Rising interest, fuel price hit margins of Omani contracting firms

Muscat: An increase in bank interest rates and fuel prices are adversely affecting contracting firms, leading to a squeeze in their margins, according to top-level officials in the construction sector.
Payment delays of completed projects have forced contracting firms to increasingly rely on short-term bank funds.
“When the companies estimated project cost (at the time of bidding), they have not incorporated these types of delays (in payment) and an increase in bank interest rates and therefore, the margins are getting affected,” Shahswar Al Balushi, chief executive officer of Oman Society of Contractors, told Times of Oman.
Losing money
Several companies are losing money due to these issues.
“Since many contracting firms are borrowing funds from banks due to delays in payment, banks have increased their fees and interest rates,” added Mehdi Borhani, chairman, Gulf Muscat United. Payment delays of completed projects are still adversely affecting contracting companies, with a severe hit on the cash flow and liquidity of the entire sector.
Short-term loans
The interest rate for short-term loans and bill discounting has increased to 6-7 per cent now, from less than 5 per cent earlier, noted Borhani.
Relatively small contracting firms are suffering more than large and medium sized companies.
Al Balushi of Oman Society of Contractors also said that a sharp rise in fuel cost, after Oman government deregulated the fuel price in January last year, is also pushing up the cost of contracting firms.
Rising fuel price
The price of Super grade petrol shot up by 55 per cent to 186 baisas per litre, ever since the deregulation.
A similar price increase was witnessed in other refined petroleum products, including diesel, which has affected the operating cost of contracting firms. “In January alone, we have seen a rise of 12-15 baisas per litre in fuel cost,” noted Al Balushi.
Al Balushi said that the contracting firms will increase their bidding price now onwards, after taking into consideration all the additional costs. “Of course, they know that there is a likelihood of further delays and they will incorporate these factors into the bidding cost.”
The budget constraints have affected timely payment by the Ministry of Finance for completed projects and the Oman Society of Contractors has been discussing with the ministry for smoothening the payment process.
Referring to the prospects of getting additional jobs this year, Al Balushi said that the government will be investing OMR1.2 billion for development projects and a major portion of this fund will go for settling outstanding payments of running projects. So, there is not enough money for new projects.
“The contracting firms will have to look for new business either in private sector or outside Oman,” added the OSC chief — the representative body of contacting firms, which has 150 companies as members.