KSA in line for multibillion-dollar infrastructure dividend

Saudi Arabia is likely to spend $1.1 trillion on infrastructure projects between 2019 and 2038. (Reuters)
Updated 17 September 2018
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KSA in line for multibillion-dollar infrastructure dividend

  • Diversification via ‘localization’ will stimulate both the home market and export potential
  • "Nigeria did it, and before them Brazil did it, and there is no reason why KSA cannot do it," says industry analyst

LONDON: Saudi Arabia stands to collect an “infrastructure dividend” worth billions as it pushes ahead with its diversification drive, powered by a localization program involving partnerships between KSA enterprises and overseas firms to ensure wealth cascades down to the wider population, say experts.

Dr. Raed Kombargi, an Abu Dhabi-based partner with consultancy Strategy&, told Arab News that KSA should be able to provide goods and services for its local market as well as build globally competitive export industries. “The dividend is certainly there and I am confident they can do it,” he said.

Kombargi said the purpose of localization was, on one level, to stimulate the economy by creating a lot of jobs. But it was also about having an impact on GDP.

“If you are focused only on the local market and local demand, you will get to a certain level but you won’t get the ‘big bang’ that you are looking for,” he said. “To take full advantage of local content, home-produced goods should, in the medium term, become globally competitive, so that you are not just manufacturing, for instance, solar panels or solar components to install in KSA, but also to export regionally and beyond. That’s how you maximize local content.”

A report from Strategy& published last week estimated that Saudi Arabia was likely to spend $1.1 trillion on infrastructure projects from 2019-2038. The report looked at infrastructure spending worldwide for the next 20 years and found that Saudi Aramco was targeting 70 percent localization by 2021 as part of its In-Kingdom Total Value Add (IKTVA) program, which favors local content during the procurement process and makes localization a key condition that encompasses all its commercial arrangements.

Looking ahead, the report noted that large development schemes were being set up in a way that would allow local companies to substitute imports, and to grow non-oil exports by building an industrial base to create export potential.

Monica Malik, of Abu Dhabi Commercial Bank, said: “You have had strong population growth and you need to upgrade infrastructure, including providing services such as health, education and housing. The requirements and objectives are very broad, as is the potential.”

Turning to construction, she said that if momentum builds up, “You will need foreign construction firms to come in and work with Saudi developers, to help with the requirements on the ground. There has been a bottleneck in the past, often the ability to get contractors in has — at times of growth — not been at the pace required.”

Asked how successful he thought KSA would be in localizing content in the building of new cities such as Neom and other mega projects, Kombargi said: “I think they can. Nigeria did it, and before them Brazil did it, and there is no reason why KSA cannot do it.

“There is a new generation of highly educated Saudis, very responsible about the future of the country, and extremely savvy about what makes sense economically and what doesn’t,” he said.

But Kombargi thought KSA and others should do things slowly, building up supply chains and being aware of strengths and weaknesses with regard to the supply base.

The report said that many governments in developing economies have a sense of urgency that can lead to short-sighted and counterproductive policies. Specifically, there were biases that can interfere with robust, fact-based analysis and policy design. There were times when policy-makers overestimated the localization potential from a given product category, failing to factor in the huge disparities in sizes, designs, and costs of goods in that category. 

Ross Teversen, of London-based Jupiter Asset Management, said that KSA seemed to be taking cues from China’s fixed asset investment model “by investing in infrastructure projects to remove bottlenecks to economic growth.”

He pointed to the high-speed Haramain train service that will link Madinah and Makkah to the King Abdullah Economic City (KAEC) on the west coast and Jeddah’s King Abdulaziz International Airport, and the new Riyadh metro system as examples of key infrastructure investments that were “transforming the Kingdom.” 


China opens up finance sector to more foreign investment

Updated 20 July 2019
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China opens up finance sector to more foreign investment

  • China will remove shareholding limits on foreign ownership of securities, insurance and fund management firms in 2020
  • Beijing has long promised to further open up its economy to foreign business participation and investment

BEIJING: China lifted some restrictions on foreign investment in the financial sector Saturday, as the world’s second largest economy fights slowing growth at home and a damaging trade war with the US.
China will remove shareholding limits on foreign ownership of securities, insurance and fund management firms in 2020, a year earlier than originally planned, the Financial Stability and Development Committee said in a statement posted by the central bank Saturday.
Foreign investors will also be encouraged to set up wealth management firms, currency brokerages and pension management companies, the statement said.
Beijing has long promised to further open up its economy to foreign business participation and investment but has generally dragged its feet in implementing the moves — a major point of contention with Washington and Brussels.
Saturday’s announcement followed a Friday meeting chaired by economic czar Liu He where policymakers focused on tackling financial risk and financial contagion and pledged new steps to support growth, according to a state council statement.
Additional measures include scrapping entry barriers for foreign insurance companies like a requirement of 30 years of business operations and canceling a 25 percent equity cap on foreign ownership of insurance asset management firms.
Foreign owned credit rating agencies will also be allowed to evaluate a greater number of bond and debt types, the statement said.
US President Donald Trump has launched a damaging tariff war in an attempt to force Beijing to further open up its economy and limit what he calls its unfair trade practices.
The US and China have hit each other with punitive tariffs covering more than $360 billion in two-way trade.
Trump and Xi Jinping agreed to revive fractious trade negotiations when they met on the sidelines of the G20 summit in Japan on June 29 and top US and Chinese negotiators have held phone talks this month.