Key reforms and continued investment fuel expansion of Kuwait's transport and logistics sector

Located at the northern section of the Gulf, Kuwait lies on the historical trade routes that have for millennia linked Mesopotamia, Arabia and Persia to the Gulf and Indian Ocean trade networks. The country already boasts a quite sophisticated infrastructure, but as part of diversification plans set out in Kuwait Vision 2035, stakeholders have laid out plans to transform the country into a regional hub and global player in transport and logistics.

Despite a reduction in oil export revenues, the government has been vocal about its commitment to move ahead with capital expenditures, including an airport terminal, a port facility, a series of roads and highways upgrades, an urban metro system and Kuwait’s segment of the region-wide GCC railway.

Aviation

Kuwait’s aviation sector is in an earlier stage of development than those of its GCC neighbours. Carriers like Emirates, Qatar Airways and Etihad have transformed international air travel, using their location at the intersection of Africa, Asia and Europe to capture a larger slice of growing global aviation demand supported by a rapid growth in their infrastructure. In 2015 Middle Eastern carriers saw passenger numbers grow by 10.5%, the fastest rate of any region in the world, according to the Geneva-based International Air Transport Association.

While other Gulf airways built themselves into global players, Kuwait Airways has taken some time to recover from the disruptions caused by the 1990-91 Gulf War. To speed up the airline’s development, privatisation plans were put in place in 2008 but were stalled due to opposition in the parliament. Recent changes, such as the appointment of a new CEO, a fleet renewal plan and its new status as an independent state-owned entity, however, seem to already be bearing fruit.

Private Players

Owned by the Kuwait-based Boodai Group, Jazeera Airways entered the aviation market in 2004 as the country’s first private carrier. It found its niche in low-cost flights to popular regional destinations, including Dubai, Beirut and Bahrain. In 2008 the airline went public, listing shares on the Kuwait Stock Exchange. In recent years, thanks to its “no fuel hedging” policy, Jazeera has been able to reap the benefits of cheaper jet fuel, cutting its variable costs – oil prices have fallen from KD0.84 ($2.80) to KD0.29 ($0.96) per gallon between February 2014 and February 2016, according to the US Energy Information Administration.

Jazeera has also revamped its development strategy. In the fourth quarter of 2014 it sold its aircraft leasing business, Sahaab, and in early 2015 announced it would exit the leasing business altogether to focus on its core operations, commercial airline services. Funds generated from selling its fleet of fifteen Airbus 320s helped the company wipe KD116m ($383.7m) in debt from its books. The company’s total liabilities and ownership equity fell from KD227.5m ($752.5m) to KD49.5m ($163.7m), according to its annual report for 2015. Net profits for the year, meanwhile, rose to KD15.4m ($51m), compared to a book loss of KD2.8m ($9.3m) in 2014. Operating profits also rose 2% year-on-year (y-o-y) to KD13.6m ($45m), indicating that the firm’s core operations have remained in the black.

The state of Kuwait has encouraged local airlines to be established and there were several start-up attempts that were not successful in the first attempt. One passenger carrier – Wataniya Airways – and a freight operator (Loadair) had begun to rolling out operations, but significant faced challenges are still attempting to fully launch as of mid-2016.

Growing Demand

Both Jazeera and Kuwait Airways operate in a steadily growing market. Over the past decade, Kuwait International Airport (KIA) has seen large increases in total scheduled aircraft movements, which more than doubled from 37,166 to 83,443 between 2004 and 2014, according to the latest data available from Kuwait’s Directorate General of Civil Aviation (DGCA). Likewise, total scheduled passengers grew from 4.8m to 10.1m during the same period. The DGCA reports that 223,764 total aircraft and 10.7m passengers moved through the airport between June 2014 and June 2015. Given KIA’s capacity of 7m passengers per year, recent growth has necessitated the construction of a new terminal to handle rising passenger numbers. “The airport is currently operating at 4m passengers over capacity with 10% y-o-y growth expected. The proposed new airport complex could accommodate 25m passengers with options to upgrade.” Fawaz Al Farah, president of DGCA, told OBG. In November 2014 the government announced that a consortium made up of Turkey-based Limak İnşaat and Kuwait-based Kharafi National Group had offered the lowest bid, KD1.4bn ($4.6bn), to build the new terminal. In February 2015, however, the ministry’s technical committee recommended that the government reject all bids, Abdulaziz Al Ibrahim, then-minister for electricity, water and public works, told local media.

Progress

The government has since re-started the tendering process. By August 2015 Limak announced that Kuwait’s central Tenders Committee had approved a second Limak-Kharafi proposal to build the new terminal for KD1.3bn ($4.3bn), slightly less than its 2014 bid (see analysis). At the end of May 2016 the agreement was finalised, nearly nine months after the agreement was reported. The new terminal will expand capacity to 25m passengers per year, and is expected to take six years to complete.

Plans by Kuwait’s low-cost airline, Jazeera Airways, to build a new terminal were put on hold in 2014, with limited development on the project reported until mid-2016. In July 2016 the carrier was granted approval by the Kuwait Council of Ministers for the land needed to build the terminal as well as parking lots at KIA. The investment is valued at KD14m ($46m) with an expected construction phase of 15 months.

Ports Development

Kuwait’s maritime transport services have also seen steady and substantial growth in recent years. The country has six ports, three for oil and three for commercial traffic. Oil is by far the country’s largest export, making up 87.3% of total exports by value in the fourth quarter of 2015, according to the latest data available from the Kuwait Central Statistical Bureau (KCSB). In 2014 Mina Al Ahmadi cleared the most oil tankers with 994, followed by Mina Al Abdullah with 203 and Mina Al Shuaiba with 188, according to figures from the Ministry of Oil. These numbers have remained largely stable between 2012 and 2014.

As for commercial vessels, Doha Port, Shuaiba Port and Shuwaikh Port have all seen a rise in vessel numbers for the same period. Doha Port, with a depth of 4.3 metres, handles smaller boats like berth dhows, barges and coastal vessels that operate within the Gulf. The number of commercial vessels that arrived there nearly doubled from 4577 to 8924 between 2012 and 2014. Shuaiba Port, the next-largest by vessels served, is located 45 km south of Kuwait City. The port, which has facilities for barge, craft and container vessels, saw its vessels handled rise from 1367 to 1749 during the same period. It contains 20 commercial and container berths at depths ranging between four and 14 metres. Located to the southwest of central Kuwait City, Shuwaikh Port is the country’s main commercial maritime gateway. It has 21 berths with depths of between 6.7 and 10 metres. Vessels enter the port via an 8-km access channel dredged to a depth of 8.5 metres at minimum tide. The number of commercial vessels arriving to the port rose about 16% to 2358 between 2012 and 2014, according to the Kuwait Ports Authority (KPA). In September 2015 local media reported that the port faced congestion after two of its gantry cranes broke down, new Customs procedures took effect and a severe dust storm struck the area, causing the KPA temporarily to halt operations there. The ensuing congestion prompted some carriers, including France-based CMA CGM and Hong Kong-based Orient Overseas Container Line, to levy congestion charges from the end of August through to the beginning of September 2015.

New Capacity

While some of those circumstances were temporary, the authorities, aware of growing trade volumes, have long had plans to significantly expand the country’s overall port capacity. To that end, work on the $16bn Mubarak Al Kabeer (MAK) Port is set to be instrumental. The development of MAK began in 2010, when the state awarded a tender to South Korea-based Hyundai Engineering and Construction for the port’s first phase. Plans called for four container berths, a small boat harbour, and road and rail connections to the mainland. Completion of this phase would provide an estimated annual capacity 1.8m twenty-foot equivalent units.

In April 2011 the foundation stone for the project was laid, and construction began. The port’s location on Kuwait’s Boubyan Island, however, raised concerns in neighbouring Iraq that MAK’s construction might hinder access to the site of Iraq’s own planned port project. Still, after some delay, Kuwait has forged ahead with the MAK project. Bids for two project management consultancy packages were collected for a June 2015 deadline, one for the construction of the container yard, back of port, and free trade zone, and another for handling equipment. The estimated completion date is the third quarter of 2020, and the ministry plans to float tenders for engineering, procurement and construction contracts by late 2016.

Roads & Highways Upgrades

As planned port upgrades roll out, so too are planned road upgrades. Kuwait has grown quickly since the 1990s, but with that growth has come increasing road congestion. The length of paved roads in the country grew by 29% from 5749 km to 7416 km between 2004 and 2014. The number of private vehicles, meanwhile, has grown more than twice that rate, increasing 63% from 900,000 to 1.5m during the same period, according to data from the Ministry of Interior. To keep up, the government has been investing in the country’s roads and highways.

The Jahra Road Development is specifically aimed at this issue, with plans to upgrade a broad swathe of the capital’s roads to elevated throughways. Started in 2010, the project includes 2.4 km of elevated link roads, 8 km of ramps, and 19.5 km of grade-level roads, in addition to a number of pedestrian bridges and signalled intersections. Upon completion the work is set to increase the number of lanes from two to 12 in each direction, along with creating separate sections above for throughway traffic and below for local traffic, which is set to improve traffic flows.

In February 2016 a 4-km section of the project opened to drivers, accessible by ramps in both directions. “This opening marks a major milestone for the project, and in Kuwait’s strategic plans to reduce traffic congestion in vital areas. In addition to easing the flow of traffic, the partial opening will result in road users having a greater ease in movement,” Ahmad Al Hassan, assistant secretary for road engineering affairs, told local daily Kuwait Times. The new section has created a way to bypass the busy UN Roundabout while work continues on the project’s remaining sections. In July 2015, meanwhile, the Ministry of Public Works appointed Canada-based consultancy WSP Global’s engineering subsidiary Parsons Brinckerhoff to lead the Kabd-Sulaibiya highway upgrade. The agreement calls for a concept and designs to better connect the southern suburb of Kabd to Sulaibiya at the western end of Kuwait City’s outskirts.

The Ministry of Public Works’s Jamal Abdul Nasser Street Development Project, meanwhile, is set to substantially improve connections to the western suburbs. Construction plans are aiming to transform Jamal Abdul Nasser Street into a multi-level expressway that would connect the western region of Kuwait to the capital’s Jahra Gate area. US-based Louis Berger and Kuwait-based Pace have taken the lead of the design, construction and supervision of the KD240m ($793.8m) project.

Mass Transit

The increase in automobiles has had the effect of increasing traffic accidents in Kuwait. The number of annual collisions in the country rose 15% from 85,557 to 98,344, or about 270 per day between 2012 and 2014, according to Ministry of Interior data. Mass transit systems can alleviate both of these issues. The 2013 introduction of bus rapid transit along commuter routes in Mexico City, for instance, reduced traffic-related injuries and fatalities by 40%, saved 12m commuter hours annually, and eliminated more than 113,000 tonnes of carbon dioxide emissions per year, according to the US-based World Resources Institute. Mass transit is especially effective in densely populated cities. In Kuwait, 98% of the population live in urban areas, tying it for third by urbanisation, according to the World Bank. This high proportion of city-dwellers offers both major incentives and significant potential for transit developments.

Indeed, the authorities in Kuwait continue to underscore the importance of transit investments. Najib Al Munifi, advisor to the transportation minister, told attendees of the Kuwait Investment Forum in March 2016 that plans to construct a railway and urban metro system were vital to national development goals. He highlighted potential investment opportunities in construction, maintenance, and railway components. Kuwait’s tradition of public transport is nearly as old as the country itself.

A year after gaining its independence, the country’s government formed the Kuwait Public Transport Company (KPTC). The organisation started operations three years later in 1965, with 100 buses serving 10 lines. Although KPTC expanded services through its first decades, it has faced decreasing ridership in recent years. Between 2010 and 2014, annual ridership on KPTC buses fell from 58,632 to 33,765, according to the KPTC.

Multiple Players

Decreases are not necessarily the result of decreased demand, however. In 2002 the government decided to allow private players to enter the sector. Between 2009 and 2013, private bus ridership increased from 37,960 to 54,013, according to data published by KCSB. The two private players are Citybus and KGL Passenger Transport Services. Citybus is owned by City Group, a public transport operator listed on the Kuwait Stock Exchange (KSE). The parent company reported that its net profits increased 20.7% from KD5.9m ($19.5m) to KD7.2m ($23.8m) between 2014 and 2015 in its financial disclosures provided to KSE in February 2016. The company’s transport segment, which operates 300 public transit buses, contributes about two-thirds of its overall net profit, according to its 2014 annual report, the latest data available at time of publication. KGL, meanwhile, is owned by Kuwait-based KGL Logistics Company, a supply chain management company that has operations in Kuwait and other Middle Eastern markets. The firm operates bus transit systems not only in Kuwait but also in Abu Dhabi and Sharjah in the neighbouring UAE.

Metro & Rail

While buses provide a more flexible and quickly deployed transit solution, railway and metro services could also alleviate congestion significantly. The country is currently exploring the details of constructing an $18.5bn urban metro system and $6.6bn railway section, as part of the proposed GCC regional railway system, Talal Al Shemmari, an official on the Supreme Planning Council, said at a November 2015 conference in Kuwait. Plans for a metro were first announced in 2006, and by 2008 the government had executed a feasibility study.

In 2012 expressions of interest to form public-private partnerships for rolling stock supplies and railway construction was announced by the erstwhile Partnerships Technical Bureau. Contracts would have begun a 69-station, 160-km metro network, but the project continued to face a series of delays. In late 2015, however, the newly created Kuwait Authority for Partnership Projects (KAPP) announced that the project was back on track. “We are planning to start the procurement in the first quarter of 2016,” Fatima Al Kandari, a project manager at KAPP, told a Dubai conference in October 2015.

Significant progress has also been made on Kuwait’s portion of the GCC railway project. In January 2015 the Municipal Council of Kuwait City endorsed plans for the Kuwaiti section, which will connect Al Abdali on the border with Iraq along a corridor to neighbouring Saudi Arabia, where it will then link up to the rest of the regional network.

As each country faces new fiscal realities arising from lower oil prices, all six have begun to rethink the $15.4bn project’s timeline, which was originally slated for a 2018 completion. “We know that 2018 is not realistic,” Abdullah Belhaif Al Nuaimi, UAE public works minister and chairman of the country’s Federal Transport Authority said at a Dubai news conference in February 2016. “The ministerial counterparts of all the Gulf countries met in Doha in late 2015 to rethink the timetable. We have asked all of them to come up with a realistic programme.” Rather, countries have focused on developing urban systems, such as the those in Doha and Riyadh, as well as national systems, like the ones seen in the UAE and Oman.

Logistics

As the authorities gear up to invest in a new airport terminal, ports upgrades, roads, and railways, Kuwait’s well-developed logistics sector is set to benefit. Players in the country include well-known global firms like UPS, FedEx and DHL, as well as important Gulf firms that have been expanding in recent years. Agility, the Gulf’s largest logistics company, started as Kuwait’s state-owned Public Warehousing Company, which was formed in 1979.

The company was privatised in 1997, rebranded in 2004, and has expanded its operations since. As of February 2016, it had $1bn in project commitments, mostly in emerging markets. The company reported a net profit of just under KD51m ($168.7m) at year-end 2014, up from KD34m ($112.5m) in 2012. As for 2015, Agility reported a net profit of KD39m ($129m) for the first three quarters of the year, up from KD37.1m ($122.7m) in the first three quarters of 2014, according to the latest financial data from the KSE. In recent years the company has been raising capital as a means to continue fuelling growth.

At the end of 2015 Agility concluded a financing agreement for a three-year credit facility worth $235m with five banks – National Bank of Abu Dhabi, Banco Santander, Natixis London Branch, Standard Chartered and HSBC Middle East – according to a communication sent to its investors in January 2016. The landmark deal represented the company’s first foray into the corporate debt markets in 12 years, Andrew McMichael, group treasurer at Agility, said during a roundtable talk in Dubai in February 2016.

While Agility expands its global presence, a relatively new local player, Posta Plus, has been stepping in to serve Kuwait’s domestic market, along with its operations in the UAE, Bahrain, China, the UK and the US. Founded in 2005, the firm is part of Post Services Company, owned by Kuwait-based Gazal Logistics. Posta Plus started off by offering services to meet locally based firms’ delivery needs. By 2011, it had partnered with key clients like the National Bank of Kuwait, Zain, Wataniya and VIVA. In the same year, Posta Plus opened its first US shipping location. “E-commerce is the mega-trend for business, and is expected to be valued at approximately $20bn around the region. This has a major impact on the logistics sector, which is driving our business model to change and adapt to market demand,” Hisham Albahar, country manager at Posta Plus, told OBG.

Outlook

The national authorities have taken a number of important steps toward developing the country’s transport and logistics sectors. Reforms of Kuwait Airways and the finalisation of the deal on the new airport terminal could significantly boost the aviation sector, while ports, roads, and rail investments could help improve connectivity within the country and to markets around the world. Although depressed energy prices have reduced state revenues, they have also helped to underscore infrastructure investment’s importance in the country’s broader economic diversification plans.

“The oil and gas situation had a hidden benefit. It has been an eye-opener,” Moustafa Osman, DHL’s Kuwait commercial director and MENA sales development manager, told OBG. “It is also sending a clear message to all logistics players: you need to diversify your portfolios.” With a number of large-scale infrastructure investments rolling out across the country and demand for imports expected to remain strong, the sector seems well-positioned to meet its plans for significant expansion in the coming years.

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The Report: Kuwait 2016

Transport & Logistics chapter from The Report: Kuwait 2016

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