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The Magic Kingdom

March 2006
Last year, Saudi Arabia's GDP grew 7%, oil exports were up 50% and the stock market touched unparalleled highs. And with its 2006 budget pegged at $89.3 billion, it is no surprise that foreign firms are flocking to the Kingdom. Alex Ma'alouf looks at the changing face of Saudi business.
Ask yourself: which Arab country saw the highest growth last year? Which country has the largest stock market in the Middle East in terms of capital assets? Which government has set in motion the privatization of some of its biggest companies, mulled plans to introduce income tax, modernized its financial institutions, and attracted more foreign investment?

Which country was judged by the World Bank to have the best overall environment in the Middle East for business? Not Qatar, not Bahrain and not even Dubai. The answer is Saudi Arabia.

If any proof was needed of the country's grand intentions, the announcement of the King Abdullah City project the largest single private sector investment to date in the Kingdom sent a shock down the spines of businesses globally. With an initial capital investment of $26.7 billion, and headed by the region's leading development firms including the Bin Laden Group, Aseer, and Emaar, the first phase of the 55 million square meter greenfield site north of Jeddah will be completed within 24 months.

Already, trade organizations from around the world have been approaching Saudi Arabia's General Investment Authority (SAGIA) in the hopes of winning contracts for the new city, which will include a port, an industrial district, waterside resorts, a financial island, a residential district, and health and education zones. Speaking off the record, Saudi sources claim that the King Abdullah City will be a free zone based on Dubai's successful business model.

Plans are being floated to establish several more economic cities based on the King Abdullah City one in Jeddah and the other on the Eastern Province of Saudi Arabia, according to media reports. "The study has reached the final stage," Mohammed Alabbar, chairman of Emaar, told reporters in Jeddah.

Investment in Saudi Arabia extends far beyond new construction projects. Infrastructure spending is the main priority for 2006, with $33.6 billion budgeted for capital projects to enhance economic growth and job creation. The government has plans to build 2,700 new schools across the Kingdom, and 440 primary healthcare centers in all 13 regions of the country.

But foreigners still voice the same complaints trade barriers, and regulatory and bureaucratic practices when doing business in Saudi Arabia. The arbitrary nature of decision making and a lack of information still hamper potential investors. However, a streamlined application process for business visas was implemented last year; visitors only needed to wait 24 hours to pick up their visas. Now, Saudi embassies require applicants to register through their Saudi sponsor online at the Ministry of Foreign Affairs in a process that takes up to five days.

As Mohammed Hajjar, the Saudi Arabia managing director of Jordanian consultancy firm NextMove, notes that while the government has taken some steps to address these concerns, much more needs to be done to make doing business easier. "Significant improvements have been made in the past few years for investors. But there are still a lot of restrictions and bureaucracy, red tape that has to be cut through with licenses and such. There are no set rules that you can go by. Everything is adhoc."

Saudi authorities do understand the frustrations of businessmen, and claim that changes are underway to ease restrictions and red tape. As Amr Dabbagh, the governor of SAGIA and the man tasked with bringing in $624 billion of foreign direct investment over the next 14 years explains: "Economic reforms are a process and not an event you have to constantly improve, and constantly raise the bar [to attract investment]. Our accession to the WTO will help open up other markets for Saudi products, and the Saudi market for increased FDI."

The impact of WTO entry is already being felt in the Kingdom's traditional trading hub of Jeddah, which has seen a number of mergers between established family-owned businesses.

"Some companies are preparing for the WTO. They realize that competition will be based on quality, cost and speed of innovation. Saudi firms will either have to improve their current operations, merge with larger organizations, or shut down," claims Mr. Hajjar. "The issue is not about capital, of which there is plenty here. The issue is how to structure Saudi companies to enable them to compete on price, quality, and efficiency."

An even larger transformation is already changing the Saudi economy. For years, the most extensive restrictions have targeted not foreign businessmen, but women both Saudi and foreign. Women make up a small percentage of the workforce, only 5%, but their influence is on the rise. Half of the graduates from Saudi universities are women, seats on chambers of commerce and industry in Jeddah and the Eastern Province have been contested and won by women, and finally, women are even driving albeit without licenses on the streets of Jeddah. Change is finally taking hold.

One businesswoman who has experienced the shift is Dania El-Kadi, marketing communications manager for the GCC at Intel, who went to Riyadh last year when Intel's ex-CEO Craig Barrett visited the Kingdom.

"Of course there are differences [in culture] but I did not see any difficulty in actually doing business. It was not difficult for me to get things done there. On both occasions we were meeting with high level government officials and launching marketing campaigns in malls, which also went well. Actually, I thought people were very positive to the fact that this was a woman on a business trip. They accepted it."

Generally, the feeling among both Saudi and foreign businesspeople is that the Kingdom is undergoing rapid change that will tear away obstacles to trade between Saudi Arabia and the rest of the world.

On the political level, in 2005 the Kingdom celebrated its national day as a national holiday an unprecedented event in the country's history where the religious establishment previously forbade any non-religious occasions. The media has also become much more vocal in its tackling of issues. Founded late last year and aimed at Saudi young people, the tabloid newspaper Shams has stirred controversy by tackling previously taboo subjects, even going so far as to print the Danish cartoons that have angered Muslims all over the world. While Shams has been temporarily shut down by the authorities for publishing the cartoons, everyone agrees that reforms must continue if the Saudi economy is to diversify.

"The next two years are the turning point in the life of the Saudi economy. You have a new king; you have the WTO, and the money flowing from the stock market and oil prices. You also have a government that has decided to gradually open up [the economy] and more women getting into the workforce," explained Mr. Hajjar of NextMove.

"These will be pillars that the future Saudi economy will be built upon. Companies are starting to restructure themselves as managers realize that their present operations cannot support the growth they are enjoying.

Things are improving, and all these changes will snowball to effect even more change," he added.

These sentiments should be music to the ears of businesses all over the world who have eyed Saudi Arabia for years without being able to move into the market.

© Jordan Business 2006