What Foreign Investment Law Reforms Are Required to Ensure Saudi Arabia Strategic Development - Thesis Example

The Kingdom of Saudi Arabia1 is peopled by an estimated twenty-eight (28) million generally Arab and Afro-Asian inhabitants, including about 5.6 million resident foreigners, in 2008. A conservative Islamic nation economically growing at 6.1% annually, Saudi Arabia’s estimated gross domestic product (GDP) in 2008 is $527 billion. Its per capita GDP (also in 2008) is $21,062. With just 1.76% of its total land arable and while having natural resources such as hydrocarbons, gold, uranium, bauxite, coal, iron, phosphate, tungsten, zinc, silver and copper, it is un-disputably the oil – of which the Kingdom is the world’s leading oil producer and exporter – that has been responsible for the economic transformation of the nation since 1960’s and 1970’s when large scale production of the “black gold” has ever since shifted to the high gear. Saudi Arabia has as its trading partners the countries of China, France, Germany, Italy, Japan, Singapore, South Korea, Holland, Taiwan, United Kingdom, United Arab Emirates, Switzerland and the United States of America – netting a total export revenue (2008) in the amount of $364 billion and import costs of $103 billion. With 90% of the country’s export and almost three-quarters (75%) of total government revenues accounted for by the oil, the Kingdom’s current rapid industrial expansion is still being led by the petrochemical sector. However, after Saudi Arabia made its intention known to join the World Trade Organization (WTO), there has been conscious effort by the Saudi government to diversify its economy as it lessens its reliance on petrochemical and try to develop its other sectors of economy. The steps that are being taken by the Kingdom since 1970’s have been programmatic. For this, the Saudi government has been observing 5-year development plans to transform its oil-based economy into a modern industrial state2. Precise data on foreign direct investment in Saudi Arabia is difficult to obtain3. But, according to the World Investment Report 20084, Saudi Arabia’s foreign direct investment (FDI) inflow and outflow in 2007 were $24,318 million and $13,139 million respectively. And these figures are products of the countries’ diligence and determination to transform their economy in particularly and country in genera into one that is enticing to the eyes of the foreign investors. Currently, new laws are being crafted and pertinent laws are being adjusted for the said purpose. Specifically, there is the new Foreign Investment Law that allows foreigners to invest in most sectors of the economy. Among others, the law has so far enabled foreign investors to own real property for company activities. Too, there is the new Real Estate Law which opens to the foreigners the possibility of owning real estate outside the cities of Makkah and Madinah. Under revision for purposes of increasing transparency and strengthening the country’s global competitiveness are Capital Markets Law5, the Companies Law6, the Agency Law, the Insurance Law, the Mining Law and the Labor Law. And, these legislative measures were being matched by the establishment of the Saudi Arabian General Investment Authority (SAGIA)7, the Saudi Industrial Development Fund (SIDF)8, privatisation of public companies9, and their December 2005 membership in the WTO.10 Other government bodies were likewise put up to actively promote opportunities in the country’s industrial cities and regions. One of those is the Royal Commission for Jubail and Yanbu. In addition, complementing Saudi government majority controlled Saudi Arabian Basic Industries Corporations (SABIC), there are private investment companies – e.g., the Saudi Venture Capital Group and the Saudi Industrial Development Company -- that have been playing an increasingly active role in bringing on foreign joint business venture partners. These structural adjustments – upgrading its legal and regulatory standards by restructuring of agencies, promulgation of new laws, establishment of new institutions, and liberalisation and privatization of non-oil sector – that are being made by the Saudi government is actually perceived quite favourably by critics. Generally, it is being said to have resulted to improving investment climate particularly by in effect reducing the risk premiums in foreign direct investments.11 In fact, Saudi Arabia has improved by leap and bounds from38th to the 23rd position in World Bank’s Ease of Doing Business Report 2008, to the 16th position among 178 countries in the same report in 200912. Spearheading these developments are recent key institutional changes – aside from those already said in the preceding especially the Foreign Investment Law and the SAGIA -- starting from the beginning of the 21st century13. For one, King Fahd in 1999 established the new Supreme Economic Council that includes representatives from both government and private sectors to come up with development of new economic strategies for the Kingdom and to ensure that legislative changes are implemented. Besides, in the following year, in recognition of the centrality of energy to the economy of Saudi Arabia, the Supreme Petroleum Council was institutionalized. Its mandate is to supervise the expansion of new strategies in relation to Saudi’s role in the world oil markets and OPEC as well as the increase of avenue for private sector investment opportunities in the sector of, particularly, natural gas, and, generally, energy. A further major change by the Supreme Economic Council was the opening up of the Saudi Stock Market to foreign investors. This is a novel move, since previously only their citizens were allowed to own individual securities, and foreign investment to Saudi mutual funds was solely from the neighbour Gulf Cooperation Council (GCC) states. But, now, international investors can access the mutual funds with the probable prospect of the individual stocks ownership to follow suit soon. Revised in 2000, Foreign Direct Investment law has allowed foreigners to invest in all sectors of the economy but in specific activities contained in a “negative list”14. However, this list of industry into which foreign investors are off limits consistently continues to contract on account of the trade liberalization of Saudi Arabia. For instance, foreign investors may no longer take local partners in many sectors to begin a business enterprise in the country, may also sponsor foreign employees to come in the country to work in one’s company, and may also own real state for company activities. Aside from such, foreign investors may be allowed too to transfer money from their ventures outside of the country after the elimination of the minimum capital requirements (to start a business entity) aside for, say, insurance companies for which capitalization requirements have been committed by the country’s accession to the WTO in specific services.15 The advantages and disadvantages that await foreign investors in the Kingdom of Saudi Arabia are spelled out by economists and academics. Among the former are government incentives (e.g., free land for eligible plants, heavily discounted energy, and/or concessionary financing), tax holidays and oil entitlements (that is, guarantee of oil price in par with the level of OPEC per every million invested dollars). Additionally, Saudi Arabia guarantees even playing field to foreign investors. As member of the Multilateral Investment Guarantee Agency (MIGA), the Kingdom ensures fair treatment, protection and incentives to foreign investment as what is accorded to national capital. In the concrete, Saudi’s government agencies are helping investors prepare feasibility studies for industrial projects, providing information and statistical figures for investment projects within the scope of Saudi Arabia’s development plans, making available land – either through lease or sale at nominal charges --for industrial units, providing basic infrastructure such as electricity, water and fuels to industrial projects at low prices, and granting soft, medium and long-term loans to industrial establishments for up to fifty percent (50%) of the project (with payback period of up to fifteen years and a two-year grace period from the start of production).16 But these advantages are said to be necessary for offsetting the Kingdom’s vast disadvantages like great distance from export markets, more expensive building costs, cultural barriers, etc.17 For his part, Dr. Mohamed Ramady18 citing the particular characteristic of Saudi Arabia – being in a capital surplus – as haven for FDI. From this characterization, he notes that FDI is actually enriching Saudi Arabia, as a host country, in terms of heightening of productivity level and labor standards through technology transfer. This happens when the locals learn from the deep well of know-how and experience of the multi-national corporations, say, in production and management spheres. Of course, this is much truer only when the investment is labor intensive. Likewise, FDI in such country as Saudi Arabia does not have to worry against banking or debt crisis (viz. the financing lending in, say, Latin American countries). Moreover, part of FDI profits is open for reinvestment in the Kingdom as a country of investment leading to further growth in project investments. However, despite the seemingly rosy scenario that must have been portrayed in the preceding, there are still a lot of issues that Saudi Arabia needs to wrestle against if it is to improve its economic standing among countries in the world, further diversify its economy especially for its own domestic betterment, and be able to attract much more FDI into its shore.19 Simply said, Saudi Arabia needs to raise the bar of its investment climate. It needs to continue to investing in transportation, education, health, ICT, life sciences and energy especially in what is called the six “Economic Cities”20. On the negative note, among the issues that have to be the focus of Saudi’s attention must be the perceived lack of transparency in the enforcement of intellectual property rights (that meets international standards)21, a requirement by the government that (foreign) companies hire Saudi nationals22, slow payment of some government contracts23, a qualified visa policy for all workers24, a very (Islamic) conservative cultural environment, gender segregation both in the workplace and in social settings, and to ensure a transparent and comprehensive legal framework for resolution of commercial disputes25. Prospective foreign investors further want to see standardized treatment for corporate taxes, entry into skilled and motivated local labour force, and unswerving enforcement of custom duties to cease the entrée of counterfeit products into the country. There is also a need for the Kingdom to push further the SAGIA to live up to the high expectations by foreign investors. For one, foreign investors fret over Saudi embassies’ non-implementation of the Saudi decree scrapping local sponsorship for business visits as prerequisite for facilitation of visa application. This is understandable on the basis of the fact that SAGIA is known to have agreements with various Saudi government agencies and ministries for streamlining of FDI procedures. Moreover, foreign investors do not positively take the fact that Saudi Arabia is still essentially closing oil exploration, drilling and production to foreign investment. This is stipulated in Saudi’s legal system prohibiting a foreigner’s purchase of stake in Aramco, the country’s national oil company, or taking an equity position in the upstream oil sector. While in 2003 the Ministry of Petroleum has particularly opened to foreign investors non-associated natural gas exploration, foreign investors are effectively asking for more concession points particularly because the Kingdom’s WTO commitments would effectively translate to more substantial aperture of its energy service market, such as allowing foreign energy firms to compete on an even playing field for energy services projects concerned with oil and gas exploration and development, pipeline transport of fuels, and consulting services management. Much is still to be desired from the Saudi government in terms of ensuring a level playing field among investors. This is especially true in corporate tax rate to investments in hydrocarbons, where there are still privileges and preferences for Saudi companies and joint ventures with Saudi participation – e.g., local partners of foreign investors pay only tax on net current assets that is equivalent to a measly 2.5%, but do not pay corporate income tax of 20%. Concerning transparency of regulatory system of the country, few of its aspects are still quite opaque. For instance, there are not informal regulatory processes that are being managed by non-governmental organizations (NGO’s) and/or private sector associations. Nonetheless, conditions are expected to improve as SAGIA becomes more and more active and engaged in lessening the barriers to foreign investments. Read More