Nader MOGHAZY,Partner, Advisory Middle East for PwC MIDDLE EAST

The question remains of how fast Kuwait will implement the VAT and how serious they will be about it.

Nader MOGHAZY Partner - Advisory Middle East PwC MIDDLE EAST

Market momentum in Kuwait

September 27, 2018

Nader Moghazy, partner for advisory for the Middle East at PwC Middle East, talks to TOGY about areas of growth in the country’s hydrocarbons industry, how companies should react to the upcoming VAT and the pros and cons of merging K-companies. PwC is a multinational consultancy and advisory firm that provides technology, management, financial consulting and auditing services to industries including energy.

• On the pick-up in activity: “If we compare this quarter [Q2] of 2018 with the same quarter in 2017, the number of transactions was much lower then compared to now. This shows that banks and investors are happy to come here and capture opportunities. Everyone is recruiting as well. We are very optimistic about what is happening in Kuwait, and we think growth is going to continue.”

• On VAT experience: “Our tax advisory colleagues have experience when it comes to the VAT rollout and implementation, given our experience in the UAE and KSA [Kingdom of Saudi Arabia], where we are helping companies such as Saudi Aramco, QP, SABIC and ADNOC [Abu Dhabi National Oil Company] on this issue. We are bringing that experience to KPC and its subsidiaries. In addition to the oil and gas sector, we have been working extensively in the finance sector with regulators in Kuwait, whether it be the Ministry of Finance or the Central Bank of Kuwait.”

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What is your assessment of the availability of works in Kuwait?
There are a lot of things happening this year. Government spending in general was very quiet in 2017, not only on the KPC side. It was recovering from the crisis and downturn. Now, Kuwait has a very clear strategy and good momentum towards the new 2035 and 2040 mandates.
Deputy Prime Minister and Minister of Defence of Kuwait Sheikh Nasser Sabah Al-Ahmad Al-Sabah is taking a huge leadership role in the new north Kuwait cities as well as the government transformation. A lot of mega-projects are happening, such as a new refinery, new power station, new city and new airport.
All of these new projects brought a lot of momentum and interest to the Kuwaiti market, and we saw the ecosystem of that immediately. Everyone is busy in our fields. There are a lot of transactions shaping up in the oil and gas sector, whether locally or outside. This shows that there is interest.
If we compare this quarter [Q2] of 2018 with the same quarter in 2017, the number of transactions was much lower then compared to now. This shows that banks and investors are happy to come here and capture opportunities. Everyone is recruiting as well. We are very optimistic about what is happening in Kuwait, and we think growth is going to continue.

Which lines of service are most required in the Kuwaiti oil and gas industry?
Indeed, business consulting is on top. We also recently started bringing in our tax practice because there is a lot of talk about the VAT and the impact it will have on the various K-companies, whether inside or outside Kuwait. We are in a position to leverage the oil and gas experience we have along with our tax advisory services.
Our tax advisory colleagues have experience when it comes to the VAT rollout and implementation, given our experience in the UAE and KSA [Kingdom of Saudi Arabia], where we are helping companies such as Saudi Aramco, QP, SABIC and ADNOC [Abu Dhabi National Oil Company] on this issue. We are bringing that experience to KPC and its subsidiaries. In addition to the oil and gas sector, we have been working extensively in the finance sector with regulators in Kuwait, whether it be the Ministry of Finance or the Central Bank of Kuwait.
We see oil and gas, health care, the public sector and utilities as the major growth areas for us and we are investing heavily in them. From a services perspective, we believe that digital is the biggest investment area for us. We are investing quite heavily in that; we are bringing in talent and acquiring companies and technology. Cyber security is another major area from which we are seeing a lot of growth. We are investing heavily in that as well.
We are investing ahead of the curve, and the Middle East has been recognised as one of the main offices in our global network that is doing a lot of that.
Another key area for us is innovation. We have been investing heavily in shows, presentations, building knowledge and showing how one can be innovative in marketing and in dealing with customers. Improving the customer, supply and employee journeys as an organisation is one of our major areas.

Are companies adequately prepared for the upcoming VAT?
An impact will be felt in the oil and gas sector because of all of the transportation, communication and investment that extends across the GCC. All of this will be subject to the VAT. It is not just an issue of how they should prepare for the VAT, but of how the VAT will impact their trading and future growth.
The Kuwaiti government established a programme for the VAT a few months ago. This shows that they are preparing themselves. The GCC law must come sooner or later. That said, I am not aware of a decline in investment by KPC or KOC in specific projects.
The question remains of how fast Kuwait will implement the VAT and how serious they will be about it. We see that everyone is trying to prepare themselves. We are trying to be ahead of the curve and be the first to bring such an agenda.
Everyone is doing their due diligence because, as we saw in the Saudi market, no one was expecting it two or three months before the VAT was launched. People thought they were going to delay it until after January 1 [2018]. They rolled out the VAT even though they were not 100% ready. It might be different in Kuwait, but it is coming sooner or later.
In terms of maturity from the various stakeholders and the decision makers in the K-companies, everyone is interested to hear more about how the VAT could impact them. When we spoke to CFOs and decision makers, they were always open to how they can help and what they can learn in relation to their concerns. It is a learning curve.

 

What are the major challenges facing the implementation of the VAT?
It is more about raising awareness and how to build it up to ensure that the right systems and processes are in place once the VAT is rolled out. This is where we are helping. We are doing a type of diagnostic assessment of the key areas they need to prepare 90 days before and after launching.
We have seen a lot of interest from the banking sector, including attempts to understand its ramifications, their future planning and how it could impact their operations and investments.
The key area is going to be the internal consumption of oil and gas products. There is a big question mark in regards to how the VAT is going to impact the oil, gas and petrol prices in Kuwait. From what we have seen recently, there will be more of an impact on KPC’s outside investments rather than KOC’s investments in Kuwait.

Has Kuwaitisation been successful in the oil and gas industry?
A large challenge is capability and capacity building within KPC. The largest element of that is Kuwaitisation and how one can make sure one is bringing in talent in order to build up the capacity and capability of the Kuwaiti youth.
The oil and gas sector is now one of the most mature sectors in the country in terms of percentage of Kuwaitisation. However, if you plug in the amount people leaving because of retirement, it is a little scary. Around 40% of the expertise in oil and gas and K-companies might leave or retire in the next three to five years. That is going to leave a big gap in the market.
In addition, the current discussion in parliament about reducing the retirement age from 60 to 55 could lead to an increased burden on KPC. There might be a gap between people who are retiring and how fast KPC can rebuild capability and expertise.
We did a project a few years back that showed that if the retirement age dropped by as much as is currently proposed and the government of Kuwait forced KPC to apply this law, they would be losing a lot. KPC lost a lot of capabilities, knowledge and expertise five years ago. In the end, people who had top expertise in areas such as drilling and technologies were not easily replaceable.
They found that 60-70% of the top experts that would be very hard to replace are 50-55 years old. If those people are allowed to retire and are ensured the same or better benefits than what they are currently getting, the impact will be tremendous.
Successful Kuwaitisation could occur by knowledge transfers and by changing the concepts or ideas of how KPC operates. There are a lot of K-company joint ventures in Europe and America that have the required expertise and skillsets. Moving Kuwaitis from Kuwait to the outside in order to strengthen and acquire this knowledge, build up capabilities and then bring them back to Kuwait is a successful mechanism. KPC has started doing this to a certain extent.
There is currently a lot of momentum in KPC towards looking into joint ventures and embedding them with major clauses or elements to support knowledge transfer and capability building.
Saudi Aramco has been doing this for the past 10 years and is now benefitting from a very aggressive knowledge transfer policy as part of their joint ventures outside of the country. This allows them to bring back a lot of knowledge. The idea is to do the same in Kuwait. There has never been integration between the education sector, vocational training and KPC’s needs.

Will K-companies be able to meet the New Kuwait 2035 mandates?
Kuwait cannot afford to do any more exploration projects without greater certainty. After two or three years of spending on upstream projects, they had tripled their capex on drilling, yet their gross production was much lower. It is about making sure that every dollar you invest pays back more than its value.
We know that there are big challenges to meet KPC’s 2030 target. We are optimistic about the efforts made to make that happen, but we know that there are a lot of challenges. It is not so much about the rush to drill as it is about rationalising, optimising and having all of the right techniques and digital components to allow them to make wise decisions on how they should invest their capital.

How has the recent downturn in activity affected the structure of Kuwait’s oil and gas industry?
Integration is one of the key rationales that is absolutely correct and is taking the entire sector in Kuwait in the right direction. In other words, how can we integrate more in order to optimise more? I believe that the initiative that KPC has taken in establishing KIPIC [Kuwait Integrated Petroleum Industries Company] presents a huge opportunity when it comes to optimisation and efficiency. There will be more of that happening.
I have been working with KPC for the past 18 years. There has always been a discussion of how we can integrate and perform as one sector and how we can work as one corporation, as Saudi Aramco does, for example. There are some aggressive, serious actions that have been taken over the past one or two years in this regard. Hopefully people will see the results of that in the next two to three years.

Do you think that K-companies merging into one or several entities is a good idea?
It is not a bad idea. The formula behind all of that is always one plus one equals three. Knowing the decision makers within K-companies, they are seriously looking into that and they have that in mind. If one plus one equals two, then they should keep everyone separate and continue with business as usual. However, when we do the integration, we ensure that this integration will give us much more than what we expect.
My understanding is that there are definitely pros and cons to every integration process, but the benefits are greater for the national economy. There will be some issue about the number of people that might be laid off. That is a large concern for some of the leadership. However, they have seen a number of different innovative ideas that show that laying off employees is not the only way to do it. Rather, it can be done through re-education, relocating and establishing external private-sector companies or key companies that services can be outsourced through.
Overall, it is good for the national economy, and this is the only focus for K-companies. The 2040 goals are all based on the UN’s SDGs [Sustainable Development Goals]. The heart of that is about sustainable economic growth and sustainable development.

What are PwC’s key activities?
We have a very strong focus on oil and gas. The main line of services we have in oil and gas is the assurance and tax businesses and our advisory services, which covers consulting and deals. We have been extensively involved in the big agendas in the oil and gas and utility sectors.
In Kuwait, we have a very strong relationship with K-companies. The acquisition of Strategy& has given us huge leverage and capability in Kuwait and the Middle East to continue advising and complementing our service offerings to KPC. We are helping them restructure in order to optimise exploration, drilling, production costs and efficiency in the upstream sector. We are also involved in restructuring the downstream business. Additionally, we are extensively involved in restructuring certain functions for KPI [Kuwait Petroleum International] and their European joint ventures.
We have been extensively involved in the cyber security agenda in the oil and gas sector. Technology and digitisation is one of our main focuses for the region, and we have been actively involved in shaping the digital agenda and addressing cyber security for some of the K-subsidiaries.
Especially since we brought in our Strategy& colleagues, our proposition to the market is that we can offer help all the way from strategy to execution. We are one of the few in the market who can offer that. However, the key areas in which we can help are capital and portfolio optimisation. If you have the capital, the challenge is in what volumes they need to have and what kinds of portfolios they should invest in. There are a lot of lessons to be learned in Kuwait about doing projects that are not really adding value.

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