McKinsey blueprint for Saudi National Transformation Plan

On 1 December, the McKinsey Global Institute (MGI) published a 156-page report named Saudi Arabia beyond oil. It set out the strategic challenges facing Saudi Arabia and the approach its government and business leaders might pursue to address them. The report was published at a time when McKinsey has been advising the Saudi Arabian government about strategy. The consultancy says the report is the product of its independent think tank, but business people in Saudi Arabia believe it distils the recommendations made to deputy crown prince Mohammed Bin Salman, CEDA chairman and Saudi Arabia’s Defence Minister which are shaping the National Transformation Plan.

The report said that Saudi Arabia’s GDP could be doubled by 2030 and 6 million jobs could be created by that year by the implementation of appropriate government policies that targeted eight key sectors. It also said the kingdom’s budget deficits could be eliminated by fostering high growth rates; savings in operational and capital spending through efficiency measures and increases in government revenue, principally involving better management of state assets; increases in domestic energy prices and new and higher government fees, including VAT.

The following is the executive summary and two extracts from the report. The full version can be found here: file:///C:/Users/EdmundoSullivan/Downloads/MGI%20Saudi%20Arabia_Full%20report_December%202015%20(2).pdf

“MGI is publishing this report on Saudi Arabia at a time of change in the Kingdom. After a surge in prosperity over the past decade, the economy is at a transition point. We see a real opportunity for the Kingdom to inject new dynamism into the economy through a productivity- and investment-led transformation that could help ensure future growth, employment, and prosperity for all Saudis.

An oil price boom from 2003 to 2013 fueled rising prosperity in Saudi Arabia, which became the world’s 19th-largest economy. GDP doubled, household income rose by 75 percent, and 1.7 million jobs were created for Saudis, including for a growing number of Saudi women. The government invested heavily in education, health, and infrastructure and built up reserves amounting to almost 100 percent of GDP in 2014.

The Kingdom can no longer grow based on oil revenue and public spending, in the face of a changing global energy market and a demographic transition that will lead to a bulge in the number of working-age Saudis by 2030. Current labor participation is 41 percent, and productivity growth of 0.8 percent from 2003 to 2013 lagged behind that of many emerging economies. Foreign workers on temporary contracts who are paid considerably less than Saudi nationals today constitute more than half the labor force.

We have developed a model that integrates Saudi Arabia’s economic, labor market, and fiscal perspectives. It shows that even if the Kingdom introduces reactive policy changes such as a budget freeze or immigration curbs in the face of these challenging conditions, unemployment will rise rapidly, household income will fall, and the fiscal position of the national government will deteriorate sharply.

However, a productivity-led transformation of the economy could enable Saudi Arabia to again double its GDP and create as many as six million new Saudi jobs by 2030. We estimate this would require about $4 trillion in investment. Eight sectors—mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, health care, finance, and construction—have the potential to generate more than 60 percent of this growth opportunity.

To enable this transformation, Saudi Arabia will need to accelerate the shift from its current government-led economic model to a more market-based approach. In the labor market, greater workforce participation by Saudi men and women is essential to achieve higher household income. The proportion and number of foreign workers may decline but they would likely benefit from higher wages and better conditions. Faster productivity growth requires better business regulation and more openness to competition, trade, and investment. Improved efficiency of spending and new revenue sources, possibly including taxes and higher domestic energy prices, can help ensure fiscal sustainability.

All stakeholders, including the private sector, foreign investors, and households, will need to be involved in this transformation. The state will have to embrace a new delivery philosophy while businesses adapt to a more competitive environment and the individual Saudi citizen takes more personal accountability. The transition will be challenging, but the new era of economic growth and employment it could usher in would be more sustainable than the oil booms of the past.

Between now and 2030, there are opportunities throughout the economy to supercharge …  non-oil growth. In this report, we highlight eight sectors that analysis suggests have some of the biggest potential, and could contribute more than 60 percent of the overall growth needed to double GDP by 2030. They are mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, health care, finance, and construction.

Mining and metals. On the western side of the Arabian Peninsula are substantial deposits of metals and non-metallic minerals, including major phosphate resources, gold, zinc, bauxite and high-quality silica, gypsum, limestone, kaolin, and magnesite. They present an opportunity for the Kingdom to develop both additional resource sectors and manufacturing sectors. For now, while the reserves are ample, the mining and metals sector is still largely underdeveloped; combined GDP of the extraction and manufacture of these resources is estimated at less than 3 percent of the Kingdom’s GDP. We estimate this sector could triple in value added and potentially create up to 500,000 new jobs for Saudi nationals. To develop the industry, the Kingdom will need to invest more heavily in exploration and create a competitive ecosystem that allows both public- and private-sector companies to thrive.

Petrochemicals. This sector already accounts for two-thirds of Saudi Arabia’s nonoil exports, and the Kingdom is competitive in global markets. Saudi Basic Industries Corporation (SABIC), which is 70 percent owned by the government, is one of the top five global chemicals companies, and the Kingdom is home to four of the world’s biggest ethylene complexes. We estimate that by reducing current inefficiencies, further integrating its oil refining and petrochemical sectors, and investing in innovation to make higher-margin products, the Kingdom could boost the sector’s GDP by up to $30 billion and create thousands of attractive skilled research, engineering, and management jobs.

Manufacturing. Saudi Arabia is a big market for a range of manufactured goods, including automobiles and electrical and mechanical machinery. As with other countries in the region, its needs for now are supplied from abroad. We see the Kingdom as having an opportunity to meet a larger share of its domestic demand, and potentially some regional demand, by leveraging the country’s natural endowments, and relatively large market size. Already some private companies are starting to produce locally, including international firms such as Isuzu, which opened a truck assembly plant in the Kingdom in 2012. To ensure competitiveness in these segments would require a skilled and more productive workforce, stronger legal and investment protection, and the removal of a range of obstacles that hinder business, including high import duties, lengthy customs and visa procedures, and gaps in local supply chains.

Retail and wholesale trade. Saudi Arabia’s retail sector could boom as online retail and modern formats replace traditional baqala neighborhood “corner” stores. Overall, we estimate that retail and wholesale trade have the potential to employ as many as 800,000 additional Saudi nationals over the next 15 years and triple valued added. Retail has been expanding rapidly, at a 12 percent annual rate over the past decade, propelled by the rise in household income. While the workforce now largely consists of low-paid foreign workers, the number of Saudis working in the sector doubled between 2010 and 2014. This is an area where Saudi women in particular have found employment; according to the Ministry of Labor, their number jumped from 10,000 in 2010 to 120,000 in 2014. This reflects a push by the government to encourage Saudization and feminization of retail categories catering to women, such as lingerie or cosmetics. Adapting modern retail formats, migrating rapidly online, and adopting best practices in merchandising, including supply-chain efficiencies such as more automation in warehousing, could significantly enhance productivity and growth.

Tourism and hospitality. Saudi Arabia attracts ten million to 13 million Muslim visitors to the holy sites of Mecca and Medina every year, including more than two million during the annual Hajj pilgrimage period. Overall, however, the tourist industry is in decline; the total number of visitors dropped by 31 percent between 2004 and 2012 as Saudis preferred to vacation abroad. An onerous visa process also may have discouraged some international visitors. We see an opportunity to reverse this trend and develop a thriving private-sector leisure tourism industry for Saudis and foreigners alike that leverages the Kingdom’s long Red Sea coastline, a wealth of archaeological treasures, and areas of natural beauty. Religious tourism could also be further developed and cater to tens of millions more pilgrims each year outside the peak Hajj season. Developing tourism, both religious and leisure, will require higher-quality facilities, better safety and service, and greater openness to foreign visitors. Potentially, the sector could employ as many as 1.3 million additional Saudi nationals and increase value add more than fivefold.

Health care. Health care was one of the biggest beneficiaries of public spending during the oil boom, and there was a large-scale buildup of health-care infrastructure including 81 new hospitals. The Kingdom will need to continue spending heavily on health care, especially given the projected increase by 2030 in the number of Saudis over the age of 65. It faces three key challenges that are also opportunities: current suboptimal productivity and financing that could be increasingly covered by the private sector; a health-care workforce that is not structured to tackled the growing prevalence of non-communicable diseases such as diabetes, and an increased need for doctors, nurses, pharmacists, and other skilled professionals. For now, just one in three health- 10 McKinsey Global Institute Executive summary care professionals is a Saudi national, and there are not enough health-care graduates to replace professionals who retire or leave their jobs, let alone fill additional posts. To reverse this trend, several initiatives will be needed to improve the perception of the health-care professions and to provide the educational capacity at colleges, universities, and appropriately equipped teaching hospitals.

Finance. This will be an essential sector to enable economic growth in the private sector and at the same time contribute to it through a substantial expansion of its own. There is significant potential room for growth in lending to small and medium-sized business, as well as in better provision of financial services to households, including mortgages and investment products. Households will have an important role to play in helping to finance the Kingdom’s big investment needs indirectly through their savings.

Construction. The eighth sector is construction, which grew significantly over the past decade as the Kingdom built out its infrastructure. Over the next 15 years, further largescale investments, increasingly from the private sector, should translate into continued demand for construction. For the investment to be productive, the sector must become more efficient, adopting modern techniques and improving operational management to be able to deliver projects on time and on budget. For now, more than nine in ten workers in the sector are foreign laborers. If the current Saudi stigma of working in construction could be overcome, the sector could become an important driver of future Saudi employment.”