The announcement in July of contracts for the Riyadh Metro programme worth more than $22.5bn was a signal moment for the Saudi Arabian projects market.

The metro scheme is the kingdom’s largest civil project and the first urban railway in Saudi Arabia. The consortiums appointed to build it are working under design and build (D&B) contracts in the most extensive application of the procurement methodology the kingdom has ever seen. The project should also ensure that the value of contracts awarded in Saudi Arabia this year exceeds the previous record of $73bn set in 2011.

The contracts confirm Saudi Arabia as the premier Middle East projects market, a position that will be consolidated in the years to come, according to experts who will address the MEED Saudi Mega Infrastructure Projects 2013 conference in Riyadh on 16-17 September.

“The economy is solid and it is based on the solid performance of the oil and gas sector in the past decade,” says Fahad Alturki, senior economist at the local Jadwa Investment. “There is strong domestic demand and political stability.”

Economists forecast oil prices in 2014 will stay around present levels with modest downside risk. The kingdom’s oil output, which hit 10 million barrels a day (b/d) in August as Saudi Arabia made up for supply disruptions in Libya, Iraq and Nigeria, is expected to remain buoyant. The consensus is that it is unlikely to fall below 9 million b/d on average during the year. In 2014, the kingdom should record its 11th successive budget surplus. The current account of the balance of payments will also be healthily in the black.

High investment

The Riyadh Metro awards show the kingdom is determined to continue investing in major projects to keep up with population growth and the dynamic expansion of its major cities, particularly Riyadh, the Al-Khobar/Dhahran conurbation, Jeddah, Mecca and Medina.

“We are seeing high investment in transport, infrastructure and residential projects, which is also leading to significant expenditure in other built assets types, such as social infrastructure, retail and hospitality and leisure,” says Neil Lineham, partner at EC Harris Saudi Arabian International. “We expect this to continue beyond 2015.”

Others go further. “Saudi Arabia is the most mature and best project market in the Middle East,” says Steve Miller, senior vice president at India’s Shapoorji Pallonji, which has a portfolio of major civil projects in the kingdom. “It is going to be the best market for design and construction for the next 15 years.”

The Saudi Arabian construction boom since 2003 has already been the longest in the kingdom’s history. MEED estimates that the construction sector doubled in the 10 years ending December 2012.

The impressive performance of the kingdom’s construction industry is largely due to unprecedented government investment in projects. Actual state capital spending grew at an average annual compound rate of 28 per cent in 2003-11, although not all of it went on projects. The fact that annual government capital spending is consistently higher than the output of the sector shows the scale of the leakages into imports of goods and services from abroad, particularly labour. But the figures confirm the Saudi government has used capital spending to lift the kingdom’s economy as a whole.

The huge increase in government project spending is not without its critics. “The construction sector is overheated above its capacity,” says Jadwa’s Alturki. “I have suggested that we should cut back on the capital spending by the government, but I don’t see evidence of this happening.”

The drive to invest is raising fears of accelerating inflation. This could be countered by providing more data about government capital spending, says Alturki. “Better information about material prices is [required],” he says. “Enforcement of competitiveness is also needed.”

The megaproject sector has been dominated by a handful of giant corporations that have demonstrated over many years their ability to deliver.

“These companies are run by a relatively small number of people and they can only deal with so much,” says Ivan Hopkins, head of project finance at Riyadh’s Arab National Bank.

The capacity constraint is expressed in higher levels of project delays, say construction industry executives. “The sheer number of people required to put projects into action is a growing issue,” says Hopkins. “The management, the location, the hiring and importing of all the people is one of the biggest challenges the construction industry faces.”

Human resources are consequently emerging as the Saudi projects sector’s top issue. This encompasses finding sufficient Saudis capable of evaluating complex bids for massive projects, as well as recruiting experienced engineers and project managers with international experience and the hundreds of thousands of additional construction workers needed on multiple sites, some in remote places.

“Saudi Arabian clients want to see people on the ground in the kingdom,” says Chia-Teh Bien, deputy programme manager at US-Saudi joint venture CH2M/Olayan and programme manager for the Arriyadh Development Authority’s Riyadh Metro project. “We listened to the client and we have more than 2,000 people here.”

The labour challenge

The special conditions in Saudi Arabia have long presented a challenge to companies wishing to hire senior managers with experience of sophisticated and complex projects. The new factor for those seeking to win work in the kingdom is radical changes in the rules governing the employment of foreign workers of all kinds, including the Nitaqat Saudisation scheme.

Success in megaprojects requires aligning cultures… and getting all the stakeholders working together

Roger Nickells, Buro Happold

Saudi Arabia remains the largest importer of foreign labour in the Middle East and official figures show that there were about 8 million expatriate workers in the kingdom at the end of 2011. This figure is likely to have increased by at least 10 per cent since. On top of this, there are probably at least 1 million foreigners working in the kingdom without official approval. This means that more than one in three of the people living in Saudi Arabia are non-Saudis. About half of the foreigners working in the kingdom are employed by the construction industry, where they account for more than 90 per cent of the labour force.

Saudi Arabian Monetary Agency (Sama) figures show that there were more than 1 million Saudis seeking work at the end of 2011. It is thought that this is a significant underestimate of the number of those jobless who are capable of working.

Responding to the demand for jobs, the Labour Ministry has applied the most radical labour market reform programme the Middle East has ever seen. Launched in two parts, the first involves deporting or encouraging the departure of unauthorised residents. The ministry initially set a deadline of the end of July for all unauthorised foreign residents to regularise their status or leave. By June, at least 100,000 are estimated to have left the kingdom as a result. About 2 million foreign workers changed their status to conform with ministry rules.

Deadline delayed

But the impracticability of dealing with huge numbers of foreigners, and pressure from the business community for concessions, led to the announcement that the deadline has now been deferred to 3 November. The panic that swept the foreign worker community when the deadline was first announced has eased. But there is no evidence that Labour Minister Adel Fakieh, who will speak at the MEED Saudi Mega Infrastructure Projects conference, has stepped back from the main objective, which was to remove as many illegal residents as possible.

The government’s action has crippled the local casual construction workers market, which supplied many of the small companies upon which the big prime contractors depend.

“The section that has taken the biggest hit is the small and medium sector; the small or medium projects and the smaller contractors,” says Samir Khosla, vice-chairman of Dynamic Staffing Services and group managing director of India-based Brentford Group.

“The large contractors are dealing with it significantly better because their reliance on subcontractors is much smaller. It has made an impact on projects in all sectors, though oil and gas has been less affected because of the type of contractors working there. People working there did not come through the informal labour sector. The civil and infrastructure sector is where it has been felt to the maximum.”

Less immediately pressing, but of equal long-term significance, is the Labour Ministry’s Nitaqat programme, which sets minimum ratios for Saudis in construction company work forces. The programme has been criticised by Saudi business leaders, who claim the targets are almost impossible to achieve because of the shortage of nationals with the required skills. Contractors say the ministry has responded by relaxing Saudisation ratios, but there is growing acceptance that Nitaqat is an irreversible measure. This is intensifying interest in measures that will substantially increase the number of Saudis working in construction. Industry leaders are calling for a big increase in the number of Saudis studying architecture, engineering and construction at university; an expansion in vocational training programmes for nationals of all ages and action to help the huge numbers of Saudi women entering the labour force to work in the sector.

Successful delivery

Project professionals familiar with the kingdom say the storm about foreign workers will eventually pass. This will then expose the ultimate issue: the capacity of the Saudi construction industry to deliver high-quality megaprojects on time and to budget.

“Success in megaprojects requires aligning cultures and objectives and getting all the stakeholders working together,” says Roger Nickells, Middle East managing director at UK-based consultancy Buro Happold. This will encourage the development of a completely different type of Saudi project company and a more pragmatic approach among government clients in particular to allow quality and lifetime sustainability to be taken into account. The programme management approach adopted by the ADA is evidence that new thinking is being welcomed.

“Major projects are very complex and involve many factors and partners,” says Claudio Mingrino, director of US-based Intergraph Corporation Middle East, who will be addressing the MEED Saudi Mega Infrastructure Projects conference. “Risk management requires effective sharing and integration of information among project participants, including sub-contractors, clients and operators. This is particularly vital for the final user. If this co-operation and information sharing is not optimised, everyone will be a victim.”

Surplus finance

The good news is that there is no shortage of finance for projects being developed by credit-worthy clients. At the end of June, Saudi Arabia’s banks had current, savings and time deposits with a combined value of SR1,327bn ($353bn). The value of customer deposits rose by no less than 14 per cent in 2012.

“There seems to be capacity in the banking system,” says head of project finance at Arab National Bank Ivan Hopkins. “We haven’t seen payment delays for people we are dealing with and I have never seen a project where contractors have failed to get insurance.”

Government clients are playing their part in making it easier for contractors. “The government is providing larger advanced payments,” says Hopkins. “We have seen some at over 20 per cent.”