This is the third part of ‘Services Sector: The Future’, issued by Advantage Consulting Company, Kuwait, which is headed by Managing Director & Chairperson Safa Al-Hashem – Editor

The need for privatization in GCC countries was initiated due to many motives. The most important motive has been the need to achieve efficiency and better allocation of scarce resources by making public enterprises more responsive to market and commercial conditions. It has been indicated that privatization would be amongst the best ways to reduce the inefficiencies of service delivery and bureaucracy associated with most government institutions in the GCC, especially when these companies must compete within the global economy. Citizens have also expected public services to meet changing and growing areas of need more effectively, and have become less prepared to tolerate inefficiencies, poor quality, rigidity and lack of responsiveness. Not only economic changes but also a range of cultural changes – such as decline in deferential attitudes to the State and to professions – have influenced these trends.

Awareness has grown that, however noble in its intentions and suited to its time might have been the earlier widespread public administration model of providing standard services through monolithic institutions and organizations, it needed to adapt to modern conditions. As the private sector demonstrated increasing willingness to provide in different ways for different segments of their customer bases (differentiated by varying ability to pay, among other dimensions), many people increasingly wanted more choice and flexibility from public services too. Another motive has been the effort to increase the role of the private sector in the economy by transferring responsibilities for the production of goods and services from the public to the private sector. This is in line with the basic objective of GCC countries of promoting the non-oil sector, enabling the government to insulate itself from the volatility that has resulted from over-dependence on the oil sector revenues.

In the context of GCC countries, privatization can also be used as a tool to check capital flight. The Bank for International Settlements estimated that Gulf countries have significant international deposits. These amounts, when channeled into the nation’s privatization activities, can result in the creation of significant growth opportunities.
In addition to these obvious factors, there are others which are as important, such as the functioning of the labor market. Government wages have continued to be above those in other sectors and un-related to market conditions, leading to severe fiscal drain. Privatization encourages the diversion of labor toward more productive activities and enables adjustment of salaries in line with the market.
Another reason for introducing privatization has to allow competition, which will lead to improvement in productivity of the indigenous labor, encourage its participation in the private sector and reduce the sector’s dependence on foreign labor. In addition, such transition will lead to separation of social benefits from employment earnings and a greater shift towards a market-based economy.

Privatization initiatives have, however, not come without much opposition. There has been strong opposition from workers’ unions, such as the Kuwait Trade Union Federation. There has also been debate in the National Assembly on whether the government should go ahead with privatization or not and which State Owned Enterprises should be privatized, considering the perceived impact on consumers and employees alike. Observers fear that post privatization, firms streamline their operations and in the process reduce the labor force in order to improve efficiencies. This might be the case of Kuwait in view of the overstaffing in the public sectors. Fearing unemployment and the loss of benefits, public workers and unions are often amongst the most vocal and organized opponents of privatization, taking actions to delay or block the reform programmes, even when privatization might be beneficial to the society.

Privatization in Education
Education has always occupied a prominent role is promoting economic growth. The need for integration into the globalized world has prompted countries to allocate significant resources for the development of the Education sector.
The education sector, as it constitutes a significant expenditure item in government budgets, often faces pressure to privatize. Also, excess demand, particularly for higher education, when the absorptive capacity of the public education system is less, requires the participation of the private sector. Diversity in people’s preferences about educational content and method, and the need for specific skills from private enterprises, requires the Private Sector to play an important role. Also, cultural, religious, linguistic and ethnic reasons have increasingly played a role in the Privatization of the Education Sector.
Most private sector participation in education provision and finance in the GCC has involved private for-profit enterprises. Not-for-profit education institutions are constrained by the lack of facilitating legal, regulatory and accreditation frameworks, particularly for post-compulsory education. While the State has the responsibility to guarantee access to high quality basic education for all and standards in post basic levels, public finance and provision at all levels is not affordable without a deterioration of quality.

Private financing is thus a priority area for development, through both cost recovery in public institutions and expansion of private (for-profit or not-for-profit) delivery systems. Regulatory frameworks that create demand and supply incentives and provide sufficient autonomy to operate independent institutions will be needed. To enable the market to move past provision of the low quality training which meets simple credentialing demand, the financial ability to establish expensive facilities and the opportunity to borrow for tuition against future earnings are needed.
GCC governments will need to choose the point along a spectrum of control ranging from full institutional independence to full State authority over provision. Regulation which tightly controls many aspects of provision eliminates sufficient autonomy to make private operations feasible and impedes private provision. On the other end of the spectrum, significant absence of public control over crucial aspects of provision would lead to substandard quality in some instances.

Models for Privatization in Education
Privatization in Education, encompasses a wide array of models that have, in some cases, resulted from deliberate policy; but in others, resulted from unplanned change. Various models of privatization have been previously identified, as listed below:

A. Sale of Government Assets, which involves the transferring of property rights from government to the Private Sector for an agreed-upon price.

B. Franchise, an arrangement whereby a private organization is awarded monopoly privileges to provide a service, where the students may or may not have to pay the cost.

C. Load shedding, which refers to the state withdrawal from both funding and providing an educational service. It is being observed in many countries around the world now.

D. Vouchers, which are issued by the government, to be used like cash or as credit, and which can be used for receiving education in an institution of the individual’s choice. 

E. Contracting out of public services to non-government entities to provide or help to provide public services, without the help of public employees. Typically, in this case, support services in institutions are contracted out to public agencies.

F. Voluntary Service, which provides education and related services performed by volunteers, as in the case of religious and non-governmental organizations.

G. Leaseback arrangements, which include the construction and purchase of public educational and related facilities by private parties, who then lease these back to the public sector under mutually agreed terms.   
Most of the above mentioned models are applicable in the GCC countries, and have been implemented to some extent in some countries, where a parallel system of education is maintained by transnational and non-governmental agencies, for the purpose of their own specific needs.

Privatization in Healthcare
The GCC is amidst a fundamental paradigm shift in its healthcare sector where governmental spending has lagged behind the global norm. Governments are implementing a spate of reforms to attain and sustain international standards of healthcare delivery. This progress is critically driven by a sharp increase in demand for healthcare because of population growth, increased life expectancy, and increasingly common and costly lifestyle diseases. The ongoing structural changes are marked by unprecedented innovation, infrastructure upgrades, and expansion, which are creating considerable opportunities in the sector across the value chain.

While the development of healthcare provision has traditionally relied almost wholly on government expenditure, the mounting demand has more recently paved the way for large scale private-sector investment. Moreover, the treatment of cancer and increasingly widespread lifestyle ailments — notably diabetes and coronary diseases — calls for establishment of specialized facilities on a growing scale, which requires the participation of the private sector.

GCC governments have, over the years, encouraged internationally renowned institutions to set up healthcare facilities in the region. The governments also recognize that private sector funding will be needed to finance some of the massive healthcare infrastructure projects in the pipeline. By shifting their focus increasingly to policy-making and regulation, the GCC governments are at the same time developing ways to shift more of the responsibility of healthcare provision onto private employers. These trends have the potential to create new opportunities for healthcare providers, private insurance companies, suppliers of medical equipment, and educational institutions, among others.

The private sector already has an established presence in GCC healthcare, representing 25% of the total spending. Besides direct provision of diagnostic and treatment services, the private sector provides a range of goods and services: facilities planning, construction, medical equipment, consumables, pharmaceuticals, education and training, outsourced services, hospital information systems, clinical waste management, and insurance. The future growth of private sector participation will thus build on an established presence in a number of  areas.

Even though the governments in the region have made significant progress in providing incentives to private sector players, a number of challenges still complicate the operations and growth of the sector:

1. The main incentive offered to private providers is guarantee of a minimum patient volume. Though this provides assurances in terms of hospital revenues, it is not sustainable in the long term in the absence of a system of referrals underpinned by actual demand.

2. Private sector service providers can differentiate themselves based on the quality of service, which in turn depends on the quality and stability of human resources in the sector. However, the healthcare sector in the Gulf remains overwhelmingly dependent on expatriates who constitute 80% of its total work force. The variety of backgrounds and diverse skill sets of the staff also create particular coordination challenges.

The building blocks for the emergence of a strong healthcare sector are in place. The GCC governments will now need to continue to buttress the ongoing efforts with a robust institutional set-up and effective regulatory framework. Efforts to make the region an attractive destination for private healthcare providers, investors, and other partners are of particular importance and urgency. Governmental support and industry-wide innovation can help place the GCC region on the world map as a globally important center of healthcare provision and research.

Going the Half Way
Although privatization of both these sectors has significant advantages that can transform their performance efficiencies, the inclination of the private sector to prioritize profits over the well being of the general public is a hurdle that needs to be worked around. The GCC governments have to retain control on these sectors in order to ensure that the inhabitants of the region are benefited to the maximum. A work around to the ill effects that result from complete privatization of the education and health sectors is to build more Public – Private Partnerships (PPPs).

Public – Private Partnerships are contractual agreements between the public and the private sectors, whereby the private operator commits to provide public services that have traditionally been supplied or financed by public institutions. When implemented, PPPs enable significant reduction in life-cycle costs, better risk allocation, faster implementation of public works and services, improved service quality and additional revenue streams.

PPPs are internationally proven means for development when governments cannot or choose not to solely finance its own projects. Studies in the GCC show that PPP structured investments have the potential to catalyze new private industries, through addition of businesses worth billions of dollars. Through the effective use of PPPs, governments can enable the market to identify and unlock the hidden value of their assets, thereby benefiting citizens, asset owners and operators. PPPs enable governments to improve their existing operations by providing effective avenues for the expansion and maintenance of its infrastructure projects.

Models of Public Private Partnerships
n Service contracts – These are agreements between a public agency and the private sector particularly suited for simple, short-term operational requirements. It is a very limited form of PPP, where the private party procures, operates and maintains an asset for a short period of time. Management and investment responsibilities remain with the public sector, which bears the financial risk and residual value risk, but benefits from the technical expertise of the private operator and obtains some cost savings, without transferring control over the quality of outputs. Service contracts are commonly used for toll collection services, for the provision and maintenance of vehicles or other technical activities.

n  Operation and management contracts – These are agreements in which the responsibility for asset operation and management is passed on to the private sector. The duration is generally short but can normally be extended. The private party is remunerated on a fixed fee basis or on an incentive basis with premiums linked to specific performance targets. The public party still bears the investment risk and the financial risk. This type of contract allows significant efficiency gains and investment in technological sophistication, as the private operator has a strong interest in improving service quality to reduce both overall costs and the demand risk during the operational stage.

To be continued