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What lessons can Saudi contractors learn from SBG?

Saudi BinLadin Group’s fluctuating fortunes are an indicator of how the Kingdom’s contracting sector is evolving, experts tell CWO

Troubled times: SBG’s enviable project portfolio includes Saudi’s 160ha King Abdullah Financial District.
Troubled times: SBG’s enviable project portfolio includes Saudi’s 160ha King Abdullah Financial District.

Last week, it emerged that sanctions and travel bans levied on Saudi BinLadin Group (SBG) in the aftermath of the crane crash at Makkah Grand Mosque last year are set to be lifted. Additionally, the contractor’s rating would also be reinstated, a spokesperson for SBG told Construction Week.

Yaseen Alattas, chief communications officer at BinLadin Holding Company, said: “The restoration of the group’s classification and lifting of travel bans have been enacted based on the Saudi government’s decision, and hence, it is a matter for the government to comment upon.”

On 7 May, Saudi’s Al Watan reported that a spokesperson from Saudi Arabia’s General Authority of Civil Aviation (GACA) had announced that work had recommenced at King Abdulaziz International Airport (KAIA), for which SBG was awarded a $7.2bn (SAR27bn) deal.

Speaking to Construction Week, Alattas said the contractor’s works on the KAIA project have been progressing as scheduled.

“GACA has already confirmed that the work [for] King Abdulaziz project did not stop, and that [it] is continuing until today.”

In the wake of last year’s fatal crane accident at Makkah’s Grand Mosque, senior management figures from SBG were prohibited from travelling abroad, and the company was forbidden from taking on new projects. SBG has traversed stormy waters since these restrictions were levied – more so in light of dwindling market fluidity and payments.

In that context, SBG’s latest triumph will no doubt redeem the contracting giant’s reputation in the industry, but could also buoy the construction sector in the Kingdom. After all, SBG’s fortunes have historically been a barometer for the performance of Saudi’s contracting sector.

While the Kingdom’s once-bullish national economy rewarded SBG with the high-profile projects it boasts in its kitty, declining petrodollars have now reduced profitability for Saudi contractors. As oil-related uncertainties continue to dictate the Kingdom’s construction sector, SBG has had to take tough decisions regarding the size of its workforce.

One could argue that SBG’s undoing this year has been its own enormity. As the Kingdom’s largest contractor, SBG has worked on some of the country’s most notable projects, such as King Abdullah Economic City, Al Faisiliyah Tower, and the 160ha King Abdullah Financial District. Its portfolio also includes the UAE’s Town Square and Sharjah International Airport.

Within the context of such expansive developments, the size of SBG’s workforce – which Reuters reported was 200,000-strong last year – seems both economically necessary and feasible for the contractor.

However, dwindling state finances in the Kingdom, and their detrimental impact on project development, have compelled SBG to pull back on the same resources that supported its upward trajectory in the Kingdom during the last decade.

On 30 April, a report by Al Watan said SBG had terminated the contracts of 50,000 workers – allegedly all foreigners – and given them permanent exit visas to leave the country.

On 9 May, Abdullah Al Alyan, director-general of the Ministry of Labour’s Makkah branch, told Arab News that the construction group would pay 10,000 workers their dues this month, and had slashed 69,000 jobs so far.

An Al Watan report dated 3 May said SBG would lay off up to 17,000 Saudi nationals in supervisory, administrative, engineering, and management roles as well.

Although Alyan did not remark on these figures, he said the company would complete the transfer procedures of 16,000 employees who have transferred their sponsorship to other companies, Arabian Business stated.

The company’s dues have reached more than $1.2bn (SAR4.8bn) payable in 2017, and a further $148.6m (SAR595m) payable in 2018, Arabian Business’s report added.

Al Watan’s 30 April report coincided with SBG’s workers organising demonstrations in Makkah to protest the contractor’s job cuts.

SBG workers reportedly set fire to company buses during these demonstrations. Maj Nayef Al-Sharif, the spokesman for the Civil Defence in Makkah, said that firefighters put out the blaze without any injuries reported, according to Arab News.

SBG has not remarked on these protests or the extent of damage caused to its assets. However, responding to Construction Week’s queries regarding the job cuts, Alattas said manpower adjustment is “normal” and a “routine” for the firm.

In an e-mailed statement, he explained: “Our manpower size is always proportional to the nature and scale of the undertaken projects, along with the time spans required to complete them. Adjusting the size of our manpower is a normal [and] routine [activity], especially whenever projects are completed or near completion.

“Most of the released jobs had initially been recruited for contracted projects with specific timeframes and deliverables.

“We do understand that manpower reductions are never easy for all involved. However, the group is honouring its commitments, and the affected employees have already received their full compensations and any other entitlements in accordance with the applicable laws.”

SBG has reportedly implemented restructuring measures as it awaits the full restoration of its operational freedoms. Al Watan reported that a number of round-the-clock meetings had taken place to restructure the project sectors under the contractor’s portfolio.

Viewed simply, SBG’s current human resources strategy is what would be expected of a contractor battling an economic crunch, due to both internal and market factors. However, SBG’s efforts to update its operations are an indicator of the Saudi contracting sector’s future.

Fakher Al Shawaf, general manager of Al Bawani, believes the ongoing economic slowdown is remodelling the fundamentals of contracting in Saudi Arabia. Traditional contract models and client-contractor dynamics are being replaced, he asserts.

“[Saudi contractors] are in a stage of restructuring, and the country’s business model now tends towards privatisation.

“While dealing with the government earlier, we were mostly relied upon as contractors. We’re [involved in projects] not just as contractors, but as partners of the government,” he tells Construction Week.

Al Shawaf’s observations fall in line with the ambitions of Deputy Crown Prince Mohammad Bin Salman, whose National Transformation Plan (NTP) has been designed to improve Saudi’s investor-friendliness.

Sameer Daoud, Middle East leader – infrastructure at Arcadis, also believes NTP will boost foreign interest in Saudi. The Kingdom is currently ranked 15th on Arcadis’s Global Infrastructure Investment Index 2016, and Daoud expects this rating to improve in the years to come.

“Saudi will have much higher score [in the next index], as the long-term economic strength and the changes around NTP will positively impact the country,” he tells Construction Week.

“In terms of business freedom – such as ease of doing business around government policies, for instance – the country is still developing, which [reflects in] its current rankings. However, Saudi’s position is improving by the day, and with its strong economic growth, the country will improve its ranking very soon.”

Earlier this year, the Deputy Crown Prince said delayed government payments to Saudi contractors – to which SBG has partly attributed its unpaid salaries – were spurred by a major restructuring process being implemented by the Kingdom.

Daoud says such payment delays are unlikely to impact developers, and did not influence Arcadis’s index either.

“Payment terms in Saudi are not necessarily attractive, but the cost structure reflects that. It is mainly the contractors and the consultants who will be affected, and this will improve with the recent changes [in policy].”

Al Shawaf may be right in saying that Saudi’s contracting market is discovering a “new language”. Models such as public-private partnership (PPP) and build-operate-transfer are reshaping the practices of Saudi builders.

Local contractors, he opines, are chasing operational overhauls in light of the realisation that their “old-fashioned” methods would not survive competition.

However, it is encouraging that the Kingdom is charging ahead with planned reforms even as oil prices remain lower than the historic values on which it has built its economy.

Amer Khan, CEO of advisory firm, Precipio Consulting, says now is the time for Saudi’s contractors to evolve and grow.

“Fundamentally, the contracting industry in the Kingdom needs to overcome its susceptibility to boom-bust cycles and smooth out its backlogs to become more sustainable,” he tells Construction Week.

“The Kingdom will probably remain the region’s biggest construction market for a long time and, as such, there will be a place in the market for different types of contractors to play their role,” he concludes.

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