Openness to Foreign Investment
Prospective investors will find attractive Saudi Arabia's economic and political stability, the largest market in the Gulf (with a population of over 24 million), sound infrastructure, a well-regulated banking system and relatively high per capita income.
The foreign direct investment law, revised in 2000, permits foreigners to invest in all sectors of the economy, except for specific activities contained in a "negative list" that are off limits to foreign investors. Foreign investors are no longer required to take local partners and may own real property for company activities. They are allowed to transfer money from their enterprises outside of the country and can sponsor their foreign employees. They are also eligible for low-cost funding from the Saudi Industrial Development Fund (SIDF) for up to 50 percent of a project. The new foreign investment law also established minimum levels of investment for agricultural projects (SR 25 million), industrial projects (SR 5 million), and non-industrial projects (SR 2 million).
In April 2000, the Council of Ministers established the Saudi Arabian General Investment Authority (SAGIA) to provide information and assistance to foreign investors. SAGIA's duties include formulating government policies regarding investment activities; proposing plans and regulations to enhance the investment climate in the country; and evaluating and licensing investment proposals. All foreign investment projects must obtain a license from SAGIA. Local investors continue to apply to the Ministry of Commerce and Industry's foreign capital investment committee for licenses.
SAGIA set up an Investor's Service Center (ISC) to provide licenses to foreign companies, provide support services to investment projects, offer detailed information on the investment process, and coordinate with government ministries in order to facilitate investment procedures. The ISC must decide to grant or refuse a license within 30 days of receiving the application and supporting documentation from the investor. SAGIA is trying to make it easier for businessmen to visit the Kingdom and is able to provide sponsorship for visa requests directly without having to ask a local company to sponsor such visits. SAGIA opened a Women's Investment Center in spring 2003.
In February 2001, SAGIA developed a negative list of sectors off-limits to foreign investment. (See www.sagia.gov.sa.) The sectors currently closed to foreign investment include three manufacturing categories and 16 service industries. The list includes real estate investment in Mecca and Medina, some subsectors in printing and publishing, some subsectors of telecommunications, audiovisual and media services, distribution services in wholesale and retail trade, land and air transportation services, fisheries and toxic centers, blood banks, and quarantines. Although these sectors are off-limits to 100 percent foreign investment, foreign minority ownership in joint ventures with Saudi partners may be allowed in some sectors. Insurance and telecommunications sectors are to open to foreign investors in 2004.
Other government bodies, such as the Royal Commission for Jubail and Yanbu, and the Arriyadh Development Authority, have also been active in promoting opportunities in Saudi Arabia's industrial cities and other regions. In addition to the majority government-owned Saudi Arabian Basic Industries Corporation (SABIC), private investment companies, such as the National Industrialization Company, the Saudi Venture Capital Group, and the Saudi Industrial Development Company have also become increasingly active in project development and in seeking out foreign joint venture partners.
The Saudi Industrial Development Fund (SIDF) is an important source of financing for foreign investors. SIDF is a development finance institution affiliated with the Ministry of Finance. The main objective of SIDF is to support the development of the private industrial sector by extending medium to long-term loans for the establishment of new factories and the expansion, upgrading and modernization of existing ones. Foreign investors are eligible to receive low cost financing for up to 50 percent of project costs (i.e., fixed assets, pre-operating expenses and start-up working capital). Loans are provided for a maximum term of 15 years with repayment schedules designed to match projected cash flows for the project in question.
The national oil company, Saudi Aramco, presently conducts all oil exploration and development. In July 2003, the Ministry of Petroleum announced an auction to open up part of the Ghawar area to foreign investors for non-associated natural gas exploration. In January 2004, six companies competed in the auction for the three offered blocks.
Foreign investment in the full upstream hydrocarbon sector will be vital in the coming decades if Saudi Arabia hopes to expand production capacity to meet expected growth in international demand. The greatest foreign investment in Saudi Arabia is found in downstream energy – particularly in oil refining and petrochemicals.
Foreign investment is generally welcome in Saudi Arabia if it promotes economic development, transfers foreign expertise to Saudi Arabia, creates jobs for Saudis, and expands Saudi exports.
Industrial projects normally require at least 25 percent capitalization, although it may be higher for some industries. Additionally, 10 percent of profits must be set aside each year in a statutory reserve until it equals 50 percent of the venture's authorized capital.
Professionals, including architects, consultants, and consulting engineers, are required to register with and be certified by the Ministry of Commerce and Industry in accordance with the requirements defined in the Ministry's Resolution 264, published in 1982. These regulations, permit the registration of Saudi-foreign joint venture consulting firms.
In early summer 2002, the Supreme Economic Council announced the approval of a privatization strategy that outlined the procedures of privatization, sectors to be offered to domestic and foreign investors, and a timetable to transfer certain public services to the private sector. The services include: water and drainage; saline water desalination; telecommunications; air transportation and related services; railways; some sectors of roadways; post services; flour mills and silos; seaport services; industrial cities services; government portions of SABIC, banks, SEC, Maaden, STC, and local refineries; government hotels; sports clubs; some municipality services; some educational services; some social services; some agricultural services; and some health services.
Limited liability companies with at least 50 percent Saudi financing receive preferences for public sector tenders. Companies or citizens from Gulf Cooperation Council (GCC) countries (Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and Oman) may currently own land or engage in internal trading and distribution activities. Similarly, only joint ventures with at least 51 percent GCC ownership interest are permitted to export duty-free to other GCC countries.
SAGIA becomes more engaged in identifying and reducing barriers to foreign investment. The government did announce in early 2002 that it would ease restrictions on the issuance of visas to foreign businessmen to allow greater access to Saudi Arabia.
Conversion and Transfer Policies
There have been no recent changes, nor are there plans to change remittance policies. There are no delays in effect for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal legal channels. There is no need for a legal parallel market for investor remittances.
There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, imported inputs, etc. Since 1986, when the last devaluation occurred, the official exchange rate has been 3.745 Saudi Riyals per U.S. dollar. Transactions occur using rates very close to the official rate. The Saudi Arabian Monetary Agency (SAMA) has intervened at times to keep the exchange rate fixed.
Protection of Property
Saudi Arabia is currently undertaking a comprehensive revision of its laws covering intellectual property rights, with an eye toward bringing them in line with the WTO agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The revisions are being undertaken as a part of joining the WTO, and are being promulgated in coordination with the World Intellectual Property Organization (WIPO). The Saudi Government recently updated their Trademark Law (2002) and Copyright Law (2003) with the dual goals of TRIPS-compliance and effective deterrence against violators.
The Saudi Government has revised its Copyright Law, is devoting increased resources to marketplace enforcement, and is seeking to impose stricter penalties on copyright violators. The Saudi Government has stepped up its efforts to force pirated printed material, recorded music, videos, and software off the shelves of stores.
Trademarks are protected under the Trademark Law. Currently, trade secrets are often protected by contract. Saudi officials relate that the upcoming Unfair Competition Law will protect trade secrets. Also under government review is a law to provide protection for industrial designs, plant varieties, and integrated circuits, although general protection is currently provided under the Patent and Trademark Laws.
Efficient Capital Markets
and Portfolio Investment
Credit is widely available to both Saudi and foreign entities from the commercial banks and is allocated on market terms. Credit is also available from several government credit institutions, such as the Saudi Industrial Development Fund (SIDF), which allocates 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, but there is no true corporate bond market. IPOs are limited.
Currently there are 11 banks operating in Saudi Arabia, ten majority-owned Saudi banks and one GCC bank, Gulf Investment Bank (Bahrain). Four other GCC-based banks, Emirates Bank International (UAE), National Bank of Bahrain, National Bank of Kuwait, and Muscat Bank hold licenses to operate in the Kingdom, but have not yet opened their doors. In 2003, the Saudi Arabian Monetary Agency (SAMA) granted Deutsche Bank the first foreign (non-GCC) banking license in 20 years. In 2004, HSBC, PARIBAS, and JP Morgan applied for and received banking licenses. SAMA seems receptive to new entrants, which should deepen the pool of prospective project financing. The legal, regulatory, and accounting systems practiced in the banking sector are generally transparent and consistent with international norms.
The Saudi Arabian Monetary Agency (SAMA), which oversees and regulates the banking system, generally gets high marks for its prudent oversight of commercial banks in Saudi Arabia. SAMA is the only central bank in the Middle East that is a member and shareholder of the Bank for International Settlements in Basel, Switzerland.
The new Capital Markets Law, passed in 2003, allows for brokerages, asset managers, and other non-bank financial intermediaries to operate in the Kingdom.
Up to now, brokerage and financial management services are available only through commercial banks. New financial firms established under the new law will drive an increase in corporate and consumer finance activity. The IPO market will likely develop slowly as commercial banks and other underwriters gear up to help private Saudi firms go public under the law's streamlined registration procedures. Foreigners, with the exception of GCC citizens, may only invest in the stock market through mutual funds. There is an effective regulatory system governing portfolio investment in Saudi Arabia.