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Abu Dhabi, UAEMonday 25 June 2018

On the cusp of a new era, Saudi Arabia courts the world

Global business leaders attending next week's Future Investment Initiative in Riyadh will get to experience Saudi Arabia's revolutionary transformation first-hand

Saudi Crown Prince Mohammed bin Salman wants to remodel the kingdom into an investment powerhouse to reduce its dependence on oil.  Faisal Al Nasser / Reuters
Saudi Crown Prince Mohammed bin Salman wants to remodel the kingdom into an investment powerhouse to reduce its dependence on oil. Faisal Al Nasser / Reuters

JEDDAH:Next week, Saudi Arabia, the Arab world's largest economy and Opec's biggest oil producer, will court hundreds of movers and shakers from across the business world and government, as the kingdom presses on with its national and economic transformation initiatives, unfazed by detractors or the challenges ahead.

At a three-day event in Riyadh dubbed the Future Investment Initiative (FII), the kingdom’s 32-year-old crown prince, Mohammed bin Salman, will host the top echelons of technology superpowers and global banks. These include players like SoftBank, Citi and HSBC; regional investment heavyweights like UAE’s Mubadala Investment Company and Bahrain’s Mumtalakat; and some of the world’s biggest money managers like the Carlyle Group, BlackRock and Schroders.

“We are having this event after doing very daunting homework,” said Ihsan Buhulaiga, a Riyadh economist who heads Joatha Consulting. “The Saudi Arabian government has worked very hard for about two years and it is time to forge strategic partnerships and show the world what the kingdom can offer in terms of investments to the rest of the world.”

As the kingdom engages the business world, those descending on Riyadh also hope to forge new relations and strengthen existing investment ties with the country as it realigns its economy for the post-oil 21st century.

The grand economic makeover of Saudi Arabia is about fiscal sustainability. That is underpinned by energy reform, cutting subsidies and the country's inflated public servant wage bill, creating jobs, privatising state-controlled assets, boosting foreign direct investment (FDI) and increasing private sector contribution to the country’s economy. About 90 per cent of the kingdom’s spending depends on oil revenue. However, following the collapse of prices from late 2014 onwards, the strategic imperative has changed.

The non-oil sector of the economy accounts for about 40 per cent of GDP. The kingdom aims to increase FDI as a percentage of GDP to 5.7 per cent by 2030 from 3.8 per cent, according to the Vision 2030 document published last year. The target for the private sector’s contribution to the economy is set at 65 per cent from about the base level of 40 per cent in the same period. Easier said than done: the country’s business community completely realises the challenges at hand.

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“It’s not all without risk. But it’s very positive,” said Suhail Algosaibi, chief executive of Falak Consulting and son of the late Ghazi Algosaibi, a respected former Saudi government minister and diplomat. “It’s something that should have been done a long time ago and is long overdue. It's better than the status quo that we have always been used to.”

Abdulla Al Zamil, the chief executive of Zamil Industrial Investment Company, agrees. Transformation comes with the inherent risk of making mistakes, but this is all part of an exercise for the betterment of the nation and errors will be rectified as the process moves along, he said.

“This is the problem I have with some people who don’t have the patience unfortunately, to give the transformation the chance to take its natural route – make some mistakes and correct the path,” said Mr Al Zamil. “It’s going to be a rough path but we know where we are heading.”

Prince Mohammed, who has private sector experience and is said to think like a technocrat or a chief executive, has been the force behind the kingdom’s economic overhaul, with the country’s sovereign wealth fund, Public investment Fund (PIF) at the epicentre of his ambitious drive.

PIF, which predominantly maintained a very large portfolio of stakes in Saudi companies before the oil price slump, has now teamed up with global and regional players as part of a multi-pronged approach to find new alternative revenue lines, with a view to boosting the country's non-oil component of GDP.

Among the more talked about investments of PIF is a US$3.5 billion stake in the ride-hailing firm Uber, acquired in June 2016. In May this year, it took a giant leap and became a co-investor with Mubadala in SoftBank Group's $100bn Vision Fund. PIF’s contribution to the Japanese-led technology fund is expected to reach $45bn.

Within the Arabian Gulf, PIF has partnered with Dubai billionaire Mohamed Alabbar to fund his $1bn online e-commerce firm Noon. Just weeks after announcing its entry last November into the e-commerce sector, the fund took a 50 per cent stake in Mr Alabbar’s investment vehicle Adeptio, which took a majority stake in Kuwait’s Americana, the operator of KFC and Pizza Hut chains in the region.

On the domestic front, the PIF already invested $1bn to support small and medium-sized businesses last month and opened two companies within the span of one week in October to venture into the energy efficiency and waste management businesses.

The kingdom, which is home to two of Islam’s most holy sites, has always been a centre for religious tourism, but Riyadh wants to make the kingdom a hub of tourism for people from across the globe.

Over the summer, Saudi Arabia announced an ambitious project known as the Red Sea Project, off the coast of its commercial and business hub, Jeddah. The project, which will comprise 50 islands and will be bigger than the land mass of Belgium, will receive seed capital from the PIF, which will later form partnerships with international companies. Next week's conference in the capital, perhaps, is a good opportunity to build those partnerships.

“In the past Saudi Arabia didn’t leverage its heritage, now it’s changing laws and promoting tourism and tolerance,” said Said Al Shaikh, chief economist of National Commercial Bank, the kingdom’s biggest lender. “At this pace with no hiccups along the way, reform initiatives can be achieved. Once you relax what was restraining you in the past, you realise your potential."

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Looking ahead, the kingdom plans to float 5 per cent of Saudi Aramco, which based on a $2 trillion valuation, is estimated to bring in $100bn into the state's coffers. Proceeds of the share float, possibly the biggest in the history, will be used for ventures at home and abroad, particularly, development of the kingdom’s renewable energy, mining and industrial sectors.

Saudi Arabia is still heavily reliant of the sale of hydrocarbons for revenues, but Mr Buhulaiga says the economic pain will gradually ease with every passing year as reforms gather pace and the government takes steps to boosts aggregate demand.

“It was expected since the beginning that 2016, 2017 and the next year are going to be tough years. At the outset the question was: are these guys really going to do this – the Vision 2030 – but everyone is now getting the message. We are getting into a good territory now: earlier it was murky waters [for the kingdom],” he said.

A meaningful change, however, is going to take time; the government’s shifting of gears to engage the private sector in a larger capacity, in parallel to the overarching Vision 2030 programme will boost the economy as it restructures its finances and reduces its reliance on oil. All of this will happen in tandem with the government putting in place the legal framework for privatisation and PPPs, while carrying out institutional reform.

Thus far, four contracts have been awarded on a public private partnership (PPP) basis in the transportation sector, including for the new Taif airport. There are about $40bn worth of PPP projects in the pipeline related to power, desalination and other sectors.

“These projects will deepen the role of the private sector and the government will gradually pull out from being the builder and the operator,” said Mr Al Shaikh. “It will lessen the burden on the government of dedicating sizeable funds upfront and instead utilise the private sector to do that. The private sector will operate projects more efficiently.”

The change that Saudi Arabia’s leadership seeks is holistic. Empowerment of women and their participation in the country’s economy is what Riyadh wants. Already the social reform agenda has taken major strides and women will soon be allowed to drive, encouraged to seek jobs and participate in business activities.

“Transformation is not only for the country, every single individual in Saudi Arabia has to transform him or herself. Things will be different [going forward],” says Mr Al Zamil. “The participation of women in various aspects - be it in entrepreneurship, management, C-suite positions - we are seeing more and more women taking positions and proving themselves.”