Saudi government could cancel $13.3bn projects in 2017

At least $13.3bn of government projects are at risk of being cancelled in Saudi Arabia this year because of fiscal pressures and changing government priorities, Zawya Projects reported, citing a study by consultants Faithful+Gould.

The total value of project awards for 2017 is forecast at $27bn, and could rise to $32bn if the Mecca Metro project, which was originally expected to be awarded in 2016, goes through this year.

“If Mecca Metro is awarded, which I believe will be the case in 2017, admittedly slightly downscaled, then it’s 60 per cent growth year-on-year,” David Clifton, regional development director at Faithful+Gould, told Zawya Projects, a Thomson Reuters service.

The figures suggest $20bn in contracts were awarded last year, compared with $35.5bn in 2015.

Faithful+Gould’s 2017 forecast assumes a major infrastructure project will be awarded by “exception or royal decree”, according to the firm’s Construction Intelligence Report on Saudi Arabia, which was released on Tuesday.

It referred to expenditure under the 2017 state budget that appears to make room for a big new infrastructure scheme.

“I would expect that another major or semi-major government scheme will be singled out for award,” Clifton said, predicting a reprioritising across five major ministries in the first half of 2017.

The report said about 20 per cent of Saudi Arabia’s long-term projects pipeline of $820bn, or $168bn worth of projects, could be at risk of being cancelled because of the reprioritisation programme.

“2017 will see at least a SAR50bn cut-back due to the reprioritisation programme because of fiscal pressures and realigning the project pipeline to national priorities,” Clifton said in an emailed response to questions.

“I don’t expect 2017 to be very easy” for construction firms, he said. “Backlogs are shrinking and staff have been laid off. I think 2017 is still a ‘batten down the hatches’ kind of year, and 2018 is very much the year to commence recovery.”

The Mecca Metro award is “highly likely” because it is a priority project with a strong business case, Clifton said, adding that he believes the main question is how the project will be financed.

“The question really remains around the potential to switch the scheme from central government funding to a type of PPP (public-private partnership) model or bringing other forms of finance to the table, for example main contractor funding.”

The value of Saudi contract awards has varied widely year-on-year over the past eight years as state spending ebbed and flowed, with a peak in 2011 of $75.9bn, according to the firm’s data.

Following the sharp drop in oil prices, the government and private companies have taken a much more conservative stance.

“I expect social infrastructure to be prioritised along with significant alternative finance investment opportunity within the power and water sectors, which are intrinsically linked in the Middle East due to the power-hungry requirement to desalinate water,” Clifton said.

The report said the risk facing the government’s long-term projects could be mitigated by the planned creation of a projects oversight body.

Under this plan, the National Project Management Office (NPMO) and governmental Project Management Offices (PMOs) will be tasked with controlling government project funds and reducing inefficiencies.

“If this implementation generates time and cost savings of 10 percent, the government could negate the $168bn of projects at risk through efficiencies,” the report said.

Clifton said he expected an NPMO management contract to be awarded in the first quarter of 2017 and the design programme and rollout to take another 12 months.

Under the government’s economic development plans, vanity projects are being separated from essential schemes, Clifton said. He cited the cancellation of 10 football stadiums that Saudi Aramco had been tasked with developing in major cities around the country.

“In 2017, I would expect critical analysis of the nuclear schemes and major heavy rail and metro projects in cities other than Mecca and Medina,” Clifton said.

“Furthermore, with the global political unrest, significant schemes such as the $100 billion KCARE nuclear power stations must be called into question.”