Kuwait government reforms attract investment through partnership

The Kuwait Development Plan 2015-20 looks to address a range of challenges and hurdles that have hindered the country’s economic development strategy over the last five years. While 2014 proved to be a stellar year in terms of projects awarded and implemented, the government has recognised that reforms are required in order to maximise the country’s development potential. The government has indicated that the country needs to reform two key areas in order to maintain steady growth in its discussions with the IMF. These include initiatives to improve the business environment and to increase public investment efficiency.

STRATEGIC CHOICES: The government has identified measures to address some of these challenges and it implemented a number of reforms during 2014, as well as into the middle part of 2015. The country’s parliament has passed a number of important laws recently that lay the necessary groundwork to improve Kuwait’s business climate. Laws have introduced new anti-corruption measures, foreign investment programmes and, in a vital move that supports the extensive investment programme, public-private partnerships (PPP) to leverage greater financial and technical expertise from local and international private investors. The PPP Law was one of the most significant reforms of 2014. The new law will establish a new regulator for PPPs and replace the Partnerships Technical Bureau with a formal government entity called the Kuwait Authority for Partnership Projects. The regulator will approve new PPP projects, review bid documents, approve winning bids and manage public land allocations for approved projects. The new law will also increase the maximum concession period under PPP projects from 40 years to 50 years.

It is expected that these reforms will help improve the procurement process and attract private sector participation in Kuwait’s multi-billion-dollar project development programme. The government is expected to publish the executive regulations that will support the new PPP Law in 2015. Other reforms include strengthening the country’s foreign direct investment (FDI) market by establishing a public authority dedicated to attracting FDI. The new FDI Law, issued in 2013, succeeded the previous law, issued in 2001, and shifted the Kuwait Foreign Investment Bureau’s existing assets and functions to the newly established Kuwait Direct Investment Public Authority. The new organisation is expected to draw investment into priority sectors in line with the national development strategy.

FINANCIAL EFFICIENCY: Phasing out wasteful subsidies and enabling more employment within the private sector, for example, would help shrink the government’s wages and subsidy bill. The vast majority of Kuwaiti workers are currently employed within the public sector, which will see the government spend an estimated KD9.9bn ($34.11bn) on wages between 2015 and 2016, up from KD4.4bn ($15.16bn) in the 2010/11 budget. However, government spending on subsidies and social benefits has dropped from KD6.6bn ($22.74bn) in 2010/11 to KD3.7bn ($12.75bn) in 2015/16. Despite this, total government expenditures have increased from KD16bn ($55.12bn) to KD18.9bn ($65.11bn) during the same period.

While the government’s revenues have allowed the country to operate with a budget surplus over the last decade, lower oil prices have highlighted the need to reform government spending. However, despite successfully implementing some reform measures, Kuwait has faced difficulties in initiating other changes. The government’s attempt at reducing the subsidy on diesel and kerosene, for example, was short-lived due to political pressure. The decision to raise the price of diesel at wholesalers and filling stations from KD0.055 ($0.19) to KD0.170 ($0.59) on January 1, 2015, was repealed within less than a month. According to IMF, the diesel price cuts would have saved the government up to $1bn, or 0.5% of GDP, each year.

While this setback is not a major issue in itself, it raises important questions on how broader budget reforms that draw down expenditures on more politically sensitive subsidies and wages will be implemented.