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Construction sector constrictions bankrupt firms
March 10, 2018, 4:36 pm
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Spree of activity witnessed in the country’s construction sector in recent years is clearly waning. Fewer new contracts, tighter monetary conditions, frequently changing policies and priorities, as well as administrative and regulatory weaknesses have left many firms with a liquidity crunch that has forced them to file for bankruptcy.

In its latest economic update on Kuwait, the National Bank of Kuwait (NBK) the country’s leading private lender, said that in 2017 the total value of contracts awarded across all sectors fell by 28 percent. Citing data from Middle East Economic Digest (MEED), the bank said that value of projects awarded in the year gone by amounted to KD4 billion, which was below the five-year average of KD5 billion.

The report pointed out that while there was a surge in contracts awarded in the power and water sectors, relative to previous years, this was more than offset by a slowdown in other sectors, notably transport and construction. The total of 30 construction contracts awarded in 2017 amounted to only around KD500 million, compared to the 21 projects worth KD1.2 billion that were awarded a year earlier. Budgetary constraints together with bureaucratic hurdles and delays in the bidding phase, has meant that many of the construction projects slated for 2017 are now likely to surface only in 2018.

The government’s project priorities and policies that depend on oil prices, construction tenders that reward the lowest bidder, and labor regulations that keep changing by the week, as well as the drying up of access to easy credit, administrative shortcomings and payment bottlenecks, have all combined to create an environment that undermines the functioning, and sometimes the very existence, of many construction companies.

Last week, around 13 local construction firms reportedly filed for bankruptcy proceedings with the Ministry of Commerce and Industry. In their bankruptcy filings the firms cited inability to complete their ongoing projects and fulfill financial commitments, including to their investors, creditors and employees. Investors and creditors of these firms are also said to have approached the ministry with complaints that over the past three years, profits in these construction firms have fallen by more than 80 percent.

While the ministry is understood to have refused sanctioning the liquidation proceedings in order to protect the rights of shareholders and funds of small investors, it was not clear what the fate of thousands of employees working for these companies would be, or whether their salaries and other dues would be met before the firms were declared insolvent.

Article 50 of Kuwait’s private sector labor law states that an employment contract is deemed terminated in case of a final verdict declaring the employer as bankrupt, or if the establishment is permanently closed. However, in the event, the establishment is sold, merged with another establishment or transferred by inheritance, donation or other legal action, the work contract shall remain valid under the same conditions and the obligations and rights of the original employer towards the workers shall be transferred to the employer who has taken his place.

Though it accounts for only a relatively modest proportion of Kuwait’s GDP — around 5.3 percent in 2016 — construction is one of the biggest employers in the private sector. According to the Public Authority for Civil Information, there were around 395,000 construction workers in Kuwait in 2016; all but 21,000 of them were expatriate employees. Construction sector accounts for around 18 percent of jobs in the private sector and just over 15 percent of all expatriate workers in the country.

The large number of workers employed in the construction sector, the majority of whom are unskilled laborers unaware of any labor rights, means they often get exploited by unscrupulous employers. In recent years there has been a spate in number of protests against companies by employees seeking unpaid wages and other benefits, especially by workers employed in the construction and services sector.

In early March of 2017, a large number of Indian employees of a contracting firm working at the West Doha Power Plant held a protest in front of their embassy to complain about unpaid salaries. This followed an earlier protest by hundreds of Bangladeshi service workers, who staged a sit-in at their labor camp in Mangaf and refused to go to work claiming they had not been paid salaries for up to four months. In January 2018, thousands of Indian workers protested over dismal living conditions in their camps and claimed they had not been paid for over six months by a leading construction company in Kuwait.

In Kuwait, it is illegal for expatriate workers to stage industrial action, including engaging in strikes or peaceful protests. Workers who engage in such activities are liable to face fines, jail-time or deportation. But the law also clearly specifies that employers are obligated to pay all their workers on time and in accordance with their labor contracts. Moreover, in case of company liquidation, salaries and other benefits of employees are legally accorded priority over other claims.

Despite the fall in oil prices in mid-2014 and consequent budgetary limitations, Kuwait has maintained support for several infrastructure projects deeming them a strategic priority for the country’s growth and development. As such, projects in the energy, infrastructure, health and housing sector have seen a strong resurgence in construction activity during the past few years.

A study by BNC Network, a leading project research and business intelligence provider in the region, published ahead of ‘The Big 5 Kuwait’ construction show that was held in Kuwait in September 2017, estimated the combined value of the more than 700 construction projects currently active in Kuwait at KD70 billion, with a further KD10 billion worth of developments in the concept or design phase.

The infrastructure and other construction projects align with the country’s revamped strategic development plan, the New Kuwait 2035, which aims to transform Kuwait into a financial and commercial hub in the region. New Kuwait 2035 envisions among others, a greater role for the private sector, developing more projects through Public-Private Partnerships (PPP) models, and attracting Foreign Direct Investments (FDI) to diversify the country’s economy and wean it away from over-reliance on hydrocarbons.

In the last few years, increased private sector engagements and joint ventures with international companies have led to significant progress in various construction projects. With more funding streams such as the PPP model and FDI being attracted to the country’s construction sector, it is sincerely hoped that some clause will be added to construction contracts to ensure that the poor workers who are helping to construct the ‘New Kuwait’ will at least be paid regularly, and on time.


 

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