CHAPTER- II

"PRIV A TISA TION IN SAUDI ARABIA, KUWAIT AND

THE UNITED ARAB EMIRA TUS"

Having outlined the issues and nature of the debate on privatisation especially in case of

the rentier economies, this chapter will be examining them with reference to three major

economies of the Gulf region namely Saudi Arabia, Kuwait and the United Arab

Emirates. A country wise profiling of issues will highlight two major ~hemes, the

common concern of the oil exporting economies and the specific dimension with

reference to a particular country. While the former will provide the basis for common

regional policy, the latter would be underlining the need to look into the local

specificities within the common regional universe. Saudi Arabia, Kuwait and the UAE,

three states have vast reserves of oil compare to other GCC members. Iri the world level,

Saudi Arabia represents twenty five percent of oil reserves, and Kuwait and the UAE

both represent eleven percent each. Other three GCC members, i.e., Bahrain, .Oman, and

Qatar, represent small percentage of oil reserves but have rich deposit of natural gas.

Saudi Arabia

Saudi Arabia is an oil-based economy. Oil will continue to play a major role for a period ~

of time. It is a major source of revenue for the government accounting more than seventy

percent of the income. Consequently, any variations of oil price in international market

affects the Saudi economy; this is clearly visible in the targeted and actual expenses

during the plans. The first five year plan, 1970-74 the government actual expenditure

reached SR 80 billion, or approximately US $19.9 billion, though the estimated plan

expenditure was SR 4 billion (US $ 10.2 billion)'. In the second five-year plan, 1975-

1979, expenditure reached SR 684 billion (US $ 193 billion); estimated plan expenditure

was SR 498 (US$ 140 billion).2

1 Ryed Krimly, "The Political Economy of Adjusted Priorities: Declining Oil Revenues and Saudi Fiscal Policies", Middle East Journal (USA: Middle East Institute), Vol.53, No.2, Spring, 1999, pp.255-267.

2 Ibid., p.269.

This trend continued during the third five-year plan also 1980-1984, actual expenditure

reached SR, 1,025 billion (US $ 344 billion). But the reversal trend started with fourth

five year plan, 1985-1989, actual expenditure stood at SR 770 billion (US$ 205 billion),

the plan target was set at SR 1,000 billion (US $ 267 billion). Clearly during these five-

year plans, there has been financial uncertainty. The major cause of this was dramatic

fluctuations in world market prices over the past twenty-five years, thus, it has posed a

major policy concern to rethink about expenditure policies. The following table shows

declining oil revenues and oil price fluctuations in world market had taken during the

1974-1998 period.

Table 2.1: Declining Oil Revenues in Saudi Arabia: 1974-1998

(Billions of US dollars)

Saudi Arabia Oil Revenues Years Total Oil Revenues Years 1974 31.06 1974-1979 230:77 1979 57.15 1980-1984 367.30 1980 101.40 1985-1989 115.39 1983 44.30 1980-1989 482.69 1984 36.30 1990-1994 211.55 1990 40.13 1990-1998 389.03 1992 47.56 1994 39.20 1998 . 33.74

Source: Survey of Economic and Social Developments in the ESCWA Region, 1998-1999 (N~w York: UN

Publications), 1999, pp.45-46.

The adverse impact of declining oil revenues on the economy became more enduring

leading to budgetary deficit. The two leading factors had to be counted her~: one, the

defence and the other, demographic burden. One of the challenge faces by Saudi Arabia

has been the diversion of oil revenue to finance the external threats reflecting in high

defence expenditure. The external threats as accounted by the Saudi State include, 1979

Iranian Revolution, 1980-1988 Iran-Iraq war, and 1990 Gulf war. These three events in

the gulf region affected the country's security concern pricing major budget allocation to

the Defence Sector. The following table shows major budget allocations on Defence

Sector in different years.

Table 2.2: Saudi Arabia's Major Budget Allocations on Defence Sector: 1985-200 I

Saudi Arabia - Budget Allocations Years (Million, Riyals) 1985/86 1987/88 1988/89 1) Defence and Security 63,956 54,226 50,080

Total Expenditure 2,00,000 l ,59,646 l ,41,200 Total Revenue 2,00,000 1,06,926 1,05,300 Budget Allocations Years 1992 1993 (Million, Riyals) l) Defence and Security 54,300 61,636

Total Expenditure l ,81,000 1,90,950 Total Revenue 1,51,000 1,69,150 Budget Allocations Years (Million, Riyals) 1994 1995 1996

1) Defence and Security 53,549 49,501 50,025

Total 1,60,000 1,90,000 I ,90,000 Budget Allocations Years 2000 2001 (Million, Riyals) 1999

1) Defence and Security 68,000 74,866 78,850 Total Expenditure 165,000 185,000 215,000 Total Revenue 121,000 157,000 215,000

Source: MEES, 1985, 86, 87, 88, 89, 94, 95,96 Budget Reviews. The Middle East and North Africa Year

Book -2004 (UK: Europa), 2004, p.988.

The mounting demographic burden emanates from rapid rise of population. It was 7.3

million in 1975; but increased by three fold to leads 21.3 million in 1999. The Central

,Department of Statistics (CDS) Report, says that, the Kingdom's total population stood

23.37 million in 2002. 3 An average annual growth rate was 3 percent, this rate was

considered highest in the world. The following table shows population growth in year

WISC.

3 "Saudi Population Growth Reaches 3.4% in 2002", Saudi Commerce and Economic Review (Dammam), No.ll2, August 2003, p.25.

Table 2.3: The Trend in Population Growth (000)

Years Saudi Growth Non-Saudi Growth Total Average Population Rate Population Rate(%) Growth

(%) (%) 1992 12,311 4,637 16,948 1993 12,643 2.7 4,872 5.0 17,232 3.3 1994 13,111 3.7 5,120 5.1 18,802 4.1 1995 13,593 3.7 5,208 1.7 19,345 3.1 1996 14,089 3.7 5,255 0.9 20,001 2.9 1997 14,599 3.6 5,403 2.8 20,665 3.4 1998 15,122 3.6 5,523 2.6 21,334 3.3 1999 15,658 3.6 5,676 3.4 22,010 3.2 2000 16,208 3.5 5,801 2.2 22,010 3.2 2002 16,771 3.5 5,919 2.0 22,690 3.1

Source: David Butter, "Ushering in the New Generation", Middle East Economic Digest (London:

UK), 16 March 2001, p.33.

The population growth had affected all sectors of the economy. In education sector the

school going students have been increasing year by year, the total number of secondary

school students increased from 6,00,000 in 1970 to 30,50,000 in 1992. This growth has

resulted as a greater percentage of high school students opted to go for higher education.

During the period 1955 to 1999, 1,66,000 Saudis graduated from the Saudi Universities,

thus emerging the growing pool of employment seekers4. Consequently, the current

demographic explosion in Saudi Arabia represents a serious challenge in the critical area

of employment opportunities.

The second sector affected by population growth was power sector. In Saudi Arabia,

demand for power was increased because of increased electricity consumption by

household, and rapidly growing urban and industrial demand, and in the meanwhile, the

number of electricity subscribers rose by 1,15,000 to 31,50,000 and by 1997, according

to government estimate, the power demand was growing at an annual rate of sixteen

percent.

4 Ryed, n.1, p. 259.

Population growth also leads to the growth of urbanisation making it eighty percent in

1990. According to 1992 Census Report, fifty percent of the population was under the

age of 15 years; it has made majority of the people are very young. The population

growth followed a geometric progression which could lead to bigger size of population

in the future. At the same time while the oil wealth is diminishing, the population growth

registered in the Kingdom a rate higher than the growth of gross domestic product

(GDP). It has reduced the per capita income from US $14,000 in 1980 to US $8,325 in

20035. Unless the State adopts a clear-cut policy the future will be gloomy and worrying.

Rising pressure on public expenditure is shown in increasing deficit budgets. The

Kingdom registered revenue surplus between 1970 and 1982, except in 1977 and 1978;

during this thirteen year period oil price was very high, the Kingdom presented a surplus

budget totaled Saudi Riyals, (SR) 357 billion (US $ 105 billion), represented a eighty six

percent of gross domestic product (GDP).

The Government relied on deficit financing beginning in the early 1980, over spending

by SR 23.8 billion (US $ 6.6 billion) in 1983, by SR 50.4 billion (US $ 13.8 billion) in

1985 and by SR 69.7 billion (US$ 18.58 billion) in 1987.6

High deficit budget was presented in the 1991 of SR I 04.5 billion (US $ 27.86 billion).

In 1996 the deficit came down to SR 17 billion (US $ 4.53 billion). It was lowest since

1982. As percentage of GDP, the deficit dropped from 25.3 percent in 1987 to 1.1

percent in 1997.7 Following table shows the budgetary deficit in Saudi Arabia in

different years and the following figure shows budgetary deficits and surpluses in 1980-

2004 periods.

5 Saudi Economy-2003, Saudi Economic Report (Riyadh: CCFI), Issue No.5!, September 2003, p.l8. 6 Ryed, n.l, p. 201. 7 Ibid., p.206.

Table 2.4: Budgetary Deficits in Saudi Arabia

YcllrS Actulll Actulll Surplus/ Gross Domestic Deficit liS

Hcvenues (SH Expenditure (SH Deficit (SH Product (SH % ofGDP. billion) billions}_ billions}_ billions}_

1970 7.9 6.3 1.6 22.9 ·-1971 I 1.1 8.1 3.0 28.3 --1972 15.3 10.2 5.1 40.6 --1973 40.6 18.6 22.0 99.3 --1974 100.1 35.0 65.1 139.6 --1975 I 03.4 81.8 21.6 164.5 --1976 135.9 106.7 29.2 205.1 --1977 132.2 137.1 (4.9) 225.4 2.2 1978 131.5 146.3 (14.8) 249.5 5.9 1979 211.2 185.7 25.5 385.8 --

1980 348.1 230.4 117.7 520.6 --1981 368.0 283.3 84.7 524.7 --1982 246.2 244.9 11.3 4.52 --1983 206.4 230.2 (23.8) 372.0 6.4 1984 171.5 216.4 (44 9) 351.4 12.8 1985 133.6 184.0 (50.4) 313.9 16.1 1986 76.5 13 7.4 (60. 9) 271.1 22.5 1987 I 03.8 173.5 ( 69. 7) 275.2 25.3 1988 84.6 134.8 (50.2) 285.1 17.6 1989 114.6 149.5 (34.9) 310.8 11.2 1990 154.7 210.4 (55.TI_ 392.0 IU 1991 161.9 266.4 (I 04.5) 442.0 23.6 1992 165.4 232.5 (67.1) 461.4 14.5 1993 141.4 205.5 (64.'!2_ 443.9 14.4 1994 129.0 163.8 (34.8) 450.0 7.7 1995 146.0 169.0 (23.0) 469.4 4.9 1996 177.0 194.0 (17.0) 509.8 3:3

1997 204.0 210.0 (6.0) 507.0 1.1

() Indicates deficit budget.

Source: Saudi Fiscal Policies, Middle East Journal (USA: Middle East Institute), Vol. 53, No.2,

Spring, 1999, p. 263.

Figure 2.1 Saudi Arabian Government Deficits and Surpluses, 1980-2004

100-----------------,

-1oo......, ............. ..,.... ............. .u,.., ...... ,....._ ....... .,...........,......,

Source: Saudi Commerce and Economic Review (Dammam), No.ll7, January 2004, pJI.

The Saudi Govemment steps to reduce expenditure show while the share of allocation on

human development, mainly education and health, witnessed a dramatic growth, the

share of expenditure on infrastructure and economic resources registered low growth (see

the table). lt can be argued that the level of expenditure on infrastructure investment was

extremely high in the 1970s and 1980s. After 1995, private sector was invited for

investments in these sectors. The table shows the sectoral distribution of development

expenditures.

Table 2.5: The Sectoral Distribution of Development Expenditures

Years Human Human Economic Infrastructure Development Development Resources Percentage

Value [SR Percentage Percentage billions!

1970-1975 10.5 30.9 27.7 41.1 1975-1980 78.6 22.6 28.0 49.3 1980-1985 176.2 28.2 30.7 41.1 1985-1990 177.0 50.7 20.4 28.9 1990-1995 218.3 66.6 10.6 22.8

1996 40.9 66.4 10.0 23.6 1998 65.3 68.5 - -

Source: Saudi Fiscal Policies, Middle East Journal (USA: Middle East Institute), Vol. 53, No.2, Spring,

1999, p.265.

Saudi Arabia provided highest level of subsidies among the Gulf countries. Extensive

subsidies covers such areas as, housing, healthcare, education, electricity, water, fuel,

agriculture, and capital costs, which have also contributed to budget deficits in the

country. These subsidies generated economic distortion and led to reduce the standard of

living for future generations, but they are inconsistent with long-term goals. In 1975

subsidies in Saudi Arabia accounted for 2 to 4 percent of GDP and 3 to 4 percent of oil

revenues, but in 1984 onwards these figures went on 36.1 percent of GDP and 68.4

percent of oil revenues. 8 Fuel, electricity and water subsidies accounted for the lion

~ Neemat Shafik, ed., Economic Challenges Facing the Middle Eastern and North African Countries (London: Macmillan Press, 1998), pp. 238-239.

share. In the year 1980, subsidies were US$ 7,755 million (6.69 percent) and it went on

US$ 15, 726 million (13.65 percent) in 1990-92. Whereas, 1995 onwards, the Kingdom

had taken some steps to reduce subsidies, like number of consumer products, including

gasoline and certain prices also raised, for example, on oil products, water for urban

dwellers, telephones charges, domestic airlines, visas, and introduced additional levies

for foreign workers permit etc.9

The above-discussed trends suggest that the Government has little choice to re-examine

its policies. Accordingly, the Government initiated the process of economic reforms;

privatisation is a part of economic reforms of the govemrnent.10

In the Sixth-Five Year Development Plan (1996-2000),"Privatisation" was considered as

process to develop infrastructure and development of non-oil sector. The World Bank

has played an important role in the Kingdom's privatisation process. The Bank has

provided financial assistance to the Kingdom, mainly in the context of Structural

Adjustment Policy. 11 The Bank has supported the privatisation programme; the

conditions to remove price controls, restrictions on import commodities, monopolies and

helped to create understanding between public and private sector etc. These assessments

have created an environment to encourage private sector investment in the Kingdom. 12

The Kingdom's interest for genuine economic and institutional reforms aimed at creating

a more open, competitive and investment-oriented economy.

The policy makers accepted the importance of a fully diversified economy, hence,

reducing over reliance on a single volatile commodity, that is, oil. In August 1999, the

9 Ryed, n.l, p.265. 10 Neemat, n.8, p.244. 11 Said El-Naggar, Privatisation and Structural Adjustment in the Arab Countries (Washington D.C.: IMF,

1989), p.65. 12 Ibid., pp.65-66.

Kingdom Crown Prince Abdullah set up a Supreme Economic Council (SEC) with

Prince Abdullah as the Chairman ofthis Council. 13 This Council has the responsibility to

implement and monitor economic reforms and privatisation programme.

The main objectives of the privatisation outlined by the Government are to improve the

efficiency and rationalising public expenditure. The receipt from the sale of State- owned

enterprises is to be used to redeem the national debt. Crown Prince Abdullah declared the

privatisation as "strategic choice" for the Kingdom to encourage more investment in

fi 0 14 in rastructure and management proJects. Clearly this includes, power sector,

telecommunications, airlines, and ports.

Demand for power was steadily rising because the population is growing approximately

at three percent a year and industrial demand was rising by six percent a year. Second

major concern was that electricity in the Kingdom makes losses because they were

obliged to sell at below cost to Saudi customers, who regard cheap electricity as a right. 15

1990 onwards electricity demand has been doubled, while generating capacity reportedly

increased just fifty percent. Peak demand continued to grow nationally at ar estimated

ten percent a year. The power sector faced some of the chronic problems such as, tariffs

that do not reflect full cost of production, build-up of arrears, and the need to restructure

in order to improve efficiency. 16 To resolve these problems faced by the power sector,

privatisation is perceived as effective way.

The modalities of the private-sector investment in the power-sector could be the various

concession arrangements, like the build-operate-transfer (BOT). This agreement involves

private companies financing, building and operating an infrastructure system for a certain

13 Pamela Ann and Siddiqi, "Special Report Saudi Arabia", www.gulfnews.online.com 14 Pamela Ann and Siddiqi, "Special Report Saudi Arabia"www.gulfnews.online.com 15 Diarmid 0' Sullivan, "Paying the Saudi Electricity Bill," MEED (London: UK), Vol.39, No.28, II July

1997,p.9. 16 "Special Report Saudi Arabia," MEED (London: UK), Vol. 41, No.28, II July 1999, pp. 2-3.

period of time then it will return to the public sector. Build-own-operate (BOO) basis is

similar scheme but does not involve transfer of the assets. Independent-power-products

(IPP) basis is the most efficient plant in the merit order and should indeed run on as

specified in the typical contract. 17

The following figure provides the proposed chart by the Government for privatisation of

five power sectors.

I GENCO I D IPP

Asset Sale

Saudi 1... Electricity Saudi National Grid (Transco) c .....

,!!;

c: a. 0:

D D

Company (Holiday

Company Distco East

Region

SEC Companies

Other Power Players

Distco Distco Central West Region Region

IPP/ WPP Green Field

Distco South

Region

Source: MEED (London: UK), Vol. 44, No. 44,30 November 2001, p.35.

BOT Trans co

17 Pierre Guislain and Michael Kerf, Public Policy for the Private Sector: Special Edition Infrastructure (Washington D.C.: World Bank Group, 1996), pp. 21-33.

Four major utilities called Saudi Consolidated Electricity Companies (SCECOs), in the

Eastern, Western, Central and Southern Regions. 18 The SCECOs were owned by the

Government and the private sector (as shares), and their shares were traded on stock

exchange markets.

The four, Southern, Eastern, Central and Western Region were merged with one

Corporation called, Saudi Electricity Commission (SEC) in April 2000. One year after

the creation of a regulatory authority approved by the Supreme Economic Council on 11

November 200 I, the SEC announced Private Investor Involvement of the 25 Years Long

Term Electrification Plan (1998-2023). The Plan highlights that the Kingdom's peak load

demand will raise almost three fold to 59,256 MW by 2023 from 21,292 MW in 1999.

To meet the increase, new capacity of some 50,500 MW will have to be installed over

the period. 19 The following tables show Long Term Electrification Plan 1998-2023.

Table 2.6: Long Term Electrification Plan 1998-2023

Type/ Period 2000-2005 2006-2010 2011-2015 2016-2023 Total Steam I ,600 3,400 2,000 3,000 I 0,000

Combined 4,714 5,176 3,904 10,300 24,094 Cycle

Gas Turbine 2,895 2,451 4,782 6,268 16,396 Total 9,209 II ,027 10,686 19,568 50,490

Source: MEED (London: UK), 15 September 2000, p.35.

IH Abdul Hafeez Sheikh, ed., Privatisation of Energy in the Gulf, Selected Issues and Options (Abu Dhabi: ECSR Publication, 1999), p.25.

19 Special Report, Saudi Arabia, "Power Demand Growth Drive Expansion", MEED (London: UK), Vol. 44, No.34, 15 September 2000, pp. 35-36. ·

Table 2.7: Financial Requirements of the Kingdom's Electricity Services up to 2023

2001 Situation Future Situation up to 2023 Financial Requirements for the Period (1999-2023)

No. of cities and 7,700 Generations sector SR 177 bn. villages that were Transfer sector SR 92 bn. provided electricity Distribution sector SR 72 bn. services Total SR 341 bn. No. of subscribers 3.7 mn. No. of subscriber 8.8 mn. Power generation 26,000* Power generation 66,000 capacity mw C(lpaci!y mw Peak load 23,582 Peak load 59,000

mw mw Power sold during 1,25,000 Power sold 3,13,000 2000 mn. Kw/h mn.

Kw/h High voltage transfer 19,092 High voltage 31,000 lines km transfer lines km. Electricity 2,25,438 distribution lines km.

*Desalination plants contribution stood at 2,757 MW

Source: "Privatisation Process Gaining Momentum in Saudi Arabia," Saudi Commerce and Economic

Review (Dammam: Chamber of Commerce), No.ll2, August 2003, p.27.

The Government's projection for electricity demand up to 2023 is sufficient to illustrate

the importance of creating the right framework for private investment in power sector. In

the coming next 22 years the Government aims to expand generating capacity by 50,000

MW. Total investment in expanding the power sector is estimated at SR 4,38,000 million

($ I 16, 800 million) over the period of which 54 percent will go to power generation.20

The country's first privately owned and operated power plant was the Shuaiba Power

Station bui It in 120 km South of Riyadh, which consists of five 350 MW oil fired steam

turbines, given total capacity of 1, 7 50 MW. This privately financed Plant by

US $ 2 billion, on a BOO basis was referred to as an independent power project (IPPs)

where lum-sum Turnkey approach was involved on a cash payment by the client, Saudi

Consolidated Electricity Company for the Western Region (SCECOs-West). The

20 Special Report, Saudi Arabia, "Power Generation Expansion Plan", MEED (London: UK), Vol. 46,No.

5, 2 Feb 2002, pp. 4-5.

partners involved in this plant were ABB Energy Ventures with local Kingdom holding

company, Mitsubishi of Japan, Enron Corporation of the USA, and Saudi Bin Laden

Group. 21 A BOO contract had given signal to the launch of wider p'"ivatisation

programme in Saudi Arabia.

Telecommunications are increasingly recognized as a key component m the

infrastructure of economic development. The mam intention to privatisation of

telecommunication sector in Saudi Arabia was to comrnercialise the power sector and

separate operations from the Governrnent. The competition is an important criterion to

diversify supply of services and to scale down the Governrnent responsibility from

. d h . 22 ownmg an management aut onty.

Telecommunication sector is essential for economic development because this service is

used mainly in connection with the wide range of economic production and distribution

activities, delivery of social services, and governrnent administration. They also

contribute to improving the quality of life and to achieving social, political and security

objectives. 23

The Saudi Stock Market played an important role in collecting shares. The telecom

sector has got major shares, which accounted for 22.2 percent of the total market

capitalisation of US $33.44 billion. The Kingdom has the la;gest stock market in the

region, in terms of market capitalisation, the stock market stands at US $ 157.67 billion

in 2003.24 Saudi Stock Market (SSM) has listed 69 companies separated into seven

sectors, out of which three sectors, they are, telecom, banking, and the industrial

21 David Butter, "Private Power, Shuiaba Plan Explores All the Options", MEED (London: UK), Vol. 41, No. 43,21 November 1997, pp. 26-27.

22 Robert J. Saunders and Jermy J., Telecommunications and Economic Development (USA: World Bank, 1994),p.311.

23 Ibid., p.305. 24 "Stock Market Rally- Is it Backed by Fundamentalist?.," Saudi Economic Report (Riyadh: CCFI), Issue

No.5!, September 2003, p. 7.

contributed to 73 percent of weightage of the market. 25 (See figure). Saudi Telecom

Company (STC) has th~: largest market capitalisation of US $ 33.44 billion and 22.2

percent of the total market.

Figure 2.2: Sectors by Market Capitalisation

Industrial 23%

29%

Telecom 21%

Cement4% 7%

0%

ctricty 16%

Source: Stock Market Rally -Is it Backed by Fundamentalist, Saudi Economic Report- 2003 (Riyadh:

CCFI). No.5!, September 2003, p.8.

The state-owned STC came into existence in 1998 with an initial capital of 12,000

million Riyals. The main objective of this body is to provide advanced and adequate

telecommunication services at affordable costs, and to ensure clarity and transparency of

procedure. It was intended that the STC, once established as profitable commercial

enterprises, should become the subject of Saudi Arabia's first major privatisation process.

The STC has undergone a restructuring process, which resulted in a company operating

entirely on a private competitive commercial basis. This sector installed 7,00,000

additional fixed lines, 6,35,000 mobile telephone lines, an additional 5,00,000 Pager

lines, and I ,500 Iridium and Global Star Satellite phones by the end of 2000. 26

25 Ibid, p.8. 26 Saudi Arabia privatisation oftelecom marches, www.gulfnews.online.com

Internet servrces for the public began in 1999. After one year since its opening, the

number of Internet subscribers jumped to 3,50,000, ranking among the highest number of

hours on line in the world. 27 The privatisation plans included a sale of 30 per cent of STC

shares to a foreign strategic partner. This investor/partner has given extensive

management control of the entire STC system, including design and planning

expansions, procurement personal billing, accounting and all other aspects ofoperations.

The privatisation process in the telecommunication sector in the coming years would be

expected to cover wider areas. The following table shows the telecom performance in

Saudi Arabia. The State-owned Saudi Airlines faced financial losses because of its low

price of domestic airfares, where the loss was estimated around SR 8,500 millions (US$

2,270 million) annually. 28 The air transport needed large capital investments to

modernise aircraft fleets, improve airport infrastructure, introduce more sophisticated air

navigation systems, and meet the demand of new markets. But the Government was

unable to meet these demands because the Kingdom's economy was already facing the

deficit budgets and declining oil revenues. The way to privatisation was opted to

mobilise the sources of this sector, besides to improve the economic condition and

provide efficiency.

27 Ibid., p.2. n Survey of Economic and Social Developments in the ESCWA Region 1995, Part II, Privatization in the

ESCWA Region (New York: UN Publications, 1997), p.44.

Table 2.8: Saudi Arabia's Telecom Sector Performance and Subscribers Year, 2000

1 2 3 4 5 6 7 8 9 10 II Country Population Total Number Fixed Lines Total Growth of GSM GSM Total Users Estimated

(million) of Fixed Lines Per 100 Number of GSM Subscribers Subscribers Number 10,000 Number of (1000) Inhabitants GSM Subscribers Per 100 as a of Users Inhabitants PCs Per

Subscribers 1995-2000 Inhabitants Percentage ('000) 100 In ('000) ('%) of Total Internet habitant

Telephone Subscribers

Saudi 21.61 2,964.7 13.72 1,275.9 143.7 6.37 31.7 200 92.56 5.74 Arabia

Source: MEED (London: UK), Vol. 44, No.3!, 24 August 2001, p.22.

In Saudi Arabia there are 25 commercial airports, and three international airports are at

Jeddah (King Abdal-Aziz), Dahra (the Eastern Province International Airport), Riyadh

(King Khalid). The privatisation process involved in King Abdelaziz International

Airport at Jeddah was estimated at a cost of US$ 500-750 million, where the investor

company was Netherlands Airport Consultant (NAC0).29 The airport business has

increased in a multifaceted way, extending into real estate, commercial, and other

ventures. These activities are of two main types: the provision of air-side or aeronautical

services (runway, taxi ways, terminals) that by their nature were considered monopolistic

within each airport; ami the provision of landside services (passenger and aircraft

services food and beverage concessions, duty free shopping, parking, hotels), where a

wider variety of supplies is possible. 30 The current trend in airport economies is to rely

on commercial operations in order to contribute as an increasing share in airport services.

The private-sector participation in Saudi Airlines has involved m vanous methods,

through management, long-term leases and build-own-operate.

In the Kingdom the main seaports are Jeddah, Yanbu and Jizan on the Red sea and the

Gulf. In the late 1970's Saudi Seaports Authority (SEAPA) was formed. Private-sector

participation provided greater competition to international level and sea routes, and

greater efficiency improved through export growth. The Kingdom has six main

commercial ports and two industrial ports, which handled more than 86 million tones a

year of cargo and generated annual profits of US $150 millions. The SEAP A says

productivity rose to 1,550 tones a day per berth in 1996, but it was 489 tones a day in

1976.31

29 David Butter, "New Departure for Arab Airports," MEED (London: UK), Vol. 45, No.I 0, 9 March 200 l, pp.4-5. .

30 Elvis J. Juan, Public Policy for the Private Sector-Special Edition, Infrastructure (Washington D.C.: World Bank Group, 1996), pp.77-78.

31 "Special Report-Saudi Arabia, Ports, Privatisation Programme Sets Sail," MEED (London: UK), Vol. 41, No.22, 13 June 1997, pp. 37-38.

In the year I997 a programme was introduced to "Commercialise" the operation of the

main ports by offering I 0-year operations, maintenance and management leases to

private sector contracts. The following shows privatisation involvement in the port-sector

in the Kingdom.

Ports- O&M: on the private-sector

Ports

I. King Falid Ship Repair Yard, Jeddah Islamic Port.

Project Involved: I 0-year lease for O&M.

Status: Bids submitted on 3 May I997 by local companies: Deha Marine Services

and Saudi Bin Laden Group.

2. Bulk Terminal, Jeddah Islamic Port:

Project: I 0 year O&M.

Status: Bids submitted on I2 May by local companies: Globe Marine Services and

Dena Marine Services.

3. Container Terminal, King Abdulaziz Port, Dammam

Project: I 0 year lease O&M.

Status: Bids submitted by local company: Alireza Delta Massive Transport

International.

4. Bulk Terminals, Dammam and Jubail:

Project: I 0 year O&M.

Status: Bids submitted by Companies, Abdul Kadir Muhadir and Sons Company,

and Al-Pawal Shopping and Martinique Company.

O&M: Operation & Maintenance.

Source: MEED (London: UK), Vol. 41, No.22, 13 June 1997, pp.37-38.

Privatisation experience in the Port-Sector shows that the total Saudi Arabian trade

volumes about 95 percent, which was transported by sea route. In 1995, the total trade

amount was US$ 75, 691 million, which increased to US$ 106, 770 million in the year

2000, whereby exports rose to 66 percent to 73 percent in the same period. This

escalation shows a promising indicator of Saudi Arabian industrial growth. 32 The

privatisation involved very important role in this sector.

Saudi Basic Industries Corporation (SABIC) is the largest Corporation in the Middle

East region and also a highly profit making institution. The SABIC can be considered as

a semi-private organisation. While the Saudi Government holds 70 percent of SABIC

ownership, 30 percent was held by the private sector. It was established in 1976 for the

purpose of producing chemicals and petrochemicals, fertilisers, steel, and industrial

gasses. It is based in Riyadh with offices in the USA, Europe, and Asia. It has nineteen

basic industries. SABIC's total sales revenues have surged dramatically from Saudi

Riyals (SR) 1-9 billion in 1985 to SR 23.59 billion in 1995. It exports to 75 countries. 33

SABIC is considered as the prime candidate for privatisation. It's shares were trading

during 1996 at around SR 3 70 (US $ 1 00) each, and the Government sold

at that price 45 percent of its stake in SABIC (bringing down its share from 70 percent to

the target level of 25 percent), which will be wroth SR, 16,857 billion (US$ 4.5 billion).

32 Disby Lindstone, "Ports, the Keys to the Kingdom," MEED (London: UK), Vol.45, No.44, 30 November

2001, p.38. 33 Samir S. Ghazal, Indigenous Manpower in the Private Sector of the Arabian Peninsula (London: Keg

an Paul International Publication, 1997), p.ll7.

The SABIC has 100 million shares with a nominal value ofSR, 100 each. 34 Some ofthe

important SABIC industries invited for privatisation are:

I. Saudi Yanbu Petrochemical Company: local and international contractors were

invited for a contract of US$ 25,000 million. This project's main contractors, the

US based ABB Lummas Global, and Toyo Corporation of Japan, have entered into

the contract for a production at 4,10,000 tone a year of ethylene plant, and

production of ethylene cracker at 8,00,000 tone a year. This project was completed

in 2000.

2. Saudi Arabian Fertiliser Company (SAFCO): The Lumsum Turnkey. contractor

Wast Italy's Teenimont Company installed both the ammonia and urea with a

capacity of 5,00,000 tone a year, and 6,00,000 tone a year in1999 respectively. 35

3. Saudi Petrochemical Company (SADAFt International Companies prepared a bid

for an engineering, procurement and construction (EPC) contract on the scheme

built 500,000 tones a year styrene monomer plant. The bidders estimated US$ 200

million contract were: the US based ABB Lummus Global, and Tee Corporation,

Mitsubishi Heavy Industry, and JGC Corporation of Japan.

4. National Industrial Gases Company (NIGS): Germany's Linde signed a US $ 72

million contract for the construction of gas planned air separation plant in Yanbu.

5. The output will be 30,000 normal cubic meters of hour (ncm/h) of oxygen and

40,000 ncrnlh of nitrogen. The project was estimated at US $187 million.

34 Survey of Economic and Social Developments in the ESCWA Region 1995, Part !1 Privatization in the ESCWA Region (New York: UN Publications, 1997), p. 44.

35 Special Report, Saudi Arabia, "Projects, No Shortage of Business Opportunities," MEED (London: UK), Vol.41, No.31, 19 September 1997, pp. 36-41.

Privatisation has taken place slowly in other areas also, like, water distribution,

sanitation, health, waste management. In the coming years private-sector is likely to play

very important role for the country's economic development.

The following table shows that SABIC share holding in Joint Stock Market.

Table 2.9: Saudi Arabia: Government Shareholding in Joint Stock Enterprises by Sector, 1994

1) Industry Total Capital Government Government Share Government Market Value of (millions in SRis) Share in Capital (Percentage) Capitalisation Govt. Shares

(millions in SRis) (million SRis) (million of SRis) 1) Saudi Basic Industries 10,000 7,000 70% 26,900 18,380 Corporation 2) Electricity Sector 1. Air Electricity Company 15 9 59.9% 21 13 2. Tabuk Electricity Company 8 3 33.3% 8 3 3. Domat AI Juddal Electricity 10 8 80.0% 20 16

Company 4. Rafha Electricity Company 4 2 24.9% 4 2 5. Eastern Electricity Company 5,000 2,450 49.0% 5,300 2,597 6. Central Electricity Company 8,000 6,160 77.0% 8,400 6,468

?.Western Electricity Company 8,000 6,720 84.0% 8,080 6,787 8.SouthernElectricity Company 4,000 3,940 98.7% 3,920 3,869

Source: Survey of Econom1c and Soc1al Developments m the ESCW A Reg1on 1995,Part II Pnvat1sat10n m the ESCW A Reg1on (New York: UN, 1 Q97), pp.42-43

Performance

Since 1996, when Privatisation was started, the process has been effective in terms of

growth. It has acquired an increasing importance in the Kingdom. In 1997 onwards the

private sector growth constantly increased around four to five percent annually. It is

observed that the private sector performance in the Saudi Arabian economy has

improved every year. The share of the private sector in the total gross domestic product

(GDP) has increased from 19.7 percent in 1976 to 38.4 percent in 199936 (See table

2.1 0). Privatisation process played an important role particularly in non-oil economy;

and it can play a major role in providing employment opportunities in the Kingdom.

Table 2.10: Saudi Arabia: Share of the Private Sector in GDP and Non-oil GDP, and Share of the Oil Sector in GDP, 1976-1999 (Percentage)

Years Share of the Private Share ofthe Private Share of the Oil Sector in Non-oil Sector in GOP Sector in GOP

GOP 1976 59.4 19.7 66.8 1979 57.0 19.4 65.9 . 1982 57.2 28.5 64.7 1985 61.6 42.2 31.3 1988 61.0 42.8 25.0 1991 55.5 34.1 38.5 1994 59.3 36.7 35.7 1997 57.8 40.8 39.7 1999 58.1 38.4 33.9

Average for 58.7 33.8 42.7 1976-99

Source: Survey of Economic and Social Developments in the ESCW A Region 2000-0 I, Part II Comparative Analysis ofthe Role ofthe Private Sector in ESCWA Members (New York: UN,

2002), p.56.

Privatisation experience in power sector reforms has reached an advanced stage. The

total generating capacity in the Kingdom achieved up to 23,000 MW, while the total

36 Survey of Economic and Social Developments in the ESCWA Region 2000-01, Part 11 Comparative Analysis of the Role of the Private Sector in ESCWA Members (New York: UN, 2002), pp.56-57.

transmission lines reached 17,500 kilometers, and total distribution also reached

2,07,500 kilometers. 37

The Kingdom's first privately owned the Shuiaba thermal power plant, I 000-2500 MW

under the BOO basis, a US based company was taken over from the Saudi electricity

company. This power plant had been completed successfully and started operation with

commercially successful.

The second important sector is Saudi Telecom Company (STC), where privatisation

involvement has created mobile revolution in the region. The STC installed capacity at

the end of 2001 was increased up to fixed lines of 3.3 million and Global System for

Mobiles (GSM) lines of 2.5 million. The forecast subscription will base the fixed lines

services to 5.2 million and GSM services to 8.6 million at end 2006. The telecom

coverage had reached ninety eight percent in the Kingdom, as the estimated investment

in the telecommunication sector during 1998-2008 has been US $ 25,000 to 35,000

million.38

The Saudi Ministry of Post, Telephone and Telegraph (MOPTT) has awarded the

expansion contract for switching lines, estimated at US $ 4billion, to AT & T, a US firm.

It has completed 1.5 million telephone lines, 2,00,000 cellular units and fiber-optic

network across the Kingdom.39 Private sector involvement in this sector has lead to

improvement in services, efficiency and competitive market. Most of the consumers have

got modem communication facilities, like, Telex, Fax, ATM, GSM mobile phones and

Internet. The telephone rates have reduced drastically reflecting the growing competition.

37 Special Report Saudi Arabia, "Refonns, Gradual and Continuous Change," MEED (London: UK), Vol. 46, No.2, 22 March 2002, p.28.

38 Ibid., p.32. 39 1997 Country Commerce Guide: Saudi Arabia, Bureau of Economic of Business Affairs (Dammam ),

August 1996, p.6.

Privatisation in airlines and ports sector has contributed in creating a good infrastructure

facility and the distribution of goods and services. The business centers in the Kingdom

are Riyadh, .Jeddah, Dammam, and AL Khobar, served by a variety of international

airlines with passenger and cargo facilities. Under the privatisation programme work had

completed at the New King Fahd International Airport in the eastern province.40 Services

such as catering, baggage handling and aircraft cleaning have been privatised in the

airport sector. Jeddah and Dammam are the main international seaports for moving

containerised red and bulk cargo. The volume of cargo handled at these ports throughout

1995 reached 86.8 million tons and the number of berths also increased to 18,245, which

are of industrial uses. 41

Privatisation of ports has introduced an element of competition and contributed for the

rapid growth of international merchandise trade. Under the ports privatisation

programme m the Kingdom private sector is expected to encourage the commercial

activities and promoting efficiency.

Saudi Basic Industrial Corporation (SABIC) was running commercially successful in the

Middle East region. Its annual production capacity reached to 30 mn. metric tons by

2000. SABIC's combined production was 25 mn. tons in 1995, and was expected to rise

to 48 mn. tons by 2010.42 In 1997 SABIC total production rose by 3 percent to 23.7 mn.

metric tons, while its market production rose by 4.5 percent of 18.39 mn. tons. The total

transfer rose by 15.3 percent to 24.02 rnn. Riyals in 1997 and the net profit rose by 4.3

percent to 46,000 mn. Riyals. SABIC has been very active in the raising finance for new

40 Ibid., p. 5. 41 Ibid., pp.S-7. 42 The Middle East and North Africa Year Book 2002, 48'h Edition (London: Europa Publication, 200 I),

p. 913.

projects. The following table shows the national and international banks financing for

SABIC companies up to 2000.

Table 2.11: SABIC Financing

Affiliate Date Size ofDeal Tenor Pricing Arrangers us$ Million.

!.Arabian Petrochemical Mar. $600 8 years 72.5 bp Riyadh Bank, Arab Company 2000 Petroleum

Investments Corporation etc.

2.Saudi European Nov. $138 3 year lOO+bp National Commercial Company 2000 Bank, The Saudi

British Bank, Sand International Bank etc.,

3. Saudi Iron and Steel Oct. 99 $1,260 3-5years 140bp ANZ Bank, Riyadh Company Bank, At-Bank etc. 4.Saudi Petrochemical May. 99 $300 8.5 95bp Samba Company (SADAP) Abicorporation, SHB

etc., 5.Al-Jubail Sep.98 $720 8.5 years 45 bp Citi Bank, Samba Petrochemical Company Bank, Arab Banking

Corporation etc., 6. Saudi Yanbu July. 97 $2.322 10.5 years 52.5 bp Riyadh Bank, ANB Petrochemical Company Samba ANZ Bank, (Yanpet) Bank of America etc., Total $11,940m

Source: MEED (London: UK), 12 May 2000, p.22.

Privatisation programme is aimed at to promote the non-oil sector. The quality and

competitiveness of infrastructure services is increasingly becoming a key factor in the

country.

Implementing Difficulties in Privatisation Programme

The first constraint for the private sector development was the Stock Market. A strong

Stock Market is a good sign for the private sector development. In Saudi Stock Market

foreign participation was restricted in mutual funds. The second constraint for the private

sector development was bureaucratic set up in the Kingdom, without maintaining well

management facilities, like data managing; no co-ordination among different branches,

and poor working conditions etc. The Civil Service Personnel were not ready to perform

their duties efficiently, and they have no decision-making power in public sector

enterprises. In fact this has been the main obstacle facing the privatisation programme in

the Kingdom. The third constraint for the private sector development was scarcity of

skilled human resources. According to UNDP Report, Human Resources Development

in the GCC countries is lagging behind. In Saudi Arabia shortage of skilled t.xhnicians

and competent workers has been rated as one of the constraints to the private sector. The

Saudi citizens are not trained in advanced and modem technologies like, marketing,

packaging, distribution, computer skill, and engineering etc.43 The Government has to

encourage more and more technological oriented education. The fourth constraint for the

private sector development has been the lack of financing by international lending

agencies and the international banks. GCC states do not have well developed financial

markets.44

Fortunately, the situation is changing. In Saudi Arabia privatisation programme has been

supported by the World Bank, IMF and other International Agencies and provided

financial assistance to the Kingdom.

It indicates that significant shift of emphasis has taken place. The fifth constraint for the

private sector development was the establishment of the rule of law and commercial laws

and its implementation. The sixth constraint for the private sector development was

government should promote clearly defined economic programme to support

privatisation programme without making any delay. 45 Constraint has been faced by the

43 Ibid., p.50. 44 Steve H. Henke, ed., Privatisation and Development (California: ICS, 1987), p.44. 45 Neemat Shafik, ed., Economic Challenges Facing the Middle Eastern and North African Countries

(London: Macmillan Press, 1998), p.243.

Kingdom affecting the pace of privatisation process particularly due to non-transparent

way of implementation.46

Saudisation Process has been special issue before the Government. The Kingdom has

passed a separate bill "localization", i.e., called Saudisation Bill. The Bill deals with a

compulsory recruitment of national citizens in the private sector. The private company

should abide this law and make a recruitment of certain percentage becomes compulsory.

If they do not follow this, the private companies will not get license. In Government

services Saudi nationals accounted for more than ninety percent but in the private sector

majority were the non-nationals working. Most of the skilled workers have been non-

Saudis due to the shortage of suitably qualified Saudis. Saudisation process has been

given special emphasis in the seventh five-year development plan 2000-2004. Under this

plan period, a council has been set up. This council has number of ministries, i.e., the

Ministry of Civil Services, the Ministry of Labour and Social Affairs, as well as

Chamber of Commerce and Industry, and major private companies and corporations

working together to enforce policies related to increase the level of the national labour

force in private companies. 47

The most important initiatives taken by the Saudisation process are:

I) In Human Resource Development with following activities

a) Upgrading number of institutes and technological changes:

Civil aviation institute

Nine institutes belong to the Ministry of Health

46 "Saudi Economy, Mid Year Review, September 2003," Saudi Economic Report-2003 (Riyadh: CCFI), Issue No.5!, September 2003, p.l 0.

47 "Saudi Population Growth Reaches 2.4% in 2002", Saudi Commerce and Economic Review (Dammam:

Chamber of Commerce), No.ll6, December 2003, p.32.

b) Encouraged the private sector to effectively contribute to training and national labour

for established technical education and vocation training for girls.

2) Saudisation- gradual substitution of Saudis for non- Saudis.

- To increase national labour force in to the private companies over by five percent of

the total number of the workers annually.

Saudisation Committees- these committees working in the major regions of the

Kingdom under the chairmanship of Emirs of regions.

This committee makes follow-up tours to enforce the issued Saudisation decisions

and increase the contribution of labour force.

Identified to address difficulties and problems faced the Saudisation and employment

issues. This policy passed by the Government has encouraged Saudisation process in

the private companies.

See the following table Saudi labour force working in the sector wise distribution 1994-

2004.

Table 2.12: Structure of the Labour Force in Saudi Arabia by Sector: 1999- 2004

1999 2001 2002 2004

Description No. of % No. of % No. of % No. of % Annual Workers Share Worker Share Worker Share Workers Share Growt

s s h Rate Scientific and 1,122.4 15.6 1,137.0 15.6 1,144.5 15.5 1,159.9 15.5 0.7

Technical Jobs Administrative 133.9 1.9 137.4 1.9 139.2 1.9 142.9 1.9 1.3 and Business

Directors Clerical Jobs 534.4 7.4 543.9 7.4 548.6 7.4 558.4 7.4 0.9

Salesman 507.6 7.1 515.7 7.1 519.9 7.1 528.2 7.0 0.8 Service 2,138.1 29.8 2,161.2 29.6 2,172.9 29.5 2,196.6 29.3 0.5

Workers Agriculture 551.0 7.7 560.4 7.7 565.2 7.7 575.1 7.7 0.9 and Fishing

Workers Production, 2,188.9 30.5 2,249.3 30.8 2,280.3 30.9 2,343.8 31.2 1.4

Construction and Transport

All Sector 7,176.3 100.0 7,305.0 100.0 7,370.7 100.0 7,504.9 100.0 0.9 Total

Source: Saudi Commerce and Economic Review (Dammam) No.ll6, December 2003, p.31.

Implementing the privatisation process, the kingdom has encouraged and passed a

certain laws to make successful privatisation process in the country.

Summing up it can be argued that privatisation process though limited has yet to go long

distance. It has yet to over come the processes of structural limitation of the rentier

economy.

Kuwait

The oil rich economy of Kuwait experienced a severe setback in 1990 when Iraq invaded

the country, damaging its capital assets including the oil infrastructure. The cost of Iraqi

occupation became enormous burden forcing the Government to recast its economic

policies.

According to one estimate Iraqi invasion of Kuwait severely damaged petroleum

industry, including total 1,330 active wells, of which about 700 were on fire and others

were pouring out oil. As a result 6 million barrels of crude oil was lost every day, a daily

financial loss of between US $ 40 million to US $ 120 million.48 The UN Report

estimated a loss of US $ 8,500 million as a result of occupation, and the consequent loss

of production.

The second major affected area is petrochemicals where the loss was estimated at US $

7.8 million; more than 720 offices in 25 oil sector buildings had been vandalised and

looted, and there was systematic pillage of warehouses, workshops, tool and laboratories.

The third major affected area was electricity, transport and communication. The UN

Report puts the cost of restoring the electric system to pre-invasion standards at about

US $ 1,000 million. Over all losses sustained by ports, airport and Kuwait Airways

Corporation amounted to more than US $ 2,000 million. Restoring the country's

transport fleet to its former levels of 56,000 vehicles was estimated to cost over US $5

million. Total losses in the telecommunication sector could amount to more than US

$2,000 million and losses to the telecommunication sector exceeded 50 per cent of the

val uc of the original assets.

4H "Counting the Cost of Occupation", MEED (London: UK), Vol.35, No.26, 7 June 1991, p.22.

The fourth major affected area was housing, urban, infrastructure and municipal services.

Total damaged I, 70, 000 houses were estimated at the cost of US $2,500 million. The

cost of rebuilding and refurbishing up to 800 rooms in luxury and first class hotels was

estimated at US $500 million.49

Health sector in particular was affected severely; its infrastructure collapsed, and loss of

medical equipments was enormous. Thousands of expatriate health workers and trained

electro-medical technicians left the country.

The main financial affect of the invasion of Kuwait in 1990 was on the state budget. The

cost of the war on Kuwait was billions of dollars, and oil revenue was severely ·disrupted

for about two years. In this war Kuwait investments were drained from US $ 40 to US$

160 billion, because the money was used to finance the Government's contribution to the

allied military effort and reconstruction of the economy.

Kuwait has one of the most extensive welfare systems. Its provisions include social

services such as education and health care, well paid jobs and the supply of many goods

and services free of charge or below cost. The Government wages, salaries and

allowances consume 60 per cent of oil revenues, which in tum represented 85 per cent of

the total Government revenue. The employees involved amounted to nearly 95 per cent

of the Kuwaiti's labour force and it has estimated that an average two-thirds ofthe salary

of a Kuwait in the pubic sector may be effectively be a transfer payment and only one­

third relates to a productive work. Kuwait's annual spending on health care is 200

million Kuwait Dinar (KD), of which KD 50 million goes on Kuwaitis who are referred

to abroad for treatment at the State's expense. Private health insurance is being

considered but not until Kuwaitis have adapted to the erosion of subsidies on utilities.

49 Ibid., p.23.

The right to free housing was also targeted; for the time being the State was heavily

committed building 5,000 homes a year for Kuwait citizens in suburban areas while

thousands of apartments stand empty in Kuwait City. 50 The tables and figures show year-

wise allocation of wages and salaries Bill in various years' budgets. The trend shows the

Government expenditure has increased every year.

Table 2.13: Public Revenue and Expenditure, 1993/94--1994/95 (KD Million)

1993/94 1993/94 1994/95 1994/95 1995/96 Approved (Closing Approved Approved Budget Approved

Budget Account) Budget after Additional Budget A.llocation

Oil Revenue 2,419.8 2,324.3 2,234.9 2,224.9 2,490.0 Other Receipts 293.9 402.8 402.3 402.3 420.0 Total Revenue 2,713.7 2,775.1 2,637.2 2,637.2 2,910.0

Wages and Salaries 1,160.0 1,003.5 1,144.0 1,44.0 1,164.5 Goods and Services 276.0 248.8 263.0 303.0 261.0

Transport and 45.0 34.7 38.0 35.0 30.0 Equipment

Development 345.0 400.4 340.0 408.4 279. Projects

Miscellaneous 2111.0 2,553.4 2,358.0 2,482.3 2,395.0 Expenditures I

Transfers Total Expenditure 3,937.0 4240.8 4,140.0 4,372.7 4,230.0

Net Deficit 1,224.0 1,465.7 1,502.8 1,735.5 1,320.0

Source: MEED (London: UK), 13 February 1996, p.l 0.

Table 2.14: Budget Allocation (KD Million)

1999-2000 2000-01 2001-02 Total Revenues 2224.0 2306.5 3831.5 Oil Revenues 1761.0 1927.0 3263.0 Non-Oil Revenues 1761.0 1927.0 568.0 Total Expenditure 4295.0 3593.0 5274.0 Wages and Salaries 1375.0 136.0 1557.0 Goods and Services 345.0 380.0 565.0 Vehicles and Equipment 30.0 33.0 35.0 Projects and Maintenance 345.0 350.0 583.0 Miscellaneous Expenditures 2200.0 1694.0 2534.0 and Transfers

Source: MEED (London: UK), 23 February 2001, p.28.

50 "Special Report Kuwait, Economy" MEED (London: UK), Vol.39, No.8, 24 February 1995, p.13.

Goods &

services 11%

services 7%

Wages salaries 34%

Figure 2.3: Public Expenditure:

Projects & maintenance

2000-01

Transport & Equipment

0%

Source : MEED (London: UK), 28 June 2002, p.24.

Figure 2.4: Public Expenditure: 2002-03

Projects &

maintenance 12%

Transport &

Equipment 1%

Source: MEED (London: UK), 28 June 2002, p.24.

Transfers & Miscellaneous

Transfers & Miscellaneous

46%

( ~-.

Declining oil revenues and the Iraqi invasion (1990-91) led to increase the Government

budget deficits. In 1991 deficit was increased to KD 5,349, which was the highest deficit

budget among 1 0-year period. The following table shows various years' deficit budget

presented by Kuwait.

Table 2.15: Kuwait: Public Finances, 1991/92-1993/94 (KD Million)

1991/92 1992/93 1993/94 Total Revenue 870.0 2,218.0 2,774.0

Total Expenditure 6,219.0 4,000.0 4,551.0 Net Deficit* 5,349.0 1,782.0 1,777.0

*Excludes allocations to the reserve fund for future generations.

Source: MEED (London: UK), 24 February 1995, p.l3.

During the war period oil revenue was declined to KD 0.3 billion (US $1 billion)

in 1990/91, and KD 0.5 billion in 1991/92, compared with KD 2 billion in 1989/90. This

was insufficient to finance the high increase in budget expenditures, from KD 3 billion in

1989/90 to KD 7.6 billion in 1990/91 and KD 6.1 billion in 1991/92. Consequently, the

deficit was increased tremendously to KD 7.3 billion (US $24.3 billion) in 1990/91. It

slightly came down to KD 5.5 billion (US $ 18.3 billion) in 1991/92 (See the table

Kuwait Government budget). The increasing deficit budget led the Kuwait to external

borrowing. 51 It was in 1995/96 that Kuwait could return to a normal remedy building,

while oil revenue increasing to KD 3.4 billion and expenditure coming down slightly of

KD 4.1 billion, led to decrease in KD 0. 7 billion.

Kuwait's increasing deficit budget triggered the debate raising some important issues

about fiscal correction. There was much talk about the introduction of revenue-

51 Survey of Economic and Social Development in the ESCWA Region, 1998~99 (New York: UN), 1999,

p.75.

generating and expenditure-cutting measures. On the revenue side, the measures include

the introduction of a personal income tax and corporate tax at 30 percent. On the

expenditure side, the measures include a reduction in subsidies, review of prevailing

housing policy entailing every Kuwaitis to a long-term loan of KD 70,000 (US $

2,28,000)52. But these issues could not be implemented in practice. The imbalances

between budget revenues and expenditures continued in the years ahead and the view

gained the acceptance that the private sector involvement would be imperative to provide

greater immunity to reduce deficit budget in the coming years.

Table 2.16: Kuwait Government Budget, 1980-1999

(Billions ofKuwaiti Dinars)

1980/81 1985/86 1986/87 1989/90 1990/91 1991/92 1995/96 1997/98 1998/99 Revenues 6.9 2.3 3.8 2.4 0.3 0.6 3.4 3.1 2.4 Oil Revenues 6.7 2.1 3.7 2.0 0.3 0.5 3.2 2.6 1.9 Non-Oil 0.2 0.2 0.1 0.4 0.0 0.1 0.2 0.5 0.5 Revenues Expenditures 2.1 3.0 3.1 3.0 7.6 6.1 4.1 4.4 4.3 Current 1.4 2.1 2.1 2.5 NA NA 3.8 4.0 3.9 Expenditures Capital 0.7 0.9 1.0 0.5 NA NA 0.3 0.4 0.4 Expenditures Surplus (or 4.8 (0.7) 0.7 (0.6) (7.3) (5.5) (0.7) ( 1.3) ( 1.9) Deficit) GDP (%) 9.4 (8.4) 6.1 (9.4) NA NA (16.3) (12.0) ( 13.0)

A == Actual; B == Budgeted ( ) Indicates negative

Source: Survey of Economic and Social Development in the ESCWA Region, 1998-99 (New York: UN),

1999, p.76.

In Kuwait, subsidies were implemented widespread through maintaining artificially low

prices and including basic foods, water, electricity, petrol, telecom and housing.

Inevitably, this resulted in extremely wasteful consumption and high cost of production.

52 Ibid.,p. 76.

The Government spends KD 150 million a year-subsidy to the power sector. This sector

getting major shares of subsidies accounted 90 per cent of electricity costs. The water

sector comes in the second place on which the Government spends KD 125 million a

year-subsidy, which accounted 75 per cent of water costs. 53

Two-thirds of the country's water meter were reported broken, while entering homes to

read meters would be opposed on privacy grounds and an alternative centralised

metering system for electricity would be time consuming and expensive to be installed.

The following table shows that year-wise allocation of subsidies went increasing, which

affected developmental projects in the country.

Direct taxation system was politically unacceptable, besides there were also practical

problems, for instance, privacy was paramount and no Kuwaitis would willingly disclose

income from investments thereby making virtually impossible to tax. The Planning and

Finance Ministry proposed sales tax on local made goods at the same rate as customs

duties. It also increased these duties to I 0 per cent in the year 2000. Corporation tax

envisaged companies wholly owned by Kuwaitis were exempt from the tax. But

foreigners were levied on foreign company profits and the profits of foreign shareholders

in Kuwait companies.

53 "Special Report Kuwait, Economy" MEED (London: UK), Vol.39, No.8, 24 February 1995, pp.l3-14.

Table 2.17: Subsidies

(In Million national currencies)

Country/ 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Years

Kuwait 496 719 789 905 757 799 657 549 623 606 589 5964 3035 1640 Bahrain 19.3 21.5 20.5 27.4 18.4 18.9 18.5 30.4 36.3 33.5 38.6 33.2 43.2 68.7 Oman 40.3 52.6 28.5 29.1 28.8 107.1 80.9 87.5 94.5 99.2 115.4 124.2 131.5 117.5

... Source: GmJesh Pant, The Arab Gulf Economies: From Cns1s to Reform (New Delhi: Har Anand PublicatiOns, 1996), p.ll4.

Privatisation programme in Kuwait was conceived as part of structural adjustment of the

public sector of the economy. It involves redefining the role by disengaging it from those

activities which are best done by the private sector with the over all obj.cctive of

achieving economic efficiency. As pointed out by the Kuwait economic consultant AL-

Shall, "Privatisation is not a choice but it is a necessity. Hedging for greater private

sector involvement will be blessing."54 Kuwait accepted the principles of the World

Bank recommendations, which urged the privatisation of 74 local industries inCluding 62

companies in which the Kuwait Investment Authority (KIA) has shares. The

Government holds shares in 37 out of 48 companies listed on the Kuwait Stock

Exchange and the total value of its holdings was put at KD 864 million (US $ 2.9 billion)

or 26 per cent of the market's total capitalization where government stakes in 16 out of

the 3 7 companies were between 50 per cent and I 00 per cent. 55 The Government holds

shares between 25 per cent and 99.99 per cent in seven of these companies and has

shares of less than 25 per cent in the rest. Below table shows Government share's in joint

stock companies.

54 "Special Report Kuwait, Winds of Change" MEED (London: UK), Yol.46, No.5, 8 February 2002, p.28. 55 ESCWA Study on Privatization in the Gulf Countries E/ESCWA/ED/1995/8 (New York: UN

Publications, 1997), p.32.

Table 2.18: Kuwait: Government Shares in Joint Stock Companies, 1992

Percentage of Government Shareholding

I. Investment Companies Kuwait Investment Company 70.08 Kuwait Foreign Trading, Contracting and 99.58 Investment Company Kuwait International Invest Company 31.94

2. Insurance Companies Kuwait Insurance Company 7.52 Gulf Insurance 75.18 National Industries 58.08 Kuwait Cement 36.57 Kuwait Shipbuilding and Repair Yard 56.38

3. Real Estate Companies Kuwait Real Estate 13.70 United Real Estate 57.85 National Real Estate 25.22

4. Service Companies Kuwait Hotels 73.98 Kuwait Food Staffs 34.50 General Warehousing 53.00 Mobile Telephone Systems 50.44

Source: Survey of Economic and Social Developments in the ESCW A Region, 1995,

Privatization in the GCC Countries (New York: UN), 1997, p.33.

There were several companies targeted for privatisation that were not listed on Kuwait

stock market. It was estimated that the total value of the Government share in these

companies, targeted for privatisation (excluded oil sector companies) was around KD 4

billion (US $13.5 billion), including KD 2.2 billion (US $7.3 billion) in electric power

and water facilities, KD 420 million (US $ 1.4 billion) in Kuwait airways corporation

and KD 800 million (US $2.66 billion) in Kuwait Investment Authority (KIA), some of

which were listed in stock exchange. 56

Kuwait Investment Authority has envisaged three ways to proceed when privatising the

companies it owns: (I) to float shares for subscription through the establishment of

investment funds that would acquire KIA assets in these companies; (2) to sell shares

through an open auction or closed bids; and (3) through public shares flotation. 57 In

total, KIA sold I ,066.6 million shares in I 3 total companies between 1994 and 1996,

which represented about 79 per cent of its shares in these companies. The following table

shows sale of KIA shares in local companies.

57 Ibid., p.34.

Table 2.19: Sale of KIA Shares in Local Companies Through, 30 June 1996

Name of the Company Date of Sale Total No. of No. ofShares No. of Shares Sold Value of Shares Method of Sale Outstanding Shares Owned by KIA (million) Sold (millions of

at Time of Sale Before Sale KD) (million) (million)

Commercial Facilities September 1994 177.1 98 70 40.3 Public Subscription Company Auction

Estate United Real February 1995 427.3 268 220 27.5 Public Subscription Auction

National Real Estate. May 1995 360.5 190 190 28 Public Subscription Auction

National Industries June 1995 347.5 271 170 193.8 Public Subscription Company Auction

Gulf Cables Electrical February 1996 61.9 17.3 16 16.28 Public Subscription Industries Auction

Industrial Insurance May 1996 150 52.5 52.5 6.7 Public Subscription Company Auction

Gulf Insurance Company June 1996 113.1 84 20" 12.6 Public Subscription Auction

Source: ESCW A Study on Privatization in the Gulf Countries E/ESCW A/ED/1995/8 (New York: UN Publications, 1997), p.36.

The privatisation process m Kuwait is confined to non-oil sector, especially

infrastructure sector such as telecommunication, power and water, airways, roads,

wastewater management, and construction sector. Kuwait has passed a Privatisation

Law, which has got the Parliament approval, and it calls for setting up of a higher '

commission for privatisation with an exclusive mandate to select the method and timing

of individual privatisation. The law recognises the need for competitive processes and

public reporting of the commission's activities.58 It will open the way for sale of the

State utilities. The first privatisation process took place in telecommunication and civil

aviation sectors under this law.

Telecommunication Sector has become increasingly important in Kuwait. Kuwait

Telecommunication Company (KTC) was formed in 1992 to take over the

Telecommunication Ministry responsibilities. And shares in the company, valued at

around KD 150 million (US $ 500 million) were offered to the public in 1995/96.59 It

was a more advanced and new corporation.

In 1994 Sweden's Ericsson won two key contracts worth KD 5.4 ($18.3 million) of

international exchange. The UK's GPT was awarded a contract to upgrade 40,000 lines.

The contract involved the installation of two system exchanges; the first of this type was

installed in the Middle East region. The privatisation of the fixed-line network is on the

agenda. The first step was taken for making a Corporatisation of the Communication

Ministry into the Kuwait Telecommunications Company. The National Assembly has

approved the Corporatisation process.

SM Yousuf A. AL-A wadi, "Privatisation: A Kuwaiti Perspective," MEES (Cyprus: Nicosia Publication), 39: 65/66, 23/30 December 1996, p. 09.

SY ESCWA Study on Privatization in the Gulf Countries EIESCWA/ED/199518 (New York: UN Publications, 1997), p.35.

In I 997 Kuwait had 4,12,000 fixed telephone lines in use, and some 2,10,000 subscribers

to its mobile network were a part of its privatisation programme to upgrade the country's

fixed line system. The Communication Ministry awarded a contract in 1997 to another

German private company, Siemens, to install 1,00,000 new telephone lines at five

exchanges at Surra, Qurain, Sulaibikhat, Salwa and Old Salmiya.60

The Government announced the sale up to half of its 48 percent stake in the Mobile

Telecommunications Company. Kuwait mobile network has proved a great success in

Global Standard for Mobile (GSM) system, increasingly dominated by the US Motorola

and Germany's Siemens Companies. This contract was part of a large-scale project,

which Germany's Siemens won a slice. This company started work on its 2,30,000

lines. 61

In reality, Government was unable to invest in the power and water department, and at

the same time Kuwait faced rising population growth and industrial expansiQn, whereby

the power and water consumption was increased making annual growth rate of 6.2

percent. For meeting these demands Kuwait had to go for larger projects, and it invited

private sector participation in these sectors.

By the end of 1997 there were five power stations in the country at Shuwaikh, Shuaiba

North, Shuaiba South, Doha East and Doha West, which had a total installed capacity of

5,230 MW.62 A sixth power station has got privatisation involvement at AL-Zour South

in 1998. The Ministry of Electricity and Water Department had given permission to

construct the 2,400-MW project on BOT basis at an estimated cost of US $2,200

60 The Middle East and North Africa 48th Edition, 2000 (London: Europa Publication, 2001 ), p.634. 61 "Special Report Telecommunications" MEED (London: UK), Vol.40, No.9, 1 March 1996, pp. 7-8. 62 The Middle East and North Africa. Year Book-2002, 48th Edition (London: Europa Publication, 2001 ),

p.633.

million.63 The private company involved in this project was Person's Brickerhoff

International, a US Company, and this project came into full operation in 199~.

The second private company invited at Shuaiba power station by the Ministry of

Electricity and Water Department had been given technical clarification with Siemens of

Germany and Alstom of France on BOT basis, which covered the supply and installation

of 1,000 MW capacity in two phases. This project was started in 1999. These two power

stations got private sector involvement in the country, besides the fact that in the coming

days the Government will go for other projects.

Kuwait was facing scarcity of water resources to meet the safe drinking water and started

desalination plants at Shuwaikh, Shuaiba North, Shuaiba South, Doha East and North,

which gave total installed capacity 212.8 M gallons in 1999.64 The rapid increase in

population had reflected in a huge water demand rising in an average daily water

consumption of64-million gallons in 1980 to 212.8 million gallons in 1999.

Private companies are invited in water sector also. An agreement was announced in 200 I

to build a privately funded Shuaiba water desalination, being the cost of the project at US

$ 470 million, had involved the construction of a water network to distribute 96 million

gallons of water a day to industrial and residential users in Subiya Mutla and West. The

second agreement was announced to build a privately funded suitable sea water-cooling

at Shuaiba, for which the Central Tenders Committee approved the appointment of the

63 Ashok Dutta, "Special Report Kuwait, Winds of Change," MEED (London: UK), Vol.46, No.6, 8 February 2002, p.29.

64 The Middle East and North Africa, Year Book-2002, 48'h Edition (London: Europa Publication, 200 I), p.634.

UK's Mott Macdonald as a consultant. The estimated cost of US $ I 00 million entailed

the construction of this project. 65

Privatisation of Kuwait Airways resulted in reflecting greater efficiency and speedy

development of infrastructure. Kuwait Airlines Corporation (KAI) was created in 1990,

which was taken over from the Ministry of Civil Aviation. This Corporation was

responsible for inviting private sector and increasing airlines competition in the region.

Since liberalisation of airways with rebuilding fleet and administration, the airline came

out of its shell to face the fierce competition in an increasingly liberalised world aviation

market.

Kuwait Airways Privatisation was high on the agenda. Kuwait Aviation Services

Company (KASCO) was formed; this company covered all flight catering, ground

handling and flight desk operations at Kuwait International Airport; and it was an

attractive proposition. A major programme of privatisation work began in 1992, and a

I

huge place replacement and fleet expansion programme were continued. Finance for this

programme was put in place in 1993 through US $ 80 million deal with International

Gulf Bank, and US $ 480 million agreement with local Islamic Finance Company. 66

Kuwait Airlines Corporation scheduled for greater private participation is ahead.

It is observed that Kuwait's battle against the budget deficit injected new creativity into

the construction sector. Contractors used to rely on public sector opportunities, but which

were expanded with the increasing confident of the private sector. The Government

65 Ashok Dutta, " Special Report Kuwait, Winds of Change," MEED (London: UK), Vol.46, No.6, 8 February 2002, p. 24.

66 "Special Report Kuwait, KAC, New Carrier Rises From the Ashes," MEED (London: UK), Vol. 39, No. 8, 24 February 1995, p.22.

departments with plenty of work that needs to be done are looking to private sector

initiatives in areas, which have traditionally the presence of public sector.67

The most advanced BOT basis project was the development of Kuwait City Water Front.

The Kuwait Municipality has divided the project into separate packages.

For the most advanced BOT scheme - an AL-Sharq Water Front, bids have been

submitted for phases four and five. The work has been completed well on an AL-Sharq

Scheme. The National Real Estate Company (NERC) was awarded the .contract to

develop this site in 1994. This company invested KD 35 million in the scheme over 25

years, on the expiry of which it will be handed back to the Municipality.68 This scheme

was completed in 1998, which was the successful private sector involvement m

construction sector. The second maJor project included the biggest concentration of

construction work in Kuwait in the new campus for Kuwait University at Shauwaikh.

During 1996, contracts totaling US $110 million were awarded for the construction of

the sports complex, library, college of social science and law department, computer

building, lecture rooms, conference hall and campus control system.69

To encourage the private companies to invest in non-oil sector, Kuwait has announced

major incentives, like allowing 100 per cent of direct investment in capital and

technology, which is the Central Government privatisation plan. Consequently, previous

;

foreign investors, who paid 55 per cent tax on profit, need to pay only up to 49 per cent

of the profit on registered companies in Kuwait.

67 "Special Report Kuwait, Construction Turning to the Private Sector for Help" MEED (T ,ondon: UK), Vol.39, No.8, 24 February 1995, p.19.

ox "Special Report Kuwait," MEED (London: UK), Yol.41, No.9, 28 February 1997, p.18. 69 Ibid., pp.18-19.

Foreigners are allowed to trade on the Kuwait stock exchange and to own stock in

compames (until this point, trading had restricted to Kuwaitis and GCC states).

Foreigners could own stocks only through mutual funds. Some of them with a market

capitalisation of approximately US$ 20 billion invested on the Kuwait's Stock Exchange.

No corporate taxes are assessed on companies wholly owned by Kuwaitis or citizen of

Gulf Co-operation Council (GCC) countries. Foreign Corporations are subject to a 55 per

. 70 cent corporate mcome tax rate.

Performance

Privatisation process in Kuwait has to be seen as a part of a wider process of economic

reform and other measures to improve econorn ic pert<.mnance. It primarily iti meJ at to

down the Government economic activities in non-oil sector. Privatisation involvement in

economic activities has increased constantly by four to five per cent yearly. By

privatisation experience to telecom-sector, the competition had increased tremendously.

After the creation of Kuwait Communication Corporation, a new telecommunication

regulation was enacted with a comprehensive, licensing and regulatory function to be

exercised by the Government; and networks and services were provided largely by

private sector to an increasingly competitive market place. 71 This Corporation was

recognised to become the telecommunications regulatory agency with operating

responsibilities getting transferred from the Government. And it was a new autonomous

state enterprise that became the domestic and international satellite carrier. The

Corporation has emerged from the reform as a very successful, viable private company.

It has to meet slightly its connection targets to all nearing areas. The quality and

responsibility has improved in this sector.

7° Kuwait Information Office, Kuwait 2002 (Kuwait), p.6. 71 Robert J. Saunders Bjorn Wellenius, Telecommunications and Economic Development (USA: World

Bank Publication, 1994), p.315.

The privatisation performance in power and water sector has led to efficient operation of

public assets and services, and improved transmission and distribution services. Private

sector performed well in a new thermal power plant at AL-Zour North a 2,400 MW. The

US private company invited to construct the plant. This project also included a water

desalination plant with a capacity of 48mn. Gallon per day; this project successfully

. I d n Imp emente .

Another power station got private sector involvement, which was a new station

constructed at Shuaiba. This station had increased Kuwait's total installed capacity to

9,280 MW and was completed in 1999. In the coming years private sector will play a

major role in the power and water sector.

Under the Kuwait Airport privatisation, restructuring was at the core of the airlines

strategy. The Government understood to be looking at the possibility of transforming

Kuwait Airways Corporation into a shareholding company as a precursor to

privatisation. Private-sector-seeks efficiency first; staff levels are being cut and

unprofitable routes being closed in order to push the cost down. 73

The Government has pursued plans for expansion of Kuwait International Airport (KIA).

The KIA built a new terminal with capacity for 5 million passengers a year on a BOT

basis in 200 I .In the long-term the market is growing and efficiency drive will make sure

that Kuwait airlines are well placed to make the most of it. 74

The privatisation performance in construction sector has been succeeded tremendously.

The construction sector was owing to the vast amount of infrastructure development

72 The Middle East and North Africa Year Book- 2002, 481h Edition (London: Europa Publication, 200 I),

p.633. 73 "Special Report Aviation," MEED (London: UK), Vol.41, No. 23, 6 June 1997, p.8. 74 "Special Report, Gulf Airports," MEED, (London: UK), Vol.46, No.28, 12 July 2002, p.8.

carried out by the foreign contractors. 1990 onwards public sector was increasingly

allocated to the private sector. The biggest concentration of construction work was

successfully completed as new campus for Kuwait University at Shuwaikh, on BOT

basis. 75 This example shows the successful privatisation process implementation in the

country. Another one BOT basis project was the development of Kuwait City Water

Front by Kuwait's National Real Estate Company (NREC); this work has completed

successfully in 2002.

Privatisation Programme in Implementing Difficulties

The country has been facing difficulties in implementing the process. Kuwait economist

said, "Privatisation is the only real chance of creating a sustainable stimulus to the

economy." But this will require bold and decisive moves, and it is yet to be seen whether

they will be taken. 76

An estimated 90-95 percent of Kuwaitis are employed in the public sector, and it is

widely accepted that the most are over paid and unfit for work in competitive private

sector, or they are unwilling to enter it. A period of transition is needed but there must be

incentives. But for this to be worked out, there are a great number of political battles still

to be fought.

Second important problem faced in implementing privatisation process has been of

creating work for young nationals, who are entering into the job market at ·the rate of

75 The Middle East and North Africa, Year Book- 2002, 481h Edition (London: Europa Publication, 200 I),

p.634.

76 Tom Everett-Heath, " Special R.eport Kuwait, History Repeats Itself," MEED (London: UK), Vol. 46, No.4, 26 February 2002, p.26.

I 0,000 a year. It also needs to achieve higher rates of growth and higher investment.77

Employment in the public sector is directly bloated and over staffed, but many young

Kuwaitis still expect the generous salaries and benefits enjoyed by their old generation.

One widely solution to the employment problem is to expand activity in the private

I

sector, but the private sector in Kuwait is small, even by Gulf standards, and accounts for

less than 7 per cent of Kuwaitis to employment. But finding a simple way of enlarging its

role is proving to be a difficult task. The privatisation pace of growth is very slow.

Another problem of implementing difficulty was that the Government enforced a

"Kuwaitisation Policy" in the private sector. Employment is sensitive political issue and

hotly debated in Parliament. One private company director said, to employ Kuwaiti

nationals in preference to expatriate labour would be a disastrous for us, because the high

wages and short working hours demanded by Kuwaiti national would quietly put them

out ofbusiness. 78 Wage demand thus is another key issue in the private sector.

Fearing of job loss is another factor of implementing difficulty. It has estimated that the

programme would affect jobs of some 26,000 Kuwaitis; this implies that two sorts of

compensation payment may be required for people whose job is privatised. A

redundancy payment or income maintenance scheme for those who lose jobs is an

incentive payment for those who accept less general terms.

Kuwaitisation Policy, a programme of "Kuwaitisation", was a vigorously government

passed law; it was compulsory to recruit Kuwaiti citizen in the private sector. This aim

was achieved by a majority of Kuwaiti nationals in private sector by 2000.

77 Yawar Mian, "Special Report Kuwait, Rich and Restless," MEED (London: UK), Vol.44, No.8, 25 February 2000, p.9. ·

7H "Special Report Kuwait, Slow Progress on the Road to Reform", MEED (London: UK), Vol.40, No.6, 9

February 1996, p. 8.

This programme was most successful in public sector where 90 per cent ·of Kuwaiti

workers were employed, but the private sector continued to be demanded by expatriates,

representing 60 per cent of the population.79 The basic challenge faced by the

Government was demographic; 20 per cent of the population is aged 15 and 24, and right

to employment is a constitutional right in Kuwait. The Government has to provide jobs

to its citizens, is a necessary requirement.

The United Arab Emirates

Oil still dominates the economy of the UAE contributing to the public revenues around

seventy five percent. The Emirates has successfully restructuring its dependence on the

oil sector. 80 Growth of non-oil economy is illustrated by some important sectors, like

services, industry, tourism, agriculture and maritime trade. These sectors are increasingly

acquiring important role in the national economic development.

The boom of seventies relieved the economy of the Emirates from the perpetual financial

constraints, which afflicted the earlier developmental efforts. 81 The oil triggered growth

in the GOP, and the ever-expanding trade surplus increased the country's purchasing

power. The thirst of developmental efforts was to give high priority to infrastructure

projects such as, roads, airports, harbors, low-cost housing, school etc. Major projects set

the tone for the quick economic activities in the 70s and early 80s. However in the late

eighties and nineties the UAE faced the stagnating oil revenues, impact of increasing

population, cost of highly dependent on expatriate workers, providing expensive

79 The Middle East and North Africa, Year Book- 2002, 48'h Edition (London: Europa Publication, 200 I), p. 635.

80 United Arab Emirates, Year Book-1997 (Abu Dhabi: Ministry of Infonnation, 1997), p.5. 81 AL-Mubarak, "Economic Development and Industrialisation in the UAE", American Arab Affairs

(Washington D.C.: American Arab Affairs Council), No.30, Spring, 1990, pp.l3-17.

subsidies and increasing deficit budgets. A brief review of tbe economy underlines the

point made above.

The rich oil endowment of the economy is underlined by the proven oil reserves

estimated 97,800 million barrels in the year 2001. During the period, 1973 to 1980, the

UAE's oil revenues were increased by 25 fold, and especially during the period of 1973

and 1976 the economic activities were expanded very rapidly. Consequently, the public

expenditure was increased at an annual rate of seventy two percent. 82 Oil r~venue had

reached its peak in 1980 and remained stable for one to two years, but started declining

about twenty one percent. This decline continued until 1986, falling approximately sixty-

four percent in real terms. For the oil dependent economy this declining oil revenues

obviously affected the economic growth. Since the Government budget had been heavily

depended on the oil revenue, declining oil revenue led to the delay of most of the

developmental projects. 83

Falling oil prices affected both direct and indirect way. The most direct effect was the

loss of oil revenue, which were normally translated into declining government

expenditures, which restricted overall economic growth. The following table shows the

estimated crude oil production and export earning for the UAE's, an average price per

barrel of Gulf crude oil for 1986 of around $14.

~2 The Middle East and North Africa, Year Book-2002, 48th Edition (London: Europa Publicatipn, 2001 ), p.ll67.

HJ AL-Mubarak, n.2, p.l3.

Table 2.20: Oil Revenues in the UAE, 1974-1998 (Billions of US dollars)

UAE Oil Revenues Years Total Oil Revenues

(Years) 1974 6.33 1974-79 52.13 1977 9.26 1980-84 76.1 ()

1979 12.86 1985-89 46.90 1982 108.30 1980-89 123.00 1984 12.40 1990-94 68.73 1986 7.00 1990-98 118.92 1988 7.10 1990 15.69 1992 14.49 1995 13.35 1997 14.09 1998 9.37 Grand total 294.22

Source: Survey of Economic and Social Developments in the ESCW A Region, 1998-1999 (New York:

UN), 1999,pp.45-46.

The loss of oil revenue can be estimated at certain average price and production levels

(see the table impact of lower oil prices in the UAE). The indirect effects are more

difficult to quantify, they are, lower interest rates, declining dollar exchange rates

guaranteed accompaniment to lower oil prices. In the UAE interest rates dropped around

20 percent and dollar exchange rate also dropped around 18 percent84. Declining oil

prices also affected reducing the import bill of major oil importing countries. Another

indirect effect of declining oil revenue leads to higher inflationary pressures in the

country. The following table shows the impact of lower prices in the UAE.

84 Henry T. Azz.arn, The Gulf Economies in Transition (London: Macmillan, 1988), pp.167 -169.

Table 2.21: Impact of Lower Oil Prices in the UAE's Oil Revenues

Production Earnings (UAE) 19R4 19R5 19R6

(mb/d)* ($million) (mb/d) ($million) (mb/d) ($million) 1.10 I 11,707 1.05 I 10,890 1.30 I 7,022

• mb/d- million barrels a day

Source: Henry T. Azzaro, The Gulf Economies in Transition (London: Macmillan, 1988), p.l68.

The rapid growing demographic profile could be seen by the fact that under 1968 Census

the population was at 1, 79,126, but it reached to 10,42,099 by 1980 Census, a rise by

55.7 percent. The1995 Census recorded a population of2.3 million distributing 9,28,360

in Abu Dhabi, 6,74,160 in Dubai, 4,00,400 in Sharjah, and the remainder in other

Emirates. During 1994-2000 the population has been increased by an annual average rate

of 4 per cent. In 2000 the population was officially estimated to 31 ,08,000. 85

This period is also instrumental to the demographic transition, characterised by the high

birth rate and low death rate, reflecting in the age structure of the country's population. In

the total population about half of total native population was under 15 years. 86 The

following tables show the population growth and age structure in the UAE.

85 The Middle East and North Africa, Year Book- 2002, 481h Edition (London: Europa Publication, 200 I),

p.ll67. H6 Prakash C. Jain, Population and Society in West Asia (New Delhi: National Publishers, 2001), p.53.

Table 2.22: The UAE: Population Growth Rate in 1978-1988 and 1988-1998

Annual rate of growth Annual rate of growth Country. t978-tn8 1988-1998

United Arab 8.7 4.2 Emirates

Source: Survey of Economic and Social Developments in the ESCWA Region, 1998-1999 (New York:

UN), 1999, p.l51.

Table 2.23: The UAE's Population Structures, 1960-90 (%)

Country I 1960 I 1965 I 1970 I 1975 I 1980 I 1985 I 1990 Shares of population less than 15 years old

UAE I 41.8 I 38.2 I 35.0 I 28.3 I 28.7 I 30.7 I 30.7 Dependency ratio

UAE j 85.1 J 67.8 l 59.6 I 44.o I 42.6 I 47.4 I 48.0

Note: The dependency ratio is the sum of the population less than 15 years old above 64 years old, divided by the population between 15 and 64 years old.

Source: Neemat Shafik, ed., Economic Challenges Facing the Middle Eastern and North African countries (London: Macmillan Press, 1998), p.248.

During the oil boom period, population growth was not the problem. Huge oil revenue ......_

made the Government to provide better facilities to their citizens. When oil revenue

started declining in 1980 onwards, the per capita income and the Government finances

were declined. Employment opportunities to be provided to nationals in the private

companies became a major issue. The nationals were not much technologically

competitive; this was the major hindrance for the private sector growth in the UAE.R7

Foreign workers in the UAE comprised eighty percent of the total labour force in 1975;

by 1990 their share had been increased to eighty nine percent.

87 Neemat Shafik, ed., Economic Challenges Facing the Middle Eastern and North African Countries (London: Macmillan Press, 1998), p.247.

The following table shows the foreign labour force in the Gulf Countries:

Table 2.24: Foreign Labour Force in the Gulf Countries, 1975- 1990

Country Foreign Labour Force (1000s) Foreigner as Percent of Total Labour F orcc

1975 1990 1975 1990 UAE 234 805 84 89

Kuwait 218 731 70 86 Saudi Arabia 475 2,878 32 60

Oman 57 23 83 92 Qatar 103 442 54 70

Bahrain 39 132 46 51 Total/ Average I ,125 5,218 47 68

Source: Abdel R. Omran and Ferzaneh Roudi, "The Middle East Population Puzzle", Population

Bulletin, Vol. 48, No.1, 1993, p.24.

High dependence on expatriate workers has negative impact on the UAE's economy. Not

surprisingly, the Government issued a decree of banning foreigners from working as

auctioneers, cashiers, secretaries and security guards and from performing some other

categories of private sector jobs. 88

The Emirates like other GCC countries provided highest level of subsidies to their

citizens; this has adversely affected economic growth of the country. Subsidies covering,

housing, health care, education, electricity, water, fuel and capital costs, have also

contributed to budget deficits in the economic distortions, and led to reduced standards

of living for future generations; they were inconsistent with longer goals. 89 Fuels

and electricity account for the lion share of subsidies.

XX Ibid., p.64. x9 Ibid., p.238.

The following table shows the UAE's subsidies.

Table 2.25: Fuel, Electricity, and Water Subsidies in the UAE: 1980-92

(Million of US. Dollars)

Country 1980 1985 1990 1991 1992 UAE 1,207 1,412 2,223 2,620 2,676

(4.08) (5.23) (6.54) (7.63} (7.60)

Note: Number in parentheses is percentage of GOP.

Source: Neemat Shafik, ed., Economic Challenges Facing the Middle Eastern and North African

Countries (London: Macmillan Press, 1998), p.248.

These subsidies have led to dramatic growth in the consumption of fuels, electricity and

water, with ominous implications. These subsidies not only placed financial burden but

' also excess consumption of water and power. Now there is a talk going on that it has

become imperative to reduce these subsides year by year.

The UAE has taken some steps to reduce Government expenditure and introduced

greater private sector participation to increase non-oil revenues. One way of achieving

was to abandon the ownership of the public commercial corporations and transfer them

to joint-stock companies to be run more efficiently on profit and loss basis by the private

sector. It is agreed that by doing so the Government would be able to reduce the burden

of administering these institutions and cut down on the recurrent expenditure item of the

budget. 90 This process has already started in the country. The following tables show

various years budget deficit presented by the UAE Government.

~0 Henry ,n .. 5, p. 70.

Table 2.26: The UAE's Budgets for 1981/82-1985/86 ($million)

UAE 1981/84 1982/85 1983/84 1984/85 1985/86 Total Revenues 6,318 4,372 3,526 3,502 3,537

Total Expenditures NA NA 5,014 4,696 4,561 Surplus or 697 (873) (I ,488) (I, 194) (994) (Deficit)

Source: Henry T. Azzam, Gulf Economies in Transition (London: Macmillan Press, 1988), p.248.

Table 2.27: The UAE Government Deficit Budget: 1992-2000 (Million Dirham)

United Arab 1992 1993 1994 1995 1996 1997 1998 1999 2000 Emirates

Total 46,425 40,019 37,464 42,713 51,231 56,192 42,713 44,738 73,903 Revenues

Total 51,435 54,142 54,946 62,135 73,825 64,391 71,469 74,265 80,793 Expenditures

Deficit(-) -5,010 -14,123 -7,482 -9,602 -2,394 -8,199 -8,756 -29,527 -6,890

Source: Statistical Abstracts of the ESCW A Region, 2003 (New York: UN publications), 2003,pp.335-

342.

In the year 2000, the country's GOP rose to 20.4 percent due to primarily the strength of

the oil sector and the UAE's policy of economic diversification. 91 This commitment of

the diversification and privatisation programme has made the UAE one of the few

countries in the region that can grow without the oil trade. Non-oil sector accounted for

seventy four percent of the gross domestic product in 1999.

91 lbid.,pp.l-2.

The United Arab Emirates has been active supporter of privatisation programme. The

UAE has joined the World Trade Organisation (WTO) membership in 1996. Joining the

WTO membership has made the economy to open more-market oriented activities, and

thereby created a more competitive local market.92 Stable political and financial system

has provided a greater encouragement to do foreign business investment in the UAE.

Privatisation is seen in the UAE as a pragmatic response to the difficulties of reforming

public enterprises, the fiscal constrains, and financing requirements of infrastructure.

Privatisation programme has opened the areas traditionally public sector enterprises

(PSE's) under the exclusive domain of the Government; these PSE's went to· the private

sector participation. The programme targeted for infrastructure and public utilities. In the

U AE privatisation has identified in infrastructure sector, like power and water, roads,

telecommunication, ports and civil aviation etc. These are the following:

Power and water sector became the prime sector for privatisation because of growing

demand for electricity reportedly increasing at a rate of ten percent per annum. This was

very high rate compared to the regional and international growth. The ten percent growth

demanded a sharp increase in output of 400 MW per annum. The demand for water has

been growing at fifteen per cent per annum, which means additional demand output of

32.5 million gallons of water per annum. This alarming rate indicates the need for

increased investment in this sector. 93 Second important cause was that electricity was

viewed as an essential commodity and as a sign of economic development. Third cause

was that power sector faced some problems, such as tariffs that do not reflect full cost of

production; build up of arrears, and the need to restructure in order to improve efficiency.

92 United Arab Emirates, Year Book-1997 (Abu Dhabi: Ministry of Information, 1997), p. 73. YJ Aaccession day, 2002, electricity and water in UAE. www.gulfnews.online.com

The following table shows that electricity tariffs of the UAE are lowest in the world.

Table 2.28: Electricity Tariffs in the UAE

UAE Bahrain Saudi Arabia Kw/hr LC US$ kw/hr LC US$ kw/hr LC US$

Residential Any 7.5 (0.0204) 0-200 8 (0.016) 1-4000 5 (0.0 13) 2000- 12 (0.032) 4001- 8 (0.021) 5000 6000

75000 16 (0.043) >6000 15 (0.046) Any 16 (0.0204) 1-4000 5 (0.013)

Commercial Any 7.5 (0.0209) >6000 15 (0.040)

Oman Qatar Ku~ait

Kw/hr LC 1 US$ kw/hr LC 1 US$ kw/hr LC 1 US$ Residential 0-3000 10 (0.026) 0-4000 6 (0.0 175) I 2 (0. 70)

3000- 15 (0.038) >4000 8 (0.022) 5000 5001- 20 (0.052) 7000 7001- 25 (0.065) 10000

>10000 30 (0.070) Commercial Any 20 (0.052) 0-4000 6 (0.175) 1 2 (0.70)

4001- 8 (0.022) 15000

>15000 10 (0.028)

Notes:

I - LC = Local Currency

2 - In Qatar electricity is free for nationals.

Source: Privatization and Deregulation in the Gulf Energy Sector (Abu Dhabi: ECRS, 1999), p.29

The Federal Ministry of Electricity is responsible for II power stations in the UAE. In

May 1997, H. H.Sheikh Khalifa bin Zayed AI Nahyan issued a decree for the

privatisation of the Abu Dhabi Water and Electricity Department (ADWEA). However,

in early 1998 the Government appointed a committee which recommended that ADWEA

to be transformed into semi-autonomous regulatory body called the Abu Dhabi Water

and Electricity Authority (ADWEA), and that Abu Dhabi Power Station~ should be

partially or totally privatised. The Government of Abu Dhabi planned to privatise the

water and power sector as part of its policy to boost the economy, and provided a greater

role to participate in economic development. Privatisation in power sector invited foreign

investors to take a share up to 49 percent, retaining 51 percent with Abu Dhabi

h . 94 Investment Aut onty.

Privatisation Law Committee for the Water and Electricity Sector was conceived. In

1997, the programme was officially unveiled; the state owned Water and Electricity

Department (WED) had been disbanded. In its place 11 new companies were created.

Each began operations with their own budget and with brief operations as s::ommercial

enterprises. This Committee's main objective was to develop and implement a

privatisation programme for the power and water sector by sub-dividing the industry into

three core activities: production, transmission and distribution.

To achieve the goal, it was granted wide-ranging powers, these include:

• Setting out the parameters for private-sector involvement.

• Mapping out the necessary plant, timetables and structures needed to ensure the

programme success.

• Drawing up proposals for the re-organisation of existing Government departments

and preparing those that are to be privatised.

• Making recommendations on how existing Government holders can be restructured

so that they can play supervisory role in three core sectors.

The Committee's recommendation is to be submitted to the Abu Dhabi Crown Prince

Shaikh Khaifa Bin Zayed al Nahyan for approval. In addition the Committee will study

the future demand requirements for electricity and water, and determine the basis on

which the Government can enter into contractual agreement with the private sector. Once

94 United Arab Emirates, Year Book-1997 (Abu Dhabi: Ministry of Infonnation, 1997), p.l60.

in place, it will carry out negotiations and enter into agreement with such parties for the

management or acquisition of the utilities and distribution of their output. The agreement

will be subject to approve by the executive council.

Three teams have been established under its auspices; they are:

The independent water and power producers (IWPP) team; its role will be to review the

privatisation experience and implement an IWPP model for the planned Taweelah A2

extension co-generation plant.

The Water and Electricity Department (WED), after reviewing the privatisation options,

the group will set about breaking up and privatising the assets of the existing

Government utility.

The regulation team, to set up regulatory on financing for both the new IWPPs, and the

privatised entities. The team will specify the tariffs, performance standards, and dispatch

and hy pass rules and model the market and transition process. 95 Six l.nternational

Companies have been brought on board as advisers and consultants in the Committee.

They are:

Mickensey and Company (US)- Strategy Consultant.

Fichtner (Germany)- Technical advisor.

White and Case (US)- Legal advisor.

CS First Boston (Swiss/ US)- Financial.

95 Angus Hindley," Special Report UAE, Ready to Rebound," MEED (London: UK), Vol. 43, No.50, 10 December 1999, p. 23.

Merz and Mcellan (UK)- Technical regulation Consultant.

Denton Hall (UK) - Legal regulation Consultant.

Local legal advisors- AL Tamimi and Company.

This privatisation Committee has been established with a much greater degree of

accuracy than the cost of production and supply. This was enormous value projected for

future budgeting in assessing the over all efficiency of the industry.

Abu Dhabi's first private IWPP project came into existence at Taweelah -A2. This plant

is the largest of its kind in the world. Eight international groups have pre-qualified to bid

by 31 March 1998. Bidders have been asked to base their quotas on taking a 40 percent

stake in a new utility company which has developed the 480-580 MW co-generation

plant, on BOO basis, producing water of 50 million gallon-a-day. As a mould-breaking

project, Taweelah A2 has special significance in the Abu Dhabi privatisation programme.

It was the first private co-generation plant construction in the Gulf, and litmus test of

Abu Dhabi's ability to put its privatisation theories int? practice.96

96 Angus, Hindley, "Special Report, Abu Dhabi, Power Privatisation", MEED (London: UK), Vol.42, No.l2, 20 February 1998, p.IO.

The following figure shows the private power structure, generation and distribution.

Figure 2.5: New Structure: Proposals for Private Generation and Desalination,

(G/0) and Distribution

Private Private

G/D 1 (E+W) Umm AL-

:~ Government

NAR Bani yas

~ Di tribution

""' ~ At u Dhabi

Transmission

I G/D2 Taweelah B

PID3 AI Mirfa Madrnat Zayed

Power& Economic and Water Technical

I /D4 Taweelah A, AI Ain Procurer Dispatch

AD STS +GTS y (PWP)

"Di tribution

l IWPPs * 1\bu Dhabi Steam Turbine Station AI Aim

Distribution

I G/D Villages and Islands Gas Turbine Station villages af;ld islands

Source: MEED (London: UK), 20 Feb 1998, p.l 0.

An independent regulatory body is to over see the new companies and institutions and

monitor general policy issues such as market concentration, cross ownership and

environmental standards. It also set performance levels and regulate tariffs. Transmission

and distribution tariffs set through a price cap mechanism based on benchmarks.

Nominal tariffs for consumers will take into account the total system costs, comprising

the cost of generation, transmission, distribution and regulation.97

This project has been implemented in three phases, successfully. It could also pave the

way for more of Abu Dhabi's state run economy to be opened for private sector

participation. The second important project got privatisation process was the Shuweihat

S 1 project which was part of the ongoing privatisation, being undertaken by the Emirates

of Abu Dhabi in its power and water sector, and was an important part of the

Government's strategy to achieve the objectives of the Emirates' overall privatisation

initiative.

The main Shuweihat S 1 project documents are as follows:

• Power and Water Purchase Agreement (PWPA): Between ADWEC (as the Procurer

of power and water) and the project company. This agreement covers the sale of

power and water and the supply of fuel. There was no separate fuel supply

agreement.

• Turnkey Agreement engineering, procurement and construction (EPC) co~tract: Joint

and several obligations between Siemens AG and Fisia Italimpianti (together the

EPC contractor) and the project company.

• Operations and Maintenance [O&M Agreement]. Between an indirectly, wholly

owned subsidiary of CMS Generation and International Power, and the project

company.

• Sl shareholders agreement: Between the three shareholders of the project company.

• Land lease agreement: Between the project company and ADWEA;

97 Ibid., p.l2.

• Shared facilities company shareholders agreement: Between Abu Dhabi Power

Corporation (ADPC) and Shuweihat CMS International Power Company (SCIPCO),

which will own 66.7 percent and 31.3 per cent ofthe shares in the SF Company.

• Shared facility lease agreement: Between SF Company and ADWEA.98

The Project Structure is Illustrated Below:

Government

ADPC Procure Credit Jupport

lders Agreement I ADWEC j Sl Land Lease '---------'

SF Share

PWPA

SI Sl Project Company

Company SCIPCO

Turnkey Contrac

Sh'" l O&M

SF Land Lease

ADWEA

Siemens/FISIA

Italimpiani

Agreem nt

40°

Shuwaihat

Partnership

Limited

Holders Cont

60%

Shuwaihat Power

Company

ADWEA

Shuwaihat O&M

Limited

Partnership

CMS

Generation/lnte

mational Power

Guarantee

Source: Unified UAE National Electricity Grid to Be Ready By 2004. www.gulfnews.online.com

'IX "Unified UAE National Electricity Grid to Be Ready By 2004," www.gulfnews.online.com

The Shuweihat S 1 independent water and power project comprises a "Greenfield" power

generation and water desalination facility, currently being built at Jebel Dhana, near

Shuweihat, situated about 260 kilometers west of the city of Abu Dhabi. This project

developed on a BOO.

Telecommunication sector is seen essential for economic growth, and for that the UAE

Government is pressing for urgent improvements. Privatisation revenues are viewed as a

means of generating cash for the Government's current account helping to manage

massive budget deficits. Infrastructure and telecommunication are high on the agenda in

the UAE, and opening up of the field has encouraged the Sate operator to become more

competitive.

Emirate Telecommunications Corporation (ETISALAT) was one ofthe largest telephone

companies in the Middle East, which controls the telecommunication business in the

UAE. In ETISALAT the UAE government owned sixty percent of shares, and Emirate

citizens owned forty percent of shares.99 The ETISALAT provides reliable and

geographically comprehensive telecom services, negating the needs for competition. The

operator offers the lowest international call rates in the Gulf region. Mobile penetration

was well over 80 percent of the area and ranked one of the highest in the world.

The ETISALA T invited private sector for rapid expansion plan, switching capacity was

7,00,000 lines by Japan's private company Fujitsu, and 2,00,000 lines by Sweden's

Ericsson, and 500,000 lines by France's Alcatel. At least I ,00,000 lines of capacity has

been added each year up to end of 2000. 100 This was a more than ten percent a year

increase in the number of subscribers. In the UAE the citizens have more mobile

telephones than landlines (about one million). The demand of business will require 9.3

'1'1 www.vahoo.com "Privatisation in UAE Telecommunication Sector Analysis"

100 "Special Report Telecom," MEED (London: UK), Vol.39, No.15, 14 April 1995, p.21.

million telephone lines by 2013. Nearly 70 percent of households have Satellite

d. 101 I shes.

Internet subscribers of the ETISALA T have reached to 3,10,000 in 2002. In the near

future there are plans to build more earth stations working with various satellites. Other

capital investment was directed towards the construction of modem high technology

offices in the UAE. In the coming years private sector will play a major role in telecom

operation and maintenance with highly competitive in nature.

One of the principal benefits claimed for airport privatisation was that it reduces

budgetary pressures on the Government, both by generating revenues from the sales of

assets and in the case of loss making. Airports are important features of the UAE's

economic development. Privatisation process offered safe and efficient transport, cargo

and passage handling; thus, privatisation process was involved in airport sector.

There are six international airports, and sixteen other paved airports in the UAE. The

busiest international airport is Abu Dhabi; it has doubled its capacity to 12 million,

passengers in 2000. In the same year, Emirates Airlines became the first world air link to

place an order for new airbus A3 XX 'Super Jumbo' with delivery scheduled for 2006. In

1997-98 Emirates Airlines carried 3.68 million passengers and 200.138 tons of cargo,

achieving net profits of AEU 262.4 million. There was a strong competition from the

Gulf air, which enjoys considerable regional superiority. 102

The UAE Government has offered privatisation programme in Abu Dhabi International

Airport expansion, and the public works department on behalf of Abu Dhabi's

Department of Civil Aviation handled the expansion. The overall project manager was

101 The Middle East and North Africa, Year Book- 2002, 48'h Edition (London: Europa Publication, 200 I),

p.ll74. 102 Ibid., p.ll75.

the US Parson's International, besides, the second company, France's Airports Deparis,

designed two-storey building which will have capacity of 4 million passengers a year.

The estimated amount was US$ 200 million. The third company involved is UK's

Halcrow Group, which has started designs of Abu Dhabi's second runway with 4000

meters long. 103

There were some reasons to go for privatisation under the Government pressure to

reduce costs; and the authmity went through comprehensive restructuring programme

under the private sector participation. The UAE's six major container ter~inals were

under critical condition. In the form of Salalah and Aden Ports in the region have created

competition and at the same time, the UAE ports authority were unable to tackle budget

deficit. The Government has pressed the UAE port authorities to embrace whole sale

change which will grant private sector a dominant role in the running of country's

ports. 104 Seaports have a major priority of development in the UAE. All Emirates and

major towns are located on the coast.

To reduce cost they have handed over certain port operations to the private sector.

Privatisation was invited in Dubai's Mina Zayed Port. Abu Dhabi Sea Port Authority

planned a significant expansion of Mina Zayed, which was increased capacity by about

80 percent to an estimated 900,000 TEUs by 2003. 105 Designed for two berths, equipped

with four post-panamax cranes were underway of Frederic R'Harris of the Netherlands,

while deepening of the ports channel up to 15 meters from 12 meters was completed in

2000.

103 Angus Hindley, "Special Report UAE, Ready to Rebound," MEED (London: UK), Vol.43, No.50, 10 December 1999, p.44.

104 "Special Report Shipping", MEED (London: UK), Vol.40, No.6, 9 February 1996, p.10. 105 Angus Hindley, "UAE Sits Pretty as Hub Port King", MEED (London: UK), Vol.44, No. 13,31 March

2000, p.3.

The second privatisation process was started at the Musaffah Industrial Port at an

estimated cost of AED 65 million contracts, which involved the construction of a 350-

metre berth, paving, roads and buildings.

The terminal handled 5,00,000 tones per year and, caters for small and medium sized

vessels. The consultant was the Hall-Crow Intemational. 106 The UAE's Strategic Plan

emphasised more on non-oil development growth with the private sector.

Dubai's Strategic Development Plan 1990-2030:

Privatisation: The Government considered privatisation of infrastructure and public

sector business projects as a policy option to increase efficiency of services.

Upgrading Infrastructure: Efforts were made to further expand and upgrade the Emirate's

infrastructure - areas of special attention are the airports, roads, electricity and water,

transportation, housing, and urban services.

Administrative Procedures: A special programme for the streamlining of administrative

procedures was adopted to reduce the time and paper work involved in licensing and

other statutory approvals of business and investment activities. 107

Investment Policy: A new policy was drawn, which would include among other things.

Identification of areas for foreign investment equity ownership; rule and visas

procedures, and special incentives to attract multinational corporations in selected

industries.

106 "Special Report UAE," MEED (London: UK), Vol.42, No.5!, 18 December 1998, p.54. 107 Angus Hindley," Special Report UAE, Abu Dhabi, Lights a Beacon for Reforms", MEED (London:

UK), Vol. 43, No.52, 24 December 1999, p.2.

Immigration Rules: As for as possible the immigration rules was further simplified and

made sure to the needs of the tourist, trade, business men and shoppers.

Proposed Training Project: The plan calls for the establishment of a new technical

training institute; Oubai Business School and Training Institute for those motivated in

hotels leisure and tourism. The following table shows that Oubai Vision: 2030

Table 2.29: Dubai's Vision: Projected Growth, 1990-2030

Period Average Growth a Year (%) Relative GOP Total GOP Non- Population GOP Per GOP Per of Non-oil

oil Capita Capita($) Sectors 1990-95 3.4 7.3 7.6 -4.1 14,595 81.2

1995-2000 5.0 6.9 3.0 2.0 16,164 88.7 2000-2010 5.0 6.9 3.0 2.0 19643 97.5 2010-2015 5.0 5.6 3.0 2.0 21687 I 00.00 2015-2030 4.0 4.0 2.5 1.5 27114 100.0

Note- I at end of period, measured in US $ in 1995 figures for 1990-95 are actual.

MEED (London: UK), 6 Dec 1996, p.44.

The UAE announced some incentives for private companies investing in the country.

This announcement has encouraged private sector development.

The UAE has joined the World Trade Organization (WTO) in February 1996. After that

the Government has established clear guidelines for foreign investment portfolio. Under

these guidelines, foreigners can hold up to forty nine per cent ownership rights of limited

liability companies and up to hundred per cent of professional companies or branches

and representative offices of foreign companies in free trade zones. 108 Additional

attractive cost-saving incentives include:

• 100 percent repatriation of capital and profits

108 www. privatisation in UAE. com, 2002

• No direct taxes on corporate profits or personal incomes (except if derived from the

oil industry)

• No foreign exchange control

• Liberal policies on expatriate workers

• Protection of Intellectual property rights

• No trade barriers or quotas

• Direct trade- setting directly to established dealers and distributors

• Competitive costs- in real estate, labour, and energy. 109

Companies can also establish themselves in a free zone with no services charges or fees,

no import and export duties and enjoy some of the lowest tariffs in the region. Within

free zones foreign companies are permitted 100 per cent ownership, and can attain I 00

per cent repatriation of capital and profits, and pay no personal income tax and no

corporate tax.

The Jebel Ali Free Zone: Dubai created a Government authority JAFZ to ensure that free

zone contributes to the local economy and maintains quality services to companies

wishing to operate within it. Jebel Ali operates within the free zone and is the man-made

port in the world, currently hosting nearly 2000 companies.

Performance

Private sector involvement in the non-oil economy has provided greater efficiency and

success. The private sector was called upon to take an expanded role in other areas of the

economy. Abu Dhabi was at the forefront of attracting private capital into infrastructure

sector, which successfully implemented three independent water and power projects

109 Ibid., p.2.

(IWPP). Dubai Water and Electricity Authority (ADWEA) was passed with achieving its

target of having private sector involvement in all of its generators. The ADWEA

restructuring represents a sea change in corporate center for the Abu Dhabi utility sector.

Raising efficiency was a top priority; ADWEA has already scored a notable success on

the new Taweelah-A2, the UAE's first independent water and power project (IWPP)

development, where the power and water produced will be sold to the Government at

roughly half of the cost of output from existing cogeneration plants in the Emirate rate.

ADWEA has said it received greater efficiency and reduced its 14,000 employees. 110

ADDC was responsible for the distribution of electricity and water within Abu Dhabi

city throughout a large part of its hinterland. It has about 200,000 electricity and 200,000

water customers, which it supplies by delivering water and power from Abu Dhabi

Transmission and Dispatch Company (Transco ). After privatisation of power sector, rate

structure has changed, expatriate workers has to pay more and less for nationals. Abu

Dhabi national pay about AED 0.05 a kwh, and non-nationals were charged AED 0.15

kwh, water continues to be provided free to nationals. As far as non-nationals they were

charged mere AED 5a I 000 gallons. 111 Nationals and non-nationals alike were

disconnected if they do not pay their bills. It was surprise of customers, but they were

getting used to the commercial aspects of operations.

One of the most important aspects of the privatisation process, and an important part of

its future, was the re-centering of ADCC's culture. They were putting very much on

customer service and have invested heavily on this side of the business. Their main aim

was to be customer-centric through the provision of a wide range of payment and

110 Angus Hindley," Special Report UAE, ADDC Utilizing the Private Sector", MEED (London: UK), Vol.44, No.49, 8 December 2000, p. 36.

Ill Ibid., p. 37.

enquiry channel Abu Dhabi Water and Electricity Department the main aim was cutting

out fat, reduced operational costs, improved business performance, putting capital

expenditure on the right footing and provided better service to the customers. 112 The

government has clear view, the process might not have been completed, but a good

argument for the merits of privatisation has already been made.

The second important private sector drive has taken place in Shuwaihat S 1. Which was

expected to produce 1500 mega watt electricity and 100 million gallons of water per day,

has 'very successful. Its financing came number international banks to complete the

project 1.289 billion, 12 international banks financed the project with local banks

provided forty percent of the fund. 113

The ADWEA has succeeded attracting huge investments to the electricity and water

sector about DH 14 billion. By adopting the privatisation policy the Government has

spared the trouble of having to shoulder the responsibility of funding these projects.

Privatisation process in telecommunication sector in the state was growing at a rapid

pace on the bulk of rising demand for fixed and mobile telephones and Internet services

both in public and private sector. Emirates Telecommunication Corporation

(ETISALA T), the sole service provider in the federation was constantly trying to

improve and expand its services in part to justify its continuing monopoly.

ETISALA T has earmarked a budget of AED 6, I 00 million ($1 ,662 million) for 1999. In

1998, the Corporation had total installed capacity of 1.1 million fixed lines. The total

number of subscribers stood at 9, 15,223, an up of 10 percent from previous year,

represented a penetration of 39 lines for every 100 inhabitants.

112 Accession Day 2002, Electricity and Water in UAE, www.gu1fnews.online.com 113 David Butter, "Special Report, Mobile Revolution," MEED (London: UK), Vo1.43, NoA5, 5

November 1999, p.14.

The number of ISDN connections stood at 9,518 up of 262 per cent from the previous

year. There were 21,860 pay phones up of 19 percent from 1997 and direct dialing

service is available to more than 248 countries around the world. 114

Demand for ETISALA T's global system for mobiles (GSM) service had one of the

highest in the region. In 1998, the number of mobile subscribers stood at 4, 76,491 up, a

staggering 76 percent from 2, 70,836 in 1997. There were 19 mobile phones per I 00

inhabitants. A further R26 hasc stations were added during 1998 bringing the total

number to I ,561. The following table shows the telephone performance of the UAE up to

200 I period.

Table 2.30: The UAE Telecom Sector Performance in 2001

Country Population Total Fixed Lines Total Growth GSM GSM Total u~ ~ Estimated (million) Number Per 100 Nwnbcr of of GSM Subscribers Subscribers as Number I <XXX) No. of res

of Fixed Inhabitants GSM Subscrib Per 100 a Percentage of Inhabitants Per Lines Subscribers ers 1995- Inhabitants of Total Internet Inhabitants ('000) ('000)

2001 (%) Telephone Users Subscribers (000)

UAE 2.65 1052.9 39.69 10909.3 56.7 71.97 64.5 900 3392.39 15.83

Source: MEED (London: UK), 16 August 2002, p.22.

Privatisation of airports in the UAE has taken place in a very progressive manner and

one of the fastest growing sector in the Gulf region. Privatisation process started in three

international airports: (1) Abu Dhabi International Airport; (2) Sharjah International

Airport; and (3) Ajman International Airport.

These three airports' expansion and upgrading to international standard has been taken

place. Dubai International Airport was of the top class; the survey conducted on 52

114 David Butter, "Gulf Airports", MEED (London: UK), Vol. 46, No.28, 12 July 2002, p.6. ·

airports world wide puts Dubai in the first position for overall passenger ·satisfaction

among both leisure and business travelers. 115

Dubai's Department of Civil Aviation (DCA) has embarked on an expansion programme

aimed at dealing with 3 million passengers a year by 20 I 0, and this expansion will be the

biggest in the region. DCA president and Emirates Chairman, Sheikh AhmaC: Bin Saeed

AI Maktoum said, "We have invested US$ 2,500 million to create one of the most

advanced and user-friendly aviation hubs not just in the region but world wide."

The expansion programme includes construction of a third terminal, and airfield lighting

system would be upgraded. The project was targeted for the completion by 2006. There

will be a number of aircrafts in the coming years, and by 2010 their number will be

closer to around I 00 aircrafts. In November 200 I, Emirates signed orders worth US

$15,000 million for the purchase of 56 new airlines, including 20 airbuses, A-380 "Super

Jumbos". 116

Work had been completed on the first major package on the airport expansion through

the award of an estimated US $I36 million earth works and pilling contract to a Dubai

based firm. Several other major packages were tendered to the private companies.

Port-privatisation process in the UAE was operated successfully. The UAE was the

undisputed King of regional hubs handling two thirds of all containers in the Gulf. Dubai

Port Authority is the largest player in the federation, accounting about sixty per cent of

handling activity.

115 Ibid., p.6. 116 Ibid., p.8.

In 1998 privatisation process in the Dubai Ports Authority's area of operation handled 2-8

TEUs. In the same year the Abu Dhabi Port of Mina Zayed handled 4,368.007 tons of

general cargo. 117 In 2002 ship building facility was opened with a 2,000 - ton ship lift

;

capable of raising vessels with a length of 85 million and two assembly halls where as

many as six shops were built simultaneously. The strongest traffic growth was recorded

with the US, Europe, Japan, India and Taiwan.

Implementing Difficulties in Privatisation Programme

The UAE Government has faced some problems while implementing privatisation

programme. The main issue was the creation of employment opportunity to the nationals.

The Ministry of Labour and Social Affairs has given top priority for the recruitment of

the UAE nationals into the private companies. The Ministry had sent letters to hundred

private companies on the subject of providing employment opportunities to young

nationals; in response to that many of them welcome the idea. Some of the obstacles

faced to the recruitment of nationals were the language problems, lack of technological

skills, demand of higher salaries and senior posts in the private companies. IlK The

Government had to provide necessary training courses for nationals to meet job

recruitments but in practice they failed to recruit nationals. This was the major problem

faced by the privatisation programme. Attractions of a life in the civil service remained

strong; pay scale was good, working hours was short, job security was rarely questioned,

and prestige was a generous pension lies at the end of a career. But the cost was high: the

federal budget saw a 5.5 percent increase in its wage bill in 2000, and salary costs

117 The Middle East and North Africa. Year Book- 2002, 481h Edition (London: Europa Publication, 200 I),

p.ll75. 11 s United Arab Emirates, Year Book-1997 (Abu Dhabi: Ministry oflnfonnation, 1997), p. 174.

considerably exceeded development expenditure. 119 This trend was mirrored in each of

the Emirates. But this trend in the private sector was in opposite direction.

The UAE Government has passed 'Emiritisation Policy', which imposed on private

companies to recruit more number of nationals instead of expatriate laborers. This will

enter to be a high on the agenda in the years to come; there were 15,000 to 20,000

unemployed the UAE nationals. The Labour Ministry has chalked out a framework to

encourage the locals in the employment. Under the Emiritisation Policy in coming years

nationals will replace expatriate workers. Quotas for the employment of the nationals

have been laid down in some sectors; especially in legal and banking sectors it has

implemented.

The process of privatisation must lead to the training of greater number of auditors,

finance, valuation and marketing specialists, to the benefits of both the Government and

the private sector. 120 It is clear that any regime contemplating the privatisation must take

the concerns of labour into account at every stage in the process. The Government should

be prepared to meet with labour leaders at an early point in discussion of the SO E' s to be

targeted for privatisation. 121 If unemployment is already severe under. the State

management of the economy, the Government will doubly concerned about any action

that threatens to produce further loss of jobs.

From the above review and analysis it is clear that privatisation will be increasingly

required to the UAE in order to improve fiscal situation and gain control of the public

finances. The relatively tight fiscal situation is unlikely to improve the country. The

fiscal effects of privatisation seem to have worked positively. However, any privatisation

119 Angus Hindley," Abu Dhabi See the Privatisation Light", MEED (London: UK), Vol.41, No.34, 22 August 1997, pp. 2-3.

120 L. Gray Cowan, Privatisation in the Developing World (London: Preager, 2001), p. 37. 121 Ibid., p.38.

Jroject will have to balance carefully the risks and rewards, for, the private sector's

Jarticipation in future will entirely depend on them.