Powering up: Substantial expansion is expected as the country looks to enhance its regional position

Situated between Saudi Arabia, Iraq and Iran, at the very top of the Gulf, Kuwait is in a strategically advantageous location and has the capacity to act as an important logistics conduit for its northern neighbour, Iraq. Determined to realise this potential, the government has committed to developing a portfolio of transport infrastructure that will both benefit domestic economic diversification and serve future opportunities to the north, particularly as Iraq’s hydrocarbons production and broader industrial output increases. Kuwait is forging ahead with infrastructure upgrades as part of its KD30bn ($107bn) National Development Plan (NDP) to support all modes of transport. This is underpinned by the Kuwait Vision 2035 – the economic development strategy, which envisages Kuwait as a services, trade and financial hub by 2035. Home to 8% of the world’s oil reserves, hydrocarbons continue to define Kuwait’s current transport infrastructure, yet contemporary strategic goals – in line with Vision 2035 – look to develop the entire sector with diversification as the central focus. “The New Companies Law brings much needed updates to the investment environment,” Thomas Charbine, general manager of Gazal Logistics, told OBG, referring to the long-awaited update to the country’s business environment (see Legal Framework). “The recent political turmoil has been restricting, but fortunately 2013 is proving to be a good year for progress.”

PORT OF CALL: At the forefront of Kuwait’s economic infrastructure are its ports. The two main ports are Shuaiba and Shuwaikh, which between them delivered 98% of export revenues in 2011, the government’s Central Statistics Bureau reported. That amounted to 128m tonnes of cargo and revenue of KD27.84bn ($99.4bn). Ports accounted for 60.3% of imports – 23m tonnes of goods valued at KD4.18bn ($14.9bn). Hydrocarbons exports and all bulk commodities are channelled through the Shuaiba Port, 45 km south of Kuwait City and bordered by the southern pier of Ahmadi Port to the north, and Mina Abdullah to the south, which exclusively serve adjacent refineries. In January 2013 there were several positive developments in the area: a $486.5m Kuwait Oil Company contract awarded to Turkey-based contractor STFA to construct a port next to the Ahmadi Port and Mina Al Ahmadi refinery. This includes upgrading the existing harbour, building several smaller ones along the coast and undertaking $14.2bn worth of road works over the next five years. The expansion is being undertaken in preparation for increased production at Kuwait’s refineries, which are being upgraded and expanded to accommodate a production capacity of 4m barrels per day (bpd) by 2020 (see Energy and Industry chapters). The new port will serve 70 boats used to support oil tanker shipments, which are set to increase from fiscal year 2014/15, when the Kuwait Oil Tanker Company is scheduled to receive nine new tankers from the Daewoo Shipbuilding & Marine Engineering and Hyundai Mipo Dockyard.

Shuaiba Port is also looking to expand its facilities to better accommodate larger vessels and global shipping demand. The Kuwait Ports Authority (KPA) has plans to dredge the whole basin to 16 metres, which will enable the port’s 20 commercial berths to accommodate the largest cargo vessels, which are over 300 metres long and weigh 75,000 tonnes. These plans were set to be presented for government approval in the first quarter of 2013; however, at the time of writing this approval was delayed due to changes at the Kuwaiti parliament. Whenever the green light comes, the scale and number of expansion plans are testimony to Kuwait’s determination to provide import and export infrastructure to enable greater participation in global maritime trade.

CIVILIAN APPLICATION: Shuaiba’s current capacity is well tested and although detailed statistics are not available, the port served as the principal point of access for military equipment used in the US-led 2003 Iraq invasion and continues to be used in the drawdown of military equipment. With military activity declining, attention is now focused on civilian applications. Situated adjacent to Kuwait City’s Central Business District (CBD), Shuwaikh Port serves as the country’s principal gateway for commercial and merchant commodities. With 21 berths including two floating berths (or “dolphins”), the port has a maximum draft of 9.6 metres at 14 of its berths during high tide, posing limitations on use. Port pilotage movements have – despite year-on-year volatility – increased since the 1960s, rising from 1318 in 1961 to 2993 in 2010, and the port’s proximity to customers in Kuwait City has provided little impetus for freighters to shift operations to the larger and deeper Shuaiba Port. While a comprehensive redevelopment of Shuwaikh Port’s facilities, which have seen staggered development since the 1960s, would undoubtedly be to the port’s and the city’s advantages, any move to expand the port has raised concerns over increased congestion. Current port movements already deliver 1000 truck movements onto the roads every day and this may now rise with plans under discussion plans to expand Shuwaikh Port on the seaward side. The plans, which have yet to be approved, include six new quays and an extension of the container depot, according to KPA officials that spoke with OBG.

CHANGING TRACK: While proposed expansions to both ports would be welcomed, modernisation is necessary to fully leverage the opportunity, according to KPA officials. Increased regional competition from privatised operations, notably Hutchison Port Holding of Hong Kong, Singapore’s PSA International in Saudi Arabia and Maersk in Bahrain, has put Kuwait on unequal footing, even as it tries to position itself for a greater share of regional and global trade volumes. Looking ahead, Kuwait’s future maritime fortunes are heavily invested in development of the $1.2bn Mubarak Al Kabeer (MAK) port on Boubyan Island. The MAK port is crucial to furthering the regional hub ambitions outlined in Vision 2035. The island’s master plan also includes a nature reserve, residential developments and tourism resorts. To date, the port has made substantive progress, with land reclamation completed and quay construction ongoing as of June 2013.

BOUBYAN ISLAND: The original plans for the KD345m ($1.2bn) port included 60 berths, but following a dispute with Iraq over the port’s development, the fifth Passenger traffic at KIA, 2007-11 and final phase was dropped in 2012, reducing MAK final plans to 24 berths and an initial handling capacity of 2.5m twenty-foot equivalent units (TEUs) per year, although there is capacity for this to be increased at a later stage. Contracted to Hyundai Engineering & Construction Company and Kuwait’s Kharafi Group, the project is making substantial progress since breaking ground in April 2011, and in December 2012 the Ministry of Public Works (MoPW) announced the completion of the railway network and vehicular causeway.

Subsequent phases, which include deepening the harbour draught to 30 metres and the staggered completion of dockyard berths over four phases, lie ahead. Approval for a $2.6.bn, 36-km causeway across Kuwait Bay, connecting to Sabiya and reducing the current transit distance of 140 km, is pending following a tender review initiated in early 2013, but project completion is still expected in 2016 or shortly thereafter.

The MAK port remains a key component of Kuwait’s plans to establish a trans-shipment hub on its shores. While the site’s commercial potential as a natural transit and transport hub for the northern Gulf is evident, the substantial investments made have been questioned given competition from established ports to the south. However, a key catalyst for establishing the port’s market position remains the anticipated export and import demand arising from the reconstruction of Iraq, which is projected to last more than 20 years.

Any effort to improve cross-border trade, investment and maritime logistics, as MAK is intended to do, will be dependent on strong bilateral relations, not infrastructure alone, and these saw positive advances in 2013. Iraq had considered MAK a commercial rival to its own port operations on the Shatt Al Arab, which includes the $6bn Great Faw Port. In January 2013 a landmark agreement settled shared use of the Khor Abdullah. Further negotiations are required, but both governments have agreed that their projects are, “complementary and not competitive”.

“Infrastructure developments and mega-projects are driving growth all sectors, which naturally creates opportunities for logistics companies," Fares Barqawi, the CEO of Posta Plus, told OBG. "The trick is to be well placed to take advantage of Kuwait’s strategic location between Iraq, Iran, and Saudi – countries which are becoming increasingly influential in the region.”

ROADWORK: On the sidelines of Boubyan, the $2.6bn, 36-km causeway is a flagship infrastructure project to be built by South Korea’s Hyundai Engineering and Construction Company, but one that is ultimately unique given limited requirements for national highways. Just 20% of Kuwait’s 17,818 sq km is considered inhabited and Kuwait has three major highways: the King Fahd bin Abdul Aziz Road and Al Salmi Afraaf Road, which runs south and south-west to Saudi Arabia, and the Al Jahra Road to Iraq in the north. While terrestrial transports carry 9.7% of imports and 0.78% of exports, equal to a total of $5.54bn, attention to the development of road infrastructure has been principally focused on metropolitan areas, where 90% of the population is concentrated. The MoPW has outlined KD4bn ($14.3bn) of road investments over the next five years that are focused on upgrading infrastructure in Kuwait City.

Investments in municipal roads have become critical, as traffic congestion has increased across the city. Annual growth rates of vehicles at 8-9% have vastly outpaced the 2.1% average increase in road capacities over the past decade, with approximately 1.6m registered vehicles in 2012. Efforts to curtail congestion and growth spearheaded by the Ministry of Interior have focused on improving traffic monitoring, the potential introduction of highway tolls and increased licence fees; however, no resolution to strong domestic demand is expected without the improvement and expansion of public transport infrastructure.

DISRUPTED DELIVERIES: National logistics firms have faced tougher operating environments over the past five years. The sector’s fortunes are tied to government-led projects and few alternatives exist, with low rates of organic growth in the private sector. Delays in the implementation of Kuwait’s NDP and mega-projects have had cascading impacts within the industry.

The drawdown of coalition forces in Iraq, a business mainstay, has left operators dependent on the domestic economy. Opportunities north of the border are close, but Iraq and Kuwait have yet to resolve issues affecting logistics firms. Principally, neither country will permit the other’s trucks to cross the border, requiring cargo transfers be made in a bonded warehouse at Safwan. Kuwaiti truckers may obtain Iraqi visas, these cost in excess of $500 and have a maximum validity of six months. Furthermore, Customs clearance is still required on all shipments arising from within the GCC and cargos arriving by land are escorted in convoys to central locations for inspection, increasing delays. Such impositions individually remain small, but combined they are a hindrance to large commercial operations.

Another consideration is Kuwait’s small territory and close proximity to borders, which does not necessitate large fleets. Kuwait’s largest firm, Agility Logistics, has divested itself of its commercial trucking fleet, citing large cost overheads for a small market. Its attention has now turned to areas of operations outside transport. “In Kuwait, contract logistics is Agility’s most important revenue generator, which primarily serves the private sector. This has demonstrated a year-on-year growth, but remains a low-profit-margin activity although there are evolving opportunities amongst Kuwait’s government departments for expansion,” Agility’s senior vice-president, Ali Mikail, told OBG.

The shift to contract logistics, onsite document management systems and warehousing has provided the sector with new revenue streams post-2008 and has taken prominence since 2010. This is in response to the unregulated nature of the logistics sector, which has encouraged a profusion of independent operators to flood the market. The downturn resulted in a more price-conscious and competitive market environment, but large commercial operators have maintained an edge by tapping into their own global networks. This was reinforced in May 2012 when DHL Global Forwarding launched an express less-than-container-load (LCL) service between Shanghai and the Middle East, including Kuwait, a hat tip to growing GCC-China trade volumes. However, for most industrial logistics firms, times have remained lean as mega-project implementation timelines have lagged. Industry executives speaking with OBG estimate that the sector’s value has seen a 50% reduction in the past four years.

DUAL-TRACK POLICY: There may also be more competition in the pan-GCC rail line that Kuwait stitched into its NDP and mega-project portfolio. Yet the markets are distinct and road-borne container traffic may be unaffected. “The proposed railway is an obvious benefit to Kuwait as a fourth modality, but it will almost certainly be driven by bulk commodities,” Mikail told OBG.

The 2000-km Inter-GCC rail project is one of the largest rail ventures in the world, estimated to cost $25bn. The project will be inaugurated in 2017. A feasibility study is set for completion in the first quarter of 2014, but the project has received buy-ins from member states, which are expected to expand and integrate existing national systems. Having proposed a 518-km National Railway System (NRS) to link with Iraq and Iran, at an estimated cost of KD1.8bn ($6.43bn), Kuwait is on the verge of a new era in transportation, in harmony with the GCC’s efforts to improve regional connectivity and public transport modalities. The UAE and Saudi Arabia had reportedly constructed 200 km as of August 2013, and Kuwait sees complements with Boubyan Island’s MAK port, for which KD45m ($160.7m) was allocated in 2010 to link the island with Kuwait City’s proposed metropolitan rail systems.

Progress is expected in 2013 on the formation of a proposed public-private joint venture firm to lead the national railway development project once an agreement is reached on Kuwait’s pilot public-private partnership (PPP), the Al Zour North power station and desalination plant (see Industry chapter). However, the rail project has gotten off to a faltering start, and land disputes along the proposed route in Wafra and Kabad on the Saudi Arabian border have had limited progress. This has underscored the need for legislative land reform, which features on the government’s tabled proposals and continues to affect wider industrial development (see Industry and Real Estate chapters).

GOING UNDERGROUND: Attracting greater international attention, with offers of 40-50% of shares in design-build-finance-maintain infrastructure packages, the $7bn PPP for the Kuwait Metropolitan Rapid Transit (KMRT) development for Kuwait City and its environs is expected to begin construction in 2013. The 160-km KMRT will be built in five phases to 2035 covering the city via four lines. More than 60 stations and 60 km of track will be built underground. Upgrades to domestic transport infrastructure are as essential to future Kuwait oil tanker fleet, 2007-18 growth as regional linkages, and the KMRT is seen as key in tackling shifts in Kuwait’s economy, once it becomes operational in 2020. Kuwait’s population is expected to grow by more than 50% by 2030, reaching 5.4m people. Economic diversification will also alter commercial, industrial and residential demographics.

Designed by Spain’s Ingenieria & Consultoria de Transporte, trains on the KMRT are proposed to be driverless and operate at a maximum speed of 100 km per hour. Phase 1 will cut across the city on a north-east to south-west axis, connecting Kuwait International Airport (KIA) with the city through 54 km of railroad and 28 stations (nine underground).

Tenders were requested in 2012 by the government’s Partnerships Technical Bureau (PTB), following a feasibility study by the Transaction Advisory, a consortium led by Ernst & Young; construction engineering firm Atkins, as the technical advisor; and legal advisors, Ashurst. Construction is expected to proceed as planned in 2013, despite the suspension of tendering in late 2012 with the dissolution of parliament.

POWERING UP: As Kuwait works to modernise its metropolitan transport infrastructure, KIA is undergoing a complete overhaul, with a new terminal building, cargo facility and a third 4.6-km, runway, approved in 2010. Built in 1983 for 2m passengers, KIA is accommodating 8.9m passengers per year, more than four times its original capacity, and projections estimate it will see 13m passengers by 2020. While a new airport was originally proposed in 2007, redevelopment was only given the green light in 2012 when oil prices recovered.

With a ceiling capacity of 25 metres, but room for a second terminal, the forthcoming KIA has been presented as a new aviation hub, tapping into trends seen among Kuwait’s southern neighbours. The proposed facilities will be complementary to and promote Kuwait’s new international image. However, it is not expected to compete directly against other existing regional hubs and their national carriers. This is in line with the comparative scale of the investment and ongoing reform of the national airline, Kuwait Airways (see analysis).

With construction of the new terminal located on a greenfield site within the current airfield, no disruptions to service are expected as ground is broken in 2013. Pursuing a leadership in energy and environmental design “Gold” certification, the airport will incorporate technology to minimise its carbon footprint. This includes a trefoil canopy laced with photovoltaic panels to harvest solar energy that also extends over the airport’s apron to shelter planes and workers. The airport has been designed with flexibility and superior service in mind. It will be able to accommodate 21 A380s or 50 A320s (two per stand) in the first phase with maximum convenience for passengers considered throughout the airport’s design. The landside area also has sufficient space to include offices, hotels and the headquarters of the Directorate General of Civil Aviation (DGCA).

Meanwhile, work continues on the 3m-sq-metre cargo city located between the western and proposed third runway, adjacent to the joint US-Kuwaiti Al Mubarak Air Force Base. When complete, this will be the largest cargo facility in the Middle East, according to the DGCA. The first phase alone will be able to accommodate 67 freighter Airbus A380 and Boeing B800-747 aircraft.

While such a facility could serve Kuwait’s northern neighbours, the demand is currently unclear as air cargo represents less than 1% of imports and exports by volume in 2011 (0.39% and 0.008%, respectively). However, Kuwait can offer competitive rates to global and regional logistics firms and underwrite the operational expenses through current budget surpluses.

OUTLOOK: Kuwait has placed transport infrastructure at the forefront of its NDP as an enabler of inclusive economic diversification. If political stability endures then the sector can expect to reap substantial rewards as mega-projects receive government approval in the near term. The initial steps have been taken and while there have been some delays due to political conflicts in the face of established and determined regional competition, Kuwait is preparing to accelerate a substantive and rapid evolution in its market position in order to fully capitalise on forthcoming investments.

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The Report: Kuwait 2013

Transport & Logistics chapter from The Report: Kuwait 2013

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