ON EVE OF POTUS VISIT, PARLIAMENT SUDDENLY PASSES

C O N F I D E N T I A L SECTION 01 OF 02 KUWAIT 000047

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E.O. 12958: DECL: 01/07/2013
TAGS: ECON EAIR PGOV EINV ETRD KU IZ
SUBJECT: ON EVE OF POTUS VISIT, PARLIAMENT SUDDENLY PASSES
RAFT OF ECONOMIC LAWS AFTER YEARS OF DELAY

REF: A. 07 KUWAIT 1762

B. KUWAIT 0043

C. 06 KUWAIT 4561

Classified By: Charge D'Affaires Alan G. Misenheimer for Reasons 1.4 (b
) and (d)


1. (C) Summary and Comment: Amidst rumors of parliamentary
dissolution and following years of delay in bringing any
significant economic reform legislation to a vote, Kuwait's
parliament passed three important economic laws on January 9
to privatize Kuwait Airways, to control investment related to
public properties (especially under Build-Operate-Transfer
contracts),and to create public-private partnerships to own
and operate customs facilities and warehouses near the Iraq
border. This follows the passage of a long-awaited tax law
on December 26. This sudden and unexpected wave of economic
lawmaking marks a breakthrough in the legislative deadlock of
the past two years.


2. (C) The passage of these laws shows that a growing number
of MPs are ready to cooperate with the government in order to
forestall an Amiri edict dissolving Parliament. MPs also
hope to protect themselves against growing public discontent
with their performance. These laws will also be seen as a
triumph for PM Nasser Mohammed Al Sabah, whose reputation has
suffered due to his inability to advance the GOK's
legislative agenda. President Bush's impending visit
certainly figured into the MPs' tactical calculations. Both
the Build-Operate-Transfer law and the warehousing/customs
law are favorable developments for U.S. interests, and
warrant positive acknowledgment by the USG. End Summary and
Comment.

Rare Display of Government-Parliament Unity
--------------


3. (C) On January 9, the parliament passed three significant
and long-awaited economic laws. This follows the passage on
December 26, by a vote of 36 to 17, of a tax law reducing the
tax on foreign companies from 55 per cent to 15 per cent
(Ref. A). The first new law, which privatizes sclerotic and
loss-making Kuwait Airways, passed by a vote of 50 to 4. The
second, which authorizes the creation of public-private
partnerships related to the development of public properties,
especially through the use of Build-Operate-Transfer (BOT)
contracts, passed by 57 to 0. The third, which creates
public-private partnerships to own and operate warehouses and
customs facilities near the Iraq border, passed by 43 to 8.
The sudden passage of these laws is a watershed event for a
parliament that, increasingly over the past year, has been
preoccupied with political infighting and threats to grill
ministers (Ref B).


4. (SBU) An editorial in the Arabic-language Al-Qabas called
January 9 "a distinctive day in our parliamentary life."
Prime Minister Nasser Al-Mohammad Al Sabah reportedly said,
"Ratification of the laws reflects genuine cooperation
between the two authorities (the government and parliament)."
Leading opposition MP Ahmad Al-Saadoun told Al-Qabas, "We
have eased tension between the two authorities by the
ratification of these laws." Another local daily, Al-Jarida,
ran the front-page headline, "Ratification of the Three Laws
Keeps the Ghost of Dissolution Away." Opposition Islamist MP
Mohammad Al-Bossairi said, "The three laws will pave the way
for turning Kuwait into a financial center. They are our
gift to the Amir." There is also speculation in the press
and among some of our government contacts that a general
privatization law will also be passed in the near term.
Leaders of the various parliamentary blocs are scheduled to
meet with the Amir on January 13 to discuss the way forward
for the government and parliament.

Kuwait Airways Privatization
--------------


5. (SBU) Under the first law, state-owned Kuwait Airways
Corporation (KAC),which has operated at a loss for 17 of the
last 18 years and is expected to lose USD 35 million this
year, will be transformed into a private company within the
next two years after two independent international auditors

KUWAIT 00000047 002 OF 002


have valued the company's assets. Under the law, 35 per cent
of the company will be sold to a "core investor," which will
be the local or foreign company making the highest bid.
Forty per cent will be sold to Kuwaiti citizens through an
IPO. Government institutions will retain a 20 per cent
stake, and the remaining five per cent will be distributed
equally among current KAC employees. As a concession to
populist MPs, the law requires the new company to retain
current Kuwaiti employees for at least five years without
reducing their pay. Kuwaiti employees who do not wish to
remain can either elect an automatic transfer to another
government job or retire with three years' severance pay.
Forty-two per cent of the new company's staff must be Kuwaiti
nationals. The minimum salary for Kuwaiti employees in the
new company will be set by the government. The government
reiterated its previously announced policy that Kuwait
Airways will not purchase any new aircraft until the
privatization is complete, although it reserves the option of
leasing aircraft in the interim. KAC operates a fleet of 15
Airbus and 2 Boeing aircraft.

Public Properties (BOT) Law
--------------


6. (SBU) The second law establishes clear guidelines
regarding the sale, lease, or transfer of state-owned land
(about 95% of the total land area of Kuwait) to local or
foreign investors to implement development projects.
Specifically, the law governs Build-Operate-Transfer (BOT)
and Build-Own-Operate (BOO) contracts, which have been
suspended in Kuwait since the State Audit Bureau cited
widespread irregularities in the awarding of contracts in
November 2006 (Ref C). The law establishes a high commission
for state properties and bans any other government
institution from allocating state land to any project without
the approval of the new commission. The law stipulates that
new companies will be established to implement major projects
on state land with a 40 per cent share sold in an auction to
an investor, 50 per cent sold to Kuwaiti citizens in an IPO,
and the remaining 10 per cent sold to the local or foreign
company implementing the project. The law limits the term of
BOT contracts to 30 years with the exception of "special"
projects, which can continue for up to 40 years. The passage
of this law represents a significant opportunity for America
project management, engineering, and construction companies.
At the same time it will allow the Kuwaiti government to
award major contracts for badly needed infrastructure
projects.

Public-Private Warehousing and Customs Facilities
-------------- --------------


7. (SBU) The third law authorizes the formation of one or
more companies to establish and run warehouses and associated
customs facilities near the Iraqi border. The law states
that 26 per cent of each company will be sold to a "core"
local or foreign company, 24 per cent to government
institutions, and 50 per cent to Kuwaiti citizens in an IPO.
Under the new law, an existing contract between the GOK and
the major Kuwaiti logistics company and DOD contractor
Agility may be canceled or renegotiated. New facilities
built under this law would largely be used to support DOD
contracts associated with Operation Iraqi Freedom.

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For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s

Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
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MISENHEIMER