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Sustaining industrial growth needs more than land
November 10, 2018, 3:49 pm
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In early October, the Minister of Commerce and Industry Khaled Al-Roudhan announced the launch of two new industrial cities in Al-Salmi and Al-Shadadiyah areas. The two cities, located respectively in Al-Jahra and Al-Farwaniya governorates, are projected to host 700 new industrial units, attract over KD850 million in investment and provide around 2,000 fresh job opportunities for citizens.

The cities will usher in “a new industrial era in the country by increasing the number of manufacturing units, boosting exports of non-oil products and augmenting the state budget, while creating new jobs for national manpower,” said Al-Roudhan.

While a ‘new industrial era’ is certainly what the country needs, it is highly unlikely that providing more industrial plots alone will solve the tenacious shortcomings and dismal performances that have become hallmarks of many industries in Kuwait.

Speaking following the announcement by the minister, the Director-General of Public Authority for Industry (PAI), Abdulkarim Taqi, said that with the new allotment the number of plots specialized for industrial use would expand by 50 percent, from 1,435 units at present to 2,135 units.  The PAI, which is mandated to develop, promote and supervise industrial activity in the country, has since 2010 been distributing industrial plots in nearly a dozen specialized areas, including large tracts of land in Shuaiba, Sabhan, Al-Shadadiyah, Al-Naeem and Amghara areas.

Given Kuwait’s relatively small land area, 90 percent of which is owned by the government, the lack of land available for industrial development is definitely a challenge. In addition, approval for industrial development plots are often vetoed by the oil ministry, which opposes the distribution of land near existing or potential oil installations and reserves, while government land allotments and land ownerships are regularly challenged in parliament. Environmental restrictions add to the woes of industrialists, already frustrated by bureaucratic red-tape that hamstrings at every turn.

In view of such daunting challenges, it is indeed commendable that the government has gone ahead and opened up new plots for industrial development. But land alone is not the issue behind the poor performance of the industrial sector in Kuwait.

According to available figures, in 2017, mineral fuels, oils and distillates, were the largest contributor to exports, bringing in KD15 billion, or roughly 92 percent of all export revenue. Industry’s contribution to the country’s GDP was a paltry 3.3 percent and formed 7.4 percent of the total export revenues of KD16.24 billion. Export of organic chemicals, which accounted for 2.2 percent of total exports, and plastics, which formed 1.2 percent of total exports, were among the major contributors in the non-oil sector.

If contributions made by petrochemicals, plastics and fertilizers, which mainly rely on subsidized oil and its derivatives for feedstock, were excluded then industry’s share to export revenue drops to 3.4 percent and its contribution to GDP dips to 1.5 percent. Not very salutary numbers when one considers the huge investments and lands that have gone to sustaining the industrial sector in Kuwait over the years.

Developing a strong industrial base capable of producing essential goods, or at least achieving a modicum of self-sufficiency in indispensable products, is a dire necessity for Kuwait, as currently the country is totally reliant on imports for its existence. On this basis, the release of more industrial plots is certainly a welcome move as it tackles a major supply-side challenge. 

Policymakers also need to focus on several demand-side factors, including the comparatively small size of the domestic market and the need to differentiate industrial exports in a region where competition is rife, and where most industries are concentrated around a narrow band of products that depend on easily available oil and its derivatives as raw material.

In Kuwait, plastics, fertilizers and organic chemicals, all of which rely heavily on oil and its by-products for feedstock, account for a major part of the industrial sector production and export revenues. The government for its part is keen to continue having petrochemicals lead the industrial expansion as it has historically been a more fail-safe industry. But it is worth considering other industries, including foodstuff, pharmaceuticals, metals and construction material, especially given the need to achieve some level of self-sufficiency from a security perspective.

It is also worth noting that other Gulf Cooperation Council (GCC) states are also seeking to boost their overall industrial capacities, not just their petrochemical industries. For instance, the Saudi Industrial Property Authority, which oversees development of industrial cities in the Kingdom, manages 3,380 different productive factories. In the UAE, the new Dubai Industrial Strategy 2030 seeks to transform the emirate into “an international hub for knowledge-based, innovation and sustainable industrial activity.

The distribution of new industrial units aligns with the government’s efforts to diversify the economy and conforms with the New Kuwait development plan, which aims to diversify the economy from its over-reliance on hydrocarbon revenues, and transform the country into a regional financial, commercial and cultural hub by 2035. A major thrust of the New Kuwait vision is to encourage the private sector to take on a greater share in the economy through innovative enterprises that boost exports and provide employment to national manpower.

However, at this point it is not clear whether all ‘industrialists’ can be counted on to engage in economic diversification activities and are keen to create new jobs for nationals. The government mandated Kuwaitization policy, which requires new industries to hire a certain percentage of national manpower, can be stifling. In manufacturing and agriculture, the minimum quota for nationals is 3 percent of workforce, but in some industries such as petrochemical and refining it is as high as 30 percent.

The government also needs to ensure that land allocated for industries is being effectively utilized for the purposes that they were intended. In the past, industrialists have been known to acquire government plots and then engage only in rent-seeking activities. For instance, with the average price of a square meter of industrial land in Al-Jahra approximately KD400, and the same area in Farwaniya topping KD1,500, some industrial investors could find it more lucrative to speculate on the new industrial plots being made available, rather than engage in any industrial development.

The authorities are hoping to discourage industrial speculation by placing a hefty upfront price-tag of KD250,000 as prerequisite capital investment to own a new plot, but this could also end up by only raising the bar for entry by smaller speculators. According to one report, more than 4,000 requests have been received for registering new industrial units. If all these requests represented genuine industrial entrepreneurs keen to develop the country’s industrial sector, Kuwait could easily afford to turn off its oil spigots.

 

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