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Workshop on the Role of the Private Sector

Workshop on the Role of the Private Sector

Experts’ views of the capabilities and the potential role of the private sector in
promoting economic and political reform in the Arab countries are sharply divergent.
Some view the private sector as being still primarily subordinated to the government
and depending on government expenditure or other forms of government protection to
be able to achieve profit in business. Accordingly, the emphasis is laid on the lack of
international competitiveness except in sectors, such as petrochemicals, which are
formally privatized but in fact still closely controlled by government; on the lack of
transparency and openness to international investment; on excessive dependence on
government contracts or other business opportunities essentially influenced by
government decisions and initiatives.
A contrasting view has emphasized that the private sector has come a long way since
its beginnings in the 1970s or earlier, and has now acquired capabilities that it did not
have in the past. Therefore, while the picture of a business sector subservient to the
government might have been correct 30 or 40 years ago, it no longer represents reality
today. Many genuinely private business groups have greatly increased their financial
capabilities also through international investment, and are increasingly engaging in
business that caters to open and fairly competitive markets. The declared strategy of
the Arab governments to increasingly rely on the private sector, while not always
implemented to the point of divesting or reducing government holdings in key
enterprises, nevertheless is opening further opportunities for private sector investment
and growth, progressively tilting the balance in the equation.
This proposal aims at conducting original research that might throw light on the
capabilities and attitudes of the private sector, opening the door to a more
sophisticated understanding of its evolving reality.
The proposed research plan is divided in two parts: the first part aims at evaluating the
private sector capabilities and degree of dependence on government spending or
protection; the second part aims at discussing the actual and potential role of the
private sector in promoting economic and political reform.
1. Private sector capabilities and degree of dependence on the government.
The first part of the research will entail collecting and evaluating evidence on key
parameters to measure private sector dependence on, or independence from the
government. We propose to articulate research in four main tasks:
1. Estimate total domestically vs internationally invested capital, and domestically vs
internationally generated profits
A crucially important reason why the private sector is believed to have progressively
become less dependent on governmental support is that a growing share of private
investment has been directed outside of its country of origin, and wealth has been
accumulated internationally even more rapidly than nationally. GCC investors have
engaged in financial investment in the major international markets, and real estate
investment in countries outside the GCC; as well as cross direct investment in other
GCC countries or other Arab countries or, finally, the rest of the world. Arabentrepreneurs from outside the GCC frequently made their fortune by starting
business activities in the GCC countries or in the US/Europe. In all cases,
international investment escapes from the direct control, but also cannot benefit from
special government support, being normally outside of the government’s jurisdiction.
In parallel with the expansion of investment and wealth accumulated internationally,
the origin of private sector profits has changed. It is important to estimate whether
today’s major business groups realize their profits primarily in the domestic economy
or internationally, and the extent to which their prosperity depends on the prosperity
of the domestic economy, or is rather tied to global prosperity and, at least to some
extent, de-linked from economic conditions at home.
2. Estimate turnover with government and government entities vs open market based
For some private companies government procurement remains a fundamentally
important source of business and profit, but for many others the business is conducted
primarily with private customers, be they final consumers or other business
enterprises. Surely, the purchasing power of final consumers is also essentially
influenced by government spending, and in this sense it might be true that the well
being of the Arab economies still is substantially influenced by government
expenditure. However, the significance and implications of being directly dependent
on government business is entirely different from catering to a market whose overall
purchasing power is influenced by government expenditure, but individual purchase
decision are made privately and without government interference.
The modalities of government procurement are also of relevance. We propose to
explore the extent to which more transparent and competitive procedures have been
adopted in procurement by the government and other major government-controlled
agencies or companies, in order to estimate the extent to which direct access to this
market still is a source of extra profit.
3. Estimate concentration/competition
The degree of competitiveness of key markets is very important in determining
whether business may be said to stand on its own feet or be dependent on government
support. Government can support specific businesses either through procurement, or
by creating conditions of limited competition or outright monopoly to facilitate extra
profit – i.e. create positions of rent. Competition can come from openness to
international trade and investment, or from a multiplicity of domestic actors
competing for the same customer, or both. It is the superficial impression of the
proponent that the competitiveness of the Arab economies has significantly increased
on both counts, and today there are relatively few “protected” niches in which private
players can prosper undisturbed by competitors. Indeed, it is increasingly the case that
also government-controlled corporations are being exposed to competition, or forced
to become more competitive because their market increasingly lies abroad.
4. Evolution of corporate structures and corporate governance The corporate structure
of the business sector is also evolving, from being organized primarily as informal
family-owned conglomerates (business groups) to being increasingly organized as
formal, publicly-held corporations in which the founding families may maintain adominant ownership, but management and ownership are increasingly separate. The
extent to which this process is actually unfolding needs to be investigated; are the well
known-cases of this tendency just isolated exceptions, or do they constitute the
dominant trend?
The reorganization of business enterprises is extremely important inasmuch it opens
the door to more aggressive management of assets, i.e. divestment, acquisitions and
mergers. Formal companies will tend to critically assess their assets, and exit areas in
which their profits are below par, to concentrate in areas where they can do better. In
this process of critical evaluation of corporate assets, corporate governance is also
likely to improve, because management will pay attention to the transparency of
results as a prerequisite of rational decision making.
This is but one motivation behind the attention that has recently been devoted to
improved corporate governance. The increasing importance of financial
intermediaries and the desire to tap the equity market for growth by way of listing in
the regional stock markets will inevitably bring about pressure to improve corporate
governance and transparency.
2. Actual and potential role of the private sector in promoting economic and political
reform.
Political science literature has frequently asserted a link between a thriving and
competitive private sector and economic and political reform. This link can exist at
two levels: because business openly and expressly articulates a reform agenda and
calls on the government to engage in it; or because, even in the absence of open calls
for reform, the business sector engages in behaviour that encourages/precipitates
reform.
Accordingly, we propose to divide our discussion in this second part in two main
areas: participation and contests.
1. Participation
Participation refers to the formulation of opinions or proposals for policy initiatives in
the economic or political sphere, constituting a partial or widely-encompassing
program of reform. The following aspects are proposed for research:
1. Private sector representation in state institutions
Private business entrepreneurs or members of business families are represented in
government, in Parliament or Majlis ash-Shura, in major public agencies. We will
investigate the extent to which these business leaders or members of business families
have supported economic or political reform in their statements, vote or through other
action, including the fulfilment of their mandate as managers of public agencies.
2. Private sector representative institutions notably CCIs
Institutions have been established to represent the private sector. These are primarily,
but not exclusively, the Chambers of Commerce and Industry. Attention should bedevoted also to groupings such as specific sector associations or more or less informal
associations of business leaders at the national or regional level, which may be
promoting a reform agenda through the organisation of debates or the publication of
reports.
3. Private sector and policy research
The establishment and support to policy research is another frequent tool for the
private sector to influence the policy debate. Whether policy research is carried out
indigenously, through the establishment of research centres and think tanks
independent of the government; or through such institutions existing abroad; the study
will aim at summarizing and evaluating the message that is generated from private
actors and directed to holders of political power.
4. Private sector and social responsibility
The private sector also increasingly engages in activities directed at meeting its
perceived social responsibility. Corporations engage in supporting training,
community development and other benevolent activities. The nature and importance
of these activities will be surveyed and analyzed in view of understanding their
overall potential significance for economic and political reform.
5. Private sector and education
Specifically, the private sector has been playing a growing role in the provision of
education. The launching of educational enterprises is done sometimes as primarily
benevolent activity, sometimes for profit. The difficulty that government authorities
have encountered in reforming curricula and education methods - notwithstanding the
fact that these are widely recognized as indispensable to guarantee long-term
employment perspectives to young national entrants into the work force - has led to
greater reliance on private sector initiative. In view of the central role of education in
the political system, the characteristics of private sector initiatives in education, their
profile, curricula, teaching methods etc. acquire considerable significance as tools for
promoting economic and political reform, and will be analyzed in this light.
6. Private sector and media/public sphere
The private sector also has invested in the media and in this way contributes to the
development and shape of the public sphere in the Arab countries. The relevant media
include not only traditional press and TV, but also the publishing business (books are
important) at the more traditional extreme and internet-based platforms at the
opposite, advanced ICT extreme. This is important because, while much of the press
and TV is either directly government controlled, or controlled by individuals with
very close ties to political power, when it comes to other forms of communications
the role of genuinely private actors appears to be much greater.
2. Contests:
The importance of contests derives from the fact that, while the private business
community may be quite conservative in its ideas and timid when it comes toadvocating reform; nevertheless the progressive development of private enterprise in a
competitive environment will inevitably generate conflicts of interest – contests – that
the government will find increasingly difficult to mediate on the basis of traditional
patron/client approaches. The natural dynamics of private sector development will
necessitate the adoption of more formal rules of engagement and market regulations,
which will limit the government’s room for arbitrary decision making.
We identify three main areas for research:
1. Major government tenders/transparency As competition heats up, and the number
of potential bidders is increased - also thanks to the impact of WTO and closer
relations within the GCC and with other Arab countries - major government tenders,
including new utilities concessions or floating of government-owned assets, will have
to be conducted in a more transparent and reliable fashion. We propose to survey the
introduction of more advanced procurement methods, such as e procurement; and
review the more important cases of privatizations and issuance of concessions (e.g.
mobile telephones) to discuss the extent to which more formal and transparent rules
are being adopted and adhered to.
2. Other major market contests notably stock market
Government procurement and tenders are not the only relevant market for contest.
Other markets also should be considered, notably the stock market and implications of
boom (bubbles) and bust on income distribution and economic development. The
greater the importance of the stock market and the wider the participation of small
investors in it, the more important becomes for political authority to perform the role
of regulator and enforce rules and transparency – rather than merely agent for the
allocation an distribution of the oil rent. This transformation will, with time, increase
the legitimacy and influence of successful private enterprise and lead to calls for
greater transparency of government expenditure, decision making and investment
policies. The influence that the government may have on the fortunes of individual
companies or group of companies is likely to become increasingly evident, and
provide an opportunity for questioning government policy or administrative
behaviour. The aftermath to the bursting of the 2003-6 stock market bubble has
already provided abundant evidence to this phenomenon.
3. Inter-Arab competition for investment – at the broad governance level as well as
specific initiatives
Arab governments are ever more actively competing for attracting investment from
other Arab countries as well as from the rest of the world, through improved
governance, streamlined rules, more sophisticated judiciary and effective contract
enforcement, and friendly investment environment. Such competition is especially
intense within the GCC. Governments compete also through specific and targeted
initiatives, such as the various free zones or “cities”, often imitating and in direct
competition with each other. Considering the geographic closeness of urban centres
especially along the Gulf coast, and the ease of travel between them – which is bound
to improve with the implementation of some road and rail projects currently under
consideration – the competition for attracting factories, logistical facilities or
company headquarters can only intensify. Already now, the private entrepreneurs inthe Arab are clearly playing governments against each other through their investment
decisions, and are, in a sense, “voting with their feet”. This phenomenon is further
reinforced through the increasing importance attributed in the media to international
benchmarking of various aspects of government activity, or scoring of government
services outcomes, or rating of financial performance and creditworthiness. Through
these private sector controlled tools, governments in the region have come under
constant scrutiny and a degree of accountability is increasingly enforced.
Paper proposals for this workshop should aim at offering original material relevant to
one or more of the points illustrated above. We are especially looking for case studies,
preferably papers covering two or three case studies from different countries, allowing
for comparative analysis. We expect that the condition, capabilities and behaviour of
the private sector will be very much different in different countries. Case studies may
be based on material from the press, company sources, interviews or the like. If
sufficient statistical information is available – which is unlikely to be the case,
statistical analysis would also be relevant.