During 2018, the Saudi Arabian government (SAG) continued to pursue its ambitious series of socio-economic reforms, collectively known as “Vision 2030.” Aimed at diversifying the Saudi economy away from oil revenues and creating more private sector jobs for a growing population, Vision 2030 contemplates the development of new economic sectors and a significant transformation of the economy. Spearheaded by Crown Prince Mohammed bin Salman, the reform program seeks to expand and sharpen the country’s knowledge base, technical expertise, and commercial competitiveness.
To help accomplish these goals, Saudi Arabia seeks increased foreign investment and international participation in the Saudi private sector. To this end, the SAG took a number of steps in 2018 to improve the investment climate in the Kingdom. During 2018, the SAG established and reinforced a variety of institutions that facilitate investment in new segments of economic activity, such as the entertainment sector. These efforts led to the April 2018 opening of the first cinema in the Kingdom in over 35 years. Furthermore, as of June 2018, women are permitted to drive in the Kingdom, thereby facilitating increased female workforce participation and increased access to Saudi human capital resources. Improvements to infrastructure, such as the USD 23 billion Riyadh metro and the new Jeddah airport, also progressed during 2018 and will facilitate future economic activity. Additionally, the incorporation of Saudi Arabia’s Tadawul Stock Exchange into the FTSE Russell Emerging Market Index in March 2019 resulted in sizeable foreign capital infusions into the Kingdom, which increased international interest in Saudi markets and economic sectors.
However, a number of high-profile SAG actions led to a negative impact on the investment climate in the Kingdom during 2018. Principal among these actions was the killing of journalist Jamal Khashoggi by Saudi government personnel on October 2, 2018, in Istanbul, Turkey. Subsequently, several U.S. and international investors withdrew or indefinitely put on hold plans to invest in the Kingdom. Other SAG actions in 2018 gave rise to additional investor concerns over rule of law, business predictability, and political risk in Saudi Arabia, such as the Kingdom’s public dispute with Canada, the reported exclusion of German firms from certain Saudi government tenders, the arrest of prominent women’s rights activists, the continued detention and prosecution of prominent Saudi businessmen under the anti-corruption campaign launched in November 2017, and the continuation of the diplomatic rift with Qatar.
In addition, U.S. and international stakeholders have continued to claim violations of their intellectual property rights in Saudi Arabia. U.S. and international pharmaceutical companies allege the SAG violated their intellectual property rights and the confidentiality of their trade data by licensing local firms to produce competing generic pharmaceuticals. Industry attempts to engage the SAG on these issues have not led to satisfactory outcomes for the companies. Furthermore, during 2018, an illicit satellite and online provider of sports and entertainment content known as “beoutQ” became widely available in the Kingdom. Despite SAG assurances of a crackdown on this unprecedented case of satellite piracy, as of February 2019, beoutQ set-top boxes were openly sold in public markets in Riyadh and the pirated satellite signal continued to beam U.S. and international-sourced entertainment and sports content.
Lastly, economic pressures to generate non-oil revenue and provide more jobs for Saudi citizens have prompted the SAG to implement measures that may weaken the country’s investment climate. In particular, increased fees for expatriate workers and their dependents, as well as “Saudization” polices requiring certain businesses to employ a quota of Saudi workers, have led to disruptions in some private sector activities and may lead to a decrease in domestic consumption levels.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||58 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||92 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||61 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$11,085||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$20,090||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
Attracting foreign direct investment remains a critical component of the SAG’s broader Vision 2030 program to diversify an economy overly dependent on oil and to create 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 increases Saudi’s non-oil exports. The government encourages investment in nearly all economic sectors, with priority given to transportation, health/biotechnology, information and communications technology (ICT), media/entertainment, industry (mining and manufacturing), and energy.
Saudi Arabia’s economic reform programs are opening up new areas for potential investment. For example, in a country where most public entertainment was once forbidden, the SAG now regularly sponsors and promotes entertainment programming, including live concerts, dance exhibitions, sports competitions, and other public performances. Significantly, the audiences for many of those events are now gender-mixed, representing a larger consumer base. In addition to the reopening of cinemas in April 2018, the SAG hosted its first Formula E race in December 2018 in Riyadh, as well as the Saudi International Golf Tournament in Jeddah in early 2019 (a leg of the PGA European Tour).
The SAG is proceeding with “economic cities” and new “giga-projects” that are at various stages of development and welcomes foreign investment in them. These projects are large-scale and self-contained developments in different regions focusing on particular industries, e.g., technology, energy, tourism, and entertainment. Principal among these projects are:
- Qiddiya, a new, large-scale entertainment, sports, and cultural complex near Riyadh;
- King Abdullah Financial District, a USD 10 billion commercial center development in Riyadh;
- Red Sea Project, a massive tourism development on the western Saudi coast, which aims to create 70,000 jobs and attract one million tourists per year.
- Amaala, a wellness, healthy living, and meditation resort on the Kingdom’s northwest coast, projected to include more than 2,500 luxury hotel rooms and 700 villas.
- NEOM, a new USD 500 billion project to build a futuristic “independent economic zone” in northwest Saudi Arabia;
The Saudi Arabian General Investment Authority (SAGIA) governs and regulates foreign investment in the Kingdom, issues licenses to prospective investors, and works to foster and promote investment opportunities across the economy. 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 impediments remain. Foreign investment is currently prohibited in 11 sectors, including:
- Oil exploration, drilling, and production;
- Catering to military sectors;
- Security and detective services;
- Real estate investment in the holy cities, Makkah and Medina;
- Tourist orientation and guidance services for religious tourism related to Hajj and Umrah;
- Recruitment offices;
- Printing and publishing (subject to a variety of exceptions);
- Certain internationally classified commission agents;
- Services provided by midwives, nurses, physical therapy services, and quasi-doctoral services;
- Fisheries; and
- Poison centers, blood banks, and quarantine services.
(The complete “negative list” can be found at www.sagia.gov.sa .)
In addition to the negative list, older laws that remain in effect prohibit or otherwise restrict foreign investment in some economic subsectors not on the list, including some areas of healthcare. In 2018, Saudi Arabia began to allow foreign ownership in businesses providing services relating to road transportation, real estate brokerage, labor recruitment, and audiovisual display. At the same time, SAGIA has demonstrated some flexibility in approving exceptions to the “negative list” exclusions.
Foreign investors must also contend with increasingly strict localization requirements in bidding for certain government contracts, labor policy requirements to hire more Saudi nationals (usually at higher wages than expatriate workers), an increasingly restrictive visa policy for foreign workers, and gender segregation in business and social settings (though gender segregation is becoming more relaxed as the SAG introduces socio-economic reforms).
Additionally, in a bid to bolster non-oil income, the government implemented new taxes and fees in 2017 and early 2018, including significant visa fee increases, higher fines for traffic violations, new fees for certain billboard advertisements, and related measures. The government implemented a value-added tax (VAT) in January 2018 at a rate of five percent, in addition to excise taxes implemented in June 2017 on cigarettes (at a rate of 100 percent), carbonated drinks (at a rate of 50 percent), and energy drinks (at a rate of 100 percent). In January 2018, the government also implemented new fees for expatriate employers ranging between USD 80 and USD 107 per employee per month, as well as increasing levies on expatriates with dependents amounting to a USD 54 monthly fee for each dependent. These expatriate fees are scheduled to increase every year through 2020. On January 1, 2018, the SAG also reduced previous subsidies on electricity and gasoline, which resulted in a doubling of residential electricity rates and an increase in price of gasoline by more than 80 percent.
Limits on Foreign Control and Right to Private Ownership and Establishment
Saudi Arabia fully recognizes rights to private ownership and the establishment of private business. As outlined above, the SAG excludes 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 hydrocarbon 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, Shell, China’s Sinopec, and Japan’s Sumitomo Chemical are partners with Saudi Aramco (the SAG’s state-owned oil firm) in domestic refineries. ExxonMobil, Chevron, Shell, and other international investors have joint ventures with Aramco and/or the Saudi Basic Industries Corporation (SABIC) in large-scale petrochemical plants that utilize natural-gas feedstock from Aramco’s operations. In Saudi Arabia’s Eastern Province, the Dow Chemical Company and Aramco are partners in a USD 20 billion joint venture to construct, own, and operate the world’s largest integrated petrochemical production complex.
With respect to other non-oil natural resources, the national mining company, Ma’aden, has a USD 12 billion joint venture with Alcoa for bauxite mining and aluminum production and a USD 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. The requirement that law firms and engineering consulting firms must have a Saudi partner was rescinded in 2017. Foreign engineering consulting companies must have been incorporated for at least 10 years and have operations in at least four different countries to qualify. However, offices practicing accounting and auditing, architecture, or civil planning, or providing healthcare, dental, or veterinary services must still have a Saudi partner, and the foreign partner’s equity cannot exceed 75 percent of the total investment.
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 20 million Saudi riyal (USD 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 some companies have already received licenses under the new rules, the restrictions attached to obtaining full ownership – including a requirement to invest over USD 50 million during the first five years and ensure that 30 percent of all products sold are manufactured locally – have proven difficult to meet and precluded many investors from taking full advantage of the reform.
Other Investment Policy Reviews
Saudi Arabia completed its second WTO trade policy 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 often takes 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 three to five months from the time an initial SAGIA application is complete, placing the country at 141 of 190 countries in terms of ease of starting a business, according to the World Bank (2019 rankings). 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.
Saudi officials have stated their intention to attract foreign small- and medium-sized enterprises (SMEs) to the Kingdom. The SAG established the Small and Medium Enterprises General Authority in 2015 to facilitate the growth of the SME sector. In 2016, the SAG released a new Companies Law designed in part to promote the development of the SME sector. The law allows one person, rather than the previous minimum of two, to form a corporation, though in very limited cases. It also substantially reduced the minimum capital and number of shareholders required to form a joint stock company (from five previously to two).
Saudi Arabia does not restrict domestic investors from investing abroad. Private Saudi citizens, Saudi companies, and SAG entities hold extensive overseas investments. The SAG is attempting to transform its Public Investment Fund (PIF), traditionally a holding company for government shares in state-controlled enterprises, into a major international investor and sovereign wealth fund. In 2016, the PIF made its first high-profile international investment by taking a USD 3.5 billion stake in Uber. The PIF has also announced a USD 400 million investment in Magic Leap, a Florida-based company that is developing “mixed reality” technology, and a USD 1 billion investment in Lucid Motors, a California-based electric car company. Saudi Aramco and SABIC are also major investors in the United States. In 2017, Aramco acquired full ownership of Motiva, the largest refinery in the United States, in Port Arthur, Texas. SABIC has announced a multi-billion dollar joint venture with ExxonMobil in a petrochemical facility in Texas.
2. Bilateral Investment Agreements and Taxation Treaties
Saudi Arabia has signed bilateral trade and investment agreements with over 20 countries. The United States and Saudi Arabia signed a Trade and Investment Framework Agreement (TIFA) in 2003, building upon a bilateral agreement on secured private investment with the United States that has been in place since February 1975. The United States and Saudi Arabia last held TIFA consultations in May 2018 in Washington, D.C.
Saudi Arabia is a founding member of the Gulf Cooperation Council (GCC), which also includes Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates. While still under development, the GCC Customs Union formally ensures the free movement of labor and capital within the bloc. (Note: On June 5, 2017, Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt announced they were severing diplomatic relations with Qatar. The land border between the Kingdom and Qatar remains closed and there are no direct flights between the two countries.)
The GCC currently maintains free trade agreements (FTA) with Lebanon, Singapore, the European Free Trade Association (Norway, Switzerland, Iceland, and Liechtenstein), and the Greater Arab Free Trade Area of 18 Arab countries. The GCC is in the process of negotiating additional FTAs with China, the European Union, New Zealand, and several other trade partners.
Saudi Arabia does not have a bilateral taxation treaty with the United States, though the country maintained double taxation agreements with more than 43 countries as of March 2019.
The corporate tax treatment in Saudi Arabia of foreign and domestic companies is imbalanced and favors Saudi companies and joint ventures with Saudi participation. The SAG imposes a flat 20 percent corporate tax rate on foreign investors. Saudi investors do not pay corporate income tax but are subject to a 2.5 percent tax, or “zakat,” on net current assets.
3. Legal Regime
Transparency of the Regulatory System
Saudi Arabia received the lowest score possible (zero out of five) in the World Bank’s 2018 Global Indicators of Regulatory Governance Report, which places the Kingdom in the bottom 13 countries among 186 countries surveyed (http://rulemaking.worldbank.org/ ). Few aspects of the SAG’s regulatory system are entirely transparent, although Saudi investment policy is less opaque than other areas. Bureaucratic procedures are cumbersome but can generally be overcome with persistence. Foreign portfolio investment in the Saudi stock exchange is well-regulated by the Capital Markets Authority (CMA), with clear standards for interested foreign investors to qualify to trade on the local market. The CMA is progressively liberalizing requirements for “qualified foreign investors” to trade in Saudi securities. Insurance companies and banks whose shares are listed on the Saudi stock exchange are required to publish financial statements according to International Financial Reporting Standards (IFRS) accounting standards. All other companies are required to follow accounting standards issued by the Saudi Organization for Certified Public Accountants.
Stakeholder consultation on regulatory issues is inconsistent. Some Saudi organizations are scrupulous about consulting businesses affected by the regulatory process, while others tend to issue regulations with no consultation at all. Proposed laws and regulations are not always published in draft form for public comment. An increasing number of government agencies, however, solicit public comments through their websites. The processes and procedures for stakeholder consultation are not generally transparent or codified in law or regulations. There are no private-sector or government efforts to restrict foreign participation in the industry standards-setting consortia or organizations that are available. There are no informal regulatory processes managed by NGOs or private-sector associations.
International Regulatory Considerations
Saudi Arabia uses technical regulations developed both by the Saudi Arabian Standards Organization (SASO) and by the Gulf Standards Organization (GSO). Although the GCC member states continue to work toward common requirements and standards, each individual member state, and Saudi Arabia through SASO, continues to maintain significant autonomy in developing, implementing, and enforcing technical regulations and conformity assessment procedures in its territory. More recently, Saudi Arabia has moved toward adoption of a single standard for technical regulations. This standard is often based on International Organization for Standardization (ISO) or International Electrotechnical Commission (IEC) standards, to the exclusion of other international standards, such as those developed by U.S.-domiciled standards development organizations (SDOs).
Saudi Arabia’s exclusion of these other international standards, which are often used by U.S. manufacturers, can create significant market access barriers for industrial and consumer products exported from the United States. The United States government has engaged Saudi authorities on the principles for international standards per the WTO Technical Barriers to Trade Committee Decision and encouraged Saudi Arabia to adopt standards developed according to such principles in their technical regulations, allowing all products that meet those standards to enter the Saudi market. Several U.S.-based standards organizations, including SDOs and individual companies, have also engaged SASO, with mixed success, in an effort to preserve market access for U.S. products, ranging from electrical equipment to footwear.
A member of the WTO, Saudi Arabia notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Legal System and Judicial Independence
The Saudi legal system is derived from Islamic law, known as sharia. Saudi commercial law, meanwhile, is still developing. In 2016, Saudi Arabia took a significant step in improving its dispute settlement regime with the establishment of the Saudi Center for Commercial Arbitration (see “Dispute Settlement” below). Through its Commercial Law Development Program, the U.S. Department of Commerce provides capacity-building programs for Saudi stakeholders in the areas of contract enforcement, public procurement, and insolvency.
The Saudi Ministry of Justice oversees the sharia-based judicial system, but most ministries have committees to rule on matters under their jurisdictions. Judicial and regulatory decisions can be appealed. Many disputes that would be handled in a court of law in the United States are handled through intra-ministerial administrative bodies and processes in Saudi Arabia. Generally, the Saudi Board of Grievances has jurisdiction over commercial disputes between the government and private contractors. The Board also reviews all foreign arbitral awards and foreign court decisions to ensure that they comply with sharia. This review process can be lengthy, and outcomes are unpredictable.
The Kingdom’s record of enforcing judgments issued by courts of other GCC states under the GCC Common Economic Agreement, and of other Arab League states under the Arab League Treaty, is somewhat better than enforcement of judgments from other foreign courts. Monetary judgments are based on the terms of the contract – i.e., if the contract is calculated in U.S. dollars, a judgment may be obtained in U.S. dollars. If unspecified, the judgment is denominated in Saudi riyals. Non-material damages and interest are not included in monetary judgments, based on the sharia prohibitions against interest and against indirect, consequential, and speculative damages.
As with any investment abroad, it is important that U.S. investors take steps to protect themselves by thoroughly researching the business record of a proposed Saudi partner, retaining legal counsel, complying scrupulously with all legal steps in the investment process, and securing a well-drafted agreement. Even after a decision is reached in a dispute, enforcement of a judgment can still take years. The U.S. government recommends consulting with local counsel in advance of investing to review legal options and appropriate contractual provisions for dispute resolution.
ICSID Convention and New York Convention
The Kingdom of Saudi Arabia ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1994. Saudi Arabia is also a member state of the International Center for the Settlement of Investment Disputes Convention (ICSID), though under the terms of its accession it cannot be compelled to refer investment disputes to this system absent specific consent, provided on a case-by-case basis. Saudi Arabia has yet to consent to the referral of any investment dispute to the ICSID for resolution.
Investor-State Dispute Settlement
The use of any international or domestic dispute settlement mechanism within Saudi Arabia continues to be time-consuming and uncertain, as all outcomes are subject to a final review in the Saudi judicial system and carry the risk that principles of sharia law may potentially supersede a judgment or legal precedent. The U.S. government recommends consulting with local counsel in advance of investing to review legal options and contractual provisions for dispute resolution.
International Commercial Arbitration and Foreign Courts
Traditionally, dispute settlement and enforcement of foreign arbitral awards in Saudi Arabia have proven time-consuming and uncertain, carrying the risk that sharia principles can potentially supersede any foreign judgments or legal precedents. Even after a decision is reached in a dispute, effective enforcement of the judgment can take a long period of time. In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners and creditors have blocked foreigners’ access to or right to use exit visas, forcing them to remain in Saudi Arabia against their will. In cases of alleged fraud or debt, foreign partners may also be jailed to prevent their departure from the country while awaiting police investigation or court adjudication of the case. Courts can in theory impose precautionary restraint on personal property pending the adjudication of a commercial dispute, though this remedy has been applied sparingly.
In recent years, the SAG has demonstrated a commitment to improving the quality of commercial legal proceedings and access to alternative dispute resolution mechanisms. Local attorneys indicate that the quality of final judgments in the court system has improved, but that cases still take too long to litigate. In 2012, the SAG updated certain provisions in Saudi Arabia’s domestic arbitration law, paving the way for the establishment of the Saudi Center for Commercial Arbitration (SCCA) in 2016. Developed in accordance with international arbitration rules and standards, including those set by the American Arbitration Association’s International Centre for Dispute Resolution and the International Chamber of Commerce’s International Court of Arbitration, the SCCA offers comprehensive arbitration services to firms both domestic and international. The SCCA reports that both domestic and foreign law firms have begun to include referrals to the SCCA in the arbitration clauses of their contracts. However, it is currently too early to assess the quality and effectiveness of SCCA proceedings, as the SCCA is still in the early stages of operation. Awards rendered by the SCCA can be enforced in local courts, though judges remain empowered to reject enforcement of provisions they deem noncompliant with sharia law.
In December 2017, the United Nations Commission on International Trade Law (UNCITRAL) recognized Saudi Arabia as a jurisdiction that has adopted an arbitration law based on the 2006 UNCITRAL Model Arbitration Law. While Saudi Arabia adopted this law in 2012, UNCITRAL did not consider it as a model law jurisdiction due to the SAG’s reference to sharia’s supremacy over UNCITRAL-adopted provisions. After discussions between UNCITRAL representatives and Saudi judges, during which the Saudi judges clarified that sharia would not affect the enforcement of foreign arbitral awards, UNCITRAL added Saudi Arabia to the list of model law jurisdictions. The potential impact of the decision is that foreign investors and companies in Saudi Arabia have slightly more certainty that their arbitration agreements and awards will be enforced, as in other UNCITRAL countries. Whether (and how) Saudi courts will apply this latest interpretation of the relationship between foreign arbitral awards and sharia law remains to be seen.
Laws and Regulations on Foreign Direct Investment
In January 2019, the Saudi government established the Foreign Trade General Authority (FTGA), which aims to strengthen Saudi Arabia’s non-oil exports and investment, increase the private sector’s contribution to foreign trade, and resolve obstacles encountered by Saudi exporters and investors. The new authority will also monitor the Kingdom’s obligations under international trade agreements and treaties, negotiate and enter into new international commercial and investment agreements, and represent the Kingdom before the World Trade Organization. The Governor of the Foreign Trade General Authority will report to the Minister of Commerce and Investment.
Until the FTGA becomes operational (possibly later in 2019), MCI and SAGIA remain the primary Saudi government entities responsible for formulating policies regarding investment activities, proposing plans and regulations to enhance the investment climate in the country, and evaluating and licensing investment proposals.
Despite the list of activities excluded from foreign investment (see “Policies Toward Foreign Direct Investment”), foreign minority ownership in joint ventures with Saudi partners may be allowed in some of these sectors. Foreign investors are no longer required to take local partners in many sectors and may own real estate for company activities. They are allowed to transfer money from their enterprises out of the country and can sponsor foreign employees, provided that “Saudization” quotas are met (see “Labor Section” below). Minimum capital requirements to establish business entities range from zero to 30 million Saudi riyals (USD 8 million), depending on the sector and the type of investment.
SAGIA offers detailed information on the investment process, provides licenses and support services to foreign investors, and coordinates with government ministries to facilitate investment. According to SAGIA, it must grant or refuse a license within five days of receiving an application and supporting documentation from a prospective investor. SAGIA has established and posted on-line its licensing guidelines, but many companies looking to invest in Saudi Arabia continue to work with local representation to navigate the bureaucratic licensing process.
SAGIA licenses foreign investments by sector, each with its own regulations and requirements: (i) services, which comprise a wide range of activities including, IT, healthcare, and tourism; (ii) industrial, (iii) real estate, (iv) public transportation, (v) entrepreneurial, (vi) contracting, (vii) audiovisual media, (viii) science and technical office, (ix) education (colleges and universities), and (x) domestic services employment recruitment. SAGIA also offers several special-purpose licenses for bidding on and performance of government contracts. Foreign firms must describe their planned commercial activities in some detail and will receive a license in one of these sectors at SAGIA’s discretion. Depending on the type of license issued, foreign firms may also require the approval of relevant competent authorities, such as the Ministry of Health or the Saudi Commission for Tourism and National Heritage.
An important SAGIA objective is to ensure that investors do not just acquire and hold licenses without investing, and SAGIA sometimes cancels licenses of foreign investors that it deems do not contribute sufficiently to the local economy. SAGIA’s periodic license reviews, with the possibility of cancellation, add uncertainty for investors and can provide a disincentive to longer-term investment commitments.
SAGIA has agreements with various SAG agencies and ministries to facilitate and streamline foreign investment. These agreements permit SAGIA to facilitate the granting of visas, establish SAGIA branch offices at Saudi embassies in different countries, prolong tariff exemptions on imported raw materials to three years and on production and manufacturing equipment to two years, and establish commercial courts. To make it easier for businesspeople to visit the Kingdom, SAGIA can sponsor visa requests without involving a local company. Saudi Arabia has implemented a decree providing that sponsorship is no longer required for certain business visas. While SAGIA has set up the infrastructure to support foreign investment, many companies report that despite some improvements, the process remains cumbersome and time-consuming.
Competition and Anti-Trust Laws
SAGIA and the Ministry of Commerce and Investment review transactions for competition-related concerns. Concerns have arisen that allegations of price fixing for certain products, including infant nutrition products, may have been used on occasion as a pretext to control prices. The Ministry of Commerce and Investment has looked to the GCC’s reference pricing approach on subsidized products to assist the SAG in determining market-price suggested norms.
Saudi competition law prohibits certain vertically-integrated business combinations. Consequently, companies doing business in Saudi Arabia may find it difficult to register exclusivity clauses in distribution agreements, but are not necessarily precluded from enforcing such clauses in Saudi courts.
Expropriation and Compensation
The Embassy is not aware of any cases in Saudi Arabia of expropriation from foreign investors without adequate compensation. Some small- to medium-sized foreign investors, however, have complained that their investment licenses have been cancelled without justification, causing them to forfeit their investments.
Potential investors should note that the “Resolving Insolvency” indicator most negatively affects Saudi Arabia’s World Bank “Doing Business” ranking.
However, in February 2018, the SAG announced the approval of new bankruptcy legislation, which became effective in August 2018. According to the SAG, the new bankruptcy law seeks to “further facilitate a healthy business environment that encourages participation by foreign and domestic investors, as well as local small and medium enterprises.” The new law clarifies procedural processes and recognizes distinct creditor classes (e.g., secured creditors). The new law also includes procedures for continued operation of the distressed company via financial restructuring. Alternatively, the parties may pursue an orderly liquidation of company assets, which would be managed by a court-appointed licensed bankruptcy trustee. Saudi courts have begun to accept and hear cases under this new legislation.
4. Industrial Policies
SAGIA advertises a number of financial advantages for foreigners looking to invest in the Kingdom, including the lack of personal income taxes and a corporate tax rate of 20 percent on foreign companies’ profits. SAGIA also lists various SAG-sponsored, regional, and international financial programs to which foreign investors have access, such as the Arab Fund for Economic and Social Development, the Arab Trade Financing Program, and the Islamic Development Bank.
The Saudi Industrial Development Fund (SIDF), a government financial institution established in 1974, supports private-sector industrial investments by providing medium- and long-term loans for new factories and for projects to expand, upgrade, and modernize existing manufacturing facilities. The SIDF offers loans of 50 percent to 75 percent of a project’s value, depending on the project’s location. Foreign investors that set up manufacturing facilities in developed areas (Riyadh, Jeddah, Dammam, Jubail, Mecca, Yanbu, and Ras Al-Khair), for example, can receive a 15-year loan for up to 50 percent of a project’s value; investors in the Kingdom’s least developed areas can receive a 20-year loan for up to 75 percent of the project’s value. The SIDF also offers consultancy services for local industrial projects in the administrative, financial, technical and marketing fields. (The SIDF’s website is at https://www.sidf.gov.sa/en/Pages/default.aspx .)
The SAG offers several incentive programs to promote employment of Saudi nationals. The Saudi Human Resources Development Fund (HRDF) (https://www.hrdf.org.sa/), for example, will pay 30 percent of a Saudi national’s wages for the first year of work, with a wage subsidy of 20 percent and 10 percent for the second and third year of employment, respectively (subject to certain limits and caps).
American and other foreign firms are able to participate in SAG-financed and/or -subsidized research-and-development programs. Many of these programs are run though the King Abdulaziz City for Science and Technology (KACST), which funds many of the Kingdom’s R&D programs.
Foreign Trade Zones/Free Ports/Trade Facilitation
Saudi Arabia does not operate free trade zones or free ports. However, as part of its Vision 2030 program, the SAG has announced it will create special zones with special regulations to encourage investment and diversify government revenues. The SAG is discussing the establishment of special regulatory zones in certain areas, including at the NEOM giga-project, and the King Abdullah Financial District project in Riyadh.
Saudi Arabia has established a network of “economic cities” as part of the country’s efforts to diversify away from oil. Overseen by SAGIA, these four economic cities aim to provide a variety of advantages to companies that choose to locate their operations within the city limits, including in matters of logistics and ease of doing business. The four economic cities are: King Abdullah Economic City near Jeddah, Prince AbdulAziz Bin Mousaed Economic City in north-central Saudi Arabia, Knowledge Economic City in Medina, and Jazan Economic City near the southwest border with Yemen. The cities are in various states of development, and their future development potential is unclear, given competing Vision 2030 economic development projects.
The Saudi Industrial Property Authority (MODON) oversees the development of 35 industrial cities, including some still under development. MODON offers incentives for commercial investment in these cities, including competitive rents for industrial land, government-sponsored financing, export guarantees, and certain customs exemptions. (MODON’s website is at https://www.modon.gov.sa/en/Pages/default.aspx .)
The Royal Commission for Jubail and Yanbu (RCJY) was formed in 1975 and established the industrial cities of Jubail, located in eastern Saudi Arabia on the Gulf coast, and Yanbu, located in north western Saudi Arabia on the Red Sea coast. A significant portion of Saudi Arabia’s refining, petrochemical, and other heavy industries are located in the Jubail and Yanbu industrial cities. The RCJY’s mission is to plan, promote, develop, and manage petrochemicals and energy intensive industrial cities. In connection with this mission, RCJY promotes investment opportunities in the two cities and can offer a variety of incentives, including tax holidays, customs exemptions, low cost loans, and favorable land and utility rates. More recently, the RCJY has assumed responsibility for managing the Ras Al Khair City for Mining Industries (2009) and the Jazan City for Primary and Downstream Industries (2015). (The RCJY’s website is at https://www.rcjy.gov.sa).
Performance and Data Localization Requirements
The government does not impose systematic conditions on foreign investment. For example, there are no requirements to locate in a specific geographic area (except for some restrictions on the distribution of retail outlets and the location of industrial activities). Investors are not required to export a certain percentage of output. There is no requirement that the share of foreign equity be reduced over time. Investors are not required to disclose proprietary information to the SAG as part of the regulatory approval process, except where issues of health and safety are concerned.
Although investors have not been required heretofore to purchase from local sources, the situation is changing. In line with its bid to diversify the economy and provide more private sector jobs for Saudi nationals, the SAG has embarked upon a broad effort to source goods and services domestically and is seeking commitments from investors to do so. In 2017, the Council of Economic and Development Affairs (CEDA) established the Local Content and Private Sector Development Unit (NAMAA in Arabic) to promote local content and improve the balance of payments. NAMAA is responsible for monitoring and implementing regulations, suggesting new policies, and coordinating with the private sector on all local content matters.
Government-controlled enterprises are also increasingly introducing local content requirements for foreign firms. Aramco’s “In-Kingdom Total Value Added” program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021.
In the defense sector, Saudi Arabia’s military is in the process of reforming its procurement processes and policies to incorporate new ambitious goals of Saudi employment and localized production. The SAG has shifted over the last two years away from offsets in favor of “localization” of purchases of goods and services and “Saudization” of the labor force. Previously, the government required offsets in investments equivalent to up to 40 percent of a program’s value for defense contracts, depending on the value of the contract. The SAG is currently mandating increasingly strict localization requirements for government contracts in the defense sector. The SAG’s Vision 2030 program calls for 50 percent of defense materials to be produced and procured locally by 2030, and simultaneously seeks comparable increases in the number of Saudis employed in this sector.
The government encourages recruitment of Saudi employees through a series of incentives (see section 11 on “Labor Policies” for details of the “Saudization” program) and limits placed on the number of visas for foreign workers available to companies. The Saudi electronic visitor visa system defaults to five-year visas for all U.S. citizen applicants. “Business visas” are routinely issued to U.S. visitors who do not have an invitation letter from a Saudi company; the visa applicant must provide evidence that he or she is engaged in legitimate commercial activity. “Commercial visas” are issued by invitation from Saudi companies to applicants who have a specific reason to visit a Saudi company.
In the fall of 2016, the SAG implemented a series of significant visitor fee increases for expatriates whose countries do not have reciprocity agreements with Saudi Arabia, doubling the cost of a single-entry business visit visa to USD 533. (U.S. citizens are exempt from such increases on the basis of reciprocity.) The SAG also imposed higher exit and reentry visa fees for all foreign workers residing in the Kingdom, including U.S. citizens. Furthermore, in January 2018, the SAG implemented new fees for expatriate employers ranging between USD 80 and USD 107 per employee per month and increased levies on expatriates with dependents to a USD 54 monthly fee for each dependent (see section 11 on “Labor Policies”). In January 2019, fees on expatriate employees increased to between USD 133 to USD 160 per month, and levies on expatriate dependents increased to USD 80 per month. These fees are scheduled to increase again in 2020, but no additional increases are planned at this time.
There are no requirements for foreign IT providers to turn over source code or provide access to encryption. Other than a requirement to retain records locally for ten years for tax purposes, there is no requirement regarding data storage or access to surveillance.
5. Protection of Property Rights
The Saudi legal system protects and facilitates acquisition and disposition of all property, consistent with Islamic practice of upholding private property rights. Non-Saudi corporate entities are allowed to purchase real estate in Saudi Arabia in accordance with the foreign-investment code. Other foreign-owned corporate and personal property is protected by law. Saudi Arabia has a system of recording security interests, and plans to modernize its land registry system. Saudi Arabia ranked 24th out of 190 countries for ease of registering property in the 2019 World Bank Doing Business Report.
In 2017, the Saudi Ministry of Housing implemented an annual vacant land tax of 2.5 percent of the assessed value on vacant lands in urban centers in an attempt to spur development. Additionally, in January 2018, in an effort to increase Saudis’ access to finance and stimulate the mortgage and housing markets, Saudi Arabia’s central bank lifted the maximum loan-to-value rate for mortgages for first-time homebuyers to 90 percent from 85 percent, and increased interest payment subsidies for first-time buyers. This further liberalized stringent down-payment requirements that prevailed up to 2016, when the central bank raised the maximum loan-to-value rate from 70 percent to 85 percent.
Intellectual Property Rights
In the last two decades, Saudi Arabia undertook a comprehensive revision of its laws governing intellectual property rights (IPR) to bring them in line with the WTO agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs); the changes were promulgated in coordination with the World Intellectual Property Organization (WIPO). The SAG updated its Trademark Law (2002), Copyright Law (2003), and Patent Law (2004) with the dual goals of TRIPs compliance and effective deterrence against IPR violations.
Saudi Arabia was included on USTR’s Special 301 “Priority Watch List” in April 2019 following an increase in the number of stakeholder complaints about the protection of IPR in the Kingdom, particularly with respect to pharmaceuticals, rampant digital and signal piracy, software, and counterfeit goods.
Recent steps by the Saudi Food and Drug Authority (SFDA) to license locally-manufactured, cheaper generic versions of patent-pending drugs within their five year regulatory data protection period have created significant concern among U.S. industry stakeholders, who allege commercial loss resulting from this abrogation of their patent and data protection rights. Additionally, in 2017, the SFDA granted a license to a local generic pharmaceutical manufacturer for an innovative treatment developed by a U.S. pharmaceutical company that had filed for patent protection with the GCC patent office. According to the U.S. pharmaceutical and biologics industry, the SFDA’s failure to recognize the patent and protect the data constitutes a serious breach of intellectual property rights.
During 2018, an illicit broadcast and streaming service called “beoutQ” became widely available in Saudi Arabia. beoutQ is suspected of satellite and online piracy, as well as supporting piracy devices and related services, such as apps that allow access to unlicensed movies and television productions, including sports events.
U.S. software firms report that the Saudi government continues to use unlicensed and “under-licensed” (in which an insufficient number of licenses is procured for the total number of users) software on government computer systems in violation of their copyrights. Other concerns include the lack of seizure and destruction of counterfeit goods in enforcement actions by MCI, and limits on the ability of MCI to enter facilities suspected of involvement in the sale or manufacture of counterfeit goods, including facilities located in residential areas.
The Saudi government is in the process of reorganizing its IPR agencies and centralizing responsibility for all IPR matters in the new Saudi Authority for Intellectual Property (SAIP). SAIP’s Board of Directors held its first meeting in March 2018 under the chairmanship of the Minister of Commerce and Investment. SAIP also signed a Memorandum of Understanding in September 2018 with the U.S. Patent and Trademark Office. SAIP’s objective is to ensure the unification and integration of IPR in Saudi Arabia. SAIP is expected to prepare a new national IPR strategy and oversee its implementation.
Resources for Rights Holders
Embassy point of contact:
+966 11 488-3800 Ext. 4140
Regional IPR Attache:
Pete C. Mehravari
U.S. Intellectual Property Attache for Middle East and North Africa
U.S. Embassy Kuwait | U.S. Department of Commerce
Office: +965 2259-1455
6. Financial Sector
Capital Markets and Portfolio Investment
Saudi Arabia’s financial policies generally facilitate the free flow of private capital, while currency can be transferred in and out of the Kingdom without restriction. Saudi Arabia maintains an effective regulatory system governing portfolio investment in the Kingdom. The Capital Markets Law, passed in 2003, allows for brokerages, asset managers, and other nonbank financial intermediaries to operate in the Kingdom. The law created a market regulator, the Capital Market Authority (CMA), which was established in 2004, and opened the Saudi stock exchange (Tadawul) to public investment.
Prior to 2015, the CMA only permitted foreign investors to invest in the Saudi stock market through indirect “swap arrangements,” through which foreigners had accumulated ownership of one per cent of the market. In June 2015, the CMA opened the Tadawul to “qualified foreign investors,” but with a stringent set of regulations that only large financial institutions could meet. Since 2015, the CMA has progressively relaxed the rules applicable to qualified foreign investors, easing barriers to entry and expanding the foreign investor base. The CMA adopted regulations in 2017 permitting corporate debt securities to be listed and traded on the exchange; in March 2018, the CMA authorized government debt instruments to be listed and traded on the Tadawul. The Tadawul was incorporated into the FTSE Russell Emerging Markets Index as of March 2019, resulting in an initial foreign capital injection of approximately USD 700 million. This was the first of five staged capital infusions over the next 12 months totaling USD 6.8 billion. Separately, the USD 11 billion infusion into the Tadawul from integration into the MSCI Emerging Markets Index will take place in two tranches beginning in May 2019.
Money and Banking System
The banking system in the Kingdom is generally well-capitalized and healthy. The public has easy access to deposit-taking institutions. The legal, regulatory, and accounting systems used in the banking sector are generally transparent and consistent with international norms. The Saudi Arabian Monetary Authority (SAMA), the central bank, which oversees and regulates the banking system, generally gets high marks for its prudential oversight of commercial banks in Saudi Arabia. SAMA is a member and shareholder of the Bank for International Settlements in Basel, Switzerland.
The SAG has authorized increased foreign participation in its banking sector over the last several years. SAMA has granted licenses to a number of foreign banks to operate in the Kingdom, including Deutsche Bank, J.P. Morgan Chase N.A., and Industrial and Commercial Bank of China (ICBC). A number of additional, CMA-licensed foreign banks participate in the Saudi market as investors or wealth management advisors. Citigroup, for example, returned to the Saudi market in early 2018 under a CMA license.
Credit is normally widely available to both Saudi and foreign entities from commercial banks and is allocated on market terms. The Saudi banking sector has one of the world’s lowest non-performing loan (NPL) ratios, in the range of 1.5 per cent for 2017. In addition, credit is available from several government institutions, such as the SIDF, which allocate credit based on government-set criteria rather than market conditions. Companies must have a legal presence in Saudi Arabia in order to qualify for credit. The private sector has access to term loans, and there have been a number of corporate issuances of sharia compliant bonds, known as sukuk.
Foreign Exchange and Remittances
There is no limitation in Saudi Arabia on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs, other than certain withholding taxes (withholding taxes range from five percent for technical services and dividend distributions to 15 percent for transfers to related parties, and 20 percent or more for management fees). Bulk cash shipments greater than USD 10,000 must be declared at entry or exit points. Since 1986, when the last currency devaluation occurred, the official exchange rate has been fixed by SAMA at 3.75 Saudi riyals per U.S. dollar. Transactions typically take place using rates very close to the official rate.
Saudi Arabia is one of the largest remitting countries in the world, with roughly 75 percent of the Saudi labor force comprised of foreign workers. Remittances totaled approximately USD 39 billion in 2018. There are currently no restrictions on converting and transferring funds associated with an investment (including remittances of investment capital, dividends, earnings, loan repayments, principal on debt, lease payments, and/or management fees) into a freely usable currency at a legal market-clearing rate. There are no waiting periods in effect for remitting investment returns through normal legal channels.
The Ministry of Labor and Social Development is progressively implementing a “Wage Protection System” designed to verify that expatriate workers, the predominant source of remittances, are being properly paid according to their contracts. Under this system, employers are required to transfer salary payments from a local Saudi bank account to an employee’s local bank account, from which expatriates can freely remit their earnings to their home countries.
In 2017, SAMA enhanced and updated its previous Circular on Guidelines for the Prevention of Money Laundering and Terrorist Financing. The enhanced guidelines have increased alignment with the Financial Action Task Force (FATF) 40 Recommendations, the nine Special Recommendations on Terrorist Financing, and relevant UN Security Council Resolutions. Saudi Arabia is a member of the Middle East and North Africa Financial Action Task Force (MENA-FATF). In 2015 Saudi Arabia obtained observer status to the FATF and is seeking full membership in the organization.
Sovereign Wealth Funds
The Public Investment Fund (PIF, www.pif.gov.sa ) is the Kingdom’s officially designated sovereign wealth fund. While PIF lacks many of the attributes of a traditional sovereign wealth fund, it has evolved into the SAG’s primary investment vehicle.
Established in 1971 to channel oil wealth into economic development, the PIF has historically been a holding company for government shares in partially privatized state-owned enterprises (SOEs), including SABIC, the National Commercial Bank, Saudi Telecom Company, and others. Crown Prince Mohammed bin Salman is the chairman of the PIF and announced his intention in April 2016 to build the Fund into a USD 2 trillion global investment fund, relying in part on proceeds from a potential initial public offering of up to five percent of Saudi Aramco shares.
Since that announcement, the PIF has made a number of high-profile international investments, including a USD 3.5 billion investment in Uber, a commitment to invest USD 45 billion into Japanese SoftBank’s VisionFund, a commitment to invest USD 20 billion into U.S. Blackstone’s Infrastructure Fund, a USD 1 billion investment in U.S. electric car company Lucid Motors, and a partnership with cinema company AMC to operate movie theaters in the Kingdom. Under the Vision 2030 reform program, the PIF is financing a number of strategic domestic development projects, including: “NEOM,” a new USD 500 billion project to build an “independent economic zone” in northwest Saudi Arabia; “Qiddiya,” a new, large-scale entertainment, sports, and cultural complex near Riyadh; “the Red Sea Project”, a massive tourism development on the western Saudi coast; and “Amaala,” a wellness, healthy living, and meditation resort also located on the Red Sea.
As of early 2019, the PIF had an investment portfolio valued at approximately USD 250-260 billion, mainly in shares of state-controlled domestic companies. In an effort to rebalance its investment portfolio, the PIF has divided its assets into six investment pools comprising local and global investments in various sectors and asset classes: Saudi holdings; Saudi sector development; Saudi real estate and infrastructure development; Saudi giga-projects; international strategic investments; and an international diversified pool of investments. The PIF has ambitions to achieve USD 600 billion in assets under management by 2020.
In practice, SAMA’s foreign reserve holdings also operate as a quasi-sovereign wealth fund, accounting for the majority of the SAG’s foreign assets. SAMA invests the Kingdom’s surplus oil revenues primarily in low-risk liquid assets, such as sovereign debt instruments and fixed-income securities. SAMA’s foreign reserves stood at approximately USD 497 billion at the end of 2018. Total reserves increased by approximately USD 165 million in 2018, after falling USD 39.4 billion and USD 80.6 billion in 2017 and 2016, respectfully. SAMA’s foreign reserve holdings peaked at USD 746 billion in mid-2014.
Though not a formal member, Saudi Arabia serves as a permanent observer to the International Working Group on Sovereign Wealth Funds.
7. State-Owned Enterprises
SOEs play a leading role in the Saudi economy, particularly in water, power, oil, natural gas, petrochemicals, and transportation. Saudi Aramco, the world’s largest producer and exporter of crude oil and a large-scale oil refiner and producer of natural gas, is 100 percent SAG-owned, and its revenues typically contribute the majority of the SAG’s budget. Five of the eleven representatives on Aramco’s board of directors are from the SAG, including the chairman and vice chairman. The SAG announced a plan for an initial public offering (IPO) of up to five percent of Aramco shares in 2018, but the IPO has been delayed. The SAG claims the company is valued at USD 2 trillion, which would make a five percent IPO the largest in history. Saudi Aramco has announced it will acquire SABIC, Saudi Arabia’s leading petrochemical company, which is 70 percent owned by the SAG. Five of the nine representatives on SABIC’s board of directors are from the SAG, including the chairman and vice chairman. The SAG is similarly well-represented in the leadership of other SOEs. The SAG either wholly owns or holds controlling shares in many other major Saudi companies, such as the Saudi Electricity Company, Saudi Arabian Airlines (Saudia), the Saline Water Conversion Company, Ma’aden (mining), and the National Commercial Bank and other leading financial institutions.
Saudi Arabia has undertaken a limited privatization process for state-owned companies and assets dating back to 2002. The process, which is open to domestic and foreign investors, has resulted in partial privatizations of state-owned enterprises in the banking, mining, telecommunications, petrochemicals, water desalination, insurance, and other sectors.
As part of Vision 2030 reforms, the SAG has announced its intention to privatize additional sectors of the economy. Privatization is a key element underpinning the Vision 2030 goal of increasing the private sector’s contribution to GDP from 40 percent to 65 percent by 2030. In April 2018, the SAG launched a Vision 2030 Privatization Program that aims to: strengthen the role of the private sector by unlocking state-owned assets for investment, attract foreign direct investment, create jobs, reduce government overhead, improve the quality of public services, and strengthen the balance of payments. (The full Privatization Program report is available online at http://vision2030.gov.sa/en/ncp .) The program report references a range of approaches to privatization, including: full and partial assets sales, initial public offerings, management buy-outs, public-private partnerships (build-operate-transfer models), concessions, and outsourcing. The SAG aims to create 10,000-12,000 jobs and generate USD 9-USD 11 billion in non-oil revenue by 2020 through the Privatization Program. While the Privatization report outlines the general guidelines for the Program, it does not include an exhaustive list of assets to be privatized. The report does, however, reference education, healthcare, transportation, renewable energy, power generation, waste management, sports clubs, grain silos, and water desalination facilities as prime areas for privatization or public-private partnerships.
In 2017, Saudi Arabia established the National Center for Privatization and Public Private Partnerships, which will oversee and manage the Privatization Program. (The Center’s website is at http://www.ncp.gov.sa/en/pages/home.aspx .) The NCCP’s mandate is to introduce privatization through the development of programs, regulations, and mechanisms for facilitating private sector participation in entities now controlled by the government.
8. Responsible Business Conduct
There is a growing awareness of corporate social responsibility (CSR) in Saudi Arabia. The King Khalid Foundation issues annual “responsible competitiveness” awards to companies doing business in Saudi Arabia for outstanding CSR activities.
Foreign firms have identified corruption as a barrier to investment in Saudi Arabia. Saudi Arabia has a relatively comprehensive legal framework that addresses corruption, but many firms perceive enforcement as selective. The Combating Bribery Law and the Civil Service Law, the two primary Saudi laws that address corruption, provide for criminal penalties in cases of official corruption. Government employees who are found guilty of accepting bribes face 10 years in prison or fines of up to one million riyals (USD 267,000). Ministers and other senior government officials appointed by royal decree are forbidden from engaging in business activities with their ministry or organization. Saudi corruption laws cover most methods of bribery and abuse of authority for personal interest, but not bribery between private parties. Public officials are not subject to financial disclosure laws. Some officials have engaged in corrupt practices with impunity, and perceptions of corruption persist in some sectors.
On November 4, 2017, King Salman issued a royal decree forming a new Supreme Anti-Corruption Committee. The SAG subsequently detained approximately 200 government officials, businesspersons, and royal family members as part of the anti-corruption campaign. The royal decree exempted committee members – which included the Crown Prince, attorney general, chairman of the National Anticorruption Commission (“Nazaha”), chief of the General Audit Bureau, chairman of the Saudi Monitoring and Investigation Commission, and head of the State Security Presidency – from “all laws, regulations, instructions, orders, and decisions” that would impede anticorruption efforts. Some of the detainees reportedly negotiated financial settlements in exchange for their release. In January 2018, the attorney general announced that the SAG had collected more than USD 100 billion in various types of assets, including real estate, commercial entities, securities, cash, and other assets as part of its anti-corruption campaign. In January 2019, the Saudi government announced the end of the anti-corruption campaign.
The Supreme Anti-Corruption Committee, National Anticorruption Commission/Nazaha, the Public Prosecutor’s Office, and the Control and Investigation Board are units of the government with authority to investigate reports of criminal activity, corruption, and “disciplinary cases” involving government employees. These bodies are responsible for investigating potential cases and referring them to the administrative courts.
Nazaha, established in 2011, is responsible for promoting transparency and combating all forms of financial and administrative corruption. Nazaha’s ministerial-level director reports directly to the King. Nazaha refers cases of possible public corruption to the Public Prosecutor’s Office. Some evidence suggests the organization has not shied away from prosecuting influential players whose indiscretions may previously have been ignored. In 2016, for example, it referred the Minister of Civil Service for investigation over allegations of abuse of power and nepotism. In November 2016, Nazaha announced it found irregularities in the appointment of the minister’s son to the Ministry of Municipal and Rural Affairs. The Commission regularly publishes news of its investigations on its website (http://www.nazaha.gov.sa/en/Pages/Default.aspx ).
The Control and Investigation Board is responsible for investigating financial and administrative malfeasance, and the Public Prosecutor’s Office has the lead on all criminal investigations. The General Auditing Bureau is also charged with combating corruption, as is the Human Rights Commission, which responds to and researches complaints of corruption.
SAMA, the central bank, oversees a strict regime to combat money laundering. Saudi Arabia’s Anti-Money Laundering Law provides for sentences up to 10 years in prison and fines up to USD 1.3 million. The Basic Law of Governance contains provisions on proper management of state assets and authorizes audits and investigation of administrative and financial malfeasance.
The Government Tenders and Procurement Law regulates public procurements, often a source of corruption. The law provides for public announcement of tenders and guidelines for the award of public contracts. Saudi Arabia is an observer of the WTO Agreement on Government Procurement (GPA). Although Saudi Arabia committed to initiate negotiations for accession to the WTO GPA when it became a WTO Member in 2005, it has not yet begun those negotiations.
Saudi Arabia ratified the UN Convention against Corruption in April 2013 and signed the G20 Anti-Corruption Action Plan in November 2010.
Globally, Saudi Arabia ranks 58th out of 180 countries in Transparency International’s Corruption Perceptions Index 2018.
Resources to Report Corruption
The National Anti-Corruption Commission’s address is:
National Anti-Corruption Commission
P.O. Box (Wasl) 7667, Al Olaya – Ghadir District
The Kingdom of Saudi Arabia
Nazaha accepts complaints about corruption through its website http://www.nazaha.gov.sa or mobile application.
10. Political and Security Environment
Saudi Arabia is a monarchy ruled by King Salman bin Abdulaziz Al Saud. The King’s son, Crown Prince Mohammed bin Salman, has assumed a central role in government decision-making. The Department of State regularly reviews and updates a travel advisory to apprise U.S. citizens of the security situation in Saudi Arabia and frequently reminds U.S. citizens of recommended security precautions. As of March 2019, the Travel Advisory for Saudi Arabia urges U.S. citizens to exercise increased caution when traveling to Saudi Arabia due to terrorism and the threat of missile and drone attacks on civilian targets. The Travel Warning notes that terrorist groups continue plotting possible attacks in Saudi Arabia and that terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, and local government facilities. In the past, terrorists have targeted both Saudi and Western government interests, mosques and other religious sites (both Sunni and Shia), and places frequented by U.S. citizens and other Westerners. Additionally, Houthi rebel groups operating in Yemen have fired missiles and rockets into Saudi Arabia, targeting populated areas and civilian infrastructure, and have publicly stated their intent to continue to do so. Missile attacks have targeted major cities such as Riyadh and Jeddah, Riyadh’s international airport, Saudi Aramco facilities, and vessels in Red Sea shipping lanes. The Houthi rebel groups are also in possession of unmanned aerial systems (drones), which they have used to target civilian infrastructure and military facilities in Saudi Arabia. U.S. citizens living and working on or near such installations, particularly in areas near the border with Yemen, are at heightened risk of missile and drone attack.
Please visit https://travel.state.gov/ for further information, including the latest Travel Advisory.
11. Labor Policies and Practices
The Ministry of Labor and Social Development sets labor policy and, along with the Ministry of Interior, regulates recruitment and employment of expatriate labor, which makes up a majority of the private-sector workforce. About 75 percent of total jobs in the country are held by expatriates, who number roughly 12.6 million out of a total population of approximately 33.4 million. The largest groups of foreign workers come from India, Pakistan, Bangladesh, Egypt, the Philippines, and Yemen. Saudis occupy about 96 percent of government jobs, but only about 25 percent of the total jobs in the Kingdom. Over one-third of Saudi nationals are employed in the public sector.
Saudi Arabia’s General Authority for Statistics estimates unemployment at 6.0 percent for the total population and 12.8 percent for Saudi nationals (Q3 2018 figures), but these figures mask a high youth unemployment rate, a Saudi female unemployment rate of 30.9 percent, and low Saudi labor participation rates (42.0 percent overall;19.7 percent for women). With approximately 60 percent of the Saudi population under the age of 30, job creation for new Saudi labor market entrants will prove a serious challenge for a number of years.
The SAG encourages Saudi employment through “Saudization” policies that place quotas on employment of Saudi nationals in certain sectors, coupled with limits placed on the number of visas for foreign workers available to companies. In 2011, the Ministry of Labor and Social Development laid out a sophisticated plan known as Nitaqat, under which companies are divided into categories, each with a different set of quotas for Saudi employment based on company size. Reforms enacted in 2017 refine the program to incentivize further the employment of women, individuals with disabilities, and managerial and high-wage positions. Each company is determined to be in one of four strata based on its actual percentage of Saudi employees, with platinum and green strata for companies meeting or exceeding the quota for their sector and size, and yellow and red strata for those failing to meet it. Expatriate employees in red and yellow companies can move freely to green or platinum companies, without the approval of their current employers, and green and platinum companies have greater privileges with regard to securing and renewing work permits for expatriates.
Over the past few years, the SAG has taken additional measures to strengthen the Nitaqat program and expand the scope of Saudization to require the hiring of Saudi nationals. The Ministry of Labor and Social Development has mandated that certain job categories in specific economic sectors only employ Saudi nationals, beginning with mobile phone stores in 2016. The ministry has since broadened the policy to include car rental agencies, retail sales jobs in shopping malls, and other sectors. The ministry has likewise mandated that only Saudi women can occupy retail jobs in certain businesses that cater to female customers, such as lingerie and cosmetics shops. In 2017, the Ministry of Labor and Social Development began to phase in rules forbidding employment of foreigners in retail sales positions in 12 sectors, including: watches, eyewear, medical equipment and devices, electrical and electronic appliances, auto parts, building materials, carpets, cars and motorcycles, home and office furniture, children’s clothing and men’s accessories, home kitchenware, and confectioneries. Because many retail shops in sectors subject to Saudization are owned and operated by expatriates, these policies have resulted in numerous store closures across the country. Many elements of Saudization and Nitaqat have garnered criticism from the private sector, but the SAG claims these policies have substantially increased the percentage of Saudi nationals working in the private sector over the last several years, despite near-record unemployment levels.
In 2017, the Ministry of Labor and Social Development and the Ministry of Interior launched the latest phase of an ongoing campaign to deport illegal and improperly documented workers. Furthermore, in January 2018, the SAG implemented new fees for expatriate employers (ranging between USD 80 and USD 107 per employee per month), as well as increased levies on expatriates with dependents (a USD 54 monthly fee for each dependent). In January 2019, fees on expatriate employees increased to between USD 133 to USD 160 per month, and levies on expatriate dependents increased to USD 80 per month. These fees are scheduled to increase again in 2020, but no additional increases are planned at this time. The combination of Saudization and Nitaqat policies, new expatriate fees, increased visa and entry/exit permit fees, the new VAT, and other measures that have raised the cost of living, has prompted approximately 1.5 million expatriates to depart the Kingdom over the past two years. These measures have also significantly increased labor costs for employers, both Saudi and foreign alike.
Saudi Arabia’s labor laws forbid union activity, strikes, and collective bargaining. However, the government allows companies that employ more than 100 Saudis to form “labor committees” to discuss work conditions and grievances with management. In 2015, the SAG published 38 amendments to the existing labor law with the aim of expanding Saudi employees’ rights and benefits. Domestic workers are not covered under the provisions of the latest labor law; separate regulations covering domestic workers were issued in 2013, stipulating employers provide at least nine hours of rest per day, one day off a week, and one month of paid vacation every two years.
Saudi Arabia has taken significant steps to address labor abuses, but weak enforcement continues to result in credible reports of employer violations of foreign employee labor rights. In some instances, foreign workers and particularly domestic staff encounter employer practices (including passport withholding and non-payment of wages) that constitute trafficking in persons. The Department’s annual Trafficking in Persons Report details concerns about labor law enforcement within Saudi Arabia’s sponsorship system is available at: https://www.state.gov/trafficking-in-persons-report/
Overtime is normally compensated at time-and-a-half rates. The minimum age for employment is 14. The SAG does not adhere to the International Labor Organization’s convention protecting workers’ rights. Non-Saudis have the right to appeal to specialized committees in the Ministry of Labor and Social Development regarding wage non-payment and other issues. Penalties issued by the ministry include banning infringing employers from recruiting foreign and/or domestic workers for a minimum of five years.
12. OPIC and Other Investment Insurance Programs
The U.S. Overseas Private Investment Corporation (OPIC) ceased operating in Saudi Arabia in 1995 due to the SAG’s failure to take steps to adopt and implement laws that extend internationally recognized workers’ rights to its labor force. Saudi Arabia has been a member of the Multilateral Investment Guarantee Agency since April 1988.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2017||$686,738||2017||$686,738||www.worldbank.org/en/country|
|Foreign Direct Investment||Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||N/A||N/A||2017||$11,085||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Host country’s FDI in the United States ($M USD, stock positions)||N/A||N/A||2017||$14,055||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Total inbound stock of FDI as % host GDP||N/A||N/A||2017||32.8%||UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx|
* Source for Host Country Data: Saudi General Authority for Statistics
Table 3: Sources and Destination of FDI
According to the 2018 UNCTAD World Investment Report, Saudi Arabia’s total FDI inward stock was $232.2 billion and total FDI outward stock was $79.6 billion (in both cases, as of 2017).
Detailed data for inward direct investment (below) is as of 2010, which is the latest available breakdown of inward FDI by country.
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment*||Outward Direct Investment|
|Total Inward||$169,206||100%||Data not available|
|United Arab Emirates||$12,601||7%|
|China, P.R.: Mainland||$9,035||5%|
|“0” reflects amounts rounded to +/- USD 500,000.|
*Source: IMF Coordinated Direct Investment Survey (2010 – latest available complete data)
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$156,967||100%||All Countries||$95,897||100%||All Countries||$61,069||100%|
|United States||$55,449||35.3%||United States||$42,602||44.4%||United States||$12,847||21.0%|
Source: IMF’s Coordinated Portfolio Investment Survey (CPIS); data as of December 2017.
14. Contact for More Information
Economic Section and Foreign Commercial Service Offices
Embassy of the United States of America
P.O. Box 94309
Riyadh 11693, Saudi Arabia
Phone: +966 11 488-3800