THE EMBASSY OF ITALY. Riyadh - Saudi Arabia

Transcription

1 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA MARKET STUDY FOR WATER & ENERGY SECTORS IN SAUDI ARABIA Submitted To THE EMBASSY OF ITALY Riyadh - Saudi Arabia Presented by: SAPCO Member Of Talal Abu Ghazaleh Org. March, 2008 Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization

2 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA # Description page - Executive Summary - 1. Introduction Scope Of The Study Project Objectives Study Methodology 2 2 The Kingdom Of Saudi Arabia Profile Overview Of The Saudi Economy Supporting Factors of the Saudi Economy Saudi Economy Scenario To Strengths of the Saudi Economy Challenges that Saudi Arabia Face Saudi Arabia External Trade 15 3 Saudi Arabia's Population Official Statistics Population Forecast 26 4 Saudi Budget Royal Decrees Issued For FY 2008 State Budget Budget Highlights Budget Analysis Focus of Investment Plans Specialized Credit Development Institutions and Government Financing Programs 35 5 Investment Environment In Saudi Arabia Overview Investment Incentives Regulations On Exchange Transactions Focus Of Investment Sectors 44 Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization

3 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA 5.5 Strategic Projects Under The Eighth Development Plan 52 6 Water & Energy Sector Analysis Water sector Water Consumption Agricultural Consumption Municipal Consumption Industrial Consumption sector performance Issues and Challenges The Role of the Private Sector Water Demand Forecasts Water related entities Financial Requirement Sector Performance (Improvement Plan) Sector Inputs (Budget Distributed) Sector Policy and Government Framework Energy and Resources Sectors Defining the Sector (Sector Priorities): Sector Performance (Improvement Plan) Sector Inputs (Budget Distributed) Sector Policy and Government Framework Current Conditions Privatization of the Water & Energy sector Decision of the Supreme Economic Council The Privatization Of The Electricity Sector In Saudi Arabia The PPP Contracts in the 4th Quarter of Appendix Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization

4 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Economic Developments in 2007 Executive Summary: The Saudi Government made public the economic results for 2007 In addition to announcing the budget for the 2008 fiscal year. Overall, as a result of high oil export revenues, the year was regarded as one with healthy fiscal performance. It saw the fifth budget surplus in a row, amounting to $47.6 billion (SR289.7 billion). The new budget surplus, however, represents a decrease of 62 percent compared to the 2006 budget surplus. The 2007 budget was based on projected revenues of $106.6 billion (SR400 billion) and expenditures of $101.3 billion (SR380 billion). However, budget expenditures for 2007 reached $118.1 billion (SR443 billion), while revenues reached $165.7 billion (SR621.5 billion). Thus, actual expenditures for 2007 were 16.5 percent higher than the planned spending, which can be attributed to an increase of food subsidies, funds allocated to education, and increase of wages. Most of the $47.6 billion surplus was used to accumulate foreign assets at the Saudi Arabian Monetary Agency (SAMA) and to repay the country s debt. SAMA foreign assets increased by 22.5 percent through October 2007, compared to 47 percent over the same period in 2006, reaching a total of $271 billion (SR1.01 trillion). Government debt, all of which is domestic, was reduced to $71.6 billion (SR268.6 billion), down from $97.6 billion (SR366 billion) in Consequently, the country s debt represents 19 percent of the Kingdom s gross domestic product (GDP), compared to 28 percent in 2006 and the 119 percent peak in A significant contribution, 46.1 percent, to the GDP came from the private sector this year. Inflation for 2007 recorded a 12-year high with 3.1 percent, up from 2.2 percent in The non-oil private sector grew by 5.9 percent, compared with 6.4 percent in Non-oil industrial growth stood at 8.6 percent as a result of the expansion of the petrochemical and cement sectors. Transportation and communications witnessed a 10.6 percent increase, the highest growth rate within the private sector, followed by construction (6.9 percent), electricity, gas, and water (4.4 percent), and wholesale and retail trade, hotels, and restaurants (6 percent). The financial services, real estate, and insurance sectors grew by 4 percent. Other macroeconomic indicators show that Saudi Arabia s economic performance remained healthy in According to the Saudi Arabian British Bank (SABB), real GDP slowed to 3.5 percent, down from 4.3 percent in This decrease can be attributed to a decline in oil production during the first seven months of the year. Oil production, however, recorded an increase after July from around 8.55 million billion barrels per day (bpd) to the million bpd. Nominal GDP reached $376 billion (SR1.41 trillion), maintaining Saudi Arabia s top economic position in the Gulf Cooperation Council (GCC) and the Middle East. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -a-

5 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Economic Performance Saudi Arabia's growth is solid. It is the largest free market economy in the Middle East and North Africa holding 25 percent share of the total Arab GDP. The Kingdom s geographic location provides easy access to export markets in Europe, Asia and Africa. It has a continuously expanding domestic market (annual population growth of 3.5 percent), which is adding to a young and consuming population with strong buying power. The investment environment in the Kingdom reflects traditions of liberal and open market private enterprise policies, and its new Foreign Investment Law allows 100 percent foreign ownership of projects and real estate. The Kingdom has an impressive record of political and economic stability and has a modern world-class infrastructure. The kingdom of Saudi Arabia has benefited enormously from oil and gas reserves that have generated vast financial liquidity in the six years between 2001 and Over that period, it has also increasingly opened up to the global economy, becoming a member of the World Trade Organization in December While providing the government with ample income, the Kingdom's resource wealth poses a challenge to the future of the country. Follows some factors that strongly affect the economic performance and make the Kingdom a much more attractive country in which to invest: o Geographical Factor: Saudi Arabia has vast natural resources and strategic geographic location, A vast desert land which is about the size of Western Europe or more one fifth of the United States is known giving it the advantage of proximity to major markets characterized by growth, in addition to the government's efforts to increase private sector participation in development plans. o Ability to Execute Projects: Saudi Arabia is expected to complete more than 419 projects, according to a report of the National Commercial Bank in Saudi Arabia, over the next two decades until 2012, a total value of trillion Riyals (267.3 billion dollars), and those projects are distributed on 5 key sectors which are construction, petrochemicals, oil and gas, water, energy, and industry. Recently, there have been a worth of 204 billion riyals (54.4 billion dollars) of awarded contracts, covering 195 projects, while the rest of the projects are in various stages of pre-implementation of the design, planning and feasibility study and an invitation to make offers. o Public and private sectors opportunities: the overwhelming majority of private and public investment opportunities to foster sharing of experiences and benefits. o Country Rating: According to the World Bank, the Kingdom rates the best of any Middle East state even ahead of mature economies such as France and Austria. The Kingdom is now aiming to be among the top ten most competitive countries globally by 2010 increasingly focusing on building a knowledge-based economy. o WTO membership: WTO membership since December 2005 has to date little direct effect on the economy. This will change. As the sustainability of the current period of strong economic performance becomes evident, more and more foreign companies will enter the Kingdom. The opening of foreign banks is an important step in this regard. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -b-

6 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA o Infrastructure and Real Estates Expansion: Extremely rapid population growth has taken place. Thus growth was accompanied with massive The Saudi government's is spending large amounts on basic infrastructure and residential projects for lowincome segments in order to meet the rising growth in population in major cities, put at 4% per annum. The Saudi government has seen the needs of a growing, young, urban population and is no longer focusing solely on luxury villas and palaces. Statistics show that up to 60 percent of the total population is in need of around 1.2 million residential units over the coming period, with this number likely to increase to around 2.9 million over the next twenty years. o Government Reforms: As a result of the economic reforms ushered in by the Saudi Arabian General Investment Authority (SAGIA), the growth rate of the corporate sector in the first quarter of 2008 is projected at almost 30 percent, surpassing the performance of the 18 percent growth rate in The Cabinet also decided to institute a SR1,000 fee for issuing multiple-entry visas valid for a year, enabling foreign businessmen to visit the Kingdom. Not to be left behind, the Capital Market Authority (CMA), too, streamlined the functioning of the stock market. Consequently, stock prices which had dropped by 52 percent last year rallied this year and were in fact percent higher than before on Nov. 8, Budget 2008 Saudi Arabia's 2008 national budget projected the revenues at SR450 billion and expenditure at SR410 billion resulting in the surplus of SR40bn. Budget 2008 is a continuation of the government focus on optimizing the available resources and giving priority to social infrastructure and services especially in education, health, social affairs, municipal services, water and sewage( $7.6 billion (SR28.5 billion) Of the total budget set aside for the water, agriculture, and infrastructure sectors, the Saudi Government allocated $3.54 billion (SR13.3 billion) alone for water, sewage, and desalination projects. In addition, the industrial cities of Jubail and Yanbu, as well as other industrial and agricultural projects in the Kingdom, will receive $2.02 billion (SR7.6 billion)), and roads. Moreover, the budget put special emphasis on projects related to research and development and e- government in addition to capital expenditures that will create more job opportunities and enhance economic activities, and boost economic growth. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -c-

7 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Water Sector& Energy Sector analysis : A- Water Sector: Saudi Arabia undoubtedly faces a major challenge on the water front, but what it has done in terms of reforms, privatization of the sector, regulatory measures and creation of live-wire institutions during the last two years to deal with this problem deserves kudos. What is planned for future is still more impressive. The taste of what is cooking can be made out from the mutli-billion riyal schemes of desalination finalized during the first two months of SR 7 billion desalination project in Shuqaiq signed last month, which followed finalization of a SR 13 billion Marafiq project in Jubail in January, among others. These projects represent something which has not yet been tried elsewhere in the world and are indeed of mammoth size. More similar projects are ahead too. But that is not the complete story. The Ministry of Water and Electricity (MOWE) has revamped the basic structure of the supply and demand management of water resources. This is no exaggeration and, believe it or not, MOWE seems to be developing a new global formula of water sector development, which will become a pattern for other countries to follow, obviously with adaptations to suit local needs. One finds Saudi Arabia alone making an innovative experiment, among all the countries worst hit. There is no reason why the experiment should not succeed, as it looks today. We already have the Saline Water Conversion Corporation (SWCC), which currently runs the world's largest network of desalination units producing both drinking water and electricity. The authorities have decided to privatize this corporation. SWCC is on track to be corporatized as a holding company with separate production and transmission subsidiaries. The essential features of the Public Private Partnership (PPP) are: An agreement between public and private sector parties on the provision of public infrastructure and services. PPP is a variation of privatization in which elements of services previously run by public sector are provided by partnership between government and private sector companies (including top international companies specializing in this field). Private partners will provide outcome guarantee and obliged to utilize the existing manpower under government authority. Payment for the services according to identified and improved performance based on share the gain & pain policy. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -d-

8 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Global trends in water privatization are outlined below: o The consensus is in favor of having cooperation between private sector and the state in managing water as per French model. This model is normally termed as PPP and there are three major types of PPP in order of risk transfer to private operator o O & M / Management contract o Lease contract o Concession contract An additional structure BOT exists for bringing in private investment, usually in construction of specific new water or wastewater treatment plants. According to official sources, there are plans to introduce further reforms in future. The core elements of the future program include a new institutional and regulatory framework and revised tariff structure. A restructuring of the sector will also include water demand management initiatives, including a reduction in non-revenue water, and the introduction of metering throughout the Kingdom. The reforms will also include serious attempts to attract significant private capital for investments for capacity extensions, and other infrastructure improvements, in order to reduce the burden on the national budget. B- Energy Sector: The decision to invest in the Saudi Arabia's energy sector is made by both the Saudis and the IOCs for different reasons. The Saudis are interested in stimulating their economy, generating jobs, expanding their petrochemical industry, satisfying a growing domestic demand, and freeing additional oil for export. IOCs on the other hand, are interested in maximizing their profit and establishing a base in Saudi Arabia with the expectation that one day the door will be opened for investment in the country's lucrative oil sector. In addition to these commercial interests, strategic and political considerations play a role. The course of foreign investment in the Saudi energy sector in the foreseeable future is likely to be determined by a combination of domestic, regional and international developments. First, inviting foreign investment to the Saudi energy sector should be seen as a part of broader strategy of economic reform. The high level of economic growth since the early 2000s is due mainly to high oil prices. The Saudi economy is heavily dependent on oil and suffers from structural imbalance. Saudi leaders have acknowledged the need for economic reform and since the late 1990s have repeatedly re-affirmed their contention that privatization is a "strategic choice." In line with this contention, the Saudi government has moved cautiously and slowly toward subsidy cuts and tax increases. In 1999, a Supreme Economic Council was created and charged with boosting investment and promoting privatization. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -e-

9 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Second, developments in next-door neighbor Iraq will have an important impact on foreign investment in Saudi Arabia and the rest of the region. Some analysts suggest that Saudi Arabia has vigorously negotiated with IOCs out of concern that these companies will focus on investing in Iraq and lose interest in the kingdom. Third, Russia is the world's largest exporter of natural gas and the second largest oil exporter (after Saudi Arabia). Following the Soviet collapse in 1991, Russia's oil production fell sharply. With more stable economic and political environment and the gradual privatization of the oil industry, the country's production has rebounded. This rising Russian oil production, in conjunction with repeated calls in the West to reduce dependence on Middle East oil, has made Russia an attractive energy partner to both the EU and the United States. Both Brussels and Washington seek to invest billions of dollars in Russia's energy sector to reduce their dependence on the Middle East. More foreign investment in Russia would come at the expense of other regions and would mean fewer financial resources available to invest in other oil producing regions and countries, including Saudi Arabia. To sum up, the future of foreign investment in the Saudi energy sector will be largely shaped by the Saudi government's commitment, by political stability within the kingdom and the entire Gulf region and by competition with other oil and gas producers. In the foreseeable future, it is highly unlikely that IOCs will be allowed to invest in the Saudi oil sector. The kingdom has no incentives to change its policy, so the focus will remain on the gas sector. Domestic consumption of energy is expected to grow at an average annual rate of 5% during the period of the Eighth Development Plan, from 2,138 thousand barrels of crude oil equivalent per day in 2004 to 2,733 thousand in 2009 (Table 24.7 and Figure 24.5). Domestic consumption in the main energy categories (Table 24.7) is expected to grow, at an annual rate of 3.3% for refined products and 14.8% for crude oil for direct combustion. The share of refined products in total consumption is expected to decline from 54.2% in 2004 to 49.9% in 2009, while the share of crude oil will rise from 6% to 9.4%. Consumption of natural gas as a fuel is expected to grow at an average annual rate of 5.5%, increasing its share in total energy consumption from 39.8% to 40.7%. However, consumption of natural gas is not limited to its use as fuel. Its use as a feedstock is expected to grow at an average annual rate of 16.8% during the period. Thus, total consumption of natural gas, including gas liquids, will increase at an average annual rate of 10%, from 1273 thousand to 2054 thousand barrels of oil equivalent per day. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -f-

10 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Strategic Projects Under the Eighth Development Plan: Table below shows a number of strategic programs and projects expected to be implemented under the Eighth Development Plan by both public and private sectors. These programs and projects constitute the key areas of investment activities under the Plan. Strategic Projects under the Eighth Development Plan Activity Size/Outputs 1. Gas Projects Agreements have been concluded for four major projects for exploration and production of natural gas with the participation of international firms. (See Oil and Gas Chapter) 2. Expansion of Saudi ARAMCO's production capacity Expansion of crude oil production capacity. 3. Expansion and development of refining capacity Expansion of refining capacity with a foreign partner. Renovation of Rabeigh refinery with a foreign partner 4. Petrochemical projects Increased availability of natural gas will lead to new opportunities for the growth of petrochemical industries. This has resulted in the announcement of a considerable number of new investment projects to be undertaken by SABIC, as well as private domestic and international companies. (See Industry Chapter). Exploration area is about 330,700 km 2. Addition of 1.5 million barrels/day to the production capacity. Increase refining capacity by 30% during period of the plan. Development of the refinery to become an integrated complex for refining and petrochemicals. Establishment of a new complex in Yanbu for production of: 1.3 million tons of ethylene. 800 million tons of polyethylene. 700 million tons of ethylene glycol. Establishment of a new ethylene glycol plant at Jubail, by SABIC, with a production capacity of 625 thousand tons/year. Establishment of a Butene-1 plant with a production capacity of 130 thousand tons/year in Jubail, by PETROCHEMYA, a subsidiary of SABIC. The International Methanol Company will establish a 970,000 tons/year methanol plant in Jubail. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -g-

11 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Activity Size/Outputs The National Petrochemical Industrialization Company will establish a plant for production of 5000,000 tons of acetic acid, 275,000 tons of vinyl and 1.8 million tons of methanol. 5. Railway Projects Work is underway to finalize an integrated plan for expansion of the railway network with the participation of the private sector. 6. Mining Projects Work, with the involvement of foreign investors, is expected to commence on implementation of major phosphate and bauxite projects that are linked with the railway projects. (See Mining Chapter). 7. Communication and information technology. (See the Communication and Information Technology chapter) Saudi Chevron Philips plans to establish a new plant in Jubail for production of ethyl benzene and styrene with a capacity of 730,000 tons/year. Construction of a 1,683 km railway line to connect phosphate and bauxite mines in the Northern Part of the Kingdom with Jubail Industrial City. Construction of a 946 km rail road linking Jeddah with Dammam, and passing through Riyadh. Connection of Mecca with Medina via Jeddah along with a link to Yanbu city. Connection of Dammam with Jubail industrial city (115 km) Establishment of an integrated phosphate fertilizer project with a capacity of 2.9 million tons/year, including four sulfuric acid plants, three phosphoric acid plants and three DAP plants. Completion of the bauxite project, which includes development of Al- Zubairah Bauxite mine with a production capacity of 3.3 million tons/year, establishment of an ammonium refinery with a capacity of 1.4 million tons/year and an ammonia melting furnace at Ras Zour north of Jubail city. More mobile and fixed telephone services will be provided so that the number of customers will reach about 13 million for mobile telephones and about 7 million for fixed telephones by the end of the plan. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -h-

12 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA Activity Size/Outputs 8. Electricity Generation and Water Desalination. The Water and Electricity Company has been established to promote establishment of several independent water desalination and power generation projects. Several power generation and transmission projects will be launched on (BOT) and (BOO) basis. * Establishment of power generation plants which will contribute about 10,996 MW, in addition to 1330 MW expected to be provided by desalination plants. Establishment of power transmission lines to provide electricity to 1126 villages and hamlets and to add about 1163,2 thousand customers. 9. Water and wastewater projects. Expansion of water distribution and wastewater networks and increasing wastewater treatment plants. * BOT = Build, Operate Transfer. Expansion of water distribution network to increase coverage rate to 80%. Expansion of wastewater networks to increase coverage rate to 50%. Increasing rate of wastewater treatment to about 40% of wastewater volume. Increasing desalination capacity from 1070 million cubic meters per year to 1650 million cubic meters per year. BOO = Build, Operate, Own. "Appendix 5,6,7 shows the projects of water & energy ".. Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization -i-

13 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA MARKET STUDY FOR WATER & ENERGY SECTORS IN SAUDI ARABIA Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization

14 MARKET STUDY FOR WATER AND ENERGY SECTORS IN SAUDI ARABIA SUBMITTED TO : THE EMBASSY OF ITALY IN SAUDI ARABIA 1. Introduction: Building on last year's success, SWPF 2008 is dedicated to companies and investors aiming to capitalize on additional 30 GW of power generating capacity targeted by the Saudi Arabia's Water and Electricity Ministry for This figure will double the current installed capacity of 29.1 GW at a cost of an estimated US $ Billion. In addition, Saudi Arabia's state-owned Saline Water Conversion Corp. (SWCC) has estimated that through, the country will need to spend US $ 50 Billion on water projects, many integrated with new 2020power generation capacity, in order to meet the Kingdom's equally rapidly growing water demand. At a time of huge investment in the utilities sector, SWPF 2008 strategic forum will provide unique perspectives on the best investment strategies, the key uncertainties and most appropriate risk mitigation tools for Water and Power projects in Saudi Arabia. This must-attend event will attract decision makers in water, power and supporting sectors to discuss the future of the industry. From our research for this report we have uncovered a tremendous amount of activity and analysis around different Saudi economic sectors, especially water and energy sectors. The conclusion from all research data is that growth in water and energy sectors will continue in the foreseeable future. This study will serve to assist Italian entities and investors to develop the market opportunities that exist in the water and energy sectors in Saudi Arabia. " appendix 1,2,3 show the economic technical & financial agreement between ITALY & KSA ". Saudi Arabia's water and power industry represents a challenge on a scale unknown anywhere else in the world and the Saudi Arabian government has undertaken an ambitious programmers of reforms in this sector. " appendix 4 show the Italian companies worked in KSA ". Prepared by : Saudi Arabic projects Co. ltd. " SAPCO" Member of Talal Abu Ghazaleh Organization Page 1 of 90

15 1.1 Scope of the Study: This study was commissioned to gather information and data regarding the Saudi economic sectors, especially the water and energy sectors. Over the course of the past few weeks, our project team has reviewed many studies, undertaken investigative level, and talked to numerous individuals to assist us in developing a picture of the Saudi water and energy sectors. Basically, we have approached this project with the end user in mind looking for practical and realistic opportunities in the Saudi water and energy sectors." Appendix 5,6,7 sows the projects of water & energy ". When reading this study, one has to keep in mind that all markets/sectors are dynamic and constantly evolving and shifting. There is no guarantee that the data identified today will still be there tomorrow or be there in or 5 years from now, but our research team has built theses information on reliable data sources in order to assist your needs and requirements the best way possible. 1.2 Project Objectives: The goal of this market study is to assess you in providing needed market information for water & energy sector in Saudi Arabia. Researched information will cover : An overview of the Saudi Economic & trade Statistical data Saudi budget 2008 Government reforms and regulation 1.3 Study methodology. This study depends on the statistical and economical methods in collecting, sorting, classifying and analyzing data. In collecting its secondary and raw data, the study applied the desk and field survey methods as follows: a. Desk Method. In the desk research works, the official and unofficial data issued by official and unofficial parties which addressed the water & energy sectors,were covered. In this connection, we checked with the hereunder authorities and had access to their study-related data and information: Official reports and statistics issued by the government authorities (Ministry of Planning, Ministry of Water and Electricity, SAMA,SAGIA, Chamber of Commerce etc.) Unofficial reports and statistics ( articles, internet libraries..etc. ) b. Field Survey. These works included collection of raw and secondary data which serve the study objectives where field visits were paid to many government authorities such as the Ministry of Industry and Electricity, Ministry of Planning and the Chamber of Commerce etc. Page 2 of 90

16 2. The Kingdom of Saudi Arabia: 2.1 Profile : The Kingdom of Saudi Arabia is the largest country of the Arabian Peninsula,Its size is approximately 2,150,000 square km (830,000 square miles). The Kingdom is sometimes called "The Land of The Two Holy Mosques" in reference to Mecca and Medina, the two holiest places in Islam. In English, it is most commonly referred to as Saudi Arabia. The Kingdom was founded by Abdul-Aziz bin Saud, whose efforts began in 1902 when he captured the Al-Saud s ancestral home of Riyadh, and culminated in 1932 with the proclamation, and recognition of the Kingdom of Saudi Arabia. Saudi Arabia is the world's leading petroleum exporter and petroleum exports fuel the Saudi economy Oil accounts for more than 90 percent of exports and nearly 75 percent of government revenues, facilitating the creation of a welfare state which the government has found difficult to fund during periods of low oil prices. 2.2 Overview of the Saudi economy 2007 : Saudi economy continued to grow, but in a slower paste in 2007 affected by the low volume of production, with an average daily production hit 8.6 million barrels compared with 9.2 million barrels in the previous year (according to the monthly statistical bulletin of OPEC), but the continued increase in government spending and the growth of the private sector especially the non-oil sector has contributed to the growth in real gross domestic product amounted to 3.5% in Preliminary figures showed revenue for the year registering a surplus of billion riyals. While the overall budget of the state for the continuation in 2008 showed an increase in Page 3 of 90

17 government expenditure to 410 billion riyals compared with revenues estimated cost of 450 billion riyals surplus estimated at about 40 billion SR. Oil prices also continued to increase during the year 2007 to reach record levels, where the general price of a barrel of West Texas oil dealings closed at the level of 96 dollars and the average price of oil in 2007 amounted to about $ 72 a barrel, an increase of 9% from the average price in This is a continuation of the series of rise in oil prices since 2003,which could be summarized as the most prominent reasons why prices climb towards this in the following: Dealers' growing concern regarding the shortage of oil as a result of the continued decline in American oil stocks data (the largest consumer of oil in the world), with the OPEC pumping additional quantities on the market in light of assurances that the reasons for the high prices are not bound by the lack of supply but because of dealers' speculation. Geopolitical tensions in a number of areas which are the source of this strategic commodity, and especially the Middle East, which dominated the atmosphere of tension because of Iran's nuclear program as well as Nigeria, which dominated security and political unrest. Weakness of the dollar value, which is the currency trading world oil markets, which has given additional justification for increasing oil prices. Oil price has continued to rises to the level of historic hit $ 100 a barrel and that on January 2, 2008, and there's no doubt that the standard of high prices is a source of primary energy in the world had formed an obsession with dealers that contribute to the decline in the American economy, which is still suffering from the repercussions of the mortgage crisis, which would happen if the economy of many countries around the world related to the American economy and consequently lead to lower global demand for oil under the prevailing economic recession & stock market, reflected negatively on oil prices and paid landing... the following table shows the most important economic indicators in the Kingdom for the years " appendix 8 show capital market law in KSA ". Page 4 of 90

18 Table 1 Saudi Arabia: Economic Indicators ( ) r 2007 p Gross Domestic Product-Nominal (SR billion) , , ,414.0 Growth in GDP-Nominal (%) GDP Real (1999 prices - SR billion) Growth in Real-GDP (%) Growth in Private Sector (%) Growth in Government Sector (%) Growth in Oil Sector (%) Gross Fixed Capital Formation ( 1999 prices - SR billion) Growth in Gross Fixed Capital Formation (%) GDP/Capita Total Population (SR) 34,674 32,821 32,979 36,608 41,669 51,147 55,760 58,966 GDP/Capita Saudi Population (SR) 47,650 45,092 45,296 50,259 57,174 70,179 76,456 80,846 Total Population (Millions persons) Saudis Non-Saudis Total Labor Force (Thousand persons) 6, , , , , , , ,766.3 Saudis 2, , , , , , , ,584.7 Non-Saudis 3, , , , , , , ,181.6 Government Sector , , , ,125.1 Private Sector 5, , , , , , , ,641.2 Government Budget Balance (SR billion) Revenues Expenditures Balance as % Share of GDP-Nominal Merchandise Exports (fob - SR billion) Oil (Crude & refined products) Others (Non-oil) Merchandise Imports (CIF - SR billion) Trade Balance - Merchandise (fob - SR billio As % Share of GDP-Nominal Current Account Balance (SR billion) As % Share of GDP-Nominal Crude Oil Production (Million barrels/day) Average Price-Arabian Light (US$/barrel) Official Foreign Assets - Net (SR billion) # SAMA Official Foreign Assets Govt. Institutions & Independent Organizations # Exchange Rate (SR/US$) Money Supply M3 Growth (% change) Cost of Living (1999=100) % change Saudi Share Price Index (1985=1000) * 2, , , , , , , ,176.0 Source: Central Department of Statistics & Information, MOEP/macroeconomic calculations, SAMA -Annual Report # 43, 4 th Quarterly Statistical Bulletin-2006, and MoF 2008-Budget statement. Notes : r revised, p preliminary estimates, 1/ CDSI revised estimates, # To be provided, * at year-end. Page 5 of 90

19 2.3 Supporting Factors of the Saudi Economy: A. Successful Development Experience Despite regency of economic and social development, the Kingdom has made notable achievements, reflected in all sustainable development indicators. These achievements have been made possible by setting of correct economic growth priorities throughout the successive seven development plans. Each such plan was based on current conditions, while ensuring continuity of the development effort and concentrating on human development sectors, such as education, healthcare, and family care, and on the infrastructure, in order to transform available resources into effective productive capacities that contribute efficiently to realizing long-term strategic objectives. B. Advanced Infrastructure and Services All regions of the Kingdom are covered by advanced facilities for transportation, electricity, water, sanitation, and a distribution network for oil products, as well as by varied health, education, training and social services. C. A Unique Experience in Promoting Comprehensive Development The Kingdom built two industrial cities at Jubail and Yanbu in record time. The two cities, with their 218 establishments employing more than 85,000 workers, have attained a distinguished status in production of petrochemicals, both regionally and internationally, with the Kingdom currently meeting around 7.6% of world demand for petrochemicals. D. An Active and Entrepreneurial Private Sector The private sector enjoys a high degree of dynamism, contributing 54.6% of the GDP in 2004 with activities covering all available fields. Financial and administration capabilities of the sector have been enhanced, as it moved from high dependence on government contracts and public expenditure to self-propulsion, becoming a major partner in the development process. The private sector was quick to participate in the newly privatized projects and its role is expected to grow rapidly as privatization proceeds further. E. Abundant Material Resources The Kingdom has substantial resources that would allow it to meet the requirements of the development process and continue to invest in the national economy should an improved investment climate persist. Indeed, the oil resources and huge reserves of the Kingdom are capable of meeting all foreseeable future needs of development. The Saudi economy also enjoys many other positive factors, bolstered by the recent measures aimed at improving the investment climate. F. Institutional and Organizational Environment Institutional and administrative reforms and developments undertaken during the Seventh Development Plan period have contributed to rationalizing the public administration and enhancing its capabilities, as well as to developing the regulatory environment for supporting economic restructuring and providing an attractive environment for business and investment. Many government procedures have been streamlined, and the process is expected to continue at a fast pace during the coming years, creating a solid base for the implementation of the Long-Term Strategy. Page 6 of 90

20 G. Geographical Characteristics The Kingdom occupies a strategic position, with its sea ports linking the three continents of Asia, Africa and Europe. It thus has great potential in providing transit services by air, sea and land, as well as for re-export of goods and commodities; all of which increase available development options. H. Demographic Characteristics The relatively high population growth rate, coupled with the young-age structure of the Saudi population, has significant implications for development, creating challenges for education and training. However, if these challenges are confronted successfully, the demographic characteristics of the Kingdom should become a source of strength and positive advantage, contributing to the achievement of the goals and objectives of the strategy. I. Gross Domestic Product (GDP) The value of GDP (i.e., the aggregate values added generated by all economic sectors) is expected to rise from around SR billion in 2004 to about SR billion in 2009 at 1999 constant prices, which represents an average annual growth rate of 4.6%. j. Imports The value of imports of goods and services is anticipated to rise from about SR billion in 2004 to around SR billion in 2009 at constant 1999 prices, i.e., at an average annual rate of 4.6%. The ratio of the value of imports to GDP, which was 28% in 2004, is expected to remain the same in K. Political Stability The political and social stability in the Kingdom has been a key success factor for its economic development. This is all the more remarkable considering the tremendous socio-economic changes the Kingdom has gone through in recent decades. The stable political environment has allowed the nation to focus its entire attention on the task economic development. To what extent are the region's political problems hindering economic growth and reform? The results of the latest Zogby International Poll, financed by ABC, which sought to assess the mode of the Arab community on whether geopolitical uncertainty is having an impact on investment, business confidence and the general psyche of the wider Arab population. The poll posed the following four questions to citizens in Egypt, Jordan, Lebanon, Morocco, Saudi Arabia, and United Arab Emirates: What is the impact of recent negative events on economic development in the region as a whole? What is the impact of the recent negative events on political stability? Are you better off or worse off than four years ago? How do you expect to be in four years from now? Page 7 of 90

21 Findings: The Arab/Israeli conflict clearly emerged as having the greatest impact on the countries economic development. Iran's nuclear ambitions are also negatively affecting the economic development of the region. The closer the country was geographically to a particular crisis, the greater the tendency to feel impacted by such a crises. Participants in the survey from the Levant countries felt worse off than four years ago and were pessimistic about the years to come. High level of uncertainty of the situation four years from now. Page 8 of 90

22 2.4 Saudi Economy Scenario to 2025: The Kingdom of Saudi Arabia has benefited enormously from gas and oil revenues that have generated vast financial liquidity in the six years between 2001 and Over that period it has also increasingly opened up to the global economy, becoming a member of the World Trade Organization in December While providing the government with ample income, Saudi Arabia's resource wealth possesses a challenge to the future of the country and the region. Among the Saudi market sectors taken into consideration in this study, two key themes consistently emerged as being crucial to the future of Saudi Arabia: A. Education and Innovation: one of the Saudi key challenges is to ensure that the education system is geared towards supporting the growing private sector as a means of aiding diversification and reduce reliance on state-run industries. The scenario demonstrates that ensuring that highly qualified Saudi workers with relevant skill sets are available in an innovative economy is crucial to the country, in reducing national unemployment and the economy's current reliance on foreign labor. In this way, education and innovation are key to the Kingdom capitalizing on the present oil wealth and achieving its goals of long-term economic stability. B. Leadership and Governance: the evolution of the Kingdom's leadership and governance structures is a primary drive of the country's future, offering both a challenge and an opportunity to the government. While transparency is increasing and adherence to the rule of law has improved in recent years, there is room for far greater efficiency and openness in government structures. The scenario indicates that this would reduce opportunities for corruption, increase the effectiveness of public programs and mollify some critics of the government who have the ability to destabilize the nation. Regional Environment Scenario to 2025: Three different paths for the GCC and Saudi Arabia through 2025 are represented as follows: Oasis: describes a scenario where regional stability continues to be a challenge for the GCC countries, which are nevertheless able to achieve substantial institutional reforms. The GCC countries develop strong identities and work together to coordinate diplomatic and economic policies through technocratic governance and a strong internal market. Sandstorm: describes a future where regional instability is a defining factor, affecting the ability of GCC countries to effectively carry out much needed institutional reforms. The Fertile Gulf: describes the rise of the GCC countries as innovation hubs in a global environment characterized by robust demand for energy an increasing globalization. Regional stability gives the GCC countries the opportunity to focus on enhancing their human capital at all levels, investing heavily in education while proceeding carefully with political and institutional reforms to support their growing economies and societies. Page 9 of 90

23 Country-Level Dynamics: Oasis: : the government's industrial policy focuses on energy and transportation, while investment programs are in infrastructure, mega-city projects and public works fuel in the expansion of the construction sector. Education reforms progress with an increased emphasis on technology and science. A softer oil market and increased welfare costs strain public finances. The GCC grows in influence as a grouping, with a new Economic Coordination and Development Board established to promote regional reform, including The Three Pillars Policy. Within the GCC, Saudi Arabia pushes for monetary integration and for concerted policies to contain extremism and promote stability. However, security constraints and the influence of Iran lead to increased military spending : improvements in education and some labor reform sustain economic growth but fail to reduce unemployment, as demographic shifts outpace private sector expansion. The Kingdom works with the UAE on alternative energy technologies, attempting to create a new cluster of innovation. Governance is improved through new training, standards for public officials and a commitment in government spending. This increased institutional effectiveness helps heal internal fractures. The Three Pillars Policy shows good results, as the number of public and private partnerships grows rapidly, and measures of diversification and governance improve : Saudi society gradually opens up. However, while average measures of quality of life show significant improvements, income disparities remain high both among social classes and regions. The economy experience stable growth, but the kingdom remains relatively reliant on energy despite its attempt at diversification and the government continues to look for industry policy-driven solutions. The Kingdom is required to balance a complex geopolitical situation, as the historical relationships with the US shift and its greater connection with China influences regional politics, including ongoing unrest in Iraq and a tense relationship with Iran. Sandstorm: : After a political unrest and peak in the region, the oil prices collapse as global demand plunges in a global recession, negatively affecting the flow of government funding in Saudi Arabia. Market disruption and budget deficit halt domestic and foreign investments, causing economic hardship and public discontent : under-investment in public infrastructure due to a lack of funding and a distracted government results in a utilities and services crisis, with water, energy and health services deteriorating. Attempts at social and political reforms relating to education, the labor market and the role of women are hampered by radical forces and religious sensitivities. Capital and skills become difficult to attract in an increasingly shaky economic and social situation and unemployment levels reach new highs. Page 10 of 90