Better policies: Improving incentives and mechanisms to attract more foreign investment

In the decade since the passage of Kuwait’s foreign direct investment (FDI) legislation, the nation has worked to capitalise on the numerous advantages it offers investors from beyond its borders. These include: its location between Iraq and Saudi Arabia; a relatively open economy with a thriving merchant class; one of the most vocal and democratic states in the region; an ambitious development plan with significant budgets for infrastructure projects; a civil-law-based legal system; a robust national economy with GDP per capita above the global average; a strong currency and a financial system of considerable depth; an investor-grade sovereign rating and low political risk; FDI incentives for 13 economic sectors; low corporate tax and no income tax for individuals; and solid information and communications technology (ICT) infrastructure and public utilities. Yet for all this, Kuwait has been unable to match the FDI inflows of neighbouring Saudi Arabia and the UAE, attracting only $399m in 2011, according to the UN Conference on Trade and Development. Addressing this issue has, therefore, become a governmental priority, and in 2013 the Kuwaiti parliament approved new legislation that may at last see the country’s FDI targets reached. “It is all happening in Kuwait now with the approval of a host of economic laws that will favourably improve the business environment and facilitate the role of the private sector in the economy by encouraging investment in energy, utilities, infrastructure, transport and housing projects,” Sheikh Meshaal Jaber Al Ahmad Al Sabah, CEO of the Kuwait Foreign Investment Bureau (KFIB), told OBG.

CHALLENGES: Kuwait’s political system is frequently cited as an obstacle to foreign investment. The elected parliament has an adversarial relationship with the royally appointed Cabinet that, although resulting in a laudable level of accountability, presents a challenge to economic growth at times. Critics of the political system point out that as elected representatives have neither the rights nor the responsibilities of government, they are limited to functioning solely as an opposition, able to veto government actions but not in a position to provide solutions to key issues. The main tools of opposition are blocking legislation and votes of no confidence in ministers; under the present structure there is little provision for the resolution of such disputes between the legislature and executive other than the outright dissolution of parliament by the ruler.

When the Emir was compelled to dissolve parliament in December 2011, it was the fourth time he had done so since 2006, and in June 2012 a parliamentary stand-off resulted in another adjournment followed by its dissolution by the constitutional court.

The vicissitudes of parliamentary life in Kuwait present challenges with regard to long-term planning and implementation of economic programmes in a general sense, while its adversarial nature has sometimes affected projects in the particular – most notably in recent years with the K-Dow case.

COMPLEX GOVERNANCE: In 2008 the government approved an agreement between Kuwait’s Petrochemicals Industries and Dow Chemicals of the US to establish a large petrochemicals complex in the country. However, as the decision was made during a parliamentary recess, the parliament exercised its legal right to review the contract upon its return, at which time opposition MPs forced the government to cancel it. Subsequently, an international court of arbitration ruled that Kuwait must pay $2.2bn to Dow, which had meanwhile moved its attention to neighbouring Saudi Arabia, where it intends to develop a petrochemicals joint venture with Saudi Aramco – with projected revenues of $10bn per year after its scheduled 2016 start date. The controversy is frequently held up by the business community as an example of political concerns trumping economic common sense.

That said, the election of a new parliament in December 2012 that is considered more amenable to the government has boosted optimism regarding foreign investment and the implementation of the nation’s economic plan.

While the political system remains a long-term, structural challenge to FDI, less intractable issues also present difficulties for foreign investors. Among the most salient of these is the length of time it can take to acquire necessary licences and approvals before establishing a business or project in the country. The International Finance Corporation ranks Kuwait 119th out of 184 countries in terms of dealing with construction permits, while acquiring the licences, permits and approvals to build a warehouse takes about 130 days to complete. Dealing with government departments can be somewhat time-consuming, and those not directly attuned to the government’s FDI strategy may undermine the proactive approach taken by others.

“Some government agencies still do not understand the importance of international investors, and so take too long,” Al Sabah, told Bloomberg in 2012.

Access to land presents another key challenge, as much of the nation’s total area of approximately 17,800 sq km holds the potential for hydrocarbons extraction, and is therefore set aside for the purpose of exploration and production activity. As a result, licences are sometimes withheld and building is curtailed in areas where long-term infrastructure projects are under consideration.

SOLUTION: Aware that success has been slow to come following the promulgation of the current FDI Law No. 8/2001, the government recently announced a new drive to make the country a more appealing destination for foreign capital. The decision in 2007 to reduce the tax burden on foreign companies from 55% in some cases to 15% was the first such change in more than half a century and has done much to increase interest in Kuwait amongst the international investment community.

However, structural issues in the current economic environment require a more holistic approach. To this end, in 2012 the government announced the details of a new FDI law that promises to significantly enhance the regime that is currently applied to foreign investors. One of the most prominent changes is discarding the “approved list” system, by which 13 sectors have been identified as open to foreign investment, and instead adopting a “negative list” model, whereby the Council of Ministers will determine economic activities excluded for FDI, leaving the remainder of the economy open to foreign capital.

Under the new provisions, the KFIB will also transfer all of its funds, assets, obligations and liabilities to a new public authority that will act as an independent investment promotion agency in charge of attracting and serving investors. It will become the main point of contact for foreign firms undertaking projects in Kuwait, assisting them in obtaining approvals for investment licences and other permissions.

As an independent body the new authority will have a greater freedom of movement to launch promotional campaigns and will be able to deploy more agile strategies and appoint qualified teams as needed. Its independence will also allow for more outreach by opening branches in targeted countries, while at home it will adopt the ubiquitous one-stop shop, by which the authority will group around 16-18 government entities in one place. The latter provision enables it to reduce the amount of time needed to obtain investment licences from the current four months to 30 days. Other incentives offered by the new FDI law include a robust investment dispute mechanism that offers a choice of arbitration or a formal alternative dispute resolution mechanism, 10-year tax exemptions, and either full or partial waivers of Customs duties, depending on certain conditions.

IMPORTANT MILESTONE: In formulating its new legislation, the government has tackled some of the most significant challenges to FDI head on, most notably with regard to the bureaucracy that surrounds it and, perhaps most importantly, the question of trust and confidence in the investment process that had been undermined in previous years by a small number of high-profile cases. The KFIB, which has been involved in the process from a very early stage, has a clear objective in mind with its imminent implementation. “Our objective is to increase both the volume and inflow value of FDI investments, supported by lucrative investment opportunities provided by the Kuwait development plan. There is no upper or lower limit on investments and we welcome all investments that prove viable for Kuwait,” Sheikh Meshaal told FTSE Global Markets magazine in 2012.

In May 2013 the Kuwait National Assembly deliberated the new law for a second time and then passed it with an overall majority vote. After publication in the official gazette, the legislation will be fully implemented within six months. The coming year will thus see the new public authority set about its business of attracting more FDI to the country, a process that will be keenly observed by the local business community as it seeks to enhance its position regionally.