More than 6 million visitors from across the world visit Mecca every year for the Haj and Umra pilgrimages. The influx has strained the narrow roads and outdated transport system.
Four metro lines of a total length of 182 km will be built across the city, with 88 stations, SPA reported.
Construction for the transport project will be carried out over about 10 years, the report said, without giving details of when it would start or how companies would bid for contracts.
Last year the city's mayor told Reuters that within six years the government hoped to build new roads and foot bridges near the Kaaba.
Other long-term projects around the mosque include building hotels, malls and cafes. Developments in the suburbs include housing estates and a park for residents who have been made to relocate from the city centre.
Saudi Arabia is also spending billions on upgrading the transport system in the capital Riyadh and on a high-speed rail line connecting Mecca with the holy city of Medina.
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Is it free for pilgrims or do they have to pay? I am beginning to worry that in the future hajj will be expensive. Nothing wrong in infrastructure improvements but will the pilgrim pay the price?