New construction contract awards in Saudi Arabia drop 25% in final quarter of 2015

The value of new construction contracts awarded in Saudi Arabia shrank by a quarter in the last three months of last year as contractors were battered by spending cuts.

New data from National Commercial Bank (NCB) shows the value of awards dropped to 45.6 billion Saudi riyals (Dh44.65bn) from the previous quarter.

About 62 per cent of contracts worth more than 1 million riyals that were awarded in the period were in the oil and gas sector.

The once-booming Saudi construction industry has emerged as one of the biggest casualties of a spending slowdown triggered by the sharp decline in the price of oil since the summer of 2014. Some builders are also finding it more difficult to tap lending as banks become more cautious.

NCB said that contractors had faced “significant changes” over the past six months as the government has sought to get to grips with lower oil prices by cutting infrastructure spending and reducing advances paid to contractors on projects from 20 per cent to just 5 per cent of a contract’s value.

It said that projects already awarded will proceed, but some will be scaled back or rescheduled over a longer period and that costs of future projects are expected to be trimmed.

“These increasingly tough economic conditions, along with rising geopolitical concerns, will adversely impact the construction industry outlook,” it said.

About 54 per cent of the contracts awarded during the fourth quarter of last year (23.6bn riyals) came from just three major construction packages for the Fadhili gas plant in the Eastern Province, which will have a capacity to process 2.5 billion standard cubic feet of gas per day once work completes in the third quarter of 2019.

Two packages worth more than 16bn riyals went to the Spanish contractor Tecnicas Reunidas, and the third, worth more than 7bn riyals, was awarded to UK-listed Petrofac.

Only two major government contracts, worth a combined 285 million riyals, were placed during the quarter.

Overall, contract awards for the whole of last year were marginally – 1.2 per cent – higher than in 2014, at 223.4bn riyals. NCB said this figure risked “masking the challenges ahead”, citing a probable 14 per cent drop in overall government capital expenditure this year to 840bn riyals, down from 975bn last year.

When announcing its budget in late December, Saudi Arabia said that spending on transport infrastructure would be cut by 63 per cent this year – down to 23bn riyals from 63bn riyals last year as it attempts to respond to declining oil receipts, which make up about 80 per cent of government revenue.

The ministry of labour has recently stepped in to resolve worker disputes at two of the country’s biggest contracting firms, Saudi Binladin Group and Saudi Oger, over delayed payments to workers, say recent reports from the country.

Reuters reported last week that the French ambassador in Riyadh had written to the chief executive of Saudi Oger requesting that French staff who were owed four months’ salaries receive payment.

One UAE-based contractor working in Saudi Arabia, who declined to be identified, said that contractors were being made scapegoats.

“The government has delayed payments to contractors. They don’t pay me for six months and then blame me for not paying my workers.”

NCB’s competitor bank Samba Financial last month cut its average forecast price for oil this year to $40 per barrel. It described current prices as “simply too low”, but it did not expect a rebalancing of the market until next year. The bank said that non-oil growth in the country was likely to be “minimal”, with the potential to go into reverse as so much private-sector activity is linked to government spending.

Samba’s report said Saudi Arabia’s contractors had “been hit hard by the near-freeze on new government construction projects and payment delays for ongoing projects”.

Despite this, it said that stresses were being managed by contractors and that banks were rolling over credit lines or extending loan tenors to firms in the industry.

An investor conference organised by EFG-Hermes in Dubai last week also highlighted emerging problems in the Saudi Arabian construction sector – specifically slow awards, delays in execution and in getting paid.

[Source:- Thenational]