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Kuwait to launch new fund to manage domestic assets
March 5, 2016, 5:30 pm

In February, Kuwait announced plans to create a new fund to manage its domestic assets with the aim of selling them to private investors within five to seven years. In a step intended to signal its drive towards privatizing state-owned companies, the government said the new fund could manage up to $100 billion in local assets and would be managed by the country’s sovereign wealth fund manager, Kuwait Investment Authority (KIA).

The fund is expected to invest in local companies, as well as in power, water and other utility projects, as well as domestic assets currently being managed by KIA. The move is primed to support the government’s plans to privatize its utilities over the next five to seven years, as well as encourage the private sector to play a more significant role in the country’s development.

Though previous attempts at privatization by the government have been, at best, lukewarm, this time around there is a sense of determination to see it through. The fact that oil prices have been in a slump for over 18 months and a looming budget deficit have added urgency to privatization drive.

However, analysts say that in order to make the utilities and other local assets attractive to potential investors, the government will first have to make these ventures more profitable. Currently the utilities are drowning in subsidies and many local assets are saddled with bloated number of employees who are Kuwaiti nationals and enjoy large salaries and perks. Before putting these assets to the market, the government will have to reduce or remove the substantial subsidies and find ways to rationalize manpower in these sectors.

Kuwait’s move to create a new sovereign wealth fund comes nearly a decade after the government first began preparing the groundwork for privatization of some of its assets including sale of the national carrier Kuwait Airways.

In May 2010, the country’s then contentious parliament approved a privatization bill that could pave the way for the sale of some of Kuwait’s state-owned entities. While the bill included certain downstream energy assets, it banned the privatization of oil and gas production, as well as assets in the health and education sectors.

The bill allowed government to reduce its stake in other major assets to 20 percent or less, with Kuwaiti nationals being given the opportunity to buy 40 percent of shares in the privatized firms through initial public offerings (IPO) and the remaining 35 percent to be offered to local listed shareholding companies through public auctions.

Under the regulations, the Supreme Privatization Council, led by the prime minister, would oversee the process and ensure earnings from the privatization were added to the government’s budget with half of all revenue going to the Future Generation Fund. Unfortunately, the privatization agenda all but ground to a halt, while seemingly more important political considerations were attended to.

Privatization of Kuwait Airways and the Kuwait Stock Exchange, which were delayed on multiple occasions as the executive and legislature debated, have once again gathered steam in recent months. While earlier proposals had suggested the government would retain a 20 to 40 percent stake in Kuwait Airways, in June 2015 a new structure was approved, which included 75 percent state ownership. According to the new plan, 20 percent of shares will be offered to Kuwaiti citizens, with another 5 percent to be sold to current and retired airline employees.

Low oil prices have a significant impact on Kuwait’s economy as hydrocarbons account for roughly 60 percent of Kuwait’s GDP and close to 95 percent of its export revenues. With the Ministry of Finance projecting a record deficit of KD11.5 billion for fiscal year 2016/17, equivalent to nearly 30 percent of GDP, the pace of privatization plans have accelerated and this could mark a turning point for the economy if realized.

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