Saudi Arabia open for business

The Middle EastÆs most pro-business economy continues to open up to foreigners. But just who is investing in the kingdom?
Saudi Arabia is open for business. Across the investment spectrum, the kingdom has reduced restrictions on starting, investing in and running a business. Investment is up and, even with the global credit crisis, business is good.

The kingdom is taking advantage of its competitive edge. From its strategic location at the centre of the Middle East, a centuries old way-point between east and west, to its natural cost-effectiveness in many petroleum-derived and energy-intensive products, Saudi Arabia makes sense for many businesses.

ôWe are cherry picking industries and businesses that are correlated to our competitive advantages and core competences,ö says Saudi Arabia General Investment Authority (SAGIA) governor and chairman Amr A. Al-Dabbagh. ôOn all fronts we are doing extremely well. Well in terms of the competitiveness of the investment environment, in terms of the flow of foreign direct investment and the progress of our mega-projects, the economic cities.ö

The highlight of Saudi ArabiaÆs improving investment climate is its ô10 x 10ö programme û a plan laid out in 2004 to move Saudi Arabia into the top 10 most business-friendly national regulatory environments in the World BankÆs annual Doing Business report by 2010. Since reforms began, the kingdom has moved to 16th in 2009 from 67th in 2006, making Saudi Arabia the most business-friendly regulatory environment in the Middle East.

No barriers
ôOne of the good things about our procurement system here is they allow everybody to bid,ö says Riyadh-based ACWA Power Development managing director Rasheed Al-Rasheed. ôEverybody, from local companies, joint-ventures and foreign investors, if they are qualified with the right technical skills and the right financial capability, they are welcome to come and bid.ö

That reduction of barriers has been a hallmark of SAGIA. Charged in 2000 with making Saudi Arabia more competitive, the organisation has succeeded in many ways to open the kingdom up to new business û both domestic and foreign. Under SAGIAÆs tenure, the National Competitiveness Centre (NCC) was opened in 2006 and charged to ômonitor, assess and support the enhancement of competitivenessö in the kingdom. The NCC has overseen the 10 x 10 programme, and is working to improve on the 10 Doing Business indicators.

The Doing Business report quantitatively measures the regulations in a country. Conducted by the World Bank and International Finance Corporation (IFC), the report covers aspects of the business regulatory environment ranging from the cost of starting a business to the availability of credit and trading across borders. Saudi Arabia's ranking as 16th in the world in Doing Business 2009, makes it number one in the Middle East and North Africa and well above the regionÆs average ranking of 90.

While Saudi Arabia did not make the top 10 reformer list in 2009 as it did in 2008, the country did continue to make significant strides. ôOne of the indicators that we dealt with is starting a business,ö says Al-Dabbagh. ôThis year we reduced the cost of starting a business significantly, we also reduced the number of steps and the timeline, and last year we reduced the capital requirement of establishment of limited liability companies from half a million Saudi riyals to zero which is a major reform that would help in stimulating the economy in a big way.ö

According to Doing Business, Saudi ArabiaÆs elimination of minimum capital requirements has led to an 81% increase in new business registrations annually.

While Doing Business measures a wide breadth of business regulations, it remains only a quantitative measure of a countryÆs competitiveness. The report leaves out indicators including corruption and any subjective analysis to what is happening on the street in terms of new businesses. In Saudi Arabia, the regulatory improvement is obvious but foreign companies are still notably absent among the kingdomÆs major projects.

Open to whom?
In meeting after meeting, Saudi businessmen confirm that the country is open to everyone. They cite the lack of ownership limits and minimum capital requirements as some of the most positive aspects of Saudi ArabiaÆs competitiveness but when prompted to name some foreign investors who have taken advantage of this openness most businessmen fall silent. This begs the question: who is Saudi Arabia open to?

ôForeign investors have been kicking down the door wanting to get into Saudi Arabia for the last five years and itÆs been a lot slower process than investors would like,ö says Al Mal Capital managing director Robert McKinnon. ôThatÆs actually turned off investors quite a bit.ö

The Doing Business report charts a definite decrease in barriers to starting a company in Saudi Arabia. What the report does not cover is anecdotal evidence on who is starting businesses in the country, and this would offer a more rounded vision of the countryÆs competitiveness reforms.

For years Saudi Arabia has been run by a combination of state-run companies or family businesses with close ties to the royal family. This former ôclosedö attitude is still pervasive, despite a notable increase in foreign direct investment (FDI) in 2005 when it grew six-fold to $12.1 billion from $1.9 billion in 2004, according to the United Nations Conference on Trade and Development (Unctad). By the end of 2007, annual FDI totalled $24.3 billion.

ôA lot of investors who really wanted to start investing in Saudi Arabia heard over and over, æYes weÆre going to allow foreign investors, yes weÆre going to open up this marketÆ but it just never seemed to happen,ö says McKinnon. ôObviously foreign investment has increased but not to the point it really could have, not to the point of the demand out there.ö

The truth is, competition is ripe in Saudi Arabia. Domestic companies are flush with cash and the credit markets remain comparatively open as the kingdomÆs banks are among the best capitalised in the world. Even without restrictions on foreign investment, foreign investors have to battle a two-front war between a propensity to keep projects in domestic hands and Saudi companies with extensive local knowledge and similar levels of technical expertise.

SAGIAÆs work
SAGIA continues to fight the good fight for foreign investors. The agency is pushing ahead with its 10 x 10 project with only six more rungs to climb in the next two years. Those last few rungs are likely to be the most difficult for a country that has come so far already including the streamlining of the new business approvals process from three departments and nine ministries to one and a 17.4% reduction in start-up costs from 2008 to 2009.

Over the next year SAGIA aims to target the sectors it sees opportunities in and expand private investment. ôWe are the most cost effective production location in the world for the industries we are targeting,ö says governor Al-Dabbagh. ôCorporations pay attention to how to cut costs. One way to cut costs is to relocate to a more cost-effective production location and that is what we are trying to promote in the industries and sectors we are interested in.ö

In addition to improving on the Doing Business indicators, SAGIA is actively seeking to enhance the country's competitiveness by improving other areas of the economy. Those areas include judicial reform, infrastructure, education, health, and technology and innovation expertise.

In terms of achieving their 10 x 10 goal, governor Al-Dabbagh says: ôWeÆre on track and weÆll meet our key performance indicators that govern our performance [in the next year]. We made it from 67 to 38 to 23 to 16 and I am very bullish that we will get there by the end of the day.ö

Glass half full
With the understanding that there may still be non-quantitative barriers to FDI in Saudi Arabia, opportunities do exist for companies. SAGIAÆs governor Al-Dabbagh cites $650 billion worth of opportunities in the kingdom including the economic cities of Jazan, King Abdullah, Knowledge and Prince AbdulAziz bin Mousaed. Foreign companies have already begun to take advantage of opportunities in the cities with Malaysia-based MMC jointly developing Jazan with the Saudi Binladin Group and Dubai-based EmaarÆs Saudi subsidiary Emaar, The Economic City developing King Abdullah.

Joint ventures are another opportunity for foreign companies in Saudi Arabia. Mitsubishi has formed a corporation with ACWA Power and Gulf Development Corporation for work on an independent water and power project. ACWA Power DevelopmentÆs Al-Rasheed cites these independent projects as a new model for infrastructure and utility development that offers significant opportunities to private business, domestic and foreign.

With SAGIA or a local partnerÆs aid, business leaders agree it is not a problem investing in Saudi Arabia. The opportunities are there û four new economic cities under construction and two more proposed, new infrastructure being built to connect the countryÆs far-flung regions and utilities to serve the more than six million additional housing units needed. Meanwhile, the government is actively privatising and opening sectors to investors, both domestic and foreign.

ôThe business of government is to get out of business,ö says governor Al-Dabbagh. ôWe are acting as the regulator and facilitator of the flow of FDI and DDI [domestic direct investment] and also providing all the support and incentives that foreign and local investors need.ö

This story first appeared in a Saudi Arabia supplement that was published together with the December/January issue of FinanceAsia magazine.
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