Privatisation

Privatisation

An important initiative on which a consensus has gradually been formed in government - considerably influenced by some of the new ministers and the Majlis as-Shura - is privatisation.

The basic instinct of the Saudi government, and of other Arab governments, is against this idea. The governments do not like losing control of any part of the societies they rule, and in the Saudi case the government is embarrassed by the thought that the sale of a state enterprise implies it cannot continue to give its people some of the subsidies it has told them are their right.

In the present conditions of falling oil revenues and rapidly rising demand for services, however, the government has come to accept that it cannot maintain its old policies. It has also come to see that in the long term privatisation will help create a more vigorous economy which will provide more jobs. And in the shorter term it sees it as a means of deflecting some of the criticism being directed at ministries by businesses and members of the public who cannot get telephone connections or seats on aeroplanes, or who are suffering from the occasional "brown outs" that occur at times of peak electricity demand in summer.

So far there has been an announcement of only one definite privatisation plan - in the electricity business. Here demand is expected to grow by an average of 4.5 per cent a year during the next two decades, which implies that generating capacity will have to increase from its current 21,000 megawatts to 70,000 megawatts by 2020. This will require investment of some $120 billion. Under the tariff system that has operated up to now there is no possibility of the industry generating its own funds, because it has been running at a large loss, caused partly by its being forced to sell electricity below cost and partly by its inability to collect even the minor charges it does levy from many members of the royal family. It seems equally out of the question that the government will be able to provide capital funds from the central budget.

Bowing to the inevitable, at the end of November last year the Minister of Industry and Electricity, Hisham Yamani, published a plan for the reorganisation, financial reform and privatisation of the industry, and in so doing greatly enhanced his reputation as an effective reformer. The scheme first involves the merging of four regional electricity companies, in which the government owns an average of about 80 per cent of the shares. Then, when the new company begins operations in the summer there will be a round of price rises, which will not affect small households but will involve big increases for the larger consumers. There will be parallel increases in connection charges, with households having a large amperage capacity paying a heavy premium.

The merged business, to be called the Saudi Electricity Company, will be given three divisions, for generation, transmission and distribution, each of which will be run as a profit centre. Part of the purpose of this is to make it possible - if the government wants - for foreign companies to invest in generation on some sort of lease or build-operate-transfer basis, and receive dividends on their investments. It will be up to the distribution division to collect all the revenues due to it, or negotiate some form of continuing subsidy from the central government. The assumption is that the government is anxious that the company should collect as much revenue as possible - hence in part Crown Prince Abdullah’s remark about everyone being "the same". It is expected that the new company will publish much more detailed figures than did the old regional companies, and this should help the government in enforcing the new policy.

Once the new structure is operating the Saudi Electricity Company will be privatised in stages, with an initial offering of about 30 per cent of the stock probably taking placein 1990.

The other state businesses most often mentioned in the restructuring and privatisation context are telecommunications and the national airline, Saudia. Both suffer from the same problems as with electricity: high levels of subsidies and non-payment of bills. The Ministry of Telecommunications, which until last November was thought to have the most advanced plans, has formed a board for a new private firm, the Saudi Telecommunications Company, which is to be capitalised at $2.67 billion. No further plans have been published, because in 1997 the government unwisely announced that the new company would not raise prices, cut salaries or make workers redundant. At Saudia, which comes under the control of the Minister of Defence and Aviation, Prince Sultan, there has been an announcement, in March 1998, of the intention to privatise, but no details have been published of how this will be done. To prepare the ground for a sale, the airline is trying to make itself more efficient and more attractive to customers.