TIMES KUWAIT REPORT
A special session of parliament called for by the government on 25 October, to discuss and approve the annual budget for fiscal 2022/2023 did not achieve this objective, as most lawmakers objected to approving the budget without extensive study and discussion. Though the annual budget needs to be approved by November, the MPs asked for the document to be returned to the National Assembly’s Budgets and Final Accounts committee for further review, and agreed to vote on the budget at the next sitting of parliament on 1 November.
Parliamentary budget approvals are needed to implement the programs and projects of the state, and to move the wheels of progress forward. Any delay in passing the budget hampers these development processes and results in market uncertainty. For instance, the budget for the previous fiscal year 2021-22, which was eventually approved only in June 2021, had included substantial allocations for strategic projects. However, because the budget also envisaged a deficit of around KD11 billion, the government decided that the easiest way to reduce the budget was to cut spending on projects. As a result several projects were shelved or scrapped, unsettling the plans and forecasts of stakeholder in the projects market.
Given the importance of development projects to the country the hope among many is that with a new executive and legislative now in office, and an apparent truce prevailing in relations between the two arms of the National Assembly, even a belated budget approval for the many stalled development projects could provide a much-needed boost to economic revival in the country.
Reviving the construction sector should be a priority for the authorities considering that development projects, especially vital infrastructure projects, are crucial to achieving the country’s ambitious Vision 2035, that guide the ‘New Kuwait’ development plans, designed to transform Kuwait into a financial, commercial and cultural hub in the region. Construction projects, which form a major non-oil component of the economy, are also integral to the country’s strategic growth plans, of weaning the market away from its over-reliance on the oil sector, encouraging greater private sector participation, and providing more jobs for young nationals in the workforce.
Over the past two years, repercussions from the COVID-19 global pandemic including a steep fall in global oil prices and a subsequent liquidity crunch led to the country facing a fiscal crisis, which led to delays in rolling out and implementing several vital developmental projects. The surge in oil prices following an abatement of the pandemic has eased pressure on the country’s finances and the budget for fiscal year 2022-23 is now expected to run a surplus. This has fueled optimism among many that the projects market could witness a surge in the coming months.
Despite the apparent buoyancy in the market over the current conviviality in parliament, and the windfall revenues pouring in from higher oil prices, there is skepticism among some about whether the prevailing politically and financially favorable environment will result the structural changes required to revive stalled projects, and to revamp the projects market so as to accelerate the processes involved in approving, tendering and awarding of planned projects, as well as make the implementation of awarded projects more efficient.
Kuwait has many factors in its favor when it comes to project developments; it is the sixth-biggest projects market in the region, after Saudi Arabia, UAE, Egypt, Iraq, and Iran. It is a high-income, energy-rich economy with substantial oil reserves that make it one of the most creditworthy countries in the Middle East. These favorable factors, along with the wide spectrum of investment and partnership opportunities, including in key project markets such as the chemical, construction, oil & gas, industrial, power, water, and transport sectors, should potentially attract investors and businesses to Kuwait. But they do not; and we need to find, why not?
Industry analysts have repeatedly pointed out that with currently over KD62 billion in projects planned or in various stages of the development cycle, the country’s challenges are, not in a dearth of planned projects, but in its implementation. Very few of the planned ventures end up being brought to tender, or in contracts being awarded, most continue to be bogged down by bureaucratic hurdles or lie indefinitely in design and bickering phases. And, even when projects are awarded there could be further delays related to the incompetence or inability of contractors to finish awarded projects on time.
Many of these planned projects that have yet to be tendered or awarded, or are in delayed implementation stages are in some of the most urgently needed projects, including in the construction of infrastructure developments. Following more than a decade of underspending and inefficient spending in the infrastructure segment, there was a revival with the announcement of the ‘New Kuwait’ development plans. However, this initial euphoria appears to have faded.
The project for infrastructure development in the country’s largest industrial area, the Shadadiya Industrial Zone, is a glaring example of this inefficiency in spending, as well as a showcase for the inability of incompetent contractors, often hired on the basis of the lowest tender they submitted, to complete awarded contracts. Spread over nearly 6 million square meters, the contract for infrastructure work was initially awarded in 2013 with project completion set for 2016.
Repeated delays by the contractor and extensions granted by the client, the Public Authority for Industry (PAI), saw the project drag on till theNovember 2020, when PAI finally decided to dismiss the contractor and submit the project for retendering. The project is now expected to be completed only by 2024, a decade after the official launch of the project. Such delays are also evident in the country’s vital oil sector. A project to remediate the soil after contamination from the oil-wells set ablaze in 1991 during the Iraqi occupation, were eventually awarded only last year.
Spending in the oil sector also suffered a slump in 2019 and 2020 due to the fiscal crisis and from market repercussions during the COVID-19 pandemic, including low oil prices, supply-chain disruptions and shortage of qualified and experienced manpower. Although a sector restructuring last year coincided with a few, previously shelved major contracts for oil and gas projects being awarded, there have been delays from other externalities with no major projects announcements.
One major project that has been underway since 2019 is the 145km long gas export pipeline that extends from gas fields in the border areas in northern Kuwait to the Mina Al-Ahmadi Refinery in the south of the country. The project by state-owned Kuwait Oil Company (KOC) and valued at around KD140 million, was awarded to the Indian multinational conglomerate Larsen &Toubro (L&T) in 2019. Completion of the project, which was subject to delays and extensions related to fall-outs from the global pandemic, is now expected to be completed by year-end..
Other mega projects in the pipeline in the country that are currently at various stages of the development cycle, include several ambitious power projects that together aim to produce around 14.3GW of capacity. Power generation to keep up with soaring demand is crucial given that much of the existing capacity is old and inefficient. Although Kuwait has an installed capacity of 20.25GW, available capacity is always much lower and in March of this year was just 12.69GW.
Industry analysts have repeatedly noted that the country urgently needs to speed up the delivery of projects, especially those deemed critical to Kuwait’s continued growth and progress. They point out that the country’s projects market has slided in terms of the value of contracts awarded, nearly every year since 2015. According to a previous World Bank report, implementation phases of infrastructure projects in Kuwait are drawn down by cost overruns in 20 percent of cases and time delays in 110 percent of cases.
These and other assessments by market analysts and international institutions are borne out by the latest report on the project market in Kuwait compiled by the National Bank of Kuwait. The report notes that new project awards declined to a near twenty-year low of KD49 million in the third-quarter of 2022, which was also down 69 percent quarter-on-quarter from the KD156 million registered in the second quarter of this year. In addition, the total value of project awards in the first nine months of the year totalled KD339 million, which was 63 percent lower compared to the same period in 2021.
The bank presaged that although a rebound in project awards was plausible in the fourth-quarter of the year, it would still require a significant number of projects to be awarded in order to tally with KD1.5 billion project awards notched in 2021. While there is hope that many of the more than KD2 billion in project tenders in the offing — many of them postponed from previous quarters — would be awarded in the fourth quarter, this appears to be highly unlikely given past trends.
Looking ahead to 2023, the bank report noted that project activity should increase from the low levels this year, especially with the new government looking to prioritize Kuwait’s development plan, and oil prices expected to remain relatively high over the next 12 months. According to industry experts, nearly KD5.5 billion worth of projects are expected to be tendered in the first three quarters of 2023.
The buoyant projections for 2023 notwithstanding, it is worth remembering that a similar optimistic prognosis made in January of this year by Fitch Solutions, a sister-division of sovereign rating agency Fitch Ratings, did not pan out as predicted. The agency had forecast that following the pandemic related delays the construction and transport sectors were expected to recover and gain momentum in 2022. But sadly, this optimistic analysis failed to materialize, as in the ensuing months yet another political stand-off between the executive and parliament once again led to resignation of the cabinet, dissolution of parliament and fresh elections.
With a new government and parliament now in place there is a tired sigh of weariness and once again the hope, although very faint, that this time around it will be different; that this time development projects will be accorded the priority they deserve considering their importance to the long-term sustainable development of the country and its people.