Foreign Investment Law in Kuwait


According to the Public Authority of Investment, article 4 states that “It is allowed, by a decree from Minister of Commerce & Industry in accordance with a recommendation from investment license, to grant license for establishing companies in which the foreigners share amount to 100% of company capital in accordance with conditions and terms set by cabinet.”

The Foreign Investment Law (No. 8/2001) proposes to regulate foreign investments in Kuwait. This law was expected to substantially increase foreign investments to further add major economic developments in the State of Kuwait as it allows foreign investors to own up to 100% equity in Kuwaiti companies or ventures for special projects as determined by the Council of Ministers. This change in foreign investment law is expected to throw open the Kuwaiti markets to multinational corporations giving them a free hand in doing business in Kuwait and creating new opportunities for local employment. Until recently, prior to the enactment of this law, foreign investors were subject to a maximum of 49% of foreign equity set under the Law of Commerce No. 68 of 1980 and the Commercial Companies Law No. 15 of 1960. Albeit its advantages, many members of the parliament and other officials are against this new law and are trying to revoke it.

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According to Al-Ayoubi and Associates, foreign investment licenses are granted in construction. They are also granted for the operation and management of infrastructure enterprises in the fields of water, power, drainage, and communications. Furthermore, the authorities should grant licenses to investment corporations, banks, and foreign exchange companies, insurance companies, IT and software developments, hospitals, and medicine manufacturing. Tourism and hotels, real estate, and housing projects should also benefit from the same scheme.

The main issue is that Kuwait was always welcoming to foreign investment to a certain extent. The country allowed a maximum of 49% ownership in foreign investments. This law was satisfactory towards the country and its people since everyone approved of it and was happy with how things were. However, recent changes in foreign investment law had created controversy. This is when it states that foreigners should own up to 100% of an investment in Kuwait. Some people were against this law claiming that it would damage local businesses and investments. Others claimed that this law would be the best thing that would happen to Kuwait because it would create numerous opportunities to the country and its people, not to mention creating international investments for Kuwait thus booming its economy and taking it to the next level.

Even after passing the new foreign investment law, foreign companies are still facing some problems when trying to get into the market. The PIA created a new committee headed by the Minister of Commerce & Industry. This is the investment committee of foreign capital. The issuing its formation, work system, duration and its members’ rewards is set by cabinet. This committee has been rumored to tie down the issuance of foreign licenses in an attempt to slow down their entrance. By that, foreign companies are growing tired of the long wait. They doubt their choices of continuing with business in Kuwait or taking it elsewhere. That in its own is an issue because it is putting a strain on the economic development of Kuwait.

Apart from this new law in foreign investment, the other issue is that the oil industry in Kuwait belongs exclusively to the country. However, a recent 25-year-old project called Project Kuwait had been formulated in 1997, which states that with the help of foreign oil companies, Kuwait will increase their oil production. Nasser Al-Sane, a member of the parliament who opposes Project Kuwait stated that “The step the government wants to take is against the law, and we have to stand against it strongly… The constitutional issue is the main one. We’re not against foreign investments, but the problem is that you have to stick to the constitution.” “Major foreign investor in Kuwait as of 2001 included Japan’s Arabian Oil Company and US-owned Texaco” (Encyclopedia of the Nations, par 1).

What makes this particularly an issue is that members of the parliament have stated that it goes against the Kuwait constitution in which Kuwait’s natural resources are exclusive to the usage of Kuwait only. Any investments going towards the oil sector are to be from Kuwaiti companies only.

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The foreign investment law

The major conflict on the Kuwaiti oil industry is on the government’s law in foreign investment and the parliament. We actually need to discuss the foreign investment law in relation to the government views, the members of the parliament views and the oil company official’s view. This will now help us to ascertain the problem facing the foreign investment law in Kuwait.

The government view on this law

The initial law of commerce no. 68 1980 and the commercial company law no.15 1960 as we discussed, states that the foreign investors are to get 49% equity. This was the proposal of the government to the foreign investment law, which not all members of the house took positively. At last, this became a binding law to foreign investment. The law was still unsatisfactory and because of this the members of parliament have continually complained and wanted the law to be revered. This means that after the reviewing of the law foreigner will no longer have a chance to own any oil company in Kuwait. They further proposed that foreigners be allowed to become service providers only. Actually, this means they will only be given a chance to fund the oil-producing companies and own shares but not owning the company.

This at the part of the government is not good because it feels that 49% equity to the foreign investors is alright and can lead to the goals of the county. Surely the law that has already been passed is satisfactory to the government. This implies that the government is only being pressurized by the members of the parliament, yet the law provided for the foreigners to have 49% equity is well. Then this is satisfactory to the government side. The point that makes the government feel even better to increase the foreigner’s equity on investment from 49% to 100% is to make this field realize its goals. The government plans to have more foreigners investing in the oil company, so that both the nation and the citizens gain positively.

Members of the parliament on this view

When we look at this parliaments view, we realize that even though this law is binding, there remains a conflict by the members of parliament. They feel this law is not good because they want the oil industry to be run by the Kuwait’s citizens but not foreign investors. This makes the members of parliament to propose of the abolishing of this law. The government had suggested that the foreign investors should even be allowed 100% equity on the owning of the oil companies. This was actually for the interest of the nation. It was said that when this happens, the nation will oil production will rise and thus will boost the nation. This fact still as not something good to the members of the parliament and they saw the government being against the law. The members of the parliament felt it better to protect the nation against foreign investment. Their reason was that their nation was to own all oil companies for the interest of the citizens. As well this may be a reason, but they had not viewed it in a perspective that foreign investors will profit Kuwait. This will in turn be to the interest of the nation and its citizens. The members of parliament have remained a stumbling block to the nation’s idea of the Kuwait’s foreign investment law. This remains an issue to be sorted out between the government and the members of the parliament.

The officials views on this law

On the other hand, the oil company officials insist that foreign investors are very important to the benefit of the Kuwait’s citizen and the country as well. This has become a conflicting issue between the government and the members of parliament. The members of parliament are against the law of foreigners owning oil companies in Kuwait. They actually propose that the government should only allow the foreigners to become the service providers other than owning the business. Now on making a close observation on the oil company officials, we realize that they are also baking the government on allowing foreign investment to a greater percentage than the 49% equity that was allowed by law.

The officials feel that foreign investors will be of great significance to Kuwait and its citizens. A comparison was brought in by an African Nation Algeria, (Mouwaward, par 23) the essence of comparing Algeria with Kuwait was to bring out the need of foreign investment in Kuwait’s oil companies. In Algeria, foreign investment was allowed in the oil companies. The foreigners were allowed to own some of the oil companies and after a short duration there was a great positive impact on the oil company. This was to the benefit of Algeria and its citizen.

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With the above statement, the law of foreign investment in Algeria was even better to be reviewed according to the government view where 100% equity was to be allowed to the foreign investors. Even though this remains to be a conflicting issue between the government and the parliament, the officials also insist that the foreign investment is something vital to their country. The officials in the oil company don’t look at this issue in the perspective of the members of the parliament. They insist that it is better to involve the foreign investors in this field rather than leaving this project to the members of Kuwait and remaining in law profiting state. This is makes the country and the citizens disadvantaged.

The issue therefore is to convince the members of the parliament to accept the foreign investment law event to be changed from foreigners owning 49% equity to 100% equity, in order to allow more foreign investment on the oil companies. If this is done according to the officials, the country will meet its expectation in this field. Besides the country meeting its expectations, the citizens of Kuwait will be a beneficiary of this. Actually, when the foreign investors start up the projects the citizens of Kuwait will get employment. On the other hand the government will earn a lot in form of foreign exchange. The main issue to the government and the officials is not allowing the foreign investment but the convincing of the members of parliament to accept an improvement of the law of foreign investment.

The chief executive of petroleum Nada Sultan in Kuwait had a question, if really they had to do it alone without the foreigners. On his perspective this was actually impossible, for with their effort it would not be possible. This therefore calls for the need to invite the foreign investors. Another point to note according to the Kuwait officials is that they actually they need the help of the global oil companies to provide a combination to their experience of oil extracting methods which had become challenging. This brings a real reason as to why the foreign investment law in Kuwait is becoming an issue.

As we look at the oil company expectation or the plan, we can realize that without the intervention of the foreign investors Kuwait Oil Company will not realize its goal of being among the best oil producing country. It will not make the expected profits in the oil company and its citizens will as well be left behind. They will have less to benefit if there is no foreign investors to boost their oil company.

Now the officials are very positive on the improvement of the foreign investment law in Kuwait because of the above discussed reasons. The improvement of foreign investment law in Kuwait is not only a benefit to the government but to the citizens too. This is actually the fact that the officials and the government are trying to explain and further convince the members of parliament.

Kuwait present foreign investment law has allowed foreign investment. On February 2008 a new taxation law was introduced in Kuwait. This law allows 15% tax for the foreign direct investment and zero percent on the portfolio investment. This has made it possible for the foreign investors to invest in the oil company in Kuwait (Waters, Par 13). As a result of this Kuwait has made a better improvement as compared to the conflict that was there between the members of the parliament and the government in 2005. This drastic improvement has made Kuwait to experience better results in the foreign investment.

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The foreign investors have made Kuwait’s oil companies to meet its requirements of providing more oil. In the present Kuwait is one of the leading countries in oil production. This means that it has also made it possible for its citizens to secure chance for employment. Therefore the foreign investment is an important issue not only to the government of Kuwait, but also to its citizens. This brings out the importance of the chances in foreign investment law in Kuwait. All the improvements that has been made in this field, is as a result of the improvement in the law of foreign investment, especially in the field of oil producing companies. Truly foreign investment law is not an issue in Kuwait at the present moment. This is because foreigners are now allowed to carry out investments in various fields. Also the government and the members of the parliament are in agreement over the new law. This therefore means that there is a good coordination between the government, members of the parliament and the oil company officials.

The role of foreign investment in Kuwait

Economic development depends very much on foreign investment. This is seen from the value that it adds to the national economy of any country. It also helps the locals to get employment and thereby providing a source of livelihood to them. Foreign investment also brings expatriates who set up companies in Kuwait, consequently enhance healthy competition with other developed countries. Kuwait has an immense potential in terms of available resources (e.g. oil). The only problem is the capability of utilizing these resources. Foreign investment therefore narrows the gap between the resources and capabilities (Twaijri, par 1). Kuwait needs to venture in a number of the following formats of foreign trade or even all of them: in long-term projects, in loans, in securities and credit facilities.

The establishment of the World Trade Organization helped a lot in improving the climate for international trade. This initiated the General Agreement on Trade Tariffs. On the liberalization of financial markets in several nations, investment climate changed considerably. It is therefore wise that Kuwait taps into this foreign investment to expand its basis of investment. The state will benefit from administrative and marketing experiences that other international companies enjoy.

Other countries have tapped into this mode of investment

Kuwait does not need to hesitate from welcoming foreigners to invest in it. This is because other countries have welcomed foreign investment and they are not disappointed. China is now ahead of United States of America in terms of involving foreign investment in its economic growth, despite the fact that it is a socialist country. China has attracted foreign investment, which is more than trillion dollars (Twaijri, par 3). In the Arab nations, there was a great leap of foreign investment in the year 2004 and it has continued rising since then to $62,407 billion in the year 2006. This was about 4.3% of the worlds’, which was $1.3 trillion according to UTCAD year 2007 report (Twaijri, par 3). Saudi Arabia ranked the first among the rest. In Africa Egypt was coming up faster than South Africa. This is a prediction by Oxford Business Group.

Benefits

Kuwait needs to embrace foreign investment policy that the cabinet proposed. This will see the nation having surplus in its national budget, increase in national savings and decrease in depts. In the year 2007 Kuwait was ranked the first among the Arab nations and 30th worldwide. That is probably what made Kuwait to have the ease in its economy that year.

So far, Kuwait has attracted European companies to work in the energy sector, which majorly includes oil industry. This was with the specific aim of gaining technology from European countries and contributing to safety of energy in Kuwait. This would improve the output in the energy sector, and consequently boosting on economy of the nation. Though in the past few years the Kuwaitis nationals had not welcomed foreign investors, the current state is that Kuwait is attracting foreign investors to improve its economic growth. This fact is clear, as we have earlier discussed that its parliament shot down the amendment bill that would encourage foreign investment several times. On February 3, 2008, Law No. (8) of the year 2001 of Direct Investment was enacted. “On February 3, 2008 Kuwait introduced a new taxation law allowing 15 percent tax for Foreign Direct Investment (FDI) and 0 percent for portfolio investment, slashing the rates foreign investors pay – this will increase the level of foreign investment in the market” (Waters, par 13). This has welcomed investors and so improving Kuwaitis economy greatly.

Kuwait now seeks to maintain the lead as a center of foreign investment in the region. This is because they were able to recognize that it lifts up investment climate by great margin. That is why the government pushed the law through by early 2008. This encouraged investment by the care that it gives to investment activities in the state. The law has offered total or partial tax exemptions to industrial goods. This is either the machinery or raw materials. An exemption on custom duty is also in place. Through this law, the government reinforced confidence of foreign investors. The local investors gained the confidence in process.

On improving of investment further, the law stipulated that the proceeds or the profits from the initial investments would be used to put up new investments. This will keep Kuwait in a sustained growth. From every new investment we have profits and this will keep set up other new investments.

The law also allowed the ministry to decree that foreigners would have up to 100% of the shares. The ministers also gave a decree that foreigners will be permitted to practice within Kuwait. This gave a leap to the amount of foreign investment in the nation.

The government is now working on main challenges to ensure that the people of Kuwait benefit. The oil sector has started growing due to the encouragement of the foreign investors. Encouraging more companies in addition to United States owed Texaco and Japan’s Arabian Oil Company has helped in creating employment to the locals. This will continue as the government implements the scheme that is purposes to produce an additional 450,000 bpd from the four fields located in northern and southern Kuwait.

Research has shown that Kuwait has up to 10% of the world oil reserves but it is still mining relatively small quantity. As the government enhances the oil production through foreign investors, more people will be employed by this companies and therefore reducing its burden on paying salaries. This will have definitely offered people an opportunity to improve on their lively hood.

Furthermore, the government should encourage more nationals to seek employment in the private sector. We have seen this clearly when the government improved the investment climate. This would in turn improve the employment conditions in the private sector. Statistics show that in the recent past, 92% of the population was employed in the public sector. The percentage would largely reduce, consequently reducing the amount allocated for salaries I the budget.

It is very clear that the technology of various sectors is improving. This is because of the expatriates that are allowed to come and fully practice in the country. This will improve the local industries by making them more efficient in production. This will, without doubt increase on their profits and the salaries that they pay their workers.

As the government encourages the foreign investment policy, it also encourages the local investors as we have earlier mentioned. This is a form of privatization program. Instead of the government doing all the oil work itself, it has outsourced opportunities to foreign and local investors.

The above discussed is the role played majorly by foreign investment in Kuwait.

The foreign trade barriers in Kuwait

The observation on the foreign trade buriers in Kuwait outlines quite a series of trade barriers in the past as compared to the present. These trade barriers are still subtly haunting foreign trade in Kuwait today. Kuwait’s government and the parliament should rationally agree on removing the barriers completely. The barriers are as discussed below.

Trade a barrier has been seen under banking where, the barrier has been that the banking system has been affected directly. The foreign banks have got a restriction to only open a single branch that offer investment banking services only. They have no permission to compete in the normal retail banking. The foreign banks have also been subjected to maximum credit concentration. This is equal to the ¼ of the biggest local bank. The foreign banks have also been restricted from directing clients to borrow from other branches externally. It is a fact that when trade barriers affect the banking system of the nation even the economy will go down. As a result of poor economy the foreign investment will as well be discouraged.

Another most critical trade barrier in Kuwait is the investment barrier. This actually has disfavored the foreingn trade because it has been so discriminative in the taxation policies that had been provided as at the year 2000. This was a proposal that had been put across to allow the foreigners to own 100% equity in the owning companies in Kuwait. Later on in 2004 this law was the law was passed and the investors were allowed the 100% equity. At the present, the foreigners are doing great in Kuwait because in the new law they have been allowed 15% tax on the foreign direct investment. This has actually motivated foreigners to invest in the Kuwait’s investments.

Generally, the investment has improved because of the enactment of the direct investment law in the year 2008. This has made Kuwait to get into the long journey to successful economic growth. It will soon catch up with countries that welcomed foreign investment early enough. This is because it has one of the best resources, which is oil.

Works Cited

JAD, MOUAWAD. “Foreigners May Soon Play a Part in Kuwait Oil.” The New York Times Business New York Times. The New York Times Company. Web.

“Kuwait – Foreign investment.” Encyclopedia of the Nations. Advameg, Inc. Web.

Mohammed, Al Twaijri. “Role of foreign investment in Kuwait.” Arab Times. Arab Times. Web.

Rebecca, Waters. “Exec Digital takes a look A Business Traveller?s Guide to Kuwaitemirate.” Exec Digital. White Digital Media Ltd/Inc, 2009. Web.

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