(MENAFN - Arab News) The increasingly accelerated government and private financing has been driving the fast pace of execution of Saudi Arabia's infrastructure projects.
Even as this is in progress, there is intense pressure from the Kingdom's rapidly growing population to seek adequate physical and social infrastructure services.
The National Commercial Bank, which underlines this in its new report, says approximately SR230 billion worth of infrastructure projects are expected to be completed by 2014. These were among the projects executed between 2008 and Q3, 2013.
The high value of completed projects is mainly attributed to the value of contracts awarded in the infrastructure sector during 2011-2012. Contracts worth nearly SR288 billion were awarded during the period.
Projects normally have an execution period anywhere from six months to three years but larger, more complex projects can go beyond that average time frame. Similar to 2011, 2013's contract awards in the infrastructure sector witnessed an impressive growth.
The SR210 billion contract awards through the first three quarters of 2013 illustrate that expenditure in the infrastructure sector remains strong and is foreseen to continue over the medium term.
John Sfakianakis, chief investment strategist at Masic in Saudi Arabia, said: "Without proper infrastructure it will be hard for any country to reach its full potential and compete. The level of expenditure in the infrastructure sector over the past couple of years has put the Kingdom in a position to provide its citizens with improved road networks, water distribution, power extensions and airport/rail services."
He said the use of public private partnerships (PPP) as a financing alternative had been extensively used in the United States and Europe with a wide degree of success. However PPPs are fairly new to the MENA region and are now in the beginning stages of implementation.
"The government's control over all infrastructure entities places a heavy burden on itself to meet the needs of its citizens. PPPs are a favorable option for financing these entities as the private sector shares the benefits and risks of the project, while performing part of a government's function. When objectives have been met, private entities enjoy compensation by way of service tariffs and/or through government budgets," Sfakianakis told Arab News.
The Kingdom's ninth five-year development plan has placed a major emphasis on enhancing and growing its infrastructure capabilities. The SR1.4 trillion budget will be allocated across all sectors with a particular emphasis on advancing the standard of living, increasing employment and improving the development of all its sectors.
Approximately SR400 billion will be spent on water, power, transportation and municipal and housing services.
Paul Gamble, director: Sovereign Group at Fitch Ratings, said: "Improving infrastructure has both short and long-term gains to an economy. Over the short term it is a source of employment and revenue not just for construction companies, but for the suppliers of all raw materials and associated services. Over the long term, an improved infrastructure can enhance productive capacity throughout an economy. For example, better roads will allow goods and people to be transported quicker and at therefore at less cost, generating savings for all companies."
The level of construction spending plays a critical role in identifying the level of growth within the infrastructure sector. Construction spending represented 4.4 percent of nominal GDP during 2012 and has been fairly steady over the past five years reflecting that the global economic slowdown played a significant role in the declining growth of construction spending as a result of numerous project delays and cancellations. Hence, construction spending slipped from 9.2 percent of nonoil GDP in 2008 to 8.4 percent in 2010.
"Infrastructure expansion is critical as the economy diversifies and the population expands. The growing demand for physical infrastructure in the coming years will necessitate new ways of funding it and important initiatives have already been launched in this regard. Sukuk funding has been used for airport projects and is an option for many other areas.," Jarmo T. Kotilaine, a regional analyst, said.
He said: "Some of the economic cities are being built by listed companies. There are a growing number of initiatives toward public-private partnerships. Involving more private capital in infrastructure development will reduce the burden on the government budget but will also offer attractive long-term investment opportunities for institutions and individuals alike."