Q: What is the role of the SIDF?
A: Its primary focus is to extend its financial support to those industries that will accelerate the use of locally available raw materials, create employment opportunities for Saudi citizens, bring in advanced technologies and add overall economic value.

Over a long period, the SIDF has gained unmatched knowledge, experience and expertise, developing a database on key industrial indicators, which help us in devising meaningful industrial project financing parameters for industries to be established in Saudi Arabia.

Another important channel [for the SIDF] is the provision of valuable consulting services. The fund offers financial, administrative, technical and marketing consultancy services to SIDF-financed projects. Since a large number of factories are in the form of small and medium enterprises, the SIDF has created a new mechanism to guarantee borrowing for these businesses from commercial banks.

Another key achievement of the SIDF is that it has not only successfully financed numerous industrial projects, but it has also been developing well-trained Saudi managers. It is not surprising that many large business houses, industrial and public sector entities have entrusted key management functions to managers who had earlier been employed and trained by the SIDF.

Q: What determines the type of financial assistance you provide?
A: SIDF lending policies have been tested and updated over several years. Our borrowing criteria are not different from general borrowing guidelines. However, our risk exposure is relatively high as we lend mostly to greenfield, grassroots and new projects.

This requires a thorough check on the basic parameters, such as the project itself, products, the promoters, their financial strengths, technical marketing and managerial capabilities and, more importantly, the project’s ability to generate sufficient cash flow to repay first the commercial debt, if any, and then the SIDF loan. We ensure that any shortfalls on these capabilities are triggered by period loan conditions or covenants so that the project does not suffer.

There is no short-term lending. All loans extended by the SIDF carry a sufficient grace period before they start repaying gradually over a five-to-six-year period. SIDF lending is against a fixed evaluation fee in line with the time and effort required to evaluate a project, and post-approval administrative costs.

Put together, these costs make a very attractive proposition compared with commercial loans spanning the medium to long term. In SIDF lending there is, however, no reference to the current or fluctuating interest rates.

Q: How soon is a business expected to achieve independent commercial viability?
A: A project should be generating healthy cash flow from the third or fourth year of commercial operation. While all projects have the option to prepay and be independent of SIDF involvement, often the promoters opt to repay as planned and might go for expansion loans, even prior to repaying the original loans, given the attractive cost structure of SIDF financing.

Q: What are the main economic sectors in which the SIDF is active?
A: The SIDF is active in almost all manufacturing sectors. It has no sectoral preferences, as projects are appraised on their own merits.

Beyond that, preference is given to projects that make a significant contribution to the kingdom’s industrial development objectives - technology transfer, employment of Saudi labour, export growth, adding local value.

However, since World Trade Organisation (WTO) membership, the SIDF gives more consideration to activities where the kingdom has a competitive advantage.

Key sectors are petrochemicals, together with its downstream industries. The phenomenal recent growth of this sector, under the leadership of Saudi Basic Industries Corporation (Sabic), has paved the way for strong future investment and growth in many industries, such as ammonia, propylene, methanol, polystyrenes and paraffins. Other prospective sectors include chemicals, electronics and other metallic product industries. Another promising prospect is the mining industry, which is currently receiving increased attention.

There is also good potential in manufacturing sectors, such as environmental industries and pollution-control equipment, computers and telecommunications equipment, automotive parts and services, water resources equipment, medical and laboratory equipment, energy and infrastructure-related projects, and many others.

Q: Given the tightness of the project finance market, is SIDF support even more critical?
A: SIDF financing has always been a preferred source of long-term finance for borrowers, specifically due to its highly specialised approach in evaluating projects that have no similar presence in the kingdom, in terms of technical, financial, marketing and management capabilities.

Local banks largely depend on an initial SIDF commitment [to the project] and an approval of a project financing before they decide on their proportion of the short or long-term lending.

Q: What relationships do you have with banks and investment institutions?
A: As a government development institution, the SIDF has firm co-operation and integrated relations with other entities, such as commercial banks and investment institutions, in forming, fulfilling and evaluating development plans and strategies.

For example, banks consider SIDF loan approval for their finance to industrial projects. The SIDF approval, which includes terms and conditions, is usually used as a guideline for banks in assessing the viability of a project.

Moreover, the SIDF, through its Kafalah [loan] programme designed for the development of small and medium-sized enterprises, has strong co-operation with the commercial banks operating in the kingdom to achieve the Kafalah programme’s ambitious goals.

Also, other investment institutions are shareholders in some corporations that are financed by the SIDF, and some take SIDF approval into consideration when extending loans. Whenever required, the SIDF extends and shares its knowledge and expertise with other government entities, local banks and institutions.

Q: Do you think it is worth supporting business in less developed regions?
A: The SIDF has been devoting greater attention to the achievement of balanced regional industrial development, so the fund does not discriminate between cities in the financing process, as long as the applying project is financially viable. Accordingly, the fund loans cover all the kingdom’s regions. However, as the population and infra-structure are more intensive in some cities such as Riyadh, Jeddah, Mecca and the Eastern Province, they normally get a large share of SIDF loans.

The government is keen that the remote areas of the kingdom become attractive in terms of economic activity, so that the citizens in the area get suitable employment. As part of the government’s overall package, the SIDF is committed to making loans attractive that emanate from such remote areas of the kingdom, in terms of the repayment period and/or any required concessions.

Q: How do you view Saudi Arabia’s industrial prospects in the wake of lower oil prices and the global economic downturn?
A: The latest developments, whether related to oil prices or the global downturn, will afford advantages in cheaper fuel and capital goods. But there will be obvious drawbacks from the financial downturn in terms of lower demand and government revenues, which will be challenges for Saudi industry.

The overall impact on the industrial sector is assumed to be positive as production costs will be lower and, in turn, the competitive position will be stronger in local and international markets.

Specifically, lower oil prices offer the petrochemicals sector a good opportunity to give more consideration to the Saudi market at a time when export demand is lower due to the financial downturn.

Moreover, Saudi industries will have greater opportunities to invest and capitalise on the new economic and industrial cities.

The capacity of the Saudi market to absorb produce has been deepened and diversified, so Saudi industries will be able to offset the expected losses in the international markets resulting from the economic downturn.

Saudi Arabia is a developing economy with continued population growth. The domestic consumption of goods and services will therefore continue to grow despite the economic slowdown.

As the largest economy in the region, the kingdom has grown into an export hub to the GCC and Middle East, which means further growth in industrial activity.

One of the key attractions for industry in Saudi Arabia is its lower production cost because of access to cheaper energy - petroleum products, gas, water and - lower electricity tariffs.

On top of this, the easy availability and access to regional manpower makes an attractive proposition to bring in advanced technologies, manufacture products in a low-production-cost environment and export to the countries all over the world, given the cheap transport and generally low shipping costs. SIDF financing is open to all businesses including foreign ones.

SIDF: Terms of lending

The Saudi Industrial Development Fund (SIDF) was established by royal decree in 1974 as a government financing and development institution, affiliated to the Finance Ministry.

It started with initial capital of SR500m ($133m), but because of substantial growth in demand for SIDF loans, the government approved several increases of capital to its current level of SR20bn. These funds are used to extend loans to projects that are evaluated as feasible and capable of repayment.

Stringent measures are applied in monitoring the performance of the financed projects and repayment of the borrowed loans, enabling the SIDF to regularly recycle the fund’s capital.

The fund applies the following criteria in a flexible manner, depending on the type of project: It must be viable from a marketing, technical and financial point of view; it must offer scope for the employment and training of Saudi citizens; it must be able to use locally available raw materials; it must integrate with other projects in the kingdom or other GCC countries; it should replace imported projects as well as aiming for export growth; and it must be able to bring advanced technology to the kingdom.

SIDF regularly undertakes industry surveys in consultation with existing industrial projects to ensure there are no large excess capacities, particularly in industrial sectors. Accordingly, there are several sectors that are closed to SIDF financing, including structural steel, household refrigerators and printing.

Foreign investors are eligible for low-cost financing for up to 50 per cent of project costs. Loans are provided for a maximum term of 15 years, with repayment schedules designed to match the project’s projected cash flows.

TABLE: SIDF loans by sector

* Of which SR7.4bn ($1.97bn) has been terminated.

Source: SIDF

Table: Value of investments into operating factories backed by SIDF (SRbn)

Source: Saudi Industrial Development Fund (SIDF)

DATA: SIDF loans and operating factories

Saudi state funds increase their influence during the downturn