Saudi Arabia puts reform into top gear

Q. What is the current state of the Saudi economy?

A. Over the last few years, the economic situation has been improving. In many ways, three years of very good oil prices have helped. A program of economic reform has been put into place and we have started implementing it.

The economy is always affected by the changes in the oil market, but there is something very important for the Saudi economy and that is the real growth rate of the non-oil economy, which is mostly private. Our non-oil private economy has grown at an average of four percent over the last three years. This is a very good indicator of the sustainability of the Saudi economy.

We've started implementing the structural reform program, which comprises several new laws. We have a new foreign investment law that allows non-Saudis to own real estate. We cut the tax rates and custom duties. We are hoping to see a new capital market law soon.

There will also be an insurance law for the first time in Saudi Arabia - the Majlis al-Shura has just finished discussing it. We hope to have a new tax law. We started an ambitious privatization program.

We started first to put things in perspective. We put up the regulatory framework for that program and we have an agency to take care of it. We now have regulatory agencies for electricity, telecommunications and industrial cities. All will be creating private participation in those sectors.

As you probably now, we had one of the most successful IPO experiments with STC [Saudi Telecommunications Company]. The first day of dealing was yesterday. The prices closed at 279 riyals and 5 million shares were traded on the first day. The whole amount was $4.5 billion.

So we are doing it. We're doing it the right way. We are trying to be consistent. We are not looking for quick fixes; we're looking for an organized, sustained effort for economic reform within Saudi Arabia.

Q. But why did STC's privatization take so long?

A. First, it was a huge operation. Second, it was the first real experiment of our privatization program. It went through stages. It used to be just a government department, then we had to change it to a company. When you take an operation as huge as this one - 30 percent of it is worth $4.5 billion - it takes time. It's the most successful recent flotation in the world.

Q. What's next?

A. The easiest thing in privatization is just to sell government shares to the public - this is not the way we are looking at privatization in Saudi Arabia. Our main objective is to open sectors that were closed to the private sector before, like water, electricity, industrial parks.

These used to be only provided by the government. Now we want to open those sectors. That's the main objective of privatization. Selling stocks is easy. The privatization of Saudi airlines will take some time.

Q. Do you have a target date?

A. No, because the privatization program for Saudi Arabian Airlines is not complete. They hired companies to evaluate it - a French bank - but they're still in the process of studying the program itself. It's difficult for me to set a deadline.

Q. Which company is most likely to be privatized next?

A. There's no company 100-percent owned by the government. The only companies owned 100 percent by the government are STC and Saudi Airlines.

The National Commercial Bank [NCB] is not 100 percent owned by the government, but the government acquired a large portion of it. Some funds and some private citizens own NCB, but the government recently increased its share. That's why people are thinking about the next company to be privatized.

Q. So you have to turn government departments into companies and then sell them.

A. Exactly. We are now converting most services into companies or into institutions that could later become companies. Don't think that privatization is only about selling assets.

Selling assets is handing over ownership from one person to the other. It doesn't make a big difference. Privatization is letting the private sector provide the services that in the past had only been provided by the government.

Q. Will STC have competitors?

A. Our privatization strategy emphasizes something that is very important: competitiveness. You cannot really privatize without opening the market. Changing from a government-sector monopoly to a private-sector monopoly is not what we're going to do. Next year, STC will be open to competition.

To encourage competition, you need strong anti-trust laws. This is now being studied by the Majlis al-Shura. The law will hopefully be coming in the course of this year.

Q. Why does the $25 billion oil and gas field initiative seem to be stuck?

A. They are currently in the final stage of negotiations. Hopefully, they will come to a successful conclusion in a few weeks. But this is a huge operation: the first stage is a $25 billion investment.

Of course, when you negotiate such an investment between parties, you need time. It's not easy. Everybody is trying to benefit as much as they can from this deal. Companies need to ensure their profits.

The Saudi government is also trying to ensure that its national interests are served. So the negotiations took longer than expected. The problem is that there were high expectations that it would go very quickly and easily. That didn't happen.

Q. Doesn't Saudi Arabia need a vibrant stock market in order to absorb all the stocks which will be offered as part of the privatization program?

A. You will probably hear about a new capital market law in Saudi Arabia in two months. It will change the whole structure of the stock market in Saudi Arabia.

It will create two things: an independent agency that will be supervising and regulating the market and a private-sector company to run the market. The Majlis al-Shura has approved it and it has come to the Supreme Economic Council. Hopefully, it will come into effect shortly.

Q. What about allowing foreign investors?

A. Foreign investors are allowed in Saudi Arabia - from the GCC. Indirectly, all foreigners are allowed to invest. There is a mutual fund for Saudi stock.

Q. Don't you need to diversify government revenue resources?

A. It is extremely important for Saudi Arabia to diversify the source of revenue for the government because you cannot continue to depend on oil forever. If you depend on oil, you will be dependent on the vagaries of the oil market. It goes up and down, and creates problems for us. You're talking about an attempt to tax individuals.

We had an income tax law before, about 50 years ago. But applying it was suspended in the early 1970s. We will include elements of the old law in the new law. We thought this would help create a structure for taxation. We don't know what the outcome will be, but there are many ways to raise revenues. We will probably also discuss a value-added tax.

Q. Will you allow foreign companies to run their businesses independently?

A. We had a new foreign investment law two years ago, which allowed companies to own 100 percent of their operations in Saudi Arabia. They don't need a local partner. The law equates Saudis and non-Saudis. It is in effect now and is working.

Q. Has that attracted investors?

A. The Saudi Investment Authority was created to give licenses to foreign investors and to facilitate their investment in Saudi Arabia. In a year and a half, it gave out licenses worth 40 billion riyals, or more than $10 billion. So, yes, foreign investors are coming.

Q. What is holding up WTO membership?

A. The WTO is becoming more difficult with time because of new laws and new regulations. Each time there is a new law, they want to apply it to new members, while old members are probably not applying it. The only two countries that are left out of the WTO that are important to the world are Saudi Arabia and Russia. The problem is that within each country, you are not negotiating with one institution.