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The Kuwaiti parliament, or National Assembly, passed the privatization law, which effectively opens the door for transferring public-sector assets to local and foreign private ownership, excluding the production of oil and gas, oil refineries, and health and education services. Thirty-three members of the Assembly (MPs and cabinet ministers) voted for the law while twenty eight opposed it in an eight-hour marathon session that witnessed heated arguments that threatened to end the session at times.

 

The government and its supporters unexpectedly submitted a request to accord priority to the debate over the privatization law ahead of every other issue. The request was approved after only heated arguments and protests by opponents of the law, who criticized the government for rushing the issue.

 

The law was passed in the second and final reading.

 

Opponents of the law charged that it is a tool for “the robbery of the wealth of Kuwait and a plan to destroy the country” and that “it will only deepen class divisions in the society”. MPs opposed to the law lashed out at privatization as an evil that will negatively impact the future of Kuwaiti employees and the future of the country.

 

The law, which will be effective after six months, slaps a blanket ban on the privatization of oil and gas production, oil refineries in addition to the health and education services even with a new law.

 

Public shareholding companies must be established to run the would-be privatized facility in which at least 40 percent of the shares will be sold to Kuwaitis in an initial public offering. A maximum of 20 percent of the shares will be held by government institution, five percent to Kuwaiti employees and at least 35 percent of the shares will be sold at an auction to a private or foreign investor.

 

The law stipulates that the government must hold the so-called golden share in any privatized project, which gives it veto power over any decision by the board of directors. According to the law, the privatized company must keep the Kuwaiti employees for at least five years with at least the same salary they received before privatization.

 

The law states that the percentage of Kuwaitis at the privatized company must be maintained or raised but cannot be decreased. Also, all the privatized companies must operate in accordance with the Islamic Sharia law.

 

May 11, 2010

 

 

Analysis and Forecast: Decreasing Risk

 

The passing of the privatization law is a very important step in Kuwait’s efforts to diversify the economy away from oil. Like all other GCC states, Kuwait, though capitalist, has its economy and large businesses dominated by the public sector, either directly or through quasi-governmental entities. This has inevitably raised constant questions on competition, economic sustainability and resilience to change in income from oil exports.

 

The privatization of non-oil businesses will eliminate most of the concerns that were seen to be a hindrance to diversification. However, the bill also posses a number of serious challenges that not only threaten the bill, but also have wider implications.

 

The concerns raised by the MP’s opposing the bill are legitimate and need to be addressed properly before the bill becomes effective. In particular, concerns about taxation, conflict of interest, transparency and governance. If those are not addressed adequately, the failure in applying the bill could have serious long-term repercussions that could threaten the whole diversification efforts of Kuwait for many years. This is an added concern given that the bill was proposed and passed in a very hasty way.

 

The chart below shows the make-up of the Kuwaiti GDP. The privatization law essentially covers most of the non-oil sectors. Currently, over 75 percent of the Kuwait economy is controlled by the public sector.