The overwhelming influence of the government sector is stunting Kuwait’s private industry. The only way for the economy to diversify is to attract investors with new ideas. Published in MEED, 16 October 2013
In five months’ time, Kuwait will have reached the end of its four-year Development Plan, part of the wider Vision 2035 strategy to propel the economy forward and transform the country into a regional trade and finance hub. But even now, it is clear the government will miss its targets.
The plan, approved by the National Assembly (parliament) in February 2010, envisaged KD30.8bn ($108bn) being spent on infrastructure projects, of which half was to come from the private sector.
The aim was to decrease the state’s dependence on oil revenues and increase the role of the private sector in the economy. In the process, it was hoped that more locals would be enticed into working for private companies. At the time, the private sector accounted for 37 per cent of total economic activity, according to local investment firm Markaz, and the plan was to increase this to 44 per cent by 2014.
Up-to-date figures on the size of the private sector are not available, but developments over the past few years have not been encouraging. As the Washington-based IMF noted on 23 September, after concluding its annual review of the Kuwaiti economy, the investment programme has lagged behind schedule and large hikes in public sector wages in April 2012 have undermined efforts to boost private sector jobs.
The missed targets will not be a surprise to anyone in Kuwait. Despite the failure to move ahead with major state-backed projects, it is clear the economy still relies heavily on government spending.
“Kuwait spends very little on projects, which is something the private sector benefits from a lot in the other GCC countries,” says Steffen Hertog, an associate professor in the department of government at the London School of Economics.
“But the Kuwaiti private sector is still indirectly dependent on the government. Very little consumer demand emerges from within the private sector because the volume of salaries paid is not very large and most of it is remitted abroad. Most of the households that can engage in serious consumer spending get their salaries from the government.”
The fact that the targets are all but certain to be missed is due to a mixture of factors. When it comes to employment, private companies struggle to match the wages being paid by government departments and agencies – a problem that is getting worse rather than better, as the IMF points out. According to recent official figures, four out of five Kuwaiti nationals who have a job work for the state.
In 2011, the last year for which there are comprehensive figures, some 230,000 nationals had public sector jobs, while 61,000 worked for private firms, according to Kuwait’s Central Statistical Bureau. In contrast, there were 1.1 million expatriates working in private sector jobs that year and most of them were low-paid and unskilled. About 72 per cent of foreign workers had not completed secondary school education and 49 per cent were earning KD60 ($212) a month or less.
In addition, soaring oil prices distort the country’s gross domestic product (GDP) figures, as it is hard for the private sector to gain ground against the public sector when government revenues are so high. That will become even harder if Kuwait increases its crude output from 3 million barrels a day in 2012 to 3.5 million by 2015, as US ratings agency Standard & Poor’s suggests it might.
In any case, the government has struggled to get parliament to agree to major spending plans and economic reforms, which could help diversify the economy and ensure major schemes move ahead.
“The high oil price highlights the challenges of trying to specify what percentage of GDP the private sector should ideally account for,” says Daniel Kaye, head of macroeconomic research at National Bank of Kuwait. “The metric is sensitive to what is happening to crude prices, particularly in a country such as Kuwait, where oil production is so large when compared to the economy.
“The Development Plan laid out all sorts of targets and metrics, but I interpreted them more as guidelines than strict targets. What we can say for sure is that until recently none of the plan’s big, signature schemes was under way. Now, at last, we look like we are inching closer to the start of a couple of them, as well as many smaller ones.”
Among the projects that are slowly moving forwards is the Al-Zour North independent water and power project (IWPP). This was awarded to a consortium led by France’s GDF Suez and Japan’s Sumitomo in January, although reaching financial close on the $2.5bn scheme since then has proved to be a lengthy process.
“There will be challenges in the implementation of projects, but there are enough in the pipeline to engender optimism,” says Kaye. “A lack of investment – both public and private – has been one of the economy’s key weak spots for years. Even a moderate improvement in project execution could go a long way to boost confidence and improve the supply side of the economy.”
For now, the limited progress means Kuwait remains more heavily dependent on crude revenues than most of its GCC peers. In 2012, hydrocarbons production accounted for an estimated 64 per cent of the country’s GDP, compared to an average of 48 per cent across the GCC as a whole, according to Qatar National Bank (QNB).
The chances of there being more private sector activity received a boost in December 2012, when opposition groups boycotted the general election and a more pro-government parliament was voted in. The hiatus between parliaments while the poll took place had also opened the way for some long-awaited reforms to be introduced by emiri decree, including a new Companies Law in November. Once parliament was in place, other reforms were passed, including approval for the privatisation of flag carrier Kuwait Airways.
However, it did not take long for the country’s political problems to reassert themselves. As the months passed, the new parliament became more combative in its dealings with the government and in June, the Constitutional Court ruled that the December election was invalid.
Another poll was duly held in July. After briefly convening in early August, the new parliament took a long summer break, which is due to end in mid-October. Whether the latest members of parliament are more open to cooperating with the government remains to be seen, but history suggests the relationship is likely to be characterised by opposition and intransigence. As a result, meaningful economic reforms that might benefit project spending or the private sector seem unlikely to move ahead quickly.
“Parliament shoots down pretty much all the schemes the private sector is interested in,” says Hertog. “It is rational populism. Voters don’t really benefit from policies that further business development and if there is a choice between increasing public sector salaries or making cash grants to families on the one hand, and spending on infrastructure that would benefit the private sector on the other, then I think the private sector will always lose out.”
“There could only be a change in the long run if private firms completely shifted position and started employing more nationals and perhaps started paying taxes,” he continues. “Then they would become a serious negotiating partner. But right now, they don’t do anything that’s essential for society or for the survival of the regime.”
Despite the tough climate, there are some bright spots. According to MEED’s annual ranking of the 100 largest listed corporates in the region, 12 are from Kuwait, which is a strong showing given the size of the country. The banking sector is the clear leader within the group, accounting for eight of the 12 companies, along with two telecoms firms, a real estate business and a food company.
Developing domestic champions is one thing, but for the economy to really diversify, it needs to attract international skills and investors with new ideas. However, the relatively unwelcome environment for private capital means Kuwait has received less than 1 per cent of total foreign direct investment into the GCC over the past decade, according to QNB.
With the current Development Plan nearing its end, the challenge facing the Kuwaiti authorities is to draw up a successor plan to start in the new financial year, which begins in April. A more realistic set of targets would probably be wise, but the structural issues in the economy and the political system mean any change will be very difficult to push through.