Confidence in Saudi giga-projects is rising and so are its challenges

First appeared on Construction Week

• Maarten Wolfs, Partner  Deals Infrastructure & Government Leader at PwC Middle East
• Omar Raza, Partner Infrastructure Finance at PwC Middle East

As part of the Kingdom of Saudi Arabia’s  transformative Vision 2030 programme, several landmark giga-projects were established to increase non-oil revenue to more than SAR 417 billion by 2023 as part of Saudi’s diversification strategy.

Saudi Arabia, the GCC’s largest economy, has ramped up tendering on its Public Investment Fund (PIF) giga-projects  programme, particularly for NEOM, Red Sea Global, Diriyah Company, Qiddiya, and ROSHN. Along with dozens of other major projects such as AlUla, New Murabba and King Salman International Airport, all of which are expected to drive year-on-year growth across the infrastructure and construction sectors, accelerating national in-country value and imparting new technologies.  

Since June 2021, more than a dozen major contract packages have been awarded in NEOM alone, as the estimated SR 500 billion plus development of the futuristic, zero-emissions city is now entering full-scale construction. PIF, Saudi Arabia’s sovereign wealth fund, also plans to invest SR 1 trillion in new projects by 2025 – highlighting the growth potential for capital projects and infrastructure sector in the Kingdom. 

The simultaneous development of multiple projects, from the design to build phase, is intensifying the demand for talent, technology and infrastructure solutions. The construction and infrastructure industries in Saudi Arabia are now being tasked to deliver on accelerated timelines using advanced technologies and new methods to manage the rising complexity of project delivery. Based on our 2022 Middle East Capital Projects and Infrastructure survey, respondents recognised that a step-change in skills and organisational capacity is needed in order to reconfigure their business to service the growing demand. 

The top three areas of urgency are hiring and retaining high-skilled employees (48%), developing accurate cost estimates and forecasts for their projects (47%), and creating suitable governance and risk management processes (37%). Organisations have also identified other areas that need to be modernised. These include the need to increase supply chain capacity and performance (34%), to upgrade technology and tools (33%), as well to improve their contracts and procurement strategy (33%) and secure the required project finance (31%).

The five leading opportunities for enhanced project delivery are:

1. Greater access to skilled resources and management capabilities: Effective and skilled resources and management capabilities will support better  planning, mitigation of risks, and on-time delivery - enabling  growth and successful project delivery. 
   
2. Developing accurate cost estimates: Due to the capital-intensive nature of the sector, accurate cost estimates can help avoid serious consequences such as project cancellations, delays, decreased scope, and increased financial risks for both project owners and contractors .
   
3. Enhancing governance and risk processes: Given the Kingdom’s rapidly expanding capital projects and infrastructure sector, the implementation of governance and risk processes needs to keep up with the pace of development. Establishing effective oversight and adequate risk assessments can help mitigate scope creep, cost overruns and even project failures. 
   
4. Planning for supply chain limitations: Supply chain pressures have increased with large-scale development programmes and multiple giga-projects running simultaneously. Project leads need to plan for increasing material and shipping costs, and reduced  availability of shipping companies that work with the Kingdom. 
   
5. Developing funding and financing plans: Successful project funding and financing plans consider the benefits of different capital channels and various financial structures and instruments to achieve desired objectives.

The recent survey also captured the sector’s optimism that is being driven by a surge in capital investment following the crisis of the pandemic. With sustainability at its heart, multiple investments have unlocked the capabilities of the nation’s promising sectors, especially tourism and culture, reducing the dependency on fossil fuels. The investment uptick has been regionwide but catalysed by the delivery timelines of PIF’s giga-projects.

While the era of the giga-project, is irrefutably bringing an unprecedented project pipeline to the industry, it is clear that to realise its growth potential, changes need to be made within the sector to take full advantage of these opportunities.

Private sector financing is rapidly emerging as a strategic source of funding to meet the investment demand of the project pipeline. Project financing plans are now critical to meet capital requirements, and will help increase the likelihood of delivering on time, delivering on budget and having access to private sector experience. The sheer scale of the ambition in the Kingdom will have to be delivered as a mix of domestic, Foreign Direct Investment (FDI) and public-private partnership financing structures, according to the latest Middle East Capital Projects and Infrastructure Survey. 

To maximise the growth potential within Saudi Arabia’s capital projects and infrastructure sector, those operating within it must respond positively to market dynamics. Companies must develop accurate cost estimation models, implement effective governance and risk assessments processes, while adopting new technologies and sources of capital to realise the success of the Kingdom’s promising giga-projects and reinforce their impact beyond the Kingdom’s borders.