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International firms return to Saudi construction

31 January 2023

 

International contractors are winning increasing volumes of construction work in Saudi Arabia as activity ramps up in the country.

After five years of design and planning work, construction activity is accelerating on the kingdom’s five gigaprojects and other major projects. Some $569bn-worth of contracts could be awarded between 2021 and 2025, according to MEED’s Saudi Gigaprojects report.

Since 2017, when most of these projects were launched to support the economic objectives of Vision 2030, the consensus has been that local contractors do not have sufficient expertise or capacity to complete all the planned projects.

The concern was that after years of spending cuts and disputes on major projects, foreign players might not want to step in to bridge the gap. 

“International players were quiet for a few years,” says a European contractor. “Now we see that most of the players we would expect to see in Saudi Arabia have won major contracts over the past year or so.”

Data from the past five years confirms that international companies now play a more active role in the kingdom’s construction market.

According to regional projects tracker MEED Projects, $8.2bn of construction and transport contracts in Saudi Arabia were won by international construction companies or joint ventures containing firms from outside the region in 2022.

In total, there were $31.4bn of construction and transport contract awards, which means international firms achieved a market share of about 26 per cent.

The volume of work secured by international firms significantly increased compared to the previous year, when $1.9bn of work was won. In total, there were $19.8bn of construction and transport contract awards in 2021.

In 2020, international firms won $3.2bn, about 22 per cent of the year’s $14.5bn of construction and transport awards.

Chinese construction companies are the dominant force and include some of the world’s largest contracting firms. According to GlobalData’s Global 500 Contractors – 2022 report published in December 2022, Chinese construction companies are the most active in the world.

In Saudi Arabia, they secured $4.1bn of orders during 2022, which is 50 per cent of the total secured by international companies and 13 per cent of the total market.

Beijing’s influence on the Saudi construction market has grown in recent years. In 2021, Chinese companies secured $400m of orders, about 21 per cent of the total secured by international companies.

International firms could have an even better year in 2023. With just one month gone, multinational firms have won $3.5bn of work. The most recent award was the estimated $800m deal awarded to a joint venture including Netherlands-based Boskalis and Belgium’s Besix for the expansion of Duba Port at Neom’s industrial city Oxagon.

Other major contracts being tendered are also expected to be secured by international companies, such as the deal to build the three dams that will create a central lake at the Trojena mountain resort in Neom.

The Saudi construction market has become more attractive to international construction companies due to various factors.

As the pace of construction in the kingdom quickens, clients have started to improve payment terms, and contractors are increasingly being engaged on an early contractor involvement (ECI) basis to accelerate project delivery.

Supply and demand factors will also have an impact. As the supply of projects increases and contractors’ order books fill up, margins are expected to improve.

Margins on major projects have improved during previous business cycles. In many cases, these expected profits were not realised thanks to project delays and cuts to capital expenditure in the kingdom.

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Colin Foreman

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