Chart 20: Budgeted spending - up or down?
SARbn
Budgeted Defense & Security spending
350 ———% of total budgeted spending (rhs) 45
300 250 200 150 100 50 0
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Source: SAMA, Ministry of Finance, Bank of America Merrill Lynch Global Research.
2001 2003 2005 2007 2009 2011 2013 2015
Privatization comes back to the government’s agenda
The consideration of a privatization program is not surprising at the current juncture, in our view. Recall that the Saudi privatization program was initially started in 1999 with the creation of the now-dissolved Supreme Economic Council, following the drop in oil prices in 1998. Small-scale privatizations took place in the early 2000s, and 2002 saw large privatization in the telecommunication sector and postal services.
Selling public sector stakes is one of the non-debt creating financing options for the government that would help minimize the direct drain on Fx reserves, encourage private sector development and improve services delivery. That being said, given the lack of non-oil taxation, this would only contribute to one-off financing flows alongside savings from a drop in budgetary allocations to the privatized entities, in our view.
The 2015 budgetary appropriations for public institutions totalled SAR163.7bn (USS43.7bn; 19.0% of total budgeted spending and 6.8% of GDP). We calculate that the public institutions related to the entities that appear to have been slated for privatization according to press reports account for budgetary appropriations of SAR124.8bn (US$33.3bn; 5.2% of GDP. This is likely to be the upper bound of fiscal savings possible under the privatization program. In our view, this is unlikely to be realized fully as it includes a large number of universities and because most timelines
appear to center around 2020.
Table 9: Privatization / Public Private Partnerships (PPPs) planned
Entity Date Airports 2016-2020 Saudi General Grains Organisation 1Q17 Saudi Aramco by 2018 Stock exchange (Tadawul) by 2018
Saudia Medical Services -
Saudi Electricity (SEC) by 2020 Saline Water Conversion Corporation (SWCC) - General Port Authority by 2020 Saudi Post by 2020 Education / schools - Healthcare / hospitals
Road, railway and port projects
Source: Press reports, Saudi Vision 2030, National Transformation Plan
Comment (press reports and Saudi Vision 2030/NTP, unless stated otherwise)
Targeted sale of 11 airport units by 2020
A financial advisor has been appointed
A stake of less than 5% could be sold
A financial advisor has been appointed
Saudi Arabian Airlines appointed a financial adviser for the privatization of its unit Saudia Medical Services and had its Board of Directors restructured in June
SEC's generation assets are likely to be split into four separate regional companies where minority stakes would be sold to major global utilities or sold in the public market
Investment partners are likely to be sought to buy a stake in production assets, with the holding company to be listed later Commercialization program to be completed by 2020
Saudi Post to be turned into a holding company with six subsidiaries. The NTP aims to transform it to a commercially viable company with government subsidies (SAR2bn) to be phased out by 2020.
Official pronouncements have suggested this could be considered, but there does not appear to be concrete plans for now The 2030 vision suggests no privatisations in the near-term, in our view. Authorities are likely to look to improve management and quality of service before considering privatisation, in our view.
NTP suggests PPPs are planned with percentage in private sector contribution to development and operation to increase
OS Merrill Lynch
GEMs Paper #26 | 30 June 2016 23
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