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Project delays stifle non-oil growth
October 30, 2018, 9:18 am

Weaning the economy from its inordinate dependence on depletable hydrocarbon resources, and oil revenues that are susceptible to global price volatility is critical to ensuring sustainable long-term growth and development in Kuwait.

Economic diversification and widening private-sector involvement in the economy are especially vital to success of Kuwait National Development Plan, which envisions transforming the country into a leading financial, commercial and cultural hub in the region by 2035.

The government has reiterated its commitment to broadening the economic base and enhancing gross domestic product (GDP) growth in the non-oil sector. Several schemes have been launched in this regard aimed at promoting private investments, developing human resources, supporting innovation, encouraging competition and ensuring production efficiencies that enable the creation of more job opportunities for national manpower.

Despite the implementation of these programs, in the fiscal year that ended on 31 March,2018 the oil sector contributed 89 percent to government revenues, while the non-oil sector’s share was 11 percent.

According to figures from the Central Bank of Kuwait, in 2017, oil sector accounted for nearly 55 percent of the country’s GDP, while non-oil sector contributes 45 percent to GDP. This anomaly not only highlights the overwhelming dominance of the extractive oil industry but also how precarious and vulnerable the economy is to oil price fluctuations on the international market.

Even if we set aside the weak productivity caused by the hydrocarbon-reliant nature of Kuwait’s economy — where oil accounts for over half the GDP and nearly 90 percent of exports and government income — it is hard to envision a situation where the private sector could on its own effectively enhance non-oil GDP growth. Attracting international investments and attempts by the government to implement projects through public-private partnerships (PPP) have so far had only limited success.

Additionally, in Kuwait, major constituents of the non-oil sector remain closely intertwined with the oil sector and its revenues. For instance, manufacturing includes oil refining; construction encompasses mega projects in the oil and gas industry, and utilities rely on oil or gas as fuel for water and power installations.

Under these circumstances, a fall or rise in global oil prices has a disproportionate impact on the non-oil sector’s performance. Moreover, construction, manufacturing and utilities together employ nearly a quarter of the country’s total workforce, and a downturn in these areas impinge consumer confidence and spending, which then adversely affects the overall economy.

It is apparent that without the all-important ‘government spending’, market-confidence would soon nose-dive and much of the non-oil economy would come to a grinding halt in short order. A case in point is the sluggishness witnessed in the market in recent months, which can directly be attributed to the postponement or canceling of projects by the government over the last two quarters of the year.

Although KD380 million worth of projects were awarded in the third-quarter of the year, and this value was higher than in the second-quarter, it was still below half the average level of awards in each of the four quarters of 2017. According to analysts at the National Bank of Kuwait (NBK), only KD1.1 billion, or less than 30 percent of the KD3.8 billion projects planned to be released in 2018 have been awarded so far this year.

It now looks highly unlikely that the remaining KD2.7 billion worth of projects would be awarded in the fourth-quarter of this year. Any pick up in the pace of project awards is only expected in upcoming quarters, with many of the pending projects from 2018 possibly rolled-over into the new year. A major project that has been delayed is the KD3 billion Al-Zour Petrochemical Complex that is now slated for the second-quarter of 2019.

The tendering of this project was initially planned for 2018 but has been pushed to the next year due to a redesign of the Al-Zour Refinery, with which it is integrated. The redesign follows a rethink by the Ministry of Electricity and Water to use gas oil rather than fuel oil for power generation.

Projects in the transport sector, which saw no awards in third-quarter of this year, have also been held up by legal and technical delays in the ongoing restructuring and mandate revision of the Public Authority for Roads and Transport (PART), which is responsible for managing projects in this sector.

Provided the bottlenecks are straightened out, project awards could pick-up in coming quarters with KD1.1 billion of projects hopefully coming on line by the last quarter of 2018 and KD510 million in early 2019.

Another delayed project was in the water and power sector, where key upcoming projects include the Al Zour North IWPP Phases 2 & 3 and the Nuwaiseeb Power and Water Desalination Plant, with a combined value of KD1.4 billion.

The two projects are under the aegis of the Kuwait Authority for Partnership Projects (KAPP), which oversees public-private partnership (PPP) projects in the country. However, according to NBK, the Al-Zour North IWPP has been delayed due to a contractual dispute between KAPP and private investors on project finance technicalities, as well.

- Staff Report

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