Wednesday, January 04, 2017 1.00PM / by Huma Yusuf, ©Control Risks.
A privatisation push across the Middle East and North Africa in 2017 will act as a siren call to investors from around the world. As foreign companies prepare bids for new projects and tune into public debates about the benefits that privatisation offers, they should closely inspect what is on offer – and from whom.
The growing interest in privatisation will signal Middle Eastern economies’ pro-FDI stance and the increased momentum of economic reform agendas, which present foreign companies with new opportunities. But understanding the political dynamics and risks associated with privatisation processes in the region is key for companies seeking to benefit from these offerings.
Reasons and Risks
Many factors drive regional interest in privatisation, persistent low oil prices being foremost among them. The IMF forecasts that oil prices will average USD 51 per barrel in 2017, with limited prospects for recovery – it expects prices to hover under USD 60 until at least 2021. This outlook weighs heavily on regional economies, all of which are likely to post fiscal deficits in 2017. This is likely to force the pace of fiscal consolidation, economic diversification and reform implementation.
Privatisation enables countries to boost foreign exchange reserves in the short term, and cut government expenditure in the long run, making it an attractive option. In some countries, such as Pakistan and Egypt, it is also a condition of loan packages from international financial institutions. But what seems a quick solution for an emerging economy may create problems for eager investors.
Some of the risks that accompany privatisation drives in emerging economies are well known: corruption in the form of kickback demands or collusive procurement; contract renegotiations and project delays resulting from nationalist opposition; and security issues arising from labour unrest that often follows wide-scale lay-offs. But other, less anticipated risks can affect privatisation projects, not only at the acquisition stage but throughout the project lifecycle.
These include political interference, exposure to sanctions, expropriation, and regulatory issues such as investment restrictions and tax rises. Foreign companies should be able to answer three questions before becoming involved in a privatisation process: What are the government’s objectives in selling state assets? Who are the decision-makers? And who wants to benefit from divestment? The answers to these questions will vary not only by country, but also by sector, meaning companies will have to dig deep to get it right.
Responses to the first question clarify the nature and scale of privatisation projects. Countries in the Gulf Co-operation Council (GCC) are looking to cut state spending while retaining influence through control of strategic assets and sources of revenue. As such, privatisations in the GCC will be partial and likely to privilege local investors, with continued limitations on foreign ownership. Although no concrete proposals have been put forward, Saudi Arabia is expected to list only 5% of Aramco. At the same time, privatisation initiatives in less strategic sectors such as healthcare and education will move ahead more quickly across the region, and with larger stakes on offer.
In Algeria, the government recognises the need for diversification in light of low oil prices, but is keen to minimise the potential for unrest resulting from unemployment and other socioeconomic grievances. In March 2016, the government floated the idea of letting foreign companies acquire majority stakes of up to 66% in state-owned banks, an advance on the current cap of 49% foreign ownership for all businesses. Whether this or other divestment measures are adopted over the coming year will largely depend on the government’s appetite for risking a public backlash.
Partial privatisation, were it to occur, would not signal a shift in prevailing statist trends, and would carry a risk of government interference. Previous privatisation regulation in the country has indicated that the state may retain the right to intervene in decision-making for five years, citing national interest. Companies availing themselves of opportunities may face demands to maintain workforce levels or continue contracting with public-sector entities.
Identifying the decision-makers around a privatisation initiative is as important as knowing their objectives, particularly to understand the risk that decisions might be reversed. Egypt, for instance, has announced that it will offer a 40% stake in the Arab African International Bank and 20% in Banque du Caire on the Egyptian stock exchange, the first major offering in more than a decade. The partial privatisation fits with President Abdel Fatah el-Sisi’s efforts to attract FDI to help stabilise the economy.
However, Egyptian privatisation has a mixed record. Former president Hosni Mubarak (1981-2011) sold off a large number of state-owned companies between 1991 and 2008 to encourage private-sector growth. Following the Arab uprisings of 2011, activists challenged the sales, arguing that companies were privatised under corrupt circumstances for far less than their actual value. The Egyptian courts agreed: between 2011 and 2013, 11 privatisation deals agreed by Mubarak’s administration were overturned.
Mohamed Morsi, Egypt’s first democratically elected president (2012-13), not only suspended privatisation initiatives but also sought their reversal via renationalisation committees. Egypt illustrates how the resilience of a privatisation process can be tied to the motivations, interests and networks – but also the political longevity – of key decision-makers.
Finally, companies should identify the beneficiaries of privatisation in a particular jurisdiction. The GCC is likely to seek local investors, which would skew the competitive landscape for foreign companies but not necessarily pose inherent challenges. In other countries, the identities of beneficiaries could pose various political, integrity and reputational risks.
Iran, for example, underwent a major privatisation drive that started in the 1990s and gathered pace under former president Mahmoud Ahmadinejad (2005-13). Parastatal organisations – including entities linked with the Islamic Revolutionary Guard Corps (IRGC), or welfare trusts and business conglomerates known as bonyads – were the main beneficiaries. These entities operate in the grey areas between the public and private sectors, and several remain subject to international sanctions. Understanding the Iranian privatisation process – and who might benefit from future offerings – will help companies to operate there with limited exposure to sanctions or political interference.
As reports of privatisation opportunities emerge in the Middle East and North Africa, whether in the form of initial public offerings, public-private partnerships or asset sales, companies need only look to the political environment of a country to understand when, how and to what extent privatisation will take place in 2017 and beyond.