DOCUMENTARY CYCLE “MAKES THE SECTOR MUD MORE WET"

    Aug 30
    “GOVERNMENT BODIES CONTINUE DELAYING PAYMENT OF DUES”

    Al Rai – Issue No. A0 -13551  - 
     
    Business- Sunday 7 August – 2016

    Who cares for the contractors’ suffering? (photo by Assad Abdulla)

    | By Mohamed Al Jamous |

    One and a half year passed since offering the project as a tender and signing the contract...

    Al Qahtani: there is a persistent need to expedite the period for starting the execution of any project

    Contracting works laws are “outdated”


    Oil prices drop may be a blessing or curse...

    Despite the numerous difficulties and hurdles, nevertheless the contracting and construction sector in Kuwait is still holding to a large extent and facing numerous challenges which are already existing.
    However, the continuation of this sector, upon which the State depends for executing the great majority of major vital and development projects seems to be at stake, with the growing crisis due to the decline or slowdown in investment spending in light of falling oil prices to a very low levels.
    While the “negative” economic indicators and expectations cast their heavy shadow on the overall economic sectors, comes the length of the documentary cycle to increase the “vain of the contracting sector.”
     
    When the documentary cycle goes on in an exaggerated manner, which could be up to a year or year and a half between the start of offering the project as a tender and signing the contract with the winning company, this creates an imbalance for companies, especially since there are many things  which may shift and change during the waiting «lost time», particularly in terms of prices, which could lead to a gap between the estimated price for the material (at the time of the project launch) and the date to begin implementation, which is not consistent with the vision of the State for the settlement of an attractive environment for investment.
    It is not only the documentary cycle which disturbs the contractors, as there is a delay on part of the government bodies in the payment of the companies ‘dues, causing a problem for the latter to pay their instalments to the creditor banks, plus the delay in the payment of the final instalment which may extend for a long time without convincing reasons.
    Al Rai has surveyed the opinions of experts in the contracting sector to stand on their suffering in dealing with government bodies. The following are the most prominent statements of these experts:
    The Chairman and CEO of “First Equilease” Company Mohammad Al Qahtany, said the “contracting sector is significant and vital. I do not think there is a scarcity of projects, as the State is still launching projects in the oil sector and residential cities. Further, the sector is approaching great work and opportunities.’
    Further, there is a great and fundamental need for accelerating the period of starting the execution of any project won by a contracting company, as the documentary cycle is still long between the launching of the project and start of the execution, which extends between one year to one and half year in some instances, which is unacceptable. This long period may witness great changes in terms of providing manpower, and the prices of materials which may undergo an increase in their value. Furthermore, the company sustains costs for the mobilization of the required equipments and materials to execute the project, which means that the long period may reflect negatively on the company.
    Al Qahtany pointed out to the existence of big hurdles also related to the delay in the payment of instalments or the final amount by the concerned government bodies owning the projects being implemented, which has negative reflections on the company and subcontractor, as well as on the banks which are owed dues by these companies in terms of providing finance. All these matters are related to the long documentary cycle.
    Al Qahtany said the “problem is not with the projects being implemented currently, which were approved before the decline in oil prices. But, the problem or fear is from the next projects, whether they shall be launched completely or partially, and whether there is a delay in launching them due to the pressure of the State general budget, although they are projects approved as part of the State plans, including projects which are being reconsidered.” He pointed out that the main projects, particularly “Oil” and “Housing” projects may be sufficient and satisfy the requirements of contracting companies, if we take into consideration that these projects have secondary projects such as infrastructure.
    Al Qahtany observed that what is happening today is that the government is reconsidering, and may be conducting a revision relevant to the State budget in general, although there are big projects being implemented.
    Outdated
    Meanwhile, a Chief Engineer in one of the companies, considered that the laws relevant to this sector are old and “outdated”, and no longer in line with the present time. He pointed out that there are many hurdles affecting negatively the contracting companies.
     He observed that the project prices are the basis, and hoped that the State will not approve the lowest prices for winning any project, because this will force the contractor to go in a hot competition to win the project at rates which do not conform with the project value, in order to find work to do. This will be at the account of the quality of execution, which will expose him to loss. He pointed out that the best is for the government to take the second lowest price or the price closest to the project estimated budget by the project owner government sectors, and that there should be a technical evaluation of the project.
    He considered the increase in the prices of materials, sometimes in a big manner, such as iron, wood, gravel, and diesel, may expose the contractor to losses. The contracts do not include a mechanism to compensate him for such increases or part of them. Therefore, he called for the necessity of reconsidering this matter, whereby a clause is included in the contract which determines a specific percentage which the government sectors should pay upon increase of prices.
    He addressed the problem relevant to the designs of large and medium projects, which may not be finalized in many world countries unless with the existence of some variations which take place on the design, while in Kuwait there are no variation orders, and if they happen they take two or three months, but without material compensation, which exposes the contractor to additional burdens.
    Among the other hurdles upon executing an infrastructure project such as highways, occasionally the contractor faces unforeseen hurdles such as the discovery of pipelines buried underground since tens of years during the digging operations. Work is discontinued in the project pending removal of such hurdles, but usually takes time and causes loss to the contractor for discontinuation of work in the project without receiving compensation. He pointed out that administrative contracts do not stipulate compensating the contractor if the unforeseen hurdles delays him in executing the project and his exposure to loss.
    He stressed on the necessity that the State imposes on the foreign contractor who wins a Kuwaiti project to give 25 to 30% of the project value to a local contractor in order to provide work opportunities to the local market.
    Among the other hurdles which the chief engineer addressed is the strictness of providing a bank guarantee by 10%, which is a large percentage burdening the contract. Further, it imposes on the contractor performance bonds by 10% as well up to the end of the maintenance period which reduces the contractor’s cash flows. He called for reducing both percentages to 5% instead of 10%.
    Unfair competition
    Meanwhile, the Project Manager of a major company (he preferred not to mention his name) agreed in the opinion with Al Qahtany’s statements. He confirmed that the documentary cycle, obtaining finance, unfair competition and the comparison between prices are among the most prominent challenges and difficulties facing contracting companies.
    He observed that the decrease in oil prices may be a blessing and it may be a curse as well. He said it is “a blessing for the government which has to launch projects despite the decline in oil revenues, but it obtains prices less than those in the normal conditions where the oil revenues are high. In this case, it is assumed that the State offer big projects with high costs.”  On the other hand, it is a curse for the contracting companies which offer prices less than those in the same conditions in order to have work and continue working.  He pointed out that the government may offer a number of projects it deems necessary for the exploitation of the opportunity of decline in their cost, instead of launching them at a time where there is a hike in the oil prices. This type of projects may consist of schools or hospitals.

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Clients Testimonials

  • Meanwhile, Chairman of Arabian Beverage Company, Mr. Adnan  Al-Mousa said: “The region is in dire need for development in the equipment and transportation leasing market. Therefore, First Equilease comes as a valuable addition to the market as it offers advanced services due to the financial experience it possesses.”

    Arabian Beverage Company