Risk drives Kuwaiti contractors abroad

17 July 2008
Firms compete for international work as local clients decline to share risk of rising materials costs.

Established contractors in Kuwait are increasingly seeking work outside their domestic market, claiming that the failure of local clients to share the risk of rising materials costs is driving them abroad.

Following the decision by Mushrif Trading & Contracting Company to move its headquarters to Abu Dhabi (see Business Close-up, page 24), several large contractors now tell MEED that the local market is increasingly unattractive compared with others in the Gulf.

If the trend continues, the Kuwaiti construction market, which is the slowest growing in the region, could fall even further behind the rest of the Gulf and leave major government infrastructure projects facing delays.

Local contractors say the main problem is the insistence of local clients on using fixed-price contracts, leaving contractors struggling to make their work on some contracts economically viable.

Fixed-price contracts place all the risk of rising materials costs on contractors. As a result, contractors are opening offices in markets such as the UAE and Qatar, where they say clients are more willing to share the risk.

Mushrif, which was established in Kuwait in 1968, says its decision to move to Abu Dhabi is an attempt to capitalise on opportunities in the UAE capital (MEED 11:7:08).

With the majority of tenders in Kuwait based on fixed-price, lump-sum contracts, the greater risk-sharing approach adopted in Abu Dhabi is attractive, says Donald Featherstone, chief executive officer of Mushrif.

“Fixed-price, lump-sum contracts are generating some problems within the industry, particularly now with inflation the way it is and its impact on raw materials,” he says.

“From a risk-reward standpoint, the UAE market represents a very good utilisation of our assets and capabilities.”

Other local firms say they are also increasingly seeking to win international contracts.

“We are pushing hard for work outside of Kuwait,” says another large Kuwait-based contractor. “We are trying to find more opportunities in places such as Abu Dhabi and even Oman.

But getting staff is a problem for us. Trying to find engineers or quantity surveyors is difficult. You either find high-quality staff or none at all.”

One executive at Mohammed Abdulmohsin Kharafi & Sons, the country’s biggest contractor, says it is also pursuing international work and will continue to do so.

“We have a branch in Abu Dhabi and we are looking next at Qatar,” says Amr Essam, project manager at Kharafi & Sons.

“The market in Kuwait is still slow. The political situation also has an adverse affect. I cannot see how the megaprojects that have been announced will arrive in the announced timeframe.”

The reliance on fixed-price contracts is having an impact on the bidding for major projects in Kuwait.

According to the local contractors, some firms are either unwilling to bid for work or are walking away from tenders.

“Of course it is a problem,” says the local contractor.

“We are the lowest bidder on one contract, but they keep extending it [the bidding process].

After some time, we have had to say sorry as there is no way to incorporate escalation clauses, and it is a risk.”

“So far, only Kuwait Oil Company [KOC] has implemented a policy for this.

It will pay the difference for the steel between tender stage and the beginning of work. But still this will not cover the big losses as the contract is not just for steel.”

KOC announced a change to its contracts in 2006, when it began using enhanced lump-sum turnkey contracts (MEED 12:5:06).

Elsewhere in the region, developers have been more willing to share the risk of rising costs by forming joint ventures with contractors.

Among the deals that have been done, Abu Dhabi-based Aldar Properties formed a joint venture company with the UK’s Laing O’Rourke in 2006.

It followed this a year later with a similar operation with Belgium’s Six Construct (MEED 1:2:08).

The switch in focus by Kuwaiti contractors is the latest indication of how inflation is causing problems for companies in the Gulf.

Earlier this year, contractors called for a change to contracts in Saudi Arabia, where government contracts do not typically have escalation clauses, which would allow for the value of a contract to increase to cover rising prices.

Riyadh recently responded with plans to compensate contractors for losses incurred on government contracts (MEED 4:7:08).

Kuwait is the third largest market in the Gulf for projects, according to Gulf projects tracker MEED Projects.

As of mid July, the value of projects planned or under way in Kuwait had reached $266bn, some way behind Saudi Arabia at $492bn and the UAE at $900bn.

However, Kuwait is by far the slowest growing market in the region, with growth of just 6 per cent over the past year, compared with a 36 per cent rise for Saudi Arabia and a 37 per cent increase for the UAE. On current trends, it could soon be overtaken by Qatar.

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