The past 12 months have been hard going for the region’s projects market. With just $120bn-worth of contracts awarded in the GCC in 2011, the total is some $25bn less than the $146bn signed in 2010. Overall, it was the worst year for the industry since 2005.

The sharp fall in contracting activity can primarily be attributed to the well-documented slump in new contract awards in Abu Dhabi. Other extenuating factors include the delay in the anticipated upsurge in activity in Qatar as the country prepares to host football’s 2022 Fifa World Cup and the fact that the value of awards in Kuwait also fell from the previous year.

The only exception to the downward trend was an increase in contract awards in Saudi Arabia, according to the Saudi Arabia Projects Market 2012 report, published by MEED Insight, the premium research and analysis division of MEED.

Biggest projects market

Total awards in the kingdom rose 6 per cent to $66bn last year, meaning Saudi Arabia awarded more than twice the value of the contracts of the other five GCC states combined. The kingdom is now, without doubt, the largest projects market in the region, and for most companies the country is the number one priority.

There are several factors driving this growth in projects. The most obvious is the close correlation between the oil price and the increase in the value of contracts awarded. As the oil price has risen since 2003, so too have government revenues and Riyadh’s ability to fund projects. In a projects market that is still largely dominated by the public sector, the oil price is probably the one overriding factor driving its performance. At the same time, this also means a slump in the oil price, while unlikely, would have a detrimental impact on the projects market.

The other key factor is demographic growth, which, in turn, has created political pressure as Riyadh struggles to cope with the intense need for infrastructure, especially social infrastructure such as schools, hospitals and public housing. The extra-budgetary spending announcements made by the government in early 2011 reflect the authorities’ growing anxiety over discontent brought on by inadequate infrastructure, jobs and government services.

Saudi Arabia’s population is projected to increase to more than 50 million by 2050 from nearly 30 million today. To avoid a demographic crisis, the government is keenly aware that it has to invest now to ensure enough jobs are available for the local population. Unlike the Dubai projects boom, which was driven by speculative real estate transactions, the Saudi projects market is driven by necessity. The combination of need and the ability to finance this need is the perfect recipe for continued projects market growth.

Like elsewhere in the region, the Saudi projects market is dominated by public clients, with private-sector activity primarily limited to the petrochemicals, construction and power sectors. Looking ahead, the proportion of private-sector schemes is likely to increase as the government encourages greater private-sector participation in projects development. This will principally take the form of an increased focus on private power, water and wastewater schemes as well as greater private-sector involvement in real estate developments.

Construction giant in Saudi Arabia

Within Saudi Arabia’s contracting sector, there is only one dominant player: Saudi Binladin Group. The local conglomerate is so big in terms of work under construction that it is almost as large as the other nine top 10 contractors combined. It is also by far the largest contractor in the region.

Binladin effectively acts as a contracting arm of the state, taking on some of the biggest and most prestigious public-sector contracts. Frequently, these contracts are subcontracted out to other firms. Some of the notable successes of international contractors in Saudi Arabia stem from these subcontracts and Binladin itself is the target partner of choice for foreign firms.

Saudi Oger is the only local contractor that compares with Binladin and has been a major force in the kingdom for two decades. Most of the other firms on the top 10 list are international engineering, procurement and construction contractors, five of which are South Korean, reflecting the rising influence of Seoul-based contractors in the GCC’s projects market. While the kingdom’s civils sector remains dominated by local contractors, process projects are still the domain of international firms.

Unsurprisingly, Saudi Aramco is the biggest client in the kingdom in terms of work under execution. The world’s largest oil and gas firm has close to $25bn in contracts under construction as it implements a plan to raise oil production and builds two 400,000-barrel-a-day export refineries at Jubail and Yanbu. It is difficult to see Aramco losing its position as the number one client in the kingdom anytime soon.

Saudi Electricity Company is in second position. The kingdom’s main electricity utility has the onerous task of ensuring 4,000MW of new electricity capacity is brought online every year to keep up with soaring demand and has been a regular tender supplier of power plants, substations and transmission projects.

The ambitious nature of the country’s railway programme is reflected by Saudi Railways Organisation’s (SRO) third place position. SRO recently awarded a $10bn-plus contract to the Spanish/local Al-Shoula consortium to complete the Haramain high-speed rail link. The interior ministry and the higher education ministry are also placed highly on the list due to the vast amount of security facilities and schools and university work under way.

Increased spending in Saudi Arabia

For 2012, MEED Insight forecasts about $72bn-worth of contract awards will be made in the kingdom, a 10 per cent increase on the $66bn awarded in 2011. The rise in spending reflects the continued growth in the projects market and is testament to the increase in government spending, especially the emergency spending programme and housing stimulus packages that will start to have an impact this year.

From a sector perspective, MEED Insight anticipates that construction will remain the most active, followed by upstream and downstream oil and gas, then petrochemicals. On the construction front, a small rise in awards is forecast, based on several key public-sector projects, such as new security forces medical complexes in Riyadh and Jeddah, the King Fahad Specialist hospital in Dammam and the third phase of the security compound programme.

Awards will also be made on several smaller private residential and commercial developments, although the construction industry as a whole will continue to be dominated by the public sector.

The hydrocarbons sector will be focused on a small number of high-value schemes, such as the long-awaited Jizan refinery project and offshore and onshore activity in the Divided Zone.

Welcome boost from petrochemicals sector

Petrochemicals is the sector that will experience the strongest growth as a result of awards on two high-profile projects: the Sadara Chemical Company complex in Jubail; and the second-phase expansion of PetroRabigh. There is also expansion and upgrade work at the Kemya, Petrokemya and Sipchem complexes.

The increase in activity will come as a welcome boost to contractors that have suffered from a fall in petrochemical opportunities since the market hit its peak in 2007.

Conversely, awards in the infrastructure (transport) sector are expected to be considerably lower than in 2011. While the industry is set to provide plentiful opportunities in the long run, there are only a handful of projects due to be awarded in 2012, following a bumper previous year. The exception would be if the estimated $7bn Landbridge rail scheme is awarded, but this is thought unlikely.