Saudi Arabia’s Supreme Economic Council (SEC) has had a busier than usual month in June. Defining decisions on ongoing economic reforms have materialized, which will impact particularly on accelerating the Kingdom’s privatization drive.
The SEC, chaired by Crown Prince Abdullah, approved in early June a privatization strategy that outlines the type and method of privatization, those sectors that will be open to the domestic private sector and foreign investors; and a timetable for the transfer of certain services to private ownership. The sectors include the postal services, ports services, desalination plants, railways, telecoms, Saudi Arabian Airlines (Saudia), and even the oil and gas sector through the establishment of a new Petroleum Services Company, jointly to be owned by the government and the Saudi private sector and capitalized at $200 million.
How realistic is this strategy and the reforms already implemented? Are the reforms not only in the Kingdom but other GCC countries too inflexible and drawn-out?
Saudi Arabia’s internal debt is a staggering estimated $168 billion. Revenue raised from the privatization will be used to offset the public debt, which according to the independent Jeddah-based Consulting Center for Finance and Investment, has been growing at a rate of five percent of the gross domestic product (GDP) annually and which accounts for 15 percent of the national budget. Saudi Arabia services this debt to the tune of $8 billion annually, which economists stress is a serious drain on the economy and warn that unless the public debt is brought under control, GDP growth rate will be well beyond the actual potential of the Saudi economy.
Privatization experiences elsewhere including Britain, however, show that revenue maximization is not necessarily the best option. It is the method and quality of privatization; the management and technical capability of the new owners, who will be answerable to shareholders; the in-built checks and balances such as an independent industry regulator especially if the privatized entities are utilities such as electricity, water, and gas companies. A botched privatization such as the experience of rail privatization in the UK will only create huge problems for the future and will continue to be a drain on government resources. The then Conservative government hastily privatized British Rail and in a way which many analysts have deemed bordering on the corrupt, since the rail company was sold-off at a generous price to a small group of rail managers, who after a short time sold it on at a huge profit, and thus becoming instant millionaires.
Nevertheless, Saudi and Gulf watchers in the West are welcoming the increased urgency toward economic and financial liberalization, but with some caution. Middle East experts such as Andrew Buxton, Senior Advisor to Barclays Bank and Chairman of the Saudi-British Business Council, want an even faster pace of reforms, not only to attract foreign direct investment (FDI) flows but also to tap domestic private liquidity, some of which has been repatriated from the US and Europe post 9/11.
“When you talk to people in the Gulf they feel that the liberalization process is moving along quite constructively. I would say it is. Compared to a decade ago, this process in a country like Saudi Arabia has come a long way. That does not mean that I would not like it to move faster. In the interest of the country it needs to move along as fast as possible. Not only to encourage foreign direct investment (FDI), but also to encourage investment from their own people,” explained Buxton to Arab News.
To many British and European businessmen, the introduction of a capital markets law; an active stock market; the adoption of insurance regulations; greater corporate and government transparency and disclosure — are all imperative to the acceleration of the Kingdom’s privatization drive and the sustainability of its economic reform program.
They welcome the establishment and progress especially of the Saudi Arabian General Investment Authority (SAGIA). SAGIA has done a very good job in Saudi Arabia, maintained Buxton. “If you talk to British businessmen about SAGIA, firstly they welcome its formation, and secondly within the context of Saudi Arabia where things don’t happen very quickly, SAGIA’s influence has been very good. The Kingdom has been quite a bureaucratic country. SAGIA has managed to cut through this bureaucracy in order to help incoming investment. Opportunities need to be created for both foreign direct investment and for investment in Saudi Arabia by Saudis repatriating their money. That needs an active stock market; a better capital market generally; bond market; development of venture capital funds; and asset management. It also means proper regulation in other parts of the economy such as electricity, telecoms, and water, that actually encourages private investment into those industries. All this is coming about. I believe Saudi Arabia has made a lot of progress.”
In the past, there have been suggestions from some Western businessmen and bankers that the Saudi and Gulf private sector in general are over-protected through generous subsidies and protectionism, and therefore would find it difficult to compete with others on a level playing field. But bankers such as Buxton reject such suggestions. “I find the Saudi business community very sophisticated,” stressed Buxton. “I think the quality of management there is very good. But it does take time for new legislation to be introduced. Saudi Arabia is not a country in which instant decisions are taken and liberalization suddenly happens. It takes a long time. It is happening and a lot has already happened.”
Transparency and disclosure are major issues. Again say British businessmen, this is gradually coming about in all aspects of Saudi life, although they would like it to happen faster. SAGIA, once again, has been a catalyst in this respect as well. They also welcome the moves to reform the so-called “Negative List “ — the list of economic sectors in the Kingdom in which foreign investors are barred from investing. According to Buxton, who is also a member of the Court of Directors of the Bank of England, “the Negative List is too long. I would like to see some positive statements coming out of the Kingdom — Saudi Arabia as a member of WTO; the introduction of a new Capital Markets Law; the adoption of insurance regulations. These are positive statements that Saudi Arabia can make to the world. I hope the Capital Markets Law will be law within the next three months or so. WTO negotiations are going on. The Kingdom wants to be a member of WTO and the present members of the WTO want Saudi Arabia in, but negotiations are taking quite a long time. Don’t lets lose sight of the fact that things are moving on. But nevertheless they should be moving forward quicker.”
