Saudi Arabia, it was revealed last week by the Saudi Arabian General Investment Authority (SAGIA), has granted foreign investors a total of 1,203 licenses for projects worth $11.65 billion since April 2000, the month in which SAGIA was established. Foreign direct investment (FDI) can be both a lifeline and an important indicator for any economy. Before anyone gets carried away, $12 billion in three years, which averages at $4 billion a year, is by international standards not exactly excessive. Yes, it is encouraging, but it implies that much needs to be done to attract larger flows of FDI. Foreign investors, like fund managers, can also be fair-weather friends. Economic slowdown, labor disputes, payment delays, force majeure, business disputes, high unit cost of labor, low productivity and high cost of manufacture, a lack of or excessive regulation or bureaucracy, and no recourse to international arbitration, have soured countless FDI projects all over the world — both in the industrialized and emerging countries. And there is no reason to believe that Saudi Arabia will be spared such potential problems in the future. In fact, last week a group of Saudi workers at three British Aerospace (BAE) projects in Taif, Dammam and Riyadh under the Al- Yamamah Offset Program, started legal action against the company over alleged contractual breaches and changes, and unilaterally imposed cuts in wages.
To pre-empt the dispute from getting ugly, the Saudi Ministry of Defense and Aviation stepped in a few days later to assure that the rights and privileges of Saudi employees in the BAE projects will be protected.
How potential foreign investors view this is debatable. But the dispute and the management of the contract changes does not augur well for FDI flows. There are of course some economists who argue that FDI flows related to defense offset arrangements such as Al- Yamamah; and the Saudi-American and Saudi-French Offset Programs, should not be counted as foreign investment in the classical sense, because their contribution is not toward economic and social development, employment creation, and poverty alleviation. They are specialized defense-related projects, although in the case of Al- Yamamah, some of the projects are outside the defense industry such as the Tate & Lyle/Savola sugar mill.
Others, such as bankers, are also concerned about the lack of financial, legal and capital markets infrastructure to absorb greater flows of both foreign capital and Gulf capital currently residing outside the region in the US and Europe. Andrew Buxton, Senior Adviser to Barclays Bank, confirmed to Arab News: “Given the attitudes in the US at the moment to Arab funds, it would be beneficial for those funds to start looking elsewhere. Given the Gulf attitudes to American products and investment, I would not at all be surprised if there is more repatriation of funds and redirection of investment. It is very important for the Gulf to recognize that and to seize the opportunity by opening up its markets, particularly its financial markets to better products, so there are structures that this money can invest in. “One of the difficulties in the Gulf is that capital markets are not developed. The economic and financial liberalization process in a country such as Saudi Arabia has come a long way compared with a decade ago. In the interest of the country it needs to move along as fast as possible. Not only to encourage FDI, but also to encourage investment from its own people.”
Another concern about FDI flows is the quality of investment and in which sectors they are directed. The trend in both FDI flows and employment sectors including in countries such as UK and western Europe, is toward the services sectors and IT (information technology and Internet-based projects). The global companies are constantly looking for cheaper and more labor-friendly countries in the emerging world to relocate their manufacturing activities.
These include aspiring economic giants such as China, where a communist government has no qualms about colluding with capitalist corporates in establishing manufacturing outlets ranging from white goods, consumer goods, toys, electronics, to cheap trinkets; the emerging countries of East Asia such as Vietnam and Laos; and those from Eastern Europe such as Poland, Czech Republic, Hungary, Croatia, Latvia and so on.
In the case of Saudi Arabia, according to Fahd Al-Sharif, Deputy Governor SAGIA, of the 1,203 FDI projects approved since April 2000, 794 projects worth $8.6 billion were wholly-owned by foreign investors, and the remaining 409 projects worth $3.04 billion were joint ventures between Saudi and foreign investors. Saudi investors constituted a mere $1.6 billion share. According to SAGIA, industrial investments accounted for 530 projects worth $6.77 billion, while the services sector accounted for 671 projects worth $4.88 billion. SAGIA is keen to promote and focus FDI flows on small- and medium-scale projects because they employ more workers and need smaller investments, and because most of the large infrastructure projects are already in place. However, the single biggest challenge for FDI flows into Saudi Arabia, and the other Gulf Cooperation Council (GCC) states will be how to accommodate the requirements of Saudization or Arabization of the labor force. Last week the Kingdom, suspended work permits for expatriates in 22 professions including industry, banking, tourism, and construction, in a continuing effort toward Saudization of the private sector. Currently, Saudis constitute a mere 4 percent of the total workforce in the private sector, and 87 percent work in the public (government) sector. The government plans to create 817,300 jobs for Saudis during the current seventh Five Year Plan (2000-2005), which some analysts have deemed ambitious.
Of course, it is a legitimate right of any country to create employment for its own citizens. In fact, that is what is normally demanded from governments especially in democracies. In Malaysia, for instance, the Mahathir government’s of the past introduced the New Economic Policy (NEP) which favored the Bumiputras (Malays), because the Malays were at a disadvantage in the educational and economic ladder. The perception was that the Chinese and the Indians controlled the economy, and this was to the detriment of and was fueling resentment among the Malays, especially the younger generation. In a multicultural society with underlying potential ethnic sensitivities which did manifest itself in limited riots by Malays in the late 1970s, the Malaysian government did act to defuse the situation.
In South Africa, the Mandela coalition government introduced so-called “affirmative action” and “Black empowerment” policies to redress decades of discrimination in the employment field by the apartheid governments. This policy is being continued by the current Mbeki ANC government. Unfortunately, affirmative action has meant a reverse discrimination against so-called Coloreds (mixed-race), Cape Malays, and Asians.
In Saudi Arabia, where generations have been nurtured on expatriate labor, it will be a challenge to build up a labor force which is skilled and semi-skilled, productive, organized, and adequately qualified. Saudis have to wake-up to the realities of the labor market, although it remains the task of government to ensure that they are not unduly exploited and that their labor rights are protected. Why, because sooner or later Saudization like other affirmative action programs will run their course, thanks to the pressures mainly of globalization and of membership of the World Trade Organization(WTO).
