The advent of public enterprises in the Kingdom of Saudi Arabia has been a relatively recent development. This new form of organisation for government operations was the product of the unprecedented prosperity associated with oil production and marketing since 1970. The resultant buoyant economy highlighted the need for economic and social planning, and for the restructuring of the economy from a consumers market to an industrial base producing capital goods. Also apparent was a need for diversification in order to reduce over-reliance on oil revenues.
In view of these emerging needs and priorities, the government adopted the strategy of establishing undertakings for industrial, agricultural, commercial, financial, educational, health, social, advisory and managerial functions. All these developmental activities required large amounts of capital which could be provided only by the public sector.
Public enterprises in Saudi Arabia may be classified in two categories, viz. the public corporation and the state-owned company. There are about 30 public corporations established by special legislation or decrees of the Chairman of the Board of Ministers. The operating rules and procedures for the finance, management, audit, personnel and other activities of the corporations are detailed in these enabling authorities. The administrative and financial independence of public corporations vary according to the nature and importance of their activities.
There are about 65 other public enterprises in the form of companies wholly or partially owned by government and established under the relevant companies legislation. Commonly, public agencies are set up as joint stock companies in partnership with private individuals. The Kingdom's industrial base - including large companies engaged in the production of cement, electricity, vegetable oils, maritime and land transportation, and oil refineries - was consolidated in this manner. Joint ventures have also been undertaken with multi-national companies conducting various activities in the pharmaceutical, electronics, mining, agricultural and fishing industries.
Public corporations in Saudi Arabia are usually managed by an individual or a company specially commissioned for that purpose and paid a fixed fee or a specified percentage of the undertaking's profits or revenues. The rationale for this type of compensation is that the enterprise can obtain competent management while, as a public entity, exercising control over product prices. The Arabian American Oil Company (ARAMCO), for example, manages petroleum, oil and gas establishments owned by the Kingdom. Some government-owned hospitals and hotels are also managed by international companies.
Public corporations may be managed either by a board of directors or by a Board of Management. The Chairman of the board of directors (who may be a Minister) and members appointed by the board of ministers are responsible for policy matters. The board of management, appointed by either the board of ministers or the board of directors, is responsible for the day-to-day operations and functions of the corporation.
The Ministry concerned appoints its representatives to the board of directors of a company partially owned by government, while the other members are elected by the shareholders through the annual general assembly. Where there is majority ownership by the government, the Minister concerned may also be the chairman of the board of directors.
The personnel of public corporations are recruited in accordance with the Civil Service Act, the Employment and Employees Act, and under specific bylaws and regulations. Government-owned companies recruit their staff from the open market in line with company policy and procedures.
Public enterprises generally have no difficulties in recruiting trained or qualified staff either from the Public Service or from the open market. Institutions such as the Institute of Public Administration, the Institute of Technical and Professional Training and also the universities supply the job market with qualified persons. However, some attrition of experienced personnel from public corporations occurs because of perceived better prospects in the private sector.
Some public corporations in Saudi Arabia are able to meet operating costs from their own revenues but others are totally dependent on government subsidies. Because of the public interest aspect of these corporations, the government controls rates, fees and product prices.
Subsidies are given to public enterprises to cover operational deficits but, where the government controls prices, the grants given could be to cover operating losses or guarantee a specified net income. To encourage private foreign investments, tax exemptions are granted for certain activities for limited periods of time.
Public corporations are not allowed to borrow on the open market but there are no such restrictions for government-owned companies. Companies may borrow moneys but the government does not provide guarantees. Loans to public enterprises from the government are usually made on preferential terms, but loans from commercial sources are at the usual market rates of interest.
Another form of financing public enterprises is through equity participation in companies. Accordingly the government may invest in companies in order to establish a national industry or to support industries or services that produce a strategic product or service. Private participation in enterprises is encouraged to attract capital in addition to fostering business and managerial abilities and skills.
Public corporations showing surpluses in their accounts are required to surrender them to the Ministry of Finance and National Economy. Alternatively, such surpluses may be deducted from the following year's grants. Although government-owned companies are not affected by this requirement, the normal procedures for liquidation as prescribed in the Companies Law and the Companies Establishment Act apply should a company become insolvent.
The responsible Minister may be the chairman of the board of directors of a public enterprise or a company established under company legislation in which the government has a controlling interest. If the Minister is also the chairman of the board of directors of a government company, the entity is directly controlled by him. Where the Minister is not the chairman of the board, officials from the Ministry are appointed as members of the board and derive their authority from the Minister.
Ministers exercise control over public enterprises, other than companies, through the periodical reports submitted to them. The Ministry concerned issues guidelines and supervises the operations of the public enterprise.
Central control is exercised by the Ministry of Public Enterprises over financial allocations to various public enterprises. There is also an arrangement for parallel control by the Ministry of Finance and National Economy in regard to the financial affairs and budgets of public enterprises.
The General Civil Services Bureau controls the appointment and dismissal of staff of public corporations and their conditions of service in terms of the Civil Service Act. In the case of government companies, the Ministry of Works and Social Welfare supervises the implementation of the Employees and Employment Act, which governs the employment of all public sector staff.
Other central agencies of the government which exercise control over public enterprises include the Control and Investigation Body, while the Ministry of Commerce sets price ceilings for public enterprises. Subsidised prices are also fixed by government for certain services provided by companies partially owned by government, e.g. electricity and intra-city public transport. In these cases the government covers operating losses and guarantees a specified return on investment.
The day-to-day functioning of public corporations and government companies is independent of the government and in accordance with the laws and regulations of the particular entity. While government companies have complete financial autonomy, other public enterprises are independent within the limits set by their laws and regulations. Further, government companies have full discretionary powers, except where the government determines the prices of their products or services.
Public enterprises are accountable for their performance in meeting the objectives set for them. Organisational controls are necessary to ensure their contribution to the promotion of national economic development.
A distinction is made between the board of directors and the board of management of the enterprise. The latter handles day-to-day problems and reports to the former.
As already mentioned, the chairman of the board of directors may be the Minister. The Ministry appoints its representatives (the number depending on the percentage of contribution of government to the capital) on the board of directors of a government company, while the other board members are elected or removed by the shareholders. In the case of other public enterprises, the members of the board of directors are appointed or removed by the Council of Ministers. The board of management could be appointed by the Council of Ministers or by the board of directors.
The board of directors exercises its day-to-day functions independently of the government, in compliance with the laws and regulations of the entity. Rules and regulations governing the internal administration of public enterprises are approved by the board of directors. However, some rules and regulations may need the approval of the Minister of Works and Social Welfare.
Most public enterprises have management information systems which are computerised. There are also management reporting systems which monitor the performance of the enterprises. In the case of government companies,
annual reports are made to the board of directors or to the general assembly of shareholders. A company is required by law to submit its annual report at least 25 days prior to the session of this general assembly. Other public enterprises report to their board of directors four times a year.
Periodical reports on the operations and working of public enterprises cover areas such as financial returns, physical production, industrial relations, pricing decisions or other market developments, and completion of construction projects on hand. These reports are discussed between the top management of the enterprise and the Minister or the administrative ministry officials. The annual report of the SAI gives a summary of the periodical reports of government companies, and this annual report is presented to the Council of Ministers. In the case of other public enterprises, the periodical reports are presented to the Council of Ministers. Directives may be issued as a result of discussions with the management. The annual report of each ministry also contains information about the functioning of public enterprises under the administrative control of that ministry.
The representatives of the administrative Ministry on the board of directors also submit reports to both the ministry and the Minister on the functioning of public enterprises. Such reports may also be sent to other ministries, e.g. Finance Ministry or Planning Ministry. These ministries further receive reports regarding the generation of internal resources and attainment of planned targets.
Public enterprises may set their own accounting standards. However it is necessary that these standards adhere to professionally recognised principles. The form of the financial statements of a public enterprise is approved by the Ministry of Finance and National Economy.
The SAI does not participate in the preparation of the financial statements of auditees. This is the responsibility of the public enterprise concerned, irrespective of its type.
The Council of Ministers is a legislative body, which is also responsible for executive and administrative matters. The legislature controls are thus not distinct from the executive functions. The Council of Ministers reviews the budgets of all types of public enterprises.
There are no parliamentary committees in Saudi Arabia. However, it is said that the Council of Ministers pays adequate attention to the reports of the SAI. The SAI representative is called for discussions wherever necessary.
The General Auditing Bureau, the Supreme Audit Institution in the Kingdom of Saudi Arabia, is empowered to audit all public enterprises. Under Item Number (7) of the Royal Decree No. M/9 of 11/2/1391 (H), the SAI"... audits all government revenues, expenditures and all moveable and immoveable assets so as to ensure the proper maintenance, use and investment of such assets." The auditing mandate of the SAI thus encompasses public funds of any nature, so that all public corporations and companies in which the government has a financial interest are subject to external audit by the SAI. The latter companies are also subject to external audit by commercial auditors as provided by relevant legislation and internal regulations.
Although the SAI has no direct legal power to act as consultant or advisor to the management of public enterprises, the SAI does so when requested by public corporations. Government-owned or controlled companies, however, rely on their own boards of directors and commercial auditors. In those cases where either the public corporation or the government company makes decisions which do not comply with companies legislation or regulations, the SAI is empowered to intervene and correct such managerial decisions of the enterprises concerned.
In carrying out a mandate established by Royal Decree, the SAI conducts comprehensive financial, social and performance audits of all public enterprises. Originally the audits of the SAI were confined to the traditional transactions-based approach focused on inventories, documents, balance sheets, final accounts and contracts. The focus has now shifted to comprehensive auditing highlighting the economic utilisation of resources. In view of this change, the types of audits undertaken by the SAI are no longer concerned exclusively with financial and legal aspects. Efficiency audits and performance evaluation now involve a wide range of other considerations.
The general objectives of the audit of all public enterprises by the SAI in Saudi Arabia are to protect public property and ensure that proper financial and managerial policies and standards are being observed. In order to achieve these objectives, the scope of audits conducted by the SAI is relatively wide, extending to all aspects where public funds and property are involved.
All public enterprises are required to have an internal audit function. Generally this function is effective but where there are deficiencies the SAI may emphasise the importance of the internal audit function to the particular enterprise involved and recommend improvements such as increasing the sample sizes to be tested.
It is common for public enterprises to have audit committees. These advise on internal auditing procedures and generally oversee the auditing function. In some cases outside assistance is sought from commercial auditors to perform the internal audit function.
The SAI is not empowered to engage private auditors on contract. However, a public enterprise, under its statute, is empowered to appoint a private auditor. The private auditor of a company, where government owns no less than 25% of its capital, is required to provide the SAI with the audit program and a copy of the report on the final accounts together with such observations of discrepancies or violations he might discover at least 15 days prior to that company's general assembly meeting. Such appointments would not satisfy the auditing requirements of the SAI.
In common with other audits, the principal audit methodology employed by the SAI for public enterprises is systems-based, with statistical sampling techniques applied where necessary. Additionally - in view of the general use of computers in processing significant revenue and expenditure transactions, maintaining records of accounts receivable and accounts payable, and in controlling assets - the SAI is in the process of introducing computer-assisted auditing techniques.
The audit of public enterprises is carried out by particular branches of the SAI in major cities. These branches do not function autonomously but remain an integral part of the General Auditing Bureau under centralised control and direction. Specific audit guidelines accompanied by comprehensive audit programs are issued by the SAI for the audit of public enterprises. In carrying out attest or financial audits auditing standards set by the SAI are followed. However in performance auditing, where standards have not yet been fully developed, procedures are more flexible and tend to adapt to the needs of different enterprises. Specially trained and qualified staff are engaged in the audit of public enterprises. As audit staff are recruited from various disciplines and are not necessarily qualified accountants, the SAI provides internal training programmes in accounting and auditing where necessary.
The SAI is required to audit and report on financial statements annually. In the case of public corporations audits are conducted progressively throughout the year and also after the annual financial statements are received. Where the government has a controlling interest in companies, the audits of the SAI are not carried out until the end of the year when the annual financial statements are available.
With both types of public enterprises, other audits may be carried out as circumstances warrant, as in the case of complaints regarding inventories. Here special audits of inventories in warehouses and vaults may be ordered by the SAI.
A detailed report by the SAI on audit findings is submitted to the minister concerned. A final comprehensive annual report on audit findings of all auditees, is submitted to the Prime Minister (Custodian of the two Holy Mosques). A copy is also sent to the Council of Ministers and another to the Ministry of Finance and National Economy.
Time limits on the annual reports of public corporations are specified by the board of ministers, Ministry of Finance and National Economy or General Auditing Bureau. The SAI also prescribes the time limits for the submission of the annual reports of government-controlled companies.
The annual reports of public corporations are followed up by either the Ministry of Finance and National Economy or by the SAI. The SAI follows up the reports of government-controlled companies and also the answers to any queries.