Privatization in the Arab World - Report Example

Privatization in the Arab World Name Institutional Affiliation Date Abstract This paper discusses the debate on privatizations focusing on the debates for and against privatization. Privatization refers to the change of ownership of entities from public to government holdings. Some people believe that privatizations results to better, timely, efficient, and effective delivery of services while opponents have put claims of selective accessibility, high costs, and capitalism issues associated with privatization. The research also focuses on privatization and its impact in the Arab world. Data for the paper has been gathered from relevant, articles, peer-reviewed journals and books on the subject. Table of Contents Abstract 2 Table of Contents 3 Public Holdings 4 Egypt 18 United Arab Emirates (U.A.E) 22 Conclusion 24 References: 25 Privatization in the Arab World Introduction Where ownership shifts from the hands of government machinery into the hands of a private individual or corporation, privatization is said to have occurred. Privatization is a huge topic when approached from a wide sense. But in the strict sense, it implies to the removal of governmental influence from the day to day running of a company, organization and corporation as well as the government hold on the decision making process, thereby, effectively reducing the number of people who can run the company, and thus removing it from the public domain. It must be understood that despite the hype that surrounds the idea of privatization, a good many people are still very reluctant about making public holdings private and with good reason. This paper addresses private and public holdings, arguments for and against privatization, the extent and impact of privatization, and privatization in the Arab world with a focus on Egypt and UAE. Public Holdings Anytime there is a mention of public holding, theoretically, it refers to a government involvement of some kind in the said public holding either in full or partly (Suleiman & Waterbury, 1990). This involvement would include government funding or grants to the public holding or where a government plays a role in the day to day running or administration of the organization, company, or entity that is a public holding. To find out whether a holding is a public one, it is necessary to find out how much the government allocates to the entity or spends in it. Rosenbloom and Kravchuk (2005) assert that this usually is the indicator that an organization, corporation, company is a public holding. Examples for the purpose of this study would include; a parastatal ,which refers to any organization funded by the government to provide public services and the provision of goods and services and in some cases, even private holdings, so long as the government owns the majority shares in that holding (Suleiman & Waterbury, 1990). Private Holdings Theoretically put, private holdings are closed up entities to the public; organizations that are run without government funding or government involvement in their day to day running (Suleiman & Waterbury, 1990). This may not be practically true since the provision of goods and services normally has some governmental involvement of one kind or another. Private holding also include such companies as are given work that is normally the government’s job, to do (Kettl, 1993). This may include the provision of social amenities and/or services. Private holding are owned by and large by private individuals and corporations and involve little or no government involvement (Kettl, 1993). Why then is there so much hew and hullabaloo about privatization? Meaning of privatization ‘Privatization’ as a word has a so many definitions, depending on a school of thought. There is not one agreed meaning but in general terms, privatization means the change of ownership from the public to the private holdings (Kettl, 1993). In other words, it is the transfer of assets from the public to private ownership. The full meaning can be derived from the following forms of privatization. Forms of privatization There are three types of privatization normally recognized namely: Franchising: where the government continues to supply the resources required for the running of a company but now doing it in the private holding De-nationalization: where there is a complete transfer of the company ownership from the public to the private hands by the sale of assets De-regulation: where a closed up sector is opened up for competition by allowing the private holding to participate in it. This is done by removing any regulations that were hitherto existent in the said sector (Osborne, & Gaebler, 1993). For the purposes of this study, the focus will be on de-nationalization, that is, the sale of assets that effectively changes the ownership of a public holding to a private one. Arguments for and against De-nationalization For starters the pro-privatization school of thought are of the opinion that resources are more likely to be efficiently put to use in a private state as compared to a public state (Kettl, 1993). They argue that the process of doing things in the public holding is slow due to governmental machinery which therefore underutilises resources as compared to what a private holding is able to do in the same vein (Osborne, & Gaebler, 1993). The main reason for privatization normally is to straighten government holdings and bring order, the assumption is that public holding are poorly run and privatization can help improve this; a fact that critics against privatization argue is not in entirety true, as providing goods and services via a public holding does not necessarily portend inefficient service (Osborne, & Gaebler, 1993). The theorists against privatizations have argued that state government assets will end up being sold to private hands to the detriment of the public (Rosenbloom and Kravchuk,2005). Main arguments for privatization include (Rosenbloom and Kravchuk, 2005; Osborne, & Gaebler, 1993). i. Provision of efficient services: Proponents argue that privatization will have the effect of increasing the level of efficient supply of goods and services in comparison to government owned enterprises. ii. Continuity is assured: This means service delivery will not depend on how long a particular government stays in office. iii. No politics involved: This has been argued to be one of the major ills of public holdings. iv. Improvement in services: With privatization, comes competition, which means improved services for the consumer On the other hand, arguments against privatization include: i. Danger of monopolization: With services handed over to the hands of a private individual or holding, there is the danger of that service being monopolised to the disadvantage of the public (Feigenbaum, Henig, & Hamnett, 1999) ii. Pursuit of profit: This being the major aim of private entities, there is a possibility that the public would suffer a beating in a case where the good of the public competes with the margin of profits (Feigenbaum, Henig, & Hamnett, 1999) iii. Danger of malpractices: Where there is no strong regulation to act as a system of checks and balances, the public may be short-changed in the provision of goods and services (Feigenbaum, Henig, & Hamnett, 1999). iv. Loss of government revenue: The government is not able to collect all it would be able to collect in terms of revenue in the case of privatization of goods and services which translates therefore to a possibility of increased taxes to manage government spending. This is a disadvantage to the public (Feigenbaum, Henig, & Hamnett, 1999). Taking into stock every argument put forth whether for or against, it can be evaluated that first, privatization needs regulation (Feigenbaum, Henig, & Hamnett, 1999). Privatization in itself is not a bad thing. In the absence of regulation, unfortunately, it can turn out to be. Second, privatization also depends on what is being privatised. If it is applied in the area of public services with the aim of improving them, it is important that this should increase in profitability without short changing the public on the provision of quality service (Kettl, 1993). Privatization in the Arab World History of privatisation in the Arab World Over the past decade, the phrases privatization and liberalization have become familiar in the Arab world. Previously, there had been socialist-oriented economies but now several businesses are opting to sell some, if not most of their government-controlled assets to the private sector. Generally, Arab countries have lagged behind the rest of the world in regards to privatization (Elhussein, 2008). When privatization began in the region, some of the Arab states were under the perspective that privatization only worked in the Western countries. Hence some countries were reluctant to push for this trend because they wanted to protect their vested interests in some institutions. The slow pace of privatization in Arab countries has heightened concerns regarding increased unemployment, which is already a major problem in countries like Saudi Arabia and Bahrain, and an emerging problem in Oman and Kuwait. Another concern is escalating prices of commodities, due to several reasons such as elimination of subsidies to the national electricity company. In addition to that, Gulf States hold the notion that rushing into privatization without planning could disrupt the private sector activities, especially because a successful privatization program requires some form of prerequisites that some have only recently obtained. These are a functioning stock market, legislative infrastructure, a functioning legal framework, and sophisticated financial services among others. Unfortunately, in the GCC privatization programs were introduced only at the implementation stage, which barred the benefits of formal planning and defined strategic objectives, or even a consistent policy framework that would enable the various phases of the process to be implemented in an efficient and effective manner. How to Successfully Implement Privatization As mentioned earlier, privatisation comes in different forms. Some of these forms include sale of the enterprise, sale of part of the enterprise, franchising, stock options, leasing, and shift of ownership by awarding tender and contractual management (Hodge, 2000). These among others would enable a public enterprise to undergo the necessary and needed reforms, but an assumption cannot be made on the above which therefore calls for a system of checks and balances that will ensure the original need for privatisation is met. Some of these systems would include agreements to protect the public interest in the enterprises, a very structured legal system and clear laws to guide the private entities and guard against the excesses or shortfalls of privatisation, and revisiting contractual agreements to check on the extent of execution among others (Hodge, 2000). Privatization is a complex and extensive process that requires keen conceptualization and planning. Generally, it consists of state policy objectives applicable methods, re-engineered company structures, and an implementation plan which in turn is dependent upon the methods and structure. Impact of privatisation The impact of privatization has been widely discussed in literature. The first lesson in at least the past two decades is that privatization can actually be beneficial. Privatization has had for the better part, a positive on the countries that have implemented it. The following indicators are recurrent in studies on the impact of privatization: company performance, fiscal adjustment, foreign investment, capital market development, employment, and poverty. Privatization has been shown to increase company performance at both financial and operational terms. Table 1 sowing impact of privatization on company performance Privatization has also enabled fiscal adjustment as governments have to accompany privatization with parallel measures to manage public debt efficiently and reduce the budget deficits. Table 2: Showing impact of privatization in newly privatized companies Source: Shehadi (2002): p 14. Privatization has been shown to be one of the most effective ways to attract foreign investments. Table 3 showing impact of privatization on foreign investment in countries Shehadi (2002). Privatization is the primary factor behind development of capital markets. In terms of market capitalization, it has led to growth, and in terms of shareholder numbers, it has led to deepening of financial markets as well as increasing their liquidity. Countries like Jordan declared privatization as the driving force and main objective in deepening of the capital markets. In Egypt, privatization has encouraged the issuance of new financial instruments for the sake of raising capital. Morocco has taken measures to reform its capital markets in preparation for privatization. Table 4 showing key stock market indicators in selected Arab countries Shehadi (2002). The impact of privatization is employment is not only complex but multifaceted. It is unclear whether privatization has a negative or positive impact on employment. Nevertheless, it has been observed that privatization can have a neutral or positive impact on employment if governments combine privatization with adequate labor policy, and social safety nets. Table 5 showing impact of privatization on employment Shehadi (2002) Privatization is of prime importance to the least advantaged groups in society and poverty. Privatization of enterprises in competitive sectors has the likelihood of affecting poverty through its effect on employment and through the associations between privatization and the overall macro-economic situation. Table 6 showing macroeconomic linkages between privatization and poverty Shehadi (2002) Extent of Privatisation in the Arab world The Arab world, just like most other parts of the world has had their share of privatisation with noted results. Almost all the prospering countries in the Arab world have embraced privatisation of public holdings or enterprises as a way of increasing and/or improving production in their economies (Elhussein, 2008). Worldwide, privatization has covered all sectors of economic activity, with energy, telecommunications, and transport accounting for the largest shares of privatization revenues. In the Arabs States, privatization was begun reluctantly. Morocco was the first Arab country to endorse privatization as a policy in a formal way. This was immediately followed by Tunisia, Jordan and Egypt. With the exception of Tunisia, most Arab countries that started on privatization succumbed to some degree of pressure from international financial institutions. Table 7 showing proceeds from privatization in selected Arab countries Shehadi (2002) Countries like Egypt, Morocco, Sudan, United Arab Emirates (UAE), Qatar, The Kingdom of Saudi Arabia, Turkey, and Algeria are just but a few examples of the countries in the Arab world that have tried and tested privatisation with mixed results. Privatization in public institutions such as telecommunications banking and insurance, water and energy supplies is gaining heightened momentum across the Arab countries. For example, Bahrain is trying to diversify its economy through the Supreme Privatization Council. Abu Dhabi has taken the initiative towards privatizing utilities. The Capital Market Authority of Muscat’s Securities Exchange has recently proposed a ‘golden share method’ in which strategically important state-owned companies are urged to provide stakes for public investing while giving the government veto power, even in situations where it is a minority shareholder. Figure 1 showing privatization revenues in developing country regions by 1998 Table 8 showing infrastructure privatization proceeds by sectors (USD millions) Shehadi (2002) Need for privatisation in the Arab world The Arab world cannot afford to be left behind in the area of privatisation if it has to compete favourably with the rest of the world. Privatisation is no longer a matter of ‘if’ but ‘when’ for Arab countries and they too can do a very good job, far much than what they have done so far, should they embrace privatisation (Shehadi, 2002). One major factor that has led some of the Arab counties especially the Gulf cooperation Council (GCC) towards privatization is the need to provide relief of the financial burdens if capital expenditure from the government. It is also believed that privatization will bring investments into the country and create jobs for the educated youths. Another factor that contributed largely to need for privatisation is the increase in most of the Arab countries’ debts that as a result gave the international financial institutions, otherwise known as the Bretton Woods institutions, the power to insist on certain policies that would see the Arab nations shift gradually to privatisation (Shehadi, 2002). This has had an effect across the Arab world at large, that have seen legislations passed and regulations put in place to allow privatisation into these economies. Another factor is to promote equal opportunity among the citizenry. For instance, the financial strains on state budgets may bring concerns over state revenues reserved for only the ruling families which lead to inequality in the population. The implications of enforcing hardships such as rising prices and unemployment on the population while the ruling classes maintain or increase their state revenue shares could generate a lot of public resentment. Privatization will reduce the ongoing advantage of the ruling elites in the private sector as there will be reduced factors such as preferential treatment by state authorities or immunity from judicial proceedings. Nevertheless, a closer look at the GCC implies that many of their ruling families are now willing to forgo some of their economic power control and instead are encouraging participation of the private sector in the process of wealth creation, for the sake of alleviating poverty. Progressively, this is being achieved through privatisation programs which are ongoing in several Arab countries as well as the region’s financial market development. For the purposes of this study, I will focus on privatization in two nations, namely Egypt and United Arab Emirates (UAE). Egypt Egypt was among the first Arab countries to try out privatisation in their economies as a tool of improving productivity in their economies thus growing it in the early 1960’s that saw those economies grow as the government largely privatised Agriculture as well as some industries(Shehadi, 2002). By 1952 the private ownership controlled about 76% of the Egyptian sectors. This would later change when it fell into British colonial hands (Carana, 2002). The Government gave out a program that would allow Egyptian workers to buy shares in the privatised companies. Unfortunately this did not work very well and although the inequality ratio widened, it may or may not have been attributed to privatisation program. Figure 2 showing private participation in infrastructure projects in Egypt during the period 1990-2004 Source: OECD (2010). Through the economic policies of president Sadat (Jiyad,1996), otherwise known as “Infitah” trickling Down to Hosni Mubarak, Egypt’s shift to privatisation would serve as an example to other Arab nations, that privatisation could work in their economies, and that it was the way to go. Some of the government’s hold on particular enterprises was relaxed with positive results, particularly in agriculture and industry sectors (Rutledge, 2005). Egypt has had some success with its privatization program having established a clear legal framework for the process. A series of laws and regulations from the early 1990s established guidelines for the privatization program. The government of Egypt launched a new PPP (public-private partnership) strategy in 2006 which acknowledges that Egypt needs to quickly remove the barriers that hinder of discourage private investment in basic services such as electricity, water, gas, waste management, road building and transportation. To remove such obstructions, reforms were necessary in economic, legal, financial, and institutional dimensions. These include, first; reforming and upgrading the laws governing private investments in infrastructure facilities. Second, reforming and improving the institutional framework, and third; developing a communications strategy. Figure 3 showing assessment framework for privatisation policy and public-private partnerships (PPP) projects in Egypt Source: OECD (2010). By 2002 about 190 of those companies had been privatised (Carana, 2002). Some of the public holdings that have been privatised include, the cement industry, tobacco industry, engineering industries, among others. Figure 4 showing number of privatization transactions in 2001-2009 Source: OECD (2010). Of late though, the lack of political will due to upheavals has slowed down Egypt’s privatisation process, the latest being the recent directive by President Morsi on no more privatisation of state enterprises. Egypt integrated widespread privatization under President Hosni Mubarak. However, after President Mubarak was overthrown in the 2011 revolution, the link between the newly privatized businesses and the crony capitalism of the old regime, together with the new look at long-festering labor and police-state issues have resulted to the urges for re-nationalization (Amos, 2011). Figure 5 showing Egypt’s earnings from privatization between 2000 and 2009 Source: OECD (2010). United Arab Emirates (U.A.E) The United Arab Emirates (UAE) emerged as an independent country in the 1971, and although small, it is among the richest Arab countries with an estimated GNP per capita of USD 23,290 in 2007. U.A.E’s population largely consists of foreigners with the indigenous population forming a small percentage of it. It must be mentioned that the Sheik system is still in existence as well as modern government (Elhussein, 2008). This therefore means that roles are divided between these two governance sectors with particular enterprises billed as public and therefore coming under the hand of the modern government while those billed as private fall under the purview of the Sheik or traditional governance. In U.A.E, public employment of nationals in the public sector is emphasised, seen as a way to achieve public welfare and foster equality in the country (Rutledge, 2005). There is a strong hold of the government in areas that would affect the welfare of the citizenry as a result of which privatisation is not in entirety a realisation in U.A.E, although the governments permits the private enterprises to invest in healthcare and education, despite the fact that there is provision of free Education and healthcare. According to Rutledge (2005) the U.A.E has found a system that works for it and currently is one of the most thriving oil producing Arab nations as well as the Arab world at large. The choice of privatization in the UAE is highly influenced by the realities of the political system and international obligations. On the positive side, the UAE has been shown to score on fiscal freedom, labour freedom, trade freedom and freedom from corruption as a result of privatization strategies. These freedoms represent the interest of the national business which entails a fundamental element of the traditional patron client system. On the other hand, in several cases, the government is accused of interfering in the labor market to safeguard the interest of its national by giving the private companies the obligation to employ certain nationals’ quota as part of its nationalization program or the Emiritization. The private sector has a preference in employing cheap expatriate labor to national labor because the latter demands high wages and fringe benefits. Also the primary concern for the UAE federal government is that privatization should not disturb the closer ruler-ruled ties by interrupting the provision of social services to nationals and their job security (Elhussein, 2008). The UAE privatization policy does not show substantial impact on the size of the public sector in its totality. Individual sectors such as social services, infrastructure, and economic affairs, portray both declining and increasing trends in their sizes. The shrinking in size of the social sector is only partially explainable by limited macro-privatization efforts which entail the transfer of water, electricity and communication services to the private sector. Somehow, it is largely due to government policy of Emiritization of government jobs and reorganization of administrative function (Elhussein, 2008). Conclusion In conclusion, privatisation is highly debated with proponents applauding its capability of quality and efficient services while opponents fear for the reduced accessibility of services to ordinary citizens. Privatisation is a tool of economic growth in the Arab world, and even though embraced, it still has a lot of hurdles to cross. Privatisation has proved to be effective in systems that hither to have not worked well. Egypt and U.A.E are just but varied examples of the two scenarios in the Arab world. References: Amos, D. (2011). In Egypt, revolution moves into the factories. 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