Privatization isn’t just business, it transforms a country

Transferring assets from the state to the private sector has a profound effect on the social contract that underpins the relationship between many Arab governments and their people.

PRIVATIZATION may be broadly defined as the full or partial sale by a government of state-owned enterprises (SOEs) or assets to private operators. However, privatization should be understood in its broadest sense as a transfer of assets from the state to the private sector, coupled with a radical process to reallocate productive resources, restructure the existing institutional framework in which production is taking place, and adopt new methods of corporate governance free of the most severe governmental political and economic interference.

Privatization has become a vital part of economic reform policies and even an engine of economic transformation in some Arab countries, in which they ultimately aim to decrease state intervention in the economy and increase the role of the private sector.

That said, several Arab governments, because of their economic crises, have no choice but to embark on privatization programs in order to ease the fiscal burden of supporting inefficient SOEs and reducing the fiscal deficit in the national budget. Or to put it bluntly, the social contract of the past decades, whereby Arabs traded political freedom for an expansive welfare state and generous subsidies, is no longer sustainable.

In practice, several Arab governments involved in privatization programs are aiming at a set of key objectives. These include privatization of target sectors in the shortest possible time, maximizing the financial receipts, selecting the right domestic and foreign buyers, maintaining employment and creating a competitive environment to secure longterm investments.

To achieve these objectives, the number of independent instruments must equal the number of goals pursued by policy makers. Certainly, once a decision is made to privatize state-owned enterprises as soon as possible, any restrictions on the other four objectives (such as restrictive regulations on foreign investment and limiting the redundancy of workers) may slow down the privatization process and limit the actual scope of efficiency and financial gains.

In this context, the privatization process must be carefully designed and sequenced, and implementation should proceed with a clear timetable and subject to high standards of accountability and transparency. It must be underpinned by legal and regulatory frameworks, an efficient tax regime, well functioning legal/judicial systems and specialized agencies where the expected volume of privatizations is so large.

Most importantly, privatization programs must be as part of a broader agenda to transform the whole country through deepening political and economic reforms. For example, creating a competitive environment is more important than the privatization programs themselves. Selling large state-owned enterprises that monopolize the production of important goods without creating a competitive environment or expanding ownership could be a strategic mistake.

A recent report by the Organization for Economic Co-operation and Development emphasized: “Governments should normally not privatize SOEs before an appropriate regulatory framework has been established. This framework includes anti-trust regulation to ensure competition where feasible, and specialized regulation to oversee activities where an element of monopoly is likely to persist.”

Meanwhile, neglecting the social dimension of privatization could have serious political consequences. If privatizations are inevitable, it is economically and politically necessary to expand social security nets, rehabilitate demobilized workers and act in a proactive manner to reduce the effects of higher prices for consumers, particularly where price subsidies are removed.

In the end, many policy makers in the region consider the participation of the private sector to be a vital issue that cannot be delayed. Yet governments still have certain obligations, including balancing the economy, ensuring the equitable distribution of wealth and guaranteeing the basic rights of citizens, especially those with low incomes or less fortunate in Arab societies.

Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on e-mail: nasertamimi@hotmail.co.uk. Twitter: @nasertamimi

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