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A plant of Equate, owner-operator of several integrated world-class petrochemical units

A plant of Equate, owner-operator of several integrated world-class petrochemical units



Bigger private role more likely now

Investments in Kuwait are still high but new moves to place key business institutions in non-government hands could be a game changer for the economy

April 2016

If Kuwait privatises its key assets, as seems likely, it will be fruit of an initiative it took some five years ago when parliament approved a bill seeking just that.

The move suffered delays due to questions of how best to approach the privatisation issue and what stakes should be offered. But with the steep decline in oil prices and a deficit to boot, the Kuwaiti government believes this is probably the right time to act. Benefits of privatisation will be lower administrative costs and higher efficiencies, just what the doctor ordered. Savings would be immense considering that Kuwait has a big-girthed bureaucracy and private managers have a way of trimming costs – a wholesome thought when Kuwait is losing billions of dollars from lower oil prices.

One other advantage of privatisation is that within the cost-cutting culture, managers tend to stretch their entrepreneurial thinking to new fields and new products. It is likely Kuwait in the long run will see greater investments, perhaps in integrated services and manufacturing.  

Plans have been announced to create a fund to manage $100 billion in local assets which could be sold to private investors in coming years. At least one well-known company, Agility, has made clear it would be in the running for bids to manage ports and airports, should they be placed in non-government hands.

While the privatisation initiative is gathering pace in today’s less than happy circumstances, the situation is really not as bleak as one would think. According to Korn Ferry, the advisory firm, notwithstanding that a third of businesses in Kuwait failed to meet their targeted budget in 2015 and none reporting they had exceeded their targets, some 86 per cent of firms that participated in a survey expected to grow by five per cent this year. 

Oil sector woes may have rocked Kuwait’s non-oil private sector, but it remains unbowed. According to the National Bank of Kuwait (NBK), growth is set to pick up pace and is poised to hit 4 to 5 per cent in 2016 and 2017. That’s because public investment is growing and there is steady growth in consumption, it said last November.

The government is expected to spend KD34 billion ($112 billion) between 2015 and 2020. Some $32.2 billion worth of contracts projects were awarded in 2015, 20 per cent more than the year before, NBK said in another review this year. Over half of the contracts signed were related to the oil and gas sector, as Kuwait attempts to reach its oil production target of 4 million barrels per day by 2020. 

In the transportation sector, authorities awarded a KD1.3 billion contract to build the New Terminal Building at Kuwait International Airport. The project should see airport passenger capacity double to 15 million by 2020. 

2016 should also be a bumper year with the authorities looking to sign deals worth $55 billion before year’s end, NBK stated. This comes at a time when Kuwait is expected to record its first actual budget deficit in 16 years of KD4.7 billion, 11.6 per cent of GDP, by the close of 2015-16. The government, for its part, has shown no sign of cutting capital expenditure, stressing that development projects are to move ahead in 2016.

Kuwait is building the Al Zour refinery and petrochemical complex at an investment of $28 billion, easily one of the region’s high-investment projects.  Investments there include $16 billion for the Al Zour refinery, $10 billion for the petrochemical complex and $2 billion for gas supply facilities. The refinery will supply low sulphur fuel to local power plants and count as one of the largest of its kind anywhere in the world, fulfilling Kuwait’s downstream strategy.  Even as it supplies feedstock to power plants, it will enhance the competitiveness of Kuwaiti petroleum products on world markets, thanks to its ability to meet the stringent requirements of those markets. 

 

Equipment at Kuwait Catalyst Company

Equipment at Kuwait Catalyst Company

ECONOMIC CITIES

While mega Kuwait projects capture the headlines, relatively smaller schemes tend to escape attention.

Reports have surfaced that the government intends to build economic cities on five of its eastern islands with annual investment of up to $2 billion. These hubs will come up on Bubiyan, Warbah, Miskan, Failaka and Auhah and, according to the Arabic daily Alanba, they could lift Kuwait’s GDP significantly when up and running. The economy could benefit with the arrival on the islands of thousands of tourists for whom facilities would be built.

“Direct foreign investment in these projects is expected to be between $1.5 billion and $2 billion annually.

The project will create thousands of jobs for Kuwaitis,” the daily said. The islands will house some 400,000 people who are forecast to grow by 3 to 4 per cent annually – an absolutely ambitious scheme.

 

SME ISSUES

While much of the talk in recent weeks has been on Kuwait’s privatisation manoeuvres, it is not clear how small and medium enterprises will fare should control of key institutions pass on to non-government leadership. Kuwait is not particularly known for SME achievements and the record for this category is far from satisfactory. Unlike high-income and emerging economies where SME contributions are 50 per cent and 40 per cent of GDP, their Kuwait counterparts account for just 3 per cent.  It has emerged that Kuwait SMEs employ 23 per cent of the country’s workforce, less than half of SME employment in high income and emerging economies.  

What’s striking in Kuwait’s case is that in 2013, the government established a National Fund for SME Development in April 2013 with $7 billion in capital, quite a large some for a small city state. The fund was designed to be convenient, a kind of one-stop shop for smaller businesses. Yet, the scheme has not elicited the yield one would have expected and SMEs are still an insignificant lot. This is not to say that the situation will not change radically in the next few years. Executives of large privatised firms could see local SMEs as kindred souls and create greater opportunities for them in their operations and expansions. 

For now, certain shortcomings or grievances need to be addressed. According to a 2014 World Bank survey of Kuwait SMEs, some 34 per cent of respondents saw hindrances in business licensing, permits and time-consuming dealings with other government regulations.




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