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The year 2003 witnessed highly-important political and economic developments locally, regionally and internationally, as a result of numerous positive factors, the most important being the liberation of Iraq.

Internationally, the global economy witnessed a gradual recovery following the recession over the past two years. It is estimated to have grown by 3.2 per cent in 2003 compared to 2.9 per cent in 2002. All indicators show an optimistic positive outlook for the global economy, with projected growth of 4.1 per cent in 2004.

Regionally, the GCC economies demonstrated a positive performance that was favourably reflected on their estimated growth rates. One of the main factors that contributed to this growth was the prospering trading activity between Iraq and the GCC countries, in response to Iraq’s immense needs for consumer and durable goods as well as its reconstruction projects, all of which provided strong momentum to the economies of the region.

By virtue of its geographic location and ability to play a vital role, Kuwait was the country that most benefited from these positive effects. They were clearly manifested through increased political and economic stability in the country with consequent restoration of confidence in the Kuwaiti economy and in Kuwait as a safe investment environment, as well as through the upward performance of the Kuwait Stock Exchange to exceptional levels, vivid activity in the real estate sector, and strong momentum that drove the performance of several economic sectors to levels hitherto unseen. In these regards, the Kuwaiti private sector displayed its vitality and ability to take the initiative, showing inherent capabilities that need only the opportunity to unlock creative abilities.

The performance of the Kuwaiti government was assumed to attain levels that would cope with the consequences resulting from the year’s highly-significant event, particularly since Kuwait was freed from the restrictions of security considerations that for many years overshadowed all other considerations, resulting in them being placed at the bottom of the government’s list of priorities. Following the end of the war in Iraq, a new parliament was elected and a new government was formed. This government was expected to adopt change as a methodology and to rearrange its priorities to put the affairs of the national economy at the top of its agenda, introduce economic and financial reforms to rectify inherited structural imbalances in the economy, and de-regulate the private sector from its many restrictions to allow it to expand into areas previously the exclusive domain of the government sector.

However, with 10 months elapsed since the end of the war and the appointment of the new government, the national economy has not seen any government initiatives towards rectifying the imbalances. Furthermore, the private sector has not seen any signals that the Kuwaiti government is on the way to implement a well-planned programme for encouraging this sector and stimulating it to perform its vital role in the country’s economic activity. Moreover, the government has not proposed any creative solutions for the inherited problems in Kuwait, such as the housing problem, nor has it activated progress of pending projects aimed at developing the infrastructure to deepen and expand the Kuwaiti economy, or provided the private sector with alternative investment opportunities instead of those limited to the Kuwait Stock Exchange and the real estate sector. In addition, it is noteworthy that the government has not taken any serious steps to direct available liquidity towards such projects.

The performance of the Kuwaiti government was also below expectations in regard to participation in the Iraqi rebuilding projects. It appears that the government has not developed any plans for this purpose, nor has it prepared itself adequately, before or after the war in Iraq. Alternatively, it may be that the initial plans of the government were not executed due to slow formalities and the inefficient mechanism of the decision-making process.

Obviously, the private sector took the lead in this respect, launching those investment projects that were pending for some time. Here KIPCO was the role model, and set an example for taking the initiative. KIPCO was one of the first Kuwaiti companies that rapidly responded to the need for participating in the efforts for the reconstruction of Iraq, through its subsidiaries.Wataniya Telecom, with the support and financial contribution of United Gulf Bank, actively participated in the Asia-Cell consortium that won the GSM licence in northern Iraq, and United Gulf Bank is also involved in the current study on establishing a new commercial bank.

In this context it is hardly surprising that so many companies in Kuwait have announced such positive results. On the face of it, KIPCO is no exception. Our businesses have expanded and multiplied. Our financial results have been excellent. Our share price has doubled.

However, we believe that KIPCO is an exception. Many of the positive performances reported this year are a direct outcome of the market conditions, but the truly successful companies are those whose results are based on fundamental factors, not temporary circumstances. KIPCO’s results have been enhanced by the current conditions, not created by them; there have been major developments which have not only generated profits this year, but will continue to do so, year in year out, irrespective of the prevailing economic environment. These developments include the establishment of radical new businesses and strategic alliances, such as a US$ 250 million development project in Lebanon, and the mobile networks in northern Iraq and Algeria by the year-end.

One reason that our Group will prosper regardless of economic conditions is the deliberate policy of diversification that we have followed for a number of years. As a Group we have expanded into different businesses, income streams and types of assets. As a result we are not hostage to a decline in particular industries or in the market values of real estate, venture capital investments or stock markets.

This diversification strategy fits neatly with our regionalisation strategy. KIPCO is committed to being a regional business, not a local one.Wataniya Telecom provides current year proof of this with its expansion into Iraq and Algeria. Showtime’s increasing dominance throughout the region adds further evidence. Gulf Insurance Company’s multiplied presence in the Lebanon through a merger with the Fajr Al Gulf Insurance and Reinsurance Company provides another example. The establishment of Algeria Gulf Bank during the year also extends KIPCO’s banking interests to another country in our region. The results of these strategies are increased synergies (both within the businesses and between different businesses) and a diversification of country risk.

For these reasons, and many others, the financial achievements you will see reflected in these pages should not be considered as non-recurring or one-off ; these profits are here to stay. The KD 18 million of net profits are anchored on a stable, diversified income stream, and at an increase of 182 per cent over the previous years are beginning to show the levels of higher returns on investments that we expect, and which we expect to continue and improve. The asset base of the company - which represents only around a tenth of the assets controlled - is solid, diversified and, at KD 685 million, recorded at conservative values.The structure of the balance sheet, with a planned and carefully managed mix of funding, provides the agility the business needs to respond rapidly to threats and opportunities alike.

This year we have begun to see some of the “hidden” value in KIPCO shares being unlocked for our shareholders, as there is a growing realisation that our Group is delivering sustained growth through real and recurring profits.We believe that it is this growing realisation that has led to the increase in the share prices of subsidiaries and affiliates of the Group that we have seen this year.We are certain that these profits, and this growth, will continue in the years ahead, and look forward to this being fully reflected in their share prices.

Some of this better understanding of the underlying strength and profitability of the Group has been reflected in KIPCO’s own share price. However, it is obvious that not all of this effect has yet worked through; despite the significant increase in its share price KIPCO is still clearly undervalued. Simply comparing the book value of KIPCO’s quoted investments with a fair value based on their current market prices proves this. Moreover, we believe the holding company adds real value to each of the Group companies, making the Group more than simply the sum of its parts.Therefore, we believe that as we persist in adding value to the companies that are part of our KIPCO Group the day will come when this will be reflected in our share price.

We would like to thank His Highness the Amir of the State of Kuwait, Sheikh Jaber Al Ahmed Al Jaber Al Sabah, His Highness the Crown Prince Sheikh Sa’ad Al Abdullah Al Salem Al Sabah, and His Highness the Prime Minister, Sheikh Sabah Al Ahmad Al Jaber Al Sabah for their continuing support and guidance.

We wish to extend our gratitude to the Company’s shareholders for the trust they have invested in us. Finally, we would like to express our heartfelt appreciation to our staff for their tireless efforts to serve the Company’s best interests.

May God grant us continued success and prosperity.