ON PRIVATIZING GOVERNMENT UNDERTAKINGS IN SAUDI ARABIA

ON PRIVATIZING GOVERNMENT UNDERTAKINGS

IN SAUDI ARABIA

DR. ABDULAZIZ M. AL-DUKHEIL

The talk on need for privatizing some of the government undertakings in Saudi Arabia has been going on for quite some time now. The Fourth Development Plan (1985/1990) of Saudi Arabia has accorded a high priority to privatization of public undertakings. The Plan states the privatization policy in unequivocal terms: "... the government will in future concentrate more on regulatory and promotional functions and allow the private sector, through the market system, to meet the Kingdom's demand for goods, services and facilities" and will "increase opportunities for the private sector to acquire, manage, and operate projects currently operated by the government ...". But, no concrete step has been taken so far in this direction, perhaps, because of the downturn in the economy which had badly affected the private sector capabilities.

However, with the revival of the economy and increasing private sector abilities and confidence, the privatization move has gained momentum once again. The issue is now being considered more seriously than ever before. At the Jeddah Conference of Businessmen, public authorities have reiterated government's urge to privatize some of its commercial enterprises and have

* Dr. A1-Dukheil, former Deputy Minister of Finance, Saudi Arabia, is President of the Consulting Center for Finance and Investment (CCFI), Riyadh. The author would like to thank Dr. D.N. Dwivedi of CCFI for his help in preparing this paper.

invited the private sector to take on some of the economic functions of the government. The private sector participants and businessmen at large have, on their part, enthusiastically welcomed the move and voiced their preparedness to accept the challenge, though some have expressed skepticism. In the

deliberations at the Conference, some 13 public enterprises including giant-size undertakings like SABIC, PETROMIN, SAUDIA, SAUDI TELECOM, SAUDI RAILWAYS ORGANIZATION and MOH hospitals were listed to be privatized over 10-15 years.

WHY PRIVATIZATION?

Privatization move in Saudi Arabia should not be viewed and evaluated merely as an anti-thesis of nationaliza­tion. Nor should it be considered only as a means of reducing financial burden of the government or creating new investment opportunities for the private sector. To place the issue in a right perspective, privatization in Saudi Arabia should, in fact, be viewed in the background of historical and socio-economic develop­ments in the Kingdom.

Historically, the economic system of Saudi Arabia has been based on the principles of laissez-faire. Free private entrepreneurship with least government intervention has been the underlying philosophy of the Saudi economic system before and after the unification of the country. The laissez-faire policy has been followed ever since irrespective of the size and the nature of the economy.

Saudi businessmen from eastern province, Najd, north, west and south have for long been carrying out variety of economic activities including agriculture, livestock breeding, handicrafts, trade, money exchange and shipping based on the principles of free entre­preneurship. Camel and sheep were exported to Egypt, Syria and Iraq and consumer goods were imported in lieu thereof. All these activities were dominated by private initiative, capital, management and operation. Traders and labour force from different parts of the country, have sought business and work opportunities in India, Iraq, Kuwait, Bahrain, Egypt, Syria, Jordan, etc. Economic activities were, indeed, the sole preserve of the private sector.

The Saudi government has all along adhered strictly to the principle of free enterprise system. It has provided social, political, legal and economic environment necessary for encouraging, promoting and maintaining private sector activities. Saudi Arabia did not entertain the idea of nationalization during the nationalization-wave of 1950s and 1960s which had swept across the Middle East and the third world at large. Many neighbouring countries - Egypt, Syria, Iraq, Algiers, etc. - nationalized, rather deprivatized, most of their private industries during this period. Saudi Arabia however, adhered to the principles of free enterprise  system     and  promoting  private

entrepreneurship.

INEVITABLE GROWTH OF THE PUBLIC SECTOR

Although Saudi Arabia has all along adhered to its policy of promoting private sector, the public sector has grown exponentially and has dominated the economic scene of the country over the past 3 decades. With its  60% share, the public sector continues to remain the major contributor to the GDP. Many of the major industries of the country are owned, controlled and operated by the government and its agencies. Besides, government institutions own majority shares in many

industrial, banking, service and utility sector establishments. To an unsearching mind, these facts may appear to contradict the Kingdom's adherence to the policy of promoting private sector activities. The fact is however otherwise.

In fact, the growth of public sector in Saudi Arabia has been a historical, social and development necessity. The exploration and production of oil, the single source of the county's foreign exchange had eventually to be in the hands of the government. For, the private sector capabilities to meet the investment, technological, machinery and managerial requirements to develop oil industry on a scale it has acquired to day were insufficient in the early 1940s when oil was discovered and produced. Besides, the private sector did not possess at that time the place and power to cope with international oil politics and vicissitudes of the oil market.

Far more important was the imperative need for using the new-found wealth, oil income, for transforming a traditional society into a modern nation. In order to achieve this national goal, it was indispensable to create conditions and necessary growth infrastructure for economic diversification and rapid growth of modern

industries.A network of means of transport and communication (roads, harbours, airports and telecommu­nication), electricity and water supply had to be created. Educational institutions, i.e., schools, colleges, universities, research institutions, training centers, and health care facilities had to be created for speedy development of manpower resources in the country. These development activities aimed at creating conditions for the growth of private sector activities as an integral part of the government's economic policy. This was too giagantic a task involving colossal investment, far beyond the private sector capabilities. Besides, the government had also to develop agriculture sector and certain basic industries in order to meet input needs of the private sector enterprises. The government had the financial capabilities to accomplish these tasks in a short span of time irrespective of the cost involved.

In order to achieve a speedy growth of industries, agriculture, transport and communication system, and socio-economic infrastructure, the government invested huge amount of money in these activities. Consequently, the government expenditure rose from SR 6.4 billion in 1970/71 to SR 368.0 billion in 1981/82 and project expenditure increased from SR 2.6 billion to over SR 200 billion during the same period. Such a speedy approach to investment and spending was however not free from waste and misallocation.

The exponential growth in the project expenditure led to a greater share of the government in the total assets and economic activities of the country. The result was an eventual growth of the public sector in Saudi Arabia. Public sector continues to grow although pace of its growth has considerably reduced in recent years due to a 50% fall in public expenditure following the oil price collapse in mid 1980s.

PROMOTION OF THE PRIVATE SECTOR

Government policies and programmes to expand the public sector activities should not be misconstrued as deviation from its policy of building a private enterprise-based economy. All along its efforts to expand public sector, the government has provided huge amount of interest-free loans, concessional industrial sites and electricity with a view to speeding up the growth of the private sector. Total loans disbursement by the specialized credit institutions between 1975/76 and 1985/86 has exceeded SR 200 billion.

Due to both government support and its own initiative and thrust, private sector has made tremendous progress in industry, trade, commerce, construction and agriculture over the past two decades. These sectors have grown horizontally as well as vertically. Private sector share in GDP has gone up from 27% in 1970/71 to about 40% in 1987/88, though it had declined in the late 1970s to around 18%. Private sector gross fixed investment currently accounts for about 47% of the total. Over 85% of the total labour force is employed by the private sector. Private sector exports account for over 50% of the total non-oil exports. These are few indications of the current status of the private sector in Saudi Arabia.

NOW AN APPROPRIATE TIME FOR PRIVATIZAION

Most of the development infrastructure necessary for further growth of the economy is in place. The strength of the Saudi economy has been tested during the recent economic downturn. The economy has been able so far to weather the fluctuations in the oil prices.

The economic downturn has also simultaneously tested the strength of the private sector and it was able to withstand the odds of the recent economic fluctuations. The private sector, we believe, has the capabilities to share some of the economic functions of the government, through its relatively higher competence to manage and operate large scale business enterprises more efficiently.

On the other hand, due to financial constraints, spending capacity of the government has declined by over 60% between 1981/82 and 1988/89. Although the recent rise in oil prices and oil quota have improved the revenue prospects, the need for higher levels of government spending has virtually reduced. It is at this juncture that privatization of government enterprises gains a great significance.

Furthermore, notwithstanding the foregoing facts, the Saudi economy has certain challenges to face and certain problems to resolve. The major challenges and problems are: need to diversify the sources of incomes in order to reduce the dependence on oil income and to ensure a long-term, steady and stable growth; providing larger opportunities to the private sector to invest its wealth accumulated during the boom period in the national ventures and to attract the money invested

abroad; revitalising the government projects and industries,improving their performance; reducing

burden on public treasury and creating alternative sources of financing productive ventures; creating conditions for social justice through redistribution of public wealth based on private property institution; making appropriate use of private sector managerial abilities, resources and potentials. Privatization of public enterprises can play a big role in facing the challenges and in resolving the ensuing problems.

CONCLUSION

The Saudi economy has reached a stage where reorienting the economy from public sector-based growth to private sector initiative has become an economic necessity. However, we feel that privatization issue is still at the stage of good will announcement. The next stage should be to chalk out a long-term programme and strategy, to select some government establishments for privatization and to announce the implementation schedule. The privatization need to be carried out gradually, beginning with transfer of some viable

Projects to the private sector on experimental basis. The experience gained from the experimental transfers should form the basis of the future course of privatization. The initative for transferring public organizations to the private sector will have to come from the government.

 

-    Source : Journal of Arab banks, Arab Bankers Association, NYC, USA ,   July 1989