Expanding transport infrastructure and special economic zones to attract foreign and domestic investment to Saudi Arabia

The government’s vision is for both domestic and international transport to play a key role in the diversification and modernisation of the economy. The authorities are aiming to make the country a regional and international logistics centre. To achieve this goal, they envisage working closely with leading global logistics companies via public-private partnerships (PPPs). One aspect of the new approach is the increased promotion of special economic zones (SEZs) in different parts of the country, creating industrial clusters with multi-modal freight links to a range of international destinations. Progress is already being made. “Foreign direct investment (FDI) and domestic investment levels are increasing, in particular with regard to big-ticket infrastructure items that will boost intermodal transport capacity. We expect to see healthy growth in all transport verticals over the coming decade,’’ Osama Abdouh, CEO of Metro Jeddah Company, told OBG.

Transport Strategies

Saudi Arabia’s transport industry is one of the key sectors of the economy targeted by the government’s Vision 2030 strategy, which calls for wide-ranging diversification and modernisation. In essence, the government is seeking to develop the Kingdom as a major logistics centre within the wider MENA region. Saudi Arabia’s location between the Gulf and the Red Sea makes it an important destination for freight flows from the US and Europe, and the region is of course strategically important as an oil and gas exporter.

It is estimated that some 252m tonnes of goods were handled by Saudi Arabia in 2016. Of that total, around 95% was carried by sea, 3% by air and 2% by road. This significant freight flow is expected to be at the centre of reform, modernisation and ownership changes as the Kingdom seeks to move goods in a more rapid and efficient manner. The authorities are keen to develop PPPs. The Saudi Ports Authority (SPA) is seeking to privatise all nine ports currently under its control. In addition to generating public revenue, the aim of privatisation is to achieve greater efficiency and even more competitive tariffs through innovations such as 24-hour operation and automated container handling.

Nine-Point Plan

In early 2018 the government outlined a nine-point logistics transformation strategy. The first priority was to automate and re-engineer the import-export process. The goal is to reduce the time, cost and variability of importing and exporting goods. Significant headway has already been made in this respect — for example, through the automation of various goods-handling processes.

The time taken for Customs declarations to be cleared at maritime ports has been halved to 2.2 days, while at airports it has been reduced to 1.2 days. Customs declarations can now be submitted electronically and prior to arrival in port, and Customs offices are open on a 24-hour basis. Officials say that paperwork related to import-export processes has been reduced by as much as 75%.

The plan also called for investment in digital systems. These are intended to improve the security, transparency and control of trade movements. Importers can track the status of their shipments in real time. Recent initiatives include the creation of an online port community system to offer secure information exchange, and a dedicated digital payments platform for Customs fees and duties.

The third point the authorities are working on is a transport infrastructure plan, focused on infrastructure quality, safety and efficiency. The plan outlines key investments such as the Saudi Landbridge Project (a railway connecting the east and west coasts of the country) and two new rail corridors (Ras Al Khair to Dammam in the east, and Yanbu to Jazan in the west). Future priorities may include the development of multi-modal freight terminals. Eliminating air cargo bottlenecks is the fourth action point. The overall objective in this regard is to boost airfreight capacity from the relatively low 800,000 tonnes per annum (tpa) at present to 6.8m tpa by 2030. With this end in mind, various projects are under way to modernise airports and expand or create associated freight terminals. The fifth plank is a pledge to meet international regulatory standards. Transport industry regulation is being updated to bring it closer to international benchmarks, considered a necessary move as more international players begin to operate on the local market; licences for road transport and warehouse operators are already under review.

An improvement in seaport quality and efficiency is the sixth focus point. A number of top global port operators already hold concessions in Saudi Arabia, among them Singapore-based PSA International, Dubai-based DP World and Hutchison Ports from Hong Kong. The priorities under this heading include making the country’s ports more specialised, reforming governance systems and updating the terms of concessions granted to the port operators. The longterm aim is to separate port regulation and port ownership, with the creation of a single national regulatory body as one option under discussion. “Some 95% of cargo arrives by seaport and then continues on land,” Michael Wuebbens, managing director of local marine services firm Huta Marine, told OBG. “Seaports are the driver of any changes we will see in transport investments in the Kingdom.”

The seventh point calls for reform of the rail industry. In 2017 rail regulation and ownership were separated, with the regulatory function vested in the Public Transport Authority (PTA). The government has plans to award more operations and maintenance contracts to international rail companies. It has also expressed an interest in financing future rail infrastructure through PPPs.

The eighth point signals the importance of making a concerted attempt to engage the private sector. Across the different transport modes the government is increasingly interested in awarding private operating concessions, with a view to achieving modern and efficient transport services that minimise the financial burden on the public sector.

The ninth and final point in the plan is to develop SEZs, which are widely regarded as an excellent means to reduce the costs of and barriers to creating new businesses and development poles around the country. It is envisaged that the SEZs will have their own light-touch regulations and tax incentives, offering increased ease of doing business. They will also offer Customs-bonded areas and efficient multi-modal transport connections.

Privatisation Drive

As part of its modernisation programme, the government has been seeking to privatise some state-controlled companies and activities, and in general to promote PPPs. In mid-2018 the authorities published a draft law regulating PPPs, designed to improve transparency, boost the construction sector and ease pressure on government finances. The draft was tailored to help attract foreign investment in infrastructure mega-projects in utilities, transport and real estate.

The government is aiming to raise SR35bn-40bn ($9.3bn-10.7bn) from the privatisation programme running up to 2020, which will also create as many as 12,000 new jobs. The programme prioritises 14 PPPs which are thought to be capable of raising a combined SR24bn-28bn ($6.4bn-7.5bn). Moving further into the future, there are more ambitious aims for the overall privatisation programme, which is hoped will raise $200bn by 2030, as part of Vision 2030.

The draft law provided an element that had been missing – a legal framework to govern PPPs. Given the Kingdom’s pressing need for new investment, the draft law was seen to have the potential to unlock financing and foreign participation. International pensions funds and sovereign wealth funds are likely to be interested in opportunities generated by the programme, in particular with regard to projects in real estate, affordable housing, schools, hospitals, airports and railways. The draft states that foreign investors will be able to recover losses “incurred as a result of any change in the law or unlawful action, or the failure of public authorities to take an action which they should have taken, which caused loss to the primary party”. It establishes that foreign citizens may own property anywhere in the Kingdom, with the exception of the holy cities of Makkah and Medina, although land may be leased in those two cities for the length of any PPP contract.

It also provides for a committee to adjudicate disputes. A clause that especially captured investor attention outlined the possibility for exemptions to labour laws that set minimum quotas for hiring Saudi nationals. Foreign firms have previously expressed concern over the effect of these quotas in sectors where there may be shortages of skilled labour.

Spurring Investment

The draft PPP law was in part a response to the fall in FDI inflows, which hit a 14-year low in 2017. The government also announced further plans to ease regulations and encourage more companies to enter the Saudi market. FDI peaked at $7.5bn in 2003, but dropped to just $1.4bn in 2017. As part of efforts to reverse the trend, in late 2018 the ministerial Cabinet was reported to have relaxed rules for investment in the services sector, opening segments including staff recruitment, audio and video, road transport and real estate services to foreign companies. Private foreign investment in these sectors had not previously been allowed.

The Saudi Arabian General Investment Authority announced that, in order to stimulate foreign interest, it was also considering issuing longer-duration foreign investment licences and streamlining the authorisation process. It said the time taken to complete the authorisation process was being cut from 53 hours to less than four.

In addition, instead of one-year licences, companies will be able to choose one- to five-year renewable licences, and they will only need to present two documents to register, instead of eight as was previously the case. There are still a number of areas where FDI is not allowed, among them printing and publishing, and the upstream oil and gas sector.

Public Transport

While the private vehicle remains the main form of transport in most Saudi urban centres, the authorities are beginning to put significant public transport infrastructure in place. One sign of the new approach can be seen in Riyadh, a city of 6m people, where municipal authorities have signed two major contracts with RATP, the French state-owned public transport company. One is a 12-year, €1.7bn contract to operate a bus network, and the other is a 12-year, €2bn contract to operate two out of six planned metro lines.

The first buses are expected to begin operating in the city during the course of 2019. RATP Dev, a subsidiary of the main company, is expected to hire around 3500 people in Saudi Arabia, of whom 2500 will operate the bus service. Following a change in the rules allowing women to drive, RATP says that at least 100 of its bus drivers will be female. Another city addressing mobility issues is Dammam, which in November 2018 launched the first phase of a public transport plan. The city authorities also launched an online licensing platform for the registration of drivers and vehicles. The PTA announced that its overarching goal was to provide “safe, efficient, integrated and green public transport”.

Airports

There are 26 airports in Saudi Arabia offering commercial services. The busiest among them are Jeddah, Riyadh, Dammam and Medina, all of which handled in excess of 5m passengers in 2017. Not all of them publish detailed up-to-date statistics, but Medina, the smallest of the top four, which is operated by TAV Airports of Turkey, reported 19% growth in 2017, reaching 7.8m passengers. Jeddah, the busiest airport in the country, was reported to have handled 34m passengers in 2017, an increase of 9% on the preceding year. Riyadh is the largest city in Saudi Arabia, but it handles approximately 20% less airport traffic than Jeddah.

A number of new airports are being planned or are under construction around the country. Among them is a SR2.5bn ($666.5m) project being built 30 km north of the city of Jazan. According to the General Authority for Civil Aviation, the airport is to be called King Abdullah and will be able to handle 3.6m passengers a year. There are plans to modernise and upgrade a range of existing airports as well, including those in Abha, Al Ahsa, Al Qassim, Arar and Hail. A new terminal is being built at the King Khalid International Airport in Riyadh, and there are also plans for new airport developments in Al Qunfudah, Farasan Island, Taif, Riyadh North and Riyadh South.

Passenger Traffic

One consequence of the expected growth in air travel is that there will be more demand for pilots and technicians. Speaking at a meeting of the MENA Business Aviation Association in September 2018, Bander Khaldi, managing director of the National Aviation Academy, said it was estimated that the country would need an additional 8800 pilots and 11,700 aviation technicians by 2024 as a result of attrition replacement and fleet growth.

New tech solutions are designed to play a key role across the segment. “Distance learning, and technology more broadly, have facilitated higher demand in the industry, and made it more practical for pilots to manage their own time and obtain specific accreditations. Technology also allows us to pool resources more efficiently,” Ismael AlKoshy, managing director of the Prince Sultan Aviation Academy, told OBG.

Passenger traffic through Saudi Arabia’s airports rose by 8% to 91.8m in 2017, and projections suggest that future growth could accelerate into double-digit annual percentage increases. International traffic is expected to surge as the country develops its tourism sector, leading to increased inbound demand. International traffic was up 14% in 2017 and 12% in the first half of 2018. At present there are approximately 640,000 domestic weekly passenger seats available in Saudi Arabia and 1.4m scheduled international seats. A new terminal at King Abdulaziz International Airport outside Jeddah started operations in a phased manner in 2018. The total construction cost was estimated at SR36bn ($9.6bn). The airport is one of the main gateways for pilgrims coming to Saudi Arabia to visit the holy cities of Makkah and Medina.

The capacity of the new terminal will be 80m passengers by 2035. The main terminal covers 15 sq km, and has 46 air bridges for passengers to board and disembark aircraft. The airport complex includes a five-star hotel, shopping centres, an advanced communications centre, and a railway station for the new high-speed passenger train to Makkah and Medina. It will host around 60 domestic and international airlines, including national flag carrier Saudia.

Carriers

Since 2017 the number of domestic carriers has more than doubled, from two to five. Saudia, including its new budget subsidiary flyadeal, is the dominant presence, with a 70% market share of domestic air travel. Until late-2016 Saudia and privately owned competitor Flynas were the only two players, operating a duopoly in domestic aviation. However, new arrivals are set to provide a competitive challenge. SaudiGulf, based in Dammam, is focusing on the top end of the market and plans to add new aircraft in the 2019-21 period. Another new arrival, Nesma, is based in the small city of Hail, where it operates 12 routes with ATR 72 turboprops, although it also competes on the Riyadh-Jeddah route with Airbus A320s. At the budget-carrier end of the market, the battle for market share is being fought between flyadeal and Flynas.

In terms of international aviation, Saudia has a 36% share of seat capacity, followed by Flynas with 7%, and Nesma and SaudiGulf, each with under 1%. The rest of the market is divided among foreign airlines, led by EgyptAir, Emirates Airlines and flydubai. In 2018 Saudia was offering services to 79 international destinations, whereas Flynas covered 22. The international air travel sector in Saudi Arabia is heavily influenced by religious pilgrimage.

Hajj Travel

Many pilgrims use charter rather than scheduled flights. The Hajj is celebrated over a period of over a week each year, determined by the Islamic calendar, while pilgrims travelling to Saudi Arabia for the Umrah do so on a year-round basis. Saudia alone carried an estimated 3m passengers on Hajj and Umrah charter flights in 2017.

By liberalising visa policies and expanding visitor infrastructure, the government aims to increase total pilgrim arrivals from under 7m in 2017 to around 30m by 2030. The fact that EgyptAir has a significant share of the Saudi international aviation market reflects the importance of pilgrimage from the Arab world’s most populous country. Saudia, meanwhile, is planning to add capacity in flights to many of the major Muslim countries such as Indonesia. Company officials have stated that an order for eight new Boeing 787-10s is intended to increase available seats on flights to and from Indonesia and several other markets in Asia.

Capacity Concerns

Saudi Arabia increased its passenger totals by 8% to 35.5m in 2017, a number that includes both scheduled and chartered flights. Based on expansion of the aircraft fleet, it aims to carry a total of 45m passengers by 2020. The airline has been focusing on increasing its international business, by adding frequencies and destinations.

Although it operates various hubs, its main operations are increasingly focused on the new international airport at Jeddah. Saudia is positioning itself to benefit from the Kingdom’s economic reforms, and is planning to expand its fleet from the current 150 aircraft to 200 by the end of 2020. As part of its programme for renewing its fleet, the company took delivery of 28 new aircraft in 2016 and a further 33 in 2017. Saudia has orders for eight Boeing 787-10s and 35 planes from the A320neo family.

Saudia Cargo, the state-owned airline’s airfreight subsidiary, is pursuing ambitious expansion plans. In September 2018 the company said it was expanding its freight-handling facilities at both King Abdulaziz International Airport and King Khalid International Airport in Riyadh. In Jeddah, capacity will be increased to 530,000 tpa, and in Riyadh, it will be boosted to 820,000 tpa. Saudia Cargo also announced it would be joining the SkyTeam global airline alliance, and that it would be extending its international network, and adjusting its schedules to optimise its Asia, Europe and Africa freight connections.

Fawaz Al Fawaz, chairman of Saudia Cargo, told local media that in 2017 that company revenue had grown by 10.9% and the volume of cargo carried rose by 12.6%. Private carrier SaudiGulf has expressed some concern that the rapid expansion of domestic carriers could lead to overcapacity. In August 2018 its CEO, Samer Majali, told international media that there may be a period of consolidation and rationalisation. However, he added that government plans to triple the size of the Hajj and Umrah pilgrimages, and expand and diversify other forms of tourism were positive indications for the sector. The company operates four A320ceos, but is planning to incorporate six to eight A320s/A321s in 2019, with similar numbers to be added in 2020 and 2021.

Ports

As air cargo accounts for a relatively small share of trade, the authorities have been keen to expand existing port infrastructure, since they believe there is potential to develop the Kingdom as a major regional and global logistics centre. There is also interest in the economic potential of the maritime sector because, unlike other non-oil activities such as tourism and construction, running ports provides a flow of steady year-round business without major seasonal variations, it also provides significant employment opportunities for skilled and white-collar labour. However, certain questions about the future remain to be answered, in particular as regards trans-shipment. Saudi ports will face competition from the major UAE ports of Jebel Ali and Port Khalifa, and there is a danger that a combination of ambitious expansion plans across the two countries could generate a degree of overcapacity.

That said, the overall performance of the maritime sector in recent years has been strong, despite variations at different ports. In 2017 throughput at the country’s biggest four ports rose by around 6.5%. Various factors were behind this.

While relatively low oil prices had affected cargo demand, big petrochemical players such as Dow Chemical and Total were coming into the region. There were also signs that a higher ease of doing business ranking and improved Customs regulations could encourage greater use of the Kingdom’s ports. It is estimated that $2.5trn worth of goods, or 25% of global trade, flows through the Suez Canal and along Saudi Arabia’s Red Sea coast. The Kingdom has set itself the goal of capturing a larger share of that traffic for trans-shipment to onward destinations through its ports. “Port activities are a sort of bellwether for the economy at large, and we expect an increase in activity at the end of 2019 as state-sponsored, big-ticket capital expenditures kick in,” Jens Floe, CEO of Red Sea Gateway Terminal, told OBG. At present Saudi ports process a total of 7m twenty-foot equivalent units (TEUs) and 11,000 ships a year.

Cargo

In order to attract more trade, the passage of cargo needs to be as efficient and frictionless as possible. Various trade facilitation initiatives are under way, including the Al Faseh Customs clearance project, designed to reduce the time required to clear shipments to under 24 hours.

Dammam’s King Abdulaziz Port in the Gulf is the country’s top export hub for commerical goods. Its capacity has been expanded to a capacity of 1.5m TEUs, mainly to serve cargo needs in the Eastern Province and central Saudi Arabia. Total cargo volume passing through King Abdulaziz Port dropped significantly by 20% in 2018.

Jeddah Islamic Port on the Red Sea has a handling capacity of 4.15m TEUs, and serves as the country’s main logistics hub. It meets the import-export needs of the western provinces of Hejaz and Jizan and the capital, Riyadh. Jeddah Port is also linked to the new 35,000-sq-m cargo terminal at the nearby airport.

Despite it being the country’s primary logistics hub, however, Jeddah Islamic Port is facing several challenges. Cargo throughput at Jeddah fell in 2018 by 2.5% to 44.65m tonnes in the first 10 months of the year, while container handling dipped 3.2% to 3.35m TEUs. Taking a look at its performance from a bigger timeframe, since 2015 to the end of 2018 cargo throughput at Jeddah dropped by approximately 20%. This was due to two main reasons. The first is traffic restrictions due to the port’s location in the centre of Jeddah. The second reason is the port’s aging infrastructure, which makes it increasingly less attractive for shipping lines due to low cargo handling efficiency and restricted port access for large vessels. Multibillions of Saudi riyals would be needed to upgrade or re-construct the terminal infrastructure at Jeddah Islamic Port in order for it to meet shipping line requirements and provide efficient terminal services. Given the scope and cost of these upgrades, industry experts believe that expansions to Jeddah Islamic Port are unlikely.

King Abdullah Port (KAP) is the country’s newest and most ambitious port. It is located alongside King Abdullah Economic City (KAEC), an urban mega-development project which launched in 2010 and was originally due for completion in 2020. The port is designed as a trans-shipment hub and is currently handling capacity of 5m TEU, in addition to some 10m tonnes of dry bulk, break-bulk cargo and roll-on/ rolloff (ro-ro) traffic. Officials say there are plans to raise that figure much further, with the port designed for a final throughput capacity of 20m TEUs. The final completion is expected to take place after 2030. While most of the ports in Saudi Arabia are aged and not well suited for modern shipping purposes, KAP is designed with features such as ro-ro technology and deep ports of 18 metres. Thus, KAP is expected to eclipse other terminals, such as the Jeddah Islamic Port, and significantly expand operaitons. Since the official inauguration of KAP on February 11, 2019, combined port volumes from KAP and the Jeddah Islamic Port grew from 4m containers to 6.5m in early 2019, and this figure is set to increase as the newest port grows in prominence.

Another strong performer was Jubail Commercial Port on the Gulf Coast. The levels of cargo handled by this port increased by over 20% to 11.89m tonnes in the first 10 months of 2018. As well as increased bulk cargo, Jubail saw its container traffic volume rising by 9% to 600,000 TEU over the same period.

Railways

In 2011 the Al Shoula consortium, comprising 12 Spanish companies, including Renfe, Talgo, and two Saudi firms, won the €6.7bn contract to build the Haramain High-Speed Rail line, which now provides a direct connection between Jeddah and the two holy cities of Makkah and Medina.

After some delays and cost overruns, the project, one of the largest of its kind in the Middle East, was opened in September 2018. The 453-km line has five stations and was designed to carry trains with a maximum speed of 320 km per hour. It has an annual capacity of 60m passengers. Chinese and Saudi contractors carried out most of the civil engineering work. The contract includes the supply of 36 Talgo 350 trainsets, tracks and electrification. Renfe and ADIF of Spain are operating the line for an initial 12-year period. This project is expected to facilitate pilgrimage to the holy cities, widely seen as a stepping-stone to building a wider tourism industry. The Hajj and the Umrah generate billions of dollars in revenue for Saudi Arabia in pilgrims’ lodging, transport, gifts, food and fees. Officials hope that the rail service will stimulate growth at the KAEC, located 100 km north of Jeddah. Progress is also being made to extend the rail link to the new air terminal in Jeddah.

In October 2018 it was announced that US-based rail services company Greenbrier had entered a $270m joint venture with the Saudi Railway Company (SAR) to carry out rail projects and supply rail wagons. As part of the deal, Greenbrier will provide $100m in new rail cars, lift equipment and other machinery, as well as operating freight terminals. SAR will contribute locomotives, access to the rail network and other services. The two companies have been working together since 2015, when SAR placed an order with Greenbrier for 1200 tank wagons to carry molten sulphur and phosphoric acid – feedstock for fertiliser production – by rail.

Outlook

In the context of major changes to the Saudi Arabian freight and passenger transport system, prospects for the near future suggest continuing growth, although there is some uncertainty over the pace expansion will take place at. Short-term growth is expected to largely be tied to the fortunes of the wider economy. In October 2018 the IMF estimated GDP growth would reach 2.2% that year and rise to 2.4% in 2019. Exports of goods were expected to have grown by 2.0%, with imports up a stronger 3.3%. This will have an impact on overall demand for transport services. It is worth noting that in some areas such as air travel, which is achieving greater penetration among the population, growth will be significantly higher. Notwithstanding this, in light of the proliferation of significant logistics and infrastructure investment projects, for which the authorities are currently trying to attract international capital, medium-term growth in the sector could remain dependent on foreign investor sentiment in the coming years.