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An economy in transition reforms its investment laws
The last 30 years have also been characterized by a gradual reduction in the country's inflation rate. During 1984-1995 the average annual growth rate of inflation did not exceed 2 percent, and remained below 1 percent from 1995 to 1999.
Saudi Arabia's multi-billion dollar effort to build, almost from scratch, a state-of-the-art national infrastructure has yielded a 45,500-kilometer, high-standard road network linking all cities and most villages. In addition, the Kingdom has boosted the rated capacity of water desalination plants from 21,500 cubic meters per day to a whopping 2.4 million cubic meters per day.
Diversification of the economic base is another impressive outcome of the Kingdom's 30-year development effort. The non-oil GDP was increased by more than five times, while the number of operating factories in the Kingdom rose from 199 in 1970 to a total today that exceeds 3,200.
Observers of Saudi Arabia's economic development efforts - set forth in a series of seven five-year plans -- say the goal has always been to nurture the private sector through government-supported business opportunities, then to allow businesses to operate independently.
"Ultimately, we would like to deal with foreign expertise on the basis of partnership rather than contracting," says Salah Al-Hejailan, senior partner of a Riyadh-based law firm specializing in trade and commercial law. "In the past, we dealt with them as contractors. Now we hope to create business relationships based on the principles of partnership."
This view was reiterated last month in Washington by Prince Abdullah bin Faisal bin Turki, Governor of the Saudi Arabian General Investment Authority (SAGIA), while speaking at a meeting of the U.S.-Saudi Arabian Business Council.
Prince Turki used the occasion of the meeting to announce several new foreign investment regulations aimed at enhancing the foreign investment climate in Saudi Arabia. "The era of Saudi Arabia being a haven for contractors and suppliers is ending," Prince Turki declared. "We are entering an era when relations between Saudis and their foreign partners will be `business-to-business.'"
The new laws announced by Prince Turki are –says Al-Hejailan – reflect of a decision "by Saudi Arabia to achieve partnerships with the international community that concentrate on the relevant issues that would make such partnerships effective and viable."
"These legislative and administrative changes should be seen – not only in terms of Saudi Arabia's announced policy to encourage foreign investment in the oil and gas, electricity, telecommunications, airline, and other sectors – but also in the perspective of Saudi Arabia's pending application to join [the World Trade Organization] WTO and of Saudi Arabia's efforts to comply therefore with the requirements for WTO membership," says Al-Hejailan. "These requirements include market liberalization, transparency in government approval processes, judicial reforms and so forth."
Al-Hejailan believes the new investment laws are also evidence of an "emerging ethos towards creating an investor-friendly foreign investment regime" in which all reasonable investment proposals stand a decent chance of being allowed to proceed as rapidly as they do in the West.
Al-Hejailan says the new investment laws contain language that guarantees that the process for securing an investment application in the Kingdom will be more "permissive," and that foreign investors will henceforth be permitted to engage in any investment activity in Saudi Arabia, permanent or temporary, except activities of the type excluded on a list soon to be issued by the Supreme Economic Council.
"The exclusion list is not very large," notes Prince Turki. "The excluded sectors are expected to include...trading, banking, and any unlawful activity under Islam related to contraband goods and tobacco... However, I predict the list, in time, will become smaller and smaller."
The final version of the exclusion list is still under deliberation, says Al-Hejailan. But he predicts items deleted from the new list will surprise many people: "Insurance might have been among the past exclusions, but there is now circulating a draft regulation for cooperative insurance envisioning foreign investment in newly emerging insurance companies to be formed in Saudi Arabia, the development of which has until now been severely restricted in the country by the negative Islamic attitude towards insurance," Al-Hejailan says.
Al-Hejailan also notes that, while trading in goods has historically been reserved for Saudis only, the provision of services, including, specifically, computer services, has never been reserved exclusively for Saudis. He also stresses that, as one of its final acts, the Foreign Capital Investment Committee has approved two foreign investment licenses in the field of equipment and auto leasing. "This skirts the boundary of trading in goods which is still reserved to 100 percent Saudi entities and Saudi nationals," says Al-Hejailan.
"Moreover," adds Al-Hejailan, "although Saudi banks are among the investors in the leasing enterprises, nonetheless these licenses demonstrate openness to foreign investment in activities close to the heavily regulated and protected core of Saudi banking activity. One might say that the floodgates are starting to open."
The new investment laws also contain a provision for the formation of the Saudi Arabian General Investment Authority (SAGIA), an independent authority whose Board consists of high-ranking representatives of all concerned Ministries. SAGIA will be mandated to approve or deny foreign investment applications in the streamlined timeframe of 30 days. Applications not acted upon within that period shall be considered as approved. Denial of an application can be appealed to the courts.
"Processing foreign investment applications within 30 days may seem like a small thing," says Prince Turki. "But we think it's an important step in improving our credibility with foreign investors...Moreover," he adds philosophically, "the `licensing process,' outside of what is decided by a government ministry, is really a product of how two entities interact: The investor and the marketplace."
According to the new investment laws, foreign investment can take two forms: enterprises owned by foreign and Saudi investors, or enterprises wholly-owned by foreign investors. Previously, it was necessary to maintain certain levels of Saudi ownership in order to qualify for such incentives as a tax holiday, a Saudi Industrial Development Fund loan or an exemption from rules requiring local subcontracting.
"Now," says Al-Hejailan, "the Foreign Investment Regulations provide that any foreign investment will benefit from all privileges, incentives and guarantees as are available to national projects - the so-called, `national treatment.' Whether over time these privileges, incentives and guarantees will continue to be the same ones as at present remains to be seen."
The new investment laws acknowledge several protections that have traditionally been accorded foreign businesses, including 1) the ability to freely repatriate legally earned capital from the Kingdom, 2) prohibitions against confiscation of foreign investment except by judicial process, 3) prohibitions against the subordination of national law to international agreements to which Saudi Arabia is a party, and 4) the right of a foreign investor engaged in a business dispute to seek arbitration before a Board of Grievances.
Saudi Arabia's new investment laws also set forth the terms of foreign ownership of real estate and the foreign sponsorship of non-Saudi employees.
"Perhaps most importantly," concludes Al-Hejailan," the Council of Ministers has approved a reduction – in the form of a rebate of the highest graduated income tax rate –applied to profits in excess of SR100, 000 [approximately $25,000] per annum – from 45 percent down to 30 percent.
"Speaking as a Saudi Arabian lawyer who has practiced law for 35 years advising foreign companies how to enhance their interests in Saudi Arabia, I must say I am fairly satisfied with the trend of the legal system today," says Al-Hejailan. "And I am satisfied with the government's desire and determination to make things more transparent and more explainable to foreign investors when dealing with us."
"We have come to the realization that if we want to play with other people's money, we have to also play by their rules," says Prince Turki. "One thing is sure: The world is moving very fast, and – despite many legitimate concerns by Saudis over remaining true to our culture and traditions – we must accept the fact that the global marketplace is bigger than everybody."
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Table of Contents Crown Prince Abdullah: A leader with a global vision |
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Development plans implemented by the Kingdom of Saudi Arabia over the past 30 years have yielded tangible achievements in many sectors. From 1969 to 1999, the Kingdom's annual average growth rate of real gross domestic product (GDP) reached 3.2 percent, while the real average annual growth rate of non-oil sectors reached 5.6 percent.
"The Saudi Government strove to do right for the economy and the economic interests of its people while recognizing the importance of fiscal discipline and fiscal prudence," says Kevin Taecker, a former economist with the Saudi American Bank. "Fiscal discipline is living within one's budget, and fiscal prudence means recognizing that even though there is a certain amount of cash flow this year, there might not be as much next year. This means maintaining a focus on the basic objective: To create a large economy that has a large number of jobs. And they're doing that right."