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Business English: Saudis to spend $624bn on construction projects

In spite of its image as a vastly rich country boasting 25 per cent of the world's known oil reserves, Saudi Arabia faces huge challenges. von Andrew England (Cairo)

Saudis to spend $624bn on construction projects By Andrew England in Cairo An unprecedented construction boom is gaining momentum in Saudi Arabia as highly ambitious, multi-billion-dollar projects to upgrade infrastructure and meet pressing social challenges begin to have an effect. The boom may be less visible than in the kingdom's smaller Gulf neighbours, such as Dubai and Qatar, but the needs and the numbers are massive - thousands of kilometres of new roads and railways; billions of dollars of water, sewerage and electricity plants; and 4m new housing units over the next decade, with investment of $320bn estimated to be required in housing through to 2020, according to Sagia, the kingdom's investment authority. Sagia officials cite a $624bn investment programme launched last year to take the country through to 2020 as King Abdullah and his government seek to utilise the immense oil wealth the state is enjoying. Economists put the value of projects announced so far at more than $300bn, with the construction sector growing at about 7 per cent and expected to sustain similar or higher growth through to at least 2010. "If you look at the sheer numbers in Saudi Arabia the amount of project work that is required... it is much more than what is happening in the rest of the region," says John Sfakianakis, chief economist at SABB bank. The upshot is a swathe of public and private investment that is providing opportunities for both foreign and local investors, including a grandiose flagship project to build six new "economic cities". In 2006, Sagia granted licences to foreign companies for projects with an estimated value of $65bn. This year it is expected to reach $75bn, Sagia officials say. The hope is that the boom will have a multiplier effect on non-oil private-sector growth, develop infrastructure that is in need of repair following periods of little or no growth in the 1980s and 1990s and provide a platform for more diversified economic activity. In spite of its image as a vastly rich country boasting 25 per cent of the world's known oil reserves, Saudi Arabia faces huge challenges as it seeks to improve services, reduce its dependence on oil, broaden the economy beyond the main centres, improve the skills of Saudi workers and tackle unemployment, which is about 12 per cent. The kingdom has the Gulf's largest population, with 24m people (including some 6.5m expatriate workers) but its gross domestic product per capita is lower than the other Gulf Co-operation Council states, with the exception of Oman, according to McKinsey, the consultants. Experts say one of the key differences between this boom and that of the 1970s is the participation of the Saudi private sector, from cement companies that are ramping up production to small and large building contractors. Still, there are some suggestions that companies have been slow to realise the boom's potential. "The capacity for them to deliver against what's going on in a competitive way is low," says Gassan al-Kibsi at McKinsey. "There are maybe only three or four who have the institutional skills and who can service the cycles in the construction industry. That's why any large project that's not with one of those few Saudi companies is looking for construction partners from outside." The kingdom also faces hurdles as it implements its plans, including skilled labour shortages, rising costs and supply bottlenecks. In August inflation reached 4.4 per cent, a seven-year high, partly because of rising rents. These could affect the pace of growth and cause some projects to be scaled back. But the overall mood is positive. "We keep track of a number of projects and it has been rising and with oil prices remaining high ... we will probably see a continuation for this kind of phenomenon until 2015," says Said Alshaikh, chief economist at National Commercial Bank.

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