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Bigger is better for construction

23 December 2024

 

Nothing encapsulates a buoyant construction market better than signing a contract to complete the world’s tallest tower. That happened on 2 October 2024, when Saudi Binladin Group (SBG) was awarded a $2bn contract to complete the 1,000-metre-plus Jeddah Tower.

The award was significant in many ways. It was a revival of the tower project, which has been on hold since 2018, and it was also a comeback for SBG after years of financial stress that had led many in the market to think it would never win another major construction deal.

On a macro level, the construction deal confirmed that the region is home to the world’s most daring and challenging construction projects.

More importantly, these projects are more than just aspirations; they are real projects that are being built.

Biggest contracts

While Jeddah Tower was the most symbolic contract award in 2024, at $2bn, it was not the largest. That accolade went to the Italian contractor WeBuild when it was awarded a $4.7bn contract for the construction of the three dams at the Trojena mountain resort at Neom in January. 

Like Jeddah Tower, the project is a challenging one. Time pressure is a key issue. Trojena has been selected to host the 2029 Asian Winter Games, and the reservoir will be used to make the snow for the event. This means the dams must be completed and the reservoir filled well in advance.  

The project is also technically complex. The main dam will have a height of 145 metres and will be 475 metres long at its crest. Inside the reservoir there will be a kidney-shaped dam that will house an attraction known as the Enchanted Forest, which will be connected to the rest of the Trojena development by an underwater tunnel.

WeBuild’s involvement also highlighted that international contractors, after sitting on the sidelines for a number of years, are playing an active role in the Saudi construction market. 

One market segment that has attracted strong interest is building stadiums, which like Trojena have to be completed for football tournaments with fixed dates: the 2027 Asian Games and the 2034 Fifa World Cup. 

In October, Spain’s FCC in joint venture with the local Nesma & Partners secured a $1bn contract to build the Prince Mohammed Bin Salman Stadium at the Qiddiya City development on the outskirts of Riyadh.

Earlier in the year, a joint venture of Belgian contractor Besix and the local Albawani was awarded the contract to build the Aramco football stadium in Al-Khobar, and Beijing-headquartered China Railway Construction Corporation and local contractor Sama Construction for Trading & Contracting won the contract to construct the Jeddah Central stadium project.

Outside of Saudi Arabia, there were only two contract awards valued at over $1bn and both were in the UAE emirate of Abu Dhabi. 

In January, a $1.2bn contract to complete phases two and four at the Saadiyat Lagoons project was awarded to a joint venture of two Abu Dhabi-based contractors, Trojan Construction Group and Arabian Construction Company. 

The other $1bn-plus deal was a $1.4bn contract to complete dredging and marine works for the Nisi Island development, which was awarded to the local NMDC Group. 

These deals were highlights in what was a strong year for the rest of the market. In total, according to regional projects tracker MEED Projects, there were $67.9bn of construction contract awards by the end of October 2024. If the trajectory is maintained until the end of the year, it will result in about $81.4bn of awards, which is lower than the $96.9bn of awards recorded in 2023, but still higher than any of the eight years from 2015 to 2022. 

Market challenges

Replicating the record-breaking performance of 2023 was never going to be easy, especially after Riyadh warned that its spending would be more targeted at the end of 2023. Those comments, made by the finance minister, set the tone for 2024, which proved to be a year with plenty of contract awards, but without the apparent carefree attitude to spending that characterised 2023. 

The other challenge with following on from a bumper year is supply chain constraints. With full order books, contractors and suppliers have lost some of the appetite that they had for new work in 2023. The result of this for project clients has been difficulties in attracting enough bidders, and when bids are submitted, the offers are often not competitively priced.

These challenges have been felt most acutely by projects in the remote regions of Saudi Arabia. The issue is so prevalent at Neom that there is now a phenomenon known as ‘Neom inflation’, which implies that the $500bn gigaproject in the remote northwestern corner of the kingdom has its own unique inflation rate.

These regional issues have added to the international supply chain constraints that have been felt since the Covid-19 pandemic and, more recently, during the conflict in Gaza and threats to shipping lanes in the Red Sea.

Addressing challenges

The market has responded to these challenges. In Saudi Arabia, the Public Investment Fund (PIF) invested in four of the kingdom’s largest general contractors in 2023. Then, in February 2024, the sovereign wealth vehicle announced that it had, together with the National Infrastructure Fund, introduced a new contractor financing programme, designed to strengthen the construction sector’s finances. 

The programme aims to provide contractors with finance solutions to help improve their cash flows.

Developers have also been improving their contract terms and, crucially, working to ensure payments are processed on time – a move that should also help improve contractor cash flows. 

The PIF-backed development companies have also been actively working on attracting new companies to Saudi Arabia. They have been travelling the world on roadshows to attract more contractors and suppliers to projects in the kingdom. 

These roadshows have been highlighting the volume and scale of the opportunities in Saudi Arabia, and have shown that the kingdom offers long-term opportunities for companies that come and invest in the market. 

In the UAE, Abu Dhabi has invested heavily in its construction supply chain. With its government-controlled investment vehicles and a series of interconnected mergers and acquisitions, Abu Dhabi and its ruling family now own the emirate’s key contracting companies and the suppliers of vital raw materials such as cement and steel. 

These national champions shield Abu Dhabi from many, but not all, supply chain challenges that have impacted projects in other markets.

Meanwhile, in Dubai, where the real estate market is driving construction, private sector developers are courting contractors to work on their projects.

As private entities, they are not bound by the procurement regulations that government or government-controlled developers have, so they have been offering directly negotiated deals to help guarantee that their projects are delivered on time.

 

2025 outlook

Unless the market dynamics shift dramatically, the market will likely face many of the same challenges in 2025. 

One of the overriding fears is a sharp slowdown in project spending in Saudi Arabia. This has happened before and is a valid concern, and the market has already shown signs of plateauing in some areas. 

This is most noticeable when contract awards for the five official gigaprojects – Diriyah, Neom, Qiddiya, Red Sea Global and Roshn –  are examined. After a sharp ramp-up in awards from 2020 to 2023, the pace of contract awards levelled off in 2024, which reflects budgetary concerns within the development companies and the PIF, and the market’s ability to take on such large volumes of new work. 

With budgets under pressure, developers in Saudi Arabia are increasingly looking for investment to help fund their projects. The success of these efforts will determine how buoyant the market in the kingdom remains over the long term.  

Even if investment comes in, it will take time, which means there will likely be a degree of conservatism from development companies in 2025. This was signalled in mid-November, when Neom, while announcing the exit of CEO Nadhmi Al-Nasr and the appointment of Aiman Al-Mudaifer as acting CEO, said: “As Neom enters a new phase of delivery, this new leadership will ensure operational continuity, agility and efficiency to match the overall vision and objectives of the project.”

While there may be a pause in spending on some of the Saudi gigaprojects, other schemes continue to underpin the performance of the construction market. 

Oil prices remain supportive of government spending on projects across the Gulf, and for the private sector, in markets such as the UAE, real estate projects continue to move into construction as developers rush to deliver units to investors and capitalise on the ongoing strength of the property market. 

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Colin Foreman

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    > ECONOMY: Conflict bolsters case for Saudi economic diversification
    > BANKING: Saudi lenders readjust to lower lending and deposit climate
    > UPSTREAM: Aramco upstream spending gathers pace
    > DOWNSTREAM: Sabic steps up Saudi petchems investment
    > POWER: Saudi Arabia’s power award activity slows
    > WATER: Saudi water sector hits sharp slowdown
    > CONSTRUCTION: Saudi construction defies the headwinds
    > TRANSPORT: Saudi infrastructure pushes forward amid conflict
    > DATABANK: Saudi data indicates project spending shift

    To see previous issues of MEED Business Review, please click here
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    Colin Foreman