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Behind the Privatisation Drive in Saudi Arabia

by Sophie Smith

On 20 April 2021, Saudi Arabia announced that it completed the privatisation of its flour mills, netting 5.77 billion riyals (€1.27 billion).[i] The Second Milling Company and Fourth Milling Company were divested to private consortiums in the second and final batch of sales, following the privatisation of the First Milling Company and Third Milling Company at the end of last year.[ii] The move is designed to contribute to the sector’s growth and improve its performance and efficiency as the Saudi flour market remains one of the largest in the region. It comes as part of larger plans that have been gaining momentum in recent years to achieve Riyadh’s goal of socio-economic development and reform in line with Vision 2030.

 

Increasing Privatisation

 

Privatisation plans and boosting the private sector’s role in Saudi Arabia’s socio-economic development and meeting the population’s growing demands were already discussed in the late 1990s; however, it was not until the launch of the Saudi Vision 2030 in 2016 that they began to gain momentum. In 2017, Saudi Arabia established the National Centre for Privatization and PPP (NCP) to manage its privatisation ambitions. The NCP’s core competencies include: advising various sectors on privatisation, establishing regulations and developing public information and marketing campaigns to promote privatisation.[iii] Moreover, the NCP is responsible for implementing the country’s Privatization Programme — adopted in 2018 — that aims to develop the role of the private sector in the provision of services and the availability of public assets through identifying government assets and services for privatisation, developing the privatisation system and mechanisms and defining public-private partnership (PPP) frameworks.[iv]

 

In line with this framework, several key sectors have been identified for privatisation: education, industry and mineral resources, environment, water and agriculture, the Hajj and Umrah, health, housing, municipalities, transport, communication and information technology, energy, sport, media, labour and social development, interior and finance.[v] In fact, in September 2020, it was announced that these sectors (excluding the latter three) will work with the NPC to develop a privatisation plan — outlining their priorities, projects, timelines — within a two-year timeframe.[vi] And, to help with this process, the Private Sector Participation (PSP) Law was recently approved (March 2021). The law contributes to establishing a legal framework for PPP and privatisation in order to expand the private sector’s participation in the provision of public services and infrastructure projects, as well as increase national and foreign investments.[vii]

 

This builds on, and supports, ongoing privatisation projects in the country. Such projects notably cover the water sector as the Saline Water Conversion Corporation (SWCC) recently (January 2021) invited consortiums to bid for a 60% stake in the Ras Al-Khair power and desalination plant.[viii] The plant is the first of the SWCC’s assets to be privatised as part of its larger privatisation plans that include other plants, such as the Yanbu and Shuaiba production plants. In tandem, the energy sector is penning agreements with private enterprises at an equal pace. This includes the Sakaka solar PV plant, Saudi Arabia’s first utility scale renewable energy project under the National Renewable Energy Programme, of which 70% is owned by the Saudi company, ACWA Power.[ix] In 2019, the government sold some 1.7% of the state-owned oil giant, the Saudi Arabian Oil Company (Aramco), in an initial public offering (IPO), raising 29.4 billion USD and is in discussions to sell a further 1% stake of the company in the next year or two.[x] Earlier this year, the US-based EIG Global Energy Partners gained a 49% equity stake — equalling to $12.4 billion USD — in the newly established Aramco Oil Pipelines Company.[xi] Further, developments are evident in the education sector as the privatisation programme finalised phase one and launched the tender for phase two of its initiative to attract private investment in funding constructions of education institutions.[xii]

 

Motivations Behind Privatisation

 

Such initiatives hope to increase the private sector’s contribution to Saudi Arabia’s GDP from 40% to 65% as the total value of investments from public-private partnerships is expected to reach 62 billion riyals (€13.7 billion) by 2025.[xiii] Riyadh also seeks to stimulate growth of its sovereign wealth fund, the Public Investment Fund, which tripled since the introduction of Vision 2030 four years ago—anticipating a further 200% growth over the next five years and, eventually, reaching 10 trillion riyals (€2.2 trillion) by 2030.[xiv] This comes as part of the larger reforms being undertaken to diversify the economy away from hydrocarbons in line with Vision 2030 and, specifically, Saudi Arabia’s goals of unlocking state-owned assets for the private sector and privatising certain government services.

 

Privatisation will not only allow the government to strengthen its focus on its legislative and regulatory role but will help promote national economic development and diversification. It will bring further employment opportunities for the population as new economic opportunities for entrepreneurs and businesses are presented to establish and expand their operations. At the same time, opening some sectors to the private market is likely to lead to the provision of higher quality services and a reduction of costs given that private companies are considered more efficient and profit driven. In this regard, Saudi Arabia’s regional and international competitiveness is set to improve. All this is particularly relevant amidst the COVID-19 pandemic, which has contributed to a fall in economic growth to -2.3% in 2020 as unemployment rose to 8.22% in the same year.[xv] Similarly, the budget deficit reached 298 billion riyals (€65 billion) in 2020 and is expected to amount to 141 billion riyals (€31 billion) in 2021.[xvi]

 

Not only will privatisation improve the quality of services, it will also contribute to the country’s post-pandemic economic recovery and development in line with Vision 2030. However, the path to doing so is far from straight forward. Saudi Arabia remains in the nascent stages of its privatisation plans as it has faced numerous obstacles and delays. Yet, with economic growth slowing down and debt levels increasing as hydrocarbons are no longer a sustainable source of revenue, there is a growing need and impetus for privatisation in the country. In this regard, Saudi Arabia appears to be on the right track and likely to further increase its efforts at privatisation in the coming years.

 

 

References

 

[i] National Centre for Privatization and PPP (NCP), ‘The Privatization Of The Flour Milling Sector Final Phase Completed,’ 20 April 2021, https://www.ncp.gov.sa/en/MediaCenter/News/Pages/Flour_Milling_Final_Phase.aspx.

[ii] Ibid.

[iii] NCP, ‘NCP Core Expertise,’ n.d. https://www.ncp.gov.sa/en/Pages/NCP-Services.aspx.

[iv] Kingdom of Saudi Arabia, ‘Privatization Program,’ Vision 2030, n.d. https://www.vision2030.gov.sa/v2030/vrps/privatization/.

[v] NCP, ‘Targeted Sectors,’ NCP, n.d. https://www.ncp.gov.sa/en/Pages/Targeted-Sectors.aspx.

[vi] Saudi Gazette, ‘Details for privatization of 38 govt authorities in 24 months set,’ Saudi Gazette, 19 September  2020, https://saudigazette.com.sa/article/598209/SAUDI-ARABIA/Details-for-privatization-of-38-govt-authorities-in-24-months-set.

[vii] NCP, ‘Council Of Ministers Approves PSP Law,’ 16 March 2021, https://www.ncp.gov.sa/en/MediaCenter/News/Pages/Council_of_Ministers_Approves_PSP_Law.aspx.

[viii] Saline Water Conversion Corporation, ‘SWCC invites consortiums to submit their offers to own 60% of the Ras Al-Khair production bundle,’ n.d. https://www.swcc.gov.sa/english/MediaCenter/News/Pages/NewsDetails.aspx?newsid=101.

[ix] ACWA Power, ‘Sakaka IPP,’ ACWA Power, n.d. https://www.acwapower.com/en/projects/sakaka-ipp/.

[x] Asharq Al-Awsat, ‘Saudi Arabia in Talks to Sell 1% of Aramco, Says Crown Prince,’ 28 April 2021, https://english.aawsat.com/home/article/2943986/saudi-arabia-talks-sell-1-aramco-says-crown-prince.

[xi] EIG, ‘EIG Signs $12.4 Billion Infrastructure Deal with Aramco,’ EIG, 9 April 2021, https://eigpartners.com/eig-signs-12-4-billion-infrastructure-deal-with-aramco/; Noor Nugali, “PIF: Saudi Aramco may sell more shares if market conditions are right,” Arab News, 27 January 2021, https://www.arabnews.com/node/1799101/business-economy.

[xii] Kingdom of Saudi Arabia, ‘Privatization Program.’

[xiii] Ibid.

[xiv] Asharq Al-Awsat, ‘Saudi Arabia in Talks to Sell 1% of Aramco, Says Crown Prince.’

[xv] The World Bank, ‘Unemployment, total (% of total labor force) (modeled ILO estimate) - Saudi Arabia,’ The World Bank, 29 January 2021, https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=SA; Statista, ‘GDP growth in Saudi Arabia 2016-2021,’ Statista, April 20, 2021, https://www.statista.com/statistics/1033875/saudi-arabia-gdp-growth/.

[xvi] Saudi Arabia Ministry of Finance, Budget Statement: Fiscal Year 2021 (Riyadh: Ministry of Finance, 2020), https://www.mof.gov.sa/en/budget/2021/Documents/Budget2021_EN.pdf.