Like many around the world, Kuwait’s construction sector endured a challenging period as a result of the global economic recession. However, thanks to the implementation of a national development strategy that aims to overhaul Kuwait’s infrastructure and diversify its hydrocarbons-focused economy, a raft of new developments are taking shape across a range of sectors, all of which provide opportunities for domestic and foreign contractors alike.
STRATEGY: Much of the construction work currently scheduled in the market comes as a result of a national effort to implement an ambitious vision; in financial year 2010/11 the government launched a five-year development plan, the first in a series of such plans that combine to form a holistic vision for the year 2035. The chief aim is to redress issues caused by previous underinvestment in the nation’s infrastructure, the effects of which are becoming more evident as the population continues to expand. The KD30bn ($107.1bn) National Development Plan (NDP), which largely reflects the findings of Kuwait Vision 2035 – the first project undertaken by the UK’s Tony Blair Associates – also aims to diversify the nation’s economy by transforming Kuwait into a regional and financial centre, and harnessing the power of the private sector in order to do so. The strategy is the first of its kind since the 1980s, and its ideas for Kuwait’s future development provide the construction industry with a road map of potential opportunities in both the short and long term.
Among the more significant projects detailed in the plan at its unveiling in 2010 are the new Kuwait metro system and a railway link to the proposed GCC network; the multibillion-dollar Silk City project; and an array of large road and port developments, including the Subiya Causeway that will link the southern area of the city with its rapidly developing northern parts.
Within the five-year phases, the plan is further divided into annual programmes with spending schedules of around KD7bn ($25bn) each. The first of these comprised 884 projects with an aggregate value of KD115m ($410.73m), according to the Kuwait Financial Centre (MARKAZ), with the seven largest of them being developed by three main institutions: the Kuwait Petroleum Corporation, the Credit & Savings Bank, and the Ministry of Electricity and Water.
DELAYS: The scale of the development strategy accounts for much of the optimism currently exhibited by local contractors, although some point out that its timely realisation is threatened by Kuwait’s political process. Disagreements between parliament and the cabinet in 2012 led to a number of ministerial resignations, including the minister of finance and the minister for social affairs and labour, and the resultant political deadlock delayed the by-laws required for some aspects of the NDP’s implementation.
In this sense, Kuwait’s notably open political system represents both a strength and a weakness: while the ability of parliamentarians to challenge legislation, regulation and award of tenders is an aid to transparency and accountability, the fractious nature of the political system threatens to hinder the nation’s development.
IMPLEMENTATION: A number of government bodies share the responsibility of implementing the NDP. Established in 1945 as the Works Department, the Ministry of Public Works (MPW) has played a central role in the nation’s infrastructural development since Kuwait gained independence in 1961. Many of Kuwait’s key facilities, such as Al Sabah Hospital, the Kuwait Municipality building, the zoo and the central prison, were established in the 1960s by the MPW as it set about shaping the nation’s urban environment. The following decades saw it expand the health and education capacity, meet the public’s social requirements through the provision of mosques (including the Grand Mosque), new waterfront promenades and entertainment areas, as well as increase the road network to its current length of around 6000 km, according to the MPW.
At present, the MPW retains its position as the construction agency for the government. Soroof Al Attebi, the director of mega-projects at the MPW, told OBG that three segments in particular are being targeted. First, the sanitary engineering department is in the process of overhauling and expanding Kuwait City’s sewage collection and treatment system and making provisions for the distribution of treated effluent for irrigation in the nation’s agricultural areas – most notably Wafra and Abdali. Second, the roads department is addressing Kuwait’s need for local roads and highways, including a $2.6bn causeway that will connect the southern Shuwaikh port with the north of the country. And lastly, the MPW is focusing on the provision of municipal buildings, from small-scale structures such as police stations, schools, co-ops and mosques, to larger projects such as hospitals, the new airport terminal and court buildings.
MEGA-PROJECTS: Within the MPW, the Department of Mega-projects, established in 2005, represents another fruitful source of business for both domestic and foreign contractors. For the past few years its focus has been on the Boubyan Island development, which aims to provide Kuwait with a new deep-water sea port, as well as complementary economic zones and an agro-food and aquaculture centre. The long-term nature of the development, not expected to be completed before 2021, means that the department will be of interest to the private sector for years to come.
While most of the larger tenders issued in Kuwait originate from the MPW and its various departments, other government ministries may engage the services of contractors for providing new infrastructure or maintaining existing facilities. These tend to be of smaller scale than the MPW’s developments, although the Ministry of Oil and the various state-owned companies of the energy sector regularly issue sizable infrastructure tenders, such as the $48.8m contract won by Kuwaiti GCC cement current and future capacity contractor Mushrif Trading & Contracting to install flare fingers at 14 different locations in the south-east of the country for the Kuwait Oil Company.
TENDER BOARD: All government tenders are issued via a centralised process overseen by the Central Tenders Committee (CTC), which manages their design and distribution, and assesses bids based on weighted criteria that strike a balance between price and quality. The CTC’s central role in the sector means that its decisions are subject to close scrutiny, and some participants argue that its bid criteria are based too heavily on lower prices at the expense of quality, exposing the market to the risk of deteriorating building standards. The CTC, however, has pointed out that quality requirements play a large part in the process. “We balance price and quality carefully, as well as all of the conditions which the ministry has applied to the tender. Some tenders go to the fifth or sixth bidder in order of price, as long as they meet the terms and criteria. We are happy with our system,” Anwar Mohammed Al Ghunaiman, the finance supervisor of CTC, told OBG.
PUBLIC-PRIVATE PARTNERSHIPS: While the flow of business from the ministries and the CTC continues to provide numerous opportunities for contractors, since 2008 a new government agency has provided an alternative source of business. The Partnerships Technical Bureau (PTB) was established with a mandate to oversee a new era of development using the public-private partnership (PPP) model already successfully utilised across the region. It alone is authorised to issue tenders for PPP projects, as well as to apply the regulations that Kuwait has developed for such undertakings.
The PTB is the most obvious manifestation of the government’s desire to harness the expertise and capital of the private sector developing the nation’s infrastructure. To date, it has succeeded in this largely through the deployment of build-operate-transfer (BOT) tenders across an array of sectors, such as power and water, education, health, transportation, communications, real estate and solid waste management. Its wider role is considerably more active than that of the CTC and includes conducting surveys and studies to identify potential development projects, formulating the project concepts, running pre-feasibility studies, and evaluating economic and technical feasibility studies. The Higher Committee is responsible for the final approval of projects, while the Council of Ministers can also act as arbiter in decisions referred to them.
Kuwait therefore has a twin-track tendering structure with which it interacts with contractors, both domestic and foreign: the CTC is mostly used by government ministries tendering projects on an engineering, procurement and construction basis, while the PTB enables the government to use private sector capital in large PPP schemes typically lasting 30 to 40 years.
LEGISLATING & REGULATING: Just as the implementing agencies have evolved over recent years, so too has the legislative and regulatory framework that is applied to the sector. Kuwait’s Companies Law was promulgated in 2012 and replaces an earlier law drafted in the 1960s. It has been welcomed for allowing local, GCC and foreign investors to “customise” the legal structure of their commercial entities according to their activities. However, the fact that many of its provisions refer to executive regulations that have yet to be defined has led to implementation delays for amendments and some confusion within ministries as to whether the old or new law should to be applied. Nevertheless, companies must abide by the Commercial Law up to the point that the PPP Law contradicts it.
The PPP Law and its executive regulations establish the legal framework for the PPP programme, defining the roles of the Council of Ministers, Higher Committee, PTB and other public entities, as well as establishing the rights and obligations of private investors. More recently, an integrated water and power project (I[W]PP) law has established a more specialised framework with respect to the construction of electric power stations and water desalination plants in Kuwait as part of a PPP. The promulgation of the I(W)PP law has brought Kuwait in line with its regional neighbours and provided the grounds for an expansion of private sector capital into the energy sector (see Energy chapter).
At the regulatory level, the construction sector is subject to a high degree of oversight. In terms of dealing with construction permits, the IFC ranks Kuwait 119 out of 184 countries as of June 2012. Taking a standard scenario involving constructing a warehouse, including acquiring licences and permits, providing required notifications and carrying out inspections, a total of 24 procedures are required in Kuwait, which take a median 130 days to process at a cost of 96.1% of income per capita. Building permits require a deed of title and architectural contract, the original letter of zoning opinion, third-party liability insurance covering the anticipated building time, original copies of plans or blueprints, a soil test report, and approvals from the safety department and roads department.
Looking to the future, contractors in Kuwait can expect to see more regulatory change. Green building codes are a relatively new phenomenon in the GCC, where Qatar and the UAE are the only countries to have introduced them. Kuwait has announced that it plans to adopt the Global Sustainability Assessment System (GSAS) as its green building code, although no date for its implementation has been set. The code is an iteration of the Qatar Sustainability Assessment System, which was developed to help that nation’s companies reduce energy costs while ensuring sustainable growth for the economy alongside its environmental protection. Its evolution into a regional code is a measure of the rating standard’s success.
SECTORS: A wide range of sectors provide opportunities to contractors, via both the CTC and the PTB. The transport sector promises to be one of the most fruitful in coming years. The development of a $7bn, 171-km metro project for Kuwait City is expected to last until at least 2020, with construction expected to commence in 2013, and is noteworthy as one of the first to be carried out under the new PPP framework. A proposed National Rail Network is expected to link the new metro to the $30bn GCC railway line which, when completed, will connect the region with 2200 km of track. Kuwait International Airport will receive two 600-metre runways as well as a new KD212m ($757.18m) terminal designed by the UK’s Foster & Partners, while a raft of new bridges and motorways planned by the MPW will address the challenge of congested roads and open up new areas for development.
IN THE WORKS: One such area is Boubyan Island, where the MPW is overseeing the development of a new port that will turn Kuwait into a regional trans-shipment centre. Plans for the island also include a fishing harbour that will act as a centre for aquaculture based on shrimp, fish and algae, a free trade zone, a light industrial complex, a technology park and a residential area.
In 2013 the government is also set to start work on a $26.2bn project to build a 36-km causeway linking the southern Shuwaikh Port with the north of the country. While the area has yet to see substantial development, this is about to change as one of the largest projects in the residential sector takes shape. Silk City is a planned urban area near the new port that could eventually accommodate more than 500,000 people – equal to 14% of the current population. The $27bn Al Khairan Residential City Project, being developed by the Public Authority for Housing Welfare, is at a more Selected projects by sector, 2013 advanced stage of development and will be established over five stages to cover an area of 40m sq metres.
The tourism and leisure sector, meanwhile, will be considerably deepened by the development of another of Kuwait’s islands: the proposed Failaka Island project aims to create a tourism resort with hotels, marinas and luxury chalets, and has been identified by the PTB as a “priority project” in the short term (see analysis).
The oil and gas sector has provided opportunities to the private sector for decades, and continues to do so as Kuwait National Petroleum Company overhauls its existing refineries and builds a refining complex at Al Zour (see Energy chapter). Al Zour is also the location of the nation’s first IWPP project, known as Al Zour North. Overseen by the PTB, the project is being developed in five phases, and is seen as crucial to the nation’s ability to provide electricity to both industry and the wider population. The PTB has already turned its attention to its second I(W)PP project at Al Khairan, which will add a further 2500 MW to the national grid.
The health and education sectors will also see considerable investment over the coming years. A new KD180m ($642.89m) maternity hospital, KD150m ($535.74m) hospitals at Al Jahra, Al Razi and Bin Sinna, and a KD150m ($535.74m) children’s hospital have been commissioned by the Ministry of Health and are being developed by the MPW, while the Ministry of Interior is to build a police hospital in the Al Sabah Health Zone. The Ministry of Education, meanwhile, has commissioned three new special needs schools, and the PTB has embarked on a schools development programme, which may see the development of seven new schools in its first phase. Municipal infrastructure such as court buildings and sanitation facilities provide further opportunities for private sector involvement.
MATERIALS: The scale of the government’s development strategy has led to speculation that increasing construction activity will result in a shortage of building materials in the short to medium term. According to MARKAZ, to complete the projects scheduled in the NDP’s first five-year plan, Kuwait’s construction industry will need about 26m tonnes of iron, 26m cu metres of sand and 72m sacks of cement. An increase in demand of this scale might lead to an increase in raw materials prices, which would raise project costs. If the costs are borne by the government, this might result in the cancellation or delay of developments.
Kuwait’s domestic building materials industry supplies a range of products to the local construction sector. Kuwait Cement Company, Hilal Cement Company and Kuwait Portland Cement Company are all primarily engaged in cement production or trading. ACICO Industries, meanwhile, has historically focused on autoclaved aerated concrete, but has more recently commenced production of its own cement. National Industries mainly trades in pipes, ceramics and tiles, but also sells ready-mix concrete, while Kuwait Building Materials Manufacturing and Kuwaiti British Readymix focus on providing ready-mix concrete and concrete bricks.
CEMENT: Cement production levels in Kuwait have been relatively constant since 2006, at around 2.2m tonnes per annum (tpa), and to date the anticipated shortage in supply has yet to materialise. “At the moment we have plenty of cement capacity in the local producers to cover our needs. There is only one local factory for steel, but our contractors are importing from Saudi, Qatar, Turkey and even further afield, but this is not a problem,” Al Attebi told OBG.
Throughout 2012, Kuwait saw a 6.7% decline in cement prices, which dropped to $71 per tonne, compared to $76.10 per tonne the previous year. Nevertheless, the local cement price is one of the highest in the GCC, a fact that has prompted the government to intervene in the market by providing subsidised building materials to contractors for a number of years. In 2013, the Ministry of Commerce and Industry allocated KD95m ($339.3m) for the materials subsidy scheme, with a limit of 45 tonnes of rebar, 4500 cement bags, 80 cu metres of bricks and 552 cu metres of limestone bricks per contract. Operators interviewed by OBG suggested that keeping these materials costs at bay will be crucial to meeting development goals: “There are challenges when it comes to the NDP, such as ensuring there are enough qualified staff available for companies, and in terms of access to adequate materials to meet demand,” said Mohsen Dehghani, CEO, Mushrif Trading & Contracting Comeet.
CHALLENGES: As well as the potential challenge of a shortage of materials, and the related question of labour supply, Kuwait’s construction sector faces two key hurdles. The matter of access to credit became a salient issue in the wake of the global economic crash, and according to some sector participants continues to present difficulties to this day. As with most countries in the region, Kuwait’s construction sector saw a significant influx of credit between 2006 and 2008, which was sharply curtailed in the following years as banks adjusted lending criteria.
However, the implementation of the NDP has revived demand for credit, and lending growth to the construction sector over recent years suggests that the problem of funding is not acute: between August 2006 and August 2011, credit extended to the private construction sector rose at a compound annual growth rate of 13.7%, slightly higher than the CAGR of total bank credit of 13.1%, according to research by the Kuwait and Middle East Financial Investment Company.
The government may have played a part in this trend with its 2010 announcement that it would free up liquidity in the system by guaranteeing bank loans serviced under the NDP with state deposits worth some KD10bn ($35.72bn). By August 2011 total bank credit to the private construction sector amounted to KD25.3bn ($90.36bn), or 7% of total bank credit, the majority of which was directed towards personal facilities and the real estate sector.
A more serious challenge in the eyes of some are the delays caused to major construction projects by political disagreements. Progress on key developments is occasionally halted while parliamentarians investigate the award of tenders or related legal issues. Contractors, therefore, must take account of the potential for political opposition on a project-by-project basis and allow for potential delays in their timetables accordingly. Many in the sector hope to see a lessening of the political challenge; however, the parliamentary elections of July 2013 were the sixth in as many years, and some consider the newly elected representatives less likely to form a needed consensus on government plans.
OUTLOOK: The nation’s sizeable oil revenues and a government commitment to developing the country’s infrastructure – particularly in the essential areas of transport, health, education and energy – underwrites the future growth of the construction industry. As the population continues to expand, increasing demand for housing and the municipal infrastructure that residential developments require will also provide opportunities for the private sector to capitalise and grow. While political disagreements may cause delays in implementation, experience in recent years has shown this problem can be surmounted in many key instances.
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