Kuwait is poised to award the first of a raft of projects planned to attract much needed investment to the country’s infrastructure sector. The Al-Zour North power and water project promises not only to revamp the country’s power sector, but to also breathe new life into the stock market and kick-off a process that aims to attract billions of dollars of foreign investment.
The scheme could be delayed again by the latest round of political uncertainty engulfing the country, but sources close to the project say commercial negotiations are reaching a conclusion.
Kuwait’s fractious politics have long stood in the way of ambitious development plans, and the Partnerships Technical Bureau (PTB) does not lack ambition. Created in 2008 to encourage private sector investment in Kuwait and boost gross domestic product growth, the PTB outlined about 30 projects for privatisation. The plan requires an estimated $30bn of investment across several sectors.
Economic growth in Kuwait
All of these schemes in some way require a listing on the Kuwait Stock Exchange, promising to diversify the number of firms floated and the industrial sectors represented, and to pass on economic benefits to local investors. It would also transform Kuwait from what is sometimes described locally as ‘the world’s richest third-world country’ to a place with infrastructure that better reflects its vast oil wealth.
If the PTB achieves its goals, it will be a remarkable turnaround for the country, which is currently the only net capital exporter in the GCC. By the end of 2011, capital exports from Kuwait totalled $22bn, compared with foreign direct investment of just $10.7bn, according to a report by the local Inter-Arab Investment Guarantee Corporation. In contrast, the UAE exported $57.8bn of capital compared with $85.5bn in foreign direct investment.
The impact of this is clear to anyone who visits. “Kuwait is pretty much the same as it was 20 years ago,” says a senior banking executive in the country. “The best comparison is how places like Dubai have changed in that time.”
While the creation of the PTB signals the government’s intention to drive forward plans to expand the economy, it has not escaped intervention by a parliament that frequently derails its plans. In June, the National Assembly voted against the award of the Al-Zour North project to a consortium led by the UK/French IP-GDF Suez. Since then two parliaments have been removed by either the courts or the Emir, which should nullify the vote against the scheme.
Kuwaiti insiders say this illustrates the importance placed on the PTB’s initiatives. “I don’t think it is a coincidence that parliament was dissolved within a week of it voting against this project,” says one source close to the PTB. “That shows how strong support is for the project at the highest levels.”
Yet doubts remain. “There is support for privatisation going right to the top,” says one adviser to the PTB. “That includes most of the senior government figures, but not all.”
The ability of those not supportive of the privatisation programme to significantly set back the process is expected to be limited, however.
Another area of concern is the relative appeal of Kuwait as an investment destination. “You have to ask why someone would invest in Kuwait today compared to Qatar or the UAE,” says the local banking executive.
“At the moment no one would, so we have to create a set of conditions that will encourage investors to choose Kuwait above other countries. They think that the way the PTB has been set up will attract international investors, but it is not going to.”
One suggestion is that rather than the state taking an equity stake in privatisations on an equal footing with the private sector, it should take a position as a first-loss investor. This would reduce the risk facing the private sector and could help attract foreign investment.
Whether it would be enough to overcome the main impediment to foreign investment – Kuwait’s parliamentary uncertainty – is untested. A source at one bank based in Kuwait with a mandate to invest across the GCC says the domestic market accounts for the smallest portion of its assets book. This is because it struggles to get deals completed in Kuwait compared with places such as Saudi Arabia or the UAE because parliament gets involved and often ends up deterring investors or blocking particular deals.
As foreign direct investment dwindles and Kuwait’s neighbours increasingly embrace the private sector, it risks becoming even more of a regional laggard. In October, Ibrahim Dabdoub, chief executive officer of the largest bank in the country, National Bank of Kuwait (NBK), took the unusual step of criticising the government for its lack of investment spending. It was a signal that local business leaders are becoming increasingly frustrated with the inability of Kuwait’s political class to deliver on promises.
If the PTB does manage to get the Al-Zour North project awarded successfully, it could be the tipping point. As the first of its kind, the scheme is inevitably a test for the PTB as an institution and the newly written laws for private sector involvement in the economy. If it gets awarded and avoids parliamentary interference, every scheme that follows it will only get easier.
If it fails, it will be a major blow not just for international investors, but for Kuwait itself and its hopes of finally turning around decades of economic underperformance.
By the end of 2011, Kuwait reported FDI of just $10.7bn, compared with $85.5bn in the UAE
Source: Inter-Arab Investment Guarantee Corporation