Policies Towards Foreign Direct Investment
Attracting foreign direct investment remains a critical component of the SAG’s broader program to diversify an economy overly dependent on oil exports and promote employment opportunities for a growing youth population. As such, the SAG seeks foreign investment that explicitly promotes economic development, transfers foreign expertise and technology to Saudi Arabia, creates jobs for Saudi nationals, and/or expands Saudi’s non-oil exports. The government encourages investment in nearly all economic sectors, with priority given to transportation, education, health, information and communications technology, life sciences, and energy, as well as in four new “Economic Cities” that are at various stages of development. The Economic Cities are large-scale and self-contained developments in different regions focusing on particular industries, e.g., information technology. In early 2017, the SAG expressed renewed interest in developing its nascent renewable energy sector, offering foreign investors valuable opportunities to participate in the market and ultimately sign power purchase agreements. Overall, prospective investors will find Saudi Arabia relatively attractive for its economic stability, large market (the largest in the Gulf region with a population of over 30 million), sound infrastructure, and well-regulated banking system.
The Saudi Arabian General Investment Authority (SAGIA) governs and regulates such investment in the Kingdom, issues licenses to prospective investors, and works to foster and promote investment opportunities across the economy, particularly in energy, education, transportation, health, life sciences, and knowledge-based industries. Established originally as a regulatory agency, SAGIA has increasingly shifted its focus to investment promotion and assistance, offering potential investors detailed guides and a catalogue of current investment opportunities on its website (www.sagia.gov.sa ).
Despite Saudi Arabia’s overall welcoming approach to foreign investment, some structural rigidity remains. As noted earlier, foreign investment is banned in three industrial sectors and 12 service sectors, among them real estate in Mecca and Medina, some subsectors in printing and publishing, audiovisual services, land-transportation services excluding intra-city rail transport, and upstream petroleum. The complete “negative list” can be found at www.sagia.gov.sa . Additionally, older laws remaining on the books prohibit or otherwise restrict foreign investment in some economic subsectors not on the “negative list” above, including many areas of healthcare.
Foreign investors must also contend with a local content requirement of subcontracting 30 percent of the value of their government contracts to local firms, a requirement to hire increasingly larger proportions of Saudi nationals at higher costs, an increasingly restrictive visa policy for foreign workers, and enforced segregation of the sexes in nearly all business and social settings. Further, over the course of 2016, the SAG has increasingly signaled its interest in introducing new local content requirements for foreign firms, in a bid to stimulate domestic manufacturing, hire more Saudi nationals, and transfer technology and knowhow. Last, foreign and domestic contractors also reported severe payment delays from the Saudi government over the course of 2016, a problem stemming from the SAG’s 2015 decision to freeze payments to major contractors in the wake of a budget crunch induced by sustained low oil prices.
Limits on Foreign Control and Right to Private Ownership and Establishment
Saudi Arabia fully recognizes rights to private ownership and establishment of private business. As outlined above, the SAG does exclude foreign investors from some economic sectors and places some limits on foreign control. With respect to energy, Saudi Arabia’s largest economic sector, foreign firms are barred from investing in the upstream petroleum sector, but the SAG permits foreign investment in the downstream energy sector, including refining and petrochemicals. There is significant foreign investment in these sectors. ExxonMobil and Shell are both 50 percent partners in refineries with Saudi Aramco. ExxonMobil, Chevron Texaco, and Shell, as well as several other international investors, have formed joint ventures with the Saudi Basic Industries Corporation (SABIC) to build large-scale petrochemical plants that utilize natural-gas feedstock from Aramco’s existing operations at Ras Tanura. Aramco selected the Dow Chemical Company in 2006 as its partner in a $20 billion joint venture to construct, own, and operate a chemicals and plastics production complex in Saudi Arabia’s Eastern Province.
With respect to other non-oil natural resources, the national mining company, Maaden, has a $12 billion joint venture with Alcoa for bauxite mining and aluminum production and a $7 billion joint venture with the leading American fertilizer firm Mosaic and SABIC to produce phosphate-based fertilizers.
Joint ventures almost always take the form of limited-liability partnerships, to which there are some disadvantages. Foreign partners in service and contracting ventures organized as limited-liability partnerships must pay, in cash or in kind, 100 percent of their contribution to authorized capital. SAGIA’s authorization is only the first step in setting up such a partnership.
Professionals, including architects, consultants, and consulting engineers, are required to register with, and be certified by, the Ministry of Commerce and Investment (MCI), in accordance with the requirements defined in the Ministry’s Resolution 264 from 1982. These regulations, in theory, permit the registration of Saudi-foreign joint-venture consulting firms. As part of its WTO accession commitments, Saudi Arabia generally allows consulting firms to establish a local office without a Saudi partner. However, offices practicing law, accounting and auditing, design, architecture, engineering, or civil planning or providing healthcare, dental, or veterinary services must have a Saudi partner, and the foreign partner’s equity cannot exceed 75 percent of the total investment. A recent legal challenge to the MCI’s right to license joint venture law offices based on the contention that jurisdiction should properly rest with the Ministry of Justice has resulted in suspension of the issuance of new licenses, pending resolution of the jurisdictional issue.
In recent years, Saudi Arabia has opened additional service markets to foreign investment, including financial and banking services; aircraft maintenance and repair and computer reservation systems; wholesale, retail, and franchise distribution services (traditionally subject to minimum 25 percent local ownership and minimum SR 20 million [$5.3 million] foreign investment); both basic and value-added telecom services; and investment in the computer and related services sectors. In 2016, for example, Saudi Arabia formally approved full foreign ownership of retail and wholesale businesses in the Kingdom, thereby removing the former 25 percent local ownership requirement. While nearly a half dozen companies have already received licenses under the new rules, the restrictions attached to obtaining full ownership – including a requirement to invest over $50 million over the first five years and ensure that 30 percent of all products sold are manufactured locally – have precluded many investors from taking full advantage of the reform.
The SAG has also signaled its possible intention to begin enforcing offset requirements for major investments. In 2014, the SAG issued a royal decree requiring all foreign companies fulfilling contracts valued at over SR 400 million ($107 million) to implement a 40 percent offset requirement across all economic sectors. Previously unenforced outside of the defense sector, the offset mandate appeared in an early 2016 tender issued by the Gulf Cooperation Council (GCC) Health Ministers’ Council for contracts with the Saudi Ministry of Health, signaling the SAG’s intention to apply the requirement more broadly. Although the matter has yet to be clarified officially, a number of SAG investment and offset officials have indicated informally that the 40 percent offset requirement will apply across all sectors.
Other Investment Policy Reviews
Saudi Arabia completed its second WTO review in late 2015, which included investment policy (https://www.wto.org/english/tratop_e/tpr_e/tp433_e.htm ).
In addition to applying for a license from SAGIA as described above, foreign and local investors must register a new business via the MCI, which has begun offering online registration services for limited liability companies at: http://www.mci.gov.sa/en . Though users may submit Articles of Association and apply for a business name within minutes on MCI’s website, final approval from the ministry can often take a week or longer. Applicants must also complete a number of other steps in order to start a business, including obtaining a municipality (Baladia) license for their office premises and registering separately with the Ministry of Labor and Social Development, Chamber of Commerce, Passport Office, Tax Department and the General Organization for Social Insurance. From start to finish, registering a business in Saudi Arabia takes a foreign investor on average two to three months from the time an initial SAGIA application is complete, placing the country at 147 of 190 countries in terms of ease of starting a business, according to the World Bank. With respect to foreign direct investment, the investment approval by SAGIA is a necessary, but not sufficient, step in establishing an investment in the Kingdom. There are a number of other government ministries, agencies, and departments regulating business operations and ventures.
Though Saudi officials have stated their intention to attract foreign small- and medium-sized enterprises (SMEs) to the Kingdom, no formal mechanism yet exists to facilitate investment and business operations by foreign SMEs. In 2016, the SAG released a new Companies Law designed in part to promote the development of the SME sector, which allows one person, rather than the previous minimum of two, to form a corporation, though in very limited cases. It also substantially cuts the minimum capital and number of shareholders required to form a joint stock company (from five previously to two). In fall 2015, the SAG announced the establishment of a new Saudi SME Authority, housed within the MCI, but the organization has yet to announce any initiatives targeted at foreign entrepreneurs.
In 2016, Saudi Arabia announced a number of high-profile outward investments via its Public Investment Fund, including a $3.5 billion stake in Uber and an agreement with Japanese Softbank Group Corp. to jointly create a $100 billion technology investment fund. Saudi Arabia does not restrict domestic investors from investing abroad.