Bold plan for economic diversification aims to increase the private sector’s contribution to GDP from 40% to 65% whilst creating new non-oil growth engines.
The Kingdom of Saudi Arabia has been synonymous with oil since the first well struck black gold in the desert almost 80 years ago. But now, faced with a sustained slump in oil prices and a budget deficit of almost $100 billion in 2015, the new generation of Saudi leaders is spearheading a bold drive for economic diversification and modernization that has the potential to be a game-changer for the kingdom and the wider Gulf region.
Unveiled with much fanfare in April 2016, Vision 2030 was welcomed by the IMF as a “bold and far-reaching transformation in Saudi Arabia’s economy.” Key targets include increasing the contribution of the private sector from 40% to 65% of GDP and raising non-oil government revenue from SR163 billion ($43.4 billion) to SR1 trillion by 2030. Deputy Crown Prince Mohammed Bin Salman, the chief architect of the plan, said Vision 2030 was designed to end the kingdom’s “oil addiction”.
“We will not allow our country ever to be at the mercy of commodity price volatility or external markets,” the 31-year-old Prince told international journalists at the launch.
One of the most eye-catching elements of Vision 2030 is the plan to sell a 5% stake in the state oil giant Aramco through an IPO that is expected in 2018. The estimated $2 trillion raised from the IPO will be managed by the reformed Public Investment Fund (PIF), making it the world’s largest sovereign wealth fund. The PIF aims to increase its non-Saudi assets to 50% of its portfolio by 2020. It has already begun to flex its muscles internationally, having paid $3.5 billion for a stake in ride-sharing tech giant Uber earlier this year. It also partnered with Japanese firm SoftBank to create a $100 billion fund with the aim of becoming the world’s biggest investor in technology over the next decade.
Back at home, the success of Vision 2030 will depend largely on the capacity of the private sector to fill the gap vacated by the government in terms of job creation and capital expenditure, in a country where some 70% of the labor force currently works in the public sector and where the government has traditionally assumed all the risk in building infrastructure and providing public services.
“Now it is time for the private sector to take the lead and the government has recognized this,” said Fakher Al-Shawaf, CEO of Al Bawani Company, a construction firm that specializes in healthcare and education facilities. “The government is looking to partner with the private sector and allow private companies to build and manage infrastructure. Take, for example, education. The government is providing land and requirements and asking for private developers to construct schools in specific locations. The government will then rent the schools from developers for fixed periods. Such partnerships are less risky for the government and provide better outcomes,” Mr Al-Shawaf explained.
The government has unveiled an initial raft of targets to be reached by 2020 in its National Transformation Program. These include a reducing the amount of money the government spends on wages from 45% to 40% of the budget, and slashing the size of the civil service by 20%. To do that, the government plans to slow down new hiring and offer packages for early retirement. By 2020, it is envisioned that some 450,000 new private-sector jobs will be created, with labor quotas ensuring that many of these positions are filled by Saudis.
However, a change in mindset will be required if Saudis are to embrace the shift towards the private sector, with a recent study published by Riyadh’s King Saud University finding that 80% of Saudis polled in the capital said they would rather wait for a government job. A more relaxed pace of work, long vacations and short working days were among the top reasons cited.
“Vision 2030 is trying to change the methodologies and even the lifestyles of the people,” says Mr Al-Shawaf. “We are trying to change the mindset so that new ways of thinking are evident in the next generations. A transition is always tough. We are not talking only about the economy. We want to encourage ambition, productivity and a change in the way people manage their personal finances.”
Whilst Vision 2030 places a strong emphasis on building local skillsets and developing Saudi talent, there is much scope for foreign investment to help the country develop new growth engines and enhance its industrial competitiveness through knowledge transfer. Indeed, one of the headline goals is to increase the contribution of FDI to GDP from 3.8% to 5.7%.
Since the formal announcement of Vision 2030 earlier this year, there have been several high-profile investments from multinational corporations keen to play a role in the kingdom’s economic transformation. One such example is General Electric, the Boston-based firm that has evolved into one of the world’s leading “digital industrial” companies. Earlier this year, GE announced plans to invest more than $3 billion in the Kingdom of Saudi Arabia in energy, aviation, water and digital projects.
“When Vision 2030 was formally announced, we were already working on our transformation agenda separately. So, it was a great opportunity for us. Within one month of Vision 2030 being announced, we were almost done with our second ‘cluster’ of investments, which we called “Partners for Transformation”. This was a $3 billion investment plan in conjunction with SAIIC and other partners. This new cluster of investments is shaped by, and supportive of, Vision 2030,” explains Hisham Albahkali, CEO of GE – KSA and Bahrain.
GE has fully embraced the need to nurture Saudi talent at all levels of the company, from management to female engineers.
“We look to bring value to the country, by introducing technology and helping the diversification of the economy, focusing on nurturing young talent and fostering innovation,” Mr Albahkali continues. “We look to build an entire ecosystem that benefits SMEs. All of this is being spearheaded by Saudi leaders. GE has invested to ensure that the company’s vision in the kingdom is enacted by Saudi nationals who were born and raised here. We are not brought in from outside. This is the good thing about General Electric. It leads by example. The company starts by investing in its people first, and then the new technology and the rest.”