Having committed to undertaking huge infrastructure projects and continuing to subsidize food, water, petrol, and several other goods for its citizens in its tax free society, it soon became apparent that Saudi Arabia could not continue to spend money as quickly as it had been doing. Its revenues from oil had fallen by a massive 76% and by December 2015 the Saudi Government announced a deficit of $98 billion.
In an effort to counteract the situation and reduce the deficit the government began removing subsidies leading to considerable price hikes in basic goods such as bread, milk, and petrol. In early 2016 rafts of new taxes on the citizens and residents of Saudi Arabia were mooted. However, in keeping with its balancing act of maintaining power the royal family, in conjunction with management consultants McKinsey, decided to take a different path.
In late April 2016 the Saudi Government announced Vision 2030. This was to be the Saudi Governments blueprint to allow it to overcome its current economic difficulties through a raft of societal and economic changes with the ultimate aim of a more open society willing to do business with the world. Most importantly the Vision 2030 document set out the ultimate overall aim of Saudi Arabia being no longer oil dependent, instead taking a more diversified approach.
Central to Saudi Arabia becoming industrially diversified was the sale of 5% of Saudi Aramco, the Saudi state oil company which is currently regarded as the most valuable company in the world. Although an IPO has not been released for the company yet, analysts believe the company could be worth between $2 trillion and $3 trillion.
It is envisaged that this 5% public offering combined with other assets (that are not defined but thought to be through a major land sale) will make up a Saudi Arabian spending pot in the region of $2 trillion. This will create the largest sovereign wealth fund that the world has ever seen. Vision 2030 envisages that this fund will yield $100 billion in profit over the next ten years.
The fund is so large that it could potentially purchase four of the world’s largest companies - Apple, Microsoft, Alphabet (Google), and Berkshire Hathaway (of Warren Buffet fame) in one go!
Vision 2030 set out that approximately half of this sovereign wealth fund will be invested abroad with the other half being invested domestically. The Fund will be located in the King Abdullah Financial District (KAFD), which came in for some special treatment under Vision 2030.
The KAFD is a $10 billion development near the center of Riyadh, which was to be the center piece of the previous king’s vision for a financial district to rival that of Dubai within the region and be a major player alongside London and New York on a global stage. The development comprises numerous towers, the tallest of which is 57 storeys, serviced by its own monorail system. Following a slow take up in property sales the now deceased King Abdullah ordered that the site be developed in its entirety and finished within 12 months. This strategy too has failed.
Under Vision 2030 not only will the KAFD house the Sovereign Wealth Fund, it will also become a special zone with competitive regulations and procedures and will have visa exemptions. Under the plan the area will have special links to King Khaled International Airport though the details of this remain unknown at present. The area is to be transformed under Vision 2030 with a move away from a purely office environment to one which will house hotels, apartments, and civic amenities associated with a development of this kind. While the original aim was to attract all the major world banks to this area, it would seem now that various forms of occupancy giving the area a commercial viability will be enough to satisfy the future vision.
The plan also outlines a number of other special economic zones for logistics, industry, and tourism though the details of these have not been released and contribute to the feeling of this Vision 2030 being aspirational in its nature.
The plan recognizes that the Economic Cities model which was to be introduced throughout Saudi Arabia have not reached their potential. The vision aspires to salvage and revamp the economic cities to allow them to be more effective. Details of the plans for the economic cities have not been developed any further beyond its mention in the original script.
One cornerstone of the plan has been to relax the licensing arrangements currently required for businesses to open and trade in Saudi Arabia. It is hoped that relaxation of these laws will lead to greater foreign direct investment in Saudi Arabia especially in the manufacturing sector. It is hoped that the new measure will increase FDI from 3.8% to 5.7% by 2030.
This new position is already bearing fruit for the country with the announcement that Dow Chemicals will be building a manufacturing facility in the country in the coming years. They become the first foreign company to set up in Saudi under the new arrangement without the need for a Saudi partner company.
The introduction of a ‘white land’ under the recent proposal is seen as the most positive measure from a construction perspective. Under this element white land is defined as land situated within a commercial or residential zoned area within cities in Saudi Arabia and these lands can be taxed based upon the value of the land if they are not developed within a specified time frame. To begin with this measure will only apply to land owners with parcels in excess of 10,000 sq m.
Vision 2030 in its current form is an aspirational plan to improve the conditions within Saudi Arabia to allow ease of access for foreign investment. This includes major social changes which come under the scrutiny and opposition of the strict religious powers within the kingdom.
Furthermore, while there are some promising opportunities within the Vision for construction related activities the plan is very light on detail including commencement dates. The plan is an ambitious one but as previously stated is very light on specifics. One hopes that when the details are applied the difficulties attached with doing business in Saudi Arabia do not prove too taxing to overcome.
Garvan Barry is a Senior Cost Consultant based in our Bahrain office. He previously worked for three years in the Linesight Riyadh office in Saudi Arabia. He has travelled extensively throughout Saudi Arabia representing Linesight and has a deep working knowledge of the country and its economy. Garvan has worked with a number of major clients in the GCC region including Mobily, AXA, MAF, and AjRajhi Bank. He holds degrees from the University of Limerick and the University of Reading with over 18 years' experience as a Cost Manager and Project Manager in Ireland, the UK, and the Middle East.