The Importance of State-Owned Enterprises in Saudi Arabia
For many companies interested in doing business with Saudi Arabia, or companies who already have business interests in the Kingdom, understanding state-owned enterprises plays a key role in developing strategic business partnerships.
Table of Contents
- What Is a State-Owned Enterprise?
- State-Owned Enterprises in Saudi Arabia
- The Role of State-Owned Enterprises in Saudi Arabia
- Key Pressures Facing the Kingdom
- Notable Saudi Arabian State-Owned Enterprises
- How State-Owned Enterprises Are Changing in Saudi Arabia – the Diversification of the Economy via the Vision 2030 Initiative
- What This Means for Foreign Businesses Interested in Doing Business With Saudi Arabia
What Is a State-Owned Enterprise?
A body formed by any government through legal means so it can take part in a commercial venture qualifies as a state-owned enterprise (SOE). SOEs are usually created by countries that want to focus on natural resources and the extraction sector so they can build the country’s capacity to participate in a potentially lucrative field.
In many countries with an abundant supply of natural resources, such as oil and gas, the state will own a stake in companies that produce these items locally. SOEs will often offer operating licenses to form partnerships with countries from around the world. These partnerships can generate revenue on a production-sharing basis or by royalties.
In some countries, SOEs are also known as government-owned corporations. These corporations should not be confused with listed companies whose stock may be partially owned by a government. While both entities involve a government that owns shares, private individuals own and operate listed companies. In contrast, governments run state-owned corporations.
SOEs are a common commercial instrument of governments around the world. For instance, the United States Postal System (USPS) is an SOE, as are the well-known mortgage companies Freddie Mac and Fannie Mae. You can find SOEs in countries as diverse as China, South Africa, Canada, Britain, France and Norway. When SOEs are well managed and used properly, they can encourage economic development and promote solid growth.
Saudi Arabia is one of the top 20 economies in the world. While its vast oil reserves generate much of its wealth, it is increasingly looking to diversify its economy. To encourage growth and development, the Saudi Arabian government has created many significant SOEs over the years, some of which are extremely well known. These include:
- Saudi Aramco, the world’s largest oil company
- Saudi Basic Industries Corporation (SABIC)
- Saudia, the Kingdom’s national airline
- Saudi Railway Company (SAR), the Kingdom’s national railway carrier
- Saudi Arabian Military Industries (SAMI)
- Saudi Aerospace Engineering Industries (SAEI)
- National Agricultural Development Company (NADEC)
The Role of State-Owned Enterprises in Saudi Arabia
By creating these important SOEs, Saudi Arabia has gained a great deal of influence in critical industries, particularly ones that concern its natural resources. The result has been immense wealth generated for the Kingdom. Saudi Arabia’s SOEs have played a particularly vital role in establishing the Kingdom’s presence in the extraction of its natural resources such as oil, gas and minerals. It is estimated that Saudi Arabia’s crude oil reserves are perhaps the largest in the world. The Kingdom can produce about 10.7 million barrels of oil a day.
SOEs also provides several other important economic advantages to the Saudi Arabian government.
1. Financial Benefits
Saudi Arabia’s oil reserves provide the vast majority of the Kingdom’s GDP.
2. Increased Monitoring
Since the Saudi Arabian government exerts broad control and influence over their SOEs, they have a much greater ability to monitor the growth and development of each SOE and its role in a global sector, whether that be petroleum, minerals or transportation.
3. Increased Capacity
One reason that governments start SOEs is that they often do not have the capacity or the knowledge of how to develop critical natural resources. For instance, several American oil companies originally helped establish Saudi Aramco and as Saudi Arabia develops core competencies in many of these industries, this reduces their dependency on foreign partners which results in even more wealth generation for the Kingdom.
4. Speed to Market
It can often take private industry several years or even longer to effectively develop a critical sector of an economy. Saudi Arabia developed SOEs to build important development roles and establish vital economic sectors quickly. A good example of this in Saudi Arabia is the Saudi Arabian Military Industries SOE, created in 2017 to help develop world-class military products and services for the Kingdom and its allies.
When Saudi Arabia creates an SOE to help an underdeveloped sector, it can build up those sectors quickly by exerting government influence over significant decisions.
Key Pressures Facing the Kingdom
Despite the success of many of the Kingdom’s SOEs, Saudi Arabia has recently faced some turbulent economic storms. Perhaps the most consequential was the dramatic drop in oil prices in 2015.
At first glance, businesses interested in developing economic ties with Saudi Arabia, or strengthening the ones they already have, may have wondered about some of the decisions the Kingdom has made over the past few years in regard to the price of oil.
In 2014, the price of a barrel of oil was as high as $115. By 2015, that price had fallen as low as $35 a barrel.
Several factors caused the collapse. Since the price of a barrel of oil was so high, and global interest rates relatively low at the same time, this meant that companies engaged in oil extraction processes such as fracking or oil sands could make a profit. Normally the price of fracking or oil sand production is quite high per barrel. Additionally, Iran was now selling to the world again after sanctions were lifted as a result of the Iranian nuclear agreement, and oil from other countries was also in plentiful supply. Oil flooded the market, and the global oil supply began to exceed the global oil demand by almost 1 million barrels a day.
This meant that the global supply of oil continued to grow and the price of a barrel of oil plummeted. This had a sharp economic effect on oil-producers such as Saudi Arabia and led to large fiscal deficits since the government developed much of the Kingdom’s budget with the expectation that oil would be selling somewhere in the neighborhood of $100 a barrel.
Nevertheless, the Kingdom did not reduce its oil production, causing speculation over why Saudi Arabia continued to produce oil at previous levels.
As former U.S. Ambassador to Saudi Arabia Chas Freeman pointed out in remarks on to a panel at the Center For The National Interest in Washington, there was a plan behind these actions. By maintaining production levels, Saudi Arabia made it harder for competitors in other areas to flourish. In Saudi Arabia, the price of producing a barrel of oil is about $5. So even when the price was relatively low, Saudi Arabia was still making a significant profit from its oil sales. This was not the case for companies developing oil sands or engaged in fracking, where costs can run as high as $70 a barrel for production — and that does not include the cost of transportation for countries developing oil sands.
While the low price of oil did hurt Saudi Arabia economically in the beginning, oil prices have since stabilized in the $60 to $80 range, and Saudi Arabia continues to make a profit. There were other advantages that Saudi Arabia saw from the low price of oil, argued Freeman, including that most of the countries adversely affected by these low prices were Saudi Arabia’s competitors or enemies, such as Iran. Meanwhile, lower oil prices helped Saudi Arabia develop markets in rising economies like India and China. Saudi Arabia already sells two-thirds of its oil production to Asian countries.
So in the end, the collapse in oil prices worked to Saudi Arabia’s advantage. It helped to constrain the growth of future oil supplies, undermined the development of oil alternatives for the time being and preserved Saudi Arabia’s market share. And, perhaps more importantly, it maintained Saudi Arabia’s prestige.
Perhaps a more serious problem for Saudi Arabia has been the high unemployment rate among the Kingdom’s citizens, particularly young citizens. This was, to a degree, one of the unfortunate aspects of the drop in the price of oil. Saudi Arabian companies became reluctant to bring on new hires. Also, many businesses in Saudi Arabia hire expatriates from other countries because they will work for much lower wages. This means that not enough Saudi Arabian citizens are considered for jobs in the private sector. The unemployment rate among citizens in Saudi Arabia reached as high as 12.9% in 2018.
Saudi Arabia hopes to change this equation and has made reducing the unemployment rate a key part of its Vision 2030 plan. The Kingdom plans to generate over 450,000 private sector jobs by the year 2020 and lower the unemployment rate to just 7% by 2030.
Notable Saudi Arabian State-Owned Enterprises
Of all the SOEs in Saudi Arabia, these are the five most noteworthy.
1. Saudi Aramco
Saudi Aramco is the largest oil company in the world. It has annual revenues of about $465 billion. Revenues from Saudi Aramco account for about 85% to 95% of the Saudi Arabian government’s annual budget. While Saudi Arabia very much wants to diversify its economy, there is little doubt that oil will remain the most significant revenue engine in the Kingdom for the foreseeable future.
Standard Oil and the Texas Oil Company (Texaco) founded the Arabian American Oil Company or Aramco in 1944. Over the years Saudi Arabia gradually bought out American-owned companies, and since 1980, the Saudi Arabian government has wholly owned Saudi Aramco.
The scale of the Kingdom’s oil output and its role as one of the founders of OPEC gives it enormous influence in energy markets. For many years, protecting the oil reserves in Saudi Arabia and its Gulf neighbors has been a top foreign policy of the United States government.
SABIC is a state-owned enterprise originally developed in 1975 to find a use for the byproducts of oil and gas production in the Kingdom and to bridge the industrial gap between eastern and western Saudi Arabia. It is now the third largest chemical company in the world, employing more than 34,000 people in 50 countries.
SABIC is a joint government/private sector company with 70% of the shares in the company owned by the government and another 30% traded on the Saudi Arabian stock exchange. It has four strategic business units – petrochemicals, agri-nutrients, specialties and metals.
Recently, Saudi policymakers decided to merge SABIC and Saudi Aramco in the near future. The reason for the merger partially lies in the Saudi decision to sell shares in Saudi Aramco by 2021. This meant, however, that Aramco and SABIC could compete in downstream petrochemicals, a prospect which was not viewed positively in the Kingdom.
In March 2019, Saudi Aramco announced it would buy a majority stake in SABIC for $69.1 billion.
Saudia began as a gift from an American president. It was established in 1945 with a single twin-engine Dakota (DC-3) that President Franklin D. Roosevelt had previously gifted to King Abdulaziz. As of 2019, Saudi Arabia possesses 150 aircraft, including some of the top jetliners in the world from Airbus and Boeing. As an SOE, Saudia benefits from the discounts it receives on jet fuel from Saudi Aramco.
One of the largest airlines in the Middle East, Saudia’s results from the first quarter of 2018 showed that its seat capacity had grown by 9%, that it had a 19% increase in international customers and that it is currently carrying 8.3 million guests a year. It operates to 89 destinations in four different continents and is one of the main means of transportation for those who wish to go on the Umrah or Hajj pilgrimages.
As part of its SV2020 Transformation Strategy, it launched a subsidiary flyadeal in 2016.
Saudia was named “The World’s Most Improved Airline” in 2017 by SkyTrak and plans to have 200 airplanes in operation by 2020.
4. Saudi Railway Company
An SOE created in 2006, Saudi Railway Company moved 9 million tons of freight last year. Company officials told delegates at a meeting in Riyadh in September 2018 that they plan to turn the Kingdom into a world-renowned logistics hub via an expanded network of industrial and commercial rail services. At the same time, the officials told the meeting that SAR had plans to also develop the passenger side of its business, with several new projects under construction including connections to Jubail Industrial City on the eastern coast of Saudi Arabia and to the northern borders of the Kingdom to Ras Al-Khair.
The company also witnessed 139% growth in passengers from the second quarter of 2017 to the second quarter of 2018. On March 20, 2019, Saudi Arabia’s Council of Ministers decided that SAR would become the Kingdom’s national railway.
5. Saudi Arabian Military Industries
One of the newest SOEs in Saudi Arabia, SAMI was created to act as a platform for the Kingdom and its allies to obtain world-class military services and products. Its goal, under the Vision 2030 project, is to become a leader in the global military industrial sector. SAMI also hopes that by 2030, the Kingdom will be spending 50% of its military budget with the SOE.
To achieve this goal, SAMI has four major divisions – land systems, aeronautics, defense electronics and weapons and missiles. Each division is composed of business units that work with Saudi assets in the area of defense and defense research to synergize them with existing joint ventures with foreign partners.
The Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, owns SAMI.
How State-Owned Enterprises Are Changing in Saudi Arabia – the Diversification of the Economy via the Vision 2030 Initiative
As part of the Saudi Arabian government’s plan to open up SOEs to more involvement with the private sector, in March 2018, Saudi Arabia’s Council of Economic And Development Affairs approved the executive plan for the Kingdom’s privatization program.
The program is called Delivery Plan 2020, and its goal is to increase and to strengthen the role of the private sector by opening state-owned assets for investment and making certain selected government services open to the private sector. As part of the Saudi Vision 2030 program, the privatization plan seeks to increase the private sector’s involvement in the Kingdom’s Gross Domestic Product (GDP) from 40% to 65% by 2030. Officials in the Kingdom said that Delivery Plan 2020 will very much “take into account the interests of all beneficiaries and enhance the fairness of transactions with the private sector.”
The Kingdom also hopes that the privatization of certain state-owned assets will improve services, reduce government spending in these areas, and take into account the interests of Saudi Arabian citizens. The Kingdom also believes that the Delivery Plan 2020 will attract foreign direct investment and help improve its balance of payments. Delivery Plan 2020 will also help the Saudi Arabian government refocus on its legislative and organizational roles.
Delivery Plan 2020 has three main pillars:
- The establishment of regulatory and legal basis.
- The establishment of an institutional basis that would guarantee the fairness of the process for participants from the private sector as well as preserving the interests of the Saudi Arabian government.
- Steer the programs and initiatives for Delivery Plan 2020.
Delivery Plan 2020 will target over 100 initiatives across these 10 primary sectors in its first phase:
- Labor and Social Affairs
- Energy, Industry and Mineral Resources
- Transportation and Aviation
- Environment, Water and Agriculture
- Communications and IT
- Hajj and Umrah
Also under Delivery Plan 2020, the operation of ports in Saudi Arabia will also be transferred to private companies. The Kingdom sees this plan moving forward in several ways, through outsourcing, full and partial asset sales, IPOs, management buyouts and concessions.
Delivery Plan 2020 means more opportunities for increased foreign direct investment in Saudi Arabia, along with the possibilities of more private-public partnerships and joint ventures.
The Kingdom of Saudi Arabia is changing rapidly. Businesses and investors need to understand the laws and regulations, as well as other policies, which can affect negotiations or agreements. For those companies already doing business in Saudi Arabia, they will need to understand how these new initiatives will impact their businesses and their current partnerships. They will need to develop a strategy to align their business goals with the Kingdom’s goals.
How The Quincy Group Can Help
The Quincy Group is the only American consultancy that has decades of experience in government relations and business development with the sole focus on Saudi Arabia. We advise senior corporate leaders from some of the world’s largest companies on how to achieve positive results in Saudi Arabia. Since we have had an established presence in Saudi Arabia for over 50 years, we understand how western businesses can be successful in the Saudi Arabian context. We help our clients establish a full-time presence in the Kingdom, which is crucial to building relationships with key stakeholders who can make managerial and budgetary decisions.
Saudi Arabia is a one-of-a-kind market. It is a culture where the way you communicate and the protocols you follow are very sensitive to the local concepts of respect, trust and personal honor. Our goal is to help our clients learn how to successfully navigate these unique qualities and develop strong business opportunities in Saudi Arabia.
If you would like to know more about how we can help you achieve success in Saudi Arabia, call us at 202.461.2245 or visit our contact us page where you can leave us your name, email address and phone number as well as letting us know a little bit about your interest in Saudi Arabia. We look forward to hearing from you.