Earlier this month, UK Ambassador Sir Sherard Cowper-Coles told a visiting British business delegation that, thanks to high oil prices, Saudi Arabia was in the middle of a new and massive economic boom, one that would prove to be bigger and more dramatic in its effect than that of the 1970s. The fact that the delegation he was addressing was the largest group of British businessmen ever to visit the Kingdom was itself testimony to strong international interest and confidence in the Saudi economy. Business is booming to an extent that no one, even just two years ago when the price of oil started to rise, could have imagined. The whole world’s business community — bankers, investors, manufacturers, consultants — are beating a path to the Kingdom’s doors.
Nowhere is that more so than in the case of investors. There has been a dramatic rise in investment in the Kingdom over the last year. The past few weeks have seen major developments such as the announcement, just over a week ago by the Saudi Arabian General Investment Authority (SAGIA) and Intel Capital (the investment capital program of IT giant Intel), of a $100 million venture capital investment company to invest in IT companies in the Kingdom. It is just the latest in a string of recent investment deals. According to SAGIA Governor Amr Al-Dabbagh, Saudi Arabia attracted $10 billion worth of investments in petrochemical projects in 2005.
That is impressive — and the year is not over yet. The figures are even more impressive when compared to 2004. Investments for the second quarter of 2005 are up a staggering 4,600 percent over the same period last year.
Al-Dabbagh has no doubts as to why this has happened. Saudi Arabia has become more focused on selling itself on what it does best — petrochemicals. And the world has become more focused on it too. Added to that, there is the accession to the WTO.
“No country can have every kind of industry,” he says. Every country has its own competitive advantages, its core competencies. They are what attract FDI (foreign direct investment). “Saudi Arabia’s core competitive advantage is energy.” Its second advantage is its location as the hub between the East and the West. That is where the WTO comes in.
“WTO will give our products better access to markets in the industrialized world. That will help in attracting further FDI, because Saudi Arabia is the most cost-effective location on earth for downstream petrochemical industries.” The cost of feedstock in Saudi Arabia is, he points out, just 75 cents per million BTUs (British thermal units) as opposed to $8 in the US. “With no barriers against Saudi downstream petrochemical products, this would be the ideal destination for investments in energy-related industries.”
Cheap feedstock is the main reason why so much investment has already flowed in. That would probably have happened even without membership of the WTO; indeed, it is impossible to quantify how dependent investment in the petrochemicals sector has been on Saudi membership. On the other hand, it will have certainly made investing in Saudi Arabia all the more attractive, with the promise of even greater profits thanks to lower tariffs on Saudi products; and all investors in the petrochemicals knew that Saudi membership was only a matter of time.
That is not the case with three other investment targets that SAGIA has focused on — transportation, information and communication technology (ICT) and knowledge-based industries (especially in relation to education, health and life sciences). WTO membership is pivotal.
“Intel would never have come to Saudi Arabia without us agreeing to the TRIPS agreement and the Bern and Paris Conventions,” states Fawaz Al-Alamy, head of Saudi Arabia’s WTO technical negotiating team. (The two conventions and TRIPS comprise the international rules that protect intellectual property rights.)
In the new year other big names are expected to set up shop in the Kingdom as a result of the WTO membership, such as UK supermarket chains Tesco’s and Sainsbury’s — although it can be argued that it is not membership that is bringing such companies in; it is the economic reforms that have been put in place to allow Saudi Arabia to join. In one sense, membership is merely proof that the Kingdom has liberalized and opened up — although, of course, with it come the benefits of reduced trade barriers and therefore greater sales, greater profits and investor interest.
Al-Dabbagh points this out: Because of liberalization in preparing for WTO membership “retail has already been opened; franchise has been opened; banking and insurance have been opened.” The Negative List (listing sectors closed to foreign involvement) is “shrinking by the day,” he says. An additional “big chunk” will be further eliminated because of accession to WTO and it “will disappear” altogether in time, he believes.
SAGIA is not just about attracting foreign investment. A good proportion of the $10 billion worth of petrochemical projects given licenses this year involves Saudi investors. Repatriating Saudi funds invested abroad — which run into hundreds of billion of dollars — has long been a government aim. But it is only now beginning to happen in a big way.
That is not so much because of a sense of patriotism among Saudi investors, although some officials like to put it that way. It is because Saudi investors who, like investors the world over want the best return they can get, see Saudi Arabia as providing it. They are repatriating funds for the same reason that the foreign investors are coming in: High growth and high profits.
The dramatic rise in the number and value of projects this year is not the only feather in SAGIA’s cap. A recently published revaluation of FDI, carried out jointly by SAGIA and the UN’s Economic and Social Commission for Western Asia (ESCWA), revealed that 50 percent of licensed projects have materialized on the ground — much more than previously thought.
Not that that is enough for Al-Dabbagh. “Our target now is to increase it from 50 percent to 80 percent.” To make that happen, SAGIA plans to provide would-be investors with a total facilitation package to ensure they can sail through all the government permits and licenses in the minimum period of time. Currently, it takes around 90 days. SAGIA plans to get that down to 30 days.
SAGIA is also expanding its activities to spread the word about investing in the Kingdom. Representative offices are to open shortly in Saudi embassies in the US, UK, France, Germany and Singapore.
The aim is to be as investor-friendly as possible, to eliminate as many impediments as possible. Al-Dabbagh concedes that there is still progress to be made. Regulations may have been changed, but officials are not always aware on the ground floor. “Every new policy has the challenge of implementation,” he says. It can take time for them to sink in.
Nor does he have any hesitation about the mountain that SAGIA has to climb. There was $10 billion in petrochemical-related investments this year; its aim is to get $90 billion in the next 10 years — which is, as Al-Dabbagh points out, a major challenge. It is not so hard attracting investors to the big, relatively straightforward projects, he says. But, he adds, “the more downstream you go, the more interesting it actually becomes because the downstream opportunities offer the value added as well as the multiplier effect; which is important for the national economy, and the viability of the opportunities is partly based upon using the Kingdom as a launch pad to regional markets.”
This explains the confidence. Thanks to the economic boom, to WTO membership, to economic reform, and to cheap feedstock, investor interest has never been higher. Some officials almost add Al-Dabbagh to the list, saying that since taking over he has made SAGIA fitter, more focused and more effective. It was “a great appointment,” says Al-Alamy. “He gets things done.”
Al-Dabbagh himself, busy seeing investors one minute, journalists the next, jetting off to address a meeting here, a conference there, appears unfazed by the challenges of the task ahead. Instead, he exudes a quiet enthusiasm for it. That is, presumably, because he sees it as winnable. As he points out, with evident satisfaction, a recent IMF report on doing business had Saudi Arabia at 38th position, up from 67 — ahead of all Arab countries, ahead of even Portugal, Italy and France.
Are businessmen being put off coming, Arab News asked, referring to red tape? No, says Al-Dabbagh, with firmness. They will continue to come. “4,600 percent growth in investment is a vote of confidence in Saudi Arabia.”
It is difficult to disagree with that.