Improving FDI promotes New Kuwait 2035 vision

Foreign Direct Investments (FDI) are key to attracting resources, including capital, skills and technology to a country. Foreign investments help Kuwait enhance productivity and also assist in the transition from the country’s overwhelming dependence on hydrocarbon revenues, which is a primary objective of the New Kuwait 2035 plan.

However, investing in Kuwait has often been considered as a daunting process reserved for the extremely adventurous foreign investor or the very foolhardy one. Lending weight to this investment perspective has been the country’s Sisyphean efforts over the years to lure in foreign capital — while one arm of the government attempts to pull in investments, the other arm has consistently pushed back investors.

According to UNCTAD’s World Investment Report 2019, foreign inflows to Kuwait that totaled US$410 million in 2016, fell to $348 million in 2017 and to $346 million in 2018. The FDI stock in the country also decreased by 3.3 percent in 2018 to total $14.7 billion (10.5% of the GDP), down from the $15.2 billion in 2017. The bulk of foreign investments in Kuwait were directed towards the oil and gas sector, followed by real estate, construction and financial services. The majority of foreign investments came from the United States and China.

The lack of diversity in the economy and its continued dependence on a hydrocarbon sector that is vulnerable to volatility of international oil prices, along with the high level of state intervention in the market, makes Kuwait a less than ideal investment environment. In addition, the limited size of the market and questions around its political stability, from internal squabbles as well as external potential threats, make investments in the country appear as a risky proposition for many international investors.

Moreover, despite Kuwait being named among the top 20 improvers in the World Bank’s ‘Ease of Doing Business Index for 2019, Kuwait has consistently ranked low in the ‘business friendliness’ index over the years. In 2018, Kuwait was ranked 97 out of 190 countries in the index; the lowest even among the six-nation Gulf Cooperation Council (GCC) bloc. One reason for this poor ranking could be the rentier business model that prevails in the country. A citizen is able to gain controlling equity in a company, solely by lending his or her name to a business.

At the time of Kuwait’s independence in 1961, it was an accepted business principle and sanctioned policy that in order for any commercial enterprise to operate in the country, it should have a Kuwaiti partner. A new Commercial Law No.68 of 1980 codified this widely accepted norm and stipulated that a commercial entity in the country should be at least 51 percent owned by one or more Kuwaitis, or the enterprise had to be represented by a Kuwaiti agent.

The lukewarm response by international investors to Law 68/1980, especially its poor safeguards for foreign investments, led the government to revamp the law in 2001 and introduce the Foreign Direct Investment Law No.8/ 2001 (FDI Law). The new law aimed to encourage and secure direct foreign investment by creating an exception to the Commercial Law and allowing foreigners to own up to 100 percent of a commercial entity, but limited that ownership to only a handful of select industrial sectors.

The FDI Law granted full ownership to investments in entertainment, hospitals, housing, infrastructure, insurance and tourism sectors. The government even sweetened this law further by offering incentives in the form of land grants and a 10-year tax holiday. However, as usual, there were strings attached to the law, including compelling foreign enterprises receiving incentives to hire Kuwaitis at a fixed proportion of total people employed, as well as restrictions on who could invest in the country. Understandably, the FDI Law failed to elicit the expected response from investors.

Additionally, foreign investors were often overwhelmed by the bureaucracy involved in obtaining a license and delays in receiving land grants. Even though the government had established a special entity, the Kuwait Foreign Investment Bureau (KFIB), specifically to oversee and speed up implementation of the FDI law, there were reports that a license application could take a minimum of eight months to process. Implementation of FDI policies were also held back by prevailing political instability, which saw governments pass through parliament’s doors at a rapid frequency.

In 2013, spurred by the strategic vision of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah to transform Kuwait into  a regional financial, commercial and cultural hub by 2035, the government launched the overarching Kuwait Development Plan 2035, later renamed as the New Kuwait 2035 plan. At the core of 2035 plan was diversifying the economy away from its over reliance on hydrocarbon revenues by, among others, encouraging foreign investment in the country.

Accordingly, in June 2013, the old FDI Law was revamped and replaced by the new Foreign Direct Investment Law No.116/2013 (New FDI Law). The new ‘investor-friendly’ law, which was finally implemented in 2015, aimed to promote the flow of foreign funds into the country by opening up more sectors for investments, reforming legislations regarding ownership, providing attractive incentives, and making it much easier and quicker for investors to obtain a license.

As part of the revamp process the KFIB was restructured and renamed as Kuwait Direct Investment Promotion Authority (KDIPA). The new authority was mandated to promote direct investments in the country, and tasked with implementing necessary developmental, regulatory, promotional and advocacy policies and processes. KDIPA was given broad powers to attract investors, including by granting tax and customs exemptions to qualifying investors for up to 10 years, and to streamline the business environment to enhance the country’s business competitiveness, and mitigate hurdles to investments.

In 2016, through Decision No.313 of 2016, the KDIPA set up a scoring system to evaluate and grade all foreign investment applications, in order to accept or reject the application, as well as determine the incentives that could be offered. An application scoring 59 percent or lower is automatically rejected by the scoring system; where the score is above 60 percent but below 70 percent, the application would be entitled to a foreign investment licence, but without any tax incentives.

An application scoring above 70 percent but below 80 percent would receive the license as well as one incentive of their choice; and applications scoring above 80 percent would be entitled to a foreign investment licence and all incentives available under the new Foreign Direct Investment Law. Incentives for investors under the new FDI Law include tax exemptions for a maximum period of 10 years from the date of operations of the licensed entity; customs duty exemptions for the importation of materials and equipment if the material and equipment is held for a period of five years from the date of obtaining the incentive; and allocation of land and real estate.

The new FDI Law allows a foreign investor to establish a 100 percent foreign-owned Kuwaiti company, a licensed branch, or  a representative office of a foreign entity in nearly all sectors of the country’s economy, except those on a ‘Negative List’ drawn up by the government.

The negative list includes: Extraction of crude petroleum and natural gas; Manufacture of petroleum coke products, fertilizers and nitrogen compounds; Manufacture of gas or its distribution through mains. In addition, foreigners cannot invest in: Activities of hiring labor, including domestic labor; Activities of membership organizations; Compulsory social security;Real estate activities; Security and investigation activities; and in Public administration and defense.

The KDIPA is structured as a ‘One-Stop Shop’ where the application of an investor is evaluated by a specialized team comprising members from relevant ministries and departments, and responded to within 30 days of receipt of a license application. If approved, the investor is then provided with all the required licenses enabling them to begin operations immediately. The setting up of KDIPA is definitely a welcome move by the government, now all that remains to be seen is how investors respond to the makeover.

–The Times Report