Saudi Arabia has introduced measures to make it easier to do business.
These have seen its position on the World Bank’s Ease of Doing Business Index rise to number 23, and it is first among Middle East countries.
But considering the opportunities, foreign direct investment into the country is relatively low.
For the latest available figures, globally there was $1.5 trillion of FDI, but Saudi Arabia attracted only $18bn in 2006.
This still posits an increase of 51% on 2005 and the second largest in the Gulf, behind the UAE.
Of the money that did flow in, services – particularly in the financial sector – and telecoms were the main recipients.
Mergers and acquisitions tell a similar story to FDI, being at quite low levels. But, said Masatuka Fujita, Chief, Investment Trends and Data Section at the UN Conference on Trade and Development, Saudi Arabia has the potential to attract investment.
In 2004, it was ranked at 140 for FDI in the world but two years later (the latest available statistics) it had jumped to 60.
Some of these low figures can be put down to the type of companies in the country. There are over 12,000 in Saudi Arabia, but many are not ready to loosen their grip on their affairs and allow outsiders in.
Andrei Ugarov, CEO of privately-owned regional investment and merchant banking group the National Investor, commented: ‘Companies here don’t see real value add of a private equity partnership. Either they don’t need outside capital because they are part of a large family conglomerate or it’s not the kind of partnership private equity wants to establish with a business. It’s a slow process – it’s changing but will take time.’
But once that first deal is cracked, it gets easier to develop partnerships because an investing company’s credibility is higher. ‘The value you are bringing to the table increases so much. You are bringing in know-how that is not available here,’ adds Ugarov.
There are some 200 companies believed to be preparing for an IPO on the Tadawul over the coming years. Many will not float though, because they are put off by the regulatory requirements, are unable to meet those regulations or are unwilling to relinquish total control.
But where IPO plans are seen through to completion, it can raise big money to fund projects. Minerals company Ma’aden, for instance, is floating half its shares in July, which is expected to raise $9.25bn. All of that money will be pumped into project equity.
With oil prices at the time of writing over $135 a barrel, there is plenty of liquidity in the country. The Middle East GDP growth is outstripping the global average (6.1% versus 3.7%), as many countries are hurting from financial problems and rising prices brought on by the hike in oil.
Interestingly, in many of the developing nations, there is less concern among consumers about petrol prices at the pumps because they are government subsidised, while developed nations are typically feeling the pain.
Jadwa Investments has produced capital flow estimates for differing oil price scenarios and even the least optimistic spells good news for Saudi Arabia. If oil is at $50 a barrel, this will give the kingdom a capital flow of $5.5 trillion; at $100 it rises to $11 trillion and if the price averages at $150 then Saudi receives $16.6 trillion. The annual GDP for the US is $13.8 trillion, so Saudi has the potential to surpass this on oil revenues alone.
‘It will fuel the boom that is just beginning,’ Brad Bourland, Chief Economist and Head of Research at Jadwa Investment, told delegates at the Saudi Investment Summit in Jeddah last week.
Across the GCC, it is estimated that infrastructure spending will be $1.5 trillion over the next five years. In Saudi Arabia, there are between $400bn and $500bn worth of investments (figures vary depending on source) planned or underway.
These projects are split across diversified sectors, but taken as a whole are a sizeable part of the country’s push to diversify away from just pumping oil and to create more downstream jobs, rather than see them go elsewhere.
The largest chunk of that investment, 44%, is for construction projects, with 20% each earmarked for petrochemicals and oil and gas. Of the remaining sectors, 9% is for power, 4% for industry and 3% for water. And despite the desire to diversify, 90% of new petrochemical plants being built in the world will be in the Gulf or China.
In the electricity sector, it is estimated that the country needs between 20 and 40 power plants, at a cost of $60bn. For water, it needs nine new desalination plants, costing $5bn. In both cases, it is to replace aging the incumbent infrastructure and to cope with population and industry growth.
It may seem surprising that at a time of record oil prices the kingdom should want FDI, but outside investment brings with it new technology and knowledge, plus a different thinking. Saudi Arabia hopes this will put it in the position to diversify its industries and create over a million new jobs in its economic cities alone.
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