Saudi Arabia seeks to revive foreign investment

RIYADH — Saudi Arabia is ramping up efforts to lure international companies and revive Crown Prince Mohammed bin Salman’s plans for an economic makeover, after foreign investment fell to a 14-year-low in 2017.

The moves include plans to create two investment funds totaling over $18 billion for the government to enter into ventures with foreign companies, said people familiar with the matter. The kingdom is also pouring billions into entertainment-industry partnerships and working with SoftBank Group’s Vision Fund to bring technology firms to Saudi Arabia.

The first modern Saudi bankruptcy law is due to soon come into effect. The government has also drawn up a law on public-private partnerships, the first step toward the sale of billions of dollars in state-owned assets that the government hopes will attract foreign investment in big infrastructure projects.

The accelerating moves highlight worries in the kingdom about a chill spreading through business activities just as the 32-year-old crown prince is attempting a historic economic and cultural opening.

Prince Mohammed is trying to shift the economy away from oil and toward industries that provide growth and jobs for Saudis. First steps toward economic reform included cutting subsidies and adding taxes to narrow the budget deficit.

He has introduced social reforms such as allowing women to drive and opening cinemas. He has also forged an alliance with the Trump administration and shifted the kingdom into a more firm posture against Iran. But some of his economic plans have so far stalled.

The Saudi economy contracted last year, largely as a result of lower oil prices, and only emerged from recession in the first quarter of this year. The prospect of years of low oil prices helped spark Prince Mohammed’s calls for economic reform, though prices have rallied in recent months.

Direct foreign investment into the country fell to $1.4 billion last year from $7.4 billion in 2016, according to United Nations figures released last month. That compared with an average $18.2 billion annually in the years leading up to the global financial crisis in 2007-2008 and last year fell in part because of fewer investments among multinationals, said the U.N. Saudi officials didn’t dispute the numbers.

Saudi Arabia hasn’t landed investment commitments from U.S. corporate giants. In the fragile economic environment, investors have been apprehensive about spending before they see the results of Prince Mohammed’s reforms.

Also worrying some investors was the detention of Saudi business leaders last fall in what the kingdom said was an anticorruption crackdown. The charges weren’t aired publicly and some businessmen remain jailed; the government has moved to collect over $100 billion in their assets.

Saudi officials have said the crackdown should assure investors that the kingdom is serious about securing a stable rule of law, and the crown prince sought to win more American business on a nearly three-week visit to the U.S. this spring.

The cornerstone of the prince’s economic reform plan — the initial public offering of the state-owned oil giant Saudi Arabian Oil Co., known as Aramco — has stalled, and may never happen.

"If they can’t create an environment that is welcoming to foreign investment and supports it through a rules-based economy, they cannot succeed in any kind of change," said Karen Young, a political economist at the Washington-based Arab Gulf States Institute.

Reversing the fall in foreign investment is a priority, said Basem al-Sallom, a deputy governor at Saudi Arabian General Investment Authority.

"We are interested to work with companies that have the technology, the know-how, the experience to achieve our vision. We cannot do it alone," he said. "And now is the right time. There are a lot of opportunities here."

The government is in the final stages of creating a 50 billion Saudi riyal ($13.3 billion) fund for developing partnerships with foreign companies, said people familiar with the matter. Known as the International Partnership Fund, it will be run by the Saudi Industrial Development Fund, which invests in the industrial sector.

The Saudi Arabian General Investment Authority, which has operated as a licensing and regulatory entity, is planning to expand its mandate by creating a separate investment fund to enter partnerships with foreign companies, according to people familiar with matter.

The Saudi government has tentatively earmarked $5 billion for the fund, they said. The idea behind the new fund, which has yet to be formally approved, is that the government will take some of the risk for foreign companies entering the Saudi market.

"The trend right now is: They want to co-invest with foreigners to make Saudi Arabia seem less risky," said a person familiar with the new fund. "They are saying: ‘We are willing to put our money where our mouth is."

Mr. al-Sallom, the SAGIA deputy governor, said he wasn’t aware of a planned fund. He said the investment agency has cut red tape to make it easier to set up businesses in the country, and licensed 303 foreign companies in the first half of this year, up from 122 in the same period last year.

The kingdom could see strong growth this year with oil prices buoyant, said Capital Economics, an independent research firm in London. Some investment banks are expanding operations in Saudi Arabia as the government plans to list state-owned assets and establish public-private financed infrastructure projects.

But some reforms, though they may be good for the economy in the long term, have made investment in Saudi Arabia less attractive. Cuts to energy subsidies, a new value-added tax on most goods and a requirement that companies hire more Saudi workers have given foreign businesses pause.

"What is going to induce global companies to invest in Saudi Arabia? Cheap labor, low taxes and subsidized utilities — all that is going away," said Christopher Johnson, the chairman of the American Business Group of Riyadh, which promotes U.S. business interests in the kingdom.

To address one of these concerns, the government circulated a draft law covering public-private partnerships that offered investors exemptions from certain labor laws. The move acknowledged the challenge businesses face in replacing low-paid foreign workers with Saudis.

The Public Investment Fund, the country’s sovereign-wealth fund, is also working with Softbank’s Vision Fund to bring tech startups to Saudi Arabia to set up operations, people involved with the program said.

The PIF, which had been earmarked to receive the proceeds from the Aramco listing, is the biggest investor in Softbank’s $100 billion Vision Fund, and has said it wants to see some of that capital flow back to Saudi Arabia to help create jobs and transfer technological know-how to the local population.

The state is pouring money into other sectors, too. In February, Saudi officials said entertainment-industry investments over the next decade would total an estimated $64 billion, with funding from the government as well as the private sector. U.S.-based AMC Entertainment Holdings Inc., for instance, said it wants to open up to 40 cinemas in 15 cities across Saudi Arabia within five years, and up to 100 by 2030.

Write to Rory Jones at [email protected], Margherita Stancati at [email protected] and Summer Said at [email protected]

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