Kuwait enacted its first privatization law more than a decade ago, in 2010, to ease some of the burden from the demand for government resources. Privatization Law No 37 of 2010 was intended to allow the private sector to share its expertise and actively participate in the management, ownership, and administration of former publicly owned enterprises. This privatization law, while ideally expanding the potential of state-owned institutions, was not effectively developed or efficiently enacted, leading to unintended consequences that continue to hinder Kuwaiti development and modernization aims.
Institutional privatization is not a new concept and exists in many other countries around the world — it was introduced in the United Kingdom in the late 1970s and East German institutions were privatized in the 1990s. Yet Kuwait’s privatization case study remains unique. With almost forty years to observe and assess privatization efforts in other countries, Kuwait should have thoroughly scrutinized previous privatization models assessing their strengths and weaknesses.
However, Kuwait clearly did not learn from the lessons of others, as its version of the law was created with defects that have so far impeded fulfilment of some of the desires of privatization. While the specific obstacles other countries faced are beyond the scope of this discussion, the challenges of privatization exposed in the efforts of the United Kingdom, France, and other countries are mirrored in the challenges Kuwait experiences today.
Debate prior to the enactment of the privatization law in Kuwait revealed significant trepidation. Kuwait nationals feared that privatization was an invitation to openly sell the country’s public enterprises to private investors, either local or foreign, and allow them to control these operations Kuwaitis had considered public institutions since 1961, when Kuwait obtained its independence.
Foreign ownership
This trepidation was warranted considering Article 23 of the Commercial Law of Kuwait, No 86 of 1980, limited foreign ownership in Kuwaiti business capital to 49 percent under typical commercial activity, with a Kuwaiti partner in that activity holding at least 51 percent ownership. However, exceptions exist under this law for foreign investors in important businesses that are considered essential needs of Kuwait. In those instances, investors may be granted an exception and own up to 100 percent of their project.
Moreover, many Kuwaitis expressed significant concern with privatization as a mechanism that would require them to no longer be citizens receiving public services but customers to businesses that prioritized profit over public needs. Kuwaitis were worried that the private sector would raise the price of essential services that were historically provided for free or nominal prices. In addition, employment would become less secure under a private, rather than public, entity.
Accordingly, the law assured Kuwaitis that some public enterprises would be exempt from privatization due to their national importance; education and health institutions, along with oil refineries and oil and natural gas production, were included in these exempt enterprises. Moreover, the publicly-owned enterprises were not intended to be fully owned by the private sector; rather the private sector would own a part of the newly privatized enterprises along with the state of Kuwait and the citizens of Kuwait. The transformation would occur by establishing a publicly traded company listed on the Boursa Kuwait, which would enable citizens and the state to retain some ownership as shareholders.
Article 13 of Privatization Law No 37 of 2010 explains the ownership mechanism for delineating shares in each new publicly traded company. Strategic investors would be able to acquire at least 35 percent of the shares in accordance with this effort to transform the enterprise from public to private. Strategic investors could include companies listed on the Boursa Kuwait or other companies with permission from the Supreme Council of Privatization. Kuwaiti employees who used to work at the public enterprise would be able to hold up to 5 percent of the shares and the government of Kuwait would be able to own up to 20 percent of the shares. Citizens of Kuwait would be offered at least 40 percent of the shares.
The essence of this privatization law remains deeply protective of Kuwaiti interests as it grants an ownership opportunity to the state and the citizens of Kuwait, including previous Kuwaiti employees. However, the law did not give strategic investors — mainly foreign investors who require well-informed proposals for potential investments— strong incentives to consider bidding on newly privatized companies. The main objective of this paper is to shed light on the current law and analyse the four primary obstacles to effective strategic investment.
Strategic investment from foreigners is a particular desire and concern for Kuwait because it guarantees the flow of overseas money into the economy and raises Kuwait’s global status, which ideally creates a feedback loop encouraging future investment from abroad, therefore increasing Kuwait’s reserves. Understanding these obstacles beforehand is key to addressing the law and encouraging foreign strategic investors to consider Kuwait as an option. The first obstacle is that, while Law No 37 of 2010 reserves a specific number of shares to Kuwaiti citizens in the initial offering (40 percent), strategic investors are obligated to buy the surplus of the 40 percent of shares that citizens did not buy, regardless of their desire or intent to buy this surplus.
The likelihood of citizens not reaching this 40 percent threshold for shareholders in newly privatized companies is actually high, as the Ministry of Awqaf and Islamic Affairs issued a fatwa or non-binding opinion from Islamic scholars indicating that purchases on the Boursa Kuwait were haram or forbidden under Islamic law as the marketplace involves usury in its daily transactions and obtains usurious profits. Therefore, strategic investors could be obligated to obtain more shares than intended, which also would increase enterprise ownership by external (i.e., non-state or non-citizen) owners.
Golden shares
The second obstacle is the mandatory provision that the government of Kuwait receive golden shares in these privatized entities under the privatization law. A golden share offers the shareholder veto power over certain types of changes to the company. In this instance, golden shares would enable the government to veto any of the decisions of the board of directors and the shareholders to protect the national interests of Kuwait as needed. While protecting national interests, however, the existence of golden shares could hinder strategic investment as investors may be concerned that a government veto could prevent implementation of new initiatives intended to increase the return on investment under the assumption that the new initiative could contravene with national interests.
The final obstacle is derived from the applied theory for accrual of assets and liabilities when a company transitions from public to private. The theory adopted under Law No 37 of 2010 to transition assets and liabilities from a publicly owned entity to a privatized entity, when applied, does not provide the desired results for either the Kuwaiti government or the strategic investor. For both the government and the strategic investor the existing process is burdensome; application of another theory could meet the intended purpose of successful transition with better results.
The current status of privatization efforts in Kuwait clearly demonstrates the impact of these obstacles. Since the enactment of Law No 37 of 2010, only two projects have been privatized: the first was privatization of the Kuwait Stock Exchange to a publicly listed company, the Boursa Kuwait; the second project, the privatization of Kuwait Airways by Law No 6 of 2008 to a public shareholding company, has actually been postponed indefinitely. The postponed project proves that the privatization venue in Kuwait exists de jure but has not been implemented yet. The government has not released any statements regarding this situation.
PPP law
Notably, the golden share rule was not enacted in the privatization of the Boursa Kuwait, and it remains unclear whether golden shares would be included in the postponed Kuwait Airways project. The Parliament of Kuwait enacted the "Public Private Partnerships” (PPP) law in 2014, which is distinct from Privatization Law No 37 of 2010. Both the privatization law and the PPP law aim to establish a public shareholding company, but ownership by the strategic investor is not time constrained under the privatization law. On the other hand, ownership of the private sector in the PPP project is limited to a certain time and does not transfer ownership forever. With privatization, the government permanently sells the public assets it owns to the strategic investors, while under the PPP the government does not sell public assets but forms a time-limited partnership under different terms.
The privatization efforts are intended to generate additional revenue for the country and the stalled Kuwait Airways project demonstrates the challenging position the state finds itself in while trying to generate revenue and protect national interests. It is unclear whether the government is considering implementing additional measures to generate more revenue for the country, which is heavily dependent on oil revenues, or, whether the whole project will remain postponed until further notice.
Note: Dr Abdullah Ahmed Alkayat is a Commercial and Capital Markets Law Professor at Kuwait University School of Law.