Unrest lends urgency to Saudi projects

04 April 2011

King Abdullah intends to boost spending on housing, education and social infrastructure, but the kingdom still remains a tough market for international contractors


$130bn: Extra funds that King Abdullah announced in response to the regional unrest

$66.7bn: The amount King Abdullah has pledged to spend on building 500,000 new homes

$30bn: Value of transport infrastructure projects planned for the kingdom

Source: MEED

In recent years, Saudi Arabia has come to the fore as the most promising construction market in the Middle East. Now, with popular uprisings derailing projects markets in Libya and Egypt, previously seen as offering huge potential for contractors and suppliers, the kingdom has an even more important role to play.

In 2009, the kingdom overtook the UAE as the region’s largest projects market. The Saudi authorities have recently announced billions of dollars of new investment in infrastructure and is set to pull even further away as the biggest spender in the next few years.

Construction boost for Saudi Arabia

In a move to pre-empt protests in Saudi Arabia, King Abdullah bin Abdulaziz al-Saud announced plans in March to inject an extra $130bn into developing infrastructure.

“The Saudi market is the best its ever been, and is getting better,” says Saleh Muradweij, executive director at UAE-based contractor Drake & Scull International.

“As a result of the recent events in the Arab world due to the political crises, Saudi Arabia has announced another $130bn to be spent on housing and social projects to assist urban areas that have not benefited from previous packages.”

It is not just housing projects that are being pushed forward.

“There are projects being tendered in the real-estate sector, schools, universities and infrastructure, which includes roads, airports and railways,” says Muradweij.

The world’s biggest oil producer will have no difficulty in financing the ambitious plans. The political unrest in the region pushed oil prices above $100 a barrel and with a production rate of 9 million barrels a day, the Saudi government will have plenty of revenues to fund the projects.

They have huge internal demand. There will be no problems with filling up units or finishing projects

Saleh Muradweij, Drake & Scull International

In an address to the people in mid-March, King Abdullah pledged to spend $66.7bn to build 500,000 new homes for the country’s rapidly expanding population. It is estimated the kingdom needs to build 1.65 million new homes by 2015 to meet the housing requirements of the population, which is expected to grow by about 2 per cent in the next five years.

The vast housing programme will offer major opportunities for the region’s construction industry. And unlike the speculative Dubai real-estate market that crashed in 2008, the fact that this demand is real will ensure that the projects go ahead.

“They have huge internal demand. There will be no problems with filling up units or finishing projects because it is demand for local people,” says Muradweij.

Saudi Arabia social infrastructure

In addition to housing, a growing population will require social infrastructure, such as schools and hospitals.

The government is also planning to invest large sums of money on improving and expanding the country’s healthcare sector and the king has pledged to spend $4.3bn on medical facilities. The extra investment follows the publication late last year of the kingdom’s ninth development plan (NDP) that envisages $385bn-worth of investment in infrastructure in 2010-14. The NDP sets aside $73bn to provide 117 new hospitals, 750 primary healthcare centres and 400 emergency centres.

Saudi Arabia is also planning to build 25 technology colleges, 28 technical institutes and 50 industrial training institutes in the next five years to accommodate an additional 1.7 million students.

More than $30bn is scheduled to be spent on upgrading transport infrastructure and communication links in the next four years. In addition to road projects, the kingdom is expanding airport infrastructure and building new rail lines.

The General Authority of Civil Aviation (Gaca) has set a deadline of 2 May for the $1.5bn construction contract for the first phase of the planned new Medina International airport. The first phase involves building airside and landside facilities at the airport under a long-term concession. Gaca plans to upgrade and expand the airport to increase passenger handling capacity to 14 million people a year, from the current 3.5 million a year.

The kingdom is also pushing ahead with plans to expand its rail network. A project that is set to be tendered in the near future is the Mecca Mass Rail Transit (MMRT) project. In early March, the Mecca municipality appointed the UK’s Ernst & Young and law firm Ashurst, also from the UK, as transaction advisers for the project.

Work has started on the $7bn Haramain high-speed railway project, which will consist of a 450-kilometre electric rail track. In February, two consortiums were awarded contracts worth a total of $2.5bn for the second package of the first phase of the railway project.

Contractors are also waiting for several upcoming tenders for infrastructure and drainage projects in Jeddah to prevent a repeat of the damage caused by flash flooding in January.

“If you look at the Jeddah area, many of the contracts are up for infrastructure and drains before the rains come in November,” says John Spitz, senior vice-president for Saudi Arabia at US-based Hill International.

Work opportunities in Saudi Arabia

Saudi Arabia’s vast construction programme is providing some much needed work for international contractors and is encouraging firms from across the region to bid for work in the kingdom.

“We are pricing with the housing ministry, health ministry, interior ministry and others. This for new hospitals, universities, command centres and many other projects,” says Muradweij.

Drake & Scull International was recently awarded a SR2bn contract to build the commercial buildings for the King Abdullah Petroleum Studies Research Centre in Riyadh. Like many contractors in the region, Saudi Arabia is now the main focus for Drake & Scull International.

“We are targeting a lot of big jobs in Saudi Arabia. I am hoping by the end of 2012, we’ll add another SR2-3bn backlog for the Saudi market and it will become our main market,” says Muradweij.

Despite the firm’s recent success in the kingdom’s construction market, other international construction firms have struggled to win work in Saudi Arabia.

Regardless of the announcement of an unprecedented amount of construction projects to be tendered in the coming years, Saudi Arabia is still a difficult market for international contractors to penetrate.

“In the Saudi market, as much potential as there is out there, it is tricky to work around restrictions, limitations and hurdles that are there,” says Muradweij.

New restrictions on workforce quotas are making the kingdom’s market even harder to enter. King Abdullah’s drive for Saudisation, to push for more nationals in employment, is one area that will make it more difficult for foreign firms.

“The last decree that the king passed brought on a lot of work, but also more restrictions in terms of the Saudisation of companies,” says Muradweij. “There is now a very high restriction on the number of people in the company that need to be Saudi nationals.”

This will particularly cause a problem for when firms are bidding for large or multiple projects in the kingdom.

“In the construction industry, to get a new project for SR2-3bn, you need to be able to bring in a number of visas to cope with the work. And unless you comply with the Saudisation policy in your company, you cannot get more visas,” says Muradweij.

International companies also have to partner with local firms in order to achieve sponsorship, which is a legal requirement for winning work in the Saudi market.

Another issue that has proved difficult for international contractors is the presence of the big local construction firms, who currently dominate the projects market in the kingdom. The ‘big three’ comprise Saudi Binladin Group, Saudi Oger and El-Seif Engineering.

In 2009, the Saudi Binladin Group won 66 per cent of the $30.1bn-worth of construction and infrastructure awards made in Saudi Arabia. However, firms who have managed to penetrate the market believe that the lack of foreign involvement in the kingdom’s market is starting to change.

“I would say there are more cases where you have foreign companies coming in from China and Turkey, for example, that are getting into the construction market,” says Spitz.

“The Chinese firms are mainly here doing the rail systems and Turkish companies are also looking to get into the market, so the competition will start to get pretty steep.”

Patience key to success for international firms in Saudi market

Companies looking to penetrate the market will need to be patient.

“It takes time. Any company that comes in will face problems with visa, taxation and resources. And firms already there, are three to four years ahead of others that come in now,” says a Riyadh-based international consultant.

The Saudi market was seen as a key target for many contractors before the political turmoil struck, but in the face of unrest, the kingdom has gained even more of a focus for the region’s construction industry.

The events elsewhere in the region have pressured King Abdullah to invest more money into what was already a valuable projects market. There will also be a greater urgency to press ahead with projects already planned. If contractors are willing to take the risk on the difficult market, then ample opportunities await them.

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