There has been increasing support for privatization in Saudi Arabia, with proponents arguing private entities can more efficiently provide services like health care and education than government can. But would higher efficiency come at a social cost?
A wave pushing for the privatization of public services has been gaining momentum in Saudi Arabia. In January 2016, the now-ousted minister of economy and planning stated a large-scale privatization initiative would start within months. The comprehensive privatization program included airports, municipal agencies like the state-owned mail-delivery services, hospitals, and public universities.
The question of whether to privatize public services such as health care, social security, or education has been a topic of controversy among policymakers, economists, and the public. In the early 1980s, President Ronald Reagan popularized the idea by suggesting that privatizing Social Security would solve the financial challenges that the United States encountered at the time. The idea of privatizing public programs flourished again during the presidency of George W. Bush when he suggested that transforming Social Security into a private-run program would solve its solvency problem and contain its rapidly rising costs. The president attempted to persuade the public that privatizing the program is a good idea, citing Chile as a pioneer of effectively privatizing public programs.
The realities in Chile, however, were not as positive as the Bush presidency marketed it to be. After approximately 36 years since the Chilean government turned social security into a private-run program, most Chilean retirees continue to struggle to satisfy basic necessities given that the median benefit paid by a private pension fund is equivalent to 15% of final earnings, compared to the United States, where the median is approximately 40% of last earnings. The rate is even higher in the United States at 51.3%, for low-income workers falling in the 25th income percentile.
Scholars who have researched and written extensively on the topic argue that the pursuit of profit, a core difference between public and private services, is the main policy drawback of privatizing traditionally public services and programs. This fundamental objective of private entities remains the case even if it comes at the cost of lower accessibility to basic services by groups that need such services the most.
Health care is a prime example of an industry where service providers often jeopardize accessibility for the sake of profit-making. Rather than opening hospitals based on demographic and health needs, a for-profit hospital, for instance, would rationally open and expand its services in affluent areas, motivated by the prospect of having more people with higher purchasing power and likely better insurance coverage who can afford its services. This issue is likely to exacerbate in jurisdictions lacking certificate of need laws such as Spain. This occurs as private health care providers can freely expand or limit their services with no regard to actual demand in a given area. The underlying assumption of certificate of need regulations is that excess health care services and overbuilding of medical facilities in a particular region, without consideration for actual demand likely leads to higher health care costs in the long-run. This is because private medical service providers may struggle to cover their fixed costs due to inadequate demand, specifically when a hospital cannot fill its beds, so a greater portion of fixed hospital costs are passed on to consumers.
Spain and Ireland serve as a lesson in this regard. Severe health care budget cuts along with the privatization of health services have reduced medical access among the most vulnerable in their communities. The concentration of health care providers per capita is likely to occur in neighborhoods with a low number of uninsured residents when health care is fully privatized. In other words, private hospitals expand into middle to high-income neighborhoods and where a greater share of residents have health insurance.
Returning to the issue of Saudi privatization, approximately three years after the introduction of the privatization initiative, the Saudi government has delayed several projects. Prominent examples of projects that the government has put on hold include Aramco’s initial public offering (IPO) and the sale of the capital’s international airport. While the reasons for postponing such projects are still unclear, a key driver of this slow privatization may be that there is now less urgency for such a major cost-cutting transformation when oil prices hover around current levels of $55 to $65, versus $30 to $35 when privatization plans were announced.
Experts like Professor Steffen Hertog also maintain that decisions to privatize in Arabian Gulf countries have underlying economic and social considerations. Hertog states that some government agencies lack a clear vision of how a revenue-generation model should be designed for certain services that have been historically operated and owned by the state. He also argues that privatizing large public entities that employ thousands of Saudis has social ramifications. For instance, when a given public service is turned into a private service, it will seek to optimize its operations and costs. Therefore, this may also imply cutting unnecessary labor costs, with little or no consideration of the outcomes of firing an employee. Specifically, a private entity’s role in efficient markets inherently means that it is not concerned whether firing one or thousands of workers may lead to a higher unemployment rate or cause those individuals to leave the labor force.
In conclusion, the prime motive of a private-run service turns into generating profits regardless of whether this change comes at high social cost, the lack of or low accessibility to essential services such as health care, particularly among low-income individuals. Once an entity is privatized, every member of the public becomes just another customer, with little to no regard for people’s basic needs.
**
Born and raised in Riyadh, Saudi Arabia, Meshal graduated three years ago from Cal State University-Northridge double-majoring in accounting and business administration. He then worked for two private companies in projects with the Ministry of Labor and Social Development (MLSD), covering research areas such as unemployment and social mobility challenges in the country. He co-authored several policy whitepapers including Saudi Arabia’ G20 2016 and 2017 responses submitted through (MLSD). In the past three years, Meshal has also worked at a local think tank in Saudi Arabia and co-authored a research paper testing the correlation between a student’s neighborhood location, family’s property value, with their standardized high-school exam test scores. In the future, Meshal would like to continue researching labor market and social mobility in the Kingdom and become the Minister of Labor and Social Development.