KUWAIT’S battle against the budget deficit is injecting new creativity into the construction sector. As state funds dwindle, a new and more flexible culture is developing. Contractors who used to rely on public sector opportunities are expanding into an increasingly confident private sector. Consultants and architects, no longer simple providers of professional services, are investigating project finance and build-operate-transfer schemes. Government departments, with plenty of work which needs to be done, are looking to private sector initiatives in areas which have traditionally been the preserve of the public sector.
Competition for government contracts is intense. ‘The cake is getting smaller, but more and more companies are wanting a slice,’ complains one local contractor. ‘We are seeing companies we’ve never heard of bidding for and winning contracts. They just can’t find work in their usual sectors.’
When the alternatives are taxation, the lifting of subsidies, or public sector wage cuts, infrastructure projects are a soft target for budget cuts. It is not surprising, then, that the project budget has been the first to feel the knife. In November 1994, Finance & Planning Minister Nasser al-Rodhan reacted to the ‘urgent spending needs’ of the previous month’s Iraqi military build-up by announcing a 25 per cent reduction in the non-oil project budget. Further cuts are expected in the fiscal year 1995/96.
The economies come just as a number of major construction projects are drawing to an end. The Emiri diwan project, managed by Project Analysis & Control Systems Company (Projacs), the Bayan palace development, and therepair of the tele- communications tower, are all due for completion this year. While studies for other large projects are under way, invitations to bid are still some way off.
As an alternative, contractors are looking to a more buoyant private sector to take up the slack. Confidence in the local economy is high, and was boosted further by the allied response to the Iraqi military build- up. A number of prestige office buildings are under way, and others are expected.
One private sector project going ahead is the third coastal project, the largest government scheme yet allocated to the private sector. National Real Estate Company will invest KD 20 million in developing a 2.4-kilometre strip of coastline lying within Kuwait City over 25 years. Plans for the strip include fish and vegetable markets, marinas and other leisure facilities. Detailed designs are being prepared by Kuwaiti Engineer’s Office.
Studies and cost estimates have also been submitted by Pearl of Kuwait Real Estate Company to the Finance & Planning Ministry to build the new cities of Khiran, Doha and Subiya. The state owned Touristic Enterprise Company, which manages all of Kuwait’s tourist facilities, has also opened its doors to private sector investment. It has four schemes under construction with a combined private sector investment of KD 16 million. These are:
The KD 5.5 million Shaab Gardens development, with investment from the Kuwait Commercial Markets Company. Due for completion mid-1995.
The KD 5.4 million Dolphin Park, with investment from the Kuwait Farah General Trading Group. Due for Completion in 1996.
The KD 950,000 Aquapark, being developed by the Al-Jazira Entertainment Project Company.
The KD 4.7 million Physiotherapy Centre, being carried out by Shams Physiotherapy Centres Company.
Opportunities in the public sector are limited in the short term. The oil sector, which escaped the budget cuts, remains active, and will continue to provide civil work. Construction is due to start this year on the $400 million western oil fields gathering centre scheme, the MAFP and acid gas removal plant schemes at Mina al-Ahmadi, and the steam system revamp at Mina Abdullah.
In the power sector, the 2,400-MW Subiya power station has provided work for subcontractors, but on completion it will leave Kuwait with enough capacity to see it into the next decade, perhaps longer if subsidies on utilities are lifted. The country’s transport infrastructure is more than adequate, and will offer maintenance work only.
However, one government department is providing plenty of opportunities. ‘The projects we are looking at are essential.’
says Wasmia al-Eissa, chief engineer of the sanitary engineering department of the Ministry of Public Works. ‘Sewerage needs replacement and renovation, and expansions are essential to cope with the increasing demand from population growth.’
The Riqqa sewerage works expansion is perhaps the most pressing of the work to be done. In December 1994, the local Mohamed Abdulmohsin Kharafi bid KD 19.9 million to expand the plant’s capacity to 180,000 cubic metres a day (cmd) from 72,000 cmd. The expansion is necessary in part to cope with flow from the new Al-Qurain housing development. Contractors say that Kharafi’s low price may encourage the ministry to press ahead with other schemes.
Al-Eissa dismisses suggestions that market conditions are pushing prices down. ‘What we are planning for in our budgets, we are getting,’ she says. ‘There are no underestimates. The prices are reasonable for the quality.’
Two major sewerage schemes are already under way. The local United Gulf Construction Company is carrying out renovation and renewal work on the sewage network in the Sulaibkhat area, and Kharafi is a KD 19.5 million scheme to renovate and extend the sewerage, drainage and water networks in Jahra. The sanitation department is also carrying out a major refurbishment of the existing network. Asbestos pipes are being replaced by ductile and glazed clay pipes. The local Mishref Trading & Contracting Company is to replace 260 kilometres of pipes in the Mishref and North Bayan areas.
More opportunities for contractors lie ahead. Detailed designs have been completed for the new 275,000-cmd Sulaibiya treatment plant which will replace the aging Ardiya station. However, here too, budgetary constraints are coming into play. ‘We are looking to the private sector for finance,’ says Al-Eissa. ‘This could be local or international.’
In the longer term, contractors are looking to the health sector for opportunities. When the law was changed in 1994 allowing private hospitals to be built, more than 20 licences, costing KD 500,000 each, were bought. Though many of the licence holders have detailed plans already drawn up, a change in the law is awaited before going ahead with construction. The biggest stumbling block is the government’s pricing controls which place a limit on charges in all areas of medical care, from room fees to prescriptions. Contractors estimate the construction of a new hospital, covering 4,000- 5,000 square metres, cost KD 5 million. Buying the land would add a further KD 3 million to the bill. This capital outlay could not be retrieved through the fees stipulated by the government.
With nationals already bracing themselves for increases in utility charges and possible taxation, the introduction of private medical insurance remains a long-term issue. The prospective private hospital operators aim therefore to target high-cost medical care at high-income patients. Without a change in the law, private hospital construction remains commercially unviable. Operators are hoping liberalisation of the law will come within a year, leaving them free to charge commercial rates.
For long-established companies, adapting to the new realities of the construction sector will not be easy. Many remain cautious about taking the plunge into the private sector, citing delays in payment as the main cause of their reluctance. However, with pressure on public finances set to rise, those who do not diversify will find themselves fighting over an ever shrinking pool of work.