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Specific privatization issues applicable to water and electricity utilities in the Gulf Cooperation Council States
DESALINATION Desalination 120 (1998) 129-136
ELSEVIER
Specific privatization issues applicable to water and electricity utilities in the Gulf Cooperation Council States J a m i l S.K. A1-Alawi Business Promotion Center, P.O. Box 11811, Bahrain Tel. +973-531600, Fax. +973-537053
Abstract Most of the GCC States have attempted the path of privatization in recent years in order to relieve the financial burdens of capital expenditure from the government. A sudden rush towards privatization has resulted in unfortunate obstacles to most of the proposed privatization of utilities projects in the GCC States. The paper deals with specific economic, political and social issues that impact on the administrative and financial style of management in the GCC States which in turn has reflected on the performance and cost to the government and the public, as compared to utilities management elsewhere in the developed countries. A review of the forces which drive the GCC governments to the privatization process that took place and the obstacles which have hindered the progress towards successful privatization, with alternatives, in order to achieve the privatization goals and a high standard of service to the community at the least cost in order to support the economic and social development of the GCC States. Suggestions of steps towards a privatization process to ensure its success are also presented. The review also identifies some examples of successful and efficient independent authorities, with a comparison of the various types of utilities management, i.e. government, independent authority and private company showing the strength and weakness of each type. The social and the political implications of the privatization process have also been identified, with particular emphasis on tariffs and employees. The issue of ownership and funding of water and electricity utilities has been reviewed as most important commodity affecting the economic and social development of the country. Suggested recommendation is given towards balancing the risks if a decision is made to proceed with privatization projects. The paper concludes that successful privatization will depend on the ability of achieving better customer services and creating a base of highly trained productive employees and delivering the products at a lower cost than existing government or independent authorities.
Keywords:
Privatization; Economics
1. Utilities ownership worldwide Governments and the public all over the
w o r l d have a l w a y s l o o k e d at w a t e r as an available natural r e s o u r c e w h i c h should be provided by the g o v e r n m e n t as a free service
Presented at The Third G u l f Water Conference, Muscat, Sultanate o f Oman, 8 - 1 3 March 1997. 0011-9164/98/$ - see front matter © 1998 Elsevier Science B.V. All fights reserved PII S 0 0 1 1 - 9 1 6 4 ( 9 8 ) 0 0 2 1 0 - 0
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or at the least cost. Meanwhile, other services such as electricity, gas, and telecommunications whether provided by the government or by private companies have always been expected to be charged. The ownership of such utilities has been dependent on the political or economical conditions that existed from time to time. Until the 1980's, almost all water companies were owned by governments. The privatization process for electricity was initiated in the United States in the seventies due to the sudden increase of oil prices and the drive for more efficient plants and the lack of government funds to invest at that time. This process was followed by Conservative British governments in the early eighties with the objectives of reducing national debt; increasing efficiency and establishing competitive markets for utilities. Other public utilities have followed this pattern in the United States and the United Kingdom. The end results of privatization differ from place to place. In some countries the objectives have been achieved, whereas in others they have not. In Britain the cost of these utilities have risen very sharply, mainly due to the large dividends paid to shareholders and the exorbitant salaries and bonuses paid to executives. Poor service to customers has resulted from the major cuts in staff numbers employed, and was widely criticized in the UK. Elsewhere in Europe and other parts of the world, privatization of utilities has taken a longer period of time and more careful consideration. The threat of privatization has been sufficient for utilities in all countries to improve efficiency and reduce staff numbers. The success of privatization in the developed countries was due to the existence of well developed capital markets and availability of sufficient private funds to absorb the share offerings.
2. U t i l i t i e s o w n e r s h i p i n t h e G C C S t a t e s
The history of the GCC States ownership of utilities is not different than in the rest of the world, which have all gone through the private and state owned stages. The present status of water and electricity utilities is as follows: - Kuwait, Bahrain, Qatar and UAE (except Dubai) are fully government managed and owned. - Saudi Arabia is a mixture of government owned authorities and private electricity companies with the government as the majority shareholder. Dubai in UAE has established a company for water and electricity. Oman has awarded a contract for a water and electricity station on a BOT basis in 1995. Utilities are government owned and managed.
3. G e n e r a l r e v i e w o f r e c e n t p r i v a t i z a t i o n the GCC States
in
Most of the GCC States have attempted the path of privatization in recent years in order to: - R e l i e v e the governments of financial burdens of capital expenditure. - Create a vigorous and expanding private sector. - Stimulate the national e c o n o m y by adopting privatization of existing entities as a quick and easy solution. A sudden rush towards privatization has resulted in unfortunate obstacles to most of the proposed projects of privatization of utilities in the GCC. Some of the reasons attributed to these obstacles are: - Not enough thought and preparation have been made by the governments in defining their long term objectives of privatization. - International consultants and developers tried to impose privatization structures that worked elsewhere in the world, but were not suitable for the GCC States.
J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
131
- High levels of subsidies for water and electricity. - Absence of real competition has resulted in very high unit costs proposed by developers of independent electricity and water projects. - The size of the utilities does not justify fragmentation of production transmission and distribution with a number of developers operating systems in parallel to existing utility. - Scarcity of water in this area of the world, and the requirement for desalination processes dictate the need for a combined planning and operation of water and electricity utilities in order to maximize efficiency and reduce overheads. - Unique local problems such as legislation, risks, lack of local knowledge etc.
The other issues to be considered include the need to improve the performance of the organization and gradual restructuring of the tariff before embarking on privatization. Finally the most import requirement is to develop highly liquid capital markets to manage and absorb substantial share offerings. In order to avoid abuse by private monopolies and to transfer the maximum benefits from privatization to the customers, the governments would need to: - Establish a sound system of regulation to monitor tariff charges and performance. - Agree on an adequate rate of return on capital to attract new capital for a continuously expanding system, while meeting government's overall financial and other objectives.
Major similar independent power plant (IPP) schemes in various developing countries are being reconsidered due to similar reasons.
As shown from the experience of the industrialized countries when they implemented privatization, whilst the above pre-requisites cannot be achieved quickly or easily. It is not a quick process but this does not mean that it cannot be done. Privatization can be implemented in stages as follows: - The conversion of the existing water and electricity organization to an independent government owned authority, who would take over 100% of the assets. - T h e authority should be given all the necessary resources and well defined objectives in order to establish a sound management structure, and put in place a good accounting system, which can provide proper commercial profit and loss accounts on a timely and regular basis. - The government should establish a clear financial relationship by not subsidizing any services to the authority. At the same time the government must enter into a clear agreement with the authority to cover the cost of subsidies to the public, in order that the authority can be put in a healthy financial situation. - T h e Authority should propose to the government to restructure tariffs without an
4. S u g g e s t e d steps t o w a r d s full p r i v a t i z a t i o n in the G C C States
The present status of all utilities in the GCC States reflects a domination of government decisions irrespective of the type of management and ownership. This situation has led to inefficient operations, poor management and uncontrolled growth in demand due to very high levels of subsidies. If a decision is to be made towards privatization, then the government should always consider the total system of production, transmission and distribution of combined water and electricity organizations in order to avoid high overheads and efficient utilization of high capital plant and fuel. In some cases, such as Saudi Arabia, privatization of production and transmission alone can be justified. Meanwhile, the size of the systems in the other GCC State, cannot support many utilities running small IPPs.
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immediate significant impact on customers in order to control and manage growth in demand. - The authority should develop a comprehensive 10 year business plan, giving details of all capital and revenue expenditures with projections of all costs and incomes. The plan should include realistic targets for i m p r o v e m e n t s in efficiencies per sector; staff training and early retirement benefits as well as long term proposals in order to eliminate direct subsidies. - The authority should be fully independent; raise its own moneys; reward its own staff for extra efforts and results; and be responsible for improving efficiency and reducing costs while at the same time providing better customer service. - The authority should works on the basis that the cost per unit delivered to its customers shall not exceed the equivalent economic cost prior to its establishment. After a few years of successful operation of the authority when all the privatization prerequisites have been achieved, it is only then that the local private sector should be invited to take up shares gradually at a rate which the market can absorb. In most cases full privatization of generation, transmission and distribution is not the ideal solution. T h e r e f o r e , the establishment of an authority could be a better solution. This is especially true if it is managed properly, and the Authority's results match those of a private company.
5. F o r m s utilities
of management
structure
As can be seen from the above comparison (Table 1), the independent authority form of management shares most of the above factors with the private company except for two, the political and social i n f l u e n c e and the contribution to the economical activities of the state which is a matter of government policy.
6. F o r c e s w h i c h drive p r i v a t i z a t i o n
Privatization in different countries can be driven by a combination of political and financial reasons. The benefits of privatization as seen by all governments are a mixture of the following factors: - Companies in the private sector do not require g o v e r n m e n t guarantees when borrowing to finance the capital programs, and are not c o n s t r a i n e d by the government's budget limitations. - Private utilities companies are run on the basis of efficiency, therefore, the unit cost would be c h e a p e r than that from government owned utilities. - The listing of utility companies presence in the stock e x c h a n g e i n c r e a s e s the economical activities of the country by promoting the d e v e l o p m e n t of capital markets, and the spread of share ownership. - The sale of government owned assets in a utility allows the government to utilize the money in other needed projects and reduce the financial burden, particularly in a period of low oil revenues and very high level of expenditure in water and electricity sector.
for
The following comparison illustrates the differences between the various forms of management discussed in this paper. - Government management - Independently managed government authority - Private company management.
7. S o m e e x a m p l e s public utilities
of efficient
successful
These are some e x a m p l e s of very successful utilities, providing high level efficient services to their customers: - Tunisia Electricity & Gas Authority - Tunisia Water Authority
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J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
Table 1 Comparison between forms of utilities management structure Factors
Government
Authority
Private
Political and social influence Efficiency Labor policy Salaries and benefits Availability of funds for investments Government guarantees Contribution to economical activities Tariff adjustments Accounting system
Major Low Inflexible Inflexible Restricted Full Partial Restricted Government
Partial Medium/high Flexible Flexible Unrestricted Not required Partial Unrestricted Commercial
Minimum High Flexible Flexible Unrestricted Not required Full Unrestricted Commercial
- Jordan Electricity Authority - Jordan Water Authority - Singapore Public Utilities Board (PUB). The Jordanian Government has decided to gradually privatize the electricity sector by converting the authority to a company jointly owned by the government and the private sector. PUB covers electricity, water and gas supplies in Singapore, and is acknowledged to be highly efficient in operations, and provides excellent levels of customer care. It is financially sound, receives no government subsidies, and is totally independent in raising m o n e y for capital d e v e l o p m e n t and in making management appointments. PUB is a model of the high efficiencies which can be achieved by a government owned utility, if it is given the appropriate working relationship with the government and the freedom to act commercially. Such a model could be an ideal model for the GCC States to follow.
8. Social and political implications of privatization The sensitivity to privatization varies from country to another, and is also dependent on the economic and social structure of the country.
Water and electricity utilities are looked at by the government and public as important services due to the vital needs of their products, which no one could survive now a day without. Therefore, the public opinion in the GCC States feels that such utilities should either be monopolized by the government or owned by an open public company, and not be foreign owned. The measure of success of any fully privatized utility will be dependent on the following factors: Tariff Has to be cheaper than the existing utility. Cost per unit Has to be lower than the existing utility. Government subsidy Has to be lower than the existing utility. Quality of the service Has to be better than the existing utility. Employees H a v e to be better trained and paid than the existing utility. If any of these factors are not achieved, then the question will be raised "Why should we change from a government monopoly to a private monopoly". 8.1. Tariff implications
The governments of the GCC States have decided on various methods of oil wealth
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distribution. Among them was the decision to subsidize the utilities services, to the extent that some states provide these services for free, this was affordable up to a certain limit and with reasonable usage. The level of subsidies has undergone various changes since the 70s dependent on the political, social and the economical status of each government. Providing adequate supply of water and electricity services with the challenge of the uncontrolled annual demand, in an industry that requires substantial investment and high operating cost, has created major financial difficulties for all the GCC States due to the unavailability of funds to be invested at a time of declined oil prices. The existing subsidy structure should be reconsidered urgently by all GCC Governments, in order to establish clear cut policies and put in place higher tariffs before any attempt is made to consider privatization. The gap between the total costs of delivering these services to the consumers, and the tariffs charged is very high, and this results in massive subsidies direct and indirect. Direct subsidies in some GCC States are as high as 80% of the costs. The indirect subsidies are a combination of:
- Gas and oil being supplied at prices much below world market prices. - No interest charges made for money used on capital projects. - Free or nominal charges for services from other government agencies. Unfortunately, subsidies are generally given to all customers, even those with a high level of disposable m o n e y and who individually use very large quantities of water and electricity. As a result the wealthy customers receive the highest financial support in the form of subsidies. It is suggested that new forms of subsidy structure be considered by all governments in the GCC States. This new structure should allow the utility to be in direct relationship
with all consumers who will be charged the full economical cost of the water and electricity services provided. The government should in turn through the social welfare system pay only the needy consumers a fixed annual sum. By adopting this method the government will achieve: - Reduction in level of subsidy. - The subsidy will be directed only to those who need it, and wealthy consumers will pay full cost. - Conservation drive will be more effective. -The annual d e m a n d growth will be manageable.
8.2. Employees implications Transformation of water and electricity utilities to an independent authority or fully privatized organization will not cause a problem for security of e m p l o y m e n t of existing employees for the following reasons: - Water and electricity demand is directly related to e c o n o m i c and population growth. The population in the GCC States is growing at an average rate of 3% per year. To meet this increase in demand requires a continuous additions of a new plants and networks which in turn will require additional staff to manage and operate them. Except in Bahrain, where 90% of the employees are Bahraini nationals, other GCC states employ a large number of expatriates, who will gradually be replaced by locals as fast as they are available for training. - There is no substantial local over staffing in GCC states utilities, and the cost of such over staffing is very small. By adopting proper training programs to i m p r o v e p r o d u c t i v i t y c o u p l e d with incentives and earlier retirement for the untrainable staff, the implications on local staff should be minimal. -
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9. Ownership and funding of water and electricity utilities There are special considerations, which must be taken into account, when decisions are made about ownership and funding of utilities: - Water and electricity utilities are considered by the public as more fundamental and essential for living than other utilities such as communications and gas, whose services can be owned by the private sector. - People are convinced that the government must either own or strictly control the regulations for water and electricity utilities. In the UK the former Prime Minister Harold M a c m i l l a n opposed privatization of utilities and described it in the House of Lords as "like selling off the family silver instead of passing it on intact to the next generation" - If the utilities are privatized then it is essential that equity shares must be owned locally, and must not be totally in foreign ownership. - Funds and financial institutions, such as Gulf Investment Corporation and pension funds, are available in the GCC States to lead the way in taking equity shares in utilities. Employees and customers should be encouraged to invest in them.
10. Balancing the risks in full privatization projects The previous sections of the paper have suggested alternatives to full privatization. There is a need to examine what steps and precautions a government should take if it decides to go for full privatization. The following are some recommendations on how to equitably balance the risks between the government and the developer: - The government must first study the nature of risks involved affecting both parties, and how those risks could fairly be allocated in conformity with government
135
objectives, and with established industry practice. - Determine the levels of return on equity that are acceptable long term to both government and investors. - U n d e r s t a n d the n e e d for absolute transparent p r o c e d u r e s when inviting proposals, and evaluating them. - E n s u r e that the subsequent operating environment, including risk allocation, is clear before starting. - A c c e p t that the project will only be successful if the risks and returns to both government and investors are properly balanced and fair. - Realize the difficulty of converting the broad agreement on major legal issues into mutually acceptable wording for inclusion in agreements. - The overall costs of the water and or electricity produced by a developer must be of the same order or less than that produced by the government.
I I . Conclusions -The alternatives to full privatization, i n c l u d i n g the e s t a b l i s h m e n t of an independent owned government authority should be evaluated. - There are potential overall benefits to the government due to privatization, but there are also potential extra costs unless the government's objectives and strategies are clearly identified before starting the process. - Gradual move towards full privatization after careful preparation of all prerequisites is the key for successful results. - Equity investment in privatization should be offered in phases to citizens and institutions within the GCC States economy, and with the least foreign investment. - There must be an equitable balance of risks between the government and the developer. - The problems of high subsidies in GCC States must first be tackled.
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- Unique local problems must be identified and solutions found for them. Appropriate structures must be put in place. Local staff with management potential must be identified, trained and given the necessary exposure to similar type jobs. - F i n a l l y to be considered successful, a privatization scheme must meet the following objectives relative to the existing utility: -
Tariff has to be cheaper than the existing utility. - Delivered cost per unit must be lower. - O v e r a l l government subsidies must be lower. Customer service must be better. Employees must be better trained and paid. -
-
-
ELSEVIER
Specific privatization issues applicable to water and electricity utilities in the Gulf Cooperation Council States J a m i l S.K. A1-Alawi Business Promotion Center, P.O. Box 11811, Bahrain Tel. +973-531600, Fax. +973-537053
Abstract Most of the GCC States have attempted the path of privatization in recent years in order to relieve the financial burdens of capital expenditure from the government. A sudden rush towards privatization has resulted in unfortunate obstacles to most of the proposed privatization of utilities projects in the GCC States. The paper deals with specific economic, political and social issues that impact on the administrative and financial style of management in the GCC States which in turn has reflected on the performance and cost to the government and the public, as compared to utilities management elsewhere in the developed countries. A review of the forces which drive the GCC governments to the privatization process that took place and the obstacles which have hindered the progress towards successful privatization, with alternatives, in order to achieve the privatization goals and a high standard of service to the community at the least cost in order to support the economic and social development of the GCC States. Suggestions of steps towards a privatization process to ensure its success are also presented. The review also identifies some examples of successful and efficient independent authorities, with a comparison of the various types of utilities management, i.e. government, independent authority and private company showing the strength and weakness of each type. The social and the political implications of the privatization process have also been identified, with particular emphasis on tariffs and employees. The issue of ownership and funding of water and electricity utilities has been reviewed as most important commodity affecting the economic and social development of the country. Suggested recommendation is given towards balancing the risks if a decision is made to proceed with privatization projects. The paper concludes that successful privatization will depend on the ability of achieving better customer services and creating a base of highly trained productive employees and delivering the products at a lower cost than existing government or independent authorities.
Keywords:
Privatization; Economics
1. Utilities ownership worldwide Governments and the public all over the
w o r l d have a l w a y s l o o k e d at w a t e r as an available natural r e s o u r c e w h i c h should be provided by the g o v e r n m e n t as a free service
Presented at The Third G u l f Water Conference, Muscat, Sultanate o f Oman, 8 - 1 3 March 1997. 0011-9164/98/$ - see front matter © 1998 Elsevier Science B.V. All fights reserved PII S 0 0 1 1 - 9 1 6 4 ( 9 8 ) 0 0 2 1 0 - 0
130
J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
or at the least cost. Meanwhile, other services such as electricity, gas, and telecommunications whether provided by the government or by private companies have always been expected to be charged. The ownership of such utilities has been dependent on the political or economical conditions that existed from time to time. Until the 1980's, almost all water companies were owned by governments. The privatization process for electricity was initiated in the United States in the seventies due to the sudden increase of oil prices and the drive for more efficient plants and the lack of government funds to invest at that time. This process was followed by Conservative British governments in the early eighties with the objectives of reducing national debt; increasing efficiency and establishing competitive markets for utilities. Other public utilities have followed this pattern in the United States and the United Kingdom. The end results of privatization differ from place to place. In some countries the objectives have been achieved, whereas in others they have not. In Britain the cost of these utilities have risen very sharply, mainly due to the large dividends paid to shareholders and the exorbitant salaries and bonuses paid to executives. Poor service to customers has resulted from the major cuts in staff numbers employed, and was widely criticized in the UK. Elsewhere in Europe and other parts of the world, privatization of utilities has taken a longer period of time and more careful consideration. The threat of privatization has been sufficient for utilities in all countries to improve efficiency and reduce staff numbers. The success of privatization in the developed countries was due to the existence of well developed capital markets and availability of sufficient private funds to absorb the share offerings.
2. U t i l i t i e s o w n e r s h i p i n t h e G C C S t a t e s
The history of the GCC States ownership of utilities is not different than in the rest of the world, which have all gone through the private and state owned stages. The present status of water and electricity utilities is as follows: - Kuwait, Bahrain, Qatar and UAE (except Dubai) are fully government managed and owned. - Saudi Arabia is a mixture of government owned authorities and private electricity companies with the government as the majority shareholder. Dubai in UAE has established a company for water and electricity. Oman has awarded a contract for a water and electricity station on a BOT basis in 1995. Utilities are government owned and managed.
3. G e n e r a l r e v i e w o f r e c e n t p r i v a t i z a t i o n the GCC States
in
Most of the GCC States have attempted the path of privatization in recent years in order to: - R e l i e v e the governments of financial burdens of capital expenditure. - Create a vigorous and expanding private sector. - Stimulate the national e c o n o m y by adopting privatization of existing entities as a quick and easy solution. A sudden rush towards privatization has resulted in unfortunate obstacles to most of the proposed projects of privatization of utilities in the GCC. Some of the reasons attributed to these obstacles are: - Not enough thought and preparation have been made by the governments in defining their long term objectives of privatization. - International consultants and developers tried to impose privatization structures that worked elsewhere in the world, but were not suitable for the GCC States.
J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
131
- High levels of subsidies for water and electricity. - Absence of real competition has resulted in very high unit costs proposed by developers of independent electricity and water projects. - The size of the utilities does not justify fragmentation of production transmission and distribution with a number of developers operating systems in parallel to existing utility. - Scarcity of water in this area of the world, and the requirement for desalination processes dictate the need for a combined planning and operation of water and electricity utilities in order to maximize efficiency and reduce overheads. - Unique local problems such as legislation, risks, lack of local knowledge etc.
The other issues to be considered include the need to improve the performance of the organization and gradual restructuring of the tariff before embarking on privatization. Finally the most import requirement is to develop highly liquid capital markets to manage and absorb substantial share offerings. In order to avoid abuse by private monopolies and to transfer the maximum benefits from privatization to the customers, the governments would need to: - Establish a sound system of regulation to monitor tariff charges and performance. - Agree on an adequate rate of return on capital to attract new capital for a continuously expanding system, while meeting government's overall financial and other objectives.
Major similar independent power plant (IPP) schemes in various developing countries are being reconsidered due to similar reasons.
As shown from the experience of the industrialized countries when they implemented privatization, whilst the above pre-requisites cannot be achieved quickly or easily. It is not a quick process but this does not mean that it cannot be done. Privatization can be implemented in stages as follows: - The conversion of the existing water and electricity organization to an independent government owned authority, who would take over 100% of the assets. - T h e authority should be given all the necessary resources and well defined objectives in order to establish a sound management structure, and put in place a good accounting system, which can provide proper commercial profit and loss accounts on a timely and regular basis. - The government should establish a clear financial relationship by not subsidizing any services to the authority. At the same time the government must enter into a clear agreement with the authority to cover the cost of subsidies to the public, in order that the authority can be put in a healthy financial situation. - T h e Authority should propose to the government to restructure tariffs without an
4. S u g g e s t e d steps t o w a r d s full p r i v a t i z a t i o n in the G C C States
The present status of all utilities in the GCC States reflects a domination of government decisions irrespective of the type of management and ownership. This situation has led to inefficient operations, poor management and uncontrolled growth in demand due to very high levels of subsidies. If a decision is to be made towards privatization, then the government should always consider the total system of production, transmission and distribution of combined water and electricity organizations in order to avoid high overheads and efficient utilization of high capital plant and fuel. In some cases, such as Saudi Arabia, privatization of production and transmission alone can be justified. Meanwhile, the size of the systems in the other GCC State, cannot support many utilities running small IPPs.
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J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
immediate significant impact on customers in order to control and manage growth in demand. - The authority should develop a comprehensive 10 year business plan, giving details of all capital and revenue expenditures with projections of all costs and incomes. The plan should include realistic targets for i m p r o v e m e n t s in efficiencies per sector; staff training and early retirement benefits as well as long term proposals in order to eliminate direct subsidies. - The authority should be fully independent; raise its own moneys; reward its own staff for extra efforts and results; and be responsible for improving efficiency and reducing costs while at the same time providing better customer service. - The authority should works on the basis that the cost per unit delivered to its customers shall not exceed the equivalent economic cost prior to its establishment. After a few years of successful operation of the authority when all the privatization prerequisites have been achieved, it is only then that the local private sector should be invited to take up shares gradually at a rate which the market can absorb. In most cases full privatization of generation, transmission and distribution is not the ideal solution. T h e r e f o r e , the establishment of an authority could be a better solution. This is especially true if it is managed properly, and the Authority's results match those of a private company.
5. F o r m s utilities
of management
structure
As can be seen from the above comparison (Table 1), the independent authority form of management shares most of the above factors with the private company except for two, the political and social i n f l u e n c e and the contribution to the economical activities of the state which is a matter of government policy.
6. F o r c e s w h i c h drive p r i v a t i z a t i o n
Privatization in different countries can be driven by a combination of political and financial reasons. The benefits of privatization as seen by all governments are a mixture of the following factors: - Companies in the private sector do not require g o v e r n m e n t guarantees when borrowing to finance the capital programs, and are not c o n s t r a i n e d by the government's budget limitations. - Private utilities companies are run on the basis of efficiency, therefore, the unit cost would be c h e a p e r than that from government owned utilities. - The listing of utility companies presence in the stock e x c h a n g e i n c r e a s e s the economical activities of the country by promoting the d e v e l o p m e n t of capital markets, and the spread of share ownership. - The sale of government owned assets in a utility allows the government to utilize the money in other needed projects and reduce the financial burden, particularly in a period of low oil revenues and very high level of expenditure in water and electricity sector.
for
The following comparison illustrates the differences between the various forms of management discussed in this paper. - Government management - Independently managed government authority - Private company management.
7. S o m e e x a m p l e s public utilities
of efficient
successful
These are some e x a m p l e s of very successful utilities, providing high level efficient services to their customers: - Tunisia Electricity & Gas Authority - Tunisia Water Authority
133
J.S.K. AI-Alawi / Desalination 120 (1998) 129-136
Table 1 Comparison between forms of utilities management structure Factors
Government
Authority
Private
Political and social influence Efficiency Labor policy Salaries and benefits Availability of funds for investments Government guarantees Contribution to economical activities Tariff adjustments Accounting system
Major Low Inflexible Inflexible Restricted Full Partial Restricted Government
Partial Medium/high Flexible Flexible Unrestricted Not required Partial Unrestricted Commercial
Minimum High Flexible Flexible Unrestricted Not required Full Unrestricted Commercial
- Jordan Electricity Authority - Jordan Water Authority - Singapore Public Utilities Board (PUB). The Jordanian Government has decided to gradually privatize the electricity sector by converting the authority to a company jointly owned by the government and the private sector. PUB covers electricity, water and gas supplies in Singapore, and is acknowledged to be highly efficient in operations, and provides excellent levels of customer care. It is financially sound, receives no government subsidies, and is totally independent in raising m o n e y for capital d e v e l o p m e n t and in making management appointments. PUB is a model of the high efficiencies which can be achieved by a government owned utility, if it is given the appropriate working relationship with the government and the freedom to act commercially. Such a model could be an ideal model for the GCC States to follow.
8. Social and political implications of privatization The sensitivity to privatization varies from country to another, and is also dependent on the economic and social structure of the country.
Water and electricity utilities are looked at by the government and public as important services due to the vital needs of their products, which no one could survive now a day without. Therefore, the public opinion in the GCC States feels that such utilities should either be monopolized by the government or owned by an open public company, and not be foreign owned. The measure of success of any fully privatized utility will be dependent on the following factors: Tariff Has to be cheaper than the existing utility. Cost per unit Has to be lower than the existing utility. Government subsidy Has to be lower than the existing utility. Quality of the service Has to be better than the existing utility. Employees H a v e to be better trained and paid than the existing utility. If any of these factors are not achieved, then the question will be raised "Why should we change from a government monopoly to a private monopoly". 8.1. Tariff implications
The governments of the GCC States have decided on various methods of oil wealth
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distribution. Among them was the decision to subsidize the utilities services, to the extent that some states provide these services for free, this was affordable up to a certain limit and with reasonable usage. The level of subsidies has undergone various changes since the 70s dependent on the political, social and the economical status of each government. Providing adequate supply of water and electricity services with the challenge of the uncontrolled annual demand, in an industry that requires substantial investment and high operating cost, has created major financial difficulties for all the GCC States due to the unavailability of funds to be invested at a time of declined oil prices. The existing subsidy structure should be reconsidered urgently by all GCC Governments, in order to establish clear cut policies and put in place higher tariffs before any attempt is made to consider privatization. The gap between the total costs of delivering these services to the consumers, and the tariffs charged is very high, and this results in massive subsidies direct and indirect. Direct subsidies in some GCC States are as high as 80% of the costs. The indirect subsidies are a combination of:
- Gas and oil being supplied at prices much below world market prices. - No interest charges made for money used on capital projects. - Free or nominal charges for services from other government agencies. Unfortunately, subsidies are generally given to all customers, even those with a high level of disposable m o n e y and who individually use very large quantities of water and electricity. As a result the wealthy customers receive the highest financial support in the form of subsidies. It is suggested that new forms of subsidy structure be considered by all governments in the GCC States. This new structure should allow the utility to be in direct relationship
with all consumers who will be charged the full economical cost of the water and electricity services provided. The government should in turn through the social welfare system pay only the needy consumers a fixed annual sum. By adopting this method the government will achieve: - Reduction in level of subsidy. - The subsidy will be directed only to those who need it, and wealthy consumers will pay full cost. - Conservation drive will be more effective. -The annual d e m a n d growth will be manageable.
8.2. Employees implications Transformation of water and electricity utilities to an independent authority or fully privatized organization will not cause a problem for security of e m p l o y m e n t of existing employees for the following reasons: - Water and electricity demand is directly related to e c o n o m i c and population growth. The population in the GCC States is growing at an average rate of 3% per year. To meet this increase in demand requires a continuous additions of a new plants and networks which in turn will require additional staff to manage and operate them. Except in Bahrain, where 90% of the employees are Bahraini nationals, other GCC states employ a large number of expatriates, who will gradually be replaced by locals as fast as they are available for training. - There is no substantial local over staffing in GCC states utilities, and the cost of such over staffing is very small. By adopting proper training programs to i m p r o v e p r o d u c t i v i t y c o u p l e d with incentives and earlier retirement for the untrainable staff, the implications on local staff should be minimal. -
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9. Ownership and funding of water and electricity utilities There are special considerations, which must be taken into account, when decisions are made about ownership and funding of utilities: - Water and electricity utilities are considered by the public as more fundamental and essential for living than other utilities such as communications and gas, whose services can be owned by the private sector. - People are convinced that the government must either own or strictly control the regulations for water and electricity utilities. In the UK the former Prime Minister Harold M a c m i l l a n opposed privatization of utilities and described it in the House of Lords as "like selling off the family silver instead of passing it on intact to the next generation" - If the utilities are privatized then it is essential that equity shares must be owned locally, and must not be totally in foreign ownership. - Funds and financial institutions, such as Gulf Investment Corporation and pension funds, are available in the GCC States to lead the way in taking equity shares in utilities. Employees and customers should be encouraged to invest in them.
10. Balancing the risks in full privatization projects The previous sections of the paper have suggested alternatives to full privatization. There is a need to examine what steps and precautions a government should take if it decides to go for full privatization. The following are some recommendations on how to equitably balance the risks between the government and the developer: - The government must first study the nature of risks involved affecting both parties, and how those risks could fairly be allocated in conformity with government
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objectives, and with established industry practice. - Determine the levels of return on equity that are acceptable long term to both government and investors. - U n d e r s t a n d the n e e d for absolute transparent p r o c e d u r e s when inviting proposals, and evaluating them. - E n s u r e that the subsequent operating environment, including risk allocation, is clear before starting. - A c c e p t that the project will only be successful if the risks and returns to both government and investors are properly balanced and fair. - Realize the difficulty of converting the broad agreement on major legal issues into mutually acceptable wording for inclusion in agreements. - The overall costs of the water and or electricity produced by a developer must be of the same order or less than that produced by the government.
I I . Conclusions -The alternatives to full privatization, i n c l u d i n g the e s t a b l i s h m e n t of an independent owned government authority should be evaluated. - There are potential overall benefits to the government due to privatization, but there are also potential extra costs unless the government's objectives and strategies are clearly identified before starting the process. - Gradual move towards full privatization after careful preparation of all prerequisites is the key for successful results. - Equity investment in privatization should be offered in phases to citizens and institutions within the GCC States economy, and with the least foreign investment. - There must be an equitable balance of risks between the government and the developer. - The problems of high subsidies in GCC States must first be tackled.
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- Unique local problems must be identified and solutions found for them. Appropriate structures must be put in place. Local staff with management potential must be identified, trained and given the necessary exposure to similar type jobs. - F i n a l l y to be considered successful, a privatization scheme must meet the following objectives relative to the existing utility: -
Tariff has to be cheaper than the existing utility. - Delivered cost per unit must be lower. - O v e r a l l government subsidies must be lower. Customer service must be better. Employees must be better trained and paid. -
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