Industry Trend Analysis - Education Initiative Highlights Growing Social Infrastructure Emphasis - MAR 2018

BMI View: The decision to initiate a wide ranging school construction programme highlights the growing Saudi emphasis on delivering the social infrastructure assets necessary to facilitate the shift to a knowledge based economy, even as we remain skeptical of the government's ability to meet the full scope of the country's wide-ranging and ambitious economic diversification agenda.

In line with a stated commitment to growing the Kingdom's knowledge based industries, the Saudi government has announced plans to build and operate a total of 1,600 schools across the country in partnership with private sector firms. The first phase of the initiative involves building 60 schools in Mecca and Jeddah. The first phase will deliver a mix of kindergarten and primary, intermediate and secondary schools for boys and girls. Saudi King Salman bin Abdulaziz Al Saud, the Council of Economic Affairs and Development and the Ministry of Finance have approved the project. In this vein, we see scope for the ongoing prioritisation of social infrastructure to drive an increase in the share of social infrastructure projects in the country's overall project pipeline in the years to come, which, according to our Key Projects Database, account for a mere 7.5% of the total (see chart below).

Furthermore, in a country where over 80% of education infrastructure is funded by the state, the decision to tender the initiative on a Public Private Partnership basis underscores Saudi government's desire to attract private capital and expertise into the sector - particularly to lessen the financial burden on the state. Having said that, we maintain our view that the PPP initiative will fall short of government expectations in meeting its ambitious targets in the education sphere, as its effectiveness constrained by the Kingdom's lack of an overarching and consistent legal framework governing the various stages of implementing PPP projects (see, 'Education PPP Initiative Will Fall Short,' December 21, 2016). Moreover, the government has yet to establish a designated PPP agency as with other markets mentioned above, which further clouds the contract approval process and drives additional regulatory uncertainty in the marketplace.

Social Infrastructure A Small But Growing Share Of Pipeline
Saudi Arabia: Project Value By Sector, %
Source: BMI Key Projects Database

The Saudi education push will occur in the wider context of the Kingdom's economic diversification agenda as embodied by the country's 'Vision 2030' agenda, which aims to diversify Saudi Arabia's economic base away from oil and into knowledge based industries like technology and tourism. As such, in addition to the aforementioned plan to construct 1600 schools, we have seen an uptick in project announcements aiming to move the Saudi economy up the intellectual value chain.

Most prominent among these is NEOM, a planned USD500bn independent special business and industrial zone. The 26,500sq km special zone will be in the north west of the country, and will extend across the Egyptian and Jordanian borders. The zone will focus on various including energy and water, food, biotechnology, advanced manufacturing and entertainment. NEOM will be fully automated, and will be completely powered by wind and solar energy. The scheme will be supported by Saudi Arabia and the country's Public Investment Fund, and local as well as international investors. We view NEOM as emblematic of broader Saudi economic diversification efforts - exceedingly ambitious, but unlikely to be realised in their desired form due to operational and regulatory hurdles that have plagued the delivery of similar Saudi mega-projects in the past.

More recently, and more representative of a realistic project, it was reported in February that US-based Google is considering a partnership with Saudi Aramco to form a technology hub in Saudi Arabia, which would involve the construction of data centres and afford the opportunity for Saudi citizens to bolster their technological expertise.