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Saudis urged to reform public sector

By Nadim Kawach


Saudi Arabia needs to upgrade its public sector performance within overall reforms intended to diversify its oil-reliant economy and tackle its festering unemployment problem, according to an official Arab group.

While the Gulf Kingdom, which controls a quarter of the world’s recoverable oil resources, could be an attractive investment market, this will not be enough to reverse an upward trend in its joblessness rate in the long term, said the Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

In a study presented at an energy conference in London this week and sent to Emirates Business yesterday, Apicorp said Saudi Arabia’s mammoth hydrocarbon sector cannot create enough jobs on the grounds that it is a capital intensive sector with a small labour force.

“As long as the petroleum sector remains the main economic engine, growth alone cannot reverse the trend of rising unemployment,” said the study, presented by Apicorp’s chief economist Ali Aissaoui.

“Maintaining a favourable investment climate for public and private enterprise, streamlining and modernis-ing existing governance structures, and accelerating reforms of the educational and vocational training systems are essential prerequisites for the success of the outlined strategies in Saudi Arabia.”

According to the study, as far as the investment climate is concerned, a perceptual mapping by the author highlights Saudi Arabia’s unusual position. The mapping is based on three attributes – investment potential, country risk and the enabling environment.

“The resulting 3-D map shows an ideal point, which is the centre of gravity of the highest achievable scores. Saudi Arabia appears indeed in the most favorable quadrant and nearest to the ideal point.
This, however, should be complemented by the modernisation of existing public governance structures in order to improve policy co-ordination and implementation,” it said. Highlighting Saudi Arabia’s unemployment problem, Aissaoui said the rate is estimated at around six per cent but added that the problem is underscored when nationality and gender factors are taken into account. He noted that the joblessness rate among the Kingdom’s female population is far higher.

“Indeed, Saudi employment statistics make more sense when taking specific distributive differentiations into account. On the one hand, the Saudi male/female differentiation shows a very high female unemployment rate,” he said.

“On the other hand the Saudi/Non-Saudi differentiation highlights a massive presence of expatriates. As with most GCC countries, Saudi Arabia has relied heavily on imported labour, mostly low skilled, while the domestic labour pool has been rapidly expanding.”

Aissaoui, former Organisation of Petroleum Exporting Countries (Opec) governing board chairman and a member of several international organisations, put forward three main arguments in Saudi Arabia’s economic diversificatin policy.

The first is the long-term limit to growth of petroleum export-based rent. The second is the difficulty of stabilising the corresponding stream of revenues. The third is the inability of the petroleum industry to provide sufficient jobs.

 “The first two arguments are not so compelling. On the one hand, Saudi vast petroleum assets are perceived to be sufficient to meet future fiscal demands. On the other hand, Saudi capacity to influence oil markets is thought to be effective in stabilising prices and revenues. Only the third argument, which is the inability of a dominant and highly productive petroleum sector to provide sufficient jobs, is strong enough to warrant drastic and rapid changes,” he said.

“Hence, no matter how Saudi economic diversification strategies are articulated and consensually validated, leveraging oil to create more jobs is likely to be the key policy driver. The biggest challenge, however, will be filling these jobs from a rapidly expanding domestic labour pool. This challenge can only be addressed if, on the one hand, progress in policy formulation is matched by the pace of implementation of reforms in education and transfer of skills and, on the other hand, if the whole process is driven by those who are deeply committed to it.”

His figures showed economic diversification programmes in Saudi Arabia and other Middle East and North Africa (Mena) oil producers have concentrated on the downstream sector, mainly refining and petrochemicals.

Of the $490 billion (Dh1.7trn) total energy capital investment forecast by Apicorp for the Mena region for the period 2008 to 2012, the oil-based refinery and integrated refinery-petrochemical links together with the gas-based petrochemical and fertilizer links account for 42 per cent of Mena total.

“Saudi Arabia, which tops the country energy investment ranking with a $105bn or 21 per cent of Mena total, is by far more the main investor in the refinery and petrochemical sector,” Aissaoui said.

“Saudi investments in the petroleum downstream sector amount to $63bn representing 31 per cent of the corresponding Mena total.”