Kuwait: Private participation takes flight

With an announcement that a 35% stake in its national carrier is up for sale, the Kuwaiti government has taken another step towards privatising Kuwait Airlines, a project that has been in the works since 2008. At the same time, efforts are under way to build a national railway, with the government recently signing a contract with a consortium of consultancy firms to undertake research on a proposed rail link between Kuwait International Airport (KIA) and the country’s ports.

According to an August 1 statement by the privatisation committee of Kuwait Airways, the government is seeking a strategic investor to buy a 35% position in the airline. The total share capital of the privatised entity, to be known as Kuwait Airways Company, has been valued at KD220m ($806.7m).

“Any sale of the company must realign the airline towards a successful future entity that builds on the aspirations of the Kuwaiti people and the past successes of this national institution,” the privatisation committee said in its statement.

Joint-stock companies listed on the Kuwait Stock Exchange and “specialised international companies” will be allowed to participate in the sale. While the latter could include global carriers, Kuwait-based airline operators, such as Jazeera Airways, have been explicitly barred from bidding. The government set a deadline of August 25 for the submission of initial expressions of interest (EOI). As of 1 September the Privatisation Committee of Kuwait Airways was examining the EOIs but had not yet released any details of the submissions.

The government, through the Kuwait Investment Authority, the country’s sovereign wealth fund, will own 20% of the new company, while 40% of the stock will be sold to the public. Airline employees will hold the remaining 5% of shares. Last August the government announced that Citigroup, Ernst & Young and aviation consultancy Seabury would assist the government in the privatisation process.

With several news agencies reporting that the airline lost $556m on revenues of $771m in 2010, there is caution in some quarters as to how appealing such an investment might be given its current proposed structure. Indeed, John Strickland, the director of UK-based JLS Consulting, was quoted by Reuters as saying that Kuwait Airways “does not bring much attractiveness to any partner unless it gives a good deal and more control in its functioning”.

The high cost of labour has been cited as one reason for the airline’s lack of profits, but the restructured entity may not have to bear this burden. In July the government announced that it had concluded a study to determine the human capital requirements for the new company. As part of this process, all 2600 employees of the airline and its subsidiaries were approached to ascertain their preferences for a future role in the company.

As required by law, all employees were offered three options: retire, transfer to another government entity or continue to work for the new company. Although it is not clear how many will choose to stay with the airline, this development at least signals that the government has undertaken some cost-cutting efforts, which could make the investment proposition more attractive.

The government will also likely offer financial incentives to heighten the appeal of the deal. According to the August 1 announcement by the privatisation committee, “attractive rights and benefits” will be provided by the government. Although these benefits were not specified, the Financial Times reported that they will include a seven-year, 10% discount on fuel; a five-year concession to provide ground services at KIA; and exclusive rights to government business for seven years.

Meanwhile, there have been recent signs that development of Kuwait’s national railway is moving ahead. On August 10 the Partnerships Technical Bureau (PTB) signed a KD2.49m ($9.13m) contract with a global consortium to provide consulting services in connection with the railway project. During its 16-month contract, the consortium will carry out a study of using rail to link the country’s harbours with KIA, with a view to boosting regional trade.

Once again, the private sector is expected to play a major role in the development of the national rail system, according to statements by Adel Al Roumi, the chairman of the PTB, the government agency that is responsible for issuing and overseeing Kuwait’s public-private partnership projects. Speaking to reporters after the contract signing ceremony, Al Roumi specified that a shareholding company would be established in partnership with a strategic investor, with total cost of the project expected to exceed KD250m ($916.8m).

The railway is just one of multiple transportation infrastructure projects that have been identified by the National Development Plan (NPD), a four-year economic development programme that parliament approved in 2010. The ultimate aim of the NPD is to transform the country into a regional trade and financial centre while expanding the role of the private sector. With strategic partners now expected in the air and rail segments of the transportation sector, it seems that the government is on its way to achieving its goal.