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Saudi Arabia seeks investment to become logistics hub

Saudi Arabia seeks investment to become logistics hub

Saudi energy minister Khalid al-Falih announced on January 26 that the country is raising $427 billion in private sector investments, which will include roughly $36 billion for logistics infrastructure according to Reuters. The investment will be used to develop Saudi Arabia into a gateway for the trade supply chains of Africa, Asia and Europe. Other sectors that Saudi Arabia seeks investments in are mining and manufacturing.

The Saudi Arabian Transport Ministry released its plan to improve the country’s logistics infrastructure in 2018. The plan is intended to contribute to Saudi Arabia’s macroeconomic development plan, Vision 2030, to diversify its economy away from oil exports.

According to the Transport Ministry, 12 percent of the world’s containerized trade passed through the Red Sea in 2015. The Red Sea’s regional market includes the Arabian Peninsula and East Africa, which have a combined gross domestic product (GDP) of $2.4 trillion and a population of 647 million. Saudi Arabia accounts for only 5 percent of the region’s population but 27 percent of its GDP, making it central to the region’s economic and trade direction.

“The strategic position of the entire Gulf Cooperation Council (an international group of the six kingdoms in the Arabian Peninsula with access to the Persian Gulf) is key to the region’s logistical sector outlook, as a significant amount of the world’s population is found within an eight-hour flight.” said Jean Paul Pigat, founder and head of research of Lighthouse Research (a market research firm specializing in the Middle East).

Saudi Arabia has already welcomed the private sector to participate in its supply chain infrastructure.

According to Gulf News, in 2015 King Fahd International Airport in Dammam opened a new cargo terminal to handle goods moving through Saudi Arabia. The terminal, known as Cargo Village, has 500,000 square feet of space and is a joint venture between Saudi Customs and Changi Airports International (the investment arm of Singapore-based Changi Airports Group). Cargo Village is already attracting business from international air freight carriers including DHL (DPW: FWB), FedEx’s TNT subsidiary (NYSE: FDX) and UPS (NYSE: UPS).

According to the International Trade Administration (an agency of the U.S. Department of Commerce), ports in Saudi Arabia handle more than 90 percent of maritime trade moving through the Red Sea and 30 percent of maritime trade destined for East Africa. The King Abdullah Port, 100 kilometers north of Saudi Arabia’s commercial capital of Jeddah, is the country’s first port to be fully owned and built by the private sector. It’s currently the fastest-growing and most technologically advanced port in the region.

Saudi Arabia’s plan to capitalize on regional supply chains will also require the country to improve key sectors of its logistics economy.

The World Bank grades countries’ logistics capabilities with its Logistical Performance Index (LPI). The LPI analyzes six dimensions of a nation’s logistical economy with a possible score of 1.0 (lowest) through 5.0 (highest). The weighted average of these scores is used to form an overall LPI score. The six dimensions considered are: customs clearance (the accomplishment of customs procedures); logistical infrastructure quality; the ability to conduct international shipments; competence in conducting logistical operations; tracking and tracing of the supply chain; and overall shipment timeliness.

In 2018 Saudi Arabia scored 2.66 in customs, 3.11 in infrastructure, 2.99 in international shipments, 2.86 in logistics competence, 3.17 in tracking and tracing and 3.30 in timeliness.

The Ministry of Transport set target scores above 3.8 for each dimension for Saudi Arabia to meet by 2020. The country currently ranks 55 out of 160 countries on the LPI, with an aggregate score of 3.01. Germany has the highest LPI score at 4.20 (one of seven countries with a score above 4.0) while Afghanistan is the lowest performer with a score of 1.95 (and is the only country with a score below 2.0).

Economists are hopeful that Saudi Arabia’s increased participation in the international supply chain will provide new economic opportunities for the country’s citizens.

“The call for $427 billion investment in Saudi Arabia’s mining, manufacturing and logistic sectors, should provide ample ways for local investors to invest in their economy over the next 10 years.” said Dr. Ghiyath Nakshbendi, executive in residence at American University’s Kogod School of Business. “That should help to energize the economy and provide employment opportunities for its [Saudi Arabia’s] young college graduates.”

Saudi Arabia’s transition to a trade economy will require it to build the necessary infrastructure and institutions to facilitate a regional supply chain.