I. COMMERCIAL OVERVIEW (Executive Summary) A. Overview of Import Market In 1993 Kuwait imported $1.009 billion worth of goods from the U.S., making Kuwait the fifth largest market for the U.S. in the Middle Eastern and North African region. Ahead of Kuwait (in decreasing rank order) were Saudi Arabia, Israel, Egypt and the United Arab Emirates. Kuwait imports a wide variety of military, industrial and consumer products. Leading military imports in the past three years have included aircraft and aircraft parts, air defense systems, radars and tanks. Leading industrial imports include oilfield equipment/parts (HS 730420/848180), aircraft parts (HS 880330) and generating sets (HS 850210). Leading consumer imports include passenger vehicles (HS 870324) and trucks (HS 870431). Other significant imports from the U.S. include: air conditioning and refrigeration equipment, carpeting, cigarettes, computers, construction equipment, fire fighting equipment, fishing boats, hardware, housewares, office furniture, pleasure boats (including yachts), process controls, processed foods, telecommunications equipment and water treatment equipment. During the first seven months of 1993 the U.S. held the largest share, 18.5%, of Kuwait's import market. Following the U.S. were Japan (13.5%), Germany (8.8%) and Great Britain (6%). B. Brief Synopsis of Commercial Environment American businessmen and contractors have found Kuwaitis much more open to American products and business proposals than they were before the Gulf War. While trade with Kuwait has increased significantly since liberation, this does not mean that Kuwaitis blindly accept whatever American exporters have to offer. Rather, increased trade indicates that the Kuwaitis are listening and buying if the American products match their interests and are competitive in price and quality. Post-liberation Kuwait is one of the most competitive markets in the world. With almost no import duties and large public sector procurement projects, Kuwait continues to attract a large number of bidders for government projects and tenders from all over the world. Furthermore, Kuwaiti firms in both the public and private sectors exhibit a strong cultural and institutional bias in favor of the lowest price. The experience of U.S. firms since liberation has been that, to compete effectively, U.S. firms must work doubly hard to trim costs and take the fat out of proposals. In many cases, this means the U.S. firm has to use more local and regional labor and materials than it may have been used to using elsewhere. In the military sector, this pressure to reduce costs to remain competitive may mean that U.S. bidders have to consider lowering their bids, e.g., by factoring in the return on their offset projects or investments in Kuwait. In the engineering/construction sector, competitive pressure may mean that U.S. firms have to do work on a lump sum turnkey basis instead of on a cost-reimbursable basis. Generally speaking, it is very difficult to convince decision makers to accept a higher bid because of the technical merits of the product or service offered or because of long-term total savings realized over the life of the product. The responsibility for oversight and approval of most government tenders rests with the Central Tenders Committee (CTC) under Kuwait's 1964 tender law. The CTC also governs the pre-qualification process, and must select the lowest bidder on a tender unless it proves that the bid cannot meet the technical specifications or requirements of the tender. Under most circumstances, foreign companies must have a local agent, representative or distributor. U.S. exporters do not, however, need an agent to fill an order placed with them directly by a private Kuwaiti company, or by a Kuwaiti public sector purchaser if the order is less than KD 5,000 ($U.S. 17,000). U.S. exporters always need an agent to bid on government tenders. U.S. firms seeking to perform a contract in Kuwait would need an agent to facilitate their compliance with immigration, labor, tax and other laws. U.S. joint venture partners may dispense with a local agent if their local joint venture partner performs the work of a local agent for them. Selecting the "right Kuwaiti agent" is one of the most important decisions an exporter can make. The potential agent should be screened carefully to ensure that its management, financial resources, commitment to marketing the U.S. product, and its marketing, sales, and technical support qualifications pass muster. As private sector economic activity in Kuwait is still heavily weighted toward merchandising rather than manufacturing, each Kuwaiti agent typically represents a number of U.S., European and Japanese companies. U.S. firms should question their prospective agents on any relationships with other U.S. or foreign principals that may create a conflict of interest (which the Kuwaiti firm is under no obligation to disclose otherwise). For exporters who do not use the US&FCS' Agent Distributor Service or Gold Key Service, US&FCS' World Trader Data Reports provide information useful for "due diligence" checks on prospective agents. Exporters should take care to have their agency agreements reviewed in advance by legal and financial professionals in Kuwait and the U.S. to ensure that their interests are protected. The GOK encourages joint ventures in a number of industrial sectors, but requires by law that the Kuwaiti partner maintain the majority share. Sectors closed to foreign investment include financial services (banking, real estate, insurance and securities) and the oil and gas sector. Other sectors, such as health care, telecommunications, tourism, electric power and airlines, are government-run, but are on the verge of privatizing. As these sectors privatize, opportunities for new joint ventures will open up. There is little manufacturing in Kuwait and this may be an area in the future for increased private foreign direct investment and technology licensing. U.S. firms are subject to local taxation to the extent of their local ownership on up to 55 percent of profits. U.S. firms interested in establishing a joint venture in Kuwait should seek legal counseling on the application of Kuwaiti corporate law. The emergency phase and initial reconstruction of Kuwait were completed by the end of 1992. Significant opportunities still exist, however, for U.S. firms to supply and service this market. Major work continues in Kuwait's oil and defense sectors, and the government has resumed tendering and construction of major power, public works and housing projects planned before the invasion. Given the smaller number of expatriates, Kuwaitis will have to do more with fewer people, requiring greater automation and a good deal of training. Privatization plans for the airline, telecommunications, health care, tourism and power sectors all promise increased opportunities for U.S. firms to supply private business purchasers, unencumbered by the bureaucracy and delays of working within the CTC framework. The government's new demographic policies will remain in place, as will the lingering uncertainties regarding Kuwait's political and economic future. The government faces continuing deficits for the remainder of the decade as a result of its continued welfare state for Kuwaiti nationals, the repayment of debts arising from the Gulf War and reconstruction periods and its large purchases of material needed for its defense. The government has not taken steps to diversify its export sector away from oil. The government has not yet put out the welcome mat for foreign investors by offering more accommodating investment and immigration rules, more privatization, attractive tax and financial incentives and stronger intellectual property protection. The net result: a slow recovery within the non-oil and non-defense sectors of Kuwait's economy. Kuwait's economy, and prospects for U.S. business, will only gather strength as confidence returns and steps are taken by the government to further liberalize and privatize the economy. C. Host Country Business Attitude Toward the U.S. Kuwaitis are very interested in American consumer products and services, whether sold on their own or incorporated into the operation of a franchise. This is due, in part, to the large number of Kuwaitis who have studied in the U.S. or who travel to the U.S. for business and/or family vacations. It is also due to the reputation American products enjoy of being well made, of high quality and part of a convenient, comfortable, modern, affluent lifestyle. American products are not commonly perceived as being the lowest priced, even when that in fact is the case. In the case of American military items, the U.S. still enjoys a great deal of prestige as a consequence of the Gulf War. So also do the other members of the U.N. coalition, especially the other countries that have, like the U.S., signed defense pacts with Kuwait--the U.K., France and Russia. Kuwait is interested in purchasing advanced weapons systems from a wide range of international suppliers, will examine closely the technical aspects of their performance, will seek to negotiate the lowest price possible, but in the end will also take into account the would-be supplier's country of origin. The results at times are dilatory and unpredictable for American suppliers, but they can make the strongest case for their products by couching their products' benefits in terms of how these meet Kuwait's military requirements and national security interests. Kuwaiti public and private firms tend to purchase industrial items on the basis of lowest price and on whether the products or services offered conform to specifications (as for a tender) and local technical standards. Superior product quality or technology may not be relevant to the buying decision, especially in the public companies and ministries. An effective, energetic and knowledgeable agent can make a difference in the procurement of industrial items by seeking to have his principal pre-qualified in a timely fashion, by assisting his principal in preparing a bid responsive to local specifications and standards, by arranging seminars and demonstrations to educate the buyer's technical staff about the performance and benefits of one's product, by countering competitors' claims and by counseling his principal about how to interpret the buyer's behavior. No matter what item an American firm is selling, the American executive should never underestimate the skill and patience with which his Kuwaiti counterpart will bargain. For centuries Kuwait has been renowned as a trading nation and this tradition of the Kuwaiti seeking the most and the best for the least continues to this day. D. Major Business Opportunities Major business opportunities exist in Kuwait's large public sector areas of procurement: oil, defense, power, public works and housing. Other major business opportunities are expected to open up in areas slated for privatization: health care, telecommunications, airlines and private power generation. In the oil sector, each of Kuwait's large public companies--Kuwait Oil Company (KOC), Kuwait National Petroleum Company (KNPC) and Petrochemical Industries Company (PIC)--has large projects that offer business opportunities for American firms to be equipment suppliers, prime contractors, subcontractors or project management consultants. Upcoming major KOC construction projects (with estimates of contract value) include: a $150 million Gas-Oil Separation Plant; a $170 million Desalter, Phase 5; a $300 million contract for Gathering Centers Nos. 24, 25 and 26; an $85 million contract for Gathering Centers Nos. 5, 12 and 14; a $535 million contract for Gathering Centers Nos. 29 and 30; a $170 million Desalter, Phase 6; a $250 million Acid Gas Removal Plant, Phase 1; a $100 million Condensate Recovery Project; and an $85 million contract for Water Injection of Oil Wells (at the Rawdatain and Minagish fields). Upcoming major KNPC construction projects (with estimates of contract value) include: a $400 million Acid Gas Removal Plant; a $400 million contract for an MAF Project, including an MTBE (gasoline additive) unit, an Alkylation unit and a Fluidized Catalytic Cracker unit; a $40 million replacement of two boilers at the Mina Abdulla refinery; a $35 million Pumping Station and Fuel Oil Line from Mina Ahmadi to the Sabiya Power Plant; and a $16.5 million Fuel Depot in Ahmadi. Upcoming major PIC construction projects (with estimates of contract value) include: a $150 million polypropylene plant and the $2.2 billion petrochemicals complex for PIC's joint venture with Union Carbide. In the defense sector, major business opportunities exist at the Ministry of Defense level as well as in Kuwait's Land Forces, Air Force and Navy. Most of the larger sales are handled through the U.S. Government's Foreign Military Sales program, while the smaller sales may be handled on a commercial basis. At the Ministry of Defense level, opportunities exist in the areas of information technology, especially command and control systems integration. In the Kuwait Land Forces (KLF), opportunities exist for American firms to supply trucks, artillery, rocket launch systems and light armored vehicles; to remove and/or refurbish ordnance; to refurbish artillery; to integrate command and control systems; and to maintain tanks, trucks and other KLF vehicles. In the Kuwait Air Force, opportunities exist for American firms to supply helicopters, unmanned aerial vehicles; to maintain fighter aircraft; and to integrate command and control systems. In the Kuwait Naval Forces, opportunities exist for American firms to supply ships, hovercraft, electronic combat systems and missiles; and to integrate command and control systems. In the power sector, major business opportunities will be created if the GOK allows private development of power plants such as the $600 million 440 MW Shuaiba North Power Plant. In the area of public works, a planned $1 billion BOT (Build, Operate, Transfer) project for a bridge on Maskan Island linking Salmiya, Failaka and Sabiya would create a large business opportunity if it moves to the tendering stage. Other opportunities may be created by the expansion of the waste water treatment plant at Riqqa and the construction of a new waste water treatment plant at Sulaibiya; by the construction of a new campus for Kuwait University to cater for about 20,000 students (estimated value: $1.5 billion); and by the continuation of waterfront renovation by the Kuwait Municipality (estimated value: $81 million). Perhaps Kuwait's largest area of opportunity for American firms in the near future is in the housing sector. There, the National Housing Authority is administering a $15-17 billion project: the construction of 50,000 houses and apartments in two new towns, Sabiya and Khairan, over the next ten years. Kuwait's privatization of its telecommunications, tourism, airline and health care sectors is expected to open up new business opportunities, although these are now difficult to quantify. Procurement by the newly privatized entities is not expected to go through the cumbersome Central Tenders Committee process. In the area of telecommunications, the partially public Mobile Telephone Systems Company will purchase about $35 million of cellular telephone equipment for Phase Two of its GSM (Global System for Mobiles) system. Once the Kuwait Communications Company is spun off as a private telephone company separate from the Ministry of Communications, there may be additional opportunities for U.S. firms to supply telephone switching and transmission equipment. In the health care sector several American groups are currently exploring opportunities to build private hospitals in Kuwait to American standards and, in some cases, with American medical staff. Included in this sector is the construction of a Heart and Chest Disease Hospital at a value of $90 million. E. Major Roadblocks to Doing Business American firms seeking to do business in Kuwait will face a number of obstacles whether they are attempting to export, invest or license technology: (1) Local Agent Requirement: Selling to the Kuwaiti public sector (which is two-thirds of Kuwait's economy) must be done through a local agent. This increases transaction costs and reduces profit. (2) Opaque and Dilatory Major Project Procurement: At the prequalification stage, American would-be suppliers may face: (a) decision makers' preference for pre-Gulf War (usually European) suppliers; (b) specifications based on these traditional suppliers' often obsolete technologies; and (c) a prequalification process that is not always publicized and may in fact be by invitation only (as in secret sole sourcing). During the technical evaluation portion of the bidding stage, American bidders may face: (a) specifications that can be rewritten without prior notice and often without reference to international standards; (b) tests and trials without objective scoring parameters or methods; and (c) deliberations by technical committees and senior officials that may be subject to undue influence by bidders' agents. During the financial evaluation portion of the bidding stage, American bidders may face: (a) third country competitors that lowball their bids now in the hope of making up their losses through (cost) variation orders later on as the contract is executed; (b) being the lowest bidder only temporarily as competitors persuade the procuring agency to retender to get even lower bids; (c) resistance by official decision makers to one's innovative methods of financing a transaction; and (d) constant demands by official decision makers at all levels for yet another financial concession or additional part or service at no extra charge. During the contract award stage of the procurement process, American bidders may face: (a) uncertainty as to when the award actually takes place and as to who is sufficiently empowered to make it; (b) the likelihood that an official letter of intent to purchase will be followed, not by an award, but by a withdrawal of the previous tender and a retender (which further educates the official decision makers for free about the merits of one's bid or technology and allows one's competitors to regroup and refinance); and (c) the likelihood of significantly delayed procurement on the grounds of budgetary shortfall or personnel reshuffling in the procuring agency. (3) Lack of a Double Tax Treaty: As the U.S. does not have a double tax avoidance treaty with Kuwait, U.S. bidders are less competitive than bidders from countries which have signed such tax treaties with Kuwait (like France, Germany and Italy) by the extent to which U.S. bidders must pay double corporate taxes. (4) Lack of Adequate Copyright Protection: Kuwait's lack of a copyright law means that would-be U.S. exporters of computer software, movies, videotapes, audiocassettes and other items copyrighted in the U.S. have no protection against commercial piracy in Kuwait. (5) Lack of Adequate Patent and Trademark Protection: Kuwait does not permit the patenting of food, pharmaceuticals and medicines. Kuwait also has very liberal compulsory licensing laws and penalties too low to deter infringers. This lack of protection dissuades exporters, investors or technology licensors in the pharmaceutical and other industries where patenting is important for doing business in Kuwait. (6) Offset Program: Kuwait's offset program imposes a financial obligation on vendors whose sale to the GOK exceeds KD 1 million (about $3.4 million). This obligation may be discharged by investing in, lending money to, or retaining earnings in, an offset business venture; paying start-up, training and other costs related to the offset venture; and/or the offset venture's making sales. This obligation starts at 30 percent of sales contract value, but may be reduced depending on the financial method of discharge and the type of economic activity the offset venture is engaged in (e.g., manufacturing, training, assembly, services, or trading). Offsets are a restraint on trade for large American exporters that coerces them into investing in Kuwait in businesses often unrelated to theirs. (7) Foreign Investment Restrictions: Would-be American investors face sectoral and ownership restrictions in Kuwait. Kuwait's oil and financial services sectors are closed to U.S. and other foreign investors. Other Kuwaiti sectors, such as the telecommunications, airline and health care sectors, are expected to attract increased levels of foreign investment once planned privatization is carried out. American and other foreign firms are currently limited in almost all cases to minority ownership. An important test case of whether Kuwait will welcome more American investment in the future is Union Carbide's 45% ownership of a joint venture with Petrochemical Industries Company to build a $2 billion petrochemicals complex. (8) Taxation of Foreign Businesses: American companies have to pay as much as 55 percent of profits earned from "doing business in Kuwait." This compares to the U.S.' average corporate tax rate of 34 percent. In a joint venture with a Kuwaiti firm, U.S. firms are taxed on the joint venture's income to the extent of their ownership. (9) Restrictive Immigration and Labor Laws: It may be difficult and inconvenient for American firms to get visas for employees to come to Kuwait (and one-year Kuwaiti visas are too short for frequent U.S. business visitors). It is difficult for workers to change employers once they are in Kuwait. Once they are working in Kuwait, employees enjoy a number of costly benefits, such as generous vacation leave and mandatory overtime for work over 8 hours per day. At times it is difficult for U.S. executives to travel on business to/from Kuwait, especially as there are no airport immigration supervisors to facilitate business travel. F. Nature of Local and Third Country Competition As Kuwait has little manufacturing there is little competition for U.S. imports from domestic import-substituting industries. Third country competition, however, is abundant and vigorous, particularly in Kuwait's key sectors: oil, defense, power, public works, telecommunications and engineering/construction. Third country competition is very price competitive. An example of this was the bidding in the spring of 1994 in a $400 million tender in Kuwait's oil sector. There, the first and third lowest competitors were Japanese--despite a strong yen. The fourth lowest was a Chinese company--which industry sources feared (incorrectly in this case) would be able to undercut all comers with low Chinese labor costs. The sixth lowest was also the first American company--that had been the lowest bidder in the previous round of bidding on this contract only six months earlier. Third country competitors are well supported by their governments. In a competition with a European firm to sell the Kuwait military $1.15 billion worth of military vehicles in the summer of 1993, the U.S. firm soon realized that the competition had escalated beyond a comparison of technical features and prices into a political contest. Various senior officials from each side's governments contacted increasingly senior levels of the GOK until the European government won the sale with a direct appeal from its most senior political official. Third country competition is very aggressively represented by local agents. Local agents manipulate the cumbersome and protracted government procurement process for their clients' benefit in a number of ways, e.g., by arranging to have vendors prequalified selectively, by drafting technical specifications for ministries or public companies that disfavor U.S. products, by misusing internal official documents (such as others' bids or internal technical committee reports) and by skewing the contract award process by lobbying senior GOK officials to push for purchases for reasons other than the merits of price, quality, performance, delivery schedule, technology, etc.