The outlook for Saudi Arabia in general looks to be positive and this is driven in no small part by the construction industry, which is a significant contributor to the economy. And with an ‘under construction’ and ‘in the pipeline’ total of almost $1.2 trillion – of which c.$735 billion are in pre-contract, there are reasons to have a positive outlook for the short- and long-term future of the industry.

The last four years have been quite phenomenal in the Kingdom – for consultancy houses. It is telling that the rest of the supply chain have yet to see the downstream benefits of the programmes that the country is embarking on.

The next two years are expected to present significant challenges in the construction sector in KSA with imbalances and price volatility in the materials market as well as logistics –  both in terms of costs and timings – in conjunction with the intent of the government to accelerate the materialization of the delayed mega projects.

International Enthusiasm

Whilst many of the international supply chain organisations are interested in KSA to a greater or lesser extent, there are the historical issues that the Kingdom has presented to the market – most significantly the main contractor supply chain.

The primary problems for engagement stand around fair and amical contracts, payment schedules, fair assessment of variations and payments of invoice sections not disputed when a submittal is issued.  This makes engagement or reengagement challenging as the burden of trust will have to fall to the client body. This is quite separate to the complexity, location and thus the logistics addressed later for these schemes. Essentially, the possibilities are significant, although the risks are considered large.

Industry Compound Annual Growth Rate (CAGR)

Our assessment of the CAGR in the industry is c.5-6% for 2022 which is tempered against more bullish estimates due to a variety of factors that drive the modelling.

Firstly, there is a level of capacity constraint. The industry has seen the workforce (blue and white collar) in the Kingdom has contracted from 3,541,997 at the end of 2017 to 2,029,594 at the end of 2020. A loss of 42.5% of the workforce (source General Statistics Authority). This is as a direct result of declining back log and pipelines in recent years, workers have been repatriated and this will take time to ramp up.

Secondly, constraints exist around the skill sets required to deliver some of these ambitious schemes and scarcity of individuals and products to deliver. As major projects have started to wind down from peak load, skilled individuals have departed. Furthermore, because of the lack of overtly complex or mega sized projects being awarded in the past few years, larger, more complex companies in the supply chain don’t have the scale to service the market expansion as small, lower cost organisations have taken larger market share.

Thirdly, finance for the supply chain to ramp up should businesses wish to expand. The banking system has large exposures to the industry as a whole and with payment issues historically tying up supply chain cash, there needs to be an appetite to provide working capital or clients will have to increase mobilisation payments to ensure the ability to service their project/s.

Contracting Awards

Over the course a prolonged period (7-8 years), Government sector direct contracts have typically made-up c.$20-25 billion of contracting awards in the Kingdom. The variations which typically move the awards into the $30-35 Billion range are the semi government and private sector.

Moving into 2022, we see awards pickups to c.$35.6 billion which supports the CAGR forecast and contribution to GDP expectations. If all projects currently committed to be awarded in 2022, we would see an anomaly of over $50 billion in capital value, but historical trend analysis indicates this is unlikely due to a variety of constraints such us funding commitments, ‘red tape’ related to awards and unrealistic time frames for tender, negotiation and award.

Funding

Financing projects and attractive investors is critical to achieve or challenge the forecast CAGR. At this time, Foreign Direct Investment (FDI) is lagging behind the hoped for $100 billion by 2030 with only $5.5. billion in 2020 (compared to a target of $19 billion) and $1.4 billion into Q2 2021.

Having noted the challenge on FDI though, there is inherent interest from several foreign Export Credit Agencies (ECAs) to look at capital deployment or guarantees to support their export market and continue to build the political ties other G20 countries seek. We expect to see greeter engagement by ECAs as projects start to come out of design and towards main contract and supply chain awards as this is by far best way of building export content.

We will continue to see a move through to more alternative funding. PPP style models are commencing movement. Traditionally utilised models such as Independent Water Plants (IWPs), Independent Power Plants (IPPs) and Independent Water and Power Plants (IWPPs) are certain to continue on there we engaged model. But as with Tatweer and the PPP school’s programme, we expect to a variety of social infrastructure projects move to market.

There are plenty of challenges facing the industry in the Kingdom for 2022 and beyond, but there are plenty of reasons to be optimistic about the opportunities ahead.