Identifier
Created
Classification
Origin
08KUWAIT62
2008-01-15 14:02:00
UNCLASSIFIED
Embassy Kuwait
Cable title:  

2008 KUWAIT INVESTMENT CLIMATE STATEMENT SUBMISSION

Tags:  NOTAG KU 
pdf how-to read a cable
VZCZCXRO2453
PP RUEHDE RUEHDIR
DE RUEHKU #0062/01 0151402
ZNR UUUUU ZZH
P 151402Z JAN 08
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 0586
INFO RUEHZM/GCC COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPCIM/CIMS NTDB WASHDC PRIORITY
UNCLAS SECTION 01 OF 11 KUWAIT 000062 

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, STATE PASS TO USTR

E.O. 12958: N/A
PGOV, EINV, KTDB, USTR, OPIC, KU
SUBJECT: 2008 KUWAIT INVESTMENT CLIMATE STATEMENT
SUBMISSION

REF: 07 SECSTATE 158802

UNCLAS SECTION 01 OF 11 KUWAIT 000062

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, STATE PASS TO USTR

E.O. 12958: N/A
PGOV, EINV, KTDB, USTR, OPIC, KU
SUBJECT: 2008 KUWAIT INVESTMENT CLIMATE STATEMENT
SUBMISSION

REF: 07 SECSTATE 158802


1. Per reftel instructions, the following is
Post's submission for the 2008 Kuwait Investment
Climate Statement:

OPENNESS TO FOREIGN INVESTMENT

The Council of Ministers approved the implementing
regulations for its current Direct Foreign Capital
Investment Law -- Law No. 8/2001 - passed by the
National Assembly on March 11, 2001 --, through
Resolution No. 1006/1/2003 on November 1, 2003. The
legislation authorizes foreign-majority ownership
and 100 percent foreign ownership in certain
industries including: infrastructure projects
(water, power, waste water treatment or
communications); investment and exchange
companies; insurance companies; information
technology and software development; hospitals
and pharmaceuticals; air, land and sea freight;
tourism, hotels, and entertainment; housing
projects and urban development. Projects
involving oil discovery or oil and gas production
are not authorized for foreign investment and
must be approved by a separate law.

The Direct Foreign Capital Investment Law promotes
foreign investment in Kuwait; authorizes tax holidays
of up to ten years for new foreign investors;
facilitates the entry of expatriate labor;
authorizes land grants and duty-free import of
equipment; provides guarantees against expropriation
without compensation; ensures the right to repatriate
profits; and protects the confidentiality of
proprietary information in investment applications,
with penalties for government officials who
reveal such data to unauthorized persons. New
investors are protected against any future changes
to the law. Full benefit of these incentives,
however, is linked to the percentage of Kuwaiti
labor employed by the new venture. The investor
is also obliged to preserve the safety of the
environment, uphold public order and morals, and
comply with instructions regarding security and
public health. While the Direct Foreign Capital
Investment Law is on the books, foreign companies still
report numerous delays in getting approval to operate
in Kuwait, and the law does not appear to have changed
the investment climate in any significant way.

Foreign firms still may not invest in the
upstream petroleum sector, although they are
permitted to invest in petrochemical joint
ventures; Dow Chemical, a partner in EQUATE, is
the only foreign company involved in a
petrochemical joint venture. Implementing

legislation brought before Parliament in January
2004 would allow for limited, controlled
investment in the petroleum sector. This law was
submitted specifically to allow for investment in
and development of KuwaitQs northern oilfields,
but may be used to allow for other investment in
the petroleum sector in the future. The
legislation, however, is still pending and has
not been brought to a vote in Parliament.

Kuwait's economy has been dominated by the state and
the nationalized oil industry since the early 1970s
despite efforts by the government to diversify.
The government acquired major holdings in private
Kuwaiti firms -- particularly banks and insurance
companies -- following stock market crashes in
1979 and 1982. After liberation from Iraq (early
in 1991),the government passed a debt settlement
law and purchased outstanding debts emanating from
the stock market crashes and the Gulf War. Between
1995 and 1998, the government successfully
divested over 50 percent of its equity holdings
in private firms by selling off its full holdings
in 28 firms and portions of holdings in 17 other
firms, earning some US $3.2 billion. The program was
suspended in 1998 because of the weakness of the
Kuwait Stock Exchange, but resumed in May 2001 when
the Kuwait Investment Authority sold 113 million
shares (about 24 percent) of the Mobile
Telecommunications Company (MTC). There were six

KUWAIT 00000062 002 OF 011


times as many prospective buyers as could be
accommodated. The sale fulfilled the government's
intention to reduce its equity in MTC from 49
percent to 25 percent.

Established after the 1982 stock market crash,
the Kuwait Stock Exchange (KSE) is the second
largest bourse in the Arab world after Saudi
Arabia's NCFEI. The KSE lists 181 Kuwaiti
companies and 15 companies from other Arab
States, including one Iraqi company. It reopened
in 1992 following the Gulf War and has a market
capitalization of US$ 142.36 billion (KD 39
billion) as estimated by December 2007, an
increase of 2.1% from 2006. KSE boasts the
regionQs first trading floor for women and is in
consultations with a British firm to establish a
Capital Markets Authority to serve as an
independent regulatory body similar to the U.S.
Securities and Exchange Commission.

The National Assembly ratified the "Indirect
Foreign Investment Law" in August 2000, allowing
foreigners to own 100 percent of all listed
shareholding companies, except banks. The
banking sector was opened under the Direct
Foreign Investment Law and the Central Bank has
already granted licenses to six foreign banks.
Five of them have already opened branches: BNP
Paribas and HSBC, both of which began operations
in 2005; Citibank and the National Bank of Abu
Dhabi, which began operations in 2006; and Qatar
National Bank, which began operations in 2007.
Doha Bank has not yet opened a branch in Kuwait.
However, while foreign banks may now operate in
Kuwait, they are restricted to opening only one
branch and are prohibited from competing in the
retail banking sector. Kuwait's banking sector
is regulated by the country's effective Central
Bank and is comprised of Islamic, specialized,
and commercial banks. With the conversion of
Kuwait Real Estate Bank (KREB) in 2006, which
became Kuwait International Bank (KIB),there are
now three Islamic banks including Kuwait Finance
House (1977) and Boubyan Bank (2004). KIB's
conversion leaves one remaining specialized bank,
the Industrial Bank of Kuwait. The seven
commercial banks include National Bank of Kuwait
(1952),Commercial Bank of Kuwait (1960),Gulf
Bank (1960),Al-Ahli Bank of Kuwait (1967),The
Bank of Kuwait and the Middle East (1971),Burgan
Bank (1976) and Bank of Bahrain and Kuwait
(1977). Bank of Kuwait & Middle East has plans
to convert to an Islamic bank upon Central Bank
approval.


On July 9, 2001, the Kuwaiti government announced
an ambitious five-year privatization program,
which closely resembled past initiatives. The
plan outlined a wide range of activities, but
with little detail. The first year called for
privatizing some gas station outlets and part or
all of Kuwait Airways (KAC),which has operated
at a loss since 2000. Year two would initiate
privatization of post office, telegraph, and
telecommunication services. Years three and four
would complete the telecommunication
privatization and initiate the privatization of
the Ports Authority and Public Transport Company.
The fifth and final year would target the power
and water sectors, as well as Kuwait's
Petrochemical Industries Company (PIC). Kuwait's
National Assembly has made it clear that any
privatization program will have to insulate consumers
from significant rate increases and protect the jobs
of Kuwaiti citizens. Little of the 2001 five-year
plan has been implemented. A law to privatize KAC,
which continues to operate at a significant loss and
now faces direct local competition from the new,
private Jazeera Airways, was finally approved by the
Parliament in January 2008. Under the law, KAC will
be transformed into a private company within the
next two years after two independent international
auditors have valued the companyQs assets. Thiry-
five percent will be sold to a core investor, which
will be the local or foreign company making the

KUWAIT 00000062 003 OF 011


highest bid. Forty percent will be sold to Kuwaiti
citizens through an initial public offering,
government institutions will retain 20 percent, and
5 percent will be distributed equally among KAC
employees. Forty-two percent of the new company's
employees must be Kuwaitis whose minimum salaries
will be set by the government. Another private
airline, Al-Wataniya, was licensed and formed in
2005, but has not yet begun operations. Both mobile
telephone companies in Kuwait are private, with the
Government holding significant minority interest,
and the Ministry of Communication still sets
tariffs, which are high. QatarQs state owned Qtel
purchased a majority stake on one of the two mobile
phone companies, Wataniya, in March 2007. In
November 2007, the Kuwaiti government granted a
license for a third mobile telecommunications
company. The new company will be 26 percent owned
by Saudi Telecom, which was the highest bidder in a
government auction. The government will retain a 24
percent share, and the remaining 50 percent will be
sold to Kuwaiti citizens in an initial public
offering expected in February 2008. None of the
other communication services have yet been
privatized, though privatizing landlines has been
discussed for several years. The ports and
transport sector have not been privatized either.
The energy and power sector has seen the most
progress in privatization. Eighty of the 120
government-owned gas stations have been privatized,
with plans to privatize the remaining forty. The
outcome will be three competing gas station
companies, with gas still subsidized by the
government and set in a price range. The
government-owned lubrication oils plant was
privatized in 2004 as were the coke smelter
operations. KuwaitQs Petrochemical Industries
Corporation (PIC) is now operating a joint private
venture with Dow Chemicals called Equate, and the
operation has proven to be a successful, profitable
model of both privatization and foreign investment.
On the heels of EquateQs success, Dow and PIC have
formed two more ventures which have already been
tendered: a second olefins plant and an aromatics
facility which are both under construction and due
to come online in 2008 and 2009 respectively.

Build, Operate and Transfer (BOT) projects are
gaining increasing acceptance in Kuwait, with BOT
projects proposed in the power, wastewater, real
estate development and transport sectors. After
nearly four years of deliberation, the Sulaibiya
Waste Water Treatment BOT contract was signed in May

2001. The winning consortium, which included U.S.
firms, projected revenues of US $390 million over
10 years. The project, which was commissioned in
2004, now processes 50 million gallons of
wastewater daily to be used for irrigation.

A new BOT law was approved by the Parliament in
January 2008 after BOT projects came under
intense scrutiny by the State Audit Bureau in
late 2006 for alleged violations and several
contracts were cancelled. The new law
establishes a high commission for state
properties and bans any government institution
from allocating state land to any project without
the approval of the new commission. It also
stipulates that new companies will be established
to implement major projects on state land with a
40 percent share sold in an auction to an
investor (presumably a local holding company),50
percent sold to Kuwaiti citizens in an IPO, and
the remaining 10 percent 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.

There have been a number of real estate BOT projects
by privately owned Kuwaiti companies. The first-
class US $132 million Sharq Mall, owned by the
National Real Estate Company, contains retail
outlets, restaurants, theaters, and entertainment
concessions. More recently, the Fifth Waterfront
Development Project constructed Marina Mall in 2002.
This US $162 million BOT is owned by the United

KUWAIT 00000062 004 OF 011


Realty Company and features high-end retail,
eating, and entertainment outlets. A future BOT
is planned for a central incinerator in the
Shuaiba Industrial Area, a project that
stipulates foreign participation with at least 25
percent equity.

Foreign-owned firms and the foreign-owned portions of
joint ventures are the only businesses subject to
corporate income tax, which applies to both
domestic and offshore income. In December 2007,
Kuwait's Parliament approved a new tax law to
reduce the tax rate on foreign companies from 55
percent to 15 percent to attract more foreign
investment. The new 15 percent tax rate will be
applied as a flat tax on the annual net profits
of foreign companies, unlike the previous system
which incorporated a series of tranches that
progressively reached a maximum of 55 percent.
Capital gains on stock market investments will be
exempt as will the profits of Kuwaiti
distributors of foreign goods. New foreign
investors can be exempted from all taxes for up to 10
years under the new Direct Foreign Capital Investment
Law.

Kuwaiti firms are not subject to the corporate
income tax, but those registered on the Kuwait
Stock Exchange (shareholding companies) are
required to contribute 2.5 percent of their
national earnings to the Kuwait Foundation for the
Advancement of Science (KFAS). The National
Employment Law levies an additional 2.5 percent tax
that will fund a program granting Kuwaitis
working in the private sector the same social and
family allowances provided to Kuwait's government
workers. Kuwait levies no personal income tax.

Tax exclusions -- besides those offered under the new
Direct Foreign Capital Investment Law -- for business
expenses are limited, and Kuwait's tax code is often
ambiguous. For example, deductions are only three
percent for agent commissions and head office
expenses (mainly for turnkey supply and
installation-type contracts). The most
significant tax ambiguity exists in terms of
defining foreign companiesQ taxable presence in
Kuwait, and several foreign firms are engaged in
ongoing disputes over their tax liabilities.

The licensing authority of the Ministry of
Commerce and Industry screens all proposals for
direct foreign investment. In the past, this
authority has encouraged high-tech industries
over sectors viewed to be saturated, such as the
hotel industry. The Foreign Capital Investment
Committee (FIC),chaired by the Minister of Commerce
and Industry and including representatives from the
private and public sectors, will authorize
investment incentives put forth under the new
Foreign Investment Law on a case-by-case basis.
Foreign companies have reported numerous delays in
gaining authorization, some waiting up to 18 months
for approval.

On July 26, 1992, the Council of Ministers of the
State of Kuwait established the Counter Trade Offset
Program through the issuance of Decision No. 694,
which stipulates that all Foreign Contractors who meet
certain criteria should participate in the Counter-
Trade Offset Program.

In January 2002, the Kuwaiti government transformed
its offset program into a mechanism for promoting
foreign investment in Kuwait. The program was briefly
suspended in September 2004 in order to study its
effectiveness, but in August 2005 the Ministry of
Finance announced that Kuwait would reactivate its
offset regime for both civil and defense contracts.
In April 2006, Kuwait established the National Offset
Company to manage, enforce and review all offset
proposals. The company is designed to be a one-stop
shop for all matters related to offsets. On October
24, 2007, the Company launched QOffset FundQ, with
variable capital up to KD 1 billion.

Offset obligations are applied to military contracts

KUWAIT 00000062 005 OF 011


of a value equal to or above KD3 million (about $11
million),civil/government contracts of a value equal
to or above KD10 million (about $36.5 million) and
oil/gas contracts. Oil and gas exploration and
production contracts are excluded from the offset
program. Offset obligations amount to 35 percent of
contract value with offset multipliers being
established to target investment into determined
sectors of the Kuwaiti economy. The foreign
contractor will be subject to an unconditional
financial guarantee equal to 6 percent of the contract
value.


CONVERSION AND TRANSFER POLICIES

After 27 years of linking the Kuwaiti dinar (KD)
exchange rate to a basket of currencies, Kuwait
decided to peg the dinar to the US dollar under a
flexible peg from the beginning of 2003. The move
was in preparation for the adoption of a single
GCC currency in 2010. On May 20, 2007, the Central
Bank of Kuwait (CBK) announced that, based on the
Council of Ministers' approval, the determination of
the exchange rate of the Kuwaiti Dinar (KD) against
the US Dollar would be based on a basket of major
world currencies reflecting the foreign trade and
financial relations of the State of Kuwait, and in a
similar way to the policy applied before January 5,

2003. GOK cited inflationary pressures due to a
weak dollar as the reason for unpegging the Kuwaiti
Dinar from the US Dollar.

There are no restrictions on current or capital
account transactions in Kuwait beyond the
requirement that all foreign exchange purchases be
made through a bank or licensed foreign exchange
dealer. Equity, loan capital, interest,
dividends, profits, royalties, fees and personal
savings can all be transferred in or out of Kuwait
without hindrance. Under the current Foreign
Investment Law, investors are also permitted to
transfer all or part of their investment to
another foreign or domestic investor.


*Source: Central Bank of Kuwait, May 2007.


EXPROPRIATION AND COMPENSATION

There have been no recent cases of expropriation
or nationalization involving foreign investments
in Kuwait. Nevertheless, as a safeguard, the Direct
Foreign Capital Investment Law guarantees against
expropriation or nationalization except for the
public benefit in accordance with existing laws;
in this case, compensation will be provided
without delay for the "real economic value of the
project at the time of expropriation." When
foreign companies were nationalized in the past,
as with Kuwait's oil industry in the 1970s,
foreign interests were compensated promptly and
effectively.

DISPUTE SETTLEMENT

The Foreign Investment Law stipulates that
Kuwaiti courts alone are responsible for
adjudicating any disputes involving a foreign
investor and other parties, although arbitration
is permitted. Few contracts in Kuwait contain
clauses specifying recourse to traditional
commercial and political arbitration. According
to the Central Bank of Kuwait, the Kuwaiti judicial
system recognizes and enforces foreign judgments only
when reciprocal arrangements are in place. Kuwait
is a signatory to the International Center for
the Settlement of Investment Disputes (ICSID, i.e.
the Washington Convention). There have been no
investment disputes involving American firms in
Kuwait in over five years; commercial disputes are
more common. In both cases, the slow pace of
KuwaitQs legal system often frustrates American
claimants.

Kuwait has a developed legal system and a strong

KUWAIT 00000062 006 OF 011


trading history. It has a civil code system
influenced by Islamic law. As a traditional trading
nation, KuwaitQs judiciary is familiar with
international commercial laws. Kuwait has been a
GATT member since 1963 and has signed the WTO
agreement. Kuwait, however, is not a signatory to
the WTO Government Procurement Code.

A feature of Kuwaiti law which U.S. business
should be aware of is the application of travel
bans which may be applied against individuals who
have civil or criminal cases registered against
them. The ban prevents individuals from
departing Kuwait until the pending matter is
settled or acceptable guarantees are offered. Former
Kuwaiti business partners involved in disputes with
U.S. businesses have managed to have travel bans
imposed on U.S. partners for allegedly violating
Kuwaiti civil law. Though very infrequent, such
cases highlight the need to take extra care
before entering into long-term business
relationships in Kuwait.

PERFORMANCE REQUIREMENTS/INCENTIVES

Government Procurement Requirements

Law No. 37 of 1964 (Articles 43 and 44) specifies
the use of local products when available and
prescribes a 10 percent price advantage for local
firms in government tenders.

Boycotts

In June 1993, Kuwait publicly announced its
decision to end enforcement of the secondary and
tertiary Arab League boycotts of Israel.
Although there are occasional reports that some
tender requests contain boycott clauses
reportable under U.S. anti-boycott laws, these
usually result from clerical errors or the use of
outdated forms. Kuwait maintains an open boycott
office in its Customs Department, and has stated
that it will wait for Arab League action before
eliminating the primary boycott of Israeli-owned
companies and goods produced in Israel.


Shipping Requirements

The Kuwaiti government has insisted that cargoes
for government projects originating in U.S. ports
will no longer be prevented access in favor of
the United Arab Shipping Program.

Participation in Research and Development

There are no specific restrictions on foreign
participation in government-financed or subsidized
research and development, but little activity of this
kind has occurred to date. The Kuwait Institute
for Scientific Research (KISR) has expressed
interest in working with foreign firms. The
government would welcome programs that provide
expertise unavailable locally, but these are
likely to be evaluated on a case-by-case basis.
Both KISR and the Ministry of Health have entered
into discussions with MIT, Harvard, and Johns
Hopkins about prospective research partnerships.

Visa and Work Permit Requirements

Kuwait has a stringent visa regime and most work
permits require a local sponsor. The Foreign
Investment Law, however, may redress this problem
for new investors. Reciprocal changes between
the U.S. and Kuwait--particularly the introduction
of a 10-year multiple entry visa--have benefited U.S.
business travelers. Visa requirements for
citizens of 34 nations, including the United
States, were relaxed in 2004 allowing for
application for a visa upon arrival at the
airport. However, investors should be aware that
as of August 2006, persons entering on tourist
visas will no longer be able to convert to work
permits without first leaving the country.
Foreign-born U.S. citizens, especially those of

KUWAIT 00000062 007 OF 011


Middle Eastern descent, sometimes experience
difficulties with visa and residency
applications. Any problems experienced by
potential U.S. visitors should be referred to the
American Embassy or to the Bureau of Consular
Affairs, Department of State.


RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Rights to private ownership and establishment are
respected in Kuwait, although foreigners face
selected restrictions. Licenses from the
Ministry of Commerce and Industry are required for
the establishment of all new companies, and
government authorization is required for any
incentives offered by the Foreign Investment Law.
As stated above, foreign ownership is restricted or
prohibited in some sectors of the economy, and non-
GCC citizens may not own land in Kuwait.

Kuwaiti law severely restricts the types of
collateral to which creditors may have recourse
in the event of default by a borrower. Banks may
not foreclose on residential real estate property
or personal possessions in the event of default,
although they may sue the borrower for the
balance due under the loan contract. Borrowers
typically pledge a portion of their future
severance benefits as collateral for a bank loan.


TRANSPARENCY OF THE REGULATORY SYSTEM

Kuwait has not developed effective antitrust laws
to foster competition, and its bureaucracy often
resembles that of a developing country. Kuwait's
open economy has generally promoted a competitive
market. When government intervention occurs,
however, it is usually to the benefit of Kuwaiti
citizens and Kuwaiti-owned firms.


EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Kuwait has a free, but inefficient, capital
market where credit is allocated on market terms.
Foreign investors can obtain credit through local
banks. With the help of government subsidies,
the financial markets -- and particularly the
commercial banks -- operated throughout the 1980s
primarily to collect funds for the re-lending to
favored customers. Payment discipline was lax and
real economic losses common. Under a bank
stabilization program introduced in 1992, the Central
Bank of Kuwait purchased all of the outstanding
domestic credits of Kuwait's commercial banks
while eliminating all guarantees for profits,
equity, and liabilities other than the banks'
deposit liabilities. Henceforth, all losses would
stay with the banks, which would be responsible
for the management of all their assets and
liabilities. In addition, the Central Bank
improved bank supervision, resulting in a fairer
and more efficient distribution of credit
throughout the Kuwaiti banking system. Each of
Kuwait's ten commercial banks reported continued
earnings growth in 2007.

BANK ASSETS
Kuwait's banks have not yet released their 2007
annual reports. The assets of Kuwait's
commercial banks on December 31, 2006 were: (in
'000s)

BANK KD (million) U.S. $
equivalent
National Bank of Kuwait 7,898.300 28,825.91
Kuwait Finance House 6,313.791 23,043.03
Gulf Bank 4,059.951 14,817.34
Commercial Bank of Kuwait 2,917.233 10,646.84
Al-Ahli Bank 2,424.526 8,848.64
Burgan Bank 2,210.215 8,066.48
Bank of Kuwait and
the Middle East 1,929.406 7,041.63
Bank of Kuwait & Bahrain 1,616.258 5,898.75
Kuwait International Bank 803.557 2,932.69

KUWAIT 00000062 008 OF 011


Boubyan Bank 504.339 1,840.65
TOTAL 30,677.576 111,961.96

(US $1 equals KD 0.274 as of December 11, 2007 -
CBK)

The quality of local banks varies from blue chip,
world-class to weak. Some bank assets have been
non-performing in the past. The balance sheets
of some local banks are heavily weighted toward
lower-yielding government bonds. Legal,
regulatory, and accounting systems are opaque but
are generally consistent with international
norms. The Central Bank of Kuwait requires
annual reports from local banks to meet
international accounting standards. U.S.
businesspeople are advised to seek local legal
and financial advice for complicated investments
and transactions.

There are few defensive measures to protect
against hostile takeovers, which are rare in
Kuwait. There is no evidence of private sector or
government efforts to restrict foreign
participation in industry standards-setting
consortia or organizations. U.S. suppliers often
have trouble, however, complying with
specifications that are technologically-tailored
to other (usually European, especially U.K.)
suppliers. In addition, American suppliers'
preference for turnkey projects often does not
mesh with Kuwait's preference to split projects
into a series of separately-tendered smaller
projects.

Finally, U.S. investors should be aware that
family, clan, and tribal ties throughout the
business community and government can restrict
foreign participation, investment, and control of
domestic enterprises. Kuwait is a very big small
town.

POLITICAL VIOLENCE

Politically Motivated Damage to Projects and/or
Installations

With the potential for terrorist actions
throughout the Persian Gulf region still high,
the Government of Kuwait continues to strengthen
domestic counterterrorism measures. There have
not been any incidences of terrorism in Kuwait
since January 2005, and the government has
aggressively pursued convictions against members
of a local terrorist cell involved in
confrontations with Kuwait security forces in
January 2005. Kuwait also increased security
around key oil installations after Al-Qaeda
threatened to attack Gulf oil facilities.

CORRUPTION

The often-lengthy procurement process in Kuwait
occasionally results in accusations of attempted
bribery or the offering of other inducements by
foreign bidders. This is a crime in Kuwait and
there are currently several investigations and
trials underway involving current or former
government officials accused of malfeasance.
There have been no convictions for bribery,
however, since the end of the Gulf War. In 1996,
the government passed Law No. 25, which requires
all companies securing contracts with the government
valued at KD 100,000 (US $364,963.5) or more to
report all payments made to Kuwaiti agents or
advisors while securing the contract. The law
similarly requires entities and individuals in
Kuwait to report any payments they received as
compensation for securing government contracts.

BILATERAL INVESTMENT AGREEMENTS

Kuwait has signed investment agreements with Germany,
France, Italy, Russia, China, Romania, Poland,
Hungary, Turkey, Malaysia, Pakistan, Switzerland,
Malta, Finland, Ethiopia, Croatia, Tajikistan,
Austria, Bulgaria, Kazakhstan, Morocco, Mongolia, the

KUWAIT 00000062 009 OF 011


Czech Republic, Japan, UK, Egypt, Sudan and Syria.
In the past few years, Kuwait has signed a bilateral
investment agreement with Pakistan and a free trade
agreement (FTA) with Jordan. Kuwait has initiated
agreements on bilateral investment with Denmark,
Belgium, the Netherlands, Thailand, Ukraine, Latvia,
Lithuania, Lebanon, Bosnia/Herzegovina, and India.
Kuwait began talks with Singapore on a Free Trade
Agreement in December 2004.

Trade and Investment Framework Agreement

Kuwait signed a Trade and Investment Framework
Agreement (TIFA) with the United States in
February 2004. The TIFA is the first step in
developing economic reform and trade
liberalization criteria to strengthen the U.S. Q
Kuwait economic relationship and to work toward
an eventual Free Trade Agreement. At the first
bilateral TIFA Council meeting, held in May 2004
in Washington, D.C., it was agreed that the TIFA
process would provide for periodic technical
discussions. Several areas in particular stood
out as needing further attention: intellectual
property rights (IPR),standards-related issues,
taxation, and service and investment
requirements. Technical experts on both sides
continue to work on these areas. Technical
discussions took place in February 2006, followed
by a formal TIFA Council meeting in September
2006 in Washington, D.C, and another round of
technical discussions in Washington in June 2007.
While Kuwait has made notable progress on IPR
protections (including an upgrade to the Watch
list on the 2005 Special 301 Report),Kuwait's
taxation practices and standards regime continue
to be significant problems.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

In 1989, Kuwait concluded an agreement with the
U.S. on investment guaranty programs, which
facilitated the extension of programs from the
Overseas Private Investment Corporation (OPIC) to
Kuwait. Kuwait is also a member of the
Multilateral Investment Guarantee Agency (MIGA).
Currently there are no OPIC programs in Kuwait.

LABOR

Kuwait has a diverse labor force. Kuwaiti
nationals occupy most of the top management
positions in the private and government sectors. Due
to a welfare system that includes guarantees for
government jobs, unemployment among Kuwaitis is less
than five percent, but it is rising as a result
of a growing influx of young Kuwaitis into the
labor force (20,000 to 25,000 annually). The new
entrants are reluctant to enter the private sector
and cannot be absorbed by the government, where
underemployment remains a serious problem.
Kuwaitis are outnumbered in the work force by
expatriate laborers of diverse backgrounds.
While there are a number of American and Western
European workers in Kuwait, particularly in high-
skilled positions, the vast majority of
expatriate workers are low paid laborers from
other Middle Eastern countries, South Asia, and
the Philippines. Prior to the Gulf War (1991),
Palestinians occupied many of the country's
middle-management positions. Since the war,
workers of other nationalities, often Egyptians or
South Asians, have filled most of these positions.
Since liberation, the Government of Kuwait has
adopted inconsistent policies intended to limit and
discourage growth of the resident expatriate
population. The government has instituted a
quota system on work permits designed to protect
workers by preventing Kuwaitis from importing
unnecessary workers and then leaving those
workers on the street. Unskilled foreign workers
are restricted from transferring from one sponsor
to another within the private sector for a
minimum of two years, but college graduates may
transfer after one year. The government has also
levied new fees on expatriate workers and their
families in order to raise the cost of employing

KUWAIT 00000062 010 OF 011


foreign workers. At the same time, however, the
government has reduced the minimum salary
required for expatriates (in some business
categories) to be eligible to bring their
dependents to Kuwait, lowering it from 400 KD a
month to 250 KD a month.

Kuwaiti workers have the right to organize and
bargain collectively, but Kuwaiti law prevents
the establishment of more than one union per
functional area or more than one general
confederation. Foreign workers, who constitute
the vast majority of the work force, are
permitted by law to join unions only as non-
voting members after five years of work in the
particular sector the union represents. The
right to strike is also recognized for private
sector workers, although provisions calling for
compulsory negotiation and arbitration in the
case of disputes limit that right. Kuwaiti labor
law prohibits anti-union discrimination.

Separate Kuwaiti labor laws set work conditions
in the public and private sectors, with the oil
industry treated separately. Forced labor is
prohibited and the minimum age for employment is
18 years in industrial or dangerous jobs. Youth
as young as 14, however, may work part-time in
some non-industrial positions, and are allocated
more breaks than adults. A two-tiered labor
market ensures high wages for Kuwaiti employees
while foreign workers, particularly unskilled
laborers, receive substantially lower wages. In
the private sector, the minimum wage is 40 KD (US
$145.98)per month, in the public sector the
current effective minimum wage is KD 250 (US
$912.41) per month for Kuwaiti bachelors and KD
325 (US $1,186.13) per month for married
Kuwaitis, plus KD50 (US $182.48) for each child--
compared to KD 90 (US $328.47) for non-Kuwaitis.
The basic labor law also limits the workweek to
48 hours, provides for a minimum of 14 days of
leave per year, which increases to 21 days after
five years in the same job, and establishes a
compensation schedule for industrial accidents.
However, the law is inconsistently enforced and
disputes over the payment of salaries and
contract-switching are common, especially among
unskilled workers. Current labor laws do not
apply to domestic servants. The State
DepartmentQs annual Human Rights Report and
Trafficking in Persons Report highlight the
vulnerability of domestic servants to
exploitation. In 2006, the Ministry of Interior
implemented a new mandatory contract for all
domestic workers that specifies daily, weekly,
and annual rest periods, although it does not
specifically limit working hours. New
regulations also outlaw the passing
administrative fees to workers. These new rules
became effective October 1, 2006, so effective
enforcement is still an open question.

The International Labor Organization's (ILO)
Committee of Experts has reiterated its
longstanding criticisms of the discrepancies between
the Kuwaiti Labor Code and ILO Conventions 1, 30,
and 87 regarding hours of work and freedom of
association. Areas criticized by the ILO include
the prohibition to establish more than one trade
union for a given field; the requirement that a new
union have at least 100 workers; the regulation that
workers must reside in Kuwait for five years
before joining a trade union; the denial of the
right to vote and to be elected for foreign trade
unionists; the prohibition against trade unions
engaging in any political or religious activity;
and the reversion of trade union assets to the
Ministry of Social Affairs and Labor in the event
of dissolution. A new labor law, which would
award private sector workers more benefits,
establish a minimum wage, and broaden rights to
establish unions has been endorsed by the Council
of Ministers but awaits parliamentary approval.

On June 12, 2007, National Assembly ratified a law
that bans women from working during the hours 20:00-

KUWAIT 00000062 011 OF 011


0700, except for those working in the medical sector.
This law issued by Amiri Decree No. 52/2007, effective
June 15, 2007, with consensus approval from
conservative and Islamist MPs, exempts women working
in hospitals, clinics, private therapy clinics, and
any other institutions approved by the Minister of
Social Affairs & Labor.

The law also bans women from working in jobs that are
hazardous, rough, and damaging to health. In
addition, the law bans women from working in Qimmoral
jobs that abuse womenQs femininityQ and in places that
exclusively serve men.

The Ministry of Social Affairs & Labor will assign
officers to enforce this law. These Officers will
have the right to conduct raids on public places and
stores, seize violators, and report and refer them to
concerned authority.
The law stipulates a minimum penalty of 300 USD and a
maximum penalty of stated the following punishment
applied to violators:
-QUSD300 to 1500
-QShutting down the store for one month period.

FOREIGN TRADE ZONES AND FREE PORTS

In July 1995, the National Assembly passed Law No. 26
authorizing the Ministry of Commerce and Industry
to establish free trade zones in Kuwait. In May
1998, the privately-owned National Real Estate
Company signed a contract with the Ministry to
operate, manage, and market the 50 square-kilometer
Kuwait Free Trade Zone (KFTZ) at Shuwaikh port, which
was inaugurated in November 1999. Many restrictions
faced by foreign firms, such as corporate taxes, do
not apply to offices or plants within the KFTZ.
Some 90 percent of space within the KFTZ has been
leased; the majority of firms operating in the
zone are Kuwaiti.

On November 26, 2006, Cabinet Council issued
Resolution No. 507/2006 terminating KNRECQs
contract and suspending all its activities at the
FTZ area. To date, KNREC is appealing this
decision in Kuwaiti courts but has not received a
judgment to revoke the said resolution.

FOREIGN DIRECT INVESTMENT STATISTICS

Kuwaiti public investments abroad consist of
portfolio investments held by the Kuwait
Investment Authority, direct investments of other
government entities, as well as those held by
private Kuwaitis. In July 2007, the Finance
Minister publicly announced that KIAQs assets
under management were valued at $213 billion.
Details about the composition of both KIA and
non-KIA investment portfolios, such as Kuwait
Petroleum Corporation's reserve fund, remain
murky. The holdings of private Kuwaitis, in both
direct and portfolio investments, are believed to
exceed $100 billion.

Other major investors in Kuwait include Dow
Chemical which has a 45 percent stake in the US
$2 billion Equate project, a petrochemical joint
venture with the Petrochemical Industries Company
(PIC) that began operation in 1997. (Although the
U.S.-owned Saudi Arabian Chevron is headquartered
on the Kuwait side of the PNZ, it operates under
a Saudi concession for Saudi Arabia's share of
the onshore oil resources in the PNZ due to
expire in 2009.)



MISENHEIMER