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The Kingdom enters a new era

With its recently launched Vision 2030, Saudi Arabia is planning to introduce social, political and economic reforms, aimed at reducing its dependence on oil, diversifying its economy and establishing the country as a global investment powerhouse. In light of one of the Middle East’s biggest markets announcing such sweeping and ambitious reforms, what could the future hold for the region’s construction and HVACR industries?

| | Jul 19, 2016 | 12:05 pm
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Saudi Arabia 1

In early May, when news broke of Ali Al Naimi’s removal from his post as Saudi Arabia’s oil minister, which he had held since 1995, market analysts and business leaders from around the globe were quick to proclaim the move as “historic” and “significant”, in acknowledgement of the influence Naimi wielded over the international energy market. Few, however, expressed surprise, and the pervasive sentiment was that it was an expected development, following Deputy Crown Prince Mohammed bin Salman’s announcement of the Kingdom’s plans to launch reforms that would see the country try to reduce its reliance on oil and diversify its income streams.

Other than energising the Gulf’s HVACR market, Saudi Arabia – by pursuing the announced reforms – could serve as inspiration for other nations

Naimi’s removal – he made way for Saudi Aramco Chairman, Khaled Al Falih – is far from being the only “development” to result from the government’s reform framework, dubbed “Saudi Arabia’s Vision 2030”.* Ministerial restructuring and cabinet reshuffling have taken place since it was unveiled on April 25. The Ministry of Petroleum and Mineral Resources, for example, has been expanded and renamed the Ministry of Energy, Industry and Mineral Resources. The Ministry of Water and Electricity has been disassembled, with water now under the newly formed Ministry of Environment, Water and Agriculture, while electricity has been incorporated into Falih’s department.

Transforming a nation
The changes, pundits claim, are but the tip of the iceberg, and merely the start of the overhaul the Deputy Crown Prince has in mind – a plan that received a boost of support when the Saudi government, on June 6, approved the National Transformation Programme (NTP)**, which was prepared by the Council of Economic and Development Affairs. It is headed by bin Salman, in cooperation with 24 government entities, including the Ministry of Finance, the Ministry of Economy and Planning, the Ministry of Health, the Ministry of Labour and Social Development, the Ministry of Housing and the Ministry of Education.

The NTP details the different schemes to be carried out by the participating ministries. It also outlines policies and targets that have been deemed necessary for the Kingdom to achieve the goals and commitments itemised in Vision 2030. Among the targets identified in the NTP, intended to be reached by 2020, are the creation of nearly half a million private-sector jobs, a SAR-200-billion reduction in energy and water subsidies and a doubling of the output of natural gas. And an example of a ministry-specific initiative is the preparation and implementation of income tax on residents, which is to be undertaken by the Ministry of Finance.

Envisioning 2030
The NTP is just one of the various initiatives that the Saudi government has launched, and will launch, to ensure that Vision 2030 is realised. Of those initiatives, the ones that have captured the most attention are the semi-privatisation of Aramco, whose ownership will be transferred to the Public Investment Fund – an entity that itself will go through restructuring, as the government looks to transform it into the world’s largest sovereign wealth fund; the plan to increase private-sector contribution to the GDP through the privatisation of government services and state-owned assets and the expressed commitment to not only promote non-oil industries like manufacturing, renewable energy and tourism, but also to improve the business environment to make the country more attractive to talents and investors, both local and foreign.

With Saudi Arabia acknowledged as one of the biggest – if not the biggest – markets in the Middle East, the global attention its planned reforms, which Bin Salman has described as “ambitious yet achievable”, has attracted, was expected. The attention, however, has been accompanied by speculations regarding the ramifications of the Vision, as well as its possible impact on the construction and HVACR industries and on regional and international markets.

Ripple effects

Mohamed R Zackariah

Echoing bin Salman’s assessment, Mohamed R Zackariah calls Vision 2030 an ambitious plan, which was due, and observes that the age of “unlimited energy supply and lucrative hydrocarbon prices in international markets” has passed. “We are seeing the dramatic impact of oil prices in the local economy,” says Zachariah, Chief Consultant at the Saudi Arabia-based Suhaimi Design – Protecooling. “But this Vision of converting Saudi [Arabia] into an investment powerhouse, with stakes in major corporations, will drive major growth in various sectors, which would, in turn, mean growth in the HVACR industry.”

The economic growth, Zackariah clarifies, will not manifest itself in Saudi Arabia alone. “Generally, the rest of the GCC [region] always vies for a share in the Saudi market,” he says. “Any growth in Saudi [Arabia] will, therefore, directly impact the economy of the rest of the GCC [region] in a positive manner.”

Morten Schmelzer, Director for Business Development and Strategic Relations at Eurovent, on the other hand, thinks that the reforms identified in Vision 2030, particularly the part-privatisation of the country’s oil industry, could “push authorities and investors to look closely at all energy-dependent sectors”. He notes that this could then “stimulate awareness of and closer involvement with energy-efficiency related issues”, before elaborating: “Because of the climate in the Middle East, this could have far-reaching effects, as good living environments and security of food supplies need to be maintained. And increased interest in lifecycle cost of installations and buildings will likely have a major economic impact on the region.”

Morten Schmelzer

Morten Schmelzer

An example of a possible economic impact, Schmelzer adds, is the HVACR market moving “towards state-of-the-art products” and the creation of “a local base of technicians”. He further points out that other than energising the Gulf’s HVACR market, Saudi Arabia – by pursuing the announced reforms – could serve as inspiration for other nations. “Being the largest market in the region, Saudi Arabia could surely act as a role model for other countries,” he says, “and motivate them to undertake similar steps, which could eventually benefit everybody. Diversity would underpin future developments and help the region think beyond oil.”

Factors to consider
Ghaleb Abusaa, CEO of GASO (Ghaleb Abusaa Office) is of the opinion that, when attempting to measure the impact of Saudi Arabia’s economic reforms on industries like construction and HVACR, several parameters must be taken into account, namely quality, price, production volume and standard of living.

UNEP’s commitment

Dr Iyad Abumoghli

Dr Iyad Abumoghli

Dr Iyad Abumoghli, Director and Regional Representative of the United Nations Environment Programme – Regional Office for West Asia (ROWA), speaks on how UNEP can help Saudi Arabia achieve its Vision 2030…

Saudi Arabia offers great potential for promoting Green Economy concept and practices; UNEP can support in developing a national Green Economy strategy to engage the benefits of low-carbon clean technologies as a new engine of investment and growth, as a knowledge-based economic sector.

“The HVACR industry is directly connected to the construction industry,” says Abusaa, “especially in this part of the world, where no indoor life can be considered comfortable without air conditioning. Since the reforms call for a lot of construction, the HVACR industry will enjoy good expansion in terms of production volume. Moreover, food security and healthcare are important for societies like Saudi [Arabia], whose populations are rapidly growing. And that is where the refrigeration industry is needed, among other applications.”

Abusaa, addressing the presumptive association between growth in market activity and reduced product and service quality, notes that “the number of HVACR production facilities in Saudi Arabia is also growing” and could, thus, meet the demand. He, therefore, stresses that “an eye must be kept on quality”. He also points out that, in light of how the reforms could change the standard of living in Saudi Arabia, higher prices and inflation must be expected. “The cost of living will likely jump to match both demand and quality,” he says.

He further predicts that industries not big in Saudi Arabia at the moment, will experience growth as a result of Vision 2030. He cites tourism, hospitality and facility management services as examples.

Hurdles to overcome
Despite the benefits that he foresees accruing as a result of the planned reforms, Abusaa recognises that the road to 2030 will not be without its share of obstacles.

Since the reforms call for a lot of construction, the HVACR industry will enjoy good expansion in terms of production volume

“Note that the bigger the goals, the bigger the challenges,” he says. Expounding on his statement, he adds: “Those challenges include stability in the Middle East, especially since Saudi Arabia is a key player in the region, and cannot, therefore, isolate itself from what happens in it. Another challenge is global economic and political stability. For the country to achieve the goals of its Vision, it needs to work closely with industrialised countries, from where it can import technology and machinery, and with countries that have skilled and semi-skilled manpower. Such technology, machinery and manpower may not be readily available if there’s global instability.”

Zackariah, meanwhile, holds the view that, if there’s one challenge that needs to be overcome, it is to make everyone believe in Vision 2030. “There must be a top-down change in attitude,” he says. That could be a major challenge, but the time seems to be ripe.” He also emphasises that regardless of whatever challenges there may be, the reforms are highly feasible, primarily because of the strong leadership behind it – a view that is shared by Abusaa.

Feasibility study

Ghaleb Abusaa_bnw

Ghaleb Abusaa

“Before we proceed, we need to understand the term ‘feasible’ in relation to the subject and case we are discussing,” says Abusaa. “Since we’re talking about a country’s future, feasibility is affected by several factors, including financial [capability] and security.”

From a financial point of view, Abusaa’s assessment is that Saudi Arabia will have no financing problems. “Even if oil prices drop and the domestic demand goes up, the country has other resources – like minerals and solar – that will keep it in a leadership role,” he says. “Furthermore, religious tourism to Makkah and Madinah will continue so long as there is life on the planet. And the country has good infrastructure that is subjected to regular modifications and upgrades.” Having presented his assessment, Abusaa pronounces Saudi Arabia as being equipped with all the basic elements required to turn Vision 2030 into a reality.

An international perspective

Eurovent’s Morten Schmelzer shares his views on what the Kingdom can do to attract more foreign players…

For Saudi Arabia to be more attractive for foreign companies, it is essential to have a level-playing field. In order to achieve this, the following measures should be carried out:

• Ensure technological neutrality: Incentives should be given to invest in new technologies. This should happen in a technology-neutral manner, whereby, the market is allowed to decide what the best available technologies are.

• Reduce technical trade barriers: In order for Saudi Arabia to become a global hub, technical trade barriers must be minimised. An example that hinders investment in the HVACR sector is the dominance of North American standards and certification programmes. Saudi authorities should refer to international (ISO) standards in order to motivate more companies from other regions to invest in the market, which could thus create more jobs and bring more options and solutions to customers in Saudi Arabia.

• Ease the visa and investment regime: The current visa and investment regime in place is a burden for foreign investors. For HVACR companies, it is easier to invest and do business in the UAE, which offers a comparatively open and liberal visa and investment regime. 

• Reduce bureaucratic burdens: Currently, there are high bureaucratic burdens in place that hinder wide-scale investments. These burdens would need to be significantly reduced in order to attract more foreign investors.

Schmelzer, though, is more cautious with his appraisal of the reforms’ feasibility. “It all depends on how the oil price is eventually going to develop,” he says, explaining that if prices remain low, there’s a greater chancethat the reforms would be undertaken. “The current low oil price offers unique potential to take on wide-ranging reforms that could provide an overall boost to the Saudi economy,” he explains.

Offering advice, Schmelzer suggests that the Kingdom incorporate into its diversification plans a study of its internal dependence on oil. He says: “Many buildings and installations could benefit from an analysis of current energy consumption. The results may highlight retrofitting opportunities. It may prove useful to look at financing structures that would stimulate retrofitting.”

Business magnet
The experts may agree on the value of Vision 2030 to the country and the region, but do they see the reforms drawing more business into the country and increasing the market’s appeal to companies and investors?

Speaking from his company’s perspective, Zackariah believes that the reforms definitely make Saudi Arabia a more attractive market. “Saudi [Arabia] is usually an attractive market, but if everything goes well with this Vision, there will be increased activity in the country,” he says. “Take for example the anticipated reforms in energy tariff structures. Those will generate huge market for retrofit projects. Since we, as a company, are focused on energy conservation and energy auditing, we definitely see potential. As I’ve mentioned, Saudi [Arabia] has always been a market with a lot of potential, but it would become even more appealing if conditions and regulations became more conducive for business, if people’s attitude were to change and if industry stakeholders took inspiration from Saudi [Arabia’s] leadership and pushed the [2030] agenda.”

Abusaa, on a similar vein, points out that Saudi Arabia has always been a market that foreign investors wish to tap into, adding that there usually are two aspects that determine a market’s appeal. Those two aspects, Abusaa says, are, “the buying capacity of the market and the level of profit that can be made; and the investment rules, environment, terms and conditions imposed by the host country”.

He adds: “With regard to the former, there is no doubt that Saudi Arabia is an attractive market for investments. With regard to the latter, it’s all in the hands of the Saudi government. So far, they have not decided to fully open the door for all kinds of investments, and there are still restrictions imposed that don’t suit outside investors. When the reforms are implemented, they may change the rules.”

Abusaa, however, has a caveat to add: “There will always be people not happy with foreign investment rules, whether in Saudi Arabia or in other parts of the world.”

Voices

Industry leaders and stakeholders share with Climate Control Middle East their thoughts on Saudi Arabia’s Vision 2030…

“What is interesting in Saudi Arabia is that there is a certain level of correction. There’s going to be both short-term and medium-term [changes]; there will be a certain level of stabilisation. So during that process of transition, one has to align his own capabilities to prepare himself for what is likely to come. And with Saudi Arabia, because of its political and economic conditions, it has to find operational efficiency. FM is the ideal tool to find efficiency.”
– Tariq Chauhan, Group CEO, EFS Facilities Services Group

“We are seeing a lot of challenges in the Saudi market presently, because of certain economic issues like the oil price and difficulty in doing business. But we’ve been hearing some really positive developments from the government. Of course, we still need to see how it all comes out in the end. For us, it’s currently a wait-and-see scenario.”
– Gaurav Bhatnagar, Regional Marketing Manager, Armacell

“It’s a very big market. For them to try and introduce reforms, like the privatisation of assets, to their economy now – well, it’s going to be a challenge for them. The oil price is, of course, going to be a major factor; although it has marginally clawed its way back in the last few weeks.”
– Jean-Paul Logiotatos, CEO, Hydrocool

“What the Deputy Crown Prince is suggesting in term of economic reforms shows that he is a visionary. And I applaud him for it. He is opening up the Saudi economy even further with his bold leadership and vision, which should help companies by increasing business activity and limiting barriers.”
– Bob Mangiaforte, Vice President for Sales, Portacool

“I think Deputy Crown Prince Mohammed bin Salman is shrewd and intelligent. He has a lot of courage and charisma, which are traits that should help him achieve the changes he is after.
“As for the reforms, there’s been mention of a Green Card [system], which I think will make it less difficult for people to work in Saudi [Arabia]. There has also been talk of foreign investments and opening up the Saudi stock market to foreign investors. They’re also talking about improving the business environment for foreign manufacturers and establishing free zones. Put all those together, and you’ll have globalisation; you’ll have a Saudi Arabia that is changing from being a closed country to an open one. It will happen in stages.”
– Saad Ali, VP and Group General Manager, Ruskin Titus Gulf

“We’ve yet to see how Vision 2030 will affect the solar industry. There’s going be wind and solar projects coming up, and we’re expecting the Saudi market to stand up, in the same way that Abu Dhabi stood up with Masdar. Saudi [Arabia] took the initiative a few years ago with KACARE (King Abdullah City for Atomic and Renewable Energy), but due to market and political conditions in the region, the KACARE concept was put on the backburner. Now, we’re holding our breath. The next few months are going to be a decisive testing period for the Saudi projects and for its solar energy market.”
– Hadi Tahboub, Executive Director – Development, Middle East at SkyPower and President of MESIA (Middle East Solar Industry Association)

“Saudi Arabia’s Vision 2030 is going to support business, which – in turn – will support our Saudi Arabia initiative promoting clean indoor air. There is huge potential in Saudi Arabia, and because of the Vision, the country will move forward.”
– Faisal Zaidi, Marketing Manager, TROX Middle East


*The full text of Saudi Arabia’s Vision 2030 can be accessed at http://vision2030.gov.sa/sites/default/files/report/Saudi_ Vision2030_EN_0.pdf.

**The full text of the National Transformation Programme can be accessed at http://vision2030.gov.sa/sites/default/ files/NTP_En.pdf.


(The writer is the Assistant Editor of Climate Control Middle East.)


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