Kuwait invests in transport infrastructure to enhance global connectivity

In July 2021 Kuwait Port Authority (KPA) announced plans to establish a series of logistics cities on recently acquired land adjacent to several major ports across the country. The project is expected to be completed by 2025 at an investment of $400m. The proposed cities would be located on a combined area of 1.9m sq metres around Doha Port – with the new facility spanning 270,000 sq metres to the south-east and 300,000 sq metres to the south-west of the maritime centre – Shuwaikh Port (317,355 sq metres) and Mina Abdullah Port (1m sq metres).

The design and consultancy study contract was signed in the first quarter of 2022. In parallel to these efforts, Kuwait’s logistics capabilities will be enhanced by the improvement of connections between the ports, and the establishment of a single communication system for all Customs and port activities that will leverage technology for the automation of infrastructure. The authorities also plan to establish the country’s first land port to help reduce traffic congestion and support the flow of goods through land borders.

Rationale

According to KPA the development of the logistics cities is based on a dual rationale. On the one hand, the cities will tackle a persistent challenge arising from global supply chain disruptions by expanding Kuwait’s storage capacity to deepen stocks for a number of strategically important goods, such as foodstuff and pharmaceuticals. On the other hand, the logistics cities will become an enabler of Kuwait’s diversification efforts by providing space and facilities for small and medium-sized enterprises, offering competitive prices for re-export operations and presenting opportunities for international players. In this way, the cities are expected to help boost investment in the country.

Each of the planned cities will be constructed for a particular purpose or industry. This is in line with a similar initiative to build a facility for electric vehicle (EV) manufacturers. In August 2021 KPA announced plans to build EV City, the first EV manufacturing centre in the Middle East. The decision to establish these logistics cities reflects long-standing global, regional and domestic trade trends, and is aligned with New Kuwait 2035. Even so, the success of the project will largely depend on finding the appropriate frameworks to finance and execute it in a sustainable manner, as well as on the improvement of Kuwait’s transport infrastructure.

New Realities

The need to strengthen Kuwait’s logistics capabilities, particularly warehousing, stems from a number of factors. First, Kuwait would be better positioned to fulfil its ambition of becoming a gateway to markets in the region – particularly Iraq, the northern-most parts of Saudi Arabia and Jordan – if it upgrades its infrastructure. These three markets alone amounted to 49% of the value of Kuwait’s re-exports in 2019. Even in 2020, a year marked by severe disruptions in international trade flows, the relative weight of these markets remained stable, at 43.3%. Beyond these markets, the government also sees potential in the wider Levant region, which comprises a population more than 150m across Syria, Lebanon, Israel, Iraq and Jordan.

Second, the projected e-commerce compound annual growth rate in Kuwait for the period 2021-25 is expected to be 6.1%, resulting in an estimated market value of $1.6bn by 2025, according to Maze, a Lebanon-based digital marketing agency. In addition to an increase in demand for storage space, this will necessitate the modernisation of logistics services through the adoption of 5G-enabled internet of things, robotisation, artificial intelligence-powered data analytics and blockchain, with local players across the MENA region lagging behind international peers in the last two areas.

Third, most of the existing warehouses in the country register an occupancy rate between 90% and 95%, which poses risks in terms of supply security, particularly regarding foodstuff, pharmaceuticals and building materials. The disruption of the Covid-19 pandemic has prompted some companies reliant on imports to hedge against uncertainty by shifting away from just-in-time procurement models, which could further increase demand for warehouse space. “It is likely that we will see a shift from just-in-time models to companies stocking up on inventory,” Ravi Varrier, CEO of Al-Rashed International Shipping Company, told OBG.

By adding new warehouses and storage space to the country’s existing capacity it will be possible to integrate assets relevant to the development of value-added logistics services. Moreover, the new logistics cities are being designed in a way that is conducive to the adoption of emerging technologies and innovative practices, which will further enhance the country’s internal and external logistics capabilities.

Financial Tailwinds

Between 2017 and 2022 KPA registered a 400% increase in revenue, with total assets climbing to $186m. The gradual resumption of normal operations after the pandemic indicates a position of financial strength that has the potential to support the development of the logistic cities and other infrastructure projects alongside partners.

In addition, high oil prices could further support the acceleration of infrastructure development in 2023. In April 2022 the government estimated that by the end of the year it would have awarded $9.9bn in project contracts. The authorities also aim to improve public finances, which by 2023 could register a surplus. The private sector is also playing an increasingly important role in financing projects in Kuwait, and this could extend to logistics cities as well. Private financial institutions are making significant contributions to capital spending, which accounted for only 13% of the 2022 government budget.

Logistics cities present several bankable investment opportunities. There is an ever-increasing number of digital technology-based solutions for warehousing and transportation. Businesses and their clientele are also placing more emphasis on environmental and social responsibility. Sustainable financing is also key for building and operating smart ports, solar-powered warehouses, measuring stations, waste management systems and recycling facilities.

Systemic Challenges

Notwithstanding the sound principles underscoring the economic utility of logistics cities and the accommodative financial context, project execution may face several challenges.

The construction sector is growing rapidly and is projected to be valued at $9.2bn by 2028, according to Verified Market Research, a US-based market research firm, with an annual average growth rate of 6% projected for the 2022-25 period. Even so, projects often face delays and cost overruns. This unpredictability of time frames and expenses adds to the risks posed by political uncertainty due to disagreements between the executive and legislative powers, which can cast doubt over projects and lead investors to defer decisions.

Recurring political stalemates have narrowed the potential of using public-private partnerships (PPPs) for development, despite the fact that Kuwait was the first country in the region to adopt a PPP law. Given the benefits that a PPP-based development of the logistics cities could deliver, particularly in terms of risk sharing and public finance savings, addressing issues that create investor uncertainty could help unlock private funds. Positive steps have recently been taken to improve the environment for PPPs, including the designation of Kuwait Authority for Partnership Projects as the entity responsible for contracts signed under build-operate-transfer frameworks. Previously, these contracts were managed by the Ministry of Finance.

An Economic Advisory Unit was established in August 2022 that is chaired by the prime minister and comprises representatives of government and corporate organisations, as well as experts. The entity aims to facilitate high-level dialogue that could improve the effective direction and management of PPPs.

Transport Networks

If the authorities are able to bring the logistics cities to fruition, their long-term broader socio-economic impact will depend on their integration into an upgraded transport network. According to a January 2021 report from the World Bank, Kuwait’s roads and ports are expected to reach their maximum capacity soon, which could impair transport connectivity and economic productivity. Therefore, upgrades to the country’s transport infrastructure are crucial to accomplish its vision.

The 19 major roads under development by the Public Authority for Roads and Transportation, which amount to an overall investment of $4.9bn, are an important step towards addressing this challenge. The same reasoning applies to the efforts to strengthen port capacity, both through the $1.1bn expansion of the existing ports and the construction of the $3.2bn Mubarak Al Kabeer Port. Furthering the development of the Al Naayem, Wafra and Abdali economic zones will also greatly support the industrial and trade environment the logistics cities would serve, particularly in the case of the latter two zones, as they provide a fundamental link with Saudi Arabia and Iraq, respectively.