Leaders KSA: Project priorities change in Saudi
The Kingdom is likely to choose efficient over wasteful, priorities over glamour, and collaboration over interruption in the medium term
Never in the history of Saudi Arabia has there been more competition for funds. The Kingdom has a growing labour force, with the number of Saudi workers in the public sector estimated at 3.3 million in 2014. Public sector employment for Saudis is forecasted to grow by 84,000 new jobs per year for the next 10 years.
Furthermore, expenditures on security are at an all-time high. The Saudi government had budgeted $81bn (SAR304.1bn) for defence and security last year, and while it has not disclosed details of the scale and cost of air sorties in Yemen, some estimates put it at $175m (SAR657m) per month.
To top that, the government’s infrastructure, housing, and mega-city developments amount to over 1,500 projects worth $1.5tn (SAR5.6tn) planned or under construction, aimed at the Kingdom’s growing young population.
These projects are necessitating more use of water, and according to David Clifton, regional development director at Faithful+Gould, Saudi Arabia is desalinising 17 billion gallons of water per day to meet current demand.
Clifton framed a panel discussion on ‘Oil prices and project pipelines’ at Construction Week’s Leaders in Construction Summit KSA 2015. He later shared the panel with Amer Khan, general manager of CH2M Olayan.
Clifton highlighted how current and future oil prices could impact development in Saudi Arabia: “According to the IMF, oil prices will reach $52 by the year’s end and rise gradually to $68 by 2020, but Saudi’s budget breakeven point is oil at $103.”
However, he added that Saudi Arabia nonetheless boasts a huge amount of borrowing power: “In the medium term, Saudi Arabia is not in a bad place, as the country has a low borrowing ratio and strong currency reserves.”
Clifton expects that in 2016, the Saudi economy will have a GDP of $760 billion (SAR2.8tn), more than $600bn (SAR2.2tn) in foreign reserves, a budget of $216bn (SAR811bn) against $198bn (SAR743.3bn) in revenues, and a debt-to-GDP ratio of only 3%.
But these numbers will not stop the government from re-evaluating its current policies. According to Clifton, this will likely include delaying metro and heavy rail programmes, delivering more efficient development models, and opening up investment opportunities for the private sector with alternative funding mechanisms.
“The construction market, from planning to execution, will be looking to add value, which will open up big opportunities albeit with expected lower project awards and amounts,” Clifton predicted.
He also praised the Saudi government’s introduction of the project management office (PMO) law, which aims to standardise and introduce economies of repetition in project execution. It is touted as the source of project management documentation, guidance, and metrics in Saudi’s construction industry.
Furthermore, the PMO law is likely to help introduce good governance and transparency, and hopefully resolve what is considered the biggest issue with construction projects in the region: delays.
“95% of projects in the GCC are delayed and 71% are over budget,” Clifton said.
Faithful+Gould’s regional development director added consultancies should consider how they can partner with the government, rather than following the traditional buyer-seller model.
“So it’s more about a partnership model that we think could be tailored to work in the Kingdom, rather than the government handing out the traditional procurement brief. [Consultancies] need to be more collaborative,” Clifton continued.
Saudi’s government is already more careful with its spending. All public projects costing more than $27m (SAR100m), must now be approved by the Council for Economic and Development Affairs, a body created this year to streamline decision-making.
CH2M’s Khan said that one of the ways governments can attract the private sector to share the investment burden is through better contracts. “Saudi Arabia’s ability to come close to FIDIC contracts or other similar forms implies procurement laws that will be more attractive to private investors,” he said.
He also agreed that the PMO concept will improve project delivery and efficiency, but added that the private sector needs counter policies in its favour, such as with employee-hiring issues.
“While everyone acknowledges the country’s need for Saudisation, the private sector’s ability to obtain visas efficiently and quickly is key,” Khan said.
“I believe contractors and consultants have suffered because of this.”
Clifton proposed that a halfway solution could, perhaps, aid contractors in Saudi Arabia, through methods such as the provision of temporary visas to enable project commencement.
Khan said these measures will come handy at a time when heavily funded programmes, such as in the rail sector, will be scaled back or undergo reassessment.
“Cost and project efficiency should be an extended exercise over the life-cycle of the project, and that’s all the more important in the current economic climate,” he said.
However, certain mega-projects such as the Riyadh Metro, can be tweaked for cost savings in the programme, without altering the objectives towards the city or residents.
Khan remarked: “We can discuss the extent and need of these programmes and whether their objectives can be achieved with more efficient realisation of infrastructure, greater utilisation of existing capacity, and improvements in maintenance initiatives.”
He added that measures like adequate frameworks, opportunities for the private sector to operate in a free manner, could improve market forces and get the efficiencies moving.
Clifton said that partnerships with the government can take several forms including build-operate-transfer (BOT) and public-private partnerships (PPP), besides others.
“The Madina Airport PPP project is a successful example of this collaboration [model],” Clifton said.
The consortium of TAV Airports of Turkey, Saudi Oger Limited, and Al Rajhi Holding Group, recently completed the first phase of a 2011 contract with the Civil Aviation Authority of Saudi Arabia (GACA) to build and operate the Prince Muhammad Bin Abdulaziz International Airport in Al Madinah Al-Munawarah under a 25 year concession.
The $1.2bn (SAR4.5bn) financing package was arranged from multiple Saudi banks.
Khan said the time has come for functionality over glitz: “Functionality with a form of attractiveness create a very nice balance.”
He cited the example of Saudi tourism as an alternative revenue generating sector for the Kingdom, adding a “number of steps” can be taken to improve mobility in the Kingdom.
Clifton concluded that the prospects for large investment portfolios in Saudi Arabia are good, “but liquidity will go where it can make a return and this requires changes in transparency and governance”.