A wait in Kuwait
CW looks at the issues affecting the country’s contracting market
Kuwait exists in the shadow of its wealthy neighbours Qatar and Saudi Arabia in terms of international attention to its construction market for a number of reasons, many of them the fault of the tiny Gulf state itself.
The country has been slow to modernise almost all sectors of its economy, making an influx of international contractors that has been seen in neighbouring states non-existent. Even now, significant bureaucratic hurdles make setting up shop in Kuwait only a remote possibility for foreign firms – it was only this year, for example, that the government agreed to allow foreign banks to open more than one branch.
At the same time, a recent and much-reported study by Ventures Middle East claimed Kuwait’s construction market is expected to grow by 3.4% in 2014, buoyed by $15.8bn in government spending. It expects contract awards to top $17.5bn by the end of 2014, as the oil and gas sector – responsible for some 95% of government revenues – continues to keep Kuwait flush with cash.
It points to the ongoing $698.5mn KIA redevelopment project, which involves a huge redevelopment of the country’s airport. The expansion is set to see capacity grow to 20mn people, and a second terminal built capable of catering for another 12mn. The ambition is to cater for 50mn once the expansion project is finished.
Then there is the $20bn Kuwait Metro project, scheduled to cover more than 160km, as well as $10bn for more than 500km of rail tracks. The tender process is due to commence soon, with a view to the winning consortium being appointed in 2017 and the project opening by 2020.
Others are less bullish. Growth, according to the IMF, will remain poor, at between 1-2% in 2014 and a recent report by Kuwait Finance House revealed that while the infrastructure construction market is growing – set to reach $20.5bn in 2014 – delays over contract announcements and disputes over awards continue to dissuade foreign firms from throwing their hats into the ring in Kuwait.
It has always been thus in the country, where for years vast infrastructure masterplans have been released only to be quietly shelved. Who can forget Kuwait’s plan to build the world’s tallest tower – designed by architect Eric Kuhne – as part of its 2008 Madinat Al Hareer project, which was to see a whole new city built in Subiya?
Six years on, the project has still not broken ground.
A former Gulf-based construction expert and consultant, who declined to be named due to an ongoing project in the region, urged caution in an interview with Construction Week. Like other Gulf states there have been numerous cases in Kuwait of huge construction contract announcements for projects that ultimately never get built.
“The challenge has been to see domestic funding for the announced pipeline,” he said.
Engineering consultancy Atkins recently embarked on a restructuring of its Kuwait (and Bahrain) operations, which led to it moving staff out of the country in order to focus more closely on the UAE, Saudi Arabia and Qatar.
Middle East CEO Simon Moon said: “I think Kuwait has a massive amount of potential, a huge amount of wealth and a huge need to do the things that other GCC countries are doing. But they’ve not quite found the mechanisms to do that politically, stability-wise in terms of their government decision-making.
“It wasn’t a matter of saying we’re not going to do anything in Kuwait, it’s just the reality of the fact that there’s no work in Kuwait or Bahrain, and there’s lots of work in the UAE, Qatar and Saudi, so that’s where our people need to be.”
Atkins was appointed as a designer on the Kuwait Metro project in 2008, but in the interim period it has finished work on the Dubai Metro and made greater progress with the Riyadh and Doha metro projects than it has in Kuwait.
Another issue that needs to be overcome is funding. M.R. Raghu, head of the published research department at Markaz, said that rates for budgeted capital spending in Kuwait had been disappointing, at around 60-65% in the past two years, which had led to capacity constraints in the economy and a subsequent deficit in competitiveness amongst its GCC peers.
That said, Raghu sees recent changes in the political landscape as suggesting that the situation could be set to improve. New projects are not only being announced, but tenders are being issued, which bodes well for the future.
“The ensuing stable political climate post elections in June 2013 has renewed optimism for a favourable project execution. We believe the renewed momentum in awarding projects will be translated into execution phase as well,” he said.
Like many of its neighbours, Kuwait’s financing of its infrastructure projects will come from its oil reserves, but unlike its neighbours, its proximity to an unravelling Iraq will be a factor going forward. The Shia-dominated south that borders Kuwait is arguably Iraq’s second-most stable province after Iraqi Kurdistan, but the war that is engulfing the country’s central areas will remain an issue for its neighbour.
Also like its neighbours – with the exception of Dubai, perhaps – it will be reliant on ever-volatile oil markets. Indeed, Kuwaiti oil minister Ali Al Omair told the country’s official news agency at the beginning of August that he expects oil prices to ease following a rise prompted by unrest in Iraq and Libya.
“Markets have witnessed a slight increase recently, but this rise will not last for long as prices will stabilise. They have already started to ease and return to normal levels,” said Omair.
But Omair said that the violence in Iraq, where Islamist militants IS launched an offensive in June that continues to advance this month on the Kurdish north, has not impacted crude supplies. This is despite the fact that Iraq is the second-largest oil exporter in the 12-nation Opec after Saudi Arabia.
So far, said Paul Gamble, director at the sovereign group at Fitch Ratings, instability in Iraq has only served to maximise Kuwaiti oil revenues by pushing up global oil prices, but the challenge remains on how to maximise the benefit that Kuwait derives from these revenues.
At the same time, government project spending has averaged 3-4% of GDP over the past decade compared to around 10% for most of Kuwait’s GCC neighbours, due to political difficulties in implementing projects caused by the fractious relationship between government and parliament. That said, like Raghu, Gamble remains bullish.
“A relatively pro-government parliament has been in place for a year and there are tentative signs that project implementation is picking up,” he said.
A great deal of Kuwait investment will, unsurprisingly, go into the oil and gas sphere, and local media reported in August that the government was set to approve hydrocarbon projects worth between $3.9bn-$5.3bn for its 2015-2016 fiscal year.
But even if there is a break in the deadlock in either the infrastructure or oil and gas sectors, the role that contractors will play in Kuwait’s big plans going forward remains the elephant in the room. As many of its neighbours, and indeed Kuwait itself has proved, announcing big projects is easy, but if there is neither money nor manpower to build them they will end up on the shelf.
Markaz released a damning report in December 2013 on Kuwait’s public-private partnership law, under which most government-sponsored projects will be built. It claimed that although the model was important, it had been received badly by the private sector due to stringent rules and regulations and limited project finance options.
It was particularly critical of the unfair level of scrutiny given to foreign players, which it said acted as a hindrance instead of encouraging private sector investment. This included a requirement for private sector investors to hand back a project to the government without any consideration and compensation. It also criticised bureaucratic hurdles.
“Each stage of the project involves dealing with numerous entities in the public sector where governance is behindhand. The bureaucratic complexity of the process was a key factor in preventing the rollout of PPP projects,” its said.
Speaking eight months since its publication, Raghu said that challenges remain. Much work has now been done by the government to revamp the business environment and attract investment, including progress in commercial law, and a new companies law that allows for corporate structuring and provides more flexibility for foreign firms. The Kuwait Direct Investment Promotion Authority has also recently been set up, allowing foreign firms to set up joint ventures.
That said, these plans exist only at an early stage at a time when Dubai and Abu Dhabi have been welcoming foreign contractors for decades. Labour also remains an issue.
“(The) labour market faces serious challenges in terms moving people from cosy public sector jobs to private sector,” Raghu said.
It is not only moving nationals into the private sector where Kuwait has issues with labour. Like its neighbour Saudi Arabia, it has for over a year been actively trying to reduce the number of expatriates working in the country in favour of local employees. The rationale behind this policy – which is present in a number of Gulf states – is of trying to increase foreign investment while pushing foreigners out of the private sector, and the government said in 2013 that it would try to reduce expatriate workers by one million within a decade.
As in other Gulf states, it is difficult to reconcile some of the numbers. There are 1.8mn foreign workers in Kuwait and 350,000 local employees. Even without taking into consideration the skills deficit in training local Kuwaitis to international standards in the required disciplines, demand for workers will far exceed supply if many of these major infrastructure projects are progressed.
Then there is the perennial issue of project finance. Both Markaz and Fitch have already highlighted the deficit in spending in Kuwait in comparison to its neighbours, with the tiny state committing only a fraction of what the UAE, Saudi or Qatar does.
Much of the positivity going forward that the situation is due a change in Kuwait relates to banking reforms, and that as the government permits a more fluid and deregulated system – particularly with regard to international banks, which are heavily restricted in Kuwait – the cash will start flowing.
“Access to project finance remains a hurdle, however the situation might change as credit growth has gradually shown signs of improvement,” said Raghu.
“Recent measures by the government which allows foreign banks to open more than one branch, well-capitalised regional banks after years of provisioning following the global financial crisis and government-pledged bank guarantees for projects could ease the availability of credit going forward.”
In its December report, Markaz also highlighted a number of positive changes that could help to end the project finance deadlock. These included breaking down bigger projects into smaller schemes or a greater number or phases, developing a mechanism for risk sharing between government and private firms and even introducing project credit ratings, which would, it argued, encourage more foreign investment.
Raghu said one method for speeding up decision-making could be the setting up of a ‘mini-cabinet’ that could specifically deal with construction and infrastructure plans.
“The formation of a mini-cabinet to monitor progress and fast track the process could aid in better execution,” he said.
If all else fails, there is always Kuwait’s huge government coffers which, said Gamble, could be used to fund some of the country’s ambitious plans going forward – should it choose to.
“Kuwait runs very large budget surpluses each year (around $55bn in 2013/14), so has plenty of room to increase spending, it also has very large savings that can be deployed to finance project spending, if necessary,” he said.
Moon, too, believes that despite the slow pace of decision-making, the ambitious capital spending projects planned to facilitate economic diversification will become a reality.
“You ignore it at your peril,” he said. “It will happen and it has to happen.”
However, as neighbouring Qatar has proved, even a government with an eye-watering budget surplus can be reluctant to throw cash around when it comes to funding mega-projects.
Even in the oil-rich Gulf, the financial crisis and its repercussions are still making rulers and politicians reluctant to loosen the purse strings.
“A relatively pro-government parliament has been in place for a year and there are tentative signs that project implementation is picking up,” said Gamble.