Malaysia has done it. Norway has done it. Chile has done it. But can the ambitious Saudi Vision 2030 match the same achievement – turning abundance of natural resources into a diversified and robust economy?
The vision is important in three ways. It is crucial for the long-term viability of the Saudi economy. It underpins the kingdom’s ability to compete with its rivals through an extended period of low oil prices. And it lays down a challenge to similarly oil-dependent states, in its immediate region and globally.
The plans for the state oil giant Aramco have attracted the most attention. Its ownership will be transferred to the Public Investment Fund (PIF), with 5 per cent sold in an initial public offering, whose details remain to be clarified. Aramco is valued at more than US$2 trillion, but this is only possible if the taxes the company pays are removed or restructured, so that all revenues flow through the PIF.
This would bring a radically higher level of transparency to Aramco, greater than any other Middle Eastern national oil company. But the idea in some giddy media that the fund could then buy Apple, Google, ExxonMobil or other leading listed companies is clearly impossible unless Saudi Arabia would give up more ownership of Aramco in return – an unlikely prospect.
Gas production will be doubled, although the fields and reserves to support this are not clear and a large part may have to be high-cost tight and shale gas. Further developing petrochemicals and mining are sensible extensions of current plans, where the Kingdom has clear advantages in feedstock and experience.
The target of installing 9.5 gigawatts of renewable energy by 2030 should be easily achievable, but needs early and tangible progress where previous schemes have stalled.
Overall success will obviously hinge on the growth of the alternative industries and their contribution to a robust non-oil economy. This involves numerous tricky balancing acts: maintaining public support while cutting subsidies and government jobs; keeping domestic big business onside while opening up the economy; attracting foreign investment while increasing national employment, energy prices and taxes.
It is encouraging that the plan does not seem to repeat one of the major pitfalls of previous diversification efforts: pouring vast amounts of oil revenues into grandiose state-funded showpieces. Weeds now grow and spiders weave their webs in abandoned industrial zones in Venezuela, Nigeria and Iraq. Saudi bureaucracy will have to adjust from hindering visitors and investors to helping them, and the education system will have to be radically overhauled to provide a motivated workforce with the right skills. As a Saudi entrepreneur told Reuters: “I am concerned by the education transformation plan. If it is not at the top of the list, why not?”
The emphasis on export-orientated industries is vital: they are the core for every economic miracle in East Asia. Oil services and engineering do not get a specific mention, though: Saudi Arabia should have an advantage here, a sector which has been a large part of Norway’s success.
A credible economic plan helps Saudi Arabia fight a long oil price campaign, particularly important after the debacle in Doha. Budget cuts have already slowed the burning of its foreign exchange reserves. Competitors – whether Russia, Iran or shale oil companies – are more likely to come to the negotiating table or fold if they believe they cannot outlast Riyadh.
And a real economic transformation in the country lays down the gauntlet to other oil-producing states near and far. GCC neighbours will have to up their game, but can also gain by co-operating effectively. Competition between Iran and Saudi Arabia will extend to the field of foreign investment. The stakes for failure are very high, but even a partial success will reshape the region.
Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis.
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