Finding solutions to Qatar’s rising costs

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The Qatari government is taking steps to better protect the country's thriving construction industry.

While soaring construction costs continue to blight the sector's growth in the UAE and across the Gulf, the one GCC state that probably feels the pinch of the crisis more than any other is Qatar.

This is due to several reasons. Firstly, Qatar's dependence on imports - from essential raw materials and equipment, to workers - has meant the country's inflation is among the highest in the GCC.

The lack of locally developed resources means that aggregates used on projects in Qatar have to be brought in from other countries in the region, which is placing a massive strain on port capacity and the supply chain.

Secondly, increases in the cost of those aggregates have hit Qatar hard. The price of aggregate in the country reached US $30 (QAR 109) a tonne by the end of 2007, compared with around $22 at the beginning of the year.

Thirdly, like other developing economies in the region, Qatar is facing serious shortages of labour, which is largely compounded by the government's tradition of protecting local companies by limiting the number of major players in key sectors such as construction.

Attracting workers to the country has also forced companies to pay higher than average salaries.

But with infrastructure development being crucial and a plethora of real estate projects either under way or on the drawing board, the Qatari government has taken steps to better protect the construction firms that are going to be key to the country's future growth.

Qatar's Public Works Authority (Ashghal) is currently revamping its contracts to include a price escalation clause for its civil works projects.

A similar move was made by the country's electricity and water operator, Kahramaa, towards the end of 2006.

"With the system being new and not many people knowing about it yet, it's difficult to say what the advantages or disadvantages might be," said Mish'al Dhanim, a project manager with Ashghal.

"But it can only benefit the government and contractors. Contractors' costs have gone up by more than 40 to 50% of the original estimate - so the price clause will bring this down.

"If contractors need items like steel, concrete and sand, we give them the paperwork and they go and get it from the concerned factories - so they don't need to worry about paying for delivery; if the prices go up, the government will take care of it.

The move has certainly been welcomed by construction firms operating in Qatar.

Nurol Machinery and Steel has been doing business in the country since 2003, and has since made a further investment by setting up a local manufacturing base for its products, which is due to come on stream later this year.

"The price issue is a headache for all of us," said the company's general manager in Qatar, Kayihan Bagdatli.

"But this is a worldwide problem for steel. Here, almost all the projects are on a turnkey basis. So when we give our quotations we take the unforeseen risks the future may bring regarding steel prices.

Bagdatli added:

"But there are two elements to the current situation. One is finding the right material at the right time, while the other is getting a good price. Unfortunately, the steel that we need for the fabrication of our products in the local market is very hard to find in Qatar.

"Around 50 to 60% of our material comes from the UAE, or through the UK, Europe or the Middle East. Importing material from the UAE to Qatar takes about a week, while from Europe it takes around a month.

Bagdatli hoped other authorities and private clients would also adopt price escalation clauses.

"The government has to protect the construction companies who are here with goodwill and commitment, and who believe in the future of these countries. Companies like ours should not be penalised for taking unforeseen risks which are out of our control," he said.

In July last year, the Qatari government passed a three-year-law exempting imports of gravel,steel and cement from customs duties.

But the law only applies to materials imported from outside of the GCC. It covers eight types of cement including white cement, clinker and cement used in waterfront projects along with five types of steel, including rebar.

"Contractors here haven't had the best of experiences over the last couple of years, with rising prices, especially for cement, rebar and steel, and they've all been on fixed-price lump sum contracts," said Graham Wright. Gardiner & Theobald Middle East.

"Taking the duty off is one step - but it doesn't make it any easier for the contractor. It should cover all products that are imported, such as aluminium, timber and panelling.

Another area of construction that would also benefit immensely from a price risk clause is the country's energy projects.

The discovery of the North Field - the world's largest non-associated gas field - in 1971, has put Qatar on the world map and given rise to massive investment in energy projects in the country, specifically LNG.

In turn, this has created focussed opportunities for international engineering, procurement and construction (EPC) contractors, but fluctuating materials markets have created unique challenges for those committing to long-term projects.Some private firms have agreed to price escalation clauses on certain projects.

One EPC contractor, who did not wish to be named, said: "In general, offshore projects in Qatar are undertaken on a lump sum type of contract model, and in an EPC contract, materials and subcontract orders may only take place a year after contract award.

"Contractors have to be aware of the potential pricing risks when tendering for this type of project, especially given the highly volatile pricing conditions that exist within the market at present.

"We have, on a number of projects, agreed materials escalation clauses in our contracts - such agreements are beneficial not only for the contractor but also for the consumer.

RELATED LINK: Qatar reworks contracts to cover price increases

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