Flip through the latest issue of Gulf Weekly.
Bahrain's plans to privatise major public services including the loss-making Gulf Air is a step in the right direction as the kingdom not only needs to diversify its economy from oil, but also pull back state investments in several key sectors. Why privatise?
With fluctuating oil prices not assuring enough returns to balance budgets, governments in the region may have little choice but to partner with the private sector to develop civil and infrastructure projects.
Therefore, all GCC governments are trying to diversify their economies away from dependence on hydrocarbons, as reliance on inherently volatile commodities has led to wide swings in economic growth and pro-cyclical fiscal spending.
Oil prices may be up now, but the drive to create greater room for the private sector in the Gulf states appears to be escalating.
The need to keep down government spending may be less urgent at present, but governments are becoming more and more aware that the private sector is needed to create jobs, attract foreign investment, provide new management and marketing skills and to enhance technological development.
As the GCC states collectively possess around 40 per cent of proven world oil reserves, the temptation to rely on this income stream is strong.
Efforts at diversification tend to be greatest when oil prices are low, or when oil reserves are dwindling. States such as Bahrain and the emirate of Dubai in the UAE, have greater incentive to diversify than others such as Qatar and Kuwait which possess significant hydrocarbon resources.
Revenues derived from oil quadrupled in the GCC in 1973-74 and rose by over 25 per cent in 1978-79.
This enabled the region to construct excellent infrastructure as well as provide universal education and healthcare. Although the region has doubtless benefited immensely from hydrocarbons, oil dependence presents various economic problems.
Many Gulf states used to guarantee public sector employment for all nationals which led to low labour productivity and little incentive for private entrepreneurship.
Saudi Arabia, with its rapidly growing population, has found it hard to maintain such unproductive levels of fiscal spending.
The Gulf's infrastructure base should, and probably will, afford non-commodity-based economic activities a competitive advantage.
To date though, the competitiveness and growth of non-oil exports has been limited as domestically produced goods cannot compete against cheap imports.
So the GCC states have agreed in principle to follow a programme of economic liberalisation and privatisation.
Competition has been introduced in some sectors such as telecommunications, transport and utilities where state-run enterprises had dominated previously, and a programme of gradual privatisation is in place. Attracting increased foreign direct investment has been another economic policy objective to reduce dependence on public sector investment.
Bahrain, the UAE and Oman in particular, have succeeded in creating relatively open and liberal economies and, at the same time, have well-regulated business environments which have attracted significant foreign investment, particularly in service sector activities such as banking and tourism.
With its oil reserves fast dwindling, Bahrain knows better than anyone it has to reduce government expenditure and build an economy with the help of the private sector.
Bahrain first made privatisation a state policy through a decree issued in October 2002 that set out the parameters of the privatisation process and tasked the Economic Development Board (EDB)_and the ministry of finance and national economy with oversight of the programme.
The scope of the decree covered most elements of the country's economy, taking in the tourism, communications, transport, oil and gas, service and manufacturing sectors, utilities, the ports and airport services and postal services.
The decree left the government's options open by adding the provision that any other services or production sector could be included in the programme's remit.
Keeping with this, the management of the King Hamad Hospital, currently under construction, and of petrol stations owned by Bapco could be tendered to the private sector at the end of the year, says EDB chief executive Shaikh Mohammed bin Essa Al Khalifa.
Contracting out management of postal services and waste water treatment is currently under study.
Gulf Air, which said in November it expected making an operating loss of about $500 million in 2009, plans to return to profits by focusing on regional routes and cutting costs.
Bahrain plans to privatise Gulf Air within about a year, after its turnaround programme bears fruit, Shaikh Mohammed said.
The country is also planning to phase out subsidies in the long run to relieve public finances, a sensitive issue that has sparked protests.
Bahrain also plans to target other subsidies, including on electricity, to only the needy instead of all consumers.
