A multi-faceted approach carries the country forward

Driven by an expanding population and a slate of new infrastructure projects expected to enhance economic development and meet growing energy demands, Kuwait’s construction industry is set to grow impressively in 2014. Infrastructure projects in the pipeline will see an influx of public and private spending on road, airport and energy projects, while rising demand for housing and hotels has led to promising opportunities in the hospitality and residential real estate segments.

Developers are, however, grappling with several challenges. Major infrastructure projects have been stalled in the wake of bureaucratic delays and political indecision, while ambitious rail projects have been put on hold as the state works to address urgent housing and power demands. Privatisation offers a quicker way forward for many initiatives, with the state’s public-private partnership (PPP) model already helping major construction projects break ground, a trend expected to continue both in 2014 and in the longer term.

Background

The Ministry of Public Works (MPW) was established in 1945 and has played a central role in infrastructure development since independence in 1961. Acting as the government’s construction agency, the MPW’s extensive portfolio includes several key facilities, like the Al Sabah Hospital, the Kuwait Municipality building and the Grand Mosque. The Mega Projects Agency, the executive arm of the MPW, is in charge of designing and implementing the state’s major infrastructure projects. In 1974 the National Housing Authority, later renamed the Public Authority for Housing and Welfare (PAHW), was established as the body responsible for housing welfare, and mandated to supply Kuwaiti nationals with affordable housing.

Kuwait’s twin-track tendering structure is overseen by two bodies: the Central Tenders Committee (CTC), used by ministries tendering projects on an engineering, procurement, and construction basis, and the Partnerships Technical Bureau (PTB), which focuses on PPPs with private and foreign contractors. CTC, an independent government agency attached to the Council of Ministers, is responsible for pre-qualifying firms, issuing some government tenders and awarding contracts, although the Ministry of Finance holds ultimate decision-making authority. Several government bodies are exempt from CTC supervision and can issue their tenders independently, including Kuwait University, Kuwait Ports Authority, the Public Authority for Housing Care, and the ministries of defence and interior. The PTB was established in 2008 to facilitate new PPPs, and has seen considerable success in securing such schemes for gas-fired and solar power plants. It works with bodies including the Ministry of Electricity and Water and PAHW in issuing PPP tenders for major infrastructure and residential construction projects.

Making Plans

In 2010 the government announced a KD30.8bn ($108.3bn), five-year spending plan, the first of its five-phase National Development Plan (NDP), which includes construction of a $3.3bn airport terminal, $7bn metro, new hospitals, and the world’s largest crude refinery, Al Zour. The plan divided spending almost equally between the public and private sectors, with KD15.6bn ($54.85bn) allocated for public works, and KD15.2bn ($53.44bn) for private sector contracts. The private sector is expected to invest in major projects using a build-operate-transfer model.

However, as of January 2014, the state had spent just KD8.9bn ($31.3bn) of public funding with only one year of the first phase remaining, while KD6.8bn ($23.9bn) of private sector investments have been earmarked for projects, leaving an additional KD15.1bn ($53.1bn) of the plan to be implemented. This presents considerable opportunities for private contractors to participate in major infrastructure projects.

Housing

According to the World Bank, Kuwait’s population stood at 2.2m in 2004, with the Public Authority for Civil Information reporting that this had grown by over 80% to reach 3.97m by the end of 2013. Of the total population, just under a third (31.3%) consists of Kuwaiti nationals. Kuwait’s rapidly accelerating population growth has created a unique set of challenges in the housing market; demand is strong, but creation of new supply has faced considerable obstacles and delays. Provision of low- and medium-income housing is one of the most critical challenges facing the government. Kuwaiti nationals are entitled to apply for government housing after marriage, receiving loans which are paid off in small instalments over 30 years.

However, the housing backlog had reached 109,122 applications by January 2014, with some dating as far back as 1985. Furthermore, an additional 8000 applications are expected to be submitted each year. “The construction industry must keep pace with the population growth and the increasing demand for new housing developments and cities,” Ghosson Al Khaled, COO at Kuwaiti construction firm ACICO, told OBG.

Building Up

The PAHW is currently working on building several new residential cities, including Al Khairan Residential City, with 35,844 units; Al Mutlaa Residential District, with 18,000 units; and Al Sabah Al Ahmad Future City, offering 11,000 units. The state is also working to roll out South Al Jahra Labour City, which will deliver 20,000 affordable units to low-income expatriate labourers. In March 2013, the state announced plans to build an additional 174,000 units, including three new cities by 2020: two near the border with Iraq, and one on the border with Saudi Arabia in the south. For an estimated investment of $5bn over eight years, the cities are expected to contain a total of 108,000 new units, while a further 66,000 units will be added by developing other residential areas. “With the large youth population and rapidly growing middle class, there is great potential for further growth throughout the real estate sector,” Khaled Al Meshaan, chairman and managing director of Alargan Real Estate, told OBG.

However, several questions arose following the announcement. While the PTB was meant to develop residential cities under its own PPP law, the PAHW issued a request for proposals for two such projects, Al Khairan and Al Jahra, in March 2013. Although several firms were understood to be considering bidding for the two projects, insiders were confused as to why the process was not being undertaken by the PTB.

The Al Jahra PPP was subsequently listed on the PTB website, and in March 2014 the PAHW announced it will deliver 12,748 units in 2014-15, 12,000 units in 2015-16 and 9000 new units in 2016-17.

At the same time, there remain unoccupied houses in higher-end segments, and there are calls for better use of these. “There was a big high-rise construction boom in the last few years, and now that it has stopped there are several buildings left without tenants. We need to find a solution to fill these buildings before constructing more,” Ezzat Mohammed Jafaar, general manager at Arabian Construction, told OBG.

Hospitality

In the hospitality segment, meanwhile, there has been a recent rise in the demand for the development of mid-range hotels, as the country is seeing rapid growth in business travellers looking for budget accommodations. Additionally, the state’s plans to boost tourism have prompted renewed interest in tourist hotels, resorts, and similar builds. The Kuwait Failaka Island Project (KFIP), which will develop the island into a cultural and tourism hub, is the largest of these. The government is also working on a 52,326-sq-metre cultural, educational and entertainment centre on Abdullah Al Ahmed Street, as well as a complete overhaul of Kuwait City’s Entertainment City, which will involve a joint venture with the private sector.

In February 2014 the government announced it hoped to see tourism arrivals grow to reach 1m in 2015 as part of a five-year plan to develop its tourism and hospitality offerings. To cater to the influx, the Touristic Enterprises Company (TEC) is launching a number of tourism, entertainment and sports projects valued at $460m. The PTB has also prioritised tourism developments, including resorts, recreational facilities and a marina on Failaka Island. Sitting roughly 20 km off Kuwait’s coast, Failaka Island represents enormous opportunity for future hospitality developments. Although it was mined and depopulated during the 1990-91 Gulf War, the island was subsequently rehabilitated and has become increasingly popular as a domestic tourism destination.

Failaka

Development plans for the island date back over 10 years, with several private firms producing detailed designs for potential resort complexes in 2006. Although those projects stalled, the government has recently renewed its interest in developing the island’s tourism offerings in partnership with the private sector. According to the PTB, the Kuwaiti government’s KFIP is currently being developed as a PPP, and aims to transform the island into a premier leisure and tourism destination while preserving its heritage. Cultural facilities will be integrated with regular tourist and leisure facilities such as hotels and parks, with additional plans for a town centre for retail, food and beverage outlets.

Culture & Entertainment

Within Kuwait City, the PTB also hopes to build a new cultural and entertainment centre on Abdullah Al Ahmed Street. The PTB envisions the complex on two plots of land covering over 50,000 sq metres, with the project including the construction of a convention centre, exhibition halls, a training centre, a multi-cinema complex, a museum and retail space. A request for proposals is expected in the third quarter of 2014. TEC is also moving forward with upgrades at Kuwait’s Entertainment City. Announcing in September 2013 the company is seeking a joint venture partner to undertake the project. Entertainment City currently covers an area of 1m sq metres, with 225,000 sq metres slated for development. The project will include upgrades to the city’s infrastructure and utilities, including water and sewage networks, air conditioning systems, fire prevention facilities and secondary power stations. TEC also plans to construct landscaped parks, roller coasters and theme parks, high-end hotels and bungalows, a health centre, movie theatre, shopping centre and retail space.

Hotelier Middle East anticipates ongoing hospitality developments will also see new luxury hotels, with 10,000 new rooms expected to open by 2015, increasing the state’s total supply by a third. Among the new hotels are four InterContinental Hotel Group properties, as well as the 307-room Millennium Hotel and Convention Centre in Kuwait City.

Infrastructure

Transport construction accounts for 76% of total construction sector spending in Kuwait, according to Deloitte’s “GCC Powers of Construction 2013” report, and infrastructure comprises a significant proportion of the government’s $109.5bn spending package. Mega-projects under development include the Boubyan Island port, expansive highway and roads projects, upgrades at Kuwait International Airport worth $3.3bn, as well as a host of new substations and power plants. Kuwait’s Clean Fuels Project and new refinery developments will together account for more than $25bn in spending, while the regional GCC rail project is expected to cost a total of around $16bn, although this project has faced lengthy delays.

Transport

The airport expansion will involve construction of a new runway, a new terminal and cargo facility upgrades, for a cost of $6bn. The airport’s initial capacity will increase to 13m passengers, from the current level of 9m. In 2008 Siemens was awarded a $110.43m contract to complete works on the electrical infrastructure of the new terminal, but progress has been slow since. Although the government had announced it would choose a winning bid in the first quarter of 2013 from among 18 firms competing to build the new terminal, plans stalled and the project was re-tendered in September 2013. This was followed by a March 2014 announcement that the deadline for pre-qualified bidders had been extended, with the state having yet to select a winning company or consortium.

Work has also been relatively slow on the planned metro and GCC railway projects. The GCC rail project is set to cover 3954 km of track, spanning from Oman to Kuwait, and passing through the UAE, Bahrain, Qatar and Saudi Arabia, when it becomes operational in 2019. Other GCC nations have already begun moving forward on the project; the Saudi Railway Organisation is involved in the engineering and design of the rail network, Oman has opened bidding for project management consultancy contracts for its portion, and the UAE has already started construction.

Kuwait’s section of the project, estimated to cost $10bn, is currently on hold pending the release of a feasibility study. Capital Standards reports that the $7bn Kuwait City metro project is also stalled, with the planned 171-km line hoped to be completed by 2020.

Roads

The state plans to invest approximately $6.2bn in a series of motorway construction projects with an approximate length of 550 km, including the Subiya Causeway, a 37.5-km bridge that will cross Kuwait Bay, linking Kuwait City, the Subiya peninsula and Boubyan Island. The causeway is seen as a key project for the country, as it will link oil-producing areas in the north to the port at Shuwaikh. Meanwhile, the $927.8m Jahra and Jamal Abdul Nasser road projects, also seen as critical projects for Kuwait, are currently under construction (see Transport & Logistics chapter).

New Port

The Boubyan Island port project is also gathering pace, with the second stage of the project’s first phase wrapping up in 2013. The project envisions construction of the Mubarak Al Kabir (MAK) port, which will transform the state into a regional trans-shipment hub, and will eventually link to the GCC railway to become a multi-modal transport hub. “Jebel Ali in the UAE brought in all the major ship lines, and now even firms in Iraq prefer to use it, despite the fact that it is 1000 km away. MAK will not increase competition for traffic, because the two will complement each other,” Srour Alotaibi, director of consultancy studies at MPW, told OBG.

The project includes plans for 24 berths, each with a 20-metre draught, to be constructed after extensive dredging and land reclamation works. Technical and management support firm AECOM was awarded a contract to design a 40-km water navigation channel at MAK in 2013, with more tenders expected in 2014. “We’ve finished one big contract, which was the construction of a quay wall and land reclamation for phase one. By the end of 2014 we anticipate we will have prepared a dredging tender package, and the entire first phase is expected to wrap up by 2019,” said Alotaibi.

For The People

Social construction accounts for 4% of total industry spending, according to Deloitte, and Kuwait has a number of these projects under way including $5bn in university projects, the largest of which is the new $3bn Sabah Al Salem New University in Shadadiyah, about 20 km west of Kuwait City. In May 2013 Kuwait’s Ministry of Health signed a $343.3m contract with US-based Integrated Service Company for the establishment of the Amiri Hospital Tower, which includes construction, maintenance and provision of medical equipment. Additional social projects include a 500-bed hospital in Andalus, currently in the pretender stage, as well as a PPP to assume the management of 10 buildings held on state land. Both projects are currently listed on the PTB website.

Energy

Energy and resource construction accounts for 20% of total construction spending in Kuwait, according to Deloitte. The Kuwait National Petroleum Company (KNPC) is set to build the world’s largest oil refinery, the $14.5bn Al Zour facility, expected to have a daily processing capacity of 615,000 barrels by 2018. The $1.8bn Al Zour North integrated water and power plant (IWPP) is to supply 12% of Kuwait’s installed power generation capacity and 23% of installed desalination capacity. Recent developments in power and energy construction have been promising.

In September 2013 Siemens won a $247.46m turnkey contract from the KNPC to supply high-voltage substations at refineries south of Kuwait City, with construction expected to wrap up in December 2015. In the same month, HSBC was awarded a contract to manage tenders for the 280-MW Al Abdaliyah integrated solar combined-cycle power station, which will cost an estimated KD926.75m ($3.26bn) to develop.

Swiss firm ABB was awarded a $160m contract to build new substations in February 2014. These projects will provide reliable power supply to the Mina Al Ahmadi refinery and the Mina Abdullah refinery. Other planned power plants will help boost the power supply, with the Subiya thermal power and desalination plant, Al Khairan IWPP and Shuaiba North plant poised to roll out in the next several years (see Energy chapter).

Building Materials

Construction growth benefits the materials segment in addition to contractors, with the Kuwait Financial Centre (Markaz) estimating the construction industry will need about 26m tonnes of iron, 26m cu metres of sand and 72m sacks of cement to complete projects scheduled in the NDP’s first phase.

Coupled with a region-wide construction boom, increased demand for raw materials could drive up prices and raise costs, which could in turn lead to further project delays. “You wouldn’t think we need gravel, but Kuwait imports its gravel from the UAE because they’ve closed the quarries here. We anticipate we will have a sand and gravel shortage in the coming years, and sand is critical for things like sea ports and railway embankments,” Alotaibi said.

Kuwait’s Global Investment House (GIH) reported in October 2013 that new construction projects have helped cause cement production to nearly double between 2011 and 2012. “In terms of cement production capacity, Kuwait’s cement sector remained quite stagnant up till 2011. However, with improved focus of the government on construction activities leading to higher demand, the sector doubled its capacity in 2012 to almost 5.4m tonnes per annum (mtpa), from 2.5 mtpa in 2011. We expect another round of capacity addition in 2013, which is expected to take the total capacity to almost 6.4 mtpa. Thereafter, the capacity is expected to be adequate to meet the country’s local demand,” read the GIH report.

Outlook

Kuwait’s rapidly expanding population and growing energy, power and transportation demands have created an urgent need for new construction projects. Many cite excessive bureaucracy and delays as impediments to greater sector growth. The government has recognised these challenges, with the PTB moving to establish major contracts with the private sector in recent months, as the state attempts to inject a sense of urgency in project implementation.

While new rail and metro projects could be a long time coming, energy and residential construction activities will expand significantly as a result of unmet demand. New models for private sector participation have seen promising uptake, and PPPs are expected to drive spending and growth over the medium term.

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The Report: Kuwait 2014

Construction chapter from The Report: Kuwait 2014

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