Recent reforms to Kuwait’s investment laws herald a radical shake-up in the country’s attitude to investors, with a renewed focus on attracting more foreign direct investment (FDI), as well as unlocking domestic capital.  

The Direct Investment Promotion Law was published in the Official Gazette on 16 June 2013 and came into force in December. It transfers powers and assets of the Kuwait Foreign Investment Board (KFIB) to the newly formed Kuwait Direct Investment Promotion Authority (KDIPA). Executive implementing regulations are still awaited, but the authority – headed by director-general Sheikh Meshaal Jaber al-Ahmad al-Sabah, a son of the former emir – is now up and running.

Restricted sectors

Most significantly, the reforms will see Kuwait shift to a so-called negative list system, in which all companies are open to 100 per cent foreign ownership except in sectors where specific restrictions are in place. 

While the former FDI law, passed in 2001, identified 14 sectors that were open to foreign investors (among them infrastructure, insurance, healthcare, housing, tourism and entertainment), the new law will see the Council of Ministers prepare a list of sectors where there will be restrictions. For the remaining sectors, the presumption will be that foreign entities will be able to invest.

“Under the old regime, if you were not in the specific areas that were promoted to foreign investors, effectively you were out,” says Abdul Aziz al-Yaqout, regional managing partner at the Kuwait office of law firm DLA Piper. “Now, it’s clear that if you are not in the negative list, you can apply for an investment licence, full stop.”

Under the law, foreign investors can operate either though a local company that may be licensed to be 100 per cent foreign-owned, through a registered branch or through a representative office. According to DLA Piper, investors will continue to benefit from tax exemptions for a period of up to 10 years, as well as tax and customs exemptions for the import of machinery, equipment, spare parts, raw materials and intermediary goods, among others, in addition to the use of foreign labour. 

The aim is to speed up the process of approving investment projects. The new law requires KDIPA to respond within 30 days of the receipt of an investment licence application. A one-stop shop will be set up, whereby a single administrative unit within KDIPA will be responsible for coordinating the necessary licences to operate in Kuwait.

Crucially, there is optimism that KDIPA will prove more effective in encouraging investment than the KFIB. For one thing, it has moved outside the Commerce Ministry and should enjoy greater insulation from political interference. The KDIPA leadership is also not cast from the bureaucratic cloth of the government ministries.

Another critical change is that KDIPA exists to promote direct investment and not just foreign direct investment, and will therefore seek to tap more local capital. Comparison of the outflows of FDI with inflows shows how much domestic money is invested overseas. In 2012, Kuwait attracted FDI of $1.85bn, according to Unctad data, while outbound FDI totalled $7.56bn. In 2011, the imbalance was even larger. Inward FDI was just $855m, while outward investment reached nearly $9bn.

If the changes to the investment law make it possible for local businesses to attract even a small portion of the capital leaving the country, the economic payoff could be significant.

Smoother process

The process of investing should become smoother as a result of the changes. “If you want to build an aluminium smelter in Kuwait, you need to get environmental protection [and so on], which does take time, but at least now you can start operating and do your predevelopment work, bring in staff and rent an office  – things that companies would normally want to do to prepare for a larger project,” says Al-Yaqout.

Merely legislating will not guarantee an increase in investment; investor confidence will need additional support. Spirits will, however, have been raised by the financial closure in 2013 of the Al-Zour North power plant, Kuwait’s first public-private partnership project, the launch of the tender for the expansion of Kuwait International Airport, and recent progress on key energy schemes. The next step is to await the executive implementing regulations for the law, which are expected soon. 

Perhaps most important is that KDIPA establishes itself as an active body able to dismantle barriers to investment. Other Gulf states have had mixed results in reforming their investment regimes, with momentum draining after the initial flurry of anticipation. If Kuwait can stay the course, it could reap substantial rewards.