Saudi Arabia: A Destination of Choice for Investors
By Roger Harrison, Arab News
INVESTMENT as a process has been the key to the rise of Saudi Arabia as an economic power. Since the mid 1970â€™s, when the Kingdom decided to use its growing revenues from oil to industrialize by investing in processing plants that used the countryâ€™s hydrocarbon resources, this policy decision has needed at least a decade of very large investments to build the plants and the necessary infrastructure.
To build a downstream processing industry is capital intensive. However, the decision perfectly matched the Kingdomâ€™s economic and demographic profile in that it had enormous oil reserves linked to the potential income they would generate and a small population. The government saw the logic in adding value to oil exports by processing them in-country – especially by utilizing natural gas reserves and gas that was until the late 1980â€™s burned off.
Some Saudi planners saw industrialization as a good opportunity to encourage the participation of both foreign and domestic firms to widen the Kingdomâ€™s sphere of economic activity. Joint ventures with foreign companies became common and mutually beneficial. An important bonus to the Saudi economy was the transfer of technology that came with the investment.
As one local commentator put it recently, Saudi Arabiaâ€™s industrial revolution came in a box and the instructions were in English. The Kingdom used its wealth to capitalize where it may on available skills and technology to further its growth and generate its own skills and knowledge base for the future.
Thirty years or so later, the Kingdom is still an attractive investment destination. The landscape has widened from the narrow but lucrative confines of the petrochemical industry into a highly developed market with a variety of areas all offering long-term potential. Perhaps the days of the â€œquick buckâ€ return on investment have passed, but medium and long-term investments in social and industrial projects are very much alive.
Tal Nazer is the CEO of Bupa Arabia. First business between Bupa and the Nazer group began in 1997. It is a post oil boom company that specializes in catering to the health and care needs for the rapidly changing demographics and social infrastructure in the Kingdom.
â€œWe are one of the few companies that have international shareholders and one of the oldest companies in insurance in Saudi Arabia,â€ said Nazer, indicating that the company was a long way from the traditional partnerships of the 70s and 80s.
As a result of the increase in population, changing age profile and rising expectations of the increasingly affluent population, the company addresses different aspects of the health-care industry.
For Bupa, hospitals, insurance, health dialogue and care homes are the core of the business, while Bupa Arabia has health insurance as its main focus, an area that reflects the change in social concerns and infrastructure resulting from petrochemical fuelled societal development in the Kingdom. Nazerâ€™s advice to an incoming investor was: â€œSpecialize and do it well.â€
Investing in a new business requires capital and adherence to existing local regulations. In 1997, for Bupa Middle East this was relatively easy as there were few if any insurance-specific regulations. However in 2003, insurance laws and regulations came into force.
This, said Nazer, meant that existing shareholders and the company had to make adjustments to conform. They included a minimum capital of SR100 million, a requirement to be a publicly listed company, and a capital input that met the solvency requirements of the Saudi Arabian Monetary Authority (SAMA).
Having met the requirements, completed the paperwork and launched one the most successful IPOs in the Kingdom â€” nine times over subscribed â€” Bupa Arabia came into being in 2008.
Nazer reflected on the change brought about by the formation of the current company. â€œWe benefited from local experience and the international expertise,â€ he said. â€œWe had to go through the processes that any insurance company had to go through, capital, management capability, business plan and due diligence for example, but that was OK,â€ he said. â€œThe regulations are of a high standard and the reason for that is that the government wants to build an insurance industry of a high standard similar to the banking industry,â€ he added.
Nazer said that as with any inward investing company in any country, local know-how was important either by using a local partner or bringing in good quality local people to guide the investor through the challenges.
Changes in local employment law can produce very positive results. The Saudi government makes health insurance mandatory for expatriates. â€œThat increased the market from 1 to 7 million customers,â€ he said. He noted that this had resulted in a knock-on effect on the Saudi market, producing customers who saw the benefits that health insurance gave.
The Saudi population is predominantly young with some 80 percent under 39 years old and 60 percent under 21, according to generally accepted figures. However, it will age and â€œmedical inflationâ€ will become a major factor in insurance. With the mandatory health insurance for expatriates and Saudis working in private sector, health care has become accessible to more people.
These factors, said Nazer, have combined to put pressure on the existing hospital facilities, which has resulted in medical inflation. His concern is to deliver world-class services and can see a growing need for hospital facilities to cope with the future demand. He would like to see facilitation and encouragement for foreign investors to invest in the provision of physical infrastructure, i.e. hospitals, to cope with current and future demand.
The need for local knowledge, however obtained, and the transparency but complexity of regulations was echoed in the experience of Bariq Mining Ltd, the first private company to be granted exploration right for minerals in the Kingdom. Graham Pratt, Bariqâ€™s general manager, said that the application and registration process, although somewhat slow and voluminous, was precisely laid out and transparent.
Operating in the Kingdom now for five years, since the implementation of the new national mining code, and originally set up as an exploration company through the Ministry of Oil and Mineral Resources, it holds several mineral tenements (licenses) and a mining license for its copper mine south of Madinah.
Saudi Arabia is massively wealthy in minerals. The Arabian Shield that comprises the western half of the country has barely explored wealth, but initial findings hint at â€œgold rushâ€ potential, but not only in gold. Moreover, it is the declared intent of the Saudi government to establish mining as the â€œthird pillarâ€ of the economy after oil and petrochemicals and so there is a positive investment climate for mining abroad in the Kingdomâ€™s business world.
Pratt described the mining potential in the Kingdom as â€œhugeâ€ and as a genuine opportunity for local investment as well as international. Maâ€™aden has already identified bauxite and phosphate resources in the northeastern part of the country, but the Arabian Shield, though well studied, has barely been touched. The Saudi authorities are actively encouraging this by opening the doors to 100 percent investor ownership of licenses and a generous disposition towards the repatriation of profits.
â€œWithin 12 months we should be producing copper from our flagship mine,â€ said Pratt. â€œWe will be the first privately owned producing company for copper or indeed base metal or gold producer in Saudi Arabia, as previously all metals have been produced by the state mining company (Maâ€™aden).â€
An outside investor seeking to establish itself independently, Bariq had no experience of the processes of registration to work within the Kingdom. Urban business legends tell of the difficulty of navigating legal and government procedures, but Pratt recalled that he was pleasantly surprised dealing with the various regulatory authorities.
The process, from initial approach to the granting of licenses is, said Pratt, a time consuming affair in any country. â€œMining is a long term investment and we have to think strategically. Each country has its own regulations and itâ€™s a time consuming affair. It may be a little more bureaucratic than some other places and would benefit from automation and digitizing in some areas, but for us as a mining company, five years is typical and really quite reasonable,â€ he said.
The process of registering a business, however, does take considerably more time than in other parts of the world, where in many places it can be done in an hour. â€œYou can minimize that by doing your homework and get hold of a good local accountant and lawyers,â€ noted Pratt.
Potential investors are sometimes advised that the only way to forward business in the Kingdom is to develop strong personal relationships when selecting partners or dealing with the necessary formalities. Pratt said that the process was not as well defined as that, but by making good relationships, he had found that there was a commitment to and a good understanding of mining and its potential. â€œAnd itâ€™s always nice to know the man you deal with on a personal as well as official basis.â€
In a response to a similar enquiry, Axa Cooperative Insurance Company suggested that any investor spend time in ensuring that any proposed partner brings value to a relationship, not only in monetary terms, but in experience and active support of the operation.
The important thing for Pratt was that there was a clear structure and process. â€œIn our experience, the process is as transparent, as clear and as good as anywhere in the world and by far the best in the MENA region,â€ he added.
It is perhaps another example of the decline of the â€œfast buckâ€ investment and the rise of long-term, positively regulated and measured development that is beginning to characterize the Kingdomâ€™s investment scene.
The legal system of Saudi Arabia, Shariah, is sometimes viewed as an area of concern in the West and among major investors. In Bariqâ€™s experience, although all dealings are Shariah compliant, there is no differentiation in practice at all.
â€œWithin the framework we work in, you are not aware of whatever legal system you are working in. The framework is there, the regulations are there – end of story,â€ said Pratt. â€œCertainly the Shariah principles of equity and fairness come into play. but in the final analysis it has had no effect on our operations.â€
Investment needs long-term capital, especially in the high risk mining industry. Traditionally, investment in the Kingdom has been effected by individuals who prefer not to apply it to long-term projects. Mining is by nature a long-term investment and no guarantee of major returns. Pratt estimated that 90 percent of exploration projects and mine developments yield nothing, eight percent will survive and yield a varying degree of profit and perhaps two percent return a bonanza.
â€œI feel that the local investor looks for more certainty in the use of his capital,â€ he noted.
Speaking from the perspective of the mining industry, Pratt felt that a major inward investor would encounter challenges in hiring labor. While general tradesmen and administrators were available, there was, he thought, a lack of high-level technically skilled people available. â€œThatâ€™s understandable, as mining is still a young industry, but speaking to other managers, I find it applies to other industries as well,â€ he said.
While there is a move in the Kingdom to develop industrial technical skills, notable examples being the General Organization for Technical Education and Vocational Training (GOTEVOT) skills development program and the work done by Jeddah Technical College and the Saudi Japanese Higher Institute among others, the output is not sufficient.
In-house training and on-the-job training that many companies provide are seen as a burden and many industrial concerns would welcome a ready supply of well trained local people with high-level skills that integrate well with the needs of industry.
Consequently skilled labor had to be brought in to the country. The process and issuing of visas for labor, even skilled labor not available locally, was, thought Pratt, a major challenge for any industry setting up business in the Kingdom. â€œA review and easing in the restrictions of visa issuing and eligibility rules would be very welcome,â€ he said. â€œI would welcome an education system that produces a tranche of local labor with the skill sets that incoming industries need.â€
If this were to come about, then the Kingdom would be able to build an industrial base and national labor pool that would be in a position to add value to the Kingdomâ€™s core products and address the need for jobs for future generations. It would seem to make great sense to export finished aluminum products using cheap energy for example, rather than export raw bauxite or billets.
The question of availability of specialist staff and visas applies to the AXA Cooperative Insurance Company. In a written response asking what two things the company would change with a theoretical â€œmagic wand,â€ it specified an easing of visa restrictions that currently limit the recruitment of quality expatriate staff to the Kingdom and an improvement in the process of granting business and visit visas to the Kingdom.
Established in the Kingdom in 1972, the company became a 100 percent Saudi-owned company early last year. Their focus has always been commercial insurances, both on a direct basis and also through intermediaries. In the past few years, the development of compulsory medical insurance has become an important factor and looking forward, they say more focus will be given to personal lines. A fillip was provided to the insurance industry with the government move to register all insurance companies as wholly Saudi companies and also the introduction of compulsory medical and motor insurance.
During its time operating here, AXA has noted an ever-increasing awareness and responsibility to employ and develop Saudi nationals in the workplace, which is now a regulatory requirement from SAMA for insurance companies. With training and support, the company claims its Saudi staff are as good as any other nationality.
Currently, 39 percent of the staff is Saudi and that figure is growing year on year, as the company says it is committed to developing an effective Saudi staff capable of managing the company in the years to come.
However, a major hurdle AXA faces as an international company and with businesses worldwide is communication. A key challenge for personal progression in an international company is to be able to effectively speak and write in English, it says.
Once again, people power in the Kingdom is available and they are fully able to acquire the skills needed to contribute to any incoming investor. However, in many cases the skill sets that one would expect from a broad-based education system are not available.
As with Bupa, quality of service is at the centre of AXAâ€™s business. However, the company said that Saudi Arabia remains a price driven market where quality of product and service are often seen as secondary.
That said, from an insurance perspective Saudi Arabia is still a developing market. â€œBut as the economic driver of the region, the KSA market has great potential,â€ said an AXA spokesperson.
â€œThere are some 30 insurance companies in KSA, a figure which may well be excessive and no doubt some of these companies as a result of poor performances will close or merge with others in the years to come.â€
The investment environment in the Kingdom is healthy, developing and can be profitable. Setting up business is, in the experience of many companies including our contributors, a long and complex process, but one that is structured and transparent.
There remain challenges, not least the unavailability of skilled staff, be it in the vocational or professional skills area and, especially in the case of companies that deal outside the Kingdom as a matter of course, in English literacy.
Saudi Arabia has a stable government, huge resources and with both a very healthy credit rating and cash flow, it has a well-developed regulatory structure that seems transparent, if time consuming, to work through.
However as the economic powerhouse of the region, the Kingdom remains and will surely develop as the investment destination of choice, especially with an increasingly sophisticated and growing population and an almost wholly untapped reserve of mineral resources that could be in the long term as sustaining as its oil reserves.