KUWAIT: On April 15 Kuwait’s parliament approved the first draft of a privatization bill that could lead to the sale of a substantial proportion of state-held assets to the private sector. For a country in which the public sector accounts for over 70percent of GDP, such a move could dramatically alter the composition of the domestic economy.
The bill, first proposed 18 year ago, will see the establishment of a higher privatization council tasked with overseeing and regulating the sale of public assets and companies. The council will be headed by the prime minister and comprise of five ministers and three non-government-appointed members.
Up to 20 percent of the shares of each sold-off entity will remain in the hands of the government, which – according to supporters of the bill – will ensure that it can still maintain an influence to protect the interests of the company’s employees as well as the end-users of the services provided. An additional 40 percent of the shares will be sold to Kuwaiti citizens in the initial public offering; approximately 5 percent will be distributed to existing Kuwaiti employees of the concerned entity; and 35 percent will be auctioned off to local or foreign investors approved by the council.
The law also includes a stipulation that all Kuwaiti staff employed by the entity will have the option of remaining in their positions at existing salaries for a five-year period.
Upstream oil and gas production and health and education services are excluded from the bill, but could all still be subject to privatization via separate legislation.
At present, it is estimated that over 77 percent of the Kuwaiti national workforce is employed in the public sector. These workers are paid high salaries and are guaranteed lifetime employment. Some analysts label the situation as "masked unemployment", citing that many of the positions held are considered unproductive and unchallenging.
A World Bank study issued in March of this year has warned the Kuwaiti government about the financial risks of continuing such a system, claiming that it is economically unsustainable in the long term. Presently, oil accounts for over 94 percent of national revenue, and according to the study around 84 percent of oil revenues are presently being allocated towards public sector salaries.
Proponents of the privatization bill believe that with a growing population and a continued reliance on oil revenue, the government cannot maintain present public sector employment levels. They argue that if privatized, formerly government-run entities will become more efficient and profitable, easing administrative and financial burdens on the government so that national revenues can be allocated to more productive areas.
Those in favor of the bill point to the benefits achieved in the country’s telecommunications sector, where Kuwait was one of the first in the region to both privatize and license competing operators at the start of the decade. Since then, the sector has been reporting a compound annual growth rate of around 15 percent, and the two oldest operators, Zain and Wataniya, have both expanded to become highly respected global players. Wataniya has over 15 million customers and operates in the Maldives, Saudi Arabia, Tunisia, Algeria and Palestine, while Zain just recently sold off the majority of its African operations to India’s Bharti Airtel in a deal estimated at around $10 billion.
Market observers hope that a similar boost can be achieved for the underperforming national carrier Kuwait Airways, which is undergoing a privatization program of its own that is set for completion by year end.
Bader M Al Saad, the managing director of the Kuwait Investment Authority, the country’s sovereign wealth fund that has been authorized to oversee the privatization process, told OBG, "The Kuwait Airways privatization is significant because we hope it will be the first of many that the country undertakes. It is therefore vital that the entire process is carried out in accordance with the by-laws put in place and can be termed a complete success. We want to attract a local strategic investor who is best able to reorganize and expand the company to make it a strong performer." –This article was first published by Oxford Business Group April 26 2010.
