Hive of activity: Planned projects will keep construction and logistics companies busy in the years to come

In 2010 the Kuwaiti government approved a massive KD37bn ($133.4bn) spending plan, introduced to kick-start spending in the wake of the financial crisis and help reinvigorate the country’s image as an investment destination. The budget is due to stretch over five years, with much of the spending dedicated to transport and other infrastructure projects. This should reverse a trend of comparatively low capital expenditure, in which the government spent an average of less than 1% of the federal budget annually on investments from 2004-09, according to Kuwait Financial Centre (Markaz).

The plan should also enhance the role of the private sector, most prominently through build-operate-transfer schemes, which will shift the weight of development towards the private sector. A centralised contracting body, the Partnerships Technical Bureau (PTB), maintains a comprehensive list of projects out for tender, helping to facilitate private investment.

LOGISTICS: Kuwait’s position at the northern tip of the Gulf makes it a natural choice for logistics companies. Perhaps more importantly, the country’s diplomatic reputation and stability over the past 10 years has helped it earn the trust (and business) of the international community. The strong defence and government services (DGS) business that had been catering to the foreign military presence in Iraq is set to decline with the withdrawal of US troops, though the rate at which this will happen it is still unclear. El Hoss Engineering and Transport Company, for example, signed a five-year contract with the US government in early 2011.

Regardless, companies that rely on DGS have had time to prepare for the drawdown. Thanks to attractive contracts, they have had the cash available to diversify. Agility, a Kuwaiti logistics firm, used its revenue in the 2000s to fund a series of acquisitions that turned the company into a global presence. This expansion has helped the company maintain profits as its DGS is scaled back.

While DGS contracts have been an important part of many companies’ balance sheets for the past few years, the energy industry is the greatest source of demand for logistics in the country. With Kuwait Petroleum Corporation having announced some $95bn in oil projects and non-hydrocarbons-related infrastructure construction as part of the new spending plan, demand for logistics services is expected to remain high.

CLEARING CUSTOMS: However, as with the rest of the transport-related industry, the development of improved Customs clearance procedures could transform the sector. Customs procedures are meticulous, requiring comprehensive paperwork and the approval of multiple parties before shipments are cleared. Kuwaiti logistics companies have the ability to speed up this process, thanks to their knowledge of local practices.

The country’s two largest logistics firms, Agility and Kuwait Gulf Link Holding Company (KGL), are both publicly traded companies. Both posted significant profits in financial year 2010/11, though Agility’s margins were not as high as 2009/10 due to concerns related to an ongoing court case between the firm and the US government relating to charges. Net profits at KGL stood at KD7.4m ($26.7m) in 2010/11, a 53% rise over the KD4.9m ($17.7m) in 2009/10. Agility’s net income for 2010/11 stood at KD25.11m ($90.5m), down from KD156.43m ($563.9m) the previous year.

CONTAINER PORTS: Kuwait has two ports large enough to handle container ships, Shuwaikh and Shuaiba, and one smaller port, Doha. Combined, the ports have a capacity of 1.2m twenty-foot equivalent units.

The Kuwait Port Authority is in charge of the country’s shipping sector, controlling of the ports and overseeing improvements and additions. The 30-member Kuwait Shipping Companies and Agents Association, a non-governmental organisation, seeks to act as a collective voice for the industry. Members pay a fee, lodge formal complaints and establish rates collectively.

Shuwaikh covers 3.2m sq metres of land and 1.2m sq metres of water basin in the Al Asimah district of Kuwait City. With 21 berths, 14 of which are dredged to 10 metres, Shuwaikh is the main commercial port.

Shuaiba, located 45 km south of Kuwait City, has 20 berths that range in depth from 10-14 metres, and an oil pier with a depth of 16 metres. Both ports are relatively shallow by today’s standards, and many shipments must dock further south, principally in Dubai, and are transported to Kuwait overland.

The quality of service at the ports is improving as new equipment is installed. Customs clearance and the movement of goods are both areas where upgrades are being welcomed. However, a lack of sufficient warehousing space is an obstacle to the ongoing development of the logistics business. The majority of the country’s land is reserved for the energy industry and the government is reluctant to permit non-energy infrastructure to be built in zones having potential for extraction.

BOUBYAN ISLAND: All of these issues – Customs clearance, lack of warehousing space and sometimes outdated infrastructure – are due to be addressed with the construction of a massive new port at Boubyan Island. Work on the project has been moving forward since its ceremonial ground-breaking in April 2011. The five-phase construction will see a new channel dredged to allow access for ships as large as supertankers and the construction of 60 berths and associated infrastructure. Connection to Kuwait’s road network will be the first priority, with links to Iraqi networks and the burgeoning GCC rail system following. The port is expected to cost KD40m ($144.2m), with total infrastructure development forecast at some KD305m ($1.1bn). A consortium of South Korea’s Hyundai and the Kuwaiti Kharafi Group were awarded the contract to build the first phase, which includes 16 berths. The first four berths are scheduled to be operational by 2015.

Boubyan’s location has inherent advantages, though not as a trans-shipment hub as it would not make sense for ships to change cargo so far into the Gulf. It does have promise as an intermodal hub, however. If the transition from air cargo to ships can be done efficiently, it would save aircraft coming from the north the hour flight necessary to reach other centres in Bahrain, Qatar or the UAE. Ship connections to rail networks in Iraq and onwards to Turkey and Iran would also add great value, especially as Iraq’s rebuilding continues, though such schemes remain in the planning stage.

AIR: Kuwait International Airport (KIA) has seen approximately 8m passengers a year over the past few years, despite the fact that its official capacity is closer to 7.2m. An expansion to the airport is under way and should raise capacity to 20m by 2014 (see analysis).

The new airport will help ease congestion, though passenger numbers are not anticipated to increase at the rates seen elsewhere in the region, where competition between Emirates, Etihad and Qatar Airways has heated over the past decade, cornering the market.

Kuwait’s air passenger industry therefore consists largely of a captive market: Kuwaitis who travel for leisure or business, Western businessmen and contractors, and guest workers primarily from the Asian subcontinent. This kind of traffic has increased steadily. Unlike locations with significant tourist traffic, Kuwait’s passenger numbers did not decrease during the financial crisis. With the expanded airport, positioning Kuwait as a stopover point may become more feasible.

AIRLINE PRIVATISATION: Kuwait is now home to two commercial carriers, national airline Kuwait Airways (KAC) and Jazeera Airways. Wataniya Airways, which previously ran out of KIA’s Sheikh Saad terminal, ceased operations in March 2011, citing financial difficulties.

Kuwait’s parliament voted in 2008 to privatise KAC, arguing it was the most effective way to revitalise the airline, which had experienced difficulties since it lost 15 planes and 85% of its capital during the Iraqi invasion in 1990. In August 2011 the government invited bids from local and international investors to buy a 35% stake in the airline. The plan also called for 40% of KAC to be made available to the public through an IPO at a later date, with employees granted 5% and the government-owned Kuwait Investment Authority 20%. However, in October 2011 the privatisation committee announced it was delaying plans to privatise the carrier in order to address operational and structural issues prior to an IPO or acting on requests from investors.

ROOM TO STRETCH: The growth in aviation in the region has led to much competition, but Kuwait’s other airline, Jazeera, has demonstrated there is still room for Kuwaiti carriers to carve out a niche. The airline, which has been in operation since 2004, has reported profits since the third quarter of 2010, largely thanks to the comprehensive turnaround plan it implemented during the financial crisis, which included the cancellation of an extensive order book that would have increased Jazeera’s fleet to some 40 planes. This would have raised total passenger capacity on Jazeera to approximately 8m, roughly equivalent to the total number of people who currently fly through Kuwait. The financial crisis encouraged a reassessment of the feasibility of such rapid expansion, and this resulted in a decision to restructure the airline’s revenue streams.

Air cargo is viewed as another avenue for growth, and the airport expansion project includes the construction of a dedicated 3m-sq-metre Cargo City that will serve international air freight with 77 wide-body aircraft stands, 400,000-sq-metre cargo terminals, 200,000-sq-metre freight forwarding warehouses and a Customs mall. The Cargo City will be linked to all sea ports and state borders by rail and highway. The project aims to address the shortage of infrastructure and streamline Customs clearance procedures. At present, most air cargo bound for Kuwait lands in Dubai and is shipped overland. The new project aims to change this.

METRO: The development of a metro system to ease congestion within Kuwait City has been a consideration for decades. With the passage of the five-year spending plan in 2010, work on the metro has taken on added momentum. A detailed feasibility study on the project is due to be completed early 2012.

In 2009 the Kuwait municipality commissioned an assessment and overall plan to upgrade the city’s infrastructure by British architecture and engineering firm Atkins. The plan allocates approximately $6bn-7bn of $14bn in total spending for the development, though this cost is not finalised. Atkins, Ernst & Young, Ashurst and ASAR are advising the PTB on procurement, and the company should be in place by the end of 2012.

The final cost for the metro will depend greatly on what size and standard the country decides on. While Kuwait’s successive budget surpluses ensure it can build at almost any quality, the government is understandably eager to have the project finance itself in the long term. At present, there is generally a stigma among Kuwaitis against using public transport, which is seen as primarily a service for the expatriate workforce. Additionally, with cars that sell for as little as KD300 ($1082) and highly subsidised petrol, the low cost of personal transport makes public transport less attractive. However, appreciation of the environmental benefits, increased congestion and a younger generation accustomed to using public transit abroad are all making travel via metro more appealing. For the project to have widespread success, the design, branding and promotion of the metro is likely to be of as much importance as the potential reconsideration of fuel subsidies.

The GCC rail system, which is expected to stretch from the tip of Kuwait to the southern Omani port city of Salalah, will also connect to the metro. Plans for the Kuwaiti portion are still in an early stage of development, but the PTB appointed a consortium to advise on the technical aspects of the project in August 2011.

SPENDING PLAN STATUS: According to research by Markaz, approximately KD5bn ($18.03bn) was allocated to 884 projects in the 2010/11 fiscal year beginning on April 1. As reported in the Natoinal Development Plan’s semi-annual report, the majority of projects were in either the financial/design approval or implementation stage within the first six months of the financial year. This accounted for KD735m ($2.6bn), or 15% of the budgeted cost, meaning the government was on track to spend less than the allotted KD5bn ($18bn). NBK Capital, the National Bank of Kuwait’s financial services subsidiary, estimated in April 2011 that approximately 57% of projected development plan spending had been allocated by the end of the fiscal year.

This is not uncommon in Kuwait. It partly stems from a usually lengthy process of reviewing contracts, which aims to ensure both their feasibility and their competitiveness. Delays are therefore typical and expected in the legislative and executive branches.

However, Kuwait’s government has shown signs of deepening its resolve to push through major projects, even in the face of controversy. The allocation of $1.1bn to a consortium led by Hyundai to begin work on the Boubyan port project in 2010, for example, demonstrates Kuwait is once again interested in large, potentially transforming, capital expenditures.

INFLATION: With so many construction projects on the books, there is an understandable fear of price inflation for key materials. This is compounded, to an extent, by similar infrastructure plans in a number of Kuwait’s neighbours in the GCC, which are fuelling demand for cement, steel, aluminium and other construction materials to levels not seen since before the financial crisis. Further stability and the recommencement of large-scale energy projects in Iraq will also lead to further increases in demand. Yet new supply has also come on-line, with notable developments that include a massive aluminium plant in Qatar, increased cement production in Oman and the UAE, and a significant uptick in steel production in Saudi Arabia.

OUTLOOK: Assuming the government will continue to spend even a fraction of the money it has allotted towards large infrastructure projects, the coming decade should offer plentiful opportunities for transport and logistics firms to grow. Kuwait’s position as the dominant transport hub of the northern Gulf will be reinforced as large developments – such as the airport, Boubyan port and the metro – move towards implementation. Infrastructure and energy developments should more than compensate for any decrease in logistics companies’ military procurement business.

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