Government ministries in Saudi Arabia have started releasing payments owed to contractors as the kingdom tries to ease pressure on the cash-strapped construction sector, sources familiar with the matter have said.

The Health Ministry, one of the major clients for construction companies in the country, began to make payments to contractors during the first week of May, sources said, asking not to be identified as the information has not been made public.

The ministry is expected to release a total of SR20bn ($5.33bn) over the coming weeks and months, one Riyadh-based banking source said.

The government is working with contractors, according to a construction industry source, who expects the payments to start flowing by the end of this month. “The ministries have started to have funds released for payments,” says a source working with the government.

Contractors have been awaiting payments since last year for the work they have already completed for various government bodies, stifling cash flows across the contracting sector.

Releasing $48bn

Riyadh plans to release $48bn it owes to contracting firms this year. These payments constitute a major part of the total amount the government has withheld, two Riyadh-based bankers familiar with the matter told MEED on 3 March. The government still has an estimated $10bn backlog on top of the payments due to be released in 2016. However, there is no clarity about when the government will clear the remainder of the payments.

Saudi Arabia relies heavily on sale of hydrocarbons for revenue and is expected to run a budget deficit of $86bn this year. The government has cut spending, capped the award of new contracts and held contractors payments after oil fell from the mid-2014 peak of more than $110 a barrel.

In February, Abdulrahman al-Zamil, president of the Council of Saudi Chambers business association, had 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, 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

The absence of new business and delay in payments has forced contractors to cut tens of thousands of jobs. Saudi Binladin Group (SBG), the biggest contractor in the country, has laid off 70,000 foreign workers, a company spokesman confirmed on 8 May. The cash-strapped contractor had delayed workers’ salaries for several months, which gave rise to violent protests in the holy city of Mecca, prompting government intervention to address the wage issues.

SBG now expects to conclude the employee reduction programme by the end of May or the beginning of June.

Half of the laid-off employees have received their end-of-service benefits and have already left Saudi Arabia. The company has transferred the work permits of another 15,000 workers to other employers and the visa cancellation for about 8,000 employees is under process at the Saudi Labour Office. The procedures to finalise the termination of contracts and settlement of dues for more than 10,000 employees will begin shortly, according to the company spokesman.

Vision 2030

The move to release delayed payments follows the announcement of a sweeping economic reform agenda under Saudi Arabia’s Vision 2030.

On 7 May, the kingdom, the region’s biggest economy, also unveiled a wide-ranging government shake-up, naming Saudi Aramco chairman Khalid al-Falih as the new Energy, Industry & Mineral Resources Minister. Al-Falih, who had been serving as health minister, replaces Ali al-Naimi, who had served as Saudi Arabia’s oil minister for more than 20 years.

The government restructure, the latest step in the Vision 2030 reforms, was announced in a royal decree, which has seen several ministries merged and others abolished, including the Electricity & Water Ministry.

Riyadh is also scheduled to reveal the National Transformation Plan (NTP) in mid-June, which the sources have said could identify 146 state entities in which the government plans to sell stakes to strategic investors or to the public.