Getting things moving: Infrastructure development will aid diversification efforts

As one of the first Gulf states to undertake large-scale infrastructure development, the early exploitation of the county’s massive oil fields funded the construction of the region’s most comprehensive road network, bustling ports, and a robust power and water network during the 1970s and 1980s.Even before the Iraqi invasion of 1990-91, this initial edge had begun to wear off, as growth in Bahrain, the UAE and Saudi Arabia gained momentum. The subsequent loss of an estimated $50bn worth of infrastructure during the invasion also had a huge impact on Kuwait’s development.

INFRASTRUCTURE STANDARDS: Some 20 years on, Kuwait has recovered much of the ground it lost in 1990-91. However, the rest of the GCC has also made vast improvements and Kuwait today is the lowest-ranked GCC country in terms of infrastructure on the World Economic Forum’s Global Competitiveness Index. Although Kuwait gets high marks in other aspects – its macroeconomic environment is ranked second worldwide – a lack of competitive infrastructure has been identified as one of the major factors inhibiting the country’s further economic development.

For this reason, the country’s Vision 2035 development plan hinges on a number of infrastructural investments which, it is hoped, will form the backbone for a revitalised Kuwait. The first phase of Vision 2035 was initiated in 2010 with the passage of the National Development Plan (NDP), which called for some KD30bn ($108.2bn) in spending through 2015.

Approximately KD10bn ($36.1bn) of this expenditure will go towards improving the nation’s services, including new hospitals and educational facilities, as well as a major upgrade of the transport network, including an overhaul of the airport, a new metro system and an entirely new multi-modal transport hub centred around a planned port at Boubyan Island in northern Kuwait.

DIVERSIFICATION: These investments should provide a welcome short-term boost to the economy, which like the rest of the world is still reeling from the effects of the global financial crisis. Kuwait remains in a strong fiscal position due to near-record oil earnings through 2011. However, growth in the non-oil sector is lower than the government would like. Oil revenues accounted for 95% of total government earnings in the 2011/12 fiscal year, a rate that is clearly unsustainable in the long run as oil supplies dwindle. Furthermore, the volatility of the oil market makes this an unreliable source of income on which to base the government’s finances.

Diversification is therefore seen as indispensible to ensuring the country’s long-term stability.

“Going forward, the NDP must execute projects in non-oil industries that add value to the economy,” George Agajanian, the real estate appraisal division manager at the Kuwait International Bank, told OBG. “This means expanding the infrastructure of ports and airports to stimulate commerce, and building clusters of schools and hospitals that, in the future, can spur innovation and carry out world-class research.”

An important part of this diversification drive is the incorporation of the private sector into the overall economy, both to help with financing and facilitate knowledge transfer. To that end, the government has set up the Partnership Technical Bureau (PTB), which serves as a central body to list tenders and liaise between the government and private investors.

BOUBYAN ISLAND: Perhaps the most ambitious of the NDP’s current investments in infrastructure is the Boubyan Island development. In April 2011a ceremonial groundbreaking marked the first of five planned phases of construction for the port facility, which will include a new deep-water channel and 60 berths capable of handling 2.5m containers per year. A consortium of the Kuwait-based Kharafi Group and South Korea’s Hyundai were awarded the contract for the first phase and are expected to have the first four berths up and running by 2014. Plans for the island’s future include road and rail connections, a major tourist development and possibly an airport. Boubyan’s port will provide a much-desired centre for trade in the underserved northern tip of the Gulf. The government, which will be financing the project itself, has allocated approximately KD45m ($162.2m) for a rail connection to the capital, another KD19m ($68.5m) for design works, and a further KD35m ($126.2m) for roads.

The government considers Boubyan a central part of its overall development strategy, as it will help promote economic activity outside the capital area. However, its location has also provoked backlash from the Iraqi government, which claims that the port will block its own planned port development nearby. Yet with political tension within Iraq so far delaying progress on Iraq’s port, and high demand for a hub to receive traffic dedicated to the redevelopment of Iraq, Kuwait looks unlikely to alter its Boubyan plans.

AIRPORT EXPANSION: Work is well under way on the expansion of Kuwait International Airport. The main contract for infrastructure works, including roads, runway and aircraft hangars, was awarded to Alghanim International General Trading and Contracting Company in 2009, and is due to be completed in 2011. Contracts for the second phase of development, which will include government and Customs facilities, a mall and communications headquarters, is expected by the first half of 2012. The contract for the final phase, which will see the construction of a Foster + Partners-designed terminal building, is expected in 2012-13.

The airport expansion will more than double annual passenger capacity, from 8m currently to approximately 20m on completion. In addition, the plans include an ambitious new facility for air freight handling. Cargo City, as the development is called, is intended to provide an alternative to established air cargo centres in the southern Gulf, saving incoming carriers up to an hour’s worth of flight time and fuel. A tender was issued in June 2011 for the construction of a third runway, which will form the base for Cargo City.

RAIL AND UTILITIES: The idea of a metro in Kuwait City was first mooted in the 1970s, and 2010 saw the long-awaited award of a contract to carry out a detailed feasibility study of the project. Headed by the UK’s Atkins and US’s Ernst & Young, the study is expected to finish in 2011, with the initial construction tender also expected to be awarded before the end of the year.

In addition to reducing traffic within the city, the metro would also help kick-start Kuwait’s national rail project, part of the planned GCC rail network that is due to stretch some 2200 km from Kuwait’s border with Iraq to Oman’s border with Yemen.

The PTB also called for proposals to build the country’s first independent water and power plant (IWPP) in March 2011. The plant, to be constructed at Al Zour North, will generate 1500 MW and 463.7m litres of water per day. It will represent the first step in the privatisation, for the moment only partial, of the utilities sector. The construction of new power supply is indispensible as Kuwait’s energy needs continue to grow. The country plans to double existing power capacity to reach more than 20,000 MW by 2015. A preferred bidder had yet to be named as of February 2012.

HEALTH CARE: The country’s health care sector is also due to undergo a partial privatisation with the formation of the Kuwait Health Assurance Company (KHAC). As part of the NDP, the company will begin by providing health care services to expatriates through a dedicated system of hospitals and clinics, thus shifting the burden away from public hospitals.

As with the IWPP, the government will retain a 24% share through the Kuwait Investment Authority (KIA), a strategic investor is expected to carry a 26% share, and the remaining 50% will be offered to the public. Construction on the company’s three hospitals and 15 primary care clinics is expected to begin in 2012, assuming a strategic investor can be found.

In addition to the KHAC hospitals, the NDP allocates funds for the construction of eight new hospitals that will be overseen by the Ministry of Public Works. The first of these, the KD304m ($1.1bn) Jaber Al Ahmad Al Jaber Al Sabah Hospital in Surra, is currently under construction and should be completed by the end of 2012.

CONSTRAINTS: Individually, these infrastructural developments are each important contributors, both to their sector and to Kuwait’s overall competitiveness. Taken together, they have the capacity to transform the ease of doing business in country. However, important limitations remain. Kuwait’s Customs procedures remain lengthy and complicated, and will need to be amended if the country wishes to draw traffic away from more established centres in the region.

Furthermore, political tension is often blamed for delaying development projects, usually due to parliament refusing to approve financing for contracts it deems too expensive or otherwise non-competitive.

Fortunately, Kuwait’s government seems to be getting better at convincing parliament that continued investment in infrastructure is a good use of the country’s resources. The first year since the passage of the NDP has seen work move forward on the airport, rail and Boubyan projects. If this trend continues in the coming years, the country’s aims of diversifying its economy and becoming the preeminent centre for trade for the northern Gulf should be well within its reach.