Investor's Guide

Introduction

Council of Ministers Decision No.60 dated 1/4/1418 A.H. [August 6, 1997] specified eight objectives of privatization in Saudi Arabia and determined the principles to be taken into account in order to achieve these objectives. Council of Ministers Decision No.257 dated 11/11/1421 A.H. [February 5, 2001] states that the Supreme Economic Council shall be responsible for supervising the privatization program and monitoring its implementation, in coordination with the competent government agencies, and for determining which activities are to be privatized. A list of the activities to be privatized shall be issued by decree of the Resolution, and the Supreme Economic Council shall develop a strategic plan and timetable for this purpose.

A. Principles for Preparing the Strategy

Based on the foregoing, the privatization strategy for Saudi Arabia was prepared in accordance with the provisions of Council of Ministers Decision No.60 dated 1/4/1418 A.H. [August 6, 1997], to ensure a continued increase in the share of the private sector and to expand its participation in the national economy, by adopting the best available modality including transferring certain types of economic activity to the private sector, enhancing the participation of the private sector in economic development, and enabling it to carry out its investment and financing role in accordance with the national development plan.

The general objectives and strategic principles of the Seventh Development Plan, issued by Council of Ministers Decision No.58 dated 28/3/1420 A.H. [July 13, 1999] defined the eighth objective as “increasing the participation of the private sector in activities related to economic and social development.” The third strategic principle stated, “To continue the policy of enabling the private sector to carry out many economic and social functions, provided that this results in real benefits in terms of reduced cost, good performance, and employment of citizens.”

B. Definition of Privatization

Privatization is the process of transferring the ownership or management of public enterprises, projects, and services to the private sector, relying on market mechanisms and competition, through a number of methods including contracts for managing, operating, leasing, financing, or selling all or part of the government assets to the private sector.

C. Privatization Objectives and Policies

Council of Ministers Decision No.60 dated 1/4/1418 A.H. [August 6, 1997] defined the objectives of privatization, each of which will be reviewed and discussed prior to determining the policies needed to achieve these objectives, with due consideration of the need for complementarily and avoiding non-duplicity, as described below:

First Objective: Improving the efficiency of the national economy and enhancing its competitive ability to meet the challenges of regional and international competition. The Economic efficiency of the economy can be strengthened by subjecting projects to market forces. Enhancing competitiveness is closely linked to the general strategy of developing the private sector in Saudi Arabia. Important measures taken so far to create a favorable climate for investment, such as developing the capital and labor markets will help achieve this objective. It is important that all enterprises in a single sector be required to operate under the same conditions of competition.

Second Objective: Encouraging private sector investment and effective participation in the national economy and increasing its share of domestic production to achieve growth in the national economy. Mature and strong private sectors participation is essential for Saudi Arabia, as the private sector is able to develop comparative advantage and provides a better opportunity for diversifying the economic base away from the dependence on oil. The private sector can direct efficiently capital investments towards more lucrative and commercially sustainable sectors. In order to expand private sector participation, privatization must adopt the management methods used in the private sector, based on commercial principles, even when an entity is converted into an enterprise in which the government retains the majority ownership. The privatization program must also include streamlining of procedures to encourage the private sector investment and ensure that privatized projects are able to achieve self-growth.

Policies necessary to achieve these objectives

1. Privatization of public projects, enterprises, and services that are appropriate for private sector participation and encouraging competition.
2. Ensuring that privatization increases self- sustainable direct investment.
3. Managing wholly or partially privatized project on commercial basis.
4. Expediting the review of all regulations and procedures related to private sector activities to create a suitable environment, including the streamlining of procedures and harnessing obstacles.

Third Objective: Enlarging the ownership of productive assets by Saudi citizens. Privatization can be effective means to expand the participation of Saudi citizens in the ownership of productive assets in public enterprises and projects, by using the method of public subscription in the privatization, which is considered the most important privatization method to develop the domestic capital market.

Polices necessary to achieve this objective

1. Encourage participation of a large number of citizens to participate in various types of activities transferred to the private sector by using the privatization method of subscription whenever possible.
2. Adoption of clear and transparent procedures to implement all privatization activities.
3. Utilizing all media types to promote the objectives of privatization and the benefits of private sector participation for the national economy and the welfare of society.

Fourth Objective: Encourage domestic and foreign capital to invest locally. Privatization reflects the government s commitment to economic reform and a positive image to attract foreign investments. Privatization also helps develop the capital market, create new mechanisms for mobilizing capital and attracting notional capital outside the country, in addition to attracting foreign capital and domestic savings of residents in the Kingdom.

Polices necessary to achieve this objective

1. Facilitating the participation of foreign investments in the ownership of projects and various types of privatized productive activities, in accordance with the applicable rules.
2. Continuous development of the financial market to provide opportunities for additional domestic and foreign investments and mobilizing additional channels to induce savings.

Fifth Objective: Increasing employment opportunities, optimizing the use of the national work force, and ensuring the continued equitable increase of individual income. Developing the nation’s human resources is a basic element of national development; therefore, the privatization program will attach particular importance to it, including Saudization, by developing appropriate regulations and incentives to encourage the private sector to hire Saudi citizens. The privatization of certain projects may reveal that the number of employees exceed the number actually needed. In most cases employees can be retrained or their skills can be upgraded. The potential growth of privatized projects and the opening of sectors to competition also help to deal with the problem of excess labor. In the short-run, privatized enterprises can agree to keep their employees until they study their future expansion requirements to meet increased demand for their services, which will reveal their actual requirements for employees. Programs can also be developed to deal with excess labor by further training them or granting them shares in the capital of the privatized enterprise as part of their compensation, or by other methods.

Polices necessary to achieve this objective

1. Take steps to ensure that the privatization process includes the enterprises of new direct investments to help absorb the national workforce.
2. Enhance the national workforce, increase rates of Saudization, and provide opportunities for training the national workforce to meet expansion requirements.
3. Ensure fair treatment for excess employment resulting from transferring activities to the private sector.

Sixth Objective: Provide services to citizens and investors in a timely and cost-efficient manner. Privatization, particularly of investments that have monopolistic concession rights, may lead to increased prices and a reduction in the quality of services, because some enterprises (services) receive government subsidies prior to being privatized. As this is an extremely important issue, an independent regulatory agency should be established to deal with such matters.

Polices necessary to achieve this objective

1. Establishment of an independent regulatory agency to deal with the social, regulatory, and supervisory aspects to protect the interests of consumers, such as the provision, quality, and cost of services.
2. Establishment of a systematic method for determining the fees for services, taking into consideration their cost that will result in continuous provision of services and financing for the investments of the enterprises. The government may provide support when necessary.

Seventh Objective: Rationalizing public expenditure and reducing the burden on the government budget by giving the private sector opportunities to finance, operate, and maintain certain services that it is able to provide. The government budget is expected to benefit from reduced allocations for operating expenditures as a result of the privatization of public enterprises or from transferring the management of public utilities to the private sector through contracts for management, leasing, or contracts for construction, and operation by the private sector.

Polices necessary to achieve this objective

1. Evaluation of infrastructure projects and public utilities to determine the feasibility of transferring their management to the private sector, while preserving the government s role in providing certain essential services.
2. Suspend any additional government investments in public projects after it has been agreed to privatize them, with the exception of any necessary investment, required maintenance, and the revision of their financial, legal, and operational regulation in preparation for selling them.

Eighth Objective: Increasing government revenues from returns on participation in activities to be transferred to the private sector, and from financing compensation obtained, for example, from granting concessions and from the proceeds of the sale of part of government shares. The government aims at achieving positive financial results from privatization, either from proceeds from the sale of an entire public project or participation in the profits and obtaining the proceeds of the sale of part of its ownership of the project. In general, participation in the profits of, and maintaining partial ownership in a project provide better revenue to the government resulting from an increase in the value of the remaining shares it holds owing to the improved performance of the privatized project, in addition to the government s share of profits distributed among shareholders.

Polices necessary to achieve this objective

1. Make public projects that are to be privatized open to competition.
2. Develop mechanisms to ensure that the government obtains sustainable income from privatized projects, whenever possible.
3. Develop procedures to ensure that the government obtains an appropriate return from the sale of public enterprises to the private sector.

D. Administrative and Implementation Arrangements for the Privatization Strategy

Council of Ministries Resolution No.257 dated 11/11/1421 A.H. [February 5, 2001] provides that the Supreme Economic Council shall be responsible for supervising the privatization program and monitoring its implementation, in coordination with the competent government agencies, and for determining which activities are to be privatized, in addition to the recommendations of other government agencies for privatizing certain activities. The Council of Ministries Resolution shall issue a list of the activities to be privatized, and the Supreme Economic Council shall develop a strategic plan and timetable for that purpose. The agency responsible for supervising each activity to be privatized shall prepare an implementation program based on the required studies. The procedures and steps necessary to complete the privatization process shall be implemented in accordance with the pertinent regulations. Resolution No. 6/22 issued by the Supreme Economic Council on 12/5/1422 A.H. [August 2, 2001], which provided for the reorganization of the Privatization Committee within the Supreme Economic Council, under the chairmanship of the Council s secretary-general, with members representing the Ministry of Finance and National Economy, the Ministry of Industry and Electricity, the Ministry of Commerce, and the Ministry of Planning, in addition to two members from the Advisory Board for Economic Affairs. In order for the Committee to carry out the required activities and functions necessary for the discharge by the Council of its duties and responsibilities with respect to privatization, it shall:

1. Recommend a privatization strategy to be approved by the Supreme Economic Council.
2. Recommend the public enterprises, projects, and services to be privatized and set the priorities.
3. Define the regulatory and implementation framework for the privatization process.
4. Monitor and supervise the implementation of privatization activities.

A. Methods of Privatization

Methods of privatization comprise a number of tools that can be used to privatize public enterprises, projects, and services, taking into consideration a broad definition of the privatization process. These methods include transferring of ownership, contracting for management and operation, leasing, and financing, either range from sale through public subscription, or sale to a principal investor. Each method has its own consequences, regulations, and factors that contribute to its success or failure. Generally, more than one method is utilized to achieve targeted objectives. It is therefore important to choose the method of privatization in accordance with the specified objectives being the best means to be achieved. Various methods of privatization are described below.

Management contracts

With this method, responsibility for managing, operating, and developing an entity is transferred to a contractor or investor from the private sector for a period of time and an amount of money to be agreed upon. This method is usually used in cases that require high levels of specialized experience in management, operation, and marketing, or when the government has a large investment in the project s assets and prefers to keep the investment rather than sell it; that is, ownership of the assets is not transferred to the private sector. Although the contractor takes over the tasks of monitoring and daily supervision of operations, he does not assume any commercial risks (operating losses), if they occur, which are borne by the owner (the government). Among the negative aspects of this method is the possibility of the contractor s misusing the project s assets, because management contracts, in the majority of cases, stipulate payment of a fixed sum to the contractor in exchange for specific services, regardless of profitability, and this is not a sufficient incentive for the contractor to maintain the assets in a good condition and improve performance.

Leasing contracts

Leasing contracts are agreements between the government and the private sector whereby the latter provides the government enterprise with administrative and technical expertise for a specific period of time, in exchange for an agreed-upon financial remuneration. The private sector investor leases and utilizes the assets or facilities owned by the government, and the contract determines the amount of the condition to be paid to the government as well as the responsibilities of each party towards the other. The distinctive feature of leasing contracts is that the investor assumes all the commercial risks associated with operating the assets, which is an incentive for the investor to reduce expenses and maintain the assets in good condition. The investor is also obliged to maintain and repair the used assets, or to contribute to the cost of doing so, in accordance with an agreed timetable. The amount to be paid by the private sector is generally linked to the condition of the assets and the expected income from their utilization. Under such contracts, the investor appoints the people who work with him, including current employees of the government enterprise, in accordance with the agreed terms of the leasing contract.

Financing contracts

Financing contracts represent a more advanced method of privatization compared to previous methods. Under such contracts the investor assumes responsibility for providing the capital, operating, and investment expenditures unlike lessee. This method is generally considered better than leasing contracts, but implementation is more complicated owing to the large amount of financing needed for expansionary obligations. There are several kinds of financing contracts, including lease-build-operate (LBO), build-transfer- (operate) (BT, BTO), build- (own)-operate-transfer (BOT, BOOT), buy-build-operate (BBO), and build-own-operate (BOO) (Appendix). If one of these types of financing contracts is adopted as option, it must be carried out in accordance with the following:

1. An appropriate regulatory and legal framework must be put in place to guarantee the rights of all parties (financer, government, and consumer).
2. The project must be made open to general competition to which qualified parties from specialized enterprises are invited to bid, whether they are from inside or outside Saudi Arabia.
3. The government shall not offer sovereign guarantees unless absolutely necessary.
4. Sale contracts

i. Direct sale to the private sector through public subscription

This method is suitable to enterprises that are characterized by stability, continuity of activities, a sound financial position, and commercial feasibility, or enterprises that can become commercially feasible in the short-run. Either the entire entity or some of its shares are sold to the private sector by offering them for public subscription. This method is also adopted by large public enterprises and projects, which would be converted into an enterprise in harmony with the customary conversion procedures, such as designing the general legal framework for purposes of the project, separating the non-commercial activities, amending the tariff systems, transferring the assets and liabilities to the enterprise after verifying that they are in order, establishing the article of association and accounting system, and the basis for assimilating the employees.

The success of this method depends on a number of factors, including

1. The entity must be continuing in carrying out its activities, most have a sound financial position, and be profitable or capable of becoming profitable in the short-term.
2. A large amount of financial and administrative information on the activities of the entity must be available.
3. It must have a reasonable amount of liquidity.
4. Existence of an active capital market.

This makes it possible to expand the ownership base and attract additional investments, which in turn stimulate the shares market by opening the door to investors with limited financial capacity. The requirements for this method are focused on the procedures for offering shares for subscription, including choosing the appropriate time for the public offer, along with the need for a good regulatory and marketing framework and a well-developed capital market.

ii. Sale to a principal investor

Using this method, the government sells the enterprise to a principal investor who is capable of providing the required financing, management efficiency and technology for production and marketing development. The method has the advantages of ensuring the direct availability of the required financing as well as the financial and administrative expertise needed for technical and administrative development, in addition to providing new expertise and modern production and management techniques. In most cases the principal investor is an international enterprise or operator with extensive experience in the field. The negative aspects of this method are that it deprives small investors of opportunities for investment, does not expand the ownership base, and increases the possibilities of creating problems related to the work force.

In addition to the above-mentioned methods, there are a number of other mechanisms and instruments such as offering the enterprise for sale to its employees or allocating a portion of its shares for sale to its employees at market prices. These methods are usually used to privatize enterprises with low profitability or productivity, in order to encourage employees to improve their performance of the enterprise. Another mechanism is a debt swap, whereby the debts are valued and converted into shares in the name of the creditors.

B. Rules for the privatization of public enterprises and projects

The basic principles that must be taken into consideration when implementing the privatization process are:

1. Disclosure and transparency.
2. Expeditious implementation.
3. Changing the management pattern.

1. Disclosure and Transparency

To ensure proper disclosure and efficiency in the privatization process, the privatization program should be guided by:

All activities should be carried out in a clear and transparent manner and announced in accordance with recognized commercial standards. When there are no legal rights involved in the case of joint venture, direct sales or preliminary negotiations based on a special agreement shall take place only after bids have been obtained through public tenders. Prior to and during completion of the sale, the public must be aware of all aspects of the process to the extent possible, by means of the following:

1. Preparing a memorandum of information and advertising it in connection with the offer for sale of any project.
2. Publishing complete information on the financial, administrative, and other aspects of the enterprises to make them readily available to investors.
3. Preparing and publishing standards for the classification of bids.
4. Public opening the bids.
5. Publishing the valuation of assets and details of the bids.
6. Publishing the names of investors, the amounts paid, and conditions of the sale after it is completed.

2. Expeditious Implementation

Expeditious implementation is extremely important for the success of the privatization process, and a realistic timetable should be established for each stage of the privatization process, as activities that proceed slowly are more susceptible to failure.

3. Changing the Management Style

Bringing about effective change in the style and methods of management is considered a basic objective of every privatization process. Without such change, it is not possible to achieve the desired benefits of privatization. This does not necessarily mean replacing the current managers, but rather involves improving performance and implementing private sector management practices.

C. Basic steps for a model privatization of a public project or enterprise

1. Studying the feasibility of privatizing the enterprise or project proposed for privatization: The competent government agency, in coordination with the Privatization Committee of the Supreme Economic Council, conducts a study of the financial and operational position of the enterprise, its subsidiary sectors, the justifications for privatization and the expected returns, alternatives to privatization and obstacles to its implementation, and hence an assessment of the possibility for privatizing this project or enterprise. The competent agency submits the results of this study and its recommendations to the Privatization Committee.
2. The Privatization Committee issues a recommendation to privatize the enterprise or activity.
3. If a decision to privatize the activity is issued, the government agency responsible for supervising this activity prepares an implementation program for privatization, based on the required studies. After the Supreme Economic Council approves it, the procedures and measures required to complete the privatization procedure are implemented.
4. The implementation program includes:
   1. The defining elements of the government s policy for the sector, the appropriate regulatory frameworks, and the steps and timetable required for implementation.
   2. Defining and addressing the obstacles to implementation, and the extent of the need to restructuring the enterprise (conversion to an enterprise, financial structure, and settlements of employees), the steps and timetable required for implementation.
   3. Developing a preliminary plan for privatizing the enterprise, including the percentage to be sold and method of sale, and a timetable for completing the process. The preliminary plan serves as a basic for choosing a general advisor to assist with implementation of the plan.
5. The concerned government agency, under the supervision of the Privatization Committee of the Supreme Economic Council, manages the program for privatization, in cooperation with other government agencies, as deemed necessary by the Privatization Committee. Managing the implementation program involves the following elements, by way of example:

• • Defining the terms of reference of the general advisor and the selection method.
  • Selecting the general advisor and other technical advisors.
  • Developing an implementation plan for the privatization process.
  • Implementing steps for restructuring the enterprise.
  • Auditing and evaluating the position of the enterprise.
  • Preparing the documents required for selling the enterprise.
  • Managing the sale process (e.g. marketing the process, qualifying the investors, inviting bids by investors, evaluating the bids, negotiating terms of the sale, and preparing the sale contract).
  • Method for addressing manpower questions: Employees must clearly understand the method for dealing with the manpower aspect in the privatization process and its impact on them.

There are a number of methods for dealing with the workforce in the privatization process, some of which are:

1. Employee participation in ownership of the enterprise, which could induce them to support restructuring and privatization.
2. Fair compensation for employees who retire voluntarily or are terminated.
3. Obtaining a commitment from the investor to retain current employment.
4. Training and upgrading the qualifications of employees.

1. Regulatory framework for privatized sectors

Developing a regulatory framework for the privatized sectors is one of the most important elements of the entire privatization process, particularly in sectors where one enterprise enjoys concession rights that enable it to monopolize the market or control a large portion of it. Basic infrastructure enterprises are among those that most urgently require regulation. The objectives for establishing regulatory frameworks are summarized below:

• • To protect consumers from the possibility that service providers (enterprises) with monopolistic concessions may exploit their position to raise prices, limit the provision of services, or reduce quality.
  • To protect investors by insuring that government intervention in the activity is within what has been agreed upon and does not impose additional burdens on investors that could adversely affect their returns, particularly given that investors sometimes invest large sums that can take years to produce any return. 
  • To encourage production efficiency and increase competition among various companies in the sector.
  • The regulatory agencies generally grant licenses to service providers, coordinate with them, and monitor implementation on the basis of the licenses granted.

  Regulatory agencies Establishing the regulatory agencies is an integral part of the privatization process, particularly in the public services sector. There are three models for these agencies:

• • A separate regulatory agency for each service in a single sector (e.g., establishing an independent agency to regulate telecommunications services and another to regulate postal services, etc.)
  • A single regulating agency for each sector, that is, establishing a single regulating agency for the energy sector (electricity, gas) and another for the transportation sector (railroads, aviation, roads, and navigation).
  • A single regulating agency for a group of sectors, such as energy, telecommunications, and transportation.

The appropriate model will be selected on the basis of a careful and comprehensive study of its objectives, positive and negative aspects, and appropriateness for Saudi Arabia. The Privatization Committee of the Supreme Economic Council will recommend selection of the appropriate model upon completion of the study by the competent agencies.   Autonomy of the regulating agencies Autonomy of the regulating agencies is one of the most important factors in guaranteeing the success of efforts to decide on issues involving rights, duties, and common interests, as well as enjoying the confidence of all parties involved in the sector, including the government, investors, employers, and consumers. These agencies shall have legal personality and shall enjoy both administrative and financial autonomy.  

1. Fees for providing services

Fees for services vary among public enterprises because the government, based on the necessity and importance of the services provided, subsidizes some of them. Where there is no clear mechanism for determining fees for the services of public enterprises that reflects their cost, the implementation of the privatization process is hindered, particularly from the point of view of the investors. The government subsidies affect price levels for public services, particularly certain subsidies that are considered fundamental obstacles to privatization and a principle source of economic inefficiency. Therefore, a systematic method must be established to set tariffs for services that takes into consideration their cost, allows for the stable provision of services, and makes it possible to finance the investments of enterprises that provide them, while allowing the government to provide subsidies as needed.  

1. Preparing and restructuring the sectors and public enterprises to be privatized

The issue of restructuring public enterprises or projects that are to be privatized is generally raised before the privatization process is implemented, and it is generally preferred to leave the main restructuring issues to the new owners. However, it is sometimes not possible to avoid restructuring, as there may be large liabilities that adversely affect the project s value, and it may be necessary to split up the enterprise in order to improve the overall structure of the sector. Preparation and restructuring activities generally fit into one, or more of the following categories:

• • Financial restructuring: This includes either adding or removing assets or liabilities to improve the financial position of the enterprise.
  • Restructuring of manpower: This involves transferring employees or workers from the public enterprise to the privatized enterprise and dealing with the employees’ situation on the basis of a comprehensive study and clear plan developed by the enterprise in accordance with its future requirements.
  • Technical restructuring (splitting up): Splitting up [an enterprise or sector] often helps create an effective regulated environment. For example, in the electricity sector it may be preferable to separate production, transmission and distribution activities from each other, as the value of the parts maybe be greater than the value of the whole. There are also cases that require the merging of various enterprises before they are privatized, in order to increase their productivity.

1. Strategic partners

The magnitude of issues and the complexity of procedures facing public enterprises and projects that are targeted for privatization are very large, and the task of reform is consequently also large. The required tasks are often beyond the capacity and manpower of their current management, as they include improving performance, adjusting prices, and developing commercial methods of operation, in addition to the ability to compete at the domestic and international levels. The strategic partner, whether Saudi or foreign, plays an important role by providing the needed capital, sharing the risks, offering advanced technology and administrative expertise to improve performance and create added value. This mandates that the strategic partner must have sufficient financial capability and experience in managing firms similar in size to the enterprise that is to be privatized, it must be able to provide a sufficient number of technical and managerial experts and must have a good reputation.  

1. Creating a suitable climate for the success of the privatization program

The success of a privatization program depends on the effectiveness of the climate aimed at private sector development. There are three important elements of this environment: the capital market, human resources development, and the regulatory environment.  

1. Capital markets

Developing the capital market is one of the most important policies that will be pursued to achieve some of the goals of the privatization process, which include expanding the scope for participation by Saudi citizens in the ownership of productive assets and public enterprises and projects, as well as encouraging local investments of domestic and foreign capital. There is a strong connection between privatization and the capital market, as privatization leads to development of the capital market by encouraging investors and investment companies to diversify their portfolios by investing in companies that are well managed, and in diverse sectors such as telecommunications, electricity, cement, banking, and transportation. Small investors are also attracted, which will lead to the creation of investment tools of a joint nature and a balance in the liquidity position between banks and the financial market, as well as opportunities to invest the funds of social security and retirement pension agencies and other financial institutions. The existence of a developed financial market helps ensure the success of the privatization process when certain enterprises are privatized through public subscription in the capital market. This requires a number of specific elements in capital market, including:

• • The regulatory and legal framework, which protects the rights of investors and defines the basis for regulating the market on the basis of clear, published regulations, and instructions.
  • A strong infrastructure is required to develop a robust financial market that is appropriate for the economic capacities, in terms of the management system and the required technical apparatus.
  • A sufficient number of investment tools that allow for the participation of large and small investors, including Saudis and non-Saudi residents.

 

2. Human resources development

The existence of well-developed, highly productive manpower is a critical factor in the success of the privatization program. Many Saudi human resources currently face difficulties in finding employment owing to lack of skills and competition from foreign workers, in addition to the problem of excess labor beyond the requirements of enterprises that are targeted for privatization. In order to develop manpower and enhance skills and competitiveness, enterprises targeted for privatization should be required to develop appropriate training programs to retrain their workers, develop their skills, and help them keep their jobs or find employment with other companies or enterprises.  

3. Regulatory environment

The regulations and procedures related to investments and private sector activities, the capacity of the agencies responsible for their implementation, and the speed with which the related disputes can be settled are among the most important elements that must be revised, modernized, and integrated to create a suitable environment in which the private sector can operate effectively to meet the challenges of regional and international competition. Transparency in these regulations and procedures, as well as the ease of their implementation, will increase the confidence of investors and obviate the need for requesting the government to provide more guarantees, which are often required in the face of incomplete regulations and unclear procedures.

In accordance with Council of Ministries No.257 dated 11/11/1421 A.H. [February 5, 2001], the Supreme Economic Council shall determine which activities are to be privatized, in addition to those recommended for privatization by other public enterprises. A list of the activities to be privatized shall be issued by Resolution of the Council of Ministers. The Privatization Committee of the Supreme Economic Council, in coordination with the competent agencies, shall begin privatizing the recommended projects on a selective basis and in accordance with the criteria for selecting projects to be privatized.   Approval of the Council of Ministers is required for implementation of the sale, upon the recommendation of the Supreme Economic Council. Approval may also be required from the Royal Court with respect to matters that obstruct the implementation of the privatization program, such as issues related to restructuring, conditions of sale, or government returns.  

1. Criteria for determining priorities in selecting enterprises to be privatized

With the goal of enhancing the productive capacity of large public enterprises and projects, the priorities for selection for privatization are based on:

• • Positive effect on the national economy.
  • Readiness of enterprise for privatization.
  • Social benefits of privatizing the enterprise such as increasing employment opportunities, making optimal use of the work force, and ensuring the continuation of just increases in individual incomes.
  • Inadequacy of the services provided by the public enterprises.
  • The absorptive capacity of the Capital market.

 

1. Continued implementation of the privatization process

After the enterprises and projects to be privatized have been selected on the basis of the above-mentioned criteria, an implementation program will be developed comprising a sequencing of the various activities in the privatization process: selecting a group of public enterprises and projects, beginning the privatization procedures, and developing and adhering to a timetable, leading to the creation of a privatization program that ensures coordination and control of the timing for offering shares of the privatized company for sale, in a manner that does not adversely affect the capital market.

Types of financing contracts between government and private sector

• 1. Lease Build Operate – LBO
  2. Build Transfer (Operate) – BTO, BT
  3. Build (Own) Operate Transfer – BOT, BOOT
  4. Buy Build Operate – BBO
  5. Build Own Operate – BOO

 

1. Lease Build Operate – LBO

A long-term contract is signed with the private sector to develop and operate a large government enterprise, through giving the private sector the opportunity to recoup its investments during the period of the contract, in addition to paying a sum that is the amount of the lease contract.  

2. Build Transfer (Operate) – BTO, BT

The private sector investor finances and builds the enterprise, the ownership of which is transferred to the government upon completion (BT). Sometimes, the private sector investor subsequently leases the enterprise by means of a long-term contract, which gives him the opportunity to recoup the capital invested and realize profit margin.  

3. Build (Own) Operate Transfer – BOT, BOOT

The private sector investor is given a concession to finance, build, own, and operate the government enterprise, which is called either a build-operate-transfer (BOT) or a Build-Own-Operate-Transfer (BOOT) sometimes, under which the investor has the right to collect fees for a defined period of time, after which ownership is transferred to the government.  

4. Buy Build Operate – BBO

Under this type of arrangement, an existing government enterprise is sold to the private sector investor who then updates or expands the enterprise and operates it on a permanent basis. This type of arrangement is similar to liquidation of a government enterprise, as it is operated on the basis of a concession granted by the government, and this concession gives the government the right to control prices and quality of service.  

5. Build Own Operate – BOO

The private sector investor finances, builds and operates the enterprise on a permanent basis, by virtue of a concession granted by the government, but under rules that determine the prices of the services provided and the method of operation.