Value-added taxes; reduced energy and food subsidies; increased fees for entry visas and residence permits; consolidated government departments; tourism taxes; deferred projects; sin taxes on soft drinks and tobacco – all sources of additional revenue towards balancing fiscal budgets when a primary source, ie, crude, suffers a double hit – lower prices per barrel as well as lower global demand.
Borrowing takes centre stage.
Increased borrowing can result in ratings’ agencies downgrading sovereign ratings as they project deficits between oil revenues and required expenditures.
With rating downgrades, borrowing becomes more expensive as higher interest must be offered to continue to attract global investors.
A global pandemic hits forcing increased spending support.
So what else can be done?
One solution is the privatisation of government-owned assets. Hospitals, schools, utilities, desalination plants, telecoms, real estate, ports, roads, social housing, correctional facilities, airports, and many other government assets can be sold to raise funding.
Privatisation programmes typically spur much debate – how can the ‘crown jewels’ be sold to a capitalistic entity, particularly a foreign entity?
The short answer is through a number of privatisation structures which can allay these concerns.
One of the largest privatisations took place in December 2019 with the partial sale (1.5 per cent) of Saudi Aramco, the world’s second largest owner of crude oil reserves at an asset valuation of $1.7 trillion, netting around $26 billion to the Saudi government.
The government did not give up control as they remain the overwhelming majority. Governments can also privatise assets through term-limited ‘concessions’, as is the case with Bahrain’s Khalifa Bin Salman Port.
In November 2006, the government signed a 25-year concession agreement with the Netherlands-based APM Terminals, whereby APM would operate the port over the term and pay royalties and other fees to the government.
The privatisation of government assets is not an easy process. Conflicts of interest, valuation expectations, legal impediments, social and employment considerations, and public opinion create significant barriers.
Think of government schools that offer free or heavily subsidised tuition – how can they be made attractive to private owners?
One answer is through off-take agreements, where the government guarantees a minimum purchase of services from the now-privatised entity for a specified period of time.
Especially common with utility companies, where governments buy a percentage of the utility’s output over say a 10-year period.
The benefits – no initial capital outlay as the utility is built, owned and operated (BOO) by a private company, potentially saving the government hundreds of millions in cash flow that can be directed elsewhere.
Bahrain used a similar structure for its Al Ezzel Power Plant and similar programmes can also be structured under ‘build, own, operate, and transfer’ (BOOT) where the asset is held under a form of leasehold structure that eventually transfers back to the government.
Pushing ahead with privatisations in the region seems inevitable.
Done transparently they can release billions of dollars and encourage the development of infrastructure and jobs.
Bahrain’s establishment of the Tender Board in 2003 and the National Audit Office in 2011 safeguards transparency and accountability – key pillars for privatisations.
Furthermore, reducing the role of government from operator to regulator will relieve conflicts of being both operator and regulator, and create competition, reducing prices and delivering better service to users.
Finally, using IPOs, where ownership of these assets is offered not just to institutional operators but also to any individual wanting a share in the country’s crown jewels, deepens the country’s capital markets and assists in the distribution of wealth to the wider population creating participation and increased support for such programmes.
The author is head of investment banking at SICO
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