Anindya Roychowdhury - The Oil & Gas Year Kuwait 2016

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IN DISCUSSION
Anindya ROYCHOWDHURY
Partner
KPMG
' 'As of May
2015, projects
with an estimated
value of close to
$260 million are
underway in
Kuwait.''
THE OIL & GAS YEARIKUWAIT 2016
Lay the groundwork
Despite more than $80 billion in investments planned until 2020, Kuwait faces
opportunities and challenges for developing the infrastructure to accommodate
these mega-projects. Discussing Kuwait's engineering and construction sector
are Anindya Roychowdhury and lmran Najeebuddin, partner and director of
transactions and restructuring, respectively, at consulting and auditing firm KPMG.
GOVERNMENT EFFORTS ARE INFLUENCING
THE BUSINESS CLIMATE IN KUWAIT.
ANINDYA ROYCHOWDHURY: The rapid progress
made by Kuwait during the last four decades has
largely been funded by its oil reserves, and this
progress in turn has enabled the government to
make investments at a scale and speed previously
beyond the scope of Kuwait's relatively underde-
veloped private sector.
However, the lower active participation of
the private sector has resulted in an unbalanced
economic structure, where high levels of govern-
ment expenditure that are inherently fixed have
to be sustained by revenues that are dependent
on fluctuating global oil prices.
To reduce the impact of oil price shocks as
well as to provide employment for an expanding
population, the government has been encouraging
investments in non-oil industries to help diversify
the economy away from oil in recentyears. Kuwait's
location and good relations with its neighbours is
ideal for it to function as a regional commercial
centre, and the country needs to expedite imple-
mentation of the economic development plans.
GO AHEAD: Kuwait's Vision 2035 serves as the
guide to the government's ambitious plan to trans-
form the country. The initial step was the first
Kuwait Development Plan (2010-2014).
This five-year plan brought forward initiatives
including infrastructure development projects,
enhancement oflegislation and business procedures,
increased private sector participation and mod-
ernisation of the oil industry, the mainstay of
Kuwait's economy. The second development plan
(2015-2020) reinforces the government's goals.
During the past four to five years, the govern-
ment has pushed through several much-needed
initiatives, which are expected to significantly
improve the business climate in Kuwait in the
long run. These initiatives include a direct invest-
ment law that allows up to 100-percent foreign
equity in almost all sectors, the new Public-Private
Partnership (PPP) law, the new labour law for the
private sector and the revamped companies law.
Recently, the government put the National
Offset Programme on hold, much to the relief of
foreign companies, which considered it a hindrance
because it greatly increased their cost of delivery.
BIGGER AND BETTER:As of May 2015, projects
with an estimated value of close to $260 billion
are underway in Kuwait, which represents a 30
percent increase over the previous year. Housing
and real estate projects form the largest part, fol-
lowed by projects to develop the transport infra-
structure and the oil and gas industry.
The Clean Fuel Project and the newbuild Al
Zour refinery are the main beneficiaries of the
government's investments into the hydrocarbons
industry. However, Kuwait Petroleum Corporation
has delayed the tendering of several packages of
the Al Zour refinery project becaus~ of bids ex-
ceeding the company's budget.
NEXT UP: Following the success of Kuwait's first
PPP, Az Zour North IndependentWater and Power
Producer phase one, and aided by the revised and
more practical PPP law, the revitalised Kuwait
Authority for Partnership Projects is seeking to
expedite procurementfor power, water, wastewater
and renewable energy projects to address the
country's widening demand-supply gap.
Industry players expect the Kuwait Authority
for Partnership Projects will also revive or expedite
other PPP projects that had been put on hold.
~BUDGET~~~~~~~~~~~~~~~~
Kuwait's budgetary surplus and deficit,
fiscal year 2011 /12-2014/15 ($billion)
so
40
30
0
-10 ~--~---~--~~
201 1/12 2012/13 2013/14 2014/15
Source: KPMG
The Who Who ofthe Global Energy Industry

KUWAIT'SDOMESTICPROJECT FINANCING
CAPABILITY IS DEVELOPING
IMRAN NAJEEBUDDIN: As a large number of
the forthcoming projects are planned to be de-
livered through the PPP route, and with the in-
creased participation of the private sector, sig-
nificant volumes of long-term non-sponsor fi-
nance will be in demand.
While close to SS percent ofproject financing
in the GCC is provided through term and
Islamic loans, export credit facilities form the
primary source of private project financing in
Kuwait. This is not sustainable for infrastructure
projects that have large portions of civil con-
struction work expenditures not tied to the
' 'The long list of
delayed, stagnant and
cancelled projects[...]
has caused developers to
approach opportunities
in the country with
caution., ,
import of equipment. However, the relatively
small capital market in the country is unable
to cater to sl).ch magnitudes offinance, so com-
mercial banks and long-term funds will need
to enter the Kuwaiti market.
FINANCE TIME: Over the next few years, if
private infrastructure development in Kuwait
is to make any significant impact, commercial
banks need to step up their long-term lending
products and accelerate the financial closure
of key projects. Although some Kuwaiti banks
have the financial capability, their participation
in project finance so far has been limited.
An analysis of project finance transactions
between 2009 and 2014 in the GCC indicates
that banks in Saudi Arabia, the UAE and Qatar
dominate the project finance landscape. Except
for a select few, most Kuwaiti banks consider
non- or limited-recourse financing risky and
would rather offer short- to medium-term tra-
ditional lending products.
The $1.43-billion projectfinance transaction
for the Az Zour North Independent Water and
Power Producer project, featuring a lending
consortium of a leading Kuwaiti bank and a
The Whos Who ofthe Global EnergyIndustry
'·
group of international banks, has put Kuwait
on the international project finance map.
This landmark deal and the collective ex-
perience gained from it by the various stake-
holders will strengthen the project finance
market in Kuwait, as concession agreements
become more bankable and statutory lending
restrictions, such as single obligor limits, are
gradually relaxed to allow sponsors to tap into
large-scale project financing opportunities.
However, the countrystill needs to overcome
some challenges for private infrastructure de-
velopments to be able to flourish and contribute
to the government's crucial objectives. These
include overcoming excessively long project
delays and cancellations.
NEED FOR SPEED: Although the various gov-
ernment institutions involved have sought to
streamline the procurement processes, projects
continue to take months or sometimes years to
progress from one stage to the next.
Regional competition with peers is also ex-
tremely challenging. Kuwait's neighbours in
the GCC have also embarked on massive infra-
structure development initiatives, attracting
the interest of regional and international de-
velopers, investors and advisers.
The country also needs to address the busi-
ness challenges posed by national employee
quotas. Developers often face challenges in
finding an adequate number of local people
with the required skillsets who are willing to
take up available positions.
The sector will also need to regain trust
among developers. The long list of delayed,
stagnant and cancelled projects that Kuwait
has seen has caused developers to approach
opportunities in the country with caution. •
IN DISCUSSION I
lmran NAJEEBUDDIN
Director, Transactions and
Restructuring
KPMG
The initial step far Kuwait~ "Vision 2035" was the first luwoit Development Plan (2010-20 74)
THE OIL &GAS YEAR IKUWAIT 2016
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