Our Insights

Saudi ports: Bigger private sector role in development, overcapacity risk looms

**Written and disseminated among select contacts on May 5**

 

WHAT YOU SHOULD KNOW

Increasing private sector investments into Saudi port developments reflect the big potential of the maritime and logistics sector, but there is a risk that capacity may end up exceeding demand.  

Although the government has improved regulations and set up sizeable investment funds for strategic projects to attract foreign investors into the logistics sector, current market conditions may deter or impact investments as a result of spending cuts caused by the economic impact of significantly lower oil prices and the coronavirus pandemic.   

  • As outlined in the National Industrial Development Logistics Programme (NIDLP), Saudi Arabia’s ultimate objective is to become a regional logistics and industrial hub, leveraging its favourable location to gain greater access to the high volume of global trade through the Red Sea. Industrial and logistics developments are slated to boost non-oil exports and cargo volumes at Saudi ports. This is why the government has focused on private sector engagement and a supportive regulatory framework to meet its objectives.  
  • Regulations governing port operations already have been eased through the restructuring of tariffs, slashing of Customs clearance times from 14 days to 24 hours, and the licensing of foreign shipping agents. In April $3.6bn of Build-Operate-Transfer (BOT) agreements were signed with semi-foreign private companies, and will focus on the key ports of Jeddah and Dammam. The objective is to expand container throughput capacity, modernise operations and consolidate terminals under one operator. These developments will set the foundation for both ports to become regional container hubs and logistics gateways, one on each side of the kingdom. 
  • Despite these incremental successes, the current business environment will prove challenging for further progress on port developments in Saudi Arabia. With low oil prices, suspended construction, global recession, expatriate exodus, and spending cuts, including potential cuts to the NIDLP budget, there is a risk that sectoral demand growth will not keep up with the pace of capacity expansions, which would lead to overcapacity.  

 

WHY THIS MATTERS

  • There is added momentum for private operators to participate and consolidate their involvement in port developments, as existing concessions are due to expire over the next year. The latest BOTs for some of the largest Saudi ports projects are case in point: Red Sea Gateway Terminal (RSGT) expanded its operations to Jeddah’s Northern Container Terminal, and PSA International became the sole container terminal operator in Dammam. By 2023, RSGT will expand terminal capacity by 2.2m twenty-foot equivalent units (TEUs). Collectively, the three largest container terminals in Saudi Arabia (RSGT, Dammam, and King Abdullah Port) plan to add as much as 25m TEUs over the longer-term (10-year plus) horizon.  
  • Both Jeddah and Dammam – the first and third largest container ports in Saudi Arabia – experienced approximately 50% growth in volumes between 2009-19, but the growth has not always been linear, at times suffering from high volatility, especially in periods of low oil prices and sluggish growth. Government objectives to double throughput by 2030 seem over-ambitious, and the pursuit of volume growth through capacity expansion risks leading to low utilisation rates and lower investment returns for private developers and operators.  

 

WHAT’S NEXT

  • The Middle East region is exposed to the risk of overcapacity and decreasing utilisation rates for ports. While port development has become an overwhelmingly private venture in Saudi Arabia, it is unclear whether commercial logic can take precedence over ambitious government plans. While recent BOTs show the increasing involvement of foreign partners, the reality remains that most of the participating operators are local, and that the planned, long-term transfer of ports to the state by 2049 will push operators to more or less follow government plans. 
  • Growth of Saudi Arabia’s ports will rely heavily on the overall business environment, notably developments in the inland logistics and industrial sectors. Therefore, port developers will need to pay particular attention to any changes to the plans or budget of the NIDLP, and to progress on any large transportation projects such as the Saudi Landbridge, which will link Jeddah to Dammam via rail and is currently under design stage (planned for completion no later than 2025). These are important signposts for the sector, and any cuts or delays would impact negatively growth plans in the maritime sector. 

 

Daniel Moshashai | Regional Analyst Infrastructure & Geopolitics | d.moshashai@castlereagh.net

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