Increased foreign and private investment are the beacons of hope, as Saudi Arabia treads cautiously on the path of liberalisation in a bid to diversify its economy. A new investment law announced by Saudi Arabia is poised to open doors wide to increased foreign participation in the Kingdom's economy and usher in an era of greater industrialisation. It will allow foreign investors full ownership of projects, reduce red tape in setting up ventures and lift restrictions on property ownership. Over the long term, it could spell a surge in real estate development and - given the boosted oil revenues and improved economic conditions - a vibrant construction sector.

The new bill was approved last month by the Cabinet, under the chairmanship of Custodian of the Two Holy Mosques King Fahad. According to the bill, the investment projects could either be fully owned by the foreign investor or owned jointly by the Saudi and foreign investors. It also enables the licensed firm to enjoy all the benefits and incentives of a national firm, including loans from the Saudi Industrial Development Fund (SIDF).

"A licensed foreign project under this law can own property necessary to operate the project or to house its workers," the law says.

The new Foreign Direct Investment (FDI) law addresses the main concerns of foreigners keen to invest in the country which holds the world's largest oil reserves and allows them full ownership of projects and related property. Until now, foreigners were limited to a 49 per cent in ventures and barred from owning property.

In the wake of these liberalisation efforts, the Kingdom expects $100 billion in investments by foreign firms in the oil and gas, electricity and desalination sectors, according to Foreign Minister Prince Saud Al Faisal.

Saudi Arabia has also prepared a draft law that will allow expatriates to own land in the Kingdom, news of which as created a stir in the market with reports that the price of land in the Eastern Province is already on the rise. Once the new law is enacted, there will be a tremendous surge in the real estate market, according to real estate agents.

Saudi Arabia's budget for 2000 sets spending on new infrastructure projects at more than $2 billion, according to Finance Minister Ibrahim bin Abdel Aziz Al Assaf. This amount will be spent on major projects including desalination facilities and new highways.

The budget has set government spending at $49.33 billion, just two per cent higher than last year's spending which totalled $48.2 billion.

The new budget will enable the Ministry of Health to complete the construction of 17 hospitals in various parts of the Kingdom, according to the Minister Dr Osama bin Abdulmajeed Shobokshi. The projects are located in Jouf, Northern Border region and Hail, as well as the Gulf Hospital in Dammam, King Abdul Aziz Specialist Hospital in Taif, Mina New Hospital and a maternity and paediatric hospital in Madinah.

In a bid to diversify its economy away from dependence on oil, the Kingdom is firmly on the path to industrialisation. The Saudi Basic Industries Corporation (Sabic) is spearheading growth in the industrial sector, with most new industries being petrochemicals-based. It is pushing forward with its massive expansion plan targeting 48 million tonnes of production by 2010. Sabic will have spent $10 billion on increasing its production capacities by the end of this year. It is targeting a capacity of 35 million tonnes by the end of 2000, an increase of 10 million tonnes over last year, thus completing the first phase of expansion.

Ismail Abu Dawood, chairman of the Jeddah Chamber of Commerce and Industry, has affirmed the government's plan to promote industry as a strategic choice for boosting the economy. He said that Saudi industrial exports were instrumental in reducing the country's estimated $13.4 billion imports, and put the value of industrial production at $21 billion. The number of industries in the Kingdom grew from 473 with an investment of $2.66 billion in 1975, to 3,190 with investment reaching $62 billion in 1999.

The Riyadh Chamber of Commerce and Industry in its study Saudi Industry in 2010, stresses the importance of developing industry in the Kingdom so that its share in the GDP rises to more than 20 per cent by 2010. To achieve this, industry's share in GDP has to increase by 1 per cent per year, according to The Economic Bureau.

The need for economic reforms by the government was brought to the fore by the slow growth of the economy over the past two years. The Kingdom is now keenly promoting the private sector, taking steps such as privatising the telecommunication and electricity sectors.

Major developments have taken place in the power generation sector with the merger of the Kingdom's 10 electricity companies firms forming the Saudi Electricity Company (SEC). Following the signing of the merger agreement in February, Minister of Industry and Electricity Dr Hashim Abdullah Yamani confirmed that foreign companies can invest in the power sector along or in partnership with national companies.

He indicated that private investment will be focused in the power generation sector to reduce the cost of power transmission and distribution, thus lowering costs for consumers. The Kingdom's electricity sector requires SR438 billion ($116.79 billion) in investments to meet growing power demands, according to Dr Yamani.

Among the largest projects in the pipeline in the power sector are the 700 MW Phase II expansion of the Shuaiba power plant in the Western Province and the 1,800 MW expansion of the PP-9 power station in Riyadh.

Saudi Arabia, believed to be the world's largest producer of desalinated water producing some 520 million gallons per day from 25 desalination plants, plans to build further units across the Kingdom. The Saline Water Conversion Corporation (SWCC) is reported to have allocated SR2.74 billion ($997 million) for expansion projects, an increase over last year's allocation of SR2.43 billion.

The country has also embarked on the Fahad project, which calls for the establishment of 2,000 health centres Kingdomwide. Of this figure, 355 health centres will be built in the Makkah region. The five-year development plan (2000-2005) is estimated to cost SR2 billion for health projects. A further 110 centres will be built in the near future.

Another major sector of growth has been school construction with the Kingdom keen to ensure that all school premises are no longer accommodated in rented properties. A total of some 20,000 schools are being built Kingdomwide, with the private sector being strongly urged to participate in this venture.

Saudi Arabia is also eager to establish a nationwide rail network involving an investment of some $4.5 billion in the 2000-2005 development plan, according to news reports. Among such projects are plans for two railway lines linking the north and the west of the Kingdom to the Arabian Gulf coast at a cost of $2.6 billion. This would involve the construction of 1,480-km railway in five years.

In the commercial and residential buildings sector, Riyadh is fast becoming a centre of major architectural attraction with two landmark structures being built within kilometres of each other. These are the first to be built to the new height limits set for the city which is 300 m. The prestigious Al Faisaliah Center of the King Faisal Foundation is now close to completion with a soft opening set for this month (See Page 74) while the Kingdom Centre of Prince Al Waleed's Kingdom Holding Company is fast rising to its full height of 300 m, which will make it the tallest in the Kingdom (see Page 113).

The Arriyadh Main Courts complex is due for completion this year ($80 million) while Sabic's new headquarters is also nearing structural completion. The Dallah Al Baraka group is planning to build a complete planned community called Durrat Al Riyadh, covering an area of 25 sq km on the outskirts of the capital city.

Also planned for Riyadh is the King Fahad National Library (KFNL) which is expected to be the largest library in the Middle East when complete (See Page 111).

The Economic Department of the National Commercial Bank (NCB) recently published its Market Review and Outlook which provides an insight into the level of construction spending over the past year and compares it with that spent over the recent past.

Analysing the Saudi construction sector, it says: "Construction activity in Saudi Arabia is very much correlated with the price of oil, which in turn impacts the budgetary allocations of the infrastructure projects. In 1999, oil revenues made up 68 per cent of total revenues, whereas expected oil revenues made up 70 per cent of the total revenues of 2000 budget.

"Saudi Arabia's actual total expenditure in 1999 was SR181 billion ($48.26 billion) while total expenditure for 2000 is budgeted at SR185 billion. Budgeted expenditure for the year 2000 on infrastructure, industry and electricity (which made up 20 per cent of total contracts awarded in 1999) has increased by 7.1 per cent to SR9.1 billion from the previous year, offering greater opportunities for contractors specialising in these sectors.

"The Monthly Construction Contract Awards Index (MCCAI), prepared by the NCB's Economics Department, gives a good indication on future trends in the Saudi construction market for periods of around two to three years (Chart 1 and Table 1).

"For January 1999, the index stood at 100.9 points, a fall of 60.3 per cent compared to the same month of the previous year. During 1999, the index peaked in August to 126.1 points and closed the year at 90.4 points. By December 1999, the index was down 28 per cent from the same month a year ago. The index stands at 108 points for January 2000, up 19.5 per cent from December 1999's level and is likely to rise in the coming months as the government starts commissioning new projects from the year 2000 budget allocations."

The short-term future of the construction industry in Saudi Arabia is dependent on the value and volume of construction contracts awarded over the recent past, according to the report.

"The total number of construction contracts awarded in 1999 were 176 projects with a total value of SR17,448.87 million, while the construction component is estimated at SR10,403.39 million, compared to SR14,453.85 million in 1998. This reduction of 28 per cent was mainly due to weak oil prices in 1998, which contributed to the delay and cancellation of 10 major projects.

"In 1998, the total value of construction component of contracts awarded fell by 10 per cent compared to the previous year to SR14,453.85 million. Furthermore, this downward trend continued in 1999, where the total value of construction component fell again to SR10.403.39 million, but varied across the different sub-sectors.

"The social, hospital and philanthropic sub-sector contracts amounted to SR4,087.1 million, representing 28.3 per cent of total contracts awarded in 1998. It was followed by urban development with 17.6 per cent of the total at SR2,539.28 million.

"In 1999 (Chart 2), the urban development projects constituted the largest share at 26.4 per cent of the total value of -construction contracts awarded amounting to SR2,748.68 million. Commercial projects contracts, valued at SR2,523.49 million, represented 24.3 per cent of the total.

''The next significant sub-sector was social, hospital and philanthropic, which was valued at SR1,541.89 million or 14.8 per cent of the total value of construction contracts awarded in 1999 (Table 6 and Chart 3).

The major construction contracts awarded during the period between July 1999 to February 2000, for each sub-sector, are summarized in Table 3.

"Although Saudi Aramco construction activities slowed down due to the low oil prices, Aramco will continue to focus on developing gas reserves in the near future. If oil prices stabilise around the government's intended level between $20-$25 per barrel, expansion in the construction activities are expected to take place in the medium future.