The U.S.Saudi Business Council (USSBC) is a bilateral nonprofit international trade and development organization dedicated to promoting investment between the United States and Saudi Arabia. The council recently released an analysis report on construction contracts in the second quarter in Saudi Arabia (KSA). Despite the current high level of construction activities, questions about their sustainability are beginning to emerge.

Design of King Salman Stadium in Saudi Arabia"The speed of contract approvals has not slowed down; instead, it is growing at a record pace," said Albara’a Alwazir, Director of the Economic Research Department of the U.S.-Saudi Business Council (USSBC), when analyzing the second-quarter data. "In the second quarter, the oil and gas, real estate, and water sectors will continue the growth momentum of the first quarter."The construction contract data of Saudi Arabia shows that compared with the 11-year high set in the first quarter of 2024, there was a decline in the second quarter, with the total contract value dropping from $32 billion to $18 billion. Similar to the first quarter, oil and gas contracts still dominated, accounting for more than 40% of the total workload, while real estate contracts accounted for a quarter of the total. Water contracts decreased by 9% compared to the previous quarter, but the workload of power and utility projects increased by approximately 5% compared to the previous quarter.Despite the decline between quarters, as of the middle of this year, the total value of construction contracts is estimated to be slightly less than $50 billion. Just in the first half of 2024, this figure is already close to the total amount for the whole of 2022, with a difference of only billions of dollars, and it is approximately $22 billion less than the total amount in 2023."Contract approvals were very high in 2023," Alwazir said. "Starting from 2007, in the first half of 2024, the contract amount reached the highest record in Saudi history."The majority of the projects (59% or $10 billion) were concentrated in the Eastern Province, driven by the expansion project of Saudi Aramco's Fadhili gas plant.The Riyadh region (including the capital) accounted for 15% of the U.S.-Saudi contracts in this quarter. "Among the 35 contracts approved in Riyadh, the real estate sector accounted for the largest share, with a total of 25 projects and a total value of $1.5 billion, accounting for 56% of the total. In addition, there was a $600 million contract in the education sector for the construction of King Salman University in Diriyah Gate," pointed out in the second-quarter report of the U.S.-Saudi Business Council (USSBC).

Neom Super Project PlanningTabuk Province (the location of the $1.5 trillion Neom super project) accounts for 13% of the U.S.-Saudi contracts in Saudi Arabia. There are a total of 8 contracts in Tabuk Province, among which many projects in various fields are led by Neom. Neom approved 4 contracts with a total value of $1.5 billion; Red Sea Global had 3 contracts with a total value of $664 million."Is the Speed of Saudi Arabia's Construction Development Sustainable?Although oil and gas projects dominated the contracts in the second quarter, driven by Saudi Arabia's "Vision 2030" plan, which aims at economic diversification and attracting global tourists to special economic zones like Neom, contracts in non-oil and gas sectors also accounted for an important share.Saudi Arabia's Public Investment Fund (PIF), with an estimated value of nearly $1 trillion, is injecting billions of dollars into multiple projects, such as the 170-kilometer-long linear city "The Line" and the mountain tourism destination Trojena. In addition, in preparation for the 2034 World Cup, PIF is also building new stadiums and sports facilities, including King Salman Stadium in Riyadh.This series of investments has raised some doubts about whether even a wealthy and oil-rich country like Saudi Arabia can afford so many giant projects that may not generate any form of return for many years to come. Some people suggest that Saudi Arabia may need to scale back its plans. For example, a Bloomberg report pointed out that the "The Line" project may be scaled back and built in phases at a slower pace. The first phase is planned to build only 2.4 kilometers and accommodate 300,000 people, instead of the 9 million people expected when it is fully completed.Andrew Leber, a researcher at Tulane University in Louisiana, the United States, who focuses on the political economy of the Middle East, told CNBC that the current spending rate is not sustainable: "The number of these giant projects that are currently underway with the approach of 'we invest first and expect economic returns in the future' is not sustainable. Eventually, some projects will be quietly put on hold to bring fiscal spending back to a more sustainable level."Saudi Officials are Confident in Maintaining SpendingSaudi Finance Minister Mohammed Al-Jadaan is confident in the sustainability of Saudi Arabia's investment level.In October 2024, Saudi Arabia lowered its economic growth forecast and raised its budget deficit expectations for the fiscal years 2024 to 2026 due to expected increased spending and declining oil revenues. According to data from the Ministry of Finance, the growth expectation of the real gross domestic product (GDP) this year has been significantly lowered from the previous 4.4% to 0.8%.Saudi Arabia's economy has shifted from a surplus of $27.7 billion in 2022 to a deficit of $21.6 billion in 2023, mainly due to the increase in public spending and the reduction in oil production according to the OPEC+ agreement. The government expects a budget deficit of $21.1 billion in 2024, with revenues expected to be $312.5 billion and expenditures of $333.5 billion. Saudi authorities expect the budget to be in deficit for the next few years but say they are well-prepared for it."Our non-oil revenues have significantly increased and currently cover about 37% of the expenditures. This is an important step in diversification, which allows us to maintain stability and flexibility even in the face of fluctuations in oil prices," Mohammed Al-Jadaan said in an interview with CNBC in October.The Prospect of Saudi Construction Contract ApprovalsWhen talking about the prospects of Saudi construction contract approvals, Alwazir pointed out that large-scale infrastructure investments have created a solid foundation for employment in the construction and industrial sectors in the short term, and have also driven high demand for construction materials such as cement.

Alabara’a Alwazir

In the medium term, he pointed out that by strengthening cooperation between the public and private sectors, especially on major infrastructure projects like Neom, more opportunities can be created. In these projects, private investors and international companies including those from the United States are becoming key players.Alwazir said, "By continuously improving the regulatory environment and providing incentives for foreign direct investment (FDI), Saudi Arabia can attract a more diverse range of global enterprises, and promote the transfer of innovation and knowledge to the local market."The real estate sector has already secured numerous projects in both residential and commercial spaces. It is expected to continuously attract the interest of domestic and foreign investors, and offer expansion opportunities in affordable housing, retail, and mixed-use developments to meet the needs of the growing urban population. In addition, the government's investment in advanced water infrastructure, including desalination and sewage treatment, will support urban growth and industrial construction in water-scarce areas."He even stated that Saudi Arabia may become an exemplary model of effective collaboration in the delivery of large-scale infrastructure projects through government-private sector cooperation, and all of this depends on a stronger legislative framework that supports greater private sector participation and foreign investment."Saudi Arabia's surge in investment in infrastructure and economic diversification is not only a response to current economic needs, but also a carefully planned step towards a sustainable and globally integrated future. By promoting private sector growth, attracting international investment, and developing a resilient infrastructure backbone, Saudi Arabia is positioning itself as a diversified economic powerhouse," Alwazir concluded.