Talk to any major Saudi corporate or foreign company in Saudi Arabia and the story is the same, give or take the odd billion riyals. “Five years ago, we were willing to do projects for less than SR100m ($27m),” says a Jeddah-based lawyer responsible for putting together a string of large-scale project financings. “Now, we do not even look at it if it is not more than SR1bn.”

The luxury of turning away business is not the only pointer to the flood of liquidity sweeping the kingdom, which shows little sign of abating. Year-on-year money supply growth is upwards of 20 per cent, a liquidity injection reflecting the recycling of petrodollars into the economy - the kingdom pulled in some $190bn in oil export revenues in 2006.

This, in turn, is fuelling a massive investment drive as the Saudi authorities and private investors seek to capitalise on the boom by reinvesting oil wealth into more secure long-term growth opportunities in sectors where the kingdom enjoys a distinct economic advantage.

The boom, say observers, will not have a short-term impact like the boom of the 1970s, when the quadrupling of oil price triggered massive growth in the Saudi economy, at a time when the population was 9 million rather than the 26 million today.

“The second boom is different,” says the head of one of Saudi Arabia’s oldest family businesses. “It is not as easy as in the 1970s, when only a handful of merchants had capital and acted like rabbits in a lettuce patch. Now, the challenge is to manage growth without gorging themselves and getting indigestion.”

It is not just an oil story. Following the tightening of control on foreign investment in the US after the terrorist attacks on New York and Washington on 11 September 2001, significant volumes of capital have been repatriated to the region, which might once have been invested elsewhere. Saudi Arabia, as the Gulf’s largest economy, stands to gain the most from the trend.

The investment pattern in the kingdom is markedly different from other GCC states. The Saudis are not making headline-grabbing plays for overseas assets, such as supermarkets and Scandinavian stock exchanges. Unlike other Gulf states, private equity has yet to have a significant impact. Only 10 per cent of capital from more than 100 Middle East and North Africa private equity funds is invested in Saudi Arabia, says one local economist.

Domestic drivers

Instead, many Saudis have steadily built up real estate assets across the Middle East. Sabb, the local banking group, estimates 60 per cent of five-star hotels in Cairo are owned by Saudi investors. In Egypt’s residential sector, Saudis have invested about $12bn. Between 1991 and 2006, another $10-12bn was invested in Lebanon’s real estate market.

“Jordan and Syria are also rising destinations for Saudi investments,” says John Sfakianakis, chief economist at Sabb. “We tend to ignore a significant intra-regional trickle-down effect, which benefits from Saudi Arabia’s economic boom. They are significant players across the region. Saudis own an estimated 12 per cent of Dubai real estate and an estimated 20 per cent of Bahrain’s property market.”

Saudi government investments are mainly concentrated in dollar-denominated assets held by the Saudi Arabian Monetary Agency (Sama), as opposed to the sovereign wealth funds preferred by Qatar and the UAE.

Sama prefers to invest in US Treasury bills and other dollar-denominated assets designed to bolster the currency’s peg to the dollar. The country’s $270bn portfolio of foreign holdings is significantly larger than its Gulf neighbours’, with the exception of Abu Dhabi, and there is still plenty left to invest in foreign assets.

Previous booms have bypassed the domestic Saudi economy, as investment opportunities were sparse or unattractive in the kingdom. Many investors preferred to increase their exposure to European or North American real estate, rather than have their capital growth constrained by the sluggish Saudi economy.

This time, broad-based investment expenditure has emerged as the key driver of Saudi economic growth. National Commercial Bank (NCB) estimates nominal gross investment expenditure grew by 13.9 per cent in 2006, mainly underpinned by the growth in government investment. In 2005, the kingdom experienced a one-off hike in government investment expenditure of 81 per cent.

Despite public commitments to letting the private sector drive investment, the state is still the key player as the main distributor of hydrocarbons revenues. Government expenditure remains sizeable. The capital expenditure budget stands at SR140bn, about 35 per cent of budgeted total expenditure, more than half of which is earmarked for infrastructure and construction projects.

NCB says investment expenditure targeted at the non-tradeable sector is catching up with investment in the traditional import-intensive industries and will produce greater growth in terms of gross domestic product (GDP).

But some leading Saudi business figures are afraid of being sidelined. “The government wants to use local companies more to allow the investment boom to percolate more quickly through the economy,” says a leading Jeddah-based business leader. “But there is not a lot of that happening. For example, Saudi Aramco’s capital expenditure is mainly with contractors from outside the kingdom.”

The series of megaprojects driven by private sector players may only make their mark over a longer timeframe. Saudi Arabia General Investment Authority (Sagia) officials announced a $624bn investment programme in 2006 to take the country through to 2020. MEED estimates that more than $800bn (see above) worth of investment is planned, while MEED Projects estimates $385bn worth of projects are under way.

Official sources suggest a rising tide of international investment is hitting Saudi shores. In 2006, Sagia granted licences to foreign companies for projects with an estimated value of $65bn. This year, it is expected to reach $75bn. Even without the prodigious domestic sources of investment, Saudi Arabia is pulling in massive streams of foreign direct investment (FDI).

The kingdom attracted $18.3bn in FDI last year, a rise of more than 50 per cent on the previous year - proof that the kingdom’s entry to the World Trade Organisation (WTO) in 2005 has helped it become a better investment proposition.

Infrastructure upgrade

Other indicators also confirm that a greater percentage of Saudi investment is being drawn into the domestic economy, rather than put into overseas assets. In 2006, Saudi outward FDI flows recorded by the UN Conference on Trade & Development declined by $400m to $753m - concurrent with a major increase in inwards investment.

Non-oil private sector growth is focused on key sectors such as infrastructure, which are most in need of rehabilitation as the low oil prices of the 1980s and 1990s led to much of the country’s physical infrastructure being neglected.

Sabb’s Sfakianakis estimates 42 per cent of the contracts awarded by the government in 2006-07 were for public works projects. Consultant McKinsey says Saudi Arabia is now investing in infrastructure at a rate of 30-35 per cent of GDP, compared with the historical trend of about 17 per cent.

“The kingdom is going through a major upgrade of its infrastructure,” says one managing partner at a major Jeddah-based Saudi conglomerate. “A lot of our companies are now active in infrastructure schemes.”

The construction sector is experiencing the biggest impact. Bank credit for building and construction grew by 63 per cent between the second quarter of 2005 and the second quarter of 2007, reports Sabb, to reach SR41bn. The domestic focus of Saudi investors reflects a renewed willingness to leverage capital strength at home. The acquisition in early November by the Saudi-owned Jadwa Investment Company of ExxonMobil Corporation’s 30 per cent interest in the Saudi Aramco Lubricating Oil Refining Company (Luberef) is a case in point. To many observers, the deal confirmed the growing maturity of the domestic corporate sector.

Prince Faisal bin Salman, chairman of Jadwa, says the transaction exemplifies the growing ability of the Saudi private sector to participate in complex areas of the economy. If so, it would lend weight to government plans to make private investors the change-makers of the Saudi economy, driving key projects such as the development of six new economic cities (see feature, page 57).

“The government is encouraging the maximum amount of investment by the private sector,” says Brad Bourland, chief economist and head of research at Jadwa. “So, in these cases, businessmen are making the investment decisions based on market considerations, not the government.”

Local investors

The entry of local private investors, such as Jadwa, to domestic energy projects marks a shift in attitudes in Saudi Arabia. Jadwa claims to be the first Saudi joint venture partner of state energy giant Saudi Aramco. Since the bank counts as its clients the cream of the Saudi business community, including its founding shareholder members of the Al-Zamil, Al-Rajhi and Kanoo business empires, along with other senior Saudi business figures, it is evidence that the private sector is now extending its reach beyond the usual industrial, construction and services sectors and into the strategic oil and gas sector.

Inevitably, a large amount of investment is centred on the broader energy sector as the main engine of Saudi economic growth. Capacity expansions planned by commodity exporters such as Aramco and Saudi Basic Industries Corporation (Sabic) are the biggest drivers of investment demand, thanks to their large capital base and ability to optimise their investments from a wider project portfolio than other corporates.

Saudi Aramco’s $90bn five-year investment programme is intended to boost upstream production to 12.5 million barrels a day (b/d) by 2012, and double refining capacity to 4 million b/d. Downstream development is now a major focus of investment. Saudi-based project financier Apicorp estimates Saudi Arabia will spend $26.8bn on refining projects in the 2007-11 period, more than twice the amount spent on upstream. Downstream gas projects, including petrochemicals, will account for $31bn in that period.

The commercial attraction of low-cost feedstock has put Saudi Arabia at the head of the queue of likely locations for international petro-chemicals producers. “Why build a petrochemicals plant in Galveston Texas for $8 a million BTUs when you can do it in Saudi for $0.75?” asks one local economist.

The rampant oil sector has geographical impli-cations for the Saudi economic boom, which is stretching from east to west. “There is a level of activity that gives the feel of economic enthusiasm and investment confidence,” says Bourland. “You feel it strongest in the Eastern Province - the oil patch has been abuzz for years - then Riyadh, where the banks and government are headquartered. And then in Jeddah.”

Encouragingly for the government’s plans to diversify the economy, substantial capital inflows have been targeted at the services sector, considered by many to be the country’s best chance of leveraging the wider growth potential from the hydrocarbons boom.

Market liberalisation measures have prioritised the services sector: business services, telecoms, distribution, education services, financial services, tourism, healthcare and retail. Sagia and others have pushed hard for legal changes mandated under WTO commitments, replicating the Celtic Tiger model pursued by Ireland.

Favourable climate

WTO entry has had a material impact in creating a favourable investment climate. “Accession has streamlined the regulatory environment, which will support local companies wanting to invest,” says Ayman Tamer, chief executive officer of Saudi pharmaceuticals company Tamer Group. “They also need to have clear policies and regulations in place, as well as foreign investors.”

The changes in the kingdom are attracting attention. A recent World Bank report describes Saudi Arabia as the seventh-fastest reformer globally and the second-fastest in the region. “Part of the challenge is not just the hardware but the software,” says Said al-Sheikh, chief economist at NCB. “Legal and cultural reforms had to be enhanced to make the conditions right to run businesses.”

Developing the kingdom’s latent minerals wealth is another major new thrust. Saudi Arabian Mining Company (Maaden) is leading the charge, anticipating a $2.5bn cash injection from an initial public offering due in early 2008 to expand production. A new mining company, the Al-Masane al-Kobra Mining Company, is to operate a 30-year mining lease in the Al-Masane region in the southwest, in collaboration with a foreign investor.

Even so, investor confidence is still based on the health of the kingdom’s oil economy. “If you take a view that oil prices are set to stay high on a sustained basis for years to come, that creates a strong tailwind for investors,” says Bourland.

The ambitious raft of investment schemes homing in on the productive sectors of the Saudi economy have all followed in the slipstream of the oil boom, but are generating enough momentum of their own to help it realise its long-term aim to diversify away from oil.

It is a slow process, but any investor serious about Saudi Arabia knows they are in it for the long haul.

Investments in Saudi Arabia

• Agriculture - $28bn: Investments to increase production across agricultural sector to meet population growth demand

• Construction - $170bn: General construction projects planned or under way including the economic cities

• Electricity and water - $240bn: Planned investment in both infrastructure and management restructuring

• Industry - $16bn: Projects planned or under way - exclusive of economic cities

• IT - $11bn: Improving IT systems and building IT and technology studies centres

• Oil and Gas - $90bn: Saudi Aramco's five-year plan to 2012

• Petrochemicals - $74bn: Saudi Basic Industries Corporation (Sabic)'s investment in new facilities and expansion of existing plant to 2020

• Telecoms - $80bn: Telecommunications infrastructure and licences

• Tourism - $53bn: Delivering the Supreme Commission for the Tourism masterplan

• Transport - $50bn: Aviation, railways, ports and road building are all set for major investment

Overseas investment

A steadily increasing share of the Saudi oil surplus is being ploughed into the accumulation of foreign assets, which is triggering a sharp increase in investment income back home. Some 59 per cent of the SR141.3bn ($37.68bn) in Gulf foreign asset acquisitions in the year up to early September 2007 were from Saudi Arabian public and private entities, focused on four key deals:

• February Acquisition of SR24.7bn worth of shares (3.1 per cent) in HSBC by the Saad Investment Company

• May Purchase of General Electric’s plastics business by Sabic for SR43.5bn

• June National Commercial Bank (NCB) buys 60 per cent stake in an Islamic lender in Turkey, Turkiye Finans, for SR4.05bn

• July Saudi Telecom Company buys 25 per cent of Malaysia’s Maxis in a SR11.2bn deal and completes Southeast Asia’s largest buyout

• Underway Sabic takes a 35 per cent stake worth SR 982.5m in an iron ore project in Mauritania.