Oil empire that won't rest on its laurels

Saudi Vision 2030, a programme aimed at fostering the development of the Kingdom of Saudi Arabia and reducing the country's dependence on oil is one of the most widely discussed strategies of national development. The ambitious plan announced by the Kingdom in 2016 elicited mixed reactions from across the world— from admiration to doubts that the Saudi leadership is capable of not only curbing the nation's dependence on oil dramatically by 2030, but also of opening up the economy for international investors, rebuilding the governance structure and transforming the society. The surprise expressed by economists and politicians is understandable as the program seems challenging. The Business Guide offers a detailed account of the unprecedented 15-year transformation program.

Three transformation programs, no revolution

When it comes to describing the Vision 2030 initiative, any comparison with a similar program becomes a challenge. Some of its components do have similarities to initiatives undertaken by many other governments. In terms of the scale of structural reforms, Saudi Vision 2030 can be compared to China's post-Olympic plans to move from an export-based economy to a market-based one, driven by domestic demand.

It is difficult to find a match for the governance project due to a unique government structure of the Kingdom of Saudi Arabia (KSA). However, many projected governance practices have been adapted from the ones used in the UK, the US, the Netherlands, Canada and Australia. Last but not least, the social component is unusual, specifically with regard to KSA: To date no conservative society with a powerful religious foundation and commitment to traditional values has announced its ambition to become more liberal without relying on westernization. Most certainly, no nation has ever tried to do anything of this kind in the last 15 years. Nonetheless, Saudi Vision 2030 was approved by the King of KSA and the strategy has been on track for a year and a half now.

Experts do not dispute the fact that Saudi Arabia is technically capable of completing this program. The political structure of KSA, an absolute monarchy and society with a high level of education, political loyalty and wealth, makes the transformation feasible. Saudi Arabia is a country where a call against oil dependency looks somewhat like a call of bees against honey. Ideas supporting the expansion of the volunteer movement from the current 11,000 people to 1 million and the increase of the share of NGOs in the country's GDP from 1% to 5% contradict everything that political scientists know about the possible intentions of absolute monarchs. We now see the Saudi monarchy thinking outside the box.

Why? The answer can certainly be found in the history of KSA, which originated as a reformist movement in Islam within the Arabian Peninsula. It is no surprise that the plan's key ideology is "Our vision is that Saudi Arabia should be the heart of the Arab and Islamic worlds, an investment powerhouse and a hub connecting three continents." There is no reason to be surprised that it is Saudi Arabia that spearheaded structural reforms and the "open society" transition while respecting traditional values and demonstrating strong commitment to its own cultural identity.

From wealth to enormous wealth

Most descriptions of the transformation program are confined to the launch of the privatization of the Kingdom's economy's core component, i. e. the IPO of Saudi Aramco. However, the sale of up to 5% of the company's shares, initiated on schedule in autumn 2017, does not explain anything per se and most certainly does little to bring the country closer to its main economic goal for 2030: bring the economy from the 19th position in global economic ranking (by nominal GDP) to one of the top 15. That said, the IPO is only aimed at setting in motion the transformation of Saudi Aramco from a state-owned company to a multi-industry group managed by the Public Investment Fund of KSA (PIF), a sovereign wealth fund whose equity is expected to increase to 7 trillion Saudi riyals ($2 trillion) from the current 600 billion Saudi riyals ($160 billion).

PIF is supposed to operate within a framework that is similar to the Russian "budget rule" (popular globally). By 2020, KSA intends to cut the budget deficit and switch to a sustainable budget. The program also aims to increase the share of SMEs in the country's GDP to 35% from the current 20%, boost the share of foreign direct investment to 5.7% from the current 3.8% annually, expand industry localization for the Saudi oil and gas business to 75% from 40% and build up the share of the private sector in the GDP to 65% from 40% by 2030. Structural reforms will help open the local real estate market (including the expansion of real estate ownership by households, now at 50%, and mortgage programs), facilitate labour market reforms, promote major investments in the logistics infrastructure, support a number of tax reforms and maintain the defense industry localization at 50% of the national armed forces' needs. On the back of a better investment climate, the oil component of the country's exports should increase to 50% of oil revenues in the GDP from the current 15%.

Vision 2030 has no detailed description on the PIF's investment strategy. Over the past few decades, KSA's sovereign funds have boasted broad diversification of foreign investments, and the program calls for investing hundreds of billions of dollars until 2030. In that sense, the goal of transforming Saudi Arabia into an "investment powerhouse" is important for Russia as well (see page 8).

The program includes new principles and a high-level description of the financial market development going forward, mostly focused on the equity market. Saudi Arabia's goal is to increase household savings to 10% from the current 6% level, which would require the development of the financial brokerage sector. In terms of regulation in the financial sector, KSA is a strict follower of the sharia principles that forbid interest, so the plan will obviously not grant access to the Saudi market to foreign banks. However, new financial technologies are entirely applicable to Islamic banking and co-investment principles, on which the plan, or at least some parts of it, is based. In fact, the plan is extremely reticent about a few aspects, while others are described in detail. For instance, information on the IT and telecom strategy is scarce. The Saudi leadership is focused on supporting the tech sector, which is proved by recent investments in Uber.

Obviously, the 15-year reformation program is quite intense, to say the least. However, it is impossible to implement it without social changes and upgrades in the governance structure, which are taken into account.

A new society with old foundations Vision 2030 plans to change not only the quality of life. Households themselves have to change too. The plan provides for boosting female employment in KSA to 30% from the current 22% and is focused primarily on the use of local human resources rather than attracting external ones. At the same time, the unemployment rate is expected to drop to 7% from 11.6%.

The number of Hajj and Umrah pilgrims should increase to 30 million people per year by 2030, which is close to the current population of KSA. Three major cities of the Arabian Peninsula are expected to enter the list of top 100 global mega cities by 2030, while the number of UNESCO cultural heritage sites should at least double.

Households' cultural and entertainment expenses are projected to increase to 6% from the current 2.9%, which, to a large extent, is the goal of the Daem program providing government support for private cultural activities, hobbies, reading clubs and libraries. Saudi Arabia's openness to expatriates is also expected to increase: Foreigners will be able to own properties in a number of regions; the number of private schools will be growing and the procedure for obtaining visas and residence permits will become simpler and more efficient. As for leisure tourists, KSA went as far as proposing visa-free entry to some regions.

Life expectancy is projected to increase to 80 years from the current 74, with ambitious targets set for healthcare and education. Notably, the overall goal of Vision 2030 is to propel the country from the 27th to the 10th position in the Social Capital Index (SCI), which is a challenging task requiring fast social progress.

Modern government in an absolute monarchy

The question of how the Kingdom is planning to build a "vibrant political nation" without creating the traditional western elements of universal electoral democracy, civil society, competition of political parties, unrestricted freedom of speech and protection of minority rights, outside the doctrine of absolute supremacy of human rights, regarding all, including religious, regulations, is outside the Saudi agenda. The Saudi leadership is not taking it for granted and suggests its own way, combining liberalization with strong commitment to Arabic and Islamic values.

The management of reforms is expected to be as follows. The Saudi Council of Ministers will set up the Council of Economic and Development Affairs (CEDA) to provide political governance for the reforms. Design, management and alignment of all parts of the reforms will be assigned to the Strategic Committee (SC, planning) and Strategic Management Office (SMO, implementation). The SMO includes the CEDA project office, Adaa National Center for Performance Management, Ministry of Economy and Planning, Special Financial Committee of the reform, a Delivery Unit (an important structural element in project management recently focused on the implementation of decisions in government offices) and, importantly, a CEDA communication team. For each step of the reforms, such as the Saudi Aramco transformation, the PIF restructuring, the Daem program, the regional development plan and the private-sector growth plan, a set of practical initiatives has been developed. These are controlled by different executive bodies. This is a complex structure based on a project and ecosystem approach. Apparently, the complexity of goals prevents radical simplification of the program.

The system is designed to be adaptive but Saudi Arabia knows that reforms of such scale seldom run smoothly. It is too late to become concerned, however, as the reforms are already under way.

Reforms that are under way

No reform can ignore the existing problems in favor of grand and important future goals. The reforms have already started for the people of KSA in terms of both social and economic development. For instance, one part of Saudi Vision 2030 is the reform of energy, water supply and fuel sector pricing: the Saudi government has been raising tariffs both for businesses and households in order to improve target orientation of the subsidies. The tariff reform program is moving ahead swiftly, with prices expected to reach the reference level by 2020.

KSA aims to create an ultramodern e-government system with e-services. Overall, the "oil socialism", which was established in the country in the late 20th century and impacted its social development to a large extent will evidently be upgraded to a modern social support system. The matter is not so much about the underlying resources but the efficiency of their allocation. Incidentally, environmental protection and reduction of energy consumption by the economy call for the rational use of resources and other issues that are common for Russia and are related to the abundance of national resources. These will constitute important elements of the reform.

The Saudi government's key promise is that no income, property or basic benefits tax will be imposed on individuals. It also guarantees long-term stability of prices and a high level of economic security to the population. Since the summer of 2017, KSA has imposed a limited tax on foreign labor, to be followed by a 5% value added tax (100 most important consumer goods are currently exempt of VAT) and a luxury tax in 2018.

The main promise of KSA to private businesses, mainly local companies, is government support throughout the transformation period, significant benefits for the construction industry and the non-oil production sector and, with the taxation level remaining at a record low (zero profit tax), easier conditions for doing business.

In 2016, Saudi Arabia was ranked 25th in the Global Competitiveness Index. The target for 2030 is to reach the top 10. Targets for improving the nation's current 96th position in the World Bank's Doing Business Index have not been announced, but apparently will be set as well. Finally, the achievement of the Vision 2030 goal for the country to become the regional transport hub and logistics leader will create significant momentum for the globalization of the local economy. The traditional opportunities for Saudi Arabia in the global trade have been tested over centuries. As the geographic conditions remain the same, and with the development of Saudi ports and transport infrastructure, the Saudi government has reasons to believe that these opportunities will still be there in the future, and the Gulf will remain a center of global trade.

The total investment potential of KSA at the time of reforms is estimated at a fantastic $4 trillion.

Vasily Sborov