The Saudi Arabian construction industry is passing through a period of adjustment this spring. The government’s decision to slash capital spending for the second year running has reduced project opportunities to a trickle, forced contractors to restructure and left many companies with no option but to look elsewhere for business. Prospects in the private and industrial sectors are improving but contractors do not expect an upturn in general market conditions until well into 1996.
Contractors on government projects have been hardest hit by the current downturn. Since the slowdown began in late 1993, they have experienced extensive delays in contract awards and a sharp reduction in the number of new tenders being issued. An additional headache has been payment delays. An estimated $5,000 million is owed by government departments to contractors and suppliers. Some have been waiting for 18 months.
Payments have become a political issue. When King Fahd announced the budget details for 1995 at a cabinet meeting on
1 January he also instructed Finance & National Economy Minister Mohammed Ali Abalkhail to give priority to clearing the backlog of debts. Since then, payment has been forthcoming on amounts totalling less than SR 5 million ($1.3 million). The next step will be to tackle the larger debts, through the introduction of a securitisation programme. This involves the Saudi Arabian Monetary Agency (SAMA – central bank) issuing a security to a company against a proven receivable, which could then either be sold on or kept until maturity.
Whatever approach to repayment is eventually adopted, contractors accept that further delays are inevitable. Some of the kingdom’s leading companies are still owed hundreds of millions of dollars and have almost reached the limits of their bank overdrafts. To cope with this executives have been forced to draw up new business strategies, aimed at limiting the impact of the downturn.
Restructuring to reduce overheads has become essential. Companies that acquired extra capacity in the boom that followed the Gulf war in 1991 have had to cut it back again. Staff numbers have shrunk. Equipment is being kept longer before it is renewed. Inventories have been trimmed. Expatriate general managers have seen some of their traditional incentives, such as the payment of school fees for dependents, withdrawn or reduced.
On the business development front, there has been a noticeable shift, too. Recent experience on public sector projects has made contractors more cautious about choosing a project to pursue. Says one local general manager: ‘Whereas before you used to look at the size of a tender, now you try and find out whether a ministry has earmarked funds for a particular scheme in its current budget. Certain clients you just avoid because it is obvious that the money is not available.’
The government’s budgetary constraints have also forced companies to consider providing some finance themselves. Some local companies in the power sector – such as Saudi Binladin Group and Saudi Cable Company – have already set about developing their financial services capabilities in response to the request from utilities for alternatives to straight cash payments. Other infrastructure contractors say they are willing to look at using private capital in financing state projects. ‘If the government accepts the idea of project finance, say in the roads sector, we would be interested,’ says the manager of a leading local company. ‘Such a development would help to break the log jam in contract awards and formalise the repayment terms.’
The kingdom’s depressed public sector has convinced some contractors that the time is ripe to expand overseas. Several of the larger contracting companies are pushing to establish a regional presence. A favoured haunt is Lebanon, where Almabani, Saudi Binladin and Al-Seif have been pricing projects in the reconstruction programme. Lebanon is an attractive prospect because the kingdom has offered reconstruction aid to the Lebanese government. The Horn of Africa is also attracting interest. Again, companies find themselves drawn to Eritrea and Ethiopia by Arab aid, which is being used to fund several projects.
At home, the outlook beyond the Saudi public sector remains bright. Private sector projects are on the increase in the health, leisure and manufacturing sectors. In the industrial sector, contractors are gearing up for a major upturn in the second half of 1995, as Saudi Aramco and Saudi Basic Industries Corporation (Sabic) launch new capital investment programmes (MEED 10:2:95, Cover Story).
Improved prospects have already convinced Saudi Engineering & Construction Company (Sauden) to revive its operations in the Eastern Province. Since it reopened an office in Al-Khobar in mid-1994, Sauden – a joint venture of local businessman Ghassam Ibrahim Shaker and Italy’s Fochi – has won three contracts totalling SR 100 million ($26.7 million) to carry out mechanical erection work on the Bisha cement plant and to build water and fuel storage tanks in Yanbu and Riyadh, respectively. In 1995, it hopes to increase its order book to at least SR 160 million ($42.7 million).
Sauden’s approach to the market reflects the new pragmatism which is much in evidence in contracting offices throughout the kingdom. The company’s set-up in Al-Khobar aims to be flexible and no bigger than necessary to handle the work that Sauden has in hand. If a substantial order is won, equipment and expertise is brought in from Fochi’s other affiliates throughout the Middle East. This is in marked contrast to the company’s in-kingdom operations in the 1970s when head office fixed expenses were almost 10 times what they are now, regardless of the work load.
The driving force behind the constant quest to reduce overheads is competition. Even in the relatively buoyant industrial sector, new bid invitations are drawing cut-throat offers. By local standards, margins are becoming extremely tight. Some contractors see this as a welcome sign that Saudi Arabia has become a mature market. ‘The kingdom is moving much more into line with the international market,’ says one Eastern Province contractor. ‘Back in the 1970s and 1980s, profit margins were artificially inflated and quality often overlooked, because everything had to be built from scratch, and quickly. Today, the market is radically different. If companies are to be successful, they have to be prepared to accept international margins and conform to international building standards.’
Contractors working for the government are reconciled to another tough year in 1995. The hope is that this year’s budget, which calls for an increase in non-oil revenues and a 6 per cent fall in expenditure, will place public finances on a firmer footing. Only then will the government be in a position to pay off its debts and revive its capital expenditure plans.