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Investment Climate

 

 

SAUDI ARABIA INVESTMENT CLIMATE    Investment Climate in Saudi Arabia    SAUDI ARABIA INVESTMENT CLIMATE

 

Saudi Arabia’s investment environment reflects the country’s traditions of liberal, open-market private enterprise policies. There are no restrictions on foreign exchange and no restrictions on the repatriation of capital and profits. The Saudi Government officially encourages foreign direct investment. From the earliest days of its industrial development until the present, the Kingdom has sought to harness and benefit from the experience and expertise of foreign companies. The government is especially supportive of foreign investment in joint ventures with Saudi partners, although wholly foreign-owned firms are allowed to operate in the Kingdom without restrictions. Such entities are rare, however, because of the attractive incentives available to firms with at least 25 percent Saudi equity.

The Saudi Government is in the process of revising its foreign investment law to make the investment climate even more favorable for foreign investors. The revised foreign investment law is expected to be announced by the end of 1999. The government is also reviewing its tax codes and customs procedures to streamline the process.

Saudi Arabia is continuing to encourage foreign investment in a manner which will allow it to absorb the benefits of modern technology and know how, while preserving its proud religious and social traditions. Foreign investment in the Kingdom is rising steadily. By March 1999, there were 1,581 joint venture projects in Saudi Arabia, involving $39.6 billion in overall investment, compared with 1,496 projects in January 1998, totaling $38.2 billion. U.S. companies are the leading foreign participants, with 259 joint ventures in the Kingdom. The total value of joint U.S.-Saudi projects was $17.5 billion. Other major investors in Saudi Arabia are Japan, the United Kingdom, France, Switzerland and Germany.

The Ministry of Industry and Electricity is responsible for licensing all foreign direct investment with the exception of banks, which are licensed by the Ministry of Finance and National Economy, and mineral concessions, which are handled by the Ministry of Petroleum and Mineral Resources.

Under the "Foreign Capital Investment Act," foreign capital should be invested in development projects that fit within the framework of the Kingdom’s development plan at the time of the investment. "Development projects" were defined by the Ministry of Industry and Electricity in a February 12, 1990 resolution as including industrial, agriculture, health, contracting, and specialized service projects. In addition, projects that involve technology transfer, and projects that have a Saudi partner owning a minimum of 25 percent equity are strongly favored.


Joint Venture Establishments
March 1999

Sector Number of Projects Investment
$US Billions
Agriculture 10 0.14
Construction 396 0.44
Manufacturing 826 35.63
Mining 70 0.05
Services 279 3.36
TOTAL 1,581 39.62

Source: National Center for Financial and Economic Information, Ministry of Finance and Natrional Economy, Saudi Arabia


The Ministry of Industry and Electricity’s Foreign Capital Investment Committee (FCIC) screens and offers recommendations regarding license applications. The FCIC evaluates joint venture projects according to various criteria that reflect the basic economic goals of Saudi Arabia:

1) Economic diversification (one of the stated goals of the Kingdom’s Sixth Development Plan is to diversify the economy away from strict reliance on petroleum revenues, towards manufacturing and agriculture)

2) Access to modern technology

3) Training and employment of the Saudi labor force

4) Enhanced role of the private sector in Saudi Arabia’s economic development

5) Promotion of exports

Investment Incentives

Approved joint ventures that fulfill the requirements of the Foreign Capital Investment Act are entitled to the same treatment, protection, and incentives accorded to national capital, including:

Pre-investment Assistance: The government will assist in providing information and statistics for investment projects that are within the scope of Saudi Arabia’s development plans to facilitate the preparation of feasibility studies for industrial projects.

Land: In addition to the two cities affiliated with the Royal Commission for Jubail and Yanbu, the Ministry of Industry and Electricity has established eight well-equipped industrial parks in Riyadh, Jeddah, Dammam, Qaseem, Al-Ahsa and Makkah. New industrial parks are being developed in Madinah, Asir, Tabuk, Al-Jouf, and Hail. Plots of land in these parks are available to owners of licensed industrial projects at a nominal rent that is far less than what is found outside the parks.

Services: The government provides electricity, water, and other fuels to industrial projects at low prices. The industrial parks are equipped with public utilities such as roads, desalinated water, sewage, electricity, and telephone; and central services such as mosques, clinics, fire stations, restaurants, post offices and police stations.

Customs Duty Exemption: All commodities entering the Kingdom as input for industrial production are exempted from customs duties.

Company Tax: Foreign industrial companies with 25 percent or more Saudi capital are exempted from taxes for 10 years from the start of commercial operations, and joint non-industrial companies are exempted for five years. In 1993, this exemption was extended to cover profits arising from new capital investments in existing industrial joint ventures.

Industrial Loans: The Saudi Industrial Development Fund provides soft medium and long-term loans to industrial establishments for up to 50 percent of the total cost of the project, provided equity participation is also 50 percent of total financing. If the Saudi share is less than 50 percent, Fund financing will be granted at a proportionately reduced level. The payback period is up to 15 years, with a 2 year grace period from the start of production.

Government Procurement Preference: The government gives preference to national products, and joint ventures with at least 25 percent Saudi equity qualify for this preference. Specifically,

  • Government institutions must give priority to national products in drafting specifications for government projects, as long as they are available at prices no more than 10 percent higher than those of foreign goods. A 5 percent preference is given to goods produced (with at least 40 percent value added) in Gulf Cooperation Council countries by a company that is at least 51 percent owned by GCC nationals.
  • Government advertisements should announce that government institutions give priority to national products.
  • The use of national products must be specified in public works contracts between government institutions and contractors.
  • The Ministry of Industry and Electricity issues a periodic list of national factories to be given priority in government procurement.

Exporting: The government actively encourages the private sector to expand foreign markets for Saudi exports. The following are incentives to Saudi exporters (including joint ventures) to enter foreign markets:

  • Bilateral trade agreements with some Arab countries which give market access to Saudi products.
  • Bilateral "double taxation" relief agreements with some countries.
  • Government participation in regional and international programs for the finance and insurance of exports through its participation in the programs of the Islamic Development Bank, for long-term finance of trade, and the Arab system for insurance of exports licensed by the Arab Investment Guarantee Corporation.
  • 50 percent reduction of port fees on all exports of national industries.
  • Ten day exemption from storage fees for exported goods after clearing Saudi customs.
  • Favorable prices on Saudi Arabian Airlines for the transportation of agricultural and industrial products.

Support for National Industries: The Ministry of Industry and Electricity protects national industries including joint ventures against competition from similar commodities in the local markets. The rules for supporting local industries are:

  • The industries eligible for support shall cover the major portion of local market demand.
  • The products shall be of an acceptable degree of quality.
  • The industry shall be of importance to the economy as a whole.
  • The prices of supported local products must be comparatively higher than those of competing imports due to the higher production costs of the national industries.
  • Customs tariffs are imposed on the products for a period of five years, after which the tariff shall be eliminated.
  • To encourage joint ventures in manufacturing, the government grants tariff protection from competing imports to locally produced, quality goods at rates no higher than 20 percent. The Ministry of Industry and Electricity supervises the prices and quality of production so that an increase in customs duties on the imported commodities does not become a burden on the consumer or allow owners of local factories to make excessive profits.


Industrial Promotion

Government Institutions

The two main roles of the Saudi Government in its effort to diversify the industrial base are to provide the infrastructure and incentives to encourage industrial development and to generate industrial projects to take advantage of the Kingdom’s oil resources.

The Ministry of Industry and Electricity
The Ministry of Industry and Electricity is directly responsible for industrial development, such as the size of industrial projects, their financial allocations and their resources and development goals. The Ministry establishes and adopts the policies, strategies and actions necessary for development of various industrial sectors. The Ministry continuously reviews foreign investment applications that qualify for licensing, incentives, privileges and relevant customs duty exemptions. The Ministry is also responsible for reviewing feasibility studies submitted for new or modified national factories, and for issuing their licenses.

The Ministry’s services include administrative supervision of the industrial parks and their support facilities throughout the Kingdom; preparation of industrial statistics and data for supporting and enhancing industrial sector activities; and, policies and strategies for export development and promotion. The Ministry also prepares the policies for the nationwide electric power generation and electrification projects of the Kingdom.

The Ministry of Finance and National Economy
The Ministry of Finance and National Economy is one of the most important decision making organizations in the Kingdom. Its responsibilities include financial, economic, and fiscal affairs of the Kingdom. The Ministry manages revenues and expenditures, and supervises the economic development of the country. It also oversees the operation of the specialized lending institutions such as the Real Estate Development Fund, the Saudi Arabian Agricultural Bank, the Saudi Industrial Development Fund, the Saudi Credit Bank, and the Saudi Fund for Development. Other departments include the Zakat and Income Department, the Saudi Pension Fund, and the Customs Department.

The Ministry of Planning
The Ministry of Planning directs the Kingdom’s economic development policy and prepares and implements the development strategy through the ministries, organizations, and institutions concerned. Its duties include conducting periodic reports on the different economic sectors in the Kingdom; preparing the comprehensive plan for the development of all economic and social aspects based on the needs of the ministries; following up the planned projects, preparing execution reports, and forwarding them to the Council of Ministers; and preparing financial estimates for the planned projects and gaining the necessary approval from the Council of Ministers. The Ministry of Planning oversees the Central Department of Statistics.

The Ministry of Commerce
The Ministry of Commerce is responsible for internal and external trade. With respect to internal trade, this Ministry is responsible for the supply of trade and for the efficiency and quality of trade and related commercial exchanges. It implements the registration system of firms and trademarks. In cooperation with other government agencies, it monitors the quality of products distributed in the market and is responsible for ensuring the adequate distribution of goods and services within the Kingdom.

With respect to international commercial relations, the Ministry promotes the export of commodities and ensures that imports meet the needs of the country. The Ministry supervises the implementation of international commercial agreements between Saudi Arabia and other countries and international organizations. The Ministry of Commerce also handles Saudi Arabia’s negotiations for its accession to the World Trade Organization.

Organizations

Saudi Consulting House (SCH)
SCH is a specialized government consulting agency affiliated with the Ministry of Industry and Electricity. SCH prepares economic studies, industrial opportunity studies, industrial and marketing surveys, and pre-investment studies. In addition, the SCH provides technical services to factories, monitoring product quality and providing advice on production methods.

Saudi Arabian Standards Organization (SASO)
SASO was established to take responsibility for all activities relating to standards and measurements, including standards development, publication, and promotion. It also drafts regulations for granting certificates of conformity and quality marks for domestic products. SASO maintains cooperation with Arab, regional, and international standards organizations.

Royal Commission for Jubail and Yanbu
The Commission was set up to establish the infrastructure necessary for basic, secondary, supporting and light industries in the industrial cities of Jubail and Yanbu. It was also assigned the tasks of developing institutions to provide civil services, and developing and implementing training programs to upgrade Saudi technical skills. The Commission also bears responsibility for operating, maintaining, and upgrading the infrastructure, as necessary, in Jubail and Yanbu. The Commission has special authority for financial and administrative systems to promote development in the two cities.

Deputy Ministry for Mineral Resources, Ministry of Petroleum & Mineral Resources
This agency conducts all geological surveys, designs and draws maps, and carries out exploration and studies related to the Kingdom’s mineral resources. It also develops and exploits underground mineral resources throughout the Kingdom, and issues licenses for mining projects.

King Abdul Aziz City for Science and Technology (KACST)
The objective of KACST is to support and encourage applied scientific research centers and institutions to meet the Kingdom’s development needs. It is also responsible for promoting cooperation to develop national policies in science and technology in order to build a scientific and technical base to meet the development needs of agriculture, industry, mining and other sectors.

The General Organization for Technical Education and Vocational Training (GOTEVOT)
GOTEVOT was established in 1980 to implement plans and programs for training Saudi national, professional and technical manpower in industry and commerce. It provides all forms of vocational training and conducts research and vocational studies for developing performance and productivity.

The General Grain Silos and Flour Mills Organization
This organization, set up in 1972, is under the Ministry of Agriculture and Water. It manages grain silos with total storage capacity of 2,380,000 metric tons of wheat and 200,000 tons of barley. The organization is also involved in the improvement of existing types of wheat flour, and the production of new types.

Meteorology & Environmental Protection Administration (MEPA)
The Meteorology Department was originally set up in 1956. In 1981, the Department was empowered to protect the environment and natural resources and its name was changed to MEPA.

The Council of Saudi Chambers of Commerce & Industry
The Council was established in Riyadh in 1980 to look after the joint interests of all chambers of commerce and to represent them locally and internationally. It acts to coordinate among the chambers and to expand their activities in serving and developing the private sector.

The Chambers of Commerce and Industry
There are 21 chambers of commerce and industry in the major cities of the Kingdom: Riyadh, Jeddah, Dammam, Makkah, Madinah, Qaseem, Yanbu, Taif, Abha, Al-Majma’a, Tabuk, Al-Ahsa, Hail, Al-Baha, Al-Jouf, Jizan, Arar, Hafer Al-Baten, Najran, Bisha, Al-Qurayat. Most of the chambers periodically publish a guide of the existing factories in their area. The chambers promote industrial development, assist Saudi contractors, provide information and technical services to agricultural investors, and provide statistics and information.

Saudi Industrial Development Fund (SIDF)
The Fund was established in 1974 as a financial body affiliated with the Ministry of Finance and National Economy to encourage industrial development in the private sector by granting soft medium- and long-term loans of up to 50 percent of the total cost of a project.

Corporations

The Saudi Basic Industries Corporation (SABIC)
SABIC was established in 1976, with SR 10 billion ($3 billion) capital to establish and operate basic industries that depend on local hydrocarbon, mineral resources and other complementary and supporting industries to market their products. The Government owns 70 percent of the shares, and the private sector owns 30 percent.

In the 20 years since its founding, SABIC has developed a network of world-class manufacturing complexes that are meeting the need for basic industrial products in more than 75 countries around the world. SABIC now maintains 15 production compnanies in Saudi Arabia, 3 production companies in Bahrain (as joint venture partner), and several marketing subsidiaries worldwide.

SABIC’s Industrial Complex for Research and Development was established in the Second Industrial City in Riyadh. It has made significant progress in advancing SABIC’s technological growth, developing new products, and diversifying applications for existing products.  SABIC also has an R&D facility in Houston.

Saudi Arabian Oil Company (Saudi Aramco)
In 1933, the Saudi Ministry of Finance and Standard Oil Company of California signed an agreement for oil exploration. Late in 1940, Exxon, Texaco, and Mobil joined the operation, establishing the Arabian American Oil Company (Aramco). In 1970, it was decided that the company would be fully owned by the Saudi Government and managed by the American venture partners. By 1990, Saudi Aramco was fully operating most of the Saudi oil fields and producing more than 90 per cent of the country’s oil and gas, in addition to carrying out a massive scheme to explore more areas in the Kingdom.

Saudi Aramco’s activities include research, exploration, production, refining and export of petroleum and its derivatives such as crude oil, natural gas, liquefied gas, asphalt, sulfur, and all other hydrocarbon materials and their products.

The Saudi Export Development Center
The Center was established in 1986 at the initiative of the private sector and with the encouragement of government authorities to give the private sector a role in boosting Saudi exports. The Center began its activities under the umbrella of the Council of Saudi Chambers of Commerce and Industry. The Center collects information and conducts studies on foreign market conditions, publishes information, and promotes products and services in the Saudi media. It also organizes exhibitions and trade fairs abroad to promote national products and services.

The Saudi Industrial Exports Company
This company was established in 1989 to develop the export of Saudi industrial products and to open new markets for local factories to promote industry and other productive sectors. The initial capital of the company is SR 50 million, ($13.3 million) and it is fully owned by the private sector.

The Saudi Arabian Mining Company (Ma’aden)
Ma’aden was established in April 1997 to engage in and operate all mining and mineral related activities on a commercial and profitable basis. The company’s capitalization of $1.07 billion represents the share of the General Organization for Petroleum and Minerals (Petromin), which was liquidated in early 1997. Ma’aden is wholly owned by the Saudi Government, but plans call for Ma’aden to offer all or part of the company’s shares for public subscription during its sixth year of incorporation.

The Industrial Investment Groups
The government encourages the private sector to establish investment groups that will cooperate in setting up industrial projects to contribute towards the Kingdom’s national economic objectives, including the diversification of sources of national income and the transfer of advanced industrial technology. Investment groups set up to date include:

  • The National Industrialization Company (NIC)
  • The Saudi Investment Group
  • Madinah Al-Munawarah Industrial Investment Company
  • The National Operation and Industrial Services Co. Ltd.
  • Gulf Industrial Investment Company
  • The Saudi Industrial Development Company

The government is not alone in promoting investment opportunities. In addition to majority government-owned firms like Saudi Basic Industries Corporation (SABIC), private investment companies like National Industrialization Company, the Saudi Venture Capital Group, the Saudi Industrial Development Company, and the Saudi Industrial Export Company are also active in project development and in locating foreign joint venture partners. These companies have tended to focus their efforts on investment in the petrochemical, plastics and metal, agro-industry, maintenance, advanced information processing, high-technology engineering, and defense industries. The private sector’s role in investment will grow as the government continues to privatize certain commercial activities under the Sixth Development Plan.

Economic Offset Program
Further investment opportunities for technology-intensive companies can be found in the private sector in the Economic Offset Program (EOP). Saudi Arabia requires the winners of many major government tenders to reinvest a portion of the award in the local economy. The Offset Program covers military (as well as some major civilian) contracts and encourages firms from the U.S., Britain, and France to set up local high-tech plants in joint ventures with Saudi companies. The program creates new diversified industries, increases training and productivity, facilitates technology transfers, and stimulates economic growth which is fueled by the private sector. Proposals are evaluated by the Saudi Economic Offset Committee.

Typically, the Offset Program requires an investment of about 35 percent of contract value, giving the foreign company 10-12 years to identify potential investment projects, receive approval, find Saudi partners, and initiate operations. Projects under the various branches of the program are expected to generate substantial new investment opportunities through the year 2000.

Among the major American companies involved in the program are Boeing, General Dynamics, Hughes, General Electric, United Technologies, and AT&T. Boeing, through its subsidiary holding group, the Boeing Industrial Technology Group, has formed four high-technology firms capitalized at over SR 325 million. Hughes Aircraft Systems has been active in setting up a battery facility for its parent, General Motors. AT&T (Lucent Technologies) has an offset investment requirement for viable industrial joint ventures and has been an active participant in the Kingdom’s ongoing telecommunications expansion program.

Regulations on Exchange Transactions
The Saudi economy is based on the principles of free enterprise. There are no restrictions on the transfer of capital, or on exports and imports of goods and services. Therefore, there are no taxes, subsidies, or restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments). There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property or imported inputs. Investors are not required to purchase from local sources or export a certain percentage of output, and their access to foreign exchange is not linked to the level of their exports. There is no requirement that the share of foreign equity be reduced over time. In addition, the government does not impose conditions on investment such as locating in a specific geographic area, a specific percentage of local equity, substitution for imports, export requirements or targets, or financing only by local institutions. Investors are not required to disclose proprietary information to the Saudi Government as part of the regulatory approval process.

 

 

 

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