Kuwait: Moving Forward

Published in The Middle East, January 2013 From his window seat on a British Airways plane that had just landed at Kuwait International Airport, Abdul could see a Kuwait Airways jet parked on the tarmac. A student in the US, Abdul makes the long journey home several times a year but he always avoids travelling with the national carrier. “I never fly with Kuwait Airways. They’re terrible. The service, the aircraft, everything,” he says.

He is not alone. Confidence in the national airline is low, following a number of well-publicised technical problems with its planes, and at least one major local company has told its employees to use other airlines when travelling for work.

In many ways, the national airline is like the country it serves. It has a workforce far larger than it needs and a lack of investment means that its fleet now has an average age of 19 years. The wider economy also has a bloated public sector, suffers from continual delays to major infrastructure projects and has one of the lowest levels of foreign direct investment in the region.

The evidence of all this is obvious to anyone wandering around central Kuwait City. Despite the country’s massive oil wealth, there are numerous dilapidated buildings and a noxious smell from the drains can confront you close to even the tallest and shiniest of new skyscrapers.

There are plans to turn around the airline through a privatisation process led by the Kuwait Investment Authority and other plans have been formulated to reinvigorate the wider economy. Such plans have been on the drawing board for many years, but there is now a sense of optimism that something might be achieved. The main reason for that is the general election on 1 December. The poll was boycotted by the main opposition groups and, as a result, the new National Assembly (parliament) is expected to have a far more constructive relationship with the government than its recent predecessors. “There’s a chance now for the government to get it’s act together. We need strong ministers and a strong government with a willingness to push things through and then we have a chance to get things back on track,” says Abdul Aziz Al Yaqout, the Kuwait-based regional managing partner at international law firm DLA Piper.

“The government doesn’t have any excuses any more.” Even before the election there had been some signs of progress. The Emir Sheikh Sabah Al Ahmad Al Jaber Al Sabah had made a number of televised speeches, which gave observers hope that the economic inertia that has gripped the country might be coming to an end.

“The emir has started to get more involved and there are some signs of progress on projects like Silk City, the Subiya Causeway and the Al Zour power plant,” says Daniel Kaye, a senior manager in the economic research division of National Bank of Kuwait (NBK). “Given how little investment there has been in the non-oil sector in the past this is very welcome. But we won’t get carried away. There have been a number of false dawns when it comes to the project market.”

As a result of the new sense of purpose from the authorities, NBK upgraded its estimates for growth in the non-oil economy next year from 4%to 5%. “It’s not a huge upgrade, but it reflects what we believe should be a slightly more active project environment,” adds Kaye.

Other signs of progress include the improving relations with Iraq and the long-term opportunity that offers to Kuwait to tap into a fast-growing economy on its doorstep. Some of Iraq’s largest oil fields are in the south of the country and there is the potential for trade and logistics services to flourish on both sides of the border.

In recent weeks the Iraqi and Kuwaiti governments have agreed a deal for Baghdad to compensate Kuwait Airways for losses caused during the 1990 invasion. There is still around $13bn in compensation outstanding owed to Kuwait, but both sides now appear keen to settle their differences.

Parts of Kuwait’s legal framework are also getting a much-needed revamp. A new Companies Law was published by decree on 29 November and now needs parliamentary approval. Among its measures are provisions to give greater rights for minority shareholders as well as creating a separation between a company’s executive management team and its board.

“I think this will radically change things, although a lot of people don’t realise it yet,” says Al Yaqout, who was involved in drafting the law. “It brings Kuwait up to date with other countries. We’re confident that we’re now on a par with other countries in the region. We have been waiting for this law for the past 23 years, but better late than never.”

More legal reforms are coming, including a new insolvency law and a new foreign direct investment law. Such measures should help to make Kuwait more attractive to international companies and the expertise they can offer is something that Kuwait sorely needs.

The overarching vision of the emir is to turn the country into a financial and trading hub for the region by 2035, with the private sector the leading force in the economy. As many in Kuwait acknowledge, it will be extremely difficult for the economy to diversify effectively when oil is so plentiful and crude prices so high. But there is also little incentive for locals to seek more risky, challenging work in the private sector when public sector jobs and other benefits are so easily available.

Abdul, the student on the plane, is studying entrepreneurship in the US. The past two generations of his family have built up sizeable trading businesses, making themselves very wealthy in the process, but as he acknowledges, his family is an exception. Most Kuwaitis show little interest in the business world. “There is very little entrepreneurship in Kuwait, but it is slowly changing,” he says.

Most Kuwaitis prefer a job working for the government, where the balance between working conditions and pay is more to their liking. The ratio has changed over the past decade, but most Kuwaitis who want a private sector job now probably have one and the rest don’t see the point. “The number of Kuwaitis in employment who are in the private sector is now around 20% ,” says Kaye. “It used to be around 5% 10 years ago. This is encouraging, but a lot of the ‘low hanging fruit’ has now been picked. Further progress may be more challenging.”

Against this backdrop, the country’s politicians continue to argue and their differences could yet undermine the hopes for meaningful economic progress in the years ahead. Having boycotted the December election, the opposition groups now find themselves shut out of the corridors of power but they have vowed to carry on questioning the legitimacy of the new parliament and to continue their protests on the street.

In the short term, there are many in the country who argue that it is worth giving those in power another chance to get things right. But if the government and new parliament cannot work together effectively, then the situation is liable to get more tense and polarised.

“This is never going to be a utopia. We’ll always have corruption and cronyism and some people with better access to the state coffers than others,” says one local analyst. “But the last parliament was the worst we’ve ever had. There was a lot of frustration and disillusionment. It was like being in a dark tunnel without light. Without the parliament, the government has stepped up its game. It is privatising Kuwait Airways, resolving the Iraqi debt.”

One Kuwait Oil Company employee says he expects the latest election to have little or no impact on the day- to-day life of the country’s most important corporation. In the oil town of Ahmedi there is a sense of detachment from the traffic jams and political manoeuvring of the capital to the north.

Kuwait’s huge oil reserves are both its main strength and its biggest weakness. The revenues it earns from oil sales mean that it can afford to invest in almost any- thing, but it has also been able to afford to sit back and do almost nothing.

“The credit ratings agencies come here and they always ask what is Kuwait’s niche? Well maybe it doesn’t need one. It has oil and that will always be the dominant element in its economy for years to come,” says one financial analyst.

But there are many in Kuwait who now feel that it must do something, that the years of inertia must come to a close at some point and that the gap between Kuwait and more vibrant nearby economies like Qatar and Abu Dhabi should not be allowed to grow any wider.

“Our problem is not money. We have more than enough money. We need know-how and diversification,” adds Al Yaqout. “We have to work on our infrastructure. It begins with transport, it continues with oil and with education, healthcare, housing, everything.”

With the fresh parliament in place, it looks like Kuwait has the best opportunity in years for that work to at least start.