Saudi Dilemma: Balancing Vested Interests with Diversification

Low oil prices have caused a frenzy amongst senior officials across the MENA region, with sophisticated plans drawn up such as Deputy Crown Prince Mohamed Bin Salman’s vision 2030 to push the economy through a gruelling period of austerity, weaning decades-long dependence on oil.

The likes of PWC and McKinsey have been retained to establish where cuts and savings can be made, and a new budget has been drawn up on the expectation of the oil barrel price stabilising at $50.

However, the greatest challenge for these economies is not the pace of the development of non-oil industries, nor even the beleaguered bureaucracy or the stalled mega projects. Instead, it is the reluctance of the governments to tackle and challenge vested interests in economic sectors that reach the highest levels, and that have ensured a semi-monopoly on lucrative government contracts.

Typically, companies investing in Saudi Arabia usually seek a local partner not necessarily out of any desire for specific expertise, but rather to ‘ensure’ the procurement of contracts. It is not uncommon to find ‘consultancy’ contracts awarded to certain Saudi firms who enjoy the patronage of senior government officials or high-ranking princes. Moreover, foreign ownership rules have entrenched this ‘practice’ into the business environment with accusations of schmoozing emerging over time.

As a result, intelligence firms are often recruited – not necessarily for due diligence purposes – but to confirm the ‘credibility’ of local partners in their ability to lobby the highest levels of government for contracts.

However, as political upheavals take place, these ‘partners’ can find themselves out of favour or on the wrong side of the tide, inadvertently leading to contracts being ‘lost’ as partners on the right side of the tide are rewarded.

This environment has only been reinforced inadvertently by the foreign ownership laws which force foreign companies to search for partners. Coupled with an exceptionally lethargic bureaucracy, the benefits of a partner capable of bypassing red-tape and literally communicating directly with a decision-maker cannot be understated.

This has created ‘clans’ of power, with powerful families setting up companies specifically for the purpose of entering partnerships or joint ventures with foreign giants. The exchange is clear; lucrative profits for access.

This is a problem for diversification; it requires smashing the semi-monopolies created by these domestic clans, de-cluttering bureaucracy, and creating transparent processes that ensure equal competition between companies. The increased competitiveness would drive down prices for government projects, creating sizeable savings that can be reinvested in managing austerity that risks popular unrest.

Ironically, however, smashing such ‘clans’ threatens the political stability of the government which is dependent on the support of various factions. Herein lies the Achilles heel of attempts at economic diversification; not only in Saudi Arabia, but the Gulf in general. Reforms are to be made only insofar as they do not impact the power and influence of key figures in the country. Any attempts at transparency are to be made only insofar as they do not impact particular lobbying groups or ‘partners’.

As King Salman becomes older, the desire to develop and maintain key allies in a future succession struggle will take precedence, putting diversification on the back seat as patronage in exchange for support takes centre stage. As the fierce jostling for power in the last days of King Abdullah demonstrated, the tradition of ‘family over all’ that was prevalent during the succession between the sons of King Abdul-Aziz does not appear to be a common theme amongst his grandsons.

Furthermore, although the position of Deputy Crown Prince suggests long-term stability, it remains nothing more than a relic of succession politics under King Abdullah as an attempt to bind the hands of a Crown Prince. King Salman’s deposition of Prince Muqrin suffices as confirmation of the futility of the position. It cannot be expected that should Crown Prince Mohamed Bin Nayef become King, he will be content with having the Crown Prince thrust upon him. He may well choose to follow King Salman’s precedent and appoint his own, throwing Vision 2030 into disarray.

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