The fear of the political fallout associated with project failures means that Riyadh is now preparing to spend billions of dollars to take control of the kingdom’s construction sector.
Crown Prince Mohammed bin Salman has been highly critical of project failures in the past such as King Abdullah Financial District and as he launches new projects that could total close to $1 trillion, policy makers in Riyadh are keen to ensure that this new breed of projects avoid the pitfalls of the past.
To gain certainty of delivery Riyadh is buying into the construction sector. It has been acquiring international companies and is forming joint venture entities with local and international partners that will fill the void left by the traditional heavyweights of Saudi construction – Saudi Binladin Group and Saudi Oger – that have reputations tarnished by the project failures of the past and have endured financial difficulties in recent years that have forced them to scale back their operations.
The most recent development is the ongoing sale of South Korea’s Daewoo Engineering & Construction. A report in the Seoul-based Korea Times says that bidders have been shortlisted for the sale from the state-run Korea Development Bank (KDB), and those still in the running include Saudi Aramco. KDB expects to conclude the sale of 50.75 per cent in the company in April next year.
The potential deal is not the first time a Saudi entity has acquired a stake in a South Korean contractor. In 2015, there were two transactions. Saudi Arabia’s Public Investment Fund (PIF) signed a $1.1bn deal to acquire a 38 per cent stake in South Korea’s Posco Engineering & Construction.
In addition to acquiring contracting resources, Riyadh is moving to create a joint venture super contractor that will involve Aramco and the PIF partnering with local and international construction companies. In October, contractors from across Europe and Asia were invited to submit expressions of interest in the joint venture that will be 25 per cent owned by Saudi Aramco, 25 per cent by PIF, 25 per cent by a local contractor and 25 per cent by an international contractor.
At least 17 international contractors were invited to submit expressions of interest in the super contractor company. According to sources close to the scheme, contractors invited included firms from Belgium and Italy in Western Europe, Turkey and eight companies from Asia.
Riyadh’s decision to buy into the supply chain highlights the importance that it now places on certainty of delivery. After three years of limited construction activity the kingdom’s infrastructure deficit has widened, and it needs to move quickly to correct this imbalance.
Bold initial steps have been made and the new project launches have revealed what is planned, but for those plans to be a success and achieve their economic objectives they need to be delivered on time and on budget. The political consequences of that not happening means that Riyadh is now prepared spend heavily and take control of the construction sector.