New FDI law passed in December 2013 set to accelerate economic diversification

The government has identified private sector participation as a critical facet of its five-year, $109bn spending plan, reforming its regulatory framework in recent years to enhance the state’s attractiveness to foreign investors. Kuwait has traditionally ranked at the bottom of GCC nations in terms of foreign direct investment (FDI) inflows, and the state has had to work hard to retain valuable investment dollars in the wake of ongoing project delays, prohibitive bureaucracy, and a lack of consistency and transparency. Nonetheless, the promulgation of two key pieces of legislation in 2012 and 2013 has opened the door to foreign firms in 2014.

Changes Afoot

Recent efforts to reform investment legislation kicked off in 2001, when the FDI Law No. 8/2001 was passed, creating the Foreign Capital Investment Committee (FCIC), which functions under the Ministry of Commerce and Industry (MoCI). The FCIC is mandated to study applications for investment, submit recommendations to the government bodies in charge, and promote investment opportunities to foreign firms. FCIC members include government and Kuwait Chamber of Commerce and Industry representatives, as well as experts from the private sector.

The Kuwait Foreign Investment Bureau (KFIB), which previously acted as the executive arm of the FCIC, was also established in 2001 to attract direct investment, as well as realise national goals of technology transfer, job creation, development of human capital and support for the local private sector. The FDI law was an improvement over the Commercial Law No. 68/1980, and allowed foreigners to own up to 100% of a commercial entity in Kuwait, although this ownership was limited to the infrastructure, insurance, hospital, housing, tourism and entertainment sectors.

New Reform

The government began its most recent investment legislative reforms in 2008, when it passed the PPP Law No. 7/2008, which allows companies to enter into contracts under a build-operate-transfer (BOT) model that has seen considerable success in major power plant and infrastructure projects. In 2010 regulations for independent water and power projects (IWPPs) were further clarified with the introduction of the IWPP Law No. 39/2010.

Since then, considerable efforts have been made in attracting new foreign investment for a host of mega-projects, although delays and bureaucracy have had a significant impact on these efforts. The government’s 2010 spending plan had an estimated KD15.1bn ($53.09bn) waiting to be implemented in January 2014, and private sector stakeholders have long called for further reforms to administrative procedures and investment laws. However, there have been considerable improvements in the regulatory framework governing foreign investment in recent years, most significantly in 2012, when the government passed the New Companies Law (NCL) No. 25/2012.

Progress

The NCL, which replaced the 52-year-old Law No. 15/1960, was written with the aim of attracting new investors to the Kuwaiti market. Under the law, a number of new types of companies can be established in the state, including non-profit corporations, sole person companies and professional companies including closed shareholding companies, limited partnerships and limited liability companies.

The NCL is expected to accelerate the process of incorporating a company, especially for Kuwaiti shareholding companies and limited liability companies. Among the several new types of companies introduced by the NCL, the special purpose vehicle (SPV) is now recognised, which will allow the establishment of a company for a defined purpose, such as issuing bonds and other securities, debt restructuring and ownership restructuring. The 280-MW Al Abdaliya integrated solar combined-cycle plant, for example, is planned to be developed by a private sector SPV.

The NCL will reduce the time it takes to establish a company through the adoption of a one-stop shop for finalising the procedures of incorporating companies. The MoCI has created a department that will include The NCL also abolishes previous requirements for foreign partners to obtain residency in Kuwait prior to incorporating their firm, which had previously complicated the establishment of foreign businesses. Lawmakers anticipate that the NCL will expedite business processes substantially; while businesses established under Law No. 15/1960 used to take approximately six months to receive approval, as the old law required an emiri decree to be issued, approval under the NCL must be granted by the MoCI within 30 days from the day the incorporation application is submitted.

New FDI Law

Stakeholders have emphatically welcomed the recently introduced Direct Investment Promotion Law No. 116/2013, which was proposed in June 2013 and ratified in December. The new FDI law was drafted as part of the National Development Plan, which aims to transform the country into a regional commercial centre through economic diversification, reducing the state’s oil dependency and expanding the role of the private sector as a driver of economic activity.

The law included provisions for a new body, the Kuwait Direct Investment Promotion Authority ( KDIPA), which replaced the KFIB in December 2013. Like the KFIB, KDIPA is tasked with the licensing of direct investment, and is overseen by a board composed of public and private sector stakeholders, and chaired by the minister of commerce and industry.

The new FDI law also provides a one-stop shop whereby a KDIPA licence application will be considered by a specialised unit comprising all relevant officials from various government departments. This unit will be separate from the unit established under the NCL.

This FDI unit is expected to manage the issuance of commercial and employment licences, in addition to dealing with land grants, a role previously held by the Public Authority for Industry. The law also provides a maximum period of 30 days for the FDI unit to render a decision on a completed licence application, while foreign investors will continue to benefit from 10-year tax exemptions, as well as tax and Customs exemptions for the importation of machinery, equipment, spare parts, raw materials and intermediary goods.

One important change is the adoption of a “negative list” approach, in which all economic sectors will be open to foreign investment, except those sectors specifically prohibited by a decision of the Council of Ministers. Legal experts anticipate that oil-related activities will likely comprise the majority of the negative list, opening up new segments to private investors. Executive regulations which will bring the new FDI law into effect were slated to be introduced in December 2013, although, as of June 2014, they had yet to be released.

“The idea is really good, and the enthusiasm is there; the only challenge now is getting regulations out of the way, and all we’re waiting on now is ministry approval. We heard in January that it would be within two months, but it’s impossible to guess the exact timing,” Phillip Kotsis, a partner at UAE-based Al Tamimi & Co, told OBG.