Identifier
Created
Classification
Origin
08RIYADH326
2008-02-26 13:53:00
UNCLASSIFIED
Embassy Riyadh
Cable title:
SAUDI ARABIA INVESTMENT CLIMATE STATEMENT
how-toVZCZCXYZ0001 OO RUEHWEB DE RUEHRH #0326/01 0571353 ZNR UUUUU ZZH O 261353Z FEB 08 FM AMEMBASSY RIYADH TO RUEHC/SECSTATE WASHDC IMMEDIATE 7824 INFO RUCPCIM/CIMS NTDB WASHDC IMMEDIATE RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
UNCLAS RIYADH 000326
SIPDIS
SIPDIS
USTR FOR JASON BUNTIN
USDOC FOR TYLER HOFFMAN
EB/IFD/OIA
E.O. 12958: N/A
TAGS: OPIC KTDB USTR SA
SUBJECT: SAUDI ARABIA INVESTMENT CLIMATE STATEMENT
REF: 07 SECSTATE 158802
---------------------------------
2008 Investment Climate Statement
---------------------------------
UNCLAS RIYADH 000326
SIPDIS
SIPDIS
USTR FOR JASON BUNTIN
USDOC FOR TYLER HOFFMAN
EB/IFD/OIA
E.O. 12958: N/A
TAGS: OPIC KTDB USTR SA
SUBJECT: SAUDI ARABIA INVESTMENT CLIMATE STATEMENT
REF: 07 SECSTATE 158802
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2008 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
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Openness to Foreign Investment
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2. Saudi Arabia is experiencing an oil boom unprecedented
since the mid 1970,s with a government budget surplus of
over $10 billion in 2007. Foreign direct investment inflows
were over $18 billion in 2007. 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 transportation,
education, health, information and communications technology,
life sciences and energy, as well in six &Economic Cities8
that are in various states of development. The Economic
Cities are to be new, comprehensive developments in different
regions focusing on particular industries. Prospective
investors will find attractive Saudi Arabia's economic
stability, the largest market in the Gulf (with a population
of over 27 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, a
restrictive visa policy for all workers, a very conservative
cultural environment, and enforced segregation of the sexes
in most business and social settings. Further, 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 consistent enforcement of foreign arbitration
awards, a clear and transparent mechanism to reduce and stop
counterfeit products from entering Saudi Arabia, and the
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 in many sectors 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. Minimum capital requirements to establish
business entities have generally been eliminated other than
capitalization requirements to which Saudi Arabia committed
during its accession to the WTO in specific services, such as
for insurance companies.
7. In April 2000, the Council of Ministers established the
Saudi Arabian General Investment Authority (SAGIA) to provide
information and assistance to foreign investors, and to
foster investment opportunities in energy, transportation,
and knowledge-based industries (See www.sagia.gov.sa). SAGIA
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
for licenses, and investments in specific sectors may require
licenses from other government authorities, including, but
not limited to, the Saudi Arabian Monetary Agency (SAMA),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 2007, SAGIA licensed 1,483 joint and
foreign investment projects worth a total of $89 billion. The
value of projects licensed increased by 33% percent from the
previous year. Actual foreign direct investments inflows,
however, were limited to about $18 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. SAGIA has 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. SAGIA opened a Women,s Investment
Center in spring 2003.
10. 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.
11. 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 13
service industries. The list includes real estate investment
in Mecca and Medina, some subsectors in printing and
publishing, audiovisual and media services, land
transportation services excluding the inter-city transport by
trains, 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.
12. Pursuant to commitments it made when acceding to the
WTO, Saudi Arabia has opened 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
investment in the computer and related services sector.
13. 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
Capital Group, and the Saudi Industrial Development Company
have also become increasingly active in project development
and in seeking out foreign joint venture partners.
14. 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.
15. Saudi Arabian regulations currently close oil
exploration, drilling, and production to foreign investment.
National oil company Saudi Aramco presently conducts all oil
exploration and development within Saudi Arabia. However,
there are legacy foreign operations in the Partitioned
Neutral Zone with Kuwait. Foreign companies, under current
Saudi law, cannot purchase a stake in Aramco or take an
equity position in the upstream oil sector.
16. 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. Shell, in a consortium with Total
and Saudi Aramco, 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. In
February 2008, Total withdrew from the South Rhub Al Khali
Company consortium,s exploration program after disappointing
initial results.
17. 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.
18. 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 refining capacity to meet
expected growth in international demand. ExxonMobil and
Shell are the largest foreign investors in Saudi Arabia; both
are 50% partners in refineries with Saudi Aramco. Saudi
Aramco has also announced the selection of two firms,
ConocoPhillips and Total, to join as equity investors in two
new 400,000 barrel per day export refineries scheduled for
completion in 2011. Both firms are currently engaged in
negotiating the terms of these joint ventures.
19. In addition, ExxonMobil, Chevron Texaco, and Shell, as
well as several other international investors, have formed
joint ventures with SABIC, a Saudi parastatal, to build
world-scale petrochemical plants that utilize gas feedstock
from Saudi Aramco,s existing operations at Ras Tanura.
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.
20. 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,
creates jobs for Saudis, and expands Saudi exports.
21. Industrial projects remain subject to capitalization
requirements that vary depending upon the value of the
venture, 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.
22. 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.
23. 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.
20 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.
24. 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 close to $4 billion 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.
25. 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 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."
26. 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.
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Conversion and Transfer Policies
--------------
27. 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.
28. 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. SAMA, the Central Bank, has intervened at
times to keep the exchange rate fixed.
--------------
Expropriation and Compensation
--------------
29. 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.
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Dispute Settlement
--------------
30. 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 (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.
31. 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.
32. 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.
33. 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,
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.
34. 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.
35. 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 SAMA,s Banking Disputes Committee adjudicates
disputes between bankers and their clients. Judgments of
foreign courts are not consistently 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.
36. In October 2007, King Abdullah issued a royal decree to
overhaul the Kingdom,s judicial system, including allocating
7 billion SAR (approximately 1.9 billion USD) to train judges
and build new courts. The decree establishes two Supreme
Courts*a general court and an administrative court*and
specialized labor and commercial tribunals. This
announcement has not yet been implemented.
37. 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.
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Performance Requirements and Incentives
--------------
38. 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 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
positions that may no longer be held by non-Saudis is
expanding.
39. 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.
40. Nonetheless, the SIDF will provide additional incentives
and better term loans to foreign investors who set up their
manufacturing facilities in Jizan, Hail, and Tabuk. 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.
41. 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.
42. The government does not maintain any measures that it
has notified the WTO to be inconsistent with requirements of
the Agreement on Trade-Related Investment Measures (TRIMs),
nor does it maintain any measures that are alleged to violate
the WTO TRIMs text.
43. 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. In November
2007, Saudi Arabia announced that it will begin issuing
foreign business visitors one (1) year, multiple entry visas
from Saudi Embassies, Consulates and ports of entry. The
government also announced that foreign business visitors will
no longer need to provide invitation letters from Saudi
businesses to receive visas. However, the policy change has
not yet been implemented, and it is unclear when the new
business visas will be issued. Under existing procedures,
business visitors typically receive short duration,
single-entry visas.
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Right to Private Ownership and Establishment
--------------
44. 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
--------------
45. 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.
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. Saudi Arabia does have a system of recording
security interests.
46. 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.
47. 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, when this law
went into effect the patent office had 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 has 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.
48. An unknown number of pharmaceutical products lost patent
protection when Saudi Arabia transitioned to a new
TRIPS-compliant patent law in 2004. Products that had
applications for patents pending under the old law (and
enjoyed patent protection while their applications were
pending) were reviewed as new cases under the new law.
These products were then denied patents because it was
determined that they were not "novel" because they had been
publicly patented in other jurisdictions more than a year
before their cases were considered in Saudi Arabia.
49. 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.
50. Trademarks are protected under the Trademark Law. The
Rules for Protection of Trade Secrets came into effect in
2005. Saudi Arabia has one of the best trademarks laws in
the region, but enforcement still lags, and procedures are
inconsistent.
51. Saudi Arabia has not signed and ratified the WIPO
internet treaties.
--------------
Transparency of Regulatory System
--------------
52. 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
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.
53. There are no informal regulatory processes managed by
NGOs or private sector associations. While proposed laws and
regulations are generally not published in draft form for
public comment, some ministries permit public comments
through their websites. There are no private sector or
government efforts to restrict foreign participation in
industry standards-setting consortia or organizations.
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Efficient Capital Markets and Portfolio Investment
-------------- --------------
54. Saudi Arabia has generally free and open financial
markets, although non-GCC foreign investors may only invest
in the stock market through mutual funds. 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.
55. 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 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 at 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.
56. 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. SAMA granted ten foreign bank licenses to
operate in the Kingdom in December 2005, including to BNP
Paribas, Deutsche Bank, J.P. Morgan, National Bank of Kuwait,
National Bank of Bahrain, Emirates Bank, Gulf International
Bank, State Bank of India and National Bank of Pakistan.
57. The legal, regulatory, and accounting systems practiced
in the banking sector are generally transparent and
consistent with international norms. 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
other than Israel,s that is a member and shareholder of the
Bank for International Settlements in Basel, Switzerland.
58. 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. 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.
--------------
Political Violence
--------------
59. 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.
In February 2006, terrorists attempted an attack on Saudi
oil facilities in Abqaiq in the Eastern Province. In February
2007, four French tourists were killed in a terrorist
incident on a desert track north of Medina.
60. The U.S. Embassy, working closely with Saudi security
officials, periodically advises American citizens of
potential security concerns.
--------------
Corruption
--------------
61. Saudi Arabia has some, albeit limited, laws aimed at
curbing corruption. The Tenders Law of Saudi Arabia,
approved in 2004, has improved transparency within government
procurement through publication of such tenders. Further,
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. The National Authority to Combat Corruption and the
General Auditing Bureau are charged with combating corruption.
62. 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.
63. Saudi Arabia has signed but not ratified the UN
Anticorruption Convention. Saudi Arabia is not a signatory
of the OECD Convention on Combating Bribery.
--------------
Bilateral Investment Agreements
--------------
64. 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
--------------
65. 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. Saudi Arabia is a member of the Multilateral
Investment Guarantee Agency.
--------------
Labor
--------------
66. 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
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.
67. 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.
68. 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, 15 labor
committees have been established. Domestic workers are not
covered under the provisions of the new labor law issued in
2005. The Saudi government has been promising the imminent
issuance of a law covering domestic workers for over a year.
69. 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.
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
--------------
70. Saudi Arabia does not have duty-free import zones or
free ports. It does permit transshipment of goods through
its ports in Jeddah and Dammam.
71. 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
--------------
72. 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.
73. Figures provided in this section are taken from United
Nations Conference on Trade and Development's "World
Investment Report 2007, 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 18293
FDI Outflow 753
FDI Inward Stock 51828
FDI Outward Stock 5211
FDI Inflow as % of GDP 14.9
FDI Outflow as % of GDP 1.5
FDI Inflow as % of GFCF 32.1
FDI Outflow as % of GFCF 1.3
GDP = gross domestic product
GFCF = gross fixed capital formation
FRAKER
SIPDIS
SIPDIS
USTR FOR JASON BUNTIN
USDOC FOR TYLER HOFFMAN
EB/IFD/OIA
E.O. 12958: N/A
TAGS: OPIC KTDB USTR SA
SUBJECT: SAUDI ARABIA INVESTMENT CLIMATE STATEMENT
REF: 07 SECSTATE 158802
--------------
2008 Investment Climate Statement
--------------
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 is experiencing an oil boom unprecedented
since the mid 1970,s with a government budget surplus of
over $10 billion in 2007. Foreign direct investment inflows
were over $18 billion in 2007. 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 transportation,
education, health, information and communications technology,
life sciences and energy, as well in six &Economic Cities8
that are in various states of development. The Economic
Cities are to be new, comprehensive developments in different
regions focusing on particular industries. Prospective
investors will find attractive Saudi Arabia's economic
stability, the largest market in the Gulf (with a population
of over 27 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, a
restrictive visa policy for all workers, a very conservative
cultural environment, and enforced segregation of the sexes
in most business and social settings. Further, 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 consistent enforcement of foreign arbitration
awards, a clear and transparent mechanism to reduce and stop
counterfeit products from entering Saudi Arabia, and the
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 in many sectors 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. Minimum capital requirements to establish
business entities have generally been eliminated other than
capitalization requirements to which Saudi Arabia committed
during its accession to the WTO in specific services, such as
for insurance companies.
7. In April 2000, the Council of Ministers established the
Saudi Arabian General Investment Authority (SAGIA) to provide
information and assistance to foreign investors, and to
foster investment opportunities in energy, transportation,
and knowledge-based industries (See www.sagia.gov.sa). SAGIA
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
for licenses, and investments in specific sectors may require
licenses from other government authorities, including, but
not limited to, the Saudi Arabian Monetary Agency (SAMA),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 2007, SAGIA licensed 1,483 joint and
foreign investment projects worth a total of $89 billion. The
value of projects licensed increased by 33% percent from the
previous year. Actual foreign direct investments inflows,
however, were limited to about $18 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. SAGIA has 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. SAGIA opened a Women,s Investment
Center in spring 2003.
10. 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.
11. 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 13
service industries. The list includes real estate investment
in Mecca and Medina, some subsectors in printing and
publishing, audiovisual and media services, land
transportation services excluding the inter-city transport by
trains, 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.
12. Pursuant to commitments it made when acceding to the
WTO, Saudi Arabia has opened 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
investment in the computer and related services sector.
13. 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
Capital Group, and the Saudi Industrial Development Company
have also become increasingly active in project development
and in seeking out foreign joint venture partners.
14. 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.
15. Saudi Arabian regulations currently close oil
exploration, drilling, and production to foreign investment.
National oil company Saudi Aramco presently conducts all oil
exploration and development within Saudi Arabia. However,
there are legacy foreign operations in the Partitioned
Neutral Zone with Kuwait. Foreign companies, under current
Saudi law, cannot purchase a stake in Aramco or take an
equity position in the upstream oil sector.
16. 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. Shell, in a consortium with Total
and Saudi Aramco, 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. In
February 2008, Total withdrew from the South Rhub Al Khali
Company consortium,s exploration program after disappointing
initial results.
17. 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.
18. 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 refining capacity to meet
expected growth in international demand. ExxonMobil and
Shell are the largest foreign investors in Saudi Arabia; both
are 50% partners in refineries with Saudi Aramco. Saudi
Aramco has also announced the selection of two firms,
ConocoPhillips and Total, to join as equity investors in two
new 400,000 barrel per day export refineries scheduled for
completion in 2011. Both firms are currently engaged in
negotiating the terms of these joint ventures.
19. In addition, ExxonMobil, Chevron Texaco, and Shell, as
well as several other international investors, have formed
joint ventures with SABIC, a Saudi parastatal, to build
world-scale petrochemical plants that utilize gas feedstock
from Saudi Aramco,s existing operations at Ras Tanura.
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.
20. 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,
creates jobs for Saudis, and expands Saudi exports.
21. Industrial projects remain subject to capitalization
requirements that vary depending upon the value of the
venture, 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.
22. 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.
23. 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.
20 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.
24. 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 close to $4 billion 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.
25. 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 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."
26. 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.
--------------
Conversion and Transfer Policies
--------------
27. 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.
28. 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. SAMA, the Central Bank, has intervened at
times to keep the exchange rate fixed.
--------------
Expropriation and Compensation
--------------
29. 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
--------------
30. 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 (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.
31. 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.
32. 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.
33. 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,
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.
34. 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.
35. 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 SAMA,s Banking Disputes Committee adjudicates
disputes between bankers and their clients. Judgments of
foreign courts are not consistently 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.
36. In October 2007, King Abdullah issued a royal decree to
overhaul the Kingdom,s judicial system, including allocating
7 billion SAR (approximately 1.9 billion USD) to train judges
and build new courts. The decree establishes two Supreme
Courts*a general court and an administrative court*and
specialized labor and commercial tribunals. This
announcement has not yet been implemented.
37. 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
--------------
38. 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 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
positions that may no longer be held by non-Saudis is
expanding.
39. 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.
40. Nonetheless, the SIDF will provide additional incentives
and better term loans to foreign investors who set up their
manufacturing facilities in Jizan, Hail, and Tabuk. 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.
41. 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.
42. The government does not maintain any measures that it
has notified the WTO to be inconsistent with requirements of
the Agreement on Trade-Related Investment Measures (TRIMs),
nor does it maintain any measures that are alleged to violate
the WTO TRIMs text.
43. 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. In November
2007, Saudi Arabia announced that it will begin issuing
foreign business visitors one (1) year, multiple entry visas
from Saudi Embassies, Consulates and ports of entry. The
government also announced that foreign business visitors will
no longer need to provide invitation letters from Saudi
businesses to receive visas. However, the policy change has
not yet been implemented, and it is unclear when the new
business visas will be issued. Under existing procedures,
business visitors typically receive short duration,
single-entry visas.
--------------
Right to Private Ownership and Establishment
--------------
44. 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.
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Protection of Property Rights
--------------
45. 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.
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. Saudi Arabia does have a system of recording
security interests.
46. 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.
47. 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, when this law
went into effect the patent office had 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 has 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.
48. An unknown number of pharmaceutical products lost patent
protection when Saudi Arabia transitioned to a new
TRIPS-compliant patent law in 2004. Products that had
applications for patents pending under the old law (and
enjoyed patent protection while their applications were
pending) were reviewed as new cases under the new law.
These products were then denied patents because it was
determined that they were not "novel" because they had been
publicly patented in other jurisdictions more than a year
before their cases were considered in Saudi Arabia.
49. 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.
50. Trademarks are protected under the Trademark Law. The
Rules for Protection of Trade Secrets came into effect in
2005. Saudi Arabia has one of the best trademarks laws in
the region, but enforcement still lags, and procedures are
inconsistent.
51. Saudi Arabia has not signed and ratified the WIPO
internet treaties.
--------------
Transparency of Regulatory System
--------------
52. 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
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.
53. There are no informal regulatory processes managed by
NGOs or private sector associations. While proposed laws and
regulations are generally not published in draft form for
public comment, some ministries permit public comments
through their websites. There are no private sector or
government efforts to restrict foreign participation in
industry standards-setting consortia or organizations.
-------------- --------------
Efficient Capital Markets and Portfolio Investment
-------------- --------------
54. Saudi Arabia has generally free and open financial
markets, although non-GCC foreign investors may only invest
in the stock market through mutual funds. 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.
55. 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 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 at 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.
56. 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. SAMA granted ten foreign bank licenses to
operate in the Kingdom in December 2005, including to BNP
Paribas, Deutsche Bank, J.P. Morgan, National Bank of Kuwait,
National Bank of Bahrain, Emirates Bank, Gulf International
Bank, State Bank of India and National Bank of Pakistan.
57. The legal, regulatory, and accounting systems practiced
in the banking sector are generally transparent and
consistent with international norms. 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
other than Israel,s that is a member and shareholder of the
Bank for International Settlements in Basel, Switzerland.
58. 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. 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.
--------------
Political Violence
--------------
59. 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.
In February 2006, terrorists attempted an attack on Saudi
oil facilities in Abqaiq in the Eastern Province. In February
2007, four French tourists were killed in a terrorist
incident on a desert track north of Medina.
60. The U.S. Embassy, working closely with Saudi security
officials, periodically advises American citizens of
potential security concerns.
--------------
Corruption
--------------
61. Saudi Arabia has some, albeit limited, laws aimed at
curbing corruption. The Tenders Law of Saudi Arabia,
approved in 2004, has improved transparency within government
procurement through publication of such tenders. Further,
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. The National Authority to Combat Corruption and the
General Auditing Bureau are charged with combating corruption.
62. 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.
63. Saudi Arabia has signed but not ratified the UN
Anticorruption Convention. Saudi Arabia is not a signatory
of the OECD Convention on Combating Bribery.
--------------
Bilateral Investment Agreements
--------------
64. 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
--------------
65. 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. Saudi Arabia is a member of the Multilateral
Investment Guarantee Agency.
--------------
Labor
--------------
66. 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
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.
67. 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.
68. 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, 15 labor
committees have been established. Domestic workers are not
covered under the provisions of the new labor law issued in
2005. The Saudi government has been promising the imminent
issuance of a law covering domestic workers for over a year.
69. 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.
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
--------------
70. Saudi Arabia does not have duty-free import zones or
free ports. It does permit transshipment of goods through
its ports in Jeddah and Dammam.
71. 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
--------------
72. 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.
73. Figures provided in this section are taken from United
Nations Conference on Trade and Development's "World
Investment Report 2007, 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 18293
FDI Outflow 753
FDI Inward Stock 51828
FDI Outward Stock 5211
FDI Inflow as % of GDP 14.9
FDI Outflow as % of GDP 1.5
FDI Inflow as % of GFCF 32.1
FDI Outflow as % of GFCF 1.3
GDP = gross domestic product
GFCF = gross fixed capital formation
FRAKER