Builder Khodari May Double Capex To Handle Big Saudi Projects

Major Saudi Arabian construction firm Abdullah Abdul Mohsin al-Khodari and Sons says it may double its capital spending in coming years to cope with the work it hopes to do on the country’s big infrastructure projects.

Saudi Arabia’s SAR855 billion ($228 billion) state budget plan for 2014 slowed total spending growth to the lowest rate in a decade as the government became more fiscally cautious. But it still included funds to build 465 schools and 11 hospitals, and a 25 per cent jump in spending on infrastructure such as roads, railways, ports and airports.

Although global oil prices have tumbled to four-year lows in the last few months, below levels which analysts believe the Saudi government needs to balance its budget, industry executives do not expect major cutbacks in spending.

The government has huge fiscal reserves which it can use if necessary to maintain spending, while it views many of the projects as vital to improve public welfare – thus ensuring social peace – and to diversify the economy beyond oil.

“Most of these projects will go into the tens of billions of riyals,” the construction firm’s chief executive Fawwaz al-Khodari said in an interview for the Reuters Middle East Investment Summit.

“The scope relevant to al-Khodari in each of these projects could easily reach seven or eight billion. I am not necessarily saying that is what al-Khodari would capture, but that’s the potential of any one project…

”So when al-Khodari gets its share, it will have a substantial and material impact on financials, and ultimately a positive impact on the bottom line.”

Such projects will require raising annual capital expenditure above the levels of SAR150 to SAR250 million seen in past years, Khodari said.

“From one project alone al-Khodari could double its capex -so the trend upwards in capex is a fair assumption.”

The company reported a 23 per cent year-on-year rise in third-quarter net profit to SAR15 million, as its contract backlog fell to SAR3.36 billion as of Sept. 30 from SAR3.99 billion a year earlier.

Khodari said Saudi government spending on projects was only likely to drop if oil prices slumped for at least two years.

“For the immediate future, I see no slowdown in the projects stream. However, should the oil price decline continue and not rebound for a couple of years, then I would expect a more conservative spending policy to be employed.”

The stock market appears to endorse Khodari’s expectations; the company’s shares are up 82 per cent so far this year, outpacing an 18 per cent rise by the main Saudi market index .

LABOUR REFORMS

As the employer of about 20,000 workers, al-Khodari has been acutely vulnerable to Saudi Arabia’s sweeping labour market reforms, which aim to limit the use of foreign workers and encourage the hiring of Saudi citizens by the private sector.

In 2011 the government imposed penalties on companies which failed to meet quotas for hiring Saudis, who tend to cost more to employ; a year later, it introduced a levy of SAR2,400 per year for every foreigner which a company employed above the number of its Saudi workers.

In April this year Khodari told Reuters that his firm’s profit margins had been eroded by more than 50 per cent under the reforms, with an average annual cost impact of SAR50 million.

In his latest interview, however, Khodari said the impact had started to fade and that by the end of 2015 there would be very little effect on his company’s financials, as contracts negotiated before the reforms exited the revenue stream.

“The worst is behind us as far as the impact of the labour reforms goes. I am not saying they have stopped, as reforms continue to change and we get initiatives from time to time, but I think that the biggest shockwave…is fading.

“Quarter by quarter the impact is less and less. Once we get beyond the second half of 2015, we will have very little that is still dragging along with our remaining contract backlog.”

Khodari warned, however, that future labour market reforms or changes could still hit Saudi Arabia’s construction sector.

He was referring to demands for governments of some labour-exporting countries to set minimum wages for their workers in Saudi Arabia. Local media have reported the Indian government plans to introduce such a policy; by some estimates, about two million Indians work in Saudi Arabia.

“In cases where salaries have been SAR800 to SAR900, we are now hearing talk of SAR1,500 as a minimum salary which is a huge increase…Clearly this would become a major issue in the contracting industry.”

In addition, the Saudi labour ministry has been proposing to reduce maximum weekly working hours for private sector firms to 40 from 48, and to expand the weekend to two days from one. Companies could end up hiring more people to meet deadlines or paying extra overtime, Khodari said.

“The impact is mostly going to be a financial cost – it could be 10 per cent or it could be 25 to 30 per cent on the manpower cost.”

Khodari said there were simply not enough Saudi citizens available in the labour market for construction firms to meet quotas, as many people did not have the necessary qualifications, skills and work ethic. Many Saudis were not willing to work in non-administrative jobs or at remote sites, he explained.

“I agree that when you are a 100-man company, you can hire five Saudis. But when you are a 20,000-man company like al-Khodari and you have 1,600 Saudis that you must hire, don’t I need to put at least 1,400 in the field? I cannot accommodate so many in the office.”

The end result is that some companies are hiring people just for the sake of meeting quotas, Khodari said, urging all parties concerned to work with construction companies on finding a solution.

“Otherwise, in my opinion, 10 years down the line we could potentially have three million people who appear to be employed but not really. Should there be a construction slowdown, they will be unemployed, have no skills and be dependent, and that will be the biggest social time bomb.”