With its economy still heavily dependent on oil-based activity and rocked by political uncertainty, Kuwait continues to tantalize investors and project developers alike with promising prospects for the construction industry but difficulties in starting or completing projects on schedule.
Major construction companies are keeping their fingers crossed in anticipation of a slew of project opportunities in 2013 and fresh government measures to make them happen, industry executives told Zawya.
According to Zawya project tracking data compiled in February 2013, of the around USD 2.54 trillion worth of projects that are in the design, bid or construction stage in the GCC, Kuwait is in fourth position with ongoing projects valued at USD 250.58 billion. UAE still retains pole position with USD 903.05 billion worth of ongoing projects, followed by Saudi Arabia (USD 766.77 billion), Qatar (USD 316.33 billion), Oman (USD 202.13 billion) and Bahrain (USD 107.85 billion).
Economic overview
Without significant progress on infrastructure investment, Kuwait's non-oil private sector continues to grow sluggishly. In an economic note late last year, HSBC noted that its upward growth estimate for Kuwait's GDP (to 5.3% for 2012), was purely on the back of higher oil output volumes. A small country with a population of just under 3.5 million, Kuwait has oil reserves that can last for another 100 years.
According to research by National Bank of Kuwait (NBK), Kuwait's real GDP is forecast to slow to 3.2% this year, supported by stable oil production. However, the country's largest lender raised its forecast for real non-oil growth in 2013 to 5% from 4%, "based largely on signs of a greater determination by Kuwaiti authorities to implement large infrastructure projects" that had previously stalled. "This should ease the economy's dependence on growth in the consumer sector, which will nevertheless remain firm thanks to high employment levels and fresh government measures to support income growth," it said.
Government plans
There are "signs of a greater determination by Kuwaiti authorities to implement large infrastructure projects associated with the government's four-year USD 108 billion National Development Plan (NDP) announced in late 2010 that had previously stalled", NBK said. The plan includes a new USD 6 billion airport terminal, a USD 7 billion metro, a new refinery and hospitals.
In its a February note, the lender projected that if spending comes in 5%-15% below the government's forecast, "this year's budget surplus could end up between KWD 11.9 billion and KWD 14.4 billion before allocations to the Reserve Fund for Future Generations". Assuming that spending comes in below budget, NBK project a surplus of between KWD 8.7 billion and KWD 12.1 billion before allocations to the RFFG. This would equate to 18%-25% of forecast 2013 GDP, and would represent Kuwait's 15th successive budget surplus.
In a further breakdown of Zawya statistics, UAE leads the pack (USD 528.41 billion) in the real estate construction sector followed by Saudi Arabia (USD 321.42 billion). The gap then drastically widens to Kuwait at USD 89.25 billion closely followed by Qatar, Oman and Bahrain. In the GCC infrastructure sector, which boasts USD 804.97 billion worth of ongoing projects, Kuwait's project value stands at USD 79.93 billion. In the GCC power and water sector, which has a total of USD 182.22 billion worth of ongoing projects, Kuwait's project value stands at USD 14.13 billion. Additionally, within the GCC oil and gas sector, which sees a total of USD 445.31 billion worth of ongoing projects, Kuwait's ongoing project value stands at USD 67.27 billion.
Ultimately, however, oil prices are buoyant and the Kuwait economy is doing well, said Yahya Jan, vice president and design director at architect firm NORR Group. "The drivers will be excess surplus from oil revenues that needs to be invested in real estate. The return on investments in the international markets is not so great since prime rates are very low and the capital will go back to bricks and mortar. There is excess liquidity in the GCC that needs to find investment avenues and this will result in a resurgence in the real estate sector," he told Zawya.
The NDP forms the first phase of a larger program known as Kuwait Vision 2035 that will run in five-year blocks over the next 25 years. But the end of 2012 saw the sixth elections in Kuwait. "Decisions were on hold many times with hesitancy on PPP in Kuwait," said an industry executive who did not wish to be named. Another noted that "decisions on projects like the Silk City will take time". A third said: "Every year, Kuwait announces a number of projects but they are shelved or re-tendered. Now, we are finally starting to see some work but we prefer to wait and watch."
Infrastructure
"There is a new government in place after the recent elections. The feedback that we get from the Kuwaiti business community is that things will change and the new government will release some projects that were on hold for a long time," said Phillipe Dessoy, general manager at Six Construct, a regional construction company. "This includes the new terminal at the airport and tenders for some hospitals that have been tendered."
In November 2012, a British embassy statement on the UK Trade and Investment site said that Kuwait has made sweeping reforms to encourage and foster foreign direct investment and to build Public Private Partnerships / Private Finance Initiatives (PPP/PFI) as a delivery model for most of the NDP's projects. Kuwait's Partnerships Technical Bureau (PTB) was formed in 2009 to oversee its PPP/PFI programs - beginning with initial feasibility studies and surveys for potential projects.
Additionally, a Privatization Law, passed despite stiff opposition among MPs, will help build private sector capacity to deliver the NDP and also create opportunities for young Kuwaitis outside the oil-dominated public sector, notes UKTI. "State-owned holdings in telecoms, real estate and utilities are currently on the table for privatization, opening up the possibility of private companies developing, running and benefitting from NDP projects," it says.
In January, GDF Suez announced that with the finalization of the project, its consortium with Sumitomo Corporation (Japan) and Kuwaiti partner Abdullah Hamad Al Sagar and Brothers has been nominated 'successful bidder' for the Az Zour North Independent Water and Power Project (IWPP) in Kuwait by the PTB. A PTB statement in 2009 had noted that the project will be undertaken by a public joint stock company to be established by the government, of which up to 40% will be offered to the successful developer following the competitive tendering process. As per the IWPP Law requirement, up to 50% of the shares of the project company will be sold to Kuwaiti citizens through an IPO process which will take place prior to financial close. Analysts believe this award will pave the way for future PPPs in Kuwait.
In October 2012, the Kuwaiti cabinet approved the metro project and included it in the state development projects' portfolio. It also ratified a draft law to set up a special body for overseeing the Subbiya and Boubyan Island development projects.
The proposed USD 7 billion, 171km-long Kuwait Metro network (60km will be built underground) sits within the NDP portfolio. It comprises four lines, each of which will be tendered as a separate PPP contract.
- Line 1 is 25.8km long and will connect Kuwait's southern metropolitan area with the center of the city and the main university.
- Line 2 will be 21km long, connecting the main business district with the residential areas of Salmiya and Hawally and the Shuwaikh Industrial Zone.
- Line 3 will be 18.5km long and begins at the airport and connects to the railway network and the city.
- Line 4 will be 22.7km long and begins in the new university area and residential areas, and also connects to the railway network and the city.
In November 2012, Kuwait signed a contract for the long delayed USD 2.6 billion 37.5km causeway project with a consortium led by South Korea's Hyundai Engineering. The causeway, to be named after the late emir Sheikh Jaber Al-Ahmad Al-Sabah, will be built over Kuwait Bay and link the capital Kuwait City with the northern Subbiya area, which is to become home to the Silk City project.
This is a significant move, which will in turn positively impact the much talked about and delayed USD 77 billion Silk City project (it had also announced plans to build the tallest tower in the world many years ago).
In January this year, the ministry of public works confirmed that it is executing a USD 6 billion mega venture to expand Kuwait International Airport to enhance its capacity to serve 25 million passengers per year by 2024, up from the current 8 million passengers. The first phase of the project includes establishment of more gateways and apron plots to accommodate more than 50 aircraft, with a future plan to build up to 100 aprons and a huge parking lot, with surrounding greenery.
According to a UKTI note last year, it sees major opportunity for companies with the Boubyan Port, Kuwait's largest island, which is located in the north eastern part of the country and is separated from the mainland by the Subbiya Channel. When completed, the port will have 60 berths stretching 1,600 meters into the sea.
The project is scheduled to be implemented in three phases, of which the first will be subdivided into three phases. The first part will include putting in place advanced infrastructure, treating the area's soil and creating railroad links. Work has already started on this phase. Part two will encompass the construction of the first section of the port while the final part will feature marine drilling, widening channels and other aspects of the construction work. The construction industry is waiting in the wings for the go-ahead.
Real estate
The office building sector is oversupplied and there is high vacancy and low lease rates, said Jan. "There is no demand for new office products. In the longer term, we also need to see the demand side or we will run the risk of the next bubble. This could be a driver and a restraint. In Kuwait, the country is politically divided and this is a deterrent for foreign investment as well as Kuwaitis who would also opt to invest in safe haven options like Dubai," he said.
According to Jan, 2013 will be a steady year for Kuwait. "Potentially, the government might undertake more infrastructure and education projects. But it is a neutral outlook," he said. Industry executives polled by Zawya averaged a 4% growth for Kuwait in the coming year. Bishoy Azmy, chief executive at Al Shafar General Contracting, a UAE-headquartered regional construction firm, said he expects a 3%-4% growth. Dessoy predicts 3%-5% while Jan forecasts exactly the same.
"After a long and quiet period of three to four years, we are starting to see some activity again in the private sector. The residential market is under-supplied within the high-end segment. There is space for new malls but it has to be a strategic approach," said Jan.
© Zawya 2013
