Saudi Arabia is shifting from its government-led economic and social model to a more market-based approach, unlocking the potential of a kingdom where 70% of the population is aged below 30. HRH Prince Saud bin Khalid Al Saud, Head of Investment Affairs and Deputy Governor of the Saudi Arabian General Investment Authority (SAGIA), explains why this seismic shift is good news for international investors looking for ROI.
Saudi seems to be judged by the same criteria as other countries that have more than 200 years of history, and the truth is that Saudi Arabia is a very young kingdom, founded in 1926 with only 70 years of existence as a nation. How would you describe the growth of the kingdom in the past years?
If we take into account that 50 years ago people lived a rural life, the ongoing transformation of the Saudi Arabia has no precedent on an economic, infrastructural and social level; the change has been tremendous and continues at a very fast pace.
My first exposure to the government took place when I joined SAGIA eight years ago. The government back then was completely different to what it is today. Eight years ago there were only a few entities operating independently with a very entrepreneurial spirit and with a great caliber of people. SAGIA was one of those organizations and that is the reason why I decided to join. At present, we can see various government entities with very experienced and dynamic top management. It wasn’t like that 10 years ago. As I said, the pace of change in our country is tremendous, and we can now count on highly educated, motivated and productive personalities.
Facts and figures show this evolution; statistics always help us to appreciate change. One of our duties at SAGIA is to gather and analyze macroeconomic data and I must admit that I was surprised when we made the comparison over 10 years of vital statistics such as demography, education, trade or infrastructure development. The transformation is a reality and it is taking place at every level.
The KSA aims to become the favorite destination for both regional and international investors seeking promising and rewarding opportunities, offering a strong internal demand and access to many of the world’s fastest-growing economies. How would you define the competitiveness of Saudi Arabia’s business environment compared to the rest of countries in the region?
At the Saudi Arabian General Investment Authority (SAGIA), we started out with the competitiveness agenda in 2000 with a program called the 106 list, which represented the number of barriers we identified as having to overcome in order to attract FDI. After successfully dealing with most of them we moved onto the 10x10 program, a very ambitious program by SAGIA to have the kingdom among the top 10 nations in terms of global competitiveness rankings by 2010. This was the first program that really had an impact on a national level, with a specific goal within a specific timeframe.
The program was endorsed by His Majesty King Abdullah at the time and was the door for SAGIA to engage with government entities and work with them hand in hand on different indicators to achieve our target. When we started the program Saudi Arabia ranked number 67th in the Ease of Doing Business report, and by 2010 the kingdom reached 11th position. We were short by one but we honestly didn’t think we could reach anywhere near that target, so we exceeded our expectations.
The main objective was to catalyze and introduce a new way of thinking in the government; we introduced KPIs, global best practices, benchmarking, etc. and I think we managed to do so successfully and to work effectively with the different government entities. They are definitely the ones who deserve the credit because they were the main drivers of change to reach that goal.
Today in terms of competitiveness, we are focusing our efforts on the CAP (Competitiveness Acceleration Program), where we work with over 52 different government entities to improve the competitiveness of the Kingdom of Saudi Arabia, becoming also an important part of the National Transformation Plan. This program is much different than the 106 list I mentioned; people back then did not understand completely what we were talking about, it was like we were speaking a different language and some were a bit reluctant to embrace it. This time around, everyone understands the need to change, and therefore our approach has also been different.
For example, in the 10x10 program we benchmarked, we prepared all the required information and told the entities what they had to do. This time we are working more closely with them. We conducted workshops, divided the work streams and developed the KPIs and the strategy through a team effort. We just acted as a facilitator, providing the entities with the tools and knowledge needed for them to be the drivers. The positive results achieved are the fruit of the teamwork of 52 governmental entities and I consider this a very successful story.
How would you evaluate the current investment climate in Saudi Arabia? Do you believe the current geopolitical situation in the region is affecting the kingdom’s business environment?
We live in a tough neighborhood, and that is a fact that we have to accept and deal with. The kingdom does its best at a political level, offering humanitarian and economic assistance to different governments globally and regionally. We definitely want to help resolve and mitigate the challenges faced by the region nowadays. I think that the socio-political situation in the GCC in general is different to the surroundings.
I believe multinationals do realize that and that’s why they actively increase their investment portfolio in the GCC.
The challenge is definitely keeping both commercial entities and the public in general well informed about what’s the real situation in the region. Communication efforts are key, especially when you are aiming to attract SMEs into the country that might not have the necessary means or outreach to enable them to get an informed and accurate picture about the region. People need to know that Saudi enjoys solid macroeconomic stability, despite local and regional challenges, and offers many opportunities with very attractive ROI.
How easy is it to do business in Saudi Arabia? Are regulations liberal enough to attract major foreign investment?
The foreign investment law that was introduced in the year 2000, as a precursor to entering the WTO in 2005, is one of the most liberal foreign investment laws in the region and also on a global scale. We were one of the first countries in the region to allow 100% ownership, which some of our neighboring countries still don’t have.
In terms of the tax regime, the incentives provided by our government to investors in general, whether they be foreign or local, makes the investment environment in the kingdom very attractive.
We have different government funds such as the Saudi Industry Development Fund or the Saudi Human Resource Development Fund, among many others, which do not differentiate between local or international investment; as long as the investment makes sense they will fund it and in a generous way.
In addition to that, if your investment is located in one Saudi Arabia’s six developing regions, the incentives increase significantly in terms of funding, taxes and regulation. There is a wide spectrum of incentives that people are not that aware of, which makes doing business in the kingdom very profitable.
Our role at SAGIA is to spread that knowledge and facilitate business growth. We have managed to optimize our licensing processes to take only one day. On our website we have an automatically generated live feed that informs investors about the length and steps to issue a new license or to renew it.
So I definitely believe the right foundation to attract investment exists, the biggest issue that we have to deal with is perception; that is our main challenge.
Retail has been announced as one of the remaining sectors to be liberalized this year. How will this affect the dynamics of the sector and what new opportunities will it bring?
His Majesty the Custodian of the Two Holy Mosques, King Salman, announced the opening of this sector to 100% foreign ownership last September during his visit to the USA. Retail was one of the very few sectors that didn’t allow full foreign ownership, so at the moment we have a team that is working hand in hand with the Ministry of Commerce and Industry to elaborate the guidelines of the 100% ownership licenses.
Since those guidelines are not yet being formally announced, there is not much that I can add on that, however I can say that there has been significant interest from many companies. We envisioned that most of the interest to expand ownership would come from existing investors in the kingdom and we feel it will be that way.
Just under 90% of investment in the kingdom can be considered “brownfield FDI”, that’s a good and a bad indicator. It is good because it means that companies already established in the country are very happy with their investment and willing to increase it; on the other hand it shows that there is not enough awareness of Saudi Arabia’s market opportunities abroad, making it more attractive for new investors to tap into. This is something that we need to change and it is the priority at the moment for both the government and private sector.
Will this international communication effort be led by SAGIA?
We are the investment promotion agency of the kingdom, but we do realize that there are other entities in the country very keen not just to represent themselves but also to represent the kingdom. We try to coordinate efforts and act as an enabler to move forward in the same direction and with the same aim. We cooperate with companies such as Saudi Aramco and SABIC, we work with Saudi Export Development Authority, Ministry of Commerce and Industry, The Royal Commission for Jubail and Yanbu, The National Industrial Clusters Program, and other relevant ministries and entities to join efforts in promoting the kingdom abroad.
We act as a catalyst, we don’t claim to be the leader, and it is not in our interest to have that exclusive role. We believe that the more people that can promote the country, the better.
The KSA improved the regulatory environment and begun investing in large-scale infrastructure development to try to become a leading global commercial hub and more attractive for businesses to operate here. How would you evaluate the kingdom’s infrastructure nowadays?
One of the key drivers of economic development is good infrastructure, and frankly speaking, taking into account the size of our nation, the infrastructure in Saudi Arabia is good, whether it be ports, airports and, especially, roads.
The infrastructure that you see today in Saudi Arabia is not new; a lot of it was constructed in the 1970s and early 80s. We were one of the first countries in the region with solid and significant infrastructure. At that time many of the other nations around considered to be more advanced today had almost no infrastructure. Our government understood the importance of infrastructure and invested heavily from the beginning. If you travel to the north, south, east or west, you will find paved roads reaching to the smallest villages in the middle of the desert. You will see electricity and phone lines, water supply… very few Saudis appreciate this today because most of us live in the big cities such Riyadh, Jeddah and Eastern Province, but the development is there for all to see.
If we consider the scarcity of water in our country, we are the biggest or second biggest producer of desalinated water in the world. You will not find a city in Saudi Arabia that has significant water issues. We can take Riyadh as an example; it is a region of around 7 million people and almost all use desalinated water. Also, if you go to the south of Saudi Arabia, you will find the highest point of the country and they also live on desalinated water at 11,000 feet. This is the highest point on earth where desalinated water is pumped to. These few examples show how the government has been significantly spending on infrastructure development and allocating its resources in a very thoughtful way.
If we have a look at other countries, not only regionally but also globally, and we analyze the way they have allocated their resources, the differences are very obvious. Historically the kingdom developed only one resource, which is oil. Other countries that have a larger variety of resources have not been able to achieve the state of growth that Saudi Arabia and the rest of GCC enjoy today. That puts into perspective the way we have deployed our resources here.
You just mentioned human capital as an important resource for a country. How important is local talent for the realization of the National Transformation Plan?
The talent pool is currently large and growing. The number of professionals, university graduates and vocational training centers have increased dramatically. As an example, during the past two years the kingdom has had an average of one vocational training entity opening its doors per month.
Vocational training is key to our economy and we have addressed this through the Technical and Vocational Training Corporation (TVTC) and the so-called “colleges of excellence”. Through this initiative we partner with top leading educational and training institutions. The TVTC provides the infrastructure, the location and the funding and in exchange the company provides the curricula and the instructors. We are now able to get graduates with top skills from these colleges, who are immediately placed in top companies in need of their skills.
In terms of higher education, the number of universities has increased by almost 250% in the past 10 years, not taking into account King Abdullah’s Scholarship program, the largest in the world, with around 200,000 students attending international universities all around the world.
Our universities have high quality standards, which is confirmed by international ranking agencies year after year. I graduated from one of the leading technical universities in the region, King Fahad University for Petroleum & Minerals, and I can totally confirm the quality of our teachers and top-notch facilities.
International companies operating in the kingdom have been encouraged to employ Saudis and to comply with the Saudization quotas established by the government. How would you define the productivity of the Saudi workforce? What can a foreign investor expect?
I believe that even among Saudis, there is not a great understanding of what “Nitaqat” (Saudization) actually is. First of all, when we see think about the nationalization program we have to see it as a package and not just as “Nitaqat” by itself. People skeptical towards Nitaqat often forget to look at the Human Resource Development Fund, which provides up to half of the salaries of the Saudis during the first two years and contributes significantly to the training of the local talent in the private sector.
It is widely known that a lot of nationalization programs have failed globally, because it’s impossible for the government to determine the right figure of nationals in a specific sector and expect the sector to be competitive. What the government and, specifically, the Ministry of Labor did was to move away from quotas and let the market determine what the right number is.
So, effectively, Nitaqat is the percentage that the market has naturally determined to be possible in terms of nationalization. Nitaqat takes businesses of the same size and same sub-sector, and analyses the top percentage of nationalization and then encourages the rest of the players to reach that number, showing them what they should be achieving since the rules of the market are the same for all of them: this is what is possible, and this is what the rest of you need to be doing.
The government is not coming up with that figure; the market itself is showing that those percentages are possible to reach. There are exceptions of course, such as in micro investment companies with fewer than nine employees, but Nitaqat is improving and the Ministry of Labor has already announced the third version of it, focusing not only on the quantity of Saudis employed but the quality of the jobs offered.
The relationship between the UK and Saudi Arabia is close and historic. It is important to both kingdoms and continues to flourish. Saudi Arabia remains UK’s largest trading partner in the Middle East and is designated a high growth market by UK Trade & Investment, with a significant number of high value opportunities. What are the most attractive sectors of investment for UK companies specifically, and what is your vision for future commercial relations between UK and Saudi Arabia?
We value investments coming from the UK, not only because of the cash injection, which is important, but for the transfer of knowledge and technology they bring. We are definitely very eager to have more UK companies coming to Saudi Arabia.
In terms of sectors where UK companies can focus on, the National Investment Program (NIP) is clarifying and helping allocate investment where it is needed the most. The nature of doing business in the kingdom is changing, we conduct a lot of studies in different sectors to identify what kind of investment we need to attract and where maximum added value can be created. We have identified 17 sectors in the NTP using the “follow the money principle” and we have prioritized three sectors: healthcare, transportation and logistics, and industrial spare parts. UK companies have great expertise in these sectors and therefore great potential for growth.
UK companies and any other investor need to understand the potential that the kingdom has. The internal demand is tremendous. We have around 30 million people and 70% of them are under the age of 30, with relatively strong purchasing power. They are getting married, building houses, buying cars and all kinds of goods, so there is demand for everything ranging from services to consumer products.
On top of that, Saudi Arabia’s location is very convenient. We are strategically positioned between east and west, facilitating the access to 400 million consumers and many of the world’s fastest-growing economies.
British companies represent the profile of companies that we would like to see in the Kingdom of Saudi Arabia and they will benefit from the aforementioned facts about the kingdom, which are a reality lived by the many international investors located here.
During the interview you have mentioned ‘perception’ as an important facet when talking about doing business. Could you summarize why now is the time to invest in Saudi Arabia?
Our economy is cyclical. The government knows that and manages its budget accordingly. During times of high oil prices the government will save, and during times of low oil prices the government increases the pace of reform.
Each cycle, whether it is downside or upside, presents a different and unique set of opportunities. Now we are going through a downside cycle and I think this is a very exciting time to invest. Lots of opportunities will blossom in terms of PPPs and the many other ways discussed in this interview.
Opportunities are constantly present in the kingdom; the nature of the opportunity is what changes depending on our economic cycle. I foresee that Saudi Arabia’s economy will remain strong, foreign reserves are high enough to support this period, and Saudi Arabia will shift from its government-led economic and social model to a more market-based approach, unlocking the potential of our nation.