CIIT Committee Report
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The Arabian Peninsula is a mostly desert region of the Middle East, bordered on the west by the Red Sea; by the Persian Gulf and the Gulf of Oman on the east; Jordan and Iraq on the north; and the Gulf of Aden and the Arabian Sea on the south. Seven countries are considered to be part of the Arabian Peninsula: Saudi Arabia, the United Arab Emirates, Yemen, Oman, Qatar, Kuwait and Bahrain.
The Arabian Peninsula is a region of major religious, cultural and geopolitical importance. Not only is it the focal point of the Islamic world — the two holy cities of Mecca and Medina are both located in what is now the Kingdom of Saudi Arabia — but given its abundance of crude oil, it is an important economic player as well. About 22% of global oil production comes from the Arabian Peninsula, and the region is home to the world’s largest known conventional crude oil reserves.
Largely discovered in the 1930s, this energy wealth has translated into a remarkable economic transformation in a relatively short period of time in most countries in the region. We heard that Saudi Arabia, for example, had gone from “camel to Cadillac in a single generation.” Total economic output in the region, adjusted for purchasing power, was about US$631 billion in 2006, equivalent to the gross domestic product (GDP) of Turkey, the world’s 14th-largest economy (not including individual members of the EU).
Today, the Arabian Peninsula is home to about 61.5 million people, approximately equivalent to the population of Italy, or that of the United Kingdom (UK). Unlike the UK and Italy, however, the population of the Arabian Peninsula is growing rapidly. High birth rates in the region, aided by a growing cohort of foreign workers, have created a young and fast-growing population. With the exception of Bahrain, where population growth is lower than elsewhere in the region, the rate of population growth ranges from 2.1% per year in Saudi Arabia to 4.0% per year in the UAE. By comparison, population growth in Canada is about 0.86% per year, meaning that even in Saudi Arabia, the population is growing more than twice as quickly as in Canada.
Not only is the Arabian Peninsula’s population expanding rapidly, but the region is in the midst of an economic boom that, we were told, was virtually unprecedented in its history. The high oil prices of the past few years have generated tremendous economic growth and wealth, especially for the region’s governments for whom oil royalties and related income account for the lion’s share of budgetary revenues.
Overflowing coffers have given governments the means to address a number of outstanding issues in their economies. While the pressures of population growth and regional economic integration (discussed below) are high on the list of these issues, first among them is the region’s excessive reliance on oil. Economic activity on the Arabian Peninsula is highly cyclical, ebbing and flowing with the price of oil. In many countries, therefore, the current royalty windfall is being used to invest outside of oil extraction and transportation, in an effort to diversify their economies and lessen their dependence on oil. As such, hundreds of billions of dollars are being invested across the region in areas like infrastructure, tourism, trade and commercial services.
2. Overcoming the Challenges and Negative Perception of the Region
Committee members who travelled to the Arabian Peninsula were struck by the wealth of economic opportunities in the region. With hundreds of billions of dollars of planned and proposed investments in the region in the near future, if Canadian enterprises were to capture even a small fraction of that investment, or the trade in associated services and materials, the positive impact on the Canadian economy would be considerable.
However, in order to do so, Canadians must overcome their reservations about doing business in the region. It goes without saying that the Arabian Peninsula suffers from an image problem in much of the western world. To be frank, many Canadian businesses are reluctant to explore the trade and investment opportunities there because the region is considered to be unsafe and is associated with political instability, a lack of religious freedoms, human rights abuses, social and economic restrictions on women, and Islamic extremism.
In many cases, the image Canadians have of the Arabian Peninsula is inaccurate, particularly as it relates to violence, religious extremism and political instability. This perception is based not on the Arabian Peninsula itself, but is largely a function of the region’s proximity to legitimately unstable countries like Iran, Iraq and Syria.
Within the Arabian Peninsula there is, in fact, very little political instability or violence. Government regimes are secure, borders are stable, relations with neighbouring countries within the peninsula are excellent, and internal conflict is limited. Only in Yemen is there any active resistance to the national government; however even this resistance is isolated to the northern mountains and is not of immediate concern to most of the Yemeni population.
The fact that the Arabian Peninsula is associated with political instability is, in our view, unfortunate. Conflict in Iraq and deteriorating relations between Iran and the West cast a shadow over the entire Arab world, thus affecting how many westerners perceive stable countries like Qatar, Kuwait or the UAE. In most cases, the only threat of instability on the Arabian Peninsula comes from how those countries might be targeted by developments such as a resurgent and potentially aggressive Iran.
There can be no denying that religious extremism and anti-West sentiment exists on the Arabian Peninsula. Saudi Arabia in particular suffers from the distinction that it was home to the terrorists responsible for the September 11th, 2001 attacks on the United States.
However, the actions of a few individuals do not represent the prevailing mindset in Saudi Arabia, or that of the region as a whole. Terrorist cells and Islamic extremism exist in pockets around the world, including in Europe and North America. These individuals no more reflect the countries in which they live than they do the vast majority of religious observers whom they purport to represent.
In fact, governments in the Arabian Peninsula have proven to be eager to co-operate, and build closer economic ties, with the western world. The region is in the midst of one of the most prosperous periods of economic growth in its history. It would certainly not be in any country’s best interests to support anti-west terrorist groups and activities.
While Canadians’ concerns about political instability on the Arabian Peninsula are largely overstated, it is fair to say that their perceptions about differences in culture and religious observance are not. The tenets of Islam dominate day-to-day life on most of the Arabian Peninsula. This is especially true of Saudi Arabia which is the most religiously conservative country in the region. Committee members heard that, for those raised in a Western, pluralistic society, the cultural differences — the restrictions on religious observance, the activities and dress of women, the availability of social activities, etc. — are as significant as the economic opportunities are considerable.
Committee members heard repeatedly that Canadian business people should not underestimate the toll that these cultural differences can exact; Arab culture, and the business environment, is friendly and welcoming but restrictive by Canadian standards. Indeed, we met many foreign business people who had operations in Saudi Arabia or elsewhere in the region, but maintained a residence in Dubai – by far the most liberal city in the Arabian Peninsula – to house their families and to which they would return on weekends.
Indeed, the UAE, and Dubai in particular, are doing much to change the image of the Arabian Peninsula in Canada and across the Western world. The UAE is garnering an international reputation as a business and transportation hub, as well as a vacation destination — an increasing number of major international sporting events are taking place in the country; a multitude of shopping and entertainment complexes are being built; and no less than half a dozen world class museums (including one in partnership with the Louvre) are under construction in Abu Dhabi. As perceptions of the UAE change, this can only help the image of the region as a whole in Canada.
B. The Gulf Cooperation Council
Six of the seven countries on the Arabian Peninsula are members of the Cooperation Council for the Arab States of the Gulf, also known as the Gulf Cooperation Council (GCC). Only Yemen, by far the poorest country in the region, is not part of the GCC, although it does participate in some GCC initiatives.
The GCC is a regional integration organization, like the European Union. Created in 1981, its main objectives are to:
effect coordination, integration and inter-connection between Member States in all fields, strengthening ties between their peoples, formulating similar regulations in various fields such as economy, finance, trade, customs, tourism, legislation, administration, as well as fostering scientific and technical progress in industry, mining, agriculture, water and animal resources, establishing scientific research centres, setting up joint ventures, and encouraging cooperation of the private sector.[2]
Not long after the GCC was established, it became a free trade area. For the next 20 years, however, only modest progress was made in terms of further economic integration. This changed in 2003 when the six countries agreed to form a Customs Union: GCC members eliminated tariffs on all trade between member countries; established a common external tariff (CET); and allowed for free movement of capital within the bloc.
Economic integration plans are expected to continue in the coming years. We heard that the GCC is currently working towards the establishment of a common market; by the end of 2007, it is expected that all people and goods from GCC countries will be accorded national treatment within the bloc. In addition, plans are in place to establish a common currency by 2010 – although we learned that Kuwait and Oman have, for political reasons, opted out of the common currency for the time being. On top of formal integration mechanisms, GCC countries are also working to improve regional linkages more directly, through shared infrastructure and other development projects. For example, the GCC is exploring the possibility of building a series of rail lines that would link all six countries.
1. GCC External Trade and Investment Policy
The GCC is a relatively open market. It actively seeks to attract foreign direct investment (FDI) and maintains a low common external tariff. For most products, this tariff is only 5%, but because the region does not have a significant manufacturing base, goods that are inputs to production may be imported tariff-free.
Under the terms of the GCC customs union, countries are permitted a number of exceptions to the 5% tariff; each can impose a higher or lower tariff as domestic policy priorities warrant. Although exceptions differ from country to country, generally higher tariffs are applied to items forbidden or frowned upon by Islam: pork, alcohol and cigarettes. In some cases, there are additional duties on certain locally-produced agricultural products. Conversely, a number of GCC countries, not known for their fertile lands, offer tariff-free access for basic foodstuffs.
The GCC places a high priority on liberalized trade agreements with third-party countries. It is in the midst of an ambitious series of negotiations with several countries and regional groupings, including China, India, the EU, Japan, Australia, the Southern Common Market (Mercosur), Jordan, Turkey, New Zealand, Singapore and, most recently, South Korea. However, the GCC has had decidedly mixed results in concluding these agreements. It successfully completed a free trade agreement (FTA) with Syria in 2005 and is close to finalizing its agreement with New Zealand. However, negotiations with the EU, although expected to be concluded in 2007, have been underway for over 20 years without resolution.
One of the practical challenges facing the GCC’s FTA negotiations is the fact that not all countries in the bloc have the same interests. This has not only contributed to the delay in completing free trade negotiations, but has also prompted two countries, Bahrain and Oman, to act outside of the GCC and negotiate bilateral FTAs with the United States.
These agreements have caused no small amount of tension within the GCC. Saudi Arabia maintains that these bilateral FTAs violate the GCC customs union because Bahrain and Oman did not negotiate from within the GCC bloc. Saudi Arabia has pointed out that U.S. goods can enter its country tariff-free via Bahrain, but subject to the 5% duty if imported directly or, for example, from the UAE. This compromises the very principle of a common external tariff that the region has worked to implement. Questions have been raised as to the motive of the United States in implicitly driving a wedge between the GCC countries.
However, the GCC is working to reassert its position that the Gulf States must negotiate trade liberalization agreements as a bloc. Bahrain has recently explored the possibility of a free trade agreement with Thailand, but those talks have been terminated as the other GCC members have indicated that any free trade negotiations must be undertaken with the GCC members acting as a single body.
2. Canada’s Trade and Investment Relationship with the GCC
Canada’s economic relations with the GCC are limited at present, but are growing rapidly. Statistics Canada data indicate that merchandise trade was stagnant through most of the 1990s, but both exports and imports began to grow rapidly early in the present decade. From a value of $1.0 billion in 1999, two-way merchandise trade reached a record $3.6 billion in 2006, more than tripling in just seven years. This $3.6 billion total is relatively evenly divided between exports and imports: Canadian exports to the region in 2006 are measured at $1.6 billion, while imports were $2.0 billion.
To put these figures in perspective, if the GCC were considered as a single economy, it would have been Canada’s 15th largest export destination in the world in 2006 (10th largest if the EU was counted as a single entity). However, of the 14 countries to which Canadian exports are higher, only to India has export growth been stronger in the past five years. Canadian merchandise export growth to the GCC is outpacing export growth to rapidly-expanding markets like China, Mexico and Brazil.
As a single economy, the GCC would have been Canada’s 20th largest source of imports in 2006. As with exports, the rate of growth in imports from the GCC is significantly higher than it is from most other countries. Of Canada’s major sources of imports, only China, Algeria and Peru have grown more rapidly than the Arab States since 2001.
Not only is Canada’s merchandise trade with the GCC rising quickly, but it is widely acknowledged that the actual value of Canada-GCC trade is significantly understated. In general, the quality of export data around the world is known to suffer from measurement problems due to the “transshipping” of goods. Transshipping occurs when goods or services are shipped to their final destination via an intermediate destination. Export data are collected based on the known destination of the product, not the location of its intended final sale. As a result, exports are often overstated to major port countries and understated elsewhere.
Transshipping is a major issue when it comes to accurately measuring Canada’s trade with the GCC. Although the general trends evident in Canada-GCC trade are considered to be reliable, the precise dollar value of trade is not. For example, in Saudi Arabia, Committee members were told that Canadian-made Crown Victorias are a popular car in that country, yet official data does not record the sale of a single passenger vehicle to
Saudi Arabia because those Crown Victorias are all transshipped via the United States.[3] It is estimated that the value of these vehicles alone would add $1 billion to Canada’s official merchandise trade figures with the region.
Saudi Arabia and the UAE account for most of Canada’s trade with the GCC. On the export side, the UAE is Canada’s largest trading partner within the bloc, accounting for just under half of Canada’s merchandise exports to the GCC in 2006. Combined, the UAE and Saudi Arabia made up about 83% of Canada’s exports to the GCC that year. On the import side, it is Saudi Arabia which dominates, accounting for 84% of merchandise imports from the region in 2006.
Canada exports a wide range of products to the GCC, with manufactured goods making up the bulk of merchandise exports. Machinery and equipment (including electrical/electronic goods); motor vehicles and parts; aerospace vehicles and parts; and specialized instruments accounted for about half of total exports in 2006. The next largest category of exports was agriculture and food products, which made up close to 20% of total export sales that year. Forest products (wood, pulp and paper) and mineral products, led by iron and gold, each accounted for about 9% of exports.
For their part, Canadian imports from the GCC consist almost exclusively of crude oil and refined petroleum. The raw product accounts for 78% of Canadian imports and the refined good, 16%. Canada only imported two other products at values greater than $10 million in 2006: ether alcohol and unwrought aluminum.
Aside from data on merchandise trade, other information on Canada’s economic relationship with the GCC is limited. Canada does have an investment presence in the region, but the number of players is so small that data on Canadian foreign direct investment (FDI) is not publicly available in order to protect business confidentiality. This situation only occurs when there are so few investors that publishing the data could reveal the value of an individual company’s investments.
Data are available, however, only on the value of direct investment by GCC countries into Canada. Total FDI was about $92 million in 2005, a figure largely unchanged over the past five years. However, the Committee heard that the most recent data on FDI in Canada do not yet include a number of significant recent investments. Dubai Ports World is investing in Canadian ports in Vancouver and possibly elsewhere in the country; while Canadian energy companies Centurion Energy and North Rock Resources were also recently acquired by companies in the UAE. These deals will add billions of dollars to the value of FDI in Canada from the Arab States.
3. Opportunities for Closer Economic Ties with the GCC
The tremendous increase in Canada-GCC trade in recent years, as well as GCC investment in Canada, is compelling evidence of the fact that the region holds considerable untapped potential for Canada and Canadian businesses. The GCC is a large and affluent market. Governments in the region are stable, the investment climate is positive, foreign ownership restrictions are limited, and the region welcomes foreign investment and trade.
Adding to the attractiveness of the market is the fact that, as mentioned above, the GCC is in the midst of an economic boom of virtually unprecedented levels. High oil prices have created massive budgetary surpluses and huge amounts of public spending across the region. As just one example, Committee members heard that in Saudi Arabia the budget surplus in 2006 was in the range of $55 billion, not including the billions of dollars that were spent on infrastructure investments that year. In the UAE, the trade and investment opportunities are more diversified and, arguably, even greater.
Even outside of the countries we visited, there are tremendous economic opportunities, especially on the investment side. Rapid population growth and economic expansion is creating considerable demand for infrastructure development, including hospitals, schools, roads, and other municipal services across the region. In addition, countries like Bahrain, Qatar and Kuwait are also making significant investments in business, as they work to establish themselves as global financial and commercial centres.
For the most part, the opportunities for Canadian businesses in the GCC are concentrated in direct investment and establishing a commercial presence in the region. However, this is not to suggest that opportunities for increased trade do not exist, especially in areas like agriculture and manufactured goods. The GCC is a large and affluent market, but it has a limited manufacturing base, and its capacity for agricultural production is limited. As a result, it relies on revenue from oil production and export to import food and manufactured goods from around the world.
These characteristics make the GCC an excellent trading partner for Canada. Manufactured goods and agri-food products make up a considerable share of Canada’s export base. There are also obvious opportunities for mutual trade in goods and services related to oil and gas services and supplies. Moreover, Committee members heard that the region has a taste for goods produced in the United States, but are sometimes reluctant to buy from the U.S. As part of the North American economic space, Canada is viewed as a place from which the same products can be purchased, without the political cost of buying directly from the U.S.
The Kingdom of Saudi Arabia is the dominant country in the Arabian Peninsula. Not only is it the most populous and largest in geographic terms, but it is the economic engine as well. Saudi Arabia alone accounts for 55% of the region’s GDP. It holds the world’s largest conventional oil reserves and is home to the Arab world’s largest stock market. The Committee heard from the Special Advisor to the Ministry of Commerce and Industry in Saudi Arabia that, within two years, Saudi Arabia’s total GDP will be the same as all other Arab states combined. When its religious significance is also considered, Saudi Arabia is perhaps the most influential country, not only in the Arabian Peninsula, but throughout the Arab world.
Politically, Saudi Arabia is an authoritarian, but stable, system. There are no democratic elections; all government ministers are members of the ruling Al Saud family. The King of Saudi Arabia is not, however, an absolute ruler. In addition to the constraints of building consensus with the large number of senior princes, senior religious leaders control major aspects of life in Saudi Arabia, including education, social and cultural issues.
As the world’s largest producer and exporter of oil, Saudi Arabia has profited enormously from the surge in oil prices of the last few years. Revenues from oil production account for as much as 90% of government revenue in the country, and high oil prices have brought a windfall of money into Saudi Arabia. Committee members heard from the chief economist of the Saudi British Bank that Saudi Arabia received US$194 billion in oil revenues in 2006, larger than the entire GDP of the UAE that year. In fact, we learned that Saudi Arabia is working to even further expand its production capacity. Currently, the country is capable of producing up to 10.5 million barrels of oil per day (bpd). Planned production capacity will rise to 12.5 million bpd by 2009 and up to 15 million bpd by 2015.
Although oil dominates the Saudi economy, the country is taking steps to lessen its economic dependence on oil extraction. The Saudi government is using the surplus generated by oil revenues to undertake a host of investments aimed at diversifying the economy. These include investments in education, downstream energy products (such as petrochemicals and plastics), transportation infrastructure and knowledge-based industries. In our various meetings, we heard differing reports about the projected total value of these investments. In all cases, however, the figures were astronomical. One witness stated that there are $690 billion in investment projects on the horizon. Another stated that the figure was actually $1 trillion over the next ten years.
On top of that, the Saudi General Investment Authority (SAGIA) is planning to establish six “economic cities” across the country to create pockets of competitiveness in some of the above-mentioned priority sectors. Committee members met with SAGIA’s Deputy Governor for Investment Affairs who stated that these cities would include commercial, residential and retail developments, including significant investments in technology and infrastructure. Target investment levels for this project are in the hundreds of billions of dollars and are not included in the figures above.
Partly in an effort to attract foreign investors to help build and operate these facilities and projects, Saudi Arabia has taken a number of steps to make the country more welcoming to foreign traders and investors. The country recently acceded to the World Trade Organization (WTO) and has upgraded its 2001 investment law. Foreign investors in Saudi Arabia now enjoy national treatment, most-favoured nation (MFN) treatment, reduced corporate income taxes, and the ability to carry forward losses indefinitely for tax purposes. This last feature is particularly attractive for sectors like finance, insurance and telecommunications which may need time to establish themselves in the market.
In spite of its oil-fuelled economic boom, Saudi Arabia does face some significant economic challenges. In particular, it is struggling to keep pace with its growing population. Although the economy has been strong, per capita GDP in the country is only about half of what it was in the 1970s and 1980s; huge population growth has outstripped economic gains.
Not only has population growth eroded per capita incomes, but the domestic economy has not been able to create enough jobs for the large cohort of young Saudis. Committee members heard that about 300,000 Saudis enter the labour force each year, but that many of these young people lack the training and education necessary to function in the workplace. Moreover, we heard that many young Saudis grew up with the expectation that they, like their parents, would not have to work for a living. Even at present, a significant share of the jobs in Saudi Arabia, especially in the private sector, are held by foreigners. The Committee heard that, out of a total population of 25 million, about 7 million Saudi residents are foreign workers.
To address this issue, the government has implemented a policy of “Saudization” — an effort to increase the number of jobs held by Saudi nationals in the country. The long-term goal is for 75% of all jobs to be in Saudi hands. However, some of the people we met in Saudi Arabia were sceptical, saying that this policy was not well-planned and that it remained to be seen just how successful it would be.
b) Canada’s Relationship with Saudi Arabia
Although economic ties between Canada and Saudi Arabia are growing, we heard that overall relations between the two countries have not been strong. We were told that the two main reasons for this are: a lack of political contact between the two countries; and the perception in Saudi Arabia that there is a public backlash in Canada against that country stemming from the September 11th attacks in the U.S., the William Sampson case, and a general concern about women’s issues as well as concerns relating to social and religious freedoms and human rights.
While this Committee is in no position to comment on the social and religious issues, we are concerned about the lack of political contact between the two countries. In our view, infrequent contact leads to misunderstanding, perpetuates suspicion and gets in the way of closer economic ties. One witness suggested that, in its dealings with Saudi Arabia, Canada should concern itself not with judging other cultures, but with its own interests. Specifically, this witness suggested that Canada’s interests in Saudi Arabia were twofold: mutual economic benefit; and building peace and stability in the Middle East.
In terms of political contact, we were concerned to learn that our trip to Saudi Arabia was the first visit by a group of Canadian parliamentarians to that country in four years. Before that, the most recent trip was in 2003, when the House of Commons Standing Committee on Foreign Affairs visited the country as part of its study on Islam. With the exception of a state funeral in 2005, the last time a Canadian Minister set foot in Saudi Arabia was seven years ago.
Canada’s record on receiving delegations from Saudi Arabia is equally concerning. We were told that the King of Saudi Arabia has tried twice to visit Canada recently, once in the summer of 2005 and most recently in late 2006. In both cases, the trips were cancelled on the Canadian side. This has created the perception in Saudi Arabia that Canada is not interested in strengthening ties and, we heard, caused significant damage to the economic relationship between the two countries.
However, Committee members also heard some more encouraging signs regarding Canada-Saudi Arabia relations. While the Committee was visiting Saudi Arabia, a delegation of Saudi business leaders was just about to embark on a business trip to Canada, the first such visit in five years. In addition, Canada’s Foreign Affairs Ministers, at the time the Hon. Peter McKay, had recently extended an invitation to his Saudi Arabian counterpart to visit Canada. Although the trip has been postponed because of a scheduling conflict, we heard that this effort by the Canadian government was well-regarded.
Saudi Arabia has increased its involvement in regional and international affairs in recent years, providing additional grounds for rebuilding Canada-Saudi Arabia relations. Prompted in large part by their concerns about a more aggressive, and possibly nuclear, Iran, Saudi Arabia is looking to provide a stabilizing influence in the region. It has taken a more active role in the Middle East peace process, and has committed to increasing its development assistance to Yemen in an effort to help stabilize its own borders.
c) Economic Opportunities in Saudi Arabia
With a booming economy, affluent society and hundreds of billions of dollars in investments planned or already underway, Saudi Arabia offers considerable economic opportunities for Canadian businesses. In particular, the country, like the region in general, is looking to attract foreign direct investment and expertise from around the world. Proposed investments offer enormous potential for design, supply and construction contracts for Canadians, as well as for service-providers to establish a presence in the country.
Although Saudi Arabia is widely perceived as a wealthy country with tremendous oil reserves, economic opportunities in that country are generally not well-known. We were told that this was in part due to a lack of self-promotion on the part of Saudis and in part because Canada has not been truly engaged in the region.
One of the most significant opportunities in Saudi Arabia is in infrastructure development, especially transportation infrastructure. Committee members heard that Saudi Arabia will be spending US$100 to $200 billion on infrastructure projects over the next ten years. This includes road construction, building a network of railroads, expanding air services capacity, and municipal services such as water desalination.
Another area of considerable opportunity in Saudi Arabia is in education services. The Saudi education system is focused heavily on religious studies, which, we heard, account for seven out of ten classes at any level. Combined with the young and rapidly expanding population, there is considerable demand for new schools and specialized training institutions. In our meeting with the Special Advisor to the Ministry of Commerce and Industry, we were told that Saudi Arabia is building new schools at a rate of one a day for twenty years. It will build 18 new universities and grant 82 licences for private universities over the next three years. An estimated $150 billion will be spent over the next ten years on education alone.
However, Committee members heard that Canada has been absent on this file. While countries like Australia are establishing a major presence in the education services industry, Shurah Council members informed the Committee that Saudi Arabia has not met with Canada on the education file in five years.
Four other service sectors were frequently mentioned as areas where there were solid investment opportunities for Canadian businesses: finance, insurance, telecommunications and medical services. Committee members were told that insurance in particular is a rapidly-growing industry. While its current worth is about $137 million, the insurance industry is expected to grow to over $2 billion in just two years. Moreover, the risks of setting up a business in these sectors have been reduced significantly. As mentioned above, the recent reforms to the Saudi investment laws will allow any Canadian company to carry over any losses incurred in the initial years of establishing a presence in the country.
If the project gets underway, SAGIA’s proposed initiative to build six “economic cities” to establish pockets of competitiveness will also offer considerable opportunities for Canadian businesses. This project is aimed at making Saudi Arabia a world leader in three sectors: energy, transportation and knowledge-based industries. SAGIA has set target investment levels of $500 billion for this initiative. This money is on top of all other investments planned or currently underway. Even a fraction of that total could produce considerable opportunities for Canadian companies in those sectors.
The UAE is by far the wealthiest country in the GCC and one of the richest in the world. Although its economy is only a fraction of the size of that of Saudi Arabia, on a per capita basis, GDP in the UAE dwarfs Saudi Arabia’s and stands significantly higher than any other country in the region. In 2006, per capita GDP in the UAE reached US$49,700, compared to US$43,800 in the United States and US$35,700 in Canada.
The UAE is a relatively young country. It was created in the early 1970s with the union of seven Emirates, the largest of which, by far, is Abu Dhabi. Since that time, the country has benefited from good leadership and political stability, transforming itself into one of the wealthiest countries in the world.
Much of the wealth in the UAE is created through the efforts of foreign workers. Although 4 million people live in the UAE, only a small fraction are Emeratis. Foreigners make up over 80% of the population. As a result, the UAE is a remarkably diverse country. Moreover, its dependence on foreign workers and foreign investors, who cannot become citizens of the UAE, means that the country is considerably more tolerant of western culture and values than most other GCC members.
Not only is the UAE rich, but its economy is expanding at a tremendous rate. In 2006 alone, GDP growth reached 13%. More importantly, unlike Saudi Arabia, the UAE is not completely dependent on oil production and high oil prices to fuel its economy. While oil is undeniably important to the UAE economy — the country is among the world’s largest oil producers and exporters — non-oil activities account for 70% of national economic output.
The vast majority of economic activity in the UAE takes place in the two largest of the seven emirates: Abu Dhabi and Dubai. Abu Dhabi is by far the larger of the two, accounting for 85% of the UAE’s total GDP. It is also the source of most of the country’s oil.
For its part, Dubai has very little oil, but has garnered an international reputation as one of the most dynamic and rapidly-growing cities in the world. Its economy is focused on the services sector, which accounts for 75% of the emirate’s economy. Indeed, Dubai is positioning itself as a regional hub for transportation, logistics, tourism, retail trade, financial and commercial services for customers around the world. In particular, Dubai is seeking to become a hub for trade shows and exhibitions.
For those Committee members who visited the UAE, it is difficult to overstate the level of economic activity, investment and construction in the country, and in Dubai particulary. Dozens of major investment and construction projects are underway in the city, any one of which would be national news in Canada. A popular statistic circulating in Dubai is that 25% of the world’s cranes are located in that one city. We were also told that GDP growth in Dubai is faster than in China, India or Ireland.
b) Canada’s Relationship with the UAE
Canada enjoys a healthy and positive relationship with the UAE. The economic relationship between the two countries is expanding rapidly: Canadian exports to the UAE are growing exponentially (averaging 30% growth per year since 2001); and, as mentioned above, UAE companies are making major investments in Canada in the shipping, and oil and gas sectors.
Canada’s response to the proposed investments in North American ports by Dubai Ports World (DP World) has also generated a certain degree of goodwill in the UAE. While DP World’s proposed investment in U.S. ports was met with considerable resistance in that country, there was no such resistance in Canada. DP World’s investments have already more than doubled the capacity of Vancouver’s Centerm terminal.
Canada also has a considerable physical presence in the UAE. About 12,000 Canadians live in the country and 115 Canadian companies have operations there, up from 95 last year. Canada is represented in an official capacity by its Embassy in Abu Dhabi and its Consulate in Dubai. Canada also operates a large and growing visa processing facility in Abu Dhabi which serves not only the UAE, but all other countries on the Arabian Peninsula, with the exception of Saudi Arabia. Finally, Canada also has a defence presence in the country, as its theatre support for the Afghanistan operation is in the UAE.
c) Economic Opportunities in the UAE
The UAE represents a world of potential for Canadian businesses. To repeat what was stated earlier, the economy of Dubai is growing more quickly than China, India or Ireland. Moreover, the UAE is free of the major challenges businesses sometimes face in developing countries like China: the business environment in the UAE is stable; corruption is minimal; intellectual property theft is not an issue; and there are no requirements for joint ventures with local companies. From the Canadian perspective, perhaps the most compelling evidence of the stability and opportunity in the UAE is that the Ontario Municipal Pension Plan is investing in the country. Pension fund operators are not known for their risky investment behaviour.
Economic opportunities in the UAE, and in Dubai in particular, are virtually endless. When travelling in the country, Committee members had the opportunity not only to witness the expansion first-hand, but to talk to Canadian businesses operating in the country. In one case, a representative of a Canadian engineering company told us that he regularly turned down work contracts because his company did not have the time or the capacity to accept all the work that was available. Contracts were so common that he offered to provide an office, and guaranteed work, to any Canadian company willing to locate in Dubai. He stated that after a month, the new company would easily have made enough to afford its own office space.
Although the costs of establishing operations in the region can be high, especially for smaller businesses, the UAE offers another service that can help Canadian businesses navigate through these unfamiliar waters — local chambers of commerce. In the UAE, the structure and role of chambers of commerce is different from that of Canadian chambers. UAE chambers play an active, quasi-government agency role. Their purpose is to promote the city and advocate to the government on behalf of the private sector. Chambers provide information and services, and act as networking hubs and as points of entry into the local economy. All local businesses are required to be members of their local chamber of commerce; chambers receive financial support from the government; and government representatives sit on the Board of Directors.
Committee members had the opportunity to meet with both the Abu Dhabi Chamber of Commerce and the Dubai Chamber of Commerce. In these meetings, we learned of another important role played by those bodies; they act as a gateway for foreigners looking to establish a presence in the UAE. A Canadian company looking for business in Abu Dhabi, for example, should contact the local chamber of commerce which would then direct that company to appropriate partners or customers. Since all businesses are required to be members of the local chamber, these bodies are in a position to play a valuable directory function for prospective foreign investors.
Because the UAE, and Dubai in particular, is establishing itself as a services hub, most of the economic opportunities for Canadian businesses in the UAE are focused less on trade and more on direct investment and establishing a physical presence in the country. Indeed, some of the development projects underway or proposed for the UAE are truly staggering in scope and ambition. While it would be impossible to provide a comprehensive list of the major investment opportunities, several sectors were mentioned repeatedly in our meetings with government and business leaders.
The most obvious of these is infrastructure. Opportunities related to construction, engineering and design are virtually limitless and range from transportation infrastructure (roads, rail, ports and air) to building construction and design, to municipal services such as water treatment and desalination. In addition, we heard that there were tremendous opportunities for Canadians in fields like education and training services, health services, as well as manufacturing and processing.
6. Building Closer Ties with the GCC: Policy Recommendations
We strongly believe that improving economic ties with the GCC is in Canada’s economic interests. The region is wealthy, the countries are stable, corruption is minimal, and the economic opportunities in the region are difficult to exaggerate.
As described above, most of those opportunities involve direct investment in major projects and ambitious development initiatives. However, it bears repeating that the economic structure of the GCC makes it an ideal trading partner for Canada. GCC countries lack a strong manufacturing base and have virtually no agricultural industry. Canada, on the other hand, is a major agricultural producer and exporter and is looking for markets to help strengthen its manufacturing base. In addition, the fact that Canada and the GCC together have the world’s largest oil reserves suggests more opportunities for closer cooperation.
To build closer political and economic relations with the GCC does not require a major shift in Canadian foreign policy or a significant redeployment of government resources. We believe that, with a few modest steps, the Government of Canada could do much to develop the Canada-GCC economic relationship. Specifically, government policy must accomplish three specific goals: signal that the Canada-GCC relationship is important to the Government of Canada; make Canadians aware of the opportunities in that market; and remove the impediments to doing business with the region. The recommendations presented below offer a first step towards accomplishing those goals.
a) Exploring Formal Economic Cooperation and Free Trade Agreements
Perhaps the most effective way to accomplish all three of these goals would be for the Government of Canada to negotiate a formal economic cooperation agreement with the GCC. The term “economic cooperation agreement” is broad and can mean anything from a basic government pledge to build closer economic ties, all the way to a formal free trade agreement. In our view, a free trade agreement (FTA) would be the most comprehensive and ultimately preferable option. However, there are some preliminary steps that can be taken to help build the relationship in advance of any potential future negotiation.
According to the Assistant Secretary General of the GCC, the beginning of closer Canada-GCC ties is as simple as Foreign Affairs Minister Maxime Bernier drafting a letter to the Secretary General of the GCC expressing Canada’s formal interest in closer economic relations. The next step would be to negotiate an economic framework agreement. This agreement would outline areas where Canada and the GCC could work more closely together and help build a foundation upon which free trade negotiations might be initiated at some point down the road. In the view of the Assistant Secretary General, negotiating an economic framework agreement would be a straightforward matter, taking perhaps only a few days.
The Committee agrees that an economic framework agreement is an important first step in improving Canada’s economic relations with the GCC. A formal agreement would not only start Canada and the GCC on the path towards closer ties, but it could be accomplished without placing undue burden on Canada’s negotiating resources which are active elsewhere in the world. Moreover, such an agreement would also send an important signal to the business communities in both economies: closer Canada-GCC ties are important and beneficial.
As for the possibility of a free trade agreement between Canada and the GCC, we believe that the experience of an economic framework agreement will help determine whether or not an FTA with the GCC would be beneficial. The GCC is already a relatively open economy, with tariff rates of 5% or less on most products. However, if an economic framework agreement is successful in building economic relations to the point where an FTA is the logical next step, then Canada could revisit that option at a later date.
Recommendation 1:
That the Government of Canada make a formal request to the Gulf Cooperation Council to commence negotiations towards an Economic Framework Agreement between the two parties.
Economic cooperation agreements and FTAs are not the only means by which the Government of Canada can improve relations with the GCC. Some other treaties include foreign investment protection and promotion agreements (FIPAs), air service agreements and science and technology agreements, to name but a few.
While in Saudi Arabia and the UAE, the Committee consistently heard the message that, of the policy instruments listed above, Canada-GCC economic relations would most benefit from a broader air service agreement. We heard that a lack of air service can be a significant disincentive to closer business ties, adding cost and inconvenience to travel between the two economies.
Canada has bilateral air service agreements in place with Saudi Arabia, the UAE and, as of May 2007, Kuwait. In spite of these agreements, however, there is at present only one airline with direct service between Canada and the GCC. Etihad Airways offers thrice-weekly service between Toronto and Abu Dhabi. The Committee was pleased to learn that some progress is being made to improve air service between Canada and the GCC; beginning in October 2007, Emirates Airlines will also begin thrice-weekly flights between Dubai and Toronto.
In our view, it is clearly in Canada’s best interests to establish more frequent air service with the GCC. Not only would Canada profit from improved access to an affluent region which is establishing itself as a hub for air transportation around the world, but by so doing, would help minimize one of the key impediments to closer Canada-GCC ties — travel distance.
Committee members heard repeatedly that personal relationships are critical to doing business in the GCC. Moreover, we were told that all too often, Canadians do not take the time needed to cultivate those relationships. Business success in the GCC cannot be done over the phone or by e-mail; it requires frequent travel to the region. Any steps that the Government of Canada can take to remove the impediments to that travel should be welcomed.
Recommendation 2:
That the Government of Canada work to broaden and deepen its network of air service agreements with countries in the GCC.
c) Increasing the Frequency of Visits to and from the Region
One of the most frequent messages heard by Committee members travelling in Saudi Arabia and the UAE was that, at a political level, Canada has been largely absent from the region. As mentioned above, a number of people we met in Saudi Arabia were gently critical of Canada’s lack of engagement, not only in that country, but in the Middle East in general. There was also the perception in Saudi Arabia that Canadians make time to stop in Dubai, but not in the region’s largest and most powerful economy.
We believe, however, that this latter point reflects more on the competitive rivalry between Saudi Arabia and the UAE than on any preference by the Canadian government to travel to one country over the other. While in the UAE, we also heard criticism that Canadian Ministers and Parliamentarians routinely transfer through Dubai in their travels around the world, yet never take the time to spend an extra day or two to visit the country, whether in an official or a personal capacity.
These observations were not news to the Committee; our trip to the Middle East was motivated in large part by similar testimony in Ottawa. Within the past year, a number of witnesses had come forward noting that Canada’s lack of government engagement internationally was hurting our business prospects abroad.
As noted in our recent report, Ten Steps to a Better Trade Policy, trade and investment in many countries is built on international relationships which are not limited to business-to-business contact, but government relations as well. Moreover, as the report states:
When the Prime Minister, other Ministers, Parliamentary Committees, or even individual Members of Parliament visit other countries, it signals that Canada is serious about expanding its political, social and economic ties around the world.
Our Committee’s travel to the GCC stands as an excellent example of the importance and benefit of these visits. Committee members were warmly and graciously received throughout our trip. In addition to learning about the opportunities and challenges in the region, we gained access to high levels of government and business, and our trip garnered extensive press coverage in both Arabic and English-language daily newspapers. Compared to our Committee trip, which was by all accounts highly successful, the impact of visits by Cabinet Ministers or even the Prime Minister would be even greater.
The Committee is well aware of the possibility that part of the reason our trip gained so much attention in the GCC was because of the sheer novelty of the presence of Canadian Parliamentarians. In our view, this speaks all the more to the need for Canada to improve its record on foreign travel. As noted in Ten Steps to a Better Trade Policy, we are not insensitive to the political concerns of minority governments, or the haste with which some in the media accuse government members of wasting tax dollars. At the same time, however, it has been clearly established that high-level government travel is critical to establishing closer economic ties with regions like the GCC. Political involvement sets the tone for the international relationship, including the economic relationship.
Indeed, other industrialized countries are much more engaged in the GCC and have the economic results to show for it. Australia, for example, has used government travel to maximize its economic potential in the region. It takes advantage of the fact that several GCC countries are transportation hubs and, when transiting through the region, takes time to visit GCC countries. France is another example of a country which has taken the time to develop its relationship with the GCC. Committee members heard that, while in power, French President Jacques Chirac spent four full days in Saudi Arabia, an incredible number for any head of state. This was an important signal to French businesses which flooded into the country shortly thereafter.
In our view, increasing the frequency of official visits to the region would not only help improve economic ties, but would be extremely easy and inexpensive to accomplish. Given the fact that GCC countries like the UAE and Saudi Arabia are increasingly used as hubs for air travel around the world, many Cabinet Ministers or Senior Government officials regularly touch down in GCC airports on their way to and from meetings around the world. The additional cost of staying an extra night to pay an official visit to one or two countries in the region would be negligible. This is a true “easy win” for Canada.
Recommendation 3:
That, when traveling through Dubai or other GCC airports, Cabinet Ministers and Senior Government officials make an effort to extend their stay by one or two nights in order to pay an official visit to countries in the region.
Improving government-to-government ties with the GCC is about more than just increasing the number of visits to the region, however. Just as important is welcoming government and business delegations to Canada. To that end, we believe that Canada should, as a matter of priority, establish new dates for the visit of Saudi Arabia’s Foreign Affairs Minister Prince Saud to Canada, and draft an official letter inviting the King of Saudi Arabia to Canada. The Government of Canada should make similar efforts to invite leaders from other GCC countries to visit Canada as well.
d) Increasing Canada’s Foreign Presence in the Region
Country-to-country relationships, whether they are economic or political, are built on communication. One of the most effective means of establishing and developing those communication links is through official diplomatic representation.
In this capacity, Canada operates at a disadvantage in the region; compared to other G-8 countries, Canada is underrepresented in the GCC. In fact, we heard that Canada is the only G-8 country not to have official diplomatic representation in all GCC countries.
Canada is physically present in three countries in the region — Saudi Arabia, the UAE and Kuwait. In addition to its local responsibilities, the Canadian Embassy in Saudi Arabia also serves Bahrain, Oman and Yemen, while the Embassy in Kuwait also serves Qatar. The UAE is the only country in the region where Canada has two offices, an Embassy in Abu Dhabi and a Consulate in Dubai. The Embassy in Dubai also has a large visa processing centre which serves the entire region, except for Saudi Arabia.
The lack of diplomatic resources has strained Canada’s relations with GCC countries. Committee members were told that the government in Qatar refused to hear the credentials of the Canadian Ambassador serving that country because there was no Canadian Embassy in Qatar. Other countries have also lamented the lack of an official Canadian Embassy or Consulate. In Yemen, for example, the lack of an official presence a major source of friction with that country. This issue will be discussed further below.
Recommendation 4:
The Government of Canada should increase its diplomatic resources in the GCC. Decisions on whether to open embassies or consulates, as well as the allocation of resources to those offices, should be based on economic potential, political importance and promoting respect for human rights.
In the past five years, this Committee and its predecessor, the Subcommittee on International Trade, Trade Disputes and Investment, have travelled to more than a dozen countries as part of a wide range of studies. In nearly all cases, it was all but inevitable that the issue of Canadian visas was raised. The Committee’s trip to the Middle East was no exception.
At issue in Saudi Arabia and the UAE is the fact that, prior to 2001, Canada did not require visas for travellers from those countries. Since that time, not only have visa requirements been implemented, but, according to some people we met in the region, the restrictions placed on travel for successful applicants are too limiting.
In particular, it was the opinion of members of the Saudi Shurah Council that the time limit on Canadian visas is too short compared to other countries. In their opinion, those time limits also appear to be arbitrarily applied. We were told that while Canada offers three-month and six-month visas, successful applicants to the United States receive two-year visas, while visas to the UK range from a minimum of six months to a maximum of five years.
We heard that, ideally, Saudi Arabia would like a return to the pre-2001 state when there were no visa requirements in place. However, in the present environment of heightened security, even members of the Shurah Council acknowledged that this goal was unrealistic. They suggested that, at the very least, Canada could harmonize its visa time limits with that of the U.S. or, better yet, the UK.
In the UAE, the chief issue was the fact that the Emiratis are lobbying for visa reciprocity. The UAE does not require visas of Canadian travellers and, in their view, Canada should extend the same privilege to UAE citizens. Aside from that issue, however, the UAE was unique in that there were no complaints about the visa process itself. The Canadian visa office in Abu Dhabi is large, and growing due to increased demand, but still manages to provide remarkably effective and efficient service. The UAE is one of the very few countries this Committee has visited in recent years where we have heard no complaints about the visa application and granting process.
This Committee does not believe that Canada should eliminate its visa requirements on GCC countries at present. At the same time, however, the fact that Canada only grants relatively short-term visas imposes an administrative burden on both our visa officers, as well as on government and business leaders from the GCC. We do not suggest relaxing standards of scrutiny, but to examine the costs and benefits of extending the length of visas granted to successful candidates, particularly in light of evidence that the U.S. and UK both offer longer-term visas.
In our view, the rationale behind limiting the duration of stay when foreigners travel to Canada on a business or student visa cannot be significantly different from the rationale in other industrialized western countries. As such, we believe that the Government of Canada should review its policy for setting the duration of visas with a view to more closely harmonizing them with the duration of visas issued by countries like the U.S. and the UK.
Recommendation 5:
That the Government of Canada examine the benefits and drawbacks of harmonizing the length of visas it grants to successful applicants from GCC countries with the length of visas granted by the U.S. If there is no significant risk to doing so, Canada should offer longer-term visas to successful applicants, especially to those who are frequent travelers to our country.
f) Making the Promotion of Education Services a Priority
We believe that it is primarily the responsibility of Canadian businesses to seek out and act upon economic opportunities around the world. The role of government is to create a robust political and economic environment in which business can operate. It is not to decide which Canadian industries or businesses should succeed or fail. However, based on our experience travelling in the region, we believe that one specific sector should be singled out for policy action: education services.
If there was a common refrain to our meetings in the GCC, it was that there are vast opportunities in the region when it comes to the provision of education services, both in terms of attracting foreign students to study in Canada, as well as setting up Canadian education and training centres in the region. There is a particular need for specialized training schools. As mentioned above, Saudi Arabia alone will grant 82 licences to private universities over three years. It does not have the infrastructure, supplies, staff or curricula to meet this demand on its own.
The Canadian education sector has a presence in the region, but compared to countries like Australia, New Zealand and Malaysia, it is limited. We heard that, generally speaking, Canada’s large universities are complacent about offering services abroad. By contrast, private schools, community colleges and technical schools are much more active. Some of the Canadian institutions active in the region include the Southern Alberta Institute of Technology (SAIT) and its northern counterpart NAIT; the Canadian International School (for elementary and secondary education using the Alberta curriculum) and the College of the North Atlantic.
The Committee was reminded that education services provide important long-term benefits to Canada’s international relations. We were told that many prominent Saudis today were educated in the U.S. in the 1970s and 1980s. These same people, who have forged indelible links with the United States, are now in a position of power and influence at home. The value of these links cannot be understated.
In spite of the opportunities for education, it is clear that the sector is not a priority for Canada. In its Embassy in Abu Dhabi, Canada has an education resource centre in which prospective students can learn about Canadian post-secondary institutions.
However, we heard that, as a matter of policy, Canada’s trade commissioners do not focus on promoting education services because it is not identified as one of Canada’s top five priority sectors.
In our view, the education sector is one that not only offers considerable immediate economic opportunity for service providers, but is also in Canada’s strategic long-term interests. Students who receive an education connected to Canada retain that connection for the rest of their lives. Cultivating these linkages can only help Canada’s international political and economic relations down the road.
For this reason, the Committee believes that the federal government should do more to promote education services abroad. As a start, we believe that Canada should introduce trade commissioners dedicated specifically to the education file in key markets. These commissioners can help promote Canadian education institutions; help new service providers enter the market; and, perhaps most importantly, provide on-the-ground support to those institutions which have already established a foothold in their respective markets.
Recommendation 6:
That, in key markets such as the UAE and Saudi Arabia, the Government of Canada establish full-time trade commissioners devoted to the promotion and support of Canadian education service providers.
g) Establish a permanent Commercial Centre in the region
Another suggestion for a way to improve Canada’s economic relations with the GCC came from the Federal National Council (FNC) of the UAE, the approximate equivalent to our International Trade Committee. Members of the FNC observed that trade delegations and political visits are valuable, but that the memory of those events fades over time. Far more useful, in their view, would be for Canada to establish a permanent commercial presence in the region. A commercial centre could be used as a forum in which to showcase Canadian products and expertise in the UAE, and in the region as a whole, through permanent or temporary exhibitions.
The Committee has heard similar suggestions in the past. As a Subcommittee of the Standing Committee on Foreign Affairs and International Trade, we produced a report in June 2005 entitled Elements of an Emerging Markets Strategy for Canada. In that report, we recommended that the Government of Canada establish an “innovation centre” in Canada; a venue in which Canadian companies could showcase their new products and technologies.
We believe that the idea of establishing a commercial centre in the UAE, one that showcases Canadian products and technology, would be a useful step in not only creating a more active presence in the region, but also in encouraging trade, investment and helping to build a Canadian brand identity in the process. As such, we recommend:
Recommendation 7:
That the Government of Canada consider establishing a permanent commercial centre in the UAE. This facility would be used as a venue from which to showcase and promote Canadian products and expertise in the region.
The Republic of Yemen is unique in the Arabian Peninsula. While the region as a whole is characterized by extraordinary wealth, Yemen is among the poorest countries in the world. In fact, from an economic development perspective, Yemen is more at home in the neighbouring Horn of Africa than it is in the Arabian Peninsula. Per capita GDP in Yemen was about US$1,000 in 2006, a mere fraction of the levels seen in nearby Arab countries, but identical to per capita GDP in Ethiopia, Eritrea and Djibouti, located just across the Red Sea.
Because it is so much poorer than other countries on the Arabian Peninsula, Yemen is the only country in the region that is not part of the GCC. Yemen does participate in some GCC initiatives and has the support of its neighbours, but it is at such a different stage of economic development that it is not feasible for Yemen to be a full member of the organization.
Future economic development in Yemen is beset by several major challenges. Religious conflict and regional disparities have resulted in open rebellion in the north of the country. The country also lacks the resources to establish an effective government presence across its entire territory. In addition, the country has only existed since 1990, following the unification of North Yemen and South Yemen; some lingering resentment over the long civil war and subsequent unification remains. Finally, we heard that, because of its proximity to Eastern Africa, Yemen is a popular destination for would-be refugees from Somalia. However, Yemen lacks the necessary resources to guard its coastlines, meaning that it has little control over access to the country.
On top of its social and political challenges, Yemen is also suffering from imminent shortages in natural resources. Committee members heard that in some parts of the country, particularly around Sana’a, water levels could reach crisis proportions by as early as 2010. In addition, while Yemen has only modest known energy deposits, what little wealth that does exist in the country is the result of oil production. No new major discoveries have been made in recent years, and oil reserves are dwindling rapidly.
Indeed, one of the few features Yemen shares with some of its Arab neighbours is the extent to which its economy is, at present, reliant on oil production. In Yemen, as in Saudi Arabia, oil accounts for 90% of government revenues. As energy reserves are depleted, many in Yemen are pinning their economic hopes on a major petrochemical project currently under development by a French company.
Its potential as a destabilizing force in the region has led many countries to increase the level of foreign aid they provide to Yemen. Committee members heard that the UK has increased its development assistance to Yemen four-fold in recent years and that Saudi Arabia is also increasing its support in an effort to help secure its shared border with that country. Other major donors to Yemen include Germany and Denmark.
In spite of these increase in official development assistance (ODA), we were reminded by Yemeni officials on several occasions that Yemen gets relatively little foreign aid compared to other third-world countries. We heard from the Deputy Prime Minister for Economic Affairs that, although it is among the very poorest of countries, Yemen receives about US$13 to US$15 per capita in ODA, compared to an average of US$33 to US$35 per capita in other least developed countries (LDCs).
2. Canada’s Relationship with Yemen
Canada has a far more important economic relationship with Yemen than most Canadians realize. There are three Canadian oil companies with a presence in Yemen, the largest of which, Nexen Inc., is a dominant force in the local economy. Nexen accounts for 40% of total oil production in Yemen. It also operates a major pipeline for its own oil, as well as for other oil producers in the country, and an export terminal on behalf of the Government of Yemen and five other operators. Over the years, Nexen has made $3.3 billion in capital investments in Yemen and an estimated $1.1 billion in operating spending.
Nexen aside, however, Canada’s relationship with Yemen is limited. Canada does not have an official diplomatic presence in the country, and its economic ties are modest. Canada’s total merchandise exports to Yemen were valued at $27.6 million in 2006, consisting largely of parts and equipment related to oil production and transportation, along with some aircraft and agricultural products, such as pulses and wheat. Canadian imports from Yemen were only worth $229,000 in 2006, nearly half of which was unroasted coffee beans.
In spite of its limited ties, Canada enjoys an excellent reputation in Yemen. Again, this is due to the work of Nexen, not only as an agent of investment and economic growth, but also through its involvement in the wider community. This community involvement will be discussed in more detail below.
3. Economic Opportunities in Yemen
Although Yemen is, in essence, a third-world country surrounded by wealthy neighbours, Committee members found that there were nevertheless considerable economic opportunities for Canadian businesses in the country. Needless to say, like the prevailing economic conditions, these opportunities are very different from those found in Saudi Arabia or in the UAE and therefore take a very different mindset and approach.
While the litany of challenges that Yemen faces may suggest that companies should avoid the country, we heard that the experience of foreign companies operating in Yemen has been generally positive. Nexen representatives noted that, characteristic of poor countries, the legal framework in Yemen was underdeveloped. However, they also observed that their relations and negotiations with the Yemen government were always transparent and fair, and that there was no history of unreasonable legislation in the country.
Moreover, like other countries in the region, Yemen is working to improve its business environment. The country is undertaking an ambitious reform agenda and, according to the Deputy Prime Minister for Economic Affairs, is making good progress in regulatory and judiciary reforms, as well as on fighting corruption and improving the transparency of government procurement and the bidding process.
Committee members had the opportunity to meet with the President of the Yemen General Investment Authority (GIA), who outlined the ambitious agenda of his agency. The GIA has embraced the one-stop shop concept for foreign investment. It is set up to make the investing process as smooth as possible. The GIA is the sole contact point for any prospective foreign investor in the country. It is the licencing and registration body; it provides local market information; it handles all government contact on behalf of the investor; and it does troubleshooting on problems companies may face. In short, the GIA assists foreign companies through every step of the investment process.
Recognizing that Yemen does not have the most ideal investment climate, the country’s investment law contains a number of incentives aimed at mitigating some of the risks associated with investing in the country. For example, Yemen offers unrestricted foreign ownership and capital outflows in all sectors except energy, mining and banking. It also offers a potentially lucrative series of financial incentives which can offer up to 16 years of profit tax exemption.
According to the president of the GIA, these incentives are necessary to attract investment to the country. He noted that companies are willing to pay taxes in a stable environment, so long as there are not hidden costs elsewhere. Until Yemen’s investment climate improves sufficiently, he stated that the country will continue to offer financial incentives.
In spite of the country’s poverty, the Committee learned that there are considerable economic opportunities for Canadian companies in Yemen. Infrastructure is the largest investment priority in Yemen. Yemen has recognized that all other identified priority investment areas — energy, mining, fisheries or tourism — require solid infrastructure, especially roads and electricity networks, both of which are underdeveloped. Other infrastructure projects with investment potential include water desalination, dam construction and development projects such as schools or health facilities.
Perhaps the second highest priority investment sector is education. Like many GCC countries, the population of Yemen is very young. An estimated 60% of the population is under the age of 28. While this provides a large supply of labour for prospective investors, these workers are often not technically qualified for skilled work.
As with infrastructure, Yemen sees adequate education and training as underpinning the potential economic impact of investments in other sectors. For example, another priority investment sector for Yemen is tourism; there is considerable potential for the development of luxury resorts in coastal regions and on the islands in the Gulf of Aden. However, without local workers trained in the tourism/hospitality sector, many of the jobs created by foreign investment in tourism would fall to foreign workers, thus minimizing the local benefit of the investment.
Aside from infrastructure, education and tourism, most economic opportunities in Yemen are based in natural resources. Some opportunities remain for oil and gas exploration, and the country is virtually untouched in terms of mineral exploration. There are believed to be good opportunities to mine for gold, zinc, iron and limestone.
In addition, there are undeveloped opportunities in food production. There are few places on the Arabian Peninsula which have the ability to grow food in meaningful quantities. Because of the high altitudes and cooler temperatures in certain regions of the country, Yemen is much better suited to larger-scale agricultural production than its neighbours. Moreover, its coastal regions also offer considerable potential for fishing and aquaculture. Yemen hopes to position itself as a regional source of food for other countries on the Arabian Peninsula, for whom most food products are imported from overseas.
To do so, however, Yemen needs investment to help develop its agriculture and aquaculture industries. With considerable expertise in those areas, Canadian businesses are in an excellent position to get involved in those enterprises.
4. Building Closer Ties with Yemen: Policy Recommendations
The Committee believes that there is a strong case for building closer ties with Yemen. Although Yemen is one of the world’s least developed countries, and thus carries with it considerable risks, there are several sectors in which opportunities for trade and, especially, investment exist. Moreover, these sectors: infrastructure; education; mining and energy; agriculture; fisheries; and tourism, are all areas where Canada has known expertise.
A more compelling reason to increase our involvement in Yemen is to promote peace and stability in the Middle East. Yemen is by far the poorest country on the Arabian Peninsula, and it is widely believed that rogue elements in that country are a potential destabilizing force in the entire region.
Canada enjoys an excellent reputation in Yemen, thanks to the corporate and social presence of Nexen and Canada’s other companies active there. Assisted by their knowledge of the country, we believe that Canada is uniquely well-positioned to play an important role in fostering economic development and poverty reduction in Yemen. By so doing, Canada can indirectly contribute to stability across the region as well.
Indeed, some believe that Canada has an obligation to contribute to economic development in Yemen. Canada has benefited enormously from the activity of its oil companies in that country through profits, tax revenues and jobs created for Canadians. Considering the wealth of Canada and the relative poverty of Yemen, it was suggested to Committee members that Canada has a responsibility to give more to Yemen, especially considering how much it has taken out of the country.
Establishing closer ties with Yemen, and promoting economic development in that country, requires a very different set of policy tools compared to building closer relations with the GCC countries. For one, formal economic treaties like free trade agreements or economic cooperation agreements are premature. More appropriate would be policies that encourage Canadian investment in Yemen; aid and development policies; and building closer government-to-government relations.
a) Establishing a Diplomatic Presence in Yemen
As mentioned earlier, Canada does not have an official diplomatic presence in Yemen. This, we discovered, is a clear source of irritation with the Yemeni government. In every one of our meetings with government leaders and officials, we were reminded that Canada did not have an embassy or even a consulate in the country. Indeed, the President of Yemen met with Committee members and expressed his personal dissatisfaction with Canada’s lack of diplomatic representation in his country. He also suggested that a fraction of the taxes paid by Nexen alone would easily finance the cost of an embassy in that country.
In our view, Canada should consider establishing an official representation presence in Yemen. Canada has a substantial economic footprint in Yemen and the oil and gas sector has been lobbying for diplomatic support in the country as well. We are thus pleased to note recent reports that Canada is already considering upgrading its diplomatic presence in the country. We fully support this move and thus recommend:
Recommendation 8:
That the Government of Canada establish an official diplomatic presence in Yemen. A study by the Department of Foreign Affairs and International Trade can determine whether an embassy or a consulate is the more appropriate.
b) Negotiating a Foreign Investment Protection Agreement
While we believe that there are significant investment opportunities in Yemen, it goes without saying that the country does not offer a stable investment environment in the same sense as does the EU, for example. One of the ways that governments can work to mitigate the risks associated with investing in developing countries is to sign foreign investment protection and promotion agreements (FIPAs) with those countries. In essence, these agreements set out legally-binding rights and obligations on the parties involved, reducing the uncertainty that investors face in the foreign market.
This is an option to consider for Yemen. As noted above, we heard that Canadian companies have never encountered any difficulty with the Yemen government changing the rules or conditions of existing agreements. Moreover, Yemen has taken a number of steps to improve its investment climate, through government reforms and by updating its investment law. At the same time, however, a FIPA can play an important role in clarifying investor rights and obligations, and can help offset, to a certain degree, the risks associated with investing in a developing country.
We believe that, because of the economic opportunities in Yemen, and the role that foreign investment can play in promoting economic development, the idea of pursuing a FIPA with Yemen warrants consideration. In our view, the Canadian government should consult with relevant Canadian businesses to determine whether or not a FIPA with Yemen would be helpful in encouraging investment in Yemen by mitigating some of the risks associated with that country.
Recommendation 9:
That the Government of Canada consult with Canadian businesses and civil society organizations, both at home and those active in Yemen, to determine whether or not a Foreign Investment Protection and Promotion Agreement with that country would be beneficial.
c) Using Trade and Investment as a Tool for Economic Development
The Committee believes that Yemen is an excellent case study for the positive role that trade and investment, when coupled with community involvement, can play in economic development. We refer specifically to the involvement of Nexen, both in the Yemen economy and in the local community.
Indeed, Committee members were struck by the extent to which Nexen is active in the local community. The company donates $600,000 a year towards community affairs, a sum several times larger than the value of the Government of Canada’s Canada-Yemen Fund. Moreover, the company is building schools and local health centres for all Yemenis (not just its employees) and sponsors doctors to come to Yemen to establish oncology centres in the country.
Nexen is also active in building the productive capacity of the Yemeni workforce. Through its own training program, the company is increasing the number and proportion of skilled jobs that go to local workers. In 1993, Yemenis accounted for about half of the total number of jobs within the company. In 2007, that share will climb to 83%. As well, the company has established a scholarship program through which it sends 10 students per year to pursue undergraduate studies at the University of Calgary. As a matter of policy, Nexen will not hire these students when they return home, in order that their skills be made available elsewhere in the country.
It is not typical for Committee reports to dwell on the accomplishments of, and to provide free advertising for, individual companies. In this case, however, we have highlighted the activities of this one company to illustrate a point: that when used properly, trade and investment are important and effective tools in promoting economic development.
Sadly, examples abound wherein resource companies operating in poor countries simply extract energy or minerals in enclosed facilities and ship the product, and the profits, out of the country. The only benefit to the local community in these cases is a handful of jobs and some revenue for the local government.
By contrast, Nexen’s experience in Yemen demonstrates that trade and investment, especially in developing countries, can be a win-win scenario for the company and the country alike. Companies make the decision to invest or to trade based on an expected economic return. However, when they also make an effort to be active in the community, whether by training and engaging local workers or by donating to local development projects, these actions not only benefit local economic development, but also generate considerable goodwill for the company. This goodwill can lead to better relations with domestic governments and result in a more reliable, loyal and productive workforce.
In our view, Nexen’s experience in Yemen provides a model not only for how other Canadian companies can be successful in developing countries, but also for how trade and investment can be an agent for economic development and poverty alleviation. We believe that this type of trade and investment should play a more prominent role in Canada’s development policy and thus recommend:
Recommendation 10:
That, recognizing the benefits to developing countries of combining trade and investment with corporate social responsibility and community involvement, the Government of Canada give a more prominent role to trade and investment in its international development policy.
d) Official Development Assistance
In Yemen, Committee members were told on several occasions that the country receives far less than its fair share of development assistance from rich countries around the world. Some suggested that Yemen is overlooked, partly because it is forgotten amidst its wealthier GCC neighbours, and partly because its aid needs are overshadowed by those of its nearby African counterparts.
Committee members met with several people who suggested that, for the purpose of aid distribution, rich countries should consider Yemen to be a part of Africa. In our view, this is an idea worth exploring. Although Yemen is clearly a part of the Arab world, from an economic perspective, it is much closer to Eritrea or Ethiopia than it is to Saudi Arabia, or even to countries like Jordan or Syria. We therefore recommend:
Recommendation 11:
That, for the purposes of distributing foreign aid, the Government of Canada consider Yemen to be part of Eastern Africa. The Government of Canada should also ensure that by so doing, the amount of development assistance available for other countries in the region is not reduced.
[2] Taken from the official website of the GCC : http://www.gcc-sg.org/Foundations.html.
[3] Those Canadian-made vehicles remain a popular choice in the region. On several occasions, people we met in Saudi Arabia expressed concern that the Ford Motor Company was considering discontinuing the Crown Victoria model. We were asked to lobby the company to ensure that that did not happen.