DIMENSIONE PULITO INTERNATIONAL ::: Monthly magazine for industrial cleaning sanitization and environmental hygiene- SAUDI ARABIA CLEANING

::: SAUDI ARABIA: strengths and weaknesses
dossier by Giovanni Carlini
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Saudi Arabia is one of the Arab states in the Persian Gulf and East Mediterranean area that offers great business opportunities. Worth getting to know better.

::: THE OVERALL SITUATION
In June 2010 the Italian Trade Commission (ICE) in Riyadh, the capital of Saudi Arabia, issued the following bulletin: “During the Euromoney Saudi Arabia Conference in May, it emerged that the overall state of the Saudi Arabia economy was considered basically positive, even though there were a few criticisms about the difficulties faced by small-medium sized enterprises in accessing financial support.
This obstacle does not facilitate the industrial development of the country, which has a high unemployment rate, especially amongst the young, representing one third of the population.
More effective support for private industry is needed, therefore, via the creation of government funds managed by a bank dedicated to long-term industry financing. This problem of financing is less felt in the case of mega projects, as these have the capacity of generating high levels of profit in the medium term. In 2000 Saudi Arabia introduced a good law aimed at attracting foreign investment, with positive results in recent years (some 38 billion US dollars in 2008). Other positive news is that an ambitious 5-year spending plan (400 billion USD) was introduced in 2009 thanks to the remarkable surplus generated by oil revenue: the money will be spent on various infrastructure projects.”

::: E-COMMERCE INTRODUCED IN MAY 2010
Saudi Post announced in May its decision to introduce the operational conditions needed to launch e-commerce for the local market.
According to the official statistics for 2006 and 2007 there are roughly 4.8 million Internet users in Saudi Arabia, 218,000 of whom have broad-band access: an attractive target for the launch of this project.
The aim is both innovative and ambitious, especially when one takes into account the now deeply-rooted custom in Saudi Arabia to enjoy shopping in the stores and malls, which are especially numerous in the larger cities.
Saudi Post has set itself the goal of encouraging growth in commerce, especially for certain products, while, at the same time, creating new business and job opportunities through the same services offered via e-commerce.

::: Saudi Arabia

Capital: Riyadh
Area: 2,149,690 km2
Population: 2010 estimate 27,136,977
Density: 12/km2
Official language: Arabic
Government: Islamic absolute monarchy
Currency: Saudi Riyal

::: RULES OF ENGAGEMENT FOR BUSINESSMEN IN THE CLEANING SECTOR
Saudi Arabia is a country with specific characteristics and so before attempting to do business there you should bear in mind:
• the usefulness of trips organised by Confindustria or specific trade organisations to take part in trade fairs where useful contacts can be made;
• there is a high risk of spurious contacts, i.e. “DIY” contacts (as elsewhere in the world). These may be fun in terms of adventure, but may leave you exposed;
• the likelihood of receiving a reply from local operators is low, if not zero, unless you know the people concerned personally;
• it is a common faux pas to take notes during negotiations, as this invalidates the widespread custom of starting each meeting by going over past ground, even if meetings are held on consecutive days. This is one way of “tiring” the other party during the customary haggling process. Do not expect to reach an understanding until the very last seconds of the last meeting or even immediately after this;
• a new class of entrepreneurs is emerging, though this has yet to take an effect on business in Saudi Arabia;
• products that sell well on the Saudi Arabia market are simple, easy to service, ready to use and low cost;
• the competition today is mainly made up of German or British firms and is expected to remain so in the near future. Developing countries are beginning to enter the market, focussing on the price factor. To insist on quality in a market like Saudi Arabia leads to the risk of lost business through comparison with others;
• you can, of course, still use “quality” as a selling point, but it will always only be appreciated by just a small niche of the market;
• Saudi Arabia occupies a strategic position for logistics in the entire area, especially for Pakistan and India. One could also operate out of India towards Saudi Arabia given the dynamic character of Indian operators;
• however, even if Saudi Arabia is served by India (if you have the potential for such expansion), the best logistical base is still Saudi Arabia when it comes to reaching the African states along the Suez Canal and the North African coast.

::: AN ORIGINAL CONCEPT: THE INDUSTRIAL CITIES
Growth in the non-oil sector is mostly due to the use of the abundant, cheap by-products of crude oil, petrol-chemicals and minerals. Proper industrial cities have been built for this. These are huge plants using the natural gas resulting from the conversion of crude oil and which used to be burnt off. Now, like certain other by-products of the refining process, it is exploited to supply other industries with energy.
The creation of large centralised complexes has made it easier to supply the indispensable utilities: water, electricity, telecommunications, etc. Some eight industrial cities have been built to date, the major ones being in Jubail to the North of Dammam on the Persian Gulf and in Yanbu to the West of Madinah on the Red Sea.
The other ones are found in different strategic locations, the criteria being their closeness to raw material sources and the major domestic and foreign markets. Special care was taken to conserve the local environment and fauna during construction of these industrial centres.
There is currently a much-awaited ambitious development plan for four new “economic cities” based on the success of the industrial cities in Jubail and Yanbu. The authorities expect that this project will add some 150 billion USD to the GDP by 2020 and create more than 1.3 million jobs.

::: THE ECONOMIC CONTEXT
The last full ICE report on Saudi Arabia states that the Saudi economy is based on exploitation of its rich non-renewable energy sources. It is estimated that reserves amount to 260 billion barrels of oil (about one-fifth of global reserves, making it the world’s number one oil producer) and 7 trillion cubic metres of gas (about 4% of global reserves, making it the world’s fourth largest producer). Saudi Arabia exports about 68% of its crude oil. In 2009 its exports of crude oil was valued at roughly 152.9 billion dollars, a 45% drop on the previous year, but still making approximately 90% of its exports and state revenue. Crude oil exports are geographically split as follows: 57% to Asia and the Far East, 22.5% to North America and 12% to West Europe. Saudi Arabia has seen significant diversification of the economy in recent years, at present mostly concentrated in the petrolchemicals sector (oil by-products and plastics, fertilizers, etc.) and in infrastructure, although the long-term plan is to develop the services sector too (tourism, financial services, insurance, etc.). This diversification is thanks to a privatisation policy (currently more than 50% of GDP comes from state-owned enterprises), state incentives to invest in infrastructure and the introduction of a tax reform that reduces the gap between tax on foreign companies and local ones. In mid November 2008, King Abdullah announced public investment plans worth roughly 400 billion dollars over the next five years for new projects in the fields of infrastructure, construction, petrol-chemicals, energy and water resources. The government has introduced many new programmes in recent years to encourage private business and attract foreign capital investment.
The Saudi economy has reacted well to the global economic crisis, in 2009 maintaining a positive rise in GDP in real terms, even though just 0.15%. In nominal terms, however, GDP has fallen by 21%, owing to fluctuations in the cost of oil, expressed in US dollars. The decline in the oil sector is less than forecast (estimates by leading analysts expected a 9%), amounting to -6.4%, thanks mostly to signs of a turnaround in the cost of crude oil in the second half of 2009.
The current economic crisis has had an effect mainly on the private non-oil sector that, in 2009, saw its worse performance in the past 14 years, with a growth rate of just 2.5%. Difficulties in the banking sector have had a considerable adverse effect on the economic cycle, leading to the cancellation or postponing of important investment projects. Bank credit for the private sector grew by just 2% in 2009, compared to 27% expansion the previous year. The Saudi banking system has also felt the outfall of the bankruptcies of two of the country’s most important financial groups – Al Gosaibi and Saad Al Manea – that have caused foreign banking groups to doubt the financial soundness of the most exposed local banks and the level of transparency in the Saudi financial system.
Car sales – normally a reliable indicator of consumer trust – fell by 25% over the space of just a few months in 2009, finishing at -7% by the close of the year. Economic diversification plans and a cut in unemployment levels require annual growth of 6%, whereas Saudi Arabia’s GDP has never exceeded 5% since 2005, not even during the two-year period 2007-2008 when the high cost of oil should have created the conditions for more sustained growth. One of the main reasons for this is the low productivity rate, especially in the public sector (still the bedrock of Saudi Arabia’s economy).
In 2008 the Saudi government recruited about 70,000 new employees, with one stroke reducing official unemployment levels from 11.1% to 9.8%, but also causing a 4% drop in productivity.
Things are not much better in the private sector, where productivity fell by 2% between 2007 and 2008, also on account of the government’s “Saudization” policy (an obligation on private firms to employ a set quota of Saudi workers). The chance of a turnaround in the economy in 2010 is strongly conditioned not just by developments in the international economy, but also by trends in the oil market and the government and banks’ ability to sustain growth. The most accredited forecasts (FMI, SAMA and the Saudi Arabia Economics bulletin from the Saudi Fransi Bank) estimate growth in GDP of 3.9-4% in 2010 and 4.8-5% in 2011.

::: INVESTMENTS IN 2010
The state budget for 2010 foresees global spending of 540 billion SAR, about 144 billion US dollars (in 2009 about 126 billion USD), 48% of which is destined for new projects or allocated for the completion of current projects: infrastructure (ports, airports, railways, telecommunications, dams and desalination plant, city streets, lighting and bridges); education (schools, universities and training centres); health (the construction of 92 new hospitals), while current spending includes social welfare measures and financial support for private investments. A significant part (about 32%) is destined for defence and safety.
The oil revenue forecast in the 2010 budget, some 470 billion SAR (125.3 billion USD), has been calculated on the basis of a precautionary cost of crude oil, set at 44-48 USD a barrel, which, in the case of global oil production of 8.3 million barrels a day, would lead to a state deficit of about 18 billion USD.
If the mean cost of oil should remain steady at current levels throughout 2010, government revenue would be at least 634 billion SAR (169 billion USD). Making for a surplus of 78 billion SAR. The 2010 budget (see Graph 1 below for allocation details) does, in any case, confirm Saudi Arabia’s strong expansion policies.
In 2009 Saudi exports fell by 41%, compared to 2008 levels (due to a sudden decrease in oil and petrochemical products as a result of the global recession), whereas non-oil exports, totalling roughly 15% global exports, also fell but less markedly (- 16.4% compared to 2008 levels).
Saudi imports also fell in 2009 (- 21% compared to 2008 levels), making for a final balance of trade of 104.1 billion USD (- 50.9% with respect to 2008, according to estimates by the Central Bank of Saudi Arabia, SAMA).
The forecasts for 2010 are for a pick-up in international trade, both in terms of exports (thanks to a global rise in demand for oil) and imports (expected to increase by 18% according to estimates by the government authorities).

::: THE MOST DYNAMIC SECTORS IN 2010
The tourism sector offers potential growth, currently contributing 2.6% to GDP. According to the Saudi Commission for Tourism and Antiquities, short-term promotion aimed at increasing foreign visitors is complicated, whereas it is far easier to encourage domestic tourism. The Kingdom of the Two Holy Mosques currently welcomes some two million pilgrims every year.
The Saudi government’s goal is to flank its religious tourism with more cultural offers (especially in the Jeddah region).
It is possible that the Riyadh government will also focus on increasing the retail sales sector, which rose by 8% in the period 2003 - 2007. The Kearney's Global Retail Development Index places Saudi Arabia seventh in its list of countries with potential growth in this sector.
The reasons for this expansion include: the demographic increase in the population (at a yearly rate of 2.5%, at least until 2015), a wider range of products on the market (including more foreign brands) and the introduction of large shopping malls in the major cities.
Considerable investments are expected in telecommunications. The Commission on Communications and Information Technology has already partially deregulated this sector, guaranteeing new licences for land and mobile telephone operators. The situation is quite different for the transport sector, where the railway and port systems are still far from being efficient.
The Saudi government expects to extend the Jeddah airport system and the Medina airport, as well as building the Tiran Bridge to Egypt and the Haramain High Speed Rail (linking Mecca, Jeddah and Medina).
There are a few signs that the real estate and construction sector may expand noticeably in the near future. The growth in the population and the relatively small number of homeowners (just one out of two Saudis live in their own homes) would lead one to think that there may soon be a sudden rise in the demand for residential units. A similar increase in demand may also be seen for commercial and industrial premises, given the expected developments in tourism, retail sales and manufacturing. Despite the current recession, which has led to several construction projects being cancelled (worth 22 million US dollars), Saudi Arabia is still the second most important country in the Gulf area (after the United Arab Emirates) in terms of on-going building projects. In any case, as SAMA points out, public spending in infrastructure over the next five years is calculated at 400 billion US dollars (mostly oil dollars).
Two of the main hindrances to full exploitation of Saudi Arabia’s potential are its Saudization policy (the obligation to employ Saudi nationals for 75% of the workforce) and the virtually total exclusion of women workers. The economic system does, however, exploit the abundant Asian workforce, unrepresented by trade unions (about 7 million people).