The Middle East: rise of the post-oil era

21.06.2016: It is a common perception of the Middle East that the region has always been dependent on oil

It is a common perception of the Middle East that the region has always been dependent on oil revenues. This has heightened anxiety over what happens as oil prices hit rock bottom.

 While the answer is not a straightforward one, the general view is that the region is moving towards a new Post-Oil era.

It is true that the region depends heavily on oil revenues, but this is not the full story. Among the most ancient of civilizations, the ME region possesses great culture and history, aligned with a superb geographic location and economic reach.

In recent times, major petroleum exporting countries, especially in the GCC, have realised the importance of considering alternative strategic directions, the greatest example of this being the mega transformation of the UAE.

The UAE and other GCC governments, particularly Saudi Arabia and Qatar, started to review their economic ecosystems and began decreasing their dependency on oil revenues to focus on non-oil revenue sources. Year on year, the non-oil economy’s contribution is growing progressively.

A few years back, Saudi’s national strategy began to focus more on human resources development, and lately it added economic development to its agenda. This was largely expected, given the huge drop in oil prices.

A vibrant society, a thriving economy and an ambitious nation are the three main themes for the Kingdom’s strategic direction for the coming 14 years. But how can this be translated into robust actions?

A lot of opinions have been put on the table, but the consensus is that Saudi in particular, and the GCC countries in general, have committed to developing their nations by focusing on human resources and attracting investors.

Among the major successes in Saudi have been the establishment of Riyadh as a business centre, the development of the eastern region, and major joint ventures such as the one between the Dow Chemical Company and the Saudi Arabian Oil Company which invested $20 billion to build and operate a world-scale, fully integrated chemicals complex in Jubail Industrial City.

These are all great indicators of what is coming next for Saudi. National economic development is the key for the Kingdom to survive the oil price crisis and move forward to becoming one of the largest economic hubs in the region.

The UAE is a perfect example of how nations can emerge from being dependent on oil to becoming the region’s leading tourism and business hub by optimizing non-oil revenues.

The UAE’s leaders managed to attract investors, strengthen the banking, real estate, healthcare and tourism sectors and minimised dependency on oil with a clear and ambitious vision.

Massive investments have been made in economic development such as the hosting of Expo 2020 and setting a target to become the world’s number one medical tourism location.

Despite the diversity in its portfolio of investments and revenue sources, the UAE has also been hit by the drop in oil prices, and has moved to make innovation one of the highlights of its strategic direction, a move which can take it to a whole new level of excellence.

Similarly, Qatar has been focusing on developing its economy by investing in tourism, healthcare and education, as it too remains under pressure from the slump in oil prices.

The same applies to Oman, Kuwait, Bahrain and the rest of the ME countries. So how can the region plan its next move? What should they focus on? How can they leverage on current challenges and move to the next level?

Three building blocks for ME governments in the post-oil era

The worldwide economy is highly integrated, and any disturbance, whether political or economic, might and will have an effect on this side of the world.

The ME region can leverage on this integration of global economies and diversify its investments into cost reducing and revenue generating initiatives:

•    Developing human capital:

o    Reform educational programmes:
Education is a key indicator of a nation’s maturity at social and economic levels.

Governments must plan and implement a highly intellectual educational infrastructure that will help grow and develop resources to become globally recognised leaders and drive towards excellence.

For example, roughly 70% of Saudis are under 30, meaning there is an urgent need for economic reform even before the oil money to fund it dries up.

o    Nationalization:
Invest in citizens, develop them, and support them to become the next generation of leaders to drive innovation of economies and market a nation’s success.

 This will have a major impact on the social and economic agenda.

o    Empowering women in the workplace:
Women have been extremely successful in the workplace in the ME region. They are fulfilling many senior jobs in international firms as well as excelling with entrepreneurship.

A special focus should be given to female talent in the region and governments should focus on helping women step up.

According to a World Bank study, the gender gap in unemployment between females and males in the region has been remarkable and the Middle East and North Africa has made significant progress in reducing gender gaps in human development, with evidence lately of female talent becoming more visible in the region.

•    Developing economies:

o    Focus on corporatization and privatization:
To ensure smooth transition towards non-oil revenue generation, massive investments must be made by Middle East governments to strengthen the private sector.

In particular, a major focus on entrepreneurship to grow small to medium size businesses and increase their contributions into the national GDPs is needed.

Successful entrepreneurship strategies already under way include the UK-Lebanon Tech Hub, designed and run by PA Consulting Group.

The expected benefit to society of such initiatives is felt not only in financial gains, but also in the support provided to help Lebanese entrepreneurs step up and expand their businesses regionally and globally with innovative ideas.

o    Focus on attracting investments
: Given its strategic location, the ME region is one of the world’s most important business hubs. Governments need to increase foreign direct investments, and diversify spending into global investments across different sectors.

The main focus should be on education, healthcare and travel/transport/logistics. Governments should also invest in non-profit organizations that will serve as a backbone to the nation’s development, whether in education, social affairs, healthcare or human development.

Given the rise again of the south-south trade, there will be an expected boom in this area in the coming decade as it serves to increase the trade between developing markets.

According to the World Trading Organization’s (WTO) annual international trades statistics report, emerging markets’ trade with one another reached a quarter of total global trade by 2012 – up from 12% in 2000, doubling in one decade.

In its 2014 annual trade report, the WTO predicted south-south trade would account for 30% of global trade by 2030.

o    Focus on mega projects:
Some governments have already kick started this initiative, notably Qatar in winning the right to host the 2022 FIFA World Cup and Dubai in successfully landing  Expo 2020, as well as the establishment of the Saudi Arabian Industrial Investments Company in the Kingdom.

Mega projects will help governments in marketing their readiness to expand and grow. This is a huge undertaking, but the potential benefit is much higher.

It is important to note that spending associated with mega projects does not seem to be affected by changes in economic conditions, and will remain unchanged.

•    Reforming the business of governments:

o    Improve efficiency:
Around the world, governments are organising themselves with agility, and getting their businesses into continuous improvement programmes aligned with their strategic priorities.

 Efficient operations will help Governments focus on their strategic directions and facilitate decision making.

o    PPP: I
t has been proven that public-private partnerships are of great benefit to both governments and the public with minimal public sector costs. A well-executed PPP is simply another tool for procuring or managing public infrastructure.

The growing interest can be attributed to a number of factors, including tightening budgets, increased project complexity, better value for money, the desire to leverage private sector expertise, and shifting public sector priorities.

Private sector funding of capital projects will be of critical or growing importance over the next year. Analysts expect a collaboration of private and public sectors to fund capital projects and infrastructure projects over the next few years.

However, weakening fiscal positions of the ME governments may affect private sector appetite for investing in the region.

o    Innovation
: Invest in technologies, ideas and potential. For the ME region, the potential has always been there. One of the challenges was translating ideas into actionable strategies.

Technology might be one contributor to success, but innovation is more of a way of thinking rather than a process. When we think innovatively we will come up with innovative ideas, and innovative solutions.

An in-depth assessment of government business and prioritization of initiatives will help ME governments to locate gaps and come up with unique ways to improve the business.

o    Automation:
The use of information and communication technologies to improve public organization activities proved to be a great initiative to enhance interaction between government entities and the public.

Besides the cost benefit of this philosophy, e-governments have a major impact on the day-to-day operations and strategies of governments in terms of security, accessibility and reliability of all activities.

While governments have already kicked off their strategies focusing on non-oil economy contribution, the key to success is the proper implementation of these strategies.

If the oil price climbs near $70 per barrel, as some analysts predict, normality will resume in the region. If it remains at around $40 per barrel, however, there will be a new normal which, as of now, has not been clearly defined.

 A priority for governments is to develop contingency plans geared to both scenarios, and slashing costs is not the only solution.

ME governments must focus on their strengths and competitive advantages, and embed the culture of excellence and innovation in order to reach their ambitions and drive transformations in the most innovative and unique way.

Innovation is the best way to hit the ground running for the region should oil prices remain low. Governments should focus on human capital development, economic development and on transforming their businesses to cope with changes.

Priority actions to be considered by governments:

•    Review strategies and operating models to ensure agility to adapt to the new normal

•    Plan a “War on Waste”: drive performance improvement programmes and minimize inefficiencies by focusing on targeted reductions

•    Review funding plans and consider raising cash in the debt markets such as PPPs and Sukuk, and keep enough cash as a buffer to back up contingency plans

•    Optimize spending by reducing investments in working capital and focus on technology and automation

•    Review sourcing options to manage costs efficiently where possible

•    Automate, and optimize the use of technology to support the rapid implementation of strategies

•    Carry advanced urban planning to cope with the expansion of the ME countries.

-PA Consults

Lindsay Johnston, Total Communications Dubai -


21.06.2016 / MaP

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