Kuwait must act to halt exodus of local contractors

18 July 2008
Kuwait could do worse than observe how its southern neighbour, Saudi Arabia, is handling the rising costs of construction materials.

Kuwaiti contractors are the latest in the Gulf to feel the pressure of inflation, with the local preference for fixed-price contracts undermining the potential to make a profit on construction contracts.

As raw material costs rise, the difficulty in dealing with public-sector contracts without escalation clauses to soak up rising costs is becoming more and more evident.

As a result, firms are beginning to look outside the emirate for work. Markets such as Abu Dhabi, where clients are more willing to share the risk of rising prices through joint ventures with contractors, are beginning to look far more appealing.

It is not that Kuwait does not recognise the problem. Two years ago, the Kuwait Oil Company (KOC) announced a change to its contracts that was designed to encourage greater international participation and alleviate contract risk. But to date, its enhanced lump-sum turnkey contract is the only example of clients adapting to the current economic pressures.

Kuwait may not have the same high profile as the booming UAE economy when it comes to construction, but it has its fair share of major projects, such as the City of Silk, which have been designed to kick-start a sluggish economy and diversify its industrial base.

The concern now is that if firms continue to focus their efforts on winning contracts outside the country where the business environment is less risky, an already sluggish construction sector could grind to a halt.

Kuwait could do worse than observe how its southern neighbour, Saudi Arabia, is handling a similar situation. In response to the complaints of contractors, Riyadh is to compensate them for any losses made on fixed-rate contracts, while doubling advance payments to 20 per cent.
It is questionable whether the Kuwait will move to act so quickly, but it should.

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