Over the past few years, Saudi Arabia has been putting its vast oil wealth to work, upgrading its limited infrastructure in a bid to cater to the rising demand for office space, housing, schools and healthcare.

To most people, the name Saudi Arabia is synonymous with the word oil. Home to the world’s second largest oil reserves, the resource accounts for more than 95% of the country’s exports and 70% of government revenues; it has shaped the development of the country's economy since its was discovered in the eastern Al-Hasa region in 1938.

From one of the poorest countries in the world, reliant on limited agriculture and revenues from pilgrims, the discovery of its considerable oil wealth fast translated into economic prosperity. By 1976, Saudi Arabia had become the largest oil producer in the world. But while extremely wealthy, the development of the broader economy had failed to keep apace.

From the ground up

Since the mid-2000s, however, Saudi Arabia has embarked on a focused drive to invest its considerable oil wealth into creating a sustainable and diversified economy.

In August 2010, Riyadh unveiled a new five-year development plan that envisioned SR1444bn-worth ($384bn) of investment in upgrading its infrastructure. The plan involved the construction of four new economic and industrial cities, 3900 kilometres of railways, along with a series of targets such as opening 117 hospitals and 750 primary health centres, as well as adding school places for 5.3 million pupils.

Saudi Arabia's non-oil economy grew by 8% in 2011, according to figures from the International Monetary Fund, reflecting the fact that infrastructure and construction are now starting to play a tangible role in contributing to economic growth.

“Riyadh is a huge construction site – lots of infrastructure needs to be updated. There has been a huge growth in infrastructure expenditure over the past 10 years,” says Fahad Alturki, a senior economist at Riyadh-based Jadwa Investment. “In 2002, SR30bn was spent on infrastructure. By 2012, this figure had increased to SR275bn. So this means that government spending has increased, on average, by 25% over the past 10 years.”

Saudi Arabia’s Ninth Development investment Plan

Boom times

If there is any country that can afford such a substantial investment in its future, then it is Saudi Arabia. Awash with petrodollars, in 2011 its total exports of goods and services topped $355bn, some 1.6% of the world total, while its imports were less than half that figure.

“We need to expand the absorptive capacity of our economy so we are focusing on the expansion of infrastructure projects such as ports, airports and railways,” says Abdulrahman Al-Hamidy, vice-governor of the Saudi Arabian Monetary Agency, the country’s central bank.

According to the Business Optimism Index compiled by National Commercial Bank – the country’s largest bank by asset size – in the first quarter of 2013, for the sixth quarter in a row, Saudi Arabia’s construction sector had the most optimistic outlook among the various sectors surveyed.

Business Monitor International, a research house that specialises in country and industry research, forecasts a robust 7.5% growth in Saudi Arabia's real industry sector in 2013. This forecast takes into account the increased number of contracts awarded both in 2011 (when there was a 140% annual increase) and in the second half of 2012 (when there was a 50% annual increase), as well as higher government spending going towards social projects, which was pledged in order to appease large swathes of the country's 27 million population who had staged uprisings during the onset of the Arab Spring in early 2011.

In March 2011, King Abdullah bin Abdulaziz Al Saud announced a $67bn spending package to build 500,000 affordable housing units, in a bid to tackle the country's severe housing shortages. Countrywide, Saudi Arabia will require an additional 2 million housing units by 2015, and, in total, the government has committed itself to spending more than $89bn on building new homes.  

More than 90% of construction activity in Riyadh over the past two years has been for residential or commercial office buildings. Significant infrastructure is also under way to cater to the growing demand for education and healthcare, accounting for sizeable portions of the 2012 and 2013 budgets.

The government earmarked SR204bn for education in its 2013 budget, which includes plans to build 610 new schools, in addition to the 3200 already under construction. Meanwhile, Saudi Arabia has launched hundreds of healthcare projects, at a cost of SR12bn, with the aim of trebling the number of state-run hospital beds to 60,000 in the next few years.

On track

The landmark infrastructure project currently under way in the country is the new mass transit network in Riyadh. Saudi Arabia's capital city is expecting to see its population grow from its current 5.3 million to 8.3 million by 2030. Already congested, the government is well aware of the infrastructural pressures exerted by significant traffic congestion on the roads of the city, and in response has conceived the Riyadh Public Transport Project that will become the world’s largest public transport system. 

“Once fully operational, the public transport system will provide the city, its economy and its people with a highly sophisticated, sustainable transport infrastructure, supporting economic diversification and considerable job creation for local communities,” says a spokesperson for the Arriyadh Development Authority (ADA).

In July 2012, four consortia comprising local and international construction companies were shortlisted for the work. Three consortia submitted tenders in February 2013, and the ADA is planning to formally announce the appointment of partners by September 2013. The project is being entirely funded by the Ministry of Finance.

The project will comprise six metro lines that will span a total length of 175 kilometres, as well as a city-wide rapid transit bus and park-and-ride service. More than 60km of the new system will be underground and 80km elevated. The system will connect Riyadh’s airport with other parts of the city, including the new King Abdullah Financial District that is due for completion in 2014. Served by its own $241m 3.6km monorail system, the $7.8bn development will bring together all its existing banking and financial institutions in a single location spread over 3.5 square kilometres in the Saudi capital, with a built-up area of 1.6 square kilometres.

The district will become the new headquarters of the Saudi Arabian stock exchange (Tadawul) and the Capital Market Authority (CMA) in a 358-metre-high tower in the heart of the project. The project also includes a financial academy for 5000 students, as well as hotels and restaurants.

Cities of the future

Further to the new financial district, there are also four economic cities currently being built in Saudi Arabia that comprise clusters of commercial, industrial and residential development. Each city will be developed around at least one globally competitive industry that will serve as an anchor and a growth engine, around which other businesses will locate. Two of them are economic cities – each valued at $27bn – with one located in Rabigh and another in the south-west city of Jazan.

The most sophisticated of the cities will be the flagship King Abdullah Economic City (KAEC) in the western coastal town of Rabigh. When finished, KAEC will cover an area the size of Washington, DC, and will specialise in tourism, logistics, energy, transportation and manufacturing. It plans to house 2 million people and employ 1 million. To date, it has created 10,000 jobs. KAEC's industrial zone will cover an estimated 63 square kilometres and the seaport a further 13.8 square kilometres. With a capacity of more than 10 million twenty-foot equivalent units of containers per year, the seaport will be the largest in the region.

Jazan Economic City's key focus will be on heavy industry and agribusiness. Covering an area of 100 square kilometres, it plans to employ 500,000 people and house 250,000.

The $8bn Prince Abdulaziz bin Musaid Economic City in the north-west city of Hael will serve as a new hub for logistics in the region – focusing on logistics, agribusiness, minerals and construction materials. The $7bn Knowledge Economic City, near to the holy city of Medina, will be centred on knowledge-based industries with an Islamic focus and services. Covering an area of 4.8 square kilometres, it will be home to 200,000 people and plans to generate 20,000 new jobs.

The initial plan was that by 2020, the cities would contribute $150bn to GDP, and be home to a total of 4.5 million people. But with less than seven years to go, rapid progress will need to be undertaken to meet such ambitious targets and industry observers are sceptical that it can be achieved.  

Further developments

Significant infrastructural developments are also taking place in the power and water sectors. In May 2011, General Electric (GE) Energy won a $500m contract to undertake a 480 megawatt (MW) expansion of Saudi Electric Company's (SEC's) PP10 plant. In September 2012, SEC signed a fresh deal with GE to expand the PP12 installation with state-of-the-art combined-cycle gas-powered turbines, bringing an extra 2000MW to the capital by 2015.  

The accelerated growth of the capital over the past five years has also spurred major investments in sewage treatment and waste water disposal – today, there are more than 100 new projects under way to upgrade and expand the system.

While the country’s infrastructure is developing at an increasingly break-neck speed, many are quick to point out that it cannot afford to slow down given the gravity of the challenges facing the country, not only in terms of diversifying the economy away from oil but also rectifying the economic imbalances and creating jobs.

The non-oil sector of Saudi Arabia's economy accounts for just 20% of GDP today and it is estimated that 5 million new jobs are needed by 2020. With 70% of the population below the age of 30 years and 45% below the age of 15 years, Saudi Arabia’s population dynamics either present an enormous opportunity or challenge, depending on how successful the country is at implementing the raft of projects currently under way and continuing its drive to diversify the economy in the coming years. 

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