How will Saudi Vision 2030 affect construction?

With the kingdom abuzz following the finalisation and approval of Saudi Vision 2030, CW explores how the economic diversification strategy is likely to affect the country’s construction community

The post-oil era: How are economic diversification efforts likely to affect Saudi Arabia’s construction sector in the longer term?
The post-oil era: How are economic diversification efforts likely to affect Saudi Arabia’s construction sector in the longer term?

Earlier this month, Saudi Arabia approved and finalised its National Transformation Program 2020 (NTP). The plan represents an important component of Saudi Vision 2030, which was unveiled by Deputy Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud, chairman of the Council of Economic and Development Affairs, in April 2016. In short, it sets out the kingdom’s long-term strategy to diversify its economy away from traditional oil-related revenues.

A primary focus of the NTP is to gradually reduce Saudi Arabia’s dependence on crude oil exports, transforming the country into a global investment hub. Commenting in the wake of the strategy’s announcement, Prince Mohammad said: “I think by 2020, if oil stops, [Saudi Arabia] can survive. We need it [now], but I think in 2020, we can live without oil.”

The low oil price has clearly played an role in spurring on the strategy’s development, but as Prince Mohammad explained, the NTP also recognises that Saudi Arabia has much more to offer on the global stage.

“All success stories start with a vision, and successful visions are based on strong pillars,” he noted. “The first pillar of our vision is our status as the heart of the Arab and Islamic worlds. We recognise that Allah the Almighty has bestowed on our lands a gift more precious than oil.

“The second pillar of our vision is our determination to become a global investment powerhouse. Our nation holds strong investment capabilities, which we will harness to stimulate our economy and diversify our revenues.

“The third pillar is transforming our unique strategic location into a global hub connecting three continents: Asia, Europe, and Africa. Our geographic position between key global waterways makes the Kingdom of Saudi Arabia an epicentre of trade and the gateway to the world.”

At the time, Prince Mohammad also revealed that Saudi Arabia’s Public Investment Fund (PIF) had been restructured to promote the country’s investment abroad. In part, the money necessary to bolster overseas trade has been raised through sales of 5% of the shares of Saudi Aramco.

As details of Saudi Vision 2030 and the NTP continued to surface in the kingdom, it was possible to interpret each announcement in numerous ways – especially within the context of the construction sector. David Clifton, regional development director at Faithful+Gould, told Construction Week that patience would be a virtue for those looking to align their corporate strategies with Saudi Arabia’s long-term economic policy.

“People are starting to think around [Saudi Vision 2030 and the NTP], but if you make assumptions too quickly now, it could come back to bite you,” he explained.

Anchored by the country’s $2tn (SAR7.5tn) PIF, Saudi Vision 2030 should be achievable from a financial perspective, if handled in an appropriate manner.

“My concern revolves around whether this is now an investment fund, simply because nationally, [Saudi Arabia has] turned over ownership of Saudi Aramco to the PIF, starting with the floating of 4% to 5% of its shares,” noted Clifton.

“That’s still money, but it has not yet diversified itself. It will be necessary to create a strategy that allows both the unlocking of capital and the diversification of Saudi’s investment portfolio.”

One of the ideas hinted at in relation to the initial public offering (IPO) involved plans to set up a holding company for military industries that would, at first, be fully owned by the government, with a view to listing it on the Saudi Stock Exchange (Tadawul) in 2017.

“Saudi is one of the world’s biggest spenders on armament, but what good is that IPO if it’s only for internal investments?” asked Clifton. “We are looking for details in the NTP that show evidence of platforms like project management, programme management, cost and promotion management, specialist programme services, and advisory services.”

Clifton’s ‘wait-and-see’ attitude to the Saudi Vision 2030 and the NTP will no doubt be shared by many in the kingdom until theory gets put into practice. Nevertheless, early indications would suggest that the kingdom’s strategy of economic diversification could spell good news for the construction community.

For example, Saudi Vision 2030 outlines the country’s aim to more than double its total number of hotel rooms. Indeed, the kingdom has set itself the ambitious target of creating half-a-billion rooms for regional and international visitors.

Such efforts will no doubt facilitate Saudi Arabia’s target of increasing non-oil revenues to $160bn (SAR600bn) by 2020. In 2015, this figure stood at $43.5bn (SAR163.5bn).

According to official numbers from the commission, there were 230,000 hotel rooms in the kingdom as of September 2014; the sector accounting for approximately 900,000 jobs. Moreover, an Alpen Capital report dated the same year estimated that Saudi Arabia accounts for around two-thirds of all hotel rooms in the Gulf region.

As Prince Sultan bin Salman bin Abdulaziz, chairman of the Saudi Commission for Tourism and National Heritage, pointed out: “Tourism was the second biggest contributor to the kingdom’s economy [last year].”

Saudi Vision 2030 also aims to significantly grow the economic contribution of the kingdom’s mining sector. The country’s ultimate goal is for mining to account for $26bn (SAR97bn) – 185 times more than the $140m (SAR520m) revenues achieved in 2015. According to Al Eqtisadiah, the kingdom’s mining sector will represent 10% of its non-oil revenues, targeted at $268bn (SAR1tn) by 2030, up from the current 0.3%.

Ambitious though these goals may appear, Saudi Arabia is rich in mineral deposits, with approximately 6% of global uranium reserves. Moreover, between 2010 and 2014, the country produced 22,800kg of gold, 28,300kg of silver, and 106,000t of nickel.

At a strategic level, Faithful+Gould’s Clifton contends that the kingdom must continue to shift its focus from cost-generating projects to revenue-generating assets. In his opinion, Riyadh Metro represents a prime example of a project set to become a return-on-investment success. Dammam Metro, he continued, adds little in the way of ROI, so the likelihood of delays are high.

Increasing the contribution of the private sector to Saudi Arabia’s construction market will also play an important role in revenue maximisation. At present, approximately 70% of construction awards in the kingdom rely on government spending.

“That’s not massively uncommon in [the GCC], but it needs to be adjusted so as to generate international involvement,” said Clifton. “I know the proposed Saudi Green Card is [designed to encourage] expatriate investment, but it’s geared more towards individuals – not big-time investors.”

That said, shifting away from cost-generating assets can be easier said than done in the kingdom. The country’s growing population, not to mention its ambitious tourism goals, will necessitate large-scale infrastructure development programmes across sectors such as housing, education, healthcare, transport, and utilities.

Even so, it is important to remember that despite the recent approval of Saudi Vision 2030 and the NTP, these are early days for Saudi Arabia’s economic diversification strategy. Put simply, it will take years to set all of the gears in motion. Aspects such as legal and contractual frameworks, advanced procurement laws, and alternative financing vehicles cannot – and will not – be implemented overnight.

“What is likely to take place [in Saudi Arabia] is an evolution, not a revolution,” Clifton concluded. “We are talking about changes that take a generation to develop – 20- to 25-year cycles on average.”

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