Hangover of oil dependence has only just begun.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
It was supposed to be the biggest, most ambitious, most lucrative infrastructure project Spain’s construction industry had ever undertaken on the Arabian Peninsula. Launched three years ago, the high-speed rail link project between Medina and Mecca was a dream come true worth some €6.7 billion, the perfect payoff of decades of patient lobbying of the House of Saud by Spain’s former King Juan Carlos I. But now it’s a rotting financial albatross around the necks of 12 large Spanish companies.
Even from the beginning, things were not easy. Within a year and a half, the project was suffering significant delays. And two months ago, the consortium asked the Saudi government for more funds — “an absolute minimum of €1.4 billion” — to cover the Saudi Railways Organization’s “unforeseeable demands,” such as, amazingly, keeping desert sand off the tracks.
None of the consortium partners want to take responsibility — or the attendant financial hit — for keeping sand off the tracks. And the House of Saud, already hemorrhaging money due to the oil bust, is in no position to pay Spanish companies extra funds for it.
Now, news is leaking that the Saudi Railway Organization stopped paying advances on the consortium’s work over six months ago. According to the Spanish financial daily Expansión, the consortium could be owed hundreds of millions of euros in late payments. Although the reasons for non-payment are as yet unconfirmed, sources in Spain are blaming it on the House of Saud’s acute cash-flow problems.
Saudi Arabia’s oil-dependent economy is in a bit of a pickle. For its budget to break even, the country needs an oil price of $104 a barrel, claims the Institute of International Finance. The current price is around $45. According to the IMF, Saudi Arabia may run out of financial assets needed to support spending within five years. So severe is the problem that the House of Saud now has little choice but to do something it hasn’t had to do for decades: ration its spending.
To mitigate such economic pressures, Riyadh is planning a massive sell-off of major government entities, including up to 5% of Aramco, presumably the largest oil producer in the world, valued at $2 trillion.
Ominously, commercial banks recently began tightening lending to anyone outside of the government. As the cash flow problems of both the government and large domestic companies stack up, stories proliferate across the Middle East of salaries and contracts not being honored.
Just this week Saudi construction firm Binladin Group laid off over 12,000 Saudi employees. A further 77,000 out of a total 200,000 foreign workers were shown the door, though approximately 50,000 of them are refusing to leave the country because they haven’t been paid for at least four months.
It’s not just in Saudi Arabia that infrastructure projects are feeling the crippling knock-on effects from the oil crisis. This week Qatar Railways Company terminated the €1.5 billion contract of an international consortium that was building the stations of the Doha Metro project. The company did not give any reason for the contract termination but emphatically insists that every effort will be made to “ensure continuity of the project.” It even hired a replacement contractor to back up its claim.
As for the discarded consortium, its three main partners — South Korea’s Samsung C&T, with a 50% stake; the Qatar Building Company, with a 20% stake, and Spain’s Obrascon Huarte Lain (OHL) with a 30% stake — will have little choice but to launch litigation. For OHL, its Arabian hangover has only just begun. Not only will it be left €250 million short of funds by the termination of the Doha metro contract, it is also one of the leading partners in the fast-train-to-Mecca consortium.
For the moment — and probably for some time to come — the fast train to Mecca is going nowhere, very slowly. According to sources close to the Spanish consortium, it will be impossible to finish the project by the official deadline, scheduled for January 1, 2017. The consortium will need at least an extra 12 to 18 months to finish the work, which one assumes will be dominated by lots of sand brushing, work for which Saudi authorities adamantly refuse to pay.
But that doesn’t mean the 12 Spanish companies, three of which are large publicly owned companies, won’t get paid. As has happened already on numerous occasions with Spain’s world-beating construction industry, taxpayers in Spain (myself included) will be shanghaied into finishing the job. By Don Quijones, Raging Bull-Shit
Taxpayers, get ready to open your wallet! Read … Saudi Arabia Turns to Nightmare for Spanish Consortium