Since 2014, the collapse in oil prices has thrown up unprecedented economic challenges for the six Persian Gulf states that make up the Gulf Cooperation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – accentuating the necessity to wean their economies off hydrocarbons.
Judging by long standing over-reliance upon the sale of oil for government revenues, the success of diversification programs is critical. Kuwait is the most dependent, relying on oil for 89% of its revenues, while the UAE is the most diverse economically, with (a still significant) 41% of revenues derived from oil.
Government revenues are integral if spending commitments are to be realized and for populations to be pacified. Indeed, in the wake of the Arab Spring, regional governments have assessed an inability to buy off domestic political discontent stemming from reduced spending as representing an existential threat to regime security.
Given this dependence, the recent declines in crude oil prices have led to a fiscal deterioration of the Gulf states. Each country has responded by employing an aggressive cost-cutting and revenue-generating strategies within their overall economic transformation plans moving forward.
In this context, privatizations of state-owned enterprises (SOEs) have become a central plank of GCC economic reform strategies that are on the mend, and are projected to be the immediate panacea for declining oil wealth.
The rolling back of subsidies – an intrinsic part of the GCC’s social contract – is already underway. Measures to terminate fuel subsidies started with the UAE, which abolished its $7bn annual petrol subsidy in July 2015. Later in 2015, Saudi Arabia increased its gasoline prices by over 50%; Bahrain and Oman followed suit in early 2016. The discussions of value-added and corporate taxes are not mere pipe dreams, given that the GCC has agreed to impose a 5% VAT from 2018 onwards in a coordinated fashion.
While privatization has persisted a politically unpopular option both in the Gulf monarchies and in transition economies (such as Egypt), divestment from SOEs are now seen as a last resort in the Gulf in light of government belt-tightening – particularly in Saudi Arabia, Oman, and Bahrain.
In the GCC, privatization – defined as the selling of existing state-owned enterprises into the private sector – expresses itself as a range of mechanisms that are being considered to increase the role of the private sector in the economy: from build-to-operate-transfer (BOT), management contracts, and to opening restricted sectors to private investment through public-private partnerships.
Probably the highest-profile effort has been the National Transformation Program (NTP) launched in Saudi Arabia in 2016 as part of the implementation framework for Vision 2030. As noted by an IMF consultation, the strategy outlined,
“the goal of an appropriately bold and far-reaching transformation of the Saudi Arabian economy to diversify growth, reduce the dependence on oil, increase the role of the private sector, and create more jobs for nationals”
In particular, much attention has focused on the planned listing of a 5% stake in the world’s biggest oil company, Saudi Aramco. The IPO is considered to be the lynchpin of an economic reform programme led by crown prince Mohammed bin Salman, and its declared valuation at $2tn would make it the largest IPO of all-time.
Meant to foster financial transparency and accountability in one of the world’s most hermetic kingdoms, the IPO was deemed crucial amid calls for the government to increase investment and ease austerity, as an economic recession gradually pilled domestic pressure upon the regime.
However, recent reports indicate that the proposal to sell Aramco’s shares by 2018 might be shelved in favor of a private share sale to sovereign wealth funds and institutional investors, due to royal palace’s micromanagement of the IPO and vacillation over a suitable international venue for its listing.
Even if it were to list those shares on the kingdom’s Tadawul stock exchange as a move to promote Saudi capital markets, given the size of the potential Aramco listing compared to its $460bn market capitalization, further complications would be generated. Given the limited pool of capital in the country, such a listing is unlikely ever to raise the $100bn that Salman needs for his Public Investment Fund to bankroll non-oil investments in the kingdom.
Elsewhere, the Kuwaiti cabinet had approved plans that boost private sector participation to 40-50% in public-private joint ventures, and permitted the private sector to acquire shares to the value of $9bn in public sector firms such as the Kuwait Petroleum Corporation. In the UAE, approvals for the privatization of the country’s utility sector were in place for years, and by 2016 Dubai’s ruler Sheikh Muhammad bin Rashid announced plans for privatization of much of the UAE’s services as part of transitioning to a post-oil economy. Oman also has publicized that privatization is to be slated for a number of its state-owned energy companies.
The rhetoric behind privatization suggests that it is intended to both improve enterprise performance and the nation’s economic well being while solving budgetary problems in conjunction with raised government revenues.
However, in the current context of the GCC states, the prospects for attaining the necessary conditions for privatization to be successful are unlikely to obtainable.
Considering that GCC governments have a long history of strong intervention in their economies (under the rationale of delivering public policy and development objectives) and that many of the SOEs being targeted for privatization are energy-related and thus strategically integral, it is hard to envision that any regime would cease interference in the sector, irrespective of ownership.
Tied to this are employment and a skills gap, as GCC governments have sought to promote a key economic policy of securing job creation for a growing number of their unemployed citizens through nationalization (“Saudization”, Emiratization” etc.) initiatives. Under private sector ownership, this agenda would come into conflict with businesses that would be unwilling to maintain bloated workforces that are products of what are (generally speaking) dysfunctional national education systems. Thus, the goals of privatization and nationalized employment quotas are presently incompatible.
The socio-political conditions that characterize the Gulf states are far from being conducive for undertaking liberalized economic reform. Based on family and elite patronage networks, where property rights are ambiguous, the rule of law contentious, and the prospects for independent regulation of privatized enterprises undetermined, such factors would not be favorable in allowing privatization proposals to succeed.
With this socio-economic backdrop to privatization in the Gulf, and considering that the state is the largest shareholder of listed companies, to whom will these companies be sold? Domestic institutional investors might take on their shares, but this would effectively mean funneling money from one government coffer to another, as domestic capital is often sovereign. This would prove unappealing to foreign investors, seeing as such arrangements would come with a high degree of suspicion regarding the quality of governance of newly privatized companies, as they are likely to remain under the thumb of their respective governments.
Furthermore, economic liberalization will be difficult to achieve without simultaneous political liberalization. Moreover, a tangible fear is that privatization delivers but a set of windfalls for the state while buttressing traditional patronage networks, and in the process inciting the same discontent with nepotism, corruption, and inequality that triggered a wave of uprisings in 2011 across the region.
And if it does, as the old social contract transitions to a new one, there is a good chance that the tenuous legitimacy of the Gulf regimes’ ruling bargain would experience severe tension – if not outright rupture.