Major transport projects across land, air and sea transform the sector in Saudi Arabia

With a vast land mass covering more than 2m sq km, and sizeable mining and heavy industry sectors, transport and logistics are vital to Saudi Arabia’s economic success and future growth. As record oil prices from 2008 to 2014 filled state coffers, the authorities decided to invest a significant portion of the windfall in improving the Kingdom’s transportation infrastructure. An anticipated $190bn will be invested in the sector through 2025, with the majority – around $141bn – going towards rail and public transport networks.

At the same time other segments are receiving attention as well, and the Kingdom is investing billions in seaport and airport expansion projects. Through all these projects, the government has demonstrated that it is committed to bringing in market leaders from across the globe to partner with local operators and encourage knowledge transfer to the Saudi economy.

In Figures

According to the Central Department of Statistics and Information (CDSI), the combined contribution of the transport, storage and communications segments to the economy, when measured at current prices, was SR144.5bn ($38.5bn) in 2014, the most recent year for which figures are available. This figure represents 5.1% of the Kingdom’s total GDP, and year-on-year (y-o-y) growth of 7.6% compared with 2013. Indeed, thanks to high levels of government investment and strong performance, the sector has doubled in size since 2007.

Current gross fixed capital formation in transport equipment is estimated by the Saudi Arabian Monetary Authority to be SR66.6bn ($17.7bn), according to 2012 figures, while government investment in transport infrastructure is currently at SR63bn ($16.8bn) per year, as per estimates for the 2015 budget. Government investment in the sector has been steady for the past five years, with notable growth of 40% y-o-y in 2012, and more than $8bn of new projects announced every year since 2013.

Organisation

The sector’s regulation and organisation fall under the remit of the Ministry of Transport (MoT), as well as several other independent government agencies. The ministry is responsible for the coordination of all surface transport, including bus services and railways, as well as the construction and maintenance of the Kingdom’s road network. The current minister of transport is Abdullah Al Mogbel, who was appointed by the late King Abdullah bin Abdulaziz Al Saud during a Cabinet reshuffle in December 2014. Al Mogbel was formerly mayor of Riyadh, and was known for being heavily involved in that city’s current metro project. Operating under the supervision of the minister of transport, though independent of the ministry, are three further regulatory bodies: the Public Transport Authority, the Saudi Railways Commission and the Saudi Ports Authority. Independent of both the ministry and the minister is the General Authority of Civil Aviation (GACA), which is controlled by a president appointed directly by the king. The current head of GACA is Sulaiman bin Abdullah Al Hamdan, who was nominated by King Salman bin Abdulaziz Al Saud in his first Cabinet reshuffle in January 2015.

Division of Labour

During the sector’s formation, much of the Kingdom’s transport infrastructure was owned and managed by the aforementioned agencies. In recent years, however, the government has tended to separate regulatory functions from administrative ones. In the case of the ports, preexisting infrastructure remains under ownership of the Saudi Ports Authority, which has in most cases tendered out operation and management to private business (which also assumes revenue risk). This has been the strategy in particular with the Kingdom’s current largest port, the Jeddah Islamic Port (JIP), where the three container terminals (north, south and the recently completed Red Sea Gateway Terminal [RSGT]) all operate under tender. The 20-year tender for the north and south terminals is due to expire in 2019, and the Saudi Ports Authority has recently indicated it will retender concessions for these terminals beginning in 2017.

In the rail segment, the Kingdom’s existing network, which consists of some 1400 km primarily linking Riyadh with the port of Dammam, is managed by the publicly owned Saudi Railways Organisation (SRO), founded in 1966. More recently, as the government looked to rapidly expand rail infrastructure, a second publicly owned railway company, the Saudi Railway Company (SAR), was established.

Both companies are currently managing large-scale rail construction projects: for the SAR, the 2750-km north-south railway between Riyadh and Al Hadetha on the Jordanian border (with a spur connecting the bauxite mines of Al Baitha with the port of Ras Al Khair); and for SRO, the 450-km Haramain High-Speed Rail Project, which will connect Makkah and Medina via Jeddah and King Abdullah Economic City (KAEC) in Rabigh.

In the aviation sector, by contrast, the majority of the Kingdom’s airports remain both owned and managed by GACA. There are some indications, however, that the authorities are considering a similar strategy of partial privatisation. For instance, a recent $1.2bn public-private partnership (PPP) contract – the Kingdom’s first – was signed between GACA and an international consortium led by Turkish airport operator TAV to build and operate the new Prince Muhammad bin Abdulaziz International Airport in Medina under a 25-year contract. The terms of the contract will see ownership of the infrastructure remain with GACA; however, the private consortium will undertake revenue risk associated with operating the facility. Further airports (both new as well as pre-existing) might also be tendered out on operation and maintenance (O&M) contracts. GACA announced in May 2014 that it would be pursuing a PPP model for a new international airport at Taif, near Makkah, in 2015 (see analysis).

Sector Policy

The Kingdom’s transport policy is informed by the MoT’s National Transport Strategy of 2002, which detailed a number of recommendations for improving infrastructure. More recently, the government has committed an estimated $81.6bn of a planned total of $190bn on infrastructure improvements (see analysis), most of which ($141bn) will be spent on multi-modal land transport, including public transport networks for the Kingdom’s five largest cities (Riyadh, Jeddah, Makkah, Medina and Dammam), and three large inter-city rail projects: the previously mentioned north-south and Haramain railways, and a third Landbridge project to link Jeddah with Riyadh (and hence “bridge” the two Saudi coasts, owing to the pre-existing connections between Riyadh and Dammam).

Another key plank of the government’s strategy is boosting private sector involvement. While the majority of private sector activity thus far has been limited to O&M or construction contracts, private capital is also coming to play a small yet increasingly important role in the industry. Leading the way in this respect is the King Abdullah Port, which recently began operations in KAEC (see analysis). King Abdullah Port has been entirely financed by private capital, and there are plans to eventually increase capacity at the container terminal to 20m twenty-foot equivalent units (TEUs) per year. If carried out, such a development would make the port of comparable size to Jebel Ali Port in Dubai, currently the region’s largest container terminal, and located on the opposing Gulf coast. In this respect, the long-term ambition of the Saudi authorities would seem to be to transform the Red Sea into a potent trans-shipment hub on the Asia-Europe trunk line, with the attendant knock-on benefits in terms of economic development that such a role implies.

Finally, a significant part of the government’s current transport strategy is also driven by the need to accommodate growing numbers of pilgrims. In this sense, the expansion of King Abdulaziz International Airport (KAIA) in Jeddah, the Haramain High-Speed Rail Project, and the two public transport networks soon to be implemented in the cities of Makkah and Medina, form part of a unified multibillion-dollar investment package to extend and improve the Kingdom’s transport services for pilgrims.

Logistics

According to World Bank figures, trading across borders in Saudi Arabia became more difficult in 2014 owing to an increase in the number of documents required to export and import. As a result, the Kingdom fell to 92nd place in this category of the World Bank’s “Doing Business 2015” report, down from 84thth the previous year.

The World Bank’s estimate for the average cost to import and export containers in the Kingdom also rose slightly, to $1285 for exports and $1309 for imports, compared with $1055 and $1229, respectively, the previous year. The average time required remained the same, however, at 13 and 17 days, respectively. These figures compare with the OECD average of 10.5 days and $1080.30 to export, and 9.6 days and $1100.40 to import, a container, according to the “Doing Business 2015” report.

In contrast to the World Bank’s assessment, Agility Logistics, an international supply chain solutions company, placed Saudi Arabia second in its 2015 Emerging Markets Logistics Index, behind only China and replacing Brazil (which fell to third position). The Kingdom has steadily climbed Agility’s index over the past five years, rising from ninth position in 2010, thanks to “strategic economic planning, combined with growing domestic demand”. Agility ranks the Kingdom’s logistics sector alongside China, Brazil, Russia and Turkey as having “high market potential with few barriers to market entry”.

Geographic Advantage

Saudi Arabia’s significant potential is demonstrated by its presence in several of the largest emerging market trade routes. The EU to Saudi Arabia route is ranked by Agility as the seventh-largest emerging market freight route for air, while that from the US to Saudi Arabia is the eighth-fastest-growing trade lane for air. The EU to Saudi Arabia route by sea is the eight-largest trade lane in emerging markets routes. The US to Saudi is the fourth-fastest-growing sea trade lane, with volumes up by nearly 40% y-o-y between 2013 and 2014 to reach 4.2m tonnes. Trade in the opposite direction is also rising rapidly, albeit from a smaller base, with Saudi Arabian exports to the US growing 11.5% y-o-y from 2013 to 2014 to reach 1.3m tonnes.

Seaports

Competition is evident in regional shipping figures. According to Drewry Shipping Consultants, in 2012 half of all containers in the Middle East region were processed in the UAE, with Saudi Arabia in second place, handling approximately 16% of throughput. One possible advantage for Saudi Arabia as it seeks to win back some of this business could be its Red Sea coast, which has historically been relatively under-developed as a shipping route, despite lying on the main Europe-Asia trunk line. However, JIP, which is the Kingdom’s largest container port with a current capacity of around 5m TEUs per year, has seen throughput fall in recent years, from a peak of 62.7m deadweight tonnes (DWT) in 2012 to 55.9m DWT in 2014. By contrast, on the Gulf coast King Abdulaziz Port in Dammam (which serves the capital, Riyadh) has seen throughput expand throughout this period, rising from 23.6m DWT in 2010 to 31.3m DWT in 2014.

Industrial Gain

Meanwhile, the Kingdom’s industrial ports have seemingly experienced the opposite trend to its commercial ones. The port of Yanbu on the Red Sea coast has expanded rapidly over the past four years from throughput of 28.9m DWT in 2010 to 43m in 2013 (the last year for which figures are available). Yanbu port – which consists of King Fahd Industrial Port and a smaller commercial port – should experience additional growth in the coming years, as a $559.8m expansion programme begun in 2014 further increases capacity. On the Gulf coast, by contrast, the Kingdom’s other major industrial port at Jubail has experienced more modest growth over the same period, with throughput rising from 50.7m tonnes in 2010 to 53.7m in 2013.

Recent performance at JIP may be partially attributable to expansion at Yanbu and the recently opened terminal at King Abdullah Port. However, it would appear that performance at RSGT, JIP’s third and newest container terminal, which was opened in 2009, has been more robust over the same period of time, rising from 500,000 TEUs in the first year of operations to 1.4m in 2013, and an anticipated 1.5m in 2014. RSGT is operated through a Saudi-Malaysian partnership with a 25-year concession, which has a further 20 years to before the contract expires. By contrast, the north and south terminals are currently operated by UAE-owned companies, with DP World running the south terminal, and Gulftainer the north (having bought out the incumbent Gulf Stevedoring Contracting Company in 2013). DP World in particular experienced a difficult year in 2014, with major shipping line MSC pulling out of the terminal in May in favour of King Abdullah Port. As a result, shipping volumes fell to 800,000 TEUs, or around one-third of total port capacity.

Greater Shipping

The past two years have also witnessed major developments in the Saudi shipping industry, with one of the largest mergers in the country’s corporate history taking place between the National Shipping Company of Saudi Arabia (Bahri) and Vela International Marine, a subsidiary of the Saudi Arabian Oil Company (Saudi Aramco). The $1.3bn deal involved a cash payment of $832.7m with the remainder in shares, leaving Aramco with a 20% stake in Bahri. A memorandum of understanding (MoU) for the merger was signed in 2012 and agreed by Bahri shareholders at an extraordinary general meeting in June 2014, with all ship transfers to be completed by the end of 2014.

The merger resulted in a combined fleet of 77 vessels, and the world’s third-largest fleet of very large crude carriers (VLCCs), with 32. According to media reports, as part of the deal Bahri became the exclusive supplier of VLCC shipping to Aramco, in an agreement which included a time-charter equivalent floor and threshold. The newly enlarged company is also considering plans to expand into shipbuilding, having signed an MoU with Sembcorp of Singapore in 2013 to produce a feasibility study for construction of a shipbuilding yard in the Kingdom.

On Land 

According to the Kuwait Financial Centre (Markaz), the Saudi government’s investment in the road network in the two decades to 2011 saw average growth of over 11% per year. Road investment continues to play a substantial role in government infrastructure spending, with the 2015 budget setting aside funds for 2000 km of new roads, to add to the more than 60,000 km of asphalted roads already existing in the Kingdom.

In a departure from previous transport policy, however, the authorities are now committing to significant investments in public transport, particularly through the creation of urban metro systems in the largest cities. The most advanced of these projects is the Riyadh metro, a $22bn integrated transport system which will include six metro lines and a multi-tiered bus network. Contracts for the metro system, which was divided into three work packages, were signed in 2013, and construction of all three packages is being carried out simultaneously. Works are anticipated to continue until 2018-19.

While the remaining metro projects (in Jeddah, Makkah, Medina and Dammam) have yet to proceed beyond the initial planning and management consultancy stages, the roster of international contractors involved in the Riyadh metro may give some indication of the shape of things to come. The consortia feature a mix of European, US, Korean and local firms, and include Bechtel, Alstom, Siemens, Bombardier and the Consolidated Contractors Company. The next metro projects to tender for construction and rolling stock contracts are likely to be Makkah and Jeddah, with both awarding consultancy contracts in 2014 to support preliminary planning. In contrast to Riyadh, the Makkah project will be staggered across three phases, with construction expected to run over a 10-year period.

Moving at High Speed

Progress on the Kingdom’s inter-city rail connections is also continuing. The Haramain High-Speed Rail Project, which will connect the cities of Medina, KAEC, Jeddah and Makkah along the Red Sea Coast (including a stop at KAIA in Jeddah), has recently begun trials on certain sections of the track, and according to local media reports, the network’s stations are 90% complete. The $6.7bn phase 2 contract for superstructure and maintenance of the track was awarded to the Al Shoula consortium of 12 Spanish and two local companies in 2011.

The progress has been challenging partly due to the terrain upon which much of the line is set – sandy flatland subject to five metres of sand movement per second, even under mild conditions. The conditions necessitated the use of concrete ballast in the most difficult sections, resulting in a more timeconsuming construction process. Sources within the consortium also claim that changes to Saudi labour regulations in 2013 made hiring of qualified staff more difficult. However, now that these issues have been overcome, progress on the construction is expected to be more rapid, and it is hoped the track will be completed before the end of 2016.

The north-south railway is approaching the final stages of completion, with freight traffic already running on the industrial mineral line, and passenger services expected to begin later in 2015. Testing of the railway’s new rolling stock, consisting of five diesel trainsets, was scheduled by SAR to begin at the end of March, following delivery by Spanish company CAF. The new trains, which are similar to the locomotives currently in service with SRO, are capable of operating speeds of 200 km per hour, and are designed to cope with temperatures of up to 55°C. They will be run in nine-car services during the day, and 13-car sleeper services at night.

Elsewhere in the country, additional Saudi cities are either currently building or planning major integrated transport systems, with total investment based on current reports expected to reach SR250bn ($66.63bn) through 2025. Of the $190bn of transport infrastructure spending currently forecast in the Kingdom, it is estimated that over a third – 35.3% – will be invested in municipal public transport (see analysis).

Aviation

The coming year should bring further liberalisation to the Saudi Arabian aviation sector, as Qatar Airways’ delayed entry into the Kingdom’s domestic market is completed, and Dammam-based local operator Saudi Gulf Airlines also begins operations. Saudi authorities previously announced the proposed liberalisation of the domestic aviation market in 2012. Currently, only Saudi Arabian Airlines (Saudia) and budget airline Nas serve a market with more than 20m passengers per year. The Abdel Hadi Al Qahtani group, which will own and operate Saudi Gulf Airlines, has already placed orders for four Airbus A320 jets worth a total of $375m and 16 CS300 jets from Canadian manufacturer Bombardier worth $2bn. The Bombardier contract also includes an option for 10 additional units.

Spreading Wings

Liberalisation is hoped to eventually reduce costs in the sector, while also allowing national carrier Saudia to focus on expanding its international routes. Speaking to industry press in 2014, the former director-general of Saudia, Khaled Al Molhem, said, “We have 50 planes operating on domestic routes; [putting] assets here takes away our ability to grow internationally and we lose out on potential traffic. We know our neighbours are taking advantage of the connectivity between East and West.” According to Al Molhem, some 80% of passengers currently flying out of the Kingdom on Gulf carriers are travelling outside the GCC.

In an effort to expand further into international markets, Saudia secured a $1.9bn loan in 2014 to continue fleet upgrades. The loan will finance the delivery of 17 new aircraft, and according to press, the airline is in talks for a further 50 planes. The carrier is also expected to raise a further SR10bn ($2.7bn) in the near future through a series of initial public offerings involving subsidiaries. Saudia’s ground-handling, cargo and maintenance units will all float 30% stakes, in a move which mirrors the flag carrier’s 2012 partial float of its catering division. A total of six units in the carrier will eventually be partially privatised, according to a 2006 decision.

Saudia’s performance appears to have improved markedly over the past two years, with the first half of 2014 in particular witnessing an 11% growth in passenger numbers y-o-y, rising from 12.7m to 14.1m. Passenger growth across the industry as a whole has been strong for the past five years, with total passengers at the Kingdom’s four international airports reaching 57.6m in 2013 (the last year for which figures are available), up significantly from 38.3m in 2009. Cargo growth also expanded strongly over the same period, nearly doubling from 516,000 tonnes in 2009 to 1.05m tonnes in 2013.

“Saudi Arabia is a natural hub because of its considerable expat communities, its large and wealthy population, as well as its attractiveness for pilgrimage,” Youssef Al Abdan, director-general of King Khalid International Airport (KKIA), told OBG. “However, this creates a major challenge: limited capacity for the coming few years,” Al Abdan added.

Large-scale investment in terms of ground infrastructure is ongoing. The Kingdom’s two largest international airports, KAIA in Jeddah and KKIA in Riyadh, are both undergoing expansion to raise capacity to more than 30m passengers per year.

The expansion of KAIA will in fact consist of three phases, the last of which is not anticipated to be complete until 2035, and which will see the facility’s capacity expand to 70m-80m passengers per year. The first phase, which consists of a 670,000-sq-metre new terminal costing SR27bn ($7.2bn), is expected to open in mid-2016.

The first phase of the KKIA expansion, which will see Turkish airport operator TAV construct a $400m terminal 5, is expected to be complete by 2017. A new airport has also been completed in Medina (see analysis), with investment also planned at Taif and an SR1.8bn ($480m) contract recently signed with UAE-based Al Jaber Group to build an airport at Abha with a capacity of 5m passengers.

Outlook

The substantial sums being invested across the transport sector point towards a future of sustained growth and significant opportunity for some years to come. With perhaps $100bn still to be spent through 2025, and tendering for large public transport projects in Makkah, Jeddah, Medina and Dammam still to come, demand for international expertise to partner with local Saudi companies in delivering these investments will remain high. In the field of public transport, private sector involvement for the near future is likely to remain limited to construction, operation and management, with the government assuming revenue risk for the initial years of operation. In the areas of aviation and ports, however, a wider role for private sector involvement is envisioned and more likely, and the coming years may see an expansion in the application of PPP models.