“Although there is a general trend in the media toward advocating attracting foreign investment into Saudi Arabia, people should not overlook the inherent wealth that the country currently has, that is finding its way into other economies in the form of foreign direct investment.”
There is much talk these days about attracting foreign investment, and its importance to the Saudi economy and its future. The authorities have made an effort to identify certain areas of the economy that are open to investment by foreigners, in the hope of attracting this financial inflow. Important steps have also been taken with regard to privatization, and there is a glimmer of hope that foreign investment may play a role there as well. The idea is to invigorate the economy and create jobs for the local work force by attracting large foreign players to spend money locally.
Although these ends are certainly noble, and foreign investment may indeed bring the country closer to them, there is still a significant opportunity for “local non-foreign investment” that has not yet been tapped, that could be used quickly and effectively to take the first significant steps toward job creation and economic reinvigoration. In fact, this non-foreign investment which is currently sitting in banks or floating around somewhere in the global financial network is far easier to obtain and more accessible to the local economy than the investment by foreign players who are not familiar with the practices, culture, and local market conditions. It is often wealth that is owned by Saudis but ends up leaving the country for many reasons, the most significant being the absence of a variety of transparent and well-structured investment opportunities locally.
In fact, current investment opportunities in the Kingdom are limited in their scope and level of risk, even though there is the demand for more variety after the global crisis which has motivated many investors to repatriate their funds or look for alternative and diversified investment opportunities at home. In addition, in terms of economic performance and return, there is technically more opportunity in the region than in the US, which is currently going through a recession, and is already crowded with businesses and investments.
The local response to the repatriation has been relatively slow, and has consisted mainly of banks offering a few new prototype real estate investment funds and others not previously offered.
There has been no departure from the traditional nature of low risk investment products though. The local investment atmosphere still consists basically either of individuals engaging in do-it-yourself real estate, or banks offering their equity funds, trade finance, Murahaba, and other low-risk investment opportunities for which banks are known; many of which involve re-investing this money abroad in foreign instruments, real estate, or loans to international corporations. There has been unfortunately no response to the immediate opportunity that is clearly apparent, to reconcile the need for local job creation and economic invigoration with the existing and incoming potential flow of funds.
Part of the reason why there aren’t investment opportunities locally to cater for a diversified portfolio and create jobs for the local work force is because the providers of structured investment opportunities in Saudi Arabia are mostly banks, who are by nature heavy and risk-averse institutions that concentrate on taking the least risk possible at all times. It is not part of the role of commercial banks to create business opportunities, write organized business plans, bring together various entrepreneurs, develop innovative business models, and basically act as incubators.
Banks do not drive the major value-driven growth that a nation can experience and that many already have or are in the process of seeing. The role of commercial banks has never been to take risks. The institutions which do usually take these risks, and make it their business, are investment banks or other groups who act as venture capitalists, and make it part of their mission to start and fund successful companies, using their money or that of other investors. This type of activity is generally lacking or very disorganized at best in Saudi Arabia.
There is also a general lack of education about alternative methods of investment, and most investors are not aware that a well-structured and diversified portfolio of investments in new companies can very much be worth the added risk, as the returns can often be very rewarding. The important and essential element of a successful venture capital fund though is an experienced firm with a proven track record of making successful investments, coupled with a management that understands the key value drivers of a business and has insight into certain specific industries.
The authorities must thus strive to provide an increasing number of licenses to such Investment banks and other groups to enable them to take their important role as middle-men and facilitators of investment. Firms wishing to act as venture capitalists must have the authority and legitimacy to do so, as they will be responsible for investing peoples money and providing them with sound and structured investment opportunities outside of the scope of what banks offer.
Although there is a general trend in the media toward advocating attracting foreign investment into Saudi Arabia, people should not overlook the inherent wealth that the country currently has, that is finding its way into other economies in the form of foreign direct investment.
(Karim Samra is a financial adviser at Swicorp (www.swicorp.com), an investment advisory firm specializing in facilitating investment and structuring investment opportunities in the Middle East and Africa.)
Arab News Business 3 March 2003