Government

Day-to-day government is handled by the prime minister Sheikh Jaber al-Mubarak al-Hamad al-Sabah, who presides over a cabinet of up to 16 ministers.

Parliament is composed of 50 lawmakers, elected from 25 constituencies, although this will be brought down to five constituencies from the next election. Cabinet members, who do not necessarily need to be elected, are ex-officio members with voting rights, bringing the total number of parliament members to a maximum of 66.

Bills can be proposed by either the government or the national assembly and are enacted by a simply majority vote in parliament. Due to parliament’s increasing opposition to the government, it has been extremely difficult for any major legislation to reach the statute book in recent years.

A new National Assembly has been in place since fresh elections were held on 2 December 2012 and the body has already made it clear that it is more willing to acquiesce to the government’s agenda than the previous assembly. On 9 January, it ratified controversial changes to the electoral law set out in an emergency decree in November. The new law, which was decreed while the previous parliament had been disbanded, allowed voters to select only a single candidate instead of four under the previous system.

The change prompted an escalation in street demonstrations and calls for a boycott of the snap elections ushering in a largely pro-government parliament. This included 17 members from the Shia community, a minority group that has traditionally tied its fortunes to the ruling family. Opposition groups have called for further demonstrations to protest against the ratification.

As a result of its election boycott, Kuwait’s opposition has left itself with little or no voice in parliament and no avenue for disapproval except through street protests. Hundreds rallied in Sabah al-Nasser, a predominantly tribal area just southwest of Kuwait City on 13 January, carrying orange flags and calling for parliament to be dissolved yet again.

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Economy

Despite diversification efforts, Kuwait’s economy is still heavily dependent on oil export revenues and GDP is determined as much by the oil price as anything else. With the oil boom of recent times, this has worked to the state’s advantage as nominal GDP growth has averaged more than 20 per cent in the last four years to see the economy grow to more than $95bn.

With the vast majority of government revenues coming from oil sales, this has also led to record budget surpluses. Fiscal surpluses are estimated to have reached more than 30 per cent of GDP in 2011.

Kuwait’s major challenge however has been translating these surpluses into expenditure. The issue is mainly budgetary. Budgets, and thus expenditure, are estimated on a conservative oil price of just $44 a barrel for the 2011 and 2012 financial years. The result of this fiscal conservatism is that ministries receive much less to spend than the state can afford. The result is a massive yearly underspend.

The other major issue is the heavy involvement of the state in economic activity. More than 90 per cent of the local working population work for the government. As a result, private sector growth has been stunted and remains heavily reliant on government spending. There is little innovation and entrepreneurialism in Kuwait. Government plans to open up and diversify the economy have been met with resistance, particularly since high oil prices have allowed the government to deliver economic expansion without the need for significant structural reform.

The economy remains largely closed and unreformed with an inefficient government bureaucracy and restrictive labour conditions. Foreign firms have to pay up to 55 per cent tax on their profits and there is limited  consequent international investment. In 2005, about $250m was invested in Kuwait, less than many sub-Saharan countries.

In 2010, Kuwait’s foreign direct investment (FDI) was approximately $1.1bn, an uncharacteristically high figure for the country which over the last decade has averaged only $313m a year in FDI. This is by far the lowest among the GCC states, which average $44bn a year.

The government has stated its intention to open up the economy, but legislation to reform the tax system and privatise state firms has been consistently blocked by parliament.

Oil & gas

Kuwait has been one of the world’s most important oil producers since oil was first found in the state in 1938. A member of Opec, the state has a production capacity of 2.7 million barrels a day (b/d), thanks mainly to the giant Burgan oil field, the world’s second largest oil field. The vast majority of Kuwait’s oil output is destined for export, mainly to the Far East and Europe. Control of the state’s hydrocarbons policy is in the hands of the Supreme Petroleum Council while the Oil Ministry is entrusted with overseeing the implementation of policy.

Kuwait Petroleum Corporation (KPC) is the state firm tasked with operating the sector. It has several subsidiaries to handle different areas, the most important of which are upstream operator Kuwait Oil Company (KOC) and refinery operator Kuwait National Petroleum Company (KNPC).

The state’s key oil and gas strategy is its 2020 plan to increase oil production capacity to 4 million b/d through the development of new reservoirs, the introduction of enhanced oil recovery techniques and the production of heavier oil grades.

The constitution prohibits the foreign ownership of the state’s natural resources and this has meant that the state is one of the few countries in the world without any international oil company presence. This has led to problems as the government says it urgently requires foreign assistance to help it maintain and boost output.

The state’s landmark upstream initiative, Project Kuwait, has been delayed by parliament for more than 10 years for this reason. KOC did however recently sign an initial agreement with the US’ ExxonMobil Corporation for the development of its heavy oil reserves, although it remains to be seen whether lawmakers will view this as constitutional.

Otherwise the focus upstream has been on improving the state’s woeful safety record and dealing with rapidly rising water cuts (the water content in the crude oil). Over the next 10 years, the state is expected to start producing more water than oil and has to find ways of disposing this effluent.

In terms of gas, Kuwait has not been so fortunate, with only limited amounts of associated gas. According to UK oil major BP, Kuwait has an estimated 63 trillion cubic feet of proven natural gas reserves, compared with 215.1 trillion cubic feet in the UAE and 884.5 trillion cubic feet in Qatar. In 2009, significant volumes of non-associated Jurassic gas were discovered in the north of Kuwait, attracting interest from international oil companies. UK/Dutch oil major Shell signed a five-year enhanced technical services agreement in 2010 to help KOC develop and manage the technically challenging resource. However, the $800m deal has been challenged in parliament over its transparency.

As a result, Kuwait has been forced to import gas. In 2011, with oil production at 2.8 million b/d, Kuwait produced some 1 billion cubic feet a day (cf/d) of associated gas, along with 150-200 million cf/d from non-associated fields. It consumed an average of 1.45 billion cf/d, with the shortfall covered by imports of around 270 million cf/d of liquefied natural gas (LNG), largely from regional neighbours, Yemen and Oman.

Downstream, the aim is to increase local refining capacity to more than 1.4 million b/d from more than 956,000 b/d today. The centerpiece of this is the long delayed new 615,000 b/d Al-Zour refinery, which aims to secure the supply of low sulphur fuel oil for electrical power plants. The initial tender in 2006 was cancelled after bids for the four packages came in well over budget at $16.5bn. The New Refinery scheme was relaunched in 2008, this time with five packages. About $10.3bn-worth of contracts were awarded to various firms in 2008, but were cancelled in 2009 before construction had begun.

The other main downstream scheme is the $16bn clean fuels project to upgrade and increase capacity at the state’s three existing refineries at Shuaiba, Mina al-Ahmadi and Mina Abdulla. Both schemes now have approval from the Supreme Petroleum Council, Kuwait’s highest oil sector decision-making body.

Kuwait has been planning to develop the two projects since the start of the new millennium, driven by the need to produce more fuel to prevent electricity shortages in the summer, as well as the decrepit state of the Shuaiba refinery. Project management consultancy contracts have already been awarded to UK engineering firm Amec and the US’ Foster Wheeler. KNPC has prequalified a number of firms for the clean fuels project, but it remains unclear when EPC tenders will be launched.

The decision to approve the deals, which have previously been vigorously opposed in parliament, has been seen as a boost for the Gulf state’s project market. At more than $30bn the two schemes will easily be the largest undertaken in Kuwait.

Banking

Kuwait’s tightly regulated banking sector is one of the most developed and sophisticated in the region, with its banks enjoying some of the best credit ratings in the Gulf. Only 10 local banks provide retail banking services, and the sector remains largely closed to foreign competition - although licences have been given to a handful of international banks, they are unable to open more than one branch.

Unlike elsewhere in the Gulf, Islamic banking has been slow to take off in Kuwait, partly due to a strong appetite for conventional banking from locals, but also because only three banks - Kuwait Finance House, Boubyan Bank and Kuwait Real Estate Bank - are licensed to provide Islamic banking services - a bone of some contention amongst other banks.

The sector is tightly - some say too tightly - regulated by the Ministry of Finance and the Central Bank of Kuwait, with banks closely monitored and often restricted by what they can and cannot do. Several financial firms have requested licences to start retail operations, but have been prevented from doing so. Nonetheless, the sector’s strong fundamentals have meant that it is one of the few in the region this year to have grown following the stock market meltdown last year.

Financial Markets

The Kuwait Stock Exchange (KSE) is the oldest and most sophisticated stock market in the Gulf. Until 2012, Kuwait was largely self-regulating and the only Gulf state not to have an independent financial regulator, but it has now established the Capital Markets Authority (CMA). This replaces the old three-pronged system of regulation by the Central Bank of Kuwait (CBK), the Commerce & Industry Ministry and the KSE. The Kuwaiti authority is independent, but ultimately answerable to the government.

The new structure includes a special stock exchange court and licensing systems for brokers, assets managers and funds operating on the bourse. And, for the first time, Kuwait has established rules that specifically prohibit money laundering and insider trading.

The value of trades on the KSE in May 2012 - at a mere KD654.7m in share sales and purchases - was less than a quarter of those in October 2008, just before the global financial downturn. This is an indication of the distance yet to be travelled for Kuwait’s capital markets to regain their momentum.

Industry

Kuwait has a relatively small industrial sector centred around the Shuwaikh and Shuaiba industrial areas. Most of it is light industry, although the state does have the region’s only catalyst manufacturing plant. There are also two cement producers; Kuwait Cement Company and Kuwait Portland Cement.

Petrochemicals

A lack of gas feedstock has hampered the development of a local petrochemicals industry, with ethylene production standing at just 1.6 million tonnes a year (t/y) compared to 12 million t/y in Saudi Arabia and 2.9 million t/y in Qatar. Nor is there much prospect for a significant capacity increase. Unlike in the UAE and Qatar, no new petrochemical capacity is at the implementation phase in Kuwait.

A joint venture of the US’ Dow Chemical Company and state-owned Petrochemical Industries Company (PIC), Equate has been a huge success story for Kuwait accounting for 60 per cent of its non-oil exports since it was set up in the late 1990s.

Feedstock constraints will continue to limit Kuwait’s domestic petrochemicals ambitions. Plans for a third olefins cracker within Kuwait have been mooted since 2011, but no progress has been made due to the lack of feedstock. As a result, much of PIC’s focus will be on developing and securing capacity overseas. This drive, initiated with the establishment of the MEGlobal and Equipolymers ventures, suffered a setback with the collapse of the K-Dow venture in late 2008. Undeterred, PIC is now working with Kuwait Petroleum International (KPI) to develop an integrated petrochemical and refining complex in China.

Construction and real estate

Kuwait’s construction boom was kick started by the US invasion of Iraq and the subsequent basing of many international firms in the state to take advantage of the post-war situation. Real estate prices have risen since then, helped also by the lack of available land and a shortage of housing. The government hoped to rectify that by building whole new cities such as the $77bn Silk City project in the north to provide jobs and more affordable housing stock as well as diversify its economy. However, so far the schemes have failed to progress.

Nearly all construction activity in Kuwait is carried out by local firms. Many have expanded rapidly over the last four years and are now looking to expand into other Gulf states.

The Silk City plan is to create a new metropolis on uninhabited land in Subiya, on the northern side of Kuwait Bay. In March 2006, the City of Silk development was unveiled by UK-based Eric Kuhne & Associates, but it has essentially gone nowhere since then.

In limbo for more than two years, the Jaber al-Ahmad Causeway was finally awarded by the Public Works Ministry to a consortium led by South Korea’s Hyundai Engineering &; Construction at the end of October 2012. The $2.6bn bridge will cross Kuwait Bay, linking Kuwait City with Bubiyan Island, where the government has a series of multibillion dollar projects planned.

Power

Recently, Kuwait has had to contend with peak power demand growth of 6-8 per cent a year, which has been driven by an expanding economy and population. This growth, coupled with a lack of new capacity being installed in the period 2000-06, placed an increasing strain on the sector: in 2009 and 2010, Kuwait’s power reserve margin fell below 5 per cent, well under the internationally accepted standard of 15 per cent. As a result, there were genuine fears that Kuwait was facing serious electricity shortages in the summer months.

In addition to having to replace existing infrastructure, some 10,000MW of new capacity will be required to meet the projected 2020 load.

Unlike most other Gulf states, Kuwait still hangs on to the conventional government-funded model for its power and water developments. Extensive work on the transmission and distribution network is also required.

On 8 January 2013, Kuwait’s Partnerships Technical Bureau (PTB) awarded the contract to build the country’s first independent water and power plant (IWPP). A consortium of UK/French IP-GDF Suez, Japan’s Sumitomo and the local AH Sagar & Brothers won the long-awaited Al-Zour North IWPP deal. It offers hope that Kuwait’s projects market could finally start living up to its potential after many delays and dashed expectations. As the country’s first IWPP, Al-Zour North is a test case of the willingness of the private sector to back projects in Kuwait.

Water

The water sector largely escaped the shortages experienced by the power sector. Nonethless, new capacity does need to be brought onstream to avoid future shortages and the state is currently building two new desalination plants at Shuaiba north and Shuwaikh to avoid shortfalls.

Kuwait has one of the most advanced sewerage systems in the Gulf and is also in possession of the world’s largest wastewater treatment and reuse plant at Sulaibiya.

Transport

Such has been the rapid rate of passenger growth in Kuwait that the existing terminal is now heavily overcrowded, handling 8.5 million passengers a year against the design capacity of 5 million.

To rectify the situation, the government, through the Directorate General of Civil Aviation (DGCA), has created a masterplan for Kuwait International airport’s (KIA) future growth. The plan calls for an ultimate capacity of 50 million passengers a year, a target the government expects to reach by 2048.

The centrepiece of the redevelopment plan is a new $775m international terminal, designed by the UK’s Foster & Partners, which when finished will more than double passenger handling capacity to more than 13 million.

Kuwait is one of the key proponents of the GCC railway. It has plans for a high-speed network of its own and is also planning a multi-billion-dollar metro system.