Saudi Vision 2030: Opportunity or Mirage?

The following remarks are from MECACC Chairman, Christopher Johnson, participating as the lead panelist for the National Council on U.S.-Arab Relations.

In 2008, the Kingdom responded to the G20 call to revive global economic activity by investing heavily in its own domestic market, to help restimulate global demand while building locally; this policy has however reached its limits in the wake of falling oil revenues.

Domestic investment included the $ 30+ billion King Abdullah Financial District project, now stalled at 85% complete; the $ 22+ billion Riyadh Metro project, more or less on schedule for completion in 2019; an ambitious GCC-wide rail project; a Jeddah metro, currently suspended; ambitious airport expansion and construction projects; and much else, largely stalled or suspended pending an overall planning and financial review.

Financial reserves remaining from salad days, 95% concentrated domestically, are now being diversified to 50/50 parity between domestic and foreign investment.

In addition to oil revenues, the Kingdom seeks to diversity revenue sources towards increased private sector taxation and enhanced returns on sovereign wealth.  Current 95% weighting in favor of domestic investments is seen as unduly risky, particularly given uncertain oil prospects.  The Kingdom proposes to invest half or more of its sovereign assets abroad in sectors other than energy, thereby diversifying risks and maximizing returns.

The Kingdom’s very substantial domestic energy, petrochemical, transportation, power and water assets are being privatized, and proceeds redeployed in the U.S., Asia and elsewhere. 

The Kingdom has already partially privatized the Saudi Arabian Basic Industries Corporation (30% publicly traded), Saudi Telecom Company (16.31% publicly traded) and the Saudi Electricity Company (18.76% publicly traded); current plans include not only sale of 5% of Aramco in 2018, but also full privatization and deregulation of power, water and possibly other utilities, and at a later stage healthcare and education assets also, with the Ministries of Health and Education becoming regulators rather than operators.

Complications include uncertain revenue streams, and reluctance to issue sovereign guarantees.  The Ministry of Finance recently issued sovereign guarantees to support a public-private partnership for Madinah Airport, possibly the first of many.

Just as the Saudi Government has developed Tenders Regulations and contract forms for construction and other government procurement, similar regulations and templates are being prepared for public/private partnerships, to assure private investors a less risky structure than currently exists for government procurement, with contractors required to continue working even in the face of nonpayment.

The Public Investment Fund is assembling world class investment teams, as in Norway and Abu Dhabi.

The Public Investment Fund remains heavily understaffed, as compared with 1,000+ at its Norwegian and Abu Dhabi counterparts, though it is recruiting aggressively.

As an initial step the Kingdom has recruited top-tier talent from the U.S., the UK and elsewhere specialized in private equity, real estate and other sectors, as part of a broader initiative to privatize domestic holdings and diversify investments.

Foreign investors are being invited to play a leading role in bringing financial, technical and managerial discipline to utilities and other sectors, as only a free and deregulated private sector can assure. 

Not unlike government-operated utilities elsewhere, the Saudi energy, power, water and energy companies have been characterized as flabby dinosaurs, overstaffed and inefficient; it has been said that an independent oil company could likely operating the Aramco concessions with 15-30,000 employees, as opposed to 65,000 currently.  The logic behind partially privatizing Aramco and other state-owned entities is to bring these incumbents up to the best global standards.

Despite political sensitivities in rightsizing workforces while seeking to expand employment opportunities, competition would based on experience in other markets reduce cost and increase supply to the overall national benefit.

Much work remains to be done in creating an entrepreneurial enabling environment; this commitment lies at the core of Vision 2030 and the National Transformation Program.

Saudi Arabia currently ranks 94th on the World Bank Ease of Doing Business Index, 147th on the Ease of Forming a Company Index, and 167th out of 167 on the Ease of Liquidating a Company Index.

The absence of a clear and predictable process for liquidating companies leaves foreign investors with no reliable exit option, and hence no real economic freedom.  Moreover, Saudi courts do not reliably recognize or enforce foreign judgments or arbitral awards.  These and other obstacles will need to be addressed, before foreign companies will feel confident in investing scarce capital.

Among other localization goals, Vision 2030 seeks to expand military production from 2 to 50% of national defense supply.  Unless and until state defense agencies commit to meaningful offtake, defense suppliers are unlikely to license technology or invest in manufacture of products which can more cost-effectively be produced elsewhere.

Efforts to attract automotive and other clusters must also be realistic in identifying industries with real competitive potential, with high energy and human resource inputs, in the face of a very aggressive Saudiization program that threatens to raise labor costs and interfere with investors’ freedom to recruit critical management and technical manpower from abroad.

It is hugely consequential that the Kingdom’s vision succeed, not only for the sake of the Saudi people, but also for the Kingdom’s strategic partners in the U.S., Europe and Asia, so critically in need of friends, partners and success stories in an otherwise imperiled region.

Along with Europe, threatened as it is by a newly adventurous Russia, and Asia, also threatened by an expansionist China, the Middle East remains a theater of major threat to the U.S. and its allies.  Saudi Arabia and its Gulf allies represent rare bright spots in an otherwise dark and endangered region.

As rare examples of countries willing and able to engage meaningfully and productively on economic, human rights, political and other fronts, we cannot afford to abandon the field to forces that threaten the stability of these few remaining bright spots, or threaten to impose illiberal and potentially hostile regimes on the model of the Islamic State or Muslim Brotherhood.

When he met with President Obama in September, 2015, King Salman proposed a strategic partnership. While little progress has been made towards this end, it is critical that this initiative succeed, ideally by relaunching a Strategic and Economic Dialogue along the lines of what has been developed with China, India and most recently Japan.

In 2003 George W. Bush launched a Middle East Free Trade Initiative seeking to create a U.S. Middle East Free Trade Area,  increase trade and investment, and help countries in the region implement domestic reforms, institute the rule of law, protect intellectual and other private property rights, and enhance openness, economic growth, and prosperity, resulting in free trade agreements with Israel, Jordan, Bahrain, Oman and Morocco.  This effort should be revived, initially with both the United Arab Emirates and Saudi Arabia, and possibly with the GCC as well.

Our relationship with Saudi Arabia and the Gulf represents a key strategic asset, that we neglect at our peril.

Among other causes of societal failure, Jared Diamond in Collapse identifies the breakdown of relationships between countries with complementary trade, citing among other examples Pacific islands which found ruin following disruption of trade in seafood, shells and stone cutting tools.

As a contemporary example, the U.S. currently maintains a critical security for oil relationship with the Gulf countries, which supply the world with reliable energy from the pivotal nexus of Europe, Asia and Africa, and serve as partners on a broad range of challenges in an otherwise unstable and often hostile region.

For all these reasons, and to avert breakdown in this critical trade and defense partnership, we need all the regional partners we can find, starting with Saudi Arabia and its GCC partners, and have an important interest in the success of the Kingdom’s economic transformation program.

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About the Author

Chris Johnson

Active in the Kingdom since 1978, Chris Johnson is the founding partner of Johnson & Pump/Al-Sharif Law Office, based in Riyadh. +966-11-462-5925