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Incentives for diversifying.

THE SAUDI GOVERNMENT is well aware that diversification away from oil is increasingly essential. This will only come by shifting the emphasis of economic activity from crude oil production to petrochemicals, manufacturing, non-hydrocarbon minerals and agriculture.

Economic growth reached 6.6% in 1991 and a further advance for last year is expected. These figures blend reasonably with the aim to produce annual growth rates of near 8% in the manufacturing sector during the current Fifth Development Plan which runs to 1995. Here private investment is playing an increasingly important role. If targets are to be achieved, $11.7 billion will have to be raised with $7.6 billion coming from the private sector.

There are five main sectors. The major petrochemical and steel industries come under the overall umbrella of Saudi Basic Industries Corporation (Sabic). Oil refining is largely the preserve of Saudi Aramco and Saudi Marketing and Refining Company (Samarec). General manufacturing is mainly undertaken by the private sector, and light industry is in the hands of some 20,000 small units and workshops often run by third country nationals. Finally there are the large-scale military offset programmes, incorporating high technology joint venture projects.

Confidence in the kingdom's economic future has led to renewed interest in the industrial sector. The government has been quick to offer major incentives to companies starting up or establishing joint ventures.

As Mohammad Aba al Khail, the minister of finance and national economy, points out, support agencies such as the Saudi Industrial Development Fund (SIDF) provided a massive SR1.75 billion loans in 1991 to finance 48 new industrial projects and expand 20 existing ones. This was the second highest annual financing SIDF has undertaken since it was founded in 1974.

Aside from the manufacturing activities linked to the oil sector, the main industries are iron and steel - based on Sabic's affiliates, the Saudi Iron and Steel Company (Hadeed) in Jubail and the Steel Rolling Company (Sulb) in Jeddah - and, predominantly under private management, pharmaceuticals, cables, a growing food processing industry and, partly linked to that, a flourishing agribusiness sector.

Particular official encouragement is given to joint ventures with the parallel objectives of boosting exports and promoting import substitution. Foreign investors are offered tax-free holidays, exemption from tariffs on imported equipment, and tenure on an increasing number of industrialised estates is subsidised. Medium and long term industrial loans at low cost are generally available. Moreover, local manufactures and suppliers are usually favoured by government departments.

The industry and electricity minister, Abdul Aziz al Zamil, emphasises that factories in the kingdom are producing an annual sales turnover of SR25 billion. They cater for most of the domestic market requirements, and are now turning their attention to exports. Here Sabic and Petromin are strong performers.

The industrial sector is expanding on a broad front, and boasts many success stories. The Saudi Cable Company has now breached the SR1,000 million annual sales mark and is exporting its copper and aluminium cable. The establishment of Arabian American Chemicals Company (Aramchem), a joint venture with Mobil Oil of the United States, will produce the largest privately-owned manufacturing entity in the kingdom, while the launch of Al Warak National Paper Manufacturing Company late last year brought yet another company to the stock market.

Building projects have revived in Riyadh and other major cities since the Kuwait crisis. Construction materials and metal product companies account for over half the factories operating. In conjunction, the eight regional cement factories - even with a capacity of 15 million tonnes a year - cannot cope with demand, and basic materials have still to be imported. The first eight months of 1992 saw demand increase by more than 80%.

Of the overall budget of $200 billion in the current Five Year Development Plan, $42 billion has been set aside for the building and construction sector. Development of the country's infrastructure included a further 400 factories, bringing the total to 2,000 together with thousands more kilometres of new roads to service these and new offices, supermarkets and residential complexes. The Saudi Building Industries Exhibition '92 which took place at the end of November in Jeddah mirrored this new confidence with 350 leading firms taking part.

The same confidence can be seen in the activity centred on the two industrial cities of Jubail on the Arabian Gulf and Yanbu on the Red Sea. Prince Abdullah bin Feisal bin Turki, chairman of the Royal Commission for Jubail and Yanbu, is understandably bullish. "As a place for foreign companies to come and invest, Saudi Arabia has never been safer," he says. "Joint ventures are actively encouraged, and the terms are very favourable, although we are always trying to improve them." Twelve of Jubail's and 20 of Yanbu's primary industries are joint ventures, as are more than 25% of secondary, support, light manufacturing and service industries, and foreign participation is likely to continue to grow.
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Title Annotation:Saudi Arabia Special Report; incentives package for investors in Saudi Arabia
Author:Arnold, Stuart
Publication:The Middle East
Date:Mar 1, 1993
Previous Article:Saudi Arabia preserves tradition in a changing society.
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