Kuwait commits to development plan

08 November 2015

Kuwait is one of the few GCC countries that has both the ability and the willingness to spend money and invest in capital projects these days

In the face of low oil prices, other governments are putting large new spending commitments on hold and keeping a close eye on the cost of existing projects, but the authorities in Kuwait seem intent on pushing ahead with their capital expenditure plans, regardless. The momentum is much needed.

Kuwait has lagged behind the rest of the region in terms of project spending, largely due to the testy relationship between the National Assembly (parliament) and the government. That has meant that many ambitious plans have gone nowhere. Bureaucracy is another hindrance – the country is ranked in 86th place by the World Bank in its ease of doing business rankings. The end result of all this is that the country’s infrastructure is often tired and inadequate.

“Whereas fellow GCC members have ramped up infrastructure investment, Kuwait still lags in developing its non-oil economy,” says Steffen Dyck, a senior analyst at US ratings agency Moody’s Investors Service. “The on-and-off confrontation between government and parliament, and red tape, have held back the development of energy, transport and health infrastructure.”

Financial standing

On the positive side, Kuwait is in a relatively strong position in terms of the government’s financial position. The UK/US Fitch Ratings estimates that it has one of the lowest fiscal breakeven oil prices among GCC sovereigns at $57 a barrel, putting it second only to Qatar, which is at $55 a barrel.

Oil prices are hovering a little below that level, but the government also has access to large savings it can draw on if needed. According to the SWF Institute, a US-based research firm, the country’s sovereign wealth fund, the Kuwait Investment Authority (KIA), has an estimated $592bn in assets. That makes it the fifth-largest SWF in the world, with savings equivalent to more than $500,000 for every one of the country’s 1.1 million citizens. The government’s debt levels are also very low, running at just 7.1 per cent of GDP last year, according to the IMF.

Top project owners by value of projects 
Project ownerValue ($m)
Ministry of Public Works (MPW)41,933
Kuwait National Petroleum Company39,914
Public Authority for Housing Welfare30,392
Kuwait Oil Company30,246
Ministry of Electricity & Water (MEW)8,595
Petrochemical Industries Company7,000
Kuwait University6,231
MEW/Kuwait Institute for Scientific Research5,655
Ministry of Health5,044
United Real Estate5,000
Al-Diwan al-Amiri3,296
Directorate General of Civil Aviation2,099
US Army Corps of Engineers1,700
KAPP=Kuwait Authority for Partnership Projects. Source: MEED Projects

In a report on the country’s banking system in August 2015, the Central Bank of Kuwait noted: “On the macro front, [the] government’s commitment to continue with its development plan is backed by its ability to fund mega projects by using substantial savings the country has accumulated through its fiscal surpluses since 1995.”

A major reason for the country having such large savings and so little debt is that it has been so poor at spending money. Moody’s says the government managed to spend only half of the KD30bn ($100bn) planned for the five-year development plan announced in 2010.

Hostile atmosphere

A lot of that was down to parliamentary opposition to the government’s plans. The often fractious and antagonistic relationship between the unelected executive, appointed by the emir, and the elected parliament has led to delays and cancellations of many projects over the years. Neither side can push through its plans without the support of the other, and the hostile atmosphere between the two sides meant that inertia tended to prevail.

Capex has been averaging about 3 per cent of GDP in Kuwait, compared with 8 or 9 per cent elsewhere

Paul Gamble, Fitch Ratings

The picture changed somewhat in the summer of 2013. The election in July of that year – the third in a politically tumultuous 18-month period – was boycotted by some opposition figures. That resulted in a more amenable slate of parliamentarians being returned by the electorate, offering an opportunity for the government to move ahead with its plans and for the country to catch up with its regional peers in terms of infrastructure.

“Kuwait is different to elsewhere in the Gulf because the capex [capital expenditure] is low,” says Paul Gamble, senior director at Fitch Ratings. “Capex has been averaging about 3 per cent of GDP in Kuwait, compared with 8 or 9 per cent elsewhere in the region. This reflects the complicated relationship between the government and parliament, which has hindered the implementation of projects.

“We think this relationship has improved. We are seeing more project implementation and, to be perfectly honest, Kuwait needs to step up capex rather than cut it back. We assume there will be more capital spending in Kuwait.”

Spending plan

A new five-year plan, covering the fiscal years from 2015/16 to 2019/20, was announced by the government in 2014 and passed by parliament in February this year. The total amount of development spending in the plan is slightly higher than the previous one, at KD31.45bn, with KD6.6bn due to be spent in the first fiscal year, which began on 1 April.

Projects included in the new five-year plan include public housing, a metro system for the capital, a railway network that forms part of the wider GCC Railway project, the Mubarak al-Kabeer port on Boubyan Island and an expansion of the country’s international airport. There are also several large projects in the energy sector, including much-delayed schemes for a new refinery at Al-Zour and the Clean Fuels Project.

There is some optimism that the more cooperative relationship between parliament and the executive will continue and that the government will have a better success rate with these plans than it has had with past efforts. Indeed, there have already been some positive signs over the past couple of years. Last year was one of the busiest on record for project activity in Kuwait, with KD7.3bn of contracts awarded as part of the country’s infrastructure development plans, according to National Bank of Kuwait (NBK), the country’s largest bank. This was almost four times as much as in 2013, and more than the previous three years combined.

Priority areas

In September, NBK reported that figures for the first five months of the current fiscal year showed that government capital spending had reached KD400m, a rise of 35 per cent compared with the same period the year before. Among the areas that have seen a significant lift is spending on transportation and equipment. It totalled KD56m over the five months, compared with only KD8m for the same period in the previous year. Similarly, spending on projects, maintenance and land purchases rose by a promising 21 per cent year-on-year.

While many schemes have faced delays, some important ones have been moving ahead. They include the Clean Fuels Project, which was 27 per cent complete as of July this year, as well as the project for a new refinery at Al-Zour. In mid-October, a signing ceremony was held at the offices of the state-owned Kuwait National Petroleum Company for the five engineering, procurement and construction contracts for the refinery. The contracts have a total value of $13bn.

There is already a lot of other activity in the pipeline, and the overall scale of the projects market remains impressive. Regional projects tracker MEED Projects estimates that there are just over $251bn-worth of projects planned or under way in the country. Of those, $137bn-worth are in the pre-execution state, including $85bn that are at the study stage. Key sectors include construction, with $90bn-worth of projects, oil and gas ($69bn), transport ($49bn) and power ($26bn).

PPP schemes

A key element of the projects market in Kuwait is the area of public-private partnerships (PPPs), with some $97bn-worth of such projects planned or under way, according to MEED Projects. In some countries, governments pursue PPP schemes as a way to reduce the amount of public money needed for development projects. That is not a major factor in Kuwait. Instead, the main benefits for the country include boosting the size of the private sector, adding greater efficiency and bringing in international know-how and technology.

The government recently made some changes to its approach to PPP schemes, setting up the Kuwait Authority for Partnership Projects (KAPP) last year. KAPP replaces the Partnerships Technical Bureau, which had been running since 2008. According to NBK, the changes have reinvigorated the PPP market and should lead to better regulation, with greater independence for KAPP and more executive powers than its predecessor enjoyed. NBK estimates that, once in full swing, the PPP programme could add at least KD1bn a year to capital spending in Kuwait, boosting real GDP by almost 2 per cent.

Economic boost

Others say the overall planned capital expenditure activity should provide a useful boost to the economy, which could in turn encourage more capital spending in the future. In its recent annual review of the Kuwaiti economy, the Washington-based IMF suggested that non-oil growth could rise to 4 per cent over the medium term as the impact of large investments takes effect.

There are some clouds on the horizon, however, including the potential for parliament to become more assertive and provide greater opposition to the government. Those risks became apparent in late September after the IMF issued a statement following its review, in which it suggested that the government should implement a programme of subsidy cuts and wage reforms and introduce corporation or sales taxes. Such measures would, the IMF said, help provide a more sustainable basis for government finances in the longer term and strengthen capital investment planning.

Kuwait projects by sector and status

Kuwait projects by sector and status

The government has made fitful efforts to reform the country’s large subsidy programmes in the past and, like other GCC governments, has also been eyeing up the potential introduction of value-added tax, so the IMF’s suggestions offered some welcome support. However, they did not go down well with members of the National Assembly. The parliament’s financial and economic affairs committee rejected the proposals out of hand and one of its members, Mohammad al-Jabri, was quoted in the local media as saying the committee was opposed to any measure that would result in higher costs for Kuwaiti citizens.

Even if the current parliament continues to prove more amenable to the government’s plans, it can only sit for four years. That means there will be another election in 2017 at the latest and, given how they have been sidelined while out of parliament, it seems unlikely at this stage that opposition groups would also boycott the next poll. As a result, the second half of the current five-year plan could be taking place in an atmosphere in which it is far harder for the government to gain the necessary support for its plans.

Isis attack

Regional political factors also present a threat. Few Kuwaitis are thought to have gone to fight in Syria – the UK’s International Centre for the Study of Radicalisation & Political Violence estimated earlier this year that just 70 have travelled to join Sunni militant organisations such as Islamic State in Iraq and Syria (Isis). However, Isis claimed responsibility for a suicide attack on a Shia mosque in Kuwait in June this year that killed 27 and injured 227. More attacks cannot be discounted, particularly if the war in Syria continues.

A further risk comes from the wider economic environment. While the Kuwaiti government is in a far more comfortable position than most of its Gulf peers due to its large savings and low break-even oil price, it is still overwhelmingly dependent on oil revenues. According to Moody’s, about 80 per cent of government revenues come from oil and gas sales, while most of the non-oil revenues come from investment income from the KIA.

If oil prices remain at least at the current level or do climb higher, then Kuwait looks well placed financially

Most analysts expect the price of oil to slowly climb in the next few years, but accurately predicting the future of oil prices is an impossible task. If the analysts are proved wrong and the price of oil falls further, the government may yet re-evaluate some of its capital spending plans. An example has been set by neighbouring Saudi Arabia, which has a far higher fiscal break-even price but also large savings. The government in Riyadh has embarked on a concerted effort to cut spending this year, with capital expenditure bearing much of the brunt.

Bright prospects

If, on the other hand, oil prices remain at least at the current level or do climb higher, then Kuwait looks well placed financially. There is always the danger that improved oil revenues could take some of the impetus out of the plans to diversify the economy and promote greater private sector activity, including via the projects market. If that can be avoided, and if relations between the executive and the legislature are kept cordial, at least until 2017, then the prospects for project activity in Kuwait look relatively bright.

After the next election, the situation will have to be re-evaluated. These next few years may prove to be a short window of opportunity for the Kuwaiti authorities to push through their major project spending plans.


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