August 15, 2016

Failing Gulf Megafirms Leave Workers Broke and Stranded

Migrant laborers walk during a protest in the United Arab Emirates on November 8, 2015. (AP Photo/Kamran Jebreili)

In August, reports of workers, many of them construction laborers from India and the Philippines, laid off from their jobs without pay and without access to food or a way home, shocked citizens and residents of the Gulf and outsiders alike. The wind down of large construction projects in the Gulf Cooperation Council states has been expected by businesspeople and investors for some time. It is an inevitable part of the boom-bust cycle of oil and gas dependent economies, especially of patterns of investment and government spending in the Gulf in the last decade. As oil and gas revenue increased, infrastructure and housing projects flourished. Enabled by government deposits in local banks, a lending boom allowed large contractors to hire cheap labor from abroad, often over and above current project needs. National vision documents, from Dubai’s Strategic Plan 2015, Bahrain 2030, Qatar 2030, and Abu Dhabi 2030 (all released well before Saudi Arabia’s Vision 2030) envisioned real estate, to be marketed to, built, and populated by foreigners, as a driving force of economic growth. The steep decline in oil prices since late 2014 continues to challenge Gulf states, in their fiscal policies and uneven efforts at diversification and private sector job creation for nationals.

Heavily segregated labor markets in the GCC have encouraged foreign labor particularly for low-wage private sector work, while also making very few demands on employers for workers’ safety and salaries. Employers are legally obligated to pay foreign workers according to their contracts and provide an end of service benefit, and in most cases, a return airfare home, once their visa or work contract has ended. For the embassies (and expatriate communities) of India and the Philippines to intervene on behalf of their citizens working in Saudi Arabia, providing food and basic accommodation and help with repatriation, is not supposed to be the norm. Workers in the United Arab Emirates have faced a similar crisis, while the government has intervened in some reported cases to repatriate stranded laborers.

The population of migrant workers in the GCC, especially low-wage male laborers from Asia, has exploded over the last decade. Many of these people are now facing layoffs, missing pay, and a gross lack of access to consular services and repatriation. They are stranded. And many of these people are not likely to leave. The GCC could be at the outset of its own illegal immigration crisis. The Bin Laden Group alone laid off over 70,000 foreign workers earlier in the summer; Saudi Oger has conducted significant layoffs as well – 2,500 of the most desperate laid off foreign workers are in pleas for help in repatriation. People will find ways into the informal economy, as undocumented workers, more exposed to abuse and exploitation. Some will be ashamed to go home without pay, to families that rely on remittances to survive. Some will have no support network waiting. This is the harsh reality of an economic downturn in the Gulf.

At the business level, there is another reality unfolding for the megafirms that employ these workers. As Omar Hesham AlShehabi has argued, much of the oil boom decade relied on state-driven mega real estate plans, ones that depended on an expatriate population explosion and the firms that could manage large contracts with sophisticated engineering demands in a difficult environment. The extent of the mega real estate plans constituted the major share of economic activity in the GCC in the last decade, excluding the oil and gas sector. According to AlShehabi, by 2008, 57 percent of the value of all ventures in the GCC – the equivalent of $1.2 trillion out of a total $2.1 trillion – were directed toward these mega real estate projects. In tandem, infrastructure projects to facilitate such initiatives included planned energy projects worth $134 billion, and water and sewage infrastructure expenses worth another $40 billion. As Adam Hanieh has documented, the reach of these projects was so immense that one-third of global project financing was concentrated in the region in 2006.

Flow ChartSome are going to fall into bankruptcy, not a simple legal procedure across the GCC. Some will fail spectacularly, and not just because of the oil price-induced recession. Some of these firms will face both market and political defeat. One such firm is Saudi Oger. As Deputy Crown Prince Mohammed bin Salman announced in an interview with Bloomberg in April, “Saudi Oger can’t cover their own labour costs. That’s not our problem, that’s Saudi Oger’s.” Unfortunately, Saudi Oger is becoming Saudi Arabia’s problem, and it will not stop at Saudi borders. The effects of unpaid laborers wandering the kingdom is a domestic security issue, but the regional effects of corporate default could be wider than first anticipated.

To start, Saudi Oger is a private firm owned by Lebanon’s Hariri family. Its demise could play into larger Saudi foreign economic policy toward Lebanon and its political leadership. According to a recent report by JP Morgan, Saudi Oger also holds a controlling stake in Oger Telecom (50.5 percent), while Saudi Telecom (a government owned entity) owns a 35 percent stake. Oger Telecom owns 55 percent of Turk Telecom through its local company, Ojer Telekomunikasyon. The Turkish government holds a 30 percent stake of Turk Telecom. If Saudi Oger declares bankruptcy as expected, the financial effects could reach Lebanon and Turkey. There is the possibility of a buyout opportunity for Saudi Arabia if it indeed, as some report, is in talks with the Hariri family to take over the parent firm. How the Turkish government might feel about a Saudi government stake in its national telecom firm is another matter.

There is no question that the GCC economies, Saudi Arabia’s in particular, continue to experience the disruption of persistent low oil prices, and reduced government revenue. Playing hardball with the construction firms that enabled the growth of Gulf economies of the last decade will have both human and regional political consequences.

Market Watch is a blog conceived by AGSIW Senior Resident Scholar Karen E. Young seeking to provide insights from the crossroads of Gulf politics and finance.