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24 September 2012
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Hotting up?

Financial close on the $5.4bn Al Zour power project may be holding up Kuwait's PPP market, but it's still an attractive prospect given the dampened global outlook

Despite the Kuwaiti government’s $105bn investment programme announced back in December 2010, the country’s infrastructure projects have made slow progress, with many experts in the region agreeing that Kuwait’s ability to attract foreign investment will suffer so long as the Al Zour (Independent Water and Power Project) IWPP is kept on hold.

After being appointed the IWPP’s preferred bidder, Japanese trading house Sumitomo, alongside Europe’s International Power Plc, have not been able to commence works on the project due to reoccurring political differences.

Kuwait has seen eight governments over the last six years, with many blocking or delaying the pipeline of PPPs or the economic legislation as well as the disruption of decision-making.

The Al Zour refinery, the Middle East’s largest oil refinery, was originally awarded to Japan-based JGC Corp and South Korea’s GS Engineering, only for it to be reversed in Cabinet on the grounds oil prices were too low to finance oil-based projects. It was reported in August this year that the current government is now re-tendering it.

The Al Zour, in addition to many other Kuwaiti PPPs has been hindered by years of political conflict between the Kuwait Cabinet and National Assembly, with the former selected by the current prime minister, who in turn is appointed by the Emir. The National Assembly has often accused the Cabinet of corruption and mismanagement.

However, a lawyer close to Middle Eastern PPPs says the country’s need for infrastructure PPP has grown significantly of late because unlike its cash-rich neighbours Dubai and Qatar, Kuwait as well as Egypt, requires the expertise, but more importantly the financing of the private sector.

"You’ll notice that Kuwait’s infrastructure expertise outside of oil and gas is rather light," the source says. "This is a driver for the country to look deeper into PPP projects on economic infrastructure and social infrastructure such as hospitals and schools."

The emphasis on PPPs has risen again after the National Bank of Kuwait reported a 42% decrease in profits earlier this year. The bank blamed the political turmoil for restricting state spending and delaying the passage of infrastructure PPP tenders.

So how do private investors feel about all this?

Jafar Khan of lawyers K&L Gates in Dubai says the government’s inconsistency on PPP decision-making is playing on their minds and causing a knock-on effect to future PPPs.

"Behind the Al Zour IWPP there is a steady flow of potentially successful PPPs in Kuwait," Khan says. "There is a logjam because of this project’s delays, to get through – but once it does, the investor market will gain a great deal of confidence."

Despite the political differences over PPP, the source says the country’s Partnerships Technical Bureau (PTB), which oversees and implements PPPs, has stood the test of time and continues to provide investors with the hope that projects will come to fruition, albeit slowly.

"The PTB is quite savvy in implementing projects throughout the country – given all of this, despite no projects getting to final stages, it’s only a matter of time," the source says. "This will keep investors interested, given the market potential Kuwait holds."

Kuwait also has an increasing middle class and its rule of law is strong, according to the source. This provides a measure of confidence, despite the governmental change.

"If you were to compare state-funded projects throughout the Middle East with PPP ventures in Kuwait, you’d see that the risk allocation in the projects is more realistic and closer to internationally accepted norms than is often seen with state-funded projects," the source adds.

While the debate over Kuwait’s investment potential rages on, there is no doubting the slow progress of its pipeline and the need for the Al Zour IWPP to close. Kuwait’s $1.8bn Um Al-hayman wastewater PPP recently shortlisted six consortia to facilitate the 25-year PPP and the Al Andalus Physical Medicine and Rehabilitation Centre PPP qualified seven teams for its request for proposal stage.

Interestingly, the source says, with all the political instability, the country’s PPP market is still in "full flow".

"When you look around the world at the PPP outlook, traditionally stable governments like the UK and other parts of Europe don’t have a lot of PPP opportunity," the source says. "So naturally, foreign investors and private sectors around the world will look at areas with more fruit and where potential projects are happening – Kuwait happens to be such a market." 

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Financial close on the $5.4bn Al Zour power project may be holding up Kuwait's PPP market, but it's still an attractive prospect given the dampened global outlook

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