Complex Made Simple

Private sector to save GCC’s $165 billion

Private sector in GCC states has slowly started to evolve into an equal player in the economy after it remained for long, until in the recent past, merely a supplier to their governments. If the sector’s involvement in the economy is enhanced, the countries here will be able to save $165 billion in capital expenditures by 2021, says a recent study by management consultancy Strategy&.

The countries could also generate $114 billion in revenues from sales of utility and airport assets, and up to $287 billion from sales of shares in publicly listed companies. GCC states could also narrow the innovation gap with other countries, enhance the delivery of and access to government services, and improve their infrastructure. With more Private Sector Participation (PSP), these countries can achieve operational efficiencies of 10 to 20 per cent, reducing government budget deficits. Greater PSP could also help them close their innovation gap with other countries. Between 2013 and 2015, 70 per cent of global innovations stemmed from the private sector, versus 13 percent from the nonprofit sector and only 8 per cent from the public sector, finds the study by the Ideation Center, the think tank of Strategy& in the Middle East.

Public–private partnerships

Recently, GCC countries have been facing a few long-term challenges to the sustainability of their economies: a high dependence on oil for government revenues (73 per cent of revenues and 82 per cent of exports are linked to oil); a lack of workforce diversity and skills creating unbalanced labor markets (e.g., 78 per cent of women in Saudi Arabia do not participate in the workforce, and 54 per cent of the workforce is made up of expatriates); a growing need for public services such as healthcare, infrastructure, and education (e.g., the UAE is investing $300 billion in infrastructure until 2030); and an under-developed ecosystem for innovation, which is a key driver of national competitiveness.

Increasing PSP through the establishment of public–private partnerships (PPPs) and the privatization of government assets is an ideal response to these challenges, suggests Strategy&.  Most GCC countries, including Kuwait, Dubai, Oman, and Bahrain, recognize the importance of PSP and have incorporated it in their national plans. However, there is a lack of a dedicated PSP policy and legal framework, as well as an effective institutional set up.

Salim Ghazaly, Partner at Strategy& in Beirut, while discussing past approaches to PSP and how countries can benefit from it today, says: “Past PSP in GCC countries occurred on an ad-hoc basis and in most cases without strong commitment from stakeholders (largely due to high oil prices). However, currently, we are witnessing a serious and structured approach to Private Sector Participation supported by well-defined national programs, proper legal and regulatory frameworks, and best-in-class institutional models. If properly implemented, these programs could yield significant benefits to the region, including increased job creation, enhanced quality of services, faster localization of industries, better innovation, foreign direct investment, and government expenditure rationalization.”

Foundational elements

To realize 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. Strategy& suggests three foundational elements to ensure PSP success: (i) developing a governing PSP policy, (ii) supporting it with a legal framework, and (iii) developing an institutional setup dedicated to driving PSP on the national level.

Hilal Halaoui, Partner leading the Public Sector practice at Strategy& in the Middle East, added: “PSP would enable the GCC states to refocus their efforts on the essential tasks of government, which means becoming more ‘fit for service’ (defined as becoming more cost-effective and better equipped to meet constituents’ needs in the process). They could focus on fewer and more important tasks — bringing more effort and resources to bear on the achievement of critical goals. Instead of being the leading provider of services and employer of people, for example, government entities would refocus on their roles as facilitators and regulators.”

“A holistic, long-term plan to increase private sector participation will reap greater returns for GCC countries over the long term. If GCC states can successfully develop, launch, and execute such a PSP program, they can transform their economies. 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 also lead to a workforce with improved skills and a broader-based economy less vulnerable to commodity price volatility. In addition, a well-planned PSP program will allow GCC governments to enhance the delivery of government services and improve infrastructure. It is an all-round ideal solution for GCC governments,” Karim Aly, Partner with Strategy& in Dubai, concludes the study.