Signs of stress in Saudi construction as more project awards expected
It’s a conflicting image in the Saudi construction sector.
On the one hand, there are indications that more contracts will be awarded next year for new projects.
On the other, it appears the market is not firing on all cylinders.
The good news first.
TradeArabia, an industry site, reports that the value of awarded contracts in Saudi Arabia’s construction sector is likely to surge to $44.1 billion (bn) in 2019 from $26.3 bn this year, quoting a study by Project Intelligence Platform Ventures Onsite (VO), ahead of the inaugural International Contracting Conference and Exhibition (ICCE) that will take place from September 16 to 17 in Riyadh.
The kingdom’s construction market, comprising buildings, industrial, power and water, oil and gas, and infrastructure, is estimated to be worth $1.4 trillion, estimates VO.
According to Ventures Onsite, till date, the total value of Saudi construction-related projects, comprising buildings, industrial, power and water, oil and gas, and infrastructure, is estimated to be worth $1.4 trillion.
Expanding the sector
Saudi has ambitious projects such as the $500bn NEOM city on the Red Sea and the 334km2 Qiddiya entertainment city.
Saudi Arabia’s construction sector is likely to expand quickly by global standards in the coming years, but the fall in oil prices has forced a restructuring of the project pipeline, said a report by top rating agency Fitch, as reported by Trade Arabia.
According to Fitch, the rising oil prices will serve to shore up Saudi Arabia’s fiscal position and allow the government to allocate additional funds into its expansive infrastructure agenda.
“Our oil and gas team expects the price of Brent crude to average $75/bbl in 2018 and rise to average $81.2/bbl over the next five years,” said the top rating agency in its report.
Within the kingdom’s infrastructure mix, Fitch said the economic diversification imperatives would support outperformance within the transport sector, while strong structural demand driven by a young population would incentivize investment into the energy and utility segment.
Value of the construction sector in Saudi Arabia 2011-2019- thanks to Statista (www.statista.com)
According to Fitch, the scale of the Saudi construction sector is the market’s strongest attribute and also enjoys strong ranking in the Infrastructure Risk/Reward Index both regionally and globally.
“The market will endure slow growth in the coming years, however, as the fall in oil prices has forced a restructuring of the project pipeline, although this will improve Saudi Arabia’s risk profile over the long term by addressing transparency issues and opening up the competitive landscape,” Fitch added.
Projects ready to deliver
Saudi already has a $22.5 billion Riyadh metro transit system underway, with 6 metro lines, spanning 176 km and 85 stations, to be fully operational by 2021.
Also about ready to launch is the $8.2bn Haramein high-speed rail project linking Mecca and Medina via King Abdullah Economic City, a 453 km long train that can make the trip in 2h, 52 minutes, stopping in 5 stations along the way.
The Saudi Gazette reported the Haramain high-speed train will start commercial operations on Sept. 24 between Makkah and Madinah via Jeddah and Rabigh, according to sources.
All the carriages are ready for the operation after the successful completion of trial runs and railway stations in Makkah, Madinah and Rabigh are fully furnished while finishing touches are being finalized in Jeddah station.
There will be eight services daily on both sides until the end of this year, which will be increased to 12 by next year.
Mistakes to avoid
Zooming in on the $500 billion NEOM city project, the bold 26,500 Km2 land development, overall success will be dependent on whether the Kingdom has learned from the shortcomings of past mega-projects, said, an opinion piece by Consultancy-me.com.
“These previous infrastructure projects, such as Riyadh’s King Abdullah Financial District (KAFD) and Jeddah’s King Abdullah Economic City (KAEC), Cooper contends failed to reach their full intended potential in attracting investment and stimulating enterprise and employment due to changing market dynamics and often a lack of alignment with immediate market requirements,” said the opinion article.
The article points to the Kingdom’s slated $200 billion, 200GW solar power farm development backed by Softbank, which is intended to power NEOM and is by far the world’s largest proposed project of its type at 200 times the capacity of the next largest contender.
“Saudi Arabia could learn, for example, a lot from how some countries in Northern Europe have approached consortia building when constructing their wind farms,” said the site.
Now the bad news.
Signs of stress
Saudi Al Yamamah Steel Industries said in a missive to Tadawul that its net profit for the nine months to 30 June 2018 amounted to $1.4 million compared to $24.75 million during the corresponding period for 2017, Construction Week Online (CWO) reports.
The company attributed the 94.2% difference in net profit to a 39% decline in sales to the construction and electricity sectors, “due to the stagnation of projects and the intensity of competition, despite the decline in selling, marketing, and administrative expenses, and funding burdens”. I
Al Yamamah said its Q2 2018 net loss of $1.5 million was caused by “a decrease in the quantity and value of sales to the construction sector by 19% and 16%, respectively”.
Bloomberg reported research by JPMorgan, that capital outflows of residents in Saudi Arabia are projected at $65 billion in 2018 or 8.4% of GDP.
Research by Standard Chartered for Q1, 2018 saw $14.4 billion in outward portfolio investment into foreign equities, the largest surge since 2008.
“While efforts at privatization and encouraging private-sector investment have lagged, government spending continues to focus on large, state-funded development and infrastructure projects,” said Bloomberg.
It said NEOM is far from major population centers, where people are looking for work, and there is a mismatch between planned high-tech industrial projects and the Saudi labor force’s available skill set.
“The only jobs Neom is currently creating are in low-wage construction for foreigners, of whom there are now fewer, as many are leaving due to increasing visa fees and cost of living,” said Bloomberg.
Following the imposition of a tax on companies that hire overseas workers in January as an incentive to hire locals, it is estimated that roughly 234,000 expatriate workers have left the country in Q1 2018, to add to 700,000 leaving since the start of 2017.
Fitch in its Saudi Arabia Infrastructure Report, Q4 2018, reported that the ongoing difficulties in effectively implementing the government’s Saudisation policy pose a growing risk to the kingdom’s ability to deliver on its ambitious infrastructure development agenda.
The policy mandates private sector companies to hire a certain percentage of Saudi citizens in an effort to curb domestic unemployment and reduce reliance on public sector employment, it added.