The latest law on the Kuwaiti scene

Jeremy Curran, Clyde & Co, Dubai, takes a look at the new 'Build-Operate-Transfer' law in Kuwait and what this means for the country.
The latest law on the Kuwaiti scene
By Jeremy Curran
Sat 22 Mar 2008 04:00 AM

Jeremy Curran, Clyde & Co, Dubai, takes a look at the new 'Build-Operate-Transfer' law in Kuwait and what this means for the country.

Prior to 2006, build-operate-transfer (or "BOT") had been gaining favour in Kuwait as a method of financing - not only for infrastructure-based projects, but also those in the power, real estate and transport sectors.

The new law limits BOT projects to a lifespan of 30 years.

By then, procurement through the BOT model had been used on projects such as the Sharq and Marina Mall retail/marina developments, the Salmiya Market and the Sulaibiya Waste Water Treatment and Reclamation Plant - at the time the world's largest plant of its type.

In late 2006, however, BOT projects in Kuwait were suspended amid concerns raised by the government's Audit Bureau over transparency and fairness of award processes, and "irregularities" in implementation.

A ministerial committee was established to review BOT projects granted to the private sector by four government bodies, in particular the Public Authority for Industry, the Public Customs Department, the Touristic Enterprises Company, and the Finance Ministry. During this period of investigation, work on new BOT projects in Kuwait was effectively brought to a halt.

Since then, the Kuwaiti government has sought to address the problems identified by the State Audit Bureau in its report, and in January the parliament passed Law No.7 of 2008 (the "BOT Law"), thereby seeking to establish and clarify a structure for the BOT model in Kuwait.

Outline of the BOT Law

Under the new law, no government body may enter into a BOT agreement involving state-owned land without first obtaining the approval of a new "supreme committee".

This committee is to be chaired by the Minister of Finance, and will include various other ministers (e.g. Minister of Public Works and Minister of Municipality) and senior administrators (e.g. head of the environmental authority). As well as reviewing and issuing approvals, this committee will be responsible for setting BOT policy and for administering a technical sub-committee - which in turn will co-ordinate the technical aspects of all reviews.

Next, the new law limits BOT projects to a lifespan of 30 years, after which time they must be handed back to the State "without any consideration and compensation".

In certain cases of a "special nature", the committee may approve a lifespan of 40 years - however this must be planned for and included in the project's bid documents, rather than be brought about by an extension during the operation phase.

One year prior to a project being handed back, the government may invite bids for the on-going management contract for the particular asset, for which the contract itself will be limited to a period of no more than 10 years.

In carrying out a project, the special purpose vehicle to be used must be a Kuwaiti joint stock company - 40% of the shares in which must be offered in public auction to companies either listed on the securities market or approved by the supreme committee to participate in the bid, 50% to be offered for public subscription to Kuwaiti citizens, and the remaining 10% to be sold to the company implementing the project.

Going forward

The subordinate regulations supporting the BOT Law are still to be issued by the Kuwaiti government, but the new law states that these will deal with (among other things) the advertising and tendering processes to be followed, as well as the principles surrounding the means by which investors receive financial compensation for their involvement.

It is intended that these regulations will be issued within six months of the BOT Law's publication, i.e. by August 2008.

Conclusion

Kuwait has an impressive list of recently announced multi-billion dollar projects, such as a US $50 billion (KWD 13.6 billion) oil sector financial investment plan, the $8 billion rail system project, and the $75 billion City of Silk Development - leaving little doubt that the private sector will have a key role to play in the country's development plans.

Overall, the BOT law does succeed in providing some much needed structure to the stalled Kuwaiti BOT industry, even if the commercial principles behind certain aspects (such as the shareholding split for the SPV's) are not entirely clear.

The BOT market is awaiting with interest the regulations to be issued shortly, which, together with the new law, will help to restore the reputation of BOT projects and encourage a revival of the BOT market itself.

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