Private gains: Understanding the political landscape for privatisation

The potential benefits a privatisation strategy offers to Kuwait are similar to those experienced in other jurisdictions, especially the possibility of increased foreign direct investment (FDI), the potential to reduce public spending and greater tax revenues. Other significant advantages include improved sector efficiency, encouraging Kuwaiti citizens to return from abroad, higher standards driven by more competition, the provision of new job opportunities and availing public assets to more citizens. Establishing a legal framework to underpin the nation’s privatisation scheme has, therefore, been a concern for the government for some years, and in 2010 it finally succeeded in establishing one. The victory was not won easily, however, and the concessions made to its opponents have prompted some to question whether the public sector companies to which it is applied will be fully and properly privatised.

LEGAL SYSTEM: In May 2010 the Kuwait National Assembly enacted Law 37-2010, establishing the Privatisation Programmes and Operations Law ( Privatisation Law). The promulgation was intended to provide a legal platform for the privatisation of public sector enterprises and functions currently owned and operated by the government, a readily accepted concept in many economies but still a controversial proposal in Kuwait’s public-sector-dominated environment. More than 77% of the population is employed by the government, which pays relatively high salaries. Understandably, any alteration to the public-private balance in the economy is carefully scrutinised, and frequently opposed. In the run-up to the reading of the bill, many parliamentarians echoed the concerns of trade unions that privatisation would amount to a selling off of the country, while those seeking or currently in government employment voiced concern regarding pay and conditions in newly privatised companies.

DIVISIONS: The bill gained the support of 33 MPs at its reading, including the votes of the Cabinet, but 10 MPs voted against its passing and 17 walked out of the session. Supporters of the bill, however, point out that the concerns of its opponents have been noted and addressed in its second article, which outlines a number of safeguards against many of the fears raised in the debate. Under its provisions, the interests of consumers are protected in terms of pricing and quality, the confidentiality of information and data is safeguarded, the protection of the environment is made a requirement, and measures to prevent conflict of interest, either directly or indirectly, are enacted. Article 3, meanwhile, expounds upon the law’s wider intent, and might be seen as a further attempt to provide reassurance to opponents of privatisation. The article recognises that the national economy’s purpose is to “realise social development, increase production, upgrade the standard of living and provide welfare for citizens”, and that for these ambitions to be served, all natural resources must be completely owned by the state. On this point the law is clear, stipulating that oil and natural gas production, refineries, and health and education services may not be privatised.

However, in some respects this is a mere legal tautology, in that Kuwait’s constitution already prohibits the privatisation of the nation’s important oil and gas industries. Of more importance to many observers is the codification by Article 3 of the government’s earlier verbal reassurances that the privatisation process will be a limited one, and that certain public enterprises considered central to the state’s operation and well-being will not be subject to it.

Finally, the law provides some reassurance to those concerned by the actions of privatised companies once the process is over and the government’s attention has shifted elsewhere. The state’s role in protecting public welfare is extended into the lifespan of the newly privatised company, over which it will retain a degree of control. For example, the law provides for supervisory authorities that will be required to approve prices and service systems not only before they are implemented in the first instance, but also later in the life of the company, when subsequent price hikes might be made.

IMPLEMENTATION: A new Supreme Council of Privatisation is responsible for developing general policies for the privatisation process, and has been charged with the task of identifying suitable public sector enterprises that are then referred to the Kuwait Council of Ministers for approval. The practical measures necessary to complete the process fall within the purview of the new Technical Board for the Privatisation Programme, which provides advice and assistance to the council, as well as a number of other duties, such as: managing the valuation process, conducting initial studies regarding public enterprises to be privatised, and assembling contracts and other forms of agreement to be used in the process. Further oversight is provided during the implementation phase by the State Audit Bureau, which must review the valuation provided by the board before the process can continue.

Should all parties be in agreement regarding the eligibility of the project, the council may decide to move the process forward, at which time it has two years to establish a shareholding company to effect the privatisation. At least 40% of the shareholding company will be offered to the general public, including foreign investors, while other public shareholding companies and firms approved by the council will be offered at least 35% of the shares. A 20% stake will be allocated to governmental bodies nominated by the council, and not more than 5% of the shares will be distributed equally among the Kuwaiti employees of the public enterprise that is being privatised. The latter provision is just one of several measures aimed at making the bill more palatable to concerned government employees. The law also provides a number of specific protections for the staff of the original public enterprise wishing to continue as employees of the newly privatised company: their new employment contract must have a duration of at least five years, unless the staff member wishes to work for a shorter term; the compensation and benefits offered in the new contract must be similar to those received prior to the privatisation process; and if the employment term is extended beyond the initial five years, the employees benefits and compensation must not be altered. TRUE PRIVATISATION?: In formulating the privatisation law, the government has been cognisant of the objections of its opponents. The safeguards applied to both employees’ rights and the duty of privatised companies to the public good are so extensive that some have questioned whether “privatisation” is an accurate term for the process. A number of the law’s provisions have been identified as particularly onerous. In addition to the stake of the privatised company that is to be retained by government companies, the law provides the state a “golden share”, which will grant it a right of veto over board decisions. There is also the government’s ability to regulate pricing even after the privatisation process has been completed, regarded by some as a significant limitation on the new companies.


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The Report: Kuwait 2013

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