Gulf Cooperation Council States Need To Strengthen Anti-trust Laws Prior To Privatization

18 June 2016 Kuwait

For years, governments in the Gulf Cooperation Council (GCC) states had managed to maintain GDP growth and fend off social discontent by lavishly dispensing oil revenues into infrastructure projects, supporting loss-making government sector ventures and ‘creating’ jobs in the public sector for young unemployed nationals. But the slump in oil prices since mid-2014, which led to a huge fall in oil revenues and subsequent budget deficits and cuts to spending, have made governments realize that the 'business as usual' model will no longer work.

Most GCC states rely on oil as their main source of export and fiscal revenue. But with current low prices and the prospects of oil regaining its luster in the immediate future appearing increasingly bleak, governments in the six-nation bloc are looking at ways to diversify their economy and wean the local market from its near-total reliance on oil revenues. New economic diversification plans being implemented are intended to not only reduce these countries’ exposure to the volatility and uncertainty of global oil markets, but also to create a strong non-oil economy. Diversification plans aim to increase the role of private sector in the economy, improve productivity, create jobs and ensure growth that will sustain these states when oil revenue inevitably begins to dwindle in the future.

In line with their diversification plans, GCC states are introducing, or have put in place, a slew of economic, legal and financial reforms designed to strengthen the business environment, including liberalizing trade and foreign direct investment (FDI), developing infrastructure, stimulating the private sector, and privatizing, or partially-privatizing, many state-owned enterprises.

As part of this privatization drive, a string of state-asset sales are taking place across the region. Last year, Oman’s finance minister revealed, without giving any specific details, that the sultanate would privatize three state-owned companies in 2016. In April of this year, Saudi Arabia announced its 15-year development plan that includes privatization of Saudi state assets Among the state-assets up for sale are an initial public offering (IPO) for shares in oil giant Saudi Aramco and all 27 airports in the country. Meanwhile, Kuwait has been trying to sell-off its national carrier, Kuwait Airways, in an attempt to make the airline competitive and profitable. However, the 'on-again, off-again' privatization process has dampened enthusiasm among many potential buyers.

But amid all this fervor for selling off state-assets, one should not forget that there are some inherent dangers in unbridled privatization. In many parts of the world, where privatization, or partial privatization, of multiple public sector ventures have taken place, rampant corruption has been discovered. Government employees with vested interests have been found to engage in corrupt practices that wreck the intended purpose of privatization. In exchange for bending or breaking rules, these employees were found to have gained lucrative personal favors, including financial or non-financial inducements, from potential private buyers.

Also, following privatization, businesses were seen to engage in anti-competitive behaviors such as price-fixing, predatory-pricing, bid-rigging or collusions that lead to monopolistic ventures. Though corruption was once regarded as an offense relevant predominantly to the government sector and anti-competitive behavior was limited to the private sphere, there is growing evidence now of an unholy nexus existing between these two economic crimes. Ensuring an open and competitive economy calls for greater vigilance and stronger anti-trust laws to regulate the behavior and organization of business entities and criminalize corruption and anti-competitive practices in the private and public sector.  

Though most Gulf countries have some form of anti-trust and anti-bribery laws in place, they are largely outdated and lack an overarching framework needed to tackle some of the corruption and anti-competitive practices prevailing today. Experts warn that unless GCC states strengthen their anti-trust laws and make sure the privatization of their state assets takes place in a transparent manner, they risk increasing corruption in the very industries they hope to make more competitive.

Among other things, new and stronger anti-trust laws should stop businesses from tacit collusions that create monopolies and market allocations that stifle competition. They should, penalize improper book-keeping, which allows businesses to hide corrupt transactions, and establish public registries that reveal detailed and transparent information on corporate ownership. Any vibrant economy depends on transparency, fair competition and open markets; lack of these market characteristics leads to consumers, both people and businesses, ending up with higher prices, lower quality products and services, and restricted choices, as well as an increase in inefficiency and a decrease in productivity and innovation. While privatization is great news for the GCC economies, greater news would be the implementation of anti-trust laws that stop corruption and anti-competitive behavior that affects both people and businesses.

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