Background Vision

1 April 2017 Saudi Arabia has made some bold claims about its future. But nearly a year into its Vision 2030 plan, Paul Jarvis asks whether it can live up to expectations

In April 2016, the Kingdom of Saudi Arabia’s Cabinet approved the proposed Vision 2030 programme, in a move that marked a decisive shift in the country’s approach to its economy.

Recognising the fact that Saudi Arabia must diversify its economy if it is to survive and develop as a nation in a future where it can no longer depend on oil revenues, the Vision 2030 plan offers a long-term goal to transform the country into a logistics hub and investment powerhouse for the region.

One of the programme’s pillars will be developing its infrastructure to enable the country to become the logistics hub it wishes to be – and using the PPP model to deliver that.

So, almost a year in, how are things progressing?

“I would say progress has been slower than anticipated,” says Graham Griffiths, analyst for Saudi Arabia at Control Risks.

Leroy Levy, partner at King & Spalding, agrees. “Some sectors are moving faster than others,” he explains. “There is clearly movement in education, water and aviation.”

Alongside Vision 2030, there has been the creation of the interim National Transformation Programme 2020, which is meant to provide a roadmap for the early years of the programme. There are projects such as the Taif International Airport scheme and a plan for a pipeline of schools projects, which are due to hit the market imminently.

“The government is looking at a very ambitious pipeline in education, with a programme with billions of dollars covering public and private schools,” says one source close to the market. “If the government is able to grow the private schools sector that will relieve the pressure on the public schools sector.”

To date, though, much of the work has been in the background. “A lot of it is about revising what is there,” explains Christopher Cross, partner at law firm Hogan Lovells. “A lot of the process is to do with reducing the public wage bill.”

One example is in healthcare, where the Saudi government is looking to move its model towards a national insurance scheme, and would want this to be the way in which future projects are funded.

Until that system is put in place – and that is still a long way off – some sort of sovereign guarantee would be required.

“The insurance scheme will take a number of years to set up,” says Levy. “The government wants to start its first PPP hospital before that, but it will need to work out how it arranges that transition, and that is complex and takes time.”

It is this sort of structural reform that is taking place across the Saudi Arabian economy, and is perhaps why, at first sight, things seem to be moving slowly in the PPP sector.

“So far, we have not seen much of the upside,” says Griffiths. He points out that the government has published a roadmap to balance its budget by 2020, which involves a whole host of structural changes, from cuts in bonuses in the public sector (already being implemented), to the imposition of a tax on things like sugary food and drinks.

“There is a lot of work going on in the background but not much of that has been seen yet on the surface,” he explains.

As a result of all this upheaval across the country’s economy, it is perhaps no surprise that the government’s PPP programme will no doubt suffer some teething troubles. “Progress is going to be halting and subject to delays and uncertainty, probably across every area of the Vision,” suggests Griffiths.

The main reason for all this economic upheaval is, of course, related to the price of oil. Like many parts of the Middle East, it is almost impossible to look at the Saudi Arabian economy without making reference to the oil price.

“There have been grand plans for PPPs in the past, but the commitment has always been dependent on oil prices,” says Griffiths.

However, Saudi is increasingly keen to move away from its dependency on oil, especially given the long-term trend towards much lower prices than in the past. The country’s rulers appear to acknowledge both the fact that there is no long-term future in an economy based solely on exporting oil, and that a diversified economy will bring a whole host of benefits in the longer term.

If nothing else, Vision 2030 is an expression of this important ideological shift, which means that these reforms will be seen through – even if the price of oil were to suddenly increase. Not that this is much of a threat at present.

“The government has been very aggressive on its Vision 2030, and that is positive,” says Levy. “If oil prices increased, maybe they wouldn’t be so aggressive, but that is a theoretical discussion because I don’t see any big turnaround in the oil price.”

“There is a broader ideological commitment to using the private sector to deliver government services,” agrees Griffiths. “The scale of opportunity is large and the government commitment is there.”

This commitment is also down to a recognition that major reforms are required to satisfy the Saudi population, as the country cannot simply wait in hope of a rise in oil revenues.

Despite the fact that Saudi Arabia is run by its royal family and is not a democracy, experts feel that it has shown itself to understand the expectations of its public.

“The government is cognisant of public opinion and some previous mis-steps have led to a backlash,” says Griffiths.

Another source goes further, arguing that the Saudi government is running scared over the potential that high unemployment in the country could lead to revolution – and so a change of direction to improve the population’s opportunities is seen as crucial.

Bold ambition

Vision 2030, together with the National Transformation Programme, are clear that Saudi Arabia’s new direction should be to become a logistics hub. But it is not the first country in the region to have this idea.

“Abu Dhabi, Kuwait and Oman all want to become logistics hubs for the region,” says Griffiths. “Dubai was the first mover here so is it feasible for Saudi Arabia or another country to replace it?”

However, Cross suggests it is not an either/or option. “It is a different offering,” he says. “Saudi Arabia is looking at the logistics hub as an ‘in and out’ offering because it exports its own materials, so it is not just acting as a way to bring things into the region, like Dubai is.

“The question will be are these alternative revenue streams economic? I’m not sure anyone knows the answer to that at the moment. Hopefully the answer is ‘yes’ in the longer term, but at the moment these activities are quite heavily subsidised.”

Either way, experts agree that Saudi certainly has room for growth in this area, but concerns remain that the scale of ambition may be too much compared with both the opportunity and the country’s own ability to deliver on its plans.

“The big question is whether or not it has got the funding,” says Cross. “People aren’t going to want to do massive deals where credit risk is a concern.”

Levy points to plans for toll roads as an example. “We don’t imagine the government will put in any sovereign guarantees on toll roads, so the model is for operators to raise revenue through the tolls. The question is does that raise enough revenue to service the bank debt? It will be interesting to see if they can get that off the ground.”

Getting things off the ground will be vital if the country is to attract international investors.

“There is interest in some sectors but the government needs to get to a position where it has looked at how deals are going to be structured,” says Levy.

“Without clarity on how deals are going to be structured, you are not going to see any firm commitments [from international investors]. Once there is clarity I think investors will come in.”

Griffiths goes further. “PPPs are emblematic of the challenges that foreign investors will face in Saudi Arabia. The changes that were envisioned [in Vision 2030] are quite sweeping and the ability to deliver on that in the time being suggested is probably not there.

“There are lots of different ministries of various abilities and capacities to deliver what is being asked of them. They have quite different levels of preparedness.”

However, Cross suggests that much of the investment can come from local banks. “There are a lot of banks with a lot of money. So there needs to be a way to get those banks involved,” he says.

In the end, it remains early days for the Vision 2030 programme, but already it is entering a critical phase. “The programme is ambitious,” says Levy. “It will be interesting to see over the next 12 months how many projects get off the ground. The government is going to have to be innovative in the way it gets the private sector involved.”

This page was last updated on:
1 June 2017.

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