Have you read the “Privatization Law” recently approved by the Kuwaiti parliament? Only a handful did, yet the majority of us took an uninformed and emotionally driven stance on the issue. Many individuals oppose privatization in Kuwait because they are content with the current status quo and are afraid of change. Others are taking a patriotic stance declaring they are fighting it because they don’t want to be associated with “selling” their beloved country, but are they? No, simply because we currently don’t have a law that regulates privatization and it is better to pass a law and regulate than have no law at all.
Simply put, privatization is the transfer of ownership from a government to a privately-owned entity. Nothing scary about it! In fact, the implementation of privatization has on average been rewarding. There are various advantages to privatization such as improved productivity, efficiency, profitability, and levels of service. It also successfully removes economy elements used for political and social gains since parliament members can’t for example ask that electricity bills be waived when the department is privatized. More importantly, it provides the incentives to invest and innovate. In cases where shares are floated on an exchange, it enhances the monitoring of management, transparency, and forces disclosure. These are all general concepts on the benefits of privatization. These are all textbook theories, but do they work in the real world? You bet!
Two great examples of the successful application of privatization versus government ownership is evident by looking at two of the largest oil companies in the world: the partially privatized Brazilian oil company “Petrobras” and the government-owned Mexican oil giant Pemex. The Brazilian government chose to privatize 44% of Petrobras in 2000 and this decision transformed it from an industry laggard nicknamed Petrosaurus (dinasour) into a world-leader in deep-water wells. During the past decade, Petrobras dramatically boosted its reserves, doubled its production, and nearly tripled both its net income and revenues. This sent its shares soaring 1440% from an adjusted $5 level to a high of $77 in 2008.
Compare this to the still government-owned Mexican Pemex, which saw its annual production drop each year since 2004! The company has been deprived from investments to increase its production, which resulted in it missing on the boom in oil prices. Sadly, Pemex is merely considered a piggy bank that provides nearly 30% of the Mexican government revenues. What happens to piggy banks when we don’t throw coins in them every once on a while? They run out. Other examples of government failure are evident in Indonesia as it turned into a net oil importer from an exporter and Venezuela which is witnessing a constant decline in oil production.
In Kuwait we suffer from bloated pay-rolls which account for a whopping 90% of the government’s annual budget. According to Tony Blair’s report, only 18% of Kuwaitis work in the private sector and Al-Shall consultants estimate that come 2030, Kuwait will need a massive KD 20 billion to cover salaries alone! This is impossible and leads us to the inevitable choice of restructuring our economy into becoming private-sector driven. The private sector would not only take-off part of the salary strains and allow the government to focus on important sectors such as education, but it also adds taxation income to the government budget.
The current law passed by the parliament isn’t ideal. It is extremely protectionist and in some ways unrealistic. It fends-off private sector initiation because the costs are simply too high. For example, the government asks the private sector to guarantee the working conditions of employees in privatized institutions for 5 years with the same or better benefits. Further, it stipulates that the percentage of Kuwaitis and their share of the total salaries remains the same. Not only that, but the government retains a golden share enabling it to overturn any decision made by the privatized entity. The government also provides an employee with the choice to be transferred to an equivalent government position if he/she decides they don’t want to join the privatized company. If many employees opt for this option, the government wouldn’t solve the issue of its inflated salaries. The government provides and the private-sector provides, but shouldn’t we ask Kuwaitis to provide too?
Although it isn’t an ideal law, it’s long-term benefits are ample and material. The mere approval of a proposal presented by the government since 1993 provides us with a glimpse of hope for change. Consider it the 1st step in a 1000 mile journey to reform the Kuwaiti economy. The following steps should be passing taxation, transparency, anti-trust, consumer protection, and conflict-of-interest laws. Privatization is a global trend that we should cease fighting, go in front of, and embrace.
(3 votes, average: 4.67 out of 5)
Loading ...Tags: Kuwait, Kuwait Privatization, Privatization
I Totally agree!! Thanks
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in countries w/ weak oversight by the gvmt, like in Kuwait. where the gvmt is totally in bed w/ private business (Alkhorafi group, Boodai Group, among several others) privatization only leads to disparity in the wealth levels and this disparity is not due to the “innovational skills” of the private sector but mostly to their political influence……. I see the value, but in Kuwait’s case, it will only be another Egypt….
and on Petrobras, this was largely due to new discoveries….. these discoveries were made not because it was partially private or public but because they made the decision to dig in the deep waters and they struck oil!!!!…….I don’t know what the ownership structure has to do with all that….
oh and btw, the Brazilian president is more socialist than the mexican president….he was a union leader at earlier point in his life…. and now Brazil has many social projects……the mexican president supports “free trade” and “flat taxation” …all marks of a pure “Capitalist”……..
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Keynesian Reply:
May 31st, 2010 at 7:56 am
As far as Brazil is concerned, a move in PBR’s ownership structure to a more private one had a significant effect on its exploration activities. The reward aspect incentivized the new private hands to dig aggressively. Oil didn’t just pop out of the ground. They invested heavily in technology and it paid off. Compare this to PEMEX which never keeps any of its revenues for investment as the government uses it as a side pocket.
As far as President Lula is concerned, he ran as a Socialist but the market forces changed his ways as a closer look at him deems him Capitalist. I guess winning the elections late 2002 just as China was turning on its engine to drive global growth and the BRICs placed the upper hand!
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good read..but I think the author is being a bit too optimistic when he said this was the first step..this is 0.001% of a first step. Privatization alone does not increase productivity and create employment. If you privatize and the privatized entities replace the Kuwaiti workforce with Expats (which 99% of them will do, as the case with Oula), then isn’t the govt back to square one ??!?
The issue to keep in mind is that Kuwait like all of its GCC counterparts has to grow jobs at 5% p.a. to keep up with the population entering the work force. Governments in the region realize that this cannot be done by them alone and they need to stimulate private sector to fill the job “gap”. Privatization is a process not a stimulant. If not planned and executed correctly the privatization process can be a boon for expat population and recessionary for the local population.
The underlying issue is the reasons why a company chooses to hire expats in place of Kuwaitis. Number one quoted reason is not the cost but its lack of skill. Until the issue of lack of qualified and skilled Kuwaitis is issued privatization will again lead to the same cycle repeating itself. In a population the key drivers of skill are – 1. Education/Training 2. Incentive to work. The government needs to focus on these factors for privatization to work. These factors can’t be changed in a year or two, it requires a systemic change with a long term horizon. And i don’t think guys here know how to think long term, so i have my fingers crossed.
The government till date has done exactly the opposite of what was required, by guaranteeing employment to everyone the government removed incentives among the local population to educate/train themselves and also removed incentive to perform at any level. This was gross mismanagement and lack of planning. To put in the right incentive and get the required results will take some persistence and a long term approach. The current political climate is not conducive for either. Additionally, government has a zero track record for executing long term plans. In short, Kuwait is falling off a cliff and I don’t think the government is equipped to deal with it. Gov’t can only “create” jobs till a limit and what after that.
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Keynesian Reply:
May 31st, 2010 at 8:15 am
Thanks for the excellent comment. I tend to look at the glass half-full although our government nearly always proves it is in fact empty. As for the 1st step in a 1000 mile trip, my 0.1% isn’t too far from your 0.001% ;P
I see where you come from and tend to agree with you on several points. Further, I would give this law a 5 out of 10 and the whole 5 is just for the fact a privatization law has been passed and could be the foundation for change. It isn’t change per se.
The government needs to decentralize and let the private sector lend a helping “invisible” hand. That hand will eventually force Kuwaitis to train and become skillful.
I remember 10 years ago when all you needed to get hired in Kuwait was a diploma and a last name. Now you MUST have the grades and perhaps from a good school too. Mentality changes, but the government has to be tougher and not act like a spoiling dad.
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RBB, well said.
I want to elaborate on the point Keynesian made about private sector initiation being “fended-off” because of the costs being too high. Any private investor will simply discount the cost of sustaining a largely idle Kuwaiti workforce in the new, private, arm-length company that is formed for 5 years, ie., they will pass the cost along to the government by paying a lower price to purchase the company. What is more troubling is the stipulation that the percentage of Kuwaitis and their share of the total salaries remains the same. In order for this to make commercial sense, the cost would have to be passed on to the consumer, which in turn, could indirectly be passed on to the government (through further allowances, or some other parliamentary populist act), or directly in the case of utilities where production is directly sold to the government. This further reinforces RBB’s point that the significantly bigger task of fundamental structural reform (which is long-term in nature) in both education/training and creating “incentives to work” (a 180-degree culture shift) would need to take place, over time. That said, the privatisation law is a step in the right direction.
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Keynesian Reply:
May 31st, 2010 at 8:19 am
I agree with all your points. Very well said. Parts of the law create unbelievable inefficiencies, but it will eventually change. Having something “anything” in place for now is what counts.
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Simply, begin with privatising the government !
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Thank you for this wonderful introduction. I’ve always loved the idea of privatization in Economics with all its advantages, but I do agree with RBB there. I’m not sure if Kuwait is quite ready for this kind of change yet.
I haven’t read the law yet, but if Kuwait is being extra careful, we might not go anywhere with implementing it. Taking risks is expected here!
I was wondering, where can I find this law to read it?
Keep it up
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If somehow RBB & Keynesian are instructors I would love to be their student! Mashallah.. very defining and smart put out!
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@Kenysian: “s far as Brazil is concerned, a move in PBR’s ownership structure to a more private one had a significant effect on its exploration activities. The reward aspect incentivized the new private hands to dig aggressively. Oil didn’t just pop out of the ground. They invested heavily in technology and it paid off”
seriously now, ARAMCO is a model company and is discovering oil. and it isn’t even partially private.
one must make a distinction between cause and effect. As for Lula da Silva, he as usual in democratically run countries, become a softer socialist basically a left-centrist and not-god forbids- full time capitalist!! you need to look at all the social projects undertaken right now in Brazil to know where is he leaning. Brazil had actually out-spent Mexico 4 times on Social Projects! – there isn’t much believe of of the so called “invisible hand” in that now would there?!!
http://topics.nytimes.com/top/reference/timestopics/people/d/luiz_inacio_lula_da_silva/index.html
here is an article by the NYT for your viewing
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a recent study by booz:
http://www.arabianbusiness.com/589837-gcc-jobless-rate-is-regions-no-1-challenge—study
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@Keynesian:
This Kuwaiti writer pretty much sums up the reasons why Kuwait should never go into Privatization especially under a weak government such as ours
http://www.alraimedia.com/alrai/Article.aspx?id=197847&date=05052010
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