Mecca light rail construction woes leave China Railways over a Saudi barrel

The Chinese government has been encouraging its state-owned enterprises to expand overseas as part of its 'going out strategy', but one company, China Railway Construction Corporation (CRCC), has found that venturing abroad can be difficult.

CRCC, which is listed in Hong Kong and Shanghai, has run into trouble with a light rail project under way in the holy city of Mecca in Saudi Arabia.

Plagued by labour unrest, the project has racked up big losses.

It is a cautionary tale of a publicly traded company that got caught up in Saudi bureaucracy, diplomatic considerations between China and its biggest supplier of oil, Saudi Arabia, and the cultural sensitivities of doing business in the holiest Muslim city in the world.

At the heart of the issue is a Saudi decision to alter the terms of the original contract that called for the Chinese company to build and operate a 12 billion yuan (HK$14 billion) light rail project to ferry the millions of pilgrims who come to Mecca every year on the annual Haj pilgrimage around the holy city.

CRCC told the Hong Kong Stock Exchange in October it had booked a net loss of 1.36 billion yuan in the third quarter because of the Mecca project. By comparison, the company had a net profit of 1.45 billion yuan in the year-earlier period.

The company's operating cash flow collapsed by 99.35 per cent to 48.2 million yuan during the first three quarters, and it flagged that overall losses from the Mecca project could be as high as 4.15 billion yuan. It was seeking compensation from the Saudi government.