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Privatization Strategy for Saudi Arabia

The Supreme Economic Council, under the chairmanship of Crown Prince Abdullah bin Abdul Aziz., approved the privatization strategy for Saudi Arabia which comprises eight basic objectives, each of which requires the adoption of a number of policies. The objectives are focused on improving the capacity of the national economy and enhancing its competitive ability to meet the challenges of regional and international competition. The strategy is also aimed at encouraging private sector investment and effective participation in the economy based on commercial principles, expanding the ownership of productive assets by Saudi citizens, encouraging local investments of domestic and foreign capital, increasing employment opportunities and optimizing the use of the national work force, ensuring the continued equitable increase of individual income, providing services to citizens and investors in a timely and cost-effective manner, rationalizing public expenditure and reducing the burden of the government budget by giving the private sector opportunities to finance, operate, and maintain certain services that it is able to provide, increasing government revenues from :returns on participation in activities to be transferred to the private sector and monies obtained, for example, from granting concessions or the sale of government properties. The strategy defines a number of administrative and implementational procedures related to privatization, whereby the Economic Council will be responsible for supervising privatization programs and monitoring their implementation. Among the top priorities of Privatization Committee will be determining and recommending the public establishments, projects, and services that are to be privatized, in addition to determining the regulatory and implemental procedures for the privatization process, which will be defined in the contracts for managing, operating, leasing, financing, and selling all or part of the assets in question. The strategy clarifies the steps that are to be taken, as described in detail below.

Chapter 1 - Privatization Objectives and Policies

Cabinet Decree 60 of 1/4/1418 A.H. [August 6, 1997] established eight objectives of privatization in Saudi Arabia and the principles to be taken into account in order to achieve these objectives. Cabinet Decree No. 257 of 11/11/1421 A.H. [February 5, 2001] states that the Supreme Economic Council shall be responsible for supervising the privatization program and monitoring its implementation, in coordination with the competent government agencies and for determining which activities are to be privatized. A list of the activities to be privatized shall be issued by decree of the Cabinet, and the Supreme Economic Council shall develop a strategic plan and timetable for this purpose.

A. Principles for preparing the strategy

Based on the foregoing, the privatization strategy for Saudi Arabia was prepared in accordance with the provisions of Cabinet Decree No.60 of 1/4/1418 A.H. [August 6, 1997] to ensure a continued increase in the share of the private sector and its expanded participation in the national economy. The best means for achieving this include transferring certain types of economic activity to the private sector, expanding the participation of the private sector in economic development, and enabling it to carry out its investing and financing role in accordance with the national development plan.

The general objectives and strategic principles of the Seventh Development Plan, issued by Cabinet Decree No. 58 of 28/3/1420 A.H. [July 13, 1999] defined the eighth objective as "increasing the participation of the private sector in activities related to economic and social development." The third strategic principle is "to continue the policy of enabling the private sector to carry out many economic and social functions, provided that this results in real benefits in terms of reduced expenditure, good performance, and employment opportunities."

B. Definition of Privatization

Privatization is the process of transferring the ownership or management of public establishments, projects, and services from the government sector to the private sector, relying on market mechanisms and competition, through a number of methods including contracts for managing, operating, financing, or selling all or part of the government's assets to the private sector.

C. Privatization objectives and policies

Cabinet Decree No. 50 of 1/4/1418 A.H. [August 6, 1997] defined the objectives of privatization, each of which will be reviewed and discussed prior to determining the policies needed to achieve these objectives, with due consideration for complementarity and avoiding redundancy, as described below:

Objective 1: Improving the capacity of the national economy and enhancing its competitive ability to meet the challenges of regional and international competition. The capacity of the economy can be' strengthened by subjecting projects to market forces. Enhancing competitiveness is closely linked to the general strategy of developing the private sector in Saudi Arabia. Important measures taken so far to create a suitable climate for investment, such as developing the capital and labor markets, will help achieve this objective. It is important that all enterprises in a single sector be required to operate under the same circumstances of competition.

Objective 2: Encouraging private sector investment and effective participation in the national economy, and increasing its share of domestic production to achieve growth in the national economy. A mature and strong private sector is essential for Saudi Arabia, as the private sector is able to achieve a comparative advantage and provides a better opportunity for diversifying the economic base and moving away from the dependence on oil. The private sector and direct capital investments towards the more lucrative and commercially sustainable sectors. In order to expand the private sector, privatization must adopt the management methods used in the private sector, based on commercial principles, even when an entity is converts into an enterprise in which the government maintains the majority share. The privatization program must also include simplification of procedures to encourage investment in the private sector and ensure that privatized projects are able to achieve growth.

Policies necessary to achieve this objective

1, Privatization of public projects, enterprises, and services that are appropriate for private sector participation and encouraging competition.

2. Take steps to ensure that privatization results in increased direct investments that are self-sustainable.

3. All privatized projects should be managed wholly or partially an the basis of commercial principles.

4. Accelerate the review of all regulations and procedures related to private sector activities in order to create a suitable environment, including the simplification of procedures and removal of obstacles.

Objective 3: Expanding the ownership of productive assets by Saudi citizens. Privatization can be an effective means of expanding the participation o£ Saudi citizens in the ownership of productive assets in public enterprises and projects, by using the method of public subscription in the privatization which is considered the most important privatization method for developing the domestic capital market.

Policies necessary to achieve this objective

1. Encourage a large number of citizens to participate in various types of activities transferred to the private sector by using the privatization method of public subscription whenever possible.

2. Use clear and transparent procedures to implement an privatization activities.

3. Use various media to promote the objectives for privatization and the benefits of private sector participation for the national economy and public welfare.

Objective 4: Encourage local investments of domestic and foreign capital. Privatization reflects the government's commitment to economic reform and projecting a positive image on attracting foreign investments. Privatization also helps develop the capital market, create new mechanisms for providing capital and attracting domestic capital outside the country, in addition to foreign capital and domestic savings of residents.

Policies necessary to achieve this objective:

1. Facilitate the participation of foreign investments in the ownership of projects and various types of specialized productive activity, in accordance with the relevant regulations.

2 Continuous development of the financial market to provide opportunities for additional domestic and foreign investments, providing additional channels to attract savings.

Objective 5: Increasing employment opportunities, optimizing the use of the national work force. and ensuring the continued equitable increase of individual income. Developing the nation's human resources is a basic element of national development; therefore, the privatization program attaches particular importance to it, including Saudiization, by developing appropriate regulations and incentives to encourage the private sector to hire Saudi citizens. The privatization of certain projects revealed that the number of employees was larger than the number actually needed. In most cases employees can be retrained or their skills can be enhanced. The potential growth of privatized projects and the opening of sectors to competition also helps to deal with the problem of excess staff. In the short term, privatized enterprises can agree to keep their employees until they study their future expanded requirements to meet increased demand for their services, which will reveal their actual requirements for their employees. Programs can also be developed to deal with excess staff by training or retraining them, or giving them ownership in the shares of the privatized enterprise as a portion of their compensation.

Policies necessary to achieve this objective:

1. Take steps to ensure that the privatization process includes the establishment of new direct investments to help assimilate the national workforce.

2. Enhance the national workforce, increase rates of Saudization, and provide opportunities for training the national workforce to meet expansion requirements.

3. Ensure fair treatment for redundant staff resulting from transferring activities to the private sector.

Objective 6: Provide services to citizens and investors in a timely and cost-efficient manner. Privatization, particu1arly of projects that have monopoly concession rights, may lead to increased prices and a reduction in the quality of services, because some enterprises (services) receive government subsidies prior to being privatized. As this is an extremely important issue, an independent regulatory agency should be established to deal with such matters.

Policies necessary to achieve this objective:

1. Establish an independent regulatory agency to deal with the social, regulatory, and supervisory issues as related to protecting the interests of consumers, such as the provision, quality, and cost of services.

2. Establish a systematic method for determining the fees for services, taking into consideration the cost, that will result in continuous provision of services and financing for the investments of the enterprises. The government may provide support when necessary.

Objective 7: Rationalizing public expenditure and reducing the burden of the government budget by giving the private sector opportunities to finance, operate, and maintain certain services that it is able to provide. The government budget is expected to benefit from reduced allocations for operating expenditures resulting from the privatization of public establishments or transferring the management of public utilities to the private sector by means of contracts for management, leasing, construction, and operation by the private sector.

Policies necessary to achieve this objective:

1. Evaluate projects for basic facilities and public utilities to determine the feasibility of transferring the management to the private sector, while preserving the government's role in providing certain necessary services.

2. Suspend any additional government investments for public projects after it has been agreed to privatize them, with the exception of any necessary projects, required maintenance, and the costs of their financial, legal, and operational reorganization in preparation for selling them.

Objective 8: Increasing government revenues from returns on participation in activities to be transferred to the private sector and monies obtained, for example, from granting concessions or the sale of government properties. The government aims at achieving positive financial results from privatization, either from proceeds from the sale of an entire public project or participation in the profits and proceeds from its partial ownership in a project. In general, participation in the profits of a project while maintaining partial ownership in it provides better revenue to the government resulting from an increase in the value of the remaining shares it holds owing to the improved performance of the privatized project. in addition to the government’s share of profits distributed among shareholders.

Policies necessary to achieve this objective:

1. Make public projects that are to be privatized open to competition.

2. Develop mechanisms to ensure that the government obtains continued income from privatized projects, when possible.

3. Develop procedures to ensure that the government obtains an appropriate return from the sale of public enterprises to the private sector.

D. Administrative and implementational arrangements for the privatization strategy

Cabinet Decree No. 257 of 11/1l/142l A.H. [February 5, 2001] states that the Supreme Economic Council shall be responsible for supervising the privatization program and monitoring its implementation in coordination with the competent government agencies, and for determining which activities are to be privatized, in addition to the recommendations of other government agencies. A list of the activities to be privatized shall be issued by decree of the Cabinet, and the Supreme Economic Council shall develop a strategic plan and timetable for this purpose. The agency responsible for supervising each activity to be privatized shall prepare an implementation program based on the required studies. The procedures and measures necessary to complete the privatization process shall be implemented in accordance with the pertinent regulations and with Decree No. 6/22 issued by the Supreme Economic Council on 12/5/1422 A.H.[August 27, 2001] stipulating the reorganization of the Privatization Committee within the Supreme Economic Council, under the chairmanship of the Council's Secretary-General, with members representing the Ministry of Finance and National Economy, the Ministry of Industry and Electricity, the Ministry of Commerce, and the Ministry of Planning, in addition to two members from the Advisory Board for Economic Affairs. In order for the Committee to carry out the required activities and tasks permitting the Council to fulfill its duties and responsibilities with respect to privatization, it shall do the following:

1. Recommend a privatization strategy to be approved by the Supreme Economic Council.

2. Recommend the public establishments, projects, and services to be privatized and establish the priorities.

3. Define the regulatory and implementational framework for the privatization process.

4. Monitor and supervise the implementation of privatization activities.

Chapter 2 - Privatization Methods and Regulations

A. Methods of privatization

Methods of privatization include a number of tools that can be used to privatize public establishments, projects, and services, taking into consideration a broad definition of the privatization process. These methods include transfer of ownership, [contracts for] management operation, leasing, or financing, sale through public subscription, or sale to a principal investor. Each method has its own effects, regulations, and factors that contribute to its success or failure. Generally, more than one method is used to achieve the targeted objectives. It is important to choose the method of privatization in accordance with these objectives and the best means of achieving them. Various methods of privatization are described below.

1. Management contracts

With this method, responsibility for managing, operating, and developing an entity is transferred to a contractor or investor from the private sector for an agreed-upon period of time and amount of money. This method is generally used for cases that require high levels of specialized experience in management, operations, and marketing, or when the government has a large investment in the project's assets and prefers to keep the investment rather than sell it; that is, ownership of the assets is not transferred to the private sector. Although the contractor takes over the tasks of monitoring and daily supervision of operations, he does not assume any commercial risks (operating losses, if they occur), which are borne by the owner (the government). Among the negative aspects of this method is the possibility of the contractor's misusing the project's assets. Most management contracts stipulate payment of a fixed sum to the contractor in exchange for specific services, regardless of profitability, and this is not a sufficient incentive for the contractor to maintain the assets in good condition and improve his performance.

2. Leasing Contracts

Leasing contracts are agreements between the government and the private sector whereby the latter provides the government entity with administrative and technical expertise for a specific period of time, in exchange for an agreed-upon financial remuneration. The private sector investor leases and uses the assets or facilities owned by the government, and the contract determines the amount to be paid to the government as well as the responsibilities of

each party with respect to the other. The distinguishing feature of leasing contracts is that the investor assumes all the commercial risks of using the assets, which is an incentive for him to reduce expenditures and maintain the assets in good condition. The investor is also obliged to

maintain and repair the assets he uses, or to contribute to the cost of doing so, in accordance with an agreed-upon timetable. The amount to be paid by the private sector is generally linked to the condition of the assets and the expected revenue from their exploitation. Under such contracts, the investor appoints the people who work with him, including current employees of the government entity, as agreed upon in the leasing contract.

3. Financing contracts

Financing contracts are a more advanced form of privatization compared to earlier methods, whereby the investment assures responsibility for managing the capital, operating, and investment expenditures (as opposed to the leaseholder). This method is generally considered superior to leasing contracts, but implementation is more complicated owing to the large amount of financing needed for expansion obligations. There are several kinds of financing contracts, including lease-build-operate(LBO), build-transfer-operate (BT, BTO), build (own)-operate-transfer (BOT, BOOT), buy-build-operate (BBO), and buy-own-operate (BOO) (attachment). If one of these types of financing contracts is an option, it must be carried out in accordance with the following:

1. An appropriate regulatory and legal framework must be provided to guarantee the rights of all parties (finance, government, consumer).

2. The project must be made open to general competition in which qualified parties from specialized entities be invited to participate, whether they are from inside or outside Saudi Arabia.

3. The government shall not offer sovereign guarantees unless absolutely necessary.

4. Sale contracts

a. Direct sale to the private sector through public subscription

This method is adopted by entities that are characterized by stability, continuity of activities, a sound financial position, and commercial feasibility, or entities that can become commercially feasible in the short term. Either the entire entity or some of its shares are sold to the private sector by offering them for public subscription. This method is also adopted by large public establishments and projects, which are convened into an enterprise in accordance with the customary conversion procedures, such as designing the general legal framework for purpose of the project, separating the non-commercial types of activities, amending the tariff systems, transferring the assets and obligations to the enterprise after verifying that they are in order, establishing the by-laws and accounting system, and the basis for assimilating the employees. The success of this method depends on a number of factors, including the following:

- The entity [to be sold] must be stable in its activities, have a sound financial position, and be profitable or be able to become profitable in the short term.

- A large amount of financial and administrative information on the activities of the entity must be available.

- It must have a reasonable amount of liquidity.

- There must be an active financial market.

This makes it possible to expand the ownership base and attract additional investments, which in turn stimulate the shares market by opening the door to investors with limited financial power. The requirements for this method are focused on the procedures for offering shares for subscription, which must be done at the appropriate time, along with the need for a good regulatory and marketing framework and a well-developed financial market.

b. Sale to a principal investor

Using this method, the government sells the entity to a principal investor who can provide the required financing and has sufficient capacity in management and implementation to develop production and marketing. This method is characterized by the direct availability of the required financing, as well as the financial and administrative abilities needed for technical and administrative development, in addition to high-quality expertise and production techniques. In most cases the principal investor is an international enterprise or factory with extensive experience in the field. Among the negative aspects of this method is that it deprives small investors of opportunities for investment, it does not expand the ownership base, and it increases the chances of problems related to the work force.

In addition to the above-mentioned methods, there are a number of other instruments such as offering the enterprise for sale to its employees or earmarking a portion of its shares for sale to its employees at market prices. These methods are generally used to privatize enterprises with low profitability or productivity, in order to encourage employees to improve their performance. Another mechanism is a debt swap, whereby the debts are valuated and converted into shares in the name of the creditors.

B. Rules for the privatization of public establishments and projects

The basic principle that must be taken into consideration when implementing the privatization process are as follows:

1. Transparency

2. Rapid implementation

3. Changing the management style

1. Transparency: To ensure transparency in the privatization process, the privatization program should be guided by the following principles:

All activities should be carried out in a transparent manner and announced, in accordance with recognized commercial standards. When there are no legal rights involved in the case of joint projects, direct sales or preliminary negotiations based on a special agreement shall take place only after bids have been obtained through public tenders. Prior to and during completion of the sale, the public must be made aware of all aspects of the process to the extent possible, by means of the following:

- Preparing a memorandum announcing the offer for sale of any project.

- Publishing complete information on the financial, administrative, and other aspects of the establishment to make them readily available to investors.

- Preparing and publishing standards for the classification of bids.

- Opening the bids in a public forum.

- Publishing the valuation of assets and details of the bids.

- Publishing the names of investors, the amounts paid, and conditions of the sale after it is completed.

2. Rapid implementation: Rapid implementation is extremely important for the success of the privatization process, and a realistic timetable should be developed for each stage of the process, as activities that proceed slowly are more susceptible to failure.

3. Changing the management style: Bringing about effective change in the style and methods of management is considered a basic objective of every privatization process. Without such change it is not possible to achieve the targeted benefits of privatization. This does not necessarily mean replacing the current managers, but rather involves improving performance and implementing private sector management practices.

C. Basic steps in the sample privatization era public project or establishment

1. Feasibility study for privatizing an establishment or project proposed for privatization:

The competent government agency, in coordination with the Privatization Committee of the Supreme Economic Council, conducts a study on the financial and operational position of the entity, its subsidiary sectors, the justifications for privatization and the expected returns, alternatives to privatization, obstacles to its implementation, an evaluation of the possibility for privatizing this project or enterprise. The competent agency submits the results of this study and its recommendations to the Privatization Committee.

2. The Privatization Committee issues a recommendation to privatize the enterprise or activity.

3. If a decision to privatize the activity in question is issued, the government agency responsible for supervising this activity prepares an implementation program for privatization, based on the required studies. After it is approved by the Supreme Economic Council, the procedures and measures required to complete the privatization procedure are implemented.

The implementation program includes the following:

a. The defining elements of the government's policy for the sector, the appropriate regulatory framework, and the measures and timetable required for implementation.

b. Defining and dealing with the obstacles to implementation, evaluation of the need to restructure the establishment (conversion to an enterprise, financial structure, settlements with employees), and the measures and timetable required for implementation.

c. Developing a preliminary plan for privatizing the establishment, including the percentage to be sold and method of sale, and a timetable for completing the process. The preliminary plan serves as a basis for choosing a general advisor to assist with privatization.

4. The competent government authority, under the supervision of the Privatization Committee of the Supreme Economic Council, administers the implementation program for privatization of the enterprise, in cooperation with other government agencies, as deemed necessary by the Privatization Committee. Administering the implementation program involves the following elements, by way of example:

a. Defining the tasks of the general advisor and the method for selecting him.

b. Selecting the general advisor and other technical advisors.

c. Developing an implementation plan for the privatization process.

d. Implementing measures for restructuring the enterprise.

e. Reviewing and evaluation the [financial] position of the enterprise.

f. Preparing the documents required for selling the enterprise.

g. Managing the sale process (e.g. marketing the process, qualifying the investors, inviting bids by investors, evaluating the bids, negotiating terms of the sale, and

preparing the sale contract).

h. Method for dealing with the work force: Employees must clearly understand the method for dealing with the work force in the privatization process. There are a number of methods for dealing with the work force in the privatization process, some of which, are described below:

(1) Employee participation in ownership of the enterprise, which could induce them to support restructuring or privatization.

(2) Fair compensation for employees who retire voluntarily or are terminated.

(3) Obtaining a commitment from the investor to retain current staff.

(4) Training and upgrading the qualifications of employees

Chapter 3 - Basic issues to be Dealt with in the Privatization process

A. Regulatory framework for privatized sectors

Developing a regulatory framework for the privatized sectors is one of the most important elements of the entire privatization process, particularly in sectors where one enterprise enjoys concession rights that enable it to monopolize the market or control a large portion of it. Enterprises that provide basic supplies are among those that most urgently require regulation.

The objectives for establishing regulatory frameworks are summarized below:

- To protect consumers from the possibility that service providers (enterprises) with monopolistic concessions may exploit their position to raise prices, limit the provision of services or reduce quality.

- To protect investors through government intervention in the activity that has been agreed upon and does not impose additional burdens on investors that could adversely affect their returns, particularly given that investors sometimes invest large sums that can take years to produce any return.

- To encourage high productivity and increase competition among various companies in the sector.

- The regulating agencies generally grant licenses to service providers, coordinate with them, and monitor implementation on the basis of the licenses granted.

Regulating agencies: Establishing the regulating agencies is an integral part of the privatization process, particularly in the public services sector. There are three models for these agencies:

- A separate regulating agency for each service in a single sector (e.g., establishing an independent agency to regulate communications services and another to regulate postal services, etc.)

- A single regulating agency for each sector, that is, establishing a single regulating agency for the energy sector (electricity, gas) and another for the transportation sector (railroads, aviation, roads and navigation).

- A single regulating agency for a group of sectors, such as energy, communications, and transportation.

The appropriate model will be selected on the basis of a careful and comprehensive study of its objectives, positive and negative aspects, and appropriateness for Saudi Arabia. The Privatization Committee of the Supreme Economic Council will recommend selection of the appropriate model upon completion of the study by the competent agencies.

Autonomy of the regulating agencies: Autonomy of the regulating agencies is one of the most important factors in guaranteeing the success of efforts to decide on issues involving rights, duties, and joint interests, as well as obtaining the confidence of all parties involved in the sector, including, it the government, investors, employers and consumers. These agencies shall have the status of legal entities and shall enjoy both administrative and financial autonomy.

B. Fees for providing services

Fees for services vary among public enterprises because some of them are subsidized by the government, based on the necessity and importance of the services provided. There is no clear mechanism for determining fees for the services of public enterprises that reflects their cost, which hinders implementation of the privatization process, particularly from the point of view of the investors. Given the effect of government subsidies on price levels for public services, particularly certain subsidies that are considered fundamental obstacles to privatization and principle source of economic inadequacy, a systematic method must be established to set fees for services that takes into consideration their cost, allows for the stable provision of services, and makes it possible to finance the investments of enterprises that provide them, while allowing the government to provide subsidies when needed.

C. Preparing and restructuring the sectors and public enterprises to be privatized

The issue of restructuring public enterprises or projects that are to be privatized is generally raised before the privatization process is implemented, and it is generally preferred to leave the main restructuring issues to the new owners. However, it is sometimes not possible to avoid restructuring, as there may be large liabilities that adversely affect the project's value, and it may be necessary to split up the enterprise in order to improve the overall structure of the sector. Preparation and restructuring activities generally fit into one of the following categories:

- Financial restructuring: This includes either adding or removing assets or liabilities to improve the financial position of the enterprise.

- Restructuring of job functions: This involves transferring employees or workers from the public enterprise to the private enterprise and dealing with the employees' situation on the basis of a comprehensive study and clear plan developed by the enterprise in accordance with its future requirements.

-Technical restructuring (splitting up): splitting up [an enterprise or sector] often helps create an effective systematic environment. For example, in the electricity sector it may be preferable to separate production, transport and distribution activities, as the value of each part may be greater than the value of the whole. There are also cases that require the merging of various enterprises before they are privatized, in order to increase their productivity.

D. Strategic partners

The number of difficulties and complications facing public enterprises and projects that are targeted for privatization is very large, and the task of reform is also large. The required tasks are often beyond the capacity of their current management, as they include improving performance, amending prices, and developing commercial methods of work, in addition to the ability to compete at the domestic and international levels. The strategic partner, whether Saudi or foreign, plays an important role by providing the needed capital, sharing the risks, offering advanced techniques and administrative expertise to improve performance and create added value. The strategic partner must have sufficient financial capability and experience in managing firms similar in size to the enterprise that is to be privatized, it must be able to provide sufficient number of technical and managerial experts, and must have a good reputation.

E. Creating a suitable climate for a successful privatization program

The success of a privatization program depends on the effectiveness of the climate aimed at developing the private sector. There are three important elements of this environment: the capital market, human resources development, and the regulatory environment.

1. Capital market:

Developing the financial market is one of the most important policies that will be adopted to achieve various goals of the privatization process, which include expanding the scope for participation by Saudi citizens in the ownership of productive assets and public enterprises and projects, as well as encouraging local investments of domestic and foreign capital. There is a strong connection between privatization and the financial market, as privatization leads to development of the financial market by encouraging investors and investment companies to diversify their portfolios by investing in companies that are well managed, and in diverse sectors such as communications, electricity; cement, banking, and transportation. Small investors are also attracted, which will lead to the creation of investment tools of a joint nature and a balance in the liquidity position between banks and the financial market, as well as opportunities to invest the funds of social security and retirement establishments and other financial establishments. The existence of a developed financial market helps ensure the success of the privatization process when certain enterprises are privatized through public subscription in the financial market. This requires a number of specific elements, including the following:

- The regulatory and legal framework, which protects the rights of investors and defines the basis for regulating the market on the basis of clear, announced orders and instructions.

- A strong infrastructure is required to develop a robust financial market that is appropriate for the economic capacities, in terms of the management system and the required technical apparatus.

- A sufficient number of investment tools that allow for the participation of 1arge and small investors; including Saudis and [non-Saudi] residents.

2. Human resources development

The existence of wel1-developed, highly productive human resources is a critical factor in the success of the privatization program. Many Saudis currently face difficulties in finding employment owing to lack of skills and competition from foreign workers, in addition to the problem of excess labor beyond the future requirements of enterprises that are targeted for privatization. In order to develop human resources and enhance skills and competitiveness, enterprises targeted for privatization should be required to develop appropriate training programs to retrain their workers, develop their skills, and help them keep their jobs or find employment with other companies or establishments.

3. Regulatory environment

The regulations aid procedures related to investments and private sector activities, the capacity of the agencies responsible for their implementation, and the speed with which the related disputes can be settled are among the most important elements that must be revised, modernized, and integrated to create an appropriate environment in which the private sector can operate effectively to meet the challenges of regional and international competition. Transparency in these regulations and procedures; as well the ease of their implementation, wil1 increase the confidence of investors and make it unnecessary for them to ask the government for more guarantees, the provision of which is often stipulated by incomplete regulations and unclear procedures.

Chapter 4 - Criteria for setting priorities and continued implementation of the privatization program

In accordance with the Cabinet Decree No. 257 of 11/11/1421 A.H. [February 5, 2001] the Supreme Economic Council shall determine which activities are to be privatized, in addition

to the recommendations of other government entities, and a list of the activities to be privatized shall be issued by decree of the Cabinet. The Privatization Committee of the Supreme Economic Council, in coordination with the competent agencies, shall begin privatizing the recommended projects on a selective basis and in accordance with the criteria for selecting projects to be privatized.

The Council of Ministers must approve implementation of the sale, upon the recommendation of the Supreme Economic Council, and approval may also be required from the Royal Diwan with respect to matters that [affect] implementation of the privatization program, such as structure, conditions of sale, or government returns.

a. Criteria for determining priorities in selecting enterprises to be privatized

With the goal of enhancing the productive capacity of large government enterprises and projects, the priorities for selection for privatization are based on the following criteria:

- Positive effect on the national economy.

- Ability of the enterprise to contribute to society by increasing employment opportunities, making optimal use of the work force, and ensuring the continuation of just increases in individual incomes.

- Failure of public enterprises to provide adequate services.

- The absorptive capacity of the financial market.

b. Continued in implementation of the privatization process

After the enterprises and projects to be privatized have been selected on the basis of the above-mentioned criteria, an implementation program will be developed comprising a series of activities in the privatization process: selecting a group of public enterprises and projects, beginning the privatization procedures) and developing and adhering to a timetable, leading to the creation of a privatization program including coordination and control of the timing for

offering shares of the privatized company for sale, in a manner that does not adversely affect the financial market.

1. Lease-build-operate(LBO): A long-term contract is signed with the private sector to develop and operate a large government enterprise, thus giving the private sector the opportunity to obtain a return on its investments during the period of the contract, in addition to paying a sum that is the amount of the lease contract.

2. Build-transfer(operate) (BT, BTO): The private sector investor finances and builds the enterprise, the ownership of which is transferred upon completion (BT). On some occasions, the private sector investor subsequently leases the enterprise by means of a long-term contract, which gives him the opportunity to obtain a return on his investments and a reasonable profit margin.

3. Build-(own)operate-transfer (BOT, BOOT): The private sector investor is given a concession to finance, build, own, and operate the government enterprise, which is called either a build-operate-transfer (8OT) or a build-own-operate-transfer (BOOT) agreement, under which the investor has the right to collect fees for a defined period of time, after which ownership is transferred to the government.

4. Buy-build-operate (BBO): Under this type of agreement an existing government enterprise is sold to the private sector investor who then updates or expands the enterprise and operates it on a permanent basis. This type of agreement is similar to liquidation of a government enterprise, as it is operated on the basis of a concession granted by the government, and this concession gives the government the right to control prices and quality of services.

5. Build-own-operate (BOO): The private sector investor finances, builds, and operates the enterprise on a permanent basis based on a concession granted by the government but with rules that determine the prices of the services provided and the method of operation.