Developing Kuwait's export products and improving investment legislation for industry

Economic diversification is at the heart of Kuwait’s long-term development strategy, as is establishing the country as a gateway to the northern Gulf and Middle East. The industrial sector has a central role to play in this, as the state looks to develop export-oriented businesses that can supplement hydrocarbons income and broaden the revenue base. Under the Kuwait Development Plan (KDP) 2015-20, which lays out a strategy for large-scale investments in infrastructure and energy, and includes a strong emphasis on private sector involvement, the government aims to raise the non-oil sectors’ contribution to GDP to 64% in 2015-20, up from an average of 45.1% in 2010-13.

Strong Base

The chemicals and particularly petrochemicals sector is already strong in Kuwait and is expected to raise output strongly in the coming years, leveraging the country’s wealth of resources and a wave of investments. Other industries with particular potential include construction materials, demand for which is rising as Kuwait ramps up infrastructure projects, and food, where domestic demand as well as the country’s strategic location are important upsides. A new emphasis on attracting foreign and private investment, including regulatory reform, may start to ease some historical constraints on Kuwaiti manufacturers.

Important Contributor

While Kuwait’s manufacturing sector is not as large as that of some of its neighbours – partly due to a relatively small domestic market – industry is a vital contributor to the economy as a magnet for investment and a source of non-oil export earnings.

While mineral fuels, oils and related products are overwhelmingly Kuwait’s largest export earners, manufactured goods bring Kuwait billions of dollars a year. Chemicals are the country’s second-biggest export earner, generating $1.71bn in 2014, according to the 2015 “Investment Climate in Arab Countries” report published by The Arab Investment and Export Credit Guarantee Corporation (Dhaman), a regional supranational organisation, using data from the International Trade Centre, a joint agency of the World Trade Organisation and UN. Plastics were the third-most-important generator of export income, bringing in $1.09bn, followed by vehicles (excluding railway and tramway vehicles) at $1.02bn, fertilisers ($329m), machinery ($294m), iron and steel ($201m), and electrical and electronic equipment ($172m).

In the first quarter of 2016 organic chemicals remained the state’s second-largest export earner, accounting for 2.7% of total export income, after mineral fuels and oils with 87.1%, according to the Central Statistical Bureau.

In the period from January 2003 to May 2015, the chemicals industry was Kuwait’s fourth-largest recipient of inward investment, attracting $1.79bn, or 16% of the total for the period, in eight projects. Consumer products saw investment of $289m, textiles $263m, and food and tobacco $244m, according to the Dhaman report.

Competitive Advantages

Kuwait has a number of competitive advantages as a manufacturing centre. Its location at the top of the Gulf places it close to some of the biggest markets in the Middle East, with easy access to the other GCC member states, and at the centre of a region that lies between the wealthy developed markets of Europe and the fast-growing emerging economies of Africa and Asia. The lifting of international trade sanctions on Iran following a deal in 2015 is expected to boost trade between the GCC and Iran, which could particularly benefit Kuwait, given its proximity to the Islamic republic and its plans to develop “gateway” economic zones as a centre of Gulf trade.

The state’s large capital base makes access to financing for industrial development more straightforward than in many other countries, particularly given the government’s commitment to supporting the manufacturing industry.

The state is also keen to attract more private investment into the sector. Kuwait’s ample oil and gas reserves also provide low-cost feedstock and energy for industry, an all-important advantage at a time of slower global economic growth, with consumers seeking better value across the board.

As one of the world’s wealthiest countries per capita, and with 25% of the population under the age of 15, Kuwait has a small but fast-growing and highly affluent domestic market that manufacturers can leverage. It also has political stability, which is particularly valuable at a time when parts of the MENA region have been affected by social and political turmoil. The country’s sound macroeconomic fundamentals and political stability support its excellent international credit ratings. In May 2016 Moody’s Investor Services confirmed Kuwait’s Aa2 sovereign rating, following a similar decision by Standard and Poor’s in February.

Vision 2035 

The government’s industrial development strategy is guided by the over-arching Kuwait Vision 2035 economic development plan, which aims to reduce the country’s reliance on hydrocarbons earnings through economic diversification. Kuwait Vision 2035 sets out plans for extensive investments, as well as social and economic reforms, with the aim of developing the country’s role as a regional centre for trade, financial services and other businesses.

The wide-ranging document covers areas including education, health care, transport infrastructure, and the establishment of industrial zones and business parks, with the aim of catalysing sustainable long-term growth in a broad range of sectors, while promoting social development and generating jobs for Kuwait’s growing population.

The strategy envisages substantial government investments, but an emphasis is put on encouraging the growth of the private sector, which is expected to play an increasingly important economic role. The vision likewise emphasises skills development and training, as well as improving public administration and related processes to make it more efficient, transparent and accountable.

Development Plans 

Central to the execution of Kuwait Vision 2035 is a series of development plans put in place by the government, each entailing multibillion-dollar investment programmes funnelling funds to key projects. These benefit the Kuwaiti manufacturing sector in several ways: by boosting demand for its output, including building materials and chemicals; by enhancing infrastructure to the benefit of manufacturers, particularly those importing and exporting; and by stimulating broader economic growth.

Kuwait’s National Development Plan (NDP), launched in 2010, entailed an investment package worth $108bn between 2010 and 2014. Launched shortly after the global financial crisis, the NDP was partly intended as a stimulus package to keep Kuwait’s economy and important non-oil sectors moving forwards at a time of international uncertainty. It leveraged lower global commodity prices to push infrastructure investments at a considerably lower cost than would have been possible in the mid-2000s, when an oil boom and the fall in the dollar led to soaring prices in the region. These projects will help boost Kuwait’s competitive advantages as an exporter and a regional trading centre, directly benefitting the manufacturing sector.

A number of long-term transportation infrastructure upgrades were outlined under the NDP, including $1.2bn for Mubarak Al Kabeer Port on Boubyan Island, located off Kuwait’s north coast, on which construction is ongoing, as well as the expansion of Kuwait International Airport (KIA) to raise its capacity from 9m to 25m passengers annually by early next decade, with an eye to scaling to some 50m passengers a year in the long term.

In May 2016 Turkey’s Limak Construction signed a contract to build a new terminal at KIA after its $4.34bn bid was accepted. The sum is indicative of the scale of the project, which is expected to take six years to complete. Projects like this can also be a boon for the Kuwaiti building materials and engineering sectors, with the new terminal’s construction expected to use more than 1m cu metres of concrete and 100,000 tonnes of steel.

Other major projects in the NDP – some still being delivered – include a large-scale house building programme to deliver up to 70,000 new homes, new roads and nine new hospitals.

KDP 2015-20

In 2015 the NDP was supplemented by the KDP 2015-20, which is set to deliver more than 500 projects in a wide range of sectors, including transport, utilities and energy.

The KDP aims to accelerate the rate of private sector growth in particular, taking its contribution to GDP from an average of 26.4% in 2010-13 to 41.9% in 2015-20 – an ambitious target. In the same period, the government aims to increase the proportion of Kuwaitis in the private sector workforce from 6.8% to 8.2%. In both cases, private investment in high-value and labour-intensive industries can play an important role.

The KDP takes on many projects that were not fully implemented in the NDP, as well as adding nearly 100 more. The plan puts a new emphasis on public-private partnerships (PPPs) to deliver projects worth an estimated KD8bn ($26.5bn), according to international consultancy Ventures Onsite. This follows on from the revised PPP Law of 2014, which streamlines processes governing PPPs and is intended to make such partnerships more attractive for private investors. Major projects include a metro system and a new railway network which will link with a broader GCC network. Investments in oil and gas are also at the heart of the plan, bolstering long-term supply for manufacturing industries.

Government Role

A range of government and state-linked bodies are responsible for overseeing and promoting industrial development, and foreign investors and companies with operations in Kuwait are likely to interact with several of them. The Ministry of Industry and Commerce is the top-tier government department with sector oversight, including company registration. The state-owned Industrial Bank of Kuwait specialises in financing industrial development in the country, while the Public Authority for Industry promotes the expansion and diversification of Kuwait’s industrial base, particularly in strategic industries.

Investment Promotion

Kuwait Direct Investment Promotion Authority (KDIPA) is an independent but government-led agency with responsibility for attracting and supporting foreign direct investment (FDI) in the country. Law No. 116 of 2013, which established the KDIPA, also enhanced regulations governing FDI, including establishing a one-stop-shop process, enhancing transparency, introducing new legal forms and instituting a “negative list” approach to ease barriers to investment.

KDIPA has four main goals: economic diversification, technology transfer, job creation and training for nationals, and supporting the domestic private sector with a focus on small and medium-sized enterprises. In each case, there is a strong strategic fit with manufacturing investors.

The authority’s responsibilities are manifold. Beyond attracting initial investment and promoting Kuwait, they include licensing investors, providing investor services, managing economic zones, and working on streamlining the business environment and enhancing competitiveness.

Business Environment

A range of incentives are available to foreign investors. These include up to 100% foreign ownership of enterprises, tax holidays of up to 10 years, Customs duties exemptions, land facilitation and access to foreign labour. Free transfer of foreign capital, protection from expropriation, transfer of ownership and project information protection are all guaranteed for investors.

Recent reforms, including to the FDI and PPP laws, have considerably improved the state’s regulatory environment for foreign investors. However, there is still considerable room for development. Kuwait ranks 101st out of 189 countries in the “Doing Business 2016” report published by the World Bank Group. The annual publication is considered one of the most reliable assessments of countries’ business environments. The state scored 60.17 on the “distance to frontier” scale of 0 to 100 (measuring overall performance) in the 2016 report. This is above the 56.28 average for the MENA region, but below most of its Gulf peers. Regional reform leader Bahrain scored 66.81.

Rankings 

On one measure in the World Bank’s rankings, the ease of paying taxes, Kuwait places highly, at 11th worldwide, thanks to its straightforward system and low corporate tax rate. It performs respectably on enforcing contracts, ranking 58th, protecting minority investors (66th) and registering property (68th). In other areas, the country has room for improvement.

Authorities, both local and foreign, recognise this. “Kuwait is perceived as a difficult place in which to invest and do business, and challenges to operating in the country remain,” noted the US Department of State in its “Kuwait Investment Climate Statement 2015”. It cited challenges including implementation of FDI legislation, limits on foreign investment in sectors such as petroleum and real estate, bureaucratic hurdles, and a close-knit business culture unfamiliar to many outsiders. Adnan Al Mousa, general manager of Arabian Beverage Company, a drinks manufacturer, notes similar hurdles: “Kuwait does have inefficiencies and bureaucracy that can hamper the supply chain,” he told OBG. “This includes administrative systems such as documentation, clearing and licensing, and can slow movement of goods and the supply pipeline.”

Zones 

With Kuwait’s government making attracting investment and economic diversification a priority, and KDIPA now driving change, further improvements to the business environment are likely to take place in the near future.

KDIPA is also pushing forward with the development of three economic zones that it hopes will attract investment and “create a commercial gateway between Kuwait and the Gulf states”.

In May 2016 Kuwait Municipal Council approved the adoption of a feasibility study prepared by the authority on the establishment of economic zones in Al Abdali, Al Naim and Al Wafrah, located respectively to the north, west and south of Kuwait City. Each of these economic zones will specialise in certain sectors. Al Abdali, lying near Kuwait’s planned railway line linking to a broader Gulf network, would focus on segments including petroleum products and coke (used in steel-making). Al Naim will focus on both basic industries producing at low cost, and more high-tech manufacturing, including renewable energy technology. Al Wafra, which is located on the Saudi border, is intended to support cross-border trade and supply major urban centres (the Saudi cities of Jubail, Dammam and Hafir Al Batin are all within 400 km). It could therefore become a centre for fast-moving consumer goods (FMCGs). The KDIPA’s department of economic zones was in the process of finalising the design plans and project roadmaps for the three developments as of mid-2016.

Petrochemicals 

Kuwait’s largest manufacturing industry is the chemicals segment, with petrochemicals in particular an important contributor, benefitting from abundant and low-cost feedstock. Major products of the segment include polyethylene, urea, ethylene, ethylene glycol and chemical catalysts. The state’s main export markets for chemicals are in Asia, including China and India, and the state’s strong trade relationships with these sizeable and fast-growing emerging markets should help secure a solid growth path for the sector in the medium term.

Leading players including the Petrochemical Industries Company (PIC), a subsidiary of Kuwait Petroleum Corporation, the national oil company, are investing to boost capacity. PIC’s proposed Olefins III and second aromatics plants are expected to raise potential production to 10.3m tonnes on completion, from 7.6m tonnes, though they remain on the drawing board for the time being.

The new Al Zour refinery was initiated in 2015 and is due for completion in 2019, while upgrades to both the Mina Abdullah and Mina Al Ahmadi refineries should lift refining capacity from 936,000 barrels per day (bpd) to more than 1.5m bpd, strengthening supply for the Kuwaiti petrochemicals sector and improving its competitiveness, according to KDIPA.

KDIPA aims to see petrochemicals output raised from 7.57m tonnes per annum (tpa) in 2014 to 10.54m tpa in 2019. Rising domestic consumption from other manufacturing industries and demand from Asia should help absorb the additional production, while increasing use of naphtha is expected to ease supply-side concerns (see analysis).

Construction Materials

The construction materials manufacturing sector should also have a bright future as the government pushes on with big-ticket projects such as the expansion of KIA, the $10bn Kuwait National Rail Road, and the $7bn metro rail system, as well as new utilities, housing, hospitals and schools. Despite the fall in the oil price, the government has continued to commit to new projects, with KD1.5bn ($5bn) of contracts awarded in the first quarter of 2016 alone.

The state is home to some sizeable construction materials manufacturers, including Kuwait Cement Company (KCC), the country’s second-biggest private sector manufacturer after the diversified Gulf Cable and Electrical Industries Company. The government has a stake of just under 30% held both directly and indirectly in KCC, which started production in 1972 and today has an annual capacity of more than 5m tonnes a year.

Kuwait-based Kirby Building Systems, a subsidiary of local conglomerate Al Ghanim Industries, is one of the world’s largest manufacturers of pre-engineered steel buildings, having pioneered the technology in the Middle East in the mid-1970s. It has worked on factories, warehouses, transport infrastructure, hospitals, supermarkets and stadia in the Middle East, Asia and Africa in particular. With plants in Kuwait, the UAE, India and Vietnam, Kirby Building Systems has a production capacity of approximately 400,000m tonnes a year, including a 100,000m tonnes at Mina Abdullah.

FMCG Market 

While global markets have been roiled by a range of crises in recent years, investors have been drawn to the FMCG sector, which tends to be less volatile and grow more steadily thanks to the high turnover rates of the segment’s products.

With its high per-capita income and growing population, Kuwait’s food segment is particularly promising. The country had the highest food consumption per head in the GCC in 2012, at 867.5 kg a year, according to the “GCC Food Industry” report by regional investment bank Alpen Capital published in 2015. The report showed that while Kuwait accounted for 8% of the region’s food consumption, it had only 5% of its production, and the state meets only 15.6% of its food needs through domestic output, indicating scope for boosting local production to meet domestic demand.

Population growth, urbanisation, developing consumer tastes and the expansion of the hospitality and tourism sectors (largely domestic, business and transit) have all contributed to the growth in food sales, which reached $9.5bn in 2014, according to Alpen Capital. The bank expects this trend to continue, forecasting that food consumption will grow by an annual average of 3.1% per year between 2014 and 2019 to reach 4m tonnes, with demand for meat and fruit particularly strong.

Domestic FMCG manufacturers are also looking overseas for growth opportunities. According to Majid M Abdoh, CEO of Majdi Foods a producer of spices, dry fruits, honey, oils, pulses, beans and herbs, “The regional market for dry foods is highly competitive, therefore many are seeking growth opportunities further afield.”

While government incentives for agriculture are expected to boost domestic supply of inputs, Kuwait’s arid climate has led government agencies and private companies such as Kuwait-based regional giant Americana to invest abroad to enhance domestic and regional food security. Combined with rising demand at home, the state’s aim of developing value-added industry within its borders should logically lead to the expansion of the domestic food processing sector.

Outlook

Kuwait’s industrial base did not develop as strongly as some of its neighbours until recent years. This is largely due to the market’s relatively small size, though red tape has also played a part. However, with the formation of KDIPA and new FDI and PPP laws, and a wave of government investment, Kuwait has made a clear statement of intent.

With financial and natural resources as well as geographical location on its side, the country has a great deal of potential that it can leverage through the development of strategic industries in the state’s new economic zones. The domestic market, though not very populous, is highly affluent and growing steadily. While the drop in global oil prices remains a downside risk for investment, it also creates the clearest incentive for continuing to develop and broaden the manufacturing sector.