Kuwait Infrastructure Report Q2 2008

With remarkable infrastructure sector growth in the last few years, Kuwait has been one of the major drivers of the construction boom in the Gulf Cooperation Council (GCC) region. The country's construction industry was valued at US$1.64bn in 2006. In this report, BMI forecasts the construction industry to grow at an average rate of about 4.22% during 2008-12.

Kuwait is marked by a high level of oil dependency, first world living standards and an unusual population structure. Kuwaiti citizens occupy a privileged position in the local economy, while there is a large population of resident expatriates, mainly from other parts of the Middle East, South Asia and the Philippines. These expatriates account for as much as 80% of the resident workforce of around 700,000.

Infrastructural development in the country is being spurred by high levels of population growth. A robust economy, bolstered by surging oil prices, has provided the government the necessary liquidity to undertake large-scale construction projects. The government is expected to invest US$3bn in the construction industry in the next five years, while private sector investment to the tune of US$8bn is also anticipated.

The Public Authority of Housing has taken up an ambitious welfare project to provide 69,000 new housing units by 2014, while the Ministry of Education has promised to build 340 new schools over the same time period. The first phase of the ambitious Boubyan Island Project has commenced, while Project Kuwait - which aims to increase production in the country's northern oil fields - is now in its final planning stages. Other major projects include the US$14bn al-Zour refinery, the US$3.3bn Failaka island development, the US$2bn planned expansion of Kuwait International Airport (KIA).

Private sector participation has been on the rise since 2004, especially through the BOT (build, operate, transfer) mechanism. BOT models are popular methods of financing infrastructure projects in the power, wastewater, real estate development and transport sectors. The government's affinity for BOT is likely to boost co-operation with the private sector. The Ministry of Finance is proposing a new law to ease regulations relating to BOT. The construction industry boom is in sync with the general Gulf trend - skyrocketing oil prices are fuelling massive investment across the region.

The Kuwaiti infrastructure sector has its share of drawbacks. Construction in Kuwait is state dominated, with the Ministry of Public Works and the Ministry of Planning playing a key role. As a result, the decision-making process often takes an inordinate length of time, even by regional standards. Ventures such as the US$1.5bn Subiya causeway have suffered due to the nation's bureaucratic hassles. Further, the country's real estate sector is largely fragmented due to limited plots and restricted development space. In addition, foreign companies have to bear high levels of duties and taxes.

Annual cement consumption is estimated at roughly 3mn tonnes. The Kuwait Cement Company, which imports clinker from abroad, accounts for around 50% of total supply; Kuwait Portland is responsible for another 35-40%. Al-Hilal and a few others supply the balance.

BMI forecasts the construction industry to be valued at KWD0.63bn (US$2.19bn) in 2012, making up 1.97% of GDP. However, a rapid pace of development may entail higher raw material prices and lead to labour shortages. The government will have to ensure availability of necessary back-up infrastructure to support the new developments.