While some GCC governments are looking how to rationalise spending in the coming year as a result of lower oil prices, Kuwait has batted away concerns of falling revenues and approved an ambitious $116bn five-year development plan.

Parliament approved the programme on 11 February, more than a year after the previous plan ended in December 2013. The plan will run from the beginning of the new budget year in April until March 2020.

Although the details have yet to be publicly released, those who have seen drafts say the government has not cut back on any proposed major schemes.

Similar scope

“It looks similar to the old plan,” says a senior economist at a major local bank. “It is still very ambitious and the priorities are much the same. The expenditure on infrastructure looks to address the issues we have now, and also to develop the north of the country, where Silk City and the port in Bubiyan are planned.”

The proposed projects list includes the $14bn New Refinery Project, major utility schemes, and metro and railway projects. It is hoped that as a result of recent legislative and structural reforms of the country’s development bodies, the new plan will be more successful than the previous $110bn one.

“It will still, I’m sure, face problems of implementation, but hopefully the implementation rate will be much higher than the 52 per cent they did last time [under the previous five-year plan],” says the economist.

Economic slowdown

Kuwait’s overall economic growth is forecast to slow significantly in 2015 as a result of the sharp drop in oil prices. National Bank of Kuwait (NBK), in its most recent Mena Outlook report, expects GDP growth to fall from 1.5 per cent in 2013 and an estimated 1.3 per cent in 2014 to 0.8 per cent in 2015.

The drop in crude prices is, unsurprisingly, the primary culprit for this, with the hydrocarbons sector accounting for about 90 per cent of the country’s budget revenue and 95 per cent of exports. NBK estimates that the lower commodity price will have caused the oil sector’s GDP to contract 1.3 per cent in 2014. The bank expects a further drop of 2.3 per cent in 2015 unless there is a significant pick-up in prices.

However, while the official budget for 2015/16 has yet to be announced, any cuts in spending are expected to be limited to trimming operating expenses such as official missions, with the more important areas such as infrastructure projects and the public sector expected to be unaffected.

While lower oil prices will result in a loss of revenue, the government is able to commit to a large capital expenditure programme as it has built up significant reserves by maintaining a budget surplus throughout the past 15 fiscal years, with an annual average surplus of 21 per cent of GDP.

The surpluses have accrued as a result of record production and high oil prices since 2011, and an inability to hit budgetary spending targets due to slow progress with major infrastructure projects.

Non-oil growth

A welcome development in Kuwait’s economy in the past couple of years has been the emergence of its non-oil sector, which for many years lagged behind its GCC neighbours. Non-oil GDP growth reached 5.6 per cent in 2013, up from just 0.6 per cent in 2012, and is expected to remain steady for the next two years.

“The overall GDP growth will be weaker, and maybe even down, depending on developments in the oil market with the falling price,” says the economist. “But the non-oil sector did pick up in 2013, probably also in 2014, and we expect that to continue in the next few years.”

Non-oil growth is expected to be further boosted by capital spending as the government delivers major infrastructure projects set out in the new five-year development plan.

“It is vital that the government and parliament are able to push ahead with major projects,” says an analyst at a major local investment firm. “These projects are important to kick-start and diversify the economy, which is still too reliant on oil.”

Infrastructure spending

While the implementation of the previous five-year plan was largely disappointing, the signing of the final agreements for the $1.4bn Al-Zour North independent water and power project (IWPP) in December 2013 ushered in fresh optimism that the next five years would be more successful.

Progress with the long-awaited IWPP was followed by the award of five packages on the $16bn Clean Fuels Project in the first quarter of 2014, an important scheme that had also faced significant delays.

Although the award of the Al-Zour North IWPP, the country’s first public-private partnership (PPP), was regarded as a seminal moment in Kuwait’s development, the slow procurement of the pioneering scheme subsequently resulted in the government introducing several changes to both the legislation and structure of its PPP body.

In January 2015, the restructured and renamed Kuwait Authority for Public Partnerships (KAPP), formerly the Partnerships Technical Bureau (PTB), was unveiled. It has already started the procurement process for its next two utility schemes, the Al-Zour North 2 and Al-Khiran IWPPs. The body has also started the tendering process for the programme to redevelop schools throughout the country.

Those within Kuwait’s financial and projects sectors are hopeful the restructuring of the body will allow further progress in engaging the private sector, with more than $20bn-worth of schemes slated to be procured using the model.

Private sector

“The optimism in the market is two- or three-fold,” says a source at a major local bank. “The PTB - now KAPP - has come a long way. It is now fully staffed and has one PPP under its belt, and so is more experienced and savvy. So it should be able to move things forward.

“The new structure gives them more authority and more autonomy, and along with the new Kuwait Direct Investment Promotion Authority [KDIPA], it will make it easier for foreign investors to come and be involved in these projects.”

Those within Kuwait’s finance sector say that a prolonged period of lower oil prices could result in KAPP assuming an even larger role in the country’s development programme. The verdict is still out on whether or not this would be a positive development.

“More things might move towards the PPP model because of the low oil price, but we will have to wait and see,” says the economist. “I’m not sure if this is good news for Kuwait, as PPPs are much slower in coming to fruition.”

A central aim of Kuwait’s new development plan will be to increase the role of the private sector in the economy and encourage more locals to work for private companies.

PPP market

In addition to the restructuring of the PPP body, the recent launch of the KDIPA will assist in efforts to grow the involvement of the private sector in the economy. The new authority granted its first approval to US technology giant IBM in January, after having opened for business on 29 December 2014.

While under the previous 2011 foreign investment legislation, only specified sectors such as infrastructure, tourism and insurance were open for 100 per cent foreign ownership, now there are fewer limitations and they mainly concern the hydrocarbons sector.

Another decision undertaken by the government in the past six months, which is set to increase the attractiveness of Kuwait to foreign companies, is the suspension of the offset programme, under which international companies that won major government contracts were required to invest in the local economy.

The offset programme, which had in the past resulted in many contractors pulling out of tenders for key infrastructure projects such as the planned airport, was suspended in September, and the government is looking at ways to improve the process moving forward.

Investment laws

“The suspension of offset and the new foreign direct investment laws, allowing 100 per cent ownership, are very important and have been in the planning stage for a long time,” says the senior economist. “It is a good start, but more needs to be done. [The government] needs to make it as easy as possible for the private sector to grow.”

Long-running efforts to privatise national carrier Kuwait Airways provide an example of how red tape and a convoluted decision-making process have prevented the government from making progress with a scheme that would stimulate private investment and reduce pressure on public coffers.

The national airline is not required to publish regular financial reports, but has not reported profitability in more than 20 years and regularly records losses of hundreds of millions of dollar annually. The privatisation of the carrier was first approved by Kuwait’s National Assembly in 2008. Seven years later, little progress has been made in achieving this.

National carrier

“Kuwait Airways is a never-ending story,” says the economist. “This is very slow and very political. However, in early February, an extra mandate was removed, so it may help progress. It is moving, but there is still a lot to do.”

As Kuwait’s population continues to grow at a rapid rate and oil prices show no sign of rebounding back towards recent highs any time soon, 2015 will be an important year for economic development in the mid-to-long term.

Many of the proposed infrastructure and economic diversification schemes were planned previously, and the drop in oil prices has increased the urgency to deliver on these. While the government has large enough surpluses to cover lower hydrocarbons revenues in the short term, it is imperative that infrastructure investment and privatisation initiatives move ahead to secure its long-term economic future.

If Kuwait is able to deliver on some of its languishing projects, NBK says GDP growth will rebound to 3.6 per cent in 2016.