Saudi Arabia: Climate For Change

Since its accession to the WTO in 2005, the kingdom has been pressing ahead with economic reforms, opening the door to private sector investment, and launching construction on a series of economic mega-cities that will transform the Gulf-nation’s landscape.

Saudi Arabia is reaping the benefits of its fourth – and highest - oil price boom. Flush with funds beyond its budgetary expectations, the kingdom is spending billions of dollars on expanding its social services and industrial infrastructure. At the same time it is opening the door to private sector investment and pressing ahead with economic reforms.

“The government has made a conscious decision to bring in the private sector to work with the government in a partnership that will allow the sector to take the lead and be the driver in the next boom,” says Abdullah Zainal Alireza, a Saudi minister of state. “It is one of the most important things happening in Saudi Arabia.”

Since its accession to the World Trade Organization (WTO) in November 2005, the Riyadh government has liberalized the nation’s markets, restructured its legal regimes, fostered a more open and balanced economy and, in the view of experienced American observers, made the Saudi economy infinitely more receptive to foreign participation than it had been in the past.

New laws and regulations are opening up the insurance and banking sectors and promise more transparency in business and financial affairs. The kingdom’s business community is confident that these will be speedily implemented.

Robert Jordan, the U.S. ambassador to Riyadh following 9/11, describes the changes as “hopefully the dawning of a new age in Saudi Arabia.”

Many experts agree. “The exceptional fiscal performance last year has put the kingdom’s finances on a sound footing for many years to come,” said a Riyadh banker. “It has made our economic developments sustainable for future generations.”

Plans have been unveiled for the opening of four new universities and the construction of 56 colleges and 2,000 schools. Spending on health and social affairs has been increased by 27 percent this year and 13 new hospitals are to be built along with the 64 already under construction.

Financing has also been allocated for an additional 5,000 miles of new roads to go with the 10,000 miles currently being built. Furthermore, the go-ahead is being given for the development of the country’s ports, airports, railways and new postal services.

At the heart of the government’s development plan is the construction of a series of economic mega-cities that will utilize the country’s core resources while providing employment and homes for its citizens.

The first of these is the King Abdullah Economic City, an industrial and financial complex being built north of Jeddah on the Red Sea coast. The cost of construction, which began in 2005, is $26.7 billion.

“The ultimate objective of the economic cities is the establishment of ten global industries in which Saudi Arabia will be number one or two,” says Fahd Al-Rasheed, the deputy governor for special economic cities. “This is a very lofty task but we can do it because we are only going to select industries that are based on our two competitive advantages, energy and location. We are talking about things like petrochemicals, steel and aluminum processing and phosphates.”

Another of the chosen industries is information technology. While Saudi Arabia does not have a competitive advantage in this sector, Al-Rasheed believes it is vital to the kingdom’s economic growth. “It is an industry of the future. If we don’t create a vision and a plan today, we’ll never become a leader and never rid ourselves of our dependence on oil.”

In addition to King Abdullah City, three other integrated economic cities were launched last year: Hail, in the north, Medina in the west, and Jazan in the far southwest. Construction on a fourth city, at Talbuk in the north, is due to begin later this year.

The cities are being developed in accordance to the cluster concept and are being modeled on Silicon Valley and similar conurbations in Singapore and Ireland.

“We are adopting a market-driven approach,” says Al-Rasheed. “It is about asking our tenants what they need in terms of regulations, infrastructure, incentives, and human resources.”

Last year the Saudi Arabian General Investment Authority (SAGIA) licensed 1,389 joint and foreign projects worth a total value of $67.5 billion, an increase of 25 percent on the previous 12 months. It aims to attract similar investment this year to the tune of $80 billion.

The strength of the economic turn-around can be gauged by the level of government debt. Peaking at 119 percent of GDP in 1999, it stood at 28 percent at the end of 2006.

One of the most encouraging aspects of last year’s economic performance was the growth of the non-oil sector. Spurred by higher petrochemical and metals production, it continued to expand faster than other sectors, increasing by 10 percent on the previous year.

Global demand for petrochemicals remains practically limitless and as the kingdom has such cheap feed stocks, production is expected to increase substantially. Saudi Arabia currently produces about 46 million tons of petrochemicals a year, 10 percent of which comes from the private sector, which makes it the world’s seventh largest producer. The kingdom is expected to become the world’s biggest producer by 2015.

Saudi production of cement and steel is also projected to increase substantially. The kingdom currently produces 5 million tons of steel a year and with the construction of new railroads underway is looking to expand steel exports by a distinct margin.

The Saudi Arabian Monetary Agency (SAMA), the kingdom’s central bank, says it expects another 12 months of healthy economic performance thanks to the increase in government spending and significant public and private sector investment in numerous mega projects.

Aramco, the giant state-owned oil company, believes that demand for global energy will grow by nearly 60 percent over the next quarter of century. It is investing heavily in its upstream activities and drilling additional development wells in its producing fields to off-set the normal decline of older wells.

It has also signed memorandums of understanding with Total and ConocoPhillips to build two new refineries, at Yanbu on the Red Sea and Jubail on the Gulf coast, each with an initial capacity of 400,000 barrels per day.

Overall, the spending on new infrastructure – energy and water supplies, transportation, oil and gas production and downstream petrochemical industries – is expected to reach nearly $700 billion over the next 20 years.

Around $40 billion must also be spent to attain the goal of providing universal potable water and safe sewage. At present 10 percent of the population lack supplies of water and 55 percent lack adequate sewage facilities.

According to Nabila Al Tunisi of Aramco, the unprecedented scale of the economic boom “provides tremendous opportunities to worldwide suppliers, manufacturers, fabricators, contractors and investors and offers the chance for companies to form international alliances and partnerships.”

By Michael Knipe