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Crown Prince: Abdullah: campaign against the “middlemen” |
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The price of crude oil has gone through $30 a barrel this year but being a Saudi or a Kuwaiti today feels very different from the way it did when oil was last at this level 15 years ago. In the 1970s and early 1980s the Arabs of the Gulf were rich and confident, now they are worried. As Crown Prince Abdullah of Saudi Arabia has put it in his new, blunt style: “The good times have gone and they will not return”.
In terms of its buying power, wealth is just not at the same staggering levels. On revenues of perhaps $68 billion this year it would take Saudi Arabia 180 years to buy all the companies listed on the New York Stock Exchange and 40 years to buy those on the London Stock Exchange. In 1974, immediately after the first big Opec price rise, it was calculated that Saudi revenues – then $29 billion – could have bought New York in 19 years and London in 23 months.
Saudi Arabia is now just a fairly well off developing country. Its per capita income is about the same as Argentina’s or Slovenia’s.
Earlier this year, UK telecoms company Vodafone valued takeover target Mannesmann at considerably more than Saudi GDP.
Kuwait is still much richer per capita than Saudi Arabia but is suffering a crisis of confidence. The place is miserable – and the unhappiness was made worse this summer by dust storms and temperatures soaring to 50 degrees celsius.
In the view of Siraj Al-Baker, who runs Kuwait’s International Investment Projects Company: “There’s a lack of faith in the system. There’s too much politics. It’s a question of how much confidence business people have in the government.”
Or as Ahmed Al-Baghdadi, the head of the University of Kuwait’s political science department says: “It doesn’t seem to make any difference to my life whether the oil price is $10 or $30. We know we as Kuwaitis have a lot of money but there seems to be no relation between the price of oil and the economic situation – which is bad.”
Saudi Arabia’s business atmosphere is changing dramatically. Under Abdullah emphasis has been placed on transparency and honest dealing.
In an interview granted to the official press agency earlier this year, when he was discussing the possibility of foreign oil companies being invited to invest in downstream oil and gas, the crown prince stated: “We oppose the involvement of middlemen or brokers. I have made this emphatically clear to the companies’ executives in our meetings. The issue is very important to me and I will not tolerate or accept any proposal that does not meet the highest ethical standards. Each company will be asked to sign an undertaking that it will deal only, and directly, with the relevant government agencies and all dealings must be completely transparent.”
Taking their cue from Abdullah, Saudi businessmen, consultants and middlemen are becoming quite nervous about introducing foreign companies, in oil and other businesses, to officials in the government.
They are afraid that other officials will wonder whether they have some “arrangement” with the person to whom the introduction is being made – and in some cases the mere suspicion of this will be enough to blight the company’s chances. Often they suggest that companies should simply use them as advisers before making their own approaches directly.
There is a feeling that too much wealth in the past has damaged Saudi society and that high prices damage the oil market. The Saudi government does not see it as being in its long-term interest to have the oil price breaking through $30. It much prefers the $20 to $25 range.
At senior levels in the ministries, in the royal family and in state oil company Aramco, it is accepted that peak world demand for oil may come before 2025, which would imply that a large part of Saudi Arabia’s vast reserves, a quarter of the world’s total, will be left in the ground. If this is so, it is obviously in the interest of Saudi Arabia and of Kuwait and Abu Dhabi, the two other big Arabian Peninsula producers, to keep prices at a level that encourages the continued use of oil as an energy source, rather than alternatives.
The Saudis are fully aware that the overpricing of oil in the 1970s led to the development of other sources in the North Sea, Alaska and Mexico. (There was less development of alternative sources of energy at this time.) They also know that high prices forced the industrialized countries into becoming much more efficient in oil consumption. Since the mid-1980s demand in the US, Europe and Japan has been static. All the growth now comes from newly industrializing countries.
What the Saudis do not like to admit is that it was the nationalization of the foreign oil concessionaires working in Opec territory that encouraged the same companies to develop hundreds of small fields in the North Sea, South America, offshore Australia and Africa and in east Asia. It is these small fields, which the companies turn to first because they have a share in the oil in them, that have met about half the increase in demand since 1985.
It is hardly ever mentioned in the Gulf because ownership of oil production is still a highly sensitive issue politically but the takeover of the foreign companies in the 1970s has worked strongly against the countries’ interests economically.
The same pattern has applied to the governments’ spending policies. They have been popular politically. They have been far more generous to the populations than public opinion in the west supposes. But socially and economically they have been disastrous, creating societies that consume but, oil and petrochemicals apart, hardly know how to produce.
Until the mid-1990s the Saudi government virtually guaranteed its citizens jobs in the civil service if they did not want to go into private business. It provided free education and health services, albeit of a low quality.
If a student could get a place at a foreign university he would be sent abroad to study at the government’s expense. Likewise a person who needed specialist medical treatment would be sent abroad, with one or two members of his family to provide moral support, and everybody’s expenses paid.
Internal telephone calls were free. Gasoline, electricity and water were provided for a nominal charge – in the case of electricity and water way below their production costs.
Domestic flights and basic foodstuffs, such as rice and sugar, were subsidized. Businessmen investing in industry benefited from free land on industrial estates and low-interest loans.
Agricultural investors got free land, interest-free loans and an extraordinary array of other subsidies, grants and support prices. House buyers got interest-free loans. No direct tax was levied on Saudis, other than the small religious tax, zakat, at 2.5% on the annual increase in a person’s assets.
Most of this generous regime is still in place, though there have recently been some increases in the charges for utilities and gasoline and fewer students and hospital patients are sent abroad. There has been a big cut in the help given to agriculture. Most important, the government has frozen employment in the civil service.
The Kuwaiti government, having much bigger per-capita oil revenues, has been even more generous. It has managed to employ 95% of the indigenous population in its civil service.
Among its welfare benefits is a $150 a month payment for every child in every Kuwaiti family. It has spent billions of dollars on land purchases.
The Abu Dhabi government in some ways has gone further still. When it bought most of the land on Abu Dhabi island and the nearby mainland in the 1960s and 1970s it paid the owners generous compensation and gave them free land for houses. In the early 1980s it launched a scheme to update the families’ compensation every seven years, involving an average payment of $250,000.
The Buildings and Social Services Committee set up at about the same time invited citizens to choose an architect’s drawing for a building that would be “theirs” – often a mixed retail/office/residential structure in bright reflective glass. The committee supervised construction, leased the building, managed it and paid the owner 20% of the income. It stopped new projects two years ago only because Abu Dhabi did not need more buildings.
Equally remarkable is the Abu Dhabi Marriage Fund, established in the 1990s to help nationals pay their wedding expenses. Nasser Nowais, a former senior government official who is now chairman of Rotana Hotels, explains that “surprisingly there are still some people in this state who cannot afford to get married and Shaikh Zayed [the ruler] wants to stop them looking for cheap brides in India”. In July the fund began offering a $6,000 supplement to every national of the United Arab Emirates who marries a local woman over the age of 30.
In Saudi Arabia it is mainly government salaries and welfare policies, along with high defence spending, that have produced a budget deficit every year since 1983. If high oil prices continue the government will break the pattern in 2000.
Until the Gulf crisis of 1990-91 the Saudi government financed deficits by running down financial reserves, which in 1983 totalled about $150 billion. Since 1992 the deficits have been financed by borrowing. The government now has a domestic debt equivalent to $160 billion and a further foreign debt of $10 billion. The total comes to 125% of GDP.
A much more intractable problem is unemployment. Since the mid-1970s the Saudi population has been growing by just under 4% a year. It has now reached about 20 million – 13 million nationals and 7 million expatriates.
Nearly 60% of the nationals are aged 19 or under.
The number of young people in the 15-to- 24 age group, most of whom are still in full-time education, vastly exceeds the number of jobs being done at present by Saudis aged 25 to 34.
This suggests that in the next 10 years, as the wave of Saudi youth breaks on to the jobs market, there is going to be huge unemployment.
At present the unemployment rate among Saudis in their 20s is around 15% to 20%, though no official figures are published. At best this year it is estimated that one in three Saudis coming on to the jobs market will find work.
In the next few years this proportion is likely to decrease.
There is almost no growth in the Saudi Arabian economy. If fluctuations in the oil price are stripped out, GDP since 1992 has been expanding by between zero and 2% a year.
Since Crown Prince Abdullah took control of the day-to-day running of the country in 1997 the government has been working on reforms to stimulate productive sectors. The change in policy is as much the work of senior civil servants as of Abdullah himself. One difference between Abdullah and the largely incapacitated King Fahd is that Abdullah, having no full brothers in the Saud family, relies on his ministers and other senior officials. Fahd, who became increasingly reclusive in the early 1990s, worked mostly with a group of senior advisers and close relations, some of whom were nearly as much interested in their own businesses as in running the government.
A programme of privatization is being planned and the state telecommunications and electricity sectors are being reorganized and corporatized as a preliminary to their being sold off. But so far nothing has actually been sold and the government has not yet even decided how it will go about doing this.
More vigorous efforts are being made to attract foreign investment. Until this year the government has confined foreign investment to a few parts of its economy and taxed it quite heavily. In the past 25 years there has been only $5 billion of foreign direct investment.
In April the government introduced a new foreign investment law that was radical by Saudi standards. It cut the tax on foreign investors’ profits from 45% to 30% – though in a slightly ambivalent and typically Saudi way it did this by saying that the government would “bear one-third of the current tax obligation”. In cases where foreigners are in partnership with Saudis, the Saudi shareholders continue to pay no tax on their share of profits, other than the zakat.
Privileges given to Saudi-owned companies, such as soft loans from the Saudi Industrial Development Fund, are now to be extended to foreign companies. These are to be allowed to own real estate associated with their businesses – though in Saudi Arabia, as in other Arab countries, property prices are so high and so far out of proportion to the income land can yield that it is doubtful whether many companies will take advantage of this privilege.
Foreign investors are to be allowed to sponsor visas for their employees to travel to the kingdom. A new General Commission for Investment has been established under the well-regarded and effective Prince Abdullah bin Faisal bin Turki, to be a “one-stop shop” in foreign companies’ dealings with government agencies.
At the end of this year or next year it is expected that Saudi Arabia will join the World Trade Organization, which will oblige it to allow foreign companies to trade with the kingdom without having Saudi sponsors or agents. The government has been talking to WTO for several years and is reported recently to have made some important concessions, though, typically, there has been no announcement of what these are.
| Abu Dhabi: citizens could choose a building and share the income | ||||||
If the legal changes are to work they will have to be accompanied by a broad change in attitudes that will make Saudi Arabia more productive. For the past 30 years the Saudis and other Gulf Arabs have seen themselves as special and in some way superior to other societies. The popular belief is that they have a priceless treasure, bestowed on them by God, that entitles them to enjoy a high standard of living without having to do much work. There are many young Saudis who prefer to be unemployed and stay at home watching videos or playing with their young brothers and sisters rather than do even moderately demanding work in the private sector.
In their view hard work is something that is done by foreigners, mainly Asians, and government is something that exists to distribute oil wealth to them – not something they have an obligation to support.
The unproductive attitudes of Saudi Arabia are writ larger in Kuwait. Kuwaitis admit their society has been corrupted over the past 30 years by their government making it almost impossible for an individual to suffer a financial loss.
In the late 1970s when there was a slide in the stock market – then on some days turning over more than the London market – it set a floor price at which it guaranteed to buy every stock. A few years later, after a crash on the unregulated market for offshore shares – the Souk al Manakh – caused another fall on the official market, it did the same thing and ended up owning most of the equity of Kuwaiti public companies.
The government could not face obliging important Kuwaitis to take a loss after the Manakh débâcle, which left a pile of worthless post-dated cheques with a face value of $92 billion. It failed to impose any plan for the part payment of debts. The economy stagnated because nobody was sure who might be bankrupt and who was not. A banking crisis followed that left all bar one of the country’s banks technically insolvent.
The Manakh crisis had a far worse effect on Kuwaiti society than the Iran-Iraq war, fought close to its borders from 1980 to 1988, or the collapse of oil prices in 1986. It may have done more to undermine the state than the Iraqi invasion of 1990.
The most corrosive aspect of it was the government’s weakness in resolving the banking crisis. The government introduced several schemes in the 1980s and early 1990s, each more generous to debtors than the one before, but at every stage people felt that if they held back from accepting a settlement they would eventually be offered something more generous and their debts would be forgiven almost entirely.
They reasoned that the government had an oil income and large financial reserves – which in the end was their money – and they felt it was right that these funds should be used to enable them to default on their debts. They were encouraged in this view by populist members of the National Assembly.
Eventually they got what they wanted. Most debtors have paid – or are paying – an insignificant proportion of what they owe.
The more thoughtful Kuwaitis look on the banking crisis settlement as a disaster.
Jassim Saadoun, chairman of Al-Shall Consulting and one of the country’s best known economists says: “Having everybody living off the government doesn’t produce a dynamic economy, or even a confident, happy society.”
Kuwaitis have come to feel that their country is drifting. They have many worries. In the back of their minds they all fear that one day, maybe well in the future, Iraq will seize their country again and this time the rest of the world will not help them. Business is flat, partly for political reasons. The country lost its important role as an entrepôt when its two big markets, Iran and Iraq, ruined themselves in their war in the 1980s.
The domestic market has never been the same since 1990-91, when several hundred thousand Palestinians, who had made Kuwait their home, left for Jordan and Lebanon and did not return.
Kuwaitis have even lost their faith in stocks and real estate maintaining their normal inflated prices. For nearly three years the stock market has fallen steadily – without the government intervening. It is now more than 50% below its all-time high. Some shares are trading at less than their companies’ net asset values.
The intelligentsia and the government have a rough idea about what should be done: Kuwaitis should be made to feel responsible for themselves and their state. Then they might find new ideas for investing in its economy – and they might be more prepared to defend it if necessary. Despite the threat to the nation’s existence the government has always found it difficult to recruit citizens into its army.
The first steps should be for the government to stop providing Kuwaitis with civil service jobs as of right and make them pay tax.
According to the finance minister, Shaikh Ahmed Abdullah Al-Sabah: “Economic reforms are essential and are going to be unpopular.” And as one of the more far-sighted members of the National Assembly, Abdel-Mohsen Al-Jamal, puts it: “We need some kind of taxation system. The private sector must take some responsibility for society.”
The problem with these policy ideas is that the public does not believe them to be necessary. It knows very well that the much publicized budget deficits that the government has run since the liberation in 1991 are artificial. The government excludes from the revenues side of its budget 10% of oil income, which is allocated to the state’s reserves and all the income and capital appreciation of the reserves. These now total $55 billion.
Most members of the National Assembly, needless to say, are utterly opposed to taxes.
So, as Sulaiman Mutawa, a business consultant and former director of the Kuwait Oil Company, says: “This idea of tax is endlessly touched on and then forgotten when the oil price rises again. Ideas like this or charging foreigners for medical services tend to be introduced on impulse. There’s no long-term policy for reducing the dependence mentality.”
In the current year of high oil prices the government has even backtracked on its principle of trying to employ fewer Kuwaitis in the civil service. Although ministries are already overstaffed by at least 40 per cent, in July this year it announced that it had found “jobs” for 7,000 new graduates and was trying to accommodate the rest.
Another government idea for incentivizing its people is privatization. In recent years the state has sold much of the stock it acquired in the late 1970s and 1980s – but nothing else. There is a suggestion that it should begin the next stage of its programme by selling the petrol stations. But the salaries of the Kuwaiti clerks working at the cash tills are so high that there would be no possibility of a private buyer making a profit. It would be unthinkable for a company to sack the Kuwaitis and bring in Bangladeshis or other low-paid foreign labour.
Increasingly Kuwaitis blame the country’s leadership for the ineffectiveness of the government’s policies. The ruler, Shaikh Jaber Ahmed Al-Sabah, is old and tired. He has been in senior government posts for nearly half a century. The prime minister, Shaikh Saad Abdullah, is slightly younger. He operates well in the traditional Kuwaiti political milieu. He “consults” all sorts of people in the government and business establishment, which is what good Muslim rulers are supposed to do. But he is chronically hesitant, he does not conceptualize the problems he faces, he is short-term minded and he has no strategy. In the words of one of his former ministers: “The man’s mind is a mess”.
The National Assembly has an equally poor reputation. Anwar Mulla, one of the state’s leading businessmen, describes it as “a bunch of nincompoops – except for about 10 I could name, the members don’t have the faintest idea of what is going on in the world. Most of them just want to grab publicity for themselves.”
The Assembly is admired much more by liberal western journalists and politicians who visit the middle east than it is by much of the Kuwaiti intelligentsia – though it does give citizens the reassuring feeling that they live in a more sophisticated state than their Arabian Peninsula neighbours, none of whom have elected parliaments.
The best argument in favour of the Assembly is that put forward by the banker Siraj Al-Baker. “It’s a safety valve,” he says. “It’s messy but at least the battles between it and the government should slowly be teaching us about politics. It is a stage in democratic evolution.”
Abu Dhabi is a much happier place than Kuwait.
In part this is because it has a much smaller population. Kuwait has 2.2 million people, of whom some 700,000 are Kuwaitis. Abu Dhabi has a million, of whom perhaps 200,000 are Abu Dhabians.
There is still scope in Abu Dhabi for masking unemployment by pushing graduates into the state and United Arab Emirates federal bureaucracies, though the government is aware that it should try to resist doing this. It has established higher colleges of technology to train graduates, particularly in English and computer studies. These are producing genuinely employable people, including candidates for junior banking jobs. The state is not burdened, as Saudi Arabia is, by having a large proportion of its graduates with Islamic studies degrees, which make them virtually unemployable and potentially politically disruptive.
Abu Dhabi has a more decisive leadership than Kuwait. According to Nasser Nowais, the success of the UAE and Abu Dhabi governments comes down to personalities. “Shaikh Zayed [bin Sultan Al-Nahayyan],” he says, “is happy and generous but also strong and strict. He is tolerant – he likes foreigners but he makes sure they contribute. So everyone feels secure here, they know where they stand.”
The remarks sound excessively sugary and they should include the facts that Zayed is prone to losing his temper and has some awkward idées fixes – but they are basically true.
Strong but generous rule is much appreciated in Arab culture.
In Abu Dhabi there is not the endless politics, arguing and manoeuvring that there is in Kuwait. Once Zayed decides on a policy it goes into effect.
Abu Dhabi is also lucky geographically and historically. It is far from the turbulent political centre of the Arab world. Its neighbours are more friendly than Kuwait’s.
And it began to spend oil revenues 20 years later than Kuwait and Saudi Arabia, so it has learnt from some of their mistakes. Part of the purpose of the Buildings and Social Services Committee has been to produce a more attractive city than Kuwait and avoid booms and busts in the property market.
While the country’s population is still small and is still grateful to Zayed for what it has been given – rather than demanding perpetual enrichment as a right – there are some at the top of the government who are thinking about how to avoid the demoralization that has overtaken Kuwaitis.
This is part of the force behind the idea of privatization. The Abu Dhabi government does not need foreign capital. It has reserves of well over $100 billion – at least $0.5 million per national. But it believes that privatization will impose some of the discipline of the market on its utilities rather than making them an extension of the welfare state – as providers of services and employers. It has begun by privatizing its new electricity-generating projects.
Shaikh Nahayyan bin Mubarak, the minister of higher education and chancellor of the UAE University, wants privatization pushed as far as possible. “The best way of forcing people to work harder and accept more difficult jobs is to privatize bits of the economy owned by the government,” he says.
“We should privatize the running of schools and the health service – though we will have to give people insurance policies. We will get better service if we do this. The state schools in the Arab countries just teach people by rote, to memorize a book to pass an exam. They don’t encourage children to use any initiative or teach them the ethics of citizenship. I want to see people being made more independent so they can help turn this state into a nation.”
