The Public-Private Partnership Law Review: Kuwait
Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. The discovery of oil in 1934 fundamentally transformed the country's economy. Kuwait's enormous oil reserves and substantial quantities of natural gas have provided the base for an economic presence of worldwide significance. Oil wealth has stimulated trade in Kuwait across all sectors including the service industries. The government has used its oil revenues to provide social services to its citizens and to build the country's major infrastructure (including ports, roads, airports, seawater distillation plants, power stations and modern government office buildings). According to Nordea:
With an estimated 100 billion barrels of oil in reserve, which is approximately 9% of the world's total, Kuwait's economy is greatly dependant on oil exploitation. The oil sector represents 48.4% of the country's GDP and more than 90% of the country's exports. By 2030, Kuwait is planning to invest more than USD 87 billion in the oil sector, especially in upgrading its current oil infrastructure and creating new oil refineries. Overall, the industrial sector contributes more than half of GDP (59.6%) and employs 25.4% of the total workforce.2
However, the continuing decline in oil prices, the acknowledgement of the benefits and need for the expertise available in the private sector and the increasing worldwide advocacy for cleaner fuels has led the government to engage in various efforts in an attempt to diversify Kuwait's economy. These efforts have included the government's promotion, support and engagement in public-private partnership projects.
In 2017, the government unveiled its plans to transform the country into a regional financial and cultural hub by 2035 through the Kuwait National Development Plan, branded 'New Kuwait', which sets the nation's long-term development strategies. The aim of the New Kuwait programme is to 'transform Kuwait into a financial and trade hub, attractive to investors, where the private sector leads the economy, creating competition and promoting production efficiency, under the umbrella of enabling government institutions, which accentuates values, safeguards social identity, and achieves human resource development as well as balanced development, providing adequate infrastructure, advanced legislation and inspiring business environment'.3 The New Kuwait programme is designed around the following seven pillars:
- Kuwait's global positioning;
- developed infrastructure;
- creative human capital;
- effective public administration;
- high quality healthcare;
- a sustainable diversified economy; and
- a sustainable living environment.
One of the main strategies pursued to achieve the programme's objectives is the restructuring of the role played by the state so as to allow more private sector participation. Accordingly, the government has adopted various forms of cooperation between the public and private sector and, in particular, PPPs.
With respect to the PPP legal regime, the government enacted Law No. 7 of 2008 regarding the Regulation of BOT Operations and Similar Systems (BOT Law) in 2008, which was essentially the first specialised law on the books regulating PPPs. However, the BOT Law was repealed and replaced by Law No. 116 of 2014 Concerning Partnerships between the Public and Private Sectors (PPP Law)4 and its executive regulations.5 The PPP Law was developed as an improvement to the BOT Law as the government's response to the difficulties experienced by investors, lenders and procuring entities as a result of the implementation of the BOT Law. The PPP Law is currently the general law that sets the guidelines for the procurement and implementation of PPPs on government-owned land across all sectors.6
The development of the PPP legal regime is further evidence of the government's support of and strategy for developing PPPs.
However, non-oil investment continues to be primarily driven by government spending, and therefore lower oil prices have had the effect of reducing growth-enhancing investments in areas such as infrastructure, depriving Kuwait's economy of important multiplier effects that would stimulate the private sector. It is hoped that higher spending on capital-intensive projects will help address long-running under-investment in Kuwait's infrastructure. In the World Economic Forum's Global Competitiveness Report 2019,7 Kuwait was ranked 66th out of 141 countries in terms of its infrastructure quality, which was a decline from the previous year. It is yet to be seen how the newly appointed government8 under the new Amir, His Highness Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, will tackle the challenges that have dogged Kuwait's infrastructure development.
The year in review
Despite the covid-19 pandemic and the low oil price crisis, the Supreme Council for Planning and Development intends to implement and continue with the implementation of approximately 38 mainly mega infrastructure projects in fiscal year 2020–2021;9 a spend of 26.5 billion dinars was budgeted for and is being spent on these 38 projects, which include a number of strategic projects aimed at supporting the New Kuwait programme. Some of these projects are being procured by the government directly, while others are in partnership with the private sector (i.e., PPPs). The largest of these projects continue to be in the oil sector and include the Clean Fuels Project,10 the Al-Zour refinery11 and the Al Zour petrochemicals complex.12 While not procured as PPP projects, all these projects included private sector participation, with the private sector typically being the EPC contractor (and their financiers).
The Ministry of Public Works (MPW) has notably continued with the implementation of five major projects worth approximately 3.1 million dinars. These are the Kuwait International Airport – Terminal 2,13 the Mubarak Al Kabeer Port,14 the New Maternity Hospital,15 the Children's hospital16 and the South Mutlaa waste water treatment project.17 As with the oil sector projects referenced above, while not procured by the MPW as pure PPP projects, these projects all involve the private sector in various roles, including design and construction.
The Public Authority for Housing Welfare (PAHW) continued its progress in the implementation of four mega projects worth 2.6 billion dinars. The Al Mutlaa Residential City project is the biggest of these and worth 2 billion dinars,18 followed by the Jaber Al Ahmad City project valued at 325.2 million dinars,19 the South Abdullah Al Mubarak project worth 140.5 million dinars20 and the South Saad Al Abdullah City project worth 136.7 dinars.21
The Health Assurance Hospitals Company (Dhaman),22 being a public joint-stock company, is required (by the PPP Law and the Companies Law) to offer at least 50 per cent of its shares to the Kuwaiti public. Dhaman confirmed in November 2020 that 50 per cent of the company's shares would be offered in an initial public offering (IPO) at the end of 2021. The company intends to have its listing on the Kuwait stock exchange coincide with the start of the full operational phase of the health insurance system to achieve the greatest investment benefit. It is understood that Dhaman will be the provider of the new compulsory health insurance for expatriates working in the private sector and their dependant families.23
While a number of projects continue to progress slowly through its pipeline, the covid-19 pandemic appears to have affected the progress of a number of projects being procured by the Kuwait Authority for Partnership Projects (KAPP), as evidenced by the relatively low level of activity of KAPP in the past year. Notably, the Umm Al Hayman Waste Water Treatment PPP Project finally reached financial close in July 2020 after the project's PPP agreement was signed on 23 January 2020. As a result of the pandemic and the restrictions put in place by various governments to curb covid's spread, financial close was delayed for a couple of months. However, despite these restrictions, the MPW, KAPP, the sponsors and the lenders, in a show of commitment to the success of this project, worked together and exerted all efforts to overcome the challenges they faced to reach financial close as soon as possible. The Umm Al Hayman Waste Water Treatment Company KSCP (the project company), which had taken over early possession of the current plant under a separate operation and maintenance agreement, has now started construction.24 With respect to the Az Zour North IWPP Phase II and III and Al Khairan Phase I, which are being procured jointly, KAPP announced that it would be appointing and signing a contract for transaction advisory services with the consortium led by Ernst & Young for these two mega infrastructure projects. This should progress the procurement of these projects, which have been stalled a number of times.25 The KABD Municipal Solid Waste Project made no progress, as the issues raised by the State Audit Bureau concerning this project remain unresolved.
As there have been no amendments to the PPP Law in the past year, and the general framework of the procurement of PPPs under the PPP Law in Kuwait remains largely the same.
i Types of public-private partnership
PPP projects under the PPP Law are essentially procured on a build, operate and transfer (BOT) basis. That said, variants of PPP models may be used, including design–build–operate–transfer or design–finance–build–operate–transfer. Essentially, a concession26 is granted to a successful investor, as defined in the PPP Law, to finance, build, operate and transfer the project and its assets to the state upon the expiry of the agreed term. The PPP Law, however, also envisions the use of service and management contracts.27
The type and structure of PPPs is further provided for in the definition of the PPP model in the PPP Law, which provides as follows:
Public Private Partnership Model: a model whereby a private Investor invests in State-owned real estate property – if required – in one of the projects procured by the Authority [i.e., KAPP] in collaboration with one of the Public Entities after signing an agreement with the Investor to implement or build or develop or operate or rehabilitate a service or an infrastructure project, and to provide financing thereto and operate or manage and develop the project, for a specified term, after which the project shall be transferred to the State; the foregoing shall be carried out in one of two forms: 1) the implementation of the project in consideration for fees – for services or works performed – to be paid to the Investor by the beneficiaries or by the Public Entities who have entered into an agreement with the Investor, and whose objectives are in compliance with the project or by both the beneficiaries and the Public Entities; and 2) the purpose of the project is for the Investor to implement a project with strategic importance to the national economy and to exploit it for a specified term. In both cases, the Investor shall pay a fee for the use of any State-owned real property allocated for the project.
While Article 10 of the PPP Law provides the type of PPP model to be procured, the mechanisms for the procurement and implementation of the project are to be determined based on the approval of the Higher Committee for Public-Private Partnership Projects (Higher Committee) and in accordance with the provisions of the PPP Law; it does not elaborate on the different types of PPP models.
The principal features of the PPP models contemplated by the PPP Law are that:
- the project would be located on state-owned real estate property (if required);
- the project would be procured by KAPP in collaboration with a public entity;28
- a PPP agreement would be signed between the public entity and the private investor to implement, build, develop, operate or rehabilitate a service or an infrastructure project and to provide financing thereto and operate or manage and develop the project;
- the project would be for a specified term, after which the project and its assets should be transferred to the state;29 and
- the investor would receive consideration for provision of the services or works required under the PPP agreement.
Additional features of the PPP model structure under the PPP Law include the following:
- a public joint-stock project company that will undertake the PPP project will be incorporated by KAPP (for projects valued above 60 million dinars);
- pursuant to Article 13 of the PPP Law, the shares of such project company will be distributed as follows:
- no less than 6 per cent and no more than 24 per cent of the share capital shall be allocated to the public entities entitled to acquire such shares;
- no less than 26 per cent of the share capital shall be allocated to the successful investor for subscription in accordance with the PPP Law, taking into account the percentage of shares allocated to the initiative proposer under Article 20 of the PPP Law; and
- 50 per cent of the share capital shall be allocated for subscription through an initial public offering to living Kuwaitis listed in the register of the Public Authority for Civil Information on the date of the invitation to pay the price of the shares;
- the procurement of these projects will be governed by the PPP Law and its Executive Regulations rather than the Public Tenders Law that would otherwise regulate government projects;30 and
- any consortium that is awarded the project is required to establish one or more consortium companies in accordance with Kuwaiti law. Such company will hold the shares of the successful investor in the project company if a public joint-stock company is incorporated. If none is required, then such company will undertake the project.
Where the total cost31 of the project does not exceed 60 million dinars, the successful investor32 will have to establish a project company, but such company will not be required to be a public joint-stock company with its shares distributed as per Article 13 of the PPP Law. Similarly, where a project is considered to be of a special nature, and whose total cost does not exceed 250 million dinars, the successful investor will not have to establish a public joint-stock company.
In light of the specific language of Article 34 of the PPP Law, which exempts companies formed under the PPP Law from the nationality requirements provided for under the Commercial Code,33 it is clear that the foreign ownership restrictions provided for under the Commercial Code should not apply to a project company established for purposes of executing a PPP project under the PPP Law. This would mean that a project company and the consortium companies established under the PPP Law may have foreign shareholders owning more than 49 per cent of its share capital. Additionally, once the company is listed on the Kuwait Stock Exchange, its shares may be freely bought by non-Kuwaitis, which may result in the majority of the company being owned by non-Kuwaitis.
The PPP Law also contemplates projects being procured as a result of unsolicited proposals or initiatives34 submitted to the government. If such a proposal is accepted by the Higher Committee, the project would follow the regular PPP procurement procedures; however, the proposer of such initiative would have his, her or its costs reimbursed by the project company, and would receive a 5 per cent advantage over other bidders if he, she or it participates in the procurement process. Additionally, if the project is implemented through a public joint-stock company, a percentage not exceeding 10 per cent of the shares of the project company, deducted from the successful investor's percentage, will be allocated to the proposer.
ii The authorities
Articles 2 and 3 of the PPP Law provide for the establishment of the Higher Committee and determine its competences and authorities. The Higher Committee is comprised of:
- the Minister of Public Works, the Minister of Commerce and Industry, the Minister of Electricity and Water, and the Minister of Municipality;
- the Director General of the Public Authority for Environment;
- KAPP's Director General, as member and rapporteur;
- three experienced specialists appointed by the Council of Ministers from among the civil servants; and
- a representative of the relevant public entity sponsoring the PPP project, who shall be invited to meetings without having a voting right.
The competences of the Higher Committee now include:
- setting the general policies for projects and initiatives of strategic importance to the national economy;
- approving requests of public entities for the procurement of PPP projects;
- proposing PPP projects to public entities;
- identifying public entities that shall participate in the procurement of the projects;
- approving the requests for the allocation of land necessary for the project;
- approving studies and concepts of PPP projects;
- approving the successful investor based on KAPP's recommendation;
- approving the PPP agreements to be executed by the public entity; and
- deciding upon the request of the contracting public entity for contract termination (including for public interest).
Ministry of Finance
The decisions of the Higher Committee are only effective upon their approval by the Minister of Finance. Additionally, the Minister of Finance is required to present to the Council of Ministers an annual report on all the projects that have been executed or implemented in accordance with the provisions of the PPP Law and to forward a copy of this report to the National Assembly.35
Kuwait Authority of Public-Private Partnership Projects
Articles 4, 5 and 6 of the PPP Law provide for the establishment of KAPP and determine its competencies and the scope of its authority. KAPP's competencies include:
- assessment and completion of feasibility studies;
- development of the mechanism for the submission and evaluation of initiatives;
- development of contract templates;
- incorporation of the project companies;
- follow up on the implementation of PPP agreements; and
- overcoming obstacles on implementation and proposing project incentives.
These are the government entities that participate in PPP projects and are defined by the PPP Law as any government entity, ministry or department, or any public entity with a supplementary or independent budget that enters into an agreement with a private investor, to carry out a project in pursuance of the PPP model and in compliance with the provisions of the PPP Law, or that participates by investment in the project company by owning shares in the project company established for the implementation of the PPP project.
iii General requirements for PPP contracts
Article 35 of the PPP Law and Article 26 of the Executive Regulations to the PPP Law provide a list of the matters that should be incorporated into all project contracts. These include but are not limited to:
- the nature and scope of works and services that shall be executed by the project company and the terms and conditions of such execution;
- technical, environmental, financial and safety conditions of the project;
- the ownership of the project's funds and assets, the obligations of the parties in respect of handing over the project and the terms and conditions of transfer of ownership at the end of the project;
- allocation of responsibility for obtaining licences, permissions and approvals;
- each party's financial obligations and its relation to the financing of the project;
- the price of products or fees for the service provided;
- regulation of the right of public entities to amend terms of construction, maintenance, operation and other obligations of the project company;
- the events of termination of the agreement, including for public interest;
- the distribution of risks in the event of amendment of laws, accidental events and force majeure, and determination of compensation as the case may be;
- the contract term, and the term of the investment period, construction and preparation or completion of development works; and
- the dispute resolution mechanism.
Article 36 provides that a public entity shall be able to amend the terms and conditions of construction, equipment, development and other works and fees for services provided for in a contract. However, such amendments may only be made in compliance with the terms of the contract and with the approval of the Higher Committee.
Article 39 of the PPP Law provides that while the PPP agreements should in principle be drafted in Arabic, the same article states that it may also be drafted in a foreign language (e.g., English) subject to the approval of the Higher Committee.
The Fatwa and Legislation Department and the State Audit Bureau are two government departments that play a crucial role in the conclusion of PPP agreements. They must both approve the agreements before they are executed.
Bidding and award procedure
Article 9 of the PPP Law provides that procurement under the PPP Law will be exempted from the application of the Public Tenders Law. Instead, the PPP Law and its executive regulations shall regulate the procurement and award procedures for such PPP agreement.
Accordingly, the rules and procedures for the submission of proposals, the technical and financial evaluation, the selection of the competent authority to undertake such evaluation, the procedures for opening the envelopes, the documents that would be submitted within each envelope and the pre and post-qualification procedures are all derived from the PPP Law and its Executive Regulations.
i Expressions of interest
The expression of interest (EOI) is the first step of the procurement process by which KAPP will gauge the interest of investors in a project and determine whether to proceed. The EOI should be published in the Official Gazette, local and international media (as considered necessary) and on KAPP's website. The announcement should include a summary of the project and its objectives, the proposed location of the project, if any, the rules for submitting a response to the EOI and any other information or conditions related to the project.
The EOI is then followed by the qualifications stage. Once approved by the Higher Committee, KAPP in coordination with the relevant public entity should publish the invitation for qualification (RFQ) for the project. The announcement shall be made in the Official Gazette, at least two daily Kuwaiti newspapers in Arabic and English, and other local or international media (as required), and by publication on KAPP's website. Every investor interested in bidding for a project is required to prove his or her capability (qualifications) to perform the project and to perform his or her obligations if the project is awarded to him or her.
Companies may bid individually or as a consortium and will be evaluated by the Competition Committee36 based on the criteria developed by KAPP and the procuring public entity. The results of the evaluation have to be approved by KAPP and the Higher Committee, following which they shall be announced.37
ii Requests for proposals and unsolicited proposals
The concerned public entity in cooperation with KAPP will prepare the project offering documents (RFP) in compliance with the PPP Law and present the same to the Higher Committee for approval. The public entity and KAPP may seek the assistance of local and international consultants to review and prepare the RFP. Pursuant to Article 22 of the Executive Regulations of the PPP Law, the RFP should contain the following:
- instructions to the bidder;
- reference conditions including the technical and financial conditions and specifications of the project and the basis of awarding the project;
- a confidentiality agreement;
- the contract form and language, including the draft partnership contract and the lease contracts of the plot, if any;
- the letter agreement if the project is awarded to a consortium and the substitution contract for the replacement of the investor in the event of the latter's failure to perform its obligations; and
- any other conditions or documents in agreement with the nature of the project.
Articles 23 and 24 of the Executive Regulations further elaborate on the contents of the RFP.
The announcement of the availability of the RFP (which can be purchased by the qualified bidders) shall be made in the Official Gazette, at least two daily Kuwaiti newspapers in Arabic and English, and other local or international media (as required), and by publication on KAPP's website.
The instructions to the bidders will, among other things, include the instructions for submission of the response to the RFP. This will include the deadline for submission and the guidelines on the preparation of the same. The response will typically include two envelopes; one for the technical proposal and another one for the financial proposal.
The Competition Committee shall evaluate the technical proposal on the basis of the criteria provided for in the RFP prior to considering the financial proposal. KAPP shall notify the investors whose technical proposals are accepted and those excluded. The Competition Committee shall then hold a public meeting to open the financial envelopes of the qualified investors. Such investors shall be invited to the envelope opening session. A representative of the relevant public body shall also be invited to attend such session.
Private individuals and entities are permitted to submit initiatives to KAPP for consideration. Initiatives are defined as:
[A]n innovative and creative concept of a PPP Project, unprecedented in the State of Kuwait, approved by the Higher Committee, based on a comprehensive feasibility study and submitted by the concept proposer to the Authority, providing an economic return or social benefits in line with the State's strategy and development plan.
Accordingly, the initiative must be submitted with respect to an innovative or unprecedented concept and with a comprehensive feasibility study. If the initiative is approved, the entity that submitted the initiative would be entitled to the reimbursement of the cost of the feasibility study and preferential treatment should it participate in the tender, as further discussed above.
iii Evaluation and grant
The Competition Committee shall evaluate the financial proposal on the basis of the criteria provided in the RFP, and shall prepare an evaluation report of both the technical and financial proposals. KAPP shall notify the preferred bidder of their status and the concerned public body of the name of the preferred bidder. KAPP shall also notify the other investors of their ranking and will release their bid bonds, except for the preferred bidder's and the second-ranked bidder's bid bonds.
KAPP shall then invite the preferred bidder to negotiate the details, reservations or explanations contained in the submitted bid. In all events, such negotiations should not involve any contractual conditions considered in the RFP as non-negotiable conditions or that constitute a material deviation according to the project offering documents. There should also be no amendment to the technical and financial conditions based on which the bid is provided.
If negotiations with the preferred bidder are unsuccessful, KAPP and the public entity may initiate negotiations with the second-ranked bidder. If an agreement is reached with the preferred bidder (or the second-ranked bidder), and upon approval of the Higher Committee of the recommendation to select such bidder as the winning investor, the bidder shall be invited to sign the letter of agreement38 and then the project contract with the relevant public body and KAPP.
Article 27 of the PPP Law provides that the Executive Regulations will, among other things, provide the detailed formulae based on which the investor will collect fees for services rendered.
Articles 27 and 28 of the Executive Regulations envisage in this regard that either the project company would collect fees from the public for the services it is rendering or the public entity would pay to such project company for the services it renders. In this regard, Article 27 provides that the PPP agreement should include the rules on the basis of which the project company may collect fees for the services provided or the works carried out, through both or either of the following methods:
- through the public body against:
- providing a service in compliance with the agreed performance standards;
- the use of service or infrastructure provided by the partnership project;
- the minimum expected demand on the service or infrastructure provided by the partnership project;
- completion of specific milestones in respect of the performance, operation or provision of the infrastructure, provided that they are consistent with the applicable time schedule to execute the project;
- achieving such internal return rate as determined in the project offering documents; or
- through the users of the service or infrastructure, other than the public bodies, in accordance with the mechanism of calculating the consideration set forth under the partnership contract.
Article 28 of the PPP Law goes on to provide that the PPP agreement should determine the method of calculating the consideration to be charged by the project company for the service or infrastructure according to the nature and requirements of the partnership project. Upon determining such consideration, the following rules and principles should be taken into account:
- the prices of the services and works performed through the partnership project should be appropriate in consideration of the level of their quality;
- the consumers' interests and the prices of similar services and works (where applicable);
- achievement of an appropriate financial return on the investment made;
- the inflation rates; and
- any support provided by the state to the project.
Similarly, the state may collect certain fees from the project company for use of the assets provided by the public body and the land allocated for the project.
ii State guarantees
There are no state guarantees per se offered to the investors or to the project company to guarantee payment by the state to the investors or project company other than the contractual obligations and undertakings that the public entity entering into the PPP agreements (on behalf of the government) agrees to and is therefore bound by.
Additionally, while public and private assets of the state may not be subject to attachment, there are no restrictions under Kuwaiti law that protects government bodies and entities from being sued before the courts. Accordingly, the public entity's counterparty to a PPP agreement may be sued for its breach of a PPP agreement. However, third parties, if successful, may not attach the assets of the state of Kuwait to enforce a judgment issued in their favour.
That said, the critical nature of the public services offered under the PPP models, investment in a project company by state entities, the shares held by Kuwaiti citizens and the remedies offered for non-payment under a PPP agreement should offer some comfort to investors of the government's commitment to pay for services rendered.
Also at issue is the fact that PPP agreements are considered to be administrative contracts. Accordingly, such PPP agreements would not be considered purely commercial agreements but rather administrative agreements. The question that would then arise is what would be the implications of such characterisation under Kuwaiti laws. In this regard, we note that while Article 169 of the Kuwait Constitution provides for administrative disputes to be settled by special courts (i.e., administrative courts) and Law No. 20 of 1981 establishes the administrative court circuit in the court of first instance39 as required, the Kuwaiti legal system, however, does not contain a specific administrative law; nor does it have a permanent administrative court. As such, it will be difficult to draw on precedents to understand the impact of defining a PPP agreement as an administrative agreement.
The absence of local precedents opens the door to arguments based on jurisprudence and various theories of administrative law largely developed in other civil law jurisdictions and all largely in favour of the government.40 An example of such unusual prerogatives is the government's right to terminate an agreement at any time for public interest, and in certain circumstances probably without compensation. In our view, such a risk should be remote under the PPP Law, which provides for the payment of a fair compensation in the event of termination of the PPP agreement for public interest.41 Therefore, even though PPP agreements are considered to be administrative contracts, they should be governed by the PPP Law – a special law promulgated to regulate PPP agreements.
iii Distribution of risk
Risk allocation in PPPs is undertaken in Kuwait as a process of allocating the responsibility of managing a particular risk to a particular participant (best placed to manage, control and mitigate such risk). In general, an attempt is made to have project-related risks allocated to the investor and non-project related risks to the state, while certain other categories of risk may be shared (e.g., force majeure). A few examples of risks and their allocation and mitigation follow below.
Design risk is the possibility that the investor's design may not achieve the required output specifications.
This can be mitigated through clear output specification, consultation with and review by the public entity.
This risk is typically allocated to the investor.
The availability risk is the possibility that the services to be provided by the investor do not meet the output specification of the public entity.
This may be mitigated by having clear output specifications, performance monitoring and penalty deductions for non-performance.
This risk is typically allocated to the investor.
Force majeure risk
The force majeure risk is the possibility of the occurrence of certain unexpected events that are beyond the control of either party.
These can be mitigated through the careful definition of force majeure to exclude risks that can be insured against and that can be dealt with more adequately by other mechanisms such as relief events.
Such risks are typically shared.
The environment risk pertains to the possibility of liability for losses caused by damage to the environment.
This can be mitigated by the bidder undertaking a thorough due diligence of the project site and the public entity procuring independent surveys of the project site.
If the damage is caused by the construction or operation activities of the project company during the project term, this will be the investor's risk. If the damage is not attributable to the activities of the investor, this risk lies with the public entity.
iv Adjustment and revision
As a general rule, no modification or amendment to a PPP agreement once finalised and signed will be valid unless it is in writing and has been signed by both parties.
That said, Article 36 of the PPP Law provides that the public entity may amend the terms of the PPP agreement, and the project company's rights and obligations, including the consideration paid for the services. It may do so when public interest so requires, but within the limits agreed upon in the agreement, and after the approval of the Higher Committee. This is, however, without prejudice to the right of the project company to compensation for any adverse effect of such amendment.
v Ownership of underlying assets
With respect to the ownership of assets under the PPP regime, Article 18 of the PPP Law provides in part that the PPP agreement shall determine the assets that are to be owned by the investor among the assets of the PPP project, and shall also determine any state-owned assets allocated to the project for the term of the PPP agreement. There are, therefore, potentially three categories of assets: those belonging to the project company; those belonging to the investor; and those belonging to the state. This is relevant, particularly in respect of the security package that would be available to be granted by the investor to the lenders, as further discussed below.
Upon expiry of the PPP agreement, the ownership of the project and facilities shall be transferred to the state along with any and all related assets at no cost, excluding the assets owned by the investor as set out in the PPP agreement. Such assets belonging to the investor may only be transferred to the state if paid for by the state. The PPP agreement is also required to regulate the transfer of the project to the state.
vi Early termination
Pursuant to Article 19 of the PPP Law, the Higher Committee may approve the (early) termination of a PPP agreement at the request of KAPP or the public entity for reasons based on public interest, provided that the Higher Committee justifies its decision and demonstrates the benefits of such termination and provides an estimate of the fair compensation to be paid to the investor in accordance with the PPP agreement.
Kuwait has, to date, only closed on one PPP project under the new PPP Law regime and there are, therefore, no examples yet of early termination of PPP agreements.
Termination may be based on the default of either the project company or the public entity, or as a result of a prolonged force majeure event. The consequences of termination based on such defaults are provided for in the various PPP agreements. These may include the right of the public entity to purchase the project for the price determined in accordance with the PPP agreement (a different price is typically provided for termination as a result of the project company's default, the public entity's default or a force majeure event).
If the termination is because of the project company's default, the public entity may call on the performance guarantees provided by the project company.
The project is then handed over to the public entity (including all buildings and fixtures, all raw materials, consumables and spare parts, all governmental authorisations, all warranties of equipment, and all contracts and agreements, etc., needed to continue the project), which would take over construction or operation of the project pending the identification of an alternative contractor or operator.
Funding for PPP projects is raised in a combination of ways, including equity and loans taken out by the investors and the project company. Article 23 of the PPP Law lists the assets that can and those cannot be used as security by the project company and investor, and these are provided for as follows:
- the investor and the project company may not sell or mortgage the (state) land on which the project is located;
- the investor and the project company may mortgage and create a security interest on any assets owned by the investor and the project company from among the assets comprising the project;
- the investor and the project company may create a security interest in favour of lenders over any amounts payable to them (i.e., proceeds) for services they provide under the PPP agreements or income earned from the project or any other aspect;
- the investor may mortgage its shares in the project company or the consortium companies to finance the project (only after the approval of the Higher Committee); and
- with the approval of the Higher Committee, the finance documents may contain terms permitting the creditors or lenders, in the case of a breach of the financing terms by the investor, to own the mortgaged shares or request their sale.
The Law further provides that the amount borrowed (i.e., the debt taken on) should not be more than that stipulated in the project's documents.
Cross-border finance has been available for PPPs in Kuwait and investors have sourced funding from both international and local banks and financial institutions.
The exchange risk (i.e., the possibility that exchange fluctuations will affect the envisaged costs of imported inputs required for the construction or operation of the projects) is considered an investors' risk and is dealt with primarily by the investor having hedging instruments put in place.
Given the impact of the covid-19 pandemic on PPP projects, not many grievances were submitted to the grievance committee established under the PPP Law. The general view continues to be that the grievance committee is competent in its decision-making and has endeavoured to follow due process in reaching its decisions.
Despite reduced oil prices, the covid-19 pandemic and the resulting disruptions, Kuwait has continued to press on with a substantial number of its government-procured infrastructure projects, all involving the private sector to some degree.
The government now has two major PPP projects that have been successfully closed under its PPP legal regime (i.e., the Az Zour North IWPP Phase I42 and the Umm Al Hayman Waste Water Project). This success should give confidence to the government to procure more projects as PPPs.
While the Um Al Hayman Waste Water Project achieved financial close in July 2020 and a contract is soon to be signed for the advisory role for Az Zour North IWPP Phase II and III and Al Khairan Phase I, the KABD Municipal Solid Waste Project made no progress as its issues remain unresolved. However, given the success with the Umm Al Hayman Waste Water Project, it is hoped that the lessons learned will enable progress with the stalled projects.
Despite the Ministry of Finance's announcement of its intention to amend the PPP Law, no amendments were made to this Law. It is understood that the disruption caused by the pandemic interrupted this process, and it is hoped that the Ministry will continue with its pursuit of the proposed amendments in 2021.
The PAHW continues to make progress with real estate development investment opportunities structured as PPPs and, having successfully signed a number of PPP agreements, it is envisioned that it will continue to do so. The customised legal structure and relatively low value of these projects appear to have aided in the relatively swift procurement of the same.
While Kuwait appears to be committed to achieving the objectives of the New Kuwait programme, it remains to be seen how the newly appointed government will go about this.
1 Ibrahim Sattout and Akusa Batwala are partners at ASAR – Al Ruwayeh & Partners.
4 Published in the Official Gazette (Kuwait Al Youm) No. 1197 of 17 August 2014.
5 Provided for in Decree No. 78 of 2015, published in Kuwait Al Youm No. 1229 of 29 March 2015.
6 Before enacting the PPP Law, the government had enacted Law No. 39 of 2010 regarding the Establishment of Kuwaiti Joint Stock Companies to Undertake the Construction and Implementation of Electrical Power and Water Desalination Plants (IWPP Law). The IWPP law was subsequently amended by Law No. 28 of 2012 and Law No. 19 of 2015. While the IWPP Law specifically regulates power and water desalination PPP projects, the provisions of the PPP Law continue to apply to IWPP projects to the extent a particular matter is not specifically addressed by the IWPP Law.
10 https://www.hydrocarbons-technology.com/projects/knpcs-clean-fuels-project/. The Clean Fuels Project involves the upgrade and integration of the Mina Abdulla and Mina Al Ahmadi refineries, and has increased the combined capacity of these refineries from 736,000 to 800,000 barrels per day and lowered the sulphur content of petroleum products to 5 per cent.
11 https://www.hydrocarbons-technology.com/projects/al-zour-refinery-project/. This project, once completed, is meant to be one of the biggest refineries in the world and will supply 225,000 barrels a day of low-sulphur fuel oil to local power plants and produce jet fuel, kerosene and naphtha feedstock for petrochemical plants.
13 https://www.mpw-kwtairport-t2.com/gallery/?type=all&start=9. This project worth 1.3 billion dinars was procured by the MPW for the design and construction of a new terminal building for the Kuwait international airport.
14 https://www.arabtimesonline.com/news/kpa-denies-suspension-of-mubarak-al-kabeer-port-project/. This controversial US$6.5 billion project in Boubiyan Island is being procured by Kuwait Ports Authority and the MPW. The port was a key component of the first phase of the US$86 billion Silk City (Madinat Al Hareer) project planned in northern Kuwait near the Iraq border, which includes 11 other maritime transport, logistics and tourism projects that were expected to be central to the country's economic diversification plans.
15 Kuwait 2020 Health Infrastructure Report (https://www.kuwaitbuildingshow.com/news6). This is a 240 million dinar project led by a joint venture between SSH and Studio Altieri that will feature 27 operating rooms and 780 beds.
16 Kuwait 2020 Health Infrastructure Report (https://www.kuwaitbuildingshow.com/news6). This project, valued at 165 million dinars, is a joint venture between the SSH and HKS architecture firms to provide 792 beds.
17 https://www.zawya.com/mena/en/project/250917121621/al-mutlaa-water-treatment-plant-project/. The project shall comprise a wastewater treatment plant with a treatment capacity of 400,000 cubic metres/day with future expansion capacity of 600,000 cubic metres/day.
18 https://yymgroup.com/project/south-al-mutlaa-housing/. With 28,363 housing units set to house 400,000 residents, this project, which is worth 288 million dinars, is being implemented by Salini Costruttori Engineering, an Italian company, and Turkey's Kolin Group to build the city's infrastructure.
19 https://www.pahw.gov.kw/Project_en/Jaber-Al-Ahmad_en. This development was divided into three investment opportunities (J1, J2 and J3), some of which are being procured as PPPs. The PAHW signed a PPP agreement in July 2020 with a local consortium (comprising Al Argan International Real Estate Company and Combined International Real Estate Company) for investment opportunity J2, worth approximately 50 million dinars. It also signed an agreement with a consortium comprised of National Industries Group, Privatization Holding Company and Mabanee Company for the J3 investment opportunity valued at approximately 156.3 million dinars.
20 https://www.pahw.gov.kw/Project_en/South-Abduallah-Al-Mubarak_enAn ongoing project involving the construction of 3,600 housing units, which will include 60 public buildings, shopping malls, youth clubs, consumer shops and services, as well as 10 schools, 12 mosques and offices for government agencies.
21 https://www.pahw.gov.kw/Project_en/South-Saad-Al-Abduallah_en. The PHAW in conjunction with the Korean Land and Housing Corporation is developing this eco-friendly, smart city over 64.4 square kilometres, with more than 30,000 housing units to accommodate 400,000 people. It is slated to be the first city in the Middle East to be both eco-friendly and smart.
26 Concessions may also take the form of long-term contractual arrangements, whereby the private party completely takes over all aspects of the management and operations of an existing facility from a public entity. This may include building, maintenance, specified rehabilitation and capital investment in facility upgrades and enhancements, as well as raising capital for such upgrades and enhancements. The private party pays agreed concession fees to the public entity for the rights attending the concession. The public entity may also require a share of profits from its partner.
27 Article 30 of the PPP Law concerns procurement of management services for projects that have been transferred to the state at the end of PPP agreements.
28 A public entity is defined in Article 1 of the PPP Law to include any government, ministry or department, or any public entity with a supplementary or an independent budget, that enters into an agreement with a private investor to carry out a project in pursuance of the PPP model and in compliance with the provisions of the PPP Law, or that participates in an investment through a portion of the shares of the public joint-stock company established for the implementation of the PPP project.
29 Pursuant to Article 18 of the PPP Law, the term of investment in projects procured in accordance with the PPP Law shall not exceed 50 years. However, the term of investment for projects procured under the IWPP Law is 40 years pursuant to Article 1 of the IWPP Law.
30 Article 9 of the PPP Law expressly exempts projects procured under the PPP Law from the application of the Public Tenders Law.
31 Total cost is defined in Article 1 of the PPP Law as the total capital expenditure for implementing a project or preparing it for operation to determine the method according to which the PPP project shall be procured.
32 The successful investor is defined by the PPP Law as the preferred investor with whom the negotiations successfully lead to a final agreement for the implementation of a PPP project.
33 Law No. 68 of 1980 as amended.
34 Initiatives are defined as an innovative and creative concept of a PPP project, unprecedented in the state of Kuwait, approved by the Higher Committee, based on a comprehensive feasibility study and submitted by the concept proposer to KAPP, providing an economic return or social benefits in line with the state's strategy and development plan.
35 Article 33 of the PPP Law.
36 Defined in Article 1 of the Executive Regulations of the PPP Law as the joint team formed by a KAPP resolution, subject to the approval of the Higher Committee, for each project, for the review, study and preparation of the project documents and papers, and the evaluation of the technical and financial bids leading to the awarding of a project. In addition to KAPP employees, the team shall include representatives from the public entities concerned with the project.
37 It is, however, possible for the Higher Committee to combine the RFQ stage with the request for proposal (RFP) stage.
38 One of the contract documents signed by the public entity, KAPP and the winning investor or bidder, which is accompanied by the final contract documents as agreed thereon, including conditions precedent for specific and preparatory obligations for the validity and enforceability of a PPP contract.
39 The administrative courts will be composed of three judges, which shall include one or more chambers.
40 For example, it is well established before administrative courts in civil law countries that defining an agreement as an administrative contract would entail that the government enjoys certain exorbitant or unusual prerogatives or rights derogating from the generally applicable rules of law (whether under the civil code or the commercial code).
41 Article 19 of the PPP Law.