After years of slow growth following project delays and the global financial crisis, Kuwait is poised to join the GCC-wide construction boom in 2014. The government’s expansive five-year spending plan is driving the rise in construction, with a host of mega-projects that aim to expand infrastructure and meet new energy and power demands, while improving roads and laying foundations for a new rail network.
On The Up
Growth prospects are facing notable challenges, including burdensome bureaucracy and delays, higher labour costs and a lack of regulatory oversight. However, new legislative reforms, coupled with an uptick in government spending and contracts, have led to positive growth forecasts for the state’s construction industry. Medium-term growth is expected to remain strong, driven by new public-private partnerships (PPP) operating under an increasingly popular and functional build-operate-transfer (BOT) model.
In comparison to its GCC neighbours, Kuwait’s construction industry is relatively small, and has seen moderate growth in recent years. The Ministry of Public Works (MPW) is the government’s primary construction agency while there were 1478 private construction firms operating in Kuwait as of 2011, employing a total of 144,523 people, according to the Central Statistical Bureau. The Central Bank of Kuwait estimated the construction industry’s total value grew by just 0.36% in 2010, and 1.8% in 2011, although recovery has accelerated in recent years, with the Kuwait Finance House (KFH) estimating the construction industry grew by 3.6% to in 2013 to reach a total value of $3.2bn. Deloitte reported that Kuwait was the fourth-most-active construction market in the GCC in 2012, with $8bn worth of deals awarded, led by a $2.6bn contract to build the Subiya Causeway, which had been in the pipeline for almost a decade.
Pipeline
Market research firm ResearchMoz estimates projects worth KD3.8bn ($13.4bn) will be signed in the first quarter of 2014, with a further KD2.6bn ($9.14bn) expected to be awarded in the second half of the year. In September 2013 KFH projected construction growth will reach 3.4% in 2014 and $3.5bn in total value. KFH stipulated, however, that despite new project announcements adding $20.5m to the pipeline, delays and disputes over awards still pose problems.
The MPW has announced it has 426 projects scheduled for 2013-14, an increase of 50 projects over the previous year’s 376, at a cost of KD9.14bn ($32.1bn). According to MEED, the total value of construction projects in the state currently stands at $188bn, while a September 2013 report commissioned by the trade show Big 5 Kuwait found that ongoing projects were worth a total of $250.6bn. Construction lending has remained relatively stable in recent years. Construction loans comprised 12.6% of overall lending in the state in 2007, dropping to 11.4% in 2009, before rebounding to reach 12.4% as of June 2013. “Kuwait has a lot of money. Here, financing a project is not an issue. The real problems lie in obtaining approval and awarding contracts,” Srour Alotaibi, director of projects consultancy at the MPW, told OBG.
Challenges
Delays and bureaucracy have long plagued the industry, with a June 2013 report published by independent ratings agency Capital Standards identifying excessive bureaucracy as the biggest challenge facing construction growth in the state. “This is one of the most important issues facing contractors and sub-contractors in the construction process. The process to get approvals and permissions to carry out construction and repair works are full of bureaucratic hurdles. This hampers the project, resulting in time and cost overruns for the contractors,” read the report.
Kuwait dropped three places in the World Bank’s 2014 ”Doing Business” report, ranking 104 out of 189 countries, and last in the GCC region. It sank six places in the “dealing with construction permits” category to 133rd place, with the World Bank reporting that contractors must complete 24 procedures before obtaining a permit, compared to the regional average of 16, with the total process averaging 130 days to finish.
At the same time, the Central Tenders Committee’s (CTC) prominent role in decision-making has led to increased scrutiny of its activities, and the tendering process has been marred by delays and legal challenges. The landmark Kuwait Towers, for example, have been closed to the public since June 2013 after a project awarded for refurbishment of the building’s fire alarm systems was unsuccessful, with the selected bidder unable to deliver the project on time due to trouble obtaining financing.
Challenges such as these have lead the CTC to implement new transparency measures, including an initiative launched in February 2014 that will see tenders decided online. “We’ve heard accusations that the CTC awards contracts to our preferred companies, but we only act as an intermediary. Ultimately, it is the Ministry of Finance that decides. If a project meets the right specifications, we send it to the ministry with our recommendations, and they make the final decision,” Anwar Al Glunaiman, finance manager of the CTC, told OBG.
Regulations
Capital Standards’ report also identified budget disequilibrium, the growing cost of labour, unsustainable incentives, limited existing regulations, and outdated corporate governance and practices as major impediments. Indeed, labour costs are becoming ever more prohibitive for contractors in Kuwait. The government has unveiled plans to reduce the number of expatriate workers in the country by up to 1.4m in the next six years, which will dramatically affect the labour supply. According to the IMF, the construction sector comprises 10% of the overall expatriate workforce, while 57% of expatriates are employed as production and transport workers. “It’s not realistic to target the low-skill labourers, because they won’t find local replacements. The issue needs a long-term strategy,” Sami Daamech, senior operations officer at the World Bank’s Kuwait office, told OBG.
Although a reduction in expatriate labourers aims to increase Kuwaiti participation in the private sector, blue-collar construction positions are filled almost entirely by foreign workers. A dramatic increase in public sector salaries over the past decade, coupled with significant incentives to the private sector to hire Kuwaiti citizens, puts a burden on contractors. Reductions in the available labour base will have a negative impact on profits. “On one hand the government is trying to push its developmental plans, but on the other hand, it is trying to reduce the amount of marginal labour in the country. This has led to scarcity of labour, and has resulted in higher overall costs of labour. Some contractors are finding it increasingly difficult to maintain a profitable operation after the increase in their cost of operation,” read Capital Standards’ 2013 report.
Private Participation
Under the government’s BOT model, private firms construct and manage a facility, and transfer the project to the government with no obligations after a given timeframe. In Kuwait, the typical term spans 30 years – up to 40 years in the case of special projects, approved on a case-by-case basis and not exceeding KD250m ($879m) in value – after which time the project must be handed over to the state.
Law No. 7/2008, which established a BOT system for construction projects, has been criticised as overly burdensome for developers. The law sets strict conditions like the allocation of a percentage not exceeding 10% to initiators of any project. Additionally, the law did not specify the method of calculating the value of land on which a project is to be executed, which is usually owned by the state. Nonetheless, the operating environment for private firms has improved in recent years, following establishment of the New Companies Law in 2012 and the New Foreign Direct Investment Law in 2013 (see Economy chapter), although further regulatory reforms could still help. Stakeholders have also called for the establishment of an independent authority for the National Development Plan, which would operate under the direct supervision of the Emir, and would have power to give project approvals in a timely manner.
In 2013 Kuwait signed its first ever PPP for an integrated water and power plant (IWPP), the Al Zour North IWPP, a $1.8bn project that will be developed by a consortium of private firms including GDF Suez, Sumitomo and AH Al Sagar & Brothers. The consortium owns 40% of the project, with the remaining 60% owned by government entities. Using a 40-year energy conversion and water purchase agreement, the plant’s output will be purchased by the Ministry of Electricity and Water, with operations to commence in late 2016.
The PTB is now hoping to establish additional PPPs for projects including South Al Jahra Labour City; Kuwait Failaka Island Development; a commercial, educational, cultural and entertainment centre; a 500-bed hospital in Al Andalus; solar and gas-fired power plants at Al Zour, Al Abdaliya and Al Khairan; and the Umm Al Hayman Wastewater Project. As such, long-term growth prospects are promising. Global consultancy Business Monitor International forecasts the value of the Kuwaiti construction industry will increase from $3.5bn in 2014 to $6.8bn by 2023, growing by 4% annually, with the company identifying the energy and non-residential segments as holding the greatest growth potential.
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