Riyadh prepares to enter deficit

01 February 2009

The Saudi government is planning a massive programme of investment in education and healthcare infrastructure despite falling oil prices creating a shortfall in revenues.

As 2008 drew to a close, Saudi Arabia’s Council of Ministers (cabinet) announced the budget for 2009, projecting a deficit of SR65bn ($17bn), the first year since 2002 that public spending has outweighed Riyadh’s revenues.

While revenues are expected to reach SR410bn this year, spending will hit SR475bn, up 16 per cent on 2008 and the largest budget in the kingdom’s economic history.

This expansionary fiscal policy comes at a time of extreme financial turbulence, a global slowdown and oil prices slipping below $40 a barrel, from last year’s high of $147 a barrel.

The increase in capital expenditure in the 2009 budget marks a significant departure from previous years when oil revenues have slumped. The 1998 budget, which was planned based on the high oil prices recorded in early 1997, is an example of how the kingdom has reacted to previous oil price falls. In the run-up to the 1998 budget, oil prices fell by 50 per cent to about $13 a barrel due to the Asian financial crisis, and public spending was revised down, albeit only slightly, from SR196bn to SR189bn.

Far from scaling back investment this year, Riyadh’s budget sends out a confident message and reaffirms its commitment to continue spending.

Maintaining momentum

Riyadh’s decision to run at a deficit in 2009 could partially be influenced by the scale of the downturn in the private sector. Policymakers know that as the credit markets are scaling back access to project finance for private developers, government spending is the only source of funding that can maintain the momentum in the construction sector.

Under the 2009 budget, education and healthcare will be the main sectors to benefit. Spending on education and manpower training is rising to SR122bn from SR105bn in 2008. Health spending is being increased by SR8bn to SR52bn.

In terms of education spending, the 2009 budget will fund the construction of 1,500 new primary and secondary schools and the renovation of a further 2,000 existing educational facilities. The budget also sets aside funding for Princess Noura bint Abdulrahman University for Women, and the medical school at King Saud University, both in Riyadh.

The development of Princess Noura University will be undertaken in four packages, with a total cost of $12bn, according to Gulf projects tracker MEED Projects. The project is scheduled to begin in the first quarter of 2009 and will be completed in 2012.

The largest single education project announced under the budget is the construction of the $13bn King Khaled University in the south of the kingdom. The project will comprise nine four-to-five-storey buildings, which will accommodate medical, dental and pharmaceutical colleges, an 800-bed student hospital and a library. Invitations to bid have been issued for the contracts to build the scheme, which is expected to begin in the second quarter of 2009 and be completed at the beginning of 2012.

In the healthcare sector, spending is being increased in a bid for modernisation. The 2009 budget will fund 86 new hospitals, 11,750 beds, an undisclosed number of new primary care centres and pay for infrastructure upgrades at 22 hospitals.

Education spending

The second phase of the King Khaled University Medical Complex is also scheduled to begin at the end of 2009. The project, worth $400m, will involve the construction of an 800-bed hospital, comprising 12 medical colleges and a six-storey central complex.

The construction industry has welcomed the budget. “With the real estate and banking crisis, for contractors based in Saudi Arabia, especially those with regional ambitions, the record budget is very good news,” says Samer Arafa, executive vice-president of the local Al-Arrab Contracting Company.

In MEED’s Contractor Survey 2008, Al-Arrab, which has built more than 400 clinics across the kingdom, is ranked as the kingdom’s third-largest construction company by value of contracts awarded the previous year, behind only Saudi Oger and Saudi Binladin Group.

“The budget sends a very strong message that the Saudi government is serious in implementing large, ambitious infrastructure projects,” says Arafa.

While Riyadh has committed to pushing through infrastructure projects over the past few years, contractors have often struggled to keep pace. “The problem has been one of capacity”, says Arafa. “Contractors did not have the capacity to keep up with the ambitions of the government.”

Other factors, such as the fluctuations in labour and materials costs over the past year, have been beyond Saudi policymakers’ control and have created fresh hurdles for contractors. But Riyadh has acknowledged these issues and sought to mitigate their impact. “They [policymakers] were fair in installing the compensation mechanism in 2008,” says Arafa. “But the pressure has eased now that prices have fallen.”

In fact, the drop in construction costs has provided an opportunity to push ahead with large projects, which a year ago would have been considered unfeasible. The price of steel reinforcement bars (rebar) in Saudi Arabia fell to $650-850 a tonne in January 2009, from highs of $1,000-1,200 a tonne in July 2008.

Improving the physical and social infrastructure of Saudi Arabia remains a key priority of government spending.

The inadequacy of the existing education and health facilities in the kingdom is one obvious reason to prioritise such spending. But significantly, it is also a quick and clear way of passing the benefits of last year’s huge influx of oil revenues on to the public through modernised health and education services.

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