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Saudi Arabia Report 2010

A supplement to FinanceAsia August 2010

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2010 | SAUDI ARABIA REPORT

Saudi Arabia might have vast oil reserves but, after decades of enjoying its fossil wealth, the kingdom is now preparing for its post-oil future by building centres of learning and research aimed at creating a modern knowledge economy.Furthermore, it has positioned itself as one of the more friendly places in the world to do

business. The World Bank has ranked it the 13th best country out of 189 for ease of doing business. By the end of this year, it hopes to be among the top 10. The nation has reformed laws to reduce the complexity, time and cost of starting up a business in Saudi or acquiring a construction permit.In addition to ensuring a welcoming environment for foreign direct investment, it is building world-class infrastructure. Current developments include six new economic cities, airport expansions, new roads and high-speed, cross-country railways, which will initially transport tonnes of minerals, followed by cargo and eventually passenger lines. It is also building new industrial cities.Saudi Arabia and China have already forged close relationships, with both nations investing in each other. All signs indicate this pair up will continue to grow. Bilateral trade, which is currently at $40 billion, is set to grow to $60 billion by 2015. There are now more than 90 Chinese companies doing business in Saudi (most are construction companies helping build that infrastructure) but at the same time Saudi Arabian companies are investing in oil refineries in China. Now, both nations are looking at opportunities beyond these two key areas. All this growth, and the willingness to build more ties with Asia, presents opportunities to regional chief executives, banks and investors. We hope you find this supplement helpful as a guide to where to find the right investment for you.

Lara Wozniak, [email protected]

Getting it right

EditorLara [email protected] editorAnette Jö[email protected] editorsSameera Anand Nick FergusonAustralia editorCherie MarriottSenior writerRupert WalkerReportersLillian Liu Mei Tuicolo Jonathan WongContributorsJackie Horne Nick LordAdrian Murphy Arun Subramaniam

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Associate publisherKeith Frith [email protected] Hirst [email protected] directorTim Waldron

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Despite the crisis, Saudi Arabia is in the middle of an industrial expansion that it hopes will create the framework for sustained post-oil economic growth.By Adrian Murphy

Refining Saudi’s future

It will be 35 years this September since Saudi Arabia established the Royal Commission for Jubail and Yanbu during the kingdom’s first

oil boom in the 1970s, creating two new industrial cities.

Today, more than three decades later, the kingdom is going through another major development boom. So far, it has committed a total of $400 billion of investment in infrastructure projects, both planned and underway.

In the 1970s the two cities of Jubail, and Yanbu, on the Gulf and Red Sea coasts respectively, represented a push towards the industrialisation of the nation and in the past three decades they have created 233 industries and 107,000 jobs.

Now, the developments are being built bigger and faster, and the emphasis is on preparing Saudi Arabia for a post-oil future. The new cities are not oil-processing hubs, but centres of learning and research aimed at creating a modern knowledge economy.

Despite the recent global financial crisis, government spending is keeping these projects from being mothballed, in stark contrast to what is happening in Dubai.

“If anything, the crisis has actually helped the kingdom in many ways,” said

Oliver Cornock, Oxford Business Group regional editor for the Gulf Cooperation Council.

“Building materials and construction costs have decreased as much as 30% over what they were in 2008 and qualified human resources have become easier to tap into.

“In its efforts to diversify away from its traditional reliance on oil, the government has been actively promoting the downstream sector and wider manufacturing industries.

“We have noticed these sectors grow over the years. One only need look at the expansion of the industrial cities of Jubail and Yanbu to see the huge growth — and the opportunities — in the downstream hydrocarbons sector.”

Current developments include six new economic cities, airport expansions, new roads and high-speed, cross-country railways, which will initially transport thousands of tonnes of minerals, followed by cargo and eventually passenger lines.

As well as these projects, the Saudi Industrial Property Authority (Modon) is overseeing the establishment of 18 new industrial cities as part of the national industrial strategy, with a $65 billion investment.

The cities will create 3,000 factories

(which will be 60% of the kingdom’s total) and a 300,000-strong workforce is currently on sites across the kingdom.

“Within the past two years alone, we have increased the total size of the industrial cities from 42.5 million square meters to 71 million square meters — a 67% increase on the total of the previous 40 years’ developments,” said Tawfig bin Fawzan Alrabiah, director general of Modon.

And according to the Saudi Arabian General Investment Authority (Sagia), which is backing the new economic cities, they alone will contribute $150 billion a year to the country’s economy by 2020 and are expected to house five million people and generate 1.3 million jobs.

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One of Saudi’s new cities, as it might look

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“One of the central tenets of Saudi Arabia’s economic development strategy is diversification away from its historic reliance on hydrocarbons,” added Cornock.

“The global economic crisis has brought the problems related to an over-reliance on a single commodity sharply into focus.

“The sustained period of higher oil prices has meant that the kingdom has been well placed to fund the essential infrastructure on which to build its diversified economy.

“Indeed, the response to the crisis has been a fiscal stimulus package aimed at not only giving an energy boost to the economy in the short to medium term,

but a boost to the longer term ambition of diversification too.”

The government set aside the largest ever budget in 2010 with $69.3 billion for new and existing infrastructure projects in the areas of power generation, construction and transportation.

“This is an increase of 15.5% on the allocation for 2009 and a clear demonstration that the government’s commitment to achieving its goals is as strong as ever,” adds Cornock.

The projects gaining the most attention are the six economic cities, which were first planned on the cusp of the economic boom in 2007.

They include Prince Abdul Aziz bin Mousaed Economic City, Knowledge Economic City, Jazan Economic City and perhaps the most talked about: King Abdullah Economic City, or Kaec, as it is known. And the figures are staggering.

Kaec is by far the largest of the economic cities with a $27 billion investment located along the Red Sea between the cities of Mecca, Medina and Jeddah. It is being developed by Dubai master planner Emaar, the company behind Burj Khalifa, the world’s tallest building, and aims to create one million jobs for two million residents by 2025.

In a report published in June, Fahd al-Rasheed, chief executive of Emaar, pointed to the demographics of Saudi Arabia as a key factor to Kaec’s rationale and future success.

“Due to the fact that 65% of Saudi Arabian nationals are under 30, the kingdom estimates it will need four million housing units by 2022,” he said.

“To put it in context, this is the same number of units available today in the kingdom. Every city in the kingdom has to double between now and 2022.”

The creation of more housing and jobs is a key factor in the development of the economic cities according to Samir Pradhan, senior researcher in the GCC economics programme for the Gulf Research Center, who says unemployment levels are currently at 14%.

“We completed a project two years ago on cluster development in Rabigh (the location of Kaec) and it was clear the Saudi government wanted to know what could boost economic development in rural areas as there was a lot of internal migration to Riyadh and Jeddah,” he added.

“So the government began to plan projects in those rural areas, which will take the pressure off the more

established conurbations.”To better connect the kingdom,

massive railway projects are underway for the transportation of cargo and passengers.

The Saudi Railway Organisation (SAO) is building a 950 km Saudi Land Bridge line, consisting of two lines that will link the Red Sea port of Jeddah with Riyadh and the industrial city of Jubail with other lines on the network.

SAO is also carrying out a high speed passenger line, the Harmain High Speed Rail project connecting Mecca, Jeddah and Medina, which it is hoped will be completed by 2012 and be a much needed facility for the transport of pilgrims to the two holy cities.

Other railway projects are being completed by the Saudi Railway Company (SAR), including the 2,400 km cargo and passenger link known as the North-South Railway (NSR).

Once completed, the NSR will link Al Haditha on the Jordanian border to the capital, Riyadh. A branch off the main line will also reach industrial areas on the Gulf.

The first of three phases is a 1,486 km Mineral Line, linking the Saudi Arabian Mining Company’s (Ma’aden) phosphate mine at Al Jalamid and its bauxite mine at Az Zabirah with processing facilities located at Ras Az Zawr on the Gulf coast.

“We have completed 1,050 km of railway track out of a total of 1,486 km,” said Sulaiman Almadi, SAR marketing manager for operations. “The first phase is expected to be operational by the end of 2010.

“We have heavy duty farms and with 800,000 to 1.2 million tonnes of goods alone that need to be transported each year, not to mention the minerals.

One of Saudi’s new cities, as it might look

A PIECE OF KAEC

King Abdullah Economic City is one of six economic cities planned for Saudi Arabia with an investment of $27 billion.

It is located along the Red Sea between the two Holy Cities of Mecca and Medina and the port city of Jeddah and will cover 168 million square metres.

The city’s development will focus on ports, logistics, industry and services, and is expected to generate one million jobs among a population of two million.

It will be split into zones with a sea port, industrial sector, central business district, waterfront resort area, education zone and residential areas.



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“If you transport this by truck then 15,000 tonnes equals 600 truckloads so there are many benefits; distance, speed and safety among them.”

Transporting passengers is very much a policy of the kingdom’s Civil Aviation Authority, which is expanding the King Abdulaziz International Airport and expects passenger numbers to more than double to 30 million by 2012, from 13 million in 2009.

“This is clearly a direction Saudi Arabia wants to go in, to avoid a recession in respect of the global financial crisis,” said John Sfakianakis, chief economist at Banque Saudi Fransi.

“The government started a huge fiscal outlay of $400 billion in 2008, which extends to 2013 and will be maintained as a result of sustainable, well-balanced oil revenues and the ability to tap into foreign assets as it did in 2009 to the tune of $65 billion.

“They replenished these assets as the oil prices went up and later this year they will be back to where they were before the global financial crisis. Over the next five-to-10 years they will be able to have smaller budgets to sustain their growth

and they will have returns on these investments. The idea for the economic cities is not a bad one if they can offer the jobs Saudi Arabia needs, however, what could be challenging is the timeframe, size and delivery. We have to remember, it took 20-to-30 years for the two industrial cities in Jubail and Yanbu to reach their targets.”

While the petrochemicals sector is often cited as an example of a non-oil sector that is performing well, one sector you hear less of is education. But in 2010 the budget allocation of $36.5 billion for education and manpower development, which amounted to 25% of the largest budget ever announced in the kingdom.

The new budget has allocated funds for building 1,200 schools in the kingdom, in addition to 3,112 school buildings now being constructed.

More than 770 new schools have been completed this year and 2,000 schools renovated and refurbished.

One example of this recent surge in the knowledge sector is the King Abdullah University of Science and Technology (Kaust), the kingdom’s first co-education facility near Jeddah, which will begin its

first academic year in the autumn.The university provides national and

foreign students and faculty the chance to work together on research and will also collaborate with major industries.

“Definitely they know that education is an investment and the human capital is as important as the oil they have in the ground,” added Sfakianakis.

“Kaust is very significant for many reasons because Saudi needs to develop a university that acts as a beacon for knowledge where Saudis and foreigners can interact and create a centre of excellence.”

The energy sector is also busy improving its facilities with $79 billion in private sector energy projects under development. The Arab Oil and Gas Directory forecasts future developments in petrochemicals of $90 billion, plus a further $90 billion for power generation, $88 billion for water desalinisation and $50 billion for natural gas projects.

To put this into context, the cities of Jubail and Yanbu were accomplished with an overall investment of $20 billion, but remain a key building block to the transformation happening today. n


An executive from property developer Emaar shows off the architectural model of King Abdullah Economic City in Jeddah



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The Tadawul, Saudi Arabia’s stock exchange, has traditionally made it difficult for foreign investors to take part, but that is slowly changing.By Adrian Murphy

Opening the door to Saudi’s capital markets

In June, top executives from publicly listed companies on the Saudi stock exchange, the Tadawul, took part in the second

Saudi Arabia Capital Markets Day, bringing together global investors in an attempt boost international investment.

The event took place in the UK, in conjunction with the London Stock Exchange, and is one of the latest initiatives to encourage international fund managers to directly invest in the Middle East’s largest stock exchange, which had a market capitalisation at the end of the first half of 2010 of $320 billion (up from $236 billion at the end of March 2009).

Since the Arabian Automobile Company became the first joint stock company in the kingdom in 1934, the Saudi capital market has grown steadily with shares first open to Saudis from 1954 and then Gulf Cooperation Council nationals.

Since 2003, the Saudi stock exchange has become regulated under the Capital Markets Authority, which has increased its professionalism and paved the way for the exchange’s internationalisation.

In 2008, the country allowed foreigners to directly buy into the market through third parties in swap agreements and participation notes and is slowly opening up its capital markets to foreign investors.

Foreign investors“The Saudi market is the largest by far in the Middle East and one of the largest in the world, but it is still limited to the type of investors it has in its markets,” said Hossam Radwan, Saudi Arabia chief executive of EFG-Hermes, which

organises the capital market days.“However, foreign investors would

like to tap into the Saudi market and would like to know more about this. We at EFG are keen on developing the Saudi capital market and try to find creative ways to bring in foreign investment. We want to raise awareness of how large and

technologically advanced the market is to regulators, the public and especially to foreign investors.”

In March, Falcom Financial Services launched the first Shar’iah-compliant exchange-traded fund (ETF), which tracks the 30 biggest stocks on the index. Foreign investors can buy the ETFs

Seats on the Saudi stock exchange are still reserved for locals

“Returns on the stock market have not reflected the fact that Saudi Arabia has been immune to the global financial crisis. This is purely down to negative outside events. ” Hossam Radwan, EFG-Hermes

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through registered brokers. And, in July, Falcom announced its second ETF, this time in petrochemicals, allowing a further foray for foreigners into Saudi Arabia’s biggest sector.

“The Middle East alone produces 11% of the world’s petrochemicals,” said Adeeb Al Sowailim, chief executive of Falcom. “It is expected that this ratio will rise to be 16% in 2015 so our ETFs are timely. The country’s vision of becoming competitive in all sectors of the economy can only be realised by an open capital market that facilitates local and international investors and the second ETF is a step in opening the country’s door to investors who wishes to ride the engine that drives the world.

Exchange-traded funds “With the ETF we had to invent as well as invest in a whole new risk management tool, as classical models fell short as derivatives and other hedging instruments are not allowed under the shariah law neither is shorting allowed.

“At home we are experiencing an evolution with positive moves by the capital market authorities in spearheading the liberalisation process we have shown the region that we walk the talk and deliver.

“With the launch of the petrochemicals ETF the investment

bank is clearly way ahead of all banks in the region when it comes to new product development whilst focusing on the needs of investors.”

Unlike neighbouring markets such as Dubai International Financial Exchange (founded in 2005), which became Nasdaq Dubai in 2008, the Tadawul has not allied itself to international exchanges, which could be a further incentive to foreigners.

“The swap agreements and ETFs have opened the door to a new class of foreign institutional investors based outside the GCC,” said Abdullah Al-Suweilmy, chief executive of Tadawul.

“We are pleased on two accounts about this development of the increased participation of institutional investors and the ability of foreign investors to start having direct exposure to the Saudi market. At the Tadawul, any alliance we might consider should enable both sides to leverage the joint venture for ongoing and clear business purposes.

As a key emerging market, Saudi


Saudi Arabia would like to position itself at the heart of the Middle East, as a political and financial hub for the region. Here, Saudi King Abdullah (centre) plays host to Syrian president Bashar al-Assad (right) and his Egyptian counterpart Hosni Mubarak (left)

TADAWUL SLOWLY OPENING

● The Tadawul is the largest stock market in the Middle East with a market capitalisation of $320 billion.

● In the first half of 2010 the Saudi Stock Exchange accounted for seven out of eight IPOs in the region.

● Since the introduction of swaps in 2008 it has been steadily opening its market to foreign investors and in March introduced its first ETF.

● There are now 144 companies listed on the market with an estimated three to four million traders.

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Arabia would obviously benefit from inclusion in the Morgan Stanley Capital International emerging market index, where it would stand out. Unlike many other emerging markets, Saudi Arabia boasts a stable political system, solid economy and a currency that is pegged to the dollar.

“The most important topic for discussion is Saudi Arabia and its role in emerging markets,” added Radwan. “One of the things they could do is become part of the Morgan Stanley Emerging Markets Index. Then it becomes imperative for fund managers to be involved as it is part of a benchmark.”

So far this year, the Tadawul all-share index has edged up by 2.5% to 6,217 points at the time of going to press — though the index dropped sharply from a 52-week high of 6,930 in March as investors panicked about Europe’s sovereign debt crisis and the effect it might have on global demand for oil.

Even so, the market’s total capitalisation rose to $319.59 billion according to the exchange’s first-half report. That represents an increase of 11.55% from the previous year. The total value of shares traded dipped to $121.52 billion in the first six months of this year, decreasing by 41.58% over the same period of the previous year. As did the total number of shares traded, falling to 19.62 billion compared to 38.34 billion shares traded during the first half of the previous year, decreasing by 48.83%.

The total number of transactions executed during the fist half reached 11.6 million compared to 22.63 million trades during the first half of the previous year, decreasing by 48.45%.

“I think the results have been okay,” said Radwan. “ They could have been better or worse. The results of the stock market, however, have not reflected the fact that Saudi Arabia has been largely immune to the global financial crisis. The reason for this has been negative outside events and the markets have suffered through no fault of their own.”

According to recent figures by PricewaterhouseCoopers, Saudi Arabia accounted for seven out of eight IPOs in the Middle East/North Africa region for the first half of 2010. In 2009, the Tadawul issued 11 of 28 IPOs in the region.

However, the total amount raised at the end of June 2010 was $830 million, 31.4% lower than the $1.2 billion raised during the same period in 2009, according to Tadawul’s first-half report.

The largest IPO in 2010, as of June 30, was for Knowledge Economic City Company, which raised $272 million, the equivalent of 32.7% of the total capital raised in the GCC.

Other companies that released IPOs were Herfy Foods Services Company; three insurance companies: Wataniya, Solidarity Saudi Takaful, andAmana Cooperative; and two industrial investment companies: Al Sorayai Trading and Industrial Group and Al Hassan Ghazi Ibrahim Shaker.

Despite this positive outlook for IPOs the Saudi market is still plagued by speculators and is striving to increase the number of institutional investors.

In 2006, the Saudi Arabia Monetary Authority’s (Sama) consumer lending restrictions hit the market and confidence was weakened by rumours of market manipulation. The market dropped 28% within a month and 50% after three months, and continued a persistent decline until June 2007.

In 2008 and 2009 there were further highs and lows but throughout this the number of investors, between three and four million in 2010, and the number of

companies listed continued to grow.“People think about other markets and

some take guidance from the US markets,” said Muhammad Younas Malick, senior researcher with National Commercial Bank. “They think that the US economy and the export of oil will affect the Saudi market and when they are doing well they will start buying. This is not a mature way of investing; it is more about sentiment.”

Malick has been involved with the Saudi Stock exchange since 1992 and says that the growth of the market domestically has been strong, from 14 listed companies back then to 77 in 2003 and 144 by the end of July 2010.

With this growth the opportunities for Saudi nationals is widening all the time and with information becoming more streamlined and efficient, more opportunities are opening for foreigners as well.

“Swap agreements allow foreign

investors to get involved, but still a foreign investor cannot buy or sell shares directly — it has to be done through a third party,” said John Sfakianakis, chief economist at Banque Saudi Fransi. “It is definitely a stock market offering lots of potential. It is very transparent, its corporate transparency has increased and it is at the forefront on this. If you look at the releases done in a specific time they are leading the way. Also the data information published after the quarter ends is very speedy.

“For the largest economy in the Middle East, when the Saudi economy is doing well the stock market will do well and it has strength. Notwithstanding the 2006 stock market crash, it is the largest in terms of market capitalisation. It has the largest banks in the region, the largest petrochemicals companies and sizeable retail, fund and insurance companies all listed. It is still quite early in its development but it has grown in terms of companies, depth, transparency and management.”

In Saudi Arabia, many banks offer Islamic products, though there is currently no regulator for these

products. Banks appoint their own board of Islamic scholars who advise on the mechanisms. Islamic banking is constantly being developed, with the goal of creating a financial infrastructure that replaces the concept of interest with profit sharing (though in practice Islamic banks earn very similar returns to conventional, interest-charging banks).

Some Islamic products similar to derivatives are available including some swaps and options as well as Islamic currency options.

“There are 11 banks listed on the stock exchange and most of them are Islamic, but they offer both Islamic and conventional lending,” said NCB’s Malick. “The stock market functions the same as any other. The shareholders hold an ownership of the company depending on the number of shares, so this is an Islamic way of partnership agreement.” n

“The country’s vision of becoming competitive in all sectors of the economy can only be realised by an open capital market that facilitates local and international investors.”Adeeb Al Sowailim, Falcom

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Saudi Arabia fuels financial stability and economic growth through foreign direct investment.

Cleaner energy for a resourceful future

100 kilometers north of Jeddah on the Red Sea coast of Saudi Arabia lies the Petro Rabigh Complex, the $10 billion integrated refinery

and petrochemical facility jointly owned by Saudi Aramco and Sumitomo Chemical of Japan and the largest Foreign Direct Investment in Saudi Arabia. Within this Complex, Rabigh Water and Electricity Company (RAWEC), as the utilities provider, produces 360 megawatts of power, 5,500 tonnes per hour (t/hr) of water and 1,230 t/hr of steam on a 25-year build-operate-own (BOO) concession basis. The shareholders of this $1.2 billion project are Marubeni Corporation, JGC Corporation and Itochu Corporation of Japan and the local ACWA Power Projects.

Environmentally efficient In order to meet its production guarantees and commitment to the environment, RAWEC relies on (i) the concept of n+1/n+2; and (ii) the proven technology of a conventional thermal power and desalination plant consisting of 5x118 MW Steam Turbines, 9x470 t/hr Steam Generators, 3 wet limestone Flue Gas Desulphurization (FGD) units and 16x504 t/hr Reverse Osmosis (RO) trains, all supplied by Mitsubishi Heavy Industries. The plant meets Saudi and international environmental standards, including the World Bank’s guidelines, aimed at reducing pollutants.

RAWEC supplies over 40 million gallons of water per day. Its seawater RO plant is one of the largest in the region and the world’s first commercial triple-pass facility, supplying high-quality desalinated water at a considerably lower cost than similarly-sized Multi Stage Flash (MSF)plants and with a chloride content of less than 5mg/l, hitherto achievable only through

the MSF process. Energy consumption is less than half that of similar MSF desalination plants, producing a convincingly low carbon footprint.

Another feature of RAWEC’s environmental commitment is the installation/operation of the first FGD system in Saudi Arabia. The main function of the FGD is to control the sulphur dioxide emitted into the atmosphere. By utilising the limestone-forced oxidation system, which incorporates air injection to ensure a fully oxidised gypsum product, the amount of sulphur in the flue gas is reduced from around 2,207 to only 72 parts per million (dry). In full production the plant uses up to 600 tonnes/day of locally-mined limestone and produces up to 1,200 tons of gypsum as a by-product. The gypsum is currently being used by the Arabian Cement Company in the production of cement.

The FGD system is designed to go beyond meeting all current local and international environmental emissions standards. Indeed, it reduces sulphur in

the exhaust significantly below the applicable legal requirements and contributes strongly to improving the ambient sulphur concentrations in the area.

Commitment to ExcellenceRAWEC strives to achieve the highest standards in work environment and employee welfare. The company tries to live up to its declared mission statement to become a world class company, create a safe and efficient work environment and promote teamwork and pride of ownership among its employees.

Project Commercial Operation Date was declared as of June 1, 2008. To date, RAWEC has scored 100% reliability and availability of production. In 2009, it proudly achieved more than 500,000 man hours without any Loss Time Accidents. In recognition for upholding the company’s standards in health, safety and the environment (HSE), employees are awarded the monthly Khayyal of the Month Award and the bi-annual Samurai Award, reflecting the importance RAWEC places on

SPONSORED PROFILE

RAWEC’s $1.2 billion cogeneration project, the integrated water, steam and power plant.

Rabigh Arabian Water & Electricity Company:

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AUGUST 2010 FINANCEASIA 9

operational safety. The company intends to maintain its untarnished safety record by training and developing a safety-conscious workforce.

Currently, RAWEC employs 207 people 40% of whom are Saudi nationals at all levels of the organisation, in full support of the Saudi Government’s commitment towards Saudisation across key industries.

RAWEC’s commitment to excellence has led the company to adopt a progressive and well-planned performance management strategy based on Princeton University’s Learning Process and to periodically upgrade its rewarding structure in line with the Hay Group and other industry surveys. Employee health and wellbeing are a priority. There is a well-resourced clinic on site where employees are offered routine health screenings. On offer on the Learning and Development menu are seminars ranging from stress management, teamwork building, to feedback and coaching techniques. This emphasis on employee welfare has paid off handsomely. In 2009, RAWEC employee turnover was 3%, compared with the Hay Group’s market survey range of 5-15.7%, with a median of 9%.

As a centerpiece of its Corporate Social Responsibility Programme, RAWEC has initiated an apprenticeship scheme where qualified young graduates from the Rabigh area are enrolled in a ten-month training programme, with courses ranging from basic English offered through English Town, the web-based English language school, technical English, HSE, intensive technical courses in plant operation as well as on the job training. This has been very popular with Rabigh town residents, resulting in 19 of its graduates becoming RAWEC full time employees, with the other two finding employment with other companies in the area.

Fueling the futureRAWEC is a prime example of Saudi Arabia’s successful efforts to diversify the economy and generate employment through foreign direct investment. For 2009, RAWEC was ranked eighth in SAGIA’s report on the Top 100 Foreign Direct Investments in Saudi Arabia. Earlier this year, a certificate was awarded to RAWEC during SAGIA’s Global Competitiveness Forum in Riyadh.

RAWEC is a new contender in the conversion industry but it has already

shown that it can meet international standards in respect of the environment, operational efficiency and employee welfare. Its goal is to set the benchmark in the independent power and water industry across Saudi Arabia. RAWEC’s necessary function within Saudi Aramco’s ground-breaking project predicts a prosperous future for the energy company, which is proud to contribute its share in offering a compelling story for yet another successful foreign direct investment in Saudi Arabia. n

CONTACT

Rabigh Arabian Water & Electricity CoAl-Souhaili Center, Al-Andalus StreetP.O. Box 11133, Jeddah 21453, KSATel: (966) 2 657 7506Fax: (966) 2 657 7528Email: [email protected]: www.rawec.com

One of the largest desalination plants in the Middle East, RAWEC provides power, water and steam to the $10 billion petrochemical facility Petro Rabigh.


Website: www.rawec.com

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Saudi Arabia’s developer -in -chief

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As governor of the Saudi Arabia General Investment Authority (Sagia), Amr bin Abdullah Al-Dabbagh is at the

forefront of the kingdom’s current $400 billion of infrastructure development.

Since joining the authority in 2004, Al-Dabbagh has helped to found four new economic cities in the kingdom, at a cost of more than $80 billion, and was recently voted Leader of Tomorrow by the executive board of the World Economic Forum.

It is his job to realise the kingdom’s aim of being one of the world’s top 10 most competitive economies, by boosting domestic and foreign direct investment (FDI) into energy, transport, health, life science and education projects.

“Sagia’s vision is to act as a gateway to investment in Saudi Arabia,” he said in the authority’s mission statement. “We seek to attract sufficient investment to achieve sustainable rapid economic growth while capitalising on the kingdom’s competitive strengths as the global capital of energy, and as a major hub between East and West.”

Sagia was set up in 2000 as part of a new foreign investment law and has been instrumental in creating a highly competitive economic climate and modern infrastructure, which it believes will lead to greater social prosperity throughout the nation.

In the six years since Al-Dabbagh became governor, Sagia has seen the value of investment licences grow 40 fold

and his 10x10 strategy brings together all sectors to reach the same goal.

“Providing the best services available is the substance of our 10x10 strategy; our goal is to become among the top ten most competitive economies by 20x10,” he added. “Toward this we have the full support of the kingdom’s great leadership, including and especially King Abdullah bin Abdulaziz, Custodian of the Two Holy Mosques. The 10x10 strategy is really our bottom line. Leveraging the kingdom’s resources to become the energy capital of the world, and its ideal location to become the regional hub and launch pad to the East and West — this is in fact our daily sustenance.

“We can do this by attracting sufficient


Amr bin Abdullah Al-Dabbagh, governor of Sagia, oversees a $400 billion investment programme

Amr bin Abdullah Al-Dabbagh commands a vast investment programme, which is expected to transform Saudi Arabia into one of the world’s most competitive economies.By Adrian Murphy

FA_Saudi_2pp_Sagia.indd 10 8/4/10 4:43 PM



investment to achieve rapid and sustainable economic growth in Saudi Arabia, capitalising on the kingdom’s competitive strengths as the global capital of energy.”

In 2005, Al-Dabbagh oversaw Sagia’s launch of the National Competitiveness Center, an independent body to monitor, assess and support the development of competitiveness in the kingdom.

Also in 2005, he initiated the first comprehensive FDI survey in Saudi Arabia, with the resulting data being used to identify and repair investment weaknesses.

In 2006, Al-Dabbagh launched the Global Competitiveness Forum, an annual meeting attracting business leaders, sports stars, politicians and

intellectuals, such as Bill Gates, Michael Phelps and former Irish president Mary Robinson to share their experiences in their respective competitive environments.

He also launched an extensive study in the same year of the tax incentives offered by 55 countries and subsequently recommended tax credits as an incentive to foreign investors in the kingdom’s economic cities and less-developed regions.

Al-Dabbagh sees all these projects and initiatives pointing in the same direction and pushing people to get the best out of the kingdom’s economic plans.

“Through the creation of a pro-business environment, a knowledge-based society, and by developing new,

world-class economic cities we can position Saudi Arabia among the top 10 most competitive nations by 2010,” he said. “No one ever said it would be easy, and our 10x10 is a perfect example of this famous declaration.

“The realisation of our 10x10 will require substantial steps and effective initiatives in coordination with every stakeholder we can engage from the kingdom’s government and private sectors, and to move it forward.”

Al-Dabbagh says Sagia is relying on three mechanisms: the first is managing the investment environment through institutional work combined with a measurement of progress based on the criteria of the International Finance Commission, the World Bank, the World Economic Forum and the IMF.

Sagia also monitors and benchmarks the kingdom against the nearly 300 indicators used by these organisations to measure the development of the investment environment and the capacity to attract investment from around the world.

Second, Al-Dabbagh says Sagia is building from the ground up an integrated system of economic cities, one of which is the size of Washington DC, and each providing the ultimate in competitive investment and living environments.

As the sole regulator, Sagia has created what it calls “total service centres”, supplying commercial and residential land, visas, work permits, entertainment and healthy living to provide a high quality of life for residents and investors.

And, third, he says Sagia is focusing its attention on attracting investment into the sectors where the kingdom has a competitive advantage, including energy, transportation and knowledge-based industries.

“By capitalising on the kingdom’s value proposition and effective national leadership we are confident we will achieve our goals and create one of the 10 best investment destinations in the world, and four of the world’s most competitive cities,” he added.

As well as this, Al-Dabbagh is trying to boost the kingdom’s capacity for international economic cooperation and has opened nine overseas offices. Eight of these offices are staffed by women, which is part of Sagia’s goal to have a 50% female workforce by the end of the year. n

FA_Saudi_2pp_Sagia.indd 11 8/4/10 4:43 PM

12 FINANCEASIA AUGUST 2010

Contrary to earlier expectations of a minor contraction in output for the year 2009, Saudi Arabia’s real GDP registered a slightly positive growth rate of 0.15%, with the non-oil sector offsetting the impact of an estimated 7% decline in the oil sector.

Review of the Saudi economy 2009

The non-oil sector is estimated to have grown at 3%, stimulated by government spending programmes, with

transport and communications leading all sectors in 2009, growing at 6%, followed by the construction sector that grew at 3.9%. The oil sector, however, contracted sharply due to the decline in international oil prices and the lower production levels of Opec members for the whole of 2009. The Kingdom’s crude oil production declined from 9.2 to 8.1 million barrels per day (MMBD) in 2009, while the average annual price of Arabian light fell from an unprecedented $95 per barrel in 2008 to $61 per barrel in 2009, a 36% decline.

Despite the reduced oil prices and production levels, the government succeeded yet again in reducing its domestic debt levels, now down to S$225 billion, a 5% decline from 2008.

During 2009, the government sector, with 4% growth, was an important source of resilience, as the government increased spending and public investment authorities stepped in to support project funding. With limited access to foreign capital and tight domestic credit conditions, the Public Investment Fund (PIF) and the Saudi Industrial Development Fund (SIDF) took additional measures to provide funding for infrastructure and industrial projects. In particular, the PIF raised the cap on lending from 30% to 40% of project values, and extended loan durations from 15 to 20 years. In the 2009 budget, a total of S$40 billion was allocated for disbursement by specialised credit institutions to finance major industrial projects and to support social and human development.

At the same time, the Saudi Arabian Monetary Agency (SAMA) maintained an accommodative monetary policy,

SPONSORED PROFILE

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injecting liquidity and reducing the cost of funds to corporate Saudi Arabia, with the benchmark interest rate dropping from 1.50% to 0.25%.

The Kingdom is now internationally acknowledged as a highly open and dynamic area offering many opportunities for investment. In its recent 2010 report entitled Ease of Doing Business, the World Bank recognised Saudi Arabia as one of the top reformers. The Kingdom ranked 13th in the world, up from 15th last year and making it the best place to do business in the entire Middle East. Saudi Arabia topped the list of most attractive foreign direct investment (FDI) destinations in the region by receiving $38 billion in 2008, an increase of 57% over 2007 according to the United Nations Conference on Trade and Development. The Kingdom ranked first in the Arab countries in terms of attracting FDI and the UAE came second.

Central to these improvements in the investment climate is economic openness and institutional reforms, along with the liberalisation of services sectors such as the financial and telecom industries. Furthermore, SAMA’s net foreign assets remained in a healthy position, despite a 7.5% decline in 2009, with the $405 billion becoming a cause for envy at a time when the global economy was facing headwinds from Greece and Dubai concerning their ailing fiscal situations. These factors

underpinned Moody’s decision to upgrade Saudi Arabia’s sovereign credit rating for foreign and local currency debt to Aa3, its second-highest level, from the previous rating of A1.

An unprecedented construction boom is maintaining momentum as highly ambitious multi-billion dollar projects designed to upgrade infrastructure and meet pressing social challenges begin to take effect. As at the end of January 2010, an estimated

$622 billion of projects are planned or under way, with projects worth a relatively meager $52.4 billion put on hold. This points to the wide range of initiatives being pursued across various sectors. A key challenge for the public and private sectors is to accelerate the realisation of mega projects, and to mobilise sufficient human and financial resources to enhance the pace of economic diversification.

On the Saudi banking front, profitability is what sets the domestic banking system apart from global peers – developed or developing – with obvious strengths emanating from greater reliance on core banking activities, lower non-performing loan ratios, little recourse to wholesale funding, and ample liquidity that muted any concerns about solvency. Unlike its global counterparts, SAMA, in its capacity as central bank, did not have to rescue or nationalise any banks. Admittedly, the resilience of the banking system was partly due to SAMA’s prudent and

flexible policy-making regime, providing liquidity in the second half of 2008.

Saudi Arabia still faces significant challenges, despite such major developments and its image as a vastly rich country boasting over 20% of the world’s known oil reserves. The Kingdom seeks to further reduce its dependence on oil, improve the skills of its national workforce, and address unemployment (which reached 9.8% in 2008). Amid an uneven and uncertain global economic recovery, supporting diversification and non-oil growth presents additional challenges for the Kingdom’s fiscal and monetary policy makers. In the recent past, the key challenge was financing shortages. However, the issue now is how to best utilize excess funds. Today, the challenge is to achieve long-term economic efficiency with the least adverse economic impacts, such as inflation and unemployment.

According to NCB’s most recent projections, the Saudi economy will grow by 3.5% in 2010, fueled by sustained public spending in areas such as infrastructure, education, and healthcare. The government has shown great commitment by maintaining a highly expansionary fiscal policy, with actual 2009 expenditures 16% above budget, and 6% higher than actual 2008 levels. The stimulatory strategy is also evident in the 2010 budget, which envisages a further increase in spending – from S$475 billion in 2009 to S$540 billion in 2010.

Evidently, Saudi Arabia’s economic outlook is broadly positive, based on its macroeconomic stability, an expectation of a rebound in oil demand, and the rapid investment in infrastructure. These factors are all creating the conditions necessary for much needed sustainable economic growth.

CONTACT

The National Commercial BankP.O. Box 3555Jeddah 21481Kingdom of Saudi ArabiaTel: +966 2 649 3333Fax: +966 2 644 9474www.alahli.com

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Saudi Arabia is on a drive to become a leading global economy, but it must be more open to attract serious foreign investment. By Adrian Murphy

To the kingdom come

Investing in Saudi Arabia has never been easier for foreign investors. At the same time, the opportunities for those investors

have never been greater.Saudi Arabia’s status as a robust world

economy is the result of cautious government spending and policies, as well as its intrinsic need to develop its non-oil sectors.

The kingdom has almost 25% of the world’s known oil reserves and has been doing business with international companies since drilling for oil started in the 1930s.

In fact, the world’s largest integrated oil company, Saudi Aramco (formerly Aramco – Arabian American Oil Company), was the first foreign-led company in the kingdom.

In 1953, Saudi Arabia became a member of the IMF and in 2005 it finally joined the World Bank and WTO. It is the only country to be part of both the G20 and Opec.

Its huge improvements in attracting foreign business during the past few years paid dividends last September when the World Bank announced that Saudi Arabia was the 13th best country out of 189 for ease of doing business.

By the end of 2010 it hopes to be in the top 10 competitive economies in the world and according to the Unctad World Investment Report published in July, Saudi Arabia came eighth for foreign

direct investment (FDI).King Abdullah, the custodian of the

Two Holy Mosques, has driven the country to modernise following on from the work of the late King Fahd, who established the Saudi Arabian General Investment Authority (Sagia) in 2000.

“Under His Majesty’s leadership, Saudi Arabia has set a goal for the kingdom to become one of the top 10 most competitive countries in the world,” said Amr Al-Dabbagh, governor of Sagia.

“Government ministries, private companies, investors and the Saudi public have collaborated extensively to strive towards this vision.”

The establishment of Sagia was part of a new foreign investment law in April 2000 that allowed foreigners 100% ownership of projects, reduced corporate

tax and to retain the same incentives designated to nationals.

In 2005, Sagia set up the National Competitive Center, benchmarking the kingdom against 300 economic indicators to reach its goal of being in the top 10 most competitive countries by the end of 2010.

“For Saudi Arabia it is an area policymakers have been very keen to focus on and promote,” said Oliver Cornock, Oxford Business Group’s regional editor for the Gulf Cooperation Council (GCC).

“Indeed, there has been a dedicated government strategy to increase the competitiveness of the Saudi economy in recent years.

“In 2005 Sagia set a goal to be among the top 10 countries in the World Bank’s ease of doing business report by 2010. “Overall, the strategy has met with enormous success as the kingdom reached 13th place out of 183 countries in the 2009 report, up from 67th just four years ago.”

For the fifth year running Saudi Arabia has led the way in places to do business in the Middle East, ahead of Bahrain (20th), UAE, (33rd) and Qatar (39th), and more significantly above industrial stalwarts Japan and Germany.

There have been many reforms reducing complexity, time and cost to start a business as well as acquire a


The Hajj draws thousands of pilgrims each year, but the kingdom now wants to become a Mecca for foreign investors

Amr Al-Dabbagh, governor of SaudiArabian General Investment Authority

FA_Saudi_2pp_MarketOpening.indd 14 8/4/10 4:43 PM



construction permit.Earlier this year BDO Stoy Hayward,

an international accountancy firm, published their G20 Heatmap, which positioned Saudi Arabia sixth in terms of attractiveness for inbound construction activity. In terms of budget balance and overall tax it ranked the kingdom first, and for both credit ratings and overall announced fiscal stimulus it was ranked fourth.

“It is easy to establish a construction company in Saudi Arabia,” said Richard Kelly BDO’s head of construction. “Although you must have classification to enter in to government bid projects, you can perform these as a subcontractor and no classification is necessary to

enter into private bids. The increase in infrastructure planned over the next few years in Saudi Arabia is a great opportunity for inbound construction companies.”

However, the BDO report, which looks at opportunities and barriers to inbound construction, does state that government contracts, regulated by royal decrees, strongly favour GCC nations.

This aside, there are more than 1,400 multinational companies, (according to Business Monitor International) such as BAE Systems, Haliburton, Proctor & Gamble, Shell, Total and ArcelorMittal, pumping money into the Saudi economy each year.

The UNCTAD World Investment Report 2010 shows that FDI coming into Saudi Arabia in 2009 totalled $35.5 billion down from $38.1 billion in 2008 but still double the 2006 figure of $17.1 billion and streets ahead of the $1.5 billion average between 1995 and 2005.

This is way above any other GCC countries with FDI into the UAE at $3bn from $16 billion in 2008.

“With vast national reserves of financial assets and hydrocarbons, markets in Saudi Arabia offer many opportunities, underpinned by sound fundamentals, increasingly pro-business policy and stable government,” said Oxford Business Group’s Cornock.

“Therefore, despite the recent

downturn in oil prices, the country remains an attractive offering among emerging markets. Indeed, the kingdom has the benefit of having had minimal exposure to the economic downturn.

“From a financial perspective, banks’ exposure to international markets and toxic assets was extremely small.

“Saudi has a large and robust domestic economy, which the government is ready and able to support and will provide sufficient growth. Overall, the non-oil economy is well positioned to maintain growth, which should, in turn, offer more opportunities in the future for investors.”

This has not gone unnoticed in office circles as trade missions to Saudi Arabia are more frequent with Chinese delegations visiting the kingdom at least once a month (China is the largest consumer of Saudi oil).

Mindful of this, the US Department of Commerce’s International Trade Organisation Administration and the US Foreign Commercial Services announced a trade mission to Saudi Arabia in December 2010.

It says the mission is intended to include representatives from the US energy and infrastructure industry suppliers and service providers and will include visits to Riyadh and Dhahran (home of Saudi Aramco),

“There has been a clear recognition of the benefits of increasing foreign investment in the kingdom, and policy is continually being developed to create the right environment for this,” added Cornock.

“The significant improvements in the World Bank rankings in terms of both competitiveness, and ease of doing business speak for themselves.

“This is backed up by many of the people OBG’s analysts meet with on the ground during our research who cite very tangible improvements.”

According to a report by Banque Saudi Fransi published in June, Saudi Arabia’s GDP growth in 2009 was 0.6% and estimated to increase to 3.9% by the end of the year.

“Other than the kingdom, only a few G2O nations posted economic growth in 2009: Argentina (0.9%), Australia (1.3%), China (8.7%) India (5.7%) and Korea (0.2%),” the report stated.

This last fact is another indicator of how difficult the past two years have been for the more established economies and how the kingdom is rubbing shoulders with a new world order. n

The Hajj draws thousands of pilgrims each year, but the kingdom now wants to become a Mecca for foreign investors

FDI QUICK FACTS

Saudi Arabia is recognised by the World Bank as the 13th best country in terms of ease of doing business. In its 2010 World Investment Report the kingdom was ranked eighth for FDI coming in to the country at $35.5 billion.

It was one of five G20 countries to post a positive economic growth in 2009 at 0.6%, which is expected to rise to 3.9% in 2010.

There are more than 1,400 foreign companies doing business in the kingdom and the BDO Stoy Hayward G20 Heatmap ranked it sixth overall in terms of attractiveness for inbound construction.

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Saudi Arabian oil is one of the key ingredients in China’s extraordinary economic transformation, making relations between the two nations increasingly important. By Adrian Murphy

Fuelling China’s growth

At a reception in Beijing on July 20, the Kingdom of Saudi Arabia and the People’s Republic of China celebrated

20 years of diplomatic ties.During the period from 1990 to 2008,

bilateral trade between the two countries had risen to $40 billion from $200 million, with Chinese president Hu Jintao setting a target of $60 billion by 2015.

The importance of the relationship was highlighted in 2006 when King Abdullah, who ascended the Saudi throne the year before, made China the destination of his first foreign visit.

And President Hu has paid two visits to Saudi Arabia in the past three years.

There are now more than 90 Chinese companies doing business in Saudi Arabia of which at least 60 are construction companies and in May the Ministry of Commerce for the People’s Republic of China set up an office in Riyadh for mainland companies in Saudi Arabia.

Oil is the largest single denominator of the relationship .China’s crude oil imports from Saudi Arabia reached 20.26 million metric tonnes in the first half, up 12.49% year on year,.

In 2007 Saudi Arabia supplied the equivalent of 527,000 barrels a day

according to a report by the Saudi British Bank published in 2009. This rose to 720,000 barrels a day in 2008 and in 2009 China’s crude oil imports from Saudi Arabia grew by 12% to 800,000 barrels a day.

With Saudi Arabia being the world’s largest exporter of oil and China the world’s second-largest net importer behind the US it is a relationship built on sound foundations.

“The $60 billion goal could be seen as conservative but it’s a target that can easily be met at the speed with which it is

going at the moment,” said Tang Zhichao, director of Middle East studies at China Institute of International Relations.

“The main reason for this is that the two nation’s industries are highly complementary.”

China is the second largest source of Saudi imports and the kingdom’s fifth largest export customer.

Between 2002 and 2004, Saudi imports from China jumped by 160% — a growth rate not matched by any other country during this period in value terms.

China’s oil demand is expected to grow by nearly one million barrels per day during just the next two years, with its overall oil consumption having nearly doubled between 2000 and 2009 (to 8.5 million barrels per day). China will account for one-third of global oil consumption in 2010.

And China’s economic growth, averaging 9% a year from 1978 to 2005, has also contributed to the relationship. Saudi Arabia is China’s largest trading partner in West Asia and North Africa, with China exporting textiles, mechanical and electrical products. In 2000, Chinese exports stood at $1.9 billion — by 2008 this had risen to $10.7 billion.

“The relationship in general is


CHINA RELATIONS

● Diplomatic ties between Saudi Arabia and China stretch back 20 years.

● President Hu’s original target of $40 billion in bilateral trade was met two years early, in 2008. The new target is $60 billion by 2015.

● In 2009, China’s crude oil imports from Saudi Arabia grew by 12% to 800,000 barrels a day.

● Saudi Arabia is the world’s largest exporter of oil and China is the world’s second-largest consumer.

● There are more than 90 Chinese companies in Saudi Arabia and 30,000 Chinese construction workers.

FA_Saudi_2pp_SaudiChina.indd 16 8/4/10 4:44 PM


growing by leaps and bounds if you look at trading patterns between Saudi Arabia and China in the past 10 years,” said John Sfakianakis, chief economist for Banque Saudi Fransi.

“A lot of the foreign companies we benefit from are from Asia and there are 30,000 Chinese construction workers in Saudi Arabia.

“More than 65% of exports come from Asia and 50% of oil and gas goes to Asia with 20% of Chinese oil consumption coming from Saudi.

“There is a change in the global economy and where do we see growth? Asia. So Saudi Arabia does not want to sit back and see opportunities go by.”

Seeding growthIn order for the relationship to grow Saudi Arabia began investing in oil refineries in China to help produce heavy crude oil. It has also started to help build petrochemicals plants with two of its largest companies.

In 2009 Saudi Aramco began working with China Petroleum and Chemical (Sinopec) and US firm Exxon Mobil to triple capacity at the Fujian Province in China to 240,000 barrels a day.

Saudi Aramco and Sinopec are also thrashing out a deal for a stake in a plant in Shangdong province with a capacity of

200 barrels a day. And Saudi Arabia has also granted

Sinopec a $200 million concession to explore and produce natural gas in a 38,000 km area of the Kingdom.

Finally, in the port city of Tianjin, the world’s largest petrochemicals maker, Saudi Basic Industries , or Sabic, is working with Sinopec to build a petrochemicals plant.

In April Sabic received an 11-member delegation from the China Petroleum and Chemical Industry Association at its Riyadh headquarters. A key topic is enhancing trade and investment cooperation.

But it is not just energy that is fuelling the two economies . Heavy industry and transport are playing their part.

Chinese company CSR is manufacturing the required 688 wagons for Saudi Arabia’s 2,400 km North South railway line, with a total of 688 wagons shipped out in October.

In March 2009 a $1.8 billion contract was awarded to a Saudi-Chinese consortium, with China Railway Construction working on a high-speed passenger link between the two holy cities of Mecca and Medina.

“Saudi is the largest country in the Gulf and largest market in the Middle East so if China looks at the region they

automatically realise they must take part in what’s happening in Saudi,” adds Sfakianakis.

“Saudi didn’t have a real estate bubble and it does not have the debt that Dubai or the Abu Dhabi banks have.

“What China is most interested in is looking at its stability and, likewise, the future of Saudi Arabia lies with Asia.”

Part of Saudi Arabia’s future is also in education and in early 2009 a Chinese construction company was awarded a $500 million contract to expand the facilities at King Khalid University.

There is also a proposed deal for the Sino-Saudi Jizan Aluminium Plant with the Aluminium Corporation of China (Chalco) and other contracts to develop the Kingdom’s ports.

At the reception in Beijing to mark the 20th anniversary of diplomatic ties, Saudi ambassador to China, Yahya Alzaid, made diplomatic hay of the two nations’ traditional friendship and said the bilateral relationship is built on candour, cooperation and mutual understanding.

If this relationship continues — and all signs suggest it will — the two countries could create a trade-based bond that translates into a diplomatic and political force to be reckoned with on the global stage. n

Saudi Arabia’s pavilion at the World Expo Park in Shanghai was one of the event’s main attractions

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Despite its vast wealth, Saudi Arabia is not about to start buying financial trophies from around the world.By Adrian Murphy

Saudi Arabia’s restrained sovereign wealth

Saudi Arabia’s vast oil wealth makes it an obvious candidate to follow in the footsteps of its Gulf neighbours in launching

its own sovereign wealth fund (SWF) and buying trophy assets around the world.

However, the truth is that Saudi Arabia stands apart from its neighbours. While it does manage a huge pot of

sovereign wealth, these state funds do not act in the same way as regular SWFs and are usually spent domestically.

Even so, the kingdom owns a substantial amount of foreign assets , according to an economic report published by Banque Saudi Fransi in April — $413 billion — that will enable it to support its expansionary spending in the medium term.

The report says it expects this figure to increase to $431 billion by the end of the year, depending on oil revenues. There has been talk of setting up a fund, but progress has so far been blocked by hesitancy.

The Gulf Cooperation Council (GCC) as a whole has made a name for itself with its sovereign wealth funds buying foreign assets for knock down prices


The QE2 as it arrived in Dubai in 2008. Saudi Arabia has turned its back on such conspicuous investments

FA_Saudi_2pp_SWFs.indd 18 8/4/10 5:10 PM

For updates and more information:

Upcoming Conferences

AsianInvestor & FinanceAsia is published by haymarket media limited

■ 3rd China Offshore Investment Forum* 7-8 September 2010, Beijing, P.R.C.

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■ Asian Investment Summit - Australia 15 February 2011, Melbourne, Australia

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during the past three years, starting with Dubai’s purchase of the Queen Elizabeth 2 cruise ship in 2007, Abu Dhabi Investment Authority’s (Adia) stake in the Chrysler building in New York and Qatar Investment Authority’s purchase of Harrods in London in 2009.

According the Sovereign Wealth Fund Institute, a US organisation studying SWFs, Adia is the world’s largest, with assets of $627 billion. The Saudi Arabian Monetary Authority (Sama) is in third place, Kuwait Investment Authority in eighth place with $202 billion, followed by Qatar Investment Authority in 13th with $65 billion.

However, some specialists say that Sama – Saudi Arabia’s central bank – should not be termed as an SWF. Set up in 1952, Sama’s main purpose is to issue national currency and supervise the commercial banks, while also managing the country’s foreign reserves.

“It is completely different in Saudi Arabia,” said Hossam Radwan, Saudi chief executive of EFG-Hermes. “The sovereign wealth fund term has been used loosely. If you talk about Abu Dhabi, you have the Abu Dhabi Investment Authority, or in Qatar the Qatar Investment Authority, then these are SWFs.

“A sovereign wealth fund’s role is to invest government money in assets usually abroad. Sama has controlled wealth, which it invests in Saudi Arabia in its own way. In the UAE and Qatar, you have central banks which perform the functions they are supposed to. But then you also have SWFs that act independently of this and invest in the wealth of that nation. Sama performs

both functions at the same time. There are entities that have been set up that may have a similar role as an SWF, like PIF (the Public Investment Fund) but it is not really an SWF.”

With an estimated wealth of $5 billion, the PIF has a, has a primary function to finance investments in productive projects with a commercial character, whether belonging to the government in total or in part, or public enterprises.

PIF’s funding is handled through loans or guarantees and, in special cases, through allocations of public funds to specific projects; all in accordance with the terms and modalities determined by its board of directors.

The PIF has funded petroleum refineries, basic petrochemical industries, pipelines and storage, transportation including maritime and airline, strategic projects owned by the private sectors, the energy sector and water desalination, mineral sectors and infrastructure, such as building railroads.

In February it announced it would provide interest-free loans to speed up work on a 450 km railway linking the two holy cities of Mecca and Medina to Jeddah. The Haramain Railway, or the Two Holy Mosques line as it is being called, will also connect with King Abdullah Economic City, the Landbridge and the north-south line, linking Saudi’s population centres with industrial zones and the new economic cities.

A joint venture between French oil company Total and Saudi Aramco earlier this year secured $8.5 billion in financing for an oil refinery in Jubail,

Saudi Arabia — of that $4.49 billion came from commercial financial institutions,and $4.01 billion from PIF and export credit agencies.

“Saudi Aramco has been investing in joint ventures with us for years and Saudi is one of the first countries to do things like this,” added Radwan. “They have been very prudent in the way they have invested.”

Other SWFs may not have been so focussed. In previous years, billions of dollars have been spent by Gulf countries on trophy assets such as Adia’s $800 million 75% stake in New York’s famous Chrysler Building in 2008. The downside has been deals such as the purchase of the QE2 by Istithmar, a private equity arm of the struggling Dubai World, which paid Cunard $100 million in 2007. The ship is now lying dormant off the coast of Dubai without the necessary funds to turn it in to a static tourist attraction.

The purchase of Harrods by Qatar Holding adds London’s best-known luxury store to the emirate’s British investments, which range from the Canary Wharf banking district to the London Stock Exchange. The fund paid $2.2 billion to former owner Mohamed al-Fayed.

Earlier this year Adia showed an interest in the Russian ski resort of Gornaya Karusel, which will be home to the National Ski-jumping Centre from 2012 and has more than 200 km of world-class ski slopes. The resort will host the Olympic ski jump competition and the Olympic Alpine Media Village.

“Saudi Arabia is not designed for sovereign wealth funds. Sama is a stabilising fund supporting the high growth the country is undertaking,” said John Sfakianakis, chief economist for Banque Saudi Fransi. “There is a sovereign wealth fund that is $5 billion, but that is inward looking so it’s very different from the other SWFs in the region. It’s more in liquid assets that can be sold and bought back to the kingdom. They sell assets to help the high spending and I don’t think this will change. Saudi Arabia is different in terms of experiences and it does not have the tendency to buy trophy assets. It’s not in the business of acquiring Harrods or Ferrari to make a noise.”

For now, the money that Sama is sitting on is able to help fiscal stimulus, but the chances of a decadent international shopping spree by the agency seems a long way off. n

THE GULF COOPERATION COUNCIL’S SOVEREIGN WEALTH

Fund Established AssetsAbu Dhabi Investment Authority 1976 $627 billionThe Saudi Arabian Monetary Authority 1952 $413 billionKuwait Investment Authority 1953 $203 billionQatar Investment Authority 2005 $65 billion

“Saudi Arabia does not have the tendency to buy trophy assets. It’s not in the business of acquiring Harrods or Ferrari to make a noise. ”John Sfakianakis, Banque Saudi Fransi

FA_Saudi_2pp_SWFs.indd 20 8/4/10 5:10 PM

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Saudi Arabia Report 2010 - premierwebconsulting.compremierwebconsulting.com/pdf/Saudi Arabia Report... · 2 FINANCEASIA AUGUST 2010 FINANCEASIA.COM PICTURE CREDIT: AFP Despite the