Large scale construction projects in Kuwait developed in partnership with private sector

Kuwait’s construction sector has witnessed significant growth over the last year, as the government has approved a number of major infrastructure and development projects across key sectors. While there are concerns that some projects may be delayed, the government has taken a number of steps to help assure players in the construction industry that this wave of momentum will be sustained into 2015 and beyond.

STRENGTHENING THE PIPELINE: In July 2014 the government approved a new Public-Private Partnership (PPP) Law, which is expected to serve as the basis for the country’s development programme. Following the approval of the law, which lays out the institutional arrangements for project development in Kuwait, the government unveiled the draft Kuwait Development Plan for 2015-20. The KD34.15bn ($117.7bn), strategy, approved in February 2015, emphasises the government’s commitment to maintaining capital investments to develop the country. This commitment is further emphasised in the country’s budget for FY2015, which anticipates total spending of KD19.07bn ($64.6bn). While significantly lower than the budget for FY2014, which stood at over KD23bn ($79.2bn), the government has pledged to cut waste, cap government spending and reduce non-essential expenditures, while also continuing to finance infrastructure projects.

Both the Kuwait Development Plan and the FY2015 budget seek to revive the pipeline of projects that have been stalled for several years and to develop new ones through the five-year period. The Ministry of Finance has indicated that the FY2015 budget will dedicate an estimated $7.2bn for the construction sector. However, this figure does not include projects that will be tendered for construction further down the line.

The development plan identifies more than 500 projects across all sectors, including transport, infrastructure, utilities and energy. The oil sector is one of the biggest benefactors of the renewed investment programme. The Kuwait National Petroleum Company (KNPC), for example, has indicated that it will invest $35bn on expanding oil and gas projects over the next five years and business intelligence publication MEED reports that the vast majority of this will be awarded in 2015, estimating that project contracts worth more than $21.5bn are likely to be issued through the year.

OIL & GAS OPPORTUNITIES: As of early 2015, a number of multi-billion-dollar contracts had already been awarded within the oil sector. Petrofac, an international oil and gas services provider, was awarded a $4bn contract for developing the first phase of Kuwait Oil Company’s (KOC’s) Lower Fars Heavy Oil Development Programme in January 2015. The project, which is located close to Kuwait’s northern border, was tendered as a single engineering, procurement and construction (EPC) contract to develop a main central processing facility and a 162-km pipeline to transport heavy crude from the facility to Kuwait’s South Tank Farm in Ahmadi. The project, which will eventually produce approximately 60,000 barrels of oil per day, is expected to be handed over to KOC within 52 months. Petrofac is leading a consortium that includes Greece-based Consolidated Contractors Company for the project.

KNPC has also awarded contracts as part of its $12bn Clean Fuels Project in 2015. The project is expected to expand Kuwait’s refining capacity by modernising its largest oil refineries complex – which consists of the Mina Al Ahmadi refinery and Mina Abdullah refinery – and building a greenfield refinery at Al Zour. In April 2014 KNPC awarded two Korean firms, GS Engineering & Construction and SK Engineering & Construction, the $4.82bn contract to upgrade the existing oil refineries. The oil major continued pushing the investment programme in 2015, accepting bids for components of the Al Zour greenfield refinery, which is expected to have a finished capacity of 615,000 barrels per day.

A consortium led by South Korea’s Hyundai Engineering Company is reported to have made the lowest bid of $1.54bn for the EPC contract in order to construct an export terminal, a wharf for small vessels and other marine facilities for the new refinery. KNPC has indicated that the plant, which will be one of the largest oil refining facilities globally, will support the country’s downstream strategy and serve as the prime supplier of feedstock for power plants in the country.

UTILITIES: Kuwait’s Ministry of Electricity and Water (MEW) is also pushing ahead with major plans to expand the country’s electricity and water production capacity. The country signed off on its first major PPP in 2014, awarding a consortium led by ENGIE (previously known as GDF Suez) with the contract to develop the Al Zour North integrated water and power plant (IWPP). The desalination plant will have a capacity of 107m imperial gallons per day (MIGD) of drinking water and 1500 MW of electricity, which will fulfil approximately 20% of the country’s water and 10% of the energy demand, according to the Japan Bank for International Cooperation, one of the financing partners for the project.

The IWPP contract is structured around a 40-year long-term energy conversion and water purchase agreement with the MEW, which is the country’s national power and water grid operator. The government is planning other utilities projects for 2015 and has invited bids for the first phase of the Al Khairan IWPP, which will have capacity of 1500 MW of power and 125 MIGD of desalinated water, and the second phase of the existing Al Zour North IWPP, which will add an additional 1500 MW of power capacity and 102 MIGD of water.

INFRASTRUCTURE: The most significant development in 2015 is the $20bn Kuwait Metropolitan Rapid Transit (KMRT) project. Feasibility studies for the project were awarded to a consortium of Al Dashti, INECO and the local Kuwait United Development group and were completed in May 2010. The Ministry of Communication has finalised the layout of the stations and the rail network, and the project is currently in the pre-tendering stage. The KMRT will be developed in five phases with construction expected to start in 2017.

The metro is the first transport PPP to be planned by the government. Other projects to be initiated include the 22.5-km, KD733m ($2.5bn) Al Ahmed Bridge and the country’s section of the broader $25bn GCC rail network. Plans to expand Kuwait International Airport will also move forward in 2015. The government is expected to re-tender the project after breaking it up into smaller packages for private contractors. Finally, several new contracts for roads and bridges will provide opportunities for Kuwaiti construction companies. In 2014 the government signed a KD169m ($582.2m) deal to build a causeway linking the Doha motorway to the broader $2.6bn Sheikh Jaber Al Ahmad Causeway.

OIL VOLATILITY: Despite government assurances there remains uncertainty about how the this project pipeline will be funded, as oil prices continue to hover around $60 per barrel. The FY2015 budget has already been cut since the first draft was released to reflect lower oil revenues. Total government income for the new budget is calculated at a price of $45 per barrel with an assumed oil output of 2.7m barrels per day. This projection cuts the expected revenues, which were initially calculated on an oil price of $75 per barrel, by almost half, dropping from KD20.07bn ($69.1bn) to KD12.05bn ($41.5bn), according to Arabian Business.

The breakeven price for the budget as it stands is $77 per barrel, according to the Ministry of Finance, which appears optimistic in the current climate. While the deficit is not a major issue for the country – which has half a trillion dollars invested through its sovereign wealth fund – the shrinking budget demonstrates pressure on government finances and on construction projects due to lower oil prices. However, the government has indicated that development projects will remain a priority in the new fiscal year and that any deficit will be covered by dipping into the general reserves or by tapping into local and foreign capital markets.

Indeed, there also remains concerns that the political turmoil that had halted progress on the project pipeline under the previous KD30bn ($103.4bn) fiveyear development plan could hamper growth going forward. However, the progress made in recent years to move projects ahead, combined with reforms in the business environment, is likely to help ensure that the construction market sustains a strong growth outlook.