Saudi's expat worker levy hits construction profits

Construction giant Khodari expects impact of extra costs to impact for a few more quarters

Major Saudi construction firm Abdullah AM Al-Khodari Sons Co expects the impact on its bottom line of a government levy on foreign workers to last a few more quarters, its chief executive said.

In late 2012, the Labour Ministry began charging companies a fee of SR2,400 ($640) for each foreign worker they employed above their number of Saudi staff. The policy is part of efforts to encourage companies to hire Saudi nationals, who are generally more expensive than foreigners.

The fee must be paid when an expatriate's work permit comes up for renewal. In July this year, Al-Khodari posted a 43 percent slump in second-quarter net profit to SR25.4m, citing the fee as one of the reasons.

The firm and other construction companies have also been pressured by other labour policies, such as a quota system for the percentages of Saudis which firms must employ, even as demand for their services grows with the country's economic boom and heavy infrastructure spending by the government.

Fawwaz al-Khodari told Reuters that the impact of the fee on his firm's profits was unlikely to get worse, as the company was working through a backlog of projects negotiated before the fee was introduced. New projects can be negotiated taking the fee into account.

But the impact on profits will be felt well into next year, he said. "The sustainability of this impact is probably going to be still for a few quarters."

Al-Khodari, which has about 17,000 employees, now has a backlog of work worth about SR3.7bn; projects typically run for between two and three years.

The company is trying to improve efficiency but "to be very frank no matter what you do, the impact will still be great. The levy is a levy - if you are the best company in the world and somebody tells you your taxes will be 20 percent instead of 10 percent, how are you going to deal with that?...Whatever you do, it will hit you."

Government officials have said companies may in some cases receive compensation for the effect of labour policies on their business, but al-Khodari said it was not clear when his company could expect to receive any money.

"We have all been through a national contractors committee as well as individual contractors, we have all been putting claims for compensation. We have been informed by various government bodies that there is a committee...formed to look at the possibility of compensation for that levy," he said.

"It is very difficult to get a timeframe. It's very important to know that the contracting industry is being hurt quite a lot from a cash flow perspective because these levies you have to pay up front, whereas compensation, you never know when it's going to come, so actually the cash outflow is hitting you day by day."

Al-Khodari said some smaller construction firms had withdrawn from the market because of higher labour costs. "It's a seriously damaging issue and I think it's been understated by those who applied it."

Saudi officials have said they are applying the labour reforms carefully; after an outcry by employers who complained of disruptions to their business, the government in July extended by four months an amnesty for foreign workers to obtain legal status and avoid being deported.

So far there is no clear sign that the economy as a whole is suffering from the labour policies, and the Labour Ministry said in March that the reforms had put more than 600,000 local citizens into private sector jobs since 2011. While economic growth has slowed this year, analysts say that is mainly because of softer average oil prices and lower production.

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