Distinguished Fellow, Energy, Environment and Resources

Economic liberalization through privatization is unlikely to succeed in the GCC states without simultaneous political liberalization and reform.

A Saudi investor at the Tadawul (the Saudi Stock Exchange) in Riyadh, on 15 June 2015. Photo: FAYEZ NURELDINE/AFP/Getty Images.A Saudi investor at the Tadawul (the Saudi Stock Exchange) in Riyadh, on 15 June 2015. Photo: Getty Images.

Summary

  • The collapse in oil prices since 2014 has presented serious economic challenges for the countries of the Gulf Cooperation Council (GCC), underscoring the need to diversify their economies away from oil and develop their private sectors. In response, the GCC states have devised wide-ranging economic reform plans, central to which are, in many cases, options to privatize state-owned enterprises (SOEs).
  • Media attention has focused particularly on the proposed sale of parts of Saudi Aramco, but across the GCC states the interest in privatization extends beyond energy to other areas of industry and services.
  • Privatization, for the GCC states, is expected to create more effective incentives; force greater accountability on senior management; reduce government interference in business operations; and give management clear commercial targets unfettered by requirements of social policy. It is also intended to reduce the financial constraints on enterprises that have hitherto been dependent on government revenue.
  • However, much of the current discussion disregards the lessons learned from privatization experiences elsewhere in the 1980s and 1990s. The very large literature developed at this time raises serious questions about the ability of divestment programmes to deliver the objectives now expected of the same process in the GCC.
  • Analysis of the ideological arguments for privatization – derived from the economic theory of politics, theories of public choice and principal-agent analysis – can be used to explain why there is a strong possibility that governments in the GCC states will fail to privatize effectively.
  • Previous experience shows that simply changing the property rights of an enterprise – i.e. switching it from public to private ownership – is not in itself sufficient to improve performance. This requires other conditions, including increased competition; improved signals that force management to be responsive, flexible and inventive; reduced government interference to allow management to maximize shareholder value; and effective and efficient capital markets to impose the necessary discipline on managers.
  • The socio-political conditions that characterize the GCC countries – based on family and other elite patronage networks, and where property rights are dubious, the rule of law may be debatable, and the prospects for independent regulation of privatized enterprises are uncertain – are not conducive to enabling the necessary conditions for privatization to succeed.
  • Economic liberalization through privatization is unlikely to succeed in the GCC states without simultaneous political liberalization and reform. If privatization simply delivers a set of windfalls for the state while reinforcing traditional patronage networks, this is likely to aggravate the same perceptions of corruption and helplessness that triggered the Arab uprisings from the start of 2011.
  • Theory and contextual analysis alike therefore suggest that privatization will not be the panacea that many believe it to be for the GCC states. A process that allows the entry of the private sector and thus forces a (hitherto monopoly) SOE to compete and perform appears to be a more realistic way forward than does wholesale privatization.