Key construction projects lay foundations for future growth in Kuwait

 

Hundreds of thousands of construction workers in Kuwait are busy building bridges, roads, homes, the region’s largest refinery, an expanded airport terminal and a new port. These are just some of the major projects being completed as the country works towards the New Kuwait 2035 vision. However, these developments are almost entirely driven by government spending and components of the Kuwait National Development Plan 2015-20, which have been subject to delays and postponements in 2017 and 2018. Despite these setbacks, the remaining two years of the plan should see the completion of major infrastructure improvements that could serve as the catalyst for significant changes within Kuwait’s economic landscape.

Sector Significance

At current prices, the construction sector contributed just over KD1bn ($3.3bn) in 2017; 5% of non-oil GDP; and 2.8% of total GDP. That represented a 1.5% fall in its value compared to 2016, according to Kuwait’s Central Statistical Bureau. As of the second quarter of 2018 the construction sector made up 3.9% of non-oil GDP and 1.9% of total GDP. Data from the Public Authority for Civil Information (PACI) shows that in June 2018 there were 431,233 people in the construction workforce, including 18,122 Kuwaitis. Only 800 workers were employed by the public sector. In total, construction workers accounted for 15.6% of the 2.8m-strong workforce. There were 1494 construction businesses in 2016, according to PACI figures, including four joint ventures with foreign partners.

State Contracts

The Central Agency for Public Tenders (CAPT) oversees the tendering process for government contracts. It awarded 36 tenders in the second quarter of 2018, compared to 49 the previous quarter. Tenders are published weekly in the Kuwait Official Gazette. Law No. 49 of 2016 (the New Tenders Law) replaced Law No. 37 of 1964.

This subsequent law removed the need for foreign companies to have a local agent bid for public tenders, although in practice companies would require an agent to carry out any business they won. The new law also provides protection for the local construction market, stipulating that bidders must buy at least 30% of their contractual requirements from local suppliers registered with the CAPT, and award no less than 30% of their contracting work to local businesses.

Government Clients

Construction projects are commissioned by government ministries, such as those responsible for health, education or defence, and the Ministry of Public Works (MPW) oversees infrastructure projects including roads, bridges and ports. The Public Authority for Housing Welfare (PAHW) provides tracts of land as well as homes for citizens, and is administering the construction of several new townships, including South Al Mutlaa City. 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 (KOC), and downstream work shared by Kuwait National Petroleum Company (KNPC) and the Kuwait Integrated Petroleum Industries Company (KIPIC), with the latter responsible for refining, petrochemicals and the import of liquefied natural gas at the Al Zour complex.

PPP Projects

Although state spending dominates the construction sector, Kuwait is also following the lead of other GCC countries in utilising the public-private partnerships (PPPs). The Kuwait Authority for Partnership Projects (KAPP) was created in 2008 to identify sectors where government bodies could work with private companies to deliver development schemes and services. The water and power sector has the strongest record in PPP delivery in the GCC. In November 2016 the Al Zour North phase one independent water and power plant (IWPP) was the first such scheme successfully completed in Kuwait. KAPP originally identified four subsequent phases of development at Al Zour, as well as an equivalent IWPP project at Al Khairan and the Al Abdaliyah Integrated Solar Combined Cycle plant. KAPP has also identified five real estate schemes, the country’s planned rail network, a wastewater treatment centre, a municipal solid waste facility and an improvement programme for schools as potential PPP agreements. However, there have been delays in moving many of these ideas beyond the drawing board.

Approval Slowdown

As of April 2018 some KD1.8bn ($6bn) worth of projects were in the bidding phase in Kuwait, but the first quarter of the year had seen just KD614m ($2bn) worth of projects approved, lower than the quarterly average of KD1bn ($3.3bn) in 2017, according to the National Bank of Kuwait (NBK). The bank’s analysis also showed that the combined value of projects awarded in 2017 had declined by 28% to KD4bn ($13.3bn). The average value from 2012-16 had been KD5bn ($16.6bn), with expenditure peaking at over KD8bn ($26.5bn) in 2015.

However, a number of delays took place in 2017, a trend that continued in the first quarter of 2018. In December 2017 approval for the Umm Al Hayman Wastewater Treatment Plant PPP was granted by KAPP to a consortium led by the German firm WTE Wassertechnik and International Financial Advisors. A state-owned joint stock company will be formed to build, operate and manage the new treatment plant, which will have the capacity to treat up to 700,000 cu metres per day under a 25-year partnership agreement with the MPW. NBK reported that this project accounted for most of the KD900m ($3bn) worth of water schemes awarded under the budget in 2017, and it represented a second milestone in Kuwait’s adoption of PPP financing.

However, two other significant PPP schemes were stalled in 2017. KAPP announced that the second phase of the five-phase Al Zour North IWPP scheme was to be scrapped and would subsequently be rolled into an expanded version of the scheme’s anticipated third phase. It had initially been estimated that the second phase would be worth KD800m ($2.7bn).

Another notable delay also pushed back the Kabd Municipal Solid Waste Project, which would see power generated from municipal waste. In September 2016 KAPP announced that a consortium led by Constructions Industrielles de la Méditerranée, Gulf Investment Corporation and Al Mulla Group was the preferred bidder for the project at KD236m ($782.4m), but the State Audit Bureau rejected the tender documents and called for them to be re-submitted in 2018. The consortium planned to generate 100 MW of electric power from a plant using half of Kuwait’s municipal solid waste with a daily capacity of 3274 tonnes. If approval is granted by the State Audit Bureau, a project company will be formed to offer the service for 25 years beyond construction of the facility.

In late 2017 two other projects were postponed, with the KD260m ($862m) Al Jahra Ministries Complex delayed due to budgetary constraints. In the first quarter of 2018 it was announced the award for the KD360m ($1.2bn) Al Dibdibah Solar Photovoltaic Power Plant to be built for KNPC at Shagaya would be delayed until early 2019, because the prequalification took longer than expected. In its May 2018 projects report, NBK predicted that the total value of power sector contracts in 2018 would be more modest than 2017.

Project Approvals

Despite the approval slowdown in 2017 and early 2018, several projects were given the green light in 2017 when 15 tenders in the oil sector with a combined value of KD1.1bn ($3.6bn) were accepted. International firms from the UK, Italy and India won three bids worth KD390m ($1.3bn), KD255m ($845.4m) and KD113m ($374.6m) respectively. Petrofac, a UK oilfield services provider, will build a new gathering centre in the Burgan oilfield, while Italy’s Saipem, a drilling services firm, is constructing a new refinery feed pipeline, and Indian contractor Larsen and Toubro was selected to deliver a crude transit pipeline from North Kuwait to the central mixing manifold at Mina Al Ahmadi. In 2017 new awards in the gas sector totalled KD96m ($318.3m), compared to KD1.3bn ($4.3bn) in both 2015 and 2016. New construction projects in the energy sector worth KD70m ($232.1m) were signed in the first quarter of 2018, with up to KD620m ($2.1bn) expected for the entire year, according to the NBK. In 2017, KD800m ($2.7bn) worth of transport projects were commissioned, with the largest plans including a KD212m ($702.9m) infrastructure deal for South Al Mutlaa City and a KD147m ($487.4m) contract for the first phase of the Kuwait Airport expansion project. Total construction plans for transport in the pipeline have a combined value of KD780m ($2.6bn). It was also anticipated new transport projects would be commissioned by KOC, Kuwait University and the PAHW.

The government awarded over 30 construction projects in 2017, but with a relatively small overall budget of KD500m ($1.7bn). There were plans to commission up to KD2bn ($6.6bn) of construction projects over the course of 2018, including PAHW’s KD470m ($1.6bn) Jahra and Sulaibiya low-cost housing developments and, the Kuwait National Guard’s KD300m ($994.6m) Kazema Camp project, as well as three PPP projects.

Construction Firms

Although 2017 and 2018 have not been as busy in terms of awarded tenders, ongoing work on mega-projects undertaken since 2013 are keeping many construction firms busy. Engineering, procurement and construction contracts for many of the landmark projects have been awarded to international consortia, but components of these schemes are being fulfilled by local firms. The annual returns of construction industry firms listed on Boursa Kuwait show many have continued to make sizeable profits, despite the global downturn in oil prices since mid-2014 and the consequent impact on government revenues.

Kuwait Portland Cement Company (KPCC) boasts a 58,000-tonne cement storage facility at Shuwaikh Port, four machines to package its supplies as well as six bulk cement machines that load cement onto lorries. KPCC’s sales improved from KD80.6m ($267.3m) in 2016 to KD85.7m ($284.1m) in 2017. The company’s profits increased from KD8.1m ($27m) to KD9.2m ($30.5m) over the same timeframe. In the first six months of 2018 sales equalled KD56.3m ($186.8m), representing a year-on-year increase of 46.4%. Integrated Holding Company (IHC), a sharia-compliant equipment leasing firm serving the construction sector, saw its net profits grow by 36% from KD9.8m ($32.5m) in 2016 to KD13.3m ($44.1m) in 2017, and its net revenues increase by 30% from KD31m ($102.8m) to KD40m ($132.6m), with 89% of its income coming from the local market. IHC has also expanded its stock of heavy equipment, for instance its number of cranes rose from 1832 in 2014 to 2161 by the end of 2017. Kuwait Bruckner Construction Contracting Company specialises in foundation and tunnel works, operating and maintaining a specialised fleet of equipment. “We have not seen utilisation rates for our equipment this high since 2005-06, and that level of utility is across the board,” Ahmad Jafar, vice-chairman of Kuwait Bruckner, told OBG. “If you ask equipment rental companies you will find that everything is hired out and everyone is reinvesting in capital assets.”

Credit Facilities

However, some businesses in the Kuwait construction sector appear to have been finding it harder to return a profit. Rashed Abdulaziz Al Rashed, chairman of Kuwait Cement Company, a public cement manufacturer, noted that delays in the implementation of some major government residential projects have impacted its financial performance. The company’s sales of cement decreased by 1.3% from KD98.5m ($326.6m) in 2016 to KD97.3m ($322.4m) in 2017. The company has the capacity to produce 5m tonnes per annum at its facility in Shuaiba, and competes against imported cement from Iran and elsewhere in the region.

According to one local media report, the Ministry of Commerce and Industry had refused requests for liquidation from 13 companies that blamed weak cash flow and project delays for their financial difficulties. Companies securing loans to cover running costs while they wait for payment are faced with interest charges that were not factored into original pricing plans. The Central Bank of Kuwait’s “Financial Stability Report 2017” showed that loans to the construction and real estate sector, including instalment loans for citizens paying for the construction of private homes, had grown steadily since 2012 to reach KD21.6bn ($71.6bn) by 2017. Of that total, approximately KD3bn ($9.9bn) was loaned directly to construction firms, with the remaining credit extended to real estate businesses and private individuals. In addition, 66.3% of all bank collateral was in the form of real estate. The report also noted an increased incidence of loan default in the real estate sector. The non-performing loan ratio fell to 2.8% for the real estate and construction sector by December 2017, compared to 3.2% the previous year.

Ongoing Projects

Projects within the nation continued to be awarded and bid upon over the last quarter of 2017 and throughout the course of 2018 thus far. According to a 2017 report commissioned by The Big 5 Kuwait trade fair, Kuwait is working on $234.4bn worth of construction projects, with a further $34bn in the concept or design phase. Notably, by the end of 2018 the 36-km Sheikh Jaber Al Ahmad Al Sabah Causeway across Kuwait Bay should be complete. The shorter 12.4-km Doha link of the causeway will take traffic to the west across a narrower stretch of water. The causeway’s $3bn infrastructure development is designed to speed up travel times to the northern shore of Kuwait Bay, where the new 250-sq-km Silk City will be built at Subiyah. The consortium completing the causeway project will include Dar Al Handasah, Hyundai Engineering and Construction, Combined Group Contracting Company, TY Lin International Group and SSH Design. In the longer term, huge investments are to be directed to these northern regions of Kuwait, and work has already commenced on the construction of South Al Mutlaa City as well as the first two phases of the 18 container berths at the Mubarak Al Kabeer Port being built on Boubyan Island, which is northeast of Subiyah.

Turkish company Limak Construction is undertaking the KD1.3bn ($4.3bn) construction of a new terminal at Kuwait International Airport. The new building is designed to accommodate 13m passengers annually in order to meet rising traffic levels witnessed recently, which surpassed 13.7m travellers in 2017, a 17% increase from the previous year. Later phases plan to eventually expand annual capacity to 25m.

Expansion and overhaul of the downstream energy sector has resulted in major schemes employing tens of thousands of construction workers. The Clean Fuels Project (CFP) will see both of the country’s two existing oil refineries, Mina Al Ahmadi and Mina Abdullah upgraded and expanded. The CFP will enable the refineries to produce both petrol and diesel, while boosting capacity to 346,000 barrels per day (bpd) and 454,000 bpd, respectively. The combined CFP schemes have employed a total of 40,000 contractors. A new state-owned company was formed in November 2016 to deal with three major downstream construction projects at the Al Zour refinery. KIPIC is overseeing the construction of a 615,000-bpd refinery; a liquefied natural gas import terminal with capacity for 3000 British thermal units per day; and a 2761-kilo-tonnes-per-annum petrochemicals plant, with these major projects expected to be completed in phases between 2019 and 2024.

Outlook

By 2020 some of Kuwait’s key infrastructure projects will have been completed, but in the decade that follows the country has outlined bold plans to reduce its economic dependence on crude oil to broaden the horizons and opportunities of Kuwaiti citizens. In early 2018 an economic feasibility report on plans to develop the Silk City area and the islands of Boubyan and Failaka estimated that required spending on infrastructure would reach up to KD12.8bn ($42.3bn). Although Failaka Island was occupied before the 1990-91 Iraqi invasion, Boubyan and the site where Silk City now sits are parts of Kuwait that have never broken ground, with sandstone in some places and muddy silt remaining on Boubyan Island. “All the projects there are going to be technically challenging, which is good for our company, because we are in the soil-improvement business,” Jafar told OBG.

However, all of these major schemes will also require political backing if they are to be attractive to both private and foreign investors. Sheikh Nasser Sabah Al Ahmed Al Sabah, the country’s first deputy prime minister, is taking the lead on the Northern Gulf Gateway and Silk City mega-project. “We are very confident in Sheikh Nasser and in the committee leading on this project,” Tawfiq Aljarrah, executive director of Kuwait Projects Company, told OBG. “I think the new area in northern Kuwait will expand, but it will not grow overnight. However, Kuwait does need to expand given the high growth rate of the population. With that growth, we will need new homes, new schools and new hospitals.”

Even at a time of reduced crude oil revenues, Kuwait’s government, unlike some of its Gulf neighbours, has pushed ahead with a number of major infrastructure projects. The challenge for the country’s leaders will be to continue to maintain both political momentum for growth as well as economic diversification if oil prices continue their upward trajectory during 2018 and beyond. If they succeed, the country’s construction sector can expect to remain busy beyond the 2020s.

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The Report: Kuwait 2018

Construction & Real Estate chapter from The Report: Kuwait 2018

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