Contractors face up to a new reality in Saudi Arabia

13 March 2009

While the kingdom is expected to provide a source of work for construction firms despite the slowdown elsewhere in the Gulf, the lower profits margins available from retendered projects are causing concern.

Until late 2008, the Gulf’s construction sector had been booming for five years, and nowhere more so than in Saudi Arabia. Dubai may have led the way with its iconic Burj al-Arab and Burj Dubai buildings, but the ambition and sheer scale of projects planned and under way in Saudi Arabia will come to dwarf those launched in the UAE.

Contractors in the kingdom have enjoyed a prosperous period, during which the government has continued its economic diversification programme, first launched in the early 1980s, away from oil dependence.

Six new economic cities are planned by the Saudi Arabian General Investment Authority (Sagia), including the flagship $26bn King Abdullah Economic City, north of Jeddah. But the global economic crisis is beginning to have an impact. Despite major public investment in infrastructure and education under Riyadh’s $17bn public spending plan for 2009 ensuring that work is ongoing, concern is spreading through the industry.

Renegotiating bids

In particular, contractors are calling on banking institutions to release funds to stimulate projects. Since the beginning of 2009, they have been asking the Saudi Arabian Monetary Agency (Sama), the central bank, to ease the strict regulations on loan-to-deposit ratios, which are currently 85 per cent.

“The banks are much healthier than in other countries,” says Ali Kolaghassi, vice-president, corporate business development, at Saudi Oger. “But they are not lending and the government must ease regulation so that banks can start lending again, especially to contractors.

“Fortunately, we started the year with some good contracts. We have ongoing projects from 2008 and into 2009. But unless we see more projects announced in 2009, we cannot say what is going to happen in 2010.”

Ahmad Qanawati, technical manager at Abdullah Abdulmohsen al-Khodari Sons Company, agrees, forecasting it will take at least two years for the market to pick up. “We still have to see, it is hard to predict, but I think by 2011 we will start to see things pick up again,” he says.

“It seems they [the ministries] are rehashing all their projects, and while we do not go after too much private work, this has clearly slowed down.”

At MEED’s Arabian World Construction Summit (AWCS) in Abu Dhabi in February, a survey of 30 senior industry figures revealed that 48 per cent consider Saudi Arabia to be the market that offers the best opportunity for contractors in 2009, followed by the UAE and Qatar.

Just over one-third (37 per cent) also believe that infrastructure projects, such as power, water and wastewater plants, will provide the bulk of opportunities this year, while just 10 per cent highlight real estate as a ‘viable opportunity’ going forward.

One impact of this slowdown has been the retendering of projects after the client has received bids. The renego-tiating of low bids by the Finance Ministry for three projects at the new women’s college in Riyadh, Princess Noura bint Abdulrahman University for Women, is just one example.

Saudi Oger was awarded the first package, worth SR12.5bn, Saudi Binladin Group won the second contract, worth SR10bn, and El-Seif Engineering & Contracting won the third, worth SR8bn. The letters of award were received in mid-January.

However, the value of the contracts represents a significant reduction in the prices the firms initially submitted on 22 October 2008. The client sent a letter to the three low bidders in December 2008 requesting a discount and citing the fall in raw materials prices since the bids were submitted.Initially, Saudi Oger submitted the low bid for the first package with a price of SR17bn, Saudi Binladin was the low bidder for the second contract with a bid of SR15bn, and El-Seif submitted the lowest bid for the infrastructure package, at SR11bn.

Increasing delays

Local firms are critical of this trend of renegotiating deals. “We are fed up with giving reduced prices,” says one Riyadh-based contractor. “It is still booming here and we are being told we have to drop our prices. Why should we? No one is doing so happily. Any contractor will tell you the same thing. The market is still strong, it doesn’t make sense.”

In a further complication for contractors, deadlines for tenders for infrastructure work at the industrial cities of Jubail and Yanbu have been extended up to three times.

Nayef Othman, tendering manager at Riyadh-based contractor Shibh al-Jazira, says that while the government has earmarked millions of riyals for proposed infrastructure work - for example, the Transport Ministry is inviting companies to bid for 100 new road contracts ranging between SR20m and SR700m - the reality is that contractors will not see any of the money in 2009 because of the time needed to tender projects. This is a major concern for the contractors.

“The first tenders are due in March. We have asked to see documents for 60 of the projects. But it will be delayed because they have not allocated the funds for the project for this fiscal year,” says Othman. “What will happen is they will extend the invitations by three months, then allocate two to three months for preparation of the documents, then delay announcements by another three months or so before any award, and we are now into next year. It looks good as a plan on paper, but I don’t believe it.”

A major emphasis in this year’s budget is the continuing modernisation of education in the kingdom. In the 2009 budget, which was announced in December 2008, SR122bn is allocated for spending on education and manpower development.

Riyadh-based Al-Rashid Trading & Contracting Company won a SR1.6bn contract to build residences for academic staff at King Saud University in Riyadh in January this year. The company will build 12 buildings of up to 10 storeys in height, and 403 villas, to the south of the existing campus.

In total, the development will cover a built-up area of 400,000 square metres. Saudi Bin-ladin Group has also secured a SR8bn contract for the construction of housing facilities at a new women’s college at the university.

In addition to these awards and those for Princess Noura bint Abdulrahman University for Women, a significant number of tenders were issued in January, focusing mainly on housing facilities for educational establishments throughout the kingdom, as part of Riyadh’s plans to build 1,500 schools and rehabilitate 2,000 existing educational facilities.

Market monopoly

Bids have been submitted for 100 faculty housing units for King Fahd University of Petroleum & Minerals in Dhahran, in the Eastern Province, while bids are due to be submitted by 14 February for the second phase of King Khaled University at Abha in the southwest. The SR5bn contract covers the construction of an 800-bed hospital and 12 further buildings, including five medical schools.

The Higher Education Ministry has also issued two tenders for housing at the University of Hail in the north of the kingdom and Taibah University in Medina in the west, with bid deadlines set at 15 and 16 February respectively.

While the emphasis on education is encouraging for contractors as a new stream of work, it fails to mask an ongoing criticism of the Saudi market: the large regional contractors’ monopoly of major projects, often at the expense of smaller local firms.

Speaking at the AWCS, Khalid al-Zamil, managing director of strategic planning at the local Zamil Group, suggested that more attention should be placed on ensuring that work in the kingdom is avail-able to a wider group of firms, creating a more balanced and secure market.

“My only worry is that projects should be divided into smaller packages, so that the medium and small companies can get a slice of the cake,” said Zamil. “For the whole economy, the government needs to do some homework.

“We need conditions introduced to see jobs sub-let to other smaller firms, so that they may get a slice.”

Al-Zamil said that for the market to remain strong, capital must continue to be injected into the system rather than banks being allowed to restrict access, which would damage the kingdom’s prospects.

“I think our worst problem is confidence,” he said. “The banks have problems, but I feel the government should do more. It is acting too slowly, it is not helping contractors who need the funding to push forward with spending.”

The slowdown in the private construction sector has presented a major opportunity for developers, who are experiencing far greater demand from contractors looking to procure work.

Waleed al-Aisa, project manager on the Public Pension Agency’s King Abdullah Financial District (KAFD) project, says he has seen a noticeable change in his ability to access skilled workers. “There has been a real surge of interest in our project from contractors,” he says. “Before, we had a really hard time getting access to talent, but now there is an abundance of engineers.

“It seems that Dubai is flooding our market. Before, I used to call and [might have got] a reply back in a day or two. Now, engineers especially are knocking on my door.”

The market slowdown in Dubai is helping the markets in Riyadh and Qatar, especially with regard to prices and quality. “Before, you would be forced to take anyone, now you can demand better quality from your contractors,” says Al-Aisa. “I used to wait for a technical manager’s CV to land on my desk. Yesterday, I had 16, mostly from the UK, US and Dubai.”

As global credit conditions and market confidence continue to play havoc with the region’s - especially Dubai’s - construction markets, Saudi Arabia’s willingness to continue spending represents a real opportunity for contractors.

Spending on key infrastructure and other public projects, such as education, means the kingdom is a valuable market for contractors. The downside is that they will have to accept the lower price demands from developers, and consequently lower margins, to win the work available in the kingdom.

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