In a consumer-oriented market like Saudi Arabia, there’s no shortage of things to buy. But now power companies, the postal service, hospitals, even football clubs, are up for grabs. The country’s in the midst of a privatization fever proponents say is necessary to create jobs and diversify the economy away from oil.
While the oil-rich Arab country has been flirting with privatization for years, the new rallying call came in earnest from the Washington-based International Monetary Fund when it bluntly warned in late 2015 that the Saudi kingdom risks depleting its financial assets in only five years. The Saudi regime, which has often looked to foreign expertise for economic direction, has responded with a remarkable level of urgency.
A few months later, King Salman's favorite son and de facto ruler Deputy Crown Prince Mohammed bin Salaman announced, with much fanfare, Vision 2030, the country's strongest and clearest push towards privatization and economic change. The bottom line is that Riyadh needed to respond to an unprecedented $98bn budget deficit following oil prices falling below $40 – down from nearly $100 a year earlier.
Almost immediately, price hikes ensued. Fuel prices jumped by 46% at the pump. A tax on foreign workers’ remittances was muted but is yet to be implemented. The government says it will impose a value added tax, a fee on foreign workers and a tax on ‘harmful products and extra luxurious products’. News of plans to slash subsidies were carried in the local press and pro-privatization pundits shot to celebrity status as they justified the moves on TV talk shows.
The word privatization was once a taboo in the rich welfare state of Saudi Arabia. It was considered a snub against the ruling family's ability to provide for public services from its riches and extend their ‘generous’ benefits to citizens. Privatization has now become a buzzword for economic planning.
‘The lower oil price is definitely one of the reasons for accelerating the privatization program at this stage as it prompted the rulers to make tough decisions. It was not the only reason,’ says Omar Al-Rasheed, Attorney-At-Law with the Riyadh-based Omar Al-Rasheed & Partners Law Firm. ‘Prices have previously been even lower than the current level. Many other factors, including the size of the Saudi population, and the new leadership in Saudi Arabia also contributed to the move.’
One priority for the Saudi government has been breaking the news to the once pampered public both about a more energized privatization program as well as higher fees and taxes. The approach has been to show how taxes and fees in Saudi Arabia compare favourably to advanced economies, where taxes are higher and standards of living still high. Comparison to the US and countries in Europe feature in the Saudi press daily.
‘‘The lower oil price is definitely one of the reasons for accelerating the privatization program at this stage as it prompted the rulers to make tough decisions. It was not the only reason’
Omar Al-Rasheed & Partners Law Firm, Riyadh, Secretary-Treasurer, IBA Arab Regional Forum
‘There is an urgent need to diversify government revenue away from oil. The push started in 2016 and will expand over the coming years,’ declared the Saudi Al-Youm newspaper citing The Fiscal Balance Program, a government agency in January.
The privatization plan aims to increase non-oil revenue to $120bn a year by 2020 and a growth to $266bn by 2030, while completely offloading subsidies from the already over-stretched government. And no sectors will be spared. Just under 300 hospitals and 2,259 health centers, according to the Saudi Ministry of Health, will be privatized by 2030.
The Saudi Postal Service is among the first government-owned agencies marked for a quick sale. This will be done through a holding company that will manage other communications, transportation and money transfer agencies. The aim is to increase the Postal Service's revenue from 1bn Saudi Riyals ($267 million) to 2.75bn ($734 million) by 2020 which will also lead to zero subsidies from the government to the service.
The real prizes in the privatization program will be oil and petrochemicals companies. Airports, tourism, media, education, power companies and even some services related to the justice ministry will be put up for sale, according to statements from the Saudi government.
Legal experts say that despite the enthusiasm inside Saudi Arabia for the program, the legal framework needs fine-tuning before all this can take off. Grahame Nelson, who heads the Riyadh Office of Al Tamimi & Company law firm told Global Insight that Saudi Arabia needs to establish ‘the sort of legal framework that will be seen as foreign investor friendly.’
‘Some important elements are already present – low tax rates and attractive government incentives for example,’ he says. ‘However, one pressing area related to the securities; many of the conventional forms of project finance securities are not currently available, though the proposed Commercial Pledge Law will hopefully go a long way to solve that problem.’
The country also needs wider publication of laws in foreign languages such as English and to further free up rules governing foreign investments, Nelson says.
Omar Al-Rasheed, who also serves as Secretary-Treasurer with the IBA's Arab Regional Forum adds that the government of Saudi Arabia needs to include more local expertise in the process of preparing the legal framework because of their knowledge and understanding of the economy.
From a legal standpoint, he says, the program will need to introduce better disclosure and cut red tape. ‘I believe procedure and transparency in the judicial system should be improved,’ Al-Rasheed says. ‘The government is working towards rapidly improving the system by allocating more resources, and by introducing an improved legal system to attract more investors from all over the world. Lawyers in Saudi Arabia constantly complain about the slow improvement in the system. In some cases, it takes several years to come to a decision because of bureaucratic delays and unnecessary procedures.’