Saudis to spend Dollars 624bn on construction projects

An unprecedented construction boom is gaining momentum in Saudi Arabia with a raft of multibillion-dollar projects to upgrade infrastructure and meet pressing social challenges beginning to take effect.

The boom may be less visible than those in the kingdom's 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 housing investment requirements through to 2020 estimated at Dollars 320bn, according to Sagia, the kingdom's investment authority.

Sagia officials cite a Dollars 624bn (Pounds 304bn, Euros 434bn) investment programme launched last year to take the country through to 2020 as King Abdullah and his government look to utilise the immense oil wealth the state is enjoying.

The king begins a trip to Europe tomorrow with a state visit to the UK. He can be expected to showcase the boom and the opportunities it offers.

Economists put the value of projects announced so far at more than Dollars 300bn, with the construction sector growing at about 7 per cent and expected to sustain similar or higher growth until 2010 at least.

"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 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 Dollars 65bn. This year it is expected to reach Dollars 75bn, Sagia officials say.

It is hoped that the boom will have a multiplier effect on non-oil private sector growth, develop infrastructure in need of repair following periods of low growth in the 1980s and 1990s and provide a platform to diversify 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 oil dependence, broaden the economy beyond the main centres, improve the skills of workers and tackle unemployment of about 12 per cent.

The kingdom has the Gulf's largest population of 24m including 6.5m expatriate workers but its gross domestic product per capita is lower than all other Gulf Co-operation Council states except Oman, according to McKinsey, the consultants.

Historically, it has invested in infrastructure at a rate of about 17 per cent of GDP but this is now 30-35 per cent, says McKinsey.

Experts say a key differences between this boom and that of the 1970s is the participation of the Saudi private sector. Still, there are suggestions that companies have been slow to realise the potential.

"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," says Gassan al-Kibsi at McKinsey.

The kingdom also faces 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.

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.