In June, bankers completed the $12.5bn project financing package for the Saudi Aramco-Dow Chemical Sadara petrochemicals project. The signing off on the financing of one of the countrys largest ever foreign-backed projects suggests the Saudi authorities should not have undue cause for concern about foreign direct investment (FDI) drying up anytime soon.
The kingdom has a generally robust economy, with bank credit to the private sector rising by 15 per cent in the year to September. Inflation is stable, and the current account and budget surpluses have imbued the Saudi leadership with renewed confidence. Meanwhile, major international firms are still bidding for business in Saudi Arabia, and many are still looking to expand their operations in the Middle Easts largest and most dynamic economy.
Yet beneath the buoyant public face, there is a deeper concern among senior policymakers that the kingdom has lost traction in its efforts to attract FDI. The figures suggest a sharp dip in FDI inflows over the past couple of years.
Inward investment in 2012 is estimated by the Organisation for Economic Cooperation and Development at just $13.7bn, compared with $39.5bn in 2008. In 2011, FDI totalled $16.3bn, well down on the previous years $29.2bn. And whereas FDI accounted for nearly 10 per cent of gross domestic product (GDP) in 2009, within the space of two years, this had slid to just 2.8 per cent of GDP, according to World Bank figures.
They have a new structure in place with a committee to make decisions, but they are just creating obstacles
Saudi Arabia-based senior lawyer
Much of the decline can be explained by the impact of the global financial crisis, and since 2011, the heightened risk aversion on the part of investors in the wake of the Arab Uprisings. An equally important contributor, however, is the sense that the Saudi authorities have a diminished commitment to aggressively selling the kingdom as a destination for investors.
The big push that lead to the formation of the Saudi Arabian General Investment Agency (Sagia) in 2000, and the subsequent dismantling of barriers to foreign investment, has withered away as the authorities efforts have become bogged down by bureaucratic inertia and divisions over what kinds of investors they actually want to set up shop in the country.
The explanation from some quarters is that Sagia has lessened its focus on acting as a one-stop shop for FDI. Rather, its interest now is in promoting certain key projects the agency believes will deliver most value for the country.
There has been criticism that the kingdom has failed to build on the momentum of the early years. Indeed, some recent decisions have appeared to suggest a less than accommodating approach to foreign companies seeking to do business in Saudi Arabia.
Late last year, Tecnicas Reunidas, a Spanish engineering, procurement and construction contractor active in Saudi Arabia, saw its investment licence to operate in the kingdom revoked following a complaint by a former local partner. A Sagia review found the licence was based on false information due to the non-disclosure of a previous local partner, and on 20 November a decree was issued cancelling it.
Tecnicas Reunidas predicament, which was swiftly resolved, is only one indicator of a less than supportive approach to foreign investors. One Saudi-based lawyer tells MEED the agencys wider approach has transformed from enthusiasm to disinterest. Instead of being welcomed to invest here, you now have to prove that you are worthy, he says.
Under the first Sagia governor, Prince Abdullah bin Faisal bin Turki, the agencys approach was geared to making the investment process as smooth as possible for foreigners. At the heart of its strategy was an objective for the kingdom to rank among the top 10 most competitive investment destinations by 2010. After narrowly missing the target, that approach has been dropped in favour of a more selective strategy, handpicking only those investors deemed most suitable to deliver on the governments economic priorities.
In 2012, a new committee was formed within Sagias licensing unit, the precise remit of which is to identify investment schemes that specifically benefit the kingdoms economic development. They have a new structure in place with a committee to make decisions, but really they are just creating obstacle after obstacle to the simple licensing process, says a senior lawyer representing clients in Saudi Arabia.
This strategy has not necessarily yielded the desired results. Saudi Arabia ranked 20th in the 2013-14 Global Competitiveness Index and anecdotal evidence suggests fewer firms are now applying for foreign investment licences.
The Saudi-based lawyer reports he has had no one approach him with a foreign investment licence application since current governor, Abdullatif al-Othman, took over in May 2012.
The agency has also found itself accused of losing sight of the value-added sectors more likely to deliver on the kingdoms priorities of increasing job opportunities for young nationals.
One such example is the decision to remove the initial SR2m ($533,333) minimum investment for services (down to zero) and reducing the SR5m initial investment threshold for industrial projects to SR1m. Although this had been presented as a dismantling of the barriers to FDI, one of the effects has been to attract smaller entities that are not employing Saudi nationals in productive economic activities.
Some of the problems have been attributed to leadership issues since Prince Abdullah resigned as Sagia governor, a position that holds ministerial rank, in 2002. Despite enjoying impeccable credentials as the founding force behind the Jeddah Economic Forum, his successor Amr Dabbaghs stewardship of Sagia coincided with the agencys loss of traction.
In the words of one US diplomat, revealed in embassy cables made public by Wikileaks, Sagia was not always the most effective proponent of foreign investor interests when regulatory or licensing questions arise with other ministries.
While focusing on the most desired investors looks a rational endeavour, the feeling among many is that handing this power to Sagia might conflict with its original mandate of removing obstacles to all foreign investors.
The general process has become more cumbersome. In the early 2000s, I was able to get a foreign investment licence typically in the space of seven to 10 days, says another representative of foreign firms in Saudi Arabia. You would discuss the concept with a licensing official, get his feedback [on] whether this was within the scope or not, tweak the language, submit the next duty if the language looks OK and within a matter of days youd have a licence in hand. Now, people are saying its taking two to three months to get a Sagia licence.
Mission creep may also have undermined Sagias effectiveness as an investment promotion agency; in the mid-2000s, its remit was expanded to include the Economic Cities. This experiment appears not to have been a success and in late 2010, management responsibility for the economic cities was carved out of Sagia and handed to the Economic Cities Authority.
With the agency now lacking influence in the broader state apparatus compared with the time of its creation in 2000, when the kingdom desperately needed FDI inflows to kick-start a flagging economy, Al-Othman has his work cut out refocusing Sagia as an agent of change.
Sagias fortunes are a barometer for the kingdoms efforts to rebrand itself as a world-class economy, but many investors will be hoping that Al-Othman can put the agency back on track. As the Saudi-based lawyer says, in one sense Sagia is right: It is a privilege to be here, because theres so much money to be made. But it could be made easier.
Inward investment in Saudi Arabia in 2012 is estimated at just $13.7bn, compared with $39.5bn in 2008
Source: Organisation for Economic Cooperation and Development
Global competitiveness index 2013-14
- Hong Kong SAR
- Taiwan, China
- New Zealand
- Saudi Arabia
Source: World Economic Forum