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The ‘Giga-Projects’ of Saudi Arabia

The ‘Giga-Projects’ of Saudi Arabia

The ‘Giga-Projects’ of Saudi Arabia

Stuart Baird, Driver Trett Middle East and Africa Regional Director asks what are the challenges Saudi Arabia face in delivering some of the iconic giga-projects announced as part of the Vision 2030?

Saudi Vision 2030 was announced by Crown Prince Mohammed bin Salman in 2016 and seeks to transform Saudi Arabia, to diversify the largest economy in the Middle East away from its historic dependence on oil. The ambitious long-term development plan will aim to attract significant investment to the private sector, open up the economy and reduce bureaucracy to attract foreign direct investment.

At its core, the plan sets out the strategy to increase non-oil revenue to more than US$160bn by 2020 and US$266bn by 2030 from a baseline of US$43bn in 2015. The diversification efforts are expected to benefit key sectors such as tourism, transportation and logistics, high-value manufacturing, defence industry, renewable energy, and mining. 

The development of these sectors will also include extensive construction of roads, railways, ports, airports, power plants, factories, mines, and supporting infrastructure. In January 2019, it was confirmed that Saudi Arabia will seek to attract US$429bn in private investment over a ten-year period to fund the infrastructure drive which will include five new airports and an extensive high-speed rail network.

Some of the iconic giga-projects announced as part of the Vision 2030 include NEOM Smart City, Red Sea Resort Project, Qiddiya Entertainment City and Amaala Red Sea Riviera:

  • NEOM Smart City was announced in 2017 and is located on the Red Sea to the Northwest of Saudi Arabia bordering Egypt and Jordan. The development will cover a total area of 26,500km2 and will stretch 460km along the Red Sea coast with a reported estimated construction cost of US$500bn. Construction work commenced in 2019 and the first phase is scheduled to be completed in 2020.
  • The Red Sea Resort Project was also announced in 2017 and has been billed as one of the world’s most ambitious tourism and hospitality developments located on the Red Sea. The project will be developed over 28,000km2 and will consist of an archipelago of more than 90 unspoiled islands, inland resorts, marinas, luxury residential properties, recreation facilities and a commercial airport to serve the destination. The first phase of the project is scheduled for completion in 2022.
  • Qiddiya Entertainment City is located 40km from Riyadh and will be a fully self-contained recreational and entertainment city that, when completed, is expected to be the world’s largest entertainment city, surpassing Walt Disney World in Florida. The development will consist of 300 different entertainment and recreational facilities and is expected to contribute around US$4.7bn to the Kingdom’s GDP by 2030 and provide 57,000 jobs for the local economy.
  • The Amaala Red Sea Riviera will focus on ultra-luxury wellness tourism developed over 3,800km2 and will consist of 2,500 hotel rooms, 200 retail establishments, an art gallery, marinas, 700 villas, and a dedicated commercial airport. The project was announced in 2018 with phase one expected to be completed in late 2020.

Despite the iconic nature of the giga-projects and the glamour associated with the well-publicised announcements, the actual execution and delivery of the giga-projects will come with significant challenges which Saudi Arabia has very recently experienced and continues to experience.

As an example, the King Abdullah Financial District (KAFD) in Riyadh commenced in 2006 and was originally due for completion in 2015. The development originally consisted of 59 high-rise towers with an overall built-up area of 5.3km2 and an estimated construction cost of US$7.8bn. Fast forward four years and the project remains incomplete with the current construction cost estimates reported to be in the region of US$10bn, a cost overrun of US$2.2bn (28%).

Similarly, in 2014 construction of the Riyadh Metro commenced which consisted of a 176.7km six-line metro network with 85 state of the art stations and a development cost of US$22.5bn. Although the original completion date for the project was in 2018, it was announced in March of that year that due to project delays, the revised date for the Metro being fully operational would be 2021. The final development cost is yet unknown.

The delays and cost overrun experienced on the two giga-projects mentioned can be attributable to a variety of factors some which are, to a large degree, avoidable such as significant changes to scope and a failure to properly administer the contract. Other factors are however unavoidable such as the global financial crisis, or the prolonged and severe drop in oil prices which created a budget deficit in Saudi Arabia for six consecutive years between 2013 to 2019.

Although delays and cost overruns on major projects are not at all unique to Saudi Arabia, with the ambitious plans for the simultaneous development of a number of the pioneering giga-projects under the Saudi Vision 2030, this does present a unique set of circumstances and challenges for the Kingdom to manage effectively. 

These challenges are further compounded when consideration is given to the existing giga-projects currently under construction including KAFD (US$10bn), Riyadh Metro (US$22.5bn), King Abdullah Economic City (US$100bn), Jeddah Tower (US$1.2bn), Haramain High Speed Railway (US$16bn), King Abdulaziz Airport Expansion (US$3.8bn), Grand Mosque – Holy Haram Mosque Expansion (US$21.3bn), Dahiyat Al Fursan New City (US$20bn) and Marjan & Berri Oil Field (US$18bn) to name a few!

There are however encouraging signs that Saudi Arabia is serious about addressing the issues of delay and cost overrun on its public projects. In 2015, the Government established The National Project Management, Operation and Maintenance Organisation (known as “Mashroat” or “NPMO”) with a mandate to transform Government Ministries and Entities into efficient and effective project delivery organisations.

In 2017, the Government appointed a well-established international engineering, construction and project management company to support the implementation and operation of the Mashroat programme in order to effectively deliver the complex giga-projects, in line with the Saudi Vision 2030 plan.

Yamin Shihab, Vice President of MHPM_Driver in the Middle East, confirms the importance of Mashroat in the Saudi Arabian construction market. “The KSA real estate and construction market was never to be underestimated, however a lack of transparency and governance in the award and management of Government contracts restricted international consultancies and contractors from investing in the Kingdom. Now, NPMO has provided a framework that allows consultants and contractors to clearly understand both the procurement and delivery methodology.”

Also, in August 2019, Saudi Arabia published the new Government Tenders & Procurement Law which will apply to all government projects from November 2019 and will replace the existing Law enacted in 2006 and currently used across all public projects in the Kingdom.  

Some significant changes in the new Law include the introduction of arbitration as a method of resolving construction disputes with Government Ministries and Entities which was previously prohibited unless expressly agreed by the President of the Council of Ministers.  This will allow both the Government Ministries and Entities and contracting entities to have more control over the dispute resolution process in the Kingdom including the ability to select experienced arbitrators with a high degree of technical expertise.

In addition, the new Law will now allow contractors to submit claims for additional compensation, to be heard and fully assessed during the execution period of a contract rather than after final handover of the works as per the existing Law. 

These proposed changes alone represent a clear benefit to contractors who, based on our experience working in the Kingdom, have grown more and more frustrated with the rigid application of the existing Law on major projects, and the associated barriers that prevent an equitable assessment of entitlement to additional compensation in a timely manner and the generation of much needed cashflow.

Furthermore, the above changes will also bring significant benefit to the Government, including having more clarity about the actual cost to complete a project when a claim event has occurred, more productive relationships with contractors due to the early resolution of claims, and lower risk premiums in future tenders.

Although Saudi Arabia will continue to experience challenges relating to the planning and execution of its diverse portfolio of giga-projects over the next ten years, the steps it has made with the establishment of Mashroat and the new Government Tenders & Procurement Law will serve as the key building blocks towards the broad implementation of an international standard of project management across the Kingdom.

Articles  /  Global  /  Middle East

Articles  /  Global  /  Middle East

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