Can contractors survive Saudi's expat worker levy?
What do Saudi Arabia’s $18m claims of foreign worker levies tell us about liquidity and recruitment in the Kingdom’s contracting market? Neha Bhatia finds out.
Saudi Arabia didn’t have an easy ride during the first nine months of 2015. Amidst the crane collapse at Makkah’s Grand Mosque, which killed 111 people, and global oil-price turbulence threatening a 21.6% budget deficit as per the International Monetary Fund (IMF), the Kingdom’s construction sector has been inundated with challenges.
Unfortunately, pressures didn’t subside in November. Abdullah Abdul Mohsin Al Khodari Sons submitted claims to the government worth $17.6m (SAR66m). Al Khodari issued these claims to recoup a portion of the fines that it incurred under the foreign workers permit levy.
In November 2012, the cost of hiring foreign workers in the Kingdom was raised from $26.66 (SAR100) per year to $640 (SAR2,400) per year in a bid to encourage Saudisation.
The law has since hit several sizeable firms such as Al Khodari, which employs around 17,000 staff members. The company recorded a $3.81m (SAR14.3m) loss in the third quarter of 2015, with a 17.5% drop in its year-on-year revenue.
In a bourse filing, Al Khodari claimed its overall contract pipeline stood at $1.24bn (4.57bn) at the end of September 2015, up from $895m (SAR3.36bn) during the same period last year. In light of the 2012 fee increase, Al Khodari was issued with fines worth $2.1m (SAR8.03m) for completed projects, and $15.4m (SAR58m) for ongoing projects through to 2018. No timeframe for a decision on the claims was provided by the contractor, according to Reuters.
Such claims are the latest hurdle that must be faced by Saudi Arabia’s construction sector, which has been negatively affected by the fall in global crude prices – from $115 per barrel at last year’s peak to $45 currently.
This has adversely impacted the Kingdom’s petrodollar capacity, and as such, represents a major cause for concern amongst the country’s construction professionals.
Al Khodari does not expect the situation to improve in 2016. Fawwaz al-Khodari, chief executive of the firm, told Reuters: “I think we should expect the difficult situation in the [construction] sector to go on for 18 more months.”
Al Khodari is yet to respond to Construction Week’s questions about the full extent of impact that these fines have had on his company’s – and the KSA contracting sector’s – health and project pipelines. The latter continues to represent a significant point of discussion in the Kingdom, where contrasting views are held about the necessity and likelihood of large government-funded projects being delayed – or worse still, cancelled.
“I believe many projects that are not seen as being essential will be first to be shelved, including those that were tendered but not awarded,” Al Khodari told Reuters.
The CEO added that companies in the Kingdom have been rattled by labour reforms. Although the latest of these reforms has been hailed by Human Rights Watch – an organisation concerned with the prevention of migrants’ rights abuses – for its progressive approach to eliminating payment delays and Kafala-encouraged passport confiscations.
In that context, Al Khodari’s million-dollar claims lend perspective to how uneconomical the foreign worker levy has truly been for large-sized contractors in the Kingdom.
Niall Hughes, senior construction consultant at recruitment firm Morgan McKinley, explains: “The idea behind imposing the levy was to bridge the gap between the cost of employing Saudis and cheaper expats, by raising the cost of foreign labour.
“Some of the larger construction companies employing thousands of contractors have been hit with levies running into millions of dollars since 2013, and whilst this has impacted their bottom lines, in most cases their revenue streams were large enough to withstand this extra cost.
“Many of the smaller contractors have not been so lucky, with some going into liquidation over the past three years. Whilst the levy hasn’t been the sole reason for this, the impact of this extra cost hasn’t helped,” Hughes tells Construction Week.
Non-reimbursement of the levy has compounded problems for local contracting firms since it was implemented, Muammar Al Attawi, executive manager of Bin-Shihon Contracting Company and chairman of Jeddah Chamber of Commerce and Industry’s Contracting Committee, remarked.
“The Ministry of Labour has assured contractors that they would be paid back refunds on signed agreements with the government before the November 2012 mandate, but there was no real mechanism in place for refunds until a couple of months ago,” Al Attawi told Construction Week in August 2015.
He added that whilst the levy has bolstered Saudisation efforts in other sectors, it has had a detrimental effect on the Kingdom’s contractors, which have struggled to attract employable Saudi nationals.
“Construction companies are really struggling [to meet] the 10% quota for Saudisation; all the levy did was increase the value of project tenders in the Kingdom and reduce the competitive edge we enjoyed before, when bidding for projects outside of Saudi Arabia,” Al Attawi explained.
Hughes agrees that the absence of a reimbursement portal has placed sizeable strains on Saudi Arabian contractors. He says that some of the companies for which Morgan McKinley recruits have reported waiting since 2012 for refunds – refunds that they have yet to receive.
“Saudi Arabia’s labour ministry did implement a payment mechanism earlier this year,” he says.
“However, there is a large backlog of documentation which dates back to 2012, and is complicated by the fact that many workers move from project to project.”
But Haroon Niazi, VP of Hill International Middle East, tells Construction Week that a dearth of appropriate documentation amongst contractors has served to exacerbate reimbursement delays in the Kingdom.
“Early examples show contractors have made applications without proper documents, such as relevant letters that may be required from the employer, and employee-exit documentation.
“A [case] of the government processing refunds successfully can be seen in the visa process with respect to the fee. If a fee has been paid but the visa was not used, then a refund can be claimed,” he adds.
Fortunately for KSA businesses, the levy has not been made universally applicable across all commercial outfits. Morgan McKinley’s Hughes points out that partial exemptions were announced for small- and medium-sized enterprises (SMEs) in 2014. Saudi-owned companies with fewer than nine employees pay $26.60 (SAR100) annually for work permits for up to four foreign workers.
“Reimbursement is an ongoing challenge, which – given the number of companies and employees in the Kingdom – is likely to be time-consuming,” adds Hill’s Niazi.
“The government has recognised the need to compensate them, and [as a result] some companies don’t have to pay the full fee. It is a balanced approach from the government, which is trying to ensure the system functions as it intends to,” he adds.
However, the Kingdom’s construction sector is yet to feel the benefits of these exemptions, according to Al Attawi.
Thousands of contractors – 130,000 according to an Arab News report in July 2015 – have closed down or gone into liquidation during the last three years, although the Bin-Shihon executive points out that this trend cannot be solely attributed to hiring fees.
Nevertheless, the Kingdom’s construction sector has not been deterred from hiring foreign workers, according to Morgan McKinley’s Hughes.
“Whilst Saudi Arabian construction companies are now more inclined to hire nationals, the reality is that very few companies have been able to attract Saudi nationals into the industry, and most construction companies have no choice but to pay the levy on hiring foreign workers,” Hughes explains.
Local contractors, it appears, have a hefty price to pay for employing foreign workers through more than one law: failure to meet their Nitaqat targets of a government-specified number of Saudi employees can lead to penalties for employers. The expat worker levy is an additional burden to bear.
For companies contracted on projects prior to the issuance of the 2012 levy, reimbursement represents an added concern in a market plagued by liquidity assurance.
“The levy troubled contractors who hadn’t budgeted for such expenses after it was announced. I think you saw a reduction in the number of workers who had the right paperwork to [be employed] in the Kingdom, and [therefore], there was a short-term problem in terms of resource availability,” says Niazi.
“The levy works in direct correlation with Nitaqat; both systems operate individually, but interrelate to achieve their aims,” he adds.
Niazi argues that properly structured contractors were able to overcome such short-term challenges. When asked if the controversy surrounding hiring fees is evidence of a retrospective approach to legislation within Saudi Arabia, the Hill International vice president insists that this issue has no bearing on the country’s competence as a construction market.
“When new laws are introduced, they have an effect on [the market], and there is always an element of uncertainty when they are implemented – I think that’s with every country, and not something that’s unique to Saudi Arabia. I think what’s relevant is how companies adapt during that implementation period,” Niazi concludes.