Pretence and illusion: Arab countries and privatisation

Several states tried to introduce the private sector to their system of state-owned industry with limited success. There needs to be a new effort if the prosperity of today is to continue.

Algeria is the third largest supplier of natural gas to Europe, with a market share of about 8%
Algeria is the third largest supplier of natural gas to Europe, with a market share of about 8%

Pretence and illusion: Arab countries and privatisation

The Arab world faces real economic challenges, chief among them is that its reliance on oil revenues and universal welfare systems is not a long-term solution.

Some have long relied on aid, concessional transfers, and borrowing from international institutions and foreign banks, but to be fit for the future, they must strengthen the capabilities of the private sector and be genuinely open to foreign direct investment.

Privatisations are no longer a matter of debate. Indeed, they must be carried out despite all the administrative, cultural, and political obstacles.

To better understand the pitfalls and opportunities, it helps to recall the experience of Arab states’ privatisation reforms to date.

Egypt’s private sector

Egypt’s economic reform and privatisation programmes began when Anwar Sadat assumed the presidency in 1970 after the death of President Gamal Abdel-Nasser.

Sadat’s slogan was ‘economic openness.’ He wanted to liberalise the Egyptian economy and free it from state domination, socialism, and the bureaucracy that the Nasserist regime had adopted since the introduction of the 1962 National Pact.

In 1974, Egypt’s Law 43 set out the investment system of foreign money and free zones.

It was passed shortly after the October 1973 war, during which Egypt sent its troops across the Suez Canal into Sinai, which Israel occupied in June 1967.

Law 43 allowed the investment of foreign funds in manufacturing, mining, energy, tourism, transportation, and the reclamation and cultivation of desert lands in the form of long-term leases.

It allowed investment in housing and urbanisation while opening the door for foreign investors to enter Egypt’s banking and insurance sectors.

Sadat allowed the investment of foreign money in manufacturing, mining, energy, tourism, transport, housing, banking, and insurance. 

Initially, the law restricted foreign ownership in some sectors, such as limiting foreign owners' share of banks to 49% of banks' capital, along with stipulations on the right of investors to transfer profits abroad in foreign currencies.

There was opposition to privatisation, not least from Egypt's Nasserists and leftists, who clung to socialism and the principles of sufficiency and justice, while the state's bureaucracy also sought to obstruct anything that limited its own economic influence.

A nest of vested interests

Since Nasser, the Egyptian economy has been dominated by the military and its associated companies, particularly in the contracting and manufacturing, with senior army men holding senior positions in factories, farms, hotels, and finance.

Several major Egyptian banks are still fully- or part-owned by the state, including Banque Misr, National Bank of Egypt, Agricultural Bank of Egypt, Industrial Development Bank, the United Bank, and the Egyptian Arab Land Bank.

Some private banks have been established since the 1970s. These are owned by the Egyptian private sector, sometimes in partnership with foreign investors.

Looking ahead, continued state ownership of major banks (whose role is to finance private sector businesses) may not be feasible.

The Egyptian government, led by President Abdel-Fattah el-Sisi, needs to make bold steps towards privatisation and recently signalled its intention to sell big chunks of key state-owned companies to local and foreign investors.

Egypt's government recently signalled its intention to sell off big chunks of key state-owned firms for an estimated $1.9bn.

These stakes, worth an estimated $1.9bn, would be in industries such as hotels, telecoms, and contracting, and there are high hopes that this would be a first step.

The private sector, both at home and abroad, stands ready to play a role in Egypt, and the country's current liquidity problems may mean it does so sooner rather than later, by prompting the acceleration of privatisations.

Egypt's government seems to have grasped the idea that structural reform and national development needs to involve the private sector. Reducing the administrative, bureaucratic burden on foreign would significantly help.

Syria's failed experiences

In Syria, Law No. 10 in 1991 defined the conditions for private investment, both national and foreign. It was not the spur its backers hoped it would be, but it did facilitate several privately-owned enterprises, including banks, hotels, and real estate companies.

Despite limited oil production in Syria, several companies were established in this sector as well, in partnership between foreign and government entities.

Historically, the Syrian private sector was one of the most active in the Arab world, particularly since the beginning of the 20th century.

Syria once had one of the most active private sectors in the Arab world, active in textiles, agriculture, trade, logistics, crafts, hospitality, and food. 

However, upheavals in the mid-1950s disrupted the role of this vital sector, which had been active in textiles, agriculture, trade, logistics, crafts, hospitality, and food.

Political union between Egypt and Syria in 1958 was bad news for the sector, as laws were issued for agrarian reform and the nationalisation of manufacturing companies.

In recent years, Syria's civil war has also hit the sector hard. Millions of Syrians have been forced to flee their homes, either to neighbouring countries like Jordan, Lebanon, and Turkey, or else to further afield, such as to Egypt or Europe.

Dangling a Damascus carrot

Today, Syria's private and public sector companies suffer from sabotage, destruction, disruption, and displacement. Its reconstruction will cost hundreds of billions of dollars, to repair infrastructure or restore facilities and utilities.

In this, the private sector must partner, alongside international companies. Incentives for reconstruction initiatives should be introduced. Syrians who left the country should be enticed back to use the skills they acquired abroad.

Those who amassed significant wealth should be encouraged to invest that in their country when the right opportunities present themselves.

They will come back when they can be reassured of good returns, fit and proper laws and regulations, effective management systems, and suitable protections of the rights of shareholders and financiers.

Alongside efforts to reintroduce private capital, the state will have to help restore private ownership of businesses that were nationalised in the last 60 years, be they industrial companies, farms, hotels, or real estate.

Algeria jettisons the French

Immediately after independence in 1962, Algerians witnessed their state nationalise and confiscate private property.

Until then, economic activity had been almost monopolised by the French. After they left, the government took over the factories and farms they owned.

It also introduced 'self-facilitation', a concept based on socialist values and based on public ownership of the means of production. Unfortunately for its originators, this did not lead to beneficial economic results.

Yet more was to come. In 1971, Algeria nationalised its oil and gas sector, which had belonged to French oil interests.

Sonatrach, the national state-owned oil company, was tasked with exploiting the country's oil resources, everything from exploration, extraction, production, transportation, refining, petrochemicals, even desalination.

In 1971, Algeria nationalised its oil and gas sector. A state-owned oil company was tasked with exploiting the country's resources.

For almost two decades, the government continued to dominate vital economic activity. Only in 1988 did it finally move towards a market economy.

This was part of its 'stabilisation and structural adjustment' programme, after discussions with the IMF and the World Bank, prompted by a 1.5% reduction in its GDP from 1986, prompting the layoffs of thousands of public sector workers.

Algeria then went through a few difficult years — known as "the black decade" — when its political and security conditions deteriorated from 1991.

The civil conflict was bloody, catastrophic, and devastating for the Algerian economy.  

Scanning the horizon

After the civil war, laws were introduced to facilitate the business environment and let investors invest without governmental or another bureaucratic obstacles.

To kickstart the economy, officials sought to form relations with European countries, integrate the Algerian economy with the world economy and improve trade exchanges, especially since Algeria is a big oil and gas exporter.

In a January 2023 report, the World Bank indicated that Algeria was on track for economic recovery thanks to high oil production levels.

It also commended the development of the service sector's performance and the agricultural sector's activity improvement. Still, it called for the proper use of public resources in vital economic sectors.

Despite these positives, the political situation in Algeria remains unclear, and there are no strategies in place to promote economic development over the coming decades.

Its geographical location and demographic characteristics mean that Algeria must trade globally, promote its interests with European countries, and enable foreign investors to invest funds in vital sectors to support its export capabilities.

Gulf goes its own way

If privatisation has been disrupted in countries where the state played an overwhelming economic role (such as Egypt, Syria, and Algeria), why is it being disrupted in Gulf countries where market economics have prevailed since the beginning?

The role of the state in Gulf economies was enshrined after the region's governments accrued huge funds from oil revenues over the past 70 years.

Since the mid-1970s, those funds have allowed these governments to dominate various sectors, subsidising goods and services to citizens and residents.

The state's role in Gulf economies was enshrined after the region's governments accrued huge funds from oil over the past 70 years. 

This is despite those countries having spent decades highlighting the importance of a strong private sector and a limited state role.

Subsidies, the hegemony of the state, the satisfaction of citizens, and the importance of high employment rates, all conspire to hinder structural reform and privatisation.

No sell-offs in Kuwait

Things may not be the same in all Gulf countries, but there is a stubborn Kuwaiti model that relies on a political system that prioritises citizens' satisfaction over all else, regardless of the burden on public funds.

The government may make statements about economic reform and cutting public spending when oil prices fall, but once they rise again, reform plans get sidelined.

Kuwait's Law 37 in 2010 was issued to regulate the transfer of ownership from the public sector to the private sector.

Zain Group
Kuwait Telecommunications Company Zain Group

This opened up electricity, water, and telecoms, while ring-fencing education and healthcare as immune from privatisation.

But privatisation in the country is still immature. Even the government's printing press is considered an unsellable sacred cow. Of similar status is Kuwait Airways.

Some members of the National Assembly still consider the whole or partial sale of state-owned enterprises as akin to selling the family silver.

After it was freed from Iraqi occupation, the government — through the Kuwait Investment Authority — sold shares in banks, investment firms, real estate companies, and industrial entities through auction, obtaining significant sums in the process.

Over the years, the state acquired these shares, but the key shares were acquired during the Souk Al-Manakh stock market crash in the 1980s.

The challenges ahead

Real privatisation in Kuwait will begin when the government stops supplying electricity and water and transfers ownership of food supply companies, Kuwait Airways, public transport, and land communications.

If countenanced, a partnership between the public and private sectors would boost economic performance, improve the business environment, and create real jobs — not simply sustain a raft of pretend jobs in the public sector.

Across the region, a pre-condition of privatisation is that those who lose their jobs from the process get support for retraining.

Another pre-condition is the fostering of a climate of competition to drive up quality in services and drive down prices for consumers.

Finally, privatisation must be accompanied by tax laws to support the Treasury. After privatisation, applying value-added and corporate profit tax becomes mandatory.

All of this can be done by adopting clearly defined programmes and strategies that aren't subject to day-to-day political volatility.

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