Riyadh looks to joint ventures for infrastructure projects

18 April 2011

Saudi Arabia’s massive infrastructure investment plans and growing number of megaprojects are drawing regional contractors to the kingdom

Saudi Arabia is the only market in the region that awarded more construction-related contracts in 2009 than it did in 2008. Figures from regional projects tracker MEED Projects show that in 2009, more than $38.6bn of contracts were awarded compared with $26.7bn the year before.

I believe the [Saudi Arabian construction] market offers opportunities to newcomers as well

Yusuf Akcayoglu, TAV

The market held strong during the global financial crisis. In 2010, contract awards fell slightly to $38.5bn. This is still up 45 per cent on 2008 and explains how so many firms have managed to expand their Saudi operations, following the downturn in Dubai.

Although the market is well served by local construction majors such as Saudi Oger, Saudi Binladen Group and El-Seif Engineering & Contracting, it seems that there is room for more. “At a client level they are looking for new entrants,” says John Williams, regional leader for UK consultant EC Harris.

Projects planned or under way ($m)

22 March 2010: 641,149

23 March 2011: 668,280

Source: MEED Projects

“We were recently asked for our view on which contractors could work on a scheme in Jeddah and you certainly get a sense from clients that they are looking for new ideas and new entrants.”

EC Harris has been serving the Saudi Arabian construction market for 30 years and opened its Dammam office three years ago. A Riyadh office is planned within the next 12 months.

Joint ventures in Saudi Arabia

More joint ventures (JVs) at the main contractor level are expected in Saudi Arabia in the future. This copies the business model that neighbouring Qatar has chosen. Many Qatari clients are entering into JVs with major international firms. This guarantees them enough workload, help with mobilisation costs and the opportunity to expand operations.

UAE-based Drake & Scull International (DSI) deliberately sought to diversify its geographic and sectoral reach beyond its core Dubai market following the economic crisis in 2008. “Our concentration has dropped from 80 per cent exposure to Dubai in 2008 to 18 per cent in the first quarter of 2011,” says Zeina al-Tabari, chief corporate affairs officer at DSI. “Saudi has now become our biggest market at 49 per cent.”

DSI has worked in the kingdom since 1979. Its recent efforts to expand operations outside Dubai have met with quick success. “We have always been part of the Saudi, Kuwait and Qatar markets and have been doing business development in them for quite some time,” says Al-Tabari.

“We won three new Saudi projects last year and at the beginning of the year we announced a SR2bn ($5bn) project with [energy major Saudi] Aramco. That has given us much more exposure in the Saudi market.” The Aramco project was a major win for subsidiary Drake & Scull Construction Saudi Arabia.

It involves constructing the King Abdullah Petroleum Studies and Research Centre, which will be located near Riyadh’s King Khaled International airport and was designed by UK architect Zaha Hadid.

Other major 2010 awards in Riyadh for DSI include an $80m district cooling plant contract and a $125m mechanical, electrical and plumbing contract for the International Technology and Communications Centre, which is a joint venture with the local Al-Zamil Group.

Turkish interest in Saudi Arabia’s construction sector

Turkish contractor TAV agrees that Saudi Arabia offers good opportunities for the industry. “Even though Saudi construction companies and the established foreign companies in the kingdom have a competitive advantage, I believe that the market offers opportunities to newcomers as well,” says Yusuf Akcayoglu, Gulf regional director at TAV.

The firm signed a joint venture agreement with local Al-Rajhi Holdings in November 2009 to provide its airports expertise into the kingdom. The new company is called TAV Airports Holding.

To date, TAV has worked on 18 airport projects worldwide and currently has three in the Gulf. This includes Qatar’s New Doha International airport passenger terminal complex, work at Muscat International airport in Oman and the infrastructure package for Abu Dhabi International’s midfield terminal. TAV’s ambition is to expand on these projects and eventually be involved in every airport development in the region.

“The solid political and economic structure of Saudi Arabia makes it a correct place to do business. We have some important projects on our radar, including the Medina airport. We are eager to establish a long-term presence there,” says Akcayoglu.

Medina airport presents a huge opportunity for construction companies. It is a major public-private partnership (PPP) structured by the International Finance Corporation (IFC), which is acting as the lead adviser. The IFC is a member of the Washington-headquartered World Bank Group.

According to Saudi Arabia’s General Authority for Civil Aviation (Gaca), eight consortiums have qualified to bid, including a group led by TAV Airports Holding. In November 2010, Gaca extended the 15 December bid deadline to the 28 February. In March, it confirmed that this had again been extended to 2 May.

An announcement on technical bids is now scheduled to be made on 1 June and the selection of the winning consortium expected to be made on 6 June.

Airport infrastructure in Saudi Arabia

The winning consortium will develop, expand, operate and manage the airport and share the revenues generated. The project will be carried out in two phases. The first stage will involve construction of a new passenger terminal and 14 air bridges. Certain strategic activities such as air traffic control, customs and immigration will remain the responsibility of the Saudi government.

Upgrading and expanding the Medina airport is a strategic priority for Gaca. The authority forecasts that passenger numbers will more than double by the end of 2014 to 8 million a year, growing to 14 million by 2022. With Saudi Arabia’s estimated infrastructure budget expected to reach $385bn by 2014, PPP projects are increasingly being explored by clients in the kingdom. “We are seeing a lot more interest and discussion about PPP, but the question is whether we are seeing more schemes coming into reality,” says Williams.

“The kingdom is running at a budget deficit and when you look at the amount the government is spending, the PPP sector is something that can’t be ignored. It also reshapes client’s thinking about how they deal with long-term infrastructure. It is a way of building more in a shorter time frame.”

“When you look at the headline spending, you just can’t spend that sort of money without attracting new entrants into the market,” adds Williams.

At the planning end of the project cycle, consultants and designers tell MEED that opportunities to design buildings and plan developments are on the increase in the kingdom. For architectural services, this means entering design competitions.

“Normally public buildings are tendered through design competitions and there are more firms taking part than there were three years ago,” says the partner of an European architectural practice with offices in Saudi and the UAE.

Word of mouth is also a critical part of winning work in the kingdom as clients are seeking internationally acclaimed companies with local connections. “Clients will scan the international market. If you are already in the market then the clients will tell other parts of the government about their experiences with you,” says the partner.

Key challenges to Saudi Arabia’s construction market

Like any construction market, Saudi Arabia has its challenges. Contract terms, such as large performance bond requirements, can deter firms from participating and payment terms are much longer than in many other markets.  

“Saudi Arabia is a very important market for us, but it can be difficult,” says the director of an international consultant working in the region. “The projects are very large and the contract terms and conditions quite onerous, so it can be challenging.”

Experts warn that clients in the kingdom need to remain competitive in order to attract contractors to deliver their schemes.

“Some of those requirements are possibly more stringent than they are in other parts of the region. Other places have learned that there needs to be some sort of sense of compromise,” says the consultant.

“The fact of the matter is, Saudi Arabia is not the only place in the Middle East where there is business and so you have to be competitive as a country to attract the supply chain.”

For firms looking to enter the construction market in the kingdom, Saudisation requirements for employment of local staff must be considered.

Clients are keen to ensure consultants pass on their expertise. Training local professionals is increasingly important and often involves client staff shadowing management from the consulting side.

“What the country is looking for is long-term commitment from companies and those that will help to build capability rather than just go in and take advantage of the situation,” says Williams.

For firms able to manage the challenges, the kingdom offers many opportunities. 

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