| KHOBAR, Saudi Arabia, April 9
KHOBAR, Saudi Arabia, April 9 Major Saudi
Arabian construction firm Abdullah A. M. Al-Khodari Sons
expects labour reforms to keep weighing on its bottom
line for a few more years, but the situation will start
improving in the second half of 2014, its chief executive said.
After decades of ineffective localisation policies, the
Saudi government imposed in late 2011 stricter penalties on
companies which failed to meet quotas for hiring Saudi citizens.
A year later, it also introduced a levy of 2,400 riyals
($640) a year for every foreigner which 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 important
projects. Telecommunications firms lost business as some foreign
workers left the country; even banks were hit as they made bad
loan provisions in case the construction firms were forced to
delay some loan repayments.
Al-Khodari, which has about 17,000 employees, has been at
the centre of the upheaval. The company's margins were eroded by
more than 50 percent as the labour reforms were introduced, with
an average annual cost impact of 50 million riyals since July
2011, Fawwaz Al-Khodari said in an interview.
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, the executive said.
"2014 will have a mix of old and new business, but I think
by the second half of this year we will be coming out of the rot
and the damage we've been having in the last couple of years,
and we should be witnessing an improvement reflected on our
The company, which has yet to announce its first-quarter
earnings, reported a 69 percent year-on-year decline in net
profit for the fourth quarter of 2013 to 8.5 million riyals. It
cited as one reason an increase in manpower costs, which jumped
While the labour reforms appear to have slowed the country's
overall economic growth moderately - gross domestic product
expanded 3.8 percent last year, after 5.8 percent in 2012,
mostly because of slower oil sector growth - government policies
are in some other ways stimulating the economy, a fact which
Khodari readily ackowledged.
As demand for the company's services grows with rising
incomes and heavy infrastructure spending by the government,
there is huge potential for growth in the local construction
market, he said.
In its 2014 budget, the government plans to spend 855
billion riyals, with much of that focused on social welfare
projects such as schools, hospitals, new roads and railways, and
upgrades of ports and airports. Al-Khodari's core business line
is executing such government projects; it also hauls and
disposes of municipal solid waste.
Last July, the government awarded $22.5 billion in contracts
to three foreign-led consortia for the design and construction
of the Riyadh Metro, the capital's first metro rail system,
which will require tens of thousands of workers. Authorities
plan other metro systems in cities such as Mecca and Jeddah.
The company has discussed with some of the Riyadh consortium
members the possibility of being nominated as a subcontractor
for that project, Khodari said.
"If Al-Khodari participated with one consortium or more, the
areas which would be relevant to our scope could be up to 6
billion (riyals) in any single contract," he said.
"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 added, "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."
These expectations may explain why the company's share price
is up 15 percent so far this year, slightly outperforming a 13
percent rise in the main Saudi stock market index.
Last year, the company won contracts worth nearly 2.7
billion riyals, up from slightly below 1 billion riyals in 2012.
This year it hopes for a further increase, Khodari said.
"Our backlog in 2012 was about 2.5 billion riyals and in
2013 it was about 3.7 billion. 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."
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, Khodari said.
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, speaking in an interview at his 11th-floor office
overlooking the Gulf, acknowledged the good intentions of the
reforms. But he said the country also needed adequate
educational and vocational training for Saudi citizens, aligned
to the requirements of industries which employed them.
Since 2011, many companies have said they struggle to find
qualified Saudis to replace expatriates, despite high government
spending on university scholarship programmes and technical
training colleges. Firms have also complained that employment
rules make it too hard to fire Saudis.
"I think the last thing you should expect is for the
contracting industry to be forced to become professional
universities and colleges and vocational training centers,"
Khodari said. "We can be part of the process, but we cannot take
on the whole responsibility."
He also said the statistics on Saudis finding private sector
employment might be misleading, as all construction companies
were having "a serious battle trying to get those that they hire
to actually do anything".
He said many Saudis were not willing to work in projects
such as city cleaning or at remote sites, making hiring a large
number of Saudis in non-administrative jobs a major challenge.
"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."
(Reporting by Marwa Rashad; Editing by Andrew Torchia)