Limitations in the privatization law

An analysis of all data collected and reviewed summarizes limitations in the law itself on four thematic fronts.

First, there are some critical contradictions between the privatization method

approved and individual provisions of law 37/10, regarding the state’s rights and the private sectors’ privileges. Document reviews of the privatization law, bylaws, NGO reports, along with the state’s constitution reveal discrepancies between provisions of law 37/10 and the constitution regarding the state’s ownership and asset control. The law itself is vague in elaborating which method of privatization has been approved. Even within the provision of Article 1 that states, “transferring partial or full ownership of the asset to the private sector,” it does not specify the type of ownership. Berg and Berg (1997) discuss how private ownership of public’s assets can exist in the forms of stock sharing, IPO, divestiture, spinning off, amongst other forms as per agreed partnerships and contracting. Hartley and Parker (1991:11) argue that, “privatization embraces denationalization or selling-off state-owned assets, deregulation (liberalization), competitive tendering, as well as the introduction of private ownership and market arrangements in the ex-socialist states.”

Furthermore, the privatization method stated in the law’s preamble is the transfer of ownership for a public enterprise, wholly or partly, in accordance with provisions of law 37/10. These provisions refer to the, “the processes of transferring public projects into joint stock companies, protecting the rights of national employees, controlling prices, transactions, and revenues arising from the privatization process” (explanatory

memorandum, law 37/10). However, these provisions grant the government decision-making privileges that are not common in similar privatization approaches as defined in the literature and through history. For example, Article 2 in Chapter 1 of Law 37/10 states, “companies established within provisions of this law, are obligated to abide by the

prices and the service systems as may be decided and approved by the regulatory authorities after a periodical review thereof, and prices shall not be increased unless by approval of these authorities; these companies shall periodically provide the competent regulatory authorities will all information enabling them to assume their regulatory role.”

As seen, the government intends to transfer ownership to the respective private sector, however it still would be authorized to exercise the privileges it previously had as a full owner. Essentially, if the government dictates the final decisions and prices of

goods/services, then what is the incentive for the private sector? Entrepreneurs and private sector representatives of the research sample expressed confusion on this point.

It seems that major shortfalls in the law can be summarized into the following: (1) the method of privatization approved contradicts the remaining provisions encompassed in the law thereafter, and (2) the privileges granted to the government reflect the

divestiture method more than the ‘sale of asset’ or ‘transfer of ownership’ privatization methods.

This concept of ownership and control is further acknowledged by Bishop, Kay, and Mayer (1995), as they explain how changes in ownership are directly associated with changes in control exerted by the state and a transfer of control to private investors. The aspects of control and ownership have overlapped extensively in law 37/10. Both aspects are separate, although not mutually exclusive, making it important to identify points of convergence and divergence. One possible approach is to redefine this method to,

“ownership partly and within certain restrictions,” given the government’s constitutional rights of participating in final decision processes that concern public assets. These restrictions, therefore, must be clearly stated in the law’s individual provisions. Another

approach is to revisit the privatization method approved and have it as a ‘divestiture’

method instead. If this privatization method were to be enforced in Kuwait, the

government would still maintain ownership of the asset and all its privileges as stated in law 37/10; however, management would be transferred to the private sector. The method of transferring ownership is theoretically defined as the transfer of a majority ownership of state-owned enterprises to the private sector by the sale of ongoing concerns or assets following liquidation (Kikeri, Nellis, and Shirley, 1994). Instead, the divestiture

privatization method grants the State rights over national wealth and certain public services, as per the constitution. These limitations in the law, paired with the undefined responsibilities/privileges of each private and public entities entering the ‘fair’ agreement is also a reason for the policy’s paralysis.

Second, there are further limitations in the law that could increase the

government’s administrative and financial burden if not clarified. Some of the provisions in law 37/10 define privileges and actions that require actors in the privatization process to, “return to the privatization law for clarification,” or, “act within limits of the

privatization law” (Article 2.1). However, given that the current law is inconclusive and the SCP has yet to release standards and procedures (S&Ps) that make law 37/10 legally binding at the state level, this law cannot be implemented on its own. Therefore, even after choosing between the divestiture or asset sale approaches discussed, supplemental S&Ps are still required. Additionally, some of the general provisions that refer to the manner in which privatization would take place, state for example, “within the applicable laws” (Article 2.2), and, “in accordance to the law” (Article 3); however, there is no clear indication of which law(s) are referenced. Clarification is needed to guard against the

likelihood of misinterpretations during implementation stages. In the case of privatization initiatives during Clinton’s administration in the United States, a detailed Conflict of Interests Act during the sales of government-owned uranium enrichment and helium plants would have helped protect the rights of public and private partners (Savas, 2000).

Savas explains how the failure of public officials in clearly specifying the complete dimensions of a service purchased from or by contractors, “inevitably leads to

misunderstandings and disputes” (13). This concern of monopolists dictating the price levels was reiterated by a majority of the research participants. Perhaps enacting a Conflict of Interests Act can protect public funds from manipulation and oversee that the public interest is being served.

Moreover, Article 12 calls for the establishment of, “a Kuwaiti joint stock company to which tangible and intangible assets, and liabilities of the public enterprise scheduled for privatization, shall be transferred.” When asked who will establish this joint stock company, reference was made to Article 14 of the Law that vaguely states,

“The governmental body in charge of setting up the company shall determine its capital and carry out the distribution of all shares (…).” Therefore, a government sector is in charge of establishment; however, no indication is made of which sector this will be and how duties shall be divided. Also, in the percentage distributions of the joint stock company, it remains unclear the basis on which the exact numerations shall be set.

Furthermore, the maximum allowed time frame between the establishment of the joint stock company and the transfer of this company to the selected private sector, remains undefined. This is especially important given the evolving political and economic climate in Kuwait with new parliamentary elections and cabinet member

appointees every four years, per the constitution. How will these changes in public posts impact both continuing and new contracts of privatization? These unclear provisions could raise the likelihood for certain ‘factors and elements’ to exploit or politically manipulate the policy’s implementation process.

Third, the law is deficient as it neglects small and mid-sized businesses in the Kuwaiti marketplace by making no reference to them. Focus group participants in the diwaniya and istiqbal gatherings stated that the private sector in Kuwait is saturated with

monopolistic individuals that have abundant capital and political privileges. Therefore, if the goal of privatization is to strengthen the private sectors’ role and enhance cooperation between private and public sectors of the country, then how likely can this goal be

achieved if the law does not consider smaller businesses? When asked the research question of how to ensure successful implementation of the law in order to achieve the desirable outcomes, a majority of the respondents from these two groups agreed that, “it would be beneficial for some of the law’s provisions to discuss the level of support our comparably smaller enterprises can expect to achieve; will selection of our proposals be prioritized over the monopolizing companies.” It is anticipated that removal of this red tape will help smaller businesses participate. Assaad and Roudi-Fahimi (2007) note that the population in Arab countries over the recent years has become much younger and educated. The increasing levels of unemployment have sparked their entrepreneurial spirit to start small and mid-size businesses. In this context, selection criteria are needed to identify the basis upon which private sectors shall be chosen. It must be included as part of law 37/10 to ensure a uniform process of selection, considering the turnover rate of public posts in Kuwait (Tetreault, 2001).

Some suggested criteria for selecting the local private sectors could include the company’s capital, track record, strategic vision, financial forecasts, and plan of action.

Having uniform selection criteria to supplement the law could respond to some of the research participants’ claims of patronage systems dominating the public sector in the country (Lynn, 2001). This group of respondents justified their choice of private sector employment as an attempt of being part of a merit system of government (Davis, 2012).

Data responses gathered indicate that economic growth generated from privatization initiatives should be based on productivity, social equity, and merit. This would not only incentivize private sectors to participate locally, but also could help the national economy transition from rentier economies to merit-based economies. Achy (2012) explains how such economies drive competition and economic performance through productive investment.

Fourth, the law minimally discusses one of the most critical components – the entities that will be conducting the valuations for assets to be privatized. The law mentions that two international consultants will decide which sectors the respective public enterprise will cooperate with (Article 11). However, prior to embarking on the decision process, how will these consultants be chosen in the first place? Interviewee respondents shared their concerns about the, “two specialized independent consulting organizations (that) shall be entrusted with the valuation of tangible and intangible assets, and liabilities of every public enterprise for privatization” (Article 11). Data findings reveal that it is insufficient to merely mention that “at least one of which (has) international experience” and that the “process (of selection) takes publicity and competition into account” (Article 11). As such, criteria that specify the process for

selecting consultants could be based on their experience in asset valuations within the GCC region, familiarity with the social, economic, and political settings of the region, track record of international performance, affiliations and global recognitions, funding sources, and the organizations’ shareholders. The last criterion is a verification measure to rule out any potential biases in consultants’ inputs to the SCP. It can be concluded from the documents reviewed that the state’s role is now expanded post-enactment of the privatization law. The state is responsible for maintaining a strong legislative and

administrative environment, ensuring justice, overseeing healthy competition, providing support for small-sized strategic projects, restricting the rise of monopolies, protecting low income individuals and families, and enhancing the employment opportunities for nationals.