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Saudi Arabia - Drive for development of $ 385 billion plan

Tuesday, 24 August 2010 11:36

Saudi Arabia’s approval of a $385bn government development plan in early August bodes well for the future of the construction sector, with hundreds of new schools and hospitals planned and some 1m homes to be built over the next five years as the Kingdom strives to improve its infrastructure.

The construction segment was resilient during the global financial crisis, growing by 4.71% in 2009, according to figures from the Saudi Arabian Monetary Agency, the country’s central bank. Business Monitor International has predicted an average annual growth rate of 4.13% for 2010-14 while the sector’s value is expected to rise from SR92.2bn ($25.6bn) to SR122.48bn ($32.7bn) in the same period.

“Companies are managing much better than they were two years ago. Mortgage lending, even without an official law, has pushed a lot of construction and helped the industry,” Mu’taz Sawwaf, chief executive of Construction Products Holding Company (CPC), one of the country’s largest players in construction, told OBG.

The government of the biggest Arab economy plans a number of building projects as part of its ninth Five-Year Development Plan (FDP), which was approved by the Council of Ministers on August 9. It has already begun providing contractors with guarantees to ensure they receive the necessary support from banks.

“Around $200bn worth of projects have been issued this year and many are under construction. These projects go to major contractors but they subcontract to smaller players, so the work gets spread around the sector,” said Sawwaf.

Officials have told local media that the key priorities of the ninth plan, which covers spending for 2010 to 2014, are improving living standards, increasing employment, distributing development across all regions and enhancing economic competitiveness. Its total value of SR1.4trn ($385bn) represents a 67% rise from the last FDP.

According to the Ministry of Economy and Planning, 50.6% or $195bn has been allocated to human-resource development, 19% or $73bn to social and health care, 15.7% or $60.7bn to economic resource development, 7.7% or $29.6bn to transportation and communication, and 7% or $26.8bn to municipal and housing services.

Broad details of some larger projects have been announced. For example, some 25 technology colleges, 28 technical institutes and 50 industrial training centres are planned for the education sector. Health care development targets require the construction of 117 hospitals, 750 primary health care centres and 400 emergency centres. New facilities will also be needed for plans to increase electricity production and double desalination capacity.

The large number of government-backed projects has raised doubts among business leaders that there will be enough capacity to deliver on all of the plans.

“We have seen the government play a more prominent role in financing mega-projects through vehicles such as the Public Investment Fund. The capital markets will have to play an even bigger role, resuming IPO [initial public offering] activity and issuing debt to support the projects,” said National Commercial Bank chief executive, Abdulkareem Abu Alnasr.

Saudi banks have already gone or are planning to go to the international markets to raise medium- and long-term money, said Abu Alnasr.

“Through government vehicles, the capital markets and banks diversifying their funding sources, there is a way to keep these projects going on. However, there will have to be some prioritisation of projects because even if funding and financing were resolved, there would be execution issues due to the sheer number and magnitude,” he added.

Perhaps the most interesting of the plan’s aims is addressing the housing shortage. Estimates for the number of new homes required in the Kingdom range from 1.5m by 2015 to 4.5m over the next 15 years. Whatever the actual figure, the scale of the housing shortfall is substantial. The ninth FDP aims to address a share of this supply gap, with a target of 1m new residential units to be built by 2014.

CPC’s Sawwaf is confident the industry can deliver on this housing target. “Capacity and capabilities are sufficient among Saudi contractors to build the new units that are going to be required over the next 15 years. Moreover, many international firms have entered the market so covering the upcoming demand is possible,” he told OBG.

While meeting the plan’s aims will be challenging, it is doubtful that many players in the construction industry are troubled at the prospect of an excess of projects. The sector looks certain, therefore, to enjoy a busy period as a result of the Kingdom’s continued development drive.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Tuesday, 24 August 2010 11:45

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