Business in Kuwait 2013 by Global Investment I Limited

Special Report 2013

Business in

KUWAIT

4 Vision 2035 6 Investor Relations 12 Back to the Basics PUBLISHED BY GLOBAL INVESTMENT I LIMITED AND DISTRIBUTED WITH THE SUNDAY TELEGRAPH

INTRODUCTION

here has been much speculation and concern regarding several countries in the Middle East and North Africa (MENA) region over the last few years. While some countries have endured social unrest, leading democracies like Kuwait are preparing for a bright future. After the State of Kuwait gained independence from the United Kingdom in 1961, the economy has witnessed strong growth due to the oil and gas industry. The Country has amongst the world’s tenth largest proven oil reserves and petroleum products which account for nearly 95% of export revenues and 80% of Government income. Kuwait is the eleventh richest country in the world per capita and consistently enjoys one of the highest Human Development Index scores in the Arab world. This Constitutional Monarchy is planning its future in a non-carbon dominated world, and with a clear and well-funded vision Kuwait is on its way to becoming a premier centre for trade and finance. Kuwait’s national development plan would be considered quite ambitious even if it were not for the vast amount of legislative, regulatory, and social changes the country would be destined to undertake. The aim is to be less dependent on State owned financing and State owned enterprises while cultivating a growing class of foreign educated business professionals and entrepreneurs who will move the country forward in the 21st Century. The aim of this plan is to diversify the economy and reduce Kuwait’s over-dependence on carbon sales, which places the country at risk when oil demand decreases like in 2009 or if oil supplies thin over time as expected. Privatisation will further the development of certain sectors like water treatment and electrical supply to meet the demands of population growth. While there has been some local hesitancy to privatisation, there is renewed energy in Kuwait that the national development plan, part of HH Emir Sabah Al-Ahmad Al-Jaber Al-Sabah’s Vision 2035, will not only create opportunities for entrepreneurs and business’s, but generate the human and social development growth the country has long been seeking. Kuwait’s landscape is destined to change dramatically over the next 22 years, culminating in 2035 when HH the Emir’s vision for the country is completed. There are vast plans for many projects, most of which aim to boost economic independence from the government while furthering speciality business sectors. Supporters sight these projects as being crucial to the nation’s development, particularly in light of its expected population increase - from 2.6m in 2010 to 5.3m by 2030.

The metro is the first of a number of Public Private Partnership (PPP) projects planned by the Government as part of a KWD 37 billion infrastructure overhaul plan. Other transport initiatives include the 22.5 km Al Ahmed Bridge, which will connect the mixed-use Silk City project with Kuwait City and the re-development and expansion of Kuwait International Airport. Further to the metro project is the construction of 550 km of railway as part of a planned US$ 25 bn Gulf network, which will begin in Kuwait City and run to Muscat via Saudi Arabia, including stops in Bahrain and Qatar. These infrastructure projects forecast the expected population growth in Kuwait, while others like Bubiyan Island and Failaka Island showcase the opportunities for investors, regional workers, and visitors. Plans to develop a tourist centre on Failaka Island, one of the country’s major islands located some 20 km off the coast of Kuwait City in the Persian Gulf, aims to redefine luxury tourism in the GCC. The island has a historical significance dating back to its time as a trading post and is home to many antiquities across several cultures. The development project aims to launch a world-class tourist destination with 20 hotels and chalets, a golf course, housing units, a marine park, four marinas, and provide entertainment facilities in an environmental-friendly atmosphere. After being put on hold in 2008 due to changes in legislation, the bidding process for the project was initiated recently with roughly 42 companies having participated in the process. It is to be developed on a build-operate-transfer (BOT) basis and answers the call for the construction of tourism infrastructure in Kuwait. All together there will be 32 ‘mega-projects’ in Kuwait over the next two decades. The cultivation of knowledge expertise from foreign companies participating in these projects could be the most important factor in realising Kuwait’s vision. The Government has gone to great lengths to strengthen legislation in order to protect these national assets and the Kuwait people through the privatisation of any major entity. This includes the investment and adaptation of state of the art technology to continue the development of the privatised entity as well as providing opportunities for workers such as development training programs to further skill sets. The transition from mostly State-owned enterprises to private companies will have challenges, yet the cost of non-development and non-privatisation would hold Kuwait back against the backdrop of robust regional development in countries like Qatar and the UAE. The funding and expertise to build new sectors like tourism, logistics, and finance will provide the next generation of Kuwaiti’s a platform for success and the skills to match.

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The views expressed in Business in Kuwait 2013 are not necessarily those shared with the publisher, Global Investment I Limited. Wishing to reflect the true nature of Kuwait, the editor has included articles from a number of sources, and the views expressed are those of the individual contributors. No responsibility or liability is accepted by Global Investment I Limited for any loss to any person, legal or physical, as a result of any statement, fact or figure contained in the Business in Kuwait Special Report 2013. This publication is not a substitute for advice on a specific transaction.

BUSINESS IN KUWAIT 2013

Vision 2035

Kuwait’s grand plan for economic development and diversification.

ot many could argue Kuwait’s robust economic development over the last 50 years; the small island nation has transformed itself from a territory dependent on trade, to a country that supplies a significant portion of the world’s energy. While Kuwaiti’s have long been entrepreneurial by nature there has been an over dependence on the oil and gas sector, in fact at present oil revenues drive up to 90 per cent of GDP. The future trend is a global shift away from carbon due to worries over climate change and rising energy prices. The general consensus within the country is that economic diversification is required, entrepreneurs need to be cultivated, and an attractive business climate needs to be created where companies can grow in a stable, controlled manner without government assistance. In 2009 Kuwait’s GDP dipped 5% due to low worldwide demand and a significant drop in energy prices, so it should be no surprise that 2010 started with a major announcement. Kuwait’s Vision 2035 was approved by Parliament in February 2010 with an initial KWD 37 billion allocated for greater economic diversification and infrastructure. The plan intends to privatise many key State-owned entities such as Kuwait Airlines, as well as major utilities like water and electricity. Broken down into smaller more manageable 5 year plans, Vision 2035 is grand to say the least, State privatisation’s are the straightforward tasks, but a systemic overhaul which includes human development, infrastructure projects, legislative changes and increasing non-oil revenue by 20% will all be significant accomplishments. Since growing non-oil and gas revenues is key to the diversification plan, Kuwait is doing what many successful small island nations have done - transforming itself into a financial and commercial hub attracting investment, and creating an environment where the private sector leads the economic activity. Along the way and with vast resources the ethos of the country will be further developed through establishing strong values, maintaining social identity, realising human development, balanced development and providing suitable infrastructure, advanced legislations and creating an encouraging business environment. Kuwait’s history as a commercial hub, along with the country’s trading prowess will only

help. Additionally the Kuwait Government is playing an active role in ensuring positive business friendly legislation and superior infrastructure that presents opportunity and inspiration for Kuwaiti and foreign companies alike. To this regard, the Medium-Term Development Plan for 2010-2014 envisions quantitative and qualitative changes and improvements across a range of areas, grouped under three main headings: economic development; human and social development; and management, administration and planning. The central focus of the plan is on securing diversification of the economy and a quantum shift from public to the private sector with the aim of all round improvement in efficiency. The main targets of the plan are extensive and far reaching. The first is to secure a real annual growth rate of 5.1% in GDP; with private sector activities securing an annual rate of 8.8%, non-oil public sector at 4.4% and oil public sector at 2%. The second target is to maintain average annual investment of KWD 7393 million, with public sector (oil) at KWD 1617 million, public sector (non-oil) at KWD 2350 and private sector at KWD 3426 million. The third, is to secure a reduction in the contribution of the oil sector in GDP from 43% from the base year (2008) to 39% by 2014. The fourth target, is to secure an increase of private sector share of non-oil GDP from 65% in the base year to 70% in the final year of the plan period. The final goals are to increase the private sector share of non-oil investment from 40% to 65% and to secure an increase in the share of non-oil revenue in total state revenue from 12% to 30%. At the same time the plan addresses key issues in human and social development. For example a reduction in the average annual number of those newly employed in the Government sector from 15,000 in 2002 to 8,000 a year by 2014. This goes in line with creating a robust, responsible private sector that can help develop leading specialities in the areas of finance trade and logistics. Along with business growth the Government is preparing for population growth, with construction due to commence on 48,117 new housing projects including residential blocks, houses, and apartments. There are significant opportunities for foreign companies in the construction sector.

Kuwait’s national vision 2035 was approved by Parliament in February 2010 with an initial KWD 37 billion (GBP 85 billion) allocated for greater economic diversification. While other sectors like education and healthcare are also growing. Part of the plan under the human and social development agenda is increasing early education in Sciences from 34% of curriculum to 50% by 2014. Currently there is development and knowledge expertise needed in healthcare facilities and practices, including elderly care, dentistry, and specialised medicines. The key initiatives to gain further private sector participation in the economy have been outlined and are currently under way in Kuwait under the national development plan. Starting with diversification of property structure by gradually reducing the participation of the public sector, encouraging and increasing the private sector role, especially that of small and medium enterprises. The privatisation of state-owned enterprises will continue, while there has already been significant laws passed to facilitate and simplify investment procedures. This will be a major factor in Kuwait attracting more FDI, something which the country has not historically relied upon. The completion of on-going infrastructure projects, and realizing integration and cooperation for new projects by encouraging participation of small and medium enterprises will also continue to establish a robust private sector. Furthermore, the knowledge expertise gained by Kuwaiti companies engaging in PPP’s with major foreign firms is already introducing new skills, ideas, and best practices into several sectors of the economy. Ultimately this environment will help attract more foreign investment and trade through the on-going development of these sectors and business relationships cultivated through profitable partnerships. HH the Emir’s Vision is a grand one, the expectations are high, and Kuwait needs these positive reforms to stay relevant in a noncarbon dominated future.

Privatising the Handshake The success of Kuwait’s national development plan depends greatly on the transition of many State-owned companies.

long with Parliament’s approval of Vision 2035 the law setting out the framework for a programme of privatization of State-owned enterprises was also passed in May 2010. The Kuwait economy has long been dominated by the public sector, coinciding with a generous welfare system. A far reaching initiative to privatise many leading state-owned companies comes with significant consequences for employees, job seekers, and everyday citizens. For instance, perceptions of loss of privileged relationships and special advantages enjoyed by customers and employees were bound to evoke resistance. Kuwait has long been a place of international trade and business, with that brings unique relationships that do not always take into account matters of ownership. Failure to deal effectively with the transition process could damage the chances of success of the programme. Not least among the issues is the need to resolve the question of jobs and employment. With an estimated 80% of citizens being employed in the public sector, there is no doubt that future change was needed. Kuwait’s previous experiences with privatisation were not always greeted with optimism and some residents feel this law has been passed too quickly with not enough regard for the benefits and who they reach. Regardless regional experts and the Kuwait Government do feel it is time to move the country forward. Oil supplies are finite and if over relied upon and mismanaged, the State will no longer be able to be the sole financier of the country. A robust private sector based on knowledge expertise within defined categories will allow Kuwait and its people to move forward, albeit with some scepticism. Critics have voiced concerns over the lack of information being put forth in the country for the privatisation plans. In response the Government has established a Higher Privatization Council consisting of nine members with the Prime Minister as head and five Ministers. In addition three specialists with competence in financial, economic, legal and technical issues relevant to the programme are members. The Council’s purpose is to oversee and regulate the sale of public entities to the private sector. This stands to be an exciting time in Kuwait for both local and international investors. What Kuwait companies need most in order to move forward under private ownership is knowledge expertise in their fields, and the Government has already made improvements in the foreign visa and investment process. The Privatisation Law does set out to protect interests in Kuwait, where there is a general fear that capital reserves will leave the country with the arrival of foreign owners. Although the Government has no plans to privatise major industries such as oil and gas. None-the-less provisions of the law include ensuring consumer protections and avoiding any monopolistic practices, while setting price controls to avoid exploitation. Other inclusions are to ensure the availability and development of modern technology in order to further develop each sector. To ease fears for Kuwaiti’s, potential owners of the privatised sector cannot be current owners of another business whose objectives are similar to the company being privatised. This is something that is important as many Kuwaiti’s feel this law is mostly advantageous for the wealthy with few opportunities for entrepreneurs and a lack of job protection for ordinary workers. To alleviate concerns about loss of jobs for Kuwaiti citizens, the law provides for protection of employees working in

the relevant entity prior to being privatised. This protection will last for 5 years unless the employee chooses a lesser period of time. Ultimately the Council would hear any disputes and has the right to investigate any breach of these laws. The Council is the crucial body to oversee the process and maintain transparency, and with many large entities starting the privatisation process in 2013 it will be important to report the progress to citizens. A point of concern is whether the Privatisation Law has gone far enough or if it basically creates ‘quasi-private’ enterprises. If there is a guarantee to keep workers at their wages for up to 5 years, how can it truly be a private company? Of course the Kuwait Government feels this is a first step and employee protection is vital to their solid social-welfare system. Initially the Council will have direct oversight to review the company and its operations, which has been a detriment for some investors. To receive good partners the Council deems all of these points to be arbitrary, these are strategic assets of the Government of Kuwait, and as such they should be dealt with in a thorough and responsible manner. There has also been contentious debate regarding the issue of the ‘golden share.’ The Government will hold a share in all State enterprises going through privatisation, regardless of the actual share in the company which is typically 20% or less, it will maintain a deciding vote over matters of shareholder consideration in order to protect public interest. Some investors might take this as a good sign, still involving the Government thus ensuring a smooth transition over time, while others may want more initial flexibility - either way as strategic assets the Council will take their time to ensure it’s a win for both parties. The Privatisation Law passed by a narrow margin in Kuwait’s Parliament and is not short of critics. It is widely accepted that the law would not have been passed without certain measures for employee protection and pricing protection in place, yet Government involvement is bound to make some investors weary. There are many entities that would benefit from foreign investors with knowledge expertise, including Kuwait Electrical Company, who is expecting massive customer expansion with new commercial and residential developments over the next 10 years. In the meantime pressure will be on the Council as well as the Kuwait Government to inform the public of progress being made in the privatisation process. The Government of Kuwait has made several headlines stating privatisation will move the country to a more dynamic prosperous future, there is little doubt in this but a major success story with a leading public entity would really help attract quality foreign partners and build confidence with the local population.

BUSINESS IN KUWAIT 2013

Investor Relations

The Kuwait Foreign Investment Bureau continues to lead the way in attracting FDI and furthering international relationships.

Interview with: Dr. Meshaal Jaber Al Ahmad Al Sabah Chief, KFIB What role is the KFIB playing in helping to achieve HH the Emir’s 2035 Vision and national development plan for Kuwait? KFIB was established under FDI Law No. 08/2001 to promote Kuwait in international markets, and to attract foreign investors into mega investment opportunities in the country as partners with the local private sector to support; technology transfer, diversifying the non-oil economic base, creating more jobs and training opportunities, and fostering an environment of competitiveness. This makes KFIB one of the implementing arms of the Government of Kuwait’s national development strategy, transpired by a series of medium term 5 year plans towards the 2035 Vision. This plan is based on HH the Emir’s vision for transforming Kuwait into a world class commercial and financial hub, with the private sector leading economic activities. It is well understood that it will take a concerted effort at all levels to attain this vision. How would you describe the current investment environment in Kuwait for foreign direct investment? I truly believe Kuwait has all the right attributes to make it an attractive investment hub, attaining competitive advantage in various sectors led by the petrochemical industry, but with great potential for other promising sectors like education, health and ICT. More recently we have seen strong movement towards creative industries which are based on the generation of knowledge through innovation such as media, design, animation and film making. The core attributes that make up Kuwait, possess a Unique Selling Proposition including; our strategic location, strong macroeconomic performance, established democracy, political stability and security, a well-educated and skilful youth, a rising entrepreneurial class, high growth market, adequate infrastructure, openness and friendliness, mega investment opportunities through the development plans in various sectors, adoption of several new economic laws and establishment of regulatory bodies to improve the overall business environment. Furthermore, Kuwait has entered into more than 100 bilateral agreements connecting the country to major trading partners. Kuwait is also active in the international arena of economic initiatives; it has proposed US$ 2 billion fund for developing Asia. This was announced during the Asia Cooperation Dialogue (ACD) summit, which was held in October 2012 in Kuwait City and attended by leaders of 32 Asian countries indicating the rise of a new era of cooperation among Asian countries, in areas such as agriculture, industrialization, health & education, food security, and energy. Also, HH the Emir initiated the SME’s Arab Fund during the First Arab Economic Summit with a capital of US$ 2 billion. Kuwait was the first country to make a contribution to the fund, offering 25% of its total capital. What is the process for foreigners to invest in Kuwait? Once foreign investors choose to invest in Kuwait, it is a straightforward transparent process. There are multiple investment entry

modes; one of them is under current FDI Law No. 8/2001 pertains to an approved “investment license” issued exclusively by our office, upon coordination with concerned government entities, to establish a closed shareholding company with 100% ownership, or opt for a lower equity share to a maximum of 49% limit under the Commercial Companies Law. In this case foreign investors can apply separately under FDI Law 8/2001 for granting incentives to their project. This process usually takes 4 months by law, and is allowed to be renewed once to an extended period of 8 months maximum. We have instances where procedures take merely two months to attain the approval and issue the investment license, depending of course on the nature of the project and the subsequent requirements. These approvals are pending the decisions of the Foreign Capital Investment Committee (FCIC) headed by the Minister of Commerce & Industry, with members representing both the public and private sectors. The recommendations and feedback attained from various concerned Government entities is brought to FCIC attention through the existing coordinating mechanism with KFIB, depending on their specialization and relevance to the nature of investment projects under consideration. How competitive is Kuwait’s FDI policy and investment environment in comparison to regional counterparts? Kuwait has been described as the rising pearl of the Gulf since the early 1960’s, and it is by far the first constitutional democracy in the region, highlighted by the grant of full rights for women. It has always enjoyed freedom of commerce, and is home to a national merchant class that took the lead in establishing pioneering successful endeavours that should be built upon. Furthermore, Kuwait is classified amongst the group of High Income per capita countries, with high purchasing power because of its abundant oil resources comprising 10% of proven oil and gas reserves worldwide. Kuwait is an active outward investor in the international arena through its sovereign wealth fund (SWF), managed by the Kuwait Investment Authority, with around US$ 300 billion, and is the second oldest out of 62 currently established SWFs. The Government has further increased the proportion of revenue it allocates to this fund from 10% to 25%. Kuwait has also been an active and generous donor through the Kuwait Fund for Arab Economic Development (KFAED), established in 1961 and considered the largest development fund after the World Bank. The fund has grown since its inception and to date has participation from a total of 114 countries with total loans of 832 valued at KWD 4.9 billion; along with a total of 205 grants valued at KWD 117.9 million, making the ratio of its official development assistance to GDP around 1.3% (nearly double the international targeted average of 0.7%). The tax system in Kuwait is favourable with a flat corporate tax rate at 15% according to Law No. 2/2008 on foreign companies, an improvement from the previous gradual 5% to 55% tax rate of Income tax Decree No. 3/1955, and there is no individual income tax. Kuwait performed well in its Sovereign credit rating at investor grade by major credit rating agencies (Moody’s: Aa2 with a stable outlook, Fitch: AA, Standard & Poor’s: AA-). Kuwait has a well educated and a young population (72% age group from 15-64 years), and is leading in implementing the millennium development goals (MDG). Finally in terms of business costs, Kuwait enjoys competitive costs in transport, fuel and electricity.

What are the incentives to invest in Kuwait? The benefits under current FDI Law No.8/2001 include allowing the foreign investor who is granted an investment license to establish a business with 100% ownership, also to carry out trade or open branches in Kuwait without a Kuwaiti agent. Other specific incentives include income tax exemptions for a maximum period of 10 years; total or partial exemption from customs duties on project’s import of raw materials, equipment, and packaging materials; allocation of land and real estate in accordance with Kuwaiti laws; allowing the recruitment of foreign labour in accordance with Kuwaiti laws; and accruing benefits arising under Double Taxation Treaties (DTTS) and Bilateral Treaties for the Encouragement and Protection of Investment (BIT’s). The guarantees provided under this law include the protection against expropriation, compulsory disinvestment or nationalization, and providing fair and timely compensation if confiscation occurs due to security or public interest; allowing free repatriation of foreign investors profits and capital without any restrictions, and if compensation paid on account of disinvestment; and the protection of proprietary information. What efforts have been made to improve efficiency and enhance the overall ease of doing business in Kuwait? Kuwait faces a serious challenge to improve the starting a business sub-component ranking within the ten components of the Ease of Doing Business Index that is annually released by the World Bank. Efforts are under way at various fronts in order to improve this ranking. KFIB is actively working to pass a new draft FDI Law that would address some shortcomings of the current FDI Law No. 8/2001; the new Law will lead to the establishment of a financially and administratively independent pubic authority, establishing a one stop shop, reducing processing time of investment licenses to 30 days, and allowing for dispute settlement through arbitration. In the meantime, KFIB has taken actual measures to cultivate customer service culture by recently launching its Investors Service Centre (ISC) on our premises in Kuwait City to be on the frontline for welcoming potential or existing investors, to provide needed facilitation in completing the procedures leading to the issuance of the investment licenses, and to handle all inquiries, responding efficiently and in timely manner with requested information. We also play an advocacy role in identifying obstacles and contributing to the ongoing efforts for streamlining red tape in coordination with various Government related entities. What sectors are being promoted to help diversify Kuwait’s economy and reduce over reliance on the Oil and Gas Industry? KFIB promotes and attracts inventors into the 14 economic sectors that are permissible for foreign investment in Kuwait by the Council of Ministers decision. These sectors include: Industries except for projects related to oil and gas exploration or production; construction, operation and management of infrastructure projects in the fields of water, electricity, sanitary drainage or communications; banks, investment companies and exchange companies approved by the Central Bank of Kuwait; insurance companies approved by the Ministry of Commerce and Industry; ICT; hospitals and pharmaceutical industry; land, sea and air transport; tourism, hotels and entertainment; culture, media and marketing except issuance of newspapers and magazines and opening of publishing houses; Integrated housing projects and development of districts except for speculation in real properties; real estate investments through foreign investor contribution to Kuwaiti shareholding companies according to the provisions of law no. 20/2000; storage and logistics services; environmental activities; and recently education

and training. These are all very crucial sectors that will contribute to attainment of Kuwait’s 2035 vision. The UK is one of the largest foreign investors in Kuwait. What specific opportunities are available for British firms? KFIB completed its first Investment Opportunities Guide just as recently as April this year, and we are in the process of granting a contract for a study on the development of three economic zones for light industries and services, expected to be completed within 3-5 years. Overall, Kuwait offers lucrative investment opportunities under the current economic development plan (2010/2011-2013/2014) allocating KWD 30 billion (GBP 70 billion) for financing hundreds of projects, that meet the realization of the Emir’s vision of transforming Kuwait into a leading commercial and financial centre. Some of the Mega Development Projects in the plan provide high value investment opportunities that include: Bubyian Island Mubarak Al Kabeer port, city metro system, railway project (KWD 2.5 billion), Failaka Island (KWD 2.1 billion), massive residential developments, Kuwait International Airport development, hospital development program, electricity generation and water desalination. There are also sizable investments needed in the strategic oil sector, for both upstream and downstream petrochemical industries. Other Sectors of importance include renewable sources of energy and environmental projects such as recycling centres, waste water treatment facilities, green industries, and environmental impact assessment. It is true that UK has a leading experience in PPP and BOT projects.

“British companies have won around 70% of Kuwait’s PTB consultancy contracts to date based on their expertise in developing PPP/ PFI model for project establishment.” British companies were also successfully awarded contracts in the oil and gas sector, and the construction sector including the Mubarak Al-Kabeer port project (phase 1) and expansion to the existing Amiri Hospital. There were also many contracts awarded for design and engineering projects within public works consisting of upgrading roads and interchanges. I would like to see a continuation of the historic trade and investment relationship between UK and Kuwait which has extended for more than 200 years, with deep rooted bilateral relations. The trade between UK and Kuwait mainly covers energy from the Kuwait side, and tourism, defence exports, education, and health from the UK side. Kuwait is considered the UK’s 45th largest export partner, and 37th in terms of imports. Kuwait and the UK have signed avoidance of double taxation treaty for transport on September 25, 1984, followed by another one for income and capital on February 23, 1999. Furthermore, the Kuwait Investment Authority (KIA) has for long been an active institutional investor in the UK, and has had an office in London since 1953. A Memorandum of Understanding (MoU) was signed on business, trade and technical cooperation in February 2011, pledging to double UK-Kuwait trade to US$ 4 billion a year by 2015. The UK-Kuwait Trade & Investment Task Force, and the British Business Forum (BBF), are all active entities in voicing British business concerns in Kuwait. The KFIB database shows the UK companies that had benefited from Kuwait’s FDI Law during the period 20032012 totals KWD 22.6 million (GBP 52.2 million), with a share of around 2.1% of total approved projects in this period.

Kharafi National Company Profile

KN has a robust international expansion plan with growing operations in the Middle East and Africa. With over 32,000 employees from 58 different nationalities and with multi disciplined operations, the company is able to develop and deliver parallel projects on time and to internationally recognized quality standards.

Kharafi National (KN), established in 1976 has developed from a local contracting company into a world class Pan-Arabian Infrastructure Project Developer, Contractor and Facilities Service Provider. Today, Kharafi National is an international, multidisciplined company with diversified operations in Water/ Wastewater, Power, Oil & Gas, Waste, Petrochemical and Infrastructure sectors, closing 2011 with a turnover of $2.5 billion.

The company’s long term strategy is underpinned by its commitment to excellence and a focus on quality that lies at the core of its operations and people. KN’s strategy is based on maximizing the opportunities for synergy across the Company by firmly focusing

Kharafi National Operations Kharafi National provides a complete range of services to diverse markets through its main business lines: Engineering, Procurement and Construction (EPC), Infrastructure project development, Operation and Maintenance (O&M) which consists of institutional and commercial facilities management as well as industrial services. The company is also supported by a strong and vast platform of industrial support services which is considered the 4th business line that provides a constant, reliable service to Kharafi National projects and additionally guarantees the highest level of availability, quality, safety and trained operators.

ABJ - Fabrication Services: ABJ Fabrication is a

wholly owned subsidiary of KN. It is a manufacturer of a wide range of heavy industrial process products, and accredited to the highest of international safety and quality standards. The equipment fabricated includes Pressure Vessels, HRSG’s & Boilers, Evaporators & Desalters, Skids, Stadium Roof Structures and piping support. These facilities can fulfill the fabrication requirements for multiple parallel projects.

Instant Access - Quality Access Equipment:

Instant Access is a wholly owned subsidiary of KN. The region’s leading businesses, for the sale and rental of infrastructure-related equipment throughout the Middle East. With more than 500 units in its rental fleet of a complete and wide range of leading international brands it supports Kharafi National and external clients in their needs providing stringent products, training, and safety standards protocols.

Qtech - Trading Division: QTech is a wholly owned

subsidiary of KN. Qtech supplies leading international high-quality materials, equipment and systems to major clients and contractors principally for infrastructure projects.

on three key project stages: development, project delivery and facilities management. This will enable KN to generate the greatest amount of value across a wide range of projects.

www.kharafinational.com

Kharafi National is also continuing to expand its developments and operations in new and potentially emerging markets. With experience in PPP schemes, and a strong, extensively resourceful business development team, KN becomes the perfect partner to provide the ideal infrastructure solutions throughout developing markets.

Moreover Kharafi National has complete in-house support services such as an equipment division, scaffolding and calibration, all meeting the highest levels of quality and strict compliance with best practice HSE procedures and guidelines.

and maintenance of the entire plant; Wastewater treatment and reclamation covering 60% of the country’s needs. The Plant supplies around 330,000m3/day of water treated to a potable quality; exceeding the requirements of the World Health Organization.

Kharafi National – Leaders in Wastewater Treatment In Kuwait the most influential and avant-garde project undertaken has been a Build Operate and Transfer project for a Wastewater Treatment and Reclamation plant. This project positioned Kharafi National as one of the main leaders in the wastewater sector. This position was re-confirmed by the two following wastewater plants built in Abu Dhabi, again through a BOT contract.

Infrastructure Project Development – Manages the project, customer contracts and relations.

The Sulaibiya Wastewater Treatment and Reclamation Plant in Kuwait; one of its kind in the world

The Future UDC will continue to operate and maintain the plant through its operator Kharafi National until the expiry of the concession period in July 2032. The Sulaibiya project will continue to bring substantial benefits to the Government and people of Kuwait by the following:

This Plant is a unique example, being the first and largest privatized project in Kuwait between The Kharafi Group and GE for the Government of Kuwait. The Utilities Development Company (UDC), established by the two companies was awarded the 30 year BOT project, unparalleled in the region and one of the largest of its kind in the world using reverse osmosis (RO) technique in domestic wastewater.

• • • • • •

Kharafi National’s Scope of Work: •

EPC - KN Designed and built the largest waste/water treatment plant within a BOT structure worldwide it has a 375k m³/day reaching a maximum capacity of 500k m³/ day). Currently planning expansion to 600km³/day. O&M - Kharafi National is responsible for the operation

•

Saving the State the financial burden of huge investments. Avoiding marine environmental pollution, as partially treated wastewater is no longer discharged into the Arabian Gulf. Reusing the reclaimed wastewater in a safe manner that preserves the environment. Achieving the Government’s strategic objective to reuse treated wastewater. Treating sludge to a standard that can be further utilised as a component for natural fertilizer suitable for agricultural purposes. Delivering fresh potable water at an economic cost to the State of Kuwait, compared to desalinated water. Providing the State of Kuwait with a fully-functional wastewater reclamation plant at no extra cost when the concession period expires. The State will make savings of around KD3.2 billion ($11.00 billion) over the lifetime of the concession.

BUSINESS IN KUWAIT 2013

Capital Growth

Investors stand next to the electronic quotation boards inside the Kuwait Stock Exchange building. Photo taken by Jack Dabaghian, provided courtesy of the Ministry of Information.

he Kuwaiti financial system is sizeable, well developed, and has many advantages for future growth. The market already has an established mix of financial companies including banks, investment funds and a dynamic stock market. The insurance sector is also growing quickly including reinsurance, a specialty area in which the region had previously depended on foreign companies to provide. Banking in Kuwait consists of the Central Bank of Kuwait, eleven local banks and several leading foreign banks. In terms of both assets and capital, the market is dominated by the National Bank of Kuwait (NBK), Kuwait Finance House (KFH) and Gulf Bank making up the top three banks. NBK is listed in the world’s 50 safest banks as ranked by US-based Global Finance. There are also five sharia-compliant lenders, including Kuwait Finance House and Ahli United Bank a regional Islamic investment power. Foreign banks include HSBC, BNP Paribas, Citigroup, National Bank of Abu Dhabi and Qatar National Bank. As Kuwait begins to implement its national development plan, it is likely that businesses and the government will increasingly turn to local banks for financing, creating demand for any idle capital. The banking sector appears to be well positioned to take advantage of any profitable investment opportunities that may arise especially as there has been a slowdown in returns since 2009. Kuwait provides the necessary financial services for investors and business people conducting transactions in the MENA

With so much competition amongst other leading

financial

centres

has

been

suggested that Kuwait may find the most success in a specialised area of finance, like Islamic investments or asset management. region. This includes banking services (e.g. deposit acceptance, Loan provision and issuance of guarantees), investment services (e.g. asset management and establishing mutual funds), insurance services (e.g. property and life), and has a well organised, developed and supervised financial markets that provide diversified sources of finance for businesses. The number of non-bank financial institutions has increased significantly in the last few years as there has been wide spread opportunities for foreign investment funds, and downstream service providers including law firms. While the activity of conventional investment companies is heavily concentrated in foreign markets, the core business of Islamic investment companies, which have been growing quickly in recent years, is domestic. With so much competition amongst other leading financial centres it has been suggested that Kuwait may find the most success in a specialised area of finance, such as Islamic investments and

Kuwait’s financial industry is set for strong growth as privatisation and infrastructure projects get underway. The Kuwait Stock Exchange is the second largest bourse in the Arab world after the Saudi Arabian equity market, with over 200 listed firms. To date the market cap of the KSE is above US$ 106 billion and is up nearly 20% from last year. asset management. Over the last few years several of the leading banks in Kuwait have applied for and received Sharia compliance status. In fact, of Kuwait’s ten local banks, five are now Sharia compliant. According to Zawya Market Intelligence, Islamic assets have grown at an average rate of 15%-20% per annum over the past decade to reach approximately US$ 1.3 tln in 2011. The main driver behind the development and growth of the Islamic finance industry is the growing demand and preference for Shariah-compliant financial products, backed by rising wealth and excess liquidity arising from high oil prices over the years. For this reason, the Islamic wealth management industry remains one of the fastest growing sectors in the Middle East and has even sparked interest outside the region. Kuwait is a good position to capture this market, already a wealthy country, with a solid sharia market in place and growing class of entrepreneurs. In 2010, the Kuwait Parliament passed legislation to establish the Capital Markets Authority (CMA), Kuwait’s first independent stock market regulator, as part of a larger regulatory framework for the country’s capital markets. The CMA regulates the Kuwait Stock Exchange (KSE), supervises public and private subscriptions and oversees mergers and acquisitions. The CMA Kuwait has brought more transparency and oversight to Kuwait Stock Exchange which has boosted confidence among foreign and institutional investors. The KSE is the second largest bourse in the Arab world after the Saudi Arabian equity market, with over 200 listed firms. To date the market cap of the KSE is above US$ 106 billion and is up nearly 20% from last year. Many investors have been drawn to the high risk, high return environment, however most think that the new authority will increase competition and ultimately lead to greater direct foreign investment into Kuwait. Stability will be welcomed by long term investors who see population and development growth as a winning scenario for investment. For the past decade, investment firms in Kuwait have taken advantage of the booming economies by investing in various assets across the region, and generating profits from the sale of such investments. Wealth management and other fee generating business lines have also been exercised, but have often been overshadowed by the profit potential found in investments. In recent years as these profits have slowed and investment opportunities have withered away, Kuwait’s national development plan means that many new projects and entities will need to raise capital, which is expected to bring the finance sector back to pre-crisis growth levels. There are also expectations that Kuwait nationals will opt for safe investments on a domestic and regional basis in light of the on-going situation in Europe and the US. While there has also been a push into promising Asian economies the overall expected growth in the GCC region has local and international investors excited. The banks in Kuwait are very well capitalised and highly liquid and have the capacity to make significant loans for experienced infrastructure and development companies. Evaluating the risk will be a major factor for any bank in Kuwait yet with so much capital the financial system will need to make positive investments and with the progression of certain mega-projects in 2013 the banking and overall financial services industry is set to reap rewards of an improved economic outlook and the continued drive to become a regional financial hub.

FDI PUSH

ecently Kuwait enacted the “Law Regulating Direct Foreign Investment” to provide for a simple, transparent framework governing the direct investment of foreign capital into the country. The objectives of the law are to encourage foreign investment; recognize and stress the importance of its role in the country’s development and in bridging the gap between the availability of resources and potential demand; expand the national investment base; gain access to modern technology; promote and develop management and marketing expertise in the country; and to contribute to the success of the privatisation programme.

Kuwait offers an investment friendly tax and regulatory environment with a low rate of corporate income tax for foreigners set at 15%. The key benefits outlined include any foreigner who establishes or incorporates a company in Kuwait to hold up to 100% of its shares. The law also provides for non-confiscation or nationalization of the foreign capital, and investors are accorded the freedom to transfer profits overseas. The investor may also receive a number of privileges, namely, complete exemption from income tax for a period of up to 10 years; total or partial exemption from customs duties on import of machinery, equipment, raw materials and semi-processed goods; allotment of land and real estate required for the enterprise subject to applicable laws and regulations. Kuwait offers an investment friendly tax and regulatory environment with a low rate of corporate income tax; 15% on any income above 5,200 KWD. With many leading infrastructure and privatisation projects moving forward in 2013, there are abundant investment opportunities, especially within downstream industries of the water, construction, and energy sectors.

BUSINESS IN KUWAIT 2013

Back to Basics The financial crisis of 2008 had many consequences for banks outside of the US and Western Europe. Gulf Bank is a regional example of how financial institutions worldwide were diving head first into complex investments outside of their historic banking facilities. Established in 1960, Gulf Bank, under the leadership of CEO Michel Accad, has entered a new stage of prosperity and growth while never forgetting the not too distant past that caused so much upheaval.

CEO Snapshot Michel Accad Gulf Bank Mr. Michel Accad has received international praise for leading the recovery of Gulf Bank and for the success of the ‘best and fastest’ services campaign which provides loan approval and disbursement in one day. Gulf Bank won several important industry awards during 2012 including: ‘Bank of the Year’ from The Banker – a Financial Times publication, Best Bank from Arabian Business; ‘Best Retail Bank’ from Asian Banker, ‘Best Retail Customer Service’ from Banker Middle East, and the GCC Localization Award for the 8th Consecutive Year from the GCC Council of Ministers of Labour and Social Affairs for the employment, development and training of nationals. Prior to joining Gulf Bank, from 2006 to 2009, Michel was the Assistant CEO of Arab Bank PLC, with direct responsibility over all banking businesses globally, and served on the Group’s various Boards. Before moving to Arab Bank, Michel had spent 27 years with Citigroup, which he joined in 1979. His last position with Citigroup, from 2002 to 2006, was as MD and Division Executive for the Middle East and North Africa region. Michel has an MBA Honors from the University of Texas in Austin, obtained in 1978.

Over the last decade Gulf Bank has endured many high and lows, but is there a recognisable year that cracks began to appear in certain business units? Gulf Bank was essentially a successful retail and commercial bank in the 2000’’s – and the fastest-growing bank in Kuwait until 2007. From about 2006, however, it started to diversify its income stream in order to maintain the growth momentum, and it ventured into new, “fashionable” areas, such as proprietary trading, derivatives and direct investments. But it didn’t have the governance culture nor the proper risk management and control processes, so there wasn’t a thorough understanding of the risks it was taking. And therefore, when the market turned ugly, in 2008, Gulf Bank essentially lost its capital, as many local counterparties to the derivative trades were unable to meet their commitment towards the Bank. As one of the only Bank’s in the GCC region to experience ‘a run’ leading to Government intervention, what lessons has Gulf Bank taken away from the events of 2008? It was definitely a crash course in crisis management! The Bank, however, was viewed as systemically important to Kuwait, so the Central Bank stepped in and guaranteed the depositors money, and ultimately, by the end of 2008, the Bank was successfully recapitalized. Of course, one key lesson here is “stick to the core competencies you understand”. Another is that good times may not be the best time to test your skills in new areas (every investor looked like a smart investor before the bubble bursts). A third is that one should not shortcut the controls and processes (don’t get into a business until you have figured out and accepted

all the risks). As a result of that traumatic experience, Gulf Bank has decided to return to its roots as a conventional domestic bank, exiting all peripheral (and volatile) activities. Our aim is to be a dominant player in the local market and to offer “the best and fastest” services to our customers. In the longer term, we want to be perceived as the pre-eminent bank in the region. Mr. Accad, you were appointed CEO in 2009 to essentially rebuild Gulf Bank to its former position as a profitable, stable, trusted bank. How did you set about achieving this task? Our strategy back in 2009 revolved around 4 pillars: (1) refocus on our core competencies; (2) build a fortress balance sheet; (3) ring-fence our legacy problems; (4) provide superior customer service. The first pillar is self-explanatory, and by 2011, we had essentially exited all high-risk peripheral activities. The second pillar, the fortress balance sheet, was achieved through a drastic reduction in NPL (from 30% of our loans to less than 11% today – with a 145% coverage ratio!), Strong improvements in our capital and liquidity position, and by putting in place what I believe is the best risk management and governance process in the region. To address the third pillar, a new management structure was put in place in the Corporate Bank, splitting the good bank from the bad bank, and allowing us to follow different strategies without the risk of contamination. And finally, we were able to differentiate ourselves from all the other Kuwaiti banks by delivering on our “best and fastest service” promise, which is still unmatched in the region – who else can guarantee its clients that they will get a personal loan or credit card the same day they apply for it? Gulf Bank had an impressive 2012,

Gulf Bank completes an impressive turn around by finding strength in core competencies.

ending the year with a reported KWD 30.9 million in net profit. What key fundamentals led the bank to successfully rebuilding its profitability and robust balance sheet? When one refocuses on its core business, and that core business is relatively simple (domestic conventional banking services), it’s actually easier to excel. Our “best and fastest service” promise has essentially helped us double our loan and card sales volumes on the Retail side. On the Wholesale front, we are now offering value-added products (e.g. Cash management, project finance advisory, loan syndications, debt capital market issuance) that have increased our profile with our top Corporate clients, resulting in more business. We have also learned to manage our balance sheet much better: our cost of funds is now equal to the market average, and yet more than half of our term deposits are for 6 months or longer, giving us an exceptionally strong liquidity profile. However, the overall key to this success is a team of professionals working with a common purpose towards a common objective. Of course, the reaction of our clients, the markets in general and our regulators has been very positive. What is your outlook for the Kuwait banking sector in 2013? We continue to see good growth on the Consumer side, and generally across all Consumer products. Last year, Corporate credit growth was lagging. This year, we are a bit more optimistic, as the national developmental plan hopefully takes off. A lot depends on that, and frankly, we see some good signs already. For example a new commercial law and new corporate governance regulations have been enacted and a couple of very large power and infrastructure projects have been awarded –

and now we are waiting for their execution.

“Our aim is to be a dominant

Now that growth and profitability have been maintained, what are Gulf Bank’s plans over the next 4-5 years? I believe we have really turned the page now, so we can afford to be more ambitious in our aspirations going forward. We plan to finalize a new strategic direction and a refreshed 5-year Plan later this year, so it’s a bit too early to talk about specific products and initiatives. One thing I’d say though, is that it’s easier to move from bad to good, but much more difficult to move from good to great, so the challenge will be enormous, but we’re up to it!

player in the local market and

You are a well known banker in the region, and have successfully led the turnaround strategy for Gulf Bank. In your opinion, what do you think the customer really wants when choosing a bank as most banks have the same offering insofar as products go? When you ask a customer what they want from a bank – customers world-wide want the same thing. They want convenience, speed, quality of service, a fair price and overall value for their money, whether it is in banking services or other services. Therefore, I think we have been able to differentiate ourselves from the competition by having a very clear vision, purpose and promise that we make to the customer. Our Promise campaign has allowed us to offer our commercial and retail clients a level of service that is pretty unique. There are not many banks—actually there are no banks in Kuwait or the entire Middle East, and I would assume that there are very few banks internationally that can offer the consumer a loan and disburse that loan, the same day that they make the application. This not only means that your credit card

to offer the best and fastest services to our customers.” is approved, you actually receive your card the same day too. For car loans you get your car keys the same day you make the application if approved. Furthermore we not only promise our customers the “best and fastest service”, we actually guarantee it! What personal message would you like to send to our readers in London about Gulf Bank and Kuwait? Gulf Bank is back. It is the only bank in the region that was upgraded by the rating agencies in 2011. Since that time it has won numerous awards, including Bank of the Year in 2012 from the The Banker – an FT publication. We are the second largest conventional bank (and third largest including Islamic institutions) in Kuwait, and we offer the best service. To our Consumer Banking clients, we guarantee the best and fastest service. To our Corporate clients, we offer creative financial solutions and advice. The Kuwait market is at a turning point. While the country continues to enjoy strong and stable economic fundamentals, the financial markets have suffered since 2008 as a result of the worldwide financial crisis. The recovery of the financial markets has lagged as the developmental plan failed to take off as initially expected. However, all indications now are that the plan is being revived. In turn, this will spur private investments, stimulate economic activity and revitalize the financial markets. This is an opportunity that investors would probably not want to miss.

BUSINESS IN KUWAIT 2013

Working Together

After years of project funding and service delivery by the Kuwait Government, the PPP Law intends to develop infrastructure and a new way of thinking.

he expected growth and success of Public-Private Partnership’s (PPP) globally suggest that the estimated investment in infrastructure expansion and modernisation by 2030 will be in excess of US$ 41 trillion. Investment in the MENA region alone is expected to account for 2.1% of this investment, accounting for US$ 870 bn, with water projects taking up US$ 225 bn, road and rail projects US$ 320 bn, power projects US$ 180 bn and air/sea port projects US$ 145 bn. Government’s alone cannot support this level of funding which is why massive private sector participation is being encouraged. The region is already witnessing an increase in the number of regional investors, with banks and sovereign wealth funds showing an interest in various initiatives across the Gulf. In addition, US$ 59 bn worth of construction projects are currently planned or under way in Kuwait and more contracts will be awarded in 2013 as the Government makes a sustained effort to address and streamline their process for infrastructure development in the country. Public-Private Partnerships in various forms are a natural opportunity for Kuwait to introduce privatesector capital and expertise in sectors traditionally under public control, such as the provision of public services, without losing its supervision of output quality and tariff levels. International experience proves that PPP’s introduce private-sector practices and efficiencies, promote competitive markets, and facilitate innovation, reducing costs and improving output quality while ensuring the protection of public interests. There is also the expectation that this will further aid the development of knowledge expertise in Kuwait and in the future, help develop a vibrant class of entrepreneurs. Kuwait’s PPP Law combines the objective of attracting private-sector participation based on competitive and transparent rules with the social objective of ensuring that the economic benefits of private investment are shared with Kuwaiti citizens. The scope of the Law is great, applying to both infrastructure projects for public service delivery and commercial land development projects. As such many opportunities exist for partnerships between Kuwait companies and leading foreign entities to benefit from the nation’s economic development and growth. In Kuwait PPP’s can be undertaken by any Public Entity, whether it is a government Ministry or specific department run and funded by the Government; that enters into a contract with a private sector company to implement any project actively targeted by the Government such as those identified in the Government’s 5 year development plans. The agency for the implementation of the provisions of the PPP Law is the Partnerships Technical Bureau operating with supervision from the Ministry of Finance. A noteworthy aspect of the Law states no public body may enter into a PPP Contract without first obtaining the approval of the Higher Committee for PPPs and once the PPP is approved limits the term of

the Projects to 30 years. Albeit in certain cases the approval time could be 40 years but generally where there is no set amount of time requested the project lifespan will be 25 years. Of course once the project is awarded no party can sell on the rights and the deal cannot be extended, amended, or renewed. In the last 15 months alone, the State of Kuwait has issued requests for qualifications for a host of diverse large-scale infrastructure projects, the costs of which are expected to be in the tens of billions of dinars. As it stands Kuwait is trying to raise an anticipated US$ 28 bn through the privatisation of 32 key projects. About US$ 17 bn is currently being spent on rail schemes, which include the metro project and the railway network. Another major project is the development of Kuwait’s first independent water and power plant at Al-Zour North. With the announcement of the new Parliament in Kuwait, signs are looking positive, as neither the Government nor the public sector is expected to be the primary financier of an array of projects which also include; the planned redevelopment of Failaka Island, a new physical rehabilitation hospital, a national rail road network, a power plant, as well as the comprehensive redevelopment of the country’s international airport and the privatisation of Kuwait Airlines. The clear intention of the PPP Law is to create wider ownership in large projects and to improve the overall efficiency of public services. Furthermore the Law will help to reduce the Government’s role and financial commitment in core sectors and shift this role towards private investors, while giving the investor management control of the joint stock company and the project. In this regard, where the joint stock company approach is used, Article 5 of the PPP Law prescribes the formula for allocating the company’s shares: 40% of shares will be offered by the joint stock company in an open auction among companies listed on the Kuwait Stock Exchange and other companies approved by the Higher Committee. The Higher Committee may select unlisted companies, including foreign entities, to participate with Kuwait Stock Exchange companies in the open auction of the offered shares. The selection of such foreign or unlisted companies allowed to participate will be based on a pre-qualification process established by the Higher Committee. This particular Article provides far reaching opportunities to both local firms in Kuwait and international companies in wide ranging industries. While Kuwait based companies will benefit from receiving knowledge expertise, skills and training, and larger contracts, UK and foreign companies will be given the chance to bid on long term contracts in a host of strategic assets in a growing country and region. To date leading companies from the UK including AMEC, BDP and Petrofac have already been awarded contracts. The stakes will be high for any PPP since the projects outlined are significant interests of the Government, yet in the long-term Kuwait may have found the right recipe for growth and development, not only for their infrastructure but also their economy.

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