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Saudi Arabia and the WTO: Meeting Economic Reforms |
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Saudi Arabia is one of the world’s most active traders and contrary to popular conceptions, its economy has been a strong manufacturer for decades rather than being oil and gas-based. The sprawling desert kingdom’s accession to the WTO in late 2005 completed 12 years of difficult negotiations but has already seen considerable rewards. Murad H. EL-Anis looks into some of the major obstacles that were met during the accession talks and how Riyadh has met the economic reforms already undertaken. |
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Saudi Arabia is the MENA region’s largest economy and contrary to popular understanding this stature is not solely attributable to the kingdom’s massive oil and gas sector. Saudi Arabia was the world’s 23rd largest importer and the 13th largest merchandise exporter in 2006 according to the WTO, which Riyadh joined after 12 years of negotiations on 11 December 2005. As a major global trader and a vital component to the international as well as the regional economy, Saudi Arabia’s absence from the WTO was something of an oddity. During the course of negotiations with the WTO, the kingdom was encouraged to implement a lengthy series of economic and, to a lesser extent, political reforms (the latter referring more to procedural and administrative requirements which will be discussed in some detail below). |
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The telecommunications industry in Saudi Arabia is one of the largest in the region and has become a major source for private sector investment.
AP photo |
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Despite initial sticking-points and obstacles that at times appeared as though they would delay an agreement indefinitely (ESCWA, 2001), Saudi Arabia negotiated 38 bi-lateral agreements with WTO members (also members of the WTO ‘Working Party’ on Saudi ascension), enacted 42 trade laws and established 9 new regulatory bodies charged with overseeing economic liberalisations by late 2005.
Indeed, there has been a great deal of progress over the last three years both in terms of Saudi Arabia’s accession talks and since the end of 2005 when its WTO membership commenced. How have these developments been able to overcome the key points of earlier disagreement? In short, by simply excluding them. Of course, the WTO’s concessions over these critical issues has not come cheaply and the kingdom has faced a very clear set of requirements to be met in keeping with its accession and membership of the global club – which also take into consideration Saudi Arabia’s ‘responsibilities’ as an internationally central trader, applying highly tailored regulations requests. These measures have included dramatic reduction in tariff rates and opening up the service industry sector in addition to adopting all WTO rules, and in so opening up the economy to considerable foreign participation. A stable balance has been achieved between meeting these WTO requirements while maintaining domestic interests vis-à-vis economic reforms that Riyadh had already began implementing. Such reforms as ‘Saudization’ have been protected in conjunction with acceptable benchmarks allowing foreign capital and labour guarantees on rights of trade and participation. Other Saudi policies, such as those intended to preserve the national, cultural and religious identity of the state, have also been maintained – for instance, the total ban on pork and alcoholic products with regards religious sensitivities – while committing to WTO reforms on more important matters – such as Telecommunications as is discussed later in this paper.
The importance of Saudi Arabia’s oil and gas sectors are correctly understood to have played a key role in off-setting WTO resolve over contentious issues like alcohol importation, but the energy resources of the kingdom are not alone here. The kingdom’s healthy trade-orientated economy even prior to WTO membership has been and continues to be seen as vital to the Gulf and MENA region’s economic stability. In 2004, total merchandise trade, including exports and imports and excluding oil and gas revenues, reached US$170.7 billion, equivalent to 68% of GDP (OCE - WTO, 2005). The resulting trade account surplus – 9 of the last 10 years have seen trade balance surpluses in the kingdom – which has emerged from an average import value equal to one third of exports also leaves considerable trade growth potential, which the WTO has not been able to ignore. Saudi Arabia has enjoyed long-established trading relations with the majority of existing WTO members and of particular importance has maintained large trade surpluses with most of the G8 economies. Other ‘pivotal’ trade partners, such as South Korea, have been equally engaged with Saudi trade for some decades completing a trade picture at the centre of which the kingdom often finds itself. Furthermore, tariff reductions that were already undergoing reductions due to the GCC Customs Union by the mid-1990’s demonstrated Riyadh’s interest and pursuit of trade liberalisations and injected confidence within the WTO Working Group. In 1993 75% of the 7,177 item categorisations identified by Saudi customs were subject to a 12% import tariff, in 1995 85% were subject to duties of 5% or less. WTO membership is expected to reduce these tariff rates even further and the organisation has, for over a decade prior to ascension, been very eager to see Saudi Arabia gain membership.
For its part, Saudi Arabia has keenly pursued membership in the WTO in order to advance a number of fundamental economic policy interests. Primary amongst these are the further diversification of the Saudi economy and growth facilitation, particularly in technologically-intensive industries as well as service industries such as finance, pharmaceuticals, aviation, chemicals and telecommunications. Unlike some MENA states, Saudi Arabia does not need FDI in order to finance the capital transformation of the domestic economy as it does hold the financial resources to fund its own ongoing economic reform and modernisation. But it does require foreign participation to stimulate production and competitiveness as well as capitalise on technological assimilation in industries outside of the energy sector – Saudi Aramco serves as a standard-setter as it operates one of the world’s most technologically intensive and advanced corporate structures, is capable of out-competing most international competitors and it is this kind of capacity that is sought in other major sectors. Naturally, expansion of international trade both in terms of volume and value and in particular export growth is central to the Saudi interest in WTO membership.
There were also a number of concerns held within Saudi circles regarding the loss of potential market shares that were being captured by acceding or established WTO members while the kingdom could only watch from the outside. By gaining experience and organization within the WTO’s multilateral trading networks, Saudi Arabia’s competitors, notably those in sectors that the kingdom wished to diversify into such as pharmaceuticals, IT and financial services, were pre-empting domination in those and other sectors. Protection of trade interests was also being secured by WTO members within its dispute resolution forum and future policy shaped by them – a set of very useful tools for a large trading economy like Saudi Arabia.
In order for membership to be secured, all existing 148 WTO members’ ratification of Saudi Arabia’s application was required. Bi-lateral trade agreements with 38 existing WTO members were signed during the negotiation and accession phase as an important foundation for the functioning of Saudi WTO membership. The areas covered in these agreements and the broader scope of WTO membership include commitments in Trade Regime structural changes, Manufactured Goods, Agriculture, Hydrocarbons, Trade in Services, Saudization, Intellectual Property Rights, Investment Regime, Technical Barriers to Trade, Customs Valuation and Dispute Resolution. This paper explores just two of these: Trade Regime structural changes and Trade in Services – specifically the telecommunications sector – in order to present a case study of some developments in the Saudi economy that have succeeded in securing WTO membership and how this membership is now shaping ongoing reforms.
Issues to Tackle & Adjustments Made
In addition to the disruptive short-list of non-negotiable matters – importation of pork, alcohol and other religiously sensitive products; any change to Saudi Arabian foreign and trade policy towards Israel; addressing of human rights matters; reform of Saudization policies; standards and food safety issues; domestic energy rates; and any measures that might expose the kingdom to dumping from foreign exporters – there was a series of structural problems that required addressing in order to facilitate accession. While the former non-negotiable (from the Saudi perspective) list was eventually dropped by the WTO and its Saudi accession working party, the latter category was non-negotiable (from the point of view of successful trade reform). Regardless of the kingdom’s membership interests these structural reforms came to be considered best practice and in the best interests of the economy. Failing to undergo a process of extensive institutional and legislative reforms would leave the Saudi economy in a state non-conducive to competitive and efficient production, resulting in export loss and thus increase the potential of a trade deficit, lack of economic growth, rising unemployment, a growing public sector mirrored by a declining private sector, and the failure of government policies of diversification, Saudization, foreign asset holdings and Communications and Information (C&I) development. By adapting to the WTO’s rules and decision-making discipline, introducing the rule of law, improving transparency and accountability, reducing corruption and mismanagement and limiting discretionary authority the Saudi economy, it has been popularly argued, would gain greatly (ESCWA, 2001, p 63). Without these reforms accession to the WTO would very simply not have been feasible.
Curtailing the economic inefficiencies of a sluggish bureaucratic system was a major challenge in a country whose legal and institutional framework had proved resistant to any notion of change for some decades. However, during the accession talks era trade theorists won the government over and encouraged the successful transition towards policies of economic reform. A number of institutional and structural adjustments followed, in particular taking shape in the 1999-2005 period prior to WTO accession (RESA, 2004, p 12). The first of these new bodies established to coordinate and facilitate economic reform was the Supreme Economic Council (SEC) set-up in August 1999. The SEC assesses economic, industrial, agricultural and labour policies to ensure their conductivity to privatisation. The SEC’s primary objectives are to liberalise and open-up domestic markets to FDI and create an investor-friendly business climate. It has been considered a significant success in its six and a half years. Following the SEC, the Saudi government established the Supreme Council for Petroleum and Minerals (SCPM) in January 2000. The SCPM, as one might expect, is primarily responsible for regulating and maximising upon the exploitation of the hydrocarbons sector. It passed the Gas Initiative shortly after its inauguration to facilitate the development of gas fields and expand more rigorously into the natural gas resources of the vast kingdom. As a key element to its remit the SCPM built cooperative working partnerships with many international and national companies throughout the design and implementation phases of the projects it oversaw, building important professional bridges and integrating the local energy sector even more closely with international partners.
The Supreme Commission of Tourism (SCT) was created three months after the SCPM in April 2000 to aid in the growth of the docile tourism sector. Once more, the public-private partnership model was central to the institution’s agenda and stimulation of private sector participation in the industry – that was largely based upon the 2 million Hajj pilgrims that congregate in and around the Mecca-Medina arena each year – consumed much of the SCT’s efforts. By developing and drawing greater attention to the kingdom’s otherwise extensive, but as of yet neglected, tourism attractions the government’s strategy of diversification was pursued. In particular, the rich historical and archaeological sites of the Arabian peninsula, extensive and varied ranges of natural landscapes and wide-stretching shorelines heavily populated with marine life and water-based attractions were centre-pieces played upon in the tourism portfolio. The initial three years of the SCT’s operations, however, were not as productive as would have otherwise been liked. It was not until 15 March 2004 with the Cabinet’s approval of a General Strategy for Tourism Development that the SCT began to take a greater command of its remit. With an estimated job creation factor of 0.5-2 million, this sector is now increasingly being perceived as a potential saviour for an economy with a growing unemployment burden and in search of greater diversification.
Also in April 2000, the government established the Saudi Arabian General Investment Authority (SAGIA) to promote foreign investment in the kingdom. Complimenting the work of the SEC the authority applied a one-stop-shop concept to the provision of investor licences, permits, and other necessary documentation, lubricating the bureaucratic system and reducing the deterrence factor common in sluggish red-tape processes. Based upon the Foreign Investment Law of 2000, property ownership rights as well as reduced tax rates are also clarified and guaranteed. SAGIA continues to act as a mediator between investors and the government and works in conjunction with the SEC and SCT to simplify investment in specific sectors with the intention of tailoring the information and assistance granted to investors to their demanding needs.
Combined these institutions and a number of smaller bodies have helped facilitated economic liberalisations, stimulating both growth in the national economy on the back of diversification, privatisation and export-orientation, and attracted greater foreign investment and participation. By FY 2005 Saudi Arabia was the world’s 25th largest trader and has enjoyed over US$78 billion of total FDI to date. Furthermore, these institutions and the economic reforms that they have overseen are held accountable, to some degree or another, for the rapid expansion of the private sector’s role in the Saudi economy, which increased 28-fold in real terms between 1973-2002 and by a further 3.4% between 2002-2006, when considering GDP contribution. In 2002 the Saudi government announced its intentions to deepen the privatisation process to incorporate many of the major industry hubs of the economy – with the exception of the hydrocarbon sector, which was to remain dominated by Saudi Aramco. These included, postal services, the Saudi Railway Organisation (SRO), Airports and aviation controlling centres, Saudi Arabian Airlines (SAA), the Ports Authority (PA), health care, urban transport, the National Company for Cooperative Insurance (NCCI), Ma’aden the national mining company, and telecommunications. The telecommunications sector is a particularly interesting case study to review as it acts as both a ‘new’ sector and an industry growing at an incredible pace. Younger than most of the other hubs, telecoms has been more flexible and adaptable to the climate of reform and liberalisation, and yet at the same time it is a particularly sensitive sector, with implications for national security on a political level in addition to its economic importance. A brief review of this sector and the impacts upon it of the accession process follows.
Telecoms
According to the six bullet-point chapters of the WTO’s Reference Paper on Basic Telecommunications (WTO, 1998) all WTO members are to abide by a set of principles regarding the regulation of their respective telecoms industries. The first chapter – Competitive Safeguards – establishes a clear regulatory framework intended to prevent service providers and suppliers from engaging in anti-competitive practices. The second chapter – Interconnection – allows for the linkage of service providers and the users of these services with one another in a free and unhindered manner in order to prevent fraudulent practice, customer manipulation and lack of market transparency amongst other negative obstacles to a liberalised sector. The third chapter – Universal Service – guarantees each member the right to decide upon the type of universal service to be provided within their customs territory provided that such obligations are administered in a transparent, non-competitive, non-discriminatory manner. Chapter four – Public Availability of Licensing Criteria – demands that all criteria relevant to the licensing procedure be made publicly available and any reasons for a license denial must be explained to the applicant. Chapter five – Independent Regulators – necessitates the presence of a regulatory body that is entirely independent from and not accountable to any supplier of telecoms services and whose procedures and decisions shall be impartial with regards to all market participants (i.e. suppliers and consumers). The final chapter of the reference paper – Allocation and Use of Scarce Resources – defines the regulatory framework for the distribution and use of such scarce factors as frequencies, numbers, rights of way, ensuring that these procedures are conducted in a transparent and non-discriminatory fashion. Allocations of resources for specific government use (that may be of relevance to national security or policing such as radio frequencies) do not need to be made public but information on all commercial activities do need to be publicly available. These regulations had to be met in order to secure WTO membership, but brought less direct economic reform than reforms in other sectors making the telecoms matter one needing close exploration. |
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The Saudi telecoms industry has been under extensive review for some time. In January 2002 during an OECD conference titled ‘Global Conference on Telecommunications Policy for the Digital Economy’ held in Dubai, the Saudi Telecom Co delivered a presentation on the kingdom’s telecoms and its future. Four factors were identified as driving this industry forward: demand; sector regulation and liberalisation, corporatisation and privatisation of Saudi Telecom Co; and private sector participation. The first – demand – was seen as the key engine behind the rapidly growing sector, while the latter three factors were seen as the guiding mechanisms establishing its trajectory. The challenge for Saudi policy-makers was to distinguish between the commitments to reform and liberalisation demanded by the WTO and to what extent these regulations could be harmonised with the economic intentions of the kingdom. The common ground was found in the prospect of a liberalised, private sector and foreign participatory telecoms platform contributing to economic growth – both in terms of the sector in isolation and its linkages to other industries across the economy. By harnessing a technologically advanced and competitive telecoms sector, business in the kingdom, it was argued, would be able to add to productivity as a result of: (i) easier and more frequent communications, including mobile service access; (ii) wider access to data and information; (iii) reduced transactions costs; and (iv) improved market effectiveness (STC, 2002, slide 2). |
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Growth in GDP no longer equals the kingdom’s population growth necessitating job creation and a greater private sector with an export-orientation to counter the expanding socio-economic problems evident since the 1980’s |
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Saudi Telecom Co analysis of the 2001-2005 period revealed that out of the key industries in Saudi Arabia most would receive a medium-high positive impact factor as a result of a liberalised telecoms industry. One of the major contributors to this being the delivery of high-quality FDI, including technologies, advanced ICT infrastructure and skills-transfer that would otherwise require a lengthy learning and development curve. The telecoms industry, especially where a large private sector role is present, has received the greatest share of FDI internationally during the 1996-1998 period, adding to the popularity of arguments advocating extensive and rapid reform of telecoms in the kingdom (UNCTAD, 1999). Since the liberalisation process began with such developments as corporatisation of Saudi Telecoms Co in the late 1990’s (which saw an initial public offering of 30% at the end of 2002) and the establishment of the SEC the telecoms sector has grown dramatically. There are three key branches of growth to be seen with fixed lines rising by over 3,000% between 1970 and 2000 (2,964,730 lines in 2000); mobile lines by over 15,000% between 1991-2001 (the fastest growing and largest telecoms branch in the MENA – 2,315,100 lines in 2001); and data circuits by an average 18% each year between 2000-2006 to exceed 38,000 circuits by 2006 (STC, 2006). Mobile phone teledensity subsequently stood at 60.3% in 2005, while fixed-lines at a much lower 16.3% and internet users at 13%, though growing rapidly – up from just 5% in 1995.
Overseeing the process of telecoms liberalisation between the 2001-2005 period the Saudi Communications Commission (SCC) has project-managed the transition towards meeting WTO requirements. The SCC’s functions have included policy implementation, license issuing, drafting of statutory regulations in harmony with WTO frameworks, setting frequency plans, license request analysis and adjudication of disputes. In all, it has confirmed the liberalisation, privatisation and internationalisation of the Saudi telecoms sector to the market. A cornerstone to this process has been the corporatisation of Saudi Telecoms Co, which began in 2001. The process focused upon four strategic objectives that sought to prepare the company for its new operating environment: (i) Deploy network capacity with highest possible value; (ii) Establish STC corporate branding and related equities; (iii) Construct world-class operational and systems capabilities; and (iv) Operate as an integrated and adapting organisation. The company has achieved these objectives, in part, by implementing a market-orientated organisational structure based upon both functional and business units; has ran its corporate governance in a transparent fashion with diligent strategic planning and market research; as well as tracking progress along a four-factor ‘scorecard’ incorporating financial, market facing, business process and organisation & resources factors.
In early 2007, the Saudi telecoms sector is embarking upon a second phase of expansion – the first having taken place during the late 1990’s-2005 reform period under SCC auspices. International investors are set to bid for a third mobile phone licence - the second having been awarded to UAE-based Etihad Etisalat whose Mobily services began operating in May 2005 - and a licence to operate fixed-line services in competition with STC. Dominant regional firms have had a strong showing in the early stages of applications to bid for the licenses in the coming fortnight. Egypt’s Orascom Telecom, MTC of Kuwait, local Oger Telecom and MTN of South Africa could be the front-runners bidding up to an anticipated ceiling of US$5 billion for the mobile phone licence, while the fixed-line contract is expected to be a weaker contest due to slow consumer base growth. The fixed-line licence also does not include internet provision and must be provided to three of the kingdom’s thirteen provinces within three years and to all within seven placing considerable pressure on any service provider. Furthermore, there will be a 5% commission applied within the first year on net revenue to be paid to the government, climbing to 8% in year two and 10% thereafter for the remainder of the 25-year licence. This is lower than the 5%, 10% and 15% incremental steps of the mobile licence conditions but as the mobile sector is set to double in market size over the next five years while the fixed-line market grows by a projected 20% it is clear to see where the interest lies. Foreign ownership can, however, be up to 60% from late 2008 for both mobile- and fixed-line contracts, compensating somewhat for the deterrent factors involved.
Once the issuing of these licences has been completed, the Saudi telecoms sector will be one of the most open and transparent in the region. Its players will be highly competitive and largely private enterprises from both the region and internationally. The Saudi government has already relinquished considerable authority over this sector and as it continues to expand at such a dramatic pace, due to the strong purchasing power of the Saudi consumer base, the sector is likely to become an increasingly stable investor hot-spot. Where doubts may still exist over the economic reform process in other areas of the Saudi economy, the telecoms industry does provide a case where considerable progress has been made and in which policy-making has been confident. The extent to which reform and liberalisations in this sector of the economy will spill-over into other industries has already been evidenced in the assimilation of ICT tools in adapting and new enterprises. Government, community, social and personal services are also likely to gain considerably from the improvement and expansion of Saudi telecoms in the kingdom also, though the extent to which these shifts influence the political reform processes is yet to become clear. What is certain, however, is that accession to the WTO has coincided with significant economic reforms and growth that may well have been on the Saudi agenda already, but that have become better promoted and facilitated as a direct result of Saudi Arabia’s long road to membership.
Bibliography
ESCWA, (2001), WTO Issues for Acceding Countries: The Cases of Lebanon and Saudi Arabia, United Nations, New York
OCE - Office of the Chief Economist - WTO, (2006), Saudi Arabia and the WTO, Samba Financial Group, Riyadh
RESA – Royal Embassy of Saudi Arabia – (2004), Political and Economic Reform in the Kingdom of Saudi Arabia, Information Office, RESA, Washington D.C.
Saudi Telecoms Co, (2002), “Telecom Privatisation and Learnings in the Kingdom of Saudi Arabia”, presented at the OECD Global Conference on Telecommunications Policy for the Digital Economy, January 2002, Dubai
Saudi Telecoms Co, (2006), 5-Year Strategy, BA & H Analysis
WTO, (1998), WTO Reference Paper on Basic Telecommunications, adopted at the WTO’s Forum ’98 held in Geneva 16-18 March 1998 |
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MENAAR | March-April 2007 |
