Sleeping giant: A number of large projects are taking shape, with benefits expected for the entire economy

The industrial sector is looking forward to the substantial growth opportunities presented by a number of development projects announced by the government in February 2010. Many hope that 2013 will see progress accelerate on these projects after a number of delays, primarily the result of tensions between parliament and the Cabinet. While challenges remain, there is growing confidence that Kuwait’s industrial base is on the threshold of a renewed period of growth. Since the nationalisation of the oil and gas industry in 1975, Kuwait’s hydrocarbons have remained central to the economy, constituting 53% of GDP, 98% of exports and 93% of government revenue in the period from 2006-11, according to KIPCO Asset Management ( KAMCO). With oil and gas supporting decades of growth, a substantive welfare state and consistent annual budget surpluses – anticipated at KD12bn ($42.86bn) in 2013 alone – industrial diversification and the broader development of the private sector have not been a priority until more recent years. “Oil prices and the quantity produced have formed the basis of Kuwait’s economic model since independence in 1961, but this single-commodity model has now run its course,” Adel Al Wagayan, the secretary-general of the Supreme Council for Planning and Development, told OBG. “It is increasingly unsustainable due to rapid population growth, costly government subsidies, and less diversified industrial and services bases.”

FUTURE PLANNING: Launching the National Development Plan (NDP) in 2010, the Kuwaiti government is now determined to diversify its sources of revenue and provide employment opportunities for its growing population, which is likely to increase by more than 50% over the next 20 years to 5.4m. The NDP is intended to make Kuwait a regional centre for financial services and trade by 2035, as well as to provide an enabling environment for industry and services across both private and public sectors. Furthermore, the goal is to support the diversification process through initiatives such as establishing a technology park and supporting high value-added and advanced technology industries, such as electronics and electrical goods. The Public Authority for Industry (PAI), which oversees manufacturing industries with the exception of oil and gas production, is working with the private sector to develop a National Industrial Strategy for 2015-35, the aim of which is to support the NDP’s diversification efforts.

The PAI is also working on promoting industrial exports, offering new investment opportunities in the chemicals industry and creating an independent Public Authority for Standards and Metrology. Barrak Al Sabeeh, the director-general of the PAI, told OBG, “The NDP calls for a lot of industrial activity. Any industry that feeds into the plan would greatly benefit the country.”

INFRASTRUCTURE: The government has recognised that this requires a substantial and comprehensive upgrade of both hard and soft infrastructure. The first five-year plan, announced in 2010, had a budget of KD30bn ($107.14bn) and is focused on the upgrade and development of national infrastructure. This would provide a boost for the construction and transport industries that could increase private sector investment and Kuwait’s attractiveness for foreign direct investment (FDI), from which the government expects half of the NDP’s budget to be derived. The Supreme Council for Planning and Development reported that private sector investment in 2009/10 was 45.9% of non-oil investments, equivalent to one-quarter of total GDP.

GRASSROOTS GROWTH: With a contribution worth KD2.06bn ($7.4bn) in 2011, Kuwait’s industrial sector was valued at 6.6% of overall GDP, according to the PAI. However, strong budget surpluses and high gross national income levels, combined with the fact that Kuwait imports most of its requirements, mean that growth opportunities for industry are restricted. Outside of the oil and gas sector, most industry is focused on serving Kuwait’s domestic requirements and does not have a large export footprint. However, the growth of the country’s young population has led to a rise in demand for basic services and utilities recently, and this has been to the notable benefit of the construction, utilities and manufacturing sectors. Construction and its affiliated industries are now facing the possibility of stronger growth as Kuwait’s largest projects build up steam. Valued by KAMCO at KD775m ($2.76bn) in 2011 after six years of a 7.7% compound annual growth rate (CAGR), large NDP investments are focused on expanding and upgrading Kuwait’s transport infrastructure, utilities and housing (see Transport and Real Estate chapters). In the vanguard of such developments, infrastructure at the new KD345m ($1.2bn) Mubarak Al Kabeer port on Boubyan Island has made much progress.

Once the port is complete and fully operational, currently expected in 2016, it will serve as a regional transshipment centre. This will offer many advantages for domestic industry, which will leverage Kuwait’s natural position as a trade gateway for the Gulf to tap into foreign markets. Prominent among these is the anticipated two-decade-long reconstruction of Iraq, with which Kuwait is enjoying improved relations, and emerging markets in Central Asia. The processing sector is set for considerable growth, with food imports expected to reach $5.3bn by 2020, a rise of 130% from 2010, according to the Economist Intelligence Unit.

Ongoing development of the 500,000-sq-metre Shabhan Plot 2 – 172,000 sq metres are rentable, with the rest dedicated to roads, administrative purpose, etc – industrial estate extension, catering principally to this sector, is testament to future growth potential. Mining was also one of industry’s top performers, according to KAMCO, registering 15% CAGR, and was valued at KD79m ($282.1m) in 2011. Despite a 102% increase that has largely been fed by growth in cement production (see analysis), mining remains one of the more small-scale industrial sectors in Kuwait.

MANUFACTURING: Kuwait’s top performer outside of oil and gas is the manufacturing sector, which recorded 5% CAGR between 2006 and 2011, growing 27.5% from KD1.61bn ($5.75bn) to KD2.05bn ($7.32bn), according to KAMCO. The sector produces plastics and fibres, fabricated metal and food products. In 2012 the share of medium-to-high-tech manufacturing industries (excluding oil refining) reached 18% of total manufacturing value added, according to data from the UN Industrial Development Organisation. However, the sector’s mainstay remains hydrocarbons, which are employed either as feedstock or as cheap fuel to process imported raw materials. Accordingly, Kuwait’s hydrocarbons industries remain a central component to even the largest non-oil-and-gas sectors.

Although diversification is the main thrust of the economic development plans outlined in the NDP, it is not the government’s intention to supplant the hydrocarbons sector, but to use it to broaden Kuwait’s industrial base and expand downstream facilities to include segments such as electronics and electrical goods, silicon and fibre optic technologies.

DRILLING DEEP: State-owned Kuwait Petroleum Corporation (KPC) has led the exploitation of the nation’s oil and gas reserves since its foundation in 1980 and has 10 subsidiaries beneath its umbrella of operations. The sector is currently protected from foreign investment by the constitution. Its 10 subsidiaries cover every aspect of the hydrocarbons sector’s upstream, downstream and transportation requirements.

Operating the nation’s three refineries – Mina Abdulla, Mina Al Ahmadi and Shuaiba – the Kuwait National Petroleum Company (KNPC) is expanding through a fourth refinery that is being added in the coastal area of Al Zour North. This refinery project is now under way following a delay in 2009 after global oil prices dropped (see Energy chapter). Increasing Kuwait’s refinery capacity by some 615,000 barrels per day (bpd), it is a key component of plans to boost current production to a total of 4m bpd by 2020.

CLEAN FUELS: Producing cleaner fuels is another important aspect of Kuwait’s long-term strategy to meet power generation demand, while adhering to the latest environmental standards. To this end, project management consultancy contracts were awarded in February 2013 to AMEC and US-based Foster Wheeler for the $18bn KNPC Clean Fuels Project.

This will expand and upgrade the existing Mina Al Ahmadi and Mina Abdulla refineries to include 30 new processing units delivering Euro IV petrol with reduced CO emissions and sulphur content. Refining output will also be increased by 264,000-800,000 bpd. Seven international engineering companies have already been pre-qualified, and technical and commercial bids were made in March 2013 (although further details were not available at the time of writing). At the forefront of the sector’s ammonia, urea and polypropylene output – feedstock for fertilisers, plastic and fabrics – is the KPC-subsidiary Petrochemical Industries Company (PIC). The company is also in the vanguard of NDP strategy to diversify both Kuwait’s domestic industrial profile and expand its international outreach. Fundamentally, this has required a re-orientation of the business to focus on olefins and move away from fertilisers in a strategy that has been under implementation since 2009. “Our plan is to quit the fertilisers business in the medium to long term through privatisation or closing down,” Yousef Al Ateeqi, the deputy managing director of olefins at PIC, told Reuters news agency. “In petrochemicals, we plan to pursue growth inside and outside Kuwait by building or acquiring leading petrochemicals assets in mature markets with a proper foreign partner.”

Domestically, focus has shifted to cracking and gas feedstocks, which will provide downstream expansion into higher-value-added derivatives. Spearheading this initiative, PIC is pursuing an estimated $7bn-10bn Olefins III plant that will also be operational by 2018. This will have a capacity of 2.5m tonnes per annum, producing high-density polyethylene, linear low-density polyethylene, mono-ethylene glycol, polypropylene, ethanolamine, polyols and emulsion styrene-butadiene rubbers. PIC is also considering a $2bn purified terephthalic acid and polyethylene terephthalate refinery with a production capacity of 1240 kilotonnes per annum. These projects will provide approximately 1500 full-time employment positions based on 2012 estimates, yet their real value is to be seen in the wider economy. Current projections are that the new plants have the potential to indirectly contribute a combined KD642m ($2.29bn) to the economy and create five other jobs for each direct full-time position.

REACHING OUT: Leveraging on decades of hydrocarbons expertise, Kuwait is also exporting its knowledge. PIC is a partner with China Petroleum & Chemical in a $9bn refinery in China’s Guangdong province that is expected to be operational in 2015. In a similar move, Kuwait Petroleum International, KPC’s international marketing arm, signed two agreements in the first months of 2013 for the development of $7bn oil refinery in Balongan, Indonesia and a $9bn refinery in Thanh Hoa province, Vietnam (see Energy chapter). Such joint ventures are increasingly seen as an important avenue to develop the country’s industrial base, as well as forge bonds with key emerging markets.

Yet Kuwait’s success in further downstream diversification and providing inexpensive fuel for heavy industry is reliant on sourcing a consistent supply of gas to Estimated production of mineral commodities, 2007-11 meet demand that is expected to reach 4bn cu feet per day (cfd) by 2030. Gas demand is already outstripping supply, which is principally sourced as a by-product of Kuwait’s oil production. With approximately 63trn cu feet of natural gas reserves, the country is planning to increase output to 1bn cfd from around 140m cfd through the development of its northern oilfields over the next five years (see Energy chapter).

INVESTMENT DRIVES: Further development of Kuwait’s hydrocarbons industries now requires private sector, technology-driven inward investment to leverage its full potential. While investor interest has remained strong, identifying with Kuwait’s healthy economy, currency and location in the Gulf region, the sector remains protected as foreign firms by law are excluded from investing in the upstream petroleum segment.

The well-publicised $2.5bn fall-out from the collapsed Dow Chemicals and PIC joint venture K-Dow highlighted the continued issue of parliamentary interference hampering big-ticket, potentially beneficial industrial collaborations. While opportunities within this sector have yet to be defined as a consequence, the government is actively pursuing legislative reform that will facilitate future inward investment in the rest of the economy through joint ventures.

However, the World Bank ranked Kuwait lower than other GCC countries at 82 in its “Doing Business 2013” report. This is further supported by the country’s FDI performance: it attracted $399m in 2011, the most recent year for which statistics are available, against $8.7bn in outward direct investments.

LANDING GROUNDS: A further obstacle to inbound investment, the PAI has acknowledged, is a shortage of land for industrial development. Despite competitive utilities and labour rates in Kuwait, delays of several years in the allocation of state-owned land for development and the installation of utilities have seen some companies take advantage of incentives over the border in Saudi Arabia. With more than 4000 industrial requests for land registered and pending, approximately 25 companies decide to set up outside the country each year, the Kuwait Chamber of Commerce and Industry (KCCI) reported. Al Sabeeh told OBG, “About 99% of the problems in the industry now can be fixed by increasing the land available for industrial use.”

This loss of business is expected to slow with the release of greenfield plots in two industrial estates that are currently under development. Scheduled for completion in mid-2016, the 5-sq-km Al Shadadiyah Industrial Area will deliver 1023 lots that are between 1000 and 10,000 sq metres, with a special area designated for a 200,000-sq-metre technology park. Opening in 2016, the Al Naayem Industrial Area is planned to deliver 1200 lots over 8 sq km, including six for industrial purposes and two for scrap dealers.

While the new estates are welcome, supply is still lagging behind demand. Streamlining the issuance of industrial licences, which can take 30 days or more, and improved private sector representation on the PAI’s 16-member board beyond its current four seats would encourage further development and investment, according to the KCCI. This would help to expedite the resolution of ongoing issues experienced by industry, which includes the allocation of expansion plots away from original sites, increasing inefficiencies and high costs. Industry would also like to see Kuwait’s highly popular free trade zone at Shuwaikh Port restored. Having achieved a 90% lease rate, the government has not yet resolved the 2006 suspension of all activities in the zone following allegations of mismanagement. Addressing these concerns will be key to effective implementation of the NDP, in which public-private partnerships (PPPs) will play a central role.

PARTNERSHIPS: Kuwait’s first PPP was the Al Zour North Independent Water and Power Project, launched in 2009. Scheduled to be commissioned in 2013, it is Kuwait’s first foray into such a partnership. Embracing a model well established elsewhere in the region, it is hoped that once the project is up and running it will open the door to a raft of other similar agreements, which have the potential to accelerate infrastructure and development projects. “The Al Zour plant will be a milestone for Kuwait,” Mithqal Sartawi, the former managing director of Kuwait’s state-owned Privatisation Holding Company, told OBG. “It will be the first power plant procured under a PPP. If it is successful, people will see that the PPP model works, and more projects will come on-line faster.” Due to Kuwaiti property development law, all PPP projects follow a build-operate-transfer (BOT) framework. Ongoing legal reform, stemming from 2008’s BOT law, is also expected to attract investors following increased scrutiny of BOT projects by the State Audit Bureau in 2006 for alleged violations. This saw several contracts cancelled and led to provisions for a high commission for state properties, with restrictions imposed on the allocation of land without centralised approval. However, the law limits BOT terms to 30 years, 40 in some special cases, which has raised concerns among investors, who consider the timeframe too short to guarantee adequate returns. There have also been calls to update Kuwait’s 1964 Public Tenders Law, which requires that all bids for government-funded projects in excess of KD5000 ($17,858) must be submitted to the Central Tenders Committee.

LEGAL ENVIRONMENT: In November 2012 the Commercial Companies Law was enacted by an emergency decree, as parliament was not sitting at the time. While the new law is awaiting parliamentary approval from the current government, and Kuwait’s independent judiciary is still in the process of ruling whether this decree and others passed in similar fashion are lawful, indications are that the ruling will stand. Replacing the Commercial Companies Law of 1960, the new law has been structured to facilitate investment. Al Sabeeh told OBG, “The aim is to make Kuwait attractive for companies to manufacture here. That means making a one-stop shop for everything they need, and creating an environment conducive for them, including fuel, electricity, rent and tax exemptions – whatever it takes.”

The new law expands on the opportunities in Islamic finance markets. Shareholding ratios have also been relaxed, as has the 51% Kuwaiti shareholding in the capital of Kuwaiti companies, although the exact sectors to which this will apply have yet to be defined. The Commercial Companies Law is complementary to the 2001 Direct Foreign Capital Investment Law, which permits 100% foreign investment in a range of sectors, alongside 10-year tax holidays and various incentives pertaining to expatriate labour, land grants, duty-free imports, guarantees of propriety protection and benefits arising under double taxation treaties. However, FDI authorisation is still required from the Kuwait Foreign Investment Bureau and the multilateral Foreign Capital Investment Committee (FCIC), which are currently undergoing changes to improve their performance. Further reform is being discussed by Kuwait’s latest government, which has earmarked 18 key pieces of legislation for further deliberation. Al Wagayan told OBG, “The new mid-range development plan must focus on removing financial and administrative obstacles. This enables the government to meet its planned schedules and encourages the acceleration of PPP projects to improve service efficiency and reduce the government crowding-out effect in the private sector.”

OUTLOOK: Industry in Kuwait is faced with an opportunity for reinvigorated development and diversification. This is dependent on a triumvirate of reforms addressing investment opportunities, legislation and the national labour pool, but confidence in the sector’s potential is growing in line with progress in Kuwait’s parliament. The public sector could offer the initial catalyst for growth, specifically the oil and gas industries given their preeminent economic importance.

Yet with its strong budget surpluses, Kuwait faces few barriers to funding the necessary initiatives. This could provide a paradigm shift in the economic outlook, which could provide as many opportunities as it does challenges. Al Sabeeh said, “The potential for industry here is very high. Kuwait just needs to iron out its problems and agree to do what is best for the country.” Petrochemicals will remain at the forefront of expansion, but benefits for other industries should appear with time.