Political consensus drives optimism in Kuwait

23 November 2010

Parliament approval of an estimated $104bn five-year infrastructure development programme offers renewed hope that Kuwait is finally moving in the right direction

Kuwait in numbers

$7bn: Estimated cost to build Kuwait’s metro

$28bn: Private sector contribution to deliver Kuwait’s five-year development programme

Source: MEED

It is crunch time for Kuwait. Years of political wrangling over how best to ensure that Kuwaitis have control of their own resources and are provided with jobs has meant that the state has fallen far behind its potential in terms of project development.

The relationship between the cabinet and parliament is more positive now than it has been in recent years

Kamel al-Harami, Kuwait City-based analyst

Decimated by the impact of a devastating invasion in 1990-91 and hit again by the secondary effects of another conflict in Iraq from 2003, Kuwait has not had the best of fortunes in the past 20 years. But today, as the country begins to emerge from a slowdown as a result the global financial downturn, the signs are more promising.

Changing global economy

The world’s fourth-largest oil exporter, Kuwait is producing about 2.2 million barrels a day (b/d) of crude for which in mid-November it was commanding a price in excess of $85 a barrel. Assuming a recovery in the global economy in the coming years prompts producers group Opec to relax its quotas, Kuwait will be able to raise production to closer to its 3.3 million b/d capacity. This will ensure the country’s run of fiscal and current account surpluses over the past decade is unlikely to be interrupted any time soon.

The plan is moving forward. Some laws have been enacted … that will facilitate the execution of the plan

Source at one of  the committees formed to implement the development programme

For a country with oil reserves of more than 100 billion barrels and a population of just 3.5 million, though, macro-economic well-being is the easy part. What Kuwait has found consistently difficult is transforming these financial resources into a deliverable programme of sustainable and diversified economic development. In recent years, it has been its own worst enemy. The open debate facilitated by Kuwait’s political system, laudable in its own right, has become a barrier to getting anything done. Small steps forward have too often been followed by strides in the opposite direction as legislature and executive have become embroiled in endless debates and confrontations over the small print of multibillion-dollar deals.

But developments in the few months offer hope that this might be changing. There is cautious optimism that Kuwait, while far from overcoming its bureaucratic shortcomings, is finally moving in the right direction.

The focus of this renewed hope is the country’s estimated $104bn five-year infrastructure development programme, at the heart of which is a plan to bring in private sector expertise to help deliver $28bn in new projects. This public-private partnership (PPP) scheme comprises 32 projects, including a $7bn metro system, the country’s first independent water and power plant (IWPP) at Al-Zour North, a $3bn tourist development on Failaka Island and the redevelopment of Kuwait airport.

“The plans aims to turn Kuwait into a regional trade and financial hub through sustaining economic development, economic diversification and gross domestic product (GDP) growth,” says Faisal Hasan, head of research at the local Global Investment House.

But what is most significant about the plans is not their scale. Kuwait has had several multibillion-dollar projects on the drawing board for years, including the $60bn City of Silk megacity project and the $15bn Al-Zour refinery, that for a variety of reasons have failed to get off the ground. The reason for hope this time round is that there is more of a political consensus surrounding the plans, and a more structured approach to their realisation.

Depending on who you talk to, in recent years Kuwait’s parliament has developed a reputation either for being an impediment to the implementation of the government’s plans or for having to engage in the thankless task of picking up the pieces of an incoherent executive programme. Either way, divisions between the National Assembly and the cabinet have led to deadlock at the heart of government.

Kuwait parliament support

This time the parliament is on board. The five-year development budget was approved by the National Assembly in February, and in May, it approved the first draft of a new privatisation law designed to pave the way for the delivery of the PPP programme. “The relationship between the cabinet and parliament is more positive now than it has been in recent years,” says Kamel al-Harami, an independent analyst in Kuwait City.

An organisational structure has also been established to deliver the PPP programme. Two new entities will be responsible for the scheme’s implementation: the Higher Committee of Development Projects, composed principally of cabinet ministers, and the Partnerships Technical Bureau (PTB). The PTB was formed in 2009 and has a wide remit, including identifying projects required for the country’s development and assessing their viability; encouraging private sector participation in the economy; advising on pubic-private partnering methods; and establishing a fair and transparent bidding process for private sector companies seeking to win work under the programme.

The infrastructure development plan has wide support among a population that has become disillusioned with the government’s failure to deliver on major projects. “The people of Kuwait are fed up being at the tail end of a development list within the [Middle East] region when they were once at the top of it,” says a source on one of the committees formed to implement the new programme. “They believe that Kuwait has become an under-developed country when it has the means to become one of the leading countries in the region.”

Cautious optimism in Kuwait

Senior political sources in Kuwait speaking to MEED have expressed cautious optimism that the new programme will see a degree of success. “The plan is moving forward,” says the committee member. “Some important laws have been enacted, such as the creation of a stock exchange authority, the privatisation law, a new labour law and other important laws that will facilitate the execution of the plan.”

But the plan’s implementation is unlikely to be without its difficulties. The privatisation law has already been criticised for its stipulation that the government retain a ‘golden share’ in each company, which gives it majority voting rights, and the requirement that investors in state companies retain the existing workforce on their generous government remuneration in the early years.

From the point of view of Kuwaiti nationals anything that might help tackle local unemployment would be a major positive. Some sources speaking to MEED were sceptical that the programme will help absorb Kuwait’s unemployed, but most were optimistic. “The programme is great for Kuwait,” says Ali al-Foodari, a retired general and biographer of the emir. “There are a lot of young Kuwaiti people looking for jobs and it will help create employment for locals.”

“Local companies are already involved in the advisory consortiums and are beginning to think about the engineering, procurement and construction (EPC) stage,” says David Pfeiffer, managing partner at the UK’s SNR Denton in Kuwait. “There will be a tonne of civil works on some of these projects and if you’re a local construction company there’s a gold mine there. A huge chunk of most of these projects will go to local companies because they are best equipped to do it.”

Despite a consensus having been reached on the overall framework of the infrastructure development programme, the details of its implementation will create substantial scope for political disagreement.

“Putting the plan into effect may face difficulties due to the nature of the political system in Kuwait,” says the committee member. “The system is affected very much by influential financial groups in Kuwait, who are represented by certain MPs [member of parliament]. If the government finds a way to strike a good balance between the needs of the public and the greed of certain MPs, then the plans will proceed smoothly. Otherwise it will end up in the drawers like other megaprojects in the recent political history of Kuwait.” “Past experience suggests that there are always delays and execution is slow,” says Abdullah Nubari, a former MP. “Many of the projects only exist on paper, and some are no more than ideas. One project for 35,000 housing units is projected to cost about KD1.5bn, but the budget for the current year is only KD5m.”

“The challenge will come at the EPC stage,” says Pfeiffer. “That’s when the fighting is going to happen.”

Securing financing for the PPP programme is likely to be one of the main challenges. Banks have rejected the creation of a public fund to finance all the projects, preferring that the funds are deposited with them and the projects then funded at a low interest rate. Senior MPs, have threatened to question the prime minister personally if such a decision is taken.”

Ambitious timetable for Kuwait schemes

The build-operate-transfer (BOT) model for delivery of the PPP schemes is also likely to be contentious. “Financing the metro project on a BOT basis will be a huge challenge because Kuwait has a poor track record on BOTs,” says Pfeiffer. “The government will have to put together an attractive BOT package to get foreign companies interested. Contractors are happy to get involved, but they will need assurances on profit.”

Most sources speaking to MEED agree that a five-year horizon for the programme’s delivery is ambitious. “When laws change it still takes time for change to take effect on the ground, because there is inertia among the people who are supposed to implement it,” says Sulayman al-Qudsi, chief economist at the local Gulf Investment Corporation. “I think less than 50 per cent of the plan will be met if we are lucky,” says the committee member.

There is a general belief though that at least a part of the programme is realisable in time. “There is no reason why they shouldn’t be successful, but it will take a long time,” says Nubari. “Some of it will take 10 years or more.”

Given Kuwait’s track record in recent years, the delivery of least half of such a comprehensive plan would be a major achievement. Past experience has taught those doing business in the country to take nothing for granted. For most it would be a relief to see some momentum generated from the beginnings of implementation.

“What will unite us will be implementing part of the five-year plan,” says Al-Harami. “I think the harmony [between government and parliament] will come at the moment we create a tangible project. If we don’t do this the tension and the frustration will only increase.”

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