The political power struggle eclipsing Kuwait's development hopes

Published December 30th, 2013 - 04:20 GMT
 Key challenges facing investors include excessive bureaucracy, lack of government spending on developmental projects due to legal and political complications,
Key challenges facing investors include excessive bureaucracy, lack of government spending on developmental projects due to legal and political complications,

 Amendments to the Build-Operate-Transfer (BOT) law were supposed to be discussed during the parliament’s financial committee meeting on Sunday with senior government officials in attendance. Despite high hopes that the two sides would work on providing easier conditions that make the law more attractive for local and foreign investors, the meeting ended with no agreements. The Cabinet’s resignation, which presumably led Deputy Prime Minister and Finance Minister Sheikh Salem Al-Abdulaziz Al-Sabah to skip the committee’s meeting, cast a shadow on those hopes. And while Monday’s key court ruling which rendered the parliament constitutional puts the ball back in the MPs’ court, any plans to discuss the amendments will have to wait until the new Cabinet is formed. In the meantime, local investors continue to push for changes to the existing law that is seen as inept and a main reason that drives businessmen from inside and outside Kuwait to look for better opportunities in the region. “The old law was better than the current one which was passed in 2008 and since then, no BOT projects were established,” Khalid Al-Meshan, CEO of Al-Arjan International Real Estate Company, was quoted by Al-Jarida daily on Sunday. The beginnings The private sector’s involvement in government projects dates back to 1970 when the state offered lands in Kuwait City to build multi-storey parking lots. A law was passed in 1980 to organize utilization of state-owned lands, and it allowed the government to lease lands through renewable three-year contracts, sell land in auctions, or even sign 20-year contracts with companies to rent state properties for projects that serve the public interest.

The number of cooperation contracts signed between private companies and the Ministry of Finance until 2002/2003 reached 92. However, at least 70 of the projects were classified as real estate development projects, and the list does not include major infrastructure or mega projects. In general, the contracts can be classified under the public-private partnership (PPP) concept that do not carry the conditions found only in BOT contracts.

The state’s control over lands, heavy subsidies of services, lack of long-term financing resources as well as the lack of a comprehensive law to organize BOT contracts were seen as major obstacles facing private firms looking to invest in major projects. For example, the 1980 law allowed the government to repossess a rented property only after three years of operation if a renewal agreement is not reached. What is BOT? Build-operate-transfer (BOT) is a model of public-private partnership (PPP) under which the private party handles the financing, construction, operation and maintenance of a given facility until the end of a fixed period of time, after which the facility is transferred to the public party as per the terms of the BOT contract. It contains higher risk to the private party compared to other PPP models such as ‘service contracts’ under which a company uses government-owned equipment and properties as per a short-term contract, or ‘management contracts’ that give private parties more managerial authority over the government properties used as per a short-term contract as well. On the other hand, BOT contracts allow private firms to operate and maintain facilities for a fixed period, during which it acts as the owner of the project and is entitled to all generated revenues. The law A new BOT law was passed in 2008 as Kuwait realized the need for a model to organize complicated contracts for major projects eyed for the state’s mega development plan. It was furthermore seen as a necessary requirement for Kuwait to attract foreign investors for the highly-anticipated plan.

The law gives basic instructions to regulate contracts for major projects under which a private company constructs and manages a facility, then transfers the project to the government with no obligations after a given timeframe. In Kuwait, the typical term spans between 20 and 40 years, after which the project must be handed over to the government. The private company benefits from revenue streams during the period of operation, while the government benefits from not having to incur additional spending on its balance sheet, as well as from employing the arguably better honed skills of the private sector in identifying, planning and delivering profitable projects. BOT contracts ensure that the Kuwaiti government retains long-term strategic control of large projects, as opposed to projects carried out under other PPP terms.

The law stipulates that a shareholding company can be established to build projects with a total cost of over KD 60 million. Forty percent of the stake is offered in an auction to investors registered in the Kuwait Stock Exchange as well as other companies that the government approves. The government keeps 10 percent, while the remaining 50 percent is put in an initial public offering. Establishing a shareholding company becomes necessary for projects with a total cost of KD 250 million.

In 2008, the government, under article 12 of the law, established the Partnerships Technical Bureau to serve as the main body responsible for PPP projects implementation. Since then, it has successfully established a public shareholding company for Phase One of the North Zoor Power Plant project (investors were invited last April to submit an expression of interest (EOI) in investment in the project), and the auction for the strategic investor’s share in the Kuwait Health Assurance Company that will build 3 hospitals with a total 700-bed capacity for people covered by a government health insurance program (Arabi Group won the 26 percent share in August). Setback Despite optimism and a positive aura surrounding the BOT law at the time of its promulgation, the government did not sign any BOT contracts to establish a shareholding company for mega projects since the law was passed, according to finance minister Sheikh Salem Al-Sabah in a recent letter to MP Saleh Ashour. A report by BNC Network in Sept 2012 suggests that 31.4 percent or $61.2 billion worth of projects in Kuwait are on hold or cancelled. Key challenges facing investors include excessive bureaucracy, lack of government spending on developmental projects due to legal and political complications, high labor costs and lack of incentives that can drive Kuwaiti labor forces to leave the more lucrative, less demanding public sector job for a less profitable, more challenging career in the private sector.

Promises from Cabinet ministers and senior government officials about development and progress became a routine in local media coverage throughout the year. However, the reality on the ground saw Kuwait continuing to fall behind in timelines for establishing projects, and watch more frustrated investors transfer their money elsewhere.

The World Bank’s Doing Business 2014 Report ranks Kuwait at 104, down by three places from the 2013 report. Kuwait also dropped several places in key topics such as ease of starting a business, dealing with construction permits, registering property and getting credit. In the starting a business index for example, Kuwait ranked 152 out of 183 countries; down from 143 in 2013, and with an average of 32 days to finish an average of 12 procedures. Notably, Kuwait ranked in last place compared to the other Gulf states in the majority of topics.

To address those issues, the government proposed a set of amendments which are still under discussion at the parliament’s financial committee. The amendments reduce the number of procedural steps to ultimately cut the time required for placing tenders for developmental projects. They also give more financial flexibility by allowing the government to readjust the share distribution for shareholding companies established to set up mega projects, ultimately encouraging investors to join banks in financing projects as well as own part of the assets. Development Plan The BOT model is the main method through which the private sector would be involved in mega projects carried out under the Kuwait Development Plan. Approved in 2010 based on the vision of HH the Amir Sheikh Sabah Al-Ahmad Al-Sabah to transform Kuwait into a financial and trade center, the development plan aims to create a favorable business environment to fuel the growth of the private sector in the country. Allowing the private sector to play a more integral role in state development has been identified as one of the plan’s strategic objectives to be achieved until 2035.

The Mega Projects Agency (MPA), the executive arm of the Kuwaiti Ministry of Public Works, designs and implements most of the country’s infrastructure projects, while the banking sector provides the necessary funds to build and operate BOT projects.

The development plan includes 1,100 projects including a number of mega projects (those with a capital of over KD 100 million), such as the new business hub Silk City with an estimated cost of KD 21.8 billion, a major container harbor in Boubyan Island (Mubarak Al-Kabeer Port) and a 25 km causeway (Sheikh Jaber Al-Ahmad Al-Sabah Causeway). By Ahmad Jabr

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