Bringing in billions

With buoyant oil prices nearing the US$70 a barrel mark in the last year, a stock market that is booming, success in checking terrorist activities, and the kingdom’s accession to the World Trade Organisation (WTO), Saudi Arabia’s pointman for attracting investment couldn’t be happier.

But Amr Dabbagh, the governor of Saudi Arabia’s General Investment Authority (SAGIA) and a man with a reputation as a marketing genius, is still shaking things up. He is making his rounds internationally, leveraging his experience in the private sector, and aiming to make the oil-rich kingdom a magnet for billions of dollars of foreign investment.

Though only about 3% of all foreign direct investment (FDI) goes to the Arab world, and the region’s percentage of overall world trade has declined by almost 35% since 1980 to just 3%, Saudi Arabia has the highest annual FDI inflows in the Middle East, according to the most recent figures from the United Nations Conference on Trade and Development (UNCTAD).

But sitting in his office in Riyadh after a tour of Europe and the US, Dabbagh is hungry for more. “Our communication with the outside world is segmented and focused. We have identified the strategic business sectors into which we would like to attract FDI,” he says, in reference to the energy and transportation sectors, and what he terms as knowledge-based industries. “Our trips abroad are always designed around meetings targeted at companies that fit the investor profiles, [and] matching the investment opportunities.”

There is every indication that the kingdom is luring in the capital it needs.

According to the World Investment Report issued by UNCTAD, FDI inflows to West Asia increased from US$6.5 billion in 2003 to US$9.8 billion in 2004. More than half of that amount was concentrated in Saudi Arabia, with Syria and Turkey the next largest destinations. Both Turkey and Saudi Arabia attracted just under US$2 billion, while Syria received US$1.2 billion. It’s worth noting, though, that China alone attracted US$61 billion.

The value of licenses issued by SAGIA in Q205 against the same period in 2004 saw 4600% growth. Moreover, during Q205, licensed investments totalled SR41 billion (US$10.9 billion) — a record 4596% jump on the same quarter in 2004. “This is a vote of confidence and confirms the interest to invest in Saudi Arabia,” the SAGIA boss says.

In the first three months of 2005, investment licenses amounted to SR24.4 billion (US$6.5 billion), and increased in Q205 to SR41 billion (US$10.9 billion), a 4600% rise over the same period last year. The upward trend has carried over to the third quarter of this year, with a record 223% increase from the same period last year.

“In the fourth quarter we expect results comparable to those of third quarter,” says Dabbagh. “We believe the trend will remain strong and 2006 will be an even better year. In addition, we have a few projects in the pipeline that we are about to close and they will make growth beyond imagination,” he adds.

SAGIA’s success in marketing the country to prospective investors really comes down to two factors.

On the one hand, multinational corporations have a natural interest in the kingdom, based on the country’s oil and petrochemical industry.

But on the other, the country has been forced to liberalise its economy and open up to foreign investors as part of a drive to join the WTO — and, perhaps more importantly, to secure the colossal amount of money it needs to pour into expanding its infrastructure and meet the needs of a growing population.

But Johnny AbedRabbo a senior economist at the National Commercial Bank in Saudi Arabia, says: “So far, foreign investors have been mainly interested in petrochemical-related mega-projects — probably due to the fact that government involvement, whether explicit or implicit, is providing them with enough assurances. However, a complete overhaul of the legal system is needed in order to attract a wider-range of FDI.”

“Saudi Arabia cannot host or accommodate all kinds of investments in the world. We can only host investments and industries that are correlated to our competitive advantages, which are centred on energy and location,” says Dabbagh.

But he also adds that the country is attracting investment in other areas. “There are other sectors to which we are attracting investment, due to our regional market share and because they are industries of the future. In information and communication technology (ICT), we dominate 50% of the market in the Middle East, and the same applies to e-commerce. In terms of knowledge-based industries (KBI), we are focusing on life sciences because they’re the industries of the future, and we need to be part of that future.”

Traditionally, FDI in Saudi Arabia has arrived in the form of joint venture projects with foreign entities and has been largely restricted to petrochemical projects. But the opportunities have increased as the country has gradually removed restrictions. It has issued 40 laws and executive bylaws in the last five years. “Economic reforms are a process and not an event,” says Dabbagh. “To remain ahead of others in terms of the competitiveness of the investment environment and attract more FDI and domestic direct investment (DDI) than others, you have to constantly improve, and constantly raise the bar.”

The US remains the number one investor in Saudi Arabia. Arguably, Dabbagh says this is because the kingdom has always been an open market with low entry barriers. He also contends that the kingdom’s WTO membership — which formally came into being last week — will help it develop a healthy and robust business environment. “The whole economy of Saudi Arabia is based on the principles of a free market economy and our accession to the WTO will help open up other markets for Saudi products, and the Saudi market for increased FDI,” he maintains. “It will have a significant impact because economies today are not driven by import substitution policies. They are driven by export oriented strategies and industries. When we market Saudi Arabia we position it as a launch pad to 250 million consumers and a global launch pad for energy related products.

He adds: “The more access we have to the industrialised world, the more attractive Saudi Arabia becomes as an ideal and cost effective launch pad for energy related industries.”||**|||~|skyline-200.jpg|~|Challenges: Saudi needs huge amounts of foreign investment to upgrade its infrastructure and meet the needs of its growing population.|~|In the advent of joining the WTO, there was much speculation in the country that the agency-based monopolies held by several merchant families in the kingdom might suffer. But Dabbagh is dismissive of such talk and argues that the country’s business landscape is on a better footing than before, and that businesses have to adapt to an increasingly competitive business environment.

“The future of any relationship between a local company and an international one will be governed by the added value brought to the table by both parties, and the performance of both. We don’t encourage maintaining relations if there is no added value,” explains Dabbagh.

But he adds that the agency system is nonetheless in place. “The agency system is still valid under the WTO, but foreign investors do not require an agent to market their own products, or is a local sponsor required to license or operate a business in the kingdom. Even before our accession to the WTO we opened up lots of sectors for 100% foreign ownership.”

Dabbagh doesn’t believe agency businesses will suffer, arguing that those holding monopolies are successful because of the added value they provide and their own unique entrepreneurial approach.

“There are companies that have exclusive agencies yet have zero market share, while on the other hand there are companies that have agencies and they have the lion’s share of the market,” he explains. “In the automobile business in Saudi Arabia, one finds companies with a 40% market share. It’s not because they are leveraging the agency system but because of their added value, their efficiency and aggressiveness in selling the product and providing world class after sale service.”

But AbedRabbo of NCB says: “While some companies do offer efficient servicing for their vehicles, this remains beside the point. Most dealerships in the kingdom retain sole agency rights, which would have to change under the WTO.”

The coming years will also see a construction frenzy in the kingdom as it tries to accommodate the needs of a growing population. The country has one of the highest birth rates in the world, while the transportation, water and electricity sectors will all require investment. The size of investments likely to flow into these areas over the coming twenty years is likely to be in the realm of US$624 billion, according to a recent report by one Saudi bank.

Dabbagh concurs, but says that amount may even be surpassed, depending on the needs of the country. “The infrastructure and investment opportunities we are speaking about are the bare minimum needed to meet the demand and not based on speculation… These investment opportunities are correlated to infrastructure in a number of areas — transportation, power generation, water treatment — and the legislative environment today facilitates the flow of investments into sectors that were not accessible in the past, such as power generation.”

He adds: “The power sector alone will attract US$100 billion plus over the coming twenty years to enhance the power generation capacity from 30 to 60 thousand megawatts. The downstream and conversion petrochemical industries will attract US$90 billion in the coming twenty years. As for water treatment we are looking at about US$50 billion in investments, and in transportation another US$50 billion. The numbers we are talking about are colossal, enough to whet any investor’s appetite,” exclaims Dabbagh.

Foreign entities could very well take a stake in the kingdom’s transportation sector as it becomes privatised, discloses Dabbagh. “It’s open for joint ventures where local and foreign companies are involved. It’s also open for foreign entities alone or local entities alone — the determining factor is who’s best suited to get involved in these opportunities.”

“We are interested in FDI as long as it is associated with know-how and knowledge transfer, especially in the downstream and conversion industries — it’s an industry governed by patents, and foreign players are an important component of the investment because they bring knowledge and know-how with them.”

Trepidation is no longer the underlying factor for investors that have largely kept their money in Arab markets and at home in Saudi Arabia. Sluggish performance of western indices has contributed to an inward investment approach and led the Saudi Tadawul Stock market to hit a staggering US$535 billion market capitalisation in August. Cash liquidity, like elsewhere in the world, has been influencing the behaviour of the Saudi market, increasing the appetite of investors and creating demand for stocks. The massive injection of cash, a result of higher oil prices and its knock-on effect on the Saudi monetary system, has taken many by surprise — as have the skyrocketing valuations of some companies in areas of the stock market.

Saudi Telecom, for example, has a market capitalisation of US$74 billion, which is larger than the combined value of British Telecom (US$35 billion), America’s AT&T (US$15 billion), South Korea’s SK Telecom (US$15 billion) and South Africa’s Telekom SA (US$9 billion).

Other elements driving the growth include the economic performance of the Saudi economy that has been growing at an impressive rate of 6%-7%. The sustainable growth rate has increased demand for goods and services and, in turn, the profitability and appeal of Saudi companies. Still, though, foreigners are only allowed to invest in the kingdom through mutual funds and there appears to be no indication if this will change anytime soon. “You see how inflated the stock market is with local investors. Imagine once it is opened how this market could further inflate. We have a regulator monitoring the market and planning according to how it views market shaping,” says Dabbagh.

He adds that he would like to investment to flow into productive sectors that create jobs and investments, enhancing GDP growth. “My preference is to see capital coming to Saudi Arabia [going] into investment opportunities correlated to strategic business sectors linked to our competitive advantages. This would add more value to the economy in terms of job creation and growth in GDP, than would the simple passive investments in the stock market,” explains Dabbagh.

“At the end of the day we at SAGIA do not differentiate between foreign and local capital. Capital and investment is the oxygen for economy. Without it we cannot have growth in the GDP and without growth in the GDP we cannot create jobs and enhance the per capita income.”

There is also talk of a secondary market in the kingdom, which if realised will lure more capital to the country. Interestingly, SAGIA and Intel have also teamed up in a joint venture capital fund that will tap into US$100 million. This is an interesting deal as Intel has so far predominantly placed much of its investment in the Middle East in Israel, where it manufactures chips.

“Intel is a major player in the Saudi market. Its components are part of every single computer sold here. This announcement will further cement their presence in the Saudi market through their investment arm, Intel Capital, the largest manager of ICT venture capital funds in the world — estimated at US$4 billion,” says Dabbagh. “I see this as know-how and knowledge transfer. Having their professionals involved in advising the management of an ICT fund would add a great deal of value and stimulate investments in ICT ventures that carry risk — which may prevent them from getting financing from the banking community,” he adds.||**||