The advisory board for the MEED Kuwait Projects 2015 Conference met in Kuwait City on 15 June to investigate trends and prospects in the country’s projects market to 2020 and beyond. They concluded that Kuwait remains one of the Middle East’s best prospects for local, regional and international project services suppliers, but it continues to fail to realise its full potential due to technical and governance challenges.

Key fact

There are about $160bn-worth of projects at the study, design and tender stage in Kuwait

Source: MEED

There is, however, growing evidence that these issues are being tackled, although the pace of progress is incremental and slow. Kuwait is likely to be the third-largest projects market in the GCC, after Saudi Arabia and the UAE, in 2015.

Economic context

The board was told the fall in the oil price will have a significant impact on Kuwait’s rate of growth in the years to 2020. The Washington-based IMF’s latest forecast shows the annual average rate of dollar GDP growth at current prices will be 7 per cent in 2015-20, compared with 12 per cent in 2005-14. This means that growth adjusted for inflation will be about 5 per cent in the period.

The forecast rate of growth to 2020 is nonetheless the highest in the GCC and reflects expectations that crude oil and gas production will increase, the government will continue to invest in major projects, and private sector activity will be buoyant.

The IMF forecasts that Kuwait will have a budget deficit in strictly defined terms (excluding investment income). This will be equivalent to 8 per cent of GDP. The fund forecasts that the deficit will be less than 5 per cent of GDP for the rest of the decade.

The advisory board agreed that there will be selective reductions in state expenditure in response to lower oil prices and government income in the period. Its capacity to continue spending, however, is high, due to the fact it has accumulated significant surpluses since the start of the last decade and has an exceptional capacity to borrow from local, regional and international banking and capital markets.

Kuwait’s sovereign credit rating is the highest in the region, matching that allocated by the three principal rating agencies to Abu Dhabi and Qatar.

The advisory board identified a number of issues that could complicate the capacity of project clients and their suppliers to access project and construction finance:

  • The Basel III capital adequacy rules, which will reduce banks’ appetite to lend long-term. This will create the opportunity for banks and other financial institutions to develop innovative products to meet project finance and construction finance demand.
  • The cost of dinar-denominated borrowing. This is reducing the extent to which clients will be able to tap domestic liquidity.
  • The capacity of local banks to meet project-bonding requirements.

The advisory board was told there are about $160bn-worth of projects at the study, design and tender stage in Kuwait. The transport sector offers the greatest opportunity, although more than half of this is in the form of the Kuwait Metro and the Kuwait passenger and cargo railway programme. Both projects are at an early stage of development and there is no evidence that either will be put out to tender soon. The board also heard that progress with the new Kuwait International airport terminal is slow. All bids for the contract to build the terminal were rejected in February.

The board was updated about developments in Kuwait’s oil and gas programme, which includes:

  • Expanding sustainable crude oil production capacity to 4 million barrels a day (b/d) in 2020
  • Expanding sustainable non-associated gas capacity to 600 million cubic feet a day in 2020
  • Delivering the Clean Fuels Project, which involves building an integrated complex with a capacity of 800,000 b/d
  • Building the 615,000-b/d Al-Zour refinery
  • Building a long-term liquefied natural gas import terminal

All these projects are advancing. The largest client for major projects is the Ministry of Public Works, which plans to invest more than $20bn in sanitary, road and other projects in the next five years. The board was told that the construction industry considered the ministry to be one of the most attractive clients in the years to 2020.

Issues faced

The advisory board identified the following issues facing the Kuwait projects sector:

  • Capacity constraints within major clients. This included a shortage of qualified people capable of understanding and implementing large and complex projects and dealing with project documentation in English
  • Unfamiliarity among government clients with innovative procurement methodologies, including various public-private partnership (PPP) models
  • Poor interministerial communications, including inter-departmental rivalry
  • Slow executive decision-making at the highest level of government
  • Parliament’s demand for close scrutiny of major projects

The advisory board welcomed the progress being made by the Kuwait Authority for Partnership Projects (KAPP), previously named the Partnerships Technical Bureau. It noted the fact that commercial operations of the first independent water and power project (IWPP) in Kuwait – Al-Zour North phase 1 – is due to start at the end of June.

The board was updated about the next stages in Kuwait’s electricity and water generation capacity plan. A total of 2,590MW of power generation capacity and 137 million imperial gallons a day (MIGD) of desalination capacity – including Al-Zour phase 1 – are being completed. Plans to 2020 call for almost 10,000MW of power and 400MIGD of water capacity. The advisory board was told that the Ministry of Electricity & Water has recently been empowered to procure new large-scale electricity and desalination capacity directly and outside the PPP programme.

The time taken in finalising the Umm al-Hayman sewage treatment plant was cited as a source of concern about the capacity of the PPP programme to deliver key projects on time.

Supply chain

The board said key issues facing the construction supply chain include:

  • Onerous terms and conditions imposed on suppliers. This was cited as a factor discouraging international companies from entering the Kuwait market
  • Persistence of a low-bid-wins culture, which undercuts suppliers seeking to deliver high quality and innovation
  • A shortage of high-quality project skills across the supply chain, from design to
  • operations and maintenance. Action to encourage more joint ventures with international engineering and construction firms was recommended
  • Labour supply issues. The difficulty firms have in securing visas for professionals working in Kuwait is affecting the capacity of the construction industry to deliver projects on time and on budget. Project companies also said there were major challenges in employing qualified local people
  • Materials shortages. The board was told that all aggregate used in concrete in Kuwait was imported. Rising demand for aggregate in the UAE, the principal regional source, was creating concrete shortages

Real estate

The board was told that Kuwait’s real estate industry was failing to achieve its full potential because of:

  • Shortages of available land
  • The high cost of land
  • The absence of a law to support lending to home-buyers

The board was told that Kuwait real estate companies are, as a result, seeking opportunities across the region and in other parts of the world.

The MEED Kuwait Projects 2015 Conference

The MEED Kuwait Projects 2015 Conference will be held at The Regency Kuwait on 24-25 November 2015

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