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Kuwait's Dow deal scrapping highlights crisis

Kuwait's Dow deal scrapping highlights crisis

Kuwait's decision to scrap a $17.4 billion joint venture with U.S. giant Dow Chemical has triggered warnings that the oil-rich Gulf nation's fractious politics could undercut efforts to kick-start stalled economic development plans.
Just days before the Jan. 1 launch of K-Dow, the Cabinet backtracked, saying on Sunday the deal was too risky in light of the current global financial crisis and the precipitous fall in oil prices. On the surface, the rationale appeared sound, as other projects throughout the region have either been canceled or shelved for the same reasons. But the real impetus may have been political, rooted in an ongoing feud between lawmakers and the Cabinet.
A small group of lawmakers had threatened to question the prime minister in Parliament about the Dow deal and issues over the transparency of the agreement. Questioning the prime minister is taboo, and could have opened a political crisis leading to his removal. The Cabinet appears to have preferred to scuttle the deal, observers say.
"It definitely gives the image that Kuwait is a difficult place to do business in," Monica Malik, a Dubai-based economist with Mideast investment bank EFG Hermes. "The political environment has been deteriorating because of problems between the government and the parliament."
Kuwait's fledgling democratic system _ a novelty in a region of monarchs and presidents who rule for decades _ seemed again to be undercutting efforts to develop and diversify an economy overwhelmingly reliant on oil.
Kuwait pulled in well under $200 million in foreign direct investment in 2007, even though it has slashed high taxes on foreign firms _ compared to $24 billion for Saudi Arabia, according to the United Nations Conference on Trade and Development. Kuwait, in fact, trailed impoverished Yemen and sanction-laden Iran, said Malik.
The tiny nation is not alone in scrapping or delaying projects.
Saudi Aramco and international oil giant ConocoPhillips, for example, halted bidding last month on the 400,000 barrel per day Yanbu export refinery, citing the global economic crisis.
Earlier this month, subsidiary of global mining giant Rio Tinto also said it is pulling out of a $7 billion Saudi aluminum project due to the weakening global economy.
But the developments in Kuwait are more linked to the politics of the country than the economic climate, say analysts.
"The fact that it's happening now, a lot of people are making it reflect the global situation," said Raja Kiwan, a Dubai-based analyst with energy consultancy PFC Energy, referring to the K-Dow deal. "But it also reflects the broader political situation with such projects in Kuwait."
While its other oil rich Gulf Arab nations either have no parliaments, or essentially rubber-stamp legislatures, Kuwaiti lawmakers are quite vocal. They have a colorful history of trying to take the prime minister to task over corruption and mismanagement allegations. As a result, Kuwait has had more governments than any other Arab nation, save Lebanon, because of the stormy relations between parliament and the Cabinet.
Weeks earlier, Prime Minister Sheik Nasser Al Mohammed Al Sabah resigned and dissolved his Cabinet rather than face parliament questioning on a separate issue. He was duly reappointed to his post by his relative, the emir of Kuwait, but has yet to form a new Cabinet.
"We're living in political and economic chaos, and we'll continue to go from crisis to crisis," independent economist Ali al-Nemish said. It's time for the government to legalize political parties and enable a ruling majority that can truly back the Cabinet's plans, he said.
Under the current system, there are some unofficial political groupings, but generally Kuwaitis elect representatives on tribal, family and religious allegiances, giving them no direct party ties to the Cabinet. The Parliament does not vote to approve Cabinets, but it has the power to impeach ministers or complain to the emir that it no longer can work with his Cabinet.
Squabbles between the Parliament and the Cabinet have, since the 1990s, delayed a proposed $8.5 billion project to boost output from Kuwait's northern fields with the help of Western companies. The lawmakers have insisted they want more say in vetting contracts for the venture, known as Project Kuwait.
"That's been on hold for 10 years, so this is not a new thing," said EFG's Malik. "Basically, what's happened, especially in the last half year, (is that) there's been more of an impasse between parliament and the government."
Within hours of the scrapping of K-Dow, the same group of lawmakers demanded that the prime minister cancel contracts awarded to build the country's fourth oil refinery _ a $14 billion venture awarded earlier this year to Japanese and South Korean companies.
Lawmakers say they suspect profiteering is at work because the contracts did not go through the Central Bidding Committee, allegations the government denies. The issue is now before the Audit Bureau, the country's financial watchdog, for a final say.
While the cancellation of the Dow deal may have an impact, "it's not like investors are going to completely shun Kuwait," said Kiwan
Even so, some in Kuwait remain concerned that such developments undercut the country's image.
"The reputation of a Cabinet that backs off from its .... contracts will hit rock bottom," Al-Qabas daily columnist Khalifa al-Kharafi wrote Wednesday. "It will be ridiculed by the whole world and will not be trusted for any future contracts."


Updated : 2021-07-28 14:47 GMT+08:00