Riyadh Metro ... an artist’s perspective.

Riyadh Metro ... an artist’s perspective.

Eye on infrastructure

Al Khodari hopes to be part of the Riyadh Metro project

May 2014

MAJOR Saudi construction firm Abdullah A M Al Khodari Sons anticipates growing demand for its services as Saudi Arabia continues to spend billions of  dollars in upgrading its infrastructure across the kingdom.

One particular area that it expects to boom is the transportation sector, especially in view of the contracts worth $22.5 billion awarded by the government in July last year to three foreign-led consortia for the design and construction of the Riyadh Metro. Authorities plan other metro systems in cities such as Makkah and Jeddah.

The company has discussed with some of the Riyadh consortium members the possibility of being nominated as a subcontractor for that project, a top official told Reuters.

“If Al Khodari participates with one consortium or more, the areas which would be relevant to our scope could be up to SR6 billion ($1.6 billion) in any single contract,” says chief executive Fawwaz Al Khodari.

“We all know that as things develop, capacity problems may build up with some of the contractors, and there may be a need for other contractors to come in.”

He continues: “I think in 2015 (Saudi Arabia) will probably be the busiest workshop in the world for metros. The potential is huge and if we are successful in our drive to get our share of the business, it could definitely have a major positive impact on the top and bottom lines of Al Khodari.”

Last year, the company won contracts worth nearly SR2.7 billion ($719.5 million), up from slightly below SR1 billion ($266 million) in 2012. This year it hopes for a further increase, says Al Khodari.

“Our backlog in 2012 was about SR2.5 billion ($666 million) and in 2013 it was about SR3.7 billion ($986 million). So if we accept that this rise will be reflected in our revenue stream, then you should see pretty healthy growth in the top line in coming years,” says Al Khodari.

The firm, with offices in Abu Dhabi, Qatar and Kuwait, expects to see better opportunities in Qatar later this year or during 2015 as the country prepares to host the 2022 World Cup soccer tournament.

However, Al Khodari expects labour reforms to keep weighing on its bottom line for a few more years, although it believes the situation will start improving in the second half of 2014.

The Saudi government in late 2011 imposed stricter penalties on companies which failed to meet quotas for hiring Saudi citizens. A year later, it introduced a levy of SR2,400 ($640) a year for every foreigner that a company employs above the number of its Saudi workers.

Most private-sector jobs in the kingdom are held by roughly 10 million expatriates, who are typically paid less than Saudis, so the tighter labour policies have had a big impact on some firms by pushing up their costs and cutting profits. In labour-intensive industries such as construction, companies complained the reforms caused bottlenecks in key projects.

Al Khodari, which has about 17,000 employees, has been at the centre of the upheaval, according to Reuters. The company’s margins were eroded by more than 50 per cent as the labour reforms were introduced, with an average annual cost impact of SR50 million ($13.3 million) since July 2011, says Al Khodari.

The company now includes the cost of the reforms in the new contracts it signs, but it still feels some negative effect as it works through contracts signed before the reforms were introduced. This effect will “drag on for a few more years”, but it is steadily decreasing, he says.

“2014 will have a mix of old and new business,” says Al Khodari, indicating that the company expects to recover from “the damage in the last couple of years, and we should be witnessing an improvement reflected on our bottom line”.

Al Khodari is reported to have witnessed a 28 per cent increase in manpower costs.

And while the labour reforms appear to have slowed the country’s overall economic growth moderately – gross domestic product expanded 3.8 per cent last year, after 5.8 per cent in 2012, mostly because of slower oil sector growth – government policies are in some other ways stimulating the economy.

Labour Minister Adel Al Fakeih said in January that Saudi Arabia had doubled the number of its citizens working for private companies in the 30 months since it began introducing the labour reforms.

Khodari acknowledges the good intentions of the reforms, but he says the country also needs adequate educational and vocational training for Saudi citizens, aligned to the requirements of industries which employed them.

Since 2011, many companies say they struggle to find qualified Saudis to replace expatriates, despite high government spending on university scholarship programmes and technical training colleges. Firms also complain that employment rules make it too hard to fire Saudis.

He also says the statistics on Saudis finding private sector employment might be misleading, as all construction companies are having “a serious battle trying to get those that they hire to actually do anything”.

“By forcing the contracting sector to hire nationals that are neither available in the numbers needed, nor with interest in the sector, we are encouraging unproductive dependency.

“Official figures will indicate that we are beating unemployment, while we are in fact affecting our youths, morally and ethically, by promoting such dependency,” concludes Al Khodari.

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