No turning back

07 June 1996

Two years after its launch, the privatisation programme in Kuwait is moving into new territory. Having successfully divested more than KD 300 million-worth of government assets in listed companies, the Kuwait Investment Authority (KIA) wants to speed up the sell-off programme and start moving unlisted service companies into the private sector.

'We started out with the target of selling off KD 830 million worth of shares in listed companies and KD 340 million-worth of shares in unlisted companies over a five-year period,' Wafa Shihabi. adviser to KIA. said on 20 May. 'Now we are confident that the process can be completed in late 1997 or early 1998.' Speaking at a recent confercnce,* Shihabi said the Kuwaiti privatisation strategy was devised with the expressed purpose of increasing the role of the individual in the running of the economy while maximising government resources. 'It was also not natural for the government to own 26 per cent of the total stock on the exchange,' he said. 'It was high time for us to get out.

Cautious start

In arranging its exit, the KIA adopted a cautious approach. The investment climate in the wake of the Iraqi invasion had to be tested and restored before such a large sell-off could proceed. Uncertainty was increased further by the fate of the KD 6,700 million debt settlement programme which was hanging over the Kuwaiti financial community.

'The biggest obstacle however, was the relative inactivity of the stock market.

Between 1992-94, total trading averaged between KD 40 million- 50 million a month.

We knew that selling KD 1,170 million of, assets could have easily drowned the market,' Shihabi said.

The KIA has used four separate strategies in the sell-off programme:

Auctions. KIA has applied this method to the sale of two types of companies. A typical subject for this approach is an entity in which the KIA has a small shareholding, worth about $2 million or less. Auctions have also been employed in the sale of companies the KIA feels would benefit from the presence of major shareholder blocks.

Public subscriptions. The approach has been used in cases where a broader shareholding base was considered necessary.

Auction and public subscriptions. The most frequent approach has been to combine the two methods. In this case, an auction takes place to select a major shareholder who also agrees to underwrite the public subscription.

Mutual funds. These index-linked funds have been tailored for the needs of the small investor and to meet special investment objectives.

The sell-off programme began in earnest in mid-1994. Proceeding carefully in case it backfired. the KIA started the ball rolling by divesting stakes in companies that were already listed on the exchange. 'They were considered the easy ones,' Shihabi said.

Commercial Facilities Company was one of the first public offerings to come to market in September 1994. Seventy million shares were sold off in a KD 49.4 million subscription. To encourage investors in this pioneering sell-off, the MA offered a discount of 11.4 per cent as an incentive. It was amply rewarded when the offer was covered by 215 per cent.

Over the next nine months, KIA launched several more issues. In February 1995, shares in the United Realty Company were sold. The following May, the MA completed the divestment of 190.5 million shares in National Real Estate Company. In June, the first tranche of shares in National Industries Company (NIC) was floated.

Debt hiatus

In the 12 months to June 1995, the KIA sold KD 300 million worth of assets. A hiatus followed in the second half of 1995 as the ongoing debt settlement programme was worked out. With that highly contentious issue resolved, the activity resumed in early 1996 with the auction and public subscription in Gulf Cables.

Flexibility has been a key ingredient in the KIA sell-off programme. Each company which is identified as a privatisation prospect is judged on its own merits. 'One of our main concerns has been to get the right balance,' Shihabi said. 'We don't want to create new monopolies.' When opting for public subscriptions, care has been taken to price offers attractively. 'You can't just grab the money and run,' Shihabi said. Even in some recent offerings, most notably the second tranche of NIC shares, a discount has been built into the offered price.

Having dealt with the relatively easy sales, KIA has now set its sights on tackling some more challenging sell-offs. According to Shihabi, 'The next stage will be those government companies that are providing services, but are unlisted.' After that, the government is expected to move on to privatising some of its own services.

The KIA-managed programme has already had a significant impact on both the economy and the Kuwait Stock Exchange (KSE). Since it was launched two years ago, the KSE index has risen by 45 per cent. Over 30,000 new shareholders have been created and trading volumes on the exchange have returned to levels last seen in the early 1980s. The KSE itself has benefited from renewed private sector interest in getting listed on the exchange. 'It shows the ball is now rolling,' Shihabi said. 'There is no turning back.'

* Privatisation & Going Public, 20-22 May, Sheraton Hotel, Dubai. Organised by HR Holdings.

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