Kuwait: Turning to the private sector

09 November 2011

Expectations of a massive increase in population coupled with lacklustre economic growth have shown the government that it needs to diversify its oil-driven economy using private participation

Key fact

Oil revenues accounted for about 88.8 per cent of Kuwait’s total government income this year

Source: MEED

Based solely on its economic indicators, Kuwait has enjoyed a bumper year in 2011. According to the International Monetary Fund, Kuwait’s real gross domestic product (GDP) growth this year will reach 5.7 per cent, followed by 4.5 per cent in 2012, significantly up on the 3.4 per cent growth achieved in 2010.

Kuwait’s new economic plan calls for increased spending on projects and the privatisation of public firms

The government can also show a budget surplus equivalent to 23.6 per cent of GDP –  the highest level in the region –  and a projected current account balance of about $57.2bn at the year end. At the same time, Kuwait’s external debt fell to about 32.5 per cent of GDP, down from 40.9 per cent in 2010.

These high-level indicators mask a dismal economic performance that is characterised by the government’s failure to recycle its surpluses into long-promised and much-needed infrastructure schemes, and economic diversification projects.  

Kuwait’s oil-driven economy

Kuwait’s economy remains heavily skewed towards the state oil sector, with oil revenues accounting for about 88.6 per cent of total government income this year. Overall, the energy sector contributes about 50 per cent of the country’s total output and grew at a faster rate this year (6.1 per cent) than the non-oil sector (5.5 per cent) due to the sharp rise in oil prices.

The need for diversification is compounded by the need to create jobs for the state’s rapidly expanding population, which is expected to grow from the current 2.7 million to 5.4 million people by 2030. This will lead to a substantial number of Kuwaitis looking for employment in the next 20 years.

Perhaps the biggest challenge facing the state is stimulating private sector growth. About 80-95 per cent of Kuwaitis are employed in the public sector and spending on public sector wages and subsidies inhibits the development of the private sector.

In a major initiative to stimulate the private sector, the government unveiled a $125bn economic development plan (EDP) in 2010. This is the first economic plan since 1986 and also the first in a series of economic plans that are scheduled until 2035.

The plan calls for increased spending on a number of megaprojects, the privatisation of public firms and a renewed focus on the delivery of public services through public-private partnerships (PPPs). Projects scheduled under the plan included the estimated $77bn Silk City project, a $10bn metro system and multibillion health care and education schemes.

The Partnerships Technical Bureau (PTB) was formed in 2009 to encourage private sector participation in the economy and oversee the country’s PPP programme. Its role is to conduct initial feasibility studies and surveys for potential projects. The PTB plans to raise $28bn by privatising and developing 32 projects on a PPP basis over the next five years. The schemes include developing low-cost housing, hospitals, universities, power plants and a series of transport projects.

Progress, however, has been slow. The Silk City project has been halted while the master-plan is redesigned and there has been no contract award on the $2.6bn Subiya causeway, the bridge linking the island with the mainland. Kuwait’s health care plans have not fared better, with the Public Works Ministry’s programme to build eight new hospitals also running behind schedule.

Many in the financial sector believe that the progress of the emirate’s PPP plans hinge on the success of Kuwait’s first independent water and power project (IWPP). The project is sponsored by the PTB and will be built at a site in Al-Zour North. A preferred bidder is expected to be named in November and financial close is scheduled for May 2012.

The EDP is also crucial for the emirate’s banking sector. Analysts see its implementation as important in increasing demand for loans and credit growth.

Banks in Kuwait benefit

“The banks are in better shape than two years ago,” says an economist at a local bank. “The Central bank has been very aggressive, asking banks to provision and shore up balance sheets. Credit growth has remained flat for the last couple of years on the non-consumer side, but it should pick up when the projects start up.”

However, analysts are wary of the government’s lack of progress in pushing ahead with the provisions of the economic plan to date.

“We are very sceptical on the implementation and don’t expect to see any positives from it for the banking sector in 2011,” said Naveed Ahmed, senior financial analyst at the local Global Investment House to MEED in July.

Kuwait’s real-estate market contracted significantly as a result of the global markets crash in 2009. But after a couple of tough years, the sector is beginning to offer some opportunities for investors and banks.

“The real-estate sector is doing much better, not so much in the commercial sector, but in the residential market,” says the economist.

The country has a resilient demand for new housing and an affluent domestic market. The vast population growth expected should also increase the importance of the real-estate sector.

Kuwait’s plans to upgrade its education sector have achieved the most progress. Economists say that developing the emirate’s education is key to encouraging foreign investment.

Academic upgrades for Kuwait

Kuwait is currently constructing the estimated $3bn Sabah al-Salem campus on the outskirts of Kuwait City. The emirate has already awarded more than $1bn worth of construction contracts on the scheme in the past year.

“It is attractive for investors to come in if there is a more highly educated population,” says the economist. “The university project underway is a step in the right direction.”

The provisions of the EDP were designed to overhaul the country’s economy and encourage an increased role for the private sector in diversifying the economy. However, red-tape and political deadlock have stalled many of the proposed economic reforms. If Kuwait is to realise its growth potential and create a diverse economy over the next 20 years, it needs to prevent political infighting from stalling its economic reforms.

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