Levy Relief To Ease Construction Cost Pressures

Saudi Arabia plans to adopt measures which are aimed at relieving the financial burden of taking on foreign workers - a key drag on our buoyant outlook for Saudi Arabia's construction industry growth over 2014. The Council of Ministers announced on 23 June 2014 the partial exemption from the annual levy of SAR2400 (USD640), for expatriates working at small establishments with a total staff of nine or less. Additionally, those building contractors who signed deals on government projects before the imposition of the levy in November 2012 will be reimbursed for those charges which they have paid.

The move aligns with a number of our views for the Saudi construction industry. Firstly, as the construction industry plays an important role in both Saudi Arabia's non-oil economic growth and is a key driver of economic diversification, we held the view that the government would need to act to alleviate the increasing cost pressures labour policies were having on the construction industry ( see 'Short Term Capacity Constraints, But Project Awards Strengthen Outlook', 12 August 2013). This is indeed now playing out, with a ministerial committee now having been set up to study the compensation which is to be paid to those firms in need.

Secondly, only small construction firms are set to benefit from the new measures, which again chimes with our view that it will be the sub-contractors and smaller construction firms that will be the overwhelming casualties of the increased labour costs. Although most major projects are awarded to larger Saudi companies or international firms, there is a heavy reliance on sub-contractors in the Saudi industry, and smaller firms have a key role in delivering the affordable housing Saudi Arabia desperately needs. As such, the reports that 50% of small and medium sized contracting firms had gone out of business by the end of March 2014 and that a third of construction projects underway have been scrapped on account of the costs of labour were a huge warning sign for construction industry growth ( see ' Labour Laws To Undermine GCC's Largest Market?', 1 August 2013).

Easing Pressures On Growth Outlook
Construction Industry Value and Real Growth

Saudi Arabia plans to adopt measures which are aimed at relieving the financial burden of taking on foreign workers - a key drag on our buoyant outlook for Saudi Arabia's construction industry growth over 2014. The Council of Ministers announced on 23 June 2014 the partial exemption from the annual levy of SAR2400 (USD640), for expatriates working at small establishments with a total staff of nine or less. Additionally, those building contractors who signed deals on government projects before the imposition of the levy in November 2012 will be reimbursed for those charges which they have paid.

The move aligns with a number of our views for the Saudi construction industry. Firstly, as the construction industry plays an important role in both Saudi Arabia's non-oil economic growth and is a key driver of economic diversification, we held the view that the government would need to act to alleviate the increasing cost pressures labour policies were having on the construction industry ( see 'Short Term Capacity Constraints, But Project Awards Strengthen Outlook', 12 August 2013). This is indeed now playing out, with a ministerial committee now having been set up to study the compensation which is to be paid to those firms in need.

Secondly, only small construction firms are set to benefit from the new measures, which again chimes with our view that it will be the sub-contractors and smaller construction firms that will be the overwhelming casualties of the increased labour costs. Although most major projects are awarded to larger Saudi companies or international firms, there is a heavy reliance on sub-contractors in the Saudi industry, and smaller firms have a key role in delivering the affordable housing Saudi Arabia desperately needs. As such, the reports that 50% of small and medium sized contracting firms had gone out of business by the end of March 2014 and that a third of construction projects underway have been scrapped on account of the costs of labour were a huge warning sign for construction industry growth ( see ' Labour Laws To Undermine GCC's Largest Market?', 1 August 2013).

Easing Pressures On Growth Outlook
Construction Industry Value and Real Growth

Although the savings on offer to firms will not offer a major financial reprieve, we believe that the move to relieve labour cost pressures will act as a confidence boost to those firms who may have reduced operations on projects under construction for fear of the yearly costs of the levy. We had previously expected that growth in Saudi Arabia's construction industry was to pick up markedly over the second half of 2014 on account of the wider sector becoming more acclimatised to its new operating environment after the ending of an amnesty for foreign workers to either register or leave Saudi Arabia ( see 'Views Playing Out As Constraints Hit And Awards Grow', 17 October 2013). The aid that is to be offered to small construction firms aligns with this view of strong H2 2014 real industry growth, building momentum for 2015 in which we forecast real growth of 10.5%.

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Related sectors of this article: Infrastructure, Construction, Residential Construction, Companies - Infrastructure
Geography: Saudi Arabia
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