Chapter 3 -Basic Issues to Be Dealt With in the Privatization Process
A. Regulatory framework for privatized sectors
Developing a regulatory framework for the privatized sectors is one of the most important elements of the entire privatization process, particularly in sectors where one enterprise enjoys concession rights that enable it to monopolize the market or control a large portion of it. Basic infrastructure enterprises are among those that most urgently require regulation. The objectives for establishing regulatory frameworks are summarized below:
- To protect consumers from the possibility that service providers (enterprises) with monopolistic concessions may exploit their position to raise prices, limit the provision of services, or reduce quality.
- To protect investors by insuring that government intervention in the activity is within what has been agreed upon and does not impose additional burdens on investors that could adversely affect their returns, particularly given that investors sometimes invest large sums that can take years to produce any return.
- To encourage production efficiency and increase competition among various companies in the sector.
- The regulatory agencies generally grant licenses to service providers, coordinate with them, and monitor implementation on the basis of the licenses granted.
Establishing the regulatory agencies is an integral part of the privatization process, particularly in the public services sector. There are three models for these agencies:
- A separate regulatory agency for each service in a single sector (e.g., establishing an independent agency to regulate telecommunications services and another to regulate postal services, etc.)
- A single regulating agency for each sector, that is, establishing a single regulating agency for the energy sector (electricity, gas) and another for the transportation sector (railroads, aviation, roads, and navigation).
- A single regulating agency for a group of sectors, such as energy, telecommunications, and transportation.
The appropriate model will be selected on the basis of a careful and comprehensive study of its objectives, positive and negative aspects, and appropriateness for Saudi Arabia. The Privatization Committee of the Supreme Economic Council will recommend selection of the appropriate model upon completion of the study by the competent agencies.
Autonomy of the regulating agencies:
Autonomy of the regulating agencies is one of the most important factors in guaranteeing the success of efforts to decide on issues involving rights, duties, and common interests, as well as enjoying the confidence of all parties involved in the sector, including the government, investors, employers, and consumers. These agencies shall have legal personality and shall enjoy both administrative and financial autonomy.
B. Fees for providing services
Fees for services vary among public enterprises because the government, based on the necessity and importance of the services provided, subsidizes some of them. Where there is no clear mechanism for determining fees for the services of public enterprises that reflects their cost, the implementation of the privatization process is hindered, particularly from the point of view of the investors.
The government subsidies affect price levels for public services, particularly certain subsidies that are considered fundamental obstacles to privatization and a principle source of economic inefficiency. Therefore, a systematic method must be established to set tariffs for services that takes into consideration their cost, allows for the stable provision of services, and makes it possible to finance the investments of enterprises that provide them, while allowing the government to provide subsidies as needed.
C. Preparing and restructuring the sectors and public enterprises to be privatized
The issue of restructuring public enterprises or projects that are to be privatized is generally raised before the privatization process is implemented, and it is generally preferred to leave the main restructuring issues to the new owners. However, it is sometimes not possible to avoid restructuring, as there may be large liabilities that adversely affect the project s value, and it may be necessary to split up the enterprise in order to improve the overall structure of the sector. Preparation and restructuring activities generally fit into one, or more of the following categories:
- Financial restructuring: This includes either adding or removing assets or liabilities to improve the financial position of the enterprise.
- Restructuring of manpower: This involves transferring employees or workers from the public enterprise to the privatized enterprise and dealing with the employees’ situation on the basis of a comprehensive study and clear plan developed by the enterprise in accordance with its future requirements.
- Technical restructuring (splitting up): Splitting up [an enterprise or sector] often helps create an effective regulated environment. For example, in the electricity sector it may be preferable to separate production, transmission and distribution activities from each other, as the value of the parts maybe be greater than the value of the whole. There are also cases that require the merging of various enterprises before they are privatized, in order to increase their productivity.
D. Strategic partners
The magnitude of issues and the complexity of procedures facing public enterprises and projects that are targeted for privatization are very large, and the task of reform is consequently also large. The required tasks are often beyond the capacity and manpower of their current management, as they include improving performance, adjusting prices, and developing commercial methods of operation, in addition to the ability to compete at the domestic and international levels. The strategic partner, whether Saudi or foreign, plays an important role by providing the needed capital, sharing the risks, offering advanced technology and administrative expertise to improve performance and create added value. This mandates that the strategic partner must have sufficient financial capability and experience in managing firms similar in size to the enterprise that is to be privatized, it must be able to provide a sufficient number of technical and managerial experts, and must have a good reputation.
E. Creating a suitable climate for the success of the privatization program
The success of a privatization program depends on the effectiveness of the climate aimed at private sector development. There are three important elements of this environment: the capital market, human resources development, and the regulatory environment.
1. Capital markets
Developing the capital market is one of the most important policies that will be pursued to achieve some of the goals of the privatization process, which include expanding the scope for participation by Saudi citizens in the ownership of productive assets and public enterprises and projects, as well as encouraging local investments of domestic and foreign capital. There is a strong connection between privatization and the capital market, as privatization leads to development of the capital market by encouraging investors and investment companies to diversify their portfolios by investing in companies that are well managed, and in diverse sectors such as telecommunications, electricity, cement, banking, and transportation. Small investors are also attracted, which will lead to the creation of investment tools of a joint nature and a balance in the liquidity position between banks and the financial market, as well as opportunities to invest the funds of social security and retirement pension agencies and other financial institutions. The existence of a developed financial market helps ensure the success of the privatization process when certain enterprises are privatized through public subscription in the capital market. This requires a number of specific elements in capital market, including:
- The regulatory and legal framework, which protects the rights of investors and defines the basis for regulating the market on the basis of clear, published regulations, and instructions.
- A strong infrastructure is required to develop a robust financial market that is appropriate for the economic capacities, in terms of the management system and the required technical apparatus.
- A sufficient number of investment tools that allow for the participation of large and small investors, including Saudis and non-Saudi residents.
2. Human resources development
The existence of well-developed, highly productive manpower is a critical factor in the success of the privatization program. Many Saudi human resources currently face difficulties in finding employment owing to lack of skills and competition from foreign workers, in addition to the problem of excess labor beyond the requirements of enterprises that are targeted for privatization. In order to develop manpower and enhance skills and competitiveness, enterprises targeted for privatization should be required to develop appropriate training programs to retrain their workers, develop their skills, and help them keep their jobs or find employment with other companies or enterprises.
3. Regulatory environment
The regulations and procedures related to investments and private sector activities, the capacity of the agencies responsible for their implementation, and the speed with which the related disputes can be settled are among the most important elements that must be revised, modernized, and integrated to create a suitable environment in which the private sector can operate effectively to meet the challenges of regional and international competition. Transparency in these regulations and procedures, as well as the ease of their implementation, will increase the confidence of investors and obviate the need for requesting the government to provide more guarantees, which are often required in the face of incomplete regulations and unclear procedures.