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“Construction: A trillion dollar business”

Interview - May 20, 2015

Cash flow priority for AlKhodari in it’s aim to capitalise on Saudi mega project boom

MR. FAWWAZ ALKHODARI, CEO OF ABDULLAH A. M. AL-KHODARI SONS COMPANY
MR. FAWWAZ ALKHODARI | CEO OF ABDULLAH A. M. AL-KHODARI SONS COMPANY

We would like to get a view of the story behind the company in your own words.

The company was started by my late father, who set up the company in 1966. A man who never had the opportunity of a formal education, nor could read or write. Yet he had an ambition, not only to work to earn his living, but to build a lasting legacy entrenched in the development of Saudi Arabia. The early seventies were especially the spring time of the oil boom increasing revenues of the country to a point where vital development projects could be undertaken. That´s when he started his business ambition with a small truck.

Over the years he became a full-fledged contractor working for Aramco and the government. By the late 70´s, he had already built most of the road networks in the eastern and northern regions. By the early 80´s, he diversified into city cleaning and maintenance. I think that is part of the vision that could be credited to him in the sense that while Construction is a cyclical business, city cleaning operations never stop and they provide a sustained business as well as revenue opportunity. By the late 1980´s we were one of the largest city cleaning contractors in the Middle East.

In 1990 we were one of the main transportation and logistics contractors with the coalition forces during the Gulf War. We were proud to assist the cause of Kuwait in 1991 during the Gulf War by providing our logistical capabilities consisting of over a thousand assets to ensure that the Coalition forces had the necessary resources to facilitate movement of their supplies across their field of operations.

But I think one important thing to note here is that there are a number of Saudi families whose founders worked really hard and built a business empire for the succeeding generations to take over as well as to contribute to the society fueled by the Founder’s love for his country. Therefore when called upon by the Authorities at short notice in times of crisis to deploy the company’s construction capability, my Father would never wait for a written contract to mobilize and build. Learning from him was probably more than I could have learnt in ten years elsewhere. That is why although I was with him only three years, to me that was more valuable than 15 years elsewhere, on account of the wealth of experience, knowledge and wisdom gained from him.

My Father also insisted on sending us children during our vacation into the field to gain first-hand experience and learn from the ground up. My brothers and I therefore gleaned some of his knowledge of the contracting business from childhood.

My Father passed away in 1991. From 1995 to 1998, the construction business again went through a challenging phase. Oil prices again slid, and work volume was extremely low resulting in a wave of contractors going out of business. Once again my Father’s astute business model of having a line of recurring business saw us through that period considering that construction projects were extremely low during that downturn. This was further strengthened by our decision to go cross-border with our services into Kuwait, UAE, Lebanon and Ghana in West Africa. In Lebanon and Ghana, Alkhodari constructed roads, bridges and water projects funded by the Saudi Development Fund and BADEA. We also had operations in the UAE- in Dubai & Abu Dhabi, in partnership with local companies. The experience we got from executing these projects outside Saudi Arabia was extremely important in a variety of ways. Especially in Africa, because there are countries where some contractors have doubts about getting paid or whether they engage in fair business practices. We went to Ghana, which is one of the most stable countries, executing a project under the FIDIC Contract.

A FIDIC contract regulates the relationship between the contractor, the client and the consultant; and is internationally recognized as a fair standard. Each country and client however tends to adopt its own version of the contract. So in a country, where a lot of people believed we were going to lose money, we actually made money.  This is because, mainly the contract is fair, which means that we got compensated for issues such as delayed payments, escalation of material costs, delay in consultants approving submittals. Within the Kingdom, Late King Abdullah already approved using FIDIC as a reference standard for contracts and we are eager to see the revised contract applied for future contracts in Saudi Arabia. We are optimistic that the new leadership, will get the new draft contract approved, so that projects can be executed faster to higher quality standards, and therefore delivered to citizens a lot quicker, which is one of the major issues we have in Saudi Arabia. The Custodian of the Two Holy Mosques is always pressing to deliver projects quickly, and one of the best ways to get this done is to improve the contract framework by adopting an internationally recognized format. Late King Abdallah also approved the formation of the Contractors Authority. Its mandate would be to regulate the contracting industry and become an umbrella for Contractors securing a well-organized industry operating to the highest standards.  The Authority will bring discipline and professionalism, and strengthen the sector, which is the second largest contributor to overall Saudi GDP.

In 2003 and 2004, which was the start of the recent boom, we diversified more into vertical building construction such as universities, colleges, training centers, and public buildings and our construction portfolio started being more end to end focused. Over 95% of our business is with the government such as the ministries of education, transport, and health. We are therefore closely aligned with organizations that are mandated to build the social infrastructure in the Kingdom which is why we feel proud in being a part of enriching the lives of citizens.

In 2006 we made a decision to go public. We agreed on some issues and continued with our companies. It was in 2006 when we felt that the capital markets had reached a point making it appropriate for family companies in our field to list. This involved carving out our non-core businesses in order to only take our core construction business public. In the spirit of good governance, we also encouraged institutional organizations and non-family members, to give us constructive criticism, as a healthy practice leading to growth, contrary to what many people believe.

From hearing about the discussion of your late father, it seems he was a natural when it came to construction but he really had a strong work ethic, that’s what separated him from the rest. You have been very outspoken on the issue of Saudization. To what extent do you think people today lack this work ethic? And how have you been able to adapt as a business if there is a lack of this work ethic?

We have a responsibility as individuals and as nationals, whether we are in the business or not, to contribute in one way or another, to ensure everyone has a respectable living here. Respectable means to have a job, a house, an income and medical health, sufficient to meet their individual and family needs. This is one of the most difficult things to tackle around the globe, and we all know it. But I think how we get the average citizen, male or female, to have an interest, a work ethic, an appreciation of the fact that they must “earn” their money, is very important.

And I do not think that as contractors or a business community this ethos can easily be imparted to a generation that grew up on wrong habits over the past 20 years. We all know that, as a family - a mother or father, have extreme challenges in trying to guide and sometimes change the attitude of their siblings especially in their teenage years. It’s a significant challenge and therefore nobody expects the business community, who only interacts with them for a limited time each day, to be qualified in facilitating this transformation. We are not academic institutions trying to teach anybody everything, particularly core values.

We are here in the business of trying to train and coach those who are interested in our industry and have the minimum qualifications to get into it, to go up the ladder in our organization and make them better in what they have entered into. But what we cannot do is take somebody about who we have little idea on their background, and be forced to meet unrealistic quotas. We cannot play statistical games and say that “we have five hundred thousand unemployed, and we have so many companies and therefore each company must takes ‘x’ percent of these unemployed and we are done.” We all know that doesn’t work. All this does is creating unsustainable dependency and ends up shifting those numbers: moving one part of the responsibility and making it somebody else’s. This does not actually serve anybody. This merely creates larger social issues than what already existed. You are basically taking them off the radar screen of the unemployed, and, when they are no longer on the radar screen, you no longer have a reason to find solutions.

A study has already been done, which concluded that 39% of Saudis in the construction business are not actually productive. In my opinion they are being kind in using the word “not productive” but I think what they are trying to say is that they are not even “at work”. This now also poses a significant social problem. And this is really what as a national, a patriot, we need to send the message across. Yet unfortunately sometimes it backfires and we contractors are accused of being totally against Saudization.

I think this disconnects what the regulator is trying to do with what contractors are trying to do. It’s really this disconnect we need to fix. And we are grateful that they eventually accommodated a dialogue, which started two years ago. That was extremely helpful as a testing ground for some of the initiatives they were willing to share with our industry. The idea was that they would be willing to work with the Contractors Committee as partners. This dialogue was good when it first started. Now however it has deteriorated and in my opinion, we are again getting distant and the dialogue has in fact stalled. This will therefore result in getting more negative reaction from the contracting industry to the initiatives that come from the regulator.

It’s important not to start blaming. The important thing is to say; “Let’s sit together and truly respect the contracting industry”, because it could be potentially our solution to Saudization. But until today, nobody has been successful in getting the contracting industry to serve the Saudization issue in practical ways. All that has been done is forcing the construction sector to take on people, putting them on the payroll and getting no production out of them. We all know that the construction business goes through cycles. When we have a dip, all this surplus labor goes back to the streets. It is therefore a major risk that we need to mitigate and this can only be done by actually getting all parties concerned to sit around the same table and understand what each is trying to communicate – rather than looking at issues through a narrow framework. I am very passionate about this issue and it is not because my bottom-line hurts. It’s true that our profit has been reduced by two hundred million over the past few years, mainly due to these initiatives. This is proven and nobody can challenge me on that. I am transparent as much as I am forthright, but transparency should also help other parties to understand what’s going on.

As a company Abdullah A.M. Al-Khodari Sons Company, it began with commitment in Saudi Arabia and then branched out internationally, and since then, the strategy seems to be to come back and refocus on the development of Saudi Arabia, to what extent is that the strategy and why do you have such a strategy?

We have not changed our long-term strategy of geographical growth. We have to be dynamic so if we see challenges outside that do not justify investment then we need to redirect our focus. We continuously review what’s taking place in the environments in which operate in:  if margins are not as good, if competition is extremely fierce, if there are other risks involved, or even if none of this existed, just the fact that Saudi Arabia has invested so much money into the social infrastructure that’s creating so many opportunities - then we have to look very seriously at focusing on our home market where we know the rules and we feel we can operate as good as or better than most players in the market here. Business is in Saudi Arabia is huge and so are the opportunities.

To what extent does it keep you awake at night the fact you are so reliable on the government for contracts?

We have a strategy to reduce that dependency, and some of the business we are attracting is quasi-government. We are moving in that direction. Going entirely with the private sector where we may find opportunities however also has its own inherent risks. We have seen how the real estate sector has had its challenges. With the government, payments are stable. Today, in fifty years, they have never defaulted in their payments. That alone however does not justify our working only with the government which may be a good strategy while the government has sufficient business afloat. We are in touch with what’s going on, and can adapt and make decisions very quickly within days or weeks. So working with the private sector, is a direction we are definitely moving in.

How important is it for you as a business leader to be contributing to this development of new technologies and ways of doing business in the Kingdom?

Well, wherever opportunities are created, within the construction business, we are definitely considering them. If they make sense, then we will include it in our strategy going forward. For example, we all know that solar is an opportunity that can be embarked on within a relatively short period while nuclear is an extremely long term play. We have seen solar in some parts of the region. It is not rocket science particularly since we are not going to actually manufacture, but will be involved more in the installation which we can quickly get on to and be one of the early players. It’s something we are working on during 2015, and plan to win some of the solar business. 

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