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Doing business in Kuwait: independent water and power projects

Contributed by Al Markaz Law Firm

This article discusses the legal aspects of undertaking an independent water and power project in Kuwait. The main focus of this article shall be on the legal framework of doing business in Kuwait and managing certain aspects of legal risk.


With the rising demand for power and water, surviving in today’s global market is a challenge due to market volatility and the need to finance projects in these periods of uncertainty. With the fluctuations in oil and commodities prices, and the rising capital costs in the project, energy and infrastructure sectors, the risks associated with large-scale, capital-intensive projects have also increased, along with investors’ and contractors’ reluctance to bear significant risks and take on potential liabilities. In major and complex construction and infrastructure projects, risk identification and management has become an integral aspect of doing deals as a means of mitigating severe and unwanted consequences and disputes that may result. Broadly speaking, such risks may be categorised as technical and construction, operation, environmental, and of course financial and legal risks.

Legal risk is arguably ranked as one of the top causes for investors and contractors’ reluctance to participate in projects. Consequently, it can be said that having a weak legal and legislative framework is a major deterrence in sectoral and economic development. Furthermore, the complexity of projects and their arrangements are caused by aspects such as technical detail, financing methods, taxation, and complex documentations and sub-agreements. Not only are legal risks inherent in governing laws and regulations, they predominately stem from poorly-structured transactions. Balancing risks and the parties’ interests, which vary along the different phases of the project, may prove difficult if not addressed and dealt with at the primary stages. Therefore, it is evident that project contracts and documentation may in actual fact be the source of the issue and a key place to start when mitigating project and dispute risks, addressing and aligning the parties’ interests and managing their contractual relationship.

Changes to the Kuwaiti legal landscape

Fortunately, the legal landscape in Kuwait has witnessed fundamental changes over the last few years and has moved towards providing ample incentives to both local and foreign investors, contractors, and other stakeholders by departing from current practice and eliminating certain restrictions in order to attract foreign investment and resources.

With regard to major, overarching laws related to IWP projects, new laws introduced include the IWPP Law (Law no. 39 of 2010) and the new Company Law (Law no. 25 of 2012 and its amendments Law no. 97 of 2013), followed by the Foreign Direct Investment Law (Law no. 116 of 2013). Finally, the Public-Private Partnership Law (Law no. 116 of 2014) has been enacted as a reform of the previous laws on BOTs schemes and state property laws.

One of the key aspects of international project management and practice introduced under Kuwaiti law recently is the reform of project and capital structures. In order to realise the parties’ objectives and maximize their synergistic relationship, it is important that the transaction is structured by adopting a contractual arrangement that best suits the nature of the project. The public sector enters into a long-term contractual agreement under public-private partnership schemes for the construction and/or management of public sector infrastructure on their behalf. The importance of this relationship is based on the need to combine capital, and human and physical resources, and its success is measured by the social and economic benefits realised from the project.

Capital structures

Capital structures are governed by Articles 1 of the IWPP Law and Article 13 of the PPP Law. In essence, a partnership project with a total cost exceeding KWD60m would be procured through competition between investors willing to invest in the project. In such cases, the Kuwait Authority for Partnerships Projects, upon finalising the procurement of the project and selecting the successful investor, would establish a public joint-stock company, whereby the shareholding would be distributed as follows:

  1. A percentage between 6% and 24% of the shares would be allocated to the public entities that are entitled to acquire such shares.
  2. At least 26% of the shares may be subscribed for by the successful investor, in accordance with the law.
  3. 50% of the shares are offered to Kuwaitis listed in the register of the Public Authority for Civil Information through an initial public offering.

What is interesting about the capital structure provided under these articles is that, not only does it allow participants to minimise and diversify the risks they choose to bear, but also it allows both the private sector and Kuwaiti citizens to participate in the building of Kuwait’s infrastructure. This may also be a way to maximise resources and facilitate asset financing. Furthermore, in order to facilitate share allocation under this capital structure, Article 14 of the PPP Law allows the Authority to subscribe for the shares intended for public entities and Kuwaiti citizens, which may eliminate certain obstacles hindering the incorporation of the project company.

In addition, the law has also provided for the possibility of creating an alternative capital structure under Article 16 of the PPP Law. With certain development projects with a total cost of KWD250m, the Council of Ministers may decide to procure the project through competition as opposed to incorporating a public joint-stock company under Article 13 of the PPP Law. In such cases, the successful investor may incorporate the project company themselves. However, should the total cost of the project exceed this amount, the project would be reverted to the application of Article 13 whereby a Kuwaiti public joint-stock company would be established.

Similarly, under Article 12 of the PPP Law with projects less than KWD60m, the Kuwait Authority for Public Partnerships may collaborate with public entity the concerned to procure the project through competition, and thus the successful investor would be entitled to incorporate the project company themselves.

Whether the project company takes any of the aforementioned forms, or is incorporated under either Article 12, 13 or 16 of the PPP Law, the main focus of the law is on creating a legally and financially independent legal entity, with limited or no recourse to the project sponsors, which relieves the project sponsors from burdening their own balance sheet with the project’s costs and liabilities.


Financiers and investors, who are relying solely on cash flows as their primary source of debt servicing, would still be in the need to secure their funding. Article 23 of the PPP Law has reformed the practice in Kuwait in this aspect, and has now allowed the contracting investor or the project company to mortgage or grant security over any assets they own from among the assets comprising the project with the exception of the land on which the project is built, for the purpose of financing the implementation of the project. Furthermore, with the approval of the Higher Committee for PPP projects, the contracting investor may pledge their shares in the project company or in the consortium company, in favor of the lenders only, who are entitled to acquire the pledged shares or request their sale in the event of breach of the financing agreement.

Foreign Direct Investment Law

Another law worth mentioning that has reformed practice in Kuwait is the Foreign Direct Investment Law (Law no. 114 of 2014) which has been enacted to develop and streamline the investment environment, facilitate procedures and eliminate obstacles faced by the investors. Under Article 12 of the Foreign Direct Investment Law, an investor of any nationality may apply to carry out investment activities in Kuwait using one of the following models:

  1. A Kuwaiti company incorporated for the purpose of direct investment under Law no. 25 of 2012 (Company Law) that may be in any company structure provided under the law. In such cases, foreign shareholding in the company may be 100% of the capital, in accordance with the principles and rules set forth under the Company Law;
  2. A branch of a foreign company licensed to operate within the State of Kuwait for the purpose of direct investment; and
  3. Representative offices having the sole purpose of undertaking market studies and production possibilities, without engaging in a commercial activity or activity of commercial agents.

Companies incorporated under the Foreign Direct Investment Law may be entitled to certain incentives provided for under the law. This includes exemption from income tax or any other taxes for a period not exceeding ten years from the date of the actual commencement of operations of the licensed investment entity and exemptions from taxes, customs duties or any other fees that may be payable on imports required for the purposes of direct investment, including machinery, tools and equipment, means of transport and other technological devices, spare parts, merchandise, raw materials, and so on.


Based on what has been said, it is clear that adopting the most optimal capital structure contributes to the success of the project and naturally influences investors and contractors’ decision to undertake IWP projects in Kuwait, as it maximises the project’s efficiency and increases investors’ confidence in the projects’ credit risk. While capital structures are mostly important for project sponsors as it provides an overall framework for the transaction structure, it also plays a significant role in investors’ decisions, who would not only be seeking to maximise their return on investment but are also highly concerned with the success of the project and that their debt is repaid, or at least there is the possibility of an exit strategy, which allows them to sell or transfer their debt instruments or equity and reinvest somewhere else.

In light of what has been mentioned, we are optimistic that Kuwaiti law is moving in the right direction, towards creating a strong legal framework that enables projects to be brought to life and flourish. It is working towards creating a more creditor-friendly zone, in a manner that protects both creditors and lenders. With regard to structuring transactions, Kuwaiti law is developing so as to recognise international standards of practice, and international projects and project finance structures as providing a vast range of different solutions to problems that previously were difficult to resolve under older laws and regulations. Most importantly, it recognises that project sponsors are essentially co-operating for the sake of fulfilling greater objectives of economic, social or any other interests, that together lead to overall macroeconomic developments.

As stated in Article 3 of the Foreign Direct Investment Law, activities undertaken under this law are performed “in light of the public policy of the state, the approved economic development plans, the development of production sectors, the diversification of national revenue sources in the State of Kuwait, the creation of employment opportunities for the national workforce, and increasing its productivity and professional skills by implementing the latest technology in accordance with the best international standards adopted in this regard”.

However, it is unfortunate to say that reality and practice still does not quite match theory and the law. From the practical perspective, although some of laws mentioned have been enacted a while ago, certain aspects are not yet enforced. This is perhaps one of the key causes of legal risk in Kuwait, not to mention it is a major contributor to not realising the economic value of the law.

Nevertheless, that is not to say that legal risks associated with IWP projects are unavoidable. By utilising non-legislative tools, innovative legal solutions are used to hedge and mitigate project risk and give effect to the parties’ commercial and legal interests. We create business and legal models from scratch that are designed to protect participants and help them construct and implement socially and economically significant projects, with as little disruptions and disputes as possible. For example, we may be able to structure a project transaction under a lease-purchase structure, as opposed to traditional BOT schemes, for the purposes of spreading costs of the facility over the duration of the project for projects that require large initial investments, or to accommodate the objectives of Islamic financiers or otherwise. In effect, we utilise creativity for greater purposes and extract possibility out of what has previously been impossible.

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