LONDON, 16 January 2006 — British companies are bracing themselves for a major trade and investment offensive over the next few weeks as Saudi Arabia seeks to raise a staggering $624 billion in foreign direct investment (FDI) over the next 14 years, of which some 37 percent is earmarked for the oil and gas industries; 30 percent for water and electricity projects; 26 percent for refining and petrochemicals; and 7 percent for transport.
The Kingdom is also embarking on an ambitious privatization program in the wake of its accession to the World Trade Organization (WTO) which will see a further estimated $800 billion worth of state assets sold off over the next 14 years.
A major Saudi business and investment road show led by Amr Al-Dabbagh, governor of the Saudi Arabian General Investment Authority (SAGIA), will take place in Edinburgh and Manchester on Jan. 24 and Jan. 26. These will be similar to those which took place in the US during 2005.
In addition, several inward and outward trade missions and exhibitions are planned between the UK and the Kingdom including an UK oil and gas mission to the Kingdom on Jan. 21-26; a Saudi downstream petrochemicals mission to the UK in February 2006; an UK educational trade mission to the Kingdom on March 4-9; and a Middle East Association trade mission to Saudi Arabia in April/May this year. These follow the successful “Opportunity Arabia 2” trade exhibition and seminar organized by the Middle East Association in London in September 2005 and the Association’s trade mission to the Kingdom in November 2005.
According to British trade and business figures, some 500 British companies are expected to attend the road shows. The Saudi strategy seems to be to give companies from the West and East Asia a fair crack at co-investing with local and regional partners in this unprecedented investment drive. UK executives also now have easier access to the Saudi capital following the recent launch by bmi of a thrice-a-week direct service to Riyadh from London Heathrow — the only UK carrier to offer these flights.
As a market Saudi Arabia boasts probably the best “collateral” in the world — 25 percent of the world’s proven oil reserves. And this from an explored area covering only a quarter of the country. The Kingdom’s daily oil income, according to the Middle East Association, has increased from $196 million in August 2004 to $630 million in August 2005. This has led to an unprecedented budget surplus and levels of liquidity in the country. In the 2005 budget for instance some SR75.5 billion was earmarked for capital expenditure mainly in education and health sectors. The value of actual construction contracts awarded in the Kingdom in the first six months of 2005 totaled SR61.5 billion. This compared to SR45.8 billion for the whole of 2004. Future project expenditure, according to figures from National Commercial Bank (NCB), is estimated at $326 billion for the period 2005-2010.
The oil and gas sectors are also planning massive expansion with Saudi Aramco planning to spend $46 billion over the next five years. At least six mega oil and gas projects are planned to push production capacity to 12 million barrels per day. Saudi Basic Industries Corp. (SABIC), now a major global petrochemicals player is also planning a major expansion with much greater private sector involvement.
With all the increased industrial activity and the fact that the Kingdom’s population of 26.4 million is increasing at an annual rate of 2.31 percent — one of the highest in the world — means that demand for increased electricity capacity is increasing rapidly. Not surprisingly, the Saudi Electricity Company (SEC) spent SR7.1 billion on new capacity in 2005 alone and is planning to double capacity at a cost of SR44 billion by 2020.
Water resources are a very scarce commodity and as such the Saline Water Conversion Company (SWCC) is investing SR80 billion by 2019 in new projects and existing plant upgrades.
British companies have traditionally had good success in selling to the Kingdom. UK sales to Saudi Aramco in 2005 alone totaled $100 million. But with the changing dynamics of the Saudi economy and demography, the rules of the game are also changing. The Kingdom is looking for new types of commitment such as greater FDI flows and a committed participation in its privatization program. With this comes perceptions of country and political risks.
While Saudi Arabia is attractive in many respects — huge liquidity, a median population age of only 21.28 years, a life expectancy of 75.4 years; it can also be frustrating place to do business. Some companies still cite payment delays; tough local labor laws especially when employing Saudi nationals; and the bureaucracy of decision-making.
According to Martin Parr, founder of MPCEE, and environmental consultancy which has done much work in the region, “Saudi Arabia is a changing country, and is searching the globe for partners to assist in this change. Saudi business relationships take time to cultivate, but open and frank communication will pay long-term dividends.”
SAGIA is one organization that is too aware of the strengths and weaknesses of Saudi Arabia Inc. Its mandate is to “create a pro-business environment providing comprehensive services to investors and fostering investment opportunities in energy, transportation and knowledge-based industries.”
But as Al-Dabbagh stresses, “the creation of a pro-business environment is an on-going process. The investment package is being continually improved in conformity with international best practices, in response to feedback from the investment community, and as an active dialogue between the government and the private sector. We are now a true one-stop shop for facilitation of investment.” SAGIA’s focus on the energy, transport and knowledge-based sectors is merely because the Kingdom has “natural competitive advantages in these sectors.”
