For sale: Efforts to privatise state assets continue

In January 2016 Kuwait announced plans to create a new fund to manage its domestic assets, signalling a key step forward in the push to privatise state-owned assets. While the state has experimented with privatisation in the past, the climate of significantly reduced oil prices, which reached a 12-year low in January 2016, has added a greater sense of urgency.

Fund Facts

The new fund is expected to manage up to $100bn in local assets, which are set be sold to private investors over the next five to seven years, according to a January 2016 report from local Arabic-language daily Al Anba. The sell-offs also form a key part of the government’s plans to encourage the private sector to play a greater role in Kuwait’s long-term economic development. Stakes in local companies and power and water projects will reportedly be included in the fund, as well as other assets currently managed by the country’s sovereign wealth fund the Kuwait Investment Authority (KIA), which also oversees a sizeable international portfolio. Kuwait’s drive to create a new sovereign wealth fund comes nearly a decade after the government first began preparing for the sale of state-owned Kuwait Airways.

Long Time Coming

In May 2010 Parliament approved a privatisation bill that would pave the way for the sale of Kuwait’s state-owned entities, including certain downstream energy assets. While the bill maintained a ban on the privatisation of oil and gas production and refineries, as well as entities in the health care and education sectors, it offered an avenue for the government to reduce its stake in other major assets to 20% or less. The legislation would have given Kuwaiti nationals the opportunity to buy 40% of shares of privatised firms through an initial public offering (IPO), with at least 35% to be offered to local, listed shareholding companies via public auction. Under the regulations, the Supreme Privatisation Council, led by the prime minister, could also approve other companies to participate in public auctions. Earnings from the privatisation process were to be added to the government’s budget revenues, with a minimum of 50% allocated to the Future Generations Fund, which is controlled by the KIA.

However, the state’s privatisation agenda has largely stalled since 2010, with the sale of major assets, including Kuwait Airways and the Kuwait Stock Exchange (KSE), delayed on multiple occasions as the government has debated how best to approach privatisation. While earlier proposals had suggested the government would retain a 20-40% stake in Kuwait Airways, in mid-June 2015 a new structure was approved which included 75% state ownership. According to the new plan, 20% of shares will be offered to Kuwaiti citizens, with another 5% to be sold to current and retired airline employees.

Oil Impetus 

Kuwait’s latest plans for privatisation are advancing at a time when the country is facing significant budget constraints as a result of weaker energy receipts, despite having the lowest breakeven price in Organisation of the Petroleum Exporting Countries (OPEC), at around $50 per barrel, according to the IMF. Hydrocarbons account for roughly 60% of Kuwait’s GDP and close to 95% of export revenues, according to OPEC. With the Ministry of Finance (MoF) projecting a record deficit of KD11.5bn ($38.04bn) for the 2016/17 fiscal year, privatisation plans could represent a welcome turning point.

The UK’s decision to leave the EU is expected to have a negative impact on Kuwait’s investment portfolio, which has considerable infrastructure and real estate holdings there. Indeed, the KIA was part of the consortium that purchased London City Airport for £2bn in February 2016. At a July 2016 press conference Khalifa Mousaid Hamada, the under-secretary of the MoF and a KIA board member, said, “All our investments in Britain will have their value affected. This will be temporary, and then after that will improve. Our investments are long-term and not short-term.”

Other Gulf countries have also turned to privatisation as a means of bolstering flagging state revenues. Saudi Arabia surprised analysts when it announced in early January 2016 that it was considering listing shares of state-owned Saudi Aramco, the world’s largest oil producer and most valuable company. In the UAE, officials at state-owned health care operator Abu Dhabi Health Services have announced similar plans to privatise health care assets.

Capital Markets Focused

At the heart of Kuwait’s privatisation plans is the country’s bourse, which is expected to serve as the primary means by which state assets will be sold off to private investors. The capital market itself recently took a major step towards privatisation. In April 2016 daily operations at the KSE were taken over by Boursa Kuwait, a purpose-designed, independent company that was formed by the Capital Markets Authority (CMA) in 2014. The transition, which is set to be completed by September 2016, is a key component of the government’s plan to privatise the bourse. Indeed, a requirement to eventually privatise the KSE was included in the country’s 2010 Capital Markets Law (CML). However, since this move little progress had been made.

The move to privatise the KSE was precipitated in part by the bourse’s performance in recent years. Over the past decade the KSE has recorded a drop in liquidity of more than 80%, while in the past half-decade the market’s index has seen growth of 5.5%. The move towards the privatisation of the KSE is widely expected to have a marked positive impact on the exchange’s performance. While a share sale date has not yet been set, the terms of the eventual privatisation efforts are laid out in the 2010 CML. Under the law some 50% of the exchange is to be sold off to Kuwaiti citizens in an IPO. Between 6% and 24% of the remaining shares are to be allocated to government entities, such as the KIA. The other 26-44% of the bourse is to be sold off at auction to a foreign company with experience in capital markets and which would be expected to operate the Kuwaiti exchange.

Sharing Revenues

Kuwait’s downstream energy sector also has major potential for privatisation. In July 2016 the MoF and the state-owned Kuwait Petroleum Company were in the midst of a study aimed at deciding which energy sector services and processes might be sold off to private investors. While the nation’s production capabilities are not being considered as part of this process, all other components of Kuwait’s enormous oil industry could potentially be put on the auction block. At the centre of the government’s plans in terms of energy privatisation is the oil services sector, which consists of companies that provide the manpower and equipment used to drill for and transport oil. The privatisation of oil assets in Kuwait is potentially controversial. This was evidenced in April 2016, when around half of Kuwait’s total production capacity of 2.8m barrels per day went offline as a result of a three-day strike by labourers over fears of pay cuts and job losses due to privatisation.