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Risk in Context

Wave of Privatization in the Middle East Presents Risks as well as Opportunities

POSTED BY Nirav Modi Thursday, 31 May 2018

The Middle East is preparing for a sustained period of privatization, as countries look to diversify the economy by divesting state assets.

With the price of oil currently lingering between US$55-US$70-per-barrel mark and predictions that Gulf Cooperation Council (GCC) countries will continue to prosper and grow, governments are looking at new ways of raising capital to fund non-oil orientated projects and industry sectors.

Several countries in the region are looking to divest assets in order to grow their national economies sustainably. It appears that no sector is off limit, with energy, water, transport, education, and healthcare assets among those being readied to be privatized. 

The current transactional environment presents challenges for investors; and countries in the region will need to work hard to make the sale of their assets more attractive in order to appeal to the international investor community.

Governments in the region will be looking to develop sustainable privatization programs that help foreign investors overcome challenges such as political certainty, the effect on the labor force, regulatory and governmental processes, and resistance from local populations.

These challenges come with a range of risks that businesses will need to contemplate when considering investing; however, there are solutions they can use to mitigate the risks involved in asset purchases, including:

Directors and officers (D&O) insurance: The personal liability for directors and officers is considerably heightened during privatizations. D&O can be used to protect them from allegations of wrongful acts associated with corporate restructuring.

Warranties and indemnities insurance (W&I): The warranties schedule of a sale purchase agreement is frequently one of the most hotly negotiated areas of any transaction. W&I can be utilized to help parties bridge otherwise considerable gaps between parties’ perceptions of the amount of liability which the seller should remain responsible for after the deal has completed.

Political risk insurance:  Political risk exposures relate to people, assets and contracts; political risk insurance can offer risk mitigation solutions on all three fronts, including equity and debt exposures investors may face.

In addition to the above solutions, potential investors should ensure that they are undertaking as much intelligence gathering as possible around the risk profile of the companies they are considering purchasing, at the earliest stage possible.