Riyadh prepares to pay $48bn of contractor payments in 2016

03 March 2016

Kingdom plans to gradually release delayed payments, starting March

The Saudi government will pay the SR180bn ($48bn) it owes to contracting firms in the kingdom this year, in a bid to ease pressure on the construction sector.

These payments constitute a major part of the total amount Riyadh has withheld since last year, according to two Riyadh-based bankers familiar with the matter. The government still has an estimated $10bn backlog on top of the payments due to be released in 2016, said one of the bankers, who asked not to be named as the information has not been made public.

“Nothing has been released as yet, but everything is agreed on who will get how much,” the banker said. “Payments will be released gradually, starting March.”

The government has laid down a schedule and it has already been conveyed to the major contractors, the banker said adding that there are no haircuts involved and that the contractors will be paid in full by the government. However, there is no clarity about when Riyadh plans to clear the remaining backlog.

The Finance Ministry could not be reached for a comment.

Saudi Arabia’s finances have tightened over the past 18 months as oil prices have dropped by about two-thirds from their mid-2014 peak.

The SR444.5bn of oil proceeds in 2015 represented 73 per cent of the kingdom’s total revenues. This is 23 per cent less than the income generated from the sale of crude a year earlier.

Budget deficit

Riyadh, which expects a SR326bn budget deficit in 2016, has embarked on spending cuts to compensate for shrinking oil revenues. Infrastructure spending, which had kept the Saudi projects market in growth mode for almost a decade through to 2014, has been cut substantially. Planned infrastructure and transportation spending has been reduced by 50 per cent, from SR63bn in 2015 to SR23.9bn in 2016.

Payments on multibillion-dollar government projects have also been withheld as the government tapped the domestic market with local currency bonds to plug the budget deficit.

Most Saudi lenders that are heavily exposed to project and contracting finance have capped credit lines for the construction sector, which has led to serious cash flow issues.

Abdulrahman al-Zamil, president of the Council of Saudi Chambers business association, last month sought the Saudi monarch’s intervention to ensure government payments to construction companies.

Al-Zamil, a leading Saudi businessman, wrote a letter to King Salman bin Abdulaziz al-Saud saying some of the construction firms have been awaiting government payments for more than six months. “If the delay in payments continues, these companies will be at risk of default, or go completely out of business,” he said in the letter, adding that there is a need to investigate the situation and create a mechanism for the companies to receive the money owed to them.

Saudi Binladin Group (SBG), the top contractor by turnover in the kingdom, was among the worst hit. The construction giant, which mainly relied on state contracting work for business, has not paid salaries to about 2,000 engineers, management staff and workers for four months.

Staff protests

The employees took to the streets in Mecca, but SBG reached an agreement in February with the representatives of its workers and Saudi Arabia’s Labour Ministry, in a deal brokered by the police department of the holy city, according to an agreement seen by MEED.

The deal allows employees the option to leave the company and get final settlement before exit or get their sponsorship transferred to another firm.

In order to keep its head above water, SBG has plans to lay off 15,000 workers, in the third batch of staff retrenchments in its architecture and building construction division, according to an internal email seen by MEED in November last year. It is not known how many people the company has already laid off in previous phases.

SBG’s plans included cutting jobs at its unit Construction Products Holding Company (CPC) and transferring 8,000 workers to the King Abdulaziz International airport scheme to speed up construction and thereafter let go, according to the email.

Saudi Oger, another big name in the kingdom’s contraction sector, was forced to delay and reschedule payments to subcontractors and suppliers, two construction industry sources told MEED. The local media reports have said the company had also delayed salaries, but it has managed to resolve the issue with the Labour Ministry. 

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