How Saudi Arabia is planning a new economic era

In late February, several hundred Saudi officials, company executives and foreign consultants gathered in a luxury hotel in Riyadh to discuss how Saudi Arabia’s economy could survive an era of cheap oil.

One company manager at the event said that officials from about 30 Saudi government bodies manned booths in which they described their challenges. Corporate bosses were encouraged to “figure out ways to do partnerships to address those needs, to offer feedback, to complain and to plan future ventures or even just future meetings”, the manager said. “It was like a private sector version of a national parliament.”

The workshop was part of Saudi government attempts to work out how to restructure the economy so it no longer relies on oil.

The National Transformation Plan (NTP), as Riyadh has called the changes, is to be unveiled on April 25 as part of a wider “Vision for the Kingdom of Saudi Arabia”. Much is still a secret. Ministries have refused to discuss plans in detail and Western consultancies contacted by Reuters declined to confirm their involvement, let alone policy details.

Officials, consultants and executives are saying that the five-year programme is ambitious and risky. It includes asset sales, tax increases, spending cuts, changes to the way the state manages its financial reserves, an efficiency drive and a much bigger role for the private sector.

Such changes have been talked about for years but never put into action. One reason to think this time could be different is that policy-making has in the past year shifted away from conservative bodies such as the finance ministry and central bank. Power is now concentrated in a new 22-member Council of economic and development affairs, formed after King Salman took the throne in January last year.

The Council is chaired by his son Prince Mohammed bin Salman, the deputy crown prince, who is about 30. In his role as defence minister, Prince Mohammed launched Saudi Arabia’s military intervention in Yemen in March last year. Now, he wants to shake up economic policy.

“Since the foundation of the kingdom there has been no government-led programme that innovates in this way,” said Mohamed Al Afif, a veteran banker who now runs Cash Solutions, a boutique financial services company.

People familiar with the NTP said it was born late last year in discussions between Prince Mohammed and a few other senior officials. At the time, oil was sinking below US$30 a barrel, about half the low point that had been expected. That saddled the country with an annual budget deficit of nearly US$100 billion and strengthened the case for radical changes.

While Prince Mohammed is the ultimate decision maker, he has chosen the economy and planning minister, Adel Al Fakieh, a former food industry executive and mayor of Jeddah, to help with the detail. As labour minister between 2010 and last year, Mr Fakieh overcame opposition from business to policies that pushed companies to hire more Saudis. People involved in the NTP describe Mr Fakieh, 57, as an avid user of WhatsApp, conducting chats with dozens of groups until the small hours.

Riyadh is spending tens of millions of dollars on foreign consultants for the NTP. London-based Source Global Research said in March that total Saudi spending on consultancies – mostly by the government or state-linked bodies – grew by more than 10 per cent last year, from $1.06bn in 2014.

Consultants and ministry officials, many of them young Saudis with western degrees, work at the Khozama office building in Riyadh, thrashing out policy in as many as 40 groups known as “delivery labs”. The plans are heavy on jargon-labelled targets requiring ministries to hit rigid budget and reform goals, according to documents seen by Reuters.

UAE a model

One model is the UAE, which began to make important reforms by cutting petrol subsidies last year, said people familiar with the Saudi plan.

Another model is Malaysia, which in 2010 moved to diversify beyond commodity exports and attract more foreign investment. The consultancy McKinsey played a major role in the Malaysian plan and is now at the centre of the Saudi effort.

The NTP echoes Malaysia’s programme in three ways. It puts a single body in charge of implementation to force better cooperation between ministries. It seeks feedback from the private sector early, even during planning. And it aims to boost the private sector’s share of investment, something Saudi planners consider vital as oil revenue sags.

Riyadh wants private companies to develop tourism facilities on some of its islands, plans to create free zones with minimal red tape near airports and even wants private investment in some schools.

New infrastructure such as roads and port facilities will be constructed under build-operate-transfer contracts, in which private firms finance the projects and then operate them to recoup their investments. “The government will take no risk anymore. It will only provide opportunities,” said a Saudi economist who attended a recent workshop.

The NTP will also speed up Saudi Arabia’s long-running but slow-paced privatisation programme. Up to 5 per cent of the national oil company Saudi Aramco will be sold to the public, Prince Mohammed said, possibly raising tens of billions of dollars. Also on the block are chunks of other companies in up to 18 sectors, including health care, mining and transport.

Management of the country’s financial reserves will become more aggressive, according to officials and consultants. The central bank, which acts as the country’s sovereign wealth fund, holds $584bn of foreign assets, mostly in conservative investments such as bank deposits and US Treasuries.

In the future, privatisation proceeds will be invested in corporate assets around the world, generating income and obtaining access to technology and expertise.

Saudi officials have been visiting the Abu Dhabi Investment Authority – which has more than $700bn invested in developed and emerging-market equities, fixed income, private equity, real estate and infrastructure – to see how it works, sources said.

Prince Mohammed said last month that one fund, the Public Investment Fund (PIF), would be expanded to control more than $2 trillion eventually. The fund is now believed to have about $100bn of assets.

In an interview on Thursday at his farm in Diriyah, Prince Salman said the NTP will be launched a month or 45 days after its April 25 announcement.

Senior officials are reviewing proposals, which all the ministries involved were required to submit by March 31, two sources said. “Everyone is waiting for the NTP announcement for a clue about how things will operate going forward,” said a western diplomat who monitors the economy.

Doubts persist

There are many sceptics. Some say the NTP is too late. Local capital markets are too small to absorb a privatisation programme, so attracting foreign money will be vital. Investors are wary of Saudi Arabia’s prospects given the low oil price.

Eliminating the budget deficit by 2020 will require an additional $100bn in spending cuts and tax increases, equivalent to about 16 per cent of gross domestic product. That could stifle growth and deter the investment the NTP seeks.

Some plans are headline-grabbing but may involve little real change. For example, the PIF will take over assets such as Saudi Aramco but will not be able to reinvest that wealth unless it sells big pieces of the company, which would be tough for financial and political reasons.

And then there are the mixed fortunes of some of the models that Saudi Arabia has looked at. “Most of the economic transformation programmes in various countries did not succeed or diverged immensely from the original plans,” said Ihsan Bu-Hulaiga, a prominent Saudi economist. Malaysia, for example, has increased the private sector’s share of investment modestly, to 64 per cent in 2014 from 52 per cent in 2009. But the country’s currency has plunged along with commodity prices, something Riyadh wants to avoid.

Many question the role of highly paid consultants. “You have people in their 30s with laptops helping to determine the direction of the country,” said one foreign consultant. “The potential for change has certainly gone up, but so has the risk.”

Some Saudis think an economic shake-up could lead to the kind of social changes many foreign business executives believe are needed to modernise Saudi’s economy – allowing women to drive, for instance, or opening up the legal system. The planning itself suggests some openness to change. Senior officials, normally given to opulent robes, regularly come to workshops in simple clothes, say some attendees. And unusually, female consultants are working closely with men.

* Reuters, with additional reporting by Bloomberg

How Saudi Arabia is planning a new economic era

Much is still a secret. Ministries refuse to discuss details and consultants will say nothing. But the National Transformation Plan, to be unveiled next week, will chart a new course in a time of cheap oil.