Saudi Arabia Infrastructure Report Q2 2008

With a shift in focus towards the expansion of the non-oil economy, Saudi Arabia has outlined ambitious plans to develop its manufacturing, communication and construction sectors. Projects worth approximately US$300bn are being undertaken, nearly all of which have an element of construction in them. Buoyed by high demand, the Saudi construction industry has been contributing in excess of 5% to the country's gross domestic product (GDP) in the last few years. This report forecasts the Saudi construction industry to log an average growth of 5.20% over 2008-12.

Saudi Arabia represents the largest construction market in the Middle East. In recent years, large oil revenues have made it possible for the construction industry to employ the extra liquidity for its development. The growth of the country's construction industry is also sustained by the government's efforts to liberalise the economy. Provision for total ownership of property and projects by foreign nationals, together with relaxation of taxation norms for foreign companies who are allowed to participate in the public procurement system, has ensured attractive capital flows into the nation. At present, the focus of the construction industry is on the development of mega cities including King Abdullah Economic City (KAEC) and Knowledge Economic City (KEC).

The Bin Laden Group, Mecca Construction & Development, and Saudi Oger are Saudi Arabia's largest contracting groups, with extensive operations within the country and throughout the Middle East.

The Bin Laden Group was awarded the US$1.6bn contract to build the Al Bait Towers in Mecca, and has a strong record in major infrastructure projects. Saudi Oger is particularly active in heavy civil engineering and has been involved in several high-profile water, power and transportation projects. It entered into a joint venture with the Saudi Arabian mining company Maadin, and the two companies are exploring plans to develop a 1,600km railway linking the northern and eastern regions of the country. It is also involved in the development of independent power and water projects in the kingdom.

Barriers to foreign participation in the Saudi construction market have eased considerably over the past few years, following the introduction of the Foreign Investment Law in 2000. The new regulations include streamlined investment procedures and more relaxed sponsorship regulations; for the first time, total ownership of property and projects by foreign companies is allowed. In April 2003, the government cut taxation on foreign companies from 45% to a maximum of 25% in a bid to boost foreign investment.

In 2005, a new government procurement law was also passed under which 100% foreign-owned companies could bid for government contracts.

Despite the remarkable growth of the Saudi construction industry, it needs to be wary of rising inflation, brought about by excess liquidity in the market via persistent budget surpluses. Political instability and the threat of terrorism also pose challenges for the construction industry.

The nation continues to remain an attractive destination for foreign investment in spite of macroeconomic challenges faced by its economy. Its construction industry is poised to perform impressively in the forecast period, thanks to the government's fervent efforts. Accordingly, BMI forecasts the Saudi Arabian construction industry to register 4.75% year-on-year (y-o-y) growth in 2008 and to be valued at US$25.46bn by 2012.