Kuwait plots to let new industries breathe

Kuwait, one of the world's most oil-dependent states, has allocated more than 1,000 new plots for industrial expansion.

Construction work has begun in industrial areas after the government allocated more than 1,000 plots of land for expansion.

KUWAIT CITY // In the world's most important energy-producing region, the oil bounty has been both a blessing and a curse. While energy exports have made the GCC rich, they have fashioned economies that are addicted to oil and other sectors have struggled to compete. In a bid to diversify their economies, Saudi Arabia has built factories and the UAE has attracted tourists and embraced trade. While oil and natural gas contributed around 37 per cent of the UAE's gross domestic product in 2008 and 32 per cent of Saudi Arabia's, petroleum and petrochemicals accounted for 95 per cent of Kuwait's exports and more than half of its GDP. Kuwait remains one of the world's most oil-dependent states.

In the UAE and Saudi, manufacturing has been crucial in reducing oil's grip on the national economy. In 2008, the non-oil industrial sector accounted for 12.5 per cent of the UAE's GDP and around 10 per cent of Saudi Arabia's. In Kuwait, the figure is just three per cent. As part of the government's plan to increase industry's share of the national economy to 12 per cent in five years, the Public Authority for Industry (PAI) has announced that it will allocate about 1,070 new plots of land to local industries in the next year, allowing the country's 1,046 existing factories to expand and new industries to open. The new plots will ease land prices that have spiralled in recent years as manufacturers compete for a dearth of industrial space.

They will be rented out to companies at market rates by an investor who will operate the area for up to 30 years in return for building the infrastructure. The system, which is known as build-operate-transfer, is a government attempt to encourage private investment without selling public land. Around 70 food companies will be allocated new plots on 234,000 square metres of land in the Subhan industrial area this month, said Khaled al Fahad, the assistant undersecretary of the PAI. The lot size averages 3,400 square metres. The authority is also planning to allocate more than 1,000 lots for building materials, foodstuff and plastics companies in five million square metres of land by next year.

"We are giving priority to [companies] which already have factories and want to get an extension, and those who have had permission to start factories," Mr al Fahad said. He said about half of the 100 applicants in Subhan have had permission to build for several years but have been unable to find land. "If you have to pay one million Kuwaiti dinars [Dh13m] for your land, you will have to raise the prices of your products and this affects your competitiveness and your ability to expand," said Muhammed Saleh, the director general of Kuwait Industries Union, a lobby group for local industry. "It's as if you are handcuffed and cannot move."

Mr Saleh said bureaucracy has hamstrung the allocation of Kuwait's land, which is 90 per cent owned by government, to the country's manufacturers. "You have to involve the oil companies in the decision," he said. "If they veto it, you're at a dead end. The authority for the environment also has a veto, the municipality has a veto, and if the parliament thinks there's anything it doesn't like, it can block it, too."

Plans for Subhan industrial area started in 2004, but investors in the industrial area with 1,000 plots will have to be content with the new BOT law, passed last year. Mr Saleh said, however, that the law put unreasonable demands on investors, such as forbidding the use of the project's land as a guarantee to secure a loan and not allowing any changes to the project after the contract is signed. Mr Saleh said: "If you tried to sell Nokia mobile today, maybe in three years you can't do that because iPhone and BlackBerries are taking their share of the market. You have to be flexible." He said some investors in the past had changed their projects completely, without approval, "but this is not a reason for anyone to make a harsh decision and a decree".

More than 90 BOT projects, including the Subhan industrial area, were awarded on a case-by-case basis before the process was suspended in 2006 over concerns about its transparency. Mr Saleh said that since the creation of the new law in 2008, no investor has entered into a BOT contract, and the ministry of finance is currently looking at ways to change the law. Although the lack of land and tough investment laws might put off some investors, Majdi Gharzeddeene, the head of the investment research department at Kamco, an asset-management and financial service company, said Kuwaiti business traditions are holding back the growth of a healthy industrial sector.

"Here, they make money by two channels: the stock market and real estate; they don't focus on the industrial sector," Mr Gharzeddeene said. "All Kuwaitis have portfolios; it's the mentality. They want to make good money in a short period of time. When they gain, they gain a lot, and when they lose, they lose a lot." He said Kuwait's plan to diversify is not working because of "political reasons", citing a petrochemical venture with Dow Chemical worth US$17.4 billion (Dh64bn) that collapsed last year. MPs forced the government to scrap the deal because they said it was not viable in light of the global financial crisis. "Dow Chemical was a good investment and they dropped it," Mr Gharzeddeene said.

He said the government invests much of its sovereign wealth fund, which is estimated to be worth more than $200bn, outside the country. He said: "To have a real industrial sector, agriculture and construction, any sectors of a real economy, you have to develop the infrastructure. The government expenditure is the lowest compared to other GCC countries on infrastructure." [e-mail]