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GCC governments owe over $2.5 billion to contractors

Gulf Cooperation council (GCC) governments have created a liquidity problem for local contractors by being slow to pay fees, Reuters has reported.15 Mar 2017

The governments owe more than £2.5 billion in outstanding fees to contractors and more than 53% of Arab contracting firms are facing cash shortages as a result, Reuters said, citing Arabic-language daily newspaper Al-Riyadh.

Fahd Al-Hammadi, chairman of the Cairo-based Federation of Arab Contractors told Al-Riyadh that several companies have been forced out of the market by the problem, and that the situation is likely to get worse, exacerbated by "the downturn in construction activity and the decline in public spending on infrastructure projects in the region".

Construction procurement expert Peter Blackmore of Pinsent Masons, the law firm behind Out-Law.com said: "Some of the worst problems are believed to have been suffered by the major contractors in Saudi Arabia, who because of a government moratorium on payments last year were forced to lay off thousands of expatriate labourers. This led to a diplomatic spat with the Indian government over the repatriation of workers. It is understood that some, if not full, payments to the contractors have resumed this year."

"Another feature of the issue is the difference of view over the question of 'variations' or 'change orders'. Few of the non-payment issues concern the interim or milestone payments agreed in the contract. Most of the unpaid amounts are disputed on scope grounds: employers believe claims are ill-founded as the work involved design development within the contractor’s original brief. Contractors on the other hand will say the original scope has been varied," Blackmore said

"There is no question that payment issues are making both local and international contractors wary about biding for work with some government entities in the GCC," he said.

"Both in Saudi Arabia and elsewhere in the GCC real steps are being taken to adopt PPP as a means of procuring infrastructure projects. This will create much more cash flow certainty for contractors as their 'clients' will be bank- or bond-funded special purpose companies who will be incentivised by their concession agreements to keep the contractors motivated by regular payments," Blackmore said.