Kuwait eyes Korea for industrial diversification

SUBIYA, Kuwait ― Nestled at the top of the Persian Gulf, Kuwait had for decades boasted ample pearl supplies, fresh seafood and a treasure trove of Arabic art. 

The discovery of oil in the 1930s has turned a poor, small coastal state into one of the world’s largest crude exporters. The gem industry, meanwhile, was pummeled by the Great Depression and an advent of cultivated pearls from Japan.

Despite a vortex of civil wars across the Middle East, Kuwait now eyes another watershed transition to the region’s trade, logistics and financial hub.

In 2010, the Gulf country unveiled a 2035 economic roadmap. It set aside 37 billion Kuwaiti dinars ($144.3 billion) for 1,100 projects to revamp oil and gas facilities, build new cities and industrial districts, and improve infrastructure and welfare.

With oil remaining its primary source of revenue, its government is pinning hopes on its strategic location, massive state coffer and relative political stability at home.

“The plan epitomizes Kuwait’s resolve to better compete with more dynamic, fast-emerging rivals such as Dubai of the United Arab Emirates,” a local government official said, asking not to be named.

“We want our economy to continue to grow in spite of the global downturn, but at the same time we want to change the industrial structure and reduce our dependence on oil exports.”

Partnership

To ensure smooth execution of the initiative, Kuwait has invited enterprises and talent from other countries. Korea is one of its core partners, with 16 firms carrying out about 30 projects there, chiefly in engineering and construction. The state-run Korea Development Institute also participated in the overall design of the package as part of its “knowledge sharing” program.

Among key programs are Bubiyan Island and Silk City to be established north of Kuwait City by 2035 and 2023, respectively. 

Bubiyan envisions a commercial seaport and naval faade on a 530-square-kilometer area on the gulf. It had long been left underdeveloped due to its poor soil conditions and security issues stemming from its location close to Iraq’s southern port of Umm Qaser.

The 345 million dinar project aims to launch nine wharfs by 2021 to handle up to 2.5 million containers a year and gradually add 51 docks till 2033. It also includes substantial reclamation, three bridges and a railway connecting the island with the capital.

The Mubarak al-Kabir terminal, however, has since been a source of tension between the former foes. While Kuwait predicts benefits for a wider region, the Iraqi government says the new facility would obstruct waterways and disrupt its own port.

“Bubiyan Island and its harbor are crucial to Kuwait’s pursuit of becoming a regional financial and economic hub. (It will) serve the export and import requirements for the reconstruction of Iraq for 20 years,” the Kuwaiti Embassy in Japan said in a 2010 report.

Hyundai Engineering & Construction is tasked with the first phase of harbor construction on the island. The $1.18 billion contract marks the Seoul-based firm’s largest-ever civil engineering project.

Korea’s top builder said it is also expecting to secure an estimated 750 million dinar deal for Jaber Al-Ahmad Al-Sabah Bridge, a 37-kilometer causeway linking the island and cities. 

“We’re about 5 percent ahead of our initial schedule as we saved some time and costs by developing onshore borrow pits in the vicinity,” said Kim Young-ho, control manager of the port program, adding that he expects to curtail the construction period by up to two months.

“When the terminal is completed, business will pick up around the area, drawing more companies, buildings and residents.”

Silk City, a business district in nearby Subiya, will span 250 square kilometers and house skyscrapers, a major stadium, residential complexes, hotels and retailers in four main districts centering on finance, leisure, ecology, and education and culture. It will create about 450,000 new jobs and lure 750,000 residents, officials forecast.

To cater to skyrocketing demand, Kuwait’s Electricity and Water Ministry is striving to reinforce the power and water transmission network by funneling 253 million dinars by 2014.

Hyundai Heavy Industries set up the country’s largest combined cycle power station in June. The $2.6 billion gas-powered plant is capable of supplying up to 2,100 megawatts of electricity nationwide and operated and maintained by GE International Inc.

“The project could probably be a model case for the fastest and most effective plant construction,” said Sung Moon-sup, senior vice president of Hyundai Heavy’s industrial plant and engineering unit responsible for the Subiya complex.

“To make it on time, we’ve overcome lots of hurdles ― power shortages, a multiethnic workforce, a hot climate and other procedural issues. And we were at one point six months behind schedule. It’s such a complex thing as managing a major city.”

Doosan Heavy Industries & Construction, the world’s largest desalination plant provider, finished a $320 million reverse osmosis facility in the city in 2010 and has since been conducting a three-year maintenance and management program. Desalination is ubiquitous in regions like here where oil is plentiful but freshwater scarcity is a chronic problem.

Other Korean contractors include SK Engineering and Construction, GS Engineering and Construction, Daewoo Engineering & Construction, Samsung Engineering and Daelim Industrial.

The builders have firmed up their presences in the region on the back of their edge on engineering, procurement and construction, cost-effectiveness and quick construction.

Korea’s collective stake in the six Gulf Cooperation Council countries has soared to 22.4 percent last year from 10 percent in 2007, according to Shinhan Investment. In the plant segment alone, the ratio is estimated to hover between 30 percent and 40 percent. The six members, deemed key markets in the region, are Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain.

“Korean firms’ traditional strengths are construction, the core of the EPC, and detail engineering based on basic design, which have emerged as key factors in winning plant orders in the Middle East over the last few years,” Lee Sun-il, an analyst with the Seoul-based brokerage, said in a recent note to clients.

“With the scale of the projects fetching trillions of won, the ability to finish the job in time has also become more important than ever, cherishing Korean standards.”

Challenges

However, concerns are rising over cutthroat competition, eroding profit margin and a dwindling pool of Korean engineers willing to work in a sometimes hostile work environment.

The builders also face domestic challenges. The Kuwaiti government has newly imposed laws mandating approval for every single vendor and subcontract. The so-called “offset program” requires foreign public works contractors to reinvest 35 percent of their offshore procurement in technology transfer, health care or other areas.

An unprecedented wave of protests erupted last week amid a power struggle between rulers and a rising opposition consisting of Islamists, liberals and tribal leaders, paralyzing the parliament and further delaying pending orders.

Critics say that in many parts of the Middle East massive oil wealth has “cursed” not only economic diversification and technological advance but also the people’s aspiration for social reform and greater productivity.

The dark side of the drilling boom has also given rise to bureaucracy and complacency. Armed with a vast social welfare system and some of the highest per capita incomes in the world, Kuwaitis have grown indurate to cushy jobs and heavy reliance on cars.

“Some Kuwaiti agencies are notorious for an extremely long approval process and yet being fastidious,” an industry source said on condition of anonymity.

“You have to get okays for every trivial subcontract and purchase, buy as much as possible from local vendors regardless of the prices and quality of their products, and mobilize workers according to decreased hours with a 2006 amendment of labor law. Still, you must get the work done on time no matter how tight your schedule is.”

Still a boon

Nonetheless, Kuwait remains a boon for Korean builders searching for fresh growth engines abroad in the face of a long-festering slump in the property market at home.

Their combined orders in Kuwait have reached $990 million as of October, around half of what they have won over the past couple of years, according to the Land Ministry.

The GCC country’s economy grew 8.2 percent in 2011, buoyed by high oil prices and increased output. The International Monetary Fund put its estimates at 6.3 percent in 2012 and 1.9 percent in 2013.

Despite recent delays in some projects, the market will churn out bigger and more lucrative deals amounting to $34 billion next year, said analysts Lee Kwang-soo and Jung Gil-soo at HMC Investment Securities in Seoul.

“Kuwait and Iraq will be ever more significant in tserms of plant orders in the Middle East and North Africa region,” they said in a 2013 outlook released early this month.

Lee of Shinhan echoed their view: “One of the reasons why the overseas construction market will be favorable to them in 2013 is that the Kuwaiti market is seeing its revival.”

“Notably, orders that were awarded to Korean firms but later canceled on political causes including for a $14 billion new refinery and $16 billion clean fuel project will turn up in the market. The companies are planning to bid for almost all packages by forming consortiums in line with their gargantuan scale,” he added. 

The two countries established diplomatic relations in 1979. Ties have been deepening since Kuwait opened a mission in 1992 following Seoul’s financial, medical and personnel support during Gulf War.

Kuwait has the world’s fifth-largest oil reserves and is now Korea’s No. 2 crude supplier after Saudi Arabia with more than 117 million barrels last year, according to the state-run Korea National Oil Corp.

In the first eight months of the year, Seoul’s oil imports from the Gulf state surged 33 percent on-year to nearly 90 million barrels. The uptick is largely ascribed to the European Union’s ban on insuring Iranian crude shipments that took effect on July 1.

Bilateral trade has also increased in non-commodity sectors. Korea mainly exports cars, mobile phones, cables, power transformers and other electric supplies.

“Korea could help Kuwait build an ideal economic and logistic plan to achieve the 21-year plan, like what Korean did in order to be where it is today in terms of the world rankings of industry and economy,” said Sheikha Alanoud Al-Sabah, a member of the Kuwaiti royal family and the daughter of the governor of Al Ahmadi, an oil-rich suburb of the country’s capital.

“I believe Kuwait has more than just oil to share with the world.”

By Shin Hyon-hee, Korea Herald Correspondent 
(heeshin@heraldcorp.com)