The decision to temporarily halt and revise the Kuwait Offset Programme (KOP), before reintroducing it next year, is widely seen as a sign of the government’s commitment to enhancing the business climate amidst fierce regional competition and following regulatory reforms.
The KOP is a programme which obliges foreign companies bidding on large-scale contracts in Kuwait to participate in local business ventures.
“The move should entice contractors back to Kuwait and help the country regain some of the ground lost in the projects market to Kuwait’s neighbours in the region,” said the National Bank of Kuwait (NBK) in its latest economic research, published mid-October.
According to NBK, increased activity in Kuwait’s projects market and new measures introduced by the government have buoyed hopes of renewed interest from investors. By the end of August, the government had awarded more than $20.7bn worth of contracts, almost twice as much as last year’s total, with at least an estimated $17bn in contracts to be awarded before the end of the year.
Since its launch in 1992, the KOP has been at the heart of efforts to promote growth among local industries, particularly in the defence and education sectors.
Under the programme, foreign firms awarded government contracts are required to set up a separate, in-country business to promote growth across value-added industries. Offset obligations were applied to military contracts worth more than KD3m ($10.5m), government contracts greater than KD10m ($34.8m), and downstream oil and gas contracts. The local initiative needs to be approved by the government and be worth at least 35% of the value of the contract.
Under the KOP, investors taking on a project must fulfil one of three primary objectives by helping to advance education and training, transferring advanced technologies and integrating them into the local economy, or creating highly-skilled professional jobs for Kuwaiti nationals.
When making a deal, contractors are required to sign a memorandum of understanding (MoU) with the state-run National Offset Company (NOC) acknowledging their obligations and submit plans indicating how the business venture will be implemented over an eight-year period. Investors must also agree that a Kuwaiti national will play a key role, either in a joint venture or as an equity partner, and show how this fits into the plan.
Amendments on the way
The government said in September that it aimed to have a draft of the programme in amended form completed by Q2 2015. “We need to revise it and then, later on, implement it in a more moderate way, which we believe will help (when) inviting those international firms,” the foreign minister, Anas Al Saleh, told Reuters.
In the past, the offset programme has been criticised for disadvantaging smaller exporters, who find it more difficult than their larger counterparts to offset costs through economies of scale. Acknowledging the criticism when announcing plans to suspend the programme, Al Saleh added “This is why we have frozen it to make sure it is not an obstacle for those firms to come in.”
Kuwait has introduced a raft of legislation in the past year aimed at attracting foreign funding for projects. The Direct Investment Promotion Law, which was passed in August 2013, has proved to be a key component, paving the way for a new public authority tasked with licensing and setting out tax breaks for investors and Customs exemptions to be established.
Addressing the challenges
However, Kuwait still faces obstacles in its bid to drive up investment, including delays for business start-ups caused by bureaucratic processes, complex laws concerning ownership, family dominated set-ups, sponsorship requirements and regulations restricting foreign enterprises from direct involvement in key sectors, according to the US Bureau of Economic and Business Affairs.
According to a Central Statistical Bureau survey, some of the largest constraints listed by companies were the procedures related to land sale, leases and mortgages as well as procedures with the Ministry of Social Affairs and Labour, while the low price of fuel was one of the key motivating factors of investing in Kuwait.
The situation has been compounded by deadlocks in the Kuwaiti parliament, which have delayed liberalisation initiatives and made it difficult for the country to conclude large projects involving foreign firms. Several reshuffles involving senior staff have also impeded progress.
A report by ratings agency Moody’s in October noted that the contentious relationship between Kuwait’s government and parliament has hindered the country’s development and diversification plans. It does not, however, pose a risk to overall political stability, said Moody’s, which maintained its ‘Aa2’ sovereign ratings and stable outlook, a view supported by “very high levels of economic and fiscal strength”.