Why the US business world is closely watching Saudi reforms

Saudi Deputy Crown Prince Mohammed bin Salman's visit to the United States this week will include meeting with senior American officials and business executives. For the young head of the Saudi Council of Economic and Development Affairs, explaining and marshaling support for the kingdom’s ambitious reform plans is important. Indeed, a chief goal of his trip will be to convince American companies to invest in Saudi Arabia.

The deputy crown prince’s visit comes a week after the Saudi cabinet approval of National Transformation Program (NTP) 2020, Saudi Arabia’s five-year blueprint for reforming and injecting new life into the kingdom’s public institutions. The plan is an amalgam of strategic objectives, performance targets, and specific initiatives. In particular, it aims to greatly expand the private sector while simultaneously extending localization efforts.

On the one hand, the plan’s emphasis on exploiting the private sector and improving the business environment is clearly a boon to foreign firms. The kingdom seeks to add more than 450,000 nongovernment jobs by 2020, create new investment opportunities worth $613 billion, and more than double FDI from $8 billion to $19 billion. Saudi Arabia has also announced a number of key reforms, which, if successful, will help make conducting business in the kingdom more predictable and transparent. Targets outlined in the NTP include reducing the average resolution time for commercial cases by 30 percent, cutting the percentage of delayed projects from 70 percent to 40 percent, and slashing the time required to issue work visas for foreign employees by two-thirds.

Saudi Arabia has already announced plans to speed up the visa process for investors. It also aims to improve its rank in the World Bank’s Ease of Doing Business Index to 20th. After a feverish push last decade to make it into the top ten, Saudi Arabia peaked at 11th in 2011 before plummeting to 82nd in 2016 (in part because of new World Bank methodology). If met, all of these targets would make foreigners more likely to invest.

Localization and reduced subsidies

However, a focus on localization and reduced subsidies complicates the picture for foreign investors who have long flocked to Saudi Arabia and other Gulf states as bastions of cheap imported labor and subsidized utilities. The NTP calls for increasing local content’s share of total public and private sector spending from 36 to 50 percent and increasing the percentage of employment localization in the private sector from 19 to 24 percent. It also seeks to reduce non-oil subsidies by a fifth.

These efforts are in addition to a number of sector-specific localization targets. Minister of Labor Mufrej al-Haqbani said last week, “There is no strategic target to reduce the number of working expatriates,” but strategic intentions are clear. In the past several years, the government has undertaken efforts to expel large numbers of undocumented foreign workers and has cracked down on tasattur businesses illegally run by foreigners in the name of Saudis. These recent efforts are unlikely to affect large foreign firms operating in the kingdom, but aggressive new localization targets might.

In addition to the transformation program, Mohammed bin Salman will also be keen to address strategic partnerships, privatization, Saudi Aramco’s transformation, and the restructuring of the Public Investment Fund. In fact, some changes in the approach of the Public Investment Fund have already been seen. It recently invested $3.5 billion in the ride-sharing service Uber. This massive investment is part of the fund’s plan to increase its share of overseas holdings to 50 percent. The Uber investment indicates that Riyadh is becoming less conservative in its management of overseas investments, a trend likely to continue.

I have written previously about some of the challenges that might impede the implementation of Vision 2030. Foreign firms should keep these challenges in mind. And in light of the new five-year goals, a central question is how the kingdom will balance its push for private sector expansion and foreign investment against serious efforts to expand localization. But while business leaders are right to remain skeptical, they should also pay close attention to the deputy crown prince’s statements, which will offer clues about how best to engage the kingdom in the months and years to come. Firms willing to assist with prominent Saudi initiatives and possibly even shape their implementation will have a clear advantage and will be in a better position to benefit from some of the many opportunities in Saudi Arabia.