Transcript: Saudi Arabia market update
There are eight audio pieces in the 'Doing business in the Kingdom of Saudi Arabia' series. Read the individual audio transcripts by clicking below.
Listen to the audio pieces here
Chapter 1 – Introduction to NZTE in the KSA
Chris Tozer: Good afternoon and welcome to the sixth in our series of updates from Saudi Arabia. My name is Chris Tozer, I’m the Trade Commissioner here at the New Zealand Embassy with New Zealand trade enterprise and delighted to be here again today with our good friends from Arabian Enterprise Incubators, Stuart, who is joining me again and will take part in this presentation to hopefully elucidate you with some of the things that have been happening in Saudi Arabia over the last six months.
So quickly into New Zealand Trade and Enterprise. Many of the New Zealand companies on this call know our organisation pretty well, but just to note that this particular office here in Saudi Arabia is one of NZTE’s newer ones. We opened in September 2014, having a permanent trade commissioner, yours truly, based here in the Kingdom. Previously trade enterprise colleagues would service this market from Dubai. They’d come in for a week or so, spend some time here and fly out. Definitely a less than ideal situation as a key phrase that our good friends at AEI use, you should commit rather than commute.
As we note there, trade with Saudi Arabia is significant. Saudi Arabia is New Zealand’s 17th largest export partner with around about $524 million being sold into Saudi Arabia from New Zealand last year. It’s a very symbiotic relationship. Very crudely put, if you pardon the pun, they sell us oil and we sell them food. Our major exports here are food and beverage products, not surprisingly led by dairy products, meat and also considerable amounts of New Zealand Pinus radiata comes in the Kingdom.
But what’s particularly exciting with my role and I guess one of the reasons that the trade enterprise office was established here, was that we’ve increasingly seen newer, more innovative and more value added type companies coming in here. Service companies, software companies, training and education companies. In other words. New Zealand is beginning to diversify away from its primary products here in Saudi Arabia to different sectors, which is fantastic.
At any one time myself and my very small office here would be working with between 50 and 75 New Zealand companies, typically of that at any one time 10 to 20 in a very intensive manner. And many of these companies operate a fly-in, fly-out model. A number are based in Dubai and they’ll come into Saudi for a period of time, sorry either Dubai or in fact as we had yesterday, the company is based in the UK, they’ll come in for a period of time, a couple of weeks, we’ll assist them and then they’ll depart. The main services that are requested for New Zealand Trade Enterprise when working with companies I guess are pretty obvious. The market validation, does my product and service have applicability in this market, distributor search and then quite rapidly after that due diligence on distributor or can you please find me another distributor and then obviously regulatory requirements are pretty fundamental I guess here as a mini-market. There are a relatively limited number of New Zealand companies that actually have a physical presence here in Saudi Arabia. As a wet finger in the air we’d say approximately six to seven companies are located here in the Kingdom. As I say, considerably more are based in the UAE a few more also in Oman.
Sectorial focus, perhaps not surprisingly as you’ll see food and beverage, particularly value added food and beverage. We see a lot of companies from that sector coming through. The health sector here, we have a number of leading New Zealand companies that operate here in the Kingdom. IT services as mentioned and infrastructure companies. The last point there, I strongly advise you to have a look at our updated webpage that has a number of the key frequently asked questions and just some cultural tips about doing business in Saudi Arabia and some other suggestions for service providers as well.
Just a very quick overview of some of the companies that we deal with regularly here in Saudi. Some of whom, for example, Gallagher have an office here, Fisher & Paykel also have a representation here, Silver Fern Farms are also, they have a small sales office here in Riyadh, along with Manuka Health. But the remainder of them deal directly with distributors and partners. But as you can see they’re a pretty large spread, everything from Mr Apple that supplies around 28/29% of all of New Zealand’s apple supply, the delicious and I shouldn’t play favourites here but I do dine on them quite regularly, delicious Nourish food range from ANZCO, Burger Fuel as well is well known, in fact Burger Fuel have, I believe their largest burger shop anywhere in the world here in Riyadh. Orion Health Care which is almost a household name in New Zealand, Watson & Son, the Manuka honey company are doing great business here in a number of pharmacies, Airways the air traffic control training organisation SOE, Douglas pharmaceuticals, Opus engineering were working up at the Jubail royal commission and our good friends at Zespri have been selling their SunGold kiwifruit in here for some time. And last but not least, a personal favourite ChopChop! Chicken, canned chicken. This is a New Zealand company, the product is manufactured in Thailand and its going great guns here. We were able to introduce them to a leading distributor here and their sales have been doing very well indeed.
So look, that’s just a flavour of the types of companies that we have here in the Kingdom, or that we work with and a bit of a sense of how NZTE operates here.
Chapter 2 – KSA and the Gulf Cooperation Council
Desouza: Great. Thank you very much Chris and good morning from Saudi Arabia. I appreciate that some of you will have joined these webinars before and we have changed the slide pack quite considerably because of firstly the very substantial political events that have happened in the Kingdom and in the region in the last six to eight weeks but also we have removed some of the more basic introductory slides around the history of the Kingdom and that sort of thing. For those of you who are listening to this for the first time, please do get in touch if you want to hear anything more about the sort of historical political view of the Kingdom and how the Kingdom came to be and what the sort of cultural aspects that are quite unique to Saudi Arabia are.
But just to set the context, for those of you who are new to either thinking about exporting to Saudi Arabia or to the region, or just as a reminder to those of you that might do some business here already, Saudi Arabia is different to other countries in the gulf and the principal difference is its scale. The scale in terms of its geography, when you’re dealing with places like Dubai or Abu Dhabi or Kuwait or Doha or Bahrain, you’re principally talking about dealing with cities, city states where in Dubai, you know the longest A-highway is probably going to be, is perhaps 60, 70, 80 km whereas in Saudi Arabia to cross the country is nearly 2000 km. It’s not only geographic scale and all the challenges that poses in terms of border security, infrastructure, highways, rail, distribution etcetera, but it’s also the scale of the population.
And this slide seeks to illustrate that the main difference between Saudi and its near neighbours in the gulf is the extent of the Saudi national population. So, there’s about 32 million people in Saudi Arabia, of which about 22 million are Saudi nationals and compare that to Qatar where there is about 2 million people in the country but only about 250,000 Qataris. So that’s 250,000 Qataris who are expecting soft loans and nice government jobs and retirement at 50 with full pension for life, free education, free health care and for 250,000 people that’s probably quite manageable in Qatar but in Saudi Arabia with 22 million people who have perhaps had a similar level of expectation in years gone by, the cradle to grave entitlement culture, that’s no longer possible. And since 1970 the population in Saudi Arabia has increased four times and the demographics that you’ll be aware of in the Kingdom, 70% of the population are under 30 means that there’s this huge bow wave coming through the education system in particular and then going on into employment that means the Kingdom has had to take action to ensure there are more jobs available, better standards of education for Saudi nationals and that has in part led to the Vision 2030 reform programme which was promulgated last year and has already started to really grip the Kingdom and the impact has already been felt. And we’ll talk about that in a couple of slides time.
But just in terms of the Kingdom, we often find, in fact we always find that people have preconceptions about Saudi Arabia that actually turn out to be misconceptions. And it could be about women in the workplace, it could be about the accessibility of the market, it could be about even people asking whether or not there are McDonalds in Saudi Arabia and things like that. And Saudi Arabia it’s international reputation, it’s international profile is not a reflection of reality on the ground. A few statistics that try to sort of communicate that, 60% of undergraduates in university in Saudi are female. It’s very much the case that women do have access to education but I think it’s fair to say that there is, certainly from a UK perspective, a bit of a 1950s attitude of as soon as a female gets married, has children, there is a pressure to stay at home and look after the family. And that’s changing however. And there is an increasing pressure on government to create jobs, not just for Saudi men but also for Saudi women. And indeed they’ve even, in recent years, started to release official statistics about the unemployment rate in the female population and a key part of Vision 2030, which is documented in black and white, in writing, is a commitment to increase the employment and the employability of Saudi females.
There’s also a sort of stereotype that the Kingdom is very closed. That everyone lives a very harsh and suppressed life, barely existing and that’s simply not true. One in three people in Saudi Arabia carries a foreign passport. It is obviously a conservative country but the access to the internet is fairly unfettered. Pornography and gambling are blocked but everything else is accessible. Saudi and Saudi nationals have the highest density usage of Twitter, Facebook and YouTube in the world. They tweet more and upload more videos to YouTube per capita than anyone else in the world, except possibly Donald Trump as our New Zealand Trade Commissioner has just said. But the image that the Kingdom has of course is that we don’t have access to the internet here, that everything is controlled and monitored by the government and that’s simply not true.
There is of course also, as I’m sure most of you would be aware, a substantial programme for sending Saudi students overseas and there are currently about 120,000 students every year that are given scholarship programmes, oh sorry given a place on a scholarship programme to go and study in the US or the UK and of course in Australia and indeed in New Zealand. And there’s about 2500 Saudi students in New Zealand currently and I’m told that the New Zealand Embassy in New Zealand is the largest of all the Embassies down there, reflecting the perhaps, well reflecting the number of Saudis that are actually in New Zealand at any one time.
Chapter 3 – Cultural and social life in Saudi is changing
So, things are changing and the Vision 2030 reform programme that was introduced in the first quarter of last year, there were, I think it’s fair to say, a number of people, a number of commentators who were quite sceptical about whether or not the kingdom would actually reform and change and take the very difficult steps to modernise the economy and to achieve the objectives of Vision 2030 which is to diversify the economy away from oil and to create employment opportunities for Saudi nationals. But of course when we talk about diversifying the economy, what we’re talking about is to create alternative revenue streams for the government beyond just the export of oil. And things are changing. I cannot stress enough that those of us that are here in Riyadh you can see it every day.
Just on the sort of cultural side of life in Saudi Arabia, you can see here some pictures of events that have taken place in the Kingdom in the last six months. We had a COMICON convention in Jeddah that saw 30,000 young Saudis, boys and girls, teenagers together, no segregation, no religious Police, people dressed up in fancy dress, music, all those things that with the context of the Kingdom sound quite normal but when you place that in Jeddah it’s quite extraordinary. And we’ve even had jazz festivals and concerts and Japanese operas for those who like that sort of thing and we even had the Harlem Globe Trotters in Riyadh just before Ramadan. And this programme of cultural events are being managed by a new quasi ministry, the ministry of entertainment and this is the softer side of Vision 2030, so diversifying the economy, creating jobs are the absolute priority but the softer side of it is the cultural changes and normalising life in Saudi. It obviously has an economic impact. The Saudis spend about 52 billion US dollars every year outside of the Kingdom on vacations. They are the largest spenders per capita in the world and if you can get Saudis to come to your resort, your holiday destination, they’re your prime target audience because they do, they are big spenders. And what the Saudi government is trying to do is to persuade people instead of going to Dubai three times a year, take one of your holidays in the Kingdom. And with that has come obviously an infrastructure programme around theme parks and entertainment cities and all that sort of stuff as we come to expect from this part of the world. But it’s not just the big plans, it’s also Japanese operas and jazz festivals and monster trucks and things like that. So it’s having a real impact on people’s lives.
And that’s the real sort of symbol of change really is that these are things that would have been unthinkable five years ago. And of course the Kingdom is growing. This is a picture of Riyadh from last year. The population is projected to be 37 million by 2025. So the amount of money required, or sorry the amount of investment required in education facilities, in schools, in universities, in training, the amount of investment required in hospitals and medical facilities is just huge. Then you couple that with other infrastructure in terms of housing, roads, rail, hotels, there’s massive opportunity in this market. And again we’ll talk about the marketplace in a few slides time.
Chapter 4 – Domestic politics
So, in terms of domestic politics. This is where we could talk about these things for a long time. But I just want to take 5 or 10 minutes to talk about what has happened in the last month or so. In terms of who’s who, you can see three pictures on this slide. The top picture is his Majesty King Salman, below him is Mohammad bin Salman and over to the left is Mohammad bin Nayef. These are the three or certainly were the three dominant personalities in Saudi politics. The King, the Crown Prince and the Deputy Crown Prince. On June the 21st there was a royal decree issued which saw Mohammad bin Nayef removed as the Crown Prince and Mohammad bin Salman promoted to the role of Crown Prince. And Mohammad bin Nayef, who is at the end of the red arrow, has now effectively retired and it’s very much the King Salman and the Mohammad bin Salman show. That’s what’s happened.
There’s obviously a lot of rumour and intrigue about why this happened, why the timing, how it came to pass. I don’t intend to get stuck into any of that in any great detail because it’s largely irrelevant. The fact is Mohammad bin Salman is now the Crown Prince and actually this is very good news because Mohammad bin Salman is the man of the moment, he is the man who is behind the Vision 2030 reform programme and its very much his vision. So, his promotion to Crown Prince is good news in terms of the ability of the Kingdom to continue to reform and to move forward and to open to the world and to create jobs and to diversify the economy.
I did just want to say one thing about Prince Mohammad bin Nayef who was the Crown Prince who retired in June. He is a loss to the Kingdom. He was a reformer and very much on the same page as Mohammad bin Salman, very supportive of Vision 2030 but for various reasons which I don’t doubt we’ll ever know entirely the truth, he has stepped down and contrary to rumours in the media, he’s not under house arrest, he’s probably just enjoying a welcome break from the strains and stresses of government.
What else happened on the 21st of June was that not only did we see a promotion for Mohammad bin Salman, we also saw the promotion of a number of younger princes. And this is a key theme now which is that the Saudis government is trying to move away from lifetime appointments to a younger political class who are perhaps better trained, more technocrats who have experience of business, who have experience of administration and along with Mohammad bin Salman who is himself about 34, we saw the appointment of a 32-year-old as the new Minister of Interior and a range of other appointments, mainly ambassadorial appointments and Deputy Governor roles going to this sort of next generation of princes. And that’s a huge step for the Kingdom. In this part of the world age is an extremely valuable commodity in terms of wisdom, respect, experience. And it was very telling that when, during the recent crisis with Qatar, the Saudis needed to reach out to Kuwait. They sent a 72-year-old prince, Prince Khalid al-Faisal to go and be the intermediary with Kuwait. So the young dynamic thrusters who are looking to run the government and to run ministries and to implement the reform programme are very much front and centre but they’ve not forgotten that there is a lot of wisdom, a lot of experience in the broader family. And that’s a critical point that from the outside, it can appear that this is, well that again there’s a lot of rumour of palace coups and things like that. Things are far more harmonious than actually you might imagine.
It’s worth saying that this is the first time that succession will pass father to son since 1955. Up to that point, or since then rather, it has always been brother to brother. Now, there’s one more thing, well again, if those of you that sort of watch the media about what’s going on in Saudi, you might receive insight and information reports about rumour and all that sort of stuff in this part of the world, there is a growing rumour that the King may well abdicate and again that’s been widely reported in the press and it seems that there is a likelihood that that will happen at some point, potentially even before the end of the year. But again, if that did happen, we see that as being very positive because it’s mean that Mohammad bin Salman and the reform programme can continue to proceed, to continue to progress. And of course we must remember that all of these things are taking place peacefully. So we’re seeing huge change in the Kingdom, culturally, economically, politically and it’s all taking place peacefully. And I think from everyone’s perspective that’s the most important thing for us as business people, is that the Kingdom continues to be open for business.
Chapter 5 – The economy
So in terms of the economy, it is very much dominated by Vision 2030 and I just wanted to talk a little bit about what Vision 2030 is and what it means and where they are currently in terms of economic progress and the impact that Vision 2030 is having. Vision 2030, as I said, has two main objectives. Diversifying the economy away from oil and creating employment opportunities for Saudi nationals. That programme of creating jobs and getting jobs, Saudis into jobs is called Saudization. And there are regulations in Saudi Arabia about a mandatory quota of Saudis that all companies must employ and there’s a traffic light system to determine your compliance with those regulations. In terms of diversifying the economy, there are a number of strands to the Vision 2030 plan. And again, for the first time in Saudi, we’ve actually had a written policy, published in English and Arabic, with specific objectives with budgets for each ministry that’s subject to Vision 2030, being made open to the public. And again, that’s not happened before. I know it sounds bizarre but we’ve just not had that sort of government engagement before. And the key part of how they intend to diversify the economy and indeed to bring greater investment in the economy from the private sector, is through a far-reaching programme of privatisations. In January 2016 Mohammad bin Salman said in an interview with an economist, that the wanted a Thatcherite revolution in Saudi Arabia. He wanted to take the economic reforms that Margaret Thatcher had implemented in the 1980s in the UK and learning the lessons, apply them in Saudi Arabia.
And in the Kingdom the government does dominate everything. They even own most of the football clubs that are in the premiere league equivalent in Saudi Arabia. So some privatisations, for example the football clubs, are not going to be particularly controversial. And others do make sense in terms of privatising water, desalinisation plants, power generation, power distribution and mail services, with a view to improving those services. So the level of service, if you take the postal service for example, it’s very poor, it’s ripe for development, it’s ripe for improvement and there’s a very good business there, but the government recognises that it’s perhaps not best placed to turn that into a quality business so that will all be privatised.
It’s not really possible to talk about privatisation though without talking about Aramco. So the privatisation of the power grid and desalinisation and the mail services, the football clubs, government hospitals, that is going to raise tens of billions of dollars in revenue but the privatisation of Aramco is going to raise in excess of 100 billion dollars. Their intention is to float approximately 5% of Aramco, they’re probably looking at a dual maybe even a triple listing between Riyadh and two overseas stock markets which are yet to be decided, but New York, London, Frankfurt, Tokyo are in the front running. And that 100 billion, at least 100 billion US dollars of revenue will substantially offset reductions in oil revenue and will be a massive boost to the public investment fund. And the public investment fund is the principal sovereign wealth vehicle that will drive investments domestically, but also internationally, to again create another revenue stream for the government on the back of the investments that they make. So the privatisation of all of these state assets and state owned enterprises, the part privatisation of Aramco, the revenue from that will all be managed by the public investment fund.
In terms of the broader economy, obviously the Kingdom has suffered a bit of a shock in the last 18 months because of the depressed oil price. It is worth saying that the oil price certainly in the early part of 2015, the depression of the oil price was a deliberate policy of Saudi Arabia and it was principally focused on the containment of Iran as a regional power who had exercised and continues to exercise considerable influence in countries that surround the gulf, so Iraq, Syria, Lebanon and then more recently actually on the Arabian peninsula in Yemen and to a certain extent in Bahrain. I think that most commentators have said that the general view is that Saudi lost control of that policy towards the end of 2015. But where there have been issues is the readiness of the Kingdom to raise capital in the international debt markets. They have been to the market, last year. They went in October 2016, went to the international market for 10 billion dollars and they were actually offered 70 billion dollars. It was a new record for an oversubscription of a sovereign debt issue which indicates the markets confidence in the Kingdom’s ability to weather the current storms.
Part of the plan to balance the budget and to make up for the shortfall in revenue whilst the economic reforms are taking effect is certainly to increase public debt. Public debt in Saudi Arabia was running at about 30 billion US dollars, so pretty much non-existent, and is now at least double that, it’s probably going to approach 100 billion US dollars by the end of the year. And that is in line with a published policy from last year to say for that for the years 17, 18 and 19 public debt will increase whilst the Vision 2030 reforms take effect and will slowly start to reduce from 2020 as the new revenue streams begin to come online.
Some economic reforms that have cut the cost of government have already taken place, so public subsidies on petrol, water, gas, and even cigarettes have been removed and indeed in the last two months we’ve seen the introduction of some direct, sorry some sales taxes which are the first such taxes in the Kingdom. Again, this is all in line with the published plan which was published in March last year, that by the middle of 2017 a number of taxes would be implemented. One of them is the so called Sin tax, which is a tax of 100% on energy drinks, on sugary drinks, on fast food and on cigarettes. And they’re one of the first countries in the world to be able to pass a sugar tax. Notably in the UK it was not passed through parliament for various reasons but obviously in Saudi Arabia once the decision is made it can be implemented.
We’ve also seen some taxes coming in this month and scheduled for later in the year to encourage more employment of Saudi nationals and to, not penalise but to disincentivise those companies that are employing ex-patriots. We’ve seen a tax on dependants, so on expats dependants and we’ll see a direct tax on the number of expats employed by Saudi companies from the 1st of January.
We’re also going to see VAT introduced. And of course VAT is coming in across the Gulf Cooperating Council countries, that’s the six member states that make up the GCC and that’ll be implemented from the 1st of January. And just in the last week we’ve seen the draft law for the introduction of VAT being published and the consultation programme by the Ministry of Finance has just come to an end in Saudi to gauge the opinion of the public and to gauge the opinion of business. Again, that sounds, all sounds very normal but it’s the first time that’s ever happened in Saudi Arabia, that the government said we’d like to hear what you think as citizens and as businesses.
So, the overall things are looking, the outlook is pretty good. They’re doing what they said they were going to do, the Vision 2030 is actually happening, the taxes are being raised, laws are being passed, privatisations are happening. The government is taking quality advice from a number of very, from a significant number of expert consultancies from the west and the overall mood in the Kingdom is very positive.
Chapter 6 – Regional issues
Of course, everything that’s going on in Saudi can sometimes be overshadowed by the broader regional events. And in the last month in particular, the issues with Qatar has really dominated the sort of international media view of the Gulf and has undoubtedly caused a number of very real problems and real issues. Again I don’t want to get into why this has all happened and where we think it might go, what I want to talk about is what has happened and what the impact is on business.
As of today, Qatar remains a member of the GCC, the Gulf Cooperating Council. There is talk of a suspension for Qatar but that’s not happened yet. Qatar has basically, I mean to simplify it, they’ve basically had a falling out with Saudi Arabia and the United Arab Emirates. Egypt has become involved as well on the side of the Saudis and the Emirates and Iran has become involved notionally on the side of the Qataris. The Iranian involvement however is generally overplayed in the international press. And is broadly misunderstood. What certainly has happened is that Qatar has been cut off, politically and physically, by its neighbours. The land border with Saudi Arabia has been closed, airspace has been closed by Saudi, by the Emirates, by Bahrain to Qatar aircraft and of course that’s impacted Qatar Airways considerably, and shipping routes between the UAE and Qatar and Bahrain and Qatar are also closed. So, there has been an effective isolation of Qatar by two of its, ostensibly two of its closest allies in Saudi and the UAE.
What’s caused this, again, to oversimplify it is that this has been brewing for a number of years and there have certainly been tensions between Qatar and Saudis and there have certainly been tensions over the role that Qatar has sought to play in places like Libya, in Syria and even in Palestine. There have been tensions with the Egyptians over the Qataris support for the Moslem brotherhood. There have been tensions over a new TV channel that’s based out of Doha, called Al Jazeera, particularly the Arabic service which the Saudis, the Emirates and the Egyptians have viewed as being unfairly biased against those three countries and their interests. And most recently there has been a considerable falling out over the payment of a ransom by the Qataris to Al-Qaeda affiliated terrorist groups in Iraq who had kidnapped a number of Qatari royals. Again, media reports not entirely accurate, but it’s believed that about a billion dollars was paid in ransoms and that was one of the most recent things that has really tipped, in particular the Saudis, over the edge in terms of their frustration with Qatar and the funding of terrorism.
Of course, what stalks all of these events, is the cold war, if you like, between Iran and Saudi Arabia. Again, it’s a very documented fractious relationship between the two countries. The renewed engagement of this part of the world by the White House and by President Trump may not help resolve those issues and appears very much to be making those issues worse. But I think the general mood is, from a business perspective, that clearly importing things into Qatar has become considerably more difficult. I’ve been told that the Qatari authorities are granting additional funding for projects and granting excusable delays for delays to deliveries and that sort of thing resulting from this. But it’s not clear quite how this is going to be resolved and again, the sort of international brokers that you might look to resolve this sort of thing, particularly the Americans, have come down on one side of the argument. But having said that, we’ve seen shuttle diplomacy by Rex Tillerson in the region two weeks ago, President Erdogan of Turkey in the region this week, the French are also seeking to play a role in mediating.
One other thing that dominates people’s interest or sort of piques people’s interest in this part of the world of course is Yemen. We’re seeing some terrible consequences of the prolonged military action in Yemen, particularly with the cholera outbreak. Again, it is a complicated tale that is often misreported and is essentially a civil war in Yemen. There are attacks on Saudi Arabia regularly coming from Yemen and the Saudis are continuing to take action, alongside the coalition partners, to try and stabilise the country. Again, there’s a lot of debate there as to whether or not the policy is working and as to how to resolve it. But again, I think from an impact on business with the Kingdom, those of you that might be interested in reconstruction and aid efforts, we’re not quite there yet in terms of entering that phase of this issue.
Chris Tozer: Just if I may, just to comment Stuart on the Yemeni attacks on Saudi. Those are very localised. They’re along the border. So we’re not seeing, so in terms of travel to the Kingdom, there are no impacts for business visitors coming to the Kingdom.
Desouza: Absolutely, sorry I should have said that. I didn’t want to alarm anybody but no, I mean it’s certainly the border towns, villages, it’s not anything more substantial than that. But certainly enough to warrant a response from the Kingdom and we shall have to see how that pans out over the coming months.
This next slide, those of you that have had this presentation before will recognise it. It’s something we pinched from the economists a couple of years ago now. But it just serves as a message to say this is very complex part of the world and you don’t need to try and understand all of the dynamics of all the different relationships between all the different groups and factions and whatever. But just be aware of the risks that you are entering into when you’re doing business in this part of the world. Of course, it’s still a great place to do business and thousands of Western companies do business here every day. But they do so having sought advice from professionals that are on the ground, having had advice and support from their Embassies. So if you’re interested in doing business in this part of the world, please do get in touch with New Zealand Trade and Enterprise here.
Chapter 7 – Positive outlook in the Saudi market
In terms of the market, so with all the economic reforms and notwithstanding the sort of regional political issues, the outlook does actually remain quite positive. 2015/2016 were difficult years, undoubtedly as the shock from the oil price reductions, from the reduction in the oil price and the reduction in the revenues began to bite, but it was a necessary shock and because of that we have Vision 2030 and because of that we have all the reforms that are taking place. So, there is very much light at the end of the tunnel and into 2017, so far this year, we have already seen a significant number of large contracts being awarded and as far as we are aware at AEI, all of our western clients are now fully paid up and there are no outstanding debts.
So in terms of some of the projects, well again you can see from this list that really it touches every aspect of business. In infrastructure we’ve seen the approval for a number of big projects. The quantity of the projects may be reduced and there’s less of the sort of vanity projects but its far more focused and far more real. So, it’s more of a normalisation, if you like, where we’ve gone from years of extraordinary levels of spending to still high levels of spending, but not quite the hundreds of billions that we’ve seen in years gone by. In Jeddah we’ve seen approvals for tram projects and a bus project. The land bridge between Jeddah and Riyadh is in the design phase. The new causeway which will include a highspeed rail link between the Kingdom and Bahrain has been approved. And there continues to be a considerable amount of opportunities in infrastructure beyond public transport systems. Power, water, hospital building and that sort of thing.
The privatisation programme also has produced considerable opportunity, and again, considerable opportunity for foreign companies. We see that the Singapore Airport Authority has won the contract to run the new Jeddah airport. The Dublin Airport Authority is running the new Terminal 5 here in Riyadh. A Turkish led consortium have won the contract to run Medina airport. So there are great opportunities coming out of the privatisation programme.
There’s also not just the operating side of things, there’s also the PMO advisory consultancy opportunities which are considerable. And the government authorities are very much open to quality western consultancies who can lend support, advice and guidance.
In terms of energy, the mood has very much moved to renewables and nuclear and the King Abdullah Centre for atomic and renewable energy just signed, last week, a nuclear focused MOU with the South Koreans and we expect to see a considerable move on nuclear power in the coming years. But also in the shorter term, more focus on renewables. And obviously solar, wind are a major focus for them.
A common thread through all of these opportunities is training and education. The opportunities for New Zealand training companies remains substantial and again across all sectors from retail. I believe there’s a New Zealand company that has been looking at working with McDonalds on the training side.
Banking, air traffic control, all sorts of things. And of course, as Chris was saying, where New Zealand is already very strong in the market is in terms of retail and the supply into the food and beverage market. And a potential new area is around tourism, entertainment and leisure. So along with the economic reforms, we’re seeing, as I said before, a greater focus on more things to actually do in Saudi Arabia. That’s entertainment in terms of theme parks and cinemas and ski slopes and ice rinks and trampoline world and all that sort of stuff, but also tourism. No the sort of binge drinking brit tourism, but religious tourism, they get about 15 million religious visitors, pilgrims, tourists to the Kingdom every year and they want to offer them the opportunity to enjoy the wonderful resources they have down on the Red Sea coast in particular and the tourism industry is pretty much non-existent currently. So again, we’re expecting the commission, the Ministry of Tourism if you like, to have a big focus on improving their offer to tourists as they come into the market.
So that’s basically it. An overview there of the market place.
Chapter 8 – Questions and answers
So there’s a question there from Ali, any particular strength to the kiwi brand in the context of other brands. So versus the Europeans or Americans.
New Zealand is certainly known for its high quality food and beverage, particularly its lamb and its beef. If you go into the hiring supermarkets that are here you’ll often see New Zealand versus Australia jostling for first place in terms of the premium quality meat here in Saudi. Anchor, one of the leading brands for our largest company Fonterra, has been a market for many, many, many years and Anchor is well known and as a result New Zealand is well known for supplying high quality dairy products.
Probably other than food, there isn’t a great deal of brand recognition or indeed knowledge of New Zealand here in the Kingdom. There haven’t been historic cultural or political ties between New Zealand and this part of the world as for example there has been in India, for example through cricket and being part of the Commonwealth. So there isn’t a great deal of knowledge of what New Zealand is and does. Some of the usual clichés, yes we do exist, yes we have hobbits and we have nice mountains but it isn’t a destination or a country that people know a great deal about here. I still get asked from time to time, well I still get comments from time to time with people saying oh New Zealand yes I love Europe. So there is still some challenges in terms of geography about where New Zealand actually is. Fair to say Saudis, and Stuart commented on it before, the fact that many Saudis will spend their vacation time out of the Kingdom and now with this encouragement for them to be in the Kingdom. Saudis have been going to Europe and the United States for decades. They are now becoming more adventurous with some of the other places they’re going. Now going to places in Asia and I was recently in of all places eastern Europe and it was flooded with Saudis and people from the Gulf. And New Zealand is beginning to slowly register as a destination. What has caused part of that is, as Stuart’s comment before, about the approximately 2500 young Saudis studying in New Zealand and often mum and dad will come out and visit a student in New Zealand.
But ultimately Ali in terms of your question about the strength of the kiwi brand, fair to say it isn’t strong here in Saudi Arabia. It’s not a country that’s well known. And looking at our sister agency, Tourism New Zealand for example, they like us have a limited budget and they have chosen to focus on other parts of the world rather than the Middle East.
There’s a question from Kelvin where there’s, how do we see the reforms impacting Saudi telecom. The telecom sector, so there’s two aspects to this. There’s Saudi Telecom Company, STC, which is one of the mobile phone operators and it is the state owned operator, although it is already 50% in private hands.
There are two other major mobile phone operators in the Kingdom. There are no specific reforms been announced for or by the government for the mobile phone sector, however what we’re certainly seeing is additional mobile operating licences being granted. So Virgin mobile opened up in Saudi last year and we’re seeing the privatisation of, or the sell-off of state operated network towers, GSM towers. So it’s not government directed but there are going to be some structural changes.
And as the Kingdom opens up more to foreign investment, there are bound to be more telecoms operators coming in. There is still, however a great deal of influence from STC and indeed the other big mobile phone operators who continually lobby the government to block telecommunications companies that don’t have a licence in Saudi Arabia. And the main casualty for this are companies like Skype, what’s that calling, FaceTime, which do not have a licence in Saudi Arabia and because of the lobbying by STC principally are often blocked on Saudi Wi-Fi and internet connections.
I don’t think that will change, because again the rules are the rules. If you want to operate in Saudi you need to have a licence in order to provide telecommunications services.
There was a great question from Glen about does the sin tax apply to all sugar intensive products. Not currently. So, as currently implemented it is being applied to energy drinks. So there is some specific regulations now about where energy drinks are displayed in a supermarket. They have to have a sign with a health warning attached to them, well attached to that part of the display and the tax has also been levied on soda drinks that are provided by fast food outlets. So Coca-Cola and Fanta and all that sort of stuff. But the, I’m not aware of any plans to apply that beyond the sort of fizzy drink market but you could say well that could be a natural extension. What’s driven this is obviously a desire to raise revenue but also a legitimate concern over the massive levels of obesity and diabetes in the Kingdom. So for health reasons you could see an extension of that, but there’s no indication that that’s in their thinking currently.
In terms of Tarun’s question, is it possible to have some details of hotels and hospitality industry. Certainly, and perhaps Tarun we can take that offline. The expansion of the hotel capacity is huge. In Riyadh alone there are I think about 60,000 hotel rooms currently under construction. And they’re building the biggest hotel in the world in Mecca at the moment.
That’s right. And then of course the other focus is Mecca, where hotel capacity has been expanding for a number of years. But the real, I suppose, new projects will be along the Red Sea coast as they try to develop tourism resorts down there. Again, it’s just totally non-existent. If you think about the Egyptian side with Sharm El Sheikh or Hurghada, these are, or certainly were, extremely popular destinations. Well, the Saudi side of the Red Sea is unspoilt, undeveloped. And that’s a key focus for creating jobs for Saudis but also diversifying revenue and also giving Saudi nationals for a staycation to stay in Saudi Arabia rather than going to the beach in Dubai or Bahrain.
Given the amount of reform that is occurring, how long do you think it will take for Saudi to return to surplus. Well according to the plan, so in April last year they published a balancing the budget by 2020 plan, which includes all of the taxes that we’re spoken about. They are on track in terms of raising debt and implementing tax reform. They’re on track in terms of what they said they were going to do in that plan and in that plan it sees a modest surplus returning in, I think it’s in 2020 or maybe 2021. But obviously the not having a surplus and running a deficit is not entirely unfamiliar here. Between 1983 and 1999 they ran a deficit every year. Of course the question is how is that deficit funded. And between now and 2020 it’s very much going to be funded by public debt, until those new revenue streams come online.
How’s the technology infrastructure. Any challenges in terms of fibre networks or mobile technologies. Right. Well, yes there are challenges. The fibre network has been rolled out across at least two of the major cities, so Riyadh has, not all parts of Riyadh, but it’s an ongoing programme of rolling out fibre in the Kingdom. Where we are currently in our office, in the AIE office, we’re connected to the fibre network, where Chris’ office is it’s also connected to the fibre network and that covers quite a significant distance in Riyadh. In the eastern province in Dammam, Khobar fibre optic has also been rolled out there. Jeddah is not quite implemented yet. And then of course once you head out into the more sort of provincial towns there’s no fibre optic but the 4G Wi-Fi signal is actually very good. And in terms of mobile technologies, the Saudis are voracious consumers of mobile technology, whether that’s apps, devices and as we’ve spoken about, Twitter and YouTube and therefore there is a massive pressure on the government to make sure that the infrastructure that supports all of that is working, is functioning and is value for money.