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Small and medium sized enterprises (SMEs) are an important segment of many economies globally in terms of their contribution to GDP and employment. This importance is also apparent in some GCC states such as the United Arab Emirates which relies on SMEs for30% of its GDP and 86% of its employment. Similarly in Saudi Arabia, SMEs contribute to 28% of the GDP.
Kuwait, on the other hand, has been a late comer in unlocking the potential role that SMEs can play in its economy. Kuwaiti private sector and SME contribution to employment lacks luster, whereby approximately 85% of the Kuwaiti workforce is currently employed by the government. Historically, the private sector, although growing, has been unable to create enough jobs for nationals. This scenario is clearly unsustainable; with a growing population, the public sector will inevitably be limited in its ability to offer employment to all. It is therefore imperative that the SME segment in Kuwait be developed to play an important role in employment creation over the coming years.
Notwithstanding, Kuwait, like its neighboring states, is taking notice of the contribution of SMEs to employment and to GDP, and hence, is developing programs to support the segment. SMEs are expected to have a significant role in Kuwait’s economy moving forward. In early 2010, Kuwait’s Parliament members presented a draft bill to establish an independent SME authority to assist in creating new channels for employment and diversifying Kuwait’s economic base. In late 2010, comments by the Deputy Prime Minister for Economic Affairs indicated that the next four years would witness the establishment of 400 SMEs in Kuwait.
Given the expected important role that Kuwait’s SMEs are envisaged to play in coming years, it would be prudent to maximize support for these budding entities. Such support would not only be through the requisite finance, but through the development of a comprehensive framework by which they could participate in and benefit from the upcoming proposed projects in the country.
Enabling SMEs: Through Local Content Policy & Assistance Programs
Globally, local content policies and SME assistance programs have long been in effect, and widely successful in many nations. Several countries including Norway, Brazil, Malaysia, Venezuela, Russia, Nigeria, and Saudi Arabia have set ambitious local content targets. On the other hand, SME assistance programs have been hugely successful in the Australia, United States, Canada, Japan and Korea.
In Saudi Arabia, the General Engineering Services Plus contracts (GES-Plus) that Saudi Aramco has implemented, are a good example of local content policies within the GCC. In April of this year, Kellogg, Brown, and Root (KBR) was awarded a five-year GES-Plus contract that allows the company to implement material procurement, project management services, and FEED programs supporting Saudi Aramco’s $130 billion spending program. The contract requires KBR to train and hire local Saudis for the project. KBR will use a newly created engineering company in partnership with a local Saudi consulting and engineering company to provide the contracted services and will operate exclusively in the Middle East.
In developing countries such as Nigeria, the Oil and Gas Industry Content Development Act of 2010 contains provisions to enhance local participation in all aspects of oil operations. These include specifying minimum amounts of local materials and personnel used by oil & gas operators in the country.
In the United States, the Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government under the Small Business Act, whose function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." The charter stipulated that the SBA would ensure small businesses a "fair proportion" of government contracts and sales of surplus property.
In Europe, the Small Business Act for Europe (SBA) adopted in June 2008, reflects the European Commission's political will to recognize the central role of SMEs in the EU economy, and puts into place a comprehensive SME policy framework for the EU and its Member States. The European Commission has prepared the 'European Code of Best Practices Facilitating Access by SMEs to Public Procurement Contracts'. In United Kingdom it is proposed to award 25% of Public contracts to the SMEs.
In November 2011, India, finalized the Public Procurement policy, which will make it compulsory for government departments and public sector units (PSUs) to source 20 percent of their procurement needs from micro, small and medium sized enterprises.
The Victorian Industry Participation Policy (VIPP) of the Australian state of Victoria is a notable example of a successful local content policy geared towards stimulating the growth of SMEs. The VIPP is intended to foster industry development by encouraging bidders to genuinely consider local (Australian and New Zealand) SME suppliers while preparing their tenders. VIPP was introduced in 2001 with the objectives of:
§ boosting employment and business growth in Victoria by expanding opportunities for local SMEs
§ providing the contractors for major projects with better access to local companies that can deliver best value for money
§ developing the competitiveness of local SMEs, by ensuring Victorian SMEs have a fair opportunity to compete against overseas suppliers
Since its establishment in 2001, VIPP has driven average local content levels to 85 per cent in over 3,300 projects, amounting to more than $33 billion in local content. Furthermore, the VIPP has helped in creating more than 34,000 new jobs since 2003.
Major Projects: Finding Opportunities for SMEs
The continued buoyancy of oil prices has allowed GCC states to maintain their commitment towards continued investment in projects for growth and development. Over the next decade, the GCC states are planning 1638 major projects worth more than $968 billion across various sectors. Over 80% of these projects are construction, infrastructure, and petroleum industry related projects.
By any standard, these projects are significant undertakings that require an integrated, coherent, and compatible set of systems and policies that will cater for effective and efficient execution towards a successful outcome. Many of the GCC states have recognized the need for accelerating and facilitating the execution of these projects though mechanisms such as public private partnerships (PPP), Foreign Direct Investments (FDI), Joint Venture arrangements amongst others.
Kuwait’s share of these projects stands at 218 projects worth over $133 billion, over the next ten years. However, Kuwait, unlike its sister states, has been reserved in project spending and project award, despite its considerable financial wealth. The deadlocked political environment and slow decision making are mainly to blame for many projects such as the Subiya Causeway, Failaka Island development, Al-Zoor refinery, and the Bubiyan Port project being delayed for years. This sluggishness in spending reflects directly on the country’s slow GDP growth over the past years. Kuwait’s GDP growth rate has been dull compared to its neighbors.
Despite the current scenario, Kuwait has taken some commendable steps towards exploring more efficient frameworks. In particular, Kuwait is amongst the first movers in the Middle East to embrace Public-Private Partnerships (PPP) as an alternative means of financing and accelerated execution to modernize and upgrade its infrastructure. It has announced ambitious plans to develop more than 30 PPP projects worth over $28 billion, and is one of three GCC countries that have implemented legislation formalizing the framework for PPP projects. Kuwait introduced its PPP law in 2008, which offers a programmatic approach to PPPs through the establishment of the Partnerships Technical Bureau (PTB) to administer the program.
KLIPP: Developing Local Content Policy for Kuwait
In Kuwait, local content policies are fragmented, with various institutions implementing their own policies and programs. The setting up of an independent SME authority is still in its infancy stages. The resultant gap heightens the risk of a poor launch to SMEs that are potentially weaker and without serious opportunity to contribute to the economy.
Kuwait’s PPP law tackles the questions of private sector involvement and accelerated and improved project execution and efficiency. However, as comprehensive as it seems, there is a stark element missing in the law; it appears to have discounted a potential and important opportunity to assist in the development of the local industry. In particular, the law could have benefited Kuwaiti SMEs. The law could have provided the catalyst to stimulate the growth of SMEs in Kuwait through clear and well-defined guidelines for participation; including the promotion of local content and local employment. SMEs are likely to become the linchpins of Kuwait’s growth in the coming years and the PTB could potentially take a leading role in developing a unified local industry participation policy and system.
Beyond the economic case for including SMEs into the mix, there are other factors that bolster the case for SME participation, including the potential for technology and knowledge transfer as a result of partnerships with more sophisticated players (foreign and local). It also presents a catalyst towards accelerated and improved development of Kuwait’s human capital. SMEs will also benefit from adopting advanced business systems, procedures and policies that would bolster their competitive position in the marketplace.
It is however, important to avoid mandating a quota or percentage of content value to be executed by local firms, as that would potentially violate Kuwait’s obligations to World Trade Organization (WTO). As such, the PTB, in conjunction with other government agencies, could consider Australia’s local participation policy to stimulate the development of SMEs in Kuwait without violating its obligations to the WTO.
In that light, the PTB could potentially follow Australia’s example and consider implementing a Kuwait Local Industry Participation Policy (KLIPP). The KLIPP would encourage bidders of PPP projects to systematically consider Kuwaiti SMEs while preparing their tenders. Given that SMEs are incapable of directly bidding on PPP projects, given their size and inexperience, a policy such as KLIPP would offer them an avenue to participate in such large projects. SMEs can potentially be involved in large PPPs as sub-contractors, equipment and materials suppliers, and service providers amongst other things. In effect, the KLIPP would aim to give local SMEs a fair opportunity to participate in major Kuwait Government procurements and projects, especially PPPs. KLIPP should not mandate local content quotas for tenders or seek to erode the ‘value for money’ principle. Furthermore, the PTB could potentially propagate the formation of a Kuwait Industry Capability Network (KICN) that would assist in the successful implementation of the KLIPP.
KICN would perform the function of matching the capabilities of the local suppliers and service providers with the requirements of purchasers and project managers. As a result of such matching, KICN would encourage local sourcing, and assist Kuwaiti companies in accessing opportunities. From the tenderers perspective, every bidder could potentially be required to submit a KLIPP plan to the KICN that would outline the tenderer’s estimates of the levels of local content, local employment and skills/technology transfer that would arise if their bid were to be successful.
Summary
It is apparent that in the coming years, SMEs in Kuwait will be expected to play a critical role in contributing to employment and GDP. There is also a sea of opportunities in the planned major projects which are currently focused on the larger and more sophisticated players. We believe that in order for Kuwait to embark along a path that would drive its economy to expand beyond being fully dependent on oil, it is not only prudent, but necessary to effect policy changes that assist SME’s in tapping into upcoming projects, including PPP projects. This should be within the context of well capitalized private sector, an enabling environment, and most importantly an adequate framework driven by supportive policy.