Long-term development plans and a rebounding economy in Kuwait drive major construction projects

 

Major infrastructure works – from roads and schools to airports and hospitals – are either under way or in the design phase in Kuwait, highlighting the significant activity seen in the construction sector in recent years as the country works towards the goals outlined in the New Kuwait 2035 development plan. Perhaps the most ambitious of these projects is the 700,000-inhabitant Silk City mega-development in Subiyah on the northern side of Kuwait Bay.

These projects have by and large been driven by government spending, and 2017 and 2018 saw delays and postponements. As such, getting the investment and development balance right will be key to maintaining sustainable development, with a healthy mix of pubic and private participation now being sought. This will be especially important as Kuwait is not immune to the overall headwinds being experienced by construction outfits globally. However, with a strong demand for infrastructure going forwards, local and international developers will have much to focus on in coming years.

New Kuwait 2035

As 90% of government income and around 50% of Kuwait’s GDP comes from oil revenue, performance in the energy sector is a determining factor in overall economic well-being. The government is focused on diversifying the economy, which has been given extra impetus in recent years by sustained low global oil prices. At the same time, public spending is a key driver of economic activity. The construction industry, for example, is mainly public sector-driven in terms of the project’s complexity. “The majority of construction projects in Kuwait are being driven by public spending,” Shiraz Basma, senior manager at Khatib & Alami, told OBG. “Investment from the private sector has slowed down and mainly the focus is on mixed-used commercial projects with an eye towards investment in more lucrative projects supported by the government,” she said. Understandably, the country’s leadership wants to place a long-term emphasis on a more private sector-led economy. These overall strategic goals were outlined in the New Kuwait 2035 vision, released in 2017, aiming to establish Kuwait as a global financial and commercial centre. Many advocates see New Kuwait 2035 as integral to reviving the country’s role as a transport and logistics hub, allowing it to wield global influence in financial and political spheres.

New Kuwait 2035 is supported by seven pillars, of which three in particular are expected to result in heightened long-term building activity. The first pillar, which focuses on the creation of a more robust health system, will require a major programme of hospital and health care centre construction; the second pillar, aimed at the development of quality infrastructure, is geared towards re-establishing Kuwait’s regional and international commercial credentials; while the third pillar, which focuses on fostering a sustainable living environment, will involve major new housing and real estate projects.

Also included in New Kuwait 2035 are a series of short-term, five-year development plans. The current plan, covering the 2015-20 period, targets a range of major infrastructure works, including the revival of several stalled projects, such as the Mubarak Al Kabeer Port. In this period alone, policymakers have earmarked $124bn for projects, which is expected to boost sector growth by 15-20%.

Oversight

A number of government ministries and agencies are tasked with delivering the 2035 goals. Key to almost everything is the Ministry of Public Works (MPW), which has responsibility for a range of developments, from municipal buildings and schools, to canalisation and hospitals. Divided into a number of units, the MPW includes specialist authorities on construction project engineering, mega-projects, road engineering and sanitary engineering. Also under the jurisdiction of the MPW is the Department of Airport Projects, which is responsible for the construction and delivery of the new Terminal 2 project at Kuwait International Airport. The MPW also has a legal affairs section,and conducts testing and surveying work, ensuring construction materials are up to code and that practices meet the required standards. Occupational health and safety is also one of its primary roles. While the MPW originally held responsibility for road and maritime transport issues, Emiri decree No. 115 of 2014 established the Public Authority for Roads and Transportation (PART), which has a mandate to deliver an integrated and sustainable land transportation system for Kuwait, including providing services such as car registration, rail systems, public parking and driving schools.

Key Players

Although public spending dominates the construction sector, similarly to other GCC countries Kuwait is utilising public-private partnerships (PPPs). The Kuwait Authority for Partnership Projects (KAPP) was created in 2008 to identify sectors the government can work with private companies to deliver development schemes and services. KAPP is credited with bringing together Japan’s Sumitomo Corporation and French multinational electric utility ENGIE to build the Al Zour North gas-fired, combined-cycle power plant and water desalination facility. Shareholders in the project include the Kuwait Investment Authority (KIA), the Public Institution of Social Security and KAPP itself.

The KIA is the fifth-largest sovereign wealth fund in the world, with assets exceeding $592bn in 2019, according to the fund. While much of its activity is abroad, it also holds significant stakes in many major Kuwaiti companies. Returns on KIA investments form a major source of income for the country, with one of the KIA’s two investment vehicles, the General Reserve Fund, providing a major source of deficit financing, helping to maintain public expenditure in the construction sector and elsewhere.

The Emiri Diwan of Kuwait, which serves as the royal palace, also has its own portfolio of projects. These mostly involve public buildings, such as hospitals, administrative buildings, cultural centres and palaces. In April 2019 it was announced that the Emiri Diwan would be working to accelerate rehabilitation works at the Kuwait Entertainment City amusement park and recreation centre, although it would not be bearing any of the incurred costs.

The Environment Public Authority (EPA) is the regulatory body tasked with overseeing green construction works. The EPA also runs campaigns to promote environmental issues and awareness, such as Project UCON, which encouraged the consistent use of sustainable waste management and recycling in buildings under construction.

With regard to real estate, the Public Authority for Housing Welfare (PAHW) is responsible for the provision of houses or land free of charge for Kuwaiti nationals (see Real Estate chapter).

The government works with a wide variety of developers and construction outfits. At the larger end are companies such as the Ahmadiah Group, HOT Engineering and Construction (HOTECC), Alargan International Real Estate Company, Kuwait Company for Process Plant Construction and Contracting, Marafie Group, Al Hani Group, MNA International Group and Khatib & Alami. Most of these firms have international offices and are engaged in projects both at home and abroad. Specifically, many have a strong and established presence in the region. Khatib & Alami, for example, is working in the UAE on major road projects, while HOTECC has a subsidiary in Qatar.

K-Companies

Given the importance of hydrocarbons to the broader economy, the government is heavily involved in the sector. State-owned enterprises in the oil and gas sector, the so-called K Companies, also commission multiple projects, with upstream business handled by Kuwait Oil Company, and downstream work shared by Kuwait National Petroleum Company and Kuwait Integrated Petroleum Industries Company (KIPIC). The latter is responsible for refining petrochemicals and importing liquefied natural gas at the Al Zour Petrochemical Complex. Also at the Al Zour complex, the KIPIC is overseeing the construction of a 615,000-barrelper-day (bpd) refinery, a liquefied natural gas import terminal with capacity for 3000 British thermal units per day and a 2.8m-tonne-per-annum petrochemicals plant. These projects are expected to be completed in a number of planned phases between 2019 and 2024. The UK’s Wood Group is doing the front-end engineering and design work, while Canadian engineering company SNC-Lavalin will be providing management and consultancy services. Likewise, the Ministry of Electricity and Water is behind contracts to develop several power-generation stations, and water desalination and distillation plants.

Global Reach

Foreign construction and engineering companies are well represented in Kuwait, and the government is keen to encourage more international participation in PPPs. Recent reforms aimed at improving the ease of doing business have included establishing a one stop shop, boosting transparency in land administration and easing procedures for online registration. However, there remains an unmet demand for land, which is tightly controlled by the government. “To support construction growth there is a critical need for additional industrial land that would allow our factories to expand,” Ghosson Ghassan Al Khaled, deputy CEO of ACICO Group, told OBG. “Industrial lots need to keep pace with this level of expansion.”

Turkish company Limak Construction is undertaking the KD1.3bn ($4.3bn) construction of a new terminal at Kuwait International Airport (see Transport & Logistics chapter). The building will accommodate 13m passengers annually in order to meet rising traffic levels. Later phases plan to expand annual capacity to 25m people. In 2018 Limak Construction also won a $153m contract from the PAHW to construct government housing. Meanwhile, South Korea’s Hyundai Engineering and Construction was behind the recently opened Sheikh Jaber Al Ahmad Al Sabah Causeway (see analysis), while China State Construction Engineering has undertaken a string of major projects, including the KD215.5m ($709.8m) new headquarters of the National Bank of Kuwait (NBK), which were finished in 2016.

Size & Performance

According to the most recent statistics from the Central Statistical Bureau, the construction sector grew by 3.5% year-on-year to reach KD248.4m ($818.2m) at current prices in the first quarter of 2019. This represented 2.4% of total GDP and 4.4% of non-oil GDP. Growth is expected to continue throughout 2019 and into 2020, spurred by a recovery in oil prices and a rebound in broader economic growth, with construction in particular benefitting. According to the NBK, GDP recovered to 2.9% in 2018 due in large part to increasing oil output, while forecasts it at 2.2% for full-year 2019.

The most recent annual survey of construction establishments published in 2018 shows that the 1494 private sector construction companies registered in Kuwait in 2016 employed some 184,762 people, of which 151,056 were employed in businesses that undertook both the construction of private projects as well as civil engineering works.

Rebounding Figures

Although the economic climate is improving, the number and value of project awards decline since 2015, according to the NBK, with 2018 recording a nine-year low of KD1.7bn ($5.6bn), or around half of the total budgeted at the start of the year. While broader economic conditions played a major role, stakeholders have pointed to administrative factors as a cause of subdued figures, including the reorganisation of the PART and KAPP, which resulted in delays in the implementation of PPP projects. However, the project pipeline looks to have overcome many of these issues. By April 2019 the NBK reported KD700m ($2.3bn) in projects awarded, with KD4.4bn ($14.5bn) earmarked for 2019 as the backlog from 2018 is processed and new projects are brought on-line. These builds are largely in the transport, electricity and water, housing construction, and hydrocarbons and petrochemicals sectors.

Infrastructure Works

In line with the 2035 plan, the government has five infrastructure programmes running in the 2015-20 period, which together make up 24 projects. These five infrastructure programmes are aimed at addressing deficiencies in air, land and maritime transport, as well as servicing ICT and utilities needs.

The air transport system development programme involves a total expenditure of KD1.6bn ($5.3bn), of which KD232.5m ($765.8m) was allocated for 2018-19, to increase capacity at the Kuwait International Airport and improve security with modern technology. The land transport development programme, meanwhile, is worth KD2.8bn ($9.2bn), of which KD135m ($444.6m) is set aside for projects in 2018-19. These include the Sheikh Jaber Al Ahmad Al Sabah Causeway, which is now complete; a rail network; and the design and construction of the 258-km northern section of a regional road.

The KD1.7bn ($5.6bn) programme regarding maritime transport includes the development of Mubarak Al Kabeer Port on Boubyan Island; a search and rescue system; work to deepen and dredge access to the harbour on Failaka Island; new storage areas for Kuwait Ports Authority; export, import and Customs inspection areas at Shuaiba Port; and the further development of existing ports in Doha, Shuaiba and Shuwaikh. For the 2018-19 period total outlay is estimated at KD140.3m ($462.1m).

The fourth programme involves the development of KD153.4m ($505.3m) of hard ICT infrastructure, including fibre-optic networks, photovoltaic networks, and broadcast and digital archiving. Some KD4.3m ($14.2m) was allocated for 2018-19.

Meanwhile, the fifth programme, aimed at electricity and water production, is expected to cost KD444.7m ($1.5bn), with KD153m ($503.9m) earmarked for the 2018-19 period. This will see the first phase of a reverse-osmosis desalination plant in Doha completed, and the installation of gas turbines at a variety of combined-cycle power plants.

In addition to existing infrastructure schemes, there are a range of new housing projects, including some KD1bn ($3.3bn) set aside for residential developments to build housing for Kuwaiti nationals currently on waiting lists. These new projects include the cities of South Saad Al Abdullah, South Sabah Al Ahmad, the City of Jaber Al Ahmad, South Al Mutlaa and South Abdullah Al Mubarak.

A number of major projects were completed in 2018. The $1.2bn Jahra Medical City opened its doors in July 2018. Built on 72.4 ha of land, the hospital complex consists of four 14-storey towers, an emergency department, and the largest maternity and gynaecological units in Kuwait. What is more, laboratories, robotic pharmacies, outpatient clinics and dental centres are housed within the complex. There was also progress on the long-awaited, $7bn Kuwait Metro. In November 2018 PART announced it was looking for international advisers for the project’s design, which will include lengthy above-ground sections. The first phase of the metro is planned to run to Nuwaiseeb on the Saudi border. When finished, some 111 km of track will be laid, connecting the city to the forthcoming GCC rail network. In future phases, a 153-km line linking to Boubyan Island will also be completed. Looking to the future, the Silk City mega-development is back on Kuwait’s agenda, with early 2019 seeing a proposed new regulation for the $132bn project put forward (see analysis).

Building Materials

Given the rollout of major projects, demand for building materials is rising. While Kuwait is dependent on imports, domestic suppliers are expanding capacity to meet this challenge. Kuwait Cement Company (KCC) is one of the oldest manufacturers of clinker, ordinary Portland cement, sulphate-resistant cement, white cement and ready-mix concrete. In March 2019 KCC started offering oil-well cement, and hired Belgium’s Magotteaux to modernise three of its cement mills to boost production. Kuwait’s other local manufacturer of cement products, ACICO, is also expanding capacity. In February 2019 the firm announced it ordered a second 1m-tonne-per-annum grinding mill from Spain’s Cemengal. The mill is expected to come on-line in the first half of 2020. Despite these efforts, Kuwait’s domestic producers are not yet able to fully meet growing demand. In early 2019 Saudi firm Qassim Cement signed a contract with Kuwait’s Al Aradah Building Materials Company to send 120,000 tonnes to Kuwait by the end of 2019. Iran is also an important source for cement imports.

Other key companies include Salbookh Trading Company and the United Steel Industrial Company, also known as Kuwait Steel, the country’s sole steel producer since 1996. The latter has two rolling mills with a combined annual capacity of 1.4m tonnes of rebar, while its plant in Shuaiba has a 1.2m tonnes per year capacity of steel billets.

Outlook

With major projects in the pipeline, stakeholders will likely be working hard in the immediate future to complete existing works and begin new ones. Mega-projects, such as the Silk City development, and transport infrastructure will benefit the sector, with the years ahead also likely to see a clearer PPP structure emerge, alongside ongoing efforts to boost transparency and ease of doing business. Green building codes will likely tighten as Kuwait seeks to meet rising international standards in sustainable construction and the use of renewable energy. While for the time being Kuwait remains dependent on the oil market, the government has demonstrated its commitment to public infrastructure projects, even if this means running a deficit. At present, the state is able to use its robust finances to keep the pipeline full, with the years ahead likely to see an increased level of construction sector activity.

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The Report: Kuwait 2019

Construction chapter from The Report: Kuwait 2019

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