With more than half of Saudi Arabia’s population under the age of 20, Riyadh faces the prospect of large-scale unemployment if it does not diversify its economy and create sufficient jobs to meet the increasing number of school leavers. Figures from the Economy & Planning Ministry show the jobless rate stood at 9.8 per cent in 2008.

Job creation in Saudi Arabia is highly dependent on the price of oil. However, in its 2009 budget, which was announced in December 2008, the Finance Ministry assumes an average oil price of $37 a barrel, a level at which it may be difficult to create new jobs on a large scale because of the lower budget surplus being generated from oil revenues.

Since the early 1970s, Riyadh’s record on job creation and economic diversification shows it has been partially successful.

Successive targets of 10 per cent annual growth in the contribution of non-oil sectors to gross domestic product (GDP), as laid out in the kingdom’s five-year plans, the first of which was announced in 1970, have been missed, resulting in fewer jobs being created than expected. However, non-oil growth has averaged more than 5 per cent since 2000 - a healthy rise but below the 10 per cent hoped for.

Despite Riyadh’s mixed record, one of the policy tools the government hopes will contribute to the broadening of Saudi Arabia’s manufacturing industry is the Riyadh-based National Industrial Cluster Development Programme (NICDP), which was officially launched in 2008.

The scheme has been given a five-year mandate from the Council of Ministers to turn the hydrocarbons-dominated economy into a regional industrial powerhouse.

The programme is headed by Azzam Shalabi, former director of new business development at energy giant Saudi Aramco.

His remit is to develop five specialised industrial clusters throughout the kingdom, the locations of which are yet to be decided. The sectors represented at the clusters will comprise automotive, construction, metals processing, packaging and consumer goods.

The programme’s 10-member board is chaired by Prince Faisal bin Turki bin Abdul-aziz, an adviser to the Petroleum Ministry.

Investor issues

The choice of these five sectors is linked with the kingdom’s oil riches, despite the programme’s aim of steering the economy away from hydrocarbons dependency.

One senior source at the NICDP says the decision to focus on the chosen sectors is due to Saudi Arabia’s advantages in access to cheap feedstock and raw materials. “The clustering programme will be a vehicle by which to exploit these fully,” he says.

Currently, Saudi Arabia depends heavily on its oil wealth. However, the NICDP is focused on developing a manufacturing base using the raw materials in which the kingdom is rich to produce fabricated finished products.

These sectors are deemed to give the best opportunities to provide well-paid jobs for Saudis within the industrial manufacturing sector. The NICDP’s main strategy is to use major companies as anchors to generate interest and demand downstream, attracting further investment in the sectors. “Seventy per cent of investment comes from multinational companies,” says the NICDP source. “They are the ones who drive trade and investment."

However, potential investors in the country face several obstacles, such as the relatively high cost of labour (see chart left) and the lack of a significant local market to absorb the production of manufactured products such as car parts.

Despite this, the NICDP is confident that Saudi Arabia’s venture into industrialisation can be a success. Didier Vigouroux, head of the NICDP’s automotive division, says sales could grow to about 1 million units a year over the next decade, including exports to Europe and Asia.

Vigouroux told the International Experiences in Industrial Cluster Development Forum, held by the Energy & Industry Ministry and the Gulf Organisation for Industrial Consulting in Qatar in June 2008, that its abundant supply of materials including plastics, steel, aluminium and glass mean the kingdom also has the potential to be a global producer of automotive components and spare parts.

Many of the countries that have become strong in manufacturing, such as Indonesia, have used tariffs to shield themselves from external competition. However, since joining the World Trade Organisation (WTO) in 2005, Saudi Arabia can no longer hide behind this barrier.

The kingdom still lacks the required skilled labour force for further industrialisation, but is optimistic that investment in training will bring about change.

Khalid al-Sulaiman, deputy minister for industrial affairs at the Commerce & Industry Ministry, said at the same conference that the number of graduates from the country’s 80 vocational schools was expected to increase to 450,000 annually by 2015, from 120,000 in 2007.

The NICDP is working closely with vocational schools to prepare specific training programmes that will be required by the cluster industries to ensure that quality and quantity of graduates are met.

There are signs that major players are coming on board. Local petrochemicals giant Saudi Basic Industries Corporation (Sabic) and the US’ ExxonMobil Chemical announced in November 2008 that they had signed a heads of agreement for a new petrochemicals project in the kingdom. The project includes a vocational institute as part of its scope, in alignment with the NICDP.

The government has used certain levers to attract investment in industrial training and job creation. The petrochemicals companies in particular have come under intense pressure, with firms now only given access to cheap gas feedstock if they are able to prove that they will maximise labour opportunities further down the value chain.

Despite encouraging interest from investors, sources in the NICDP admit that it will be a long process. “The big players in the region and the world know who we are and what we are doing,” says the NICDP source. “But we cannot expect these clusters to emerge from nothing in anything less than five to seven years. We have only really been running for about seven months and are still in the planning and strategy phase."

Despite the current financial crisis, there is optimism that foreign companies will continue to invest in the kingdom. “Most of these companies have a traditional approach to investment decisions,” adds the source. “They will check costs, the local infrastructure, logistics, labour skills and market size. These are all things that are largely positive in Saudi Arabia."

The lack of a local consumer base could be a sticking point for many investors. Most products manufactured in the kingdom will have to be exported. There is not a developed local supply chain because the manufacturing base is so small. But conversely, the manufacturing base will remain small as long as the supply chain is underdeveloped.

While the kingdom’s success to date in building a manufacturing base is evident, the limitations of the drive to self-sufficiency are also becoming apparent. “The government is going a long way with its diversification plan,” says one Dubai-based consultant. “We could well see an autoparts plant in the country in the next five years. They [autopart manufacturers] have a good location and all the basic plastics they need. But they need to develop the steel industry, and tech-heavy equipment, which would need to be imported."

Growth targets

Despite the kingdom’s potential, Saudi Arabia’s record of creating jobs in non-oil industries does not stand out as an example to other Gulf states seeking economic diversification. When the government announced its first five-year plan in 1970, it set a growth target of 11.6 per cent a year for non-oil industries, rising to 13.3 per cent in 1975. The latest target is 10 per cent for the period 2005-09.

However, the most recent spike in oil prices resulted in investment in non-oil-related industries being neglected at the expense of building refineries and petrochemicals plants.

Historically, economic diversification in Saudi Arabia has proved costly. “The issue for [the Saudi Government] is a social agenda,” says one UK-based petrochemicals consultant. “The question is how much social agenda it can afford. If you want to create jobs in the Middle East, you are essentially subsidising them."

The accumulated petrodollars of recent years will allow for these subsidies in the short term, but there will come a time when the continuing expansion of Saudi Arabia’s industrial manufacturing base is expected to be self-funding.

TABLE: Saudi GDP contribution by sector, 2007

GDP=gross domestic product

Source: NICDP

National Industrial Cluster Development Programme (NICDP) structure

• International trader and investment development - Commerce & Industry Ministry, Saudi Arabia General Investment Authority (Sagia)

Source: NICDP