In the last 12 months alone, the State of Kuwait has issued
requests for qualifications for a multitude of large-scale
infrastructure projects, the costs of which are likely to be in the
tens of billions of dinars.
In the past, Kuwait could only have considered such massive project
finance obligations against the backdrop of the country's
medium to long-term projected oil revenues. But, as they are fond
of saying in the financial world, "this time things are
different."
Indeed, for Kuwait things may in fact be different this time
insofar that it is not the government or public sector that is
expected to be the primary financial backer of a diverse array of
projects including, among others, the planned redevelopment of
Failaka Island, a new physical rehabilitation hospital, a waste
water treatment plant, a national rail road network, a power plant,
as well as the comprehensive redevelopment of the country's
international airport. Rather, such projects and many others, are
expected to be developed under Kuwait's Public Private
Partnership (PPP) Law (Law No. 7 of 2008).
Under the PPP Law, projects with anticipated costs in excess of KD
250 million will be financed using a special purpose vehicle,
established as a public joint stock company, which will raise the
necessary development capital through the sale of its shares at
auction. The committee administering the PPP program (Higher
Committee) has discretion to choose alternative financing
mechanisms (e.g., direct tender), for projects having finance costs
between KD 60 million and KD 250 million.
As alluded to above, the intention of the PPP Law is to create
wider ownership in larger projects (i.e., to shift the development
cost burden away from the government and toward private investors),
while giving the investor management control of the joint stock
company and the project. In this regard, where the joint stock
company approach is used, Article 5 of the PPP Law prescribes the
formula for allocating the company's shares:
- 40% of shares will be offered by the joint stock company in an open auction among companies listed on the Kuwait Stock Exchange and other companies approved by the Higher Committee.
The Higher Committee may select unlisted companies, including
foreign entities, to participate with Kuwait Stock Exchange
companies in the open auction of the offered shares. The selection
of such foreign or unlisted companies allowed to participate will
be based on a pre-qualification process established by the Higher
Committee.
It is worth noting however that although the PPP Law allows for 40%
of the shares to be sold to the investor, in some larger projects,
the Higher Committee may allow for only 26% of shares to be
auctioned. The effect of such reduction would be to reduce the
investor's financing requirements and still give it more than
25% ownership in the joint stock company. The balance of the 40%
allocation could be held by the sponsoring public entity for some
period of time.
- After auction of shares to the investor, another 10% of shares in the joint stock company will be offered to the successful bidder at a 50% discount. However, if there is an "unsolicited proposer" who fails to become the successful bidder, such party will be offered the shares, also at a 50% discount.
- The remaining 50% of shares will be offered to Kuwaitis in a public offering.
However, the PPP Law qualifies this distribution formula by
granting the government the right to allocate up to 20% of the
joint stock company's shares to Kuwait public sector entities.
Under such circumstances, the 40% and 50% allocations discussed
above, would be reduced proportionally.
Although most of the PPP projects thus far announced are just at
the inception stage, if this financing mechanism proves successful,
Kuwait may be able to achieve a significant milestone in terms of
modernizing and upgrading its infrastructure without resorting to
public funds to do so. Perhaps things are in fact different this
time.
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