The value of awarded contracts reached SR35.3 billion ($9.4 Billion) during the fourth quarter in 2019 as the pace of construction activities continues unabated, according to a report by the US-Saudi Arabian Business Council (USSABC). Although the value of awarded contracts in Q4 2019 slumped by 26 percent compared to Q3 to reach $3.3bn (SR12.5bn). However, 2019 ended as the highest grossing year in terms of value of contracts awarded since 2015. On a year-on-year basis, the value of awarded contracts grew by 34 percent compared to Q4'18. The strong rebound in construction activities during 2019 resulted in approximately SR197.1 billion ($52.6 billion) in awarded contracts, marking an impressive 95 percent increase over 2018. The Kingdom's drive to enhance both physical and social infrastructure capabilities through numerous Vision Realization Programs (VRPs) was evident in 2019. These positive developments, which came to fruition in 2019 are expected to expand in the coming years to achieve the Kingdom's medium to long-term Vision 2030 targets. The SR35.3 billion ($9.4 billion) in awarded contracts during Q4'19 witnessed the real estate sector rise to the top spot after the oil & gas sector led the previous three quarters. The oil & gas sector dropped to second place, while the water sector surged to finish out the top three spots. These three sectors accounted for approximately 74 percent of all awarded contracts, as the oil & gas and real estate sectors maintained their top positions throughout 2019. Other significant contributors were the power, petrochemicals, and transportation sectors. USSABC's Contract Awards Index Performance Through Q4 2019 The USSABC Contracts Awards Index (CAI) reached 210.27 points at the end of Q4 2019, marking the seventh consecutive month the CAI has remained above the 200 point mark despite a slide during Q3 and Q4. The USSABC Contracts Awards Index (CAI) reached 210.27 points at the end of Q4 2019, marking the seventh consecutive month the CAI has remained above the 200 point mark despite a slide during Q3 and Q4. The CAI's 210.27 points indicated a 11 percent decrease quarter-on-quarter compared to Q3, but grew by 70 percent year-on-year compared to last year. The CAI decreased each month of Q4 as it reached 232.86 points in October followed by 214.98 points in November, and 210.27 in December. The spike in awarded contracts in June, which led the CAI to reach its highest total of 245.67 points in July aided in the recovery. The last time the CAI surpassed 200 points occurred in April of 2016. The CAI is poised to continue its streak above 200 points into 2020 as continued mega-projects will keep the CAI at elevated levels. The government's commitment to increase the number of mega-projects in 2020 compared to 2019 will bode well for contractors. Moreover, the growth of construction and contracting activities will provide growth opportunities in the non-oil sector through employment creation, increased demand for building materials, and access to financing (SMEs in particular). Overview of Awarded Contracts By Sector During Q4 2019 Real estate emerged as the top sector in the value of awarded contracts during Q4'19. The real estate sector has been the recipient of numerous contracts throughout 2019, with a particular emphasis on the residential market. Of the SR12.1 billion ($3.2 billion) in awarded contracts in the real estate sector, the residential market accounted for approximately 94 percent or SR11.3 billion ($3 billion) of the total. For 2019, the real estate sector garnered approximately 16.5 percent or SR32.5 billion ($8.7 billion) of the total SR197.1 billion ($52.6 billion) in awarded contracts. This total ranks as the second highest result in the CAI's history for the real estate sector, preceded only by 2015's total of SR81.3 billion ($21.7 billion). The oil & gas sector generated the second highest value of awarded contracts during Q4'19 with SR7.7 billion ($2 billion). This marks the first quarter in 2019 that the oil & gas sector did not register the highest value of awarded contracts. However, the oil & gas sector had the highest value of awarded contract in 2019 by a wide margin, netting approximately 43 percent or SR84.2 ($22.5 billion) of total awards. Having already surpassed its previous high of SR60.5 ($16.1 billion) set in 2009 by Q3'19, the oil & gas sector achieved the second highest value of any sector since 2008 when the transportation sector attracted approximately SR105.8 billion ($28.2 billion) in 2013.The water sector climbed to the third position with approximately SR6.3 billion ($1.7 billion). This brought the total value of awarded contracts for the water sector in 2019 to SR21.9 billion ($5.8 billion), accounting for 11 percent of the total. It also marks the highest value of awarded contracts ever for the water sector since the CAI's inception. Overview of Awarded Contracts By Region During Q4 2019 The Makkah region dominated the awarded contracts in Q4'19 as it garnered the highest share for the first time in 2019. The Makkah region's SR14.6 billion ($3.9 billion) or 41 percent share of awarded contracts was mainly attributed to a number of mega-projects that were awarded in the oil & gas and real estate sectors. Those two sectors accounted for 48 percent and 38 percent, respectively of total contracts awards. The oil & gas sector had one contract in the Makkah region, which was awarded by Saudi Aramco to Samsung Engineering in the amount of SR6.9 billion ($1.9 billion) for the construction of a gas storage facility. The Ministry of Housing awarded two contracts the involve the construction of approximately 25,000 residential units as part of the Kingdom's plan to provide affordable housing to its citizens. For the year, the Makkah region has contributed approximately SR33 billion ($8.8 billion) or 17 percent of the total value of awarded contracts. The Riyadh region contributed approximately SR9.3 billion ($2.5 billion) or 26 percent of the total awarded contracts during Q4'19. The water, power, and real estate sectors contributed SR3.4 billion ($907 million) or 37 percent, SR3 billion ($812 million) or 33 percent, and SR2.6 billion ($682 million) or 28 percent, respectively. For the year, the Riyadh region accounted for approximately SR24.6 billion ($6.6 billion) or 12 percent of the total value of awarded contracts. The Eastern region garnered the third highest value of awarded contracts, accounting for SR7.5 billion ($2 billion) or 22 percent for Q4'19. The Eastern region previously dominated the last three quarters as numerous mega-projects in the oil & gas sector was the largest contributor. For the year, the Eastern region accounted for approximately SR107.6 billion ($28.7 billion) or 55 percent of the total value of awarded contracts. Breakdown of Awarded Contracts Across Top Performing Sectors Real estate The real estate sector led all other sectors during Q4'19 with SR12.1 billion ($3.2 billion) after placing second the last two quarters. The real estate sector during Q4'19 grew by 185 percent y-o-y as the residential real estate market was the largest contributor within the real estate sector. The residential real estate market contributed the largest share with 94 percent, while commercial and mixed-use real estate contracts rounded out the remaining 6 percent. On an annual basis, the real estate y-o-y growth in 2019 compared to 2018 increased by 39 percent. The Ministry of Housing was the biggest awarder of contracts as it contracted numerous projects to local and international contractors to construct affordable housing units across the Kingdom. The largest contract in the real estate sector was awarded by the Ministry of Housing to Laseef Alfajr for the construction of residential units in Jeddah during October. The SR4.5 billion ($1.2 billion) call for Laseef Alfajr to construct 21,302 dwellings, of which phase one will include 9,502 residential units. The development spans over 1.41 million square meters and will include playgrounds, mosques, and supporting facilities. The project is expected to be completed by the fourth quarter of 2025. Two contracts in the amount of SR2.4 billion ($640 million) were awarded by the Ministry of Housing. The first occurred in October and was awarded to Ansab for the development of a housing complex in Riyadh. The project will be developed on 2.7 million square meters of land and will consist of 5,018 townhouses and 572 apartments units. Ansab will also construct 14 mosques, 8 schools, 14 gardens, four health centers and supported facilities. The project is expected to be completed by the fourth quarter of 2023. The second SR2.4 billion ($640 million) contract was awarded to Saudi Pan Kingdom in November to develop a multi-phase residential project in Al-Ahsa in the Eastern Province. The total expected number of constructed dwellings is 4,380 units. Phase one will consist of 2,945 units; 2,376 townhouses, 568 villas, three mosques, 8 schools, three gardens, and parking facilities. Phase two will consist of 1,435 units along with supported facilities. The project is expected to be completed by the fourth quarter of 2023. Oil & Gas The oil and gas sector had only three contracts in Q4'19 that were awarded by Saudi Aramco totaling SR7.7 billion ($2 billion). The value of awarded contracts in Q4'19 jumped by 582 percent y-o-y compared to Q4'18. The total value of awarded contracts for 2019 climbed to SR84.2 billion ($22.5 billion) compared to 2018, marking a 493 percent increase over 2018, which totaled SR14.2 billion ($3.8 billion). Saudi Aramco expanded its investments in the oil & gas sector across all phases with an emphasis on infrastructure enhancements, improving the piping expansion and efficiency of oil & gas, and increasing its offshore capabilities. The largest contract awarded by Saudi Aramco in December was to Samsung Engineering in the amount of SR6.9 billion ($1.9 billion). The project calls for Samsung Engineering to construct an underground sales gas storage facility with a capacity of 1,500 million standard cubic feet per day (MMSCFD) in the Makah region. The scope of the work will include construction of a gas injection facility with booster and injection compressors, construction of a gas reproduction facility with reproduction compressors and slug catchers, and associated facilities. The facility is expected to be expanded up to 2,000 MMSCFD. The project is expected to be completed by the third quarter of 2023. The second largest contract was awarded by Saudi Aramco in November to Italy's Sicim for the construction of a oil pipeline project from Jizan to Abha. The SR450 million ($120 million) project involves the infrastructure development related to installing a 91.4 kilometer 16" diameter oil pipeline along with associated facilities. The project is expected to be completed by the second quarter of 2021. Water The water rounded out the top three sectors with awarded contracts valued at SR6.3 billion ($1.7 billion). The Ministry of Environment, Water, and Agriculture, Saline Water Conversion Corporation (SWCC), and the Saudi Water Partnership Company (SWPC) were the main awarders of contracts. For 2019, the total value of awarded contracts in the water sector reached SR21.9 billion ($5.8 billion). This marks a 56 percent increase over 2018, which totaled SR14.1 billion ($3.8 billion). The jump in water sector projects, which accounted for 11 percent of all awarded contracts in 2019 focused on expanding and developing the availability of fresh water to consumer and commercial enterprises. It also included numerous projects aimed at increasing sewage connections across the Kingdom along with needed associated plants. The largest contract was awarded in October by SWCC to Al Rashid Trading & Contracting in the amount of SR1.3 billion ($346 million). The project calls for Al Rashid Trading & Contracting to construct a 128 kilometer water transmission system from Jubail to other areas in the Eastern Province. The project involves establishing new pipeline destinations along with expanding current ones. The project is expected to be completed by the third quarter of 2022. The second largest contract was also awarded in October as SWPC awarded a SR600 million ($160 million) contract to a consortium of Spain's Cobra Instalaciones y servicios and International Water Distribution Company (Tawzea). The consortium will construct an independent sewage treatment plant in Taif. The plant is expected to have an initial capacity of 100,000 m3/day to be commercial by 2022 and 270,000 m3/day capacity after expansion by 2031. The current scope involves the first phase of the plant along with storage tanks, inlet/outlet channels, effluent treatment units, aeration tanks, filters, and associated facilities. The entire project is expected to be completed by the second quarter of 2031. Power There was a noteworthy contract in the power sector that was awarded in November by the Public Investment Fund (PIF) to a consortium consisting of Spain's Abengoa and China Energy Engineering Group. The SR2.7 billion ($732 million) contract calls for the construction of a solar photovoltaic plant in Sudair, Riyadh region. The scope of work includes construction of a 1000 MW solar PV plant along with the installation of solar panels, transformers, photovoltaic panels, transmission lines, and substations. The project is expected to be completed by the third quarter of 2021. Contract Awards Outlook "The value of awarded contracts witnessed a dramatic increase in 2019 after years of lower spending. Despite the pace of awarded contracts marginally slowing during Q4'19, the focus to improve the Kingdom's infrastructure coupled with growing private sector participation led to SR197.1 billion ($52.6 billion), the highest total since 2015", commented Albara'a Alwazir, economist at the US-Saudi Business Council. "Vision Realization Programs (VRPs) such as the Quality of Life Program, Housing Program, National Industrial Development and Logistics Program, Public Investment Fund Program and others have provided the investment boost needed to support the Kingdom's economy through targeted approaches. These VRPs have revived the construction sector as the magnitude of physical and financial commitments to achieve these targets were realized in 2019 and are expected to continue fueling the Kingdom's investments into the future," Alwazir continued. The construction sector's contribution to GDP rebounded into positive territory in 2019 after seeing negative growth the last three years. The Kingdom's construction sector's contribution to GDP rose to 4.6 percent compared to 2018, the highest growth rate since 2014. This growth is supported by stronger non-oil and private sector contribution to GDP, which grew by 3.31 percent and 3.78 percent, respectively. The non-oil and private sectors witnessed the highest growth rates since 2014 as well. The private sector has had an active role in 2019 as more projects are being awarded by private companies. Private sector participation is one of the core objectives under Vision 2030 and is expected to provide new employment opportunities especially as the pipeline of mega-projects are anticipated to continue unabated. While the Ministry of Finance anticipates lower budgeted capital expenditures in 2020 compared to the 2019 budget, actual spending in 2019 decreased to 16.4 percent of total expenditures. The decrease was mainly due to increased private sector participation which lifted some of the burden off of the government. Furthermore, the private sector also participated in the financing and allocation of working capital of new projects. Efficient project management controls also contributed to enhance the effectiveness of state spending on mega-projects. This is expected to continue in 2020 as capital expenditures are budgeted to reach SR173 billion ($46.1 billion) or 17 percent of total expenditures. The 2020 budget has allocated further spending across numerous sectors with the aim of improving the education, healthcare, municipal development, and domestic security. For example, the 2020 budget's allocation for the education sector of SR193 billion ($51.5 billion), which is the highest expenditure by sector calls for ongoing construction of 653 projects and the restoration of 184 schools. The health sector has earmarked SR167 billion ($44.5 billion) for 2020 for the construction 35 hospitals with a capacity of 10,750 beds in addition to the establishment of one national medical research center. The transportation sector is expected to add 2,000 kilometers of new roads, accounting for approximately a 3 percent increase in the Kingdom's road network. There are downside risks that are at play for 2020 which could impact spending in the construction sector. The oil sector has been under pressure since the coronavirus (COVID-19) spread beyond China, and has become a global pandemic. The 2020 budget assumed oil would trade closer to the $60 range per barrel, reflecting a rational estimate at the time. However, Brent crude is currently trading close to $30 as global demand, particularly in China, has waned. The recent announcement by the Kingdom to increase production in April to more than 13 million bpd and offering discounts to its trade partners will further decrease prices. That scenario coupled with the challenge of containing the coronavirus will be the biggest headwinds faced by the Kingdom in 2020. The pipeline of mega-projects in the Kingdom will continue to fuel the construction sector. However, the challenges posed by the COVID-19 pandemic and depressed oil prices will challenge the pace of awards. Giga-projects like the Red Sea Development Company, recently announced it will more than double the value of awarded contracts in 2020 from SR2.3 billion ($613 million) in 2019 to SR6.8 billion ($1.8 billion) in 2020. The Qiddiya Investment Company has recently announced its plans to accelerate the pace of activities to meet its 2023 grand opening. The SR19 billion ($5 billion) giga-project will develop more than SR8.5 billion ($2.3 billion) alone on general infrastructure, which will include utility networks, walkways, roads, and public facilities. The residential real estate sector as part of the Housing Program under Vision 2030 will also be a significant contributor in 2020. The Housing Program in 2020 is expected to increase homeownership among Saudi citizens to 60 percent, reduce the ratio between the average unit price and average annual per capita to 5 times, contribute to raising the local content to 63 percent, and raise mortgage opportunities by raising total mortgage loans to SR502 billion ($134 billion). Consequently the residential real estate sector will likely continue to be a major contributor to the total value of awarded contracts in 2020 as it did in 2019. — SG
