Saudi bill blues
How easy is it for contractors to get paid in Saudi? CW investigates
With its massive oil reserves and ambitious plans for development in the coming years, Saudi Arabia has become one of the most attractive new markets for Middle East construction firms, which, in the last two years, have been burnt by the global economic recession.
Not only is the country investing heavily in tourism developments, but also in infrastructure, oil and gas projects, nuclear power generation, housing, schools, hospitals and more. With its rising population, construction is ongoing.
Up until now, the Kingdom’s reputation has been extremely positive, with most contractors and suppliers voicing their plans to break into the Saudi market in the near future. With abundant government funds, and a desire to rapidly expand in almost every construction sphere, it offers something that other places do not.
Unfortunately, however, many professionals who have worked, or who are currently working in the country, are not quite so enthusiastic.
Characterised by an informal business environment, a strong Sharia influence and only a short history of heavy investment in construction projects, Saudi Arabia has become known, by some, for paying late, not enough or, in some cases, not at all. Which raises the question: Is the issue of payments becoming a problem in the Kingdom?
“Out of all the countries in the region, Saudi Arabia is the most difficult to get paid,” says Ross Herdman from Qatari firm Al Shams Advanced Lighting Technologies.
“We had to chase our customers all the time, even as a local company. It is a good place to be, in that there are lots of opportunities, but it is not easy to do business there.”
He adds that late payments are not only a problem for suppliers, but also for contractors, with one of the biggest issues being collecting the last 5% to 10% of the overall fee.
“The contracts make it very difficult to get the final payment. Often if you are building a factory or a project with electrical items such as streetlights, the developer will always hold onto about 5% to 10% of the money as a warranty, to cover for any faults or construction damage.
They will hold this for maybe two years, and when that time is up and you try and track down the payment, they will make the excuse that there is a problem with something. So you have to go back and solve any problems before they pay you, and it can be a long procedure.”
He also says that the situation is different to that in the UAE in the last two years, where developers did not have the money to pay.
“In the UAE it was a different situation. There was the financial crisis and people did not have the money. But in Saudi, even if they have the money, it does not mean you are going to get paid on time.”
Others agree. According to a representative from a high-profile architectural firm working in Saudi Arabia, who asked not to be named, contractors and suppliers should not to expect to get paid any earlier than within 90 to 180 days (compared with 30 to 60 days in the UK) and should probably budget on the assumption that they will be paid just 90% of their fee.
“It simply takes longer,” he says. “It may take six months, and in extreme cases, people do not get paid. But that is rare. It is more often the case that you will not get the last 10%.”
According to legal experts, it is indeed the collection of the last or additional payments that is the biggest issue at the moment.
Construction dispute resolution lawyer Craig Shepherd, partner at Herbert Smith, said his firm has most definitely seen a disproportionate increase in these kinds of cases in Saudi Arabia in recent months.
“Certainly our firm has seen an increase in Saudi dispute work, but what we have seen more of are questions related to the release of retention at the end of a project, or those related to the valuation of changes to the pro-ject.
Getting paid the basic price is not actually too difficult. The real difficulties are related to getting paid at the end of the work for extras, or getting the 10% balance back that is kept until the work is done. At this stage, a contractor’s bargaining position changes somewhat.”
The increase in cases would suggest that the issue is becoming a growing concern in the region, as would details of project delays due to late payments reported in the Saudi Gazette.
According to the report, there are 36 projects currently delayed in Jeddah, including important road works on Prince Majed and King Abdul Aziz and King Fahd streets, due to “late payments and lack of budgeted financial allocations”, among other issues.
Reasons for this include cultural differences and a complex legal system, which prevents companies challenging delays in court, not to mention fear of losing the contract.
“It is a lot to do with the culture that people have been brought up in – they just do not like to pay for things,” says Herdman. “So you can have the richest company where everything is well, and you will still struggle to get paid on time.
And you do not have any guarantees from the customer. It will say in writing 30 or 60 days’ payment, but to claim against them if they do not pay is a long, tedious procedure, and if they say they do not have the money, you just do not get paid.”
“It is a cultural difference definitely,” says the architect. “I think it is largely true about them having the money. I do not think they are slow to pay because they do not have the money, I think it is just business practice.”
As for the legal differences, Shepherd explains: “It is a difficult place to meaningfully threaten action against the locals. If a Saudi is not paying, relatively few people want to go to a Saudi court or seek arbitration.
“Firstly, the Saudi court system is very different from the UK or indeed the UAE. It is less a judicial and much more a Sharia system, where judges tend to be men of faith rather than legal scholars, and the perception is that the local will win.”
He adds: “You could try and go through arbitration in London or France, but then you woud have to try and enforce that decision in Saudi Arabia, and that is very difficult.”
All three professionals believe the systems in place are very different to those in the UAE and Qatar. While Herdman and the architect agree that the business environments in the latter are more sophisticated and popular with business people as they “do what they say they will”, Shepherd refers to varying principles affecting the relevant legal systems.
UAE law is a standalone system, and much less affected by Sharia influences than that in Saudi. He adds that people’s assumptions about the wealth in Saudi also meanT companies take fewer precautions than they should.
Of course, there are those who believe there is no such issue in the Kingdom. KPMG partner Jon Barnes, who oversees infrastructure finance in Saudi, believes it is impossible to generalise and that, in fact, Saudi Arabia is much like anywhere else in the Middle East.
“I think the situation is variable. Even as regards our own clients, some pay incredibly quickly, and some do not. We have worked with some of the biggest contractors, government departments, the whole spectrum. Are there any common themes? The answer is no.”
Likewise, Deloitte’s head of transaction services in the firm’s corporate finance team, Paul Smith, who is based in Riyadh, is confident that the situation is no different from the rest of the GCC.
“It depends on the company you are dealing with, but generally, unless the project is in financial difficulty, then payments are made according to terms and conditions consistent with the rest of the GCC.” Bearing this in mind, there is a case to be made for companies to test the waters for themselves.
What to do in KSA
• Focus on maintaining good relationships. Be persistent, be polite, and appear in front of your client on a regular basis.
• Make sure your good relationship
is with the company that pays you.
A good relationship with a contractor which itself isn’t getting paid, won’t help.
• Be cautious about what deliverables you hand over before you get paid. Perhaps demand a 10-20% upfront payment. The more sincere the firm, the more likely it is to agree to this.
• Limit your exposure by maintaining a positive cash flow.
90-180 days Typical payment terms in Saudi Arabia, according to those working in the region
5% to 10% Amount typically held back by Saudi developers as a guarantee
50% Fall in profits reported by several companies last year due to late payments in the Dubai