Construction firms in Saudi Arabia have seen costs rise with new labour laws

Although they benefitted from more than SR220bn ($58.7bn) per year in new contracts between 2011 and 2014, according to National Commercial Bank, many Saudi construction firms have seen their margins squeezed by escalating costs in recent years. One of the greatest challenges in balancing their books has been the impact of new labour regulations on their wage bills. Saudis in the Kingdom outnumber foreigners two to one, yet fewer than one in 10 workers in construction are Saudi citizens. In contrast, more than seven out of every 10 people working for government departments or entities are Saudi nationals. By 2014, the public sector wage bill was the equivalent of 12% of GDP. According to an IMF study published in 2015, just one-fifth of the 3.6m private sector jobs created in Saudi Arabia since 2000 have gone to the country’s citizens. To address this imbalance, a number of government measures have been taken to pave the way for more engagement by Saudi employees in the private sector – though each measure has had an impact on the construction industry.

Nitaqat

In 2011 the Nitaqat quota system was introduced, with rewards for companies that employed a higher proportion of Saudis and penalties for those that failed to meet quotas specific to each industrial sector. The Saudiisation target set for construction firms with 10 employees or more was 10%. Building firms have collectively increased the level of participation by Saudis from 8.3% in 2012 to 9.3% of the construction workforce in 2015, according to the General Authority for Statistics (GaStat). However, at the same time that the Nitaqat system was introduced, the government also mandated a minimum monthly salary for Saudis of SR3000 ($800). This meant that some 700,000 Saudis employed in low-skilled work saw their wages double in 2013, according to the IMF. These measures also increased the wage differential between foreign and national workers. According to the General Organisation for Social Insurance, the average Saudi working in the private sector earned SR5519 ($1470) per month in 2014, some 3.4 times the average foreign worker salary of SR1639 ($437).

Foreign Wages

In 2013 the government announced a crackdown on non-Saudi workers whose work permits had expired or who had changed employers since their permit was issued. At the end of an amnesty period in November 2013, it announced that 4m foreign workers had updated their records and another 1m had been deported. While the crackdown was seen as beneficial for foreign construction workers with the correct documentation, as many of those working without proper documentation did so at a reduced daily rate, the rapid drawdown was a shock to the sector. In addition, the Nitaqat rules gave non-Saudi workers the right to change jobs if their employer failed to meet its quota of Saudi staff, theoretically giving those foreign workers more bargaining power in wage negotiations.

Foreign Worker Levy

In November 2012 the foreign worker levy paid by firms for each non-Saudi member of staff in the Kingdom was raised from SR100 ($26.70) per worker per year to SR2400 ($640) in order to make it more attractive to hire Saudi staff. There are some exceptions, however. The levy does not apply to workers from GCC countries, and in 2014 this exemption was extended to the spouses of Saudi nationals and their children. That same year it was agreed that firms employing fewer than 10 staff could pay a reduced levy of SR100 ($26.70) for a maximum of four foreign workers. Additionally, large contractors that had signed government contracts before 2012 were told they could claim refunds on the levy for those contracts to compensate them for additional labour costs after projects were completed. However, according to some companies, there have been significant delays in receiving these refunds, and some have faced fines in the meantime. Abdullah A M Al Khodari Sons, employs 17,000 people and was charged SR8m ($2.1m) in fines for finished projects and a further SR85m ($22.7m) in fines for projects it is due to complete by 2018.

Staffing Solutions

One response to rising labour costs has been to reduce staff numbers. In 2015 construction firms cut 61,000 staff, 5000 of whom were Saudis, according to figures from investment and research firm Jadwa Investment. GaStat data shows that from 2012 to 2015, some 347,362 construction jobs were lost across the Kingdom, and the number of Saudis working in the industry fell by nearly 11% from 141,250 to 125,802. Nonetheless, some of the largest Saudi contractors have been able to adapt their hiring and training models in order to attract and develop local staff. In the first half of 2016 this had risen to 134,601. Saudi Oger, which employs 47,000 people, established a training institute to address the issue and attended careers fairs in the US to recruit the brightest Saudi engineering graduates when they left US universities. Saudi Binladen Group established a similar institute in 2009.

The CEO of Al Arrab Contracting Company, Abdullah bin Suhail Al Masood, said the combined impact of the changes in the construction labour market has led to rapid wage inflation. “We used to pay SR8 ($2.10) for a plasterer, but now the rate is SR35 ($9.30), which shows how significant wage inflation has been in the last three years,” he said. Al Masood believes it makes more sense to find Saudi citizens more sustainable long-term jobs. “I believe the contractors should train Saudis during the construction process so that they understand the systems in the building, and then they can be employed in operation and maintenance roles,” he told OBG. Some stakeholders have also suggested that quotas may need to be tailored further.

Delays

The slowdown in government contracts is also having an impact on productivity and costs where margins are already tight. In 2015 some 44% of all projects owned by the Ministry of Municipal and Rural Affairs had stalled. Many projects are subject to budget overruns due to poor planning and management, and significant changes to the specifications of schemes. “In construction, margins are tight, and if you have a project with a 7% net profit you are fortunate,” Al Masood told OBG. “In 2014, 95% of construction companies reported losses.” The freeze in the awarding of new government contracts at the end of 2015 has also increased costs for companies trying to retain staff. “The Saudi Arabian Trading and Construction Company (SATCO) is a large company, and it needs resources to continue working, so you have to either cut down on people or go slower, which means you are making less money,” Nagib El Alam, SATCO’s vice-president for construction, told OBG.

Supply Chain

A weaker project pipeline has led to reductions in the cost of raw materials that are being felt by manufacturers of cement, concrete, steel, aluminium and other materials. “Demand for building materials is correlated with the state of the construction sector in the Kingdom. Usually the main drivers have been public infrastructure projects, such as schools, hospitals and government buildings,” Fareed Maimani, CEO of Maimani Holding Group, told OBG.

There are 14 cement companies listed on the Tadawul, and all but one reported a profit in 2015. However, some did not perform as well as in the previous year. Hail Cement Company, for example, reported a 23% decline in profit to SR114m ($30.4m). While the company sold a higher tonnage of cement, adverse market conditions meant it earned less. Meanwhile, Saudi Cement Company reported a 12.5% fall in profits, and in a statement to the bourse calculated that new government tariffs for energy would cost it an additional SR68m ($18.1m) in 2016. National Aluminium Factory Company (NAFCO), meanwhile, which makes metal products used in construction, relies on government projects for about 40% of its business. It said delays in payments and falling prices have been a concern. “To be profitable we need big demand, as margins are slim, but we aren’t expecting to see that happening in the near future,” Nabil Walid El Kachef, managing director of NAFCO, told OBG.

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The Report: Saudi Arabia 2016

Construction & Engineering chapter from The Report: Saudi Arabia 2016

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