For a country that generates a quarter of the GCC’s gross domestic product, Saudi Arabia punches below its weight when it comes to transporting goods and materials.
Last year, its ports handled 4.6 million 20-foot equivalent units (TEUs), 3.3 million TEUs of which passed through Jeddah Islamic Port on the Red Sea coast, according to the Saudi Ports Authority. The GCC states currently generate a combined annual total of about 24 million TEUs of container traffic, so Saudi ports have a market share of less than 20 per cent.
Saudi Arabia’s air-freight industry commands an even smaller market share. The kingdom’s airports handled just over 500,000 tonnes of freight in 2008, but an estimated 80 per cent of air freight from the kingdom is sent by road to airports in neighbouring Bahrain and the UAE, and flown out from there.
The Saudi logistics industry’s under-performance is not simply a result of the country’s limited transport infrastructure; local business habits have also held back its development. Comparatively few Saudi companies outsource their distribution, warehousing and transport operations.
“There has traditionally been a do-it-yourself mentality in Saudi Arabia when it comes to logistics services,” says Husam al-Saleh, managing director of local logistics business Hala Supply Chain Services. “It has not been normal for companies to outsource their logistics, even where the potential cost savings were clear, because they don’t want to lose control over their warehousing and supply chain.”
It is only recently, with the pressure on to cut costs, that the largest Saudi companies have started to outsource their transport and distribution operations. Growing numbers of medium-sized companies are expected to follow.
Exports of petrochemicals products in particular are expected to grow rapidly in the coming years. But planned power and water projects and natural gas developments will also add to the volume of materials shipped through the country’s ports.
Hala Supply Chain Services estimates that the Saudi logistics industry is currently worth close to $5bn a year. While there are no estimates for the growth of the Saudi logistics industry, the local transport and communications industry, which includes logistics, is expected to generate $32.9bn a year by 2013, up from $28.5bn this year.
In recognition of the need to improve transport infrastructure in line with the expected growth of the logistics industry, the government has embarked on a series of projects. According to Gulf projects tracker MEED Projects, $28.5bn worth of major infrastructure schemes are planned in the country in the coming years, covering improvements to the kingdom’s rail, road, air and sea transport links.
The government’s budget for this year alone provides $1.3bn to be invested in airport developments to upgrade the kingdom’s four inter-national and 24 domestic airports, showing the potential for growth in Saudi Arabia’s air freight industry.
International expertise is being brought in to help with the upgrade. In 2008, German airport operator Fraport was awarded the management concession to run King Khalid International airport in Riyadh and King Abdulaziz International airport in Jeddah. The same year, Singapore’s Changi Airports International was given the concession to manage Dammam’s King Fahd International airport. The deals are six-year concessions, and will prepare the kingdom’s three largest airports for privatisation.
The country’s rail network is being given an even more significant overhaul, with new lines planned to run north-south and east-west, linking several major cities by rail for the first time.
The north-south line, also known as the minerals railway, will link Riyadh to the Jordan-ian border, and mines in the north of the country to the east coast industrial cities and ports. In the west, the Haramain High-Speed Rail project will link Mecca, Medina, Jeddah and Yanbu.
The line that has the most potential to benefit the logistics industry is the $7bn Saudi Landbridge project. The landbridge could make it quicker and cheaper to carry freight across the kingdom by rail rather than road. The project comprises a 950km line from Jeddah to Riyadh and an upgrade of the line from the capital to Dammam. It will also connect to Jeddah Islamic Port, Dammam’s King Abdulaziz Port and Riyadh Dry Port.
Initially, the project was to have been carried out as a build-operate-transfer venture, awarded as a 50-year concession. But concern among banks about the length of the contract and uncertainty over future revenues caused the bidding process to stall twice. In 2009, the government decided to retender it as an engineering, procurement and construction (EPC) contract. The winner, which will take an 80 per cent stake in a new joint stock company, the Saudi Landbridge Company, is due to be announced by the end of 2010.
A separate rail freight contract will be awarded to operate the Saudi Landbridge as a 30-year concession. The initial freight capacity on the single-track railway will be 30 million tonnes a year (t/y) of cargo, but there is scope to add a second track if there is demand for it.
The kingdom is also investing $9.5bn in port developments. This includes $6bn for a planned megaport at King Abdullah Economic City on the Red Sea coast, which will be able to handle up to 10 million TEUs a year, and could replace Jeddah as the kingdom’s largest trans-shipment port.
Jeddah Islamic Port has itself expanded with the opening of a third terminal, the Red Sea Gateway, in December. The new terminal, which was developed by the local Saudi Trade & Export Development Company (Tusdeer), has capacity to handle a further 1.5 million TEUs a year.
Dubai-based DP World has also spent $80m on raising capacity at Jeddah South terminal from 1.4 TEUs to 2.4 million TEUs. There is sufficient capacity at the port to cope with current demand, but only following the drop in trade resulting from the economic downturn. Before the downturn hit the region in late 2008, Jeddah Islamic Port was congested, and it is anticipated that it will need the additional capacity once demand recovers.
On the east coast, Dammam Port is in the middle of a 2 million-TEU expansion programme. Further expansion plans include the construction of a 750-metre berth for bulk cargo and another container terminal with capacity for an additional 2 million TEUs. The project will be funded on a build-operate-transfer basis and should be finished by 2012.
The success of much of the infrastructure development on the Red Sea coast will depend heavily on the Saudi Landbridge. If the railway and ports operators can between them develop fast and cost-effective handling systems, it would provide an overland route for cargo to and from neighbouring GCC countries, as well as Iraq and Iran, and make it unnecessary for ships to undertake the long journey through the Strait of Hormuz into the Gulf.
But Saudi Arabia’s freight sector is not recession-proof and investment in logistics carries no guarantees of success. In the first half of 2009, the Saudi Ports Authority recorded a 9 per cent drop in movements of freight through the kingdom’s ports. Together, the ports handled 68 million tonnes of cargo between January and June, down from 73.9 million tonnes in the same period in 2008.
Air freight volumes have also fallen in recent years. In 2008, the kingdom’s airports handled 503,316 tonnes of cargo and mail, a year-on-year drop of more than 3 per cent after growth of more than 8 per cent in 2007. These falls are partly a result of the downturn in the global economy. In the coming year, however, both the Saudi economy and the global economy are expected to return to growth, and global logistics companies are positioning themselves to take advantage of the potential in the kingdom.
Germany’s Talke Logistics, for example, has created Sisco-Al-Jabr-Talke, a logistics company based in Jubail, in partnership with the local Al-Jabr Group and Saudi Industrial Services Company (Sisco), to meet anticipated growth in logistics outsourcing from petrochemicals firms in the Eastern Province. In November 2008, it opened a 100,000-square-metre logistics centre at Jubail Port to store bulk and packaged plastics.
In March, DB Schenker, the logistics arm of Deutsche Bahn, Germany’s national rail operator, set up a wholly owned Saudi subsidiary, Schenker Saudi Arabia. As a specialist in rail-based logistics, Schenker could be in a strong position to grow once the Saudi Landbridge opens. Even without the landbridge, Schenker’s managing director, Christian Tengs, says there are good prospects for growth in Saudi Arabia in the coming year, with GDP growth expected to recover to 3 per cent in 2010, according to the International Monetary Fund, after dropping by 1.2 per cent this year.
Rival logistics firms from around the region have also been expanding in the kingdom. In April, Kuwait’s Agility Logistics, for example, opened a 40,000 sq m warehouse in Riyadh, targeting customers in the foodstuffs, consumer goods, healthcare and telecoms sectors.
Local companies are gearing up too. In September, Zahid Group Holdings and Construction Products Holding merged their logistics businesses to create Warehousing & Distribution Holding Company. The enlarged group has 12 Saudi distribution centres and is building two 40,000 sq m warehouses in Jeddah and Riyadh.
Hala Supply Chain Services has a distribution network, called Naqel, covering 4,900 Saudi villages, in a joint venture with Saudi Post. Hala has also launched a warehousing division to expand its 70,000 sq m capacity. It plans to invest SR100m ($27m) in three logistics parks in Jeddah, Riyadh and Dammam. These will offer small, single-customer warehouses built around a large, multiple-user warehouse of 35,000 sq m.
“Most warehousing is built for investment purposes by landowners,” says Al-Saleh. “They are not built to ensure optimum movement of goods. It is all about how many warehouses you can put on the site for how much rent. It is up to supply chain management companies to develop sophisticated warehouses designed to meet the needs of the client.”
Global logistics firms argue that the kingdom needs further reform if its logistics sector is to achieve its full potential. They complain that licences to handle customs clearance, road haulage and air freight are restricted to Saudi firms, forcing multinationals to agree subcontracting deals, and restricting competition.
Another major obstacle to growth is the shortage of skilled labour. While there is a significant labour pool with experience in handling project cargo, there is a shortfall of people with expertise in sophisticated supply chain management and just-in-time delivery techniques. To compete with Dubai in ocean-going transport, or with Bahrain in express air freight, Saudi Arabia will need to look beyond the grand infrastructure projects and invest in training its young nationals in the required skills.
It will also need to address IT issues and bottle-necks caused by bureaucracy if it is to achieve its logistics goals.
But the most significant change needed – convincing more local businesses to hand over their logistics to specialist companies – could take longer to achieve.