In the Q110 Saudi Arabia Infrastructure Report we are maintaining our positive outlook for Saudi Arabia’s infrastructure sector. For 2009 we are forecasting real growth of 2.88% y-o-y in the construction industry value to reach a value of SAR77.69bn (US$20.74bn).

Risks continue to be to the upside for our forecasts for this year and through to 2010. This is due to the Saudi government’s decision that it will support infrastructure projects that it deems too important to fail in the event that they encounter problems with financing. Last quarter the Ras Al Zour independent water and power plant (IWPP) was a prime example of this. The consortium awarded the contract was having trouble related to financing issues, following which the government decided it would take over funding for the project and therefore re-tender it as an EPC.

In August, the US$7bn Saudi Landbridge rail project became the latest illustration of the government’s financial might. The contract had gone through two inconclusive bidding rounds, with a preferred bidder chosen but no contract signed due to the challenging project financing climate. The government, after months of silence on the project, finally announced it would fund the project solely through public funds and therefore repackage the projects into a number of EPC contracts. Previously, the Haramain highspeed rail project, another element of the kingdom’s ambitious rail plans, was transferred to an EPC contract from a build, operate transfer one. This quarter, progress has been made on contracts for the project, with five consortia having qualified for the project as of October 2009.

Progress for another element of the country’s plans to build a national rail network – the North South railway – was also made over the last quarter, with a consortium of Chinese and Saudi Arabian companies awarded a US$720mn contract for construction of a 500km section of track. Finally, the US$1.7bn monorail system connecting Mecca to Mina, Arafat and Muzdalifah is progressing well and due to be partly operational in time for the 2010 Hajj.

Saudi Arabia’s ambitious rail plans are fuelling activity in the infrastructure sector, with US$30bn worth of contracts under way or at the bidding stage. Although transport projects have been the main focus of Saudi Arabia’s infrastructure sector over the past quarter, the utilities sector has also seen a number of projects awarded and announced.

Despite this activity, as has been the case over the past few quarters, out forecasts have been dampened to some extent by high levels of inflation in the country. Nominal growth in the construction industry is estimated close to double digits; however, inflation has negated this in real terms.