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Saudi govt could shelve $13.3bn projects in 2017

DUBAI: At least $13.3 billion 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 $27 billion, and could rise to $32 billion if the Makkah Metro project, which was originally expected to be awarded in 2016, goes through this year. “If Makkah Metro is awarded, which I believe will be the case in 2017, admittedly slightly downscaled, then it’s 60 percent growth year-on-year,” David Clifton, regional development director at Faithful+Gould, told Zawya Projects, a Thomson Reuters service.

The figures suggest $20 billion in contracts were awarded last year, compared with $35.5 billion 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 yesterday. 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 reprioritizing across five major ministries in the first half of 2017. The report said about 20 percent of Saudi Arabia’s long-term projects pipeline of $820 billion, or $168 billion worth of projects, could be at risk of being cancelled because of the reprioritization program.

“2017 will see at least a 50 billion riyal cut-back due to the reprioritization program 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 Makkah 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 $75.9 billion, 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 prioritized 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 $168 billion 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 program 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.” – Reuters

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