The Saudi Arabia’s attempts to turn state-run companies into private businesses began more than 30 years ago, but a renewed push is now under way
There were 17 per cent fewer Saudi citizens employed privately in December 2009 than in January 2009
For many private-sector employees around the world, the past two years will have been punctuated by job insecurity or redundancy. In Saudi Arabia, however, the dynamics are different – 115,000 Saudis chose to leave their private-sector jobs in 2009.
Despite efforts to increase the number of Saudis employed in the private sector under a long-running privatisation policy, there were 17 per cent fewer Saudi citizens employed privately in December 2009 than in January 2009. This equates to about 680,000 people.
Reconciling privatisation targets in Saudi Arabia
This evidence suggests Riyadh is struggling to reconcile the need to slash unemployment – which stands at 10 per cent – with achieving its privatisation goals. The result is compromise and delay to a privatisation policy first conceived three decades ago.
“The popularity of privatisation in Saudi Arabia has dipped in the last few years. The government seems to have put it lower down its list of priorities,” says one Dubai-based lawyer, who has advised the Saudi government on privatisation for more than 30 years.
Globally, privatisation as a concept took root in the late 1970s, when indebted governments adopted privatisation policies as a means of shifting the cost and risk of building new public infrastructure to the private sector. The concept quickly spread to Saudi Arabia, as its third five-year development plan of 1980-85 shows: “The private sector should take the lead in the agricultural and industrial sectors to contribute to economic diversification.”
Crucially, Riyadh’s embrace of privatisation was not a response to mounting public debt, rather a means to diversifying revenue streams away from oil.
“The Saudis have developed their own brand of privatisation to suit the kingdom’s needs,” says the Dubai-based lawyer.
However, it was not until the 1990s that Riyadh trialled privatisation in earnest. The move was driven by a shortage of skilled Saudis and the need for foreign companies and workers to fill the skills gap, coupled with a need to improve efficiency in key services, such as Jeddah and Dammam’s ports. In 1997, Riyadh issued a decree calling for growth in the private sector that laid the foundation for many privatisations. The same year, Riyadh approved the partial privatisation of the Saudi Ports Authority, inviting private firms to manage, operate and maintain the nation’s ports, with ownership of the port and its facilities remaining in public hands. Today, all Saudi ports are run by the private sector.
Core privatisation objectives
Four years in to Riyadh’s privatisation experiment, in 2001, the Supreme Economic Council (SEC) was given responsibility by the Council of Ministers for overseeing the privatisation programme and measuring its success. The SEC was also given the task of setting up a regulator for each privatised industry.
The government had three core objectives in drafting a privatisation policy for the kingdom, all of which were designed to shrink Saudi Arabia’s bloated public sector. First, in inviting private companies to build and provide the services previously provided by the government, Riyadh expected improved efficiency. Profit sharing, linked to service providers meeting targets, provided performance incentives that were absent from the public sector. Second, the growth of private companies meant a generation of Saudis would become company or share owners. Third, with both domestic and overseas companies invited to bid for contracts, local and foreign capital would be invested in the kingdom, strengthening the private sector, while also contributing to the diversification of the economy.
In 2003, six years after the Council of Ministers issued the decree outlining its plans, the council released a 22-strong list of public services earmarked for privatisation. The list included agriculture, aviation, railways, road, and water, as well as public share sales in national corporations. Along with the ports sector, telecoms was one of the first major sectors to be part-privatised, with the sale in late 2002 of 30 per cent of state telecoms operator Saudi Telecom.
In releasing the list of sectors earmarked for privatisation, the SEC reiterated its aims.
“Privatisation programmes are an integral part of public policies associated with economic reform, liberalisation, monopoly control and the achievement of improved competitiveness,” it said.
However, the failure of some privatisation projects is proof the government may have been too ambitious in its policy making. In 2003, Riyadh announced plans to invite private companies to take part in building the $7bn trans-Arabian railway, the Landbridge rail project, but in 2009 announced a change of strategy. The original plan to develop the Landbridge on a 50-year build-own-transfer model was ditched in favour of using public capital.
Renewed privatisation progress
In June 2010, the Labour Ministry announced a target of creating 160,000 new private-sector jobs. The ministry is carrying out studies into private-sector wages, with the aim of identifying ways to raise salaries. As the shrinking number of Saudis employed in the private sector shows, those who do accept jobs with private companies are likely to leave – and the main reason cited, is the higher wages they can get working in the public sector.
However, the partial privatisation of the kingdom’s ports provides a good example of how Saudi nationals can benefit from the policy – and how the government’s strategy has worked for some sectors. The Saudi Ports Authority, with the help of specialist maritime institutes, has set up two training centres, one in Jeddah and one in Dammam. Skills taught include piloting, diving, maintenance and cargo handling. Trained local then have the right skills to be employed by the private companies managing the ports. At the end of 2007 (the latest year for which figures are available) the two centres had trained more than 22,700 people, 97 per cent of whom were Saudi nationals.
Privatisation roll-out in Saudi Arabia
Ultimately, Riyadh says it wants to cut its reliance on foreign labour to zero; a goal that seems both unrealistic and in conflict with the government’s aim of creating a more open economy. However, if the government rolls out its privatisation policy across more sectors, thereby reducing the number of public sector jobs available, this may push a new generation of Saudis into working in the private sector.
With the growing number of services successfully privatised, there is now a skills base of privatisation specialists who can further develop the policy. Khaled al-Molhem was at the helm of Saudi Telecom when it was privatised in 2001, he is now overseeing the privatisation of the kingdom’s national airline, Saudia.
With the lack of investor appetite that dogged Riyadh’s privatisation plans from 2008 to early 2010 beginning to ease, the government is once again reviving its privatisationpolicy.
Agriculture minister Fahad Balghunaim announced in November that it plans to hand control of 11 state-run flour mills to the private sector in 2012. Just as Riyadh entered the privatisation game for pragmatic reasons, so it has revived the policy when the time proved right.
Water and wastewater
The privatisation of the kingdom’s water and wastewater infrastructure was first announced in 2007 by Saudi Arabia’s Water and Electricity Ministry. The process was formally started in early 2008 with the tendering of a contract to manage Riyadh’s water networks. The state-owned National Water Company (NWC) awarded two water management contracts covering Riyadh and Jeddah to France’s Veolia and GdF Suez in April and May 2008 respectively. The award of further contract, for a public-private partnership covering the Mecca and Taif areas, has still not been made. A request for proposals for a similar contract for Medina was set to be issued in early-September 2010 and a Damman tender was to follow, but no tender has yet been issued.
The timetable for selling off the kingdom’s wastewater treatment plants to the private sector have also been delayed. The Finance Ministry in 2009 rejected an application seeking support for a kingdom-wide privatisation strategy and had to draw up a more conservative plan to apply for support on a case-by-case basis. The financial crisis meant the NWC opted in February 2010 to tender the construction of a new wastewater treatment plant at Al-Kharj, Riyadh, using an engineering, procurement and construction contract rather than a full private finance initiative tender.
The privatisation of Saudi Arabia’s power sector has been burdened by problems. With rising demand for electricity in the kingdom, new power plants need to be delivered on time.
As the story of the world’s largest independent water and power project – Ras al-Zour – shows, the privatisation of such an important sector was never going to be easy.
Affected by the global financial crisis, in early 2009 one of the members of the first-ranked consortium in the project announced it was seeking to reduce its equity stake in the scheme from 20 per cent to just 8 per cent. This left a financing hole that no other consortium partner was willing, or able, to fill.
This meant that the government had to step in and change the project to an engineering, procurement and construction (EPC) contract instead – a move that was repeated in the wastewater sector.
National airline Saudia is being privatised. Director general Khaled al-Molhem said in March 2010 that the airline’s core aviation unit could be privatised by March 2012 through a share sale to a consortium national corporations. The local Al-Ahli Capital and the US’ Morgan Stanley are acting as financial advisers on the deal.
Support services have already successfully been handed over to the private sector – including catering now part-owned by Abdul Mohsen al-Hokair Company for Tourism and Development and the Fowzan and Newrest Group – and cargo units, in which Tarabut Air Freight Services bought 30 per cent in 2008.
Saudi Privatisation Timeline
1980: Riyadh announces it is to adopt a privatisation policy in its 1980-1985 economic plan
1997: The ports sector is part-privatised
The government issues a decree calling for the growth of the private sector
2001: The Supreme Economic Council is given responsibility for overseeing the privatisation programme
2002: The telecoms sector is privatised
2003: The Council of Ministers releases a list of 22 sectors targeted for privatisation
Riyadh announces plan to invite private companies to build the Saudi Landbridge rail project
2008: The catering and cargo units of national airline Saudia are privatised
2009: The Finance Ministry rejects a Water Ministry application for a kingdom-wide wastewater sector privatisation
2010: The Agriculture Ministry announces plans to privatise 11 state-run flour mills