BMI Industry View - Saudi Arabia - Q4 2008

Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Executive Summary

The last quarter has seen a number of new developments in Saudi Arabia's transport infrastructure. The country's main airport, the King Abdul Aziz International Airport (KAIA), is set for expansion with a US$137mn terminal planned. The airport caters for the Saudi tourist sector and must cater for huge numbers of religious pilgrims during the annual Hajj. The new terminal, which is to be designed by Aéroports de Paris (ADP), will boost the facilities capacity by 30mn passengers per year.

The other main transport infrastructure news for the Saudi Infrastructure Q408 Report was the Saudi Transport Minister's announcement in June that the government had finalised agreements with the private sector for the construction of highways in eight regions in the country. The project will see 866km of highway built to service Makkah, Medina, Riyadh, Al-Qassim, Jouf, Jizan, Asir and Tabuk. BMI points out, that roads currently form the main transport network in the country. Domestic air travel is increasing however and with the Saudi Landbridge under construction the Kingdom will soon have other alternative modes of transport to offer. At the moment however transport demand must be met by roads.

The expansion of the nation's power infrastructure is continuing. The country's economic and population are placing demands n the current power supply and so new facilities are needed. The country has a wealth of oil and gas and so BMI has no fears about the country's capability to expand its capacity to meet consumption. One interesting trend that BMI notes in this sector is the number of foreign companies participating on projects. Alstom is to extend the Shoaiba power project with a 1,200 megawatt (MW) unit and in September Siemens was awarded a US$147.5mn contract to build power distribution infrastructure for the King Abdullah Economic City. European companies are not the only one's winning high profile projects in Saudi Arabia. Over the last quarter South Korea's GS Engineering and Construction Corporation and Japan's Sumitomo Corporation have won large power projects in the Kingdom.

BMI notes that we have revised our construction sector forecasts for 2008 onwards. Primarily, this comes as a result of new methodology being introduced in our forecasting method, a change that has been introduced across the spectrum of BMI's Infrastructure Reports, in an effort to increase the relevance and reliability of our data. In BMI's Q408 Saudi Arabia Infrastructure Report we forecast that construction industry's real growth will decline slightly to 2.5% year-on-year (y-o-y) in 2008. This decline will come as a

result of mainly rising costs for contractors and developers, as well as soaring inflation eroding returns on investments and most likely deterring a small segment of investors.

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SWOT Analysis

Saudi Arabia Infrastructure Industry SWOTStrengths Saudi Arabia has the largest construction industry in the Middle East Alongside active

government spending, efforts are being made to increase private investment, which should help maintain growth over the next few years

Government-led activity boosted by oil windfalls is driving demand in infrastructure

In addition to infrastructure development, there is strong activity in utilities, with new power plants as well as water and sewage plants under construction. New schools and hospitals are also planned in the public and commercial sectors

Weaknesses The industry is heavily reliant on government contracts and less on a free market driven by the private sector

Very high inflation in Saudi Arabia is forecast to erode the returns of investments in 2008/2009

Opportunities

The number of large, ongoing projects means that many multinational firms have a presence in the country. In particular, there is good potential for further development in the oil industry and utilities

Increasing private investment should provide opportunities for large foreign contractors to increase their involvement in the country

Threats The entire GCC region is plagued by the effects of soaring input costs and less availability of labour

Political stability in Saudi Arabia is in doubt after various attacks in which the country appears to be both a source as well as a victim of terrorism

   

Market Overview - Saudi Arabia - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Market Overview

Investments in physical infrastructure are the defining feature of Saudi Arabia's current economic development drive, as it seeks to reduce its reliance on the oil industry. Projects currently underway in the Kingdom include two huge railway initiatives, which when realised will boost trade and tourism networks. Work continues on expanding Saudi

Arabia's port network as the country vies with other Gulf states to offer a gateway to the Middle East's markets. As the population expands more pressure is being exerted on the country's utilities. Power needs are being met by the continued expansion of gas and oil fuelled power plants. The country's desert climate makes water a commodity and with few reserves to turn to, Saudi Arabia has developed a desalination sector. The country's construction industry is booming with major projects such as the King Abdullah Economic City (KAC) and Knowledge Economic City (KEC) demanding materials and building expertise and personnel.

In terms of its transport infrastructure, Saudi Arabia is well served by air links, both internationally and domestically. There are over 200 airports throughout the country, 77 of which have paved runways, and there are regular services between major cities. There are road links to all neighbouring states, but due to the huge distances involved, air travel is often preferable.

Saudi Arabia is also home to the only railway on the Arabian Peninsula. At present, its runs east from the capital Riyadh to Damman, a port city on the Persian Gulf. However, the railway is due to undergo major expansion. Saudi Railways Organisation (SRO) was expected to announce the winner of a tender for the Saudi Landbridge project by June 2008. The US$5bn project includes the construction of a 950km rail link between Riyadh and the Red Sea port of Jeddah, creating the first cross-country cargo and passenger network. The SRO is also in the process of issuing tenders for the Mecca-Medina rail link, which will connect the two cities with Jeddah, facilitating travel for the 2mn pilgrims that attend the hajj each year.

Managing water resources poses a constant challenge in Saudi Arabia due to population growth, urbanisation and the country's ageing infrastructure, which is wasting large amounts of water every year. In March 2008, the government announced increased investment in several water infrastructure projects. The city of Jeddah is to have a new water supply network following the approval of a plan to link its water mains to dams in Mecca. In the east, a US$375mn pipeline will carry water from the New Marafiq Desalination Plant in Jubail to the cities of Dammam, Alkhobar, Ras Tanura and Safwa.

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Global Overview

The Credit Crunch And Cost Inflation: Are They Jeopardizing Infrastructure Projects?

The credit crunch and the global rise in commodity prices are worrisome signs for the infrastructure sectors in emerging markets. Already we have seen projects getting delayed or cancelled because of difficulties in financing operations, or because the rising input costs make projects economically unviable for the contractors. BMI believes that of the two 'evils' now present in the infrastructure sectors of emerging markets, the problem of rising costs is the one that will persist and cause more difficulties in the long term.

A Promising Asset ClassIn a report released recently by US investment bank Merrill Lynch, infrastructure spending in emerging markets is forecast to reach US$2.25trn over the next three years. All things remaining equal, this would mean that over the next three decades close to US$23trn will be spent on infrastructure projects in emerging markets. Merrill Lynch attributed this to 'more aggressive government spending programmes', the journal Business Spectator reports. The figure is massive, but recent spending on infrastructure projects in Asia and especially China, the Gulf states, Africa and Latin America as well as Central and south eastern Europe, justify optimism for the future.

Indeed, the optimism has been widespread, judging from the decision by several financial institutions to establish infrastructure funds worth billions of dollars, to tap what investors perceive to be a highly promising market. We remain bullish about the overall outlook on infrastructure spending in emerging markets, given the need for roads, ports, power systems and large-scale water projects -- to name a few -- in emerging economies.

The 'leaders' of emerging markets, the BRIC economies, have set in motion enormous infrastructure spending programs to buttress their economic growth. One recent example that highlights governments' commitment to infrastructure spending came from Russian Prime Minister Vladimir Putin. In May 2008, he pledged US$570bn for infrastructure projects in Russia by 2015.

Credit Crunch PinchA question that needs to be answered is how the credit crunch will affect these spending initiatives, especially when public-private partnership schemes are in place. A key part of financing a major infrastructure project is the debt that the concession holder is able to get from the financial markets. With the cost of borrowing increasing, project finance is admittedly becoming more strenuous in the current tight lending conditions. A recent example of a project failing to materialise is the Trakia Highway in Bulgaria. In this case, the Bulgarian government had to annul the 35-year concession contract awarded to a MSF-led consortium, citing financing difficulties. Without a doubt, project finance operations

Steel Demand Boosts Prices(Steel prices, US$)

Source: http://www.dm.gov.ae

are facing a bumpy ride when entering the debt markets to seek financing for major projects. Given that many emerging economies have expressed great interest in getting the private sector involved with assisting on projects, the private sector's difficulty in financing operations should be a cause for concern.

Input Costs SoaringAdding to the worries of contractors are the rising prices of raw materials. Cement, steel and of course crude oil prices, have soared in the past year, forcing project cost inflation and project delays. Furthermore, rising input costs erode profit margins and can cause smaller players to get squeezed out of the market. Rising prices have become a major worry in the Middle East, a very dynamic infrastructure market which is now suffering from the instability between the demand and supply of steel and cement. The mean average annual price rise of the five cement types within BMI's basket was 20.8% in Q407, while steel rose by 13.8% y-o-y in Q407, according to quarterly data published by the Dubai Municipality.

The Middle East markets, especially the Gulf, are not the only ones feeling the pinch. In Asia, building costs have risen by 50% in the past two years, according to Reuters reports. Players in the construction industry in India and Vietnam have recently voiced concerns about the rising costs, claiming that soaring prices in steel, cement and asphalt (a key ingredient in road building) are making some projects unviable.

Governments are taking different measures to curb input price inflation. The past six months have witnessed the nationalisation of the cement industry in Venezuela; production quotas and price ceilings for cement producers in the UAE; and partial cement market liberalisation in Nigeria, all representing different approaches by governments to keep prices of raw materials from escalating further.

Cement Inflation Remains Strong   The China Effect(Cement prices, US$)   World Cement Production 2007e

 

Source: http://www.dm.gov.ae  e=estimate, Source: US Geological Survey, Mineral Commodity Summaries, January 2008

A fundamental factor behind the tight supply and subsequent rise in global cement and steel prices is the demand coming from China. To sustain its infrastructure boom, the country is consuming half of the global cement output and a third of the world's steel, according to a report in The Economist. According to the US Geological Survey of 2008, global cement production in 2007 was 2.6bn tonnes, up 2% from 2006. China accounts for exactly 50% of that output. Based on our forecasts, the construction sector in China will remain robust for the medium term. We therefore expect that Chinese demand for steel and cement will not abate and therefore continue to be one of the factors exerting pressure on prices.

New capacity is expected to come onstream -- especially in the Middle East -- in the next two to five years, alleviating some of the pressures on the cement market. Adding new capacity in the steel market is more difficult however, due to very high sunk costs; very energy-intensive production (and therefore costly if energy prices do not significantly abate); and the limited number of players in the market able to operate steel mills. The Gulf states announced an US$18bn investment in new steel mills in May 2008, although no time frame was given as to when these new plants will come onstream. It should also be noted that with crude oil prices above US$130/bbl, transport costs will remain high, putting further inflationary prices on raw materials.

Credit Crunch Versus Input CostsTherefore, between the credit crunch and rising input prices, we believe that the latter poses a greater threat to project completion (even commencement in some cases).

Financing for projects can come from alternative sources, outside the banking sector the main sources now being government budget surpluses and sovereign wealth funds (SWF). In addition, as infrastructure is considered to be a low risk, long term, alternative asset class, many institutional investors are warming up to it, hence the demand driving the creation of infrastructure funds in the banking sector. Therefore, the infrastructure sector in emerging markets can come out of the credit crunch relatively unscathed.

Alternatively, we believe that the tight supply in the raw materials market will not abate in the medium term and therefore, pose a long-term threat for the infrastructure sector in emerging markets. We anticipate that project delays will become more frequent and that contractors will face escalating costs that will erode profit margins, therefore prompting restrain in taking up new projects.

Mega-Urban Regions: Opportunities And Challenges For Infrastructure

The key determinant to assess the commercial viability of an infrastructure project whether it is in roads, railways, power or water, is to determine future demand. In emerging markets demand for infrastructure projects is largely driven by demographic trends.

Prompted by the UN's assessment that the year 2008 will mark the first time in human history when more of the world's population will live in urban areas than in the countryside, BMI's Country Risk team has conducted a study on the development of urban demographics in emerging markets over the next two decades. The conclusion is that urbanisation will be a key thrust behind the economic, social and political development of developing states. It can be a force for great prosperity, but if not managed and supported properly it can also lead to great friction, eroding the societal fabric, ultimately leading to the abrupt decline of cities and regions.

The conclusions of the study indicate monumental implications for the future infrastructure needs for several emerging markets. For this reason, parts of the study have found their way into BMI's Infrastructure Reports, as the conclusions are complementary to our analysis of the dynamics, trends and future developments in the domain of infrastructure.

Mega-Urban Regions: Investment Opportunities And Risks

As the world's urbanisation gathers pace, the emergence of megacities and 'mega-urban regions' will become increasingly important drivers of the global and national economies.

Significantly, most of the megacities will be in emerging market states, with the bulk of urban population growth coming in Asia (1.8bn) and Africa (900mn) between now and 2050.

Urbanisation offers major opportunities, in terms of raising economic productivity, creating demand for new infrastructure, goods and services, and generating wealth.

However, rapid urbanisation can also bring dramatic change, posing considerable dangers to social and political stability. A failure to address inequalities could lead megacities to become giant slums.

Urbanisation is not irreversible. Some cities can and will go into decline, either in absolute or in relative terms.

Urbanisation is one of the major mega-trends of the 20th and early 21st centuries, and will continue to be a major driver of economic growth, especially in emerging nations, for decades to come. According to the UN, the year 2008 will mark the first time in

Coming To TownUrbanisation Rates By Region (%)

Source: UN World Urbanization Prospects: The 2007 Revision

human history that more of the world's population will live in urban areas than in the countryside.

Equally significantly, over the next 42 years to 2050, the world's urban population will increase by 3.1bn people, with the majority of this growth in Asia (1.8bn) and Africa (900mn). By contrast, urban populations in the rest of the world will remain stable in percentage terms, albeit increasing only marginally in absolute terms. (Note: The definition of urban areas varies from country to country, but in the UK census of 2001, these were defined as settlements with more than 1,500 people in England and Wales. In Nigeria, the definition is towns with more than 20,000 people, engaged mostly in non-agricultural work. Regardless of definitions, it is clear that urbanisation is progressing.)

With cities becoming ever larger, through physical expansion into the surrounding countryside, absorption of hitherto satellite towns and mergers with neighbouring settlements, it is increasingly common nowadays to speak of 'mega-cities' -- cities with more than 10 million people -- or indeed mega-urban regions -- urban corridors that contain tens of millions of people. These mega-regions are now more populous than many countries and have assertive political leaders -- some of whom are increasingly conducting their own foreign policies. Furthermore, rivalry between cities is becoming more intense, forcing them to improve their competitiveness. For example, Tokyo, Shanghai, Beijing, Hong Kong, Seoul and Mumbai are all aspiring to be the dominant Asian financial centre of the 21st century, and a similar rivalry is underway in the Gulf between Dubai, Abu Dhabi, Qatar, Bahrain, and King Abdullah Economic City.

The Historical ContextCities have historically been major economic drivers, regardless of changes of governments, national borders, or in some cases even the disintegration of empires. Many cities have existed for longer than most countries. For example, present-day Istanbul has existed for around two thousand years, first as Byzantium, and later Constantinople, before adopting its present name in 1930. Similarly, Rome and Baghdad have survived many incarnations of their national polity, while Mexico City previously existed as the Aztec capital Tenochtitlan. In fact, at various times the world has seen many city-states emerge, principally as trading hubs. Some of these, such as the Venetian Republic, became major political powers in their own right.

Asia And Africa Are The Main DriversUrban Populations By Region ('000s)

Source: UN World Urbanization Prospects: The 2007 Revision

While the role of cities as economic engines is nothing new, the present mass-urbanisation drive which began in Britain in the 19th century has been on a scale never seen before. For example, at its height in the first century AD, Rome's population was about 1mn, but the world's largest urban agglomeration today, Tokyo-Kawasaki-Yokohama, houses 35.7mn people.

Table: The World's 30 Largest Urban Agglomerations

  2005     2025f  Rank Urban Agglomeration Popn (mn) Rank Urban Agglomeration Popn (mn)1 Tokyo 35.327 1 Tokyo 36.4002 Mexico City 18.735 2 Mumbai 26.3853 New York-Newark 18.732 3 Delhi 22.4984 Sao Paulo 18.333 4 Dhaka 22.0155 Mumbai 18.202 5 Sao Paulo 21.4286 Delhi 15.053 6 Mexico City 21.0097 Shanghai 14.503 7 New York-Newark 20.6288 Kolkata 14.282 8 Kolkata 20.5609 Dhaka 12.576 9 Shanghai 19.41210 Buenos Aires 12.553 10 Karachi 19.09511 Los Angeles-Long Beach 12.307 11 Kinshasa 16.76212 Karachi 11.553 12 Lagos 15.79613 Cairo 11.487 13 Cairo 15.56114 Rio de Janeiro 11.469 14 Manila 14.80815 Osaka-Kobe 11.258 15 Beijing 14.54516 Manila 10.761 16 Buenos Aires 13.76817 Beijing 10.717 17 Los Angeles-Long Beach 13.67218 Moscow 10.416 18 Rio de Janeiro 13.41319 Paris 9.852 19 Jakarta 12.36320 Seoul 9.825 20 Istanbul 12.10221 Istanbul 9.709 21 Guangzhou 11.83522 Jakarta 8.843 22 Osaka-Kobe 11.36823 Chicago 8.820 23 Moscow 10.52624 Lagos 8.767 24 Lahore 10.51225 London 8.505 25 Shenzhen 10.19626 Guangzhou 8.425 26 Chennai 10.12927 Lima 7.747 27 Paris 10.03628 Tehran 7.653 28 Chicago 9.93229 Bogota 7.353 29 Tehran 9.81430 Shenzhen 7.233 30 Seoul 9.738f = forecast. Source: UN World Urbanization Prospects: The 2007 Revision

In addition, urbanisation has primarily become a developing world phenomenon. In 1950, the world's biggest cities were all in the developed world, but now the bulk of them are in

emerging nations. This is hardly surprising, since emerging markets are the ones playing 'catch-up'.

Are Megacities Sustainable?All this begs the question of whether today's mega-urban regions are sustainable. In our view, the answer is not a question of size but of management. Although Tokyo has 35.7mn people, its citizens generally have a high standard of living. However, large South Asian megalopolises such as Mumbai and Dhaka have such vast slum populations and extreme congestion that the sustainability of their expansion must be called into doubt.

On the other hand, if governments successfully build the necessary infrastructure and reduce poverty, then 'unsustainable' cities such as Dhaka could eventually become more prosperous. Overall, let us just say that few people living in London or Tokyo 200 years ago could have imagined that in the early 21st century, the cities would respectively have eight and 35.7mn people.

That said, we also emphasise that urbanisation may not necessarily be inevitable, and many countries will remain predominantly rural for some decades yet. Indeed, even in highly urbanised countries, the trend is not irreversible. The UN's projections show Europe's annual rate of urban population growth slowing to virtually zero in the next few decades, before shrinking in 2045-2050.

The Economic Implications Of Urbanisation

Structural economic changes: Urbanisation typically results in a shift from agrarian dominance of the economy to industrial activities and services. The latter two tend to be significantly higher-productivity activities, meaning that the overall productivity level in the economy increases sharply. Meanwhile, as farmers move to cities, and as cities encroach upon farmland, the contribution of agriculture to GDP inevitably shrinks. This is a key reason why many emerging markets are currently experiencing food supply problems, and why soft commodities have surged recently. Furthermore, agriculture is often forced to shift from subsistence farming to mechanisation, as fewer workers are available to toil the land.

Urban Populations By Region ('000s)

Source: UN World Urbanization Prospects: The 2007 Revision

Massive demand for new housing: The most obvious consequence of migration from the countryside to cities is a demand for new homes, and this initially leads to the creation of shanty towns, as newcomers are forced to build ad hoc houses on the urban periphery. Over many years, as shanty residents become richer, they can upgrade their homes (perhaps even building a second storey), or move to wealthier areas. Either way, the demand for new homes often leads to a property bubble, and this is being seen in many EM cities worldwide.

Massive demand for new infrastructure: The emergence of new settlements inevitably creates demand for power generation, and ideally sewage treatment facilities (although in practice, many third world governments fail to provide this). In addition, the arrival of new workers will necessitate the construction of new roads and railways, both within the city and between the city and the countryside. Despite living in poor accommodation, new urban residents often initially have high birth rates, creating demand for new schools. Obvious sectors to benefit from all this include cement, steel, copper (for wiring), construction machinery and vehicles (trains, buses, etc.). Thus, infrastructure presents major opportunities for the world's leading engineering and construction firms.

Creation of mass markets for goods and services: The concentration of millions (or tens of millions) of people makes it much easier for companies to distribute goods and services. Thus, urbanisation leads to the creation of mass markets, and allows for economies of scale, as goods are transported in bulk to consumers. Retailers setting up new outlets typically need to determine catchment areas, and the more concentrated the population, the more viable a new store becomes. Mass distribution is much more difficult in the countryside, where populations are scattered far and wide, and infrastructure may be poor.

Changing spending patterns: Urbanisation typically leads to a change in spending patterns, as people move away from subsistence farming and have to buy their own food. A move to the cities also usually means that people no longer work on their land or in their homes, and may have to commute long distances to their workplaces. Consequently, in many emerging market cities, spending on transportation takes up a good chunk of monthly wages, often not far behind food prices. In addition, urban consumers are often wealthier and more sophisticated, presenting major opportunities for global brand manufacturers. Furthermore, there is also typically a major expansion of banking services, as the economy and society become more sophisticated.

Specialisation of functions: The coming together of millions of people of different skills sets allows for the specialisation of economic activities. Despite the telecommunications revolution, business people still like to be close to other business people, for face-to-face meetings and exchanges of ideas. Thus, some cities will develop a core industry and become renowned for this. For example, the US city of Detroit became a major car manufacturing centre, while more recently, India's Bangalore has emerged as a key IT hub. However, overdependence on a dominant industry can also cause a city to slide into long-term decline, if the industry collapses and new enterprises fail to fill the void. The US cities of Pittsburgh, Cleveland and St Louis have all fallen in national significance,

while 'newer' cities like Phoenix and Austin have risen in importance thanks to new industries and services.

Social mobility: The concentration of economic activities leads to greater competition, and more scope for upward social mobility. Certainly, there are more opportunities for personal economic improvement in cities than in the countryside, where the main activity is farming. However, there is also downward mobility or stasis, as people struggle to progress from the slums. There is a risk that some slum dwellers will be caught in a poverty trap for years.

Suburbanisation: Rising urban income levels in the more advanced emerging markets and the desire to escape congestion typically lead to suburbanisation, as happened in the UK in the 1930s and the US in the 1950s. In fact, suburbanisation is typically the next stage after urbanisation, although the two can go hand in hand. At present, suburbanisation is a major trend in China, as newly rich Chinese move out of over-crowded cities to bigger, more spacious accommodation with green space. In fact, many new Chinese suburbs are consciously modelled on their counterparts in affluent parts of southern California, even adopting American-style names (e.g. 'Emerald Riverside', outside Shanghai). This is creating a culture of new shopping malls and driving, thus leading to a higher demand for cars -- and thus oil.

Counter-suburbanisation: Also noteworthy -- at least in cities in some developed states -- is that suburbanites are moving back to inner-city areas, leading to their revival via means of gentrification. Although this has been happening for many years, anecdotal evidence suggests that the subprime debacle in the US is accelerating this trend in America. At the same time, with suburban houses being sold at knock-down prices, and with poor inner-city folk moving out to the suburbs, the classic rich suburbs-poor inner city divide is becoming reversed.

Table: The World's Richest Cities In 2020 By GDPRank City/Urban area Country Est GDP in 2020 in US$bn Est annual growth 2006-20201 Tokyo Japan 1602 2.0%2 New York USA 1561 2.2%3 Los Angeles USA 886 2.2%4 London UK 708 3.0%5 Chicago USA 645 2.3%6 Paris France 611 1.9%7 Mexico City Mexico 608 4.5%8 Philadelphia USA 440 2.3%9 Osaka/Kobe Japan 430 1.6%10 Washington DC USA 426 2.4%11 Buenos Aires Argentina 416 3.6%12 Boston USA 413 2.4%13 Sao Paulo Brazil 411 4.1%14 Hong Kong China 407 3.5%

15 Dallas/Fort Worth USA 384 2.4%16 Shanghai China 360 6.5%17 Seoul South Korea 349 3.2%18 Atlanta USA 347 2.6%19 San Francisco/Oakland USA 346 2.4%20 Houston USA 339 2.5%21 Miami USA 331 2.4%22 Toronto Canada 327 3.0%23 Moscow Russia 325 4.0%24 Mumbai India 300 6.0%25 Madrid Spain 299 3.2%26 Detroit USA 287 2.3%27 Istanbul Turkey 287 5.2%28 Seattle USA 269 2.5%29 Beijing China 259 6.6%30 Metro Manila Philippines 257 5.9%Source: PricewaterhouseCoopers

The Main Political And Social Implications Of Urbanisation

Dramatic social transformation Political destabilisation Significant political divide between the town and country Greater scope for mass movements

What Are The Main Drawbacks Of Urbanisation? Creation of slums Easier spread of disease Severe pollution Increased risk from floods and earthquakes Juxtaposition of very poor and very rich Swelling populations in war time

Many emerging market governments are investing in major infrastructure projects to respond to the potential challenges. For example, Beijing plans to increase the size of its metro system to 561km by 2020 from 142km at present (by contrast, it took 100 years to build the vast majority of London's 400km underground system). However, for many emerging market countries, the costs can be prohibitive. Thus, financing must come from multilateral agencies, or through international bond issues. Conventional heavy-rail metro systems typically provide the highest capacity solutions, but the construction costs, construction times (usually at least a few years) and the disruption caused (by digging up existing roads) can be problematic. Thus, many emerging market cities are building light rail networks. These are cheaper, but have a much lower capacity. A cheaper alternative to both is guided busways, which have been introduced in some Brazilian cities.

Table: The World's Fastest-Growing Urban Areas

Rank City/Urban area Country Average annual growth, 2006-2020 (%)1 Beihai China 10.582 Ghaziabad India 5.203 Sana'a Yemen 5.004 Surat India 4.995 Kabul Afghanistan 4.746 Bamako Mali 4.457 Lagos Nigeria 4.448 Faridabad India 4.449 Dar es Salaam Tanzania 4.3910 Chittagong Bangladesh 4.2911 Toluca Mexico 4.2512 Lubumbashi Congo 4.1013 Kampala Uganda 4.0314 Santa Cruz Bolivia 3.9815 Luanda Angola 3.9616 Nashik India 3.9017 Kinshasa Congo 3.8918 Nairobi Kenya 3.8719 Dhaka Bangladesh 3.7920 Antananarivo Madagascar 3.7321 Patna India 3.7222 Rajkot India 3.6323 Conakry Guinea 3.6124 Jaipur India 3.6025 Maputo Mozambique 3.5426 Mogadishu Somalia 3.5227 Gujranwala Pakistan 3.4928 Delhi India 3.4829 Pune (Poona) India 3.4630 Las Vegas USA 3.45Source: www.citymayors.com.

Is Urbanisation Reversible?Urbanisation is certainly reversible. Many cities in the developed world have stopped growing, and some are shrinking. As mentioned earlier, cities can go into severe decline, if a dominant industry shuts down and no new activities compensate for this. Even if cities do not shrink in absolute terms, their relative importance can fall, as more dynamic entities surpass them. The process of urban decline is most prominent in the old 'rust belt' of the US and in de-industrialised areas of Europe and the former Soviet Union. However, it can also take place in emerging nations where industries have been shut down as part of economic restructuring. This has affected several cities in China's northeast.

Extreme events can substantially reduce urban populations. For example, when the Khmer Rouge took over Cambodia, they forced the bulk of the urban population back to the countryside. More recently, several cities in the former Yugoslavia saw mass expulsion or evacuations. Natural disasters can also become city-busters. In 2005, Hurricane Katrina caused a major exodus from New Orleans. If some of the more alarmist reports about global climate change are true, then many major cities (which are often in coastal regions) will experience serious floods going forward, with concomitant costs in terms of lives and economic activity.

By way of conclusion, Rome's history offers some interesting warnings. At the height of its power in the first century AD, Rome peaked with a population of one million. It declined continuously to a nadir of 15,000 in the 11th century, and did not return to one million until the 1950s. Given that the general tempo of world history is accelerating, today's mega-regions could eventually decline with surprising speed.

   

Industry Trends And Developments - Transport Infrastructure - Q4 2008

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Saudi Arabia  -  Transport Infrastructure  -  Dec 04 2008

Major Infrastructure Developments And Key Projects

Transport Infrastructure Overview

Saudi Arabia's transport infrastructure must cater for the needs of an expanding

Annual GDP, Transport And Communications Growth2005-2012

e/f= estimate/ forecast. Source: SAMA, Central Department of Statistics, IMF, BMI

population and a growing economy. BMI estimates that Saudi Arabia will accrue a GDP worth of US$403bn and this is set to grow to US$442bn by 2012. The population is forecast to expand from a predicted 24.9mn to 28mn over the same period.

Saudi Arabia's transport network not only services the Saudi population but also the tourist industry. The country's tourist industry is based around religious pilgrimage. The annual hajj -- the Muslim pilgrimage to Mecca -- places intense pressure on the Saudi infrastructure framework as an estimated 1.9mn oversees visitors and 500,000 domestic pilgrims make the trip. During the hajj, the country's airports and roads are put under increasing strain.

The Kingdom's transport network has also grown around the needs of trade. The country's top five export destinations include the US, Japan, Korea, China and Singapore, while the majority of imports for the country originate from Asian markets, the US and Europe.

Developed Air Sector

The kingdom has three international airports. King Abdel-Aziz International Airport in Jeddah was opened in 1981. King Khalid International Airport was opened in 1983. Located 35km north of Riyadh, with a land area of 225km2, it has two 4,200m-long runways. The third international airport, the King Fahd International Airport, is at Dhahran. The King Fahd International Airport has an area of 780km2, making it the largest airport -- by land area -- in the world. There are two parallel runways, each 4,000m long. The airport has a cargo terminal with an annual capacity of 176,000 tonnes. In addition to the three international airports, there are a further 22 domestic and regional airports in Saudi Arabia, including facilities at Medina, Abha, Jizan, Taif, Tabuk and Qassim.

Urban Road Networks

As a result of physical limitations because of an often harsh climate and terrain and also as a result of localised economic development, Saudi Arabia has established a highway network that principally serves the areas of Riyadh (in the centre), Jeddah (to the west) and the eastern coast. Key highways include Dammam-Abu Hadriya-Ras Tanura Highway (257km); Khaybar-Al Ola Highway (175km); Makkah-Madinah Al Munawarah Highway (421km); Riyadh-Dammam Highway (383km); Riyadh-Sedir-al Qasim Highway (317km); Riyadh-Taif Highway (750km); and Taif-Abha-Gizan Highway (750km). The country's total road network is approximately 152,044km in length, of which 45,461km is paved.

Expanding Rail

Saudi Arabia has the only significant rail network in the Gulf Co-operation Council (GCC). There are currently two major railway lines in Saudi Arabia. A core 570km line operates between Riyadh and Dammam, opened in 1951. In 1985, a second and more

direct line linking Riyadh and Hofuf was opened. The kingdom has total track length of 1,392km, which uses a standard gauge. Major expansion is predicted in this sector as the country is to become part of the GCC's Gulf Railway Network. Two major railway projects are currently underway in the kingdom, namely the Saudi Landbridge which will service the capital Riyadh, the Red Sea port at Jeddah, the industrial city of Jubil and the oil port of Dammon on the Gulf Coast and the Medina-Mecca railway link (MMRL), which will connect Mecca, Medina and Jeddah and facilitate the travel of hajj pilgrims to the country's Islamic holy cities.

By Sea

There are four major and two minor ports in Saudi Arabia. The largest is the combined Jubail commercial and industrial ports, which accounted for 38% of all non-oil related tonnage in 2002, followed by Yanbu industrial and commercial ports (25%), Jeddah (22%) and Dammam (13%). Two further ports, Jizan and Duba, account for the remaining 2%. Although port-capacity is considered adequate to meet current requirements, refurbishment and improvements are taking place. Operation, maintenance and management of the dock facilities are undertaken by the private sector.

New And Ongoing Projects

Airports

In July 2008 plans for the construction of a US$137mn new terminal at the King Abdul Aziz International Airport (KAIA). KHL, an international construction information provider, reported that Abdullah Ruhaimy, the president of the General Authority for Civil Aviation (GACA) had signed an agreement with Aéroports de Paris (ADP) to provide design and engineering services for the first phase of the new terminal's development. The project will see the construction of 74 new jet bridges, which will be used by both international and domestic flights. The new terminal will boost KAIA's capacity by 30mn passengers per year, and is expected to be completed by 2012.

AirportsQ4 2007

In November 2007, Al Shaer Engineering announced that it had won a US$73.3mn contract to work on the expansion of the King Abdul Aziz International Airport (KAIA) in Jeddah over the next five years. The contract is part of a wider project to expand the airport's Haj terminal from 4.5mn to 9.2mn passengers by 2025; to build a new terminal, so increasing the airport's full passenger capacity from the current 10.5mn to 25mn by 2010; to construct a new runway; and to develop an airfreight village. Through the project, the General Authority of Civil Aviation (GACA) is seeking to convert the airport from a costly state-run utility into a profitable commercial operation, while attracting increased business and competing with other regional airports. The project has an estimated cost of US$31bn.

In October 2007, the president of Saudi Arabia's General Authority of Civil Aviation, Abdullah Al-Ruhaimy, announced that five new airports were to be developed across the kingdom. Locations were not named but the project has an estimated cost of US$53mn.

Ports

In July, it was reported that construction work on Jeddah's new container terminal, the US$450mn Red Sea Gateway Terminal, was underway. China Harbour Engineering Company were completing the dredging and the company was about to start work on the 1,045m long trench to construct the quay wall. The first stage of the terminal is expected to be in operation in late 2009.

PortsQ2 2008

In May 2008 the Minister of Transport Dr Jabara Al-Seraisry announced that Saudi Arabia plans to build a US$426mn dockyard at the Islamic Port in Jeddah. The project was announced by the minister at a Euromoney Conference. Arab News reports that the dockyard will be developed on a build, operate and transfer (BOT) basis, with work expected to begin soon. Upon completion, the dockyard will have the capacity to store 2mn containers.

In April 2008 DP World, the global port operator, and Emaar Economic City, the developer of King Abdullah Economic City (KAC), signed a Memorandum of Understanding (MoU) for the development of the main cargo port in KAC. PortWorld reports that the new development will have multipurpose cargo facilities and a separate container terminal with initial handling capacity of 1.6mn twenty foot equivalent units (TEUs). The cargo facilities at the port are scheduled to be operational by 2010 and the container facilities will follow a year later. The port is designed to ultimately have annual handling capacity of 20mn TEUs, making it the largest port on the Red Sea and one of the 10 largest in the world.

Q1 2008

The construction of the Red Sea Gateway Terminal is underway at Jeddah's Islamic Port. The project was announced by the Saudi Trade and Export Development Company (Tusdeer) in May 2006, when it signed an agreement with the Saudi Seaports Authority for the US$443mn venture. The terminal will be developed and operated by the Malaysian infrastructure and energy group MMC Corp. The terminal, which was designed by the UK-based Halcrow International, will consist of three berths. The first phase of the project, which is being undertaken by the China Harbour Engineering Company, is underway and will include dredging and land reclamation. The new container terminal, which is scheduled for completion in 2010, will be equipped with eight twin-lift ship-to-shore cranes, purchased from Zhenhau Port Machinery, enabling the terminal to service 1.5mn TEUs annually.

Rail Networks

RailwayQ2 2008

In May 2008 the President of Russian Railways (RZD) Vladimir Yakunin announced that Saudi Arabia had cancelled the results of the bidding contest, where RZD had won the contact to construct the 500km of track from Al-Zabira to King Khalid Airport in Riyadh as part of the Saudi Landbridge project. Yakunin stated that the Saudi's decision to null the result was not down to problems of technology or an issue with RZD but rather a problem of international relations.

In April 2008 the consortium which is to operate the Saudi Landbridge on a 50-year concession was announced. The winning tender is the Tarabot consortium, which includes the Australian infrastructure company Asciano among its members. The project has been structured on a build own operate (BOO) basis with the consortium owning 80% and Saudi Arabia the remaining 20%. The consortium has been contacted for work to upgrade the existing network and manage the freight transported across the whole network. Tarabot consortium beat other shortlisted bidders including the Agility PWC Logistics consortium, Mada and Saudi Bin Laden to win the contract. The consortium is made up of seven Saudi Arabian partners and Asciano, which will hold a 5% stake in the consortium when the project finance is finalised during the next 12 months.

Q1 2008

In February 2008 King Abdullah bin Abdulaziz of Saudi Arabia ordered the implementation of specialised funds to finance the implementation of the Makkah-Jeddah-Madina rail link (MMRL). The railway will include the construction of approximately 500km of high speed electrified track between Jeddah and Mecca and Jeddah and Medina, as well as modern signalling and telecommunications networks. The project, which has an estimated cost of SAR20bn (US$5.33bn) has planned stations along the route at the Jeddah Islamic Port, King Abdul Aziz International Airport and the King Abdullah Economic City in Rabigh. The project's financial and technical advisory services will be provided by a consortium including Swedish UBS Investment Bank, Saudi Arabia-based National Commercial Bank and French firm SNCF International, while legal advisory services will be provided by UK-based Linklaters, together with the law office of Abdlaziz H Fahad. The project has been approved by the Saudi Supreme Economic Council and

will be implemented through private sector participation as a Design, Build, Operate and Transfer (DBOT) concession. In March 2007, the Saudi Rail Organisation (SRO) received seven Statements of Qualifications (SOQ) for the MMRL. International companies from Australia, China, France, Germany, Italy, Japan, Russia, Spain and the UK expressed an interest in the project. Six consortiums are currently vying for the project, the Al-Rajhi Consortium, the Saudi Bin Laden Group, Saudi Oger, the Saudi Japanese Consortium, the Al-Sholah Consortium and OHL International. Saudi Arabia's Transport Minister Dr Jabara Al-Seraisry has previously announced that the six consortia would be invited to submit their tenders within a few months. The project is expected to be awarded to one or two consortia by the beginning of 2009. The Arab News has reported that special committees are currently surveying the land along the railway's planned route.

In January 2008, Russian Railways, Russia's state-owned rail monopoly, won the tender of the fourth and final section of Saudi Arabia's land bridge. Russian Railways will construct a 520km railway between Al Zabirah and Riyadh's King Khalid International Airport. The US$800mn contract will include the laying of track, 621 water pipes, 20 camel crossings, 26 rail and road overpasses and eight railway bridges. The entire 2,400km project, which will stretch from the north to the south of the kingdom, is scheduled for completion in 2010. The Public Investment Fund of the kingdom's finance ministry set up a holding company to implement the entire project, known as the Saudi Company for Railways (SAAR). The company divided the project into four segments and awarded them separately:

Project Overview: The first segment, to build a railway link between Ras Azzar and Az Zabirah, at a cost of

SAR2.3bn (US$613.18mn), was awarded to a consortium of the Bin Laden Group, local Mohammed Al-Swailem and German contractors;

The second segment, covering the route from Az Zabirah to the Great Al-Nufud Desert, at an estimated cost of SAR1.9bn (US$506.64mn), was secured by the local Al-Suwaikat Group.

The contract for the third segment of the project, which is valued at SAR2.8bn (US$746.47mn) and will cover the 818km of railways from An-Nafoud to Al-Haditha, Al-Jalamid and Al-Basayta, was awarded to the Australia-based Barclay Mowlem, Japanese Mitsui and local company Al-Rashed.

Road and Bridges

In August 2008 the Saudi Ministry of Transport announced a US$40mn road scheme to reduce congestion on some of the Kingdom's main roads. The money is to be used to finance projects on the King Abdul Aziz airport road, the Corniche road and the Al-Haramin road.

In June 2008 Saudi Arabia's Transport Minister announced that the government had finalised agreements with the private sector for the construction of highways in eight regions in the country. The Minister said the construction contracts have been awarded to twelve private sector companies, under strict delivery conditions. The total length of the project will be 866km and the highways will lead to Mecca, Medina, Riyadh, Al-Qassim, Jouf, Jizan, Asir and Tabuk, Arab News reports. No cost estimates were released.

   

Industry Trends And Developments - Energy and Utilities Infrastructure - Q4 2008

Top

Saudi Arabia  -  Utilities - Infrastructure  -  Dec 04 2008

Energy And Utilities Infrastructure Overview

A combination of Saudi Arabia's rapidly-expanding population and industrial base, coupled with artificially low power tariffs, has increased power demand and on occasion led to shortages, blackouts and power rationing in some parts of the country. The Water and Electricity Ministry estimates that the country will require at least 30 gigawatts (GW) of additional power-generating capacity by 2023-2025 -- virtually doubling the current total and requiring investment of up to US$100bn. The country as a whole has enough installed capacity to meet demand. In 2008 we estimate that the country will generate 207 terawatt hours (TWh) and will meet consumption needs, which are forecast to stand at 185.4TWh. Consumption is expected to increase over the mid term reaching 238.5TWh in 2012, and generation is set to meet it with the country forecast to produce 246.9twh by that time. The margin for excess electricity is shrinking. In 2008 Saudi Arabia will boast a surplus of 22TWh, but by 2012 this will have fallen to 8TWh as domestic demand increases. A drop in electricity surplus will leave the country less power to export.

Saudi Arabia is blessed with natural resources, and is therefore self-sufficient in the oil and gas that forms the basis of its power generation. It is the world's biggest producer and exporter of crude oil. Natural gas reserves are very significant, although production is at a relatively modest level capable of meeting only domestic requirements. The country intends to preserve its gas resources and control domestic consumption by favouring oil in new power generation plants.

Thermal Reliant

In 2008 we predict that gas generation will account for 55.5% of the country's total power, generating 114.8TWh of electricity. The percentage of gas used for power generation is expected to decrease slightly over our mid-term predictions, with gas expected to make up 54.4% of the power mix in 2012.

Saudi Arabia Power Mix Forecast2008

Source: BP Statistical Review of World Energy, June 2007, BMI

Oil is the only other fuel used in Saudi Arabia's power sector and as the percentage of gas used drops, oil use for power generation is set to increase. Oil use is forecast to be 44.5% in 2008 with oil fired plants generating 92.2TWh. Oil used is expected to increase to 45.7% and generate 112.9TWh by 2012.

No Major Diversification Plans

Coal and hydroelectricity do not represent a part of the Saudi Arabian energy market and BMI do not expect them to make an appearance in either mid- or long-term projections. The country has developed the world's largest desalination sector and so uses its water for consumption rather than power. There is no nuclear power capacity in the Kingdom at present, but steps are being taken that could see a nuclear sector develop in the long term. To this end, Saudi Arabia is leading a feasibility study on the development of nuclear power, which the six other Gulf states agreed to through the International Atomic Energy Agency (IAEA) in February 2007. Analysts believe that a program could emerge in 2009. The country has the potential to develop renewable energy in the form of solar power. Our forecast suggests that non-hydro renewables will make no appreciable contribution during the forecast period.

Gulf Power Transmission

Saudi Arabia is part of the Gulf Co-operation Council (GCC) transmission project. The GCC integrated power grid project will be initiated in 2008, and become fully operational in 2009. The first phase, called the GCC North Grid, will link Saudi Arabia, Qatar, Bahrain and Kuwait in an integrated power grid system consisting of overhead lines and a submarine link. The following two phases consist of connecting Oman and the UAE (GCC South Grid -- Phase Two) and the connection of the North and South GCC grids (Phase Three). The Saudi-based GCC Interconnection Authority (GCCIA) is supervising the project and the US$1bn investment necessary for the initial phase of the project. The anticipated benefits are an adequate supply of electricity for the Gulf states and a reduction of power generation costs. According to the World Energy Council, the GCC will need 100GW of additional power to meet demand over the next 10 years.

New And Ongoing Projects

Power Plants And Transmission Grids

In September 2008, the GCC announced that it had US$217bn worth of new power projects across the region. Mist News reports that US$111bn of these are in Saudi Arabia, where demand for electricity utilities is high.

In September, Germany-based Siemens announced that it had won a US147.5mn contract to build power transportation and distribution infrastructure in the King Abdullah Economic City on the Red Sea coast by April 2010. The project was awarded by Emaar Properties subsidiary, Emaar Economic City, which is currently developing the city. Emaar aims to attract US$28bn worth of investment in the new city.

In August 2008, South Korean builder GS Engineering & Construction Corporation announced that it had won a US$501mn contract with Saudi Aramco, Saudi Arabia's state-owned oil company, to construct a gas plant. The plant will have the capacity to produce 90mn cubic feet of gas and 66,400/bbl of sour condensate per day. The project is scheduled for completion in April 2012.

In July 2008, Saudi Electricity Company (SEC) said that it had secured a US$1.6bn investment from six Saudi banks to finance new projects.

In July 2008 Alstom, the French engineering company, signed a letter of intent with the Saudi power utility, SEC to construct a US$3bn power plant in Saudi Arabia. The contract, which is to be awarded on a turnkey basis, is to be built next to the existing Shoaiba power project. The plant will add an extra 1,200MW to Shoaiba's capacity, lifting it to 5,600MW. Alstom will design, supply, install and commission the plant, which will have the capability to be fuelled by both crude and heavy fuel oil. The construct is expected to be finalised over the next months and the delivery of equipment is set to take place from 2010.

In July 2008 Sumitomo Corp, Japan's third-largest trading house, in a consortium with a Malaysian power provider and a Saudi Arabian company secured the lowest bid position for a US$6bn power and water desalination project in Saudi Arabia. The tender was for the Ras Azzour IWPP, a project which will involve the construction of an oil-fired 850-1,100MW power plant and a desalination facility with a daily capacity of 1,000,000 tonnes of water. Other members of the consortium joining Sumitomo Corp on the project include the Malaysian Malakoff Bhd and Saudi Arabian company Al-Jomaih Automotive Co. The consortium members would hold 60% of the project, with the other 40% to be held by the Saudi government. Sumitomo has announced that equipment for the plant will be sourced from Fuji Electric Holdings. The consortium will operate and sell the electricity and water produced to the Saudi Water and Electricity Company (WEC) over a 20-year term. The consortium will now engage in negotiations with the Saudi government -- with an aim to sign the power and water purchases agreement with the WEC -- deals with contractors, and the securing of bank loans, for the end of the 2008 fiscal year. The plant is timetabled to begin operations in Q312.

Power Plant And Transmission GridsQ2 2008

In May 2008 GE Electric secured a US$500mn deal to supply gas turbines and generators, used in gas fired power stations, to the Kingdom.

In the same month it was reported that the US Secretary of State Condoleezza Rice and the Saudi Foreign Minister Prince Saud Al Faisal had signed a MoU on Civil Nuclear Energy Co-operation. A framework will be developed whereby the US will assist Saudi Arabia in developing civilian nuclear energy for use in the medicine industry and power generation.

In April 2008 the Saudi Alfanar Company was awarded a US$96mn project by SEC to expand the capacity at the Sharoura Power Plant. The project which is scheduled to last 23 months (till 2010) will add three generation units to the plant increasing the capacity by an extra 51MW.

Q1 2008

The GCC has announced that the first phase of its integrated power grid project will be initiated in 2008. The US$1bn initial phase is being supervised by the Saudi-based GCC Interconnection Authority and will consist of overhead lines and a submarine link, which will connect Saudi Arabia, Qatar, Bahrain and Kuwait to the integrated North Grid. The second phase of the project will see Oman and the UAE being linked together as part of the South Grid project and the third phase will involve the connection of the South and North Grids.

Q4 In December 2007, the state-owned Saudi Arabian Mining Co awarded the construction project

2007 for a US$280mn power generation and desalination plant to South Korea's Hanwha Engineering and Construction Corp. The project is due to be completed in 2010.

 

PipelinesQ4 2007

In December 2007, South Korean Hyundai Engineering joined with fellow South Korean firm Hanwha Engineering and Construction to build an ethyleneamines plant. The petrochemical plant has an estimated cost of US$210mn.

In the same month Seoul-based construction company Daelim Industrial won a US$960mn contract to build a polyethene production facility in Al-Jubail, an industrial city in eastern Saudi Arabia, which will have an annual capacity output of 550,000 tonnes of high-density polyethylene. Construction is due to be completed by April 2011.

Water

In October it was announced that a new desalination plant will be build in the south of Jeddah. The plant will have a daily capacity of 50,000 cubic metres. Water and Electricity Minister Abdullah Al-Hussayen said that the plant would help to meet growing demand for water, and added that US$200bn worth of investment would be needed during the next 15 years for desalination and power generation projects.

In July 2008, The National Water Company (NWC) announced that it will issue tenders for private companies to participate in sewage projects through its privatisation programme. State-owned NWC was established early in 2008, with a capital of SAR22bn (US$5.9bn).

WaterQ2 2008

In April 2008 it was announced that Jeddah is to be serviced by floating desalination plants. One plant is to be stationed off the Shuaiba coast and has the capacity to provide Jeddah with 25,000 cubic metres of water daily. Another floating plant is also set to be stationed off the Shuaiba coast. The plant is being prepared in Dammam and was scheduled to be moved into place by July 2008. The two plants will add an extra 50,000 cubic metres to Jeddah's daily supply and along with the other desalination plants in the area, the Jeddah desalination plant and Al-Shoaibah plant, the city will have a total of 700,000 cubic meters of water provided by desalination facilities. The project is being overseen by the Saline Water Conversion Corporation (SWCC), the authority on desalinated water in Saudi Arabia. The Saudi Gazette reports that the floating plants were built in a record time of just seven months.

In the same month France's Veolia Water won a six year contract within the Saudi Arabian water sector. The contract, which was awarded by the Saudi government, involves the production and supply of water to 4.5mn people and the collection of waste water in Riyadh.

Q1 2008

In March 2008 Saudi Arabian authorities announced that US$60bn was to be spent on the country's water sector over the next 20 years. The announcement was made by Loay al-Musallam, the deputy head of planning and development at Saudi Arabia's Ministry of Water and Electricity. The investment scheme is due to run for twenty years, with both public and private sector contributions expected. The minister estimated that around US$40bn would be capital expenditure with US$20bn being used to cover operational costs and maintenance. However, the costs may increase as Musallam described the capital expenditure projections as conservative.

In February 2008, plans for a project to modernise Jeddah's water supply were approved. The project will include the construction of four dams in the Mecca region and the laying of new high-capacity pipes. The project has an estimated cost of US$170mn and the government has also allocated approximately US$255mn for new water and sanitary drainage projects in Mecca.

   

Industry Trends And Developments - Construction - Q4 2008

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Saudi Arabia - 

Construction  -  Dec 04 2008

Construction Overview

Soaring prices of cement stocks on the Tadawul All-Share Index (TASI) stand testament to the fact that the Saudi construction industry is buoyant even as surplus liquidity is ploughed into real estate.

The Kingdom of Saudi Arabia represents the largest construction market in the Middle East, but as the industry is heavily reliant on oil revenues, construction spending can be erratic. Even so, except for a brief slowdown in activity following 9/11, the industry has recorded growth since the late 1990s. In 2008 this overall trend will continue, albeit a small slowdown that is more symptomatic of a regional downturn than particularly to do with the construction sector in Saudi Arabia. The one problem that is exacerbated in Saudi Arabia more than other GCC countries is soaring inflation. The infrastructure

Saudi Arabia Construction Industry Value and GrowthUrban Populations By Region ('000s)

e/f= BMI estimate/ forecast. Source: ILO, UNCTAD, Central Department of Statistics, SAMA, BMI

projects are expected to help the sector remain robust and once the dust settles on the macroeconomic front in 2010 the industry will resume a period of steady growth.

During 2005-2009, Saudi Basic Industries (Sabic) plans to spend US$8bn on new petrochemical projects. Also, in its 2005 budget appropriations, Saudi Arabia allocated US$14.4bn for ongoing public projects, a 29% increase over 2004, with infrastructure projects -- mainly water, desalination and sewage -- accounting for a total of US$4.95bn.

The construction industry value is likely to reach SAR74.3bn (US$19.8bn) in 2008. The industry's contribution to GDP is estimated to dip to 3.5% in 2008, compared with 4% in 2007.

New And Ongoing Projects

Residential Construction

In October, Emaar Properties and Al Shoala announced that they had agreed to establish a joint venture to develop a 31mn square metre community near Riyadh. 60% of the land would be residential developments. The project is currently in the planning stages.

In September 2008, Kuwaiti Al-Mal Investment Company, a subsidiary of the Kharafi Group, announced that it had signed a contract with the Saudi Arabian General Investment Authority (SAGIA) to develop a new economic city, Hail, which will be completed before 2025. Saudi Arabia is developing four economic cities, at Rabegh near Jeddah, Jizan, Medina and Hail.

In August 2008, Emaar Middle East announced that its flagship project, the US$1.6bn Jeddah Gate infrastructure project, is on schedule.

Residential ConstructionQ2 2008

In June 2008 the Egyptian developer Palm Hills announced that it was in partnership with a Saudi company and had plans to invest US$561mn on developing projects in Saudi Arabia. Palm Hills has already purchased 6.7mn m2 of land in Riyadh and Jeddah and plans to construct residential and commercial properties.

In May 2008 Emaar Middle East, a unit of the Emaar Properties Group, announced that it was beginning construction on the first phase on its Al Khobar Lakes project. The Al Nada Village, which will be located on an area measuring 250,000m2, is the first of the nine villages which will make up this project. The project is worth US$1.2bn and is expected to be completed in 2010. The scheme will include the construction of villas, mosques, schools and a shopping centre.

In April 2008 a Bahraini real estate company announced that it had formed a partnership with the Saudi Talal al-Ghanim for the construction of a US$237mn residential project in Saudi Arabia.

Q4 2007

In October 2007, the real estate development unit of Dubai World announced its plans to develop a US$12bn urban project near Riyadh. The Al Wasl project will involve the development of a 1,411ha site and as well as residential facilities will include office space, hotels, mosques, a hospital, a university and seven shopping centres. Construction is scheduled to begin on the project in mid-2008 and will continue over a seven-year period.

Q3 2007

In September 2007, Keppel Land, the Singaporean developer, announced that it was to build luxury residences in Jeddah with the Saudi Economic and Development Co (SEDCO). The project will see the construction of three high-rise towers and 1,000 seafront apartments on Jeddah's waterfront.

Commercial Construction

In October 2008 the Saudi real estate developer Injaz announced that it planned to build a US$2.67bn mixed use development in the Eastern province.

In the same month Reuters reported that Dar al-Arkan, Saudi's largest developer planned to construct a US$13.33bn real estate project in Jeddah.

As reported in October 2008 the Kingdom Holding Company announced that it planned to build Saudi Arabia's tallest tower, which will stand at more than 1,000m. The US$26.7bn Kingdom Tower project will be part of the Kingdom City project.

Commercial ConstructionQ2 2008

In May 2008 the Saudi real estate company Dar al-Tahkom announced that it was making final arrangements for the construction of two twin towers in the city of Aden. The US$50mn project will involve the building of two towers -- the Sirah and the Bahr al-Arab -- which are to be 35 storeys high and will contain shopping malls and offices.

The Bin Laden Group has been awarded a US$373.3mn building contract by Emaar Properties to be realised in the Emaar Economic City. The contract involves the construction of 16 residential towers at Emaar Economic's Bay la Sun village complex.

Q1 2008

In March 2008 the Saudi Health Minister Dr Hamad Al-Manee agreed to a contract with Al-Kefah Holding Company and Al-mobti Contracting for the construction of three new hospitals in the Eastern Province, Jeddah and Al-baha regions.

Emaar is developing King Abdullah Economic City (KAEC), a 168mn m2 township located on Saudi Arabia's Red Sea coast, north of Jeddah. Being developed at a cost of US$26.6bn, it is slated to become one of the most important cities of the Middle East. KAEC will host a range of economic activities. Saudi Arabian General Investment Authority, the body responsible for inbound investments to the kingdom, is acting as the prime facilitator for KAEC. It will comprise the Sea Port, Industrial Zone, Central Business District (including the Financial District), Resort District, Educational Zone and Residential Communities. In February 2008, Freyssinet signed a deal to build five office buildings in the first stage of the business park, to be completed by the end of 2008 at a cost of US$92.8mn. The design and management of the project is being undertaken by Hill International, an international design and construction company. When completed the King Abdullah Economic City is expected to serve as the headquarters for the Capital Market Authority and the Tadawul Stock Exchange.

Q4 2007

Gulf Automobile Manufacturing Company has reached an agreement with the Saudi Authority for Industrial Cities and Technological Regions (SACTR) to establish a car manufacturing plant in Dammam. The car plant will have the capacity to produce 15,000 cars.

Q3 2007

In September 2007 Al Kabeer, the India-based frozen meat and ready meal producer announced that it planned to establish a processing plant in Saudi Arabia.

Industrial Construction

In October, it was announced that the Jazan refinery in Saudi Arabia will be completed in the Q115: two years later than expected. Despite original plans to open bids in Q207, the Petroleum and Mining Ministry issued the tender for the 250,000-400,000 barrels a day (b/d) unit in September 2008 and said that the winning bidder would be announced in March 2009. It is reported that the project has been beset by delays, although Reuters reports a Ministry official as saying, 'Procedures…are progressing…according to the time schedule set'.

In September, King Abdullah announced that a SAR1.48bn cement plant will be built in the Baha province, to the south of Jeddah. This follows the King's directive in 2007 that

the state was to set up cement plants in the provinces of Baha, Jouf and Hail. The Baha plant is being built by the Baha state in partnership with the Dana Holding Company, a Saudi joint stock company. The plant will product 10,000 metric tonnes of cement.

Industrial ConstructionQ2 2008

In May 2008 the South Korean builder Daelim Industrial was contracted to build a US$887.9mn petrochemical plant in the Al-Jubail Industrial City. The plant is scheduled for completion by April 2010.

Q1 2008

In January 2008, Emal International, a joint venture between Abu Dhabi's Mubadala Development Company and Dubai Aluminium Company, announced plans to set up an aluminium smelter complex. The plant is to be located in the King Abdullah Economic City and will cost US$5bn. Construction on the project is due to begin by the end of 2008.

Q4 2007

In December 2007, the Saudi Total Lubricants Co -- a joint venture between Total, the French oil group, and Saudi conglomerate Al-Zahid Group -- announced that it had leased land and planned to build a 35,000 tonne capacity lubricant plant in the industrial zone of the King Abdullah Economic City.

   

Major Projects - Saudi Arabia - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Table: Saudi Arabia -- Major Infrastructure Projects

ProjectProject value

(US$ mn) Company name(s) Timeframe StatusAirport Construction        

Expansion of King Abdul Aziz International Airport 3,100

Al-Shaer Engineering, Safari Group, Bin Laden Group,

General Authority for Civil Aviation, Aeroports de Paris 2007-2012 Contracts awarded

5 New airport building projects 53 na 2007+ Project announcedRoad construction        Highways in 8 regions na na 2008+ Contracts awardedRoad construction in Makkah and Dharan 173.4

Al-Rio Contracting and Trading Ajzala Contracting 2007-2010 Contracts awarded

Road expansion, Yanbu 11.28Wartha Abdul-Rahman Al-

Namlah 2007-2009 Contract awardedRailways        

MMRL Rail Link 5,330 na 2008+Tenders to be awarded

in 2009Landbridge railway project

1st Phase: 613.18 2nd

Phase: 506.64 3rd Phase- 746.47 4th

Asciano, Bin Laden Group, Mohammed Al-Swailem, Al-

Suwikat Group, Barclay Mowlem, Mitsui, Al-Rashel

-2010 Russian Railways Contract cancelled. Tarabot consortium

awarded 50 year operation concession.

Phase- 800Riyadh light railway na na 2007+ Final planning stages

Port construction        

Cargo port at KAC na na 2008-2010

The port is designed to ultimately have annual

handling capacity of 20mn TEUs

Dockyard at Islamic Port Jeddah 426 na 2008+ Project to be BOT

Red Sea Gateway Terminal and JIP 443

MMC Corp, Halcrow Interntaional, China Harbour

Engineering Company Ltd, Zenhau Port Machinery Ltd 2006-2010 Construction Underway

Bridge construction        Tiran causeway (Saudi Arabia-Egypt) 3,000 na 2012 Construction underwayOil and Gas Pipelines and Petrochemical Projects     Petrochemical plant in Al-Jubail Industrial City 888 Daelim Industrial 2008-2010 Contract awarded

Ethyleneamines Plant 210Hyundai Engineering Co Ltd,

Hawha Engineering 2007+ Planning stagePolywthene Production Facility 960 Daelim Industrial Co 2007-2011

Scheduled for completion in 2011

Manifa oil field redevelopment project 9,000

Undertaken by Saudi Aramco 2007-2011

Contract signed with Jan De Nul

Fourth New Refinery at Ras Tanura 7,000-8,000

Announced by Saudi Aramco 2012 Construction started

PBT complex in Yanbu 500 OSOS Petro-Chemicals na At the bidding stagePetrochemical plant for Saudi Basic Industries Corp. (Jubail) 400 Samsung Engineering -2010 Project announcedDownstream gas pipeline project on the Khurais crude increment programme 67

Saudi Aramco, Metal Services for Trading & Contracting Company

2006-2008/2009

Likely to be completed in 2 years

Oil recycling plant 45 Hyflux,Sedco, Lubrec na At planning stageRas Tanura Petrochemicals Complex (Ras Tanura) na Saudi Aramco 2009-2012

Negotiations are currently on with Dow

Chemical CompanyUtilities and offsite facilities at a 4mn-tpa petrochemicals complex at Al-Jubail na Fluor Corp., Kalyan 2006-2009

Scheduled for completion by

December 2009

Laying crude oil pipelines from Habshan oil field to Fujairah na

China Petroleum Pipeline Bureau and China

Petroleum Engineering and Constructio na At planning stage

Power Plant and Grid Network Construction      

Ras Azzour IWPP 6,000

Sumitomo Corp, Malakoff Bhd, Al-Jomaih Automative

Co, Fuji Electric Holdings, Saudi Water & Electricity

Company    Shoaiba 1200MW Power Plant 3,000

Alstom, Saudi Electric Company    

Gas Plant 501

GS Engineering & Construction Corporation,

Saudi Aramco 2008-2012 Contract awardedPower transportation and distribution, King Abdullah Economic City 147.5 Emaar, Siemans AG -2010 Contract awardedSharoura Power Plant extension 96 Alfanar Company 2008-2010 Project awardedGas Turbines and Generators for power plant 500 GE 2008+ Contract awardedGulf Co-operation Council Integrated Electricity Grid 1Phase-1,000

GCC Interconnection Authority 2007+

1st phase scheduled to begin in 2008

Power and desalination plant 280

Hanwha Engineering and Construction Corp 2007-2010 Project awarded

Power station and a desalination plant (Jubail-Yanbu) 3,400

Suez Energy International, Gulf Investment Corporation

and Arabian Company for Water and Power Projects 2007-2009

To be completed in mid-2009

Oil-fired 1,020-MW thermal power generation and desalination plant at Shuqaiq 1,900 Mitsubishi Heavy Industries 2007-2010 Contract awardedPP10 power plant near Riyadh 1,500-2,000 na 2008+ At the bidding stageFertiliser plant 946 Samsung Engineering 2007-2010 Contract awarded380kV transmission line between Qurayyah and Al Jubail 102

Hyundai Engineering & Construction 2007-2009 Contract awarded

Electric station in Jizan region 91.45 Areva 2009 Contract awarded

Water Infrastructure        Riyadh water infrastructure Na Veolia 2008-2014 Project awarded

Jeddah water project 425 na 2007+Dams under construction

Water desalination plant, Jeddah 180,000

Doosan Heavy Industries and Construction 2006-2009 Contract awarded

The Shuquaiq Water Transmission system project 1,000

ACWA Power Projects, Mitsubishi Corp, Gulf

Investments Corp -2010Contract for second

phase signedWater transmission system for cities Dammam, Al Khobar, etc. 384 Yuksel Insaat, Insaat Saudia 2008+ At planning stage

Hotel Construction        221-room hotel: Al Diyafa Radisson Hotel, Makkah na Diyafa Real Estate, Rezidor 2007-2010

Contract signed with Jan De Nul

Crowne Plaza Hotel in Al Madinah na

Inter Continental Group and investors Saudi Telal 2007-2008

Due for opening in Q408

Residential Construction        2,670 Injaz 200+ Project announced

Hail Economic City na

Kuwaiti Al-Mal Investment Company, Saudi Arabia

General Investment Authority -2025 Contract awarded

Residential community near Ridyah na Emaar Properties, Al Shoala 2008+

Project in the planning stages

Palm Hills residential development 561 Palm Hills 2008+ Project announcedAl Khobar Lakes project 1,200 Emaar Middle East 2008-2010 1st phase underwayUS$237mn residential project 237 Al Khaleej, Talal al-Ghanim 2008+ Partnership announcedAl Wasl residential project 12,000 Limitless 2008+ Project announcedRiyadh Urban Project 1,200 Dubai World 2008-2015 Planning stageJeddah Waterfront Project na Keppel Land 2007+ Planning stageTwo mega real estate projects at Riyadh and Jeddah 20,000 Kingdom Holding Company 2007+ Land acquiredThe mixed-use City Fanar or Lighthouse City complex (between Al-Khobar and Damman 160 Ballast ham 2006-

Land reclamation complete

Commercial Construction       Kingdom Tower Project 26,700 Kingdom Holding Company 2008+ Project announcedReal Estate project, Jeddah 13,330 Dar-al-Arkan 2008+ Project announcedMixed-use development, Eastern province 2,670 Injaz 200+ Project announcedBay la Sun village complex 373 Bin Laden Group 2008+ Contract awardedTwin Towers in Aden 50 Dar al-Tahkom 2008+ Project announced

3 new hospitals naAl-Kefah Holding Company,

Al-mobti Contracting 2008+ Project announcedKing Abdullah Economic City 2,660 Hill International, Freyssinet 2006+

1st phase due for completion by Q408

Car Plant in Dammam naGulf Automobile

Manufacturing Company 2007+ Planning stageFrozen meat and ready meal processing plant na Al-Kabeer 2007+ Planning stage

Knowledge Economic city, Al-Madinah 7,000

Multimedia Development Corporation, Multimedia

University, Seera City Real Estate Development 2008-2020

Phase 1 construction underway

Lamar Towers (Jeddah) 533.53

Cayan Investment Company, Zahran Real

Estate Investment Company 2007-2010 Construction startedCement plant in Al-Ahsa near Hofuf 320.12

Al-Ahsa Development Company 2007+ At planning stage

Al-Jawharah tower in Jeddah na DAMAC Properties 2008-2011

Construction to start in 2008

Industrial Construction        Cement Plant, Baha Province 395 Dana Holding Company 2008+ Project announced

Jazan Refinery na na Sept 2007-Contract to be

awarded in March 2009

Aluminium Smelter 5,000

Mubudula Development Company, Dubai Aluminium

Company 2008+Construction due to

begin in 2008Lubricant plant na Total, Al-Zahid 2007+ Land leased Desalination plant near Jubail Industrial city 1,100 Veolia Environmentt na At planning stagena = not available. Source: BMI

   

Industry Forecast - Saudi Arabia - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Industry Forecast Scenario

Table: Saudi Arabia--Construction and Industry Data

  2005 2006 2007 2008f 2009f 2010f 2011f 2012fConstruction industry value, SARbn 54.95 59.14 67.06 74.26 82.17 88.01 93.81 100.50Construction industry value, US$bn 14.67 15.79 17.91 19.83 21.94 23.50 25.05 26.84Construction industry, real growth, % y-o-y 5.39 6.43 4.76 2.51 3.14 3.11 3.59 4.14Construction industry, % of GDP 4.65 4.43 4.69 3.50 3.96 4.29 4.51 4.87

                 Total capital investment, SARbn 195.63 233.07 253.69 288.56 326.07 354.21 380.92 417.92Total capital investment, US$bn 52.24 62.23 67.74 77.05 87.07 94.58 101.71 111.60Total capital investment, % of GDP 16.54 17.45 17.73 13.60 15.70 17.28 18.30 20.26Capital investment per capita, US$ 2,260.41 736.93 731.59 548.23 614.44 656.58 674.89 725.34Real capital investment growth, % y-o-y 5.22 5.10 4.76 5.09 5.11 4.45 4.41 6.52

                 Construction industry employment, '000 750.42 836.90 876.74 961.24 1,023.21 1,077.03 1,133.78 1,197.24

Construction industry employment, % y-o-y 5.39 11.52 4.76 9.64 6.45 5.26 5.27 5.60Total workforce, '000 6,561.56 7,522.98 7,788.54 8,063.48 8,348.12 8,642.81 8,947.90 9,263.76Construction industry employees as % of total labour force 11.44 11.12 11.26 11.92 12.26 12.46 12.67 12.92f = BMI forecasts. Source: ILO, UNCTAD, Central Department of Statistics, SAMA.

The prices of raw materials (cement and steel especially) have soared throughout the region. On the one hand, Asian demand for materials such as steel, cement and wood has decreased available supply for the Middle East, forcing up prices and producing project cost inflation that in some cases is the cause of project cancellations. On the other hand, the demand for labour and contractors has drained the regional market of available manpower, especially high skilled manpower. It should however be noted that Saudi Arabia has a young population (a large extent of which is unemployed), therefore in Saudi Arabia the problem should not be as grave as in the UAE for instance. These are factors that will take their toll on the pace of infrastructure development and construction.

This will be partly offset by the increasing private sector participation in the delivery of major power and water projects, which will strengthen the country's infrastructure and ensure a high level of activity in the utilities market. Wider private sector participation in transport will also be one of the factors to sustain high activity in the construction industry. The Saudi government hopes to attract investment in the petrochemical, manufacturing and transport industries. BMI expects that major corporate tax cuts will help, but bureaucracy remains a problem.

Overall, we forecast respectable growth of 3.30% on average per year, between the years 2008 and 2012. Although the conditions in the regional and domestic market will prompt a slowdown this year with growth receding to 2.51%, going into 2009 confidence, should resume and growth pick up.

Risks

The crucial challenge for the future is to tackle the problem of unemployment. The workforce in Saudi Arabia accounts for less than 60% of the economically active population, against a world average of almost 80%. For Saudi nationals, the figure drops to below 40%. It is an issue that is becoming increasingly pressing, as the results of the census published in 2005 revealed a population growth rate of 2.5%.

   

Industry Business Environment Overview - Saudi Arabia - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Business Environment

Regional Overview -- Middle East And Africa

The Middle East and Africa (MEA) region is far from homogenous and includes large disparities in population, wealth, economic management and political stability. These factors have shaped the development of infrastructure across the region, with some countries boasting modern transport networks, major power generating facilities and booming construction industries, and others managing with unpaved roads, power shortages and minor domestic construction sectors. While the importance of a sound infrastructure is broadly acknowledged within the MEA area, there is a lengthy track record of inadequate expenditure on infrastructure, which is only now being rectified. This is understandable to some extent as some countries, notably in sub-Saharan Africa, have social and economic imperatives that have constrained long-term planning in the infrastructure sectors.

Notwithstanding the disparities between regional states and their different political and economic conditions, two major underlying forces can be pinpointed as forming the key thrust behind the development of the infrastructure sectors in the MEA region: oil and China. On the one hand, the states of the Middle East are taking advantage of unprecedented high oil prices to invest in infrastructure. They now channel their oil windfalls towards developing the necessary infrastructure to diversify their economic base. The prime example is the UAE, where infrastructure development and rapid economic transformation have become reference points for neighbouring states. On the other hand, in sub-Sahara Africa, a region of immense natural wealth, China is making significant advances and investments in infrastructure in return for preferential access in oil blocks, gas fields and mineral reserves. Notable examples of countries where China is financing infrastructure projects worth billions of dollars in return for lucrative contracts are Nigeria, the Democratic Republic of Congo and Sudan.

In transport infrastructure, the modal balance has been traditionally in favour of roads and road networks have received the majority of investments. The standards in the region vary drastically from paved to unpaved. In the Middle East, freight transport is overly reliant on the road systems, which have developed to the detriment of railway sector. However, as the cost of oil and petrol rises, the economic viability of relying heavily on roads is decreasing, and railways have seen a significant popularity boost. Countries in the Gulf Co-operation Council GCC, Arab Maghreb and Turkey, which had no or an underdeveloped railway sector, are now investing. The GCC has announced a railway initiative which will involve the development of a railway network which is planned to run from Iraq, down the eastern coast of the Arabian Peninsula, taking in Kuwait, Saudi

Arabia, the UAE and Oman. There is also a feasibility study underway on the project to decide the viability of including Yemen in this network. To realise this interconnection initiative Gulf States are initiating projects to develop their domestic railway systems. Morocco is building North Africa's first high-speed rail line and there are plans -- although not concrete -- to link all of North Africa in a single network. In tandem, with investments in railways, ports in the MEA are developing and have become, or are investing to become, competitive on a global scale. New facilities, sometimes as part of new economic cities as is the case of the UAE and Saudi Arabia, have extended container and cargo handling capacity and as a result trade has intensified. Ports are also being expanded and made deeper to service the new league of larger cargo ships and to advance their competitive advantage. Sub-Saharan Africa has also seen a great deal of activity in the port sector, with new initiatives announced for major ports in East and West Africa as international operators raise their stakes on the continent. The region's air sector is also experiencing an expansion as airports are being constructed or overhauled to accommodate the growing number of business travellers to the region, along with the development of tourism along the Gulf coast.

Sub-Saharan Africa is witnessing less of an infrastructure transport explosion. Ports, roads, railways and airports are all being developed, but not to the extent of the major infrastructure projects being initiated in the larger and wealthier African states such as South Africa.

Being the largest oil producing and one of the largest gas producing regions in the world, the Middle Eastern states have traditionally relied on their oil and especially gas for their power sector needs. Use of gas for electricity production is expected to continue and in some countries increase. Oil usage, however, is expected to decline, as oil producing countries use the fuel for the more lucrative export market, or to develop energy intensive downstream sectors such as petrochemicals. A number of countries in the Middle East are also turning to nuclear power for their energy needs. UAE, Egypt and Turkey have concrete plans to develop nuclear plants, while other smaller Gulf states such as Qatar are exploring the possibility. Hydroelectricity is understandably not developed, as water is a precious resource that is more likely to be preserved for desalination rather than power generation. Conversely, hydroelectricity is a major source of power in sub-Saharan Africa, with some new investments being made in the region. The renewable sector is under developed, although the area does have potential to utilise its climate and develop solar power initiatives. Coal is not used and is unlikely to be developed as it is not readily available in the Middle East.

The Middle East's power infrastructure is being heavily invested in as the region's populations and economies are growing, resulting in an increase in electricity consumption. This growth is putting a strain on domestic grids and so a safety net of integrated power grids has been devised by the GCC. The grid will allow for the sharing of electricity and is being developed in the medium term.

The state of the power infrastructure in Africa is poor. It has not been economically viable for smaller African states to develop their own power facilities, as national

demands are relatively small, and so they have become reliant on electricity imports from larger, wealthier states. This situation looks set to change as power importing nations are being hit by the power shortages affecting their electricity providers. South Africa, the richest and most developed state on the continent, is the de facto example of overreliance on a single source (coal) and insufficient investments in power infrastructure, which in turn have led to power shortages and load-shedding taking their toll on the country's economy.

The construction sector has witnessed a boom in the Middle East as countries have been investing heavily in sectors like financial services, industrial production and tourism, all of which require their own distinct infrastructure development. In addition, rising incomes have boosted the demand for residential construction. Construction companies in the Middle East have grown to become amongst the largest in the world, boosted by strong demand from their domestic markets. Furthermore, complex projects like the new cities and offshore island construction in the UAE, the King Abdullah Economic City in Saudi Arabia and the Silk City in Kuwait, have attracted a variety of international contractors with different areas of expertise to enter the market.

Nevertheless, the period of rapid construction growth is coming to an end, prompted by the rising costs that are hitting developers throughout the region. On the one hand, Asian demand for materials such as steel, cement and wood has decreased the available supply for the Middle East, forcing up prices and producing project cost inflation that in some cases is the cause of project cancellations. On the other hand, and this is especially, although not exclusively true of the UAE, the labour flight has left the construction industry suffering from manpower shortages, thus delaying the completion of projects and also increasing costs. Prices in the steel market are forecast to remain high as the fundamentals behind their rise (strong domestic demand and shortage of supply) look likely to remain unchanged in the medium term.

Middle East And Africa: Business Environment Rating

Table: Regional Infrastructure Business Environment Ratings

  Limits of Potential Returns Risks to realisation of

returns    Infrastructure

MarketCountry

Structure LimitsMarket

RisksCountry

Risk RisksInfrastructure

BE RatingRegional Ranking

UAE 70.0 59.7 66.4 80.0 77.2 78.3 70.0 1Qatar 65.0 54.8 61.4 75.0 69.1 71.5 64.4 2Egypt 60.0 57.8 59.2 75.0 60.4 66.3 61.3 3Kuwait 42.5 78.6 55.1 55.0 79.1 69.4 59.4 4Iran 60.0 56.5 58.8 55.0 62.4 59.5 59.0 5Saudi Arabia 45.0 67.2 52.8 80.0 62.1 69.3 57.7 6Oman 45.0 60.8 50.5 82.5 74.0 77.4 58.6 7Libya 47.5 63.8 53.2 65.0 60.6 62.3 55.9 8Bahrain 42.5 72.0 52.8 40.0 68.0 56.8 54.0 9

Turkey 52.5 50.7 51.9 55.0 55.0 55.0 52.8 10South Africa 45.0 59.3 50.0 55.0 61.1 58.7 52.6 11Morocco 45.0 44.4 44.8 60.0 60.2 60.1 49.4 12Algeria 37.5 54.7 43.5 50.0 61.8 57.1 47.6 13Nigeria 50.0 34.4 44.5 42.5 49.7 46.8 45.2 14Source: BMI. Scores out of 100, with 100 highest. The Infrastructure BE Rating is the principal rating. It is comprised of two sub-ratings 'Limits of Potential Returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting respectively. In turn, the 'Limits' Rating is comprised of Infrastructure Market and Country Structure, which have a 65% and 35% weighting respectively and are based upon growth/size of the Infrastructure industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating is comprised of Market Risks and Country Risk which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industry regulatory and competitive issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, which the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report.

Limits Of Potential Returns

Infrastructure Market

Historically, the Saudi kingdom has focused on exploiting its oil and gas reserves to earn revenues, so much so that despite being the largest construction market in the Middle East, the construction industry has been growing rather slowly. However, factoring in the Saudi government's fervent intent to increase its non-oil revenues, the sector's y-o-y growth over the forecast period is observed to be quite healthy.

Country Structure

Saudi Arabia's performance with regard to labour, power and financial infrastructure is impressive. With its power system firmly in place, supply of electricity does not pose a threat to timely completion of construction activities. Its financial structure is also well defined and is expected to be improved by private-sector credit expansion. On the labour front, the performance of the country is rather average. The y-o-y performance of construction sector employment is observed to be on the rise over the forecast period; however, the growth is quite sluggish.

Risks To Realisation Of Returns

Market Risk Barriers to entry have been reduced considerably since the introduction of the Foreign Investment Law in 2000, followed by the decision to slash taxation on foreign companies to 25% in 2003 and the announcement to allow wholly foreign-owned entities to bid for government contracts in 2005. However, recent attacks on foreign nationals have brought to light the threat of terrorism. Despite this, Saudi Arabia still manages to perform quite impressively on this account.

Country Risk On the political and legal front, the Kingdom performs quite evenly. Caution seems to be the keyword in the political environment, as illustrated by the King's

recent decision to re-appoint the entire cabinet for another four year term. With regard to international relations, the US will remain Saudi Arabia's most important strategic partner, regardless of the result of the US presidential election in 2008. The country also seems to be on a path of reconciliation with Iraq, as reflected by its decision to reopen its embassy in Baghdad, an important symbolic gesture of support for the Iraqi government. However, the legal framework of the nation needs to be revamped and made more stringent.

Foreign Direct Investment

The Kingdom's investment regime has been transformed since the establishment of the main foreign investment promotion agency, the Saudi Arabian General Investment Authority (SAGIA), in 2000. Indeed there are signs that the Kingdom is making much greater strides towards opening up to investment and a 2008 World Bank report said that the Kingdom was the seventh fastest reformer globally and the second fastest in the region. Indeed, in recent years, a series of measures have made the climate far more propitious for foreign investment, with 100% foreign ownership of both projects and real estate allowed. In addition, the government has slashed taxes on foreign-owned capital and SAGIA recently announced a US$624bn investment programme to take the country through to 2020.

The 2000 Foreign Investment Act governs all foreign direct investment (FDI) in Saudi Arabia. The law provided for 100% ownership and also equalised treatment with national companies through investment incentives, such as soft loans from the Saudi Industrial Development Fund. FDI is particularly encouraged in key infrastructure sectors: telecoms, power and water, transport and others. However, a negative list bars foreign investment in a number of sectors, though SAGIA is resolved to shortening the list over time. The sectors currently closed to foreign investment include three manufacturing categories and 16 service industries. Notable exclusions include oil and gas exploration and production -- the most highly-prized area of the Saudi economy for foreign investors -- although some new areas have opened up in the past few years, including banking, insurance and the mining sector.

Foreign investors are allowed to transfer money from their enterprises outside of the country and can sponsor their foreign employees. In addition, there are no restrictions on foreign exchange and the repatriation of capital and profits. Ongoing institutional and legislative reforms are now helping to create a level playing field between local and foreign companies, helped by the recent adoption of a competition law. On top of this, the government is currently reviewing laws covering intellectual property rights, in order to conform to the WTO's TRIPS requirements.

Labour Force

The local workforce comprises just 3.2mn citizens. However, demographic trends suggest this will rise by 4% annually. According to SAMA, unemployment is 6.25% (2006 figures), although the percentage of jobless Saudis is much higher at 12.0%.

Indeed, anecdotal evidence suggests indigenous unemployment is close to 20-30%. Women reportedly make up less than 5% of the workforce in Saudi Arabia, but are likely to account for a larger proportion in the future as, in 2005, the government approved a new labour law that will allow women to work in any field.

According to 2006 figures from the United Nations the number of foreign workers in Saudi Arabia is 6.36mn, almost 26% of the overall population. The government's long-term aim is to reduce the foreign population to 20% of the total by 2012 through its Saudisation programme. It aims to raise the proportion of nationals working in the private sector from an estimated 13% in 2004 to around 45% by forcing companies to employ Saudi citizens over foreign workers. However, employers have traditionally been resistant to employing nationals given their generally poor education, skills levels and higher cost. For example, a South Asian labourer can earn less than SAR1,000 a month whereas a Saudi will demand an average SAR5,500 minimum. That said, the 2005 Labour Law -- which raised the target rate of Saudisation to 75% -- can be modified temporarily if there is a shortage of qualified staff: a get-out clause that will doubtless be used frequently.

There is no tradition of industrial unrest and the law forbids unions, strikes and any form of collective bargaining, although the government allows companies that employ more than 100 Saudis to form 'labour committees'. However, to date, no labour committees have been established. There is no forced or compulsory labour but domestic workers are not covered under the provisions of the new Labour Law. A July 2004 decree addresses some workers' rights issues for non-Saudis, and the Ministry of Labour has begun taking employers to the Board of Grievances.

   

Company Profile - Damac - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Company Monitor

Overview

Damac

Address Tahlia Street, FAHDA

Centre Bldg, 102. Riydah

Tel: +966 1 217 5858 Fax: +966 1 217 5959 Email:

ksa@damacgroup.com

Key Statistics No. of employees:

5,000 Year established: 1982

Key Personnel Chairman: Hussain

Sajwani

Damac Properties, a major construction company within the Middle East and a unit of Damac Holdings, was founded in 1982 as a catering company. Over the last two decades, the Dubai-based Damac has extended its portfolio into real-estate development and is behind a number of large construction projects across Dubai including Palm Island and Dubai Marina.

The company has extended its operation out across the world in 16 countries and is engaged in projects in the UK and Russia.

The company has three bases in Saudi Arabia, in Riyadh, Dammam and Jeddah.

In September 2007 the company announced that it was involved in the project to build the 178m-high Al-Jawharah tower in Jeddah. The 40-storey project is scheduled to take three years to complete.

   

Company Profile - Saudi Oger - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Overview

Saudi Oger is a large domestic construction contractor that undertakes a wide range of activities. It focuses on the energy sector, as well as on transport, infrastructure and general contracting. The company is multi-divisional and has subsidiaries and affiliates in the Kingdom of Saudi Arabia as well as overseas. Currently, it is executing major projects throughout the Middle East, Africa, Europe and the US.

In July 2007, Saudi Oger was awarded a contract worth SAR698mn (US$186.13mn) to implement the first phase of the King Abdullah road in Riyadh. The project comprises construction of three lines in the main road and erection of service roads.

Saudi Oger

Address Saudi Oger PO Box

1449 Riyadh 11431 Saudi Arabia

Tel: +966 (1) 477 3115 Fax: +966 (1) 477

0079 Web:

www.saudioger.com

Key Statistics No. of employees:

5,000 Year established: 1978

Key Personnel General Manager:

Saadeddine Rafic Hariri

Vice President and Board Member : Bahaa Rafic Hariri

In May 2007, Saudi Oger was awarded a US$131.73mn contract to construct four residential towers as a part of the first phase of the King Abdullah Economic City development project. The company will also undertake construction of roads and parking areas as well as landscaping.

In April 2007, Oger Dubai (a subsidiary of Saudi Oger) reported that it was awarded a US$436mn contract at the Dubai International Centre. The subsidiary will be responsible for the construction of a 235m-high tower called The Buildings. The project is a part of Dubai's major mixed-use development initiative and will include offices, residential apartments, retail space and a luxury hotel.

In December 2006, a subsidiary of Saudi Oger, Oger Abu Dhabi, won a US$409mn construction package from Abu Dhabi-based Mubadala Development Company for the UAE University's new campus at al-Ain. The campus is to be constructed over four years, with the first phase due to be ready by mid-2008.

In November 2006, the second-phase agreement of the Saraya Aqaba construction contract was signed between Jordan-based Saraya Aqaba and Saudi Oger. The contract is worth US$700mn. The foundation stone for the project was placed in January 2006. The first phase was signed off before the foundation stone was laid and included the mobilisation and infrastructure of Saraya Aqaba. The second phase comprises completion of the construction work on the project. Saudi Oger is the exclusive build contractor for the project, which is likely to begin operations in 2009, adding about 1.5km of beachfront to the Gulf of Aqaba. The project comprises about 617,000m2 (not including Radisson SAS land) of master-planned development, combining shopping, dining, entertainment, freehold accommodation and cultural activities within the context of an authentically styled ancient city. The total cost of the project is in the region of US$995.7mn. Founding partners in the project include the Jordan-based Social Security Corporation (SSC), the Arab Bank, the Aqaba Development Corporation (ADC) and a number of individual and corporate investors.

In partnership with the Saudi mining company Maadin, Saudi Oger won the contract for the execution of the 1,600km privately managed rail link between Jeddah and Dammam. Half the cost of this project is being borne by the Saudi government. The link is designed to provide a means for Maadin to transport minerals between al-Zubaira and the Jalameed belt regions. At full capacity, Maadin will transport 4.5mn tpa of phosphate from Jalameed to Jubail, as well as transport bauxite from al-Zubaira to smelter plants in Eastern Province.

   

Company Profile - Al Khodari Group - Q4 2008

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Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Overview

Founded in 1955, Al Khodari is one of the leading contractors in Saudi Arabia. The group has offices and an active presence in the Middle East and Africa.

The group owns about 2,300 pieces of heavy construction equipment at over 32 different locations in Saudi Arabia, Middle East and in Africa.

Al Khodari has played an important role in the development of Saudi Arabia and other Middle Eastern countries by supporting the construction of roads, bridges, buildings, infrastructure, land transportation and environmental services. It serves as general contractor for a range of services, including general civil construction, oil and gas industry infrastructure, water and electricity.

The group's major clients include: the Royal Commission for Jubail & Yanbu, the Saudi Ministry of Transport, Saudi Aramco, British Columbia-based Fama Holdings Company, Kellogg Brown & Root International (a subsidiary of US-based Halliburton Company) and Saudi Arabian Texaco.

The group's work includes the Al Khodari Mosque in Al Khobar, the Al Hasa General Library, the high-pressure implant pipeline in Uthmaniyah and a number of water storage facilities in Kuwait.

At present, the group is responsible for a number of road projects, including the Shaybah Access Road, which is about 386km long and runs from the main KSA-UAE highway near Batha to the Saudi Aramco Shaybah facilities.

Financial Highlights

For the financial year 2005, the company reported annual sales of US$127.92mn.

   

Company Profile - Almabani General Contractors - Q4 2008

Al Khodari Group

Address Al-Khodari Group Al-

Khodari Complex King Abdulaziz Street Al-Khobar Saudi Arabia

Tel: +966 (3) 895 2840 Fax: +966 (3) 864

9684 Web:

www.alkhodari.com

Key Statistics Revenue (FY05):

US$127.92mn No. of employees:

12,000 Year established: 1955

Key Personnel Chairman: Fawzi

Top

Saudi Arabia  -  Infrastructure  -  Dec 04 2008

Overview

Almabani General Contractors undertakes general contracting works on a number of projects. It has worked on prestigious projects throughout the kingdom, including high-rise buildings, government ministries, laboratories and R&D centres, roads, major airports, runways and sewerage systems.

A diverse team of specialists allows the player to undertake projects from design through to completion. Aside from its Saudi operations, Almabani has a branch in the Sultanate of Oman in Muscat and has undertaken works throughout the Middle East with a large presence in Lebanon, where it has constructed a number of major roads and undertaken reconstruction work.

In April 2007, the company reported winning a contract for the design, engineering, supply and execution of the restoration of a runway at King Khaled air base. The contract is worth SAR66.2mn (US$17.65mn).

As reported in September 2006, Almabani General Contractors was the lowest bidder for the contract to build a new runway and taxiway at Prince Sultan military airbase at Al-Kharaj, about 100km from Riyadh. Almabani submitted a bid of SAR135mn (US$40mn), while the only other bidder, the Saudi Bin Laden Group, submitted a bid of SAR233mn (US$62mn). The 18-month contract involves the construction of a 4km runway with a width of 60m, a taxiway and related facilities.

In July 2006, Almabani received the letter of award from the GACA for the execution of the KAIA airfield facilities. The SAR902mn (US$240.53mn) project is to be completed within three years.

Almabani General Contractors

Address Almabani General

Contractors Riyadh Office Malaz District PO Box 4339 Riyadh 11491 Saudi Arabia

Tel: + 966 (1) 403 3701

Fax: +966 (1) 405 7828

Web: www.almabani.com.sa

Key Statistics Year established: 1972

Key Personnel

General Manager: Nahme Y Tohme