Privatisation of Saudi Arabia's public assets targets diverse sectors

According to Vision 2030, the expansion of private sector activity is a key strategic objective of the Ministry of Economy and Planning, which has been charged with creating “an attractive environment for both local and international investors, and enhancing their confidence in our economy”. More specifically, government bodies such as the ministries of health, communications and IT, education and transportation, among others, have all been tasked with expanding “the privatisation of government services” within their purview.

In order to meet mid-term objectives of Vision 2030, in April 2017 the government unveiled 12 Vision Realisation Programmes (VRPs) to guide national development in targeted areas. This includes a Privatisation Programme that will be chaired by Mohammed Al Tuwaijri. This VRP will define new key performance indicators for privatisation, but the details are yet to be released.

New Opportunities

All this means new opportunities for international investors, as the government attempts to meet its newly established privatisation targets. Some sectors of the economy have already been opened up to significant levels of private sector involvement, and the experience garnered will be of use over the coming years as this effort is further developed. Perhaps the best example to date is taking place in the aviation sector, where the General Authority of Civil Aviation is gradually relinquishing its role as regulator and operator, and overseeing a shift towards the corporatisation of the 27 airports under its control. This means allowing each airport in the country to explore privatisation opportunities such as the one recently pursued by one of the largest aviation facilities in the country – Riyadh’s King Khaled International Airport (KKIA). In 2016 the international subsidiary of Dublin Airport Authority (DAA) won a multimillion-euro contract to operate KKIA’s Terminal 5, a new facility with a capacity of up to 12m domestic passengers per year. Under the terms of the agreement, DAA will take over management services in the terminal, including the supervision of third-party commercial tenants such as retail outlets and car-parking facilities.

Theory To Practice

This, however, is only a small step in what is expected to be a much larger privatisation programme. Since the formulation of Vision 2030 and the National Transformation Programme, the intention of the government to liberate large parts of the economy from ministerial control has become more evident. In August 2017 the newly formed National Centre for Privatisation and Public-Private Partnerships (NCP) revealed the blueprint by which it intends to carry out the transfer of government assets to the private sector. The sectors targeted by the NCP for this process are laid out in Vision 2030: environment, water and agriculture; transport; energy, industry and mineral resources; labour and social development; housing; education; health; municipalities, telecoms and IT; and the Hajj and Umrah industries.

Taking Off

The NCP is at an early stage, but 2016 and 2017 have seen substantial progress in the privatisation drives of some sectors, most notably aviation and health care. With the operation of KKIA now in the hands of an international firm, the government has pressed ahead with an organisational overhaul; the airport’s assets have been moved to a new holding company, Saudi Civil Aviation Holding Company, which will be owned by Public Investment Fund. The General Authority of Civil Aviation will retain a purely regulatory function. The government has also announced a 2020 target to privatise all 27 of the Kingdom’s airports.

Once the DAA’s five-year concession at KKIA is completed, the remaining terminals will be privatised. King Abdulaziz International Airport in Jeddah and Dammam’s King Fahd International Airport are being prepared for a similar process. Significantly, foreign firms will be allowed to invest in the new airport companies without having a local partner, and domestic investment in a number of key airports is to be capped at 25% to ensure international participation in the funding mix.

Bill Of Health

In 2017 the authorities revealed that the King Faisal Specialist Hospital and Research Centre in Riyadh will be one of the first health care assets to be privatised. The government is also starting to corporatise state-owned health care infrastructure by transferring responsibility to public companies. Accordingly, while these institutions remain in government hands, they will be operated on a corporate model, competing against each other and the private sector. The government intends to limit its role to that of regulator, rather than operator, of the health care system. For the time being, this will take place primarily via public-private partnerships (PPPs) whereby the private sector is paid to operate hospitals on a per patient basis.

Looking Ahead

The PPP model is likely to feature prominently in the wider privatisation drive. By harnessing private sector funds, the government is able to reduce its capital costs significantly – an important consideration in the context of efforts to balance the budget by 2020. Historically, ministries wishing to introduce technologies or infrastructure expansion were constrained by the central government budget, but by shifting the capital burden to the private sector, they have much greater capacity to upgrade and scale up operations. In entering into a PPP the government is also transferring risk off its books, and onto the developer. In return for accepting this risk, the private sector participant is granted an opportunity to benefit from the long-term economic growth of the country.

With regard to the government’s existing assets, some uncertainty remains as to which models will be preferred as the NCP pursues its objective of divestment. Here, the organisation has a number of options. In some cases, a straightforward sale to strategic investors is likely to be the most effective route, however, this may not be the most attractive solution when it comes to dealing with some of the more prominent state assets. Privatisation programmes in the MENA region, such as those seen in Egypt in the 2000s, have often engendered controversy, particularly when the population felt excluded from the process.

Consequently, a listing on the Saudi Stock Exchange (Tadawul), or a dual listing on a regional or international exchange, is likely to be considered where the government is divesting itself of its biggest assets. This is certainly the case with the partial sale of Saudi Aramco, which will take place on the Tadawul as well as a number of foreign exchanges. Saudi officials expect the flotation to achieve a value of $2trn; however, most observers value the company at closer to $1trn to $1.5trn. Should the issue go as planned, Saudi officials believe its estimated value of $2trn will eclipse the current record holder for the largest stock market flotation in history: the 2014 initial public offering of China’s e-retail giant Alibaba. The government’s retreat from its traditional role as service provider across a range of sectors is of historic importance, and will radically transform the structure of the Kingdom’s economy.