Saudi Arabia Table of Contents

During the 1980s, the government established, virtually from scratch, a modern industrial sector. The industrialization process had two goals: first, the use of the kingdom's enormous gas production as industrial inputs to produce chemicals and petrochemicals for export and, second, the construction of energy-intensive industries, some for import-substitution purposes and others to meet infrastructural needs. The government also established state-of-the-art industrial cities and facilities to support its industrial program, including those at Al Jubayl and Yanbu.

By the early 1990s, the vast majority of these plants had been completed, and few major expansions were planned. Infrastructure requirements had largely stabilized and were adequate to meet the needs of the population and industry for much of the 1990s. Therefore, the government concentrated on maintenance and on improving productivity and efficiency. Moreover, with the onset of serious budgetary constraints, the government's role in advancing the domestic industrialization process grew more indirect. The government was forcing a number of state-owned industrial institutions to seek financing for their new capacity-expansion programs from nontraditional sources such as domestic and foreign commercial banks, stock markets, and private investors. In an ongoing attempt to encourage more private sector investment in manufacturing, particularly in light industries, local business received incentives in the form of production and consumption subsidies.


Most of Saudi Arabia's electric power-generating capacity was built during the 1970s and 1980s. Nonetheless, after the establishment of the first municipal power plant in 1950, the development of the industry occurred largely in the private sector. By 1980 about ninety-five private companies supplied electric service, leading to a totally decentralized system. Voltages and cycles differed between towns and even within towns, preventing consumers from standardizing equipment and appliances. Consumers suffered from chronic power failures, voltage fluctuations, and poor repair service. Hospitals and large plants often had their own generators. Planners estimated that only 54 percent of the potential demand for electricity had been met in 1978.

In the early 1970s, the government embarked on a twofold plan to organize the sector and to stimulate further investment. The system relied on private sector participation with strong government oversight and planning. Early attempts to standardize the system called for all new generators to be 60 hertz with distribution voltages of 127 and 220 volts. In 1976 the first of a series of regional companies, Saudi Consolidated Electric Company (Sceco), was formed for the eastern region (Sceco-East). Ownership of the regional companies, which amalgamated their facilities under Sceco, remained locally held. The government had some equity participation, but the regional companies retained administrative autonomy. The government requested Aramco to manage Sceco-East because of its large share of generating facilities and its management expertise. Regional companies for the central and southern parts of the country were formed in 1979; Sceco-West was established in 1981. The goal was to link the generators in a region and to improve planning and service. Eventually the regional companies would be tied together to form a nationwide grid. The government-owned General Electricity Corporation, which served rural areas, participated in the regional companies in areas where it was active.

In addition, the government provided the private sector direct financial assistance for building and operating generating plants and distribution facilities under the Electric Utility Lending Program, administered by the Saudi Industrial Development Fund (SIDF). The government provided consumption subsidies by paying producers to sell their power below cost. The government also gave the producer an implicit fuel subsidy on gas. Direct subsidies to the sector peaked at SR2.75 billion in fiscal year 1984-85 but fell in 1989 to SR210 million. Following a 1992 government decree, subsidies were expected to rise again because electricity charges to users were halved.

After the early 1960s, generating capacity expanded rapidly. By 1979 generating capacity amounted to 4,214 megawatts. By 1990 this capacity had quadrupled to 16,549 megawatts. Between 1975 and 1979, consumption of electricity increased 37 percent yearly while the number of consumers rose 16 percent yearly. During the 1980s, the consumption growth rate slowed to 23.8 percent annually, with the number of consumers rising annually by 17 percent. From 872,054 subscribers in 1980--representing 4 million people--subscribers reached 2.4 million in 1990. Industry usage averaged 28.3 percent of electricity consumed, although in the Eastern Province, given the location of country's major industrial complexes, industry demand accounted for more than 60 percent of electric consumption. Industrial users in the other regions consumed less than 5 percent of total electricity generated.

Water consumption also rose rapidly during the 1970s and 1980s, both by traditional sectors and by newly established urban and industrial users. In the early 1980s, a national water plan was formulated when particularly serious problems were encountered. Lack of sewage treatment was contaminating groundwater from wells in the Eastern Province, and overpumping from wells in the central region near Riyadh drastically lowered the water table. However, few substantive changes in water supply have been instituted, leading to a continued depletion of water resources. Saudi Arabia's water was supplied from three different sources: surface water (about 10 percent), underground aquifers (more than 80 percent), and desalination plants (5 percent). The nonrenewable sources continued to provide the bulk of water to users and were being depleted at an alarming rate. Efforts to supplement the available water supply have concentrated on building desalination plants. In 1980 fourteen plants were in operation with a combined capacity of 65 million cubic meters per year. Eight more plants were constructed during the decade taking total capacity to more than 600 million cubic meters per year. By the end of the 1980s, output from these plants was approximately 500 million cubic meters per year.

Between 1980 and 1985, water consumption more than tripled from 190 million cubic meters to 574 million cubic meters. The consumption increase continued in the latter half of the decade with water usage rising to 900 million cubic meters in 1990. Agriculture was the prime water user, accounting for 85 percent; its rate of consumption quadrupled from 1980 to 1985. Although data are lacking for the late 1980s and early 1990s, it appeared that usage continued to grow but at a slightly slower rate. The government's policy of providing water free to the sector, combined with new water-intensive methods of farming have been the main factors for this growth of water consumption.

The idea of importing water into Saudi Arabia was first presented in the early 1970s when Denmark's Royal Greenland Company was commissioned to perform a study on the feasibility of towing icebergs. The conclusion reached was that no technical problems were insurmountable, but that the cost was prohibitive. In the late 1980s, the Turkish government proposed a plan whereby two pipelines from Turkey would bring water (at a cost of about US$1 per cubic meter compared with US$5 to US$6 per cubic meter for producing desalinated water) to both the Eastern Province and the Hijaz. Security concerns have prevented the Saudis from moving further on these plans, however.

Mining and Quarrying

By the early 1980s, promising deposits of metallic minerals had been found, largely in the western part of the country, but commercial mining was limited. Several international companies and other organizations, including the United States Geological Survey, were surveying and exploring for minerals. Commercial exploitation was being evaluated at some promising sites. The government owned all subsoil resources and permitted joint ventures with Petromin for exploration and mining activities. In fact, the government provided substantial assistance and incentives to foreign firms to develop mining.

The first mining project was the Mahd adh Dhahab gold mine about 280 kilometers northeast of Jiddah. The gold mine started commercial production in 1988 with a total capacity of 400 tons of gravel a day with a ratio of 26 grams of gold and 90 grams of silver per ton. Petromin reached an agreement with a Swedish company to exploit the gold deposits at Shukhaybirat, northeast of Medina. The mine began operations in 1991, planning to produce 1,500 kilograms of gold annually together with silver. Furthermore, gold deposits were found at Hajar (north of Medina), Bir at Tawilah (southeast of Al Taif), and Al Amar (southeast of Riyadh). Also in the early 1980s, iron ore deposits in Wadi Sawawin near the Gulf of Aqaba were under study to determine their economic potential. Ore containing copper, lead, zinc, silver, and gold was located in the Al Masani area about 200 kilometers northeast of Jiddah and showed promise. A pilot project began in the early 1980s to determine the feasibility of processing metal-rich mud from the bottom of the Red Sea. Lead, zinc, copper, silver, platinum, and cadmium appeared potentially exploitable. The country also has adequate nonmetallic minerals, such as clay, limestone, glass sand, and stone for the construction industry. These materials were exploited by private firms. Large gypsum deposits had been located near Yanbu and phosphorite had been found in several locations.


The government has played an instrumental role in developing the manufacturing sector by directly establishing industrial plants, mainly in the basic industries sector, such as petrochemical, steel, and other large manufacturing enterprises. Also, it has developed manufacturing through direct loans, mainly by the SIDF and through industrial subsidies, offset programs, set-asides, preferential buying programs, and tariffs. In the 1980s, the bulk of private manufacturing investment was directed to plants that manufactured goods for the construction industry. With the decline of construction in the mid-1980s, there has been a shift to other light manufacturing including food processing, furniture making, and other consumer goods. This trend accelerated in the early 1990s.

Partly because of private sector reluctance to invest in manufacturing and partly because of growing oil revenues, the government was involved early in the 1960s in some basic industries. In the late 1960s, Petromin established a steel- rolling mill in Jiddah using imported billets, a urea fertilizer plant in Ad Dammam with 49 percent private Saudi capital, and a sulfuric acid plant in the same location. In the early 1970s, as oil revenues grew, a coordinated plan emerged to collect and distribute gas that was flared to two yet-unbuilt industrial sites where it could be used in basic industries. The two sites selected were Al Jubayl and Yanbu.

In 1975 the Royal Commission for Al Jubayl and Yanbu was created. The commission was given authority to plan, construct, manage, and operate the infrastructure needed to support the basic industries the government intended to build and to satisfy the community needs of the work force employed in these industries. The commission was also to promote investment in secondary and supporting industries, to develop effective city government, and to train Saudis to take over as many jobs as possible. The commission received an independent budget to facilitate its work.

By 1990 there were sixteen primary industries, forty-six secondary enterprises, and approximately 100 support and light industrial units at Al Jubayl. Yanbu had attracted five primary industrial plants, twenty-five secondary plants, and seventy-five support and light units in 1990. Al Jubayl benefited from the massive petrochemical projects of the Saudi Basic Industries Corporation (Sabic), but both saw substantial growth during the 1980s. Nonetheless, both locations suffered from overcapacity; for example, initial population projections called for 58,000 residents by 1985 in Al Jubayl, but by 1987 total residents barely reached 40,000. Revised forecasts estimated that there was substantial room for growth during the 1990s, and that no major capacity expansion would be necessary until the year 2000.

With the establishment of Sabic in 1976, the government undertook a major effort to create a domestic petrochemical industry that was designed to augment oil export earnings and to use abundantly available domestic resources, particularly associated gas supplies. The investments have been guided by a two-phase strategy. The first phase (1976-87) included a number of large capital-intensive and export-oriented petrochemical projects that have been completed. Its aim was to produce bulk products such as ethylene, polyethylene, melamine, methanol, and downstream products including derivatives of ethylene. Moreover, during this period, Sabic undertook the construction of plants to produce fertilizers (urea, sulfuric acid, and melamine), metals (steel rods and bars), supporting industrial products (nitrogen), and intermediate petrochemical products (vinyl chloride monomer, polyvinyl chloride, and MTBE). Sabic also acquired shares in two Saudi aluminum companies and expanded overseas by investing in a Bahraini petrochemical complex.

During the first phase, financing by joint-venture partners and funding from the government's Public Investment Fund (PIF) provided the bulk of support for these projects. Domestic and regional private sector participation was also allowed after 30 percent of the equity capital of Sabic (approximately SR3 billion) was sold to residents of Saudi Arabia and other GCC countries. In 1987 Sabic split each share into ten shares to mobilize investments from smaller investors.

In 1992 Sabic owned, either outright or with a minimum 50 percent stake, fifteen major industrial enterprises. Total output capacity was 13 million tons of various petrochemicals per year, up from 11.9 million tons per year in 1990 and 9.5 million tons per year in 1989. Although total sales have continued to rise, weaker international prices depressed profits during the late 1980s and early 1990s. During 1991 Sabic registered net profits of US$613 million. About 95 percent of Sabic's sales were exported; total exports approached US$4 billion per annum. Its success in rapidly increasing exports and capturing an international market share have made Sabic's petrochemical exports subject to nondiscriminatory restraint in both Europe and Japan, its main export markets. Both the EC and Japan have applied quantitative restrictions to Saudi exports. Moreover, urea exports from Saudi Arabia were subject to antidumping duties in the EEC, which no longer permitted preferential treatment under its General System of Preferences.

Future development plans, part of Sabic's second phase, were designed to maintain Saudi Arabia's 1992 international market share and raise domestic petrochemical capacity by 40 percent. By 1993 Sabic hoped to increase total petrochemical capacity to 20 million tons per year. Projects underway included the Eastern Petrochemical Company (Sharq), an equal-share joint venture with Japan's Mitsubishi Gas Company, which was planning a major increase in its capacity to produce ethylene glycol. The expansion program aimed to raise production to 660,000 tons per year from the 1991 level of 450,000 tons per year. Sharq also intended to increase its polyethylene production from 140,000 tons per year to 270,000 tons per year. Ibn Zahr, the Saudi- European Petrochemical Company, a joint venture in which Sabic had a 70 percent share and Finland's Neste, Italy's Eco Fuel, and the Arabian Petroleum Investment Corporation (Apicorp--owned by the Organization of Arab Petroleum Exporting Countries) each had 10 percent, intended to raise the output of MTBE from 550,000 tons per year. The company's polypropylene plant was to be expanded as well. The National Methanol Company (Ibn Sina) planned to double methanol production from the 640,000 tons annually in 1991 to 1.2 million tons. This plant was also expected to increase capacity of MTBE to 500,000 tons per year and possibly to 700,000 tons per year. The National Plastics Company (Ibn Hayyan), a joint venture with the South Korean Lucky Group (15 percent), planned to expand output of polyvinyl chloride from 200,000 tons to 300,000 tons per year. The National Industrial Gases Company was engaged in 1991 in doubling nitrogen production capacity from 219,000 tons per year to 438,000 tons per year, whereas oxygen production capacity was to increase from 438,000 tons per year to 876,000 tons per year. The Saudi Arabian Fertilizer Company completed a 500,000-tons-per-year anhydrous ammonia plant and a 600,000-tons-per-year granulated urea plant in 1992, and was expected to undertake further expansion throughout the 1990s. Because the available gas-based feedstock (ethane and methane) would be insufficient to meet requirements of the second phase, Sabic has invested in two flexible feedstock crackers with a total combined capacity of about 1 million tons. The crackers help reduce dependence on ethane and methane and allow the use of naphtha, liquefied petroleum gas, or propane as feedstock.

In Sabic's second-phase financing plans, retained profits and limited borrowing from the PIF, SIDF, and domestic commercial banks were expected to provide partial funding. Nonetheless, Sabic hoped to raise almost 30 percent of the planned US$3.5 billion to US$4 billion on the international market through syndicated borrowing. For example, Sharq's expansion plans called for approximately US$600 million in foreign borrowing, and Ibn Zahr was expected to raise US$500 million from foreign capital markets.

The private sector's role in industrialization has been largely restricted to light and medium-sized manufacturing units. However, some larger merchant families had established larger- scale chemical, secondary-stage petrochemical, and car or truck assembly plants. By 1981 Saudi Arabia had approximately 1,200 industrial plants of all sizes. At the end of the 1980s, this figure had doubled to about 2,000 units and had risen to 2,100 by 1991. Most private manufacturing concerns in the 1980s produced construction materials including cement, insulation materials, pipes, bricks, and wood products. Judging from data available from the Ministry of Industry and Electricity, there has been a marked shift from this sort of production to downstream chemicals, food processing, and metals, machinery, and equipment manufacturing. The annual number of new licenses issued to companies in the chemical, rubber, and plastics sector rose from seven per year in 1987 to fifteen in 1990. Although this number constituted at most 20 percent of all licenses granted, the size of the firms was growing, judging from their authorized capital, which grew from 42 percent of total new investment planned to 90 percent. Trailing well behind this sector was the food-processing sector, which saw a rise in number of licenses between 1987 and 1990, but the volume of authorized capital declined, indicating smaller individual companies and more widespread participation. Metals and machinery manufacturing followed a pattern similar to chemical companies, with both the number of units and authorized capital growing during the four-year period.

The patterns of Saudi private manufacturing investment have conformed to government investments. Incentives offered to private businesses included interest-free loans from SIDF of up to 50 percent of the cost an industrial project, repayable within fifteen years. Exemptions from tariff duties on imported equipment, raw materials, spare parts, and other industrial inputs; land leases at significantly reduced prices; discriminatory buying practices by government agencies; and significant import protection were some of the other incentives provided.

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Source: U.S. Library of Congress