Large-scale transport projects create openings for private sector investment in Saudi Arabia

Saudi Arabia has a landmass of more than 2m sq km, making it the largest country in the Middle East. With a population of 31m and industries and urban centres scattered across the coastline and interior, it has a strong need for an integrated transport infrastructure network with connecting logistics. However, the Kingdom’s geography and desert landscape have presented challenges. Since 2008 the Saudi authorities have invested heavily in transport infrastructure projects as part of efforts to expand and diversify the economy, as well as reduce automotive transport for both passengers and cargo.

Ports have been built, airports expanded and upgraded, and railway and metro projects initiated – and in some cases already completed. Tens of billions of dollars have already been spent, and many more billions have been earmarked over the next few years. In public transport alone, $141bn is expected to be spent on infrastructure and operations in the next decade, including the $22.5bn Riyadh Metro project, set for completion in 2019.

Despite a scaling back of government expenditure in 2016 due to lower global oil prices, spending on key transportation infrastructure will likely continue to be prioritised as well-developed networks are seen as key for economic and social growth. The National Transformation Programme (NTP), announced in June 2016, includes a number of strategic goals and benchmarks for transport.

Budget Issues

As in many other oil-producing countries, low energy prices have seen Saudi Arabia cut its budget for 2016, and it is thought that many of the transportation projects under way or under consideration could be affected, either in scale or – more likely – in the timeframes for completion. In October 2015 Abdullah Al Mogbel, then minister of transport, said there would be no major cutbacks regarding transportation projects, which are seen as vital for the diversification of the Kingdom’s economy. However, in December the government revealed a record deficit in 2015 of nearly SR367bn ($97.8bn), causing the Ministry of Finance to release a scaled-back budget for 2016.

Signature Projects

The allocation for spending on transport and infrastructure fell by 62% for 2016, from SR63bn ($16.7bn) in 2015 to SR23.9bn ($6.4bn). However, another SR23bn ($6.1bn) was set aside for signature transportation projects, such as the Riyadh Metro and Jeddah’s King Abdulaziz International Airport. Alongside the budget cuts, the Kingdom also raised petrol prices by some 50% in December 2015. According to local press reports, the price of higher-quality 95-octane petrol increased to SR0.90 ($0.24) per litre, while the cost of lower-quality 91 grade rose to SR0.75 ($0.20).

The increase was the result of subsidy reforms being implemented over the next five years in an attempt to reduce domestic consumption of resources such as electricity, water, diesel and kerosene. This has led to a growing sense that public transport could eventually become an important method of transit for many in the Kingdom.

Port infrastructure also continues to develop, with the privately owned King Abdullah Port beginning operations in 2014. The port is part of the King Abdullah Economic City (KAEC) mega-project, which is scheduled for completion in 2035.

Sector Organisation

The transportation sector in Saudi Arabia is governed and regulated by the Ministry of Transport (MoT), with certain subsections overseen by other government agencies. The MoT coordinates the Kingdom’s bus and railway networks, as well as the planning and development, and construction and maintenance of the Kingdom’s expanding road networks.

There are a number of government bodies that operate under the supervision of the MoT. The Public Transport Authority (PTA), which was established in 2013, is tasked with overseeing and regulating the public transport services. In April 2016 the PTA was given the additional responsibility of regulating the railways following on the back of a merger with the Saudi Railways Commission, originally established by a royal decree in 2008. The Kingdom’s seaports are controlled by the Saudi Ports Authority (SPA), while the national body in charge of civil aviation is the General Authority of Civil Aviation (GACA), which moved under the MoT in the first half of 2016. The current president of GACA and minister of transport is Sulaiman bin Abdullah Al Hamdan.

Logistics

According to the World Bank’s 2016 “Doing Business” report, Saudi Arabia ranks 150th out of 189 countries surveyed when it comes to trading across borders, up one place from 2015. The report estimates that it takes 69 hours for exports to go through Saudi border compliance, which is a process involving Customs clearance and examination, as well as inspections by other agencies and port or border handling. Around 90 hours is required to obtain, prepare and submit documents for documentary compliance. The report estimates that for imports the same procedures take 228 and 131 hours, respectively. In 2014 some sector stakeholders argued that trading across borders was made more difficult by an increase in the number of documents needed both to export and import goods.

However, steps are being taken to utilise e-services to speed up or simplify procedures, with the SPA bringing in a number of measures to improve the services provided at ports, including the launch of a container inquiries service on the SPA website, which saves time and effort for customers who no longer need to be present at the port to inquire about the status of their containers.

“We haven’t implemented complete e-services yet,” Nasser Al Kahtani, director of the statistical analysis department at Saudi Customs, told OBG. “We are on a journey, but it is a very important one.”

Road Works

Saudi Arabia’s road networks continue to be the foundation of its economic development, and the country will remain largely reliant on them for the near future at least. As such, investing in this segment remains a priority, even at a time when resources are being put into building alternative transport infrastructure. Furthermore, in line with the Kingdom’s national development strategy, Vision 2030, private investment could come to play a larger role in future road building and maintenance.

Between 1990 and 2011 the total length of roads in Saudi Arabia, including both asphalted and paved agricultural roads, increased by 11.22% per year, according to the investment company Kuwait Financial Centre (Markaz). Currently, the Kingdom has more than 60,000 km of asphalted roads, and there are plans in the works to add another 60,000 km of roads over the next few years. At the same time, the number of new cars on the roads is expected to reach 1m per year by 2020.

Cross-Border Routes

In October 2015 Saudi Arabia and Oman completed construction of a 679-km motorway, started in 2010, directly linking the two countries for the first time. In the past those travelling between the two Gulf states by land were required to pass through the UAE.

The new motorway, which traverses Saudi Arabia’s vast Rub Al Khali, or Empty Quarter, removes that requirement and should lead to greater trade and tourism opportunities for both countries. Construction of the road, which cost Saudi Arabia SR1.6bn ($426.6m) for its section, according to local press reports, proved somewhat challenging, with temperatures ranging from -1°C to 50°C, as well as shifting sands. Construction machinery was reportedly required to dig through sand dunes as high as 300 metres at times. However, the impact of the highway should substantially exceed the difficulties of creating it. The new road will serve to cut the distance between Saudi Arabia and Oman by an estimated 800 km, with 519 km of the new road running through the Kingdom and a 160-km stretch in Oman.

Meanwhile, the King Fahd Causeway, which connects Saudi Arabia with Bahrain and is the only terrestrial link between the two nations, is also set to undergo a major expansion, with the number of lanes to be increased from 17 to 45. Fees for using the causeway, which opened in 1986, rose by 25% on January 1, 2016 to help cover the construction costs.

Traffic

Given the reliance on vehicles, traffic also remains a concern in Saudi Arabia. In early 2016 the Kingdom launched a project to reduce congestion in Riyadh. The project involves the installation of 350 control devices in traffic lights to regulate the flow of traffic at major intersections and 1400 digital cameras for counting vehicle numbers. The hope is that, with a high-tech system, the city can better control the flow of traffic at major junctions, achieving a smoother flow of traffic.

This drive to employ modern technology in solving transport issues is also being seen in the private sector. Companies like Easy Taxi, Uber and Careem are using smartphone apps to improve the availability of transport. “Saudi Arabia is the perfect country for us,” Eugen Brikcius, general manager of Easy Taxi, told OBG. “Taxis are cheap, so most people can afford them, and public transportation is limited. Most of our passengers are women.”

Easy Taxi, which began operations in Saudi Arabia in sometime in December 2013, is currently experiencing double-digit month-on-month growth and, following the announcement of the Vision 2030, Uber received an investment, worth $3.5bn, from the Saudi Public Investment Fund, which is the largest single investment to have been made in a private company up until that date.

Railway

Saudi Arabia’s existing rail system, which comprises some 1400 km of track, is the target of major upgrades as the Kingdom attempts to create a national railway network in a relatively short period of time. The NTP lays out the strategic objective of increasing the efficiency of the railways. It identifies as a benchmark to decrease the number of containers not transported from Dammam to Riyadh due to insufficient capacity of the network by 30% in the next five years. It also aims to raise the number of daily trips for cargo and passenger trains from 31 to 50 by 2020. Along with the increase in the number of trips, the NTP also lays out indicators to improve the timeliness of arrivals and departures.

A large railway network has been identified as one of the areas with the greatest potential for high-impact investment as the Kingdom pushes to diversify its economy. “All of the new railway lines will help to solve the issues of interconnectedness,” Abdullah Ali Al Subaith, director of the research and development department at the Royal Commission for Jubail and Yanbu, told OBG. “Saudi Railway Company (SAR) is working to introduce new lines. Trains will greatly affect the movement of goods and people, and can draw in many more companies. They also allow people to live and work in different areas.” Royal Commission, set up by royal decree in 1975, is tasked with implementing infrastructure plans to develop the cities of Jubail and Yanbu as centres for industry.

An earlier Saudi Railway master plan set the goal of 10,000 km of mainline track by 2040, but that has since been increased to help connect the Kingdom’s growing industrial hubs and its expanding port infrastructure to the transport network. In the long run, the goal is to fully integrate the Kingdom’s land, rail, air and maritime transport networks.

In March 2015 the publicly owned Saudi Railways Organisation (SRO) signed a SR2.84m ($757,000) contract with German-based Dornier Consulting to update and refine the existing blueprint for the national rail development project, as well as draw up a conceptual framework consistent with the National Transport Strategy of 2002.

Rail Projects

SAR has completed the railway between Qurayyat in Al Jawf and Riyadh. With operational testing under way, there will be a total of three trips per day, with the rail connection cutting the travel time between these places by half. There will be stations located in Riyadh, Majma’a, Qassim, Hail, Al Jawf and Al Qurayyat. Currently, work is under way on two major railway projects. The first is the Haramain High-Speed Rail project, which, when finished, will span a distance of 453 km and connect Medina to Makkah, via the KAEC, and Jeddah, with a stop at King Abdulaziz International Airport. The second is the 2750-km SAR North-South Railway, which attempts to link the far corners of the Kingdom through two main lines: one travelling north-west, from Riyadh to the Jordanian border, passing through Qassim, Hail and Al Jouf, and another connecting the Al Jalamid mine in the north with processing and export facilities located in Ras Al Khair, 60 km north of Jubail.

In early 2016 the $7.4bn Haramain project underwent final testing. With trains capable of travelling at speeds of up to 300 km per hour, the railway has been described as the largest public transport project in the Middle East. It is being overseen by SRO and SAR, a wholly owned public investment fund set up in 2006. Both were created in order to better develop the national rail infrastructure.

Rumaih Al Rumaih, president of SRO told OBG, “The Haramain High-Speed Rail project will complement Vision 2030’s goals as it will improve our ability to transport more religious travellers while also connecting to other planned rail lines which will support post-Umrah travel around the Kingdom.”

In 2011 the contract to run and maintain the railway for a period of 12 years was awarded to the Spanish-Saudi Al Shoula consortium. The railway is expected to begin operating in 2018 and should help to resolve the logistical challenges that occur during the Hajj. During the annual pilgrimage, trains will run every 10 minutes on the line, 23 hours a day, and will carry an estimated 160,000 passengers per day in both directions. Some issues remain, however. The line crosses the Arabian Desert, where sandstorms are frequent, and disagreement within the consortium has arisen over who is responsible for clearing away the sand that gets blown onto the tracks.

North-South Connection

As of early 2016 the SAR North-South Railway was 98% complete, and in April the first of a total of five passenger trainsets arrived in the Kingdom, supplied by Spain-based manufacturer CAF. Freight traffic on the industrial mineral line began in 2011.

Currently, there are daily freight trains running from two mines – one bauxite and the other phosphorous – with each train transporting up to 15,000 tonnes of raw material. This has helped remove around 600 trucks from the road per load, cutting down on pollution as well as congestion. The passenger line is slated to have six daily trains, two in the daytime and four running at night, each travelling at 200 km per hour and carrying up to 450 passengers.

The next major railway project in the Kingdom is likely to be the Landbridge, linking Jeddah City on the Red Sea with Riyadh and Jubail on the Gulf.

Although a planned connection between Jeddah City and Jeddah Islamic Port has run into difficulties, the railway will also include a link to King Abdullah Port. Publicly funded and with construction to be overseen by SAR, the line will facilitate the rapid and direct transport of raw materials and goods from one side of the Kingdom to the other, connecting mines, industrial centres and port infrastructure, including the industrial coastal cities of Rabigh and Yanbu. This has the potential to have a huge impact on the Kingdom’s economy. “Rail and road integration with the port will be key to improving transport and logistics efficiency,” Abdullah Al Zamie, director-general of Jeddah Islamic Port, told OBG.

The designs have already been submitted by SAR and are currently awaiting approval, with the project likely to take another five to seven years after the green light has been given. The cost of this 950-km line is estimated to be around $7bn, and project management consultancy contracts have already been awarded to US-based firms Fluor Corporation and Parsons Brinckerhoff.

GCC Rail

Another important rail development is the GCC-wide rail system, a mega-project to link all six Gulf states by rail for the first time. The Saudi portion of the project is roughly 663 km, out of a total length of 2100 km. Completion was originally set for 2018, but due to the current fiscal environment and the challenges of coordinating among all the GCC states, this is expected to be pushed back.

In February 2016 all the GCC transport ministers held a meeting in Riyadh to discuss possible avenues for funding the project in light of weakened oil prices and to discuss a new timeline.

Metro Systems

In recent years Saudi Arabia has been pushing to develop metro and bus networks in its larger cities, most notably Riyadh, although metro projects are also in development in other major metropolises. In June 2015 authorities revealed a 10-year expansion programme for the Kingdom’s public transport industry, which will see more than $90bn spent on infrastructure and $51bn on operational costs. There are plans for five metro lines in the cities of Riyadh, Jeddah, Makkah, Medina and Dammam, and new bus programmes, as well as thousands of kilometres of new railway lines.

Capital Metro

So far the only project under construction is the metro in Riyadh. In the past 20 to 30 years Riyadh has experienced significant growth, both in population size and development, which has engendered issues like road congestion. The public transport system in the capital has been irregular, provided by smaller companies, but in 2001 work began on the development of a public transport network, with approval given for the metro and bus project in 2012, under the management of Arriyadh Development Authority (ADA). The six-line metro system will serve 85 stations, while the city’s bus network will have 965 buses and around 6700 stops.

“Earlier urban planning didn’t meet the needs. We have found that car dependency in Riyadh is almost 90%, while reliance on public transport is just 2%, in a city of more than 6m inhabitants,” Hassan Al Mosa, assistant director for transport at ADA, told OBG. “The new metro is designed to carry 3.6m passengers, with an initial target of 1.16m,” Al Mosa added, though he admits that changing the mindset of Saudis and getting them to use public transport rather than private cars will take time. The project, which is expected to cost around $22.5bn, is currently on schedule to be completed in 2019. In December 2015 Al Mogbel told a regional conference in Riyadh that 25% of the project had already been completed.

Outside Riyadh, the contract to build the first phase of a new metro network in Makkah is expected to be awarded by the end of 2016. The Makkah Mass Rail Transit Company, a wholly owned subsidiary of Al Balad Al Ameen Development and Urban Regeneration Company, will oversee the construction of the planned four-line metro system, which is estimated to cost around $8bn. The railway will operate alongside the existing SR7.5bn ($2bn) Mashair light railway, which was completed in 2010 and transports pilgrims between the various religious sites during the Hajj. Tendering is also expected to begin for the metro networks in Jeddah, Medina and Dammam sometime in 2016, according to press reports.

Plans In Jeddah

In March 2013 the Council of Ministers approved the creation of the Jeddah Metro Company, a subsidiary of the Jeddah Development and Urban Regeneration Company, to develop the city’s metro network. The city plans to construct four lines, totalling 149 km and 85 stations, to link different parts of the city as well as the airport. In July 2014 France’s Systra, which specialises in rail and public transport, was awarded a $74m contract for engineering design, while UK architecture firm Foster + Partners was awarded the overall design contract for the metro, worth an estimated $80m, in March 2015. Scheduled to be operational in 2022 at a cost of $12bn, the metro is expected to provide transport to 30% of Jeddah’s commuters by 2040.

Medina 

Medina plans to construct a driverless three-line metro system, along with two bus rapid transit lines, four express bus routes and seven feeder bus routes, which authorities hope will be in operation by around 2020. “Many Muslims spend their whole lives saving up to visit the city of Medina, so the least we can do is provide a safe and easy-to-use transport system to accommodate them,” Mamdouh Tarabishi, CEO of the public transportation programme at Al Madinah Al Munawarah Development Authority, told a Middle East Rail conference in Dubai in March 2015. That same month, engineering firms Egis and Systra were awarded a contract to carry out design and feasibility studies for the metro. Meanwhile, in Dammam the plan is for two metro lines: one running from Tarout Island to Qatif and the King Fahd Causeway, which links the Kingdom with Bahrain, and the other connecting Dammam with King Fahd International Airport. The project, approved in May 2014, is expected to be completed by 2021 at a cost of SR60bn ($16bn).

Aviation

There are 27 airports operating in Saudi Arabia, four of which – in Riyadh, Jeddah, Dammam and Medina – are used for international flights. The year 2015 was a positive one for civil aviation, with the Kingdom’s airports experiencing strong growth in both the number of passengers and the volume of domestic and international flights. The airports recorded a 9.5% rise in the total number of passengers in 2015, from 74.8m in 2014 to 81.9m. There was also a 9.8% rise in flights, from 58.9m to 64.6m. GACA forecasts that annual passenger traffic at the Kingdom’s airports will hit 100m by 2020.

Plans are under way to develop the segment further through the privatisation of certain assets, the modernisation of civil airports and the opening up of the domestic aviation market to additional players (see analysis). In 2012 Saudi authorities announced the proposed liberalisation of the domestic aviation sector, which is served by just two players – Saudi Arabian Airlines (Saudia) and budget airline Nas, launched in 2007. Saudi Gulf Airlines, owned by the Abdel Hadi Al Qahtani Group, received its licence to operate domestic flights in June 2016, while Al Maha Airways, a subsidiary of Qatar Airways, and Nesma Airlines, an Egyptian airline owned by Saudi joint venture Nesma Holding Company, are awaiting final approval from GACA to begin operations.

Growing Fleet 

Flag carrier Saudia secured a $1.9bn loan in 2014 to help it expand its fleet. In February 2016 the national airline took possession of four Boeing Dreamliners, increasing its total number of aircraft to 126. “We are planning to raise up the number of our fleet to 200 aircraft,” Saleh bin Nasser Al Jasser, director-general of Saudia, said at a function held by Boeing the same month. “We have also signed an agreement to acquire 50 new Airbus aircraft and another one to send 5000 Saudi students to study aviation in the US.”

Airport Expansion

The Kingdom’s two largest airports, King Abdulaziz International Airport (KAIA) in Jeddah and King Khalid International Airport (KKIA) in Riyadh, are both undergoing expansion projects. The first phase of KAIA’s three-stage renovation is set to open in mid-2017 and will raise the airport’s capacity from 17m passengers per year to 30m. The new 720,000-sq-metre terminal, which is estimated to cost approximately $7.2bn, includes five lounges for first- and business-class passengers, 46 gates and nearly 28,000 sq metres of retail space. The second and third phases of the expansion, which are unlikely to be completed before 2035, will eventually raise total capacity to some 80m passengers a year.

Meanwhile, the new 106,500-sq-metre terminal 5 at KKIA, which was set to become fully operational by the end of June 2016, will have the capacity to accommodate 12m passengers per year.

In November 2015 GACA announced that the Kingdom would privatise its airports and related services (see analysis). This is likely to have a significant impact on the sector, with KKIA, the air navigation industry and the IT sector all slated for privatisation by the end of 2016. The government and industry stakeholders will be looking for the process to improve service, efficiency and reduce the burden on the government budget.

Opportunities At Sea

As one of the world’s largest exporters of primary products, Saudi Arabia’s port infrastructure is fundamental to the Kingdom’s economic output. “Investments in infrastructure remain a priority, as much of the growth of the industry in the country will depend on it,” Ibrahim Al Omar, CEO of the National Shipping Company of Saudi Arabia (Bahri), told OBG. “The Red Sea carries a full 25% of global trade, and Saudi Arabia is set to continue to benefit from it.”

According to the Agility Emerging Markets Logistics Index 2016, EU ocean shipments to Saudi Arabia showed the most growth among the top-10 lanes involving EU or US origins and emerging markets destinations. The index estimated that seafreight transported from the EU to Saudi Arabia rose by 20% by in 2015, from 13.3m to 16m tonnes, while shipments travelling in the opposite direction grew by 14.6%, from 3.5m tonnes to 4m. Airfreight between the EU and Saudi Arabia also increased by 8.7%. Total revenue collected at Saudi Arabia’s seaport Customs in 2014 reached SR20.2bn ($5.4bn), 83% of the Kingdom’s total Customs revenue that year, according to the latest annual report by Saudi Customs.

As Saudi Arabia increases the capacity of its seaports on both the Red Sea and Arabian Gulf coasts (see analysis), there will be an increasing number of opportunities to take advantage of the Kingdom’s location between the West and China.

“I think there is enough demand for new ports. We have more than 40 ports – seaports, airports, dry ports – and there is a need for more. Exports are growing year after year,” Al Kahtani told OBG.

The import and export potential of new industries as the country diversifies its economy, coupled with strong demand from Saudi consumers, will also bring fresh opportunities for the Kingdom’s ports.

“A quarter of global trade goes through the Red Sea, so there is plenty of room for expansion of current capacity. It also offers the private sector opportunities to build supporting facilities such as repair docks,” Nabil Al Amoudi, president of SPA, told OBG.

New Port

In 2014 the launch of operations at King Abdullah Port, the Kingdom’s second-largest port, with a capacity of 3m twenty-foot equivalent units, greatly expanded the container capabilities of Saudi Arabia. The new port is also helping drive development of KAEC, according to Michael Wuebbens, managing director of Huta Group. “King Abdullah Port will be a catalyst for the development of KAEC, but it will require integration of road and rail as well as the establishment of a logistics hub within the city,” he told OBG. “Increased government efficiency and support is also required for KAEC to be able to overtake regional competitors.”

This development, along with Jeddah Islamic Port, which is the largest port in the Kingdom and is also set to undergo an SR510m ($136m) expansion programme, will help the Kingdom continue to develop its exports outside of traditional primary products like hydrocarbons. “The expansion of the Red Sea Gate terminal will increase capacity by 500,000 standard containers annually,” Al Zamie told OBG. “Jeddah Islamic Port and the new King Abdullah Port in KAEC complement each other well,” he added.

Another major development for the shipping industry occurred in 2014, with the $1.3bn merger of Bahri and Vela International Marine, a subsidiary of Saudi Aramco. According to press reports, the merger resulted in a combined fleet of 77 vessels, with 32 being very large crude carriers (VLCCs). In March 2016 Bahri announced net profits of some SR1.8bn ($479.9m) in 2015, up almost 240% on the previous year’s profits of SR533.8m ($142.3m) largely due to the increase in the group’s VLCC fleet, which is now the third largest in the world.

In October 2015 Saudi Aramco signed a memorandum of understanding with the shipbuilder Hyundai Heavy Industries (HHI) to develop a shipyard and maritime diesel engine facilities in Saudi Arabia. This came just months after a deal between Bahri and HHI for the South Korean firm to supply 300,000 oil tankers, worth around $1bn, over several years.

Outlook

With large-scale investment strengthening the Kingdom’s transport and infrastructure, the outlook for those involved in the sector looks promising. Even with the budget cuts in 2016, signature projects are likely to move ahead in the coming years, benefitting both Saudi residents and businesses using the new transport links, as well as companies looking for contracts related to the new construction projects. There are also likely to be plenty of opportunities for international firms when it comes to tenders for public works projects, not least the metro and airport expansions.

With so many projects under way and in the planning stage, there are also opportunities for associated components and infrastructure, such as track, rolling stock and signalling systems, not to mention bridges, tunnels and stations. In addition, ongoing privatisation of some aspects of the aviation industry (see analysis) looks set to signal a shift towards more private sector involvement in the transport sector in Saudi Arabia in the years to come.