construction sector rose by 34% to SR72.5bn ($19.3bn) compared to the same period of 2011, according to data from the Saudi Arabian Monetary Agency (SAMA). This is the fastest growth for more than four years. Murad Ansari, an analyst at the investment bank EFG-Hermes Holding SAE, told Bloomberg, “When you look at the thrust of government spending, it is built around the infrastructure side of the economy. So it’s not a surprise that you are seeing lending to the construction and building segment growing at a faster rate than the rest of the economy.”

Economic Cities

Indeed, the headline 500,000 new homes is perhaps not even the most attractive project being brought to the market for contracting and construction firms. The four new economic cities – the King Abdullah Economic City (KAEC), Prince Abdul Aziz bin Mousaed City, Knowledge Economic City and Jazan Economic City – will require an investment size of as much as $60bn. More importantly, these mega projects will offer a range of contracts, from port and industrial infrastructure packages to a full range of residential and commercial real estate developments, which will keep contractors of all classifications occupied.

The development of these cities, particularly the KAEC in Rabigh in the west of the country, is well under way. Emaar, The Economic City – the developer of KAEC – expects the seaport to open in 2013, with the first phase in which the port will have a capacity of 4m twenty-foot equivalent units fully completed by 2015. Ahmed Linjawi, president of the city services and industrial division at Emaar, The Economic City told the Arab News in late July that 10m cu metres of dredging had been completed and that almost 800 tonnes of concrete blocks had been used to construct the quay wall.

The main contractor for the project is Huta Marine, a Jeddah-based contractor. The firm continues to sign agreements for the project, the latest being a $66.7m tie up with Saudi Readymix to supply 1m cu metres of concrete for the project.

Transport Infrastructure

The seaport is just one of a number of large-scale projects generated by KAEC and the three other economic cities. It is also just one of a large number of transport projects in the pipeline in the Kingdom. Indeed, the upgrade to the national transport network, across all segments from air to the roads, will offer a similarly broad range of contract opportunities for construction firms over the next five years. In the aviation sector alone, five new tenders were announced in the month of November 2012, ranging from small lighting projects to the construction of King Abdullah Bin Abdulaziz Airport including a control tower, air cargo facilities and a passenger terminal, according to MET enders.com. The new airport, a key component of Jizan Economic City, will have a capacity of 2.4m passengers upon completion.

This is far from the biggest airport project currently on the books in the Kingdom. The General Authority of Civil Aviation (GACA) has developed a master plan for King Abdulaziz International Airport (KAIA) in Jeddah, which could see the facility increase capacity in three phases to 70m-80m annual passengers by 2035. In June, GACA also signed an agreement with a consortium led by TAV Airports of Turkey for the build-operate-transfer of the new Medina airport. The project is expected to have an investment size of as much as $1.5bn and will include 138,000 sq metres of new terminals, 18 departure gates, air bridges and parking for 20 planes. TAV will operate the new airport for 25 years.

The aviation industry is far from the only segment of the transportation sector to be receiving considerable financial attention. As well as the seaports, significant capital is being directed towards the roads and the railways. The latter will see an almost seven-fold increase in the size of the network over the next three to four years, according to an interview with the president of the Saudi Railways Organisation, Abdul Aziz Al Hokail, published by the Arab News in February 2012. This will include five projects developing lines that will bisect the country north to south and east to west. There will also be inter-city networks off the main axis, including the Haramain High-Speed Rail project, a flagship line connecting Makkah, Jeddah, Medina and Rabigh. The project has already progressed to the $8.2bn second phase under which 35 trains, traffic signals and tracks will be purchased and installed by a Spanish consortium. The line, which will have six stations, is expected to be complete by 2014.

The other major rail project, the Landbridge, a 950-km line connecting Jeddah on the Red Sea with Dammam and Jubail on the Arabian Gulf coast, has also seen some movement in 2012. The $7bn project is being driven forward by the government and, like the North-South railway and the Haramain HighSpeed Rail, will be funded by the Public Investment Fund, after plans to develop it as a public private partnership came to an impasse. The government is evaluating bids for management of the development. Work is also ongoing on the North-South rail line with the Public Investment Fund signing SR2.3bn ($613.6m) worth of contracts in January 2012. This includes three contracts for five stations, a maintenance workshop and support buildings. Upon completion, the 2400-km line will carry passengers and freight, including minerals from the Al Jalamaid phosphate mines and the Az Zabirah bauxite mines to Ras Azzour on the Gulf coast, where processing facilities in the industrial zone are located.

Power & Utilities

These huge transport infrastructure projects are designed to facilitate and expedite economic growth and diversification in the Kingdom. This will also require a significant investment in power generation and utilities capacity, a further avenue of potential work for construction and engineering firms. According to the ninth five-year development plan of the Ministry of Economy and Planning, the target is to increase installed power generation capacity by more than 20 GW to a total of 72 GW by 2014. As such, a number of tenders and contracts continue to be published. For example, the ABB Group of Switzerland won a $170m contract in November 2012 to provide substations for the Saudi Electricity Company, the national power transmission and distribution company.

Given the population growth rate and the urbanisation levels in the Kingdom, contracts such as this are unlikely to disappear soon. The current levels of spending, largely funded by public sector agencies, may not be able to be sustained into the longer term, but it seems unlikely that the volume and value of contracts brought to the market in the past year will dissipate in the medium term. The government has placed strategic importance on meeting infrastructural and housing needs for the growing and young population over the next decade. Thus, the construction industry is likely to be busy for some time.