Gulf’s private sector boom still vulnerable
Gulf’s private sector boom still vulnerable
Corporate executives and economists at the Reuters Middle East Investment Summit this week said the private sector's gains were vulnerable, warning growth could quickly slow if oil prices retreat or governments slow spending in order to conserve their financial reserves.
"The current good growth we are seeing is cyclical and has its roots in government spending, but there are structural impediments to longer term private sector growth," said Liz Martins, senior regional economist at HSBC.
The oil market slide of 2008, in which prices slumped by as much as three-quarters in the space of six months, revealed the vulnerability of the Gulf countries and their big state-owned oil sectors; Saudi Arabia only barely escaped recession in 2009.
Now high oil prices have ignited a consumer spending spree that is buoying private firms across the Gulf Cooperation Council (GCC), which comprises Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman.
Middle East oil exporters will enjoy a near-record surplus in trade of goods and services worth about $400 billion this year, the International Monetary Fund estimates. Governments in the Gulf are channeling much of those oil earnings into social welfare and infrastructure projects.
This is helping private companies in two ways: Directly, through contracts awarded by Gulf governments, and indirectly, by fattening the wallets of consumers who work for the government or receive welfare benefits.
"Stable growth we have seen across the GCC over the last six to eight quarters comes ... from the public sector boost, which has stimulated the private sector as well," said Fabio Scacciavillani, chief economist at Oman Investment Fund.
For Gulf governments, developing the private sector has been a top policy goal since the 2008 crash as they seek to diversify their economies away from oil to reduce the risk of a similar setback in future.
Fostering small private companies has become even more important since last year's Arab Spring uprisings, because such firms tend to create most jobs. Although Gulf governments largely escaped the unrest, they are keen to cut unemployment to remove a potential political threat.
Trends over the last year suggest they are having some success. Bank lending growth to the private sector in Saudi Arabia, Qatar and Oman has climbed into double digits and the annual rate hit 14.8 percent in Saudi Arabia during September, the fastest pace since March 2009.
The Saudi Ministry of Labor said in September that 380,000 jobs had been created in the past 10 months. Oman says it added 155,000 new private sector jobs in January-September.
The private sector boom is typified by companies such as Saudi Arabia's Jarir Marketing Co., a retailer of books, office supplies and electronics, which plans to boost the number of its stores by at least 70 percent in the next five years and expand into other GCC countries.
"We are growing in Saudi and in the Gulf, and we want to see that we populate the GCC," Jarir Chairman Muhammad Al-Agil, who co-founded the chain with his family in 1979, told the Summit, taking place at Reuters offices in the region.
In the United Arab Emirates, one of the most diversified economies in the Gulf with the nonoil sector accounting for 62 percent of output, bank lending growth has been slower as the country grapples with the aftermath of a real estate crash.
But the hospitality sector, a focus of private sector firms, is booming; tourist arrivals grew 10 percent and hotel revenue 19 percent in the first half of 2012.
Yet private business in the Gulf remains far from being able to fuel its own growth, withstanding fluctuations in oil prices and state spending. One problem is its access to financing.
Debt and equity capital markets are small so it's difficult for small and medium-sized enterprises (SMEs) to use them to raise money, said Martins at HSBC. That leaves bank loans, but many banks in the Gulf are traditionally unwilling to lend to small, little-known firms, preferring the security and predictability of lending to big companies, preferably those with state connections.
"Financial institutions look at them (SMEs) as toxic assets," said Abdullah Al-Darmaki, chief executive of the Khalifa Fund for Enterprise Development, the Abu Dhabi government's SME development agency.
Rick Pudner, chief executive of Dubai's biggest bank, Emirates NBD, told the Reuters Summit that, historically, "you have to have a three-year track record before you can come to the table and ask for some money."
Pudner said that partly because of government efforts, the access of SMEs to bank loans would improve: "You'll see it probably getting a lot easier to access finance from banks, maybe supported by some quasi-element of government support."
But even then, private companies may face another major obstacle: regulation.
The risks of intrusive rule-setting were underlined last week when Saudi Arabia said it would fine private sector firms that employed more foreign workers than Saudis - a stance that could have a big impact given that roughly nine in 10 employees of private companies in Saudi Arabia are expatriates, according to official estimates.
In other cases, opaque and complex regulation, or the lack of any rules at all, is holding up private companies.
"One major area is bankruptcy law - also labor laws and labor protection are skewed towards national citizens and lag for foreigners. The other area is in terms of investor protection," Scacciavillani said of the GCC.
"Awareness is there but in terms of delivery, little has been done."
Pace of Saudi Arabia’s private sector sell-off accelerates
- Aim is to increase the private sector contribution to gross domestic product from 40 percent to 65 percent by 2030
- The NCP said that the privatization program would save the government around SR35 billion.
DUBAI: Saudi Arabia’s ports, hospitals, desalination plants, schools, and even its sports clubs, are among the candidates for early transfer to the private sector in a program that the government hopes will generate up to SR40 billion ($10.6 billion) in revenue over the next two years.
The National Center for Privatization (NCP), the body responsible for implementing the big state sell-off program, released details of its privatization plan after the Council of Economic and Development Affairs, chaired by Crown Prince Mohammed bin Salman, approved the proposals to increase private sector involvement in the economy — a vital part of the Vision 2030 strategy to reduce oil dependency.
The aim is to increase the private sector contribution to gross domestic product from 40 percent to 65 percent by 2030.
The NCP said that the privatization program would save the government around SR35 billion, add SR14 billion to gross domestic product, and generate up to 12,000 new private sector jobs in the Kingdom by 2020 — the initial phase of the sell-off.
“The scale is very realistic given that privatization is a complex and time-consuming process from a host of perspectives, including regulatory, governance and legal,” said John Sfakianakis, director of economic research at the Saudi Arabia-based Gulf Research Center.
“The estimated amount is equally pragmatic at this stage. These numbers change both due to valuations and appetite as well as economic conditioning with time.”
Other parts of the national economy are also earmarked for some form of privatization under the Delivery Plan 2020. Transport, the renewable energy industry and flour mills are all scheduled in an NCP report that lays out the structure and conditions of the state sell-off program.
“The most important characteristic is the commitment to push ahead with privatization as well as do it in a phased way over the next few years that involves a number of different sectors. There is an evolutionary phase to any privatization process that involves multiple phases over time,” said Sfakianakis.
The King Faisal Specialist Hospital and Research Center, the Riyadh facility regarded as the jewel in the crown of Saudi medical facilities, is named as a subject for incorporation as a prelude to becoming a non-profit organization “to become financially independent and a role model in the health sector and help in achieving its leadership position through focusing on innovation.”
- The National Center for Privatization hopes the 2020 privatization program will contribute SR13-14 billion to Saudi Arabia’s GDP.
- Total government proceeds from asset asset sales will total between SR 35 billion.
- Net savings (capex and open) from privatization and PPP projects are forecast to be SR25-33 billion.
- Between 10-12,000 new private sector jobs will be created.
- The privatization program aims to enhance competitiveness, and improve the Kingdom’s business environment through privatizing government services.
Other hospitals will be privatized by the handing over of medical facilities to private operators and the creation of new medical cities, as well as primary care facilities, the provision of rehabilitation services, radiology and laboratory
In a statement, Turki Al-Hokail, chief executive of the NCP, identified other sectors that would be the focus of the privatization plan, including agriculture, housing, energy and Hajj and Umrah services.
“The privatization program aims to enhance competitiveness, elevate the quality of service and economic development, and improve the business environment through privatizing government services,” he said.
The privatization program has been an element of the Vision 2030 strategy since it was launched two years ago, but the latest document sets out a firmer timetable for the sell-off. It identifies “game changers” — businesses that will “receive special attention from the leadership to ensure their successful completion.”
The first three “game changers” are Saudi Arabian ports, the Saline Water Conversion Company at Das Al-Khair and what the NCP calls “opportunity explorers” — structures aimed at facilitating partnership opportunities between the public and private sectors.
The NCP makes clear it is keeping its options open in choosing what kind of privatization is appropriate for a sector: “Full or partial asset sale, initial public offering, management buy-out, concessions or outsourcing” are all under consideration.
Some 100-plus privatization initiatives have been identified across 10 ministries, of which some (including sports clubs, grain silos and desalination) are expected to be completed by 2020.
Jason Tuvey, Middle East economist at Capital Economics, said that the estimate of selloffs were lower than what was possible given the “vast number” of companies that the Saudi state wholly owns or has a controlling stake in.
“Excluding the Aramco IPO, we’ve previously estimated that the government could raise around $25-50 billion from privatizations,” he told Arab News.
The document also makes clear that foreign participation will be allowed in some parts of the program.
The NCP program does not include any assets owned by the Public Investment Fund, the body which is intended to become the world’s largest sovereign wealth fund with assets of $2 trillion by 2030 and which will retain the right to sell the assets it owns in partnership with the government.
The NCP program also does not include residential real estate assets which are unlocked for private sector usage by contractors and real estate developers, and which are covered by the national housing program.
Ministers have said that the overall privatization program could raise as much as $200 billion in sell-of proceeds in the years running up to 2030, but there is no certainty as to how that figure will be reached. In Riyadh last week government officials gave a more conservative estimate of between $50 and $60 billion.
The plan also makes it clear that there is still work to do on the legislative and regulatory framework within which privatization will be pursued. The first of the three “strategic pillars” of the Delivery Plan is the creation of such structures “to enable privatization processes and governance by setting clear and specific procedures that increase the level of preparation and execution of privatization.” Key initiatives remain to be fulfilled in this respect, the document says.
Al-Hokail added: “The privatization program is in the interests of Saudi citizens, will bring many benefits, and improve the investment climate. The program’s strong governance foundation will be a strong pull factor for global investors and large corporations because it sets the guidelines that will make the program attractive.”