Has the first great Saudi Arabian infrastructure boom of the 21^st century passed its peak? That is the key question facing Saudi Arabia’s booming infrastructure market as it heads towards a new fiscal year.

With more than $1.2 trillion-worth of major projects planned or under way in the kingdom at the end of 2014, Saudi Arabia is by far the biggest projects market in the region, accounting for about 41 per cent of the total value of the GCC projects market.

And with year-on-year growth of about 16 per cent in the total value of projects planned or under way, it is also the region’s fastest-growing market. 

Giant market

Saudi Arabia’s projects market has doubled in size over the past three years. Of the $134bn-worth of contracts awarded in the GCC in 2013, just under half – $65bn – were placed in Saudi Arabia. Just over $55bn-worth of contracts are expected to be awarded in 2014, about $10bn down on the 2013 number.

Of this vast capital investment programme, about 87 per cent of the project spending is being directed towards the country’s civil infrastructure, including transportation, power, water and housing.

Rising population

Social infrastructure in the form of affordable housing, schools and hospitals will see an upsurge in investment as Riyadh seeks to provide the necessary infrastructure to meet population growth and negate pressure for political reforms. Substantial investments in airports, roads, ports and rail will be made as the government looks to increase capacity to cope with the rising population. Metro schemes especially will take the spotlight as the government looks to award projects in Jeddah, Dammam and Mecca.

Saudi Arabia’s population is growing at almost 2.5 per cent a year and includes a high proportion of young people. Of the kingdom’s 27 million residents, some 57 per cent are under 30, according to the country’s 2010 census. This rapidly growing young population is demanding improved water, electricity, housing and transportation.

Transport spending  

Transport infrastructure in particular is benefitting from Riyadh’s development plans with expenditure increasing by 3 per cent to about SR67bn ($17.9bn) in the 2014 budget, making it the third-biggest allocation of government spending this year, after education and manpower, and heath and social affairs.

The government’s transport plans for 2014 included the construction of 3,500 kilometres of new roads as well as the expansion of the kingdom’s ports, airports and railway network. In addition, Riyadh includes substantial spending on inner-city roads, intersections and bridges in its SR39bn municipality services budget.

Railway masterplan 

Saudi Arabia’s rail sector offers the most eye-catching projects. In December 2010, Saudi Railways Organisation (SRO), the main governmental body for the rail sector, formally set out its Saudi Railway Masterplan, covering the period 2010-40.

Key targets of the report included exploring the use of public-private sector partnerships in the development of a national railway network. It also pledged to build rail links into neighbouring countries to support the diversification of the country and regional economic growth.

Connecting ports

The masterplan covered the construction of both freight and passenger transport, and in the case of freight, it aimed to provide transport between all the main ports and industrial areas. A total of 9,900km of railway was proposed, with the plan broken down into three different levels of projects.

Stage one covers the period 2010-25 and involves the construction of 5,500km. The second level of projects covers 2026-33 and involves building 3,000km of track. The third and final level covers the years 2034-40 and will see 1,400km of track built.

Under phase 1, several specific projects were identified:

·      The double-line upgrade of the existing two railway lines between Dammam and Riyadh

·      The Saudi Landbridge between Riyadh and Jeddah, and between Dammam and Jubail

·      The Haramain high-speed railway connecting Mecca, Jeddah and Medina

·      The North-South mixed-traffic line between the northern regions, Ras al-Khair/Jubail and the capital Riyadh

·      Connections to the proposed GCC Railway network, with lines between Bath at the UAE border to Hofuf, Jubail, Ras al-Khair and Kuwait, as well as into Qatar and Bahrain

The total required investment for the masterplan is estimated to be SR365bn ($97.3bn). Early indications see the first phase costing SR63bn ($17bn), the second phase requiring SR209bn ($56bn) and the final phase needing SR93bn ($25bn) in investment.

Rail advantages

Saudi Arabia’s rail ambitions are driven by the need to ease congestion on its roads. The authorities are also well aware of the commercial advantages rail can bring, especially if it can successfully divert container traffic away from entering the Straits of Hormuz. Furthermore, rail is seen as a means of stimulating the economies of the more remote areas of the kingdom, which have long suffered with poor transport links to the main commercial and industrial hubs.

The main player in the rail sector is the SRO, which operates the Dammam-Riyadh link and is the client on the Haramain high-speed line currently under construction. For the new minerals railway and its expansion to Jubail and Dammam, the client is Saudi Railway Company (SAR), a project firm established to oversee the scheme.

Regulator’s powers

Both companies are regulated by the Saudi Railways Regulatory Commission (SRC). The regulator’s powers include issuing licences to rail transport companies, setting the standards and technical specifications for rail services, and investigating accidents.

In addition to the construction of cross country railways, a series of metro and light rail projects are planned or under way to alleviate inner city congestion in Riyadh, Jeddah and Mecca.

Airport programme

Riyadh is also investing heavily in a massive nationwide airport building programme. The aviation sector currently contributes about 1.8 per cent of the kingdom’s GDP, or about SR30.2bn ($8.1bn) a year, enough to support some 152,000 jobs.

Over the past decade, however, the kingdom’s aviation industry has fallen behind that of its neighbours with airports being built or extended in Dubai, Doha and Abu Dhabi to support new and expanding airlines, such as Emirates, Qatar Airways and Etihad Airways.

Air traffic

Passenger traffic, meanwhile, has continued to climb, reaching 64 million in 2012 (the most recent figures available), a year-on-year increase of 19 per cent. That year, there were 555,641 aircraft movements in the kingdom.

The growth in passenger traffic has exceeded government forecasts. Under the ninth development plan for 2010-14, the total number of passengers travelling through the kingdom’s airports was targeted to reach just 54.7 million by the end of 2014, compared with 45.4 million passengers in 2010.

Expanding capacity

The lack of investment coupled with rapid growth in air and passenger traffic has left many of the kingdom’s airports severely congested and operating far above their design capacity. But efforts are now under way to modernise and expand a number of airports around the country, as well as to introduce private sector competition into the aviation industry to improve service quality. A greenfield airport is also planned to be built at Jizan.

Saudi Arabia currently has 28 airports of various sizes, four of which are used for international flights. These are King Fahd International airport at Dammam, Prince Mohammed bin Abdulaziz International airport in Medina, King Abdulaziz International Airport in Jeddah and Riyadh’s King Khaled International Airport. There are plans in place or already under way to expand capacity at each of these airports.

Ports sector

With 95 per cent of imports and exports passing through the kingdom’s seaports, the ports sector is a hugely important part of Saudi Arabia’s transport infrastructure. As the world’s largest oil exporter and a major producer of petrochemicals, thousands of vessels depart the kingdom every year loaded with valuable cargoes that sustain the government’s coffers. Thousands more bring in products that are not manufactured domestically. For example, Saudi Arabia spends about $20bn a year on food imports. On average, 11,000 ships visit the kingdom’s ports every year.

Saudi Arabia currently has nine commercial and industrial ports, which are managed by the Saudi Ports Authority (SPA), the main governmental body overseeing the sector. The largest port is Jeddah Islamic port on the Red Sea, which now has a capacity of 7 million 20-foot equivalent units (TEUs), following the opening of the Red Sea Gateway Terminal in 2009.

Cargo volumes

The combined capacity of SPA’s ports was 470 million tonnes at the end of 2012, with a total of 208 berths. A total of 187.7 million tonnes of cargo was handled that year, the last year for which full sector figures are available, compared with 165 million tonnes in 2011. Container throughput across all of the kingdom’s ports, meanwhile, was up by more than 16 per cent by the end of 2012.

With a major infrastructure construction programme under way across the country requiring the import of vast volumes of materials, together with a rapidly expanding population and rising hydrocarbons exports, there is a huge need to continue expanding the capacity of the kingdom’s ports. At the same time, the government is also looking to strengthen the country’s position as a regional transportation hub.

The SPA plans to raise domestic container handling capacity to 15 million TEUs by 2020, up from about 9 million TEUs in 2011.

Private funding

Much of the planned port expansion will be carried out in partnership with the private sector, following a 1997 Royal Decree that allowed private firms to operate berths and equipment owned by the port authority. While the process has been slow-moving to date, it is likely that the majority of future projects will be carried out with private sector involvement.

The government’s commitment to port development was underlined in its 2014 budget, which allocated $350m to fund new projects, adding to the $1.6bn-worth of schemes already under execution. These schemes included building 20 new berths and increasing power supply to ports, the SPA said. A further $266m-worth of projects have yet to be awarded.

Social infrastructure

Other areas of the government’s 2014 budget also include significant capital expenditure plans. The SR210bn education and manpower budget includes plans to build 465 new schools across the country, and the renovation of a further 1,500 schools. While the SR108bn health and social affairs budget includes plans for 11 new hospitals and the completion of a further 132 hospitals and social centres.  

Housing is the other main sector that is expected to create new project opportunities, as the kingdom turns to the private sector to overcome its worsening housing shortage. In 2011, it was estimated that Saudi Arabia would need 1.1 million new homes over the five-year period leading up to 2015.

Housing Ministry

Responding to the problem, King Abdullah bin Abdulaziz al-Saud announced in 2011 that the government would build 500,000 of those homes directly. To do that, he created a Housing Ministry to oversee the plans, which were expected to cost $70bn to build.

Little has happened since then and the Housing Ministry now plans to allow private sector developers to build the new homes. For this plan to work, the kingdom needs a functioning mortgage market. After more than a decade of debate and discussion, the legislation was finally approved in July 2012 by the Council of Ministers and is now being developed into a functioning law governing mortgages.

Once that happens, there should be plenty of opportunities for contractors to win new work in Saudi Arabia and, unlike the market of today, it will be dominated by private firms rather than government-controlled clients.

Moderate growth

While there is no doubt that Saudi Arabia’s projects spending boom is set to continue for several more years – 44 per cent of Saudi Arabia’s major projects are still at the design stage, while a further 7 per cent are at the tendering stage – there are indications that Saudi Arabia’s infrastructure spending boom might have peaked and that, while still growing, the rate of growth is moderating.

One indicator is that many of the biggest strategic infrastructure projects have been awarded in the past two years, including the $22bn Riyadh Light Rail project, and the Haramain High-Speed Rail Network. A second, and arguably more significant factor, is the projected long-term decline in oil prices.

Oil prices

Saudi Arabia’s infrastructure boom over the past few years has been driven by the government’s huge oil windfalls from a combination of high oil prices and high levels of production. For the past three years, as Saudi Arabia has increased its spending on infrastructure projects, oil prices have average well over $100 a barrel.

The projection for 2014 is that prices will average just over $100 a barrel, but as we approach the year-end, a strengthening dollar and a slowdown in Chinese growth has seen prices dip below $100 a barrel.

Window of opportunity

For Saudi Arabia, the current fiscal breakeven point for oil prices is around $77 a barrel, so prices have a long way to fall before there is any significant pressure on Riyadh to cut its capital spending or draw down its reserves. But the long-term trajectory for oil prices is certain to moderate some of the government’s plans to initiate new mega projects.

In the meantime, however, Riyadh is taking advantage of the current window of opportunity to build for the future and has embarked on the biggest infrastructure spending programme in its history.