As Saudi Arabia works to diversify its oil-dependent economy, economic diplomacy is needed to woo foreign investors, Gus Olwan writes.
In October 2017, Saudi Arabia hosted a major investment conference to highlight efforts to diversify its oil-dependent economy and to present its new plans to build the resort city of Neom on the Red Sea – a project worth US $500 billion.
The future city will span over 26,500 square kilometres, stretching along the northwest coast of the country on the Red Sea, reaching north into Jordan and across the sea via a bridge into Egypt.
The conference was an opportunity for Saudi Arabia to convince the senior executives of global banks and investors – such as Bank of China, Mizuho, Citigroup, and Goldman Sachs – to invest in Saudi Arabia. At a time when the kingdom is going through major economic and social changes, there are many questions about the ability of Riyadh to execute its ambitious plans.
The Saudi Vision 2030 – the country’s blueprint for a post-oil economy – requires the world’s largest petro-state to reform its economy so that the government is not the only permissible engine for economic growth in the kingdom.
While the Saudi economy will remain structurally insolvent in the short term, the potential for efforts made by the government to have a positive medium and long-term impact should not be underestimated. Such efforts include the implementation of a bankruptcy law and the Financial Sector Development Program – both of which were designed to create a better regulatory environment for foreign investors.
To make Saudi Arabia an attractive business hub for foreign investors and to cement economic diplomacy efforts at a time of regulatory environmental shifting, four major pillars are needed.
First, an investment treaty is necessary to attract Foreign Direct Investment (FDI) to the Saudi market. The importance of such a treaty lies in its legal infrastructure, which stipulates the protection of investors from any legal disputes. It would enhance the transparency of the law governing the running of businesses in the Saudi market and would set a range of dispute mechanisms for future foreign companies wishing to operate in the Kingdom.
Such investment treaties require collective efforts from different ministries and agencies, including the Ministry of Foreign Affairs, the Ministry of Interior, the Ministry of Commerce and Investment, the Ministry of Economy and Planning, and the Ministry of Finance. At the same time, tax conventions are also needed to eliminate international double taxation.
Second, Public-Private Partnerships (PPPs) are vital to the development of an investment base in Saudi Arabia. The essence of PPPs is that they allow the government and the private sector to work together and share resources on the Kingdom’s key projects – they also help keep Saudi money in the country.
To this end, Saudi Arabia needs a National PPP Policy Framework to undertake and consider projects in excess of SAR 100 million (US $26.7 million). A framework should include a new approach to planning, funding and implementing the Kingdom’s future business needs, and should be made available online for foreign investors.
Third, the government needs to reshape the role of Saudi diplomatic missions abroad to better promote trade and attract investment. Diplomatic missions should demonstrate their capacity to advise both the government in Riyadh and the Saudi business community on key political, commercial, education, regulatory, and strategic developments undertaken in host countries.
An essential part in this process is to have capable, skilled, and well-trained diplomats in these key areas of expertise. They must leverage all available resources to build shared interests with the host countries through ministers, government officials, the business community, media representatives, think tanks, universities, and community groups.
Finally, the Saudi government should work towards establishing a Free Trade Area (FTA) in the Arab world. This will accelerate the expansion of future industries in the post-oil Saudi economy and benefit most of the countries in the region.
The details of an agreement to ease or eliminate tariffs, facilitate market access, and find common ground on investment regulations, agricultural subsidies, intellectual property rights, dispute settlements, and trade in services, will require a marathon of negotiations.
In this context, Saudi Arabia should identify its goals and draw up a strategy for engaging in the rapidly evolving trading system across the Arab region in a manner that would ensure their ability to pursue human development objectives and achieve their economic targets, while furthering regional economic integration. An FTA in the region will serve the approximately 411 million people who generate US $2.59 trillion in GDP as of 2017. The FTA would give the region a competitive advantage when competing in global trade, particularly with the European Union (EU) and North American Free Trade Agreement (NAFTA) trading blocs.
These four policy pillars will have major implications for the future of the Saudi economy. The critical issue is to what extent economic reform will help achieve the objectives of the blueprint: to create a viable economy for the post-oil era; and to provide productive employment for population growth.
For Saudi Arabia to succeed in its economic diplomacy, a new drive is needed to bring about better financial planning, legal reform to attract FDI, diplomats skilled at forging economic collaboration with host countries, and regional cooperation.
Plans for a new resort city may have impressed investors in the short term, but the blueprint for long-term reform will be where the rubber really hits the road.