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Kuwait risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC41C41Infrastructure riskB31B31Note: E=most risky; 100=most risky.SUMMARY Infrastructure risk is low because of excellent road networks, port facilities, and distribution networks. The lack of competition in land-line telecommunications services is holding back the quality, and increasing the cost, of international telephony. Internet usage is the highest per capita in the GCC, in significant part due to a large expatriate population of foreign workers. However there remain concerns about the standard of internet service providers, inhibiting the potential for e-commerce. Moreover, there is a serious threat of power and water shortages, especially in the summer when air conditioning use is extensive, emphasising the need for the government to take action to advance new power projects. SCENARIOS Summer power shortages disrupt business activities (High Risk) Kuwait faced a series of power shortages in the summer of 2006, emphasising the need for the urgent commissioning of new power generation projects. The government has a long-standing plan for investment in power generation, which includes the building of eight gas turbines. The National Assembly, however, forced the government to seek approval from its Central Tender Committee, causing delay in getting these urgent power projects built. In the meantime, plans to import gas from Iran are making some progress, although it could take at least two years for delivery to begin. Political disagreements between Saudi Arabia and Qatar are holding up a planned gas pipeline from Qatar to Kuwait via Saudi Arabia. As a result, the short term shipping of LNG in response to Kuwait's pressing needs could occur. Businesses are advised to make contingency plans for power (and water) shortages, particularly in the summer months. Inadequate telecommunications infrastructure impedes plans for the development of e-commerce. (Moderate Risk) Kuwait Telecom is the monopoly, state-owned landline supplier of telephonic services. It offers free local calls for a small annual fee, but Internet service is poor. Internet service improvements are impeded by the lack of competition in the fixed line market, although there is competition in the mobile market and this may help to improve some aspects of the service provided. Another hopeful development is the government's proposal to privatise Kuwait Telecom, although past plans have never come to fruition. The lack of competition and uncertainty over Kuwait Telecom's ownership will mean that improvements in Internet access are likely to continue to lag behind those in developed economies. This will hold up the progress of e-commerce, the value of which remains small despite the country's relatively open access to the internet. Companies are advised to be very cautious if they are planning e-commerce initiatives in Kuwait. BACKGROUND (Updated: May 3rd, 2006) Natural Resources and the Environment Kuwait is very largely a desert, with no fresh groundwater other than some brackish oases. Natural vegetation is extremely sparse, which leaves the desert soil very fragile. Wildlife is largely limited to insects and small reptiles. The coastline of Kuwait Bay and to the north is composed of mudflats and shoals. Other than huge hydrocarbons deposits and modest supplies of limestone, the country possesses negligible natural resources. Most of Kuwaits oil is in the super-giant Burgan field, south of Kuwait City. Smaller fields in the west and north of the country are due for further development and there are offshore deposits in the Neutral Zone. Kuwaiti export blend crude is relatively sour (high in sulphur) and, at 31 API, is medium-heavy (that is, with low calorific value). Iraqs invasion of Kuwait in 1990 and its aftermath had severe environmental consequences. In 1997 Kuwait filed a US$16.3bn claim against Iraq for environmental damage (although only a small proportion of this has been accepted by the UN Compensation Commission). Iraqs mass destruction of oil wells, the huge oil spills caused by allied air strikes against the Sea Island loading terminal and the use of heavy armoured vehicles triggered an environmental catastrophe. Marine wildlife, including fish, invertebrates and the endangered dugong, was devastated. The shallowness of the water and intensity of solar radiation have helped the marine environment to recover. However, concerns emerged that Iraqs third river project, involving drainage of the southern marshlands, adversely affected the discharge of fresh water (and hence the concentration of pollutants) from the Shatt al-Arab into the Gulf around Bubiyan island. The destruction of desert soils is also hazardous. Desert sandstorms now contain a higher concentration of by-products of the 1991 oil fires. Statistics are hard to obtain, but there are fears that this contamination has brought an increase in respiratory complications and allergies. Transport, communications and the Internet Good port facilities Kuwait has good transport facilities and plans to upgrade these further to enhance its capacity as an international transport hub and gateway for the eventual reconstruction of Iraq. There are two commercial ports, one at Shuwaikh and one at Shuaiba. A major three-phase project to develop a commercial seaport on Bubiyan island received cabinet approval in November 2004. Work was scheduled to begin in 2005--although at the time of going to press it had not done so--and to continue to 2016. In the early 1980s Kuwaiti planners developed an ambitious scheme to turn Shuwaikh into a free-trade zone (FTZ), acting on an idea first approved in legislation introduced in 1955. The FTZ was officially established in May 1998 and inaugurated, after some delays, in November 1999. Incentives to attract commercial, industrial and service companies include 100% foreign ownership, no company taxes, and no currency restrictions. The first phase of the planned four-phase development saw virtually 100% take-up. Although this represents 300 or more small firms, made up mostly of traders, including from other Gulf Co-operation (GCC) states and Iran, the number of visits by container ships has been relatively low. The National Real Estate Company (NREC) runs the FTZ as essentially a private-sector operation. However the NREC is more than 50%-owned by the Kuwait Investment Authority, and complaints have been made about the amount of government regulation affecting the zones operation. The main focus has been on the 60m-strong Iranian market, and on Iran as a conduit for trade with Central Asia. However, the original conception of the zone, and its development in the 1980s, had Iraq more in mind. Kuwaiti planners believed that the FTZ could strengthen Kuwait as a trading hub, linking it more extensively with its northern neighbour, as well as Iran, Syria and Jordan. Following the change in regime in Iraq in 2003 the FTZ is seen as more able to capitalise on Kuwaits advantageous location, having been dwarfed by the volume of goods passing through the Jebel Ali free zone in the southern Gulf emirate of Dubai. However, Kuwait also envisages setting up a special FTZ area around Abdali on the Kuwaiti side of the Iraq border. In a reflection of the frustration at the bureaucracy affecting the Shuwaikh FTZ, the Abdali FTZ is intended to be passed to 100% private management on completion. However, Iraqs unstable political and economic development looks set to limit the pace of this project. A large tanker fleet Kuwait operates its own tanker fleet: four crude carriers with a total capacity of 1,139,299 dead-weight tonnes (dwt), 15 product carriers of 705,421 dwt, two carriers for crude or products of 589,478 dwt, and six liquid petroleum gas (LPG) carriers of 289,632 dwt. The state-owned Kuwait Oil Tanker Company (KOTC) operates the tanker fleet, but it ran into controversy in the early 1990s after embezzlement charges were brought against senior officials. In August 1998 the Supreme Petroleum Council approved proposals to privatise KOTC. These failed to get beyond the drawing-board, but in 2005 the plans were revived, with the aim of transferring 75% of shares in KOTC to the private sector over three years. Roads Kuwait has an excellent road network, covering 4,967 km. However, routes into Kuwait City and around schools become clogged with traffic at peak hours. Traffic problems have been aggravated by unplanned suburban development and heavy reliance on the use of private cars. Petrol was heavily subsidised until 1999, when prices were raised by 30-50%, but with market prices for petrol having soared recently, those within the emirate remain cheap. Public transport use is mainly restricted to unskilled foreign workers. The government plans to build a causeway to link Kuwait City, Subiya and Bubiyan island. Airports Capacity at Kuwait International Airport is currently strained, with around 30 passenger airlines flying in and out. The Civil Aviation Authority (CAA) reported a rise of almost 10% in passenger departures in June 2005, which numbered 491,000, compared to June 2004, when they numbered 449,000. The CAA reports that the number of arrivals in June 2005 was 217,500, up 8.4% on June 2004, when they numbered 200,700. The total capacity is put by the CAA at 6m passengers a year, though there are plans to raise it to 20m by building a new terminal. Plans to resume direct flights to Iraq remain on the back-burner. Over time, however, Kuwait hopes that the planned expanded airport capacity will exploit its location at the head of the Gulf to enable the country to become an air transport hub. Nevertheless, doubts remain as to even the long-term likelihood of this aspiration being realised, given the competing appeal of Dubai, in particular, as a transport and communications centre in the Gulf. Telecommunications Fixed telephone lines had reached 95.3% of the Kuwaiti population by 2003, according to an independent Amman-based telecoms company, Arab Advisors Group. The National Assembly (parliament) rejected plans to privatise basic telephone services in 1997, although it ended the monopoly of the semi-private mobile-phone operator, the Mobile Telecommunications Company (MTC), which led to a big reduction in MTCs access charges. A competitor to MTC, the National Mobile Telecommunications Company (Wataniya), also part government-owned, launched its service in 1999. Behind Wataniya Telecom is Kuwait Investment Projects Company (KIPCO), a holding company owned by Sheikh Hamad al-Sabah al-Ahmad al-Sabah, one of the prime ministers sons. In 2004 the National Assemblys Financial Affairs Committee approved draft legislation allowing a third mobile-phone operator. At that point, MTC and Wataniya had an estimated 1.8m customers from a total population of 2.5m--one of the highest cellphone penetration rates in the world. Arab Advisors Group has projected that the rate could rise from around 72% to 86% by 2008. Kuwaits Internet penetration rate is similar to that in most other GCC states. According to data from the International Telecommunication Union (ITU), Internet penetration in Kuwait in 2003 had reached 23% of the population, against 27.5% in the UAE and 15% in Saudi Arabia. A strong increase in Internet use throughout the GCC is expected during the next five years, as broadband assumes an increasing part of service provision in households and in the business environment. The high penetration of the Internet in Kuwait, compared with that in Saudi Arabia, partly reflects the formers more liberal attitude to its use. However, there are some restrictions. The communications ministry has withdrawn licences from some Internet cafes, alleging infringements of codes of decency, and regulations have been introduced to tighten controls on Internet access. Kuwait has around 300 licensed Internet cafes and entertainment centres offering Internet services. Although Internet service provision is semi-competitive in Kuwait and the mobile-phone network is operated by a duopoly, the fixed network remains under a state-run monopoly. In theory, the latter system permits cross-subsidisation, with revenue from heavy business use helping to reduce charges to residential users. In practice, however, this arrangement is weakening. The National Bank of Kuwait (NBK) has set a trend by moving all its branch communication services from lines leased from the public network of the communications ministry to its own independent broadband network. An allied development of the existing Shuwaikh FTZ is the so-called Future Zone Project, a private-sector venture that enjoys strong political backing. The project is designed to cater to the e-commerce and media and communications requirements of companies operating in the FTZ. Located adjacent to the customs-free zone and Kuwait University, Future Zone enjoys tax exemption and long-term leasing arrangements. However, as with the FTZ itself, it has not been as successful as the government expected, not least because of competition from Dubai as a regional trade and communications hub. The media The Kuwaiti press is relatively free by regional standards, partly because of a relatively pluralistic political tradition and partly because the government came under international pressure after the 1991 war to revoke pre-publication censorship. Criticism of the emir is not tolerated, although informed speculation on succession issues does occur. In common with neighbouring states, the licensing of new titles remains in the government's hands and is not subject to legal appeal. This situation is periodically challenged by more liberally minded MPs, but to no avail. A new draft press law has been in circulation for several years but has not secured significant parliamentary support. Although the bill contains liberalising elements, the governments revived enthusiasm for the legislation in the wake of security problems in January 2005 seemed to stem from aspects of it that could be used to restrict media activity; it was therefore rebuffed by liberals in the National Assembly. There are five Arabic-language daily newspapers, Al Qabas, Al Siyassa, Al Watan, Al Anbaa and Al Rai al-Aam, and two English-language dailies, Arab Times and Kuwait Times. The Kuwaiti parliament has been televised (although not live) since 1999. Satellite television is popular, although some Islamists have called for it to be banned for transmitting allegedly immoral material. Energy Consumption grows rapidly Kuwait relies on desalination plants for its water supplies, and as in most Gulf states, power generation and water desalination are combined for greater efficiency. Electricity demand growth of around 7% per year is encouraged by government subsidies and driven by rapid population growth. The government earmarked KD312m (US$1bn), or 43% of its development spending, for electricity and water development in 2003/04, although this decreased to KD260m in each of the following years. Kuwait budgeted to raise KD85m in electricity and water charges in 2003/04, and this was due to increase to KD88.7m in 2004/05 and KD107.1m in 2005/06. Actual revenue from these sources was KD75m in 2003/04 and KD79.5m in 2004/05. In 2003/04 this represented 20% of total government revenue from services. According to Ministry of Electricity and Water forecasts, demand for desalinated water was expected to rise from 284m gallons/day (gal/d) in 2001 to 358m gal/d in 2005. Peak demand for electricity was expected to rise from 6,902 mw in 2001 to 9,046 mw by end-2005. According to 2005 data from the UN Development Programme (UNDP), Kuwaits electricity consumption per head, at 16,544 kwh, is the worlds seventh highest, exceeded by only Qatar among the Gulf states. Petroleum product prices arerising Petrol prices have traditionally been heavily subsidised. As most of Kuwaits oil, including that from the Burgan field, costs less than US$1/barrel to produce, subsidising domestic prices does not directly cost the government a great deal--although it does deny it a potentially high source of revenue. In 1999, however, prices were raised by 30-50%. Aviation and bunker fuel is already priced at international levels and other product prices are approaching these levels. Copyright 2006 Economist Intelligence Unit |