Oman: Construction profit warning

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A number of new projects, concentrated on bolstering Oman’s infrastructure backbone, are currently filling the order books of domestic construction firms. However, some industry insiders have warned new regulations and a rising wages bill could see profit margins eroded even as activity increases.

As part of its programme to expand and diversify the country’s economic base, the government has committed to investing billions into transport and utilities projects, including a $15bn national rail network and a series of new power stations to feed Oman’s growing industrial and private sector demand, along with several social services developments, such as hospitals, schools and housing.

According to data from the Oman Society of Contractors (OSC), the sector is already one of the largest employers in the country, with more than 55,000 local staff on the books. With the continuing surge in the building activity, the OSC estimates that the number of Omanis employed by contractors will rise to around 65,000 in 2013.

While this rise is a sign of the growing momentum within the sector, it is also a reflection of the impact of a new government policy that aims to increase local employment. In early February, the government announced it would be capping the number of foreign workers at 33% of the Omani population but did not set a deadline to meet that target. Currently it is estimated there are some 1.3m expatriate workers in Oman, representing just under 40% of the population, Reuters has reported. With no deadline set, however, this means there will likely be a phased drawing back of foreign workers, which would allow industries to recruit and train locals to fill vacated positions.

Meanwhile, newly introduced measures to increase the minimum wage for locals are set to have a more immediate impact. On February 7, the Council of Ministers announced a rise in the national minimum wage for Omani workers, with the current rate of $520 per month set to rise to $845 at the beginning of July.

Yet another measure to boost domestic involvement is the requirement set out in a decree issued by Sultan Qaboos Bin Said Al Said calling for at least 10% of any project to be subcontracted locally. This step aims to spread the benefits of the major contracts being handed out to large local and international construction firms, ensuring that small and medium-sized enterprises, which make up the majority of companies in Oman, can take advantage of the increasing opportunities in the sector.

While the OSC welcomed the government’s decision to increase the minimum wage, saying it would help attract more Omanis to the private sector, it has also called for state support to offset the higher costs. Amer Suliemani, the general secretary of the OSC, said the decision to increase the minimum wage would affect the sector adversely and could impede the government’s infrastructure programme unless the costs were balanced by the state.

“If the government does not reimburse the relative expenses of ongoing projects, many companies will become insolvent and this could lead to greater consequences,” he said soon after the decision to increase salaries was unveiled.

Hamed Hashim Al Dhahab, the CEO of Al Watanyiah United Engineering & Contracting, also raised the issue of tighter margins. Whilst he was largely positive about the opportunities on offer for construction firms, saying in an interview with regional industry publication Construction Week Online in mid-March that the flow of new projects will transform Oman’s basic infrastructure scenario, he also sees difficulties.

“There has been a considerable change in the construction market during the past 12 months. Though there are lot of new projects floated and many upcoming, the competition is very tough and the margins have become very low,” he said.

While there may have to be a readjustment of agreed prices to take into account the rise in the wages bill for ongoing projects, the government’s broader policy initiative to expand Omanisation in the sector should bear fruit in the years to come.

Indeed, the requirement for more local staff to replace the less costly foreign workforce will push up project costs, however, the dividends will be in the reduced drain on the state welfare bill and a construction sector even more attuned to the domestic market.

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