meed-logo

line1 line2 line3
SIGN IN / REGISTER

Saudi Arabia under project pressure

28 March 2023

 

Saudi Arabia’s projects market is overheating. The volume of projects announced in the past six years vastly exceeds the resources that are available to work in the kingdom. 

Combined with tight deadlines to complete projects as part of Vision 2030, the pressure on the construction industry to deliver is ratcheting up and turning the tables on the supply chain as the shift from a buyer’s to a seller’s market accelerates.

For the five years from 2016 to 2020, there was an average of about $14bn-worth of contract awards a year in Saudi Arabia for the construction and transport sectors. After rising to $21bn in 2021, the total rose to $32bn in 2022 – the second-best year on record. 

The near doubling of the total annual value of contract awards by the end of 2022 has required a significant scale-up of resources in the kingdom, and the ramp-up is set to continue. 

Much of this pressure is due to the five official gigaprojects, which are major programmes of work that will involve a sustained flow of contract awards for years to come.

Gigaproject focus

The project most recently classified as a gigaproject by the Saudi authorities is the Diriyah Gate development on the western outskirts of Riyadh. It joins the $500bn Neom development in the northwest of the kingdom, Qiddiya entertainment city outside Riyadh, Red Sea Global’s projects on the Red Sea coast and Roshn’s housing developments across the kingdom.

These projects are relatively new. They began to be launched in 2017 and spent much of the following three years in the design phase. 

After a start that was hampered by the work and travel restrictions required to manage the Covid-19 pandemic, construction activity on these projects has accelerated sharply since the start of 2022. 

According to regional project tracker MEED Projects, there have been $36bn-worth of contract awards across these official gigaprojects since 2017. Compared to the entire Saudi projects market over the same period that represents 14.5 per cent of contract awards. 

The percentage rises to 20 per cent if a more recent time frame is used and only contract awards since the start of 2022 are included. As work gathers pace on the gigaprojects, their significance is expected to grow even further.

More major projects

Saudi Arabia’s ambitions are not limited to the five gigaprojects. In January, Crown Prince Mohammed bin Salman al-Saud launched the world’s largest modern downtown in Riyadh. 

Known as the New Murabba project, it involves the development of 19 square kilometres of land to the northwest of the capital. The centrepiece of the project is the Mukaab, which is a 400-metre-cubed structure with a tower standing inside it. 

New Murabba is part of a plan announced in January 2021 to double the size of Riyadh from 7.5 million residents to 15-20 million residents in 2030. Other major projects in the capital include King Salman International airport, King Salman Park, Sports Boulevard and Mohammed bin Salman Non-Profit City. 

Beyond the capital there are development projects planned in all major urban centres by Saudi Downtown Company, as well as entertainment centres being developed by Saudi Entertainment Ventures (Seven).

Connecting these cities and projects will be railways, roads, ports and airports that form part of the National Transport & Logistics strategy, which aims to turn the kingdom into a global hub for travel and trade by 2030.

World’s largest piling project shifts to The Line’s marina

Resourcing challenges  

One of the key challenges for the development firms and government agencies responsible for delivering these projects is securing the resources they need. 

As client bodies attempt to make their projects more attractive for companies to work on, the industry is changing. The first signs of this change can be seen in the consultancy market. 

After years of searching for project opportunities, the big consultancy businesses are now only selectively bidding for projects in the kingdom. This is because their orderbooks are already full, and for many international firms there is a concern that they could become over-exposed to the Saudi market. 

On contracts that have already been won there are also challenges. Staffing projects is proving difficult as the kingdom remains a hard sell for many project professionals, despite significant social reforms that have taken place in recent years. 

Then, once staff have been recruited and deployed on projects, there is the prospect of losing them to competitors or clients that require the same human resources.

Securing contractors

As activity on site accelerates, the bigger concern is contracting resources. As things stand, there are not enough contractors working in Saudi Arabia to deliver all of the planned projects. 

The first way to deal with this problem is to increase the capacity of contractors in the kingdom. In February this year, the Public Investment Fund (PIF) invested $1.3bn in four local construction firms: Al-Bawani Holding Company, Almabani General Contractors Company, El-Seif Engineering Contracting Company and Nesma & Partners Contracting Company. 

This investment will allow the companies to scale up their capacity, adopt advanced technologies and improve local supply chains. 

As these firms grow, the hope is that it will encourage other local companies to also expand.

International or regional companies can also help, and over the past two years foreign players have become active in the kingdom again. Firms such as Bouygues, Samsung C&T, Hyundai Engineering Construction, China State, Webuild, FCC, Alec, Consolidated Contractors Company and Urbacon Trading Contracting Company have all secured major orders. 

In some cases, these contract awards have been supported with foreign finance, which gives the contractor an additional level of comfort when it comes to potential payment for projects. For others, the contract awards reflect growing assurance in the Saudi market. 

Boosting appeal

Confidence has been lifted by measures to make the Saudi market more attractive. Payment terms are improving and many of the frustrations typically faced by contractors are being addressed. 

One example is the use of performance guarantees. Red Sea Global, which is developing the Red Sea Project and Amaala gigaprojects on the Red Sea coast, no longer requires contractors to submit bid bonds and returns performance bonds on completion of the project, along with half of the retention. 

Alternative procurement methods and contract types are also being used, notably early contractor involvement and design and build. 

These different approaches reduce risk for the contractor and allow the client to lock in resources at a much earlier stage of the procurement process. 

Red Sea Global has adopted a different approach and is self-delivering the bulk of its projects. By acting as its own management contractor, it engages with subcontractors itself. While this means it does not need to secure the services of a main contractor, it still requires engaging with the supply chain, which – like the main contractor market – has finite resources in Saudi Arabia.

Payment terms are improving and many of the frustrations typically faced by contractors are being addressed 

Driving efficiency

On the other side of the equation, making construction more efficient could also help to limit the resources required. 

Client bodies are exploring modern methods of construction to increase the speed of delivery, reduce costs and cut the amount of resources needed on site.

The market could also be self-limiting. Decision-making in the kingdom remains centralised, which means key project decisions can be slow. While this is changing as development companies are left to run their own projects, bureaucracy can impact the speed of delivery, which ultimately reduces the immediate demand for resources on a project. 

While slow decision-making could impact progress on some projects, the overriding story for 2023 will be one of sustained pressure on the kingdom’s construction sector as it becomes a seller’s market. 

With that, there is the likelihood that contractor margins will start to creep up, just as they did in the UAE when its construction market overheated in 2003 and 2008. 

So far, that does not appear to have happened, as clients in Saudi Arabia have managed to find sufficient resources. For that to remain the case will be a major challenge, however, as on-site activity for most projects in the kingdom is still several years away from peaking. 

Daniel King, director, Currie & Brown

International contractors continue to see a level of risk in the Saudi market

“There is a lot of opportunity. A large volume of work is being planned, designed and rolled out. With that, there is significant pressure right now on the market in terms of resources and supply chain. 

“On the consultancy side, the market is tremendously difficult. 

“Even with the best incentives and best set of practices, retaining staff is a challenge. People are being attracted elsewhere and the competition is fierce. 

“For the contractors, there are a lot of tenders being let. The perception that the market has risk remains, however. That is certainly the perception for international contractors, and they are still looking at the Saudi market with some level of risk appreciation in terms of how quickly they are going to be paid and what the margins really are. 

“That approach will likely prevail for the short to medium term, until clients’ practices change in terms of contractual frameworks and payment practices. 

“Varied procurement practices are coming into play to guarantee supply chain. It might be early contractor involvement or partnering, but the main purpose is to guarantee the right level of contractors.”

Adel Karem Jemah, senior vice-president, Hill International

To prevent resource shortages, supply chain and procurement must be carefully considered

“It is imperative to consider alternative methods of procurement during boom times, and the current boom in Saudi Arabia is unprecedented considering the types, size, nature and complexity of projects that have been announced in line with Vision 2030. 

“This necessitates giving due consideration to the supply chain and type of procurement.

“It is not enough to look for resources locally or even regionally to cope with such projects. One needs to reach out to where such resources are available globally, either due to slowdowns in certain regions or the completion of other major projects. 

“Cost-plus contracts were used previously in many projects in Saudi Arabia. However, the risk for such contracts rests with the client and sometimes the cost ends up much more than expected. That is why financiers prefer the lump-sum type of contracts. 

“Nonetheless, I can see this type of contract being used for fast-track projects with very tight schedules, for instance to meet deadlines for facilities required for international or regional sporting events. 

“In any case, the evaluation and selection of contractors needs to be done with extreme diligence.”

MEED's April 2023 special report on Saudi Arabia includes:

> ECONOMY: Riyadh steps up the Vision 2030 tempo

> CONSTRUCTION: Saudi construction project ramp-up accelerates

> UPSTREAM: Aramco slated to escalate upstream spending

> DOWNSTREAM: Petchems ambitions define Saudi downstream

> POWER: Saudi Arabia reinvigorates power sector

> WATER: Saudi water begins next growth phase

> BANKING: Saudi banks bid to keep ahead of the pack

https://image.digitalinsightresearch.in/uploads/NewsArticle/10705629/main.gif
Colin Foreman

Register for MEED's guest program now to access this article.

Click here to register
Exclusive from Meed
Related Articles
  • Contractors submit bids for next phase of Duba port

    2 June 2023

    Contractors have submitted bids for the next phase of the Duba port expansion at Oxagon industrial city.

    The bidders are Belgium’s Deme with Greece’s Archirodon; Van Oord of the Netherlands with South Korea’s Hyundai Engineering & Construction; a Belgian joint venture of Jan de Nul and Besix; Netherlands-based Boskalis with France’s Soletanche Bachy; South Korea’s Daewoo; and China Harbour Engineering Company.

    The tender for the project’s second phase follows the award of a contract to deliver the first phase of the port expansion. A team of Boskalis, Besix and the local Modern Building Leaders (MBL) was awarded that estimated SR3bn ($800m) contract in mid-January.

    The scope of the Duba port expansion package includes excavation and dredging, revetments for channel widening, demolition, container terminal quay expansion and earthworks, in addition to the development of a flexible quay, a roll-on/roll-off (RoRo) berth and quay walls to a marine services berth and a coast guard facility.

    Jacobs is the main design consultant, with Moffatt & Nichol, IGO and Trent as the main sub-consultants.

    Contractors are preparing to submit bids in June for a contract to build tunnels connecting the offshore elements of the Oxagon industrial city at Neom to the mainland.

    The design-and-build contract involves digging a 6.5-metre-diameter tunnel using a tunnel boring machine (TBM) under the sea that will link the Neom Connector with the offshore elements of Oxagon port. It will house utilities including water pipelines, fibre optic cables and electricity cables.

    Crown Prince Mohammed bin Salman launched Oxagon in late 2021. It will include onshore elements as well as floating structures offshore. Construction works on the 48 square-kilometre, eight-sided industrial city have already started.

    An expanded Duba port is a critical component of Oxagon and the broader Neom development, as it will allow greater volumes of materials to be imported for the project. With an expected investment value of $500bn, Neom is the largest programme of construction work in the world.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/10909320/main.jpeg
    Colin Foreman
  • Egypt makes steady progress on Assiut refinery

    2 June 2023

    Egypt is making steady progress on the $2bn hydrocracking complex package that forms part of the wider Assuit oil refinery upgrade project, according to industry sources.

    Assiut Oil Refining Company (ASORC), a subsidiary of state-owned Egyptian General Petroleum Corporation (EGPC), is the project operator.

    “Work on the main units is continuing with no significant issues,” said one source.

    During 2021, the project faced disruption due to issues related to the Covid-19 pandemic.

    In 2023, many projects in Egypt’s oil and gas sector have been disrupted by currency issues due to the declining value of the Egyptian pound.

    Most of the projects that the currency issues have significantly impacted have been in their early stages, with the problems related to the procurement of materials and equipment.

    France’s Technip Energies is the main contractor performing engineering, procurement and construction (EPC) works on the Assiut hydrocracking complex, as part of a $2bn contract it was awarded by ASORC in February 2020.

    In April 2021, Switzerland-based Burckhardt Compression announced being selected by Technip Energies as the gas compressor supplier for the hydrocracker package.

    ASORC held a kick-off meeting for the project in September 2020.

    Egyptian contractors Enppi and Petrojet are supporting Technip Energies on the project. Enppi has undertaken the engineering work, while Petrojet is carrying out construction work.

    In 2021, contractors completed the construction of a $450m high-octane gasoline complex in the Assiut governorate as part of the broader $3.8bn Assuit oil refinery upgrade project.

    Assiut refinery

    The Assiut hydrocracking complex will be one of Egypt’s major strategic refineries, and will help meet growing local demand for cleaner products.

    The project will also become the largest oil refining facility to be implemented in Upper Egypt so far.

    Once completed, the project will transform lower-value petroleum by-products, such as mazut, into cleaner, higher-value products.

    It is expected to have an output of about 2.8 million tonnes a year of Euro-5 diesel, in addition to other petroleum products.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/10908534/main3340.jpg
    Wil Crisp
  • Mawani implements $950m of Saudi port projects

    2 June 2023

    Saudi Ports Authority (Mawani) is implementing a series of projects over the coming 18 months as part of its efforts to improve and expand infrastructure at ports and increase their utilisation rates.

    The programme, worth about SR3.5bn ($950m), comprises just over 150 projects, of which 48 are strategic in nature, 90 infrastructure-focused and 14 targeting security enhancements.

    The most significant projects are:

    At Jeddah Islamic Port

    • A four-year contract to build a new road, interchanges and flyovers to link Gate 9 with the Al-Khumrah integrated logistics park.
    • Deepening over three years of the north basin approach channel to 14 metres and the construction of a bull nose dike

    At Ras al-Khair Port

    • Increasing the draft depth of berths 11 and 12 to 16 metres
    • A three-year job to widen and dredge the approach channel from 300 metres to 500 metres and deepen it by 3 metres to 19 metres

    Other key investments include installing integrated security systems at Jeddah Islamic Port and King Abdulaziz Port in Dammam and constructing a new 40MVA substation at King Fahd Port in Yanbu.

    The contracts are expected to be tendered and awarded by the end of 2024.

    Mawani’s planned investment comes on the back of several major contracts awarded over the past 12 months, including an agreement with DP World to set up the Al-Khumrah logistics park, the reconstruction and expansion of the first and second container terminals at King Abdulaziz Port, and the upgrade of berth infrastructure and draft depths at Jeddah Islamic Port and King Fahd Port.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/10909176/main.jpg
    Edward James
  • Dubai unveils new masterplan for Palm Jebel Ali

    1 June 2023

    Dubai has released details of the new masterplan for Palm Jebel Ali, an artificial island located south of Jebel Ali Freezone.

    Double the size of Palm Jumeirah, Palm Jebel Ali will have 110 kilometres of shoreline and extensive green spaces. The development will feature over 80 hotels and resorts, along with a diverse range of entertainment and leisure facilities.

    Strategic masterplan

    The unveiling of the masterplan aligns with Dubai's commitment to doubling the size of its economy by 2033, as outlined in the Dubai Economic Agenda.

    The project, approved by Sheikh Mohammed bin Rashid al-Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, includes seven connected islands, catering to approximately 35,000 families. The development also emphasises sustainability, with 30 per cent of public facilities powered by renewable energy.

     

    MEED reported in January that local developer Nakheel had approached contractors to complete the reclamation works for Palm Jebel Ali.

    As with Palm Jumeirah, it is estimated that it could take around 20 years for Palm Jebel Ali to reach its full development potential. Nakheel has previously secured AED17bn ($4.6bn) in funding to expedite the development of various projects, including the Dubai Islands and other waterfront schemes.

    The upcoming dredging contract for Palm Jebel Ali is anticipated to involve 5-6 million cubic metres of material, contributing to the completion of the man-made offshore island.

    While reclamation work for Palm Jebel Ali is mostly finished, the project was put on hold in 2009. Nakheel had made some progress with infrastructure development, including the construction of bridges on the island by Samsung C+T.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/10906519/main.jpg
    Colin Foreman
  • Swedish firm to deliver apartments for Neom

    1 June 2023

    Swedish modular home manufacturer SIBS has been awarded a contract to deliver 2,174 apartments for Neom.

    The engineered equipment supply contract involves SIBS constructing 35 buildings within Neom’s primary staff accommodation and office cluster.

    The apartments will cater to professionals involved in the planning, engineering and construction of Neom. The entire project is expected to be delivered and commissioned by the third quarter of 2024.

    The $500bn Neom development in northwestern Saudi Arabia is the region’s largest construction project and employs thousands of staff.

    Elements of the project that have been officially launched so far are The Line, Oxagon, Trojena and Sindalah. There are also plans for an international airport and a coastal strip of hotels known as the Gulf of Aqaba.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/10905700/main.gif
    Colin Foreman