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Kuwait provided a financial bailout for businesses affected by Covid-19 Pandemic:

Blog  |  Kuwait provided a financial bailout for businesses affected by Covid-19 Pandemic:

Often, the local or the global crises occur repeatedly and considerably, such as “Al- Manakh” Great Recession during the eighties in Kuwait, and the global financial crisis that began in the American financial markets in 2008, but the current financial crisis is a global epidemic that has casted a heavy burden on the economic movement, activity and business as well.

This global pandamic of the Corona crisis made the financial crisis spread widely and profoundly in terms of impact, and globally in terms of expansion.

No country in the world could possibly ignore or neglect the COVID 19 pandemic, and thus the international economy entered a phase of slowdown and then contraction, and it seemed that the economic challenges posed by the Corona virus were no less threatening than the health challenges.

The State of Kuwait was greatly affected by the pandemic. The government had to impose a partial then total curfew, and imposed strict restrictions on business which has affected directly and negatively on the operational activity of the current business projects, as some of these projects have become unable to pay real estate rental fees or even pay workers’ wages.

Such these conditions may lead to a wide economic catastrophe if are not treated or resolved rapidly. The government should have intervened to support projects affected by the Corona crisis, just as it intervened to impose a curfew and restrictions on the commercial activities.

Even-though the state does not usually guarantee the financial risks, but what happened due to the Corona crisis has transformed from a financial crisis that stroke the private sector, to a direct impact which touched the state’s economy.

What is the type of financial bailout that Kuwaiti projects need?

The solution of the Corona crisis is not fulfilled only by providing direct financial support, but also by managing the financial gap formed by the difference between expenditures and revenues, which means, covering the financial deficit in the projects that the Corona crisis affected.

Therefore, the biggest challenge which faced the Kuwaiti legislator before issuing the financial bailout law was to identify the projects that deserve this exceptional financial support.

Governance of the Implementation Scope. Determining who deserves the financial bailout

Primarily, the legislator focused on “the small and medium enterprises”, which are suffering from the fragility of their financial position and also regarded as additional weight on the state budget due to the dependence of most of them in terms of equipment, establishment and incubation on the fund to support their projects on the other hand.

However, determining the projects that deserve financial support in this way is based on determining their financial size theoretically, rather than looking into the practical details of the support entitlement.

Therefore, the Law of bailing out these Projects (2/2021) had to strictly control the rules of its applying scope. These rules that prevent the exploitation of the languid state budget with undeserved support, or the deprivation of faltering projects of the support they deserve.

However, the main problem in determining the scope of Implementation was the accuracy of the specialized financial terms that constitute the starting point in the scope of the implementation of the financial bailout.

The terminological Governance of terms. Identifying those affected by the Corona crisis
The definition of the term “affected” in the Projects bailout Law is as follows:

“Small and medium clients, including startups owners who were operating with operational efficiency, and whose activity was partially or completely affected by the Corona Virus (COVID 19) crisis, which resulted in their inability to cover the required basic periodic contractual expenses” (Article 01).

Therefore, the affected people who are eligible to benefit from the financial bailout are:

  •  Business Owners (Clients}: the financing process will be from the banks to the affected people whom are regarded as clients, while the state will be the guarantor for this financing, instead of the direct financing from the Support Fund to the Small and Medium Enterprises, which finances these projects directly. The features of governance appear in this rule through the legislator’s desire to activate the elements of the entire business cycle, projects on the one hand, and credit institutions (banks) on the other.
  •  Small or medium Business Owners: They both benefit from financial assistance unlike business owners who will not deserve any financial bailout, even if their business is damaged, or reached the point of bankruptcy.
    The Law no. 2/2021 has defined the meaning of the small and medium project, as follows (Article 01):
  •  Small projects: the number of employees does not exceed 50 and their assets do not exceed KWD 250,000, and their revenues do not exceed KWD 750,000 annually.
  • Medium projects: the number of employees is not less than 51 workers and not more than 150 workers, and their assets must not exceed KWD 500,000, while their revenues must not exceed KWD 1,500,000.
    It is clear that the Kuwaiti legislator relied on three criteria to determine the size of the project:
  •  Number of workers: which is a deficient criterion; because giant technology projects that depend on automated work and innovation do not need many workers, but rather a limited number of creative innovators.
  •  The assets: This is essentially a credit criterion, and may not reflect the market value of the project’s capital.
  • The revenue criterion: It is a variable criterion, and may not be relied upon primarily, because it does not give an indication of the size of the project, especially if it is newly established and still in the process of building a commercial reputation, for instance.
  •  Projects were operating with operational efficiency before the Corona crisis; which means that, the project must be one of the successful projects according to efficiency standards that depend not only on profitability, but also on the proper operation of capital and asset management.
    Therefore, if the project is tripped, debt-ridden and inefficient in managing capital, it will not be worth financial bailout.
    However, the practical problem may lie in demonstrating operational efficiency, as this matter remains as estimation in some cases where the project ranges between good periods and faltering periods.
  •  The active project has been partially or completely damaged; which is an obvious fact, as it is not worth supporting any projects that continued to operate in the same way as they were before the crisis, such as electronic projects that do not need large workplaces or a large gathering of customers. On the contrary, these projects benefited from the embargo crisis, especially apps for delivering food and goods to houses.
  • Inability of the project to cover the required basic periodic contractual expenses; Thus, it is not enough for the project to stumble because of the crisis, or even to stop its operational work partially or completely during it, but on top of that, the project must become unable to pay its obligations due to the crisis.
    As for the projects that had accumulated profits in the quarters prior to the Corona crisis, and ended their fiscal year in a balanced condition between revenues and expenses, they do not fall within the category of affected projects; As if the project achieved profits in the quarters prior to the date of December 31, 2019 that were sufficient to cover all the losses of the operational activity that occurred after the outbreak of the Corona crisis.
    In this framework, it is possible to emphasize some defects in the conditions of the affected business owner (the client):
  •  Determining the criteria for classifying the small and medium-sized project was vague, and uncontrolled on the real image of these projects in reality; the projects may be linked to each other, which mean that providing funding for one of them may lead to support for the projects associated with it; like its subsidiaries, for example. Therefore, the project worthy of support should have been described as independent.
  • The large projects should have been supported in a way that supports and maintains them, as they constitute part of the total output, and their continuity and balance is considered as an essential part of the overall economy.

International Department Team
Dr. Bader S. Al-Otaibi
Law Firm & Intl. Arbitration