Kuwait, April 2011: Kuwait Financial Center “Markaz” recently released a report titled “Kuwait Development Plan; towards a strong beginning”. The report analyzes the Kuwait Development Plan (2010-2014) in addition to the various risks associated with its success and resources to mitigate those risks. The authors of the report note that while the Kuwait Development Plan (KDP) is no doubt ambitious; with a coherent strategy, even ambitious dreams are achievable. Successfully embarking on such plans is no longer an “option” but a “necessity”. Due to rapid population growth, Kuwait needs a strategy to brave over infrastructure deficits. With a young population entering the job market with force year after year, Kuwait needs to create credible jobs for nationals. With erratic global growth and associated oil price fluctuations, state revenue needs diversification. With government being a significant employer, public sector employees need to be re-tooled to deliver prompt services. The external image of Kuwait as a static economy needs a “facelift”. What better than a scheme like KDP to achieve all of these?
The KD 30-35 bn (USD100-USD 125 bn), 5 year plan is the first in a series of five such plans, stretching to 2035, which aims to convert Kuwait to a trade and financial hub of the region.
The plan for the fiscal year 2010/2011 is comprised of 884 projects, valued at nearly KD 5 bn, spread over 4 phases and includes those which have not yet begun. As of the first half of the fiscal year, half of the projects are in either the Financial/Design Approval or Implementation phase. The majority of projects, 259 (29% of the total) are in the Final Approval phase while 141 (16%) are in the pipeline or have not yet been started.
It must be noted that mere existence of a need is not enough to launch and pull off such a grandiose scheme. In just the first half of the fiscal year, numerous risks have emerged which have proven to be obstacles in the swift and sustained implementation of the plan. There are solutions which would go a long way towards mitigating these risks; however, such actions require a committed sense of cooperation between the involved parties.
In terms of progress thus far on the first years’ plan (2010/2011), according to the semi-annual progress report, KD 735 mn has been spent on the 884 proposed projects for the year, amounting to 15% of the budgeted cost of nearly KD 5 bn. By annualizing this figure, the full year expenditure should amount to KD 1.5 bn, an actualization of 30%, which concurs with projections by the Deputy Premier for Economic Affairs, Sheikh Ahmad Al Fahad Al Sabah. Overall expenditure was fairly well split between 1Q and 2Q, with 45% and 55% of total expenditure, respectively.
The projects are split between those which directly support the KDP (Policy Projects) versus what can be termed as Recurring projects or those which are the norm and don’t necessarily follow the KDP’s policies explicitly. These are further segmented based on whether they are developmental or infrastructural in nature. 38% of the projects (334) are Policy Projects with a budgeted cost of KD 1.05 bn for the year, of which 18% has been realized. Of the Recurring Projects, which account for 62% of the total number of projects and a budgeted cost of KD 3.9 bn (or 79% of total budgeted cost), 14% of budgeted cost has been realized.
Moreover, the majority of projects, whether Policy or Recurring, are infrastructural in nature (493 projects with a budget of KD 4.2 bn); of these projects 14% or KD 589 mn has been spent. As for developmental projects (numbering 391 with a budgeted cost of KD 783 mn), 19% or KD 146 mn has been spent.
The financing of the plan is expected to be a 50/50 split between the government and the private sector. The exact funding mechanism has not been finalized yet and has been debated rigorously in the press and at various forums. Many projects fall under the relevant agencies own budget to be financed internally while mega-projects will look for additional government and private sector funding.
Government spending has been disparate over the last eight years with no obvious trend to be seen; spending spiked 88% to over KD 18 bn in 2009 due to a one-time transfer, without which spending would have been at KD 12 bn, a 23% annual growth. 2010 saw a 38% decline in spending while the current fiscal year forecasts spending at KD 16.3 bn, a 45% annual increase.
Development Expenditure has grown steadily since 2004, reaching over KD 1 bn in 2009, before declining 9% in 2010. The current fiscal year (2010/2011) expects Development Spending to nearly double to over KD 2 bn, in conjunction with the KDP. The 1H10 expenditures in the 2010/11 plan correspond with that which had been budgeted for the year as per the budget; the government had budgeted for a near doubling in Development Expenditure to KD 2 bn, which would accommodate the spending thus far of KD 735 mn, in addition to a full year expenditure of KD 1.5 bn should spending in the second half of the 2010/11 plan match that from 1H10.
Risk & Risk Mitigation
The launch and implementation of the KDP faces several risks. It will be useful to think through these risks as well as resources that may be needed to mitigate them. The authors have identified and analyzed the following risks:
- Sovereign Risks – ability to build consensus
The sovereign risks involved in the success or failure of the Kuwait Development Plan lies in the ability of the State to build a degree of consensus between the government and parliament to cooperate in furthering the aspirations of the plan. Resolving these issues will go a long way towards alleviating Sovereign Risks associated with the KDP. The plan will not flourish unless it is supported and underscored by clear, unwavering governmental and parliamentary support.
- Financing Risks - ability to find long-term funding
The financing of the plan (both in the short and long term) have come up for debate in many areas and indeed the funding mechanism for the plan (specifically pertaining to projects which offer little-to-no investment returns such as Housing) has not yet been finalized.
The articulation of a clear policy concerning the financial sector’s involvement in the KDP is vital, given that it is both a mechanism and desired goal of the plan. The financial sector is expected to play a large role in funding the plan’s projects, both long-term and short-term. On the other hand, it is also one of the plan’s stated goals to further expand and develop the local financial sector. These two points can work in congress towards the same goal if only a clear policy is decided upon to govern the financial sector’s role.
The main avenue being discussed in implementing the various projects of the KDP is traditional bank financing, which is mainly geared towards short-term funding rather than long-term endeavors. Additionally, given the recent financial crisis, banks have become much more prudent and risk averse in their lending practices and may not be suited towards some of the funding which the plan requires.
What is needed is a clear Long-term/Short-term Funding Policy which would make use of traditional financing, but would also broaden the horizon to other financing options such as Bonds, Mezzanine Funding, Private Equity etc.
- Operational/Implementation Risks -ability to overcome obstacles
The true measure of the KDP will be in the tangible results which arise from this ambitious plan. In that vein, several operational/implementation risks have been identified that may present obstacles to the KDP and its projects.
The government has recognized that these risks fall on its shoulders as they mainly deal with high bureaucracy, inadequate legislation and other policy issues; although other operational risks arise in the form of economic results from disorganized implementation of projects.
According to the report, bureaucracy and inadequate legislation are the two pivotal issues standing in the way of the KDP and its success. Solving these two issues will go a long way towards improving the outlook for the plan and its far-reaching goals of economic diversification and private sector involvement.
- Equity Risk-ability to attract foreign investment to KDP
The benefit and attraction of increasing foreign investor participation in the economy is clear; foreign investors not only bring capital, but more importantly, they bring expertise, efficiency and innovation… not to mention providing a vote of confidence for the country thereby increasing investor sentiment across the board.
According to the World Bank, FDI net inflows to Kuwait amounted to USD 145 mn in 2009 versus over USD 10 bn to both Saudi Arabia and the UAE in the same year. Historical data shows that FDIs have been disparate throughout the years, peaking at USD 348 mn in 1996, with a historical average of a mere USD 40 mn.
- Knowledge Risk-ability to assimilate and organize information and research
The aforementioned discussion on the challenges confronting the Kuwait Development Plan has illustrated the need for focusing various actions. During the course of the coming decades, the government will need to take several significant actions in the form of investments, privatization, reforms, training, etc. Collectively, these actions will result in short-term and long-term impact including economic diversification, reducing unemployment, promoting foreign investment, capital formation, etc. All this eventually should lead to sustainable economic development, equitable wealth distribution and eventually positioning Kuwait as the trade and financial hub of the region.
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Kuwait Financial Centre 'Markaz', with total assets under management of over KD 1.03 billion as of December 31, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.