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Saudi Arabia pushes on with giga-projects supported by web of local contractors

By Gulf States Newsletter
5 August 2021
Article from volume 45,  issue 1,131

The Covid-19 pandemic has put huge pressure on government finances, but Crown Prince Mohammed Bin Salman’s favoured mega-projects have continued nevertheless, underpinned by Public Investment Fund (PIF) funding to offset the lack of foreign investment. Research by GSN, supported by data provided by Diligencia, shows the bulk of contracts have gone to some of the kingdom’s most long-established companies.

After a difficult year, Saudi Arabia is determined to promote the image that it is pushing on with the dizzying array of projects backed by Crown Prince Mohammed Bin Salman (MBS)’s favoured PIF – particularly the so-called giga-projects and other tourism and housing initiatives. The number of schemes defined as giga-projects has varied over time, but generally includes futuristic city Neom, tourism developments Al-Ula, Amaala and The Red Sea Project, housing developer Roshn and the Diriyah Gate mixed development and Qiddiya entertainment city near Riyadh. 

As the twin crises of the coronavirus pandemic and lower oil prices hit last year, some analysts assumed there would be less emphasis on the most expensive projects, as spending billions of dollars on luxury tourism developments could prompt public anger. There was certainly some austerity – finance minister Mohammed Al-Jadaan cut the projected capital expenditure for 2021 by 26% compared to the previous year’s budget, and in July 2020 the rate of VAT was tripled to 15%. However, in the pandemic’s early days, Al-Jadaan said the giga-projects would continue despite spending cuts elsewhere. 

One observer commented that “the language of austerity does not resonate among the MBS team that surrounds the Vision 2030 agenda.” The International Monetary Fund (IMF)’s July 2021 Article IV report on the kingdom noted the authorities were confident about their economic outlook, reporting that “they stressed that the Covid crisis has not affected reform momentum and believed their investment initiatives, privatisation and public-private partnerships… could boost non-oil growth above the [IMF] staff’s baseline projections.” 

MBS is widely seen to be behind the decision to maintain this momentum and his hand can also be seen in moves to form ‘super contractor’ conglomerates between the PIF and construction groups. The crown prince is personally heavily invested in the success of the mega-projects and is intensely focused on even minor details, particularly at Neom. 

As pandemic restrictions were relaxed in H2 2020, significant giga-project contracts were announced. PIF-owned The Red Sea Development Company (TRSDC) – which is behind The Red Sea Project – signed the airside infrastructure works contract for its airport with a local joint venture of Nesma & Partners Contracting Company and Al Mabani General Contractors. TRSDC later awarded over 500 contracts worth some SR7.5bn ($2bn), of which 70% went to Saudi firms. The landside package for the airport is still not awarded, although bids were reportedly submitted in January.

Neom has also awarded several projects in the past year, including an order in September 2020 for Aecom to design transport and utilities backbone infrastructure. This was the Los Angeles-based company’s second Neom contract, after a multi-year agreement to provide first-phase project management consultancy. Aecom president Lara Poloni said on an earnings call in February that Neom was “our most significant growth opportunity looking forward.” According to Neom projects director Brett Smythe, the scheme’s first construction village, to accommodate 10,000 people, will open in January.

But whether the giga projects are progressing at the desired speed is unclear. A recent market report by consultancy Currie & Brown1 claimed the Saudi construction industry may have felt the impact of Covid-19 more acutely than its peers in other regions – and cost-saving measures had included reduced giga-project investment. On an optimistic note, it said the construction sector would recover as the pandemic passed, and “considerable promotion” of Neom was under way.

There has been much debate on what the giga-projects will bring to the kingdom, particularly as many of them rely on the development of a tourism industry which Saudi Arabia has no track record in, and also because of the kingdom’s history of failing to deliver on previous grandiose schemes such as the six economic cities announced more than a decade ago. Of the various PIF initiatives, Roshn – launched in August 2020 – offers perhaps the clearest benefits, as it plans to build 30,000 homes in Riyadh to fit into the Vision 2030 goal of raising home ownership to 70%. 

Sustainability or bling?
Gauging attitudes across the Saudi population is, at best, an inexact science, but there could be considerable support for MBS’s modernisation drive if it delivers on key demands such as a need for more housing, even if critics still complain about the luxury tourism schemes and other less immediately popular elements.

However, the confidence that the authorities have in delivering on their lofty goals seems to be waning, with the specifics of the mega-projects becoming less clear as time goes by. There was, for example, far more detail on Amaala, Neom and The Red Sea Project in PIF’s 2018-20 strategy document2 than in the latest version released in January, covering 2021-253

The earlier document forecast an 8.5% annual return from these schemes. It said The Red Sea Project was aiming to receive 60% of its visitors from the Gulf Co-operation Council (GCC) and 40% from further afield; the project was expected to contribute SR15bn ($4bn) /yr to gross domestic product (GDP) and create 35,000 jobs. Qiddiya expected 17m visitors/yr for its entertainment offering, contributing SR17bn to the economy by 2030 and providing 57,000 jobs. Glitzy adverts for a new-look Saudi tourism market continue to be aired in western media, but talk of Neom as the “world’s best place to live” and the potential of robots outnumbering the human population (included in the earlier strategy) is not mentioned in the latest plans.

Even with a toning down of the rhetoric, it is questionable how much these schemes will appeal to the local population. Several of the developments are clearly focused on high-end customers, in a strategy promoted by MBS’ battery of consultants and PR professionals. PIF documents say Amaala will become a “new destination on the jet-set map” for “ultra-luxury travellers” and will provide an “experiential lifestyle choice to every discerning visitor.” The Red Sea Project’s marketing material drops the ‘ultra’ prefix, but talks about meeting the needs of the “modern luxury traveller” via a “science-led approach”. Tourism minister Ahmed Khateeb reportedly declined to respond to a question at a press conference in May about what more affordable options might be available for those with a limited income. 

An academic based in the kingdom told GSN: “If we are only going to see jet-setters, the impact will be superficial. If, on the other hand, middle class Saudis will consider having second homes along the Red Sea – especially to escape Riyadh’s hot summers – then our assessments will need to be re-evaluated.” 

The high cost of some existing leisure options has already caused concern. A kingdom-based consultant pointed GSN towards the Riyadh Oasis – described in the Arab Times as “Riyadh’s glitzy, upscale retreat” – where in the spring it cost SR28,000 for a tent to stay the weekend. “It’s not for your average Saudi,” he said, adding that “the gap between the haves and have-nots is increasing and a lot of these projects are marketed at the haves.” 

Location is also a cause of concern. In the far north-west province of Tabuk, Neom is being developed in an isolated, sparsely populated region. “It is difficult to know who will actually move to the new cities being built from scratch, but Saudis are not as sedentary as many believe – the Bedu moved frequently and only became urbanised in the second half of the 20th century,” the academic source said. He concluded that, depending on the right incentives, people could be attracted to the development. 

The government is well aware that reducing unemployment and providing good healthcare and affordable housing are the main concerns of the kingdom’s youth. According to Dr Mark Thompson’s book Being Young, Male and Saudi4, published in 2019, “young men believe strongly that Vision 2030 should be about improving the living standards of ordinary Saudis. Diversification of the national economy is a major concern for many young men. What is worst according to many young men was the vast sums of money wasted too often on vanity projects.” 

Opinion polls are carried out regularly in Saudi Arabia, with the National Center for Public Opinion Polls conducting dozens a year. The results are rarely released, although one poll on the most prominent national achievements for 2020 found that 36% of those surveyed put the kingdom’s efforts in tackling coronavirus at the top, followed by economic achievements (11%), fighting corruption and education achievements (9%) and achieving the goals of Vision 2030 (8.7%). Each giga-project company is understood to commission firms to carry out opinion polls on elements of their projects, which may offer more realistic views of local opinion than the eulogising that usually appears in the newspapers.

 

About GSN
Established in 1974, Gulf States Newsletter (GSN) provides independent reporting and analysis of the Gulf region and its ruling elites. Supported by neither governments, wealthy individuals nor institutions, GSN functions on a business model based solely on subscription revenues. GSN-online.com

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Diligencia provides specialist business intelligence and due diligence services based exclusively on primary sources in the Middle East & Africa.

More about what we do