Advantage 2nd Quarter Report on Importance of Consulting Services Role for Private & Government Sectors

Advantage Consulting Company released its quarterly report highlighting the importance of management and economical advisory services for private and government sectors and the effective role which the consultants play to enhance corporate performance and effective implementation of business strategies for such sectors.

In this context, Shariefa Al-Roomi, Senior Officer, Business Strategies in Advantage Consulting Company, indicated that: "This report highlights the status of private sector companies in the aftermath of global financial crisis and our role in providing assistance to such companies. In addition, the report gives our direct comment and cause analysis concerning why companies are hesitant to enter into partnership agreements with consulting firms (reasons and solutions). Therefore, we deemed appropriate that such reasons should be stated and analyzed, and a comparative study has to be conducted to indicate the extent of State need for advisory services, particularly we are proceeding to implementation of a comprehensive development plan in which private and public sectors will be involved. The role of management and economical advisory service is crucial at this point to design optimal and easy-to-implement business strategies.

We have great expectations for such intended implementation to pass the bottleneck where both public and private sectors hope to stand without support from anybody".

Is the Kuwait Development Plan trying to bypass the Banking System through the KFAED?

In a surprising turn of events, the Kuwait Market saw a proposal by Sheikh Ahmed Al Fahad which looks to increasing the capital of the Kuwait Fund for Arab Economic Development (KFAED) from 2bn KD to a whooping 10bn KD. The proposal, which is currently under scrutiny, aims at supporting the development of the infrastructure projects in the 5 year Kuwait Development Plan which was also put together by Sheikh Ahmed Al Fahad and approved by the Cabinet. The Kuwait Development Plan which was started in 2009 and set to be completed in 2014 is set to cost almost 30bn KWD of which 2bn KWD is to be spent on private sector with the intention of bolstering the role of SMEs in the private sector and limit the country’s dependence on the oil sector.

The projects of the developmental plan include:

• Investments to increase the production of crude oil and natural gas.
• Solving the domestic house care impediments.
• Restructuring curriculums in the public authority for applied education and training.
• Erecting new cities and involving the private sector under the (P.P.P)-private public partnership, in financing and executing the domestic housing plan.
• Increasing the occupancy capacity of health care industries.
• Collaborating with the private sector in rebuilding schools.

The proposal to increase the capital of the KFAED from 2bn KWD to 10bn KWD comes amid the implementation of the first year of the Kuwait Development Plan to lend capital to companies participating in the development plan. There has also been a suggestion to increase the capital of the KFAED to 16bn KWD by MP Ahmad Al Saadon with the same intention but restricting the funding toward state owned companies alone.

The reason that this proposal is a sour surprise is because of the detrimental effect this proposal, if passed as law, can have on the on the Banking Sector of the country. With KFAED establishing itself as a provider of government supported loans, it would become a significant competition for Kuwaiti Banks which would lure away investors and new projects from the Kuwait Banks. Moreover, the large amount of capital lent by the KFAED to companies would deprive the banking sector of chances to issue loans to finance the companies participating in the Kuwait Development Plan. This would in turn deprive the banks of the interest on loans that they would have received had the banks provided the loans themselves.

It is important to note that although liquidity among banks in Kuwait is abundant and fully capable of funding the Development Plan, banks need to continue its strict screening while approving loans so as to maintain its credibility and soundness.

Moreover, with the implementation of this proposal, KFAED will have unregulated authority over its funds with no interference from the Central Bank of Kuwait despite the fact that it will be providing banking services to these projects. Central Bank of Kuwait will not be able to control or oversee any activity of the KFAED, regarding rates, or decisions. Also owing to the soft conditions the KFAED will have to conform with, interest rates will be put under negative pressure causing the Central Bank of Kuwait to lose one of its most important intervention tools in the saving and consumer market.

Additionally, as mentioned by various bank sources, the Kuwait Fund is in no way qualified for the tasks suggested by the proposal, the implementation of which will create a parallel credit market free from the authority and control of the Central Bank of Kuwait. It should also be noted that such a super bank would cause abnormalities in interest rates and eliminate competition, thus crippling the equal opportunity mechanism of the banking sector due to existence of a cheap (soft) and commercial finances.

The KFAED was never meant to function as a provider of loans to local companies but to provide aid and loans to Third World countries as well as finances to Kuwaiti ministries and House Care establishments. It is not surprising that this proposal has been met with immense skepticism from all corners of the Kuwait Market, from economists to investors, business owners and even from the banking sector.

With this adverse impact on the banking sector there is no doubt that the private sector will also take a serious blow as well since the banking sector forms a significant portion of the private sector.

It is interesting to note that although Sheikh Ahmed Al Fahad mentioned that his development plan focuses on encouraging Private and Public Partnerships, his proposal seems to leave the private sector alone in the dark while giving more power to the public sector. Would it not be more beneficial to encourage banks to form financial partnerships with government entities instead of shutting them out completely?

It is also alarming to note several anomalies in the Development Plan and the proposal itself. The national assembly endorsed 30bn KWD for the whole 5 year Kuwait Development Plan. On the 2nd of February 2010 cabinet approved 4.78bn KWD for the first phase (2010-2011) of the development plan. However, it was stated by Sheikh Ahmad Al Fahad that the cabinet will strive to reach 7bn KWD in the first phase (2010-2011). On further scrutiny, however, the minister of finance stated that contrary to what Ahmad Al Fahad had previously stated the expenditure for the first phase would reach a whooping 16bn KWD. This in itself is a 9bn KWD discrepancy in the forecast. Moreover the plan was crystallized by Sheikh Ahmad al Fahad and substantiated by the national assembly in less than one year, which is hardly enough time to conduct detailed feasibility studies and due diligences for a project of such magnitude. Now with the new proposal to inject capital into KFAED, it is feared that this will create immense strain on the economy, as an amount of 16bn for one year is equivalent to 50% of the GDP (Year ended 2009 - 31.944bn KWD) taking into account current Market prices.

Drawing from all these factors and the numerous criticisms from various avenues of the Kuwait Market, it is immensely clear that the proposal to increase the capital of the KFAED to fund the execution of the Kuwait Development Plan is unsound and harmful to the economy as a whole. A more logical approach, supported by extensive studies and research, would be to create a separate entity that would oversee the execution of the Development Plan and acquisition of funding and finding necessary resources from both the Public (ministries and investment institutions) and Private (Banks and investment institutions) sectors. This will encourage healthy long term unbiased partnerships between the Private and Public Sectors and ensure the effective and efficient execution of the “Development Plan”.

Services Sector: THE FUTURE

Governments are facing up to the challenges of re-inventing their economies to better adapt to the needs of an ever-changing and globalized world. Countries are bolstering their economies to ensure that future generations are well equipped to weather the toughest of challenges.

GCC governments are now focusing on the Services Sector to help build the foundations for sustainable development and drive economic growth. This report assesses the importance of the Education and the Health Sectors in leading economic growth, with specific reference to the GCC countries, and explores the potential that Privatization can play in transforming the nation’s growth.       

The Future of the Education & Health Sector

Education Sector

The GCC Governments have, over the years, rapidly expanded their Educational systems to cater to the growing youth population. However, the Education sector today is faced with newer and significant challenges. The GCC has a rapidly growing segment of young people in the world, in proportion to its population. This growing segment will create unparalleled demands for new learning opportunities and even stronger expectations of better results. Also, the dynamic nature of the world has led to demand for a diverse and rich mix of skills and competencies that will influence the basic fabric of education systems.

The GCC has a significant portion of its education system in the public sector. Most public institutions have been unable to completely absorb the growing youth population. Also, centralization of most institutions in national capitals and primary cities has limited access for peripheral regions. Also, budgets allocated for education remain limited and insufficient to meet the growing needs of educational institutions. Also, the educational curriculum, has not been able to keep itself in line with requirements of the corporate world.

Health Sector

The GCC countries have previously witnessed accelerated growth in the Health sector over the last few years.  This region now faces three drivers that that will dramatically increase health-care demand in the region:

1. Population growth: The region is expected to see a doubling of its population over the next 2 decades.
2. Aging populations: Improvements in life expectancy have resulted in an increasing number of elderly people requiring care.
3. Health-risk factors: The changing health patterns show shows a unique risk profile for GCC citizens.

These factors will lead to a massive rise in the overall demand for treatment, an increase in the number of hospital beds, and an enormous increase in health care costs.

GCC countries now face a significant and unparalleled rise in demand for healthcare. To augment services and raise standards of healthcare, GCC governments are increasingly engaging the private sector to help meet future demand.

Considering Privatization

Privatization has been most associated with the transfer of ownership, management, finance or control from the public to the private sector. In a narrower sense, it has been used to describe the sale of public assets to the private sector, but it has also been associated with a reduced regulatory role for government linked to policies of liberalization and deregulation.

The need for privatization in GCC countries was initiated due to many motives, such as the need to achieve efficiency and better allocation of resources, increasing the role of the private sector in the economy, allowing competition to improve the productivity of the indigenous labor, and to allow better functioning of the labor market.

Going the Half Way

Although privatization of the Education & Health sectors will have significant advantages that can transform their performance efficiencies, the inclination of the private sector to prioritize profits over the well being of the general public is a hurdle that needs to be worked around. The GCC governments have to retain control on these sectors in order to ensure that the inhabitants of the region are benefited to the maximum. A work around to the ill effects that result from complete privatization of the education and health sectors is to build more Public – Private Partnerships (PPPs).

PPPs are agreements between the public and the private sectors, whereby the private operator commits to provide public services that have traditionally been supplied or financed by public institutions. Various models of PPPs exist, such as Service Contracts, Operation and Management contracts, Leasing, and Build-Operate-Transfer (BOT).

PPPs present a number of recognized advantages for the public sector to exploit. These include the ability to raise additional finance in an environment of budgetary restrictions, make the best use of private sector operational efficiencies to reduce cost, and increase quality to the public and the ability to speed up development.

The education and healthcare sectors in the GCC are faced with significant challenges in the years to come. With the staggering population growth and the increase in demand for these sectors, it is more than clear that both sectors have to undergo significant change to cater to the ever-growing needs. It is also of no doubt that the complete privatization of both education and health sector is hardly the answer to the problems faced by the public sector. Although the private sector does have significant advantages as compared to the public sector in terms of performance and efficiency, it is important that the government retains its control over both sectors while using the private sector to enhance performance and efficiency.