Saudi Arabia, beset by the problem of over-reliance on oil revenues, has been encouraging ventures in a host of non-oil sectors including gas and petrochemicals. The industrial cities of Jubail and Yanbu, for instance, have made big headway in recent years, housing already or due to accommodate some of the world's biggest petrochemical plants.
But economists are still not happy over the pace of diversification fearing that unsteady oil prices will put the Saudi economy at great risk if other sources of income are not developed to form a bulwark against oil-market vicissitudes.
Weakened oil prices in 2001, a budget deficit of $12 billion projected for 2002, the second consecutive gap, and a population growing faster than the GDP have underlined the urgency of new priorities. If Riyadh does not now accelerate growth in areas where it can be assured of dependable revenues, it risks social tensions, as Saudi billionaire and star international investor Prince Alwaleed bin Talal warned.
The prince recently told an economic conference in Jeddah that Saudi Arabia must act quickly or be "left behind by time". The prince described the challenges as "formidable" and called for increased economic growth to accommodate the needs of a rapidly growing population, pointing out that the Saudi GDP grew by 1 per cent per year on average during the 1990s while the population expanded 3.5 per cent and the labour force 4.5 per cent. Decrying the excessive dependence on oil exports, he suggested diversification with GDP growing at least 6 per cent per year to absorb the expanding work force and provide for adequate infrastructure. The oil sector contributed 81 per cent of the government's total revenues of SR248 billion ($66.1 billion) in 2000.
More voices are now being heard calling for bold reforms to correct imbalances in the broad economic parameters. Support has been voiced for introduction of corporate taxes to help offset the heavy expenditure the government has been incurring, particularly in salaries to government staff that account for up to 60 to 65 per cent of total expenditure.
Oil prices may not recover any time soon, as some observers believe, and this could put a greater burden on the repayment of domestic debt, which at $168 billion is close to the national GDP of $178 billion (end-2001) and could equal it in 2002. In recent months, Riyadh has liberalised rules to attract investments from overseas and, indeed, some $10 billion in new foreign investments has been approved by Sagia (the Saudi Arabian General Investment Authority). But September 11 has cast a shadow, and the flow of investments from abroad has dried up. The Gas Initiative promises to bring in investments of as much as $20 billion, and, according to a Saudi British Bank report, the government could gain additional revenues of $22.6 billion annually from the initiative itself.
Gas Initiative agreements have been initialled with international firms, but significant investment flows are unlikely to take place before 2003. There have been no reports of a change of mind among investors, possibly because the projects are economically sound and, anyway, will take time in starting. There is optimism about gas simply because the Kingdom has substantial reserves of the resource and global consumption is rising by 4.8 per cent, more than the 4.1 per cent increase in production.
Riyadh feels the pressure building up for additional economic reforms and there is optimism they will come sooner than later. One demand is for pruning or scrapping the "negative list", which contains sectors such as the upstream oil industry, telecommunications and insurance where foreign investors are excluded from investing. Sagia CEO Prince Abdulla bin Faisal bin Turki has said he would have opened up all sectors to private investors, local and foreign, if he had his way.
Crown Prince Abdullah bin Abdul Aziz has declared that the Kingdom has taken a "strategic decision to attract national and foreign investments". He told an agriculture forum in the capital earlier this year that "all necessary incentives, guarantees and facilities must be provided to lure these investments and encourage them in all fields", but gave no indication whether the "negative list" itself would be totally abolished.
The government has announced it will liberalise the agricultural sector and offer leases of up to 40 years for investors in farming and fisheries projects in the Jizan and Tihama areas that are among the Kingdom's poorest. The state is building 10 dams there to spur interest in agro-industries. Another economic step it is looking at is halving water subsidies, which should provide savings for development and contracting budgetary gaps.
Riyadh is also looking at privatisation to introduce efficiency and reduce spending associated with government operations.
Dr Said Al Shaikh, chef economist at the Saudi National Commercial Bank, is among those who believe September 11 has changed the political mood and will hasten the introduction of economic reforms.
September 11 and the projected $12 billion gap in the 2002 budget will facilitate the reform process more than any other developments in recent times, economists feel. Riyadh insists there will be no borrowing from foreign financial institutions to bridge the deficit but that it will raise the amount by tapping funds from its own commercial banks whose cumulative contribution until the end of August 2001 was said to be SR120.7 million ($32.18 million). Saudi American Bank's chief economist Brad Borland believes that Riyadh's privatisation programme is doing as well as it possibly could, while his counterpart at National Commercial Bank Al Shaikh expects pressure on reforms to build up, forcing the privatisation pace to be quickened. Another senior economist, Abdulwahab Abu Daheesh of Riyad Bank was quoted as saying it was time the Kingdom started thinking of taxation as a means to boost non-oil revenues and direct investments. "The Kingdom is prepared for gradual taxation which is needed to stimulate economic sectors. Taxes can be imposed immediately on production sectors to direct investments and upgrade private sector efficiency and supervision," he was quoted as saying.
The private sector is projected to grow 4.5 per cent during 2002 with industries being a significant element of that growth. When projects from the Gas Initiative take off, the private sector will gain from the spin off with fields such as construction getting additional business. It is common knowledge that Saudi Arabia has taken giant strides in adding value to its hydrocarbon resources. The petrochemicals sector is an expanding one and although it too is subjected to market fluctuations, it has overall managed to make a reasonable contribution to the Saudi economy. It has particularly been successful in attracting foreign investments from global players, testifying to the confidence they have in the projects. Even from the technical standpoint, recent innovations from Sabic's research laboratory have attracted international interest.
The industrial cities of Jubail and Yanbu are playing host to sophisticated production facilities and proving crucial to the Kingdom's economic development.
Yanbu, which already contains 54 plants and has seen several expansions in recent years, is the location for two new major projects - Exxon Mobil and Zinc Oxide Company.
Jubail will be the site of a million-tonnes-per-year (tpy) methanol plant and a 50,000tpy butanediol (BDO) factory being put up by Saudi International Petrochemical Company. The capacities refer to the first phase.
Saudi Al-Rajhi International Contracting and the US' UOP Company have signed a licensing and technology transfer agreement for the construction of a $150 million normal paraffin plant in the Jubail industrial area. A $80 million LAB facility is to be added later.
Alujain Corporation has announced plans for substantially expanding its involvement in the Jubail-Yanbu cities. The company is the founding investor with 41.66 per cent equity stake in National Petrochemical Industrial Company (Natpet), which is establishing the Teldene polypropylene project.
The $225 million project coming up in Yanbu will produce 300,000 tonnes per year (tpy) of polypropylene using the Montell technology. Teldene will obtain its feedstock from an adjacent propane dehydrogenation plant Alfasel. The Teldene project is expected to begin commercial production in the last quarter of 2004.
Alujain's ongoing projects include Alfasel and a super-alkylates plant.
Thirty-four new plants with a total capital investment of SR14.99 billion ($3.99 billion) are under construction in Jubail Industrial City (JIC), while 57 others with a capital investment of SR14 billion are in the design or planning stage.
Nine plants with a total capital investment of SR4.32 billion ($ 1.15 billion) are currently undergoing expansions there.
Al Jubail Fertiliser Company (Samad) recently underwent an expansion for ammonia debottlenecking.
Expansions are underway at Saudi Arabian Fertiliser Company, National Chemical Fertiliser Company (Ibn Al Baytar); Arabian Petrochemical Company (Petrokemya); Saudi Petrochemical Company (Sadaf) and Saudi Formaldehyde. Among the new industries/projects under construction in that city are Al Jubail United Petrochemical Company (United) for the production of ethylene, ethylene oxide, LAO, VCM, PVC and polyethylene; National Industrialisation Company (NIC) (propylene and polypropylene) and the Saudi International Petrochemical Company (methanol, acetic acid, vinyl acetate monomer and BDO).
An example of Saudi entrepreneurship is the pioneering Zamil family, which recently added cranes and hoists to its product portfolio in a joint venture between the HA Al Zamil Brothers Group and Morris Material Handling of the UK.
The new Morris Crane Factory in Dammam's First Industrial City will be an addition to the group's interests in steel buildings, air conditioners, glazing systems, construction and food processing.
