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When privatization goes wrong

In May 2002, Saudi Arabia adopted its national privatization strategy, with the aim of improving efficiency and reducing costs of providing government services.
Some observers have criticized the slow pace of privatization. However, considering the performance, so far, of some privatized entities and the quality of privatized services, we may want to revisit the privatization process, not to stop it, but to improve it. For privatization to succeed, we need clear guidelines and benchmarks, as well as strict monitoring by well-staffed regulatory agencies.

When adopted ten years ago, the Privatization Strategy was designed to fulfill several key objectives, chief among them improving macroeconomic efficiency and increasing Saudi competitiveness, as well as improving the quality of services, providing additional jobs to Saudis and increasing per capita income.

Ten years later, it is time for reflection and assessment. While, there are considerable benefits of privatization, when carried out correctly, there are also many possible missteps and costs associated with privatization when it goes wrong.

The Saudi privatization effort was part of an international movement that gained traction in the ‘80s, led originally by the United States (under Ronald Reagan) and the United Kingdom (under Margaret Thatcher). Between 1979 and 1988, the Thatcher government privatized British Airways, British Petroleum, British Aerospace, British Gas, Rover Group, British Steel, British Telecom and Rolls-Royce. In parts of the US, key government functions, including police work and prisons were outsourced.
Privatization frenzy quickly caught on in both industrial countries and developing economies. But not all were enthusiastic about the new trend. In the UK itself privatization elicited criticism all along, not only from labor unions and advocates for the poor, but also from the Parliament and conservative politicians. After three decades, privatization is now being closely scrutinized everywhere, by economists and government officials, and not just by those concerned about poverty and social justice. International experience with privatization has given birth to several concerns, which should be taken into account, including the following:
• While government entities are required to preserve natural resources and safeguard public welfare, there is little control over private entities to do so. A private entity is primarily accountable to its owners or shareholders, whose main preoccupation is increasing profits.
• While governments impose strict rules to guard against corruption, rules are much relaxed in private businesses, where employees are allowed to give and receive valuable gifts in the course of carrying out their functions
• There is little transparency in privatized businesses. Their opacity allows shady deals to be carried out with impunity.
• There is a risk of compromising national security when private firms are entrusted with running sensitive services or strategic industries and infrastructures.
• There is also a risk of denying essential goods and services to deserving citizens. One such example is water supply, where the water company may fail to provide water to large areas, if it is not profitable to do so.
• Privatization may skew income distribution and social justice, where monopolies are created by privatization decisions. Monopolies mean concentration of wealth among few individuals or families.
• Privatization could lead to reduction of wages and loss of jobs for nationals.
Over the past decade, Saudi Arabia has privatized several key services that used to be provided by government agencies. They include municipal water supply, electricity, telecommunications, and partial privatization of education and health care. It has also privatized parts of traffic control and car accident reporting. In almost every one of these areas, consumers have raised serious concerns about the performance of these privatized entities. Take water supply, for example. Before it was privatized, there were sporadic shortages in municipal water supply, but since then, shortages have become more common and severe. In addition to the chronic water shortage in Jeddah, large sections of the capital, Riyadh, now experience regular water shortages. Whole neighborhoods have no supply at all.
Parents and students complain about the quality of private education and a lack of accountability. A seasoned educator and investor in education services told me recently that the whole for-profit model of providing education services has been a complete failure. Private hospitals and clinics have been beset by substandard services and fake physicians. In their drive to reduce costs and maximize profits, they have hired medical staff with dubious or bogus credentials. In addition, real physicians at these institutions complain about the pressure put on them to reduce the time they spend with patients and subsequently the quality of care they can provide. In a recent visit to one of the well-known (and most expensive) private hospitals in Riyadh, a dentist filled three cavities in my son’s teeth in less than twelve minutes. Afterwards, he immediately left the room to attend to another patient in another room.
Privatization has not been very helpful in providing jobs for Saudi nationals. A government study early on warned that privatization could adversely affect employment opportunities for Saudis. The record of privatized entities has shown that to be the case. These are but a few examples of where privatization has gone wrong. However, they should not be an argument for abandoning privatization. On the contrary, privatization should move at a faster pace. They nevertheless point out the need for strengthening oversight of privatized services. Regulatory agencies should make sure that private entities provide adequate services at reasonable prices. They should not leave regulation to market mechanisms, because they typically fail by themselves when it comes to the market for essential services.

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