Key industry infrastructure developments to support petrochemicals and manufacturing segments in Kuwait

As Kuwait tries to curb its dependency on hydrocarbons, which accounted for over 90% of state revenues in 2017, other industries are coming into focus. Excluding refined petroleum products and nuclear fuel, manufacturing industries’ contribution to GDP rose by 6.2% in 2017 to KD1.7bn ($5.6bn), according to the central bank. This figure has grown steadily from KD1.6bn ($5.3bn) in 2016, KD1.5bn ($4.9bn) in 2015 and KD1.4bn ($4.6bn) in 2014. Meanwhile, refined petroleum products and nuclear fuel’s portion of GDP expanded by 18% to KD1bn ($3.3bn) in 2017 from KD844.5m ($2.8bn) the year before. This compares to the 2015 and 2014 figures of KD927.7m ($3.1bn) and KD1.2bn ($3.9bn), respectively.

Much of this recent performance is due to implementation of the country’s national development plan, New Kuwait 2035, which prioritises infrastructure upgrades and economic diversification as part of 164 programmes, projects and initiatives that aim to transform the country into a centre of finance and industry. The strategy lays out ambitions of tripling foreign direct investment (FDI), developing $100bn worth of infrastructure through public-private partnerships (PPPs) and enhancing the country’s position as a global centre for petrochemicals production.

The FY 2018/19 budget allocated 17% for construction projects, which will cover a multitude of new roads, railways, refineries and airports in the development pipeline. Large-scale upgrades are being rolled out alongside reforms aimed at attracting FDI, and international competition for the tenders of several infrastructure projects is heating up. Opportunities are also emerging for a range of related industries, such as telecoms, fabric manufacturing, automation, facilities management and services providers.

Sector Structure

The Public Authority for Industry (PAI) is the primary sector regulator. Its mandate includes developing, promoting and supervising industrial activity, implementing national policies and strategies, and deepening cooperation with the GCC and other countries. Other key state institutions include the Kuwait Direct Investment Promotion Authority (KDIPA), which manages the country’s free trade zones and promotes investment. Financing for industrial sector development is driven by the Industrial Bank of Kuwait, which the government has a 49.11% stake in. Private sector players are represented by the Kuwait Chamber of Commerce and Industry, which represents and lobbies for the interests of industrialists; and the Kuwait Industries Union, a non-profit organisation representing around 300 industrial establishments operating in the country.

Macro Numbers

Total industrial investment in Kuwait in 2016 amounted to KD4.2bn ($13.9bn), according to latest available data from the PAI. The largest industrial segments by output were chemicals, metal products, petroleum products, coal, rubber and plastics. Chemicals production comprised a 24% share of the manufacturing sector in 2016, slightly below the GCC average of 28%. Kuwait produced 6% of the region’s chemicals output, compared to Saudi Arabia (67%), Qatar (12%) and the UAE (8%).

In April 2017 regional media reported that there were over $234bn worth of active construction projects under way in Kuwait, with a further $34bn worth in the design phase. This has created opportunities for local related industries, such as manufacturers of building materials and furniture. Real estate made up the largest portion of upcoming projects, accounting for 49% of the total, followed by oil and gas (22%), infrastructure (15%), and power and water utilities (6%). According to KDIPA data, there were plans for over 90,000 housing projects to be added to the market from 2015 and 2022.

There are several major Kuwaiti industrial companies, such as Kharafi Group, which is one of the largest players in the country. There are other local companies which meet the basic demands of the population, such as water bottling, electricity and food production. Key export-focused industries include leather tanning, paper, prefabricated steel buildings, electric cables and metal pipes. Most of Kuwait’s industrial machinery, food and manufacturing equipment, and consumer goods are imported.

Recent Performance

While industrial production fell by an estimated 1.5% in 2017, output looks set to rebound in 2018. Non-oil growth rose modestly by 2% in 2016 and 2.5% in 2017, however, its medium-term performance is projected to reach 3% in 2018, and rise further to 4% by 2021, according to an IMF report released in January 2018. According to Ahli Capital, a Kuwaiti investment company, the number of listed industrial companies rose by 14.3% between March 2017 and March 2018.

The construction and chemicals segments have performed well recently, facilitating this growth. Annual growth for cement companies in the country increased following a dip in 2016. Domestic cement demand is forecast to grow by 2% per annum between 2017 and 2021, up from a 1.2% decrease in demand in 2016, but still well below the compound annual growth rate (CAGR) of 18% seen between 2010 and 2016. However, production in the chemicals segment may be impacted by increased competition, with more manufacturers set to produce key materials, such as those used to create polyethylene terephthalate bottles. “We are likely to see an oversupply of paraxylene in the market in the near future, as new plants in China, India and Saudi Arabia start production, which will impact local players,” Mahmoud Al Qattann, CEO of Kuwait Aromatics, told OBG.

Although growth in manufacturing has been slower, it is still forecast to account for 10% of GDP by 2020 and grow at a CAGR of 7.4% between 2015 and 2030. Significant increases in the producer price index for manufactured goods rose by 14.2% in 2017, further underlining the segment’s optimistic outlook.

Workforce

As of 2015 there were an estimated 160,000 people employed in manufacturing and 291,000 working in construction. Combined, these two sectors are forecast to employ around 856,000 people by 2030. Expatriates hold almost 95% of manufacturing and construction jobs. Most of these are filled by low- to semi-skilled migrant workers, often from South-east Asia. Increased industrial output will require a significant influx of both technical and lowto semi-skilled labour in the coming years. However, ongoing reforms to nationalise the workforce, which is pushing businesses to replace expats with locals, is likely to constrain supply in the short to medium term. To plug this gap, authorities are ramping up efforts to provide Kuwaiti young people with tertiary, vocational and technical education and training.

Infrastructure Overdrive

Speaking in 2016, Mohammad Al Ajmi, director-general of the PAI, announced plans to increase industrial production by 25% over the coming years. This drive is taking shape under Kuwait Development Plan 2015-20, which lays out a strategy for major investments in infrastructure and energy, with a strong emphasis on private sector involvement. The plans outlined infrastructure growth of 15-20%, which will be a major boon for construction companies. The government is prioritising new projects and upgrades to the value of $124bn, with these scheduled to be completed between 2018 and 2022. These projects include the KD274.4m ($909.7m) Regional Road, the KD3.5bn ($11.6bn) Kuwait City Metro and the KD990.8m ($3.2bn) Mubarak Al Kabeer port, as well as the execution of projects related to Doha Port and general port storage and linking.

In March 2018 the PAI announced plans to build the $600m Al Naayem Industrial City, which will be located 70 km west of Kuwait City. This development will have a residential and industrial area, and is expected to attract $6.6bn worth of investments.

China's Road to Kuwait

China is eyeing Kuwait as an important geopolitical and trade partner in its Belt and Road Initiative. In July 2018 the two countries signed several agreements relating to energy, finance and infrastructure, under which Kuwait will serve as a key maritime terminus for China’s trade routes in the Gulf, linking it with neighbouring countries such as Iran and Iraq. In turn, China will invest in diversifying Kuwait’s economy and support its industrial growth. So far, China has expressed interest in the $160bn project to develop an integrated free zone across five islands — Boubyan, Failaka, Warba, Miskan and Awha — in the north of the country. Representatives from the two countries also signed a memorandum of understanding to collaborate on the design and construction of the $86bn, 250-sq-km Madinat Al Hareer (Silk City) urban area in Subiya.

Reforms

Ongoing reforms aimed at creating a favourable investment climate are also helping Kuwait reach its bold industrial development targets. Privatisation, distribution of industrial land and tax breaks are some of the incentives on offer to foreign investors. Under the FDI law which came into effect in 2013, qualified foreign investors are allowed to own up to 100% of a Kuwaiti company, relaxing the 49% limit. Previously, this was only allowed in special industrial economic zones. Incentives such as tax holidays of up to 10 years and Customs exemptions are also on offer to companies that help meet national objectives, such as those contributing to local technological development and employment.

Since 2013 the government has offered additional incentives for investors in order to accelerate export potential and provide employment for citizens. In January 2018, for example, the Ministry of Commerce and Industry announced that it would distribute 1036 industrial blocks in the Shadadiya area to select private companies by the end of 2018. In order to be eligible, authorities would evaluate the size of the project’s investment in technology, machinery and equipment; the investment as a national priority; and the project’s value to the economy based on anticipated profits and local employment.

Recent moves to secure accreditation for laboratories has also created potential for the local production of pharmaceuticals. In March 2018 the PAI signed a contract with the GCC Accreditation Centre to provide certification services facilities to bring local practices up to international standards.

Investment Pipeline

Reforms are also seeking to increase private ownership of industrial facilities. The government is rapidly opening existing infrastructure to the private sector as well as actively encouraging investment in new facilities through PPPs. Since 2017 several power and desalination plants have gone on offer and 2018 saw further tenders issued, with requests for expressions of interest for two PPP projects issued in July. Further privatisation drives, such as those in the postal and telecoms sectors, are expected to start by the end of 2018. There are plans for more large-scale infrastructure projects to be offered in 2019, with opportunities to develop new roads, cities, an airport and the ICT network.

In March 2018 the Kuwait Investment Forum laid out plans to build the Northern Gulf Gateway project, which it hopes to complete by attracting an estimated $200bn in FDI from the US, Europe, China and other parts of Asia. The multi-faceted infrastructure development – which will comprise education, residential, medical and financial facilities – is expected to create 300,000-400,000 jobs and attract 4m-5m visitors annually. Aside from the lucrative potential the project presents for construction and industrial players, it will also provide opportunities for growth in hospitality, leisure and tourism.

Additionally, the government has plans to overhaul the country’s telecoms infrastructure by building a new global cable network for its economic and industrial zones, thereby reducing reliance on the link that runs through Egypt and Saudi Arabia.

Building Upwards

Ongoing development of the country’s air infrastructure has been driving investment in the sector. In April 2018 Korea’s Incheon International Airport Corporation won the tender to operate, manage, maintain and develop the newly operational Terminal 4 at Kuwait International Airport, and in July 2018 it was announced that five contracts had been awarded to build Terminal 2. The total project was priced at KD1.4bn ($4.6bn). The $46.3m expansion of low-cost Kuwaiti Al Jazeera Airways’ terminal is also under way.

In March 2018 authorities announced plans to build a new airport with an annual capacity for 25m passengers per year in the north of the country. The government intends to allocate land to a private investor, who will then build, operate and manage the project, which is estimated to cost some $12bn and generate over 15,000 jobs.

The push for investment in infrastructure upgrades is also driving activity among companies in related industries. Faleh Al Ajmi, business development manager at United Facilities Management (UFM), a local facilities management company, told OBG that his company is moving to capitalise on the government’s construction drive. Firms such as UFM offer service suites to buildings and facilities in the public and private sectors. According to Al Ajmi, UFM is looking for international partners to extend its business and expand into other areas such as aviation, in line with the ongoing airport upgrades.

Chemical Balance

Kuwait is investing heavily in downstream petrochemicals production, with the country’s petrochemicals output set to reach approximately 10.5m tonnes per year by 2019, up from 7.6m tonnes in 2014, according to the KDIPA. To achieve this target, the government is developing the necessary infrastructure and is working to incorporate private sector innovation.

The country’s key petrochemical products include ethylene, which is used in polyester fibres, bottles and packaging, coolants, paints, resins and construction materials, among other synthetics. The KDIPA’s current focus is on increasing output of ethylene and ethylene glycol to meet overseas demand, principally from China and India. Kuwait Integrated Petrochemical Industries Company, a subsidiary of the state oil company Kuwait Petroleum Corporation, is the key government player in the sector and is reportedly investing over $6bn in the development of refineries and other petrochemical-related projects.

Innovation will be crucial to the success of this segment, and investments by software giants like Honeywell and SAP are ensuring that refineries and petrochemical complexes meet global standards of efficiency and technology. Honeywell, a multinational software-industrial company with long-standing operations in the country, was contracted in November 2017 to devise technological solutions for expansions at the Al Zour refinery and its petrochemicals complex, located south of Kuwait City. In January 2018 EQUATE Petrochemical Company, another global producer, also contracted German-based software firm SAP to enhance activity at its plants in Kuwait through cloud-based technological solutions.

Going Digital

According to a report by management consultancy McKinsey, Kuwait’s digital economy contributed around 5% to GDP as of 2016. Companies like multinational manufacturing firm Siemens are working with the Kuwait Foundation for the Advancement of Sciences, a local non-profit organisation, to provide digital solutions to industrial companies across the country. Siemens is also supporting digitalisation training for the local workforce. Some petrochemicals companies are already using new innovations to remotely monitor production and conduct real-time quality checks. Automation of production lines is also being rapidly implemented.

According to McKinsey, only around 7.6% of the country’s digital potential is currently being captured, leaving considerable scope for further digitalisation and automation in the industrial sector. In March 2018 Peter Zornio, chief technical officer at US-based Emerson Automation Solutions, stated at an energy conference that the firm was interested in automation and digitalisation opportunities in the Middle East, particularly in Kuwait and Saudi Arabia, as these countries are on the crest of the new wave of global digital optimisation.

Challenges

The IMF has previously cited infrastructure project delays as one of the challenges facing the burgeoning industrial sector. In the first quarter of 2018 the total value of infrastructure projects awarded was KD614m ($2bn), below the quarterly average of KD1bn ($3.3bn) seen a year earlier. Although a report by the National Bank of Kuwait noted that the transport sector showed signs of recovery in the first four months of the year, it also pointed to the restructuring of certain government bodies — such as the transfer of responsibilities from the Ministry of Public Works to the Public Authority for Roads and Land Transport — as a potential cause of delays in the future. This may in turn delay turnaround times for importers and risk driving up costs for engineering and construction companies further down the supply chain.

Outlook

As of May 2018, manufacturing and construction accounted for 6% and 2% of Kuwait’s GDP, respectively, while oil and gas made up 57%. As the government continues its efforts to ease the dependency on oil by implementing its bold development strategies, a range of opportunities are opening for industry stakeholders. The drive to upgrade infrastructure and the ongoing implementation of multiple projects, alongside reforms and incentives aimed at facilitating private investment, are driving activities in construction and related industries. Meanwhile, downstream chemicals development is set to expand as more refineries and complexes come on-line, and the integration of innovative and automated technologies will offer potential increases in the efficiency of production. Looking ahead, those industry players that are moving to capitalise on the authorities’ national development plans are set to succeed.