Labour reform impact to start fading in 2014: CEO

Strict penalties against companies not hiring citizens introduced in 2011

KHOBAR, Saudi Arabia (Reuters) — 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 localization 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 (C$696) 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 per cent as the labour reforms were introduced, with an average annual cost impact of 50 million riyals (C$14.5 million) 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 bottom line."

The company, which has yet to announce its first-quarter earnings, reported a 69 per cent year-on-year decline in net profit for the fourth quarter of 2013. It cited as one reason an increase in manpower costs, which jumped 28 per cent.


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, 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 (C$6.53 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 per cent so far this year, slightly outperforming a 13 per cent 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 reforms

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.

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