The Saudi government is preparing to pay $48bn it owes to contracting firms this year, in a bid to ease pressure on the kingdom’s contracting sector.

Getting payments that have been held for more than six months is a relief for the biggest contracting market in the region. But does it solve all the problems? Would the contractors, some of them already at a tipping point, now become cash flow positive? 

The reality is the payments constitute a part of the total amount, which has been withheld since last year, two Riyadh-based bankers familiar with the matter told MEED earlier in March. The government will still have an estimated $10bn ($2.7bn) backlog of payments.

“Nothing has been released as yet,” according to the banker who asked not to be identified as information isn’t public. The payments will be released gradually, starting March.

There is a schedule in place, which has already been conveyed to the major contractors and the good thing is that they will not have to take any haircuts on the dues outstanding. The bad thing, however, is that there is no clarity on when Riyadh plans to clear the remaining backlog.

Even if the government pays $48bn to struggling contracting firms as planned in 2016, it is not going to take them far in terms of the addressing their cash flow trouble, the biggest issue weighing them down right now.

New credit facilities have dried up in recent months from banks, which have already been over exposed to contracting finance in the kingdom. The only source of cash available for contractors, especially those, who rely on multi-billion dollar state contracting for business, is the payments from clients.

Most of the major firms have several ongoing jobs, ranging from state-funded infrastructure projects including major road and rail works and building and expanding new airport terminals to massive housing, healthcare and education projects in Saudi Arabia.

Riyadh, which expects a SR326bn budget deficit in 2016, has embarked on spending cuts to compensate for shrinking oil revenues. There’s no clarity on when and how the government will pay for projects in the works. If plans are to only clear the 2015 delayed payments, it likely that the Ministry of Finance will be facing another backlog of payments, on top of the estimated $10bn from last year it is carrying forward to 2017.

Getting paid after a lag of six months is only enough to keep contractors trading. For the likes of Saudi Binladin Group (SBG) and Saudi Oger it means they will be able to meet their salary obligations.

SBG has not paid about 2,000 engineers, management staff and workers for four months, which led to labour unrest and protest demonstration. 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.

SBG, the biggest contractor by turnover in Saudi Arabia, 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.

Saudi Oger has also been forced to delay and reschedule payments to subcontractors and suppliers, two construction industry sources told MEED. According to the local media reports, the company had to delay salaries, but it has managed to resolve the issue with the Labour Ministry.

It seems, the cash-strapped contractors will need something more than the part payments on the backlog. For them to survive this crunch, they need a mechanism and a clearly laid out schedule of payments from the government on the multi-billion dollar schemes already underway.