WITH Saudi Arabia revising many of its business regulations, the international community has sharpened its focus on investment in the Kingdom. A decade has passed since the conclusion of the Gulf War and international investors once again have confidence in the region’s stability. The Kingdom has the largest population in the GCC, which is important both in terms of local consumption and also for manpower resources. The recent announcement of the foreign firms that will be participating in the nation’s gas sector, has now set the stage for the Kingdom’s third “boom.”
“With the new regulations the business climate in Saudi Arabia has become very aggressive and open,” said Rebhi I. Siyam, financial consultant, Al-Kabra Consulting. “Companies looking for profitable opportunities are quickly realizing that the situation in the Kingdom is the best in the region.”
Siyam is currently working with many investors who are either planning to move directly into this market or who are searching for partners to expand current ventures. He is pleased that in this flurry of business activity, investors are following the international model and turning to consultants for advice before putting forward plans and funding projects.
“People come to me and start discussing concepts like 100 percent ownership of a business and it is quickly apparent that they really aren’t up to date on the latest regulations,” explained Siyam. “Actually it’s been more than 10 years since foreigners were allowed 100 percent ownership of a business. The newest, most exciting changes are the ones that reduce customs tariffs, permit property ownership by foreigners and, of course, the establishment of the one-stop-shop at the General Investment Authority.”
With its expanding population and need to diversify its economic base, the Kingdom is attempting to dismantle all regulations that hinder business development. Siyam gave many examples of how other countries in the region which are considered to be more business friendly — actually are not. He stated that there are some nations in the region that do not allow 100 percent ownership of businesses by foreigners. They insist on sham ownership documents giving 51 percent of the business to a local. Some countries demand that a cash deposit be made at their central bank before a business license will be given. In many nations disposing of an investment or transferring assets is fraught with red tape, if not impossible. Here there is no prohibition. Foreigners often have difficulty competing with nationals for local financing. In Saudi Arabia that is not the case.
“In the Saudi market, foreign investors know that their assets are protected,” said Siyam. “The dollar-riyal rate has been fixed for decades. Any losses caused by fluctuations in currency are borne by the Saudi Arabian Monetary Agency (SAMA). After licenses are issued, investments cannot be taken away without a court order. Even if the project is to be taken over for public use, fair compensation must be given. The government wants projects to continue. If there are any violations or problems in a business once the license has been issued, the license will not be immediately canceled. First, the company will be notified there is a problem and asked to rectify it. Then after a few months incentives will be withdrawn. Next will come financial penalties and only as a last resort would the license be canceled. As you can see, there is nothing arbitrary or impetuous about the process and that makes investors feel confident.”
According to Siyam there are an enormous number of opportunities available to investors — even small investors. He cited that in 1999 the Kingdom’s imports totaled SR104 billion, of which 65 percent were finished goods and 30 percent were semi-finished goods. Importing in this manner added little value to the Saudi economy. There was no transfer of technology and few jobs were created. It is very realistic to expect that more goods should be manufactured locally. The Kingdom supplies many basic services such as electricity and water at subsidized rates. All raw materials to be used in manufacturing processes may be imported duty free. In the industrial cities, land complete with infrastructure may be leased long-term for eight halalas per square meter. Not all of the project’s production has to be consumed locally. The government is very interested in projects that produce goods for export as well.
The General Investment Authority has categorized the investment projects open to foreign investors under four headings. The first is manufacturing. This has a minimum capital requirement of SR5 million of which only 25 percent need to be paid up. Then there is contracting with a minimum investment of SR2 million. Services also require investment of at least SR2 million. Agriculture is more challenging with a minimum investment of at least SR25 million. In general, most areas are open to investors except trading and the negative list. Capital can be cash, assets, and/or intangible rights.
If a foreigner owns his own company then he can sponsor himself, his family and all his employees. The GIA allows special handling of the visas and other legal requirements for the foreign investor and his family. The Cabinet has approved the concept of foreign ownership of land and properties which will allow the investor to own his residence and any other properties necessary for the operation of the business including offices, factories, warehouses and employee compounds. The regulations relating to the implementation of these laws are currently being finalized.
“The government is reviewing every regulation that investors feel is difficult or costing too much,” said Siyam. “We have already seen a dramatic effect of this policy in the reduction of customs duties to 5 percent. It is anticipated that in the near future there may also be a reduction in the level of taxation paid by foreign investors.”
What are the current investment trends that Siyam has noticed? He took out copies of licenses that have recently been issued. Maintenance and contracting are popular. Using the assistance of his office there have been two licenses issued for metal works and one for a radiator factory. Discussions are also ongoing for the shifting of entire factories and workshops from other Middle Eastern countries. At this time Siyam has been contacted by the owners of more than 60 factories and workshops who are looking for investors, foreign or Saudi, to provide the capital needed to move the operations to the Kingdom where the businesses would be more profitable. Some of the operations are owned by women or make products that would be most suitable for manufacture by women and those ventures are actively looking for female partners. A few of these factories have already been selling to this market but due to transport expenses and other factors, their products have not been priced competitively. That would change if the goods were locally manufactured.
“These factories and workshops could be moved complete with all their equipment and technical expertise,” said Siyam. “The Saudi labor market is now prepared to provide the human resources needed for such operations. Saudi employees can easily be hired for reasonable salaries so there really is no rationale to import basic labor. The labor office is very willing to have entire operations run by women so that is an option as well and there are no regulations prohibiting women from owning projects such as factories or workshops.”
Siyam believes that as there are so many opportunities available to foreign investors, this is an excellent time for people to pool their savings and get into the Saudi market. He explained that limited liability companies could be set up with 2-51 partners. This gives an opportunity for investors of modest means to still get a piece of the action. If such a group were formed and went to an investment consultant with their ideas, plans could be drawn up to manage the business risks. Siyam asserted that investors should understand the financial risks and commitments involved throughout every step of the business process from planning through operation and beyond before one riyal is spent on the project.
He also believes that the private sector, including consultants, lawyers and bankers, should be more aggressive in assisting the government in promoting investment in the Saudi economy.
“The GIA is a government department with a limited capacity for promotion,” said Siyam. “GIA Governor Prince Abdullah ibn Faisal ibn Turki is constantly on the move speaking with investors and trying to bring the large cash and technology rich multinationals into this market. It is up to the private sector to work to woo the smaller investors. Our office, Al-Kabra Consulting, has been contacting chambers of commerce in other nations to discuss investment opportunities here. We also have approached our local chamber and requested them to start a monthly investment meeting similar to their monthly businessman’s meeting. This would be a chance for ideas and opportunities to be exchanged. Al-Kabra would be please to sponsor the first meeting. We would hope that the local chambers would also expand their services for women because it would be excellent if more of the financial resources currently being held by women could be put toward stimulating and supporting the local economy. With all the incentives being offered by the government no factory in the world should be able to produce goods at a lower cost than a Saudi factory. Let’s work together to make everyone aware of these incentives so that the national goal of a diversified economy will be achieved.”