Review of Saudi Arabian Contract Awards: February 2018
Key Contracts Awards for February 2018
The total value of new contracts in Saudi Arabia for February 2018 was an estimated SR3.1 billion ($815 million). By value, the largest contracts were awarded in the power sector ($362 million) and water sector ($219 million). The total value of new deals in the previous month of January 2018 was SR4.6 billion ($1.23 billion).
• The Renewable Energy Project Development Office (REPDO) of the Ministry of Energy, Industry and Mineral Resources awarded the largest contract of the month and Saudi Arabia’s first substantial solar project. Under the Kingdom’s National Renewable Energy Program (NREP), REPDO awarded the first phase of a 300MW Sakaka photovoltaic (PV) solar power plant. REPDO awarded the $302 million contract to a consortium led by the local firm ACWA Power with a 25-year PPA to develop the project at a bid of 2.34 U.S. cents per kilowatt hour (kWh). To increase efficiency, ACWA Power plans to integrate digital centralized control and monitoring technology from the Chinese firm Huawei Fusion.
• Saudi Aramco awarded two of the largest infrastructure contracts of the month, each worth $80 million for the upgrade of the desalination plant in Safaniyah and to develop the flood mitigation channel in Jizan.
• The Saudi Arabian Monetary Authority (SAMA) signed a deal with the U.S. firm Ripple for blockchain technology that would allow the central bank to instantly settle payments sent across borders. The new financial technology will allow Saudi banks to make more efficient and transparent transactions.
• Saudi Telecom Company (STC) and Cisco Middle East and Africa have agreed to jointly develop a 5G communications network that will support STC’s transformation to advanced digital and network services such as low latency, increased speed, and dynamic provision. As part of the deal, Cisco will work on STC’s architectural transformation to “unlock the commercial potential of 5G mobile networks,” and enable STC to achieve its role in smart cities, IoT, automation, and virtual technology.
Saudi Arabian Joint Venture Summary
• The private King Abdullah Port reported that it would expand its terminal capacity by 1.5 million twenty-foot equivalent (TEU) units given the 21 percent increase in annual throughput that it saw in 2017. The Saudi Arabian company Huta Marine and the Emirates developer Emaar run the joint venture. Currently, the capacity of the port is 2 million TEU, though the port plans to expand to 20 million TEU, comparable to the Jebel Ali Port in Dubai.
• The joint venture between the U.S. defense firm Lockheed Martin and TAQNIA Aeronautics – known as the Rotary Aircraft Manufacturing Saudi Arabia (RAMSA) – is reportedly now advancing in the Kingdom. The two parties first signed a letter of intent in May 2017 to build Black Hawk rotorcraft in Saudi Arabia. During the Armed Forces Exhibition for Diversity of Requirements and Capabilities (AFED) in February, Lockheed’s chief executive of Saudi Arabia, Alan Chinoda, noted progress on the deal citing creation of 640 new technology jobs in the Kingdom. “We’ve created a joint venture to produce 150 Blackhawks in the Kingdom, which is a tremendous opportunity. It will create a whole new technology eco-system and will involve the transfer of technology as well as jobs. The infrastructure to support that in Saudi Arabia is good.”
• Saudi Arabia’s General Authority for Civil Aviation (GACA) terminated its contract with the joint venture company Changi Airports of Saudi Arabia (a joint venture between Singapore’s Changi Airports and the Saudi Naval Support Company) for the operation and management of Jeddah’s King Abdulaziz International airport. GACA announced that it plans to launch the airport’s expanded and renovated look in May. Reportedly, Saudi Arabia has invested $7.2 billion in the airport.
Regulatory Feature – Pharmaceutical Intellectual Property
Pharmaceutical Research and Manufacturers of America (PhRMA) has designated Saudi Arabia as a ‘Priority Watch List’ country, the only country in the Middle East and Africa (MEA) region with this status. Despite market access concerns of some multinational drugmakers, the Saudi Arabian pharmaceutical market remains one of the most commercially attractive in the MEA region. PhRMA indicated that Saudi Arabia has made notable improvements to its patent system and pharmaceutical policy environment over the past five years. However, patent enforcement remains more difficult along with regulatory data protection. This follows the protectionist stance taken by the Saudi Government to support domestic generic drugmakers and to control rising medical costs.
As the instance of chronic disease continues to rise in the Kingdom, so will the demand for valuable patented medicines, and thus Saudi Arabia will likely continue to improve its intellectual property environment and regulatory data protection over time.
Saudi Arabia also maintains regulations permitting that only Saudi intermediary agents may supply medicines, and that may increase the difficulty of negotiations from the perspective of a multinational drugmaker. Some analysts suggest that Saudi Arabia will continue to decrease levels of subsidies. Given these factors, foreign firms in the pharmaceutical segment are likely to enter joint ventures with Saudi Arabian pharmaceutical firms as a means of market entry.
National Industrial Clusters Program Joint Ventures
Through expansion and diversification of Saudi Arabia’s manufacturing sector, the National Industrial Clusters Development Program (NICDP) aims to develop opportunities across downstream industries like automotives, construction, medical devices, and electronics. Increasingly, projects with the potential to create jobs are favored for feedstock allocation.
An array of joint ventures (JVs) and other contracts to build and operate units are aligned with these goals more broadly.
SABIC, for instance, awarded an Engineering Procurement and Construction (EPC) contract in late 2017 to Samsung Engineering to construct an ethylene glycol plant at its manufacturing affiliate Jubail United Petrochemical Company (United). As United’s third ethylene glycol plant, the facility is scheduled to open in 2020 with a capacity of 700,000 tons per annum.
Sadara Chemical Company, a joint venture between Saudi Aramco and the Dow Chemical Company is planning to build a fully integrated petrochemicals complex that will integrate many of Dow’s technologies and comprise 26 manufacturing units. Once completed, the plant will generate more than 3 million tons per annum of petrochemicals.
In September 2017, Sadara brought its 200,000 tons per annum toluene diisocyanate (TDI) facility into operation. The facility has three integrated units that produce toluenediamine (TDA), dinitrotoluene (DNT), and TDI. The TDI production was the final phase of the development, and its opening began three months following production of commercial quantities of on-specification liquid polymeric methylene diphenyl diisocyanate (PMDI). PMDI is used to produce polyurethane. This is the only complex of its kind in Saudi Arabia and is the largest in the world.
Petro Rabigh – a joint venture between Saudi Aramco (37.5%) and Sumitomo Chemical (37.5%) with 25% publicly held shares – began the $10 billion first phase of the complex in Q2 2009. The first phase of the project included capacity for a 1.3 million tons per annum ethylene plant, a 900,000 tons per annum propylene unit, and downstream units. Petro Rabigh announced it began production of thermoplastic olefin (TPO) in July 2017 as part of its phase 2 expansion. The Cumene Unit, supplying feedstock to phenol, was the first process plant in phase 2 to go online. The entire production capacity of phase 2 is expected to become fully operational in 2018.
Megaproject Feature – NEOM and Entertainment in Saudi Arabia
Announced in October 2017 at the Future Investment Initiative in Riyadh, the planned megacity NEOM would cover 26,000 square kilometers and would cost at least $500 billion. The ambitious scale of the project is part of Saudi Arabia’s larger strategy to attract foreign direct investment in renewable energy, biotechnology, manufacturing, and entertainment. Saudi Arabia’s PIF will own NEOM until its initial public offering. Currently, SoftBank is among the few investors that have publicly committed financial support to the project.
As part of the vision for NEOM, the city will have a profitable economy through focus on nine key areas: energy and water; mobility; biotech; food; advanced manufacturing; media; entertainment; technological and digital sciences; and living an idyllic lifestyle. The city will connect Saudi Arabia to Egypt and Jordan, and the Saudi Government will finance the project as well as seek private investors internationally. The city aims to become an international trade and innovation hub by “offering unique opportunities and advantages to worldwide leading investors and business owners.”
Located in Saudi Arabia, Egypt, and Jordan, NEOM would operate in a special zone with independent laws, tax system, and regulations designed by the city’s investors. NEOM would be separate from Saudi Arabia’s current government structure – creating an autonomous business environment.
NEOM is also emblematic of the Kingdom’s larger goals to create a vibrant entertainment industry. Plans for the city envision that it will become a global hub for connectivity with entertainment venues such as sports, performance and visual arts, world-renowned restaurants, shopping, and marinas. As part of its attractions, the city will have gardens and waterparks that aim to attract international tourists. The unique geographic location of NEOM makes it ideal for livability and for attracting visitors. The vision for the city would provide free amenities to NEOM residents, including internet as well as automated and technology-based services.
The diverse terrain would cover deserts, mountains, and 460 kilometers of pristine coastline with beaches and islands. The climate in the NEOM region is also more temperate than the rest of the Arabian Peninsula. The central location means that 70 percent of the global population could fly into NEOM in under eight hours, and there would be an ample amount of supply to the city as approximately 10 percent of the world’s trade flows route through the Red Sea.
More broadly, Saudi Arabia plans to boost focus to expand its entertainment sector, investing approximately $64 billion over the next decade. H.E. Ahmed Al-Khatib, the head of Saudi Arabia’s General Entertainment Authority (GEA), noted that the GEA has already started expanding the sector and that “GEA is one of the engines for transformation in the Kingdom. We are working to make KSA a global entertainment destination.” In 2018, there are over 5,000 events scheduled across more than 50 cities ranging from live music performances to stand-up comedy. Additionally, by 2030, GEA plans to increase employment to 224,000 in the entertainment sector from the 17,000 employed in the sector in 2017. These jobs will comprise 114,000 directly employed in entertainment and 110,000 jobs that are indirectly created through activity in the sector.
These goals come in line with substantial policy changes such as the lifted ban on movie theaters. As a result, AMC Entertainment was awarded the first cinema license in the Kingdom, and the company will open 100 theaters in Saudi Arabia through this venture. Saudi Arabia is also investing $500 million in the WME holding company Endeavor.
In 2017, the Kingdom announced over $26 billion in funding for expansion of the Grand Mosque in Makkah along with $3.5 investment in a hotel with capacity of 10,000 rooms. Reportedly, 84 new hotels are expected to open across Saudi Arabia during 2018. Presently, Makkah, Riyadh, Jeddah, and Al Khobar have the greatest levels of hotel construction.
GEA officials reported that the entertainment sector is looking at overall investment of SR267 billion ($71.2 billion) to create new infrastructure throughout the Kingdom.
Saudi Arabian Hospital Privatization Update
Saudi Arabia’s Ministry of Health has set out to privatize government hospitals as part of Vision 2030, and has moved forward with establishing a holding company along with 5 health companies. Reportedly, the new system will initially be deployed in the Eastern Province and then replicated in Riyadh and Makkah. For the new health system in the Eastern Province, H.E. Minister of Health Tawfiq Al-Rabiah approved a consultative council at King Fahd Specialist Hospital. Once developed, the complex in the Eastern Province will have 5 hospitals along with 19 health centers. A consultative council will supervise each privatized health complex.
As part of this goal, Tatweer Holding Company (under the Ministry of Education) announced in February that it is working to privatize 17 university hospitals. University hospitals will amend regulations to allow for private sector participation (PSP), and Tatweer aims to develop a successful PSP operational model.
These newly established healthcare companies aim to increase the efficiency of hospitals 25 percent by 2021 and to increase the efficiency of primary health centers 37 percent by 2020.
Contract Awards Summary
Saudi Aramco reported that it would likely increase its number of engineering, procurement and construction (EPC) contractors signed on long-term agreements (LTA) for offshore asset maintenance and field services because of its large upcoming planned projects. Presently, Aramco has LTAs with five local and international firms including the U.S. firm McDermott International. Among those bidding for inclusion in Aramco’s LTAs are the U.K.’s Wood Group and the U.S. firm KBR.
McDermott International is a Chairman’s Circle member of USSABC.
TAQNIA International is a Chairman’s Circle member of USSABC.
The Dow Chemical Company is a Chairman’s Circle member of USSABC.
KBR is a Platinum member of USSABC.
Lockheed Martin Corp is a Platinum member of USSABC.
Sadara Chemical Company is a Platinum member of USSABC.
Saudi Aramco is a Platinum member of USSABC.
Saudi Basic Industries Corporation (SABIC) is a Platinum member of USSABC.