After a decades-long windfall of high oil prices and uninterrupted prosperity, talk of developing Saudi Arabia’s economy beyond its hydrocarbon base appears finally to be manifesting itself into action. The changing global energy market and drop in oil prices over the past 18 months has brought an abrupt end to the golden era petroleum-exporting countries have enjoyed for years, leaving them with little choice but to act.  

Saudi Arabia’s petroleum sector accounts for 80% of its budget revenues and 91% of its export earnings. With its population of 29 million, the country faces a number of challenges, and can no longer afford to stall on measures to lessen its oil reliance. Recent announcements indicate the country is moving toward a productivity-led transformation and revenue diversification, most notably through its National Transformation Program (NTP) of Saudi Arabia’s Vision 2030, its 'roadmap for economic and developmental action'.  


The NTP is ambitious. And it has to be – a December 2015 McKinsey report called Moving Saudi Arabia’s Economy Beyond Oil wrote that even with policy changes, Saudi unemployment “will rise rapidly, household income will fall, and the fiscal position of the national government will deteriorate sharply”. Grahame Nelson, a partner and head of corporate law firm Al Tamimi & Co’s Riyadh office, says that “while it is clear that the rapid deterioration in the price of oil has been the biggest immediate factor in all this, it is also clear that the drivers of Vision 2030 and the NTP are a lot broader than that alone.” 

Private sector boost 

A long-term initiative to reduce the country’s dependence on hydrocarbons, the NTP aims in the next five years to “triple revenue from non-oil sources, taxes, reduce water and electricity subsidies, cut public sector salaries and ensure greater private sector involvement in the economy”, according to Ross Campbell, public sector director at London-based accountancy body ICAEW. It plans to increase non-oil revenue to $141bn by 2020, creating 450,000 non-government jobs, and bring private sector contribution to GDP up from 40% to 65% by 2030. The government also aims to boost FDI from 3.8% to 5.7% of GDP, according to the NTP’s outline, focusing on new sectors such as mining, healthcare, manufacturing and IT.

According to the roadmap, non-oil exports would climb from $50bn to roughly $90bn in the next five years. “It is likely that it will be some time before these objectives can be achieved,” says Mr Campbell. “But indications of the intensity of the effort will become clearer as further actions are taken throughout 2016.”  

Substantial room for investment lies in sectors such as education, healthcare, and housing, which are critical in meeting the demands of the country's booming youth population. “Opportunities for investment are in every area of the economy,” says Mr Nelson. While much of this is allotted to public investment, the private sector will be critical in creating jobs, he adds. “In the next 15 years, the country is going have to find jobs for an extra 5 million young Saudis. So there is a bit more to it than oil,” says Mr Nelson.  

Relaxed laws 

Saudi Arabia has opened certain sectors to foreigners, with 100% foreign ownership now possible in manufacturing, a particularly lucrative segment of which is defence equipment. Other key areas are housing and the Royal Commission of Al Jubail and Yanbu, which are cities developed as special economic industrial zones. “Saudi Arabia will be spending a lot of money developing infrastructure and local industry with a view to becoming a more export-focused economy which substitutes locally manufactured products for foreign imports,” says Mr Nelson.  

Further announced strategies include the sale of just under 5% of state oil company Saudi Aramco, which is valued at $2500bn. “Public assets will also be privatised,” says Mr Campbell, “starting with King Khaled International Airport in Riyadh, followed by other areas of the country’s aviation infrastructure, including air traffic control and IT.” A new terminal of the airport is being operated by the Dublin Airport Authority, Jeddah airport is to be privatised as well upon completion, and Medina airport is already operated by Turkey’s TAV Holdings. “Saudi Arabia also recently announced 100% foreign ownership in retail and wholesale businesses,” says Mr Nelson, although this has yet to be implemented.

This is typically one of the main issues that frustrates investors in Saudi Arabia – the speed of implementation.

Slow progress 

“Privatisation isn’t happening as quickly as investors would like, which has to do with the fact that the country simply did not prioritise this while oil prices were high. Now, obviously, things have changed,” says Mr Nelson. “Setting up a business can also take much longer in Saudi Arabia than in other places,” he adds. Other challenges include the inaccessibility of many Saudi laws, which Mr Nelson claims are not always publicly available. “Unannounced government changes in regulations and unexpected delays in registration procedures are also common,” he says. Dissolving business arrangements is difficult without the consent of the local partner, especially in joint ventures.    

John Martin St Valery, CEO of Dubai-based advisory firm Links Group, says that there are further legal hurdles foreign investors should observe. The government has introduced 'Saudisation' measures, designed to counter high Saudi unemployment by limiting the number of expatriates in the workforce. “Private sector companies must employ a certain quota of Saudis to comply with this obligation, or risk being fined,” he says.

Another cultural challenge is women in the workplace – while the Ministry of Labour aims to increase the rate of female participation in the Saudi workforce, religious rules in the theocratic kingdom often require strict segregation of the sexes in office settings. “This means separate facilities, work stations and workplace entrances. Such regulations can sometimes be conditions of a property lease,” says Mr St Valery. “An organisation’s lack of awareness and understanding about these cultural differences may act as stumbling blocks for foreign-owned companies.” 

Skills training 

Critical to the country's plans will be skills training for the Saudi workforce. Mobilising a population to work that has traditionally relied on government handouts is a formidable challenge for rentier states – the current labour force participation in Saudi Arabia is 41% and much of the economy relies on imported labour from south Asia. “How do we get more young Saudis in the workforce?” Mr Nelson asks. “We have to up-skill them and provide educational and vocational training to ensure they are able to take advantage of the many opportunities on the horizon.” 

The terms of Vision 2030 state: “We will redouble efforts to ensure that the outcomes of our education system are in line with market needs. We have launched the National Labor Gateway to establish sector councils that will precisely determine the skills and knowledge required by each socio-economic sector. We will also expand vocational training in order to drive forward economic development,” with a focus on innovation and entrepreneurship.   

The strategy also aims to boost the GDP contribution of SMEs from 20% to 35%, while increasing female participation in the workforce from 22% to 30%. But while Saudi Arabia’s goals are lofty, moving the country in such an unprecedented direction is no easy task. 

“We are at the genesis of the process and it’s really too soon to start making legitimate calls,” says Mr Nelson. “However, what the country is identifying in terms of priorities and opportunities seems to be right on the money.”