Construction Firms Prepared to Cope with Higher Expenditures

by shariff mohammed | Apr 09, 2018


Major players are set to streamline their recruitment process to align themselves with the market scenario

With the ambitious Saudi Vision 2030 in place pinning hopes on a better future, Kingdom’s almost all the economic sectors have encountered many challenges. The construction sector is no exception but this vital area of economic activities has started to rebound with many giant projects in sight.  Saudi construction has been set to witness strong growth in 2018-19 as a number of (Public Investment Fund) PIF’s Giga-projects begin to take shape to boost the sector. Aside from the continued development of the Red Sea project, the main pillars of the Giga-project, Neom, will also be laid out and Qiddiyah, the mega cultural, sports and entertainment facilities, is expected to break the ground during 2019.

By Mohammed Shariff

With the dawn of 2018, the regional economic landscape has seen a significant and fundamental shift.  Oil prices which were already significantly down over the previous few years saw slight upward trajectory in 2017 Q4, sending positive signals to the economic outlook.

Contracting sector, which is one of the vibrant sectors of the Kingdom’s economy is now looking for alternatives as moderate prices have posed many professional challenges.  The oil prices have started declining since the end of 2014, it entered into its lowest level in mid-2017 Q1. This has put pressure on the government to cut down investments on infrastructure projects.

According to a report, released by Saudi Council of Chambers there was a significant upswing in the value of awarded contracts during the third quarter of 2017 as it reached SR82.8 billion. It marked a strong rebound from the previous quarter. Anchor sectors took hold of the majority of spending, as the roads and residential real estate accounted for approximately 57 percent of the total value of SR47.5 billion.

Thamer J. Al-Hathal, Member of the Commercial Committee, Asharqia Chamber said: "The Kingdom of Saudi Arabia is keen on implementing the concept of sustainability in all aspects of social and economic life, particularly construction. Hence, it is witnessing a growing development in the implementation of environmentally-friendly technologies in the construction sector, which is one of the most important sectors in the Kingdom and ranked second after oil sector. The contribution of this sector in the gross domestic product (GDP) of Saudi Arabia was about SR169 billion in 2017, according to official statistics issued by the General Authority for Statistics. It is expected that this sector will continue to grow due to its enormous potential, owing to the ongoing developmental projects in the Kingdom. According to the national program, the private sector will raise its contribution in the GDP to 65% by 2030. In light of the remarkable development of the global construction and building industries and the trending concept of sustainable architecture and buildings in addition to rationalization of energy consumption, the Kingdom has signed a global partnership to develop 1.5 million residential units using 3D printing technology. The cost of this project will amount to $ 1.45 billion dollars, which reduces about 30% of the construction waste and 50% of labor force, and decreases the total cost of construction. It comes in line with the ministry’s program launched in January 2017 that aims to develop the residential sector using the latest construction technology.”

In the coming years, governments across the region will respond to the new dimensions by fundamentally readjusting their fiscal policies to cut spending, raise taxes and increase borrowing. These changes will come as part of a huge rebalancing of the regional economy that will see liquidity tighten and a hardening in market conditions. 2018 is set to be a tough year, but with steady growth.

Many contracting companies are of the opinion that it is a course correction that is happening. Saudi Commerce and Economic Review spoke to many large, medium and small contracting companies. Majority of them say, those who have nurtured strong business fundamentals will see this period as course corrections. There are many bright spots for business across the region that will continue to provide opportunities for investment.

Saleh Al-Jeweir, Advisor to the Contracting Committee of Asharqia Chamber said: "Saudi Arabia, the region’s biggest economy and most exciting market, has committed to maintaining spending to continue its essential job creation and diversification drive. Direct government spending in the Kingdom will be at lower levels than over the past few years and it will seek to raise its borrowing to finance its programs. We can also expect to see an acceleration of initiatives to tap private investments through new and alternative models for the financing and delivery of public services and projects. Various forms of the public-private partnership model will be developed in the coming months and years."

Despite many hard predictions, which will eventually hit the market,  professionally streamlined companies will steadily expand and the country is all set to open up to foreign investments and international business as the government is serious to go ahead with the structural reform measures required to create confidence and stability.

Short Term Challenges

According to many officials, things are not easy to adjust to the course correction, which was riding on high profit margin. Construction industry faces difficult times ahead as the prospect of state budget cuts adds to painful labor reforms.

Saad M. Al-Zahrani, President of Al-Mashariq Company said: “Now we are witnessing sign of strain on an economy squeezed by lower oil prices. Companies in the sector have benefited from a construction boom over the past decade as the world’s top oil exporter has taken advantage of high crude prices to spend heavily on transport, social infrastructure and industrial facilities. But prices have more than halved since last summer due to a global supply glut and the volume of building projects looks set to shrink as the government, facing a mammoth budget deficit, starts to economize by slowing or shelving some plans.”

The government has been pushing companies to hire more Saudi citizens instead of cheaper foreign workers, in order to move Saudis out of the state sector into private industry. It is also keen to ease an unemployment rate standing at 11.6 percent. “I think we should expect the difficult situation in the (construction) sector over the next 18 months. Companies are facing troubles mainly due to the labor reforms. We will see the result of the budget deficit later, but now we are in a situation where the pain is already there,” said Fawwaz Al-Khodari, CEO of Abdullah Abdul Mohsin Al-Khodari Sons.

The Saudi finance minister’s announcement in 2017 September that the government was delaying some construction projects but those deemed important for the economy would go ahead has brought positive energy in the sector. Many believe that many projects that are not seen as being essential will be first to be shelved, including those that were tendered but not awarded. For example, a plan to build soccer stadiums around the country may be seen as non-essential, while projects such as housing, hospitals and schools look likely to go ahead.


Abdullah Al-Shammari, CEO of Middle East Construction and Contracting Est, said: "The building contractors would also be boosted by long-awaited government compensation for a levy imposed on work permits of foreign staff. We expected compensation payments for contractors to start in the first quarter of 2017 Q1. Nevertheless, under present rules, compensation can only be obtained after completion of the projects to which workers were assigned, and unless this is changed, companies will face further financial stress. I think companies will be extremely lucky if they get anywhere near 60 or 70 percent (of permit levies paid) with the existing conditions, unless they are changed."

Saudi Labor Market Outlook Positive

Data released by the Central Department of Statistics and Information (CDSI) showed that the overall unemployment rate (for both Saudis and non-Saudis) in Saudi Arabia was healthy by international standards at 5.7 percent during the first half (H1) of 2017. This reflected the positive general employment stance of the non-oil economy and the private sector in particular. However, the challenge to the Saudi labor market is rooted in the overreliance on non-Saudis occupying private sector jobs. This has meant a structurally high unemployment rate for Saudis, which stood at 11.6 percent in H1 2017.

Initiatives implemented by the authorities over the last couple of years have mainly been aimed at narrowing the skills gap between Saudis and non-Saudis. Initiatives were also aimed to address Saudi labor supply challenges, and traditional preference for public sector jobs by Saudis. Since 2011, these initiatives began to have a positive impact on overall trends in employment by sectors and nationality.

The Saudi unemployment rate fell slightly to 11.6 percent during the first half of 2017  despite year-on-year growth in total Saudi employment continuing to fall to 1.1 percent. The slower growth in total Saudi employment was mainly due to slower hiring levels in the public sector, while Saudi employment growth in the private sector remained healthy. Statistics showed that the increase in Saudi employment and Saudization in the private sector was associated with positive growth in labor productivity in the sector.








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