Economic View

On infrastructure priorities and project frameworks

To what extent has Covid-19 impacted the construction sector in Kuwait?

MOHAMMED HAMAD AL GHANIM: The first lockdown in Kuwait effectively shut down construction activity for four months. Since then, we have continued to work to recoup lost time. The industry is now beginning to grasp how this event will continue to impact supply chains as they are an intrinsic part of project delivery. 
Regarding the global market outlook, most reports indicate a regression in terms of public spending. In the Gulf this has been caused by the drop and ensuing fluctuation in oil prices, and by governments’ cash flow stress. In Kuwait the public sector drives construction demand, but it is expected that only 15% of the projected state budget will be allocated to capital investment. Therefore, the construction sector is expected to be in a difficult situation for the next two years.

How can the private sector be incentivised to play a bigger role in sustainable infrastructure development? 

AL GHANIM: The issues around public-private partnerships (PPPs) are a subset of the larger discussion on how to effectively optimise private sector involvement in public spending. There are two possible frameworks: PPPs; and engineering, procurement, construction and finance (EPCF) contracts. The prevalent framework is PPPs, which are not without formidable risk. Such risk is apparent from the outset of the tendering process, which can take years to complete, thereby locking bidders into prolonged periods that might end with rejected proposals – or worse, cancelled solicitations.

Shortening the process is essential to increase the appetite of contractors and investors for public infrastructure. Structural changes to the frameworks adopted by Gulf countries are essential, especially for those PPPs that focus on water and power. PPPs in these two sectors limit the demand risk for investors as the end product is usually sold to a government agency, thereby enhancing the bankability of the project. Although there have been some reforms in Saudi Arabia and the UAE, and to a lesser degree in Kuwait, there is room for improvement.

EPCFs, as a model, bring different stakeholders together. The players enter into a negotiated process as a single cohort to determine the precise scope of the project, putting forward a value proposition that includes an impartial assessment. In the construction sector, this model would benefit GCC countries, and particularly Kuwait, where there will be considerable stress on government spending for the foreseeable future. 

The value of the EPCF model is that it does not increase the degree of leverage on contractors’ books, while at the same time providing opportunities for investors to properly allocate funding to reliable, government-supported projects. It also permits governments to benefit from much-needed projects – which in many cases have been, or continue to be, delayed – without having to allocate immediate resources for execution. This pattern, however, requires legislative and cultural changes that have yet to take place in Kuwait and the wider Gulf. 

What challenges does the GCC face in terms of infrastructure, and how should they be addressed?

AL GHANIM: The disparity between GCC countries on the condition of public infrastructure is vast. Countries like Kuwait and Oman require immediate improvements, while the UAE and Qatar have leaped ahead in this area. What all Gulf countries share, however, is the need to widen their focus, which is currently on water and power infrastructure, to include public mass transit. In this regard, the interconnected GCC rail system has been a pending issue for a decade. The investment required for railway infrastructure is considerable, while the expected returns are very low. As such, simply placing the project under a PPP framework is no guarantee it will succeed. 

At the same time, Gulf nations are lagging behind in terms of sustainable infrastructure investment. The World Economic Forum’s Global Future Council on Sustainable Development Goal Investment has identified global gaps that need to be addressed immediately. A cultural shift is urgently required to achieve this: public spending on infrastructure must emphasise value rather than cost. For example, efforts have focused on reducing the energy consumption of buildings by boosting efficiency and solar power generation. Beyond energy efficiency, meeting the region’s challenges requires the public and private sectors to carry out a review of procurement processes and infrastructure utilisation goals to ultimately achieve harmonisation across the GCC.