VII. INVESTMENT CLIMATE Rules and Regulations Governing Investment The Foreign Capital Investment Code specifies three conditions for foreign investments: (1) The undertaking must be a "development project"; (2) The investment must generate technology transfer; and (3) A Saudi partner should own a minimum of 25 percent equity (though this last stipulation can be waived). "Development projects" were defined in Ministry of Industry and Electricity Resolution 11/k/w of February 12, 1990 to include industrial, agriculture, health, contracting and specialized service projects. High technology projects are generally given priority, while projects in construction, and general operations and maintenance are discouraged. Corporate Organization and Liability While company law in Saudi Arabia permits a variety of corporate structures, joint ventures almost always take the form of limited liability partnerships. This form of organization does confer limited liability (but see below). However, there are disadvantages. Foreign partners in service and contracting ventures organized as limited liability partnerships must pay-in- full the amount of their contribution to authorized capital in cash or kind before the start of operations. For industrial projects, the required amount is normally 25 percent, although it may be higher for some industries. In addition, ten percent of profits must be set aside each year in a statutory reserve until it equals 50 percent of the venture's authorized capital. Potential investors should be aware that there were some disputed labor cases in the 1980's in which limited liability protection was denied to joint venture partners, despite the assurances contained in local commercial law. Though very few in number, these cases did have a direct impact on the partners concerned, whose personal assets were attached. In general, such actions have only been taken to recompense employees who were left unpaid for extended periods of time following the failure of the venture. There is licensing of direct foreign investment by the Ministry of Industry and Electricity, except in the case of mineral concessions, which are governed by separate concessionary agreements. Otherwise, all proposals for new investments, reinvestment, mergers, or acquisitions must go through that ministry's licensing process. For ventures with government participation, the process is usually nothing more than a formality. On the other hand, for purely private ventures, the process can involve a considerable amount of time and effort. Operating under the "Foreign Capital Investment Code," the Ministry of Industry and Electricity's "Foreign Capital Investment Board' screens all license applications and counsels prospective investors. License applications must be accompanied by a formidable array of documents including a feasibility study, and outline of the venture's proposed capital structure and legal form, its partnership agreement, its plans for training Saudi nationals for technical and managerial positions, and its plan for the procurement of machinery and other equipment. Permits to use the specific patents, the foreign partner's foreign certificate of registration, and authorization from the foreign partner's board of directors must also be submitted. Following the initial screening, applications go to the "Foreign Capital Investment Committee" for evaluation. The Committee is chaired by the Deputy Minister of Industry and Electricity and includes representatives from other relevant ministries, including the Ministries of Commerce, Finance, Agriculture, Planning and Petroleum. License applications approved by the Committee go to the Minister of Industry and Electricity for his approval, following which the new joint venture must apply for a commercial registration number from the Ministry of Commerce. Depending on the type of business, additional approvals may be needed, such as from the Ministry of Health in the case of a healthcare business. The Foreign Capital Investment Committee considers a variety of factors in making its evaluations. Foremost is the project's compatibility with Saudi Arabia's basic economic goals: economic diversification, access to modern technology, and development of a trained Saudi labor force to reduce dependence on foreign labor. The Committee looks with a special favor on projects involving the transfer of high technology to Saudi Arabia, and prefers firms with experience in the field of the proposed investment. The Committee carefully evaluates royalty arrangements and prices of equipment to be supplied by the foreign partner. In addition, while there is no minimum foreign equity requirement for joint ventures, more than nominal investment is encouraged. Intangible property is not counted towards this investment, and a Saudi accountant must evaluate the monetary worth of any contributions in kind. The Foreign Capital Investment Committee reportedly will not license a second joint venture in a specific industry sector until the Committee agrees the first venture is "established". While this has been beneficial to initial licensees, it has also allowed individual companies to tie up industrial and commercial opportunities for extended periods, while they mobilize support for their own ventures. Professionals, including architects, consultants and consulting engineers, are required to register with and be certified by the Ministry of Commerce, in accordance with the requirements defined in the Ministry of Commerce's Resolution 264, published in 1982. These regulations, in theory, permit the registration of Saudi/foreign joint ventures, but, according to business sources in Riyadh, have never fully been implemented. As a result, most foreign consulting firms work as adjuncts to established Saudi firms. Sectors in which foreign investors are denied national treatment include: catering, cleaning, maintenance and operations of facilities, power generation, trading, transportation, and businesses that affect national security. Saudi privatization efforts are embryonic, and the treatment of foreign investors has not yet been decided. Recent pronouncements by King Fahd indicate that privatization will be encouraged in the 1996-2000 development plan. Under the Foreign Capital Investment Code, wholly foreign-owned firms are guaranteed the same protection accorded Saudi nationals. They are also eligible for a wide range of investment incentives, including advantageous utility rates, land in industrial estates at nominal rents, treatment as domestic producers for government procurement contracts, and custom duty exemptions on capital goods and raw materials. There is a clear hierarchy of privileges and preferences in Saudi Arabia that favors Saudi companies and joint ventures with Saudi participation. For instance, only firms with at least a 25 percent Saudi ownership interest are eligible for interest-free loans from government credit institutions such as the Saudi Industrial Development Fund. Similarly, only foreign-owned corporations and the foreign-owned portion of joint ventures are subject to the corporate income tax, which can range up to 45 percent of net profits. Moreover, only joint ventures with at least 25 percent Saudi ownership interest are eligible for tax holidays. Only Saudi companies or citizens, or those of the other Gulf Cooperation Council (GCC) (Kuwait, Bahrain, Qatar, UAE, and Oman) may engage in internal trading and distribution activities, or own land. Similarly, only joint ventures with at least 51 percent GCC ownership interest are permitted to export duty-free to other GCC countries. Taken together, the above represent a formidable array of privileges and preferences, which can severely disadvantage a foreign investor attempting to operate his wholly-owned company in Saudi Arabia, In addition, the former practice of a Saudi illegally lending his name to a foreign-owned and operated business, so-called "cover-ups," has been curtailed by Royal Decree M/49 of May 21, 1989. Saudis and foreigners who engage in such "cover-ups" to evade Saudi commercial regulations are now subject to severe penalties, including imprisonment, stiff fines, and deportation for the foreigner. While, theoretically, U.S. and other foreign firms are able to participate in Saudi government financed and/or subsidized research and development programs on a national treatment bases, the Embassy is not aware of any examples. Foreign investors are inhibited by visa requirements. Investors or potential investors wishing to visit Saudi Arabia must have a Saudi sponsor to obtain the necessary business visa. On rare occasions, the Saudi Embassy or Consulates may grant, at their discretion, sponsorless business visas to employees of prominent American firms, but this practice is unpredictable. Business visas are valid for only one entry for up to three months, though the Saudi Ministry of Foreign Affairs has pledged to give business people from well known firms multiple entry, 6-month visas. If a businessperson went to Saudi Arabia, then visited an adjacent country, he or she would need to apply for a new visa before reentry, including a new sponsorship letter. Business women and Americans of Arab descent often face difficulties when requesting visas. To work in Saudi Arabia, a Saudi company must formally petition the Ministry of Foreign Affairs on behalf of the American. The Saudi firm then sends the approved petition to the Saudi Embassy in Washington, or to the Saudi Consulates in New York, Los Angeles, or Houston. The American would then need to visit either the Embassy or one of the Consulates to be issued a visa. Within three days of arrival in Saudi Arabia, the American must go to the Foreign Ministry and apply for an "igama" or residence permit. The Saudi employer holds the American's passport, while the American uses the igama for identification purposes. Whenever the American wants to leave Saudi Arabia, the sponsor must get an exit/re-entry or exit visa from the Ministry of Interior, then the American exchanges his or her igama for the passport. Since the Saudi firm holds the passport, it has the potential to exert great influence on the foreign employee's movements. Americans who come to Saudi Arabia cannot directly bring their families with them. The employee must apply for his family's visas in Saudi Arabia and then return to the U.S. to bring the family. As part of the application process, all potential American employees must prove they are college graduates. Openness to Foreign Investment The general Saudi Arabian government attitude is to encourage foreign direct investment. This is particularly true of foreign investment in joint ventures with Saudi partners, though wholly foreign-owned firms are permitted to operate in Saudi Arabia. The government and the private sector have been increasingly active in promoting investment opportunities in Saudi Arabia. The Ministry of Industry and Electricity periodically identifies investment opportunities, as do the Saudi Chambers of Commerce and Industry and private consulting houses. Other government bodies, such as the Royal Commission for Jubail and Yanbu and the Arriyadh Development Authority, have also been active in promoting opportunities in Saudi Arabia's industrial cities as well as in other regions of the country. In addition to the majority government-owned Saudi Arabian Basic Industries Corporation (SABIC), private investment companies, such as the National Industrialization Corporation, the Saudi Venture Capital Group, the Saudi Industrial Development Company and the Saudi Export Company, have also become increasingly active in project development and in seeking out foreign joint venture partners. These companies have tended to concentrate on investment in petrochemical, plastics and metals projects, agro-industry, maintenance industries, advanced information processing, high-technology engineering projects and defense-related industries. The government also uses its purchasing power to encourage foreign investment. In 1985, the Saudi Government reached an agreement with U.S. contractors under the Peace Shield defense procurement program for "offset" joint venture investments equivalent to 35 percent of the Peace Shield program's value. An example of the Peace Shield offset program, the Al-Salam advanced aviation support facility in Riyadh, will be inspected for FAA certification in July 1994. British and French defense firms also have offset requirements. Offset requirements are likely to remain components of major government purchases, especially those involving purchases of military equipment. Major Foreign Investors The United States is the largest foreign investor in Saudi Arabia, with a total investment approaching $3.6 billion. Based on the latest available figures, Japan comes in second place with an investment of $1.37 billion, followed by the United Kingdom with $260.8 million, Switzerland with $186.4 million, and Germany with $119.6 million. Total direct foreign investment in the Kingdom is estimated to be $10.1 billion in 1994, in industrial and non-industrial joint ventures as well as offset projects. Conversion and Transfer Policies There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments) into a freely usable currency and at a legal market clearing rate. There have been no recent changes or 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. 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. The estimated annual U.S. value of local currency used by the Embassy and other U. S. institutions in Saudi Arabia is 3.75 Saudi Riyals per U.S. Dollar. The Embassy purchases local currency at the official rate. It is unlikely that a devaluation or depreciation of that rate will occur during 1994. Expropriation and Compensation The Embassy is not aware of the government ever expropriating property. There have been no expropriatory actions in the recent past or policy shifts which would lead the Embassy to believe there may be expropriatory actions in the near future. Dispute Settlement The Saudi commercial law system is still developing, but the Saudi announcement of it intention to join the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards is a positive step. Dispute settlement in Saudi Arabia continues to be time-consuming and uncertain. Moreover, even after a decision is reached in a dispute, effective enforcement of the judgment can still take years to effect. In general, Saudi litigants have an advantage over foreign parties in any investment dispute, because of their first-hand knowledge of Saudi law and culture and the relatively amorphous dispute settlement processes. As a result, most 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. In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners have blocked foreigners' access to exit visas, effectively forcing them to remain in Saudi Arabia against their will. In cases of alleged fraud, foreign partners also may be jailed to prevent their departure from the country, while awaiting police investigation or adjudication of the case. Royal Decree No. m/4 of October 2, 1989, however, enabled courts to impose precautionary restraint of personal property pending the adjudication of a commercial dispute. This development has diminished the incentive for individuals to physically detain foreign partners pending the resolution of commercial disputes. Thus, it is very important that foreign 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. There have been few investment disputes over the past several years involving U.S. or other foreign investors or contractors in Saudi Arabia, These disputes do not reflect a pattern. The Saudi Arabian 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. Of principal interest to investors who have disputes with private individuals are the Committees for Labor Disputes (see below) under the Ministry of Labor, the Committee for Tax Matters under the Negotiable Instruments Committee (also called the Commercial Paper Committee), also under the Ministry of Finance, which has jurisdiction over disputes involving letters of credit and checks. In addition, the Banking Disputes Committee of the Saudi Arabian Monetary Agency (SAMA) adjudicates disputes between bankers and their clients. Judgments of a foreign court are not accepted and enforced by the local courts. Monetary judgments are based on the terms of the contract, i.e., if the contract is in dollars, the judgement would be in dollars; if unspecified the judgement is in the local currency, Saudi Riyals. Saudi Arabia has a written and consistently applied commercial law. The country does not have a written bankruptcy law, but there are provisions in the law dealing with liquidations and the appointment of receivers. Secured interests in property, both chattel and real, are not recognized and enforced. In mid-June 1994, Saudi Arabia deposited articles of acceptance to the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. Saudi Arabia is not a member of the International Center for the Settlement of Investment Disputes (ICSID - also known as the Washington Convention). Performance Requirements/Incentives 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 a exemption has been obtained from the Ministry of Labor and Social Affairs. However, Saudis only represent about a third of the estimated 7 million workers in Saudi Arabia, with the result that few firms have been able to meet these requirements. Foreign firms, in general, receive almost constant pressure to employ more Saudis. Investors are not required to purchase from local sources or export a certain percentage of output, and their access to foreign exchange is not related to the level of their exports. There is no requirement that the share of foreign equity be reduced over time. The government does not impose conditions on investment such as locating in a specific geographical area, a specific percentage of local content, or local equity, substitution for imports, export requirements or targets, or financing only by local sources. There is no stated Saudi intention to modify these requirements. Investors are not required to disclose proprietary information to the Saudi government as part of the regulatory approval process. Right to Private Ownership and Establishment Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. Private entities have the right to freely establish, acquire, and dispose of interests in business enterprises. The Embassy is not aware of any private enterprises competing with public enterprises, therefore the concept of "competitive equality' has not been tested with respect to access to markets, credit, and other business operations, such as licenses and supplies. Protection of Property Rights The Saudi legal system protects and facilitates acquisition and disposition of all property rights, including intellectual property. The Saudi Arabian Government has acceded to the Universal Copyright Convention; implementation will begin July 13, 1994. Saudi Arabia has had a patent law since 1989 and the patent office accepts applications, but it has not yet issued a patent. Protection is available by product and product-by-process. Product-by-process protection is extended to pharmaceuticals. There are provisions in the patent law for compulsory licenses for non-working and dependent patents. The term of protection is 15 years. The patent holder may apply for a five year extension. Saudi Arabia has a copyright law. However, this law does not extend protection to works that were first displayed outside of Saudi Arabia, unless the author is a Saudi citizen. Saudi Arabia has acceded to the Universal Copyright Convention (UCC). The Saudi government feels that this will be sufficient to extend protection to foreign works. Trademarks are protected under the trademark law. Trade secrets are not specifically protected under any area of Saudi law, however they are often protected by contract. There is no specific protection for semiconductor chip layout design, however, it would be protected under the patent law and the copyright law. Regulatory System: Law and Procedures There are few aspects of the Saudi government which are transparent, though Saudi investment policy tends to be less opaque than most other areas. The Saudi Government does not have a specific policy or laws which foster competition. Saudi tax and labor laws and policies tend to favor high-tech transfers and the employment of Saudis, which may not be the most efficient use of investment resources. Saudi health and safety laws and policies are not used to distort or impede the efficient mobilization and allocation of investments. Bureaucratic procedures are not streamlined or transparent, but Saudi red tape can generally be overcome with persistence. Efficient Capital Markets and Portfolio Investment Saudi policies facilitate the free flow of financial resources. Credit from the commercial banks is allocated on market terms, and foreign investors can readily obtain credit on the local market. The private sector has access to a variety of credit instruments. Soft financing is available from specialized credit institutions: the Saudi Agricultural Bank, the Saudi Credit Bank, the Public Investment Fund, the Saudi Industrial Development Fund, and the Real Estate Development Fund. Legal and regulatory systems are generally consistent with Shari'a or Islamic law, not with international norms. Saudi systems are seldom transparent. Accounting systems are transparent and generally consistent with international norms. Portfolio investment occurs in Saudi Arabia, but the Embassy is unsure of the effectiveness of its regulatory system. The assets of Saudi Arabia's five largest banks (National Commercial Bank, Riyad Bank, Saudi American Bank, Arab National Bank, and Al-Rahji Banking and Investment Corporation) totaled USD 58.7 billion at the end of 1993. These banks comprise 70 percent of the total assets of the 11 of the 12 Saudi banks that have published financial statements for the end of 1993. The Saudi banking system is well capitalized and well provisioned. The Embassy is not aware of any "cross-shareholding" or "stable shareholder" arrangements being used by private firms to restrict foreign investment through mergers and acquisitions. Few private firms have explicit defenses to prevent unsolicited or "hostile" takeovers. The Embassy is aware of only one having taken place, Prince Walid bin Talal bin Abdulaziz Al Saud's unsolicited 1993 takeover of the convenience food chain "Panda". No foreign hostile takeovers have occurred. The Embassy is not aware of any laws or regulations which specifically authorize private firms to adopt articles of incorporation/association which limit or prohibit foreign investment, participation, or control. Foreign participation in the Saudi Arabian Standards Organization (SASO) is not possible. Political Violence There have been no incidents over the past few years involving politically motivated damage to projects and/or installations. Saudi Arabia is not growing increasingly politicized and civil disturbances in the short term are not likely. There are no nascent insurrections, but Saudi Arabia has some belligerent neighbors, including Iraq and Iran. The civil war in Yemen has the potential to destabilize the Gulf region. Labor Recruitment of expatriate labor is regulated jointly by The Ministry of Interior and The Ministry of Labor and Social Affairs. In general, the government encourages the recruitment of Muslim workers, either from Muslim countries or from countries such as India and Sri Lanka with sizeable Muslim minorities. The largest groups of foreign workers now come from Pakistan, the Philippines, and India. Westerners comprise less that 2 percent of the labor force, and the percentage is slowly dropping as they are replaced by Saudis and less expensive expatriates from third world countries. Effective September, 1985, The Ministry of Labor and Social Affairs is required to certify that there are no qualified Saudis for a particular job, before it can be filled by an expatriate worker. In addition, The Ministry of Interior must approve all transfers of expatriate workers from one firm to another. On the other hand, bloc visas are normally available for unskilled workers recruited abroad. Saudi labor law forbids union activity, strikes, and collective bargaining. However, there is no forced or compulsory labor; any required overtime, over and above the usual five and one-half to six day week is compensated, normally at time and a half rates. The minimum age for employment is 13. The Saudi government does not adhere to the ILO Convention protecting worker rights. Saudis generally prefer to invest in labor saving technology rather that utilize foreign labor, when given the choice. Bilateral Investment Agreements The Embassy is not aware of any countries which have bilateral investment protection agreements with Saudi Arabia, but other GCC countries and their nationals receive favorable investment treatment derived from GCC agreements. OPIC and other Investment Insurance Programs The Overseas Private Investment Corporation provides investment insurance programs for qualifying U.S. investors in Saudi Arabia. Details on OPIC coverage can be obtained by calling (202) 336-8575) Foreign Trade Zones/Free Ports Saudi Arabia does not have duty-free import zones or freeports. Capital Outflow Policy There are no limitations on the export of capital and outward direct investment. There are no known incentives for investment in developing countries.