LONDON, 25 March — In the regal surroundings of the Ciragan Palace Hotel in Istanbul, the Saudi Arabian General Investment Authority (SAGIA) is scheduled to hold “The Second SAGIA Investment Retreat” on April 16-17.

The post-Sept. 11 impact on the Saudi economy; oil price volatility; privatization; the future of the Saudi labor market; SAGIA’s new policies and challenges; and the new Saudi legislation in mining and finance are some of the issues that will be on the agenda.

No doubt, SAGIA Governor Prince Abdullah ibn Faisal ibn Turki has taken the cue from Crown Prince Abdullah, deputy premier and commander of the National Guard, to stress the reformist ethos of Saudi foreign investment policy.

Only a few weeks ago in Riyadh at an agricultural forum, Crown Prince Abdullah himself confirmed emphatically that the Kingdom “has made a strategic decision to encourage national and foreign investment and provide all guarantees and facilities for investment in all sectors.”

But its was SAGIA Governor Prince Abdullah, who at the same forum, expanded on some of the policy initiatives in store. The Supreme Economic Council is currently reviewing the “Negative List” — those economic sectors in which foreign investors are currently banned from investing in; and that there is a consultation going on with the Saudi private sector.

Perhaps Prince Abdullah’s most revealing remarks were that the Kingdom would pursue economic liberalization at a cautious pace. The “Negative List” as such was unlikely to be scrapped. “It is still too soon to see what the effects are of the foreign investment law. You can have direct investment and privatization even with subsidies,” he stressed.

The Kingdom here has a real dilemma. The concerns are whether local companies will be in a position to compete with foreign rivals and whether they would be able to survive without subsidies.

At the same time, the government has consistently stressed over the last decade or so, that it expects the private sector to start contributing a greater proportion to GDP (gross domestic product). However, the Kingdom’s reliance on oil, say analysts, will continue for some time, although there are signs that non-oil industries are starting to make some inroads, albeit very slowly.

The Saudi Arabian Five-Year Development Plan (2001-2005) stresses higher economic growth and job creation. The private sector is expected to play its role in this respect. GDP growth is targeted at 3.16 percent. Private sector growth is put at 5.04 percent and non-oil GDP is set to expand by 4.01 percent, with the non-oil sector contribution to GDP set to rise to 71.6 percent by 2005.

The plan also foresees a sharp increase in private sector investment, which is expected to reach SR127.6 billion over the five years of the plan, and accounting for 71.2 percent of total investment. The aim is to create some 817,000 new jobs over the plan period, although this is going to be the major challenge.

Perhaps the Saudis can learn from the Malaysian Model in particular its Financial Master Plan, which paves the way to market liberalization in a phased way — both in terms of time and the consolidation of 10 banking and financial giants capable to compete with the global giants.

The Malaysians are achieving this through forcing many of the local banking groups to merge in strategic alliances. This can be down without being heavy-handed — but mainly through introducing tough capital and capital adequacy and other requirements, and world class compliance, management controls, best practice and reporting standards, and so on.

For Saudi Arabia, the choice is stark. Some two decades ago its GDP per capita was on par with the United States. Today it is on par with Mexico. Male unemployment is estimated at above 14 percent. With a rising and young population, the demand for power, water, communications, health care, education, training and consumer goods is expanding rapidly. The power and water sectors alone, according to one estimate, will need $200 billion worth of investment by 2020.

Saudi watchers such as Sir Alan Munro, former UK ambassador to Riyadh and now an adviser to the Al-Yamamah Economic Offset Program, applaud the fundamental seachange in economic policy, especially the new foreign investment law and the fact that foreigners now can own wholly own ventures in some sectors.

They are particularly encouraged by “the evidence of a firm commitment to change at the highest levels of government, with business now starting to set the political agenda.”

Sir Alan, however, in a recent speech, stressed that it is in the creation of a coherent and supportive legal and regulatory framework that progress is very slow, and warned that if the opportunities of new foreign investment are to be taken up, it would be necessary to demonstrate that the required adjustments to the system of laws governing business and commerce are under way.

He concluded that it is foreign investment “that has an essential part to play in ensuring that economic growth and new employment that are crucial to the continuation of this stable business environment.”