11stst Meeting of GCC Electricity Meeting of GCC Electricity RegulatorsRegulators

1313thth of November 2007 of November 2007

“Regulation in the Environment of “Regulation in the Environment of Privatization”Privatization”

A Regulatory Framework for State Owned Enterprise Privatization with Emphasis A Regulatory Framework for State Owned Enterprise Privatization with Emphasis on Electricity and Water Sector in The State Of Qataron Electricity and Water Sector in The State Of Qatar

By:By: A.Aziz Al-ZeyaraA.Aziz Al-Zeyara

privatization is Not Newprivatization is Not New Privatization was first launched in the 1930s, but gained Privatization was first launched in the 1930s, but gained

momentum in the late 1970s and early 1980s under momentum in the late 1970s and early 1980s under Thatcher, Regan & Kohl. Thatcher, Regan & Kohl.

Privatization is defined as the transfer of ownership from Privatization is defined as the transfer of ownership from State structure to the private sector. State structure to the private sector.

The rational for privatization has varied from country to The rational for privatization has varied from country to country and from region to region.country and from region to region.

In most developing countries, In most developing countries, performance improvement, performance improvement, efficiency enhancement, budgetary relief, and private efficiency enhancement, budgetary relief, and private sector support where used as the main explanation for sector support where used as the main explanation for policy implementation of privatization programmes since policy implementation of privatization programmes since the early 1980s. the early 1980s.

Why Why privatizationprivatization in the Middle East in the Middle East

In most MENA countries, the aim of privatization was toIn most MENA countries, the aim of privatization was to cut public deficit, cut public deficit, control corruption, control corruption, decrease budget imbalance, decrease budget imbalance, improve management performanceimprove management performance reduce cumulative loses.reduce cumulative loses. encouraging private initiatives. encouraging private initiatives.

Why privatization in the Middle East Why privatization in the Middle East Continue..Continue..

SOEs in most Middle Eastern states were, and most still are, loss-SOEs in most Middle Eastern states were, and most still are, loss-making enterprises, thus forcing the state to borrow from local making enterprises, thus forcing the state to borrow from local sources initially. sources initially.

But continued financial support to public enterprises reduced the But continued financial support to public enterprises reduced the public funds available for social services, and led to crowding out public funds available for social services, and led to crowding out private sector borrowing and stifled private sector development. private sector borrowing and stifled private sector development.

Large public sector and trade deficits eventually forced most Large public sector and trade deficits eventually forced most states in the region to resort to international financial institutions states in the region to resort to international financial institutions for assistance, particularly to the International Monitory Fund (IMF) for assistance, particularly to the International Monitory Fund (IMF) and World Bank.and World Bank.

It's been observed that at least 1/3 of all international borrowing by It's been observed that at least 1/3 of all international borrowing by developing countries was to cover the public enterprises dept developing countries was to cover the public enterprises dept (Cook, Kirkapatrik 1988).(Cook, Kirkapatrik 1988).

privatization Remains Largely Unsuccessfulprivatization Remains Largely Unsuccessful

Yet, despite large scale privatization, the available Yet, despite large scale privatization, the available empirical evidence suggests that the outcome of empirical evidence suggests that the outcome of privatization in most developing countries have so far privatization in most developing countries have so far been mixed. been mixed.

Not only the pace, but also the quality of privatization Not only the pace, but also the quality of privatization has, in most cases, been particularly problematic. has, in most cases, been particularly problematic.

Very slow, very difficultVery slow, very difficult In terms of quality, privatization has neither improved In terms of quality, privatization has neither improved

productivity, nor competition with negative impact on productivity, nor competition with negative impact on growth. growth.

Key Lessons from privatization Experience Key Lessons from privatization Experience

11stst, t, the reform program is generally based on a he reform program is generally based on a document or a set of documents that provide a document or a set of documents that provide a coherent framework for the various reform steps. coherent framework for the various reform steps.

22ndnd, privatization is Part of An Overall Reform , privatization is Part of An Overall Reform PackagePackage

33rdrd, The role of the Single Buyer, The role of the Single Buyer

44thth, The independence of the Regulator, The independence of the Regulator

Regulatory Systems

Privatization Process

Privatized Enterprises

Private Sector The State The Society

Control Monitor Judge

PerformanceEfficiencyReforms

LessPrice

Less Cost

BetterQuality

Satisfaction

privatization in Qatarprivatization in Qatar

privatization in Qatar has been promoted privatization in Qatar has been promoted and personally supervised by the emir of and personally supervised by the emir of the state of Qatar HH Shaikh Hamad Ben the state of Qatar HH Shaikh Hamad Ben Khalifa Al Thani.Khalifa Al Thani.

privatization in Qatar is aimed at privatization in Qatar is aimed at promoting economic diversification, promoting economic diversification, improving education and health, improving education and health, modernizing infrastructure, and increasing modernizing infrastructure, and increasing public saving.public saving.

privatization in Qatar Continues…privatization in Qatar Continues…

The state of Qatar has become one of the prominent The state of Qatar has become one of the prominent privatizors in the GCCs for the following rationales:privatizors in the GCCs for the following rationales:

Crude Oil price fluctuationCrude Oil price fluctuation The contentment for the important role of the private sector.The contentment for the important role of the private sector. State income resources diversificationState income resources diversification Develop the infrastructure for the Qatari economy and polarizing the Develop the infrastructure for the Qatari economy and polarizing the

advance technologiesadvance technologies Control the general budget expenditure Control the general budget expenditure Performance and Commercial base operationPerformance and Commercial base operation Abolishment of bureaucracy.Abolishment of bureaucracy. Support and develop the local private sector.Support and develop the local private sector. Wealth distribution among the nation.Wealth distribution among the nation. Spare capital for the state to invest and developSpare capital for the state to invest and develop

Investment to Promote Private Sector in Investment to Promote Private Sector in QatarQatar

Qatari government has taken concrete steps to Qatari government has taken concrete steps to strengthen the private sector & create an strengthen the private sector & create an attractive businessattractive business

For example: For example: The protection of private property to ensure the The protection of private property to ensure the

freedom of economic activity.freedom of economic activity. In 2000, a new foreign investment law was passed, In 2000, a new foreign investment law was passed,

and in 2002 a new company law was passed. and in 2002 a new company law was passed. The foreign investment law allows foreign The foreign investment law allows foreign

ownership ownership Incentives for investments in industrial projects Incentives for investments in industrial projects

Exemptions Exemptions Raw Material subsidized pricesRaw Material subsidized prices

Problems of privatization in QatarProblems of privatization in Qatar

While attempting to privatize, Qatari state officials have While attempting to privatize, Qatari state officials have faced several difficulties. faced several difficulties.

Will privatization guarantee sufficient return to the state? Will privatization guarantee sufficient return to the state? What is the acceptable level of alternatives returns the state What is the acceptable level of alternatives returns the state

can accept and find? can accept and find? What will happen to the states' employees? What will happen to the states' employees? How can privatization ensure the continuation of their jobs?How can privatization ensure the continuation of their jobs?

The available empirical evidence suggest that changing The available empirical evidence suggest that changing ownership itself will not be sufficient, and may not be even ownership itself will not be sufficient, and may not be even necessary to elicit performance improvements. necessary to elicit performance improvements.

Rather, competition and regulation policy will emerge as Rather, competition and regulation policy will emerge as major determinants of the performance of the privatized major determinants of the performance of the privatized enterprises and assumed benefits from privatization. enterprises and assumed benefits from privatization.

Evaluating Privatization in QatarEvaluating Privatization in Qatar

Evaluating the aimed objectives of privatized Evaluating the aimed objectives of privatized enterprises in Qatar is not easy for several enterprises in Qatar is not easy for several reasons.reasons.

Absence of clear objectives Absence of clear objectives Lack of sufficient data on the whole process of Lack of sufficient data on the whole process of

privatization privatization Evaluation Making comparisonEvaluation Making comparison

Ministry of Energy – Policy determination & role allocation -- Ministry of Energy – Policy determination & role allocation -- moderate regulationmoderate regulation

Private sector – all generation & desalination productionPrivate sector – all generation & desalination production

Qatar equity participation in all IWPP’sQatar equity participation in all IWPP’s

Qatar General Electricity & Water Corporation (Kahramaa)Qatar General Electricity & Water Corporation (Kahramaa) Sole off-taker of all IWPP productionSole off-taker of all IWPP production National network owner & operatorNational network owner & operator Power & water systems operatorPower & water systems operator Sales tariff setting & DSMSales tariff setting & DSM

Qatar Experience in the Electricity & Qatar Experience in the Electricity & Water SectorWater Sector

Qatar Experience in the Electricity & Qatar Experience in the Electricity & Water SectorWater Sector

IWPP Shareholders

Owner Shareholders

QEWC Govt 43%, public shareholders 57%

Ras Laffan Power Co

AES 55%, QEWC 25%QP 10%, GIC 10%

QPower QEWC 55%, IP 40%Chubu 5%

Mesaieed Power Co

QEWC 40%, Marubeni 40%QP 20%

Ras Laffan•

Lack of formal regulatory system lead to in-direct Lack of formal regulatory system lead to in-direct cross subsidies which are difficult to recover through cross subsidies which are difficult to recover through dominant Domestic Sector tariffdominant Domestic Sector tariff

Strong economic growth will lead to 4 fold capacity Strong economic growth will lead to 4 fold capacity growth by 2011 compared with 2001 in Qatargrowth by 2011 compared with 2001 in Qatar

Qatar does not invest directly in IWPP’s, but accepts Qatar does not invest directly in IWPP’s, but accepts responsibilities & risksresponsibilities & risks

Short project lead-time reduces negotiating edge by Short project lead-time reduces negotiating edge by the off-takers & leads to higher purchase tariffsthe off-takers & leads to higher purchase tariffs

Lessons learned & ConclusionsLessons learned & ConclusionsLessons learned & ConclusionsLessons learned & Conclusions