Is Kuwait back in the game?

New investor-friendly legislation, a fund for SMEs and the hint of infrastructure projects finally moving forward could spell out some good news for Kuwait’s sclerotic economy. However, some say they’ve heard it all before
Is Kuwait back in the game?
By Courtney Trenwith
Fri 25 Apr 2014 10:26 AM

Kuwait has long had a reputation for leaking billions of petrodollars like a sieve, handing out generous subsidies to citizens and expatriates alike and filling its government departments to the brim with locals accustomed to walking out of university and into a job, while delaying crucial infrastructure that has led the state to almost buckle under the pressure.

The roads teem with too many cars while the airport is constrained and severely outdated. Very few can afford the ridiculously bloated property prices due to the lack of supply and even local investors and businessmen are looking outside for opportunities.

It is a sad – and frustrating - picture of a country that boasts some of the largest oil revenues in the world. Almost 90 percent of Kuwait’s $115bn in government revenues comes from oil and gas, yet it has failed to make proper use of its spoils. Its gross domestic product (GDP) grew by a paltry 0.8 percent in 2013, and is expected to grow at a mere 2.6 percent this year – the lowest of the Gulf Cooperation Council states – according to the International Monetary Fund (IMF).

But there could be some good news on the horizon, with several significant legislative changes passed in recent months. Major amendments to the way businesses – including foreign firms - are incorporated, a relaxation on foreign banks and significant funding for small and medium sized enterprises (SMEs) are  all designed to ramp up Kuwait’s appeal to investors.

The government and parliament – Kuwait is the Gulf’s only semi-democracy – also are reportedly close to agreement on a controversial reduction of subsidies for oil and diesel, while a review of public sector wages is under way. The state also seems keen to reduce demand by trimming the number of expatriates living in the country.

A new law governing corporations was introduced in December, replacing the original 1960 legislation.

Abdul Aziz Abdullah Al Yaqout, DLA Piper Middle East partner and head of the Kuwait practice, which has been closely involved in writing several new laws, says the changes are “quite significant” and introduce new concepts required to modernise the country’s business regulations, including creating classes of shares and the “radical” decision to force the government to incorporate a company within three days of application, a process that in the past has taken months.

The Kuwait Direct Investment Promotion Authority (KDIPA) has also been established, elevating the body’s status from a bureau and broadening the sectors in which foreigners can have 100 percent equity in their business.

“I see that as a very huge step forward,” Al Yaqout tells Arabian Business.

A $6.7bn SME fund – one of the largest in the world - was established in March last year following a policy decision to increase support of SMEs and help expand the private sector, which contributes little to GDP and less than 10 percent of jobs.

The poorly constructed 2008 public private partnership law, which will help define most of the country’s largest projects, has also been reformed.

Also in the pipeline is draft legislation to create a telecommunications authority, boost consumer protection and reform insolvency regulation. The country’s first initial public offering (IPO) in eight years is on the cards for later this year, Al Yaqout says.

“There’s a lot - a lot - happening. That’s just the main laws I’m talking about,” he says.

As well as legislation, projects announced long ago appear to be finally getting off the mark. Government-owned Kuwait National Petroleum Company earlier this month signed contracts worth $12bn with three international consortia to upgrade two refineries, and also invited bids to build a new facility, worth an estimated $15bn. They had previously been announced but were repeatedly delayed because of political disputes between parliament and the government – a trademark of Kuwaiti politics.

If they are successfully completed, the projects will be the first major upgrades to the OPEC member’s oil sector in 25 years, and will increase its output from 930,000 barrels per day to 1.4m bpd, according to reports.

The aviation industry also suspects the $2bn-plus expansion of Kuwait’s airport – announced in 2011 – will begin in November.

Construction of the new Mubarak Al Kabeer Port – expected to become the largest port in the northern Gulf and which is highly opposed by Iraq – is moving ahead, albeit behind schedule. The building of a 36-km, $2.6bn, causeway linking the port area to Kuwait City also got under way at the end of last year.

“There are tangible, visible activities happening,” Al Yaqout says. “It’s clearly not at the pace one wants but that view of the lack of pace is tainted by the absolute lethargy that we’ve had in the last five to six years, where nothing was happening.

“It is a process but I think we’re putting the frameworks in place for quite an exciting process that is going to continue going forward.”

However, not everyone is convinced the paperwork will turn into real results.

Kuwait Banking Association secretary general Hamad Al Hasawi says the proof will be in the implementation, which is expected to take years and risks being poorly executed.

“There is improvement in terms of the law, improving relationships between investors, banks and the government, improving the supply of construction materials [and] facilitating the cash flow needed for projects [but] ... what is missing in Kuwait is a do-able action plan where we know what we’re going to be doing tomorrow morning and five years from now,” Al Hasawi says.

“If we [keep] jumping from today with our dreams and thoughts to the future, it’s going to continue to be the same situation. You will continue to see Kuwait stay still, no improvement, no development, nothing positive.

“Our issue in Kuwait is that whatever we’re putting on the ground today is not functionable. The education is not functionable, health services are not functionable, traffic is not functionable, even the solutions that you see are temporary solutions, not well thought through.”

Kuwait University veteran economics professor Abbas Al Mejren was involved in writing the country’s five-year development plans in 1996, 2000 and 2005.

“In all those years, in all those development plans, we’ve been setting objective targets that are similar to the old plan, which means we’re not making any progress towards reaching those targets,” he says.

“Everyone in Kuwait is saying, ‘we’ll believe that the government is serious out such plans when any of its projects has been implemented and is working’.”

Examples of the gap between plan and implementation abound.  The Ministry of Health announced in March nine new hospitals would be built in five years – more than 20 years after a similar pledge.  Not one new hospital has been completed in that timeframe.

“Everyone can say whatever he wants, but the question is not what you say; the question is, ‘can you do it?’” Al Mejren says.

KDIPA director general Meshaal Jaber Al Ahmad Al Sabah argues the country has allocated KD30bn ($106bn) towards “mega projects”. However, according to the IMF, little was actually spent during the country’s first ever medium-term economic development plan, which ended on March 31, and the budget for 2014-15 has allocated only KD2bn for capital expenditure - a significant drop compared to last year.

“The upcoming medium-term second development plan is expected to further focus on increasing deployment of projects, enhancing performance, and realising the country’s strategic goals in attaining economic diversification, social prosperity, human development, and institutional excellence,” Al Ahmad Al Sabah told Arabian Business in a statement.

He blames the 2008-09 global financial economic crisis for the slowdown in investment expenditure in recent years – despite other Gulf states moving forward with their plans – and argues the government has managed to maintain its sovereign investment grade rating and low country risk status during the period.

“I maintain an optimistic stance that the new observed momentum in investment growth in Kuwait will be sustained, and we shall be seeing a rising interest from both local and foreign sources to take advantage of the unique attributes that Kuwait offers as a promising investment location, and be able to tap into its lucrative investment potential,” he said.

Kuwait has been marred by ongoing political and economic issues since the 1970s, prior to which there had been reasonable expansion in key services. The problems began in the late 1970s and more so after 1982 when Kuwait’s unofficial stock market, Souq Al Manakh, collapsed, causing KD28bn in debt – more than the country’s entire oil revenues since 1946.

The nearby Iraq-Iran war and a decline in demand for oil in the 1980s made matters worse, followed by the Iraqi invasion in 1990, which destroyed much of Kuwait’s infrastructure. There was another oil price plummet in 1998, and the US-led invasion of Iraq that toppled Saddam Hussein took place in 2003.

Al Mejren concedes the country has had a more difficult development environment than its neighbours but says, similarly, there has been little action during more stable times.

“If you look at 2003 until now, 10 years have passed but things are still moving slowly,” he says. “Only lately have we heard some intention that enough is enough and the government is going to move faster with planning and setting projects.

“In recent years [Kuwaitis] have started to get really nervous with the slowing down of these projects.”

The young are particularly becoming restless, while elected MPs have been historically hostile towards government members appointed by the Emir.

There have been six governments in the past couple of years and ministers have routinely been switched from post to post – most recently in January - creating a lack of stability.

“It’s almost killing the economy except for the only source of income generation, which is oil, and even that has been tackled somehow by politicians and others,” Al Hasawi says, explaining a rivalry between public sector workers in the oil industry who claim they should be paid more than those in non-oil jobs.

Some of the problem also lies in the country’s matrix of procedures required to approve projects and new businesses. It is a familiar hindrance in most democracies, but the result appears more pronounced in Kuwait, whose autocratic neighbours, including Saudi Arabia, the UAE and Qatar, are steaming ahead with new roads, houses, hotels, airports and other infrastructure popping up every year.

“We need to change the method of implementing the plan,” Al Mejren says.

“In an open world like today, the private sector has a lot of opportunities in other markets, that’s why we see them in the UAE, Saudi Arabia, Oman, Bahrain, where they find a better environment for business development there.

“However, parliament in Kuwait does not think this way. But even if they want to think this way, it’s not an option for them because we have a constitution which divides the power, and the decision making process is not as simple as it is in Dubai; we have to go through many procedures through the parliament.

“But parliament can’t be blamed for the slow progression of projects because legislation is not needed to build a hospital. So the blame for the delays can be more on the executive authority than the legislative authority.”

Tax-free Kuwait is often viewed as resting on its laurels because it easily records surpluses year after year. In the 2013-14 fiscal year, which ended March 31, the surplus was expected to be $32bn. But the IMF says Kuwait will record its first deficit in two decades as early as 2017-18 if it does not reduce non-investment based spending and diversify its economy.

“The fiscal position is currently strong but a sustained drop in oil prices could deplete fiscal surpluses,” IMF deputy division chief of the Middle East and Central Asia department, Ananthakrishnan Prasad, says.

“A medium-term fiscal strategy is required to drive reforms, the elements of which would include containing current expenditure growth, particularly subsidies and wages, prioritising capital expenditure, and increasing non-oil revenue.

“The government needs to put in place a medium-term budgeting framework, and strengthen its macro-fiscal unit to support fiscal policy making. Economic diversification into areas with potential for national employment should constitute a key priority. Structural reforms will be required for improving the business environment, infusing greater transparency and governance in public administration, promoting a greater role for SMEs, and expanding the role of tradable services.”

Yet the government is preparing to spend another KD248m on salaries when a new scale is introduced, according to Al Mejren, who has been involved in the scheme. He says while it will cost more immediately, the new scale will make public-sector salary expectations clearer.

Well over 90 percent of working Kuwaitis are hired by the government – many without real tasks or even a desk to work at, leading to appalling productivity levels.

“In a department where you only need 50 personnel you may find 200; that’s four times [what you need],” Al Mejren says.

“Sometimes many employees have to come on time for their job and leave on time but between those hours they don’t produce, they just either read a newspaper or talk to each other. It’s a situation that’s not productive.”

Al Mejren argues the excess jobs are an acceptable form of social pension to share the country’s huge oil wealth, but they should be made to be more productive.

“The government doesn’t have a shortage of money to invest, we do have a surplus. With the kind of surplus we have you can’t say that it’s better off for the government not to provide jobs to the citizens,” he says.

“But the question is, is it economical to provide jobs without activity? We say it’s not [beneficial] ... economically and it’s also not [beneficial] ... socially because over time people will feel they’re useless.”

The government also is reportedly close to agreeing to remove subsidies for oil and diesel, while implementing rationing for citizens. Meanwhile, corruption is bleeding money from government coffers. There are numerous investigations ongoing, including into the awarding of contracts for a $2.6bn power plant and allegations that MPs have been accepting bribes. Even members of the ruling family have been accused of involvement in a huge fake visa scam.

At the end of the day, analysts agree there will be a line-up of interested investors if Kuwait can get its act together.

The MENA head of investment at US-based asset manager Schroeders, Rami Sidani, says investors are “definitely more upbeat” about Kuwait but they’re hoping the government has the political capability to fulfil its promises.

“Given the low base we’re starting from in Kuwait ... anything optimistic would make a lot of difference,” Sidani says.

“Kuwait has reached a stage where there’s a social risk if they don’t press ahead with some of these projects and that’s something that the ruling family and the entire government is very conscious about, so given the social need I’m quite optimistic that things will start getting done.”

Kuwait has one of the highest GDP per capita rates in the world, at more than $53,000, according to the World Bank. Wealthy individuals and private businesses have significant savings as well as investments abroad, but they have been reluctant to invest in Kuwait.

Al Mejren predicts that things could soon change with improvement in laws and procedures.

“If the environment is good for business in the country then definitely they will move this money inside,” Al Mejren points out.

“Once you start to see things moving in Kuwait, believe me, the private sector will not delay, they will come and start their own projects because what the private sector is saying now is, ‘we want to see that the government is serious about the implementation of the country’s development plan, then we’ll play a part’.”

Clearly, the ball is rolling but it remains in the government’s court to determine just how fast it will keep going and who else will play.

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