Kuwait's infrastructure developing in line with national economic strategy

The Kuwaiti government has energised the national economy by outlining major investments across strategic sectors under the Kuwait Development Plan (KDP), which runs from 2015 to 2020. Leveraging the country’s strategic location at the head of the Gulf, the plan will direct major investments into transport and logistics infrastructure and services with the goal of establishing Kuwait as a commercial hub for the northern Gulf. Enhancing sea and air links to improve connectivity with the region and beyond is a major priority for the state, with several significant projects planned to develop seaports, airports, and road and rail networks.

Background

While most countries in the GCC have similar plans to use transport and trade to drive economic growth, Kuwait has great advantages given its proximity to markets in the largest and most populous countries in the Middle East. Iraq, Iran and Saudi Arabia alone have a combined population of 140m people and an economic output of more than $1.3trn in 2013, according to the World Bank’s World Development Indicators. Kuwait’s transport and logistics sector could play a critical role in serving these markets.

In addition to public investments in transport and logistics infrastructure, private firms are playing a growing role in many segments, ranging from airlines and bus services to commercial logistics. Several local firms are also expanding their footprint by investing abroad, particularly in niche markets outside of the GCC region.

Despite the positive outlook, Kuwait’s transport and logistics industry faces some challenges going forward. The biggest of these come from regional competition as governments in neighbouring GCC countries fast-track investments in the transport and logistics sector. In contrast, Kuwait has faced major delays in implementing previous national development and investment plans, which could hamper growth as the country loses ground to competition in the longer term. Nonetheless, recent indicators suggest that the government is actively tackling these issues, with a number of projects approved and contracted in the first half of 2015.

Spending

A significant milestone was reached in 2014, with projects worth an estimated $38bn awarded over the year, according to business media outlet Trade Arabia. The scale of activity has made Kuwait’s project market one of the fastest growing in the region, and this momentum has been important for the country as it seeks to implement much-needed transport and logistics projects in 2015 and beyond.

Going forward, the government has outlined an $80bn budget for 2015, of which an estimated $8.2bn has been allocated for major construction and transport projects, according to data published by Construction Week. The budget covers the 2015/16 financial year running from April 2015 to March 2016 and is based on an estimated oil price of around $45 per barrel, with revenues projected to reach some KD19bn ($65.46bn), according to the Ministry of Finance. Lower oil prices would adversely affect these revenues, but the government has indicated that the deficit would not curtail investment over the short term.

The annual budget is in line with the KDP, which was approved by the parliament in January 2015. The national strategy seeks to implement a number of reforms to spur development and revive major projects sidelined over the last several years. The government has announced plans to spend approximately $116bn on projects over the next five years. The spending will cover more than 523 projects across the country, according to press statements by the parliament’s financial and economic affairs committee secretary, and will include KD2.3bn ($7.92bn) for the development of Mubarak Al Kabeer (MAK) Port, KD1.7bn ($5.86bn) for the international airport expansion project and KD5.6bn ($19.29bn) for the metro project.

Air Links

While originally a regional leader, Kuwait’s aviation sector is still in early stages of development compared with emerging regional and global hubs in the Middle East. Investment to expand passenger and cargo capacity at the country’s main airport have been gradual; however, the approval of a mega-project to upgrade the airport in 2014 should support the future growth of the sector.

Kuwait International Airport (KIA), which also serves as a military facility, was built in 1927 as a refuelling stop for British aircraft. The discovery of oil led to decades of growth and expansion for the airport, although infrastructure damage related to the Gulf War in 1990-91, estimated to be in the range of $330m, affected development. A major $60m deal in 1999 led to the expansion of passenger facilities with the construction of a 32,000-sq-metre terminal building. A new terminal featuring 64 check-in desks and modern baggage-handling systems was built in 2008 under a second phase of development. The facilities, designed to deal with approximately 7m passengers annually, quickly exceeded capacity, however. According to data from “Annual Statistics Bulletin of Transport 2013” put out by the Kuwait Central Statistics Bureau (KCSB), the latest available figures at the time of writing, more than 9.38m passengers travelled through the airport in 2013, up from 4.76m just 10 years earlier in 2004. The airport also handled 75,820 flights in 2013.

The EU-US Open Skies Agreement, unveiled in 2005, has been a major catalyst for growth and competition. While rapid expansion has been positive for the local aviation market, Kuwait’s infrastructure has also limited the overall rate of expansion. The tendering process in 2014 to upgrade the airport was expected to help reduce pressure in the future. However, while the Central Tenders Committee announced the winning consortium of local construction firm Kharafi National and Limak Holding from Turkey in November 2014, this bid was cancelled in early 2015. The Kuwaiti government is now working to determine the best way to move forward, and is considering expanding the airport through a build-own-transfer scheme under the new public-private partnership law, introduced in 2014.

Carriers

There are currently two main players in the local aviation market. Kuwait Airways, the national carrier, was founded in 1954 as Kuwait National Airways Company, with a 25% government stake. It was renamed Kuwait Airways Corporation when the government doubled its holding in the company the following year.

Kuwait Airways has invested heavily in redeveloping its operations since 1990, as a number of its aircraft and other assets were destroyed during the Gulf War of 1990-91. Ticket sales and revenues have grown rapidly in recent years. According to data from the airline, direct ticket sales excluding online sales grew from 2.79m in 2013 to more than 3m in 2014. Concurrently, revenues grew by 12% from KD366m ($1.26bn) in 2013 to over KD410m ($1.41bn) in 2014.

Despite the uptick in overall revenues, Kuwait Airways’ market share has fallen from 50% in 2005 to 23% in 2015, reflecting changes brought about by the open skies deal. However, the airline has ambitious plans to expand and upgrade its fleet and expects to add 22 aircraft by 2017. Contracts with Airbus and Boeing will include the purchase of 15 Airbus A320s and the lease of 20 Airbus A350-900s to cater primarily to its core regional markets, and a further 10 Boeing 777ERs for its long-haul routes to New York and Los Angeles. The government is supporting the airline through public sector investments, soft loans and guarantees for its fleet additions. In addition, the airline benefits from having highly coveted airport slots in some of its biggest markets, including London Heathrow, due to its long-standing operations in the region.

Privatisation

In parallel with efforts to develop its main operations, Kuwait Airways is also working with the government to privatise its ownership. The process was started in 2008 and has progressed slowly. Most recently, in May 2015, the CEO of Kuwait Airways, Rasha Al Roumi, met with the country’s Emir, Sheikh Sabah Al Ahmed Al Jaber Al Sabah, to present the airline’s new development plan. Kuwait Airways is one of the first major state-owned entities to be privatised in the country. One critical issue still being discussed is staffing. Existing laws require specific protections for national staff, which complicates the shift to private ownership. However, the government has recently put in place a number of reforms to help ease the process, including allowing transfers into other government agencies.

Under the proposed privatisation plan, the state would retain a 20% stake in the company, while 35% of the shares would be sold to private sector investors, 40% to citizens of Kuwait and the remaining 5% retained for staff of the airline. In May 2015 the low-cost carrier Jazeera Airways submitted a letter of intent to acquire the full 35% stake in Kuwait Airways, though as yet no valuation of the shares has been released. This stake represents the maximum amount allowed by a private investor under Kuwait’s privatisation law.

Making the Cut

Kuwait has also seen the rise of a major private operator following the liberalisation of the airline industry in 2003. Jazeera Airways, launched in 2004, became one of the first fully privatised airlines to operate in the Middle East and is proving to be a major competitor in the local market. The airline was launched via an initial public offering (IPO) in June 2004, raising more than $34m. The firm subsequently bought its first Airbus A320 and inaugurated operations with a maiden flight to Dubai in 2005.

Key to its success, the airline was one of the first in the Middle East to embrace a new business model that did not rely entirely on ticket agents. Developing a strong call centre and online presence, it has been able to direct more than 42% of its ticket sales away from the more expensive agent channel. The airline also focuses almost exclusively on destinations that are within two hours of Kuwait City, enabling it to maximise aircraft utilisation and to reduce turnaround times.

Jazeera Airways reports that the company has maintained profitability for 17 quarters in a row. According to its financial reports, revenues grew more than 15% year-on-year between the third quarter of 2013 and the third quarter of 2014, from KD20m ($68.9m) to more than KD23m ($79.24m). Operating profit over the same period grew even faster, from KD8.7m ($29.97m) to over KD10.3m ($35.49m). Jazeera Airways currently operates seven Airbus A320 aircraft.

The company has rapidly grown to capture more than 10% of the passenger traffic in Kuwait, transporting 1.1m-plus passengers in 2014 alone. According to financial services group Alpen Capital, the airline has carried more than 28m passengers since it first launched operations. It is now the second-biggest carrier in Kuwait, ahead of regional competitors such as Emirates, Qatar Airways and flydubai.

At the same time, another airline launched in Kuwait has fared less well. Wataniya Airways – which was the second airline to receive a licence after deregulation in 2003 – started off strongly in 2009, carrying more than 250,000 passengers during its first year of operations, according to Arabian Business.

Wataniya marketed itself as a premium airline offering only business and premium economy seats. Although its successful IPO and growth over the first year boded well for the company, high costs and increasing competition globally prompted it to halt operations in March 2011. There are, however, indications that the company will resume operations in 2015 following a major fund raising initiative in 2014. According to Swiss airline intelligence provider ch-aviation, Wataniya is currently in the process of raising KD24m ($82.7m), with plans to lease two aircraft in 2015.

The total number of airlines operating in Kuwait has fluctuated in recent years, from 74 in 2011 to 89 in 2012 before falling to 67 in 2013, according to the KCSB.

Cargo

Air freight movements in Kuwait have followed a similar trend to passenger traffic. According to the KCSB, freight shipments at KIA have grown by 22% over the last decade, from under 150m tonnes to more than 175m tonnes between 2003 and 2013. Kuwait Airways controls a large portion of this business, making up 72.5m tonnes of the total market. Jazeera Cargo is a far smaller player, accounting for just 2.5m tonnes of freight in 2014, according to data from Kuwait Airways.

Ocean Bound

The country’s ports and other sea transport infrastructure are another critical component of the government’s investment strategy under the KDP. Kuwait currently operates two dry cargo ports in Shuwaikh and Shuaiba, and three oil terminals at Mina Al Ahmadi, Mina Al Shuaiba and Mina Al Abdullah.

Shuaiba and Shuwaikh serve as the main commercial ports for Kuwait, handling an estimated 98% of exports in 2012, according to the KCSB. Shuwaikh is the main commercial port supplying the country. It houses 21 deepwater berths in a 1.2m-sq-metre water basin and has a 4.3-km channel that enables ships to enter the harbour safely. The facilities can handle merchant ships, fishing trawlers and passenger vessels.

Shuaiba Port, which primarily serves Shuaiba Industrial Area, handles imports of raw materials, equipment and machinery as well as exports from the petrochemicals and oil refining, gas liquefaction, cement and fish processing industries. The port is home to 20 commercial and container berths.

Port Expansion

The government has ambitious plans to expand this capacity by developing the new MAK port facility on Boubyan Island, located just off the coast from Kuwait City. While the port has faced a series of delays, it now looks to be on track under the KDP. The $1.2bn facility is still in the early stages of design and implementation, but is expected to serve as the major sea link into Kuwait. The port is to operate with an initial annual capacity of 1.8m containers managed through 24 berths. Land reclamation has begun for the project, though the initial target date of 2016 is likely to change as infrastructure plans are implemented.

The new port will significantly boost the country’s port capacity as well as position Kuwait as a major gateway for trade into Iraq, Iran and northern areas of Saudi Arabia. However, there are a number of other regional developments also vying for trade through these channels. MAK Port’s initial development plans, for example, have already been scaled down due to concerns voiced by Baghdad because the new facility will share access routes to Iraq’s own port facilities. Even so, it is likely that the port will become a strong competitor on regional trade routes when it is completed.

Road

While port and airport upgrades will enhance Kuwait’s transport links with regional and international trade partners, the government is also investing in local projects to improve connectivity across the country. The Jahra Road Development Project is one of the most visible of these initiatives. The project, estimated at KD264m ($909.53m), is one of Kuwait’s biggest infrastructure projects currently under development. The Ministry of Public Works sought a joint venture between Louis Berger and Pan Arab Consulting Engineers to serve as the project designers, while the Arab Contractors Company is the main contractor developing the infrastructure. The project was started in 2010 and is slated for completion by September 2015.

In parallel, the government is also developing the Sheikh Jaber Causeway, which is reported to be on track for completion in 2018. The causeway involves developing a 37.5-km sea-bridge between Shuwaikh and Subiyah, and a shorter 16-km sea-bridge between Shuwaikh and Doha. The $2.6bn project commenced in 2012. According to Construction Weekly, construction of the bridge is currently being handled by Abdullah Al Hamad Al Sagar and Brothers Company and Hyundai Engineering and Construction Company. The causeway is designed to eventually link the proposed $94bn Silk City project with Kuwait City.

Public Transport

The public transport network consists mainly of an integrated bus network. Kuwait Public Transport Company (KPTC), owned by the Kuwait Investment Authority, is the main player. KPTC was established in 1962 with 25 routes across the city. The firm’s passenger volumes have fallen from a peak of 121m in 1989 to 50m passengers across 40 routes in 2014. This represents roughly 50% of the total bus market in Kuwait. CityBus and KGL are the other two players, with the former controlling 40% of the market and the latter 10%, according to KPTC. The firm is set to expand its fleet of 300 buses, with plans to purchase 550 new buses over the next two years.

In a bid to expand the public transport network, the KDP also aims to develop the country’s rail and metro network. The metro project is expected to cost $20bn and will be constructed on a build-operate-transfer basis. Phase I of the project is anticipated to be complete by 2017, though delays in launching the project, initially planned for 2013, may extend this timeframe. The final project phase will add more than 160 km of metro rail, with a total of 69 stations across Kuwait City.

In parallel, the government is pushing ahead with plans to develop a national railway, which is expected to eventually link up with the larger GCC rail network. Construction Weekly reports that the government is aiming to lay more than 500 km of track by 2018.

Outlook

The local transport sector provides ample opportunities for the country to diversify its economy. While current infrastructure capacity may restrict growth, Kuwait has several large-scale transport infrastructure projects in the pipeline to address this. Implementation is likely to be a challenge given the raft of projects across the GCC region, although the government’s five-year development plan outlines a strategy to meet its goals. When complete, these projects will enhance the country’s trade links and help establish Kuwait as an important regional centre for commerce.