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Saudi Arabia Review

Under construction ... King Abdullah Financial District.

Positive projections

Saudi Arabia’s construction sector has much to cheer about as it looks forward to a five-year $400-billion spending plan

01 May 2010

THE construction sector in Saudi Arabia has turned full circle as most of the region battles with an economic downturn. The kingdom, which was displaced by Dubai over a decade ago as the magnet for construction players, has now regained its distinctive status as the construction powerhouse of the region.

The kingdom’s government has made enormous efforts at stimulating its economy, by being the key financier of major projects launched over the past year, thus avoiding a recession. By doing so, it has managed to derive benefits of cheaper developmental costs and capitalise on a hungrier construction sector.
Although there was a sharp decline in private sector appetite to fund development projects, Saudi Arabia has been among the least affected in the region by the global economic downturn. Also, its investment agencies have been playing a major role in spurring its growth as part of the government’s stimulus package.
Now the construction industry can look forward to major infrastructural spending to the tune of more than $400 billion until 2013 as Saudi Arabia pursues a five-year infrastructure programme. In addition, there will be an increased focus on housing as the public and private sectors join together to address the nation’s severe housing shortage.
Riyadh, the capital city, seems to be the epicentre of activity. It is witnessing massive developments on a scale it has not seen for a long time with a myriad of projects ranging from the $10-billion King Abdullah Financial District (KAFD) to the Princess bint Abdulrahman University – which are well under way offering numerous opportunities to contractors and suppliers – to others in the pipeline such as the new tower at Al Faisaliah Centre and the King Abdullah International Gardens.

Kaust ... opened last September.

That is not to say that other provinces are lagging behind. The developers of what is expected to be the world’s tallest tower, planned for Jeddah’s $20-billion Kingdom City project, have recently appointed Chicago architects Adrian Smith and Gordon Gill as designer for the kilometre-high skyscraper, and the Saudi Commission for Tourism and Antiquities (SCTA) is embarking on an ambitious development that includes a $13-billion tourist city in the Eastern Province as well as Red Sea projects, which are expected to attract $40 billion in investment.
Makkah and Madinah continue to maintain their frenetic pace of construction, putting in place the infrastructure to accommodate the surging number of pilgrims that throngs the holy cities every year.
This apart, efforts are under way to expand the kingdom’s infrastructure right from schools, hospitals and homes, to roads, airports, railways, power and desalination facilities and economic and industrial cities. Saudi Arabia already awarded development contracts worth SR20.9 billion ($5.6 billion) in the first quarter of this year, as it pursues a five-year infrastructure programme to serve its mainly young population.
The world’s top oil exporter has been issuing expansionary budgets over the past two years, which continue to focus on enhancing economic development and improving the investment environment that supports strong and balanced growth.
The kingdom also intends to give the green light soon to a long-awaited mortgage law, which is expected to revive a slow lending market as it would cater to a larger proportion of housing demand in a country where less than a third of the population owns a home. The law has been in the planning stages for almost a decade.
This year’s budget includes SR260 billion ($69.3 billion) for investment projects, a 16 per cent increase over the 2009 budget, which was the largest historically, and about three times the level in 2005, the first year in the current Eighth Development Plan. The budget gives high emphasis to projects that ensure sustainable and balanced development as well as job creation.
In line with an ambitious plan to build 3,200 new schools, Saudi Arabia has increased its budgetary allocation for education this year by 13 per cent over 2009. Total expenditure amounts to SR137.6 billion ($36.7 billion), representing more than 25 per cent of the 2010 budgetary appropriations.
New projects include 1,200 new schools (in addition to 3,112 schools currently under construction) and rehabilitation of 2,000 existing school buildings. There are 25,000 state schools in the kingdom of which 16,000 operate in rented buildings.
For higher education, the new budget includes appropriations for the construction of four new campuses for the newly-established universities. A number of new campuses are already being set up, such as the King Faisal University at Al Ahsa (see separate report) while major expansion is under way at a number of universities including the Princess Nora bint Abdulrahman University – which was previously known as the Riyadh University for Girls (see separate report). These follow the completion last September of the landmark King Abdullah University of Science and Technology (Kaust).
To boost its land transportation network, the kingdom has embarked upon its ambitious rail network project. It has also earmarked SR11.87 billion ($3.16 billion) in this year’s budget to construct 6,400 km of roads. The money will be spent on 316 road projects, which comprise both new and unfinished schemes, according to Transport Minister Jebara Al Seraisry. The work covers the Makkah and the Madinah provinces, besides construction of 1,721 km of agricultural and branch roads and 3,387 km of expressways and dual carriageways in various parts of the kingdom.
For the healthcare sector, the total allocation is SR61.2 billion ($16.3 billion), an increase of 17 per cent over 2009 appropriation. Projects include new primary care centres throughout the kingdom and 92 new hospitals with a capacity of 17,150 beds.
While progress on the economic cities has been understandably slow, given the difficulties in luring investors under the shadow of the financial gloom, work on Emaar’s $26.6-billion King Abdullah Economic City (KAEC) has regained momentum this year. Also, the $40-billion Sudair City industrial project has moved forward with contractors having submitted bids for the first stage of the massive project, which will be the largest development of its type in the kingdom.

ECONOMIC & INDUSTRIAL CITIES
Work on the KAEC is picking up and its developer Emaar, The Economic City (EEC) reports that it has completed 50 km of roads in the city including those connecting the Industrial Valley, the seaport, Bay La Sun Village and Hawadi, and also link roads to Jeddah-Yanbu and Jeddah-Rabigh highways. Major parts of the infrastructure including networks of electricity, water, sanitation services and modern communications have also been completed.
Last year, EEC handed over residential units at Bay La Sun, land plots in the Industrial Valley, offices at the business park as well as a wide variety of retail space throughout the city.
EEC has also assigned Jurong International to develop the second phase of the Industrial Valley, which is one of the six components of KAEC. The Singapore-based company will undertake the masterplanning and infrastructure engineering of a 2 million sq m area.
Saudi Arabian General Investment Authority (Sagia), which is spearheading the development of economic cities in the kingdom, is now expected to give the go-ahead for the concept masterplan of the $8 billion Hail Economic City, also known as Prince Abdulaziz bin Mousaed Economic City. Work on the infrastructure is slated to commence this summer. The 40-sq-km first phase of the city will include an international airport.
On the industrial front, the kingdom launched the Sudair Industrial City north of the capital Riyadh where it hopes to attract investments of $1.3 billion to $2.6 billion in the first few years. The 16-million-sq-m first phase of the city will accommodate approximately 600 factories, with work already launched on the first 8 million sq m at a cost of up to SR900 million ($213 million). The Saudi Industrial Property Authority (Modon) is now reviewing proposals for the initial phase of the project. Construction is expected to begin within months and to be completed by the end of 2012.
Six other industrial parks are planned in Jeddah, Dammam as well as in the less developed areas near the Yemeni and Iraqi borders, among other locations. The total area of parks is expected to rise to 71 million sq m in a first step and later to more than 100 million sq m, up from 42 million, according to Modon which is developing the industrial cities and technology zones. In total, the kingdom plans to attract private sector investments worth $19.9 billion to $26.6 billion in five years for industrial cities.
Mega developments in the industrial sector include the multi-billion-dollar Saudi Aramco Total Refining and Petrochemical Company (Satorp) Jubail export refinery, the $10-billion Yanbu Export Refinery, $7-billion Jizan refinery, the $7-billion aluminium smelter project in As Al Zour, and the $17-billion petrochemical plant planned by Saudi Aramco and US firm Dow Chemical.
The aluminium smelter project is being carried out by a joint venture of state-owned Saudi Arabian Mining Company (Maaden) and US-based aluminium firm Alcoa. The overall project, targeted for completion in 2014, comprises a 4 million tonnes per year (tpy) bauxite mine, a 740,000 tpy aluminium smelter, a rolling mill and hot mill with a capacity of between 250,000 tpy and 460,000 tpy, as well as the 1.8 million tpy alumina refinery.
Meanwhile, the Saudi Aramco-Dow Chemical venture, originally planned for Ras Tanura, is to be relocated to Jubail. The cost of reclaiming the land at Ras Tanura and congestion at the site had led Dow and Aramco to reconsider plans, according to sources.

AIRPORTS
With aviation being a major growth area, the government intends to launch projects costing an estimated SR55 billion ($14.67 billion) to overhaul the kingdom’s airports over the next 20 years. This year alone, Saudi Arabia is planning to issue tenders worth more than SR17 billion ($4.5 billion) to modernise two airports, according to Reuters.
The focus is on the Western Province – specifically Jeddah and Madinah – the gateway to the country’s holy cities. The General Authority for Civil Aviation (Gaca) is pursuing plans to expand and upgrade Madinah airport on a build, operate and transfer (BOT) basis at an estimated cost of SR7 billion ($1.87 billion) which will increase its passenger handling capacity to 14 million people a year, from the current 3.5 million. The expansion of the airport involves the construction of a new passenger terminal, renovation of the existing runway and the possible construction of a second runway. The International Finance Corporation (IFC), part of the World Bank, is acting as transaction adviser on the airport expansion project.
Meanwhile, Gaca intends to develop a $10-billion airport city near Jeddah airport to include hotels, office buildings, housing units, malls and even a flight academy. Two plots of land have been offered to Saudi and foreign investors for the development of the airport city on a BOT basis. The contract is scheduled to be awarded by August.
Developing zones around Saudi Arabia’s busiest airports in Jeddah, Riyadh and Dammam are part of Gaca’s strategy of increasing revenues in preparation for full privatisation.

RAILWAYS
Saudi Arabia’s ambitious rail network expansion programme, which is well under way, includes the Saudi Landbridge, which on completion will have a major impact on trade logistics in the entire region; the 450-km-long Haramain High-speed Railway (HHR) between the kingdom’s two holy cities of Makkah and Madinah; and the North-South Railway, which will boost its mining activities.
The Saudi Landbridge will enable goods to move between Jeddah, on the Red Sea, and Dammam, the kingdom’s main Gulf port, in 48 hours, compared with a trip of up to seven days by sea. The project has faced problems in securing long-term financing and Saudi Railways Organisation is reported to be considering various options for reviving the project, including splitting it up into smaller sections.
The Haramain Railway, or the Two Holy Mosques railroad, will link the spiritual heart of Islam, Makkah, and its second-most sacred city, Madinah, to the kingdom’s commercial hub Jeddah on the Red Sea coast. The design, construction, operation and maintenance of the project is being executed in two phases. Phase One itself will be carried out in two stages. The first part includes civil works, which has been awarded to Al Rajhi Alliance under a contract worth SR6.785 billion ($1.808 billion). Package Two of Phase One calls for the design and construction of four stations. Detailed design work on these stations has been entrusted to the UK-based Fosters & Partners and Buro Happold (see separate report). Bids have now been invited for Phase Two of the project.
The 1,486-km North-South railway will link the phosphate mine at Al Jalamid and the bauxite mine at Az Zabirah to the processing facilities at Ras Azzour, on the Gulf coast. The first section of the project is expected to be operational this year.

HOUSING & REAL ESTATE
According to Deutsche Bank, Saudi Arabia will face a substantial housing shortage by 2015. It estimates that the country would require 1.2 million homes by 2015, while 900,000 new homes will be built, meaning a shortfall of 300,000 homes. These estimates are endorsed by real estate developer Injaz Development, which states that around 250,000 homes need to be built each year within the next five years to keep pace with demand.
Current statistics suggest that 76 per cent of Saudi Arabia’s local population remain without homes of their own and the long-term demand will remain strong as nearly 40 per cent of the population is under the age of 14.
Hence, the residential segment will be the main driver in the real estate market and the proposed mortgage law could provide a shot in the arm for the sector, easing restrictions on loans for properties.
Estimates from the National Commercial Bank of Saudi Arabia say that once it is enacted, the mortgage law will result in $17 billion of investment in new housing.
The new mortgage law would “quickly galvanise the latent mortgage industry into action, stimulating a surge in house buying, particularly in the middle income sector”, according to CB Richard Ellis, a global leader in real estate services.
Saudi Arabia also proposes to establish a Supreme Real Estate Commission, an umbrella organisation that would put in place regulations and legislations that will control the real estate industry and monitor its development.
Among the various avenues being explored by Saudi Arabia to diversify its oil-reliant economy and encourage its citizens to spend their holidays within the country is the development of a series of tourism mega projects. Among them is a plan to invest $13 billion on a new ‘tourist city’ in Al Oqair, south of Al Khobar on the kingdom’s east coast. The government has also earmarked sites for development on the Red Sea which would attract $40 billion in investment, with annual tourist spending estimated at $2.6 billion. According to the Saudi Commission for Tourism and Antiquities (SCTA) the planned resorts would create a total of 557,000 hotel rooms and 413,000 jobs in the process.
In Riyadh, work is well under way on a major residential project on the ouskirts of the city. Called Durrat Arriyadh, the residential oasis is being built at a cost of $1 billion (see separate report). Also planned for Riyadh is the estimated $200 million King Abdullah International Gardens, construction bids for which are due to be submitted this month (see separate report).
Meanwhile, in line with kingdom’s drive to diversify its economy, work is in full swing on the King Abdullah Financial District (KAFD) in Riyadh. The city will offer commercial and residential districts together with hospitality, retail, recreational, cultural and educational facilities. A monorail will link the entire development (see separate report).
In Makkah, work is nearing completion on the 577-m-high Makkah Clock Royal Tower – the kingdom’s tallest tower – which forms part of the Abraj Al Bait complex. The development will have a built-up area of more than 1.4 million sq m and will comprise 15,000 housing units. It will include a mosque with a capacity for 25,000 people and seven hotels with rooms for 5,000 guests.
Behind Abraj Al Bait another mega mixed-use development called Jabal Omar is taking shape, which will reportedly include 65 buildings. The US-based Wilson Associates is currently designing 19 of the 26 hotels going up simultaneously within the development. The firm will design more than 10,500 rooms in 25 towers, ranging from 20 to 48 storeys.
Other developments in Makkah include the $9-billion Al-Shamiyah Makkah Development.

POWER & WATER
Saudi Arabia has a current installed capacity of 29,000 MW, which it plans to boost to 60,000 MW by 2020. By 2024, it is anticipated that the population of Saudi Arabia will have almost doubled to 40 million. As new power plants with a combined capacity of at least 3,000 MW will be required annually to meet the anticipated demand, Saudi Arabia is making significant investments in the expansion of capacities.
According to research conducted by local bank Banque Saudi Fransi, the country’s power and water sector will require at least SR1 trillion ($270 billion) of investment by 2025 to meet projected demand.
Saudi Electricity Company (SEC) has projects planned for sites in Qurayyah, Dheba and Shuqaiq, which will come online in 2015, 2016 and 2017 respectively. The first of the three, Qurayyah, will have a capacity of 2,000 to 2,400 MW.
Other power projects planned include the 2,000 MW Riyadh PP11 project, which will be partly privately-financed and the Ras Al Zour project, which is a public sector development.
Meanwhile, construction work is in progress on the 1,200 MW Rabigh independent power project (IPP), following the recent completion of the 900 MW Shuaibah IWPP power plant with integrated seawater desalination facility.
Another important utility sector is water and waste water treatment, in which the kingdom is estimated to require investments of up to $53.33 billion over the coming 15 years – around 70 per cent of which will be taken up for sewage and waste water treatment projects.

CONCLUSION
The challenge facing Saudi Arabia is to maintain the momentum of the past year and press ahead with putting in place the much-needed infrastructure – drawing on the resurgent oil revenues, lower construction costs, and availability of expert resources – until the private sector gains enough confidence to lead growth in the country.