The recent announcements of the signing of the mega refinery projects at Jubail and Yanbu by Saudi Aramco with foreign shareholders, as well as the inauguration of the estimated SR81 billion new projects at Jubail by Custodian of the Two Holy Mosques King Abdullah, should provide a golden opportunity to plan on how to integrate the Saudi Small and Medium Sized Enterprises (SME’s) into these economic and investment opportunities.
It may come as a surprise to many, but the SME sector is often the backbone and heart of most economies of the world, even the most advanced ones. The SME sector contributes around 80 percent-85 percent to the mighty US economy of around 11 trillion dollars, and the percentage is in the high 80 percent ranges for Germany, UK and Japan. The SME’s are traditionally more labor intensive and, as such, are the mainstay of employment and social economic cohesion. The SME sector has, until recently, been neglected in the Gulf countries due to historical and economic reasons associated with the rush for industrialization in the earlier oil boom period of the late 1970’s and 1980’s. Capital intensive projects, joint-venture partnerships and a desired high level technology transfer were all the rage in the initial effort to build industrial cities and high tech production. SME’s were seen to be backward, unresponsive to change, with outdated management skills and not export orientated. They were bypassed in their financial needs, and few government or private financial institutions catered for their investment expansion without requiring exorbitant guarantees.
All this is slowly changing in Saudi Arabia, as the economic, social and employment impact of this sector is now being recognized at the highest levels of the government. The various regional chambers of commerce and industry have established dedicated SME units to enhance SME management, IT and business planning, while the government has increased the availability of funding to the SME sector through its specialized government institutions such as the Saudi Credit Bank in the recent budgets. Local banks have been encouraged to look more positively at lending to his sector, and the government has provided bank guarantees. The SME employment impact can be positively large. By some estimates, for every SR1 million invested in the mega capital intensive projects, around 2 new jobs are created, while the same amount invested in the SME sector would generate around 18-20 new jobs.
The recent signing of the mega refinery projects by Saudi Aramco with Total in Jubail and ConocoPhillips in Yanbu, as well as the expansion of Phase II in Jubail by King Abdullah, should provide a golden opportunity for some forward planning to take place from now in how to integrate the SME sector to the production needs of these mega projects. Action is required now to involve SME “clusters” of like minded smaller firms, so as to inform them of basic input requirements of these projects as well as minimum acceptable industry quality standards and delivery process.
The chambers of commerce, Saudi Aramco and the Royal Commission for Jubail and Yanbu should begin the educating journey from now so that those SME’s who want to participate in the mega projects have time to adapt and qualify in the production process. It will not be easy, and many might fail the first hurdle of more rigorous production standards, but it will be a learning process for many to adapt and change to the modern age. Changing the mindset of the mega project managers might prove to be more of a hurdle than the qualifying of SME’s to carry out sub-contracting work, as the mega project managers might prefer to deal with fewer subcontractors with established track records. This should not be an excuse not to involve the SME’s, for cluster “leaders” can be established for certain SME production lines, who can act as the contact point for mega projects. The Japanese have led the way in involving SME’s at all stages of their mega projects. Eventually, financing was not an issue for Japanese SME’s, but more of the meeting of global standards and quality control. Whether an input comes from an SME or a multinational should not be the major concern of the Saudi mega project owners, as long as an equitable and transparent specifications process is established.
Saudi Arabia is being given a second chance in its economic diversification and industrialization policy, so as to ensure that the SME sector is firmly involved this time round, and to launch their long term and ongoing participation in the economic welfare of the Kingdom. Such chances might not come again.
(Dr. Mohamed A. Ramady is visiting associate professor Department of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.)