Aramco construction arm could squeeze out global firms: report

The decision by Saudi Arabia’s national oil company, Saudi Aramco, to establish a construction unit for non-oil infrastructure, in partnership with select private sector players and the Saudi sovereign wealth fund, will present a “formidable competitor” to international companies seeking to benefit from Saudi Arabia's diversification agenda, BMI Research said in a recent report.

The state-owned oil firm’s plans to set up the construction company were reported earlier this week, with local companies such as Nesma & Partners, Al Rashid Trading & Contracting Co, Azmeel Contracting, El Seif Engineering expressing interest.

International groups like Turkey’s Tekfen and South Korea’s Posco, Daewoo and Samsung C&T were also said to be keen on being part of the new construction venture.

“On the one hand, this announcement solidifies our expectation that infrastructure assets aimed at diversifying Saudi Arabia's economy will be a key area of government focus in the years to come,” BMI report said. “On the other, we caution that the establishment of such a company may limit the opportunities for international and private companies to win contracts in Saudi Arabia, given the government's well-documented tendency to favor large domestic firms like Saudi Oger and Bin Laden Group to deliver projects.”

The research agency said the new plan aligns with its view that Saudi Arabia’s efforts to promote expansion of non-oil infrastructure will continue to gain momentum in the coming years.

Additionally, the increased breadth and quality of private sector partnership interest is a positive indicator for the future company's technical and operational capacity to deliver the high-value infrastructure projects envisioned under Vision 2030, the report said.

The agency, however, warned that while the non-oil focused construction firm will aid in delivering the government's infrastructure agenda, it may also lead to diminishing contract opportunities for the private sector as a whole.

“Though the proposed company has yet to announce a specified policy with regard to PPPs, the fact that it will fall under the purview of Aramco signals that Saudi Arabia will be reluctant to relinquish control over key projects and may revert to the kind of less competitive tendering process that has characterized government policy in the past,” BMI Research said.

In terms of contract allocation, therefore, the private sector companies on the outside of Aramco's umbrella might find it tough to compete with the large, state-owned, and well capitalized company.

“(This) may ultimately impede the ongoing diversification of the Kingdom's competitive landscape in the construction space,” the report said.