After several years of weak performance the Kuwait construction market saw a marked rebound in 2014. Several major infrastructure developments in the transport, power and water sectors have been tendered or are in the process of being awarded. Further to this, strong economic performance and the government’s commitment to reform have sustained demand for residential, commercial and retail construction projects.
In particular, the new law on public-private partnerships (PPPs) will have a transformative impact on the local construction industry. While the government can afford to fund its project pipeline and will remain the largest financier within the domestic construction industry, PPPs are an important part of the country’s broader economic diversification strategy.
While lower oil prices have significantly affected government revenues, the budget for the new fiscal year starting in April 2015 provides strong reassurances that the government will continue to follow its capital investment programme. Although there are still some fears that political developments may limit the potential for major investment projects, the approval of the Kuwait Development Plan 2015-20 provides a reassuring roadmap for the construction industry.
Market Structure
Kuwait’s construction industry is dominated by a number of government agencies that oversee public expenditures on infrastructure, housing and other urban construction projects. Two major agencies manage the implementation of the most government-financed projects. The Ministry of Public Works (MPW), established in 1945, serves as the government’s main construction arm, planning and overseeing Kuwait’s construction requirements. Meanwhile, the Mega Projects Agency, which serves the executive arm of the MPW, leads the design and implementation of the bigger infrastructure projects.
A separate arm of the government manages government-sponsored housing projects, which comprise one of the largest construction segments in Kuwait. The Public Authority for Housing and Welfare (PAHW), which was established in 1974 as the national housing authority, has the ambitious mandate of providing housing for 2.6m people by 2030. The PAHW also has the authority to establish local joint-stock shareholding companies to implement urban residential projects.
The tendering process is undergoing reforms but is also split between two agencies. The Central Tenders Committee (CTC) comes under the purview of the minister of economy and finance, and is responsible for awarding tenders and auctions for government entities. However, the Kuwait Ports Authority, the PAHW, Kuwait University, Ministry of Defence and the Ministry of Interior are allowed to manage their own bids and tenders. The CTC is responsible for the tender auctions until the project is awarded. As well as construction projects, the committee manages the procurement and distribution of subsidised food for citizens.
The Partnerships Technical Bureau (PTB) currently manages government projects that are implemented under PPPs. The agency was established in 2008 to encourage greater private sector participation in the government’s development programme. The PTB is being phased out and replaced by a new formal government entity called the Kuwait Authority for Partnership Projects (KAPP) under the new PPP Law of 2014, but the reform process is still under way. Until the new authority is fully operational, the PTB will continue identifying potential development projects, conducting project evaluations, managing the procurement process and monitoring project implementation.
Steering Committee
A high-level steering committee, formally known as the High Committee for Projects on State-owned Real Estate, which was established under the 2008 PPP Law, oversees national policy related to PPP contracts and is the ultimate authority for all such projects. The committee refers projects to the PTB for study, approving them before they can be advertised. It also selects the relevant entity to participate in the project and sign the PPP contract. The committee has the authority to terminate a PPP contract if doing so is determined to be in the public interest. Construction companies, suppliers and real estate developers operate within this structure. The country is home to major construction companies, some of which have become regional as well as global players. Three Kuwaiti firms made the list of the top-10 publicly traded construction companies in the GCC region in 2013, according to Construction Weekly.
The construction industry saw significant growth in 2014, with a substantial increase in the number of projects awarded. Kuwait awarded contracts worth a total of KD7.3bn ($25.1bn) as part of its development plan in 2014. This represented growth of almost 400% over the previous year, according to a March 2015 report from the National Bank of Kuwait (NBK). The boost to the projects market points to the successful implementation of the wider reform agenda, enabling the government to move forward on strategic projects.
Looking ahead, the total value of Kuwait’s pipeline of planned and active projects is estimated to be in the range of KD64bn ($220.5bn), according to NBK and business intelligence publication MEED. This represents an 8% increase from a year ago, when MEEDestimated the total value of projects planned or under way in Kuwait at $202bn. The pipeline is likely to remain strong, as the government is close to approving projects worth an estimated KD14bn ($48.2bn) in 2015 alone.
Reform
There was some uncertainty surrounding Kuwait’s construction industry prior to 2014. Many of the projects in the government’s 2010-14 development plan were not approved and those that were approved ended up delayed. However, key political developments in 2013 alongside reforms that were set into motion between 2013 and 2014 have helped to inject the sector with a sense of optimism. For example, the passing of the new Foreign Direct Investment Law in 2013 and the new PPP Law in 2014 paved the way for the launch of a range of projects in 2014 and these are likely to be among the major drivers of sector growth, particularly in the non-oil segment.
As well as attracting private funding into its projects market, PPPs are important to Kuwait’s development strategy because the private sector has the necessary technical expertise to develop and manage complex infrastructure projects. Unlike its regional counterparts, Kuwait has not yet undertaken many projects on a PPP basis. One of the few examples to date is the $377m Sulaibiya wastewater treatment and reclamation project, which was structured as a build-operate-transfer (BOT) PPP project in 2002. The government has primarily used internal engineering, procurement and construction (EPC) contracts to develop its infrastructure, despite previous efforts to encourage PPPs.
The government issued its first PPP law in 2008 with the goal of developing projects by leveraging local and international private investors. The programme did not have as great an impact as hoped, as overly complex institutional arrangements as well as risk allocation concerns deterred potential private partners.
New PPP Law
In early 2014, however, PTB reached financial close on the KD2.4bn ($8.2bn) Al Zour North Independent Water and Power Project (IWPP) phase one project, one of the largest projects to be structured as a PPP in Kuwait. A consortium led by ENGIE ( previously known as GDF Suez) in partnership with Sumitomo and Abdullah Hamad Al Sager & Brothers won the BOT contract for the IWPP. The success of the PPP is attributed to a number of factors that have since been used to form the basis for the new PPP Law of 2014.
According to the old law, the shareholder arrangements under the PPP transaction were structured through a public joint stock company that was established for the project. For projects that were larger than KD250m ($861.3m), 50% of the company shares were required to be placed for subscription by local Kuwaitis through an initial public offering on the Kuwait Stock Exchange. This added a layer of complexity for the project investors, as they could not rely on a specific share price. Under the Al Zour IWPP, and going forward under the new PPP law, the PTB will hold the 50% public allocation until the plant begins operations.
The limit on the concession period has also been extended to 50 years from the previous maximum of 40, which gives the private participants a bigger window for recouping their costs. Furthermore, the joint stock project company can now include all non-land assets as part of its security package. These reforms within the PPP law were a direct consequence of the successful IWPP development and will help make PPP projects more attractive to private financiers.
Going forward, the PTB will transition into KAPP, which is expected to help expedite procurement and other processes. Construction of the IWPP plant is reported to be progressing quickly, with an expected construction completion date of November 2016. A partnership of Spain’s Sidem and Korea’s Hyundai Heavy Industries won the $437m construction contract for the desalination plant and the power station, respectively. When complete, the plant will produce 107m imperial gallons per day of drinking water and 1500 MW of power, roughly equivalent to 20% of Kuwait’s water and 10% of the country’s electricity needs, respectively.
Power & Water
Building on the success of the Al Zour IWPP, the government will initiate other power and water projects. It has already awarded contracts worth an estimated KD283m ($975m) within the power sector in 2014, according to NBK. A joint venture between the Ministry of Electricity and Water and the Kuwait Institute for Scientific Research awarded a KD13m ($44.8m) contract for phase one of the Shagaya Renewable Energy Complex. The planned complex is expected to support the country’s goal of diversifying its energy base by testing the efficacy of different renewable energy technologies in Kuwait. The plant will eventually generate a total of 70 MW of electricity, including 50 MW from a thermosolar plant, 10 MW from solar photovoltaic cells and 10 MW from wind power.
As for water, the government awarded KD79m ($272.2m) worth of projects in 2014, according to NBK, with plans to award the KD442m ($1.5bn) Umm Al Hamyan Wastewater Treatment Plant in late 2015.
Housing
The PAHW is one of the largest clients in Kuwait’s construction sector, with the agency implementing plans to construct residential townships that are expected to provide housing for Kuwait’s citizens and expatriate labour force. The PAHW constructed a total of 1263 housing units across its developments in 2014, with a broader aim of completing 1200 units per year for the next 10 years. These figures do not include the public buildings, retail spaces and utilities required for the residential developments.
The PAHW’s housing developments are generally greenfield projects located in remote areas of the country that may not attract private sector developers. Townships can range from a collection of under a hundred residential units to towns with space and infrastructure for thousands of residents and workers. The PAHW recently completed construction of the Saad Al Abdullah Township and has a number of other projects under development or in the planning and design stage. The completed township was constructed at a total cost of $700m, covers an area of 514 ha and includes 3576 residential units that are expected to support a population of over 30,000 residents.
Other major PAHW projects currently under construction include the Jaber Al Ahmed Residential City. The new district will eventually have around 6649 residential units that will support a population of an estimated 100,000 people. The $2.5bn construction project is being built on 1245 ha with EPC contracts awarded to Al Ahmadiah Contracting and Trading Company for the residential units and to Mohammed Abdulmohsin Al Kharafi & Sons (MAK Group) for the infrastructure.
MAK Group has also won a number of EPC contracts for the construction of Sabah Al Ahmad Township. The $6.2bn development is expected to house over 110,000 residents in 11,000 units. Other companies involved in constructing the new seaside city include the Al Tawbad General Trading and Contracting Company, which won a $159m contract to build residences in 2012, and the United Gulf Construction Company, which won a $465m contract to build infrastructure works and a $441m contract for residences in 2010. Construction of the project is expected to conclude in 2015.
Urban Reclamation
The PAHW’s biggest construction project, however, is the ongoing construction of housing at the $15bn Al Khairan Residential City, which is part of a much larger urban reclamation project known as the Sabah Al Ahmed Sea City. The PAHW’s role is to develop more than 30,000 residential units as part of the larger urban development that is expected to eventually house half a million residents.
When complete, the Sabah Al Ahmed Sea City will be one of the larger urban developments in Kuwait. The city will occupy an area of around 6700 ha, much of which consists of low-lying salt-encrusted land that is being reclaimed to develop the city. Public sector investment into infrastructure and land preparation is starting to attract interest from private developers.
For example, Kuwait’s Tamdeen Group launched its Al Khairan project in March 2015. The new $700m mixed-use development will be spread across 350,000 sq metres of waterfront property that is part of the reclaimed land. According to Tamdeen, the site will eventually include the construction of Kuwait’s first outlet mall, two high-rise residential towers, one furnished apartment tower and a marina with capacity for more than 900 boats. The 75,000-sq-metre outlet mall will cater to Kuwait’s growing presence of luxury brands. Tamdeen also has plans to build a five-star hotel and a large central garden space for public use.
Affordable Housing
In addition to residential areas for Kuwaiti citizens, the PAHW is also in the process of building the South Al Jahra Labour City, which will eventually include 20,000 affordable housing units for low-income expatriate labourers. The South Al Jahra Labour City project is structured as a BOT scheme and is set to cover 100 ha and include entertainment facilities, along with the necessary public utilities.
While the majority of PAHW construction projects are implemented through separate EPC contracts for infrastructure and housing units, the public authority is increasingly turning towards PPP models to help finance and build infrastructure and housing units. Indeed, in March 2013 the PAHW issued requests for project proposals, including the Al Khairan and Al Jahra Labour City residential developments.
Transport Links
The transport infrastructure segment also saw significant activity in 2014, with the NBK reporting that the government awarded contracts worth KD267m ($920m). These included the delayed KD169m ($582.2m) Doha link, which will eventually connect Doha port to the Sheikh Jaber Al Ahmad Causeway. The project was awarded to GS Engineering & Construction, a Korean company, with construction of the project expected to be completed in four years, according to the Kuwait News Agency. The Doha link will consist of a marine bridge that will connect the main $2.6bn causeway project, which was awarded in October 2012, with the Doha motorway.
OIL & GAS: Kuwait’s oil and gas sector was a major beneficiary of the country’s resurgence in construction projects. Oil and gas projects awarded in 2014 represented more than 60% of the KD7.3bn ($25.1bn) awarded through the year, according to NBK. Major contributors to this total included some of the contracts for the new refinery at Al Zour, which is set to cost a total of KD4bn ($13.8bn), and the Kuwait Clean Fuels project, which will have a final price tag of KD4.6bn ($15.8bn).
On the refinery side, the Kuwait National Petroleum Corporation (KNPC) awarded a $679m dredging contract to Dutch company Van Oord in 2014, to reclaim land for the 615,000-barrels-per-day facility. Van Oord’s mandate under the contract includes the reclamation of about 65m cu metres of sand and the construction of a jetty, a barge dock and roads. The contract is the first to be awarded out of KNPC’s investment programme for the refinery. KNPC also signed three contracts with consortiums led by JGC Corporation, Petrofac and Fluor Corporation in April 2014. These included a $3.4bn contract to design, construct and commission the Mina Abdullah Package 2 of the Clean Fuels Project, a $3.7bn contract for related work at the Mina Abdullah and Shuaiba refineries, and a $4.9bn EPC contract for work at Mina Al Ahmadi.
Outlook
After a challenging few years due to political and institutional complexities, 2014 saw the end of that cycle, with a record number of large-scale projects awarded to developers and companies across all major sectors. All indicators suggest that the government will continue to implement planned projects. NBK’s estimates suggest that the total outlay for the projects market could top $50bn in 2015. Around $7.2bn of this will be directly for construction, while the remainder will be help lay the groundwork for future projects.
“In recent years some plans for major infrastructure and development projects have failed but 2014 was a good year for the construction industry, with positive results for the government as well,” Haitham Al Refaei, CEO of Insha’a Holding, told OBG. “It has set the base for a solid 2015 and the sector has the potential to continue building up in the upcoming years.” PPP programmes in the utilities and transport sector look to be moving smoothly, which should lead to construction contracts to build the accompanying infrastructure in the near future. While there are fears that contracts awarded may not result in project execution, progress made throughout 2014 points to a sustained period of growth for Kuwait’s construction sector.
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