Saudi Arabia's 'Vision 2030' To Transform Its Economy

Includes: KSA
by: Ati Ranjan

The oil-dependent Kingdom of Saudi Arabia has a long-term blueprint to transform itself into a diversified economy, with non-oil government revenues projected to increase six-fold to SAR1tn by 2030.

It’s an ambitious dream to transform an economy that relies on crude oil exports for more than 70% of government revenues.

Deputy Crown Prince Mohammed bin Salman’s 15-year economic plan is the boldest attempt yet in the Kingdom’s history to spur additional revenue streams amid a steep fall in commodity prices.

By Ati Ranjan, Nikhil Salvi, Samia Hazuria, and Subarna Poddar of Aranca Investment Research

Saudi Vision 2030 (full text) is built around three key themes: a vibrant society, a thriving economy, and an ambitious nation (proxy for an efficient government).

The roadmap outlines numerous commitments under each theme with tangible goals to be achieved in the next 5-15 years. The planned economic diversification emphasizes on the increased participation of the private sector, with its share of total GDP projected to rise to 65% by 2030 from less than 40% at present. The reforms would focus on key non-oil sectors including manufacturing, mining, tourism, healthcare, education, and retail. In addition, the diversification is intended at the creation of job opportunities for the Kingdom's growing workforce (approximately 50% of the population is below 25 years of age).

KSA aims to leverage its investment capabilities to become a global investment powerhouse.

A vital part of the plan encompasses the restructuring of its Public Investment Fund (PIF), which is touted to become the world's largest sovereign wealth fund post the transfer of funds from the stake sale in Arabian American Oil Company (Aramco). KSA intends to sell less than 5% stake in Aramco, the value of which is pegged around USD2-2.5tn. In addition to contributing to the PIF stake sale in Aramco and its subsequent IPO (expected to be the world's biggest IPO), the initiative would provide much-needed depth and breadth to the Saudi Stock Exchange (Tadawul). Most importantly, the PIF would provide necessary capital for the development of strategic sectors and establishing national corporations.

The plan also outlines more radical changes such as the women empowerment program to alter the Kingdom's ultra-conservative image. KSA is determined to increase the participation of women in its workforce to 30% by 2030. At present, women make up only 22% of the workforce.

The government has already begun working towards achieving its Vision 2030 with numerous transformational programs underway. Moreover, an economic council headed by the Deputy Crown Prince Mohammed bin Salman would be responsible for the implementation of the plan.

KSA is expected to release further details including economic details of the vision, a package of state budget reforms, regulatory changes and policy initiatives for the next five years known as the "National Transformation Plan", by May or early June this year.

Saudi Vision 2030 has garnered strong local support and is backed by the one of the most powerful men in the Kingdom, Prince Mohammed bin Salman. Despite having the ability and resources, the execution of the plan would be a formidable challenge for Saudi Arabia.

Vision 2030: Key Themes

Broadly, the key themes envisaged under Vision 2030 aim at a diversified economy, more open and connected society, and a smaller, but more efficient government. Each theme contains specific goals and objectives to be achieved by 2020 and 2030, with certain objectives extending and overlapping within themes.

A Vibrant Society

As written in the document: "This first theme is vital to achieving the vision and a strong foundation for economic prosperity... Our nation is the core of the Arab and Islamic worlds and represents the heart of Islam. We are confident that, God willing, we will build a brighter future, one based on the bedrock of Islamic principles. We will continue to excel in performing our duties towards pilgrims to the fullest and promote our deep-rooted national identity"

The plan outlines the following goals and commitments to attain a vibrant society:

● To rank among the top 15 economies in the world from its current position as the 19th largest economy.

● To rank among the top 10 countries on the Global Competitiveness Index from the current 25th position.

● To increase household spending on cultural and entertainment activities inside the Kingdom to 6% from the current level of 2.9%.

● To rank 25th on the Logistics Performance Index from 49th position and ensure the Kingdom is a regional leader.

● To rank 10th on the Social Capital Index from 26th position.

● To increase capacity to welcome Umrah visitors to 30mn every year from 8mn.

● To have three Saudi cities recognized among the top 100 cities in the world.

● To increase household savings as a proportion of total household income to 10% from 6%.

● To increase the ratio of people exercising at least once a week to 40% of the population from 13%.

● To more than double the number of Saudi heritage sites registered with UNESCO.

● To increase the average life expectancy to 80 years from 74 years.

● To increase women's participation in the workforce to 30% from 22%.

● To lower the rate of unemployment to 7% from 11.6%.

A Thriving Economy

As written in the document: "A thriving economy provides opportunities for all by building an education system aligned with market needs and creating economic opportunities for entrepreneurs, small enterprises, and large corporations."

The plan outlines the following goals and commitments to attain a thriving economy:

● To increase the private sector's contribution to 65% of GDP from 40%.

● To raise the share of non-oil exports in non-oil GDP to 50% from 16%.

● To increase non-oil government revenue to SAR1tn from SAR163bn.

● To increase PIF's assets to over SAR7tn from SAR600bn.

● To increase the localization of the oil and gas sector to 75% from 40%.

● To increase the contribution of SMEs to the GDP to 35% from 20%.

● To increase foreign direct investment to the global level of 5.7% of GDP from 3.8%.

● To raise the non-profit sector's contribution to the GDP to 5% from less than 1%.

● To rally 1mn volunteers per year as compared with the present 11,000.

An Ambitious Nation

As written in the document: "We will apply efficiency and responsibility at all levels. Our third theme is built on an effective, transparent, accountable, enabling and high-performing government."

The plan outlines the following goals and commitments to attain an ambitious nation:

● To rank 20th on the Government Effectiveness Index from 80th position.

● To rank among the top five nations on the E-Government Survey Index from 36th currently.

● To improve the efficiency of various government departments and establish committees to review them.

● To reduce bureaucracy and improve transparency in government programs.

The government has set optimistic goals, but is yet to announce a detailed plan to achieve these goals. However, the government has marked certain milestones that it hopes to achieve by 2020.

1 - Privatisation/Divestment

● The Kingdom plans to value state oil company Saudi Aramco at more than USD2tn ahead of the sale of less than 5% of the company through an IPO.

● The government will further develop the sophistication of investment vehicles, particularly after transferring the ownership of Aramco to the Public Investment Fund, which will become the largest sovereign wealth fund in the world. It will increase the efficiency of the fund's management and improve its return on investment, with the aim of diversifying government resources and the economy.

● Emphasis would be placed on facilitating the process of listing private Saudi companies and state-owned enterprises, including Aramco. This will require deepening liquidity in capital markets, fortifying the role of the debt market, and paving the way for the derivatives market.

● The Prince plans to transform Aramco from an oil producing company into a global industrial conglomerate.

2 - Public Investment Fund (PIF)

● At the center of the plan is the restructuring of the Public Investment Fund (PIF), which Prince Mohammed said would become a hub for the country's overseas investments, partly by raising money through the sale of shares in Aramco.

● The Kingdom would raise the fund's capital to SAR7tn (USD2tn) from SAR600bn (USD160bn).

3 - Tourism

● By improving the quality of the services offered to Umrah visitors by 2020, the plan aims to enable over 15mn Muslims per year to perform Umrah. Separately, the former member of the National Haj and Umrah Committee of the Makkah Chamber of Commerce and Industry estimated revenues generated by the Umrah season to increase to SAR200bn by the year 2020.

● The government has commenced the third phase of expansion of the Holy Mosques. It is also modernizing airports and increasing their capacity. It has launched the Makkah Metro project to complement railroad and train projects. The metro service would cater to visitors to the Holy Mosques and other holy sites. Furthermore, it has strengthened the transport network to help pilgrims complete their visit with greater ease and convenience. The plan also proposes to establish more museums, tourist and historical sites, cultural venues, and improve pilgrims' experience.

● The plan proposes to build an Islamic museum in accordance with global standards. The museum will boast of the latest methods of collection, preservation, presentation, and documentation. It will also serve as an international hub for erudition, and include a world-class library and research center.

● By 2030, the government plans to more than double the number of Saudi heritage sites registered with UNESCO.

4 - Education

● By 2030, the government plans to have at least five Saudi universities among the top 200 universities globally.

● By 2020, the government aims to ensure that 80% of parents engage in their children's school and learning activities. The government will launch the "Irtiqaa" program, which will measure how effectively schools are engaging parents in their children's education. It will establish parent-led boards in schools to open discussion forums and further engage with parents.

● The plan emphasizes on building an education system aligned with market needs, and creating economic opportunities for entrepreneurs, small enterprises, and large corporations.

5 - Small and Medium Enterprises (SMEs)

● Saudi Arabia's SMEs are minor contributors to the GDP, especially when compared with advanced economies. Therefore, the Kingdom will strive to create suitable job opportunities for citizens by supporting SME entrepreneurship, privatization, and investment in new industries.

● The government aims to create suitable job opportunities for citizens by supporting SME entrepreneurship, privatization, and investment in new industries. To help achieve this goal, it has established the SME Authority and will continue to encourage young entrepreneurs through business-friendly regulations, easy access to funding, international partnerships, and a greater share in national procurement and government bids.

● The government will strive to facilitate enhanced access to funding and encourage financial institutions to allocate up to 20% of their overall funding to SMEs by 2030.

6 - Expatriates

● The government plans to improve living and working conditions for non-Saudis by extending their ability to own real estate in certain areas, improving the quality of life, permitting the establishment of more private schools, and adopting an effective and simple system for issuing visas and residence permits.

● In a televised interview, the Deputy Crown Prince informed of plans to introduce a "green card" system within five years to allow resident expatriates in the Kingdom to have more rights, thereby improving its investment climate.

7 - Social

The government aims to achieve the following goals by 2030:

● To lower the rate of unemployment from 11.6% to 7% and increase women's participation in the workforce from 22% to 30%.

● To have three Saudi cities among the top 100 cities in the world.

● To increase household spending on cultural and entertainment activities inside the Kingdom from the current level of 2.9% to 6%.

● To increase the ratio of individuals exercising at least once a week from 13% of the population to 40%.

● To increase the share of Saudi families that own homes by 5% (from 20% currently) by 2020.

● To raise the KSA's ranking from 26 to 10 on the Social Capital Index.

● To increase the average life expectancy from 74 years to 80 years.

● To launch the National Labour Gateway (TAQAT) and establish sector councils that will determine the skills and knowledge required by each socio-economic sector.

● To expand vocational training in order to drive economic development.

● To increase household savings from 6% to 10% of the total household income.

● To work toward promoting private medical insurance to improve access to medical services and reduce wait times for appointments with specialists and consultants.

8 - Housing

● To increase the housing ownership rate by 5% until 2020. The government will introduce laws and regulations, encourage the private sector to build houses, and provide funding, mortgage solutions, and ownership schemes to citizens.

● To achieve housing coverage of more than 90% in densely populated cities and 66% in other urban zones.

9 - Subsidies and Taxes

● Subsidies for fuel, food, water, and electricity will be better utilized by redirecting them to the needy.

● The criteria for subsidies will be created based on the maturity of all economic sectors, their ability to compete locally and internationally, and their actual need for subsidies, without endangering promising and strategic sectors.

● There will be no taxes on citizens' income or wealth, or on basic goods. The government will keep prices stable over the long term and provide Saudi citizens greater economic security.

10 - Military

● To cater to half of the country's military needs locally to create more job opportunities for citizens and retain more resources in the country.

● To localize over 50% spending on military equipment by 2030.

11 - Diversification of Economy

● To privatize state-owned assets, including leading companies, properties, and other assets.

● To provide better opportunities for partnerships with the private sector through three pillars: the KSA's position as the heart of the Arab and Islamic worlds, the country's strategic geographical position, and leading investment capabilities.

● To localize the renewable energy and industrial equipment sectors, and generate 9.5 gigawatts of renewable energy.

● To create tourist attractions, improve visa issuance procedures for visitors, and develop historical and heritage sites.

● To achieve a digital economy and boost the technology sector.

● The mining sector is expected to reach SAR97bn by 2020. The government will provide incentives to encourage companies to explore and develop the Kingdom's mineral resources. Furthermore, it aims to create 90,000 jobs in the sector.

● To localize the oil and gas sector, double gas production, and construct a national gas distribution network.

● To increase the contribution of modern trade and e-commerce to the retail sector to 80% by 2020 and create jobs in the sector.

● To partner with the private sector to develop quality telecom and IT infrastructure, especially high-speed broadband.

● To increase telecom and IT coverage within and around cities.

● To increase foreign direct investment from 3.8% to the global level of 5.7% of the GDP.

● To increase the private sector's GDP contribution from 40% to 65%.

● To raise the ranking on the Logistics Performance Index from 49 to 25 and ensure that the Kingdom is a regional leader.

● To boost the share of non-oil exports in non-oil GDP from 16% to 50%.

● To create special economic zones in King Abdullah Financial District with visa exemptions and direct links to the King Khaled International Airport.

Other Qualitative Goals

● To improve the quality of services by privatizing government services, especially in healthcare, improving the business environment, attracting the finest talent and best investments globally, and leveraging the country's unique strategic location.

● To create a conducive environment for citizens, the private sector, and the non-profit sector to assume responsibilities, face challenges, and seize opportunities.

● To encourage citizens to lead a healthy lifestyle and promote physical, psychological, and social well-being.

● To enhance the role of government funds while attracting local and international investors and create partnerships with international entertainment corporations.

● To provide land for cultural and entertainment projects and support talented writers, authors, and directors.

● To encourage participation in sports and athletic and work in partnership with the private sector to establish additional dedicated facilities and programs.

● To promote safety and security in cities, drive infrastructure development, and provide high-quality services such as water, electricity, public transport, and roads.

● To ensure waste management, establish comprehensive recycling projects, reduce pollution, and tackle desertification.

● To promote optimal use of water resources by reducing consumption and utilizing treated and renewable water.

● To protect and rehabilitate beaches, natural reserves, and islands, and open them to the general public.

● To review regulations to simplify the establishment and registration of amateur, social, and cultural clubs.

● To launch 'Daem', a national program to enhance the quality of cultural activities and entertainment.

● To establish more than 450 registered and professionally organized amateur clubs by 2020 for cultural activities and entertainment events.

● To move from the current position of 19 to the top 15 economies of the world.

● To push for a common GCC market; unify customs, economic, and legal policies; and construct shared road and railway networks.

● To collaborate with consumers, food manufacturers, and distributors to reduce resource wastage.

● To create effective non-profit organizations and raise the non-profit sector's contribution to the GDP from less than 1% to 5%.

● To rally 1mn volunteers per year (compared with 11,000 now).

Means to Achieve Targets

The government has not outlined a step-by-step plan to achieve its 2030 goals.

It has however, announced 13 programs to achieve the targets. Some of the programs are already underway.

Programs Underway

There are seven key initiatives currently underway that will further KSAs efforts toward their 2030 goals.

The Government Restructuring Program

The Saudi government has started eliminating supreme councils. Furthermore, it has established the Council of Political and Security Affairs and the Council of Economic and Development Affairs, which have expedited strategy development and decision-making, and resulted in better governance. The government plans to continue with its restructuring policy.

The Strategic Directions Program

The government has reviewed the existing roles of various government agencies to align them with the country's future economic and social needs. This was done on the basis of detailed studies and benchmarks as well as a comprehensive analysis of each agency's programs, plans, and relevant performance indicators.

The Fiscal Balance Program

The government has formed committees and new departments to review relevant regulations and capital expenditure, their approval mechanism, and measurable economic impact. It plans to continue diversifying non-oil revenues in the coming years by introducing new measures.

The Project Management Program

In order to coordinate its efforts toward reforms and transformation, the government has adopted an effective approach to project management and established expert Project Management Offices (PMOs) under the Council of Economic and Development Affairs and other government agencies. It has also set up a central delivery unit.

The Regulations Review Program

The government reviewed existing laws and enacted new laws in the past year, including company laws, non-governmental organizations' law, General Authority for Endowments (Awqaf) law, and the law concerning fees on non-used land. It plans to continue this process to ensure that the country' laws are in line with the Kingdom's priorities.

The Performance Measurement Program

The government has established the Center for Performance Management of Government Agencies to institutionalize the principle of performance measurement for the evaluation of all government agencies, their programs, initiatives, and executives. In addition, it has built performance dashboards to promote accountability and transparency.

Planned Programs

There are also seven key initiatives that are planned underway that will further KSAs efforts toward their 2030 goals.

The Saudi Aramco Strategic Transformation Program

The government is working on a transformation program, which will position state-run Saudi Aramco as a leader in other sectors besides oil.

The Public Investment Fund Restructuring Program

Following the restructuring of the Public Investment Fund, the government is working on refining its investment capabilities and enabling the fund to manage a broader portfolio of current and new assets, in a bid to convert it into the world's largest sovereign wealth fund.

The Human Capital Program

The government plans to launch a program for nurturing human talent. The program will assess the efficiency of civil services and support government agencies with regard to staff, assessments, consultations, and strategic partnerships related to human capital.

The National Transformation Program

Under the National Transformation program, government agencies are working on identifying partnership opportunities with the private sector as well as innovative administrative and funding approaches.

The Strategic Partnerships Program

The Saudi government is working to build new strategic partnerships with the Kingdom's economic partners around the world, with the aim of connecting with three continents (Asia, Europe and Africa) and enhancing exports.

The Privatization Program

The government is working on determining additional sectors suitable for privatization, with the aim of creating a comprehensive privatization program by employing international best practices and enabling the transfer of knowledge.

The Program for Strengthening Public Sector Governance

The government aims to restructure government agencies on a continuous basis to eliminate redundant roles, unify efforts, streamline procedures, and define responsibilities. A strategic management office will be established under the Council of Economic and Development Affairs to facilitate coordination between government programs and ensure their alignment with the national vision. A Decision Support Center will be established at the Royal Court to support decision-making through analytical and evidence-based information and reports.

Although the KSA Vision 2030 is the most comprehensive program aiming to overhaul the country, it is not the first attempt. In the past, smaller incremental changes have already been undertaken on a regular basis, making it a continuum of reforms.

Huge Step in the Right Direction; Execution Remains Key

Deputy Crown Prince Mohammed bin Salman foresees the Kingdom to "live without oil by 2020".

With the launch of Vision 2030, KSA has taken a significant step in the right direction. Nonetheless, the timing and pace of reforms to achieve the long-term objectives is uncertain. Moreover, the Kingdom has been criticized in the past for slow reforms. We expect the path to be extremely challenging with several roadblocks, especially for the cultural reforms aimed at changing the ultra-conservative social structure; the implementation of these reforms is expected to result in significant backlash from the conservative parts of the Saudi society. However, persistently low oil prices and a rapidly rising population provide a strong impetus to the government to diversify its economy away from crude oil exports.

Several positive developments have recently been recorded in KSA, including a cabinet reshuffle, wherein princes who held ministerial rank were replaced with civil servants with PhDs and other degrees from Western universities. Moreover, the Deputy Crown Prince demonstrates a strong drive for change, which could help turn Vision 2030 into a reality and enable KSA to make its mark in modern history. Nonetheless, the overall transformation plan would require sustained long-term commitment from the government. The actual transformation of the Kingdom would depend on efficiency, timing, and pace of implementation of the plan.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The article is a joint effort by Nikhil Salvi, Manager, Aranca Investment Research along with Samia Hazuria and Subarna Poddar; Asst. Managers, Aranca Investment Research.