Saudi Arabia’s construction sector is currently being driven by supply, rather than market demand, as increasing wealth from oil, gas and petrochemical sales create more funds available for mega-scale development projects, thereby increasing the supply capacity of industry, public and private infrastructure significantly.

This bodes well for the industry, as project development is currently not constrained by lack of funds. It also is a good strategy for sustainable growth, providing more jobs, with a multiplier effect throughout other sectors. Also, other factors such as globalisation, privatisation, recreation and tourism, are further helping drive construction in Saudi Arabia. 

Globalisation
Increasing competition in the oil, gas and petrochemical sector is driving expansion of production capability in the Gulf, as well as investments, facilitating distribution necessary to move products to foreign markets. Due to the advantage the Gulf has in terms of oil, gas and derivative feedstock, current and planned expansions make good economics for competitiveness and sustainability in world markets.
Funds for expansion, coming from government-dominated industry, are benefiting from the current high-price windfall, without increasing the debt of these entities or competing with private capital – thereby allowing private construction to prosper independently.
How Saudi Arabia performs in industrial development in select industries relative to its neighbours provides a benchmark, indicating industrial construction opportunities both now and in the future.
Construction activity within the oil, gas, pipeline, refineries and petrochemical industry in the Gulf is currently worth $119.9 billion.
Oil and gas accounts for approximately 60 per cent this figure (Table 1), and within this sector, Qatar is far ahead of other Gulf countries, spending approximately four times more than the UAE and five times more than Saudi Arabia. This reflects the high cost of developing gas versus oil resources. However, Qatar’s investments correctly match the rapid shift from oil to gas internationally, thus keeping ahead of the demand curve.
Saudi Arabia leads in petrochemical investments, spending 2.6 times more than Qatar and nearly three times more than Kuwait and Oman in the sector. However, its dependence on oil production-associated gas to provide feedstock may present problems to its petrochemical industry, if and when oil prices and production falls.
Investment in refineries at 12.5 per cent of the total is picking up due to the rising world demand for lighter crude, which requires considerable funds for upgrading. Therefore, it is not unusual to see Iran and Saudi Arabia investing heavily in their  refineries due to their large populations.
Nearly 25,000 km of natural gas, crude oil and products pipelines are planned or under way in the Middle East. Inter-country linkages include Russia-Iran; Iran-Pakistan; Egypt-Jordan; Qatar-UAE-Oman; and Qatar-Bahrain. Intra-country distribution includes Egypt, Iran, Jordan, Oman, Saudi Arabia, Syria and Yemen.
Thus, export and regional capacity growth is providing increasing downstream development capabilities within the Middle East, and promoting additional industrial construction activity in a more balanced manner through increased pipeline capacities. Saudi Arabia has been more aggressively expanding pipelines internally than externally, due to its multi-coast location advantages, with Jubail favouring Far East shipments and Yanbu and Jeddah serving European destinations.

IPOs
Saudi Arabia has only recently realised that initial public offerings (IPOs) can unlock capital for productive development, with follow-on construction components. Within the current low-interest environment, companies with excess liquidity are actively looking for investment opportunities in the kingdom, while throughout the region, new IPO issues are greatly oversubscribed.
Privatisation as well as the sale of state assets are providing greater opportunity for repatriation of wealth and issuance of mutual funds that spread risk. Thus, the infusion of these new funds is creating several opportunities for mega construction projects.
The World Trade Organisation (WTO) requirements for liberalisation have played no small part in this transition. However, it is still more difficult to bring an established firm to market through an IPO than to provide an entirely new one, mostly because of government controls. Thus, the slow deregulation by governments is delaying IPO opportunities and thereby denying many follow-on construction activities. 
However, Saudi Arabia provides fewer, but more often larger, IPO opportunities primarily to domestic investors, whereas the only option for international investors is to enter through joint ventures and then share in the IPO. This indirect method of investment assures the flow of technology but restricts flow of international funds that could otherwise increase investments and construction activities.
Gulfwide, IPO issues can be seen to be increasing over time (Table 2). Due to IPO offerings spread over many sectors without data provided on utilisation of funds, the 10 per cent estimated construction sector windfall is provided as a gross estimate to indicate the possible impact of IPO activity. Whatever extra the construction sector garners from additional funds through IPOs, will serve to further enhance project development opportunities.
 
Recreation & tourism
Saudi Arabia’s public and private interests seemed to have awakened simultaneously, with the realisation that over-dependence on the oil and gas sector and capital-intensive industries does not provide enough employment and income for sustainable growth of the economy. 
Instead of relying on slower increasing demand – based on domestic population and industrial growth with associated small to medium-scale housing projects, shopping malls and commercial buildings – it is better to create mega-scale projects that draw visitors and investors from a much broader base. 
The multiplier effect for the construction sector is much greater due to the need for larger deluxe hotels, resorts, recreational facilities, airports and other transport infrastructure to accommodate visitors with higher income and spending levels.
All around the Gulf, private investors are creating mega projects at an increasing scale. Of major importance to relative growth in Saudi Arabia is a lack of liberalisation and codification of property laws offering the ability to purchase properties and/or obtain permanent residency.

Driven by demand
Traditional demand-driven development in Saudi Arabia depends greatly on the government spurring construction activities. An inspection of its impact over time may prove useful in highlighting the contrast between supply and demand-driven developments on potential construction activities. Table 3 indicates the potential impact on construction activity of Saudi Arabia’s budget allocations to select construction sectors. It should be noted that allocations for transport and communications as well as infrastructure development are generally well below population growth estimates. This implies that these sectors continue to fall behind the need to sustain the required growth without assistance from the private sector.
Again, except for an infusion of capital in the Public Investment Fund in 2002, the rate of growth of credit allocations is far less than population growth (Table 4).  Thus, government credit will not significantly enhance construction growth in Saudi Arabia.
Private sector financing indicates (Table 5) a definite bias for trade financing over other sectors, approximately equal to the total of those sectors heavily weighted to construction activities. Projections indicate that a decline in share of the bank credit for construction-related sectors compared to commerce.
Thus, it can be inferred that traditional sources of institutional-derived funds are not expected to positively affect construction and the industry must continue to look toward globalisation, IPOs, recreation and tourism as drivers of growth. Given the export-driven industrialisation of downstream activities based on the comparative advantage of feedstock, the globalisation drivers of construction activities will continue.

Construction management
It is fair to ask how domestic construction companies in Saudi Arabia fit into the IT revolution, transforming society to the point where knowledge – rather than land, labour or capital – becomes the basic economic resource or means of efficient construction. 
To remain competitive with the larger internationals, Saudi construction firms must improve internal processes in everything from adoption of latest technology, training human resources to supply chain management. In order to make that happen, they must:
• Share knowledge effectively across departments and work groups;
• Effectively upgrade to new technologies and train employees to use it;
• Migrate information stored in legacy systems and merge data collections; and
• Reduce supply/chain costs.
In remaining competitive, what is more important is how they accomplish supply-chain management and direct business activities than what they construct.
An EIU (Economist Intelligence Unit) survey across industries found that performance improvement requires a common view of the desired outcome and its benefits. Change in organisational behaviour utilising people, processes and technology is the key to delivery of planned benefits, not elegance in the execution of the project.
In summary, there are numerous supply-driven mega construction projects under way and planned for Saudi Arabia in many sectors, while traditional demand-driven opportunities remain inhibited. 
Mega projects require greater change in organisational behavior utilising people, processes and technology as the key to delivery of planned benefits, not elegance in execution of the project. Thus, it remains to be seen if Saudi firms can increase their market share of construction opportunities rapidly evolving in the kingdom.
* Dr Cox, a senior economist, serves as executive director of Development Group International, Global Best Consult and Al-Sudairy Foundation.