Identifier
Created
Classification
Origin
07RIYADH364
2007-02-24 08:49:00
UNCLASSIFIED
Embassy Riyadh
Cable title:  

SAUDI ARABIA'S INVESTMENT CLIMATE STATEMENT

Tags:  ECON EINV EFIN EPET PGOV SA 
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UNCLAS SECTION 01 OF 11 RIYADH 000364 

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DOC FOR GLOOSE AND THOFFMAN
STATE PLS PASS USTR FOR PBURKHEAD

E.O. 12958: N/A
TAGS: ECON EINV EFIN EPET PGOV SA
SUBJECT: SAUDI ARABIA'S INVESTMENT CLIMATE STATEMENT

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2007 Investment Climate Statement
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UNCLAS SECTION 01 OF 11 RIYADH 000364

SIPDIS

SIPDIS

DOC FOR GLOOSE AND THOFFMAN
STATE PLS PASS USTR FOR PBURKHEAD

E.O. 12958: N/A
TAGS: ECON EINV EFIN EPET PGOV SA
SUBJECT: SAUDI ARABIA'S INVESTMENT CLIMATE STATEMENT

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2007 Investment Climate Statement
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1. Chapter Headings:

-- Openness to Foreign Investment
-- Conversion and Transfer Policies
-- Expropriation and Compensation
-- Dispute Settlement
-- Performance Requirements and Incentives
-- Right to Private Ownership and Establishment
-- Protection of Property Rights
-- Transparency of Regulatory System
-- Efficient Capital Markets and Portfolio Investment
-- Political Violence
-- Corruption
-- Bilateral Investment Agreements
-- OPIC and Other Investment Insurance Programs
-- Labor
-- Foreign-Trade Zones/Free Ports
-- Foreign Direct Investment Statistics

--------------
Openness to Foreign Investment
--------------


2. Saudi Arabia in 2006 is experiencing an oil boom
unprecedented since the mid 1970,s, with a government budget
surplus of over $70 billion in 2006, and large infrastructure
construction underway. Nevertheless, foreign direct
investments inflows were only about $5 billion in 2006.
Improvement of the investment climate is an important part of
the Saudi Government's broader program to liberalize the
country's trade and investment regime, diversify an economy
overly dependent on oil and petrochemicals, promote
employment for a very young population, and become an active
player in the World Trade Organization (WTO) following its
accession in December 2005.


3. The Government encourages investment in infrastructure,
including power, water, telecommunications and
transportation. Prospective investors will find attractive
Saudi Arabia's economic 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.


4. There are also disincentives to investment, specifically,
lack of transparency in the enforcement of intellectual
property rights, a government requirement that companies hire
Saudi nationals, slow payment of some government contracts,

an increasingly restrictive visa policy for all workers, a
very conservative cultural environment, and enforced
segregation of the sexes in most business and social
settings. The government must take steps to ensure that
there is a transparent, comprehensive legal framework in
place for resolving commercial disputes.


5. Prospective foreign investors want standardized treatment
for corporate taxes, access to a skilled, motivated labor
force, the enforcement of foreign arbitration awards to be
upheld in practice, clear and transparent mechanism to reduce
and stop counterfeit products from entering Saudi Arabia, and
protection of intellectual property rights that meets
international standards.


6. 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
list8 that are off limits to foreign investors. This list
continues to shrink as Saudi Arabia attempts to liberalize
trade. Foreign investors are no longer required to take
local partners and may own real estate for company
activities. They are allowed to transfer money from their
enterprises outside of the country and can sponsor 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 cost. The new foreign investment law
established minimum levels of investment which are currently
agricultural projects USD 6.67 million, industrial projects
USD .27 million, and company service projects USD 0.13
million. However, to ensure compatibility with WTO rules,
these requirements should be removed through application of
national treatment.


7. In April 2000, the Council of Ministers established the
Saudi Arabian General Investment Authority (SAGIA) to provide

RIYADH 00000364 002 OF 011


information and assistance to foreign investors, and to
foster investment opportunities in energy, transportation,
and knowledge-based industries (See www.sagia.gov.sa). The
Authority operates under the umbrella of the Supreme Economic
Council, and is headed by SAGIA Governor Amr Al Dabbagh.
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, and investments in specific sectors may require
licenses from other government authorities, including, but
not limited to, the Saudi Arabian Monetary Agency, the
Capital Market Authority or the Communications and
Information Technology Commission.


8. 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 an application and supporting documentation from
the investor. In 2006, SAGIA licensed 1,389 joint and
foreign investment projects worth a total of USD 67 billion.
The value of projects licensed increased by 25 percent from
the previous year. Actual foreign direct investments
inflows, however, were limited to about $5 billion.


9. Unfortunately, to date SAGIA does not appear to have
lived up to the high expectations engendered by its creation.
Investors complain that impediments remain many outside
SAGIA,s capability to correct. To date, SAGIA has 23
agreements with various Saudi government agencies and
ministries to facilitate and streamline foreign investment
procedures. Some of these agreements include facilitating
entry visas, establishing SAGIA branch offices at Saudi
Embassies in different countries, facilitating the issuance
of workers, visas, raising import tariff exemptions on raw
materials to three years and increasing the exemptions on
production and manufacturing equipment to two years, and the
establishment of commercial courts. To make it easier for
businesspeople to visit the Kingdom, SAGIA can sponsor visa
requests directly without having to ask a local company to
sponsor such visits. Saudi Arabia issued a decree stating
that sponsorship for certain business visas are no longer
required, but Saudi embassies have yet to implement the
decree. SAGIA opened a Women,s Investment Center in spring

2003.


10. 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 15
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 except railroad on a BOT basis, and upstream
petroleum. SAGIA periodically reviews the list of activities
excluded from foreign investment, and submits its reviews to
the Supreme Economic Council for approval. 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 were opened to foreign investors
in 2004.


11. Under accession to the WTO, Saudi Arabia committed to
opening additional service markets to foreign investment,
including financial and banking services, maintenance and
repair of aircraft and computer reservation systems,
wholesale, retail and franchise distribution services, both
basic and value-added telecom services, and 100% foreign
equity investment in the computer and related services
sector. Saudi Arabia has not yet opened these markets
pursuant to the WTO commitments.


12. Other government bodies, such as the Royal Commission
for Jubail and Yanbu, and the Arriyadh Development Authority,
have actively promoted 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

RIYADH 00000364 003 OF 011


Capital Group, and the Saudi Industrial Development Company
have also become increasingly active in project development
and in seeking out foreign joint venture partners.


13. The Saudi Industrial Development Fund (SIDF) is an
important source of financing for 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.


14. Saudi Arabian regulations currently close oil
exploration, drilling, and production to foreign investment.
The national oil company, Saudi Aramco, presently conducts
all oil exploration and development. Foreign companies,
under current Saudi law, cannot purchase a stake in Aramco or
take an equity position in the upstream oil sector. In July
2003, however, 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. Russia,s Lukoil, China,s Sinopec, and a joint bid
by Italy,s Eni and Spain,s Repsol were awarded blocks,
signing 40-year exploration and production contracts with the
Saudi Minister of Petroleum in March 2004. The deals mark
the first time since nationalization of ARAMCO in 1980 that
foreign oil companies have been permitted to carry out
petroleum exploration activities in Saudi Arabia. Saudi
Arabia, as part of its WTO Accession Agreement with the
United States, made a broad range of positive commitments
that should result in the substantial opening of its energy
service market. These commitments should allow U.S. energy
service firms to compete on a level playing field for energy
services projects associated with oil and gas exploration and
development, pipeline transport of fuels, and management of
consulting services.


15. In contrast, there is no prohibition on foreign
investment in refining and petrochemical development and
there is significant foreign investment in the downstream
Saudi energy sector. Foreign investment in the full
hydrocarbon sector will be vital in the coming decades if
Saudi Arabia hopes to expand production and refining capacity
to meet expected growth in international demand. Exxon Mobil
and Shell are the largest foreign investors in Saudi Arabia;
both are 50% partners in refineries with Saudi Aramco. Saudi
Aramco announced the selection of two firms, ConocoPhillips
and Total, to join as equity partners in two new USD 4 to 5
billion export refineries in the country scheduled for
completion in 2009. Both firms are currently engaged in
negotiating the terms of these joint ventures.


16. In addition, Exxon Mobil, Chevron Texaco, and Shell, as
well as several other international investors, have formed
joint ventures with the Saudi Arabian Basic Industries
Corporation (SABIC),a Saudi parastatal, to build world-scale
petrochemical plants that utilize gas feedstock from Saudi
Aramco. Aramco selected the Dow Chemical Company as its
partner in a joint venture company to construct, own and
operate a chemicals and plastics production complex in Saudi
Arabia,s Eastern Province.


17. The government uses its purchasing power to encourage
foreign investment. In 1985, the Saudi Government reached an
agreement with American defense contractors for "offset"
joint venture investments with local investments equivalent
to 35 percent of the program's value. British and French
defense firms also have offset requirements. Offset
requirements are likely to remain components of major defense
purchases and have been incorporated into other large Saudi
Government contracts.


18. Joint ventures almost always take the form of limited
liability partnerships. There are, however, disadvantages.
Foreign partners in service and contracting ventures
organized as limited liability partnerships must pay in cash
or kind 100 percent of their contribution to authorized
capital. SAGIA,s authorization is only the first step for
setting up such a partnership. Still, foreign investment is
generally welcome in Saudi Arabia if it promotes economic
development, transfers foreign expertise to Saudi Arabia,

RIYADH 00000364 004 OF 011


creates jobs for Saudis, and expands Saudi exports.


19. Industrial projects previously required at least 25
percent capitalization, sometimes higher for specific
industries, but Saudi Arabia committed to removing this
requirement as part of WTO accession. 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 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 an office in Saudi Arabia without a Saudi
partner. However, offices practicing law, accounting and
auditing offices, design, architectural, and engineering,
civil planning, healthcare services, dentistry, and
veterinary services, must have a Saudi partner; the foreign
partner,s equity cannot exceed 75 percent of the total
investment.


20. In 2002, the Supreme Economic Council announced the
approval of a privatization strategy and procedures, sectors
on offer to domestic and foreign investors, and a timetable
to transfer certain public services to the private sector.
Twenty state-owned companies handling water and drainage;
saline water desalination; telecommunications; mining; power;
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, and local refineries; government
hotels; sports clubs; some municipality services; some
educational services; some social services; some agricultural
services; and some health services were slated for
privatization.


21. As a result of the privatization strategy, the Saudi
Telecommunications Company (STC) floated a minority stake
(approximately 20%) on the stock market in January 2003,
netting the Saudi Government close to $4 million in proceeds.
An additional 10% has since been offered for private
ownership. The initial public offering of 50% of the
formerly state-owned National Company for Cooperative
Insurance (NCCI) was completed in January 2005. The first
SABIC offering went public on December 17, 2005 for 35
percent of the newly-formed Yanbu National Petrochemical
Company (YANSAB),capitalized at $1.5 billion. YANSAB will
be SABIC,s largest petrochemical complex and the IPO
represents $533 million of the company,s capital.


22. In July 2003, the government took significant,
long-awaited steps to lower the corporate tax rate on foreign
investors to a flat 20%; however, separate rates will apply
to investments in hydrocarbons. The flat tax replaced a
tiered system with tax rates as high as 45%. While this is a
welcome step toward a more balanced treatment for foreign and
Saudi owned capital, there are privileges and preferences in
Saudi Arabia that favor Saudi companies and joint ventures
with Saudi participation. For example, domestic corporate
partners do not pay corporate income tax, but are subject to
a 2.5 percent tax on net current assets, or "Zakat."


23. Limited liability companies with at least 50 percent
Saudi equity 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. Together, these
conditions can disadvantage a foreign investor attempting to
operate a wholly foreign-owned company in Saudi Arabia.
Conditions are expected to improve, as SAGIA becomes more
engaged in identifying and reducing barriers to foreign
investment. The government announced in 2002 it would ease
restrictions on the issuance of visas to foreign businessmen
to allow greater access, and decreed in 2005 that sponsor
requirements for business visas would be lifted. However,
implementation has not yet occurred, and visiting business
people typically receive short duration, single-entry visas.


24. American and other foreign firms are able to participate
in Saudi government-financed and/or government-subsidized
research and development programs on a national treatment
basis.

RIYADH 00000364 005 OF 011



--------------
Conversion and Transfer Policies
--------------


25. There are no restrictions on converting and transferring
funds associated with an investment (including remittances of
investment capital, earnings, loan repayments, and lease
payments) into a freely usable currency at a legal
market-clearing rate. 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.


26. 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),the
Central Bank, has intervened at times to keep the exchange
rate fixed.

--------------
Expropriation and Compensation
--------------


27. The Embassy is not aware of the Saudi Government ever
expropriating property. There have been no expropriating
actions in the recent past or policy shifts that would lead
the Embassy to believe there may be such actions in the near
future.

--------------
Dispute Settlement
--------------


28. Saudi commercial law is still developing, but in 1994
the Saudis took the positive step of joining the New York
Convention of 1958 on the Recognition and Enforcement of
Foreign Arbitral Awards. Saudi Arabia is also a member of
the International Center for the Settlement of Investment
Disputes (ICSID, also known as the Washington Convention).
However, dispute settlement in Saudi Arabia continues to be
time-consuming and uncertain. Even after a decision is
reached in a dispute, effective enforcement of the judgment
can still take years. The Embassy suggests that American
firms investing in Saudi Arabia include in contracts a
foreign arbitration clause. Such clauses are not, however,
allowed in government contracts without a decision by the
Saudi Council of Ministers.


29. Saudi litigants have an advantage over foreign parties
in almost any investment dispute because of their first-hand
knowledge of Saudi law and culture, and the relatively
amorphous dispute settlement process. Foreign partners
involved in a dispute find it advisable to hire local
attorneys with knowledge of Saudi legal practices. Many
Saudi attorneys, in turn, retain non-Saudi (and particularly
American) lawyers to facilitate the handling of disputes
involving foreign investors.


30. In several cases, disputes have caused serious problems
for foreign investors. For instance, Saudi partners have
blocked foreigners' access to exit visas, forcing them to
remain in Saudi Arabia against their will. In cases of
alleged fraud, foreign partners may also be jailed to prevent
their departure from the country while awaiting police
investigation or adjudication of the case. Courts can impose
precautionary restraint of personal property pending the
adjudication of a commercial dispute. As with any investment
abroad, it is important that U.S. investors take steps to
protect themselves by thoroughly researching the business
record of the proposed Saudi partner, retaining legal
counsel, complying scrupulously with all legal steps in the
investment process, and securing a well-drafted agreement.


31. In December 2005, the Saudi government announced the
formation of the Saudi International Arbitration Commission
(SIAC),the first formal arbitration program for the business
community. The SIAC falls under the Saudi chapter of the
International Chambers of Commerce, and has adopted the same
arbitration system employed by the International Court of
Arbitration. The Government, due to past fiscal constraints,

RIYADH 00000364 006 OF 011


had in the past fallen into arrears on payments to private
contractors, both Saudi and foreign. Some companies carried
Saudi Government receivables for years before being paid.
The Government appears committed to clearing remaining
arrears.


32. The Saudi legal system is derived from the legal rules
of Islam known as the Shari,a. The Ministry of Justice
oversees the Shari,a-based judicial system, but most
Ministries have committees to rule on matters under their
jurisdiction. Many disputes which would be handled in a court
in the U.S., in Saudi Arabia are handled through
administrative processes within the relevant ministry.
Generally, the Board of Grievances has jurisdiction over
disputes with the government and commercial disputes. In
November 2005, a royal decree passed approving the
establishment of commercial courts.


33. Of interest to investors who have disputes with private
individuals are the Committees for Labor Disputes (under the
Ministry of Labor),and the Committee for Tax Matters (under
the Negotiable Instruments Committee, also called the
Commercial Paper Committee). The Ministry of Finance has
jurisdiction over disputes involving letters of credit and
checks, while the Banking Disputes Committee of the Saudi
Arabian Monetary Agency (SAMA) adjudicates disputes between
bankers and their clients. Judgments of foreign courts are
not yet accepted and enforced by Saudi courts, despite Saudi
Arabia's signature of the New York Convention. Monetary
judgments are based on the terms of the contract; i.e., if
the contract were in dollars, the judgment would be in
dollars; if unspecified, the judgment is denominated in Saudi
Riyals. Non-material damages and interest are not included
in monetary judgments.


34. Saudi Arabia has a commercial law that is generally
applied consistently. Bankruptcy law was enacted by Royal
Decree no. N/16 dated 4/9/1416H (corresponding to 1/24/96).
Articles contained in the law allow debtors to conclude
financial settlements with their creditors through committees
under the Saudi Chambers of Commerce and Industry or through
the Board of Grievances. Designated as the Regulation on
Bankruptcy Protective Settlement, the law is open to ordinary
creditors except in the case of debts of expenditures,
privileged debts and debts, which arise pursuant to the
settlement procedures.

--------------
Performance Requirements and Incentives
--------------


35. Under the 1969 Labor and Workman Regulations, 75 percent
of a firm's work force and 51 percent of its payroll must be
Saudi, unless the Ministry of Labor has granted an exemption.
In practice, the percentage of Saudis employed by a firm is
often far less. The number of Saudis in the private sector
labor force is approximately 10 percent. More Saudis work in
the public sector. In 1996, the Saudi Government implemented
a regulation establishing a quota system that required each
company employing over 20 workers to increase the number of
Saudi employees by a minimum of five percent. The government
increased the requirement by five percent per annum, and
would have reached 45 percent of a firm's workforce in 2005.
However, the recently published 2005 Labor Law set a standard
limit requiring that Saudi Nationals constitute 75% of a
firm,s workforce. Companies not complying with the Saudi
minimum personnel rule will not be given visas for expatriate
workers. Few firms have been able to meet these requirements.
Foreign firms are under constant pressure to employ more
Saudis. The list of jobs/positions that may no longer be
held by non-Saudis is expanding.


36. Investors are not currently required to purchase from
local sources or export a certain percentage of output and
their access to foreign exchange is unlimited. There is no
requirement that a share of foreign equity be reduced over
time. The Government does not impose conditions on
investment such as locating in a specific geographic area, a
specific percentage of local content or local equity,
substitution for imports, export requirements or targets, or
financing only by local sources. Investors are not required
to disclose proprietary information to the Saudi government
as part of the regulatory approval process.
Nonetheless, the Saudi Industrial Development Fund (SIDF)
will provide additional incentives and better term loans to
foreign investors who set up their manufacturing facilities
in Jizan, Hail, and Tabuk.


RIYADH 00000364 007 OF 011


--------------
Right to Private Ownership and Establishment
--------------


37. Domestic private entities have the right to establish
and own business enterprises and engage in all forms of
remunerative activity. Private entities generally have the
right to freely establish, acquire, and dispose of interests
in business enterprises. Certain activities are reserved for
state monopolies and Saudi citizens.

--------------
Protection of Property Rights
--------------


38. The Saudi legal system protects and facilitates
acquisition and disposition of private property, consistent
with Islamic practice respecting private property. Non-Saudi
corporate entities are allowed to purchase real estate in
Saudi Arabia according to the new foreign investment code,
although it is unclear how this policy is being implemented.
Other foreign-owned corporate and personal property is
protected, and the Embassy knows of no cases of government
expropriation or nationalization of U.S.-owned assets in the
Kingdom.


39. Saudi Arabia recently undertook a comprehensive revision
of its laws covering intellectual property rights, to bring
them in line with the WTO agreement on Trade Related Aspects
of Intellectual Property Rights (TRIPS). The Saudi
Government undertook the revisions as part of Saudi Arabia's
accession to the WTO, and promulgated them in coordination
with the World Intellectual Property Organization (WIPO).
The Saudi Government recently updated their Trademark Law
(2002),Copyright Law (2003),and Patent Law (2004) with the
dual goals of TRIPS-compliance and effective deterrence
against violators.


40. The current Law on Patents, Layout Designs of Integrated
Circuits, Plant Varieties and Industrial Designs has been in
effect since September 2004. Largely due to a lack of
adequate resources and technical expertise, the patent office
issued slightly more than 40 patents and had a large backlog
of more than 9,000 applications dating back to issuance of
Saudi Arabia,s first patent law in 1989. The office
recently streamlined its procedures, hired more staff and
reduced the backlog. Protection is available for product and
product-by-process. The term of protection was increased
from 15 years to 20 years under the new law, but patent
holders can no longer apply for a routinely granted five-year
extension. Pharmaceutical companies have complained of
problems related to the terms of protection for their
products.


41. American companies with patents pending have also
expressed concern that the new patent law will result in
denial of patent protection when applied retroactively to a
pending patent application. Pending cases since 1989 have
been reportedly denied because the applications were not
filed within one year of the product,s inception.


42. 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 efforts to
force pirated printed material, recorded music, videos, and
software off the shelves of stores. However, many pirated
materials are still available in the marketplace. An Islamic
ruling, or &fatwa,8 stating that software piracy is
&forbidden8 backs enforcement efforts. Saudi Arabia
remains on the Special 301 Watch List for 2008.


43. Trademarks are protected under the Trademark Law. Trade
secrets are not specifically protected under any area of

SIPDIS
Saudi law; however, they are often protected by contract.
The Rules for Protection of Trade Secrets came into effect in

2005. Saudi Arabia has one of the best Trademarks Law in the
region, but enforcement still lags, and procedures are
inconsistent.

--------------
Transparency of Regulatory System
--------------


44. There are few aspects of the Saudi government's
regulatory system that are transparent, although Saudi
investment policy is less opaque than many other areas. Saudi
tax and labor laws and policies tend to favor high-tech

RIYADH 00000364 008 OF 011


transfers and the employment of Saudis rather than fostering
competition. Saudi health and safety laws and policies are
not used to distort or impede the efficient mobilization and
allocation of investments. Bureaucratic procedures are
cumbersome, but red tape can generally be overcome with
persistence.

-------------- --------------
Efficient Capital Markets and Portfolio Investment
-------------- --------------


45. Saudi Arabia has generally free and open financial
markets, although foreigners are still not permitted to
invest in the stock market. These limits are gradually
relaxing. Financial policies generally facilitate the free
flow of private capital and currency can be transferred in
and out of Saudi Arabia without restriction. In 2003, SAMA,
the Central Bank, enhanced and updated its 1995 Circular on
Guidelines for the Prevention of Money Laundering and
Terrorist Financing. The enhanced guidelines are more
compliant with the Banking Control Law, the Financial Action
Task Force (FATF) 40 Recommendations, the 8 Special
Recommendations on Terrorist Financing, and relevant UN
Security Council Resolutions.


46. 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
gaining steam as the Saudi stock market evolves with new
regulations and a Stock Market Commission in place. The IPO
market will likely develop in a much faster pace as
commercial banks and other underwriters gear up to help
private Saudi firms go public under the law's streamlined
registration procedures.


47. As part of the economic reforms initiated for accession
to the WTO, Saudi Arabia liberalized licensing requirements
for foreign investment in the financial services. In
addition, the government increased foreign equity limits in
financial institutions from 40% to 60% to entice further
foreign investment. In the last few years, the Saudi
government has taken steps to increase foreign participation
in its banking sector by granting operating licenses to
foreign banks. Deutsche Bank, J.P. Morgan and the National
Bank of Bahrain are among those currently licensed to operate
in the Kingdom.


48. 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.


49. The new Capital Markets Law, passed in 2003, allows for
brokerages, asset managers, and other non-bank financial
intermediaries to operate in the Kingdom. The law created a
market oversight body, the Capital Market Authority, and an
independent, publicly held stock exchange, Tadawul, both
established in 2004. New financial firms established under
the new law will drive an increase in corporate and consumer
finance activity. In 2005, HSBC, Osul Financial, and
Saudi-Swiss Financial received licenses to provide investment
banking and brokerage services. In addition, licenses were
also granted to Deutsche Bank, BNP-Paribas, Muscat Bank,
National Bank of Kuwait, as well as to the State Bank of
India, and National Bank of Pakistan. 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.


50. After a record year in 2005, the Saudi stock market
performed unevenly in 2006, at one point suffering a single
month drop in market capitalization of approximately 30%. The
market stabilized, and in 2006, the Tadawul All Share Index
(TASI) closed at 54,440 points, with market capitalization
declining approximately 50% over the previous year to USD 650
billion.

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--------------
Political Violence
--------------


51. The Department of State continues to warn American
citizens to defer non-essential travel to Saudi Arabia due
largely to targeted attacks against American citizens that
have resulted in deaths and injuries. There have been a
number of anti-Western attacks in Saudi Arabia since May

2003. Terrorists have targeted housing compounds,
businesses, and Saudi government facilities with
vehicle-borne explosives and automatic weapons causing
significant civilian deaths and serious injuries, and in
separate incidents have held hostages and killed individual
Westerners, including American citizens. On December 6,
2004, terrorists carried out an armed attack against the U.S.
Consulate General in Jeddah, which resulted in casualties
among the Consulate staff and damage to consulate facilities.


52. The U.S. Embassy, working closely with Saudi security
officials, periodically advises American citizens of
potential security concerns.

--------------
Corruption
--------------


53. Saudi Arabia has some, albeit limited, laws aimed at
curbing corruption. For example, the agency law
theoretically limits a Saudi agent's commission to five
percent of the value of a contract.


54. Foreign firms have identified corruption as an obstacle
to investment in Saudi Arabia. Government procurement is an
area often cited, as is de facto protection of businesses in
which senior officials or elite individuals have a stake.
Bribes, often disguised as &commissions," are reputed to be
commonplace.


55. Ministers and other senior government officials
appointed by royal decree are forbidden from engaging in
business activities with their ministry or government
organization while employed there. There are few cases of
prominent citizens or government officials being tried on
corruption charges.


56. In June 2004, the Council of Ministers approved the
Tenders Law of Saudi Arabia, which is expected to
significantly improve transparency within government
procurement. A June 2003 law requires the publication of
select details of government contracts as well as projects
listed in the government's project.

--------------
Bilateral Investment Agreements
--------------


57. Saudi Arabia has signed 17 bilateral investment treaties
with other countries, including most recently in 2006 India,
Turkey, Spain, Singapore, and Switzerland. At present,
however, there is no bilateral investment treaty in force
between the United States and Saudi Arabia, although both
sides have exchanged draft texts for review. GCC countries
and their nationals receive favorable investment treatment
derived from GCC agreements.

--------------
OPIC and Other Investment Insurance Programs
--------------


58. The Overseas Private Investment Corporation (OPIC) no
longer provides coverage in Saudi Arabia. In 1995, OPIC
removed Saudi Arabia from its list of countries approved for
OPIC coverage because of Saudi Arabia's failure to take steps
to comply with internationally recognized labor standards.
Details on OPIC programs and coverage can be obtained at.
www.opic.gov. The U.S. Export-Import Bank provides financing
and political risk insurance in Saudi Arabia.

--------------
Labor
--------------


59. The Ministry of Labor and the Ministry of Interior
regulate recruitment of expatriate labor. In general, the
government encourages recruitment of Muslim workers, either
from Muslim countries or from countries with sizable Muslim

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populations. The largest groups of foreign workers now come
from Bangladesh, Egypt, India, Pakistan, the Philippines, and
Yemen. Westerners compose less than two percent of the labor
force, and the percentage is dropping as Saudis and
less-expensive expatriates from developing countries replace
them.


60. Since September 1994, the Ministry of Labor has been
required to certify that there are no qualified Saudis for a
particular job before an expatriate worker can fill that job.
In addition, the original sponsor must approve all transfers
of expatriate workers from his sponsorship to another. While
group visas are available for unskilled and some skilled
workers recruited abroad, the Ministry of Labor is actively
trying to limit the numbers of visas being issued in its bid
to create more job opportunities for Saudis.


61. Saudi labor law forbids union activity, strikes, and
collective bargaining. However, the Government allows
companies that employ more than 100 Saudis to form "labor
committees." By-laws detailing the functions of the
committees were enacted in April 2002. To date, no labor
committees have been established. There is no forced or
compulsory labor, but domestic workers are not covered under
the provisions of the new labor law issued in 2005. The SAG
is expected to issue by-laws on employment of domestic
workers in the near future.


62. Overtime is compensated normally at time-and-a-half
rates. The minimum age for employment is 14. The Saudi
government does not adhere to the International Labor
Organization's (ILO) convention protecting workers' rights,
but is taking steps to enhance its cooperation with ILO in a
number of areas. A July 2004 decree addresses some workers,
rights issues for non-Saudis, and the Ministry of Labor has
begun taking employers to the Board of Grievances. Some of
these penalties include banning these employers from
recruiting foreign and/or domestic workers for a minimum of
five years.

--------------
Foreign-Trade Zones/Free Ports
--------------


63. Saudi Arabia does not have duty-free import zones or
free ports. It has begun to permit transshipment of goods
through its ports in Jeddah and Dammam.
Saudi Arabia is a member of the Gulf Cooperation Council
(GCC),which confers special trade and investment privileges
within the six member states (Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, and the UAE). Saudi Arabia is also a member of
the Arab League, which agreed to negotiate an Arab free trade
zone.

--------------
Foreign Direct Investment Statistics
--------------


64. Accurate, up-to-date data on foreign direct investment
in Saudi Arabia is difficult to obtain. Problems include
double counting in domestic/foreign joint ventures,
historical versus current market valuations, domestic
financing by foreign firms, difficult-to-tabulate profit
reinvestments by foreign firms, and the relatively small,
off-the-books investments by Asian entrepreneurs and others,
often disguised under a Saudi sponsor.


65. Figures provided in this section are taken from United
Nations Conference on Trade and Development's (UNCTAD) "World
Investment Report 2006, FDI from Developing and Transition
Economies ) Country Fact Sheet." Following are key FDI
indicators as provided by the referenced report for 2005 (all
figures are in USD millions unless otherwise indicated):

FDI Inflow 4628
FDI Outflow 1183
FDI Inward Stock 26066
FDI Outward Stock 3711

FDI Inflow as % of GDP 8.5
FDI Outflow as % of GDP 1.2

FDI Inflow as % of GFCF 9.4
FDI Outflow as % of GFCF 2.4

GDP = gross domestic product
GFCF = gross fixed capital formation


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