Privatization moves back on to the agenda

Privatization is suddenly back on the agenda in the Middle East with the surprise announcement that Jordan is to sell of a 26% stake in the Arab Potash Company this year. But this should be no surprise at all as several factors are now bringing privatization plans out of the cupboard.

First, Arab states want to modernize their economies and achieve higher levels of productivity. Privatization requires corporate restructuring and offers the hope of better management in private hands which leads to higher productivity.

Second, many Arab states find themselves short of cash now that oil prices have fallen. Privatization proceeds are a useful way of raising funds to fill up empty state coffers.

Thirdly, Arab stock markets, particularly in the Oil States, have come back to life, and the sale of shares through public offerings has become possible again. For once Arab investors seem far more enthusiastic about stashing their cash locally and will be receptive to well presented share offerings.

And finally, the tragic events of September 11 have tended to highlight the need for economic reform in the Arab world, and privatization is seen as an important part of this process. The creation of a dynamic and diversified private sector economy is increasingly seen as absolutely necessary for progress.

So expect to see privatization plans emerging from many corners of the Middle East over the next year. Even crisis-ridden countries like Turkey and Egypt are likely to move swiftly forward with plans for state sell-offs. Indeed, the IMF's support for the Turkish economy is partly dependent on a bank privatization program.

In the Gulf States, governments may decide to move forward with long awaited moves to privatize the telecoms sector. Who will make the first move? Surely Bahrain will be first, followed by Oman with perhaps Saudi Telecom as a surprise addition.

It is now over three years since the Dubai Government effectively privatized its building development program with the Emaar Properties IPO. And it may be that the recent successes of Emaar will encourage the authorities to come forward with further privatization ideas. The bullish Dubai Financial Market could surely absorb a few government-inspired initiatives.

May be it will be the turn of the other Gulf States to follow Dubai and privatize some of their state real estate assets. Again more buoyant local stock markets have the liquidity required. But state-owned industrial conglomerates must also offer scope for privatization.

For if the Oil States really want to boost their economic growth then the further privatization of the oil and gas sectors, and downstream activities, must be a logical option. That could still be someway off. But in the meantime the $25 billion Saudi Gas Initiative involving eight foreign oil giants amounts to privatization by the backdoor.

September 11 has focused policymakers' attentions on what needs to be done to modernize Arab economies and integrate them into the world economy. And Jordan's decision to sell-off a stake in Arab Potash to a foreign investor is just the start of a process that will now roll forwards across the region.

For there are many excellent opportunities for foreign companies to provide new expertise and technology to improve the productivity of Middle East companies which have been hampered by state interference. And capital will always flow to where it can find the best returns. September 11 may have given foreign investors a reason to stop and think, but the Middle East is a safer place after the Afghan War, and they will be back.