GCC governments are seeking to privatise select state-owned assets and industries as part of broader economic development agendas. Privatisation can create various benefits, such as fuelling growth, making government assets more competitive, attracting foreign investment, and accelerating environmental, social, and governance (ESG) improvements.
Yet governments that lack the right capabilities and processes often find privatisation initiatives complex and encounter many delays. The 10 imperatives below, based on lessons learned from previous programmes, can help governments develop and execute programmes successfully.
These imperatives are not the “be all and end all” of privatisation, but they are among the most important. These imperatives fall into three main phases of privatisation: planning, execution, and completion.
Planning
First, governments should create the regulator role early on. Regulators are critical to the success of privatisation, as they are often the first point of official contact for any private-sector investor or owner. Accordingly, governments need the right institutional setup and capabilities to provide clear, predictable oversight and governance.
Second, governments should introduce measures to protect citizen and state interests in advance. For instance, governments can stipulate that they will freeze, or even unwind, a privatisation initiative if the private-sector investors fail to satisfy market demand or if they engage in unfair competitive practices. Governments can also allow new participants to enter the market if conditions warrant, even if the private investors have received an initial exclusivity period.
Third, governments should plan a long-term, healthy competitive market structure—long before the actual sale of any assets. Promoting competition ensures that no private investor will have monopolistic power. Sophisticated models can weigh metrics such as operational capacity and revenue to determine the appropriate number of private-sector companies in a particular sector.
Execution
Fourth, governments should institute pragmatic programme governance. Governments need joint committees that encompass senior representatives and decision-makers from key ministries and authorities. Joint committees should meet regularly to provide strategic guidance, support the government teams actually implementing privatisation, and ensure that required decisions are made on time.
Fifth, governments need to employ effective management of change and communication. Privatisation programmes involve numerous stakeholders, each with their own perspective, interests, and expectations.
The government’s privatisation teams therefore need to ensure that all relevant stakeholders are aware of the latest programme updates and changes. Similarly, governments should inform consumers that privatisation will benefit them individually, not just be good for the broader economy.
Sixth, governments should provide potential investors with transparent information and access to facilities, assets, and the management teams of the public-sector entities. Investors need all the necessary information.
That entails full, meticulous documentation and due diligence reports — including financial, legal, technical, and tax reports. That also means organised visits to company sites, extensive meetings with the management team, and opportunities to ask questions. There should be continuous communication about the transaction.
Seventh, governments should be clear about future subsidy changes. Governments should devise sector-specific business models for their target sectors. These will govern the mechanism of subsidies in the post-privatisation era as a means of providing private investors with a clear path to profitability. Some governments will try to alter subsidies over time, but that may not be feasible in all situations. For investors, the most important elements are clarity from governments and visibility about the future direction of subsidies.
Completion
Eighth, governments should reduce or eliminate the risk to investors from future official decisions. For many private investors, the value of privatised entities lies less in the underlying assets than in future revenue streams from these assets—particularly for heavily regulated sectors such as utilities and public transport. For this reason, governments must be as clear as possible and as soon as possible about future laws, policies, and regulations that could affect investors’ business models.
Ninth, governments should ensure a smooth transition for employees. The government and private investors need to set the expectations of employees proactively during the transition. That means informing them about their likely career paths, compensation, changes in responsibilities, and any other relevant effects. Governments also need laws and regulations that define the treatment of employees working in sectors subject to privatisation.
Tenth, governments need to monitor enterprises continuously after the sale. Following the transaction, the government should confirm that privatisation objectives are met—and be prepared to step in if not. In the short term, the government needs to ensure that competition in the sector remains fair and that customers experience consistent (or improving) service levels and pricing. In the long term, governments need to monitor aspects such as economic development, job creation, and foreign investment.
The complex and time-consuming nature of privatisation programmes can be daunting, but governments can avoid many common pitfalls by following these time-tested imperatives.
Hilal Halaoui, Salim Ghazaly, Roger Rabbat, partners, and Ousama El Ghazzi, principal, at Strategy& Middle East, part of the PwC network
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