Public-private partnerships projects - The Kuwait approach
Ahmed Barakat and Akusa Batwala
ASAR - Al Ruwayeh & Partners
Kuwait City
Ahmed Barakat (Bio)
Akusa Batwala (Bio)
Kuwait has over the past three years promulgated a number of laws concerning public private partnerships (PPP). While new to PPP, Kuwait has seemingly embraced the concept and has initiated a number of projects in the power, transportation, health and telecommunications sectors.
The main PPP law is Law 7 of 2008 (PPP Law), which is a general law that covers all PPPs undertaken on state owned land. However, there have been a number of other PPP laws passed that cover power production, public warehousing, labour cities and other projects. A common trait in these laws is the requirement for the incorporation of a public joint stock company (PJSC) to carry out the various PPP projects. In this article we look briefly at the Project Company structures proposed by the PPP Law and related security issues.
The project company
Pursuant to Article 5 of the PPP Law, all projects to be undertaken on state real estate on the basis of build operate and transfer (BOT) or any similar system and which are estimated to cost above KD60 million ($218 million) shall be undertaken by a PJSC established for this purpose rather than offering the same for public tender.
The equity of the PJSC is to be distributed as follows; 40% of the PJSC shall be auctioned to companies listed on the Kuwait Stock Exchange (KSE) and other local or foreign companies approved by the Higher Committee (HC) to participation; 10% to the initiator of the approved project (at a discounted price). If there is no such initiator or the initiator opts out of this 10%, such percentage will be auctioned in the same manner as the 40% above. The remaining 50% will be offered for public subscription to Kuwaiti citizens through a public offering (IPO). The government however retains the right to allocate to governmental bodies a percentage not exceeding 20% equally deducted from the percentages offered to an investor and Kuwaiti citizens.
Article 6 of the PPP Law provides for an exception to having to incorporate a PJSC. In order for the exemption to be applied, the project must be valued at less than KD250 million, classified as a 'special nature' project and the Council of Ministers must issue a decision exempting the project from the requirements set forth under Article 5 following the HC's proposal. Such special nature projects may be offered out by public tender to companies listed on the KSE and those other companies that are pre-qualified to participate in such public tenders. There is no clear guidance given on the criteria to qualify as a special nature project.
Security issues
The PPP Law expressly prohibits the granting of certain securities and is silent with respect to other asset categories that may potentially serve as security for the project lender. However, the government's willingness to permit security packages comprising the non-restricted security is likely to vary to the extent it considers a particular asset category as being one that should ultimately be preserved for the benefit of the State.
Real property – Article 13 of the PPP Law clearly prohibits the mortgage of any real property and buildings as security for obtaining financing. Where the law is less straightforward perhaps is with respect to the definition of 'constructions' - this term may arguably equate to what one would ordinarily term 'fixtures'.
Assignment of rights to payment and bank accounts – The project company will have the right to receive certain payments under the project contract which may serve as a source of collateral. The commentary on Article 13 in the Explanatory Memorandum of the PPP Law expressly contemplates such proceeds being used for collateral purposes. It therefore logically follows that accounts wherein such proceeds are held on deposit could also be pledged.
Moveable property – The PPP Law is silent in terms of whether movable assets may be pledged as security. Generally, under Kuwaiti law mortgage/pledge over specific movable assets may be taken by virtue of a possessory mortgage while a business premises mortgage may be used as a type of 'blanket' security interest over all movable assets on the business premises. Certain aspects of Business Premises Mortgages (BPM) remain unsettled under Kuwait law, particularly with respect to whether such mortgages will be enforceable against third parties who purchase, acquire or otherwise obtain the charged assets in good faith without notice of the business premises mortgage. Additionally if the BPM extends to any of the assets referred to in Article 13 of the PPP Law, such mortgages will be void.
Insurance and re-insurance policies and proceeds – The PPP Law is also silent as to whether insurance proceeds over project assets are permitted to be pledged. Obviously, much will depend on the nature of the particular insurance coverage, and whether the State would view insurance proceeds as merely a transmutation of project assets from tangible into monetary form.
Shares – The PPP Law is also silent on whether the project investor may pledge its shares in the project company as security. This is presumably recognition that the PPP Law is primarily concerned about those assets that will ultimately accrue to the State, notwithstanding the fact that the project investor's shares may allow for effective control over the project. However, other matters concerning Kuwaiti law will have implications on the ability of the investor to pledge its shares as collateral.
Leases and rents – The PPP Law is also silent with respect to the project company's ability to pledge other rights to payment under agreements it may have with third parties, even though such agreements may have an ancillary attachment to the project.
Step-in rights
A key issue arises on whether the PPP Law would allow the project company's lenders to be provided 'step-in' rights with respect to the project. Under a typical scenario, the governmental authority, the project company and the project lender would enter into an agreement that provides the lender means with which to mitigate an event of default on the part of the project company without having to exercise against the collateral.
Article 13 of the PPP Law and its commentary appear to contemplate limited assignment rights under circumstances where;
(i) the approval of the HC has been obtained,
(ii) the design and execution period has expired, and
(iii) an appropriate period of time determined by the HC (but not less than three years) has elapsed, since the commencement of operation.
Consequently, while limited assignment rights (which could amount to 'step in' rights) appear to be contemplated under the PPP Law, such rights do not appear to be viable during the first three years of the project and until after the design and execution period has expired.
Given the fact that most of the projects initiated by the State under the PPP Law are still in their initial phases, it is yet to be seen if there is credence to the proposed Kuwait approach. What is clear however is Kuwait's willingness to engage in PPPs and to learn from those jurisdictions that have gone ahead of it in implementing PPPs.