Saudi Arabia: The big build

To put the task facing Saudi Arabia as it updates its transport, telecoms and utilities infrastructure into perspective, you just have to take a look at the demographic challenge the kingdom has on its hands. The population of Saudi Arabia was estimated at a little more than 27 million in 2006, but by 2025 it is predicted that the figure will have increased to 40 million and by 2050 will be just shy of 50 million.

Add to that the desire to provide not just the same level of services to the growing population, but a higher standard of living, and you can see why infrastructure development in Saudi Arabia is on such a huge scale. Although the economy is strong, the risks of rising inflation and a need to control public spending mean the Saudi government is taking two new approaches to infrastructure and utilities. It is introducing new competitors to take on monopoly providers and asking the private sector to provide innovative and cost-effective solutions to meet its massive infrastructure needs.

Power and water
During the next 18 years Saudi Arabia will require an additional 50,000MW of electricity per year and an additional 170 billion cubic metres of water per day will be required by 2020. To meet this incredible demand the Saudi government has implemented a number of schemes to increase private sector investment in the power and water sectors.

In 2002 the Supreme Economic Council issued Resolution 5/23, setting out a process and structure for private sector independent water and power production projects (IWPPs). The first such project in a series of IWPPs tendered by Water and Electricity Company LLC (WEC), the $2bn (£1.02bn)-plus Shuaibah IWPP, achieved financial close in January 2006 and construction of the plant is well underway, with commercial production of power and water expected to commence in mid-2009.

Project and finance documents for the $1.9bn (£964.65m) Shuqaiq IWPP, the second WEC-tendered IWPP, were signed in late February. Shortly afterwards the Electricity and Co-generation Regulatory Authority (ECRA) issued the first permanent co-generation (power production and water desalination) licence to the project company for the Shuqaiq IWPP, signifying the growing maturity of the sector and the regulatory regime that will no doubt boost confidence and increase the already strong appetite for international lenders on future IWPPs.

Tender documentation for the third in the WEC series of IWPPs, the massive 3,000MW of electricity and one million cubic metres of water per day Ras Al Zour project, is expected to be issued shortly, and if this project follows a similar timeline to its predecessors it is likely to reach financial close in the second half of 2008.

In addition to the WEC-tendered projects, project agreements for the 2,750MW of electricity and 800,000 cubic metres of water per day Jubail IWPP, tendered by power company Marafiq, were signed in January this year. These aggressive timelines, and particularly the momentum of the WEC-tendered IWPPs, shows the Saudi government's dedication to development of its power and water industry. For a bid to win the ability to meet these new challenging timelines is a must.

In addition to the IWPP scheme, privatisation of the Saline Water Conversion Corporation (SWCC), the kingdom's desalination utility, is currently before the Supreme Economic Council for approval. The privatisation option would involve the unbundling and selling off to private operators of the desalination business currently operated by SWCC, which comprises 26 desalination plants in the kingdom, representing 20 per cent of the worldwide desalination capacity. The privatisation of SWCC's assets is likely to generate just as much interest as the new IWPPs already outlined.

Telecommunications
In 2004 the liberalisation of Saudi Arabia's telecommunications industry got underway, bringing an end to the monopoly the Saudi Telecommunications Company (STC) enjoyed in the mobile service sector.

A consortium headed by Etisalat, the national telecoms operator of the United Arab Emirates, secured the first 3G licence granted in Saudi Arabia. STC and Mobily, the licence-holding company established by the Etisalat-led consortium, together share around 15 million subscribers in Saudi Arabia.

The ongoing liberalisation of this sector does not stop there. In April a consortium led by Kuwait's MTC was named as the highest bidder for the third mobile services licence with a bid of $6.1bn (£3.1bn) - an enormous increase on Etisalat's $3.45bn (£1.75bn) winning bid three years ago. April also saw the end of STC's monopoly over fixed-line services in the kingdom, with the approval by Saudi Arabia's Communications and Information Commission of bids submitted by three consortia, headed by operators based in Bahrain (Batelco), Hong Kong (PCCW) and the US (Verizon).

Transport
In addition to the development of its utility industries, the Saudi government is also focusing on the development of more tangible infrastructure, particularly in the transport sector. For example, the Saudi Binladen Group was successful in its bid to secure the contract for the $300m (£152.31m) overhaul of the King Abdulaziz International Airport in Jeddah - the first PPP in Saudi Arabia's civil aviation history.

The project involves the rebuilding of the airport's Hajj Terminal Complex, Saudi Arabia's air passenger terminal, which has been custom built exclusively for religious pilgrims travelling to Mecca. The number of Hajj and Umrah pilgrims is estimated to double by 2025, and the new terminal will have the capacity to handle around nine million passengers per day.

The privatisation of Saudi Arabian Airlines has been an ongoing project for some years and will involve the airline becoming a holding company, with its different functions such as catering, ground services and its training academy divided between subsidiaries. A percentage of the shareholding of these subsidiaries will then be sold to private companies.

This process moved up a gear last August when bids were invited for the purchase of between 30 and 49 per cent of the airline's catering business. Also in 2006, Saudi Arabian Airlines' monopoly on domestic flights came to an end with the award of licences to operate domestic flights to two new carriers - SAMA and National Air Services.

Notwithstanding the aviation projects outlined above, the Saudi government is taking steps to lessen the kingdom's reliance on domestic air travel. Saudi Arabia, in common with other Gulf states, relies almost exclusively on a fairly limited and increasingly overloaded road network for overland passenger transport and goods freight. However, Saudi Arabia's rail system in particular is gearing up for a massive expansion.

For a kingdom of its size, Saudi Arabia's existing railway system is limited, consisting primarily of 450km of track between Riyadh and Dammam operating four passenger trains per day in each direction.

Three ambitious rail projects currently underway in the kingdom are set to change this - the Saudi Landbridge Project, the Mecca-Medina Highspeed rail link and the 2,400km North-South Railway. The Saudi Landbridge project will connect Jeddah on the Red Sea coast and Dammam on the Arabian Gulf coast, extending to link Jubail, Saudi Arabia's largest industrial area, with Dammam. The $5bn (£2.54bn) project will involve the construction or upgrade, and the subsequent operation of the rail network, of around 1,500km of track.

The eagerly awaited Request for Proposals (RfP) for the Landbridge project received approval from the Supreme Economic Council's privatisation committee in late April, and the RfP was due to be issued to pre-qualified bidders, including consortia led by the Saudi Binladin Group and by the MADA Group.

Competition among private sector participants for involvement in these mega-projects is fierce. This appetite for involvement in Saudi Arabia's development, combined with the increasing willingness of international lenders to lend big sums, means that Saudi Arabia's infrastructure boom will not be slowing down any time soon. Professional advisers to these projects must put in place the frameworks and contracts needed to bring the international lenders on board, keep the interests of the contractors secured, and all at a pace that matches the Saudi government's impatience to improve its infrastructure.
•Leroy Levy is a partner and Rachel Rayfield an associate at Trowers & Hamlins