Saudi demand-supply imbalance needs action
26 January 2024
Some $879bn-worth of giga projects are planned in Saudi Arabia, of which about $50bn has been awarded to date, according to regional projects tracker MEED Projects.
The data shows that 2023 was a record year for projects in Saudi Arabia.
However, the extensive scope of work associated with these projects has exposed the challenges of scaling up the local construction supply chain fast enough to meet the surge in demand.
With projects launching in quick succession, suppliers, contractors and subcontractors are struggling to keep up with the influx of new work into the market.
Riad Bsaibes, president and CEO of Amana Investments, says this shortage of resources is a critical issue, stating, “There is currently a bottleneck in the entire supply chain, from human capital and materials to subcontractors and general contractors.”
Moreover, the construction sector faces significant execution risks.
While some projects are subject to delays, efforts to accelerate others are exerting pressure on timelines and budgets.
Highlighting the disparity, Bsaibes notes, “This mismatch is leading to delays as schedules stretch out and costs rise above original tender amounts. This creates risks for contractors if they cannot deliver projects on schedule or within the costs estimated during the tendering process.”
Career investment
The launch of Saudi Arabia's Vision 2030 has spurred an era of growth and investment. The surge in construction projects aligns with the kingdom's goals, positively impacting employment opportunities.
Yet recruiting top local and expatriate talent across large-scale projects is becoming a challenge in Saudi Arabia, according to Bsaibes.
He acknowledges that attracting and retaining skilled workers is getting more difficult with time, stating: “This is particularly challenging due to the scale of expansion, coupled with the pressure of Saudi Arabia’s nationalisation policies that encourage contractors to recruit qualified Saudi nationals.”
As well as focusing on hiring practices, companies must also commit to nurturing and enhancing skills over time.
Continuous upskilling is crucial in the construction industry, where new technologies, techniques and regulations frequently emerge, requiring employees to adapt and stay relevant.
Bsaibes advocates a strategic approach to talent management that involves upskilling the existing workforce before hiring new talent.
He recommends a hands-on approach to learning and improving skills.
“A core part of skills development at Amana includes on-the-job training for all employees,” he adds.
“Skills development must extend to developing competency in cutting-edge technologies such as building information modelling (BIM), modular construction and other digital tools. This long-term effort should be a key priority for firms.
“Continuous learning and development are very important throughout an employee’s career, starting from their initial entry into the construction workforce.”
Bsaibes further highlights the significance of internships in providing candidates with practical experience before taking on permanent positions.
This approach aims to facilitate a smoother onboarding process for individuals entering the workforce, ensuring they are well-prepared for new roles.
“Companies should invest in the professional development of their employees,” he says. “This could include training programmes, workshops and educational initiatives aimed at enhancing the skills, knowledge and capabilities of the workforce.”
Credit challenge
Access to credit is another major issue in the construction sector. A strong financial profile enhances borrowing capacity and facilitates the smooth execution of projects by ensuring a steady flow of financial resources.
Addressing credit concerns is, therefore, essential for construction firms.
Bsaibes recommends adhering to a strategic financial approach, opting to retain significant cash reserves instead of incurring debt.
“This approach not only facilitates self-financing for projects when necessary, but also serves as collateral for the letters of guarantee frequently demanded in construction contracts.
“Moreover, it provides the company with the flexibility to navigate through any payment delays without succumbing to financial distress.
“Amana has a strong balance sheet and well-established banking relationships,” he adds. “Banks view Amana as low risk due to its solid cash reserves and strong track record of on-time payments across different regions/currencies.”
In contrast, Bsaibes points out that many other contractors struggle due to insufficient cash flow management and weaker balance sheets.
“Maintaining high cash levels on its balance sheet is a fundamental goal for Amana.”
Strong working capital allows the contractor to be selective in bidding for projects, avoiding low-margin work while still securing sizable contracts.
“Additionally, we have a positive history with lenders, which allows Amana to support its operations and capitalise on growth opportunities.”
Incentivising growth
Clearly, there is a need for industry-wide improvements.
Bsaibes says the most impactful change would be longer-term transparency across developers’ project pipelines.
“This approach contrasts with the unpredictable, stop-start demand cycles currently prevalent in the industry.
“It involves providing the supply chain with visibility into funding-backed plans over a three to five-year period. Such transparency is crucial for better resource planning and timely project delivery,” he adds.
Bsaibes also emphasises the importance of incentivising suppliers, subcontractors and contractors to scale up their capacity. “This will help them grow in a coordinated manner through financial/regulatory support from the government.”
Another area of improvement is the digitisation of government processes, although Bsaibes notes that progress is already being made.
Bsaibes also calls for changes in Saudi Arabia’s regulatory environment.
The continued maturation of Saudi Arabia’s evolving regulatory framework will reduce the complexities faced by international firms. Yet, greater alignment with global construction norms will stimulate competition and investment in the kingdom’s expanding market.
According to Bsaibes, transitioning contract law closer to international standards, such as those outlined by the standards organisation International Federation of Consulting Engineers (FIDIC), would significantly mitigate risks for new market entrants. Presently, the reliance on sharia law introduces an element of unpredictability into obligations, he says.
To achieve this, he recommends adopting contract laws aligned with common law systems, such as the UK’s, to provide foreign suppliers and partners with a clearer understanding of their obligations.
Bsaibes concludes that while the continued evolution of Saudi Arabia’s regulatory environment will take time, gradual alignment with international construction norms will ultimately ease risks and costs for both local and global industry players.
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