Privatisation in the UAE
http://www.menafn.com/qn_news_story_s.asp?StoryId=103967#top
Khaleej Times - 20/08/2005
By Ali Al-Hashimi (Special for KT)
"Privatisation is the involvement of the private sector in providing
services or facilities usually provided by the public sector." Privatisation
is also the process of transferring operations and assets from the public to
the private sector." Privatisation techniques include, amongst other
methods; auctioning, bidding, Initial public offering (IPO) and joint
ventures.
The purpose of transferring assets from the public sector to the
private sector is derived from several notions. "Reducing government's
expenditure" and the requirement for fund and management improvement are
among the reasons for undergoing privatisation. In the United Arab Emirates,
Abu Dhabi has recently undertaken steps towards privatising a number of
projects, which, in the past, were within the domain of the government.
These projects include the Abu Dhabi Power and Water Company and one
of Abu Dhabi's oil companies. However, privatisation in these sectors has
not been initiated for the purpose of increasing capital or to introduce a
new management; rather this issue raises a question about the rational
behind privatising such sectors that were once under the auspices of the
government.
Privatisation, in the broader sense, was present in the United Arab
Emirates prior to the formation of the federation. Oil projects were being
implemented through joint ventures in which a State government would be a
stakeholder in the venture while a foreign company would hold the remaining
stake for implementing and managing the project. "Abu Dhabi was the only
Gulf oil producer to retain foreign partners on a production-sharing basis,
rather than having national oil company acquiring 100 per cent control of
oil operation. "The public sector controlled almost all project including
electricity, water, education, health in the UAE.
This relates to the government's pre-planned strategy to build a solid
infrastructure for the country. Thus, at the time, one would relate the
public sector to the government, which would be considered as the sole owner
and operator of most of the infrastructure-related projects in the Emirates.
Further more, governments supported these utilities by subsidising
electricity and water projects as well as other non-industrial projects such
as those related to agriculture.
A few Emirates have followed the international trend in privatising
utility projects which were at one point part of the public sector. This was
done mainly by transferring them partly to the private sector. "In 1997 Abu
Dhabi formed a privatisation Committee for the Water and Electricity Sector
and in early 1998, the committee called for a comprehensive restructuring,
including the elimination of the state-owned Abu Dhabi Water and Electricity
Department. "Privatising electricity and water companies in the Emirate of
Abu Dhabi was a big leap for privatisation in this region; whereby a local
government has taken the first few steps to end decades of the subsidisation
of water and electricity projects.
In addition, Abu Dhabi has recently carried out a privatisation
programme in the oil industry whereby it diluted its ownership in one of the
oil companies to the public by means of an IPO transaction.
In a country where the government has the ability to fund projects and
can afford to provide highly experienced management to run the projects; the
reasons behind the privatisation of the utility projects or oil companies
might seem unclear to some. However, as mentioned earlier, the rationale
behind privatisation differs accordingly from one privatised sector to
another.
Abu Dhabi's privatisation of the electricity and water sector was
driven by the need to reduce government expenditure and "eliminate
government subsidies. Currently electricity consumption is heavily
subsidised by up to 75 per cent of the cost for nationals and up to 50 per
cent for non-nationals and businesses. "The purpose, however, for
privatising the Aabar oil company in Abu Dhabi was not undertaken to
increase revenue from the IPO transaction because IPO transactions do not
provide additional capital.
The explicit purpose was to create a securities market. "Official
reports state that the UAE is keen on setting up an exchange to absorb
planned privatisation of service sector companies and shares in new
commercial joint ventures..." The privatisation of Aabar took the form of an
(IPO) in which the public was offered a stake in the company which would in
turn create a secondary market for the shares in the company.
Furthermore, the amount of funds generated by the IPO transaction was
seemingly not large; it was approximately one hundred and fifty million
dollars, something that the Abu Dhabi government could have easily provided
without going through the IPO transaction.
Although privatisation is growing rapidly in the UAE, a number of
sectors are not privatable. Sectors such as healthcare and education cannot
be privatised because of the constitutional restriction. The UAE
constitution strictly stipulates that healthcare and education shall be free
for all UAE nationals. This however does not restrict the establishment of
the private schools and hospitals.
If the advantages of privatisation are to help governments reduce
expenditure, end subsidies and promote management, such advantages also come
at a cost that forms the disadvantages of privatisation. Public opposition
to privatisation is one of the disadvantages, which could hinder any
privatisation transaction. Imposing fees on services, which were, at one
point in time, free would be burdensome to certain classes of people and
thus will be opposed by them.
In Abu Dhabi's electricity and water privatisation projects, the fees
that would be charged on the services provided are to be based on a pure
commercial basis. This relatively suggests a hike in electricity and water
prices. On the other hand, privatisation, in my opinion could lead to
inflation in the economy if it is overused. Increasing fees, ending
subsidies, and a mass privatisation programme whereby governments privatise
a number of projects in a short period of time could all contribute to
inflation.
Privatisation helps in reducing government expenditure, mitigate
shortfall in cash, enhance managerial performance and create securities
market. However, privatisation does of course come at a cost to the economy.
In my opinion, privatisation is a device which should be used not only by
looking at its direct rewards. It should be used carefully after examining
its indirect drawbacks.
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