Saudi Vision 2030: A breakdown of the sweeping reforms

Published April 26th, 2016 - 01:00 GMT
Vision 2030's emphasis on privatization of state assets is designed to help wean the economy away from oil dependency. (File photo)
Vision 2030's emphasis on privatization of state assets is designed to help wean the economy away from oil dependency. (File photo)

The unprecedented reform effort announced by Saudi Deputy Crown Prince Mohammed Bin Salman would set the stage for the kingdom to emerge as a major economic powerhouse, with lower dependence on oil, says an Al Rajhi Capital report.

The report entitled “Saudi Vision 2030 - Comprehensive package of reforms” released by Al Rajhi Capital, a company authorized to engage in securities activities in Saudi Arabia, summarizes the highlights of the Saudi Vision 2030 document released yesterday (April 25).

As per the document, government emphasizes priority to fully support major national companies, which have already gained a leading market share, especially in the fields of oil, petrochemicals, banking, telecommunications, food, health care and retail.

Aramco transformation and PIF (Public Investment Fund): The government aims to transform Aramco from an oil producing company into a global industrial conglomerate. Further, less than 5 per cent stake in Aramco (value estimated to be between $2.0-2.5 trillion) is envisaged to be sold via an IPO, as per media sources.

The plan, as detailed before in media interviews by the Deputy Crown Prince, is to transform the PIF into the world’s largest sovereign wealth fund by transferring Aramco’s ownership to it. PIF will also likely target global investment opportunities, in-line with the vision to maximize investment capabilities by participating in large international companies and emerging technologies. Public Investment Fund’s assets are also targeted to reach over SR7 trillion ($1.86 trillion).

Privatization: The thrust on Privatization will achieve multiple objectives of the Vision 2030 document. Apart from improving transparency and governance, the proceeds from Privatization will also aid the Kingdom’s fiscal consolidation efforts over the medium term, in our view. We believe this is an important step and can open up significant opportunities for businesses, as well as improve the efficiencies of such services in the long term. Further, backed by privatization push and also regulation reforms, the private sector’s contribution is targeted to reach 65 per cent of GDP (from 40 per cent currently).

Religious tourism: Religious tourism is given strong emphasis, which is likely to help allied sectors, primarily aviation, hospitality, food etc. Focus on Umrah will help companies which have a stronger presence in Makkah. Over the last decade, expansion of the Two Holy Mosques has led to a tripling in the number of foreign Umrah visitors, reaching 8 million in 2015.

The vision is to increase annual capacity to 15 million by 2020 and 30 million by 2030. To facilitate this, a third expansion of the Two Holy Mosques has been launched apart from modernizing and increasing the capacities of airports. Further, Makkah Metro project has already been initiated.

Small and medium-sized enterprises: SMEs in the Kingdom are not yet major contributors to the Kingdom’s GDP as SMEs contribute only 20 per cent of GDP whereas in advanced economies, this contribution can reach up to 70 per cent. To attract the necessary skills and funding, the government plans to remove the existing barriers.

Financial institutions would be encouraged to allocate up to 20 per cent of overall funding to SMEs by 2030. The government aims to increase SME contribution to 35 per cent of GDP. This should also help the government’s drive to reduce overall unemployment to 7 per cent from 11.6 per cent currently. Further, women’s participation in the workforce is targeted to improve to 30 per cent (22 per cent currently).

Localization of defence and allied industries: The government plans to manufacture 50 per cent of military needs within the Kingdom. The Kingdom is the world’s third biggest military spender, and given a low base (only 2 per cent of this spending is within the Kingdom), it opens up massive opportunities in the sector.

Currently, the industrial sector servicing national defence is limited to only 7 companies and 2 research centres. The intention is to start developing higher value and more complex industries locally, which could likely participate and replace large foreign contracts in our view. Not just defence, the government will also work towards localizing renewable energy and industrial equipment sectors.

Leveraging leadership in Oil and Gas: The Kingdom plans to leverage its global leadership position and expertise in oil and petrochemicals to invest in the development of adjacent and supporting sectors. A dedicated city to energy will be developed and gas production is targeted to be doubled, alongside construction of national gas distribution network.

Mining: The mining sector offers significant potential for growth and job creation. The Kingdom has significant deposits of important minerals such as uranium, gold, phosphate, aluminium, copper etc which can be effectively developed going forward. The government plans structural reforms to boost private sector investment in the sector. The Mining Industry is targeted to contribute SR97 billion to the GDP by 2020, and create 90,000 jobs.

Renewable energy: Domestic energy consumption is set to increase 3x by 2030. To satisfy the increase in energy demand, the government is looking to tap renewable energy potential in the Kingdom. The arid and sunny climate makes it naturally suitable to harness solar energy. Overall, 9.5GW of renewable energy is targeted by 2030, supported by localization of the renewable energy value chain.

Subsidies: The plan is to raise the efficiency of the government’s support system and make the best use by redirecting it and targeting eligible citizens and economic sectors. The free market rates over the long term will improve productivity and competitiveness among utility companies.

Development of capital markets: To aid the Vision 2030’s focus on improving Private sector’s contribution, strong capital markets will be crucial. Towards this end, the Vision document lays required emphasis on developing the Capital markets (both equity and debt markets) to make them more liquid, and possibly introduce derivatives. This will result in a strong capital market backbone which opens up a key source of funding for companies.

Improved health care services: The government is planning to privatize public hospitals to increase efficiency and productivity. Further plans to grow and improve the insurance base, reduce patient waiting time, and train future doctors and specialists are underway. The public sector will focus on monitoring and law making, promoting preventive care, fighting diseases and encouraging citizens to make use of primary care as a first step.

Retail: The tremendous growth of the retail sector over the past decade (over 10 per cent CAGR) makes it employ about 1.5 million workers, of which only 0.3 million are Saudis. Further, traditional retail still dominates 50 per cent of the market as compared to just 20 per cent in a number of GCC countries.

This provides a significant headroom to increase the penetration of modern trade and ecommerce channels (targeted to reach 80 per cent by 2020), which should also help employ additional 1 million Saudis in the sector.

Entertainment: There are likely to be partnerships with international entertainment corporations to prop the sector which is not very active in the Kingdom. By 2020, the government plans to have more than 450 registered and professionally organized amateur clubs providing a variety of cultural activities and entertainment events. “We believe companies such as AlHokair group which already have a presence could have an early advantage over the others,” Al Rajhi Capital said in the report.

The vision is to increase household spending on cultural and entertainment activities inside the Kingdom from the current level of 2.9 per cent to 6 per cent. Also, the plan is to increase the ratio of individuals exercising at least once a week from 13 per cent of population to 40 per cent.

Housing: While 47 per cent of Saudi families own their homes, the government aims to increase this to 52 per cent by 2020. The government also plans to allow non-Saudis to own real estate in certain areas – which would boost demand in those areas. Non-Saudi’s comprise 1/3rd of population and the high income segment among them may likely capitalize on this opportunity, which should result in strong demand.

Telecoms and technology: Emphasis has been laid on expanding the coverage and capacity of high-speed broadband, especially targeting increased penetration within and around cities. Ninety per cent housing coverage in densely populated cities and 66 per cent in other urban zones is targeted. We believe the leading telecom providers e.g. STC, are well-placed to benefit from the broadband push.

Logistics: The Kingdom looks to leverage its geographical advantage, by developing itself as a key hub connecting the three continents of Asia, Europe and Africa. We believe the King Salman Bridge linking Egypt and Saudi Arabia will also play a major part in this. The government will establish special zones to boost the sector.

Raising share of non-oil exports: The Kingdom aims to increase the share of non-oil exports from 16 per cent to 50 per cent of non-oil GDP. Following are some key milestones targeted:

•    Increase non-oil government revenue from SAR163 billion to SAR1 trillion.
•    Raise the non-profit sector’s contribution to 5 per cent of GDP from less than 1 per cent
•    To increase the localization of oil and gas sectors from 40 per cent to 75 per cent

The National Transformation program (NTP): The NTP will majorly focus on restructuring various government agencies, to make them better aligned to deliver on Vision 2030 and other national priorities. Identification of innovative administrative and funding approaches and opportunities for partnering with private sector are part of the programme.

Conclusion

“We believe that the Vision 2030 document is comprehensive and outlines proposals which are designed to wean the economy away from dependence on oil,” said the Al Rajhi Capital report.

“The emphasis is on privatization of state assets which will result in improved transparency, also supporting the fiscal arithmetic at the same time. We believe the large caps, which have ability to be the first entrants in areas potentially opening up to opportunities will be key beneficiaries.”


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