Saudi Arabia's new labour laws forcing contractors to tighten budgets

While competitive bid prices are putting pressure on margins, contractors in Saudi Arabia are now feeling the effects of new labour regulations on operations and costs. Since the government concluded an amnesty for illegal expatriate workers and began clamping down on illegal labour in November 2013, contractors have been having a more difficult time meeting their labour needs. Riyad Ahmed Al Thagafi, CEO of real estate firm Ewaan, told OBG, “With the Saudiisation policy having been implemented a few years ago, the construction sector is currently experiencing a major labour force deficit.”

Visa Regulations

Mohamed Alsayed, the general manager of A.S. Alsayed & Partners, told OBG, “Difficulty in obtaining a sufficient number of visas for labourers is often causing delays and cost overruns. Better communication between government stakeholders is needed so that one ministry does not hinder the work of the other.” The constriction on the workforce has had a notable impact on the sector. Khaldoun Tabari, chief executive and vice-chairman of Drake and Scull International, a Dubai-listed contractor, told the Emirati press that the exodus of illegal labour had doubled the cost of casual labour in the Kingdom.

According to Deloitte, the value of projects disrupted by the government’s attempt to solve the illegal labour problem reached $26.6bn in 2014. This phenomenon is also discernable by looking at demand for cement, a strong indicator of construction activity. “November 2013 was the end of the amnesty for labour with missing documentation, and in that month the total cement volume in Saudi Arabia went down 20% on an annual basis,” Mohamed Tomalieh, an independent financial analyst, told OBG. “Although sales have grown since June 2014, full demand normalisation is not expected to be achieved until 2016.”

Saudiisation

The situation has been further complicated by Saudiisation efforts. This government drive to ensure more nationals have a place in the workforce also has cost implications for contractors. Salaries for qualified Saudis can be 50% higher than for their expatriate counterparts, according to Nagib El Alam, vicepresident of construction at the Saudi Arabian Trading and Construction Company. “Contractors are suffering … so they are trying to raise their prices a little bit,” he told OBG. At the beginning of 2013 the Ministry of Labour set a minimum wage for nationals of SR3000 ($800) per month if a company wanted to include the employee in its Saudiisation quota commitments. A wage of SR1500 ($400) per month would count as half a worker in terms of Saudiisation targets. Below this, a national worker would not be counted for the purposes of meeting the Saudiisation quota.

There is also a practical issue of finding enough nationals either qualified or willing to work in the sector. In December 2014 the contractors’ committee of the Makkah Chamber of Commerce and Industry called on the government to adjust the targets for Saudiisation for building contractors. The organisation said that not enough locals could be found to meet the 13% target and suggested the rate be reduced to 3%.

Global Fluctuations

With India experiencing double-digit wage growth for much of the last decade, the impact on the availability and cost of labour from the sub-continent has been considerable. There are 2m Indian workers in the Kingdom, representing 20% of the expatriate workforce. As such, the Saudi market is sensitive to changes in employment conditions in India. The local reaction to a decision by the Indian government to set minimum wage requirements for Indian nationals working in Saudi Arabia was, therefore, negative. Abdulhakeen Al Ammar, chairman of the Contractors’ Committee of the Chamber of Commerce and Industry in the Eastern Province, told local newspaper

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The Report

This article is from the Construction & Engineering chapter of The Report: Saudi Arabia 2015. Explore other chapters from this report.