As the Gulf peninsula’s largest country, Saudi Arabia faces unique challenges in feeding a population of 27 million scattered across almost 2 million square kilometres.

The UAE’s Alpen Capital states in a report that the kingdom consumed almost 28 million tonnes of food in 2011, of which 80 per cent was imported. It also forecasts Saudi Arabia’s food consumption will grow at a rate of 4.2 per cent between 2011-2015. The cost of food imports is estimated at $10bn a year.

The shortfall between domestic production and imported supply highlights the serious challenge facing Saudi Arabia in terms of securing food resources for the long term.

Riyadh has acknowledged the issue and initiated a number of schemes, both domestically and abroad, aimed at diminishing the potential for future food shortages.

Difficult terrain in Saudi Arabia

Domestically, the two biggest issues facing food production are Saudi Arabia’s rugged terrain and its harsh climate. Despite being the world’s 13th largest country by size, only a tiny fraction of the kingdom’s land, 1.7 per cent, is suitable for crop production.

The situation has compelled Riyadh to look abroad for arable land on which to produce food crops. To date, the kingdom has agreed several multibillion-dollar deals with countries such as Sudan, Egypt and Pakistan for land plots to produce crops for domestic consumption.

With regard to other business sectors, food production is actually quite labour-intensive

Jean-Marc Delpon de Vaux, Olayan Group

Adding to the food challenge is a lack of food manufacturing facilities currently operating within the kingdom. Mahboob Murshed, managing director at Alpen Capital, says potential foreign investors are deterred from entering the kingdom due to the high levels of bureaucracy and restrictive ownership regulations.

“In Saudi Arabia, the vast majority of manufacturing plants are either owned by a local company or are joint ventures between locals and multinationals such as the US’ Kraft Foods,” says Murshed. “There are very few expatriates who own operations in the kingdom, compared with neighbouring countries such as the UAE.”

Murshed estimates there are 160-170 food manufacturing plants in the UAE. While there is a lack of similar data available for Saudi Arabia, he estimates that there are proportionally fewer plants operating within the kingdom.

The problem arises from the lack of opportunities for expatriates to establish and operate facilities in which they hold 100 per cent ownership rights. The Saudi Arabian General Investment Authority has recognised that it needs to sell the idea of investing in the kingdom to outside investors.

However, many of the economic cities it is planning to develop do not offer the same freedom of trade as free zones in neighbouring GCC countries.  

Despite this, the presence of multinationals and large local companies operating in the kingdom signifies the importance of the market regionally. Many of the established players are keen to further expand their presence in Saudi Arabia.

In May, Kraft Foods opened an extension to its Nabisco Arabia plant, located in Dammam. The expansion of the plant, which operates as a 75:25 joint venture between Kraft and the local Olayan Group, was initiated in response to strong demand for the company’s products both within the kingdom and across the GCC. The facility now has the capacity to produce 20,000 tonnes a year (t/y) of Kraft’s biscuit brand, Oreo cookies, as well as products such as Ritz Crackers.

Job creation for Saudi nationals

The Nabisco plant employs 170 staff, of whom 30 per cent are Saudi nationals. Increasing food production in the kingdom can not only guarantee food security, but also create thousands of jobs across the country.

“With regard to other business sectors, food production is actually quite labour-intensive,” says Jean-Marc Delpon de Vaux, president of consumer products for Olayan Group. “This is evident across our business and we are hoping that it will lead to more local people choosing a career in food manufacturing.”

Riyadh has recognised that it needs to sell the idea of investing in the kingdom to outside investors

Olayan is also a major shareholder in US-based Coca-Cola’s operations in Saudi Arabia and produces the brand’s range of soft drinks at a plant in Riyadh. The Coca-Cola Bottling Company of Saudi Arabia employs 1,400 people and has a 30 per cent market share of the kingdom’s soft drinks industry.

Saudi Arabia has also been working to boost domestic meat production by increasing the number of meat processing plants operating in the kingdom. According to a 2011 study published by the College of Food & Agricultural Sciences at King Saud University in Riyadh, 27 factories were responsible for processing more than 63,000 tonnes of predominantly imported meat into consumer products annually.

Several developing economies, as well as developing nations, supply meat to Saudi Arabia. Brazil exported 550,000 tonnes of chicken to the kingdom in 2010, accounting for 90 per cent of domestic supply.

Farmer aid

Despite farmers being offered interest-free loans amounting to 25 per cent of the cost of manufacturing equipment since the 1970s, poultry farming in Saudi Arabia has struggled for sustainability over the years. In a move to stimulate growth in the sector, the government raised subsidies in 2004.

Now, viable poultry farms are given further aid to construct cold stores and purchase refrigerated trucks, as well as farming equipment. Riyadh also offers subsidies of $42-67 a tonne for imported animal feed.

These measures are beginning to feed into food production units, with the kingdom offering incentives to manufacturers who use locally sourced meat. “This is one of the ways Riyadh is trying to attract foreign investment in the food manufacturing and processing sectors,” says Murshed.

“Now, if you source 30 per cent of your meat locally, you can apply for 100 per cent ownership of your business.” Alongside meat production, the kingdom’s waters offer vast opportunities for industrial-scale fishing.

The Saudi Agricultural Development Fund has committed to supporting fishing and fish processing operations, particularly along the Red Sea coast. It also offers loans for the purchase of equipment.

About 40 per cent of seafood consumed in Saudi Arabia annually, amounting to 81,000 is sourced locally, with the remainder being imported.

However, Saudi Arabia does not have processing infrastructure in place, so most fish stocks are sold at market.  

Fish processing

In the Jizan province in the southwest of the kingdom, fish processing has been identified as a key sector for the planned $27bn Jizan Economic City. The region is one of the most impoverished in the kingdom and lacks the facilities to add value to its fishing operations. Agricultural processing facilities and a flour mill are also planned.

While its food production sector remains underdeveloped, Saudi Arabia is hoping that the next decade will see a rise in investment that will encourage greater food security and create jobs.

However, many potential investors will remain deterred while issues including foreign ownership restrictions, subsidies and initial exemptions from strict Saudisation regulations remain a concern.

“Many of our clients have large distribution networks in Saudi Arabia, but they are very sceptical about making long-term investments in the kingdom,” says Murshed. “At the moment, they prefer India or the UAE and until they see the rules become more liberalised, I think that view will remain.”