Saudi Arabia is planning to raise about $55 billion in the next four years as it embarks on a nascent privatization plan to boost revenue and plug its yawning budget deficit. The move by Crown Prince Mohammed Salman is part of the Saudi government’s plan to pull the country from the oil-addicted, state-dominated economy, and modernize the Kingdom.
A pipeline of 160 projects
According to the finance minister, Mohammed al-Jadaan, Riyadh has settled on a total of 160 projects across 16 sectors and public-private partnerships as major beneficiaries of the privatization program. This plan will go a long way in filling the yawning budget deficit, which has been a significant challenge in Saudi’s plans to upgrade its economy and modernize the country.
As part of the privatization program set to run through to 2025, Riyadh intends to outsource the management and financing of health infrastructure and services to the private sector. The move will also rope in transportation networks, school buildings, water desalination, sewage treatment plans, and airport services.
The government is also targeting the sale of particular assets, including television broadcasting towers, district cooling, and desalination plants, and government-owned hotels. The move is expected to raise the funds needed to drive the economy forward and improve the living standards of the people.
Driving force behind privatization move
Shedding light on the privatization issue, the finance minister stated that it no longer makes economic sense for the central government to run some services and utilities, hence, the need to outsource them to the private sector. This will go a long way to cut down government expenditure and ease the pressure on public finance.
The minister further said that Riyadh expected to raise revenue through the privatization program, and the funds would go into plugging the $79 billion deficit, the equivalent of 12% of its gross domestic product. This would improve state services to the citizens. Mr. Jadaan is hoping to raise $38 billion through asset sales, and another $16.5 billion through public-private cooperation.
The Aramco connection
Talks are already underway for the possible sale of 1% government stake in Saudi Aramco, which listed 1.7% of its shares in 2019. Aramco is the country’s global energy company. Shedding more light on the Aramco connection, the finance minister said Aramco was free to monetize its assets and channel the funds into new investments, but the government would monetize its shares in the company.
However, funds raised through future sales of Aramco shares would go to the Public Investment Fund (PIF), the body spearheading the country’s efforts to diversify its economy, rather than the treasury. PIF itself will remain immune to the privatization efforts because of its role in the growth of the economy.
The country’s privation plans have been ongoing for the last three years, beginning with the sale of public flour mills, sports clubs, and a water desalination plant. But it wasn’t as fast as people would have expected, as only five asset sales had been made so far — Saudi Service Medical Center, and four milling companies.
However, the government isn’t expecting much foreign interest in privatizations. A Gulf analyst stated that the initiative would largely attract local businesses because foreign investors were still circumspect over the issue. He attributed the reluctance of foreign investors to the tarnished image of the Crown Prince’s leadership by the international community, citing alleged human rights abuses.
Benefits of privatization
The Saudi government looks forward to leveraging privatization to enhance its economy and plug its budget deficits. Although it seems to be slower than expected, the government hopes to raise a massive $55 billion in the next four years.
Here are some reason pushing the privatization program:
1. Improved efficiency
The public sector is known to perform below par because it usually isn’t under any pressure to perform. Many public industries don’t even worry about competition because they are monopolies. By privatizing sports clubs, the health sector, and some milling companies, the Saudi government is looking forward to bettering services for its people. This is because private companies work for profits, forcing them to provide better goods and services.
2. Way of raising funds internally
The government hopes to raise a whopping $55 billion internally, so it won’t have to worry about foreign dependence. Privatization will help it gather the financial resources needed to plug its budget deficits, instead of having to borrow from external financial firms, as other countries do.
3. Cuts down government expenditure
Privatizing certain sections of the public sector relieves the government of its financial responsibility. Some of these public entities need huge sums of money to run and maintain, but may not fetch enough money in profits. A good example is the management of sports clubs, which the government hopes to sell to the private sector.
4. Fosters economic democracy
The Saudi government hopes to broaden the space for the private sector struggling in a state-dominated economy. There had been numerous complaints from companies crowded out of the market by the PIF. Privatization should be a lasting solution to this challenge. As John Sfakianakis, a Gulf expert based at Cambridge University puts it, the government now wants to include the private sector in economic growth.
5. Creation of jobs
The many Saudis locked out of employment from the public corporation now have something to look forward to as privatization takes shape in the country. The Gulf expert at Cambridge says the government wants to slim down on its business operations, reduce its liabilities, and outsource financial and health services to private entities. This would open up the private sector for more jobs.
You can take advantage of the privatization program
As the privatization move gathers momentum, it’s clear that local businesses stand to gain massively if they position themselves well. As a local businessperson, you need professional and experienced lawyers to help you understand the legal implications of privatization. Such lawyers will also help you interpret the privatization law, which the government will enact in July.
You can ensure your business is in the best position to tap into the privatization move by the government by partnering with the best law firm. If you are looking for the best lawyers, please contact HMCO today to get started.