Public sector mergers vital to Kuwait’s Vision 2040
The Times Kuwait Report
The government, headed by His Highness the Prime Minister Sheikh Ahmad Abdullah Al-Ahmad Al-Sabah, stressed its commitment to a strategic roadmap that aims to revitalize public sector institutions and enhance productivity of the state’s workforce. To further this strategy, the Cabinet at its weekly meeting in early August, instructed the Joint Ministerial Committee for Legal and Economic Affairs to study the prospect of canceling or merging several state entities to improve their efficiency in functioning and quality of output.
Last week, the Economic and Legal Affairs Committee, in coordination with the Ministry of Finance, presented its report to the Council of Ministers. The report recommended drawing up a framework to merge several public agencies and institutions due to overlap in their responsibilities and scope of work. It pointed out that consolidation of these entities would help streamline and improve operational efficiency, as well as rationalize budget expenditures.
The profusion of public institutions in Kuwait having overlapping objectives, and engaged in identical activities or providing similar services to the public, can be attributed to several factors. These include the crossover and fragmentation of government programs over the years, the lack of effective oversight into the functions, and functioning, of public entities, and, perhaps more cynically, the pressure to ‘create’ employment opportunities for nationals in the public sector.
Merging public agencies pursuing similar objectives and activities is an economic and administrative reform that local economists and international institutions have been suggesting for long. Case studies, both regionally and globally confirm that such mergers deliver economies of scale and scope, achieve productive- and allocative-efficiencies, expedite implementation of strategies, and facilitate reforms to regulatory framework needed to achieve policy goals.
Additionally, integration of similar entities reduces financial and operational costs, eliminates overlap or fragmentation of services and activities, and enhances efficiency and productivity of government institutions and workforce. Such mergers have also been shown to cut down administrative structures, and facilitate the sharing of non-material resources such as business intelligence, intellectual property rights, and skills of talented employees.
Among the several consolidation proposals put forward by the ministerial committee, a significant one is the merger of Kuwait Direct Investment Promotion Authority (KDIPA), the Kuwait Authority for Partnership Projects (KAPP), the National Fund for Small and Medium Enterprises Development (SME Fund), and Supreme Council for Privatization into a single entity.
Importance of integrating these entities arises from the pivotal contributions they render to the economy and to the national growth strategy. They also play a critical role in the New Kuwait Development Plans that aim to transform the country into a commercial, financial, and cultural hub in the region and globally, in line with Vision 2040 — the revised target date set in 2023 in response to evolving global issues.
While on paper, the four entities have seemingly different roles, a closer look reveals the many similarities in their scope of work, objectives, and in the duplication of activities and services performed by them. Founded in 2013, KDIPA is a specialized public authority tasked with developing, promoting, regulating, and advocating foreign direct investments (FDI). The minister of finance serves as the chairman of its board of directors.
KAPP, established in 2014, aims to encourage participation of the private sector in developing the state’s infrastructure.The Authority is responsible for coordinating public-private partnership (PPP) programs from its inception to its financial closure. The Higher Committee for Partnership Projects, which oversees activities of KAPP, has the minister of finance as its chairman and the director-general of KDIPA serving as a committee member.
National Fund for Small and Medium Enterprises Development, also known as the SME Fund, was formed in 2013 with a total capital of KD2 billion. The Fund aims to enable the private sector to drive economic growth in the country and combat unemployment among young nationals by supporting entrepreneurial projects in small and medium enterprises (SMEs). The minister of commerce and industry serves as chairman of the Fund.
Supreme Council for Privatization, which is chaired by the prime minister, was established in 2010 under Privatization Law 37/2010, to regulate and facilitate privatization of public entities. Privatization Law seeks to increase private sector participation in the economy, by transforming public entities into private shareholding companies. The law stipulates that at least 40 percent of shares in such companies be sold to citizens through an initial public offering, and 5 percent be reserved for former and current employees of the privatized public sector entity.
Of the remaining 55 percent of shares in privatized shareholding companies, government institutions will hold a maximum of 20 percent shares, while 35 percent will be sold through auction to private or foreign investors. In addition, the law allows the government to have a ‘golden share’ in the privatized firm, which gives the state veto power over any plans by the new companies.
The proposed merger of the four separate agencies would allow the creation of a more coherent and coordinated entity that could deliver more than the sum of its parts. With a single governance structure, the new entity is expected to be more effective and cost efficient in attracting foreign direct investments (FDI), increasing private investments into development projects, providing employment and entrepreneurial opportunities for citizens, and accelerating the state’s privatization program.
Foreign direct investments are seen as crucial for countries to promote growth strategies and drive economic development and diversification. FDIs also help create new enterprises or services that offer job opportunities for nationals, boost incomes, and enable the transfer of knowledge and technologies that help improve productivity and competitiveness. In addition foreign investments help enhance the country’s human capital by promoting training and experiences that expose youth to innovative ideas and technologies.
The impetus for countries to attract FDIs notwithstanding, latestWorld Investment Report (WIR-2024) published by the United Nations Trade and Development (UNCTAD), shows that global FDI fell by 2 percent to $1.3 trillion in 2023. The report adds that the decline in FDI would exceed 10 percent, if the large fluctuations in investment flows among a few European conduit economies are excluded.
UNCTAD attributed the fall in FDI to ongoing and emerging crises, rising geopolitical tensions, and increasing protectionist policies that disrupted the world economy in 2022-23. The report notes that the decline in global FDI emphasizes the need for countries to address the lower investments by enhancing their business facilitation processes, accelerating digital government solutions, and creating a transparent and streamlined investment environment.
In a rare positive note, Kuwait bucked the FDI global trend in 2023 by registering a surge of nearly179 percent in investment flows to the country — FDI grew from USD 758 million in 2022 to $2.1 billion last year. Nonetheless, with the exception of Qatar which witnessed a significant disinvestment, Kuwait lagged other Gulf Cooperation Council (GCC) states when it came to foreign investments. The UAE led the GCC with FDI flows of $30.7 billion followed by Saudi Arabia with $12.3 billion, Bahrain with $6.8 billion and Oman receiving $4.7 billion.
While the name and organizational structure of the new entity to be formed from the merger of KDIPA, KAPP, the SME Fund and Supreme Council for Privatization is yet to be announced, there is no such ambiguity when it comes to the rationale for merging public agencies with similar functions and objectives, into single viable and more efficient entities. The economic, financial and administrative efficiencies gained through such mergers could result in public entities that are more agile, astute, and contribute to realizing the country’s Vision 2040.
