Recent investments and an ideal location bode well for the sector

The state of Kuwait sits at the confluence of three of the most populous and prosperous countries in the Middle East – Iraq, Iran and Saudi Arabia. As such, Kuwait is a logical transport centre for the northern Gulf and has committed itself to making investments towards attaining that goal.

Strategy

In 2012 transport accounted for 50% of service exports from Kuwait, up slightly from 49% in 2011, according to World Bank figures. Over the past two decades, many Gulf countries have specifically used transport as a means to diversify their economies and develop other sources of revenue. Kuwait’s national development strategy, known as Kuwait Vision 2035, envisages the country becoming a regional commercial and financial hub. In order to achieve this upgrading the country’s connectivity is an essential step. As such, Kuwait’s National Development Plan (NDP) is a comprehensive programme of investment, to the tune of KD30bn ($105.48bn).

Much of this investment is dedicated to social spheres such as housing, education and health, both in terms of physical infrastructure and improving the quality of services provided. Infrastructure projects in the pipeline include a new port, road improvements, a railway and metro system, and expanding the existing Kuwait International Airport (KIA). Separate to the NDP, Kuwait is investing roughly KD15bn ($52.7bn) to raise its oil output from around 3m barrels per day (bpd) to 4m bpd by 2020. In turn, this will necessitate increased imports of equipment, which will stimulate the economy more generally, especially the petrochemicals industry, and create further opportunities in transport and logistics.

Ports

Perhaps the initial beneficiaries of this investment in the hydrocarbons sector will be the two main ports of Shuaiba and Shuwaikh, which between them processed 98% of Kuwait’s exports in terms of revenue in 2011, according to figures from the Kuwait Central Statistical Bureau (KCSB). This came to 128m tonnes of cargo, worth KD27.84m ($97.8m). The ports processed 60.3% of imports, totalling 23m tonnes of goods, worth KD4.18bn ($14.7bn). According to the KCSB, in 2012 the number of oil tankers passing through Kuwait’s ports was 1469, compared to 1424 in 2010, while total cargo volumes were 35.9m tonnes in 2012, over 27.3m tonnes in 2010.

Shuaiba, situated 45 km south of Kuwait City, is the site of several refineries and is the main port for exports of crude oil and petrochemicals. The Kuwait Ports Authority is planning dredging works to deepen the whole basin to 16 metres, which will enable Shuaiba to accommodate the largest cargo vessels weighing up to 75,000 tonnes. At the time of writing, however, implementation remained stalled due to changes in parliament and administration.

The Ahmadi Port and Mina Abdullah to the north and south, respectively, of Shuaiba are set aside for the exclusive use of specific refineries. In early 2013, the Kuwait Oil Company awarded a $486.5m contract to Turkey’s STFA Construction Group to build a new port next to the Ahmadi refinery. The project involves upgrading the main harbour, constructing a number of smaller ones and expanding the road network around the port complex. The new port will support the Kuwait Oil Tanker Company’s expanded fleet, as the company is due to take delivery of nine new vessels from South Korea’s Daewoo Engineering and Construction in late 2014 or early 2015.

Shuwaikh is located to the west of Kuwait City, much closer to the city centre, and acts as a port for general cargo and consumer goods. It features 21 berths, including two floating berths, and has a maximum draft of 9.6 metres at 14 of them. Pilotage movements have steadily increased, from 1318 in 1961 to 2993 in 2010. Given its location so close to the capital, Shuwaikh has become a major source of congestion on the country’s already crowded roads, creating up to 1000 lorry movements a day.

Boubyan

As such, Shuwaikh is not really suitable for expansion, and Shuaiba, being geared mostly to hydrocarbons, is unable to act as a substitute. In order to expand the country’s port capacity a new port, Mubarak Al Kabeer (MAK) port, is planned for Boubyan Island, off the north-east coast of the country. Boubyan also lies near the Shatt Al Arab waterway at the mouth of the Tigris and Euphrates rivers, and as such is located very close to both Iraq and Iran. This makes it a natural gateway port not just for Kuwait, but also for Iraq, a market of some 25m consumers with an economy that will require major investment in reconstruction. Just as a number of ports in the southern Gulf, notably Dubai’s Jebel Ali Port, act as hubs for Saudi Arabia and parts of Iran, Kuwait aims to act as a centre for the northern Gulf.

New Centre

MAK port is therefore envisaged as a game changer. The port, which is scheduled for completion in late 2016, will have a capacity of 24 berths with a depth of 20 metres and an initial capacity of 2.5m twenty-foot equivalent units. The contract for construction of the port was awarded to a joint bid from Korea’s Hyundai Engineering and Construction Company and Kuwait’s Kharafi Group, and initial work commenced in April 2011. Subsequent phases will include deepening the draft to 30 metres and constructing a 36-km-long, $2.6bn causeway spanning Kuwait Bay, which would make landfall at Subiya, reducing the current distance between the port and Kuwait City of 140 km. MAK will also benefit from a rail link to the mainland and the rest of the GCC.

MAK faces challenges in the form of competition from established ports in the lower Gulf and from potential Iraqi unwillingness to avail themselves of its facilities. Iraq has plans to develop its own Grand Al Faw Port at the mouth of the Shatt al Arab, with an investment of $6bn and a final capacity of nearly 100m tonnes a year. Moreover, there have been previous territorial disputes between Iraq and Kuwait over the area in which Boubyan is located. However, Iraq and Kuwait signed an agreement in 2013 on shared use of the Khor Abdullah waterway. Iraq, despite its oil wealth, remains in political paralysis and continues to suffer from poor security, meaning that reconstruction may take years to materialise, though it is likely to generate a big flow of both imports and exports when it does. MAK could act as a stop-gap port for Iraq until they have developed their own facilities, and in any case, enjoys an advantage over Al Faw in that it has a deeper draft – 30 metres compared to 13 metres at Al Faw. Some in Kuwait have suggested that a joint Iraqi-Kuwaiti company could be set up to manage MAK port, giving the Iraqis a stake in the project and helping to smooth over differences between the two parties.

Logistics

In the wake of the US-led invasion of Iraq in 2003, the logistics industry in Kuwait benefitted from a near decade-long boom due to the presence of US armed forces, who used the country as a supply base. The withdrawal of foreign troops from Iraq, which was completed by 2012, has had a marked effect on the industry, although a number of US and NATO military personnel have remained in Kuwait. Perhaps the biggest logistics group in Kuwait, Agility was founded in 1979, has more than 22,000 employees and a presence in over 100 countries. Agility, which is listed on the Kuwait Stock Exchange, reported net revenue of KD386m ($1.36bn) on the back of KD1.38bn ($4.83bn) in turnover in 2013, compared to figures of KD370m ($1.3bn) and KD1.42bn ($4.99bn), respectively, in 2012. The value of the firm’s assets was KD1.41bn ($4.9bn) in 2013, down slightly from KD1.43bn ($5.02bn) in 2012. Agility has sold off its fleet of lorries over the past few years to concentrate on other areas, such as warehousing, but another Kuwaiti firm, Posta Plus, continues to maintain a 500-truck fleet in the region. Other logistics groups in Kuwait include global players such as DHL, UPS and FedEx.

Finding A Niche

Logistics firms often find themselves relying on government contracts, and given the relatively small size of the local market, many have had to adjust their operations to compete. “Due to the competitive nature of the logistics market, companies have had to increase the amount of services provided and tailor products to fit customers’ needs,” Hisham Albahar, the country manager at Posta Plus, told OBG. The poor relations between Iraq and Kuwait are having a negative effect on Kuwaiti logistics companies. Currently, in order to move goods between Kuwait and Iraq trucks must unload their cargo at a dedicated bonded warehouse at Safwan. Then, goods are reloaded onto Iraqi vehicles on the other side of the border. While it is in principle possible to obtain a visa for Kuwaiti lorries, this is both cumbersome and expensive to acquire, and it has to be renewed every six months. However, both the NDP and the refinery upgrade programme are likely to have a stimulatory effect on the logistics business in Kuwait, due to expected increases in demand for imports of machinery and construction materials.

Roads

The state of the nation’s roads network is also a challenge for logistics companies, especially importers. Land transport carries some 9.7% of Kuwait’s imports, but less than 1% of exports, and is equivalent to around $5.5bn. While the roads themselves tend to be of excellent quality, congestion is increasingly a problem – partly due to the fact that Kuwait is quite a small country and almost the entire population lives in Kuwait City and its environs. Public transport consists of buses and taxis; however, much of the government transport budget goes to subsidising the price of petrol, which stands at KD0.068 ($0.24) per litre, rather than the public transport network. The government is planning to develop new roads as part of the NDP, with KD4bn ($14.06bn) earmarked for new road projects. Among the biggest projects are the Jahra and Jamal Abdul Nasser roads, together worth $927.8m. The first involves widening a motorway from two lanes in each carriageway up to 12, while the latter involves the expansion of an existing road, and installing utilities and drainage facilities. The contract was awarded to a consortium of local construction firm Boodai, Italy’s TREVI and Rizzani di Eccher, and Spain’s Obrascón Huarte Lain, with completion due in late 2016.

Public Transport

However, as part of its plans to reduce congestion, the government is planning to develop a comprehensive public transport network. Presently, the main public transport body is the Kuwait Public Transport Company, which operates some 400 buses throughout the country. Citybus is another public transport provider in Kuwait. Owned privately, it commenced operation in 2002 and runs 12 routes with 180 buses, as well as a fleet of 170 coaches that are available for private hire.

While fares tend to be cheap, public transport suffers from something of an image problem. In common with many other countries, Kuwaitis who can afford it would rather use their own cars than use public transport. GCC countries have never had public transport as part of their culture, and therefore public marketing efforts will be required. As part of the NDP, the authorities are looking to develop a metro system, which they hope will prove more attractive to the public, since it will offer greater comfort and transport passengers from point a to point b much faster than a bus can. According to the plan, the Kuwait Metropolitan Rapid Transit (KMRT) network will initially stretch for some 160 km, with around 60 stations. The line will run underground in places, but around half of the network will run over ground. The project is to be developed as a public-private partnership contract worth some $7bn, involving the design, construction and maintenance of the system, and is set to be developed in five phases up to 2035. However, though initially due to be granted in 2013, the contract award has been postponed.

Railway

In addition to the metro system, Kuwait also plans to build its own railway network, to dovetail with the GCC railway that is due for completion by 2018. This will mostly be geared to freight traffic, but passenger trains may also run. The internal rail network, the National Railway System, is set to stretch for 518 km in total, and link MAK and Kuwait City, as well as provide connections to Iraq, Iran and other locations in the Arabian Peninsula.

Although the railway project currently remains at the design stage with tenders yet to be issued, the railway could cement Kuwait’s status as a transport hub, although work on Iraq’s internal rail network is unlikely to occur for some years. Omar Hariri, the Kuwait country manager for DHL, told OBG, “Kuwait has a key strategic location in the region that holds a lot of potential for the logistics sector by offering itself as a gateway to the Middle East.”

Aviation

Over the past 20 years, Kuwait has lost some of the competitive edge in aviation it once enjoyed over other Gulf countries. KIA has also become more congested as passenger numbers grow rapidly, especially after it came to act as the hub for not only Kuwait Airways, but also for the country’s low-cost carrier (LCC) Jazeera Airways as well.

In early 2014, Kuwait’s Directorate General of Civil Aviation (DGCA) said passenger traffic at KIA has reached 9.37m in 2013, a 6% increase over 2012. Arrivals grew by 5% from 4.48m in 2012 to 4.7m in 2013, while departures increased by 6% from 4.39m in 2012 to 4.65m in 2013. The DGCA also reported that commercial flights at KIA increased by 3% from 75,588 in 2012 to 78,135 in 2013. Between 2007 and 2012, KIA saw through traffic increase by over a quarter. As such, the need to increase capacity at KIA has been evident for some time. KIA’s own figures project that passenger numbers are likely to rise to 13m passengers a year by 2016 and 25m a year by 2040.

In 2012, a master plan was finalised to redevelop KIA, with more than 70 projects to be implemented over the next seven or eight years and a budget exceeding KD2.5bn ($8.79bn). Together, these will increase capacity at KIA to over 25m passengers a year. The major projects planned for the redevelopment of KIA include: extending the western runway from 3400 metres to 4775 metres; demolishing the existing eastern runway and constructing a new one in its place that will be 4000 metres long and 60 metres wide, with a 30-metre-wide parallel taxiway; a brand new third runway to be 4580 metres long and 60 metres wide, also with a parallel taxiway 30 metres wide; a new terminal building; developing 1m sq metres of apron space and a 2m-sq-metre cargo and maintenance, repair and operations centre, along with dedicated facilities for the air force; a new air traffic control tower; new landside terminal facilities, such as hotels, a mosque and parking space; and access tunnels and a connection to the KMRT.

Branching Out

The expansion programme at KIA has meant that more traffic has had to be diverted through the Sheikh Saad General Aviation Terminal (SSGAT), which had originally been purpose-built for Wataniya Airways (see analysis). Capacity at KIA is due to rise to 25m by completion of the expansion project, which is unlikely to affect traffic at SSGAT as much of the work at KIA is geared to providing Kuwait Airways with a hub so that it can re-emerge as a long-haul carrier, as well as implementing much-need updates for facilities.

SSGAT primarily serves the private, high-end segment. Indeed, as KIA becomes bigger, it may well be the case that more travellers and niche carriers are likely to find the quick turn around times that SSGAT is able to offer more attractive.

A 2014 report by investment bank Alpen Capital further notes that MENA is set to witness growth above the world average in the aviation sector, with revenue per kilometre set to expand at a compound average growth rate of 6.7% between 2012 and 2032. The report specifically identifies the lack of secondary airports in the region as one major constraint for the industry, forcing LCCs to operate from primary airports where they face head-to-head competition with flag carriers. LCCs account for just 13.5% of the MENA aviation market, compared to 30.2% in North America and 38% in Europe, according to Alpen.

New Direction

However, the impending privatisation of Kuwait Airways is likely to prove key to the success of the expansion of KIA. For some years, the carrier has been making annual losses. A 2013 report by the Centre for Aviation (CAPA) estimated that Kuwait Airways had sustained losses of $560m over the previous two years, while in early 2013 Salem Al Othaina, the then-minister of housing and communications, reported that the airline had lost over $1bn over the previous four years. Despite Kuwait Airways’ high profile in the 1980s, its fortunes have declined over the past two decades, and the adoption of an open skies regime in 2006 increased competitive pressures, which it has struggled to respond to.

Kuwait Airways counted a fleet of 17 craft, but many of these are old, with an average age of 18 years. In 2013 the airliner was reportedly in negotiation to lease five Airbus A330 from Indian carrier Jet Airways. It has also ordered 25 new aircraft from Airbus, at an estimated cost of around $3bn. Given these numbers, privatisation is generally regarded as the best way forward for the carrier. However, the ultimate form that privatisation will take has yet to be determined, with the government already having attempted to sell off Kuwait Airways twice over the past seven years. In October 2012, the carrier was reconstituted as a shareholding company. In January 2013, the Kuwaiti parliament approved the privatisation of the airline and in May of the same year signed a five-year agreement with the International Air Transport Association to develop a plan to restructure the airline, with a view to making it more attractive to a strategic investor within three years.

New Set Up

Under the privatisation plan, the Kuwaiti government will retain a 20% stake and underwrite the airline’s losses. Some 40% of the shares will be sold to Kuwaiti nationals through an initial public offering, 5% will be sold to employees and 35% will be sold to local or foreign investors privately. The government has agreed to assume Kuwait Airways’ debt of nearly KD450m ($1.58bn). Given Kuwait Airways’ withdrawal from many long-haul routes to focus more on regional destinations, analysts have identified possible synergies to be gained from Jazeera Airways taking a strategic stake in the national carrier. While Jazeera is on record as saying it might be interested if the financials were right, as of June 2013 neither side had committed itself publicly.

Jazeera, which was founded in 2004, was the first non-government-owned airline in the Middle East, and in 2012 was one of the most profitable airlines in the world by size, according to CAPA. In 2013 Jazeera recorded net profits of KD16.7m ($58.7m) on the back of operating revenue of KD65.6m ($230.6m), up on figures of KD13.9m ($48.8m) and KD62.6m ($220.1m), respectively, in 2012. In 2013 the LCC transported 1.14m passengers. The airline’s first strategic master plan for 2012-14 is due to expire by the end of 2014. Originally the plan envisaged Jazeera holding 40 aircraft by the end of 2014, but the affects of the economic crisis forced the company to change tack. Jazeera successfully weathered the storm, axing routes to the Indian subcontinent that no longer proved profitable, and has concentrated on its base in Kuwait. The carrier has 15 aircraft, all Airbus 320s, of which several are leased out to Virgin America, Saudi Arabia’s Nas Air and TAP Portugal. Jazeera serves 20 destinations and in May 2014 began running new flights to Istanbul’s Ataturk International Airport. The success of the airliner shows what the Kuwaiti aviation sector is capable of achieving, lending credence to the move to privatise Kuwait Airways.

Outlook

Of all sectors of the Kuwaiti economy, transport is perhaps the most likely to benefit from the investments programme under way as part of the NDP. Although political wrangles have delayed many projects, the authorities have demonstrated a sound understanding of the role of transport as a multiplier, and some of the most important projects, such as the expansion of the airport and MAK port, are already under way. If greater political stability can be