The Saudi Arabian economy continues to enjoy high rates of growth due to oil market trends, robust demand for Saudi Arabian oil and petrochemical exports and high levels of government investment in major projects. Figures published by the IMF in October show trends in the Saudi Arabian economy and the fund’s last forecasts for the kingdom.
Due to lower oil prices and the consensus that Saudi oil exports will fall in the years to 2020 due to rising domestic demand and increasing production among OPEC and non-OPEC countries, the kingdom’s oil sector will contract in 2015-20. This will be offset by growing non-oil growth. The net effect will be Saudi economy growing by 2.0-4.8 per cent annually in 2014-19. The IMF forecasts real growth will be 4.4-4.6 a year in 2014-19.
Saudi Arabia’s financial position will continue to be very strong. IMF figures show that it forecasts the kingdom’s current account surplus will be about $118bn in 2014. This figure will fall to $75bn in 2019 on lower export earnings and higher imports.
The IMF forecasts that the Saudi budget, however, will move into deficit from 2017. The deficit is projected to rise to $35bn in 2019, equivalent to 3.6 per cent of GDP that year. In view of the kingdom’s lack of debts, this figure should be comfortably financeable. New approaches to financing the deficit, including innovative models for raising money for infrastructure projects, are likely to be on the government’s agenda from 2015 and onwards.
Trends in the Saudi Arabian projects market
The Saudi Arabian construction market continues to be volatile. MEED project figures show that the value of construction contracts awarded in 2004 and 2005 was below $10bn. There was a sharp rise in the value of major contracts awarded in 2006 which reflected accelerated investment in the kingdom’s oil, gas and petrochemical industry.
A further surge in contract awards occurred in 2010 as the government deliberately accelerated public investment to offset the impact of the global recession and, after 2010, to stimulate the economy and employment at a time of unprecedented instability in the wider Middle East.
Figures for 2013 and 2014 suggest that the value of construction awards is returning to a more sustainable level. The number for 2013 was affected by the placing of major contracts in the Riyadh Metro programme. MEED forecasts that the value of new contracts awarded will fall to about $40bn in 2014. This declline is partly due to the impact of the Nitaqat employment measures which have delivered the government goal of cutting the number of foreign and unofficial workers in the kingdom at the expense of reduced activity in the market.
The Saudi Arabian project pipeline to 2030
MEED Projects figures show that about $1.5trn worth of projects are under way, under design or planned in Saudi Arabia to 2030. About half of these projects are under execution.
More than $100bn worth of projects are at the design stage and are likely to go to tender in the next two years. And then there is a huge pipeline of major projects that have been announced and are under study. MEED Projects figures show that about $500bn worth of projects fall into this category.
These include major long-term projects about which there is uncertainty including the King Abdullah City for Atomic & Renewable Energy (K.A.CARE) renewable energy programme. This is estimated to be worth about $150bn alone. The lack of progress in K ACARE’s solar power plan is raising questions about the extent to which the project will be implemented, though there is no doubt that Saudi Arabia will build solar power plants.
The schedule of project completion shown in suggests that construction activity in the kingdom will rise to a peak 2020 when more than $50bn worth of projects to be awarded after 2014 are scheduled for completion.
The project pipeline identified by MEED shows that the electricity generation, transmission and distribution sector will be the biggest source of projects in Saudi Arabia in 2015-30. This figure, however, includes the K.A.CARE $150bn renewable energy programme about which there are now doubts. But there is no question that the kingdom will need at least 4,000MW of additional power generation capacity annually for the foreseeable future.
General construction, including major residential projects such as the Ministry of Housing programme, will be the second largest source of projects in the years to 2030.
The transport sector in total is the third largest source of projects in the pipeline. About half of the value is accounted for by railway, metro, light rail and tram projects in major Saudi Arabian cities. The kingdom’s international and domestic airport expansion programme amounts to about $25bn worth of potential projects. A similar figure has been announced for roads and supporting infrastructure in major housing developments.
Large petrochemical projects include the Saudi Aramco Total Oil Refining & Petrochemical Company (Satorp) phase II in Jubail and a new Sabic steel plant in Jubail.
Saudi Arabia’s water investment programme includes increasing potable water supplies to the kingdom’s largest cities; reducing waste and leakage in urban water systems; expansions in sewage treatment capacity in Saudi cities and the development of commercial TSE services. Short-term sewage treatment plant projects call for the completion of units with total capacity of more than 490m gallons a day (g/d).
The National Water Company (NWC) is producing about 490m g/d of TSE at present. This is projected to rise to about 890m g/d in 2030. The conference was told that the NWC is completing a strategic storage project in Riyadh that will have the capacity to store 1.3bn gallons of water and has begun work on a reserve for Jeddah with similar capacity. The NWC told the conference that the NWC’s capital programme for the next five years is $13bn.
The figures do not include new desalination plants announced by the Saline Water Conversion Corporation (SWCC) this autumn. These will involve doubling the kingdom’s desalination capacity to almost 1,900 million gallons a day (g/d) in 2025 from 792 million g/d now.
Summaries of speeches to the MEED Saudi Mega Transport & Infrastructure Conference 2014
Ministerial keynote address: HE Dr Muhammad Al Jasser, Minister of Economy & Planning
Saudi Arabia’s Economy & Planning Minister Muhammad Al Jasser told the conference that the government must work with international companies to drive technological knowhow into the kingdom.
“There is a pressing need to facilitate the transfer of technology,” Al Jasser said. “The government is looking at this. But it must be the transfer of technology in general, not just for a single project in order to develop a knowledge economy in Saudi Arabia.”
“Knowledge is the key to everything,” he said. “It is not just about transferring technology. It is about providing the training and skills to develop and utilise technology.”
“That’s why we are investing in people in Saudi Arabia,” he said. “This is why the government is investing huge amounts in people, in training and education. Our main aim is to build up human capacity in Saudi Arabia.”
Al Jasser said that the government was also investing in developing institutions such as higher education facilities and centres of excellence such as King Abdullah University for Science & Technology (Kaust) and in a national petroleum research centre.
Ministerial address: Ahmed Al Humaidan, Deputy Minister of Labour for Labour Policies
Saudi Arabia’s Labour Ministry is to open 27 advanced vocational colleges to train locals to work on the kingdom’s megaprojects, Ahmed Al Humaidan, Deputy Minister of Labour for Labour Policies, told the conference.
He said that the centres would form an essential part of the programme to increase Saudisation in private sector workforces.
“We need to ensure that Saudi nationals get the experience of working on the megaprojects that are being planned or are under way. It is vital that they work on these construction projects and do not find out about them after they are completed,” he told delegates.
The Deputy Minister said that the 27 centres would focus on teaching Saudis advanced vocational skills that can be easily transferred to the private sector. He also cited recent figures on expatriate workers as a situation that is untenable for the kingdom.
“We are seeing one million labourers come in from overseas every year,” he said. “We only really need 20 or 30 per cent of that figure. This is not good for a developing country and we need to tackle this problem.”
The Labour Ministry is targeting large companies for Saudisation as it realises that small and medium-sized firms will not be able to handle large volumes of local workers.
Other incentives for companies include the paying of up to 50 per cent of salaries of any Saudi worker while he is being trained, as well as offering other financial incentives.
Jeddah’s transport programme
Jeddah Municipality is seeking to reduce congestion, cut accidents and modernise its limited public transport services through the implementation of a SR45bn ($12bn) multi-modal transport strategy aimed at developing a modern public transport system for the city, MEED’s Saudi Mega Transport and Infrastructure Conference in Riyadh was told. Marwan al-Azzawi, technical director at Hyder Consulting said key stakeholders from the public and private sectors have collaborated with the city to plan and develop a range of sustainable transport megaprojects for Jeddah, now being implemented. He said that a population census in 2012 showed that Jeddah’s population had increased sixty-five-fold since records began in 1947 to more than 3.6 million. Al-Azzawi said that Jeddah’s population was projected to top 6 million people by 2034.
The city has also seen unprecedented increases in annual pilgrims making hajj and umrah pilgrimages, as well as a growing economy. Jeddah is the international gateway for Muslim pilgrims travelling to the holy cities of Mecca and Medina. Rapid expansion of the city has been accompanied by a surge in car travel that has seen significant increases in road accidents. Jeddah saw about 90,000 traffic accidents in 2012, which cost the city an estimated $500m.
This has led to the city committing to several megaprojects aimed at improving travel conditions, as well as encouraging people to switch to new, high-quality public transport.
New schemes planned for Jeddah include a series of road improvements as well as a public transport network that includes an express metro line, three primary metro lines and a commuter rail link. Light rapid-transit systems are also planned. Phase one projects are programmed for delivery by 2020, with a budget of SR45bn.
“To achieve this, you need to take a lot of small steps and remember that public transport [is] central to planning and land-use development plans,” he said. “We need to accommodate the new system to fit in with people’s needs.”
This includes special timing systems for religious holidays, weekends and school term times.
The role of programme management in delivering major projects
Programme management is a service that co-ordinates resources to plan and deliver related projects to obtain benefits that would not be attainable if managed separately. This involves managing project interdependencies, combining and dealing with issues among projects and tracing the impact each project has on the overall programme.
Programme management could make a decisive contribution to the effective delivery of the kingdom’s megaproject programme. Speakers at the conference said the return on Saudi Arabia’s built assets is relatively low. The challenge for kingdom’s megaproject industry is to address this issue while delivering some of the largest projects on earth.
“This is an increasingly volatile, uncertain, complex and ambiguous world,” global head of programme management at Arcadis Julio Maggi told the conference’s programme management master class. “We need to focus intently up front on client’s risk-adjusted return expectations and define the intended benefits.”
Programme managers can lead the strategy, manage the risks, and assure the outcomes; provide stability, predictability, essentiality, and clarity, and deliver exceptional value, he said.
“Understand and define client’s required outcomes, develop KPIs to measure performance, implement scalable and flexible frameworks; deploy optimal people, systems and processes and implement programme/project controls to provide visibility over actual performance versus plan,” Maggi said.
Under effective programme management, rigorous commercial discipline is applied from start to finish and reporting on the progress of a project is delivered in real-team. It is scalable, forward-looking and actionable to enable intelligent decision-making, Maggi said.
“Effective programme management requires relentless and committed leadership focused on strategy and tactics,” Maggi said. “It calls for aggressive, hands-on management focused on tactics and operational excellence.”
Maggi said that the construction industry had not benefitted in the way other industries have from the use of technology. He said the industry had suffered from:
* Chronically flat or declining labour productivity
* Little real innovation
* Relentless margin compression.
* Expensive labour wields political power and resists innovation that would increase labour productivity.
“In emerging markets, cheap labour diminishes the impetus toward innovation,” Maggi said. “There is a hypercompetitive marketplace. Tender regulations and instructions are often very prescriptive, limiting process innovation. The low bidder wins which increases margin compression restraining resources for R&D, stifling innovation.”
Maggi said the projects industry required consolidation of service providers into one-stop-shop service providers. He listed seven action points:
* Universal adoption of Building Information Management (BIM) methods to enhance design, engineering and procurement, facilitate prefabrication, and optimise facilities management
* Integration of BIM with project controls to enhance visibility of performance against plan and KPIs
* Application of lean manufacturing principles to the design, engineering, procurement and construction process
* Collaboration across disciplines to improve the product and process efficiencies
* Large-scale application of prefabrication where possible
* The development of logistics and staging to streamline in situ construction and assembly of prefabricated systems
* Lean and scalable programme frameworks to enable efficient delivery of mega portfolios, programs and projects.
“The industry needs to partner with technology companies and our supply and value chains to explore and exploit the application of powerful technologies to design and construction processes, equipment, means and methods,” Maggi said. “This is the way to promote a virtuous cycle of sustainable value creation.”
Country Manager for Saudi Arabia at CH2MHill Amer Khan said that his company has developed a method of executing programmes in the CH2MHill programme management framework.
“This is a suite of tools and processes that provide the basic framework for successful delivery of programs, Khan said. “Adaption to Saudi Arabian requirements is underway.” Khan emphasised the role of the client in driving innovation in project delivery and programme management in Saudi Arabia. He said the owner:
* owns and maintains the vision
* sets the requirements and objectives in order to achieve the vision
* exercises overall design authority
* provides the land
* provides the funding, approves and makes payments
* facilitates the engagement with key stakeholders
* ensures that programme-level risks are managed
* is the procurement authority – it awards and manages the contracts
* is responsible for managing the definition of the institutional arrangements
* provides assurance to the higher authorities
* is the de-facto programme manager
* provides programme leadership.
The programme manager, in contrast, is:
* strategic planner
* develops the programme structure, organisation and governance
* develops an integrated programme master schedule
* manages progress monitoring, reporting and governance
* provides HSE leadership and
* deals with programme integration
Khan said that programme management will work best if the following approaches are adopted:
* time and money will be saved if there is a fully-developed strategic approach from the outset with defined needs
* there may need to be programmatic exceptions from Saudi procurement regulations at some point
* the owner’s role can’t be resourced on a part-time basis. “You are storing up future problems if you attempt to delegate to team members who have other jobs,” Khan said
* consider and stress test the consultant strategy in advance in order to be proactive
* be realistic and prudent when making risk transfer decisions
* there will be an international overlay and it will impact on the parameters of your decision making process
“Mega transport and infrastructure project delivery is already underway in the kingdom,” Khan said. “Saudi Arabia’s government and industry need to act on these recommendations now.”
“No problem is unmanageable and/ or unsolvable,” Khan said. “But decision-making has a real cost consequence and this only ramps up as the procurement and programme goes live. Programme governance is critical and this means priorities need to be assigned and action owned. You need to monitor and evaluate projects continuously and instil a delivery culture in the projects sector.”
Measuring the productivity of projects
Head of property in Saudi Arabia for Arcadis Hisham Malaika said that Arcadis has developed a global built asset performance index to track and compare the returns on investments in projects.
“The Global Built Asset Performance Index explores the economic value that is generated from the built asset wealth of 30 countries,” Malaika said. “It reveals how physical buildings and infrastructure contribute to national GDP across the world.”
The index provides answers to key questions including:
* What is the proportion of GC attributable to built assets?
* Which countries generate the greatest returns from their built assets?
* Which countries are best placed to improve their built asset performance?
* How can countries get better performance from their built assets?
Malaika said that built assets generated $27.1 trillion of income across all 30 countries in 2013
“This amounted to, on average, 40 per cent of total GDP across these countries,” he said. “This proportion increases to 45per cent in emerging economies, but is lower in advanced economies at 35per cent.”
Malaika said that the asset performance is forecast to grow by 70per cent over the next decade. There is scope for the three Middle East countries included in the index to increase the productivity of their projects.
Demand for housing in Saudi Arabia
Jamil Ghaznawi of JLL Saudi Arabia said the housing sector would be one of the biggest sources of opportunity in the Saudi projects sector in the next two decades. The rate of population growth is still more than 2 per cent and this will mean it will hit 33 million in 2017.
“Saudi Arabia has the youngest population in the GCC, with 42 per cent (of the population between the age of 20 -34,” Ghaznawi said. “Urban migration, housing sizes and preference trends are influenced by this young population.”
Ghaznawi said that household size is falling in the kingdom and the average is projected to be 4.6 people a unit in 2020 compared with 5.6 a unit in 2010.
“Saudi households are shrinking but the number of expatriates is expanding as they secure permissions to include families,” Ghaznawi said. “The trend towards smaller family sizes is driven by the younger generation which see smaller families as better avenues to a better quality of life.”
Ghaznawi said JLL had completed a study of trends in Riyadh, the kingdom’s largest city with almost 6 million residents. This included 2.5 million foreigners. A total of 600,000 of the households in the Saudi capital were accounted for by non-Saudi Arabians.
Ghaznawi said that the supply of new homes in Riyadh is forecast to rise above 35,000 in 2015. The majority of this figure is accounted for by non-organised developers. He said that 40 per cent of the Saudi capital’s housing stock is in the form of houses, and that two-three bedroom units account for 54 per cent of the total, even though the average household (excluding labourers) comprises about five people.
Ghaznawi said there is a severe and intensifying shortage of affordable housing throughout Saudi Arabia. A total of 1 million is needed immediately and 200,000 units should be built annually to keep up with demand.
“More active government intervention & support is essential to ensure sufficient supply,” he said. “This requires range of new business models including joint ventures between government and private sector and a re-think of the traditional approach to development.”
The Human Resources Development Fund: programmes and services
The conference was told that the Human Resources Development Fund (HRDF), which has been operating since 2000, supports the preparation, training and employment of the Saudi Arabian workforce. It also provides financial and advisory support to employers and works to increase the Tawteen rate.
At present, it works with about 21,000 Saudi Arabian employers and subsidises the hiring of 300,000 Saudi Arabians. It is also involved with training thousands of Saudi Arabians.
The HRDF provides services before, during and after the employment of Saudi Arabian nationals. It works with the Technical & Vocational Training Corporation (TVTC), the Saudi Skills Standards agency and colleges of excellence, which provide applied training programmes.
The HRDF rewards employers that increase their Tawteen rate with rebates twice a year. More than 12,000 employers have received hundreds of millions of riyals since the rebate was started.
The fund is increasing its engagement with megaprojects. Initiatives include the Sabic partnership which involves training 5,000 job-seekers in Jubail and Yanbu industrial cities.
Building an effective legal framework for the megaproject transaction
Judy Wilson of Blake, Cassels & Graydon LLP in association with Dr Saud Al Ammari Law Firm told the conference that poor execution of megaproject procurement is a risk for both the owner and the bidders.
“Owners and bidders often underestimate the degree to which the procurement can influence the transaction for years after the procurement is complete,” Wilson said. “Poor choices made during the procurement process impact both the commercial partnership of the owner and the successful bidder and the success of the project implementation. Parties rarely acknowledge the value of a meticulous but lengthy procurement process.”
Wilson identified reasons for the failure of megaprojects:
* Rush to issuance of the procurement documents and the hurried procurement
* The failure of projects, including megaprojects, is often traceable to a poor procurement process
* Most common mistakes include poor scope of work definition in the technical specifications, or ambiguous scope of work, often because the procurement documents are rushed into the market
* Governments often share a desire to demonstrate progress on a project by issuing the procurement documents prematurely
“The best solution is patience before a rush to issuance,” Wilson said. “But if patience is not possible, then an in-market period should be provided that allows progressive issuance of key documents. Not all documents need to be issued with the initial package.”
* Poor design of evaluation criteria
* This is one of the most common mistakes and one that runs the risk of “mis-matching” the successful bidder to the project and owner
* The owner will often emphasise price without taking into account concerns over project schedule, the strategic importance of the project or the complexity of the project
* The inappropriate use of past precedent documents is often the cause of this problem
“The best solution is the clear identification of owner’s priorities for the project, a conscious matching of evaluation criteria to the priorities and the setting of the submission requirements to reflect the owner’s priorities and the associated evaluation criteria,” Wilson said.
* Poor design and execution of a complex procurement process
* Procurement documents must be specifically designed for megaproject procurements and include such features as technical bilateral consultation, commercially confidential meetings, commercially confidential requests for information and similar tools
* Procurement processes should not be fishing expeditions.
* Failing to present a balanced commercial opportunity
* Old-style, one-sided government contracts present risk to the owner in megaproject procurements
* Megaprojects involve such significant risk that a failed project can ruin even the largest international company
* Company boards will withdraw from competitive procurements if the lack of reasonable commercial terms makes the transaction a risk to the well-being of the company
* An unreasonable commercial deal will cause bid failure or a lack of interest in the market
“The two best tools for an owner to avoid these risks are listening to the bidders, and ensuring that the advisory team has a good sense of what is acceptable to the market,” Wilson said.
* Lack of responsiveness during the in-market period
* Megaproject procurements should include a feedback loop from bidders to owner. This is intended to drive the procurement toward best value and the appropriate and most efficient allocation of risk in the project agreement
“Best practice requires owners to be responsive to serious concerns raised by bidders and bidders to make the effort to participate and to effect change to the commercial documents during the in-market period,”Wilson said.
* Poor resourcing
* Underestimation of the importance of accepted approaches to megaprojects
* Reliance on information provided by the owner during the procurement process
* Owner must decide whether bidders will be permitted to rely on information provided
* Generally, bidders are required to conduct their own due diligence and not rely on information provided by the owner
* In some circumstances bidders are permitted to rely on certain portions of the information and given reliance letters by various firms
* A reliance letter is only as good as the insurance or assets that stand behind the reliance letter
* There is an increasing trend for owners to take greater responsibility for owner information in order to avoid the pricing of a significant contingency
* The challenge of compliance with applicable law
“Some changes in law are now regarded as a cost of doing business,” Wilson said. “There is significant variability in the allocation of this risk but there are some lessons learned from PPP transactions.”
* Risks associated with site conditions and access to the site
* Major delays in construction
* Permits, licences and approvals
* For megaprojects, the inherently controversial nature of the project introduces political risk that will often have to be accounted for in provisions related to permits, licences and approvals.
* Management of subcontractors
* The ability of a project company or contractor to manage subcontractors is often in conflict with the owner’s right to approve subcontractors.
“The usual compromise is the owner’s right to approve key subcontractors,” Wilson said. “But in a megaproject, even minor subcontractors can carry out significant work value in the tens of millions (of dollars).”
* Interference by third party contractors engaged by the owner
* Force majeure events (remote and uninsurable risks)
* Insurable events beyond the control of the project company/contractor
* These are usually listed in the contract
* However, relief is not extensive because of limits on the ability of the project company/contractor to insure against these risks.
* Project insurance is becoming increasingly important in determining the allocation of risk.