Private-sector participation in the GCC: Building foundations for success

Executive summary

The governments of the Gulf Cooperation Council (GCC) states¹ have decided to change their economic development model. The stateled approach which relied upon natural resources successfully raised incomes from developing to developed country levels in a little over a generation. However, that model is no longer appropriate as it is undermined by oil dependence, a lack of workforce diversity and skills, a growing need for public services, and insufficient innovation. One effective response is private-sector participation (PSP). GCC states are already using PSP, but have wielded it tactically and ad hoc. As a result, they have not tapped its full potential. Instead, a comprehensive strategic program of public–private partnerships (PPPs) and privatization initiatives that covers all major sectors of the economy is needed to define a country’s PSP plan.

If GCC states can successfully develop, launch, and execute such a PSP program, they can transform their economies. The GCC states could avoid US$164 billion in capital expenditures by 2021 and generate $114 billion in revenues from sales of utility and airport assets alone, and up to $287 billion from sales of shares in publicly listed companies. Furthermore, GCC states could narrow the innovation gap with other countries, enhance the delivery of and access to government services, and improve their infrastructure.

To capture these benefits, GCC governments will need a rigorous and comprehensive approach to PSP and a clearly articulated, long-term implementation plan that encompasses all economic sectors. Such an approach rests on three foundational elements: A governing policy for PSP that is either a standalone policy or part of a broader national policy; a legal framework that encompasses the new laws or modifications to existing laws necessary to facilitate PSP activities; and an institutional setup that clearly defines and allocates authority over PSP to existing government entities or establishes new entities to govern it.

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Successful PSP efforts require a rigorous approach

To benefit from PSP requires an approach that fends off the pressure of short-term financial dictates, the lure of opportunism, and the tendency to over-simplify complex issues. Such an approach must be strategic in conception and execution.

In the past, GCC governments have embarked on multiple PSP projects with limited success, mainly in the energy, water, and waste sectors. Furthermore, although all GCC telecom incumbents have been privatized, their respective governments still own large stakes in many of them. As with many PSPs across the world, these initiatives had a common and fundamental characteristic: they were approached in an ad hoc fashion. Among the resulting problems were:

• A dearth of clear governance, typified by the lack of an active governing body to support the acceleration of PSP programs and set clearly defined privatization guidelines
• Limited support from stakeholders, typified by apprehension on the part of citizens, employee resistance to change, and limited ministerial support
• Ineffective planning and prioritization, typified by delays in securing required regulatory approvals and endorsements, and in establishing and launching the PSP companies
• Continued structural issues in the economy, typified by the continuation of pre-existing monopolies and/or high levels of governmental control
• Limited investor confidence, typified by a lack of appetite in the private sector to participate in the PSP programs

Three essential, foundational elements are required to avoid these problems and establish a rigorous and comprehensive approach to PSP:

• A PSP policy, which can be either a standalone policy or part of a broader national policy
• A legal framework, which encompasses the new laws or modifications to existing laws necessary to facilitate PSP activities
• An institutional setup, which identifies all of the entities involved in driving the PSP agenda, and clearly defines and allocates authority over PSP to existing government entities or, when necessary, establishes new entities.

Most GCC countries lack a dedicated PSP policy and legal framework. The exceptions are specific PPP laws in Kuwait and Dubai, and PSP laws in Oman and Bahrain that define PSP at a high level. Kuwait is the only country in the region with a dedicated institutional setup for PPPs. Thus, the first step in moving toward greater private-sector participation in the GCC states should be the establishment of these three foundational elements.

Conclusion

A holistic, long-term plan to increase private-sector participation will reap greater returns for GCC countries over the long term than their current short-term approach can offer. Growing the size, involvement, and capabilities of the private sector by allowing it to participate more in the economy will lead to a lower fiscal burden on the economy. It will lead to a workforce with improved skills and a broader-based economy less vulnerable to commodity price volatility.