Investment opportunities abound in Kingdom
An artist's impression of King Abdullah Economic City, a New Age City being built today for tomorrow's generation of Saudi citizens on a pristine location off the Red Sea in the north of Jeddah. (AN photo)
Published: Jan 25, 2011 23:21 Updated: Jan 25, 2011 23:21
The performance of Saudi Arabia’s economy has been remarkable in recent years, especially since 2002 with the national economy more than doubling to $481.6 billion owing mainly to rising oil revenues.
The combination of additional government spending toward the ongoing program of economic liberalization and greater foreign participation in the economy has sparked numerous investment projects. Saudi Arabia recently announced a $400-billion plan over the next five years aimed at upgrading energy projects, and the social and physical infrastructure in such areas as power, water, transportation, education and housing.
“Saudi Arabia is becoming a significant emerging economy able to attract substantial foreign direct investment (FDI). Since 2000, the investment environment has benefited from significant progress on structural reform involving liberalization and greater transparency. Real estate sector represented the major recipient of foreign investment, with a share of total FDI to the Kingdom expected to be more than 20 percent. This reflects the importance of the construction activities in the national economy,” said John Sfakianakis, chief economist at Banque Saudi Fransi.
According to the industry estimates, Saudi Arabia’s total transport sector investments are set to reach $100 billion by 2020 with over $30 billion allocated for new transport projects in the government’s next five-year plan. The Saudi government’s aggressive plans to overhaul existing transportation infrastructure will likely see huge investments flowing into the large-scale port, airport, rail, road and logistics projects in the coming years, the NCB Capital said in a recent report.
Inflows to the chemical and petrochemical industries sector will account for more than 10 percent FDI inflows, while FDI in mining, oil and gas will represent also around 10 percent of the total. Moreover, refined petroleum products should account for around 1 percent of total FDI inflow. Specifically, Ras Tanura, which is a combined refinery and petrochemicals project with an estimated cost of $22 billion, involves establishing a grassroots petrochemicals plant in order to produce more than 300 different products. Equally, the PetroRabigh complex, which is nearing completion, is another major combined refinery and petrochemicals project, spreading over eight square miles and involving 38,000 workers. Construction costs of the plant have reached $10 billion.
In 2007, construction started in six planned economic cities in addition to the King Abdullah Financial District in Riyadh. The new city focuses mainly on heavy industry, comprising oil industry and an integrated petrochemical complex, a copper refinery and smelter, an aluminum complex and an integrated aluminum refinery. Moreover, it is expected that projects worth more than $300 billion are under way for execution over the next few years.
Foreign investment
The variety of domestic and export-oriented investment opportunities in Saudi Arabia has attracted steadily increasing foreign direct investment as the economy has been progressively opened. Saudi Arabia’s rapid improvements have made the country an increasingly attractive destination for investment. The country’s growth in FDI inflow was especially impressive in light of the global economic downturn.
Improvements to business and property registration procedures made it easier and less costly to start a business and register real estate deeds enabled Saudi Arabia to reach the top 20, the World Bank said. Protection of public company investors was enhanced with a series of new laws from the Capital Market Authority and the Ministry of Commerce and Industry.
The government has already taken a number of decisions to increase the role of the local and foreign private sector in expanding the economic base and diversifying the source of national income. The move is also to increase the value of the country’s natural resources.
Saudi Arabia made bold business reforms making it one of the world’s leading reformers. Saudi Arabia is now the top ranked economy in the Middle East. Saudi Arabia has become the number one recipient of foreign direct investment in the Middle East. Inflows have increased and will continue to do so. With Saudi Aramco’s recent expansion of refineries and the building of the Kingdom’s economic cities, foreign investment in the country has become more attractive to investors abroad, mainly due to the liberalization of investment rules.
“In generally FDI volumes will reflect the overall scale of investment activity, with perhaps some bias in favor of those sectors that benefit from more favorable regulations. But ultimately, the key driver is economic opportunity, which in turn is a factor of the growth potential underpinned by population growth, the diversification policies, etc.,” said Jarmo T. Kotilaine, chief economist at the National Commercial Bank.
There will be massive opportunities in the great infrastructure boom, in energy, water, real estate, etc., but also most types of services. In some cases, however, investors may be cautious because of restrictive regulations on pricing. Health care is one case in point, he said.
The mode of FDI may vary depending on the regulatory environment. In some cases, foreign companies will take direct stakes in projects and operate on a fully equal basis. But the fact that the investment environment is more restrictive does not necessarily mean that foreign investors cannot benefit from it through investments in outsourcing and service companies.
“One of the major, still largely open questions, is the level of foreign interest in massive greenfield projects such as the economic cities. Here, the level of involvement will still depend on things like government guarantees/assurances, and greater clartiy on the time line of the ventures,” Kotilaine said.
According to professor Mohamed A. Ramady of King Fahd University of Petroleum and Minerals, Dhahran, the Kingdom has gone a long way in attracting both domestic and foreign investments but that the path has not been simple. The answer, according to Ramady, lies in a combination of factors: A quiet determination to overcome internal obstacles to business, whether faced by Saudi companies or multinationals, assisted by the creation of autonomous but empowered government institutions such as the SAGIA, to create a pro-business environment; develop a more knowledge-based society, and channel Saudi and foreign investments into mega economic clusters known as “economic cities.”
Unlike earlier large infrastructure developments, a key element of this strategy has been reinvigorated regional economic diversification and more equitable wealth creation for Saudi citizens. On the surface, the special economic zones and mega economic cities are seemingly alike, but in reality each are planned to specialize in certain niche core activities to leverage on the area’s location advantages.” Until such mega investor friendly projects had been launched, according to Ramady, “the Kingdom had not seemed to match inward investments with its undoubted economic size and potential compared to other Arab and Islamic countries. The reasons were a sluggish bureaucracy, uncompetitive incentives and taxation regime, multiple layers of governmental approvals, and seeming inflexible labor and sponsorship laws.”
However, Ramady said a wide range of regulatory and structural reforms were introduced to make Saudi FDI attractive, starting with the establishment of SAGIA as a one stop shop to take care of foreign partner’s investment needs and overcome the often mindless bureaucracy that had been the hallmark of doing business in the Kingdom. SAGIA was empowered to cut through red tape and assist with licensing, identifying local Saudi joint venture partners and presenting investment opportunities to foreigners. Corporate taxation levels were slashed to 20 percent levels and foreign companies were now able to own properties for their operational requirements as well as sponsoring their own employees without having to go through local sponsors.
Ramady said that the gradually whittling down of the list of “prohibited” economic activities in which foreigners could not invest in has helped to attract foreign investments, and today the prohibited areas are mainly in security and defense related sectors, but stated that “the overriding principle of welcoming FDI to Saudi remained the same with priority for those that added value through technology transfer and job creation.”
Comments
FREDRICK JOHNSON
Jan 26, 2011 20:18
Report abuseIt rains for an hour and the traffic in the streets completely collapses.
First, get the infrastructure sorted, prevent the water from cutting in housing residences. Get rid of the âœshit-trucksâ coming to empty our toilet excrement they are disgusting. Get rid of all the beggars in the streets.
Posting fancy pictures like these, bragging about how much money the city has and how flourishing it is, just makes a bigger mockery out of the âœreality pictureâ.
The truth is bitter, donâ™t make it bitterer, please!
WAQASUDDIN AL-AMERICANI
Jan 27, 2011 18:24
Report abuseBRENDA
Jan 28, 2011 21:31
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