Saudi Arabia’s Vision 2030 is a bold statement of purpose that lays out how our young, ambitious nation can best address the many socioeconomic, structural and geopolitical challenges that it faces. The Vision defines the times we live in and the future that we will pass on to our children.
We have become accustomed to the Government leading from the top. But government acting alone cannot achieve this gargantuan undertaking. It requires the involvement and commitment of all – government, non-profits, civil society and, of course, the private sector.
Yet the response from many corners of the private sector has not been one of commitment. It has been closer to despair. This is, to a degree, understandable. Many sectors of the economy have felt the immediate impact of cuts in government capital spending and benefits. Yet the private sector has to realize that these are not short-term measures. They are existential challenges for many businesses and business needs to take a more proactive approach to addressing them.
This is the new normal. The private sector must recognize the imperative to restructure and retool to meet the multitude of new growth opportunities that the Vision creates. This is not a time to look back at the way things were in the past. It is a time to embrace the astonishing potential of the Kingdom.
What does this mean in practical terms? There is no simple answer to that question, as so much depends on the dynamics of the specific sector. But by examining the main arcs of Vision 2030 it is clear to see where the main sectors of contraction and expansion are.
This is the new normal. The private sector must recognize the imperative to restructure and retool to meet the multitude of new growth opportunities that the Vision createsFahd Al Rasheed
The economic impact of Vision 2030 is best understood in terms of three distinct arcs: fiscal reform, portfolio management, and economic expansion. The government is undertaking fiscal reform to ensure economic sustainability. Increased government fees, subsidy reform and VAT implantation diversify and expand government revenues. Privatization and rationalizing capital investments reduce costs.
The government is also proactively building a diversified investment portfolio that will generate higher investment returns, protecting the Kingdom’s finances against future volatility in oil prices. The signature initiatives in this are, of course, the Aramco IPO and the restructuring of the Public Investment Fund. The government is also raising debt, leveraging the country’s high credit rating and low debt-to-GDP ratio.
These two arcs do little directly to create growth in the economy. Indeed, in some sectors they create new pressures. The construction sector can no longer depend on heavy government spending. Industrial manufacturing faces increased labor costs and decreased subsidies, driving down cost-competitiveness. And the retail sector and low-value SMEs will be heavily hit by subsidy reform, VAT, and the subsequent decline in disposable incomes.
So where does growth come from? Growth will come from four key areas, all of which should have strong, positive implications for the private sector.
Cutting red tape and retooling government processes will make the economy more business-friendly and more competitive. This should have a particular impact on SMEs and entrepreneurs, who will benefit from a regulatory environment that is more supportive of their needs.
Completing and operating the many large infrastructure projects that the Kingdom initiated in the boom years such as the new King Abdulaziz International Airport, the Haramain high speed railway, the King Abdullah Port, and the Riyadh metro will provide important economic multipliers, creating opportunities in construction and operation as well as enhancing efficiency and effectiveness. Enhanced infrastructure also creates growth in other sectors of the economy such as building materials, logistics, telecommunications and travel services while increasing efficiency of trade.
The PPP model
Privatization and public-private partnerships offer particular opportunities, especially for well-established companies. Privatization has long been proven to increase productivity, enhance long-term growth and generate higher revenues. And public-private partnerships draw on the strengths of both government and the private sector: government establishes regulations, provides permits and guarantees financial resources; private enterprise deploys the most skilled personnel, manages projects and promotes efficiency.
The most significant opportunity for business, however, will depend on the willingness and ability of the private sector to pivot their activities toward new, high-growth sectors of the economy. Sectors such as minerals, infrastructure, logistics and transportation, residential construction, healthcare, insurance and leisure and tourism offer significant potential for growth by capturing latent demand in the domestic economy. They create jobs and open up opportunities for small businesses and new enterprises as well as established companies.
Many people doubt that Vision 2030 can happen. There are voices within the country and outside it who say that it is too ambitious: that Saudi Arabia lacks the resources to make it happen. But there are good reasons to accept the viability of the plan. Indeed, King Abdullah Economic City is a strong proof of concept.
As a private enterprise, KAEC is not reliant on government contracts or oil revenues. We have therefore focused over the last decade exclusively on non-oil related industries such as logistics, pharmaceuticals and food manufacturing, which are inherently aligned with Vision 2030. In light of the Vision we are now emphasizing new target growth sectors such as leisure and healthcare.
It is a testament to the potential of the non-oil economy in Saudi Arabia that, despite the many challenges, the city has thrived. We have overcome the regulatory and logistical hurdles of commercially starting a mega project on this scale. We have managed through two economic slumps. And, in only ten years, we have created a world-class port, as well as a regional manufacturing and logistics hub, attracting major global and regional companies in industries that were either nascent or non-existent in the Kingdom.
Our mission is not complete; indeed the story of KAEC is just beginning. But our example is compelling evidence of the potential of Saudi Arabia as a non-oil economy and of the ability of the private sector to be instrumental in the implementation of Vision 2030.
The future is never certain and there remain many questions that businesses must consider in the short term. What will be the response of the shale industry to the recent OPEC oil deals? How will that affect government income and spending? How will the introduction of VAT and the increase in utility costs affect consumer sentiment and spending? What do they mean for business costs and productivity?
This the new normal – challenging, uncertain and brimming with opportunity. The companies that are ready to embrace it will help shape not only their own future but the future of the nation as a whole.
Fahd Al-Rasheed is the Group Chief Executive Officer and Managing Director of Emaar the Economic City, the master developer of King Abdullah Economic City, the world’s first publicly-listed city.