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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Kuwait Launches Ambitious Oil Privatization Plan

Kuwait is going ahead with its proposed privatization plan, which includes offering a stake in its oil sector. Though the dates for the public offering haven’t been finalized yet, the gulf nation aims to build a strong public-private partnership in the future.

“This move may be like the Saudi offering of a percentage of Aramco shares. Oil prices have dropped and indicators show the slump may last five more years. These forecasts are by most financial bodies including the World Bank and the International Monetary Fund, who expect oil prices will not exceed $50 a barrel, so we have adopted our reforms based on these figures,” said Khalifa Hamada, Undersecretary at Ministry of Finance, reports the Kuwait Times.

The sale of stakes in its state-owned companies is part of a broader economic reform plan by Kuwait to shrink its budget deficit, which is forecast to be KD11.5bn ($38.6bn) for FY 2016/17.

Kuwait’s major portion of export revenue comes from oil, as shown in the chart below.

(Click to enlarge)

Source: Forbes

Though the Kuwaiti economy depends on oil, its breakeven price of $50 per barrel is one of the lowest among the gulf nations, according to the IMF estimates.

However, in March of this year, the cabinet accepted a six-point reform program for the nation’s economy.

“This plan is a government obligation for financial and economic reforms in accordance with the goals set for the nation’s development plan for fiscal 2016-2017 which the lawmakers approved on June 17 last year,” said Anas Al Saleh, Kuwait’s Deputy Premier and Acting Oil Minister back in April of this year, reports Gulf News Kuwait. Related: Citibank: We’re Nearing A Bull Market For Oil

As part of the reform process, the government plans to levy a 10 percent tax on corporate profits. Though the Kuwaiti media reports that the government proposes to privatize 60 percent of the public sector companies, it is not going to be an easy task considering the poor response to the earlier issue of Kuwait Airways Corporation (KAC).

The first attempt to privatize KAC was in 2008, however, due to the poor response it was followed by two more attempts in 2012 and 2014, which were unsuccessful. KAC’s weak balance sheet and numerous bureaucratic hurdles deterred the two interested parties, Jazeera Airways, and the logistics company, Agility, from acquiring a stake.

This proves that only the well-run companies with a possibility of returning a profit will attract the private sector’s participation. The restructuring of KAC is an important message to the investors that the government is serious about its privatization program. Related: Shell’s New Sensors Could Reduce Exploration Costs Dramatically

With an increased private partnership, the state’s resources can be professionally managed and return higher profits to the investors. Warba Bank is a good example of successful privatization. The Kuwaiti government divested the bank in 2009. The citizens lapped up the 24 percent on offer and the remaining 76 percent was given to the Kuwait Investment Authority.

The government has kept control of the oil and gas production, education, and health services to itself.

The failure of oil to cross the first hurdle of $50 per barrel increases the urgency to privatize the assets so that the economy is in a better condition to weather another downturn in oil prices.

By Rakesh Upadhyay for Oilprice.com

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