All Time High Value Contracts

by Said A. Al Shaikh & Albara’a Alwazir | Apr 03, 2014

The value of awarded contracts moderated during the fourth quarter of 2013 to SR41.7 billion following an exceptional third quarter. The year 2013 concluded at SR293.4 billion, mark-ing an all-time high in terms of awarded contracts by value. Furthermore, 2013 surpassed 2012’s performance by 25 percent and also eclipsed the previous high of SR270.3 billion dur-ing 2011 by 9 percent. Anchor sectors were responsible for a ma-jority of the awards as the transportation (SR92b), power (SR48b), industrial (SR19b) and petrochemicals (SR18b) garnered significant contributions. Alternatively, the real estate sector (SR40b) played a prominent role as numerous contracts focusing on residential and mixed-use development were heavily targeted. As for Q4’13, the indus-trial and power sectors captured 71 percent of the value of awarded contracts.


The SR293.4 billion in awarded contracts during 2013 was largely attributed to the government’s continued expansion of capital expenditures. Consequently, the value of awarded contracts in 2013 recorded a remarkable 25 percent hike compared to 2012. The majority of the value of awarded contracts occurred during H2’13, accounting for 65 percent of awards. The water, education, healthcare and roads sectors witnessed sizeable spending by the government in the amount of SR45.7 billion as part of the targeted expenditures it has outlined in recent years. The private sector played a larger role in the development of projects. Accord-ing to the Ministry of Finance’s budget release statement, approximately 2,330 contracts worth SR157 billion were awarded by the government to the private sector.

The Construction Contracts Index (CCI) ended the year at 465.03 points in December after a volatile year, which saw the index dip down to 225.68 points in May all the way up to 494.09 in September. The CCI was relatively stable during Q4’13 as it reached 465.34 points in October followed by 470.25 points in November. The magnitude of spending in the construction sector has allowed the CCI to float above the 200 point mark for 32 consecutive months, dating back to May 2011.

The Northern Borders attracted 37 percent of awarded contracts by region, garnering the largest share. This was mainly due to numerous mega-projects being awarded for the develop-ment of the Waad Al Shamal Mining City by the Maaden/mosaic/Sabic joint venture. The Makkah region captured 25 percent of the awarded projects as the power sector played a leading role. The Eastern Province secured 9 percent of the awarded projects as a majority of the contracts were in the industrial, petrochemical and oil & gas sectors. The Riyadh region was relatively quiet with only 6 percent in awarded con-tracts.

October

The value of awarded contracts during October reached SR11.3 billion as the power and residential real estate sec-tors captured the largest shares. There were SR4.2 billion worth of contracts in the power sector, which were all awarded by the Saudi Electricity Company. The contracts consisted of constructing substations across various parts of the Kingdom as part of SEC’s long-term expansion strategy.

The residential real estate sector witnessed approximately SR4 billion worth of contracts, which were awarded by the Ministry of Housing. These contracts were awarded in vari-ous regions within the Kingdom as part of the government’s plan to complete the construction of 500,000 homes. Approximately SR2.1 billion worth of contracts were awarded in the industrial sector. A notable contract was awarded by the Southern Province Cement Company (SPCC) to National Building Material Company (CNBM) in the amount of SR713 million. CNBM will construct a sec-ond production line at the Bisha cement plant. The plant is designed for a turnkey full production line with a capacity of 5,000 tons of clinker per day.

November

November's value of awarded contracts was propelled by the industrial and power sectors. Approximately SR6.6 bil-lion in industrial contracts were awarded. Three contracts were awarded by the joint venture between Maaden, Mosaic and Sabic for the development of the Waad Al Shamal min-ing City in the Northern Borders. The largest of the three contracts was awarded to Hanwha in the amount of SR3.8 billion. As part of the fifth package of the project, Hanwha will construct a phosphate balance stream plant. The project is expected to be completed by the second quarter of 2016. The second contract was awarded to Intecsa Ingenieria Industrial S.A. in the amount of SR2.3 billion. The contracts calls for the construction of a diammoniam phosphate, nitro-gen, phosphorus and potassium plants.

The third contract pertained to senior executives housing that will see the construction of 400 units. Red Sea Housing Company was awarded the SR109 million project and is expected to be completed by the third quarter of 2014. Three contracts worth SR1.5billion were awarded in the power sector by SEC. The first two contracts were awarded in the amount of SR846 million for the enhancement of transmission capacity in Madina. The third contract was awarded to Middle East Engineering & Development Company in the amount of SR686 million for the construction of an overhead transmission line that will run from Rabigh to east Madina. The project is expected to be completed by second quarter of 2016.

A single contract was awarded in the oil & gas sector in the amount of SR938 million. The contract was awarded by Saudi Aramco to Bonatti as part of Aramco’s expansion plan of the Shaybah to Abqaiq pipeline with a capacity of 1,000 MBCD (thousand barrels of oil per calendar day). Bonatti will construct a 220 km pipeline. The project is expected to be completed by the third quarter of 2015. Approximately SR716 million worth of contracts were awarded in the residential real estate sector. A contract was awarded by Lebanon's Solidere to Al Saad general Contracting in the amount of SR401 million. The project consists of constructing the Golden Tower in Jeddah, which will have 48 floors, basement and three podium floors. The 219 meter long residential tower is expected to be completed by the fourth quarter of 2016. The second contract in the residential real estate sector was awarded by Emaar to Rezaik Al Jedrawi Company for the construction of the first phase of Al Waha Community at King Abdullah Economic City. The SR315 million project will consist of 650 residential units along with associated facilities. The project is expected to be completed by the fourth quarter of 2015.

December

The Industrial and power sectors continued their command in December as they tallied for SR15.2 billion of the total SR18.6 billion in awarded contracts. Within the industrial sector, three contracts worth SR8.6 billion were awarded as the Maaden, Mosaic and Sabic JV continued their expansion of Waad Al Shamal Mining City.

The largest contract was awarded to Hanwha once again and is valued at SR3.5 billion. Hanwha will be responsible for the construction of a phosphoric acid plant which is expected to be completed by the fourth quarter of 2016. The second contract was awarded to the joint venture be-tween SNC Lavalin and Sinopec for the construction of a sulphuric acid and power plant along with substations, transmission lines and additional associated facilities. The SR2.9 billion project is expected to cater to the entire industrial setup as part of the power supply infrastructure development. The project is expected to be completed by the fourth quarter of 2016.

The third contract was awarded to China Huanqiu Contracting & Engineering Corporation (HQCEC) in the amount of SR2.1 billion. HQCEC will be responsible for constructing a benefication plant, crusher, conveyor and mine infrastructure works. The project is expected to be completed by the fourth quarter of 2016. Within the power sector two contracts were awarded worth SR6.6 billion. The largest contract was awarded by the newly established Al Mourjan for Electricity Production Company (50/50 ownership interest by SEC and ACWA Power) to Samsung C&T Corporation in the amount of SR6 billion for the development of the Rabigh 2 Independent Power Project. The project will be developed on a BOO basis with a net generation capacity of 2060 MW, which will be delivered to SEC under the power purchase agreement. Electricity delivery is expected to last for 20 years beginning from the scheduled commercial operations date of June 2017.

The second contract in the power sector was awarded by SEC to Siemens for a turnkey project to build the 380 kV Hail 3 substation in the amount of SR660 million. Within the government sector, the Ministry of Interior awarded a SR2.5 billion contract to El Seif Engineering & Contracting. The contract covers the construction, operation and maintenance of 28 different types of facilities to be built at more than 50 locations throughout the Kingdom. The project is expected to be completed by the fourth quarter of 2016.

Outlook

The construction sector continues to benefit from extraordinary spending on a massive scale as the government continues its push towards meeting rapidly growing demand for services by its citizens while diversifying the economy away from the oil sector. This long-term challenge has necessitated heavy expenditures across all sectors of the economy. The total value of awarded contracts of SR293.4 billion clearly indicates that the government has and will continue the trend of placing significant injections into its capital expenditures. As mentioned by the Ministry of Finance in its 2014 budget release, significant expenditures are planned for the education & manpower sectors (SR210b), health & social affairs (SR108b), municipality services (SR39b), transportation & infrastructure (SR66b) and water, agriculture & manufacturing (SR61b). While we project the government’s capital expenditures to decrease from SR278 billion in 2013 to SR238 billion in 2014, the value of awarded contracts will continue in line with the activity that has been witnessed over the last few years.

*Said A. Al Shaikh is a Group Chief Economist and Albara’a Alwazir is a Senior Economist at Saudi Based National Commercial Bank

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