The opportunities in Saudi Arabia’s perestroika

Published February 11th, 2016

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Insight from Christopher Gasson, GWI publisher

I have been in Riyadh for the Saudi Water and Electricity Forum. It seems as if it has been raining royal decrees since the dynamic Deputy Crown Prince Mohammed bin Salman stepped up to chair the newly formed Council of Economic Development and Affairs last year. The paternalistic procrastination which characterised the rule of King Abdullah has been replaced by a hyper-active technocracy supported by what they call the Ministry of McKinsey.

For the water sector, it is the best thing to have happened in 30 years. Nobody wants to return to the bad old days of the 1980s when, as a result of a sharp fall in the oil price, development in the Kingdom ground to a halt. All capital expenditure plans were put on hold, government departments struggled from month to month to meet payroll, and there was no money even for urgent repairs.

The strategy for avoiding a repeat of that scenario seems to consist of three strands. The first is to ensure that Saudi Arabia’s oil revenues do not fall by as much as the oil price. This entails robust increases in production to grow market share while higher-cost producers are forced out of the market. It means that Saudi Arabia is probably the only country in the world which is investing heavily in increasing production capacity. This is good news for water technology companies selling into the Kingdom’s produced water management sector.

The second initiative seems to be to turn to the private sector to supply capital for new projects and release capital from existing assets. This will enable the government to spread the upfront cost of new assets over their lifespan, and to use the proceeds from asset sales to bridge budgetary shortfalls.

The third strategy seems to be a determination to increase efficiency in every area of public sector activity. The government believes that there is a large amount of fat which can be trimmed off its current activities before the downturn in oil revenues need have an impact on the standard of living for Saudi citizens. From a water perspective, this is going to create a huge opportunity for private water businesses to pursue performance-based service contracts to deliver efficiencies across the water cycle.

In my speech to the Saudi Water and Electricity Forum, I likened the situation in Saudi Arabia to the Soviet Union in the late 1980s. Both are essentially command economies where extensive state service provision needs to come to terms with a significant fall in revenues. Perestroika killed the Soviet Union primarily because its market-based reforms delivered more to private sector oligarchs than they did to the population as a whole.

Saudi Arabia also faces this risk, and to a large extent the success or failure of the project depends on the behaviour of the private sector. If contractors approach the challenge in the spirit of transparency, equity, and solidarity with the people and government of Saudi Arabia at a difficult time, this could be a new dawn for public services in the Kingdom. If, however, the private sector looks to take advantage of the relative lack of sophistication among its public sector clients to fleece the nation (as happened in Russia), technocracy in Saudi Arabia could be replaced by something far worse.