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Saturday , October 1 2022

Rising inflation forces contractors to shun major projects

This post has been read 21535 times!

KUWAIT CITY, July 31: A recent report by the MEED (Project Monitor in the region), expects scores of contracts worth billions of dollars to be re-floated in Kuwait, as a result of long delays and high inflation that forced companies to refuse to implement them, the situation that was brought about by the political stalemate and the Covid-19 epidemic, the contracts whose budgets were approved took up about three years to set the wheel moving from the bidding stage to the award stage, reports Al- Qabas daily. The MEED report said, with the awarding of these projects, many of the contracting companies that originally submitted bids refused to sign the contracts, considering that prices are no longer valid due to inflation, which will cause a wave of projects cancellations and resubmissions. A source in the contracting sector told MEED: “We had one infrastructure project that took three years to award.

Recently, when the state-owned company that submitted the contract contacted us, we had to tell them that we would not implement the project at the price we offered when submitting the bid.” The MEED report stated that importing steel from China has become difficult for companies operating in Kuwait, due to the disruptions associated with the Covid-19 epidemic. In April this year, Tangshan, the center of China’s steel industry which is responsible for 13% of China’s steel production, introduced lockdowns in some areas. The Russo-Ukrainian war has also caused problems for Kuwaiti contractors looking to buy steel.

The Azov-Stal Iron and Steel Plants, located in Mariupol in eastern Ukraine, were one of the largest iron plants of their kind in Europe and were destroyed earlier this year during the conflict. The war in Ukraine has also affected shipping costs globally, as the price of freight has more than quadrupled since June 2020 until now. “Due to inflation, it is impossible to use the same prices that were approved in 2019, and this affects many local and international contractors working in Kuwait,” said an executive at a Kuwait-based contracting company.

People familiar with project contracts tell MEED that the re-bidding process for canceled contracts is likely to be very lengthy, due to the country’s ongoing political problems, but there are no guarantees, and the processes to put that government in place are complicated. It is very easy to imagine a scenario in which we enter 2023 and there is no permanent government in place.” The MEED report noted that the current absence of government means that no significant decisions will have been made regarding large or small infrastructure projects, according to industry sources.

Another source in the contracting sector said: “At the moment, everything is on hold because no one knows who the next ministers will be. State-owned companies responsible for infrastructure projects cannot make any decisions and the only contracts that are likely to progress naturally are those for maintenance and those that are considered emergencies.” It seems that the contractors’ demand to re-submit the contracts, whose budgets were approved after three years, is due to the following reasons:

  1. Prices are no longer valid due to the inflation that hit the world and Kuwait, as it is impossible to use the same prices that were approved in 2019.
  2. The dependence of the Kuwaiti economy on the outside is relatively large, especially with regard to basic materials.
  3. The high cost of freight, port costs and customs clearance procedures.
  4. A big shortage of storage space.
  5. The high wages of workers and the cost of recruitment.
  6. Confusion and deficit in international supply networks, especially with the intensification and escalation of global demand.
  7. Importing steel from China has become difficult for companies operating in Kuwait, as a result of the Corona closures.
  8. The destruction of the Azov Stahl Iron and Steel Plants, located in eastern Ukraine, one of the largest iron plants of its kind in Europe.

The MEED report considered that problems related to the stability of the government in the country mean that new projects that have not yet been introduced may experience long delays, along with those being re-introduced due to issues related to inflation, as well as challenges facing re-introduced projects, which are likely to seek to increase.

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