Economic Update

Published 17 Jul 2018

Saudi Arabia is preparing to start the privatisation process of its flour milling industry, tying into broader plans to enhance the role of the private sector.

In late June the state-run Saudi Grains Organisation (SAGO) published the qualification criteria for prospective investors ahead of the privatisation and potential sale of its four flour mills and associated companies.

The Request for Qualification document outlines that bidding companies – or at least one company in a consortium of bidders – must have experience operating in flour milling or food processing, while individual companies and consortiums must have had a net worth of at least SAR750m ($200m) by the end of the financial year 2017.

Furthermore, the guidelines did not stipulate that mills should remain majority-owned by Saudi interests – reversing a requirement set out in earlier preliminary documents – which is expected to enhance the appeal to foreign investors.

While no formal offers can be made before the qualification application process begins on August 26, which will then be followed by the actual bidding phase, international media have reported that US agri-business firms Archer Daniels Midland and Bunge could be among the bidders for SAGO’s assets.

Despite the release of the document, international media also reported that companies are likely to request more information on the terms of privatisation, namely in regard to whether the Kingdom intends to continue to provide a price floor for wheat imports, and whether there would be any pricing ceilings on processed flour, factors that would impact revenue flows and the long-term viability of the ventures.

Privatisation forms part of Vision 2030 plans

While the privatisation of the milling sector had been suggested as early as 2010, the renewed impetus to undertake such measures is due to the rollout of Vision 2030, the economic development plan that aims to increase the involvement of the private sector in the economy and open up Saudi Arabia to greater levels of foreign investment.

Under Vision 2030 the Kingdom is looking to generate up to $200bn through the privatisation of a range of enterprises and services, such as utilities, transport, communications and petrochemicals.

In April the Saudi government issued the formal framework for the first round of state-asset privatisations.

The initial round – which includes the sale of SAGO’s flour milling assets, along with a partial sell-off of the Saudi Saline Water Conversion Corporation, the privatisation of the national football league and the corporatisation of the country’s ports – aims to generate between $9bn and $11bn in revenue by 2020.

The programme is expected to lead to a significant increase in both foreign investment and business activity across the broader economy.

Sell-off comes amid strong milling sector growth prospects

The privatisation of the mills will provide investors with an opportunity to enter one of the largest flour markets in the Middle East and North Africa, and one in which demand is expected to rise in the coming years.

SAGO imports the country’s entire wheat supply, around 3.5m tonnes per year, while the sector is expected to grow by annual rates of 3.2% to reach 4.5m tonnes by 2025, largely due to population growth and a projected sharp increase in overseas visitor numbers.

In April the government finalised regulations for the issuance of tourist visas, with the plans expected to be approved by officials in the next few months. The development forms part of a drive to boost annual foreign visitor numbers to 30m by 2030, up from current levels of around 18m, with the plans to complement religious tourism with the development of the Red Sea coastal strip as a leisure and business destination.

The projected increase in overseas travellers will feed into overall consumer demand, including for bread products, and could also open the door for grain exporters to enter the market.

While consumption is presently dominated by white flour products, there has been an increase in production and sale of whole wheat flour amid demand for healthier bread products.

Given the government’s campaign to improve health standards, in particular rates obesity and diabetes, the whole-wheat segment could provide an opportunity for millers to expand their product range and revenue base.