Kuwaiti authorities press ahead with big-ticket construction projects despite cutbacks

The construction industry in Kuwait is among the strongest in the region and a rising star in the country’s non-oil economy, with its steadily growing population, tightly regulated land market and relatively wealthy populous all combining to fuel demand for new building. Between 1995 and 2013, Kuwait’s population doubled from 1.8m to 3.6m, according to data from the UN Department of Economic and Social Affairs, with mid-year estimates for 2015 at around 3.9m. Despite this rapid growth, just 6-7% of the country’s 18,000-sq-km land area was open to development as of November 2015, according to the Kuwait Real Estate Association.

Foundations 

The government has played a major role in driving the construction sector, with the provision of housing, as well as financial support to Kuwaitis who opt to build their own homes, providing contractors and suppliers with a steady stream of business. Kuwait’s economic diversification goals, which rely on capital expenditures, have led to significant efforts to build the country into a more diverse regional centre for commerce, finance and tourism. To this end the government is enhancing infrastructure across the board by constructing a metro system, expanding the international airport and upgrading several highways and roads. These projects are aimed at creating a more liveable urban space and efficient business environment, with an eye toward preparing the country for its post-hydrocarbons future.

Building Up Growth

Even in the construction-heavy GCC, Kuwait’s spending plans stand out. As of July 2015 Kuwait’s prospective developments were worth $123.6bn, more than those of Qatar ($113.8bn), Oman ($29.6bn) and Bahrain ($25bn), according to data gathered by the Middle East Economic Digest. Indeed, the country’s 2015/16 budget reflects a renewed focus on capital investments. While, spending on wages, goods, services and other current expenditures fell by 16% to KD8.2bn ($27.1bn) for the first three quarters, outlays on projects, maintenance and land increased by 8.6% to KD908m ($3bn), according to a February 2016 report by National Bank of Kuwait (NBK). Market data regarding construction projects from 2015 were also strong, with the value of contracts awarded totalling KD9.7bn ($32.1bn), an increase of 20% over 2014, according to NBK. Big-ticket contracts in 2015 contributed heavily to this rise, such as the KD3.9bn ($12.9bn) Al Zour Refinery Project, as did the Ministry of Public Works (MoPW), whose budget also increased by 53% that year.

Plans & Implementation

The country’s projects market continued to expand in 2016. By the end of June 2016, Kuwait’s active and planned projects market reached KD76.8bn ($254bn) in value, according to a report released by NBK quoting MEED Projects data. The state awarded KD570m ($1.9bn) worth of construction projects in the first half of 2016. Forecasts for the near future are strong, too, with the authorities expected to push forward with upwards of KD30bn ($99.2bn) worth of development projects over the next five years, according to NBK’s September 2015 economic update.

Moving from earmarked budgets to execution has proved difficult in the past, with project implementation often held up by Parliament, the government or construction industry stakeholders. The government, learning from its experiences with the National Development Plan 2010-14, has recognised the importance of smooth implementation. This earlier economic blueprint laid out 1100 projects, yet many of them never broke ground. Instead, 421 of them were re-listed for the most recent five-year economic blueprint, the Kuwait Development Plan (KDP) 2015-20. On the project implementation front, the government has shown significant improvement in the 2015/16 fiscal year. Capital spending for the first three quarters reached 42% of the full-year’s allotted budget, compared to an average of 33% over the past five years, according to NBK. During the same period, the MoPW also recorded its highest spending-to-budget ratio, reaching 48%. The introduction of more autonomy for state agencies and greater leeway for private sector partners could help to continue streamlining the implementation process and increase the number of projects executed.

State Role

However, the state continues to play an important role, working through several agencies to steer the construction sector. The MoPW and the Public Authority for Housing Welfare (PAHW), for instance, are two of the largest construction clients in the country. The former builds mega-projects, public buildings and public infrastructure, while the latter constructs housing for distribution to Kuwaiti nationals. In 2015 the PAHW committed to the distribution of 12,000 new housing units per year for 10 years, starting in March 2015 (see Real Estate overview).

In addition, a new law for public-private partnerships (PPPs) that was passed in 2014 and fully implemented in 2015 has revamped the system for PPP projects. Ancillary to the development of the new framework was the creation of the Higher Committee, the main decision-making body for PPPs, and the Kuwait Authority for Partnership Projects (KAPP), responsible for their implementation and overseen by both the Ministry of Finance and the Higher Committee. Running the tendering processes for PPPs falls within the remit of both entities (see analysis). Building on the success of the previous PPP framework, the authorities have set their sights on incorporating private partners into projects worth $36bn under the new system, Adel Mohammad Al Roumi, then-president of KAPP, told Reuters in October 2015.

Tendering Change

Despite the positive progress that has been made with PPP reform, industry players are calling for changes to the practice of awarding contracts in order to raise standards and fairness in the sector. “The contracting tender process in Kuwait, which currently benefits the lowest bidder and places emphasis on traditional connections, needs to be re-evaluated to incorporate a points system with more thorough checks to ensure quality and maintenance,” Sulaiman Al Maarouf, CEO of Combined Group Contracting Company, told OBG.

Power & Water

To help meet its objectives of raising utilities capacity and investing in infrastructure, in recent years the government has awarded several major power and water projects to private bidders. Without other significant sources of water and electricity, Kuwait burns fuel to generate these necessities that it could otherwise export.

The cost of such operations has grown significantly over the past decade. Total fuel costs for power stations and water desalination operations increased from KD531m to KD2.86bn ($1.8bn to $9.5bn) between 2004 and 2014, according to data from the Ministry of Electricity and Water. Continued growth in demand is also forecast, and peak demand in 2014 nearly reached the country’s installed capacity of roughly 12 GW, the Kuwait Times reported in April 2016. The government, therefore, has set the target of doubling capacity to 24.5 GW by 2020.

To meet this increasing demand for electricity and water, the Az Zour North Independent Water and Power Project (IWPP) is being developed over five phases for a total capacity of 4800 MW of electricity and 1.3m cu metres of desalinated water.

The first phase of the IWPP, the Az Zour North One power and water desalination plant, successfully reached 40% of total electrical output in December 2015. Full operations, expected by the fourth quarter of 2016, will see the plant produce 1500 MW of electricity and 105m imperial gallons per day of desalinated water (see Energy chapter).

As the first such installation in Kuwait to be developed in collaboration with private sector players, the encouraging progress at phase one of the IWPP has exhibited the potential of a smoother PPP system to accomplish specific developmental goals.

Financing for the project’s first phase closed in January 2014 under the erstwhile Projects Technical Bureau (PTB), and was executed by Al Tamimi & Company’s Kuwait office on behalf of an international consortium comprising lenders from Japan, the UK and Kuwait. Currently, the PTB’s successor, KAPP, is working to issue the main contract for the project’s KD820m ($2.7bn) second phase, having collected bids in February 2016. Phase two is set to produce 1800 MW of electricity and 464,100 cu metres of desalinated water per day.

While the Az Zour North IWPP is an important success story for Kuwait’s evolving PPP framework, the authorities have also approved and begun implementing several similar projects to continue raising water and electricity capacity, attempting to keep pace with a rising population and peak demand. More recently, two new power and water contracts were signed in 2015. The contract for the first phase of the Doha Desalination Plant, worth KD118m ($390.3m), went to Korea-based Doosan Heavy Industries and Construction. Upon completion, the first section of this project is expected to produce some 273,000 cu metres of water per day. A KD117m ($387m) contract went to a consortium made up of Spain-based TSK Electronica y Electricidad and Kuwaiti firm Kharafi National for the first phase of the 50-MW Shagaya Renewable Energy Park – the first solar energy plant in the country. Project stakeholders say they aim to complete the complex by April 2018.

The government is also investing in Kuwait’s lucrative energy export sector, with three major projects under way: Kuwait National Petroleum Company’s Al Zour Refinery Project ($15bn), its Clean Fuels Project ($14bn) and Petrochemical Industries Company’s Olefins 3 Petrochemicals Plant Project ($10bn).

Clearing The Pipeline 

Demand for wastewater and sewage treatment is also increasing with Kuwait’s growing population. Projects in this sector have been moving ahead at a brisk pace, particularly as pressure on sewerage infrastructure has grown in recent years. Total water entering the country’s seven water treatment facilities grew by 19% between 2009 and 2014, from 258m to 308m cu metres per day, while total water treatment rose 13%, from 214m to 242m cu metres per day, as per the latest figures available from the MoPW. To keep up with rising demand, two major projects are being undertaken.

The first is the KD450m ($1.5bn) Umm Al Hayman Wastewater Treatment Plant, a new wastewater system with an initial processing capacity of 500,000 cu metres per day, according to a KAPP announcement issued in May 2015. Furthermore, an option to extend capacity to 700,000 cu metres per day can be pursued if needed. The project is set to take advantage of Kuwait’s new PPP framework, and the contract will last 27.5 years. According to the agreement’s terms, the investor will be responsible for designing, financing and completing the wastewater treatment plant over a two-and-a-half-year period, after which it will have a 25-year operation and maintenance agreement with the MoPW. Following the PPP contract period, the asset will be transferred to state ownership. The Umm Al Hayman project also includes a five-and-a-half-year design-build-operate agreement for an associated wastewater transmission network. Under this contract the state will bear the up-front capital costs, while the investor will be required to build the network and operate it for a period of three years. In May 2015 five consortia were shortlisted and invited to submit proposals, according to KAPP, and bidding opened at the end of April 2016.

The second plant, the Kabd Municipal Waste Project, will be about 35 km from Kuwait City and work is expected to commence in 2016. A major sewerage upgrade, the plant is set to treat up to half of the country’s municipal waste, with the project’s first phase set to process up to 3275 tonnes of waste per day. Instead of merely treating the sewage, however, the project will employ recent technologies to use processed waste materials as fuel for the generation of electricity, which the Ministry of Electricity and Water has committed to purchasing.

The installation will both boost Kuwait’s sewage treatment capacity and provide extra electricity to the increasingly burdened power grid. The PTB solicited expressions of interest for a possible build-operate-transfer contract in September 2013, and KAPP picked up where its predecessor left off by shortlisting five consortia for the project in September 2015. KAPP was due to begin accepting bids in July 2016 and settle financial agreements by the end of the year.

Health & Education

In terms of health facilities, the Kuwait Central Statistics Bureau records the number of hospital beds per 10,000 residents as having risen from 19 to 22 between 2005 and 2014, thereby reaching the figure recommended by the World Health Organisation. With the Ministry of Health (MoH) aiming to maintain such levels as the population expands, authorities have increased investment in health care.

Since 2008 the government has invested more than KD1.5bn ($5bn) in new hospital projects, and aims to award another KD881m ($2.9bn) in contracts in 2016, according to NBK. In April 2015 the Amiri Diwan commissioned the 1903-bed New Jahra Hospital, worth an estimated KD390m ($1.3bn) and in October 2015 an expansion of Al Razi Hospital in Kuwait City added 240 beds to total capacity. The MoH is also set to receive the 1168-bed Jaber Hospital by the end of 2016. As well as these new buildings, in May 2016 the Kuwait’s Central Tenders Committee approved a KD220m ($727.7m) bid for a new maternity hospital from Italian construction company Impresa Pizzarotti, with the firm having submitted the lowest bid for the project in July 2015 (see Health chapter).

Progress is also being made in the education sector, with a new headquarters for the Ministry of Education on track for completion by the end of 2016. In addition, in December 2015 the Public Authority for Applied Education and Training (PAAET) also awarded a consortium comprising Kuwait-based SSH, US-based Perkins Eastman and Kuwait-based Soor Engineering a contract for its Technology, Business, Healthcare and Education project in Kuwait’s Jahra Governorate. The PAAET project consists of four educational clusters and administrative buildings on an area of around 230,000 sq metres, according to SSH.

Residential

The residential segment is benefitting from government plans to produce hundreds of thousands of housing units by 2020. The PAHW takes the lead in housing support for Kuwaiti nationals, offering free-standing units, high-rise residences, as well as credit and land vouchers. With such a broad mandate, the agency is a major source of construction contracts. As of the first quarter of 2016, the list of projects in progress or delivered by the PAHW had a combined contract value of KD874.4m ($2.9bn), according to a report from Kuwait Financial House.

Government provision of individual land plots and construction loans also supports suppliers and contractors for smaller projects. In many cases, married nationals can obtain a KD70,000 ($231,532) soft loan in addition to a KD30,000 ($99,228) grant for purchasing building materials. Kuwait Credit Bank (KCB) acts as the main conduit for this capital. However, the total value of loans from the bank for new construction fell from KD20.8m to KD15.5m ($68.8m to $51.3m) per month between 2014 and 2015, according to data from the Ministry of Justice and KCB. The number of loans approved for new construction dropped from 303 to 229 over the same period. These shifts in real estate and construction liquidity could be arising from factors such as more Kuwaitis extending existing homes, rather than building new units, as the waiting list for government housing provisions grows. Furthermore, tighter capital requirements brought about by the Basel III regulations could be encouraging lenders to favour smaller loans for renovations and additions (see Real Estate chapter).

Transport & Tourism

The government’s economic diversification plans hinge on transforming Kuwait into a regional commercial and financial centre. To that end, the successful development of transport infrastructure is crucial. One important project that addresses this need is the $855.7m Al Jahra road project, a 142-km highway connecting Shuwaikh to Kuwait City which is due for completion in 2016.

In addition, in August 2015 a consortium made up of Turkey-based Limak İnşaat and Kuwaiti firm Kharafi National submitted a winning bid worth KD1.31bn ($4.3bn) to construct a new terminal at Kuwait International Airport, according to a statement from Limak made in August 2015. The first phase is set to lift passenger capacity from 7m to 13m, according to the Directorate General of Civil Aviation, with further phases raising that figure to 25m and then 50m. Other projects are set to gain momentum in 2017 and 2018 as well, including a $6.6bn railway network, which is part of the proposed GCC regional railway, and an $18.5bn metro system.

Better transport infrastructure could help attract more tourists. To this end, the government plans to set up a Supreme Commission for Tourism to oversee these efforts, Sheikh Salman Sabah Salem Al Hmoud Al Sabah, minister of information and minister of state for youth, told an industry conference in Kuwait City in March 2016. The government also aims to boost tourism investment by developing areas on Kuwait’s eastern islands: Boubiyan, Warbah, Miskan, Failaka and Auhah. It hopes these projects will attract at least $1.5bn-2bn worth of foreign direct investment per year, local Arabic language daily Al Anba reported in January 2016. Boubiyan is set to host the Silk City development, a 250-sq-km greenfield urban project expected to include a nature reservation, duty-free area, airport and business centre. A committee to direct the island’s development was established in June 2014. Failaka, meanwhile, is set to host a tourism-driven mixed-use development that the authorities hope will capitalise on its archaeological sites. The state aims to bring private partners into the project through a PPP, according to KAPP. Having received approval from the upper echelons of government, these projects are moving ahead, according to a statement made by Al Omair in February 2016.

Outlook

Kuwait’s construction sector seems ready to move forward on a firm footing, though some obstacles may lie ahead. “During this period of volatile economic conditions in Kuwait and across the world, all suppliers and contractors are aiming to improve work procedures and are utilising the latest technology, equipment and tools in order to remain competitive,” Riyadh Al Saleh, president and CEO of Riyadh Al Saleh Establishment for General Trade and Contracting, told OBG. The price of materials, for example, could present a stumbling block, and high levels of construction activity across the GCC have boosted demand for raw materials such as steel, cement and gabbro. As Kuwait and its GCC neighbours continue to add projects, the region could see supplies tighten and prices rise over the next eight to 10 years. Kuwait’s spending on construction materials increased by 70% between 2002 and 2013, the report stated, second only to Qatar. Even if materials prices do rise, however, the government’s commitment to maintaining high levels of construction spending could keep the sector moving forward.

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The Report: Kuwait 2016

Real Estate & Construction chapter from The Report: Kuwait 2016

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