New Kuwaiti project law builds on past success

On August 17, 2014 the highly anticipated new law governing public-private partnership (PPP) projects was issued as Law No. 116 of 2014 (“New PPP Law”). The New PPP Law replaced the previous PPP law, Law No. 7 of 2008 (“Old PPP Law”), and was well received as a major reform that will benefit Kuwait’s PPPs.

NEW PPP LAW: While the Old PPP Law was generally satisfactory in terms of regulating PPP projects, the New PPP Law helps to modernise the economy by addressing various issues related to PPP concepts that were introduced to the corporate, project and project finance world in the past decade. To address some shortcomings and the need for further laws and reforms to assist with the implementation and regulation of future small, medium and mega-PPP projects, the Kuwait government recognised that the promulgation of the New PPP Law was necessary to reform the outdated provisions of the Old PPP Law, and introduce new concepts and updated policies and procedures. In line with reforms in other countries, the New PPP Law introduces new provisions and amends previous ones to allow more flexibility and a clearer regulatory framework for implementing and facilitating the PPP process, while making it more efficient and alleviating hurdles encountered by the Old PPP Law. This will benefit new and existing investors interested in Kuwait’s projects market.

The New PPP Law codifies some of the techniques applied in Kuwait’s first independent water and power project (IWPP) project, Al Zour North IWPP Phase 1, including but not limited to: the framework for incorporating the project company and the shareholding structure; warehousing of the shares reserved for the Kuwaiti public during the initial stages of project implementation; and some of the finance and security techniques used or desired in the project, such as allowing investors to assign government proceeds and assets to lenders and the pledging of shares prior to the two-year lock-out period to provide security to lenders.

EXECUTIVE BYLAWS: Notwithstanding the addition of new provisions and the forward-moving spirit of the new legislation, the New PPP Law was dependent on the release of the executive regulations to the New PPP Law (“Executive Bylaws”). However, Article 47 of the New PPP Law states that Articles 11 and 12 of the Old PPP Law, which relate to the Higher Committee (HC) and the Partnerships Technical Bureau (PTB), have been superseded by Articles 2 through 6 of the New PPP Law, which relate to the New HC, as defined herein below, and the Kuwait Authority for Partnership Projects (KAPP), as defined herein below. Except for these certain provisions, the New PPP Law did not come into full force and effect until the publication of its Executive Bylaws.

The Executive Bylaws, published on March 29, 2015, govern the PPP legal process and implement the New PPP Law, covering aspects such as prequalification policies; request for proposal requirements; the establishment of a competition committee by KAPP (and approved by the new HC) to represent public entities in a particular project; bid submission requirements; bid bond requirements; bid evaluation procedures; selection of and negotiation with a preferred bidder; the awarding of a project; incorporation procedures; and the mechanism to both submit and review grievances and complaints by a concerned party.

This article reviews the key concepts and themes of the New PPP Law and Executive Bylaws, which provide optimism for greater clarify of the PPP regulatory regime and a significant reduction of the obstacles facing existing and new investors in upcoming projects.

NEW HC: A new HC for PPP projects has been established under Article 2 of the New PPP Law. Similar to the HC under the Old PPP Law, the new HC is the ministerial committee granted broad powers to be in charge of, amongst other things, the study and approval of PPP projects on state-owned property in Kuwait and tendering them pursuant to the provisions of the New PPP Law. Decisions made by the new HC can take effect only after approval by the minister of finance.

FORMATION OF NEW AUTHORITY: According to the New PPP Law, the PTB has been superseded by KAPP, an independent government body that will be vested with greater executive powers to more effectively manage all PPP projects. Similar to the former PTB, KAPP will have special financial allocations as part of the Ministry of Finance’s budget. Although the old PTB has been replaced with KAPP, the New PPP Law makes clear that within six months after the effective date of the New PPP Law, the minister of finance will decide which old PTB employees will be transferred to KAPP.

Many of the functions and roles of KAPP are consistent with those that were previously undertaken by the PTB. Under the law, KAPP will be responsible for the following tasks, amongst others:

• Supporting the relevant public entities through the various stages of the PPP project;

• Conducting surveys and preliminary studies to identify possible projects and present reports to the new HC for recommendations in relation to the same;

• Preparation of a new guidebook for PPP projects;

• Developing contract templates and submitting the same to the new HC for approval;

• Appointment of a transaction advisor responsible for conducting the feasibility study; and

• Drafting/approving terms of reference in relation to the transaction advisor. A new facet of KAPP’s role is that it will have responsibility for incorporating public joint stock companies. The Old PPP Law was unclear as to whether the PTB had the responsibility to undertake the establishment of the public joint stock company (as the incorporator), or whether another entity could act as the incorporator and the PTB could act in a supervisory capacity.

Under the New PPP Law, KAPP will take steps to establish the project company for projects exceeding KD60m ($206.7m) after offering the project to the successful investor. If the total project cost is not expected to exceed KD60m ($206.7m), the investor must establish the project company. The New PPP Law maintains the power of KAPP to implement development projects of a special nature via a private project company (to be established by the investor), provided the project value does not exceed KD250m ($861.3m).

The new HC and KAPP have been granted certain rights regarding the management of the project contract. The new HC has the right to terminate the project for reasons related to the public interest (subject to payment of compensation) and replace the contracting investor under specific circumstances. In addition, the new HC can put the project under the management of the public body (or another specialised company) if there are certain delays to the project.

APPLICABILITY TO CURRENT PPP PROJECTS: Article 7 of the New PPP Law states that projects/contracts concluded prior to the effective date of the law will continue to be valid in accordance with the terms of such agreements until the expiry of the terms or the date when the contract is terminated. However, the New PPP Law states that after it comes into full force and effect, the contracts or licences that govern those projects may not be amended, extended or renewed in a manner that violates the New PPP Law. There is no grandfathering arrangement for projects in procurement but not yet concluded.

WAREHOUSING PUBLIC SHARES: The issue of the initial public offering (IPO) of the project company shares to the Kuwaiti public, as called for under the Old PPP Law, caused legal and practical concerns as to the manner and timing of the issuance. As a result, previous projects used a warehousing approach for shares allocated for distribution to the public, though this approach was not explicitly mentioned in the Old PPP Law. KAPP is now formally allowed to hold the shares allocated for the public and public entities until the project becomes operational, thus building the warehousing concept into the new law for all future projects.

ALLOCATION OF SHARES: Article 13 of the New PPP Law provides that where the estimated cost of a project exceeds KD60m ($206.7m), KAPP shall incorporate a public joint stock company for the project, with shares to be allocated as follows: 6-24% to public entities entitled to acquire such shares; at least 26% to the winning investor in accordance with the New PPP Law, while taking into consideration the percentage under Article 20 of the New PPP Law allocated for the initiative’s owner; and 50% allocated for an IPO by Kuwaiti nationals who are alive and whose names are registered in the records of the Public Authority for Civil Information on the date of the invitation to pay the shares’ value under the New PPP Law (with KAPP holding the shares on their behalf until the company is operational).

UNSUBSCRIBED SHARES: The Old PPP Law was unclear about unsubscribed shares. This has been clarified in the New PPP Law, in that the new HC now maintains broader discretion to decide what to do with the unsub-scribed shares. Article 15 of the New PPP Law states that the new HC can sell the unsubscribed shares for market value to: (i) the public entities; (ii) the investor; or (iii) on the stock exchange. If the Kuwaiti public does not subscribe for all or part of the shares allocated for the IPO, such shares shall remain registered in the name of KAPP on behalf of the state until their disposal.

SECURITY: The New PPP Law expands the scope of security that can be granted. The Old PPP Law was viewed by many potential investors and lenders to be unreasonably restrictive due to limits on lender security over projects. Article 13 of the Old PPP Law restricted lenders from taking security over nearly all tangible and substantial assets, including the land the company is built on; buildings (e.g., offices, plants, other fixed structures); assets, including movable assets, that are integral to the project (e.g., turbines, equipment, other fixtures); and any other direct or real rights in the assets. Furthermore, due to the statutory two-year lock-up period for transacting in shares of newly-formed Kuwait shareholding companies as called for under the Companies Law, lenders were unable to obtain immediate share pledge security, which caused further concerns for potential lenders. Many of these issues were addressed in the New PPP Law, which allows for stronger security options in the financing of PPP projects. Article 23 seems to have relaxed some of the restrictions and prohibitions under Article 13 of the Old PPP Law.

GRIEVANCE COMMITTEE: The New PPP Law allows parties to raise their grievances with an independent sixmember body made up of various legal, financial and technical experts. The Grievance Committee is empowered to provide effective recourse and consider all grievances regarding: (i) decrees passed in violation of any provision of the New PPP Law and its Executive Regulations and (ii) errors made by the HC Committee/KAPP. Article 32 sets a specific mechanism for the aggrieved party and the Grievance Committee to follow.

EXEMPTIONS FROM COMPANIES LAW: Article 34 of the New PPP Law grants an exemption from Kuwait foreign ownership restrictions for foreign companies that are part of a winning consortium, provides an exception to certain provisions of the Companies Law, and says the first board of directors of public joint stock companies incorporated under the law will be exempt from the Companies Law requirement to hold a minimum number of shares pending the company’s listing on the stock exchange. The New PPP Law has also introduced certain incentives for a winning investor, including exemptions from taxes, Customs duties and other fees.

LAND RIGHTS: The term of a PPP project procured in accordance with the New PPP Law is not to exceed 50 years starting from the date set forth in the agreement for the completion of construction, installation and development works. The New PPP Law envisions that the government will grant a usufruct for the purpose of PPP projects. The term of the agreement, and the value and term of the usufruct rights over the stateowned land shall be determined in advance and set forth in the request for proposal. The term of the usufruct rights must be in line with the term of the project.

The project agreements must determine the project assets to be owned by the investor and the state. Article 23(1) of the New PPP Law says the contracting investor and project company are prohibited from selling or mortgaging the land where the project is built. Upon the expiration of the term, ownership of the project and facilities shall be transferred to the government along with any and all components at no cost or compensation, except for the assets owned by the investor as out forth in the project agreement. The state will collect a land use fee from the project company, to be set in accordance with the nature of the project, the usage of the land and economic feasibility.

INITIATOR STATUS: The New PPP Law sets a process for unsolicited proposals. Under Article 20 of the New PPP Law, the new HC is required to either: (i) accept the proposal as an initiative; (ii) accept the proposal as a distinctive project; or (iii) reject the proposal. An initiative is described as an innovative partnership project based on an unprecedented, innovative idea in Kuwait and approved by the new HC, based on an integrated feasibility study submitted by the inventor of the idea, which has an economic or social return in line with the state strategy and its development plan. A distinctive project is defined as a partnership project approved by the new HC based on an integrated feasibility study submitted by the inventor of the idea, which has an economic or social return in line with the state strategy and its development plan. If the new HC accepts the project as an initiative, the initiator will have the right to one of the following incentives/benefits:

• Recovery of the cost of performing the feasibility study plus 20% or KD200,000 ($690,000), whichever is less;

• Priority for accepting the initiator’s bid of 5% of the value of the best bid, unless the project execution is carried out through a public joint stock company;

• Allocation of a portion (10% or less) of the public joint stock company shares against their face value plus the issuing fees, to be deducted from the percentage determined for the investor if the project is executed through a public joint stock company. However, if the new HC accepts the project as a distinctive project that provides added value to Kuwait, the initiator will be entitled to recover the cost of performing the feasibility study plus 10% or KD100,000 ($345,000), whichever is less.

CONCLUSION: As evidenced in the above overview, the New PPP Law is both progressive and provides greater flexibility for PPP projects in Kuwait. It demonstrates Kuwait’s dedication to economic diversification and private sector participation, and introduces new concepts and clarity with respect to:

• Security over contracts and rights;

• Criteria for selecting the winning investor;

• Procedures for the sale of warehoused shares to the Kuwaiti public and public entities;

• Matters relating to the project contracts;

• Enhanced rights for the new HC and KAPP;

• Responsibility and timing for establishment of the public joint stock company; and

• Advantages of initiator status. These changes are expected to attract more investors and help to further develop projects already under way by significantly reducing the obstacles that have often faced investors interested in PPP projects in Kuwait.