Consultants flock to Saudi Arabia for ‘mother of all transformation projects’



The consultants are flocking to Saudi Arabia.

The kingdom has spent US$1.25 billion on fees for management consultants this year, according to a report from Source Global Research, as it gears up to announce its National Transformation Plan on Monday. The NTP is a raft of economic reforms designed to insulate the Saudi economy from the impact of low oil prices.

The fall in hydrocarbons revenues has hit Saudi Arabia’s financial buffers and widened its fiscal deficit, meaning that the Gulf monarchy has realised that it must embrace new policies – which is proving a boon to the economic advice industry.

Spending on consultants grew 14.8 per cent in Saudi Arabia year-on-year. That makes the kingdom the largest and fastest growing market for consultants in the region. The GCC as a whole spent $2.7bn on consultants in 2015, up from $2.46bn the previous year.

“For consultants, [Saudi Arabia] currently represents the mother of all transformation projects,” said Edward Haigh, SGR’s director.

Jason Tuvey, an emerging markets economist at Capital Economics, said: “Saudi ministries have relied on western consultants and experts for many years to help with running the economy. It’s a way for the Saudi government to get outside auth­ority for their plans. For consultants, there is plenty of work available.”

The consultancy McKinsey argues that the kingdom needs to create 6 million new jobs by encouraging $4 trillion of new investment into its non-oil economy by 2030, in a report published shortly before the Gulf state announced it would embark on an economic reform programme.

The four largest consulting firms, PwC, Deloitte, EY and KPMG – which have recently expanded their consulting businesses – have benefited most, earning $913 million in fees in 2015, according to the report.

As oil prices rose steadily from 2003 to 2014, Gulf states embarked on an infrastructure spending spree. Mega-projects from the Kingdom Tower in Saudi Arabia, to the Qatari stadium projects ahead of the Fifa World Cup 2022, and the UAE’s major airport developments, have provided plenty of business for consultants.

But with oil prices now at $43 per barrel, down from a high of $110 in the summer of 2014, the Gulf states are turning to consultants to help them trim their budgets as they enter an era of austerity. Privatisations, cuts to subsidies, reductions in social welfare payments and overhauls to sovereign wealth funds have all been considered, and consultants are advising on each of these changes.

Last December Saudi Arabia announced an austerity budget in which it would cut spending by 13.8 per cent this year.

Some elements of the NTP have been mentioned in deputy crown prince Mohammed bin Salman’s public statements.

Ministries have been told to cut their individual spending plans by 5 per cent each, on top of additional policy changes, Reuters reported in March. Prince Mohammed said this month that the kingdom would hope to generate more than $100bn per year by 2020 in new revenue from subsidy cuts, new labour market rules and the introduction of VAT. He also outlined a complex plan to transfer ownership of Saudi Aramco to the Public Investment Fund, a new sovereign wealth fund.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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