- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
The collapse of oil prices after mid-2014 has forced many oil-producing countries to revise their public spending and re-evaluate their state budget. This has become more imperative for the Gulf States due to the heavy reliance on oil export revenues. The need to raise revenue to balance state budgets as well as to strengthen and diversify economies has seen the many Gulf States adopt wide-ranging privatization programs focusing on state-owned enterprises.
Economic diversification is imperative for the Gulf States whose economies are heavily reliant on oil sales for revenue. Among the Gulf States, the United Arab Emirates (the UAE) has the most diversified economy; nonetheless, the UAE’s oil revenue reached approximately 40 percent in 2016. From Kuwait, Saudi Arabia to Oman, all have promoted wide-ranging privatization programs as a means of mitigating the overall economic vulnerability. However, privatization in the Gulf has not yet provided the expected results for a number of reasons.
After the decline in oil prices in 2014, many Gulf States reconsidered their stalled or shelved privatization plans. With the crush in oil prices and with the further decline in the Gulf’s economic performance, the search for alternative revenue generating strategies emerged. Within this framework, the privatization of state-owned enterprises seemed to offer a solution for better economic performance given that the majority of Gulf economies were largely based on the public sector.
Privatization in the Gulf goes back many years. During the 1990’s, the sustained low oil price environment forced many Gulf States to seek alternative methods to combat their budget deficits and alleviate their heavy reliance on oil.
Oman, Saudi Arabia and Kuwait set targets for privatization but their attempts resulted in failure. In 2000, Oman was among the first to undertake a wide-ranging privatization program. The country’s attempt to privatize Seeb International Airport back in 2000 resulted in failure due to the lack of transparency, excessive bureaucracy and unattractive agreement terms. In another case, where Saudi Arabia took the initiative to privatize Saline Water Conversion Corporation in 2004, its slow progress ultimately ended in failure with the lack of political commitment. A similar failure was also experienced in Kuwait in its endeavor to privatize Kuwait Airways in 2010. No final agreement was reached because of the project’s restrictive contract terms.
Many advocates of privatization suggest that its effective implementation would enhance profitability, increase efficiency, enforce greater accountability and thus improve overall performance and contribute to the economic well-being of national economies. In the context of the Gulf States, the main focus for privatization was contingent on increased performance and improved overall economic wellbeing.
Therefore, the Gulf States’ anticipated outcome from privatization was set very high. The rationale behind privatization was that economic reform would eventually mitigate the high dependence on oil by creating an efficient, accountable management with clear and unequivocal targets. Policymakers also thought that privatization would create an alternative source of finance both at home and abroad during the low oil price era when Gulf countries faced chronic budget deficits.
The major reason for the failure in privatization was the short-sightedness in having high and unrealistic expectations without full implementation. Just merely changing the property rights from the public to private proved not to solve long-held problems without taking other conditions into consideration.
State intervention is still a big hurdle to an effective privatization policy. Despite the eagerness to privatize state-owned enterprises, the insistence on state interference in running an enterprise is set to eventually distort the outcome by negatively affecting performance. In critical sectors, like energy, in particular, the state is likely to intervene on many occasions, and above all, in the absence of proper legislation, the potential to become a natural monopoly is evident by blocking other companies from entering the market.
Energy pricing also remains a stumbling block to a diversified economy in the Gulf. Overall energy costs receive government subsidies and are priced below their market value in many Gulf States. The application of market pricing for energy would be very difficult for policymakers to apply risking political instability in a region that has inextricable links between economics and politics.
The public sector has been the primary source of employment in which the majority of citizens are employed. While 72 percent of all employees in Saudi Arabia work for the state, this number increases in Kuwait and Qatar to 86 and 87 percent, respectively. The full implementation of a privatization program in generating competition and profit-seeking in countries with such a high percentage of public sector employment poses a risk to these employees’ jobs.
A lack of regulatory transparency along with heavy red tape in many Gulf States all stand against the desire to create an effective and efficient privatization policy that might help economic diversification.
The lack of experience, labor market resistance, lack of institutional capacity, and poorly designed ownership rights has also obstructed the implementation of a successful privatization program.
Changing property rights from the public to the private sector alone will not bring the expected positive outcome. As long as traditional patronage networks remain the major decision-making mechanism, and if interference in business operations is neither eliminated or supported with strong accountability and clearly set targets, the privatization of state-owned enterprises in the Gulf will not deliver its targeted outcome on which future economic success will be built.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.