Saudi privatization plans: Golden opportunity awaits foreign partnerships
The Kingdom’s privatization plans are more certain and offer some substantial opportunities to both Saudi and international investors
While all eyes seem to be fixed on the forthcoming mega Saudi Aramco IPO slated for 2018, but with still few specific details yet released, the Kingdom’s other privatization plans are more certain and offer some substantial opportunities to both Saudi and international investors. Among these are plans to privatize during the next two years the health sector, airports, grain silos, along with opportunities in education and renewable energy.
The recent Saudi budget announcement for 2017 has placed a significant emphasis on reducing “red tape” for the private sector whilst improving cooperation with the public sector and has identified a range of sectors and economic activities for privatization through the National Centre for Privatization (NCP).
Of the announced 2017 budget expenditures, the largest non-military and security items were slated for health and social development (SAR 120 billion), education and training (SAR 200 billion), and infrastructure and transportation (SAR 52 billion).
The Saudi energy sector has an integral role in the Vision 2030 plans, which aims to build up a renewable energy market to meet part of the anticipated increase in local energy consumption by 2030, despite planned subsidy reduction and energy efficiency programs.
According to the Vision, an initial target of 9.5 gigawatt/hour (gw/h) of renewable energy should be achieved through the leveraging of existing local expertize in the production of different forms of energy, including solar energy and the percentage of power plants electricity generation through strategic partners is projected to rise from 27 percent in 2015 to 100 percent by 2020.
A forthcoming launch of the King Salman Renewable Energy Initiative is also mentioned in the Vision 2030. This initiative will review the legal framework that allows the private sector to invest in renewable energy, allowing it to establish a favorable ground for investment in this increasingly vital source of energy over the coming decades.
Privatization of healthcare remains at the top of Saudi policy reform to ease on government expenditure and introduce international best practice with the Saudi private sector health contribution to rise from 25 percent in 2015 to 35 percent by 2020, taking the number of licensed medical facilities from 40 to 100.
The key elements are to enhance the provision of healthcare through the public sector with the view of privatization in the longer run; develop private medical insurance further in order to improve healthcare services and implement so called “corporatization” of the healthcare sector by transferring responsibility to a network of public companies who would compete against each other and the private sector with the government maintaining a regulatory/supervisory role.
Given the sedentary lifestyle of Saudis, the outpatient non-communicable disease outpatient market is expected to rise and is a key public awareness element of the new vision 2030 plans to reduce health expenditure. While Saudi government support through soft loans and grants are available for those interested in entering the health market as operators, alternatively, private companies can try to access the Saudi stock market through IPO to expand their business.
While Saudi government support is available for those interested in entering the health market as operators, alternatively, private companies can try to access the Saudi stock market through IPO to expand their businessDr. Mohamed Ramady
A public-private-partnership, with the private sector being paid to operate the hospitals on a per-patient agreement is also more likely as well as supporting new specialized private sector hospitals and clinics. The government will still continue to be the regulator, rather than an operator, in a so-called “corporatized” health sector as set out in the Vision 2030, with the private sector also operating non-core areas such as medical procurement, dispensing medicines and subsidizing international-local pharmaceutical manufacturing plants in Saudi Arabia which are major elements of Saudi government spending.
Food security is important not only to the Kingdom but to all the GCC countries. The Saudi Grains Organization (SGO) was restructured from the old Grain Silos and Flour Mills Organization and the twelve mills and five animal feed production units were distributed among the new SGO entities with the aim to have either Saudi or foreign investors owning and operating these mills.
Under the restructuring, the new millings entities will serve as clients of the SGO to both process and/or distribute wheat flour both process and or distribute wheat flour to government-approved distributors at agreed upon subsidized flour prices. At the same time, these privately run mills could import their own non-subsidized flour and sell at prevailing market price.
According to SGO, the government does not want to relinquish total control of the wheat silos, deeming this to be of a strategic nature to ensure food security objectives, but to privatize only a small part of the grain silos storage, but the mills are all open to be privatized. The government will still act as the key regulator concerning flour quality and ensure that there are no monopolistic practices amongst the privatized flour milling companies.
The government will also remain the main agents for import of subsidized wheat. Private sector privatization interest will revolve around the asset valuation of the mills as well as agreeing to long term milling fee charges, as this will be the key revenue element.
Airports and ground service
The Saudi airports privatization, and especially the National Carrier Saudia Airlines, has been discussed well over the past 15 years, but with only small progress being made on the non-core support activities such as Saudi Catering and Ground Services operations being privatized and listed on the Saudi stock exchange in 2012 and 2015, with marked operating efficiency and service turnaround noted by end users.
To ensure competition in domestic and Gulf routes, the General Authority for Civil Aviation (GACA) has allowed both Saudi and foreign airline operators to compete with Saudia, such as Flynass, Air Arabia, Al Maha Airways (Subsidiary of Qatar Airways), and a new license approved called Al Khaleej Airlines in affiliation with Bahrain based Gulf Airlines.
The government has now decided to privatize the operations of the airports to ensure operating efficiency and passenger services and GACA announced plans to privatize all 27 of the Kingdom’s airports through to 2020, with the first major privatization being the new terminal 5 of King Khaled International Airport, Riyadh. This is to be run as a concession for 5 years by the Dublin Airport Authority, before the remaining terminals are privatized or “corporatized”.
The other major Saudi airports slated for “corporatization” are King Abdulaziz Airport in Jeddah in 2nd quarter 2017 and King Fahd Airport in Dammam in 3rd quarter 2017, once the Riyadh model experiment has been assessed. The second stage involves bids for privatization of the operations and maintenance sectors with all employees transferred to the private sector investor and in compensation.
GACA will bear the capital expenses to operate the project and share in the operating revenues with GACA. A third model that has been discussed and implemented is the so-called Build, Operate and Transfer (BOT) which was successfully driven by the private sector at the Mohammed bin Abdulaziz Airport in Madinah, operating on a long 25 year BOT scheme by a Saudi and foreign consortium, costing around SR4.7 billion, with agreement to expand the airport capacity to handle nearly 40 million passengers by 2030, given the new emphasis of domestic and international religious and other tourism placed in the Vision 2030.
The Saudi government is very keen on foreign participation in the operation and privatization of the airports, and unlike other privatization mandates, foreign companies will be allowed to invest in these new airport companies without having local partners and local investments in some key airports has been capped at 25 percent to ensure that foreigners are incentivized to operate.
Dr. Mohamed A. Ramady is Senior Advisor with Partner Energy, and former Visiting Associate Professor, Finance and Economics, at King Fahd University of Petroleum and Minerals, Saudi Arabia. He specializes on middle east energy policy, the Saudi Economy, OPEC, GCC regional geo -political risk assessment and has authored many books such as “The Saudi Arabian Economy: Policies, Achievements and Challenges”, “GCC Economies: Stepping up to Future Challenges”, “Economic, Political and Financial Country Risk: An analysis of the GCC countries” . In 2015 he completed several books on “OPEC in a shale oil world : where to next ?”; “The Rentier Theory Revisited”; and “The Political Economy of Social Capital”.