Percent of the World\'s Proven

¶ … percent of the world's proven oil and gas reserves, the Saudi Arabian government has embarked on an aggressive initiative to diversify the country's economy and provide new employment opportunities for young Saudi nationals entering the job market. As part of this initiative, Saudi Arabia has implemented a number of pro-business foreign direct investment laws that are helping achieve this diversification. The purpose of this study was (a) to determine how the government of Saudi Arabia currently regulates foreign investment; (b) to identify the controlling laws that govern this type of investment; and, if so, what are the requirements; and (c) to analyze Saudi foreign direct investment laws through a series of case studies to gain new insights into how the regulatory framework actually operates and affects foreign direct investment in Saudi Arabia today. To this end, a review of the relevant literature and a series of case studies are presented to identify current challenges, obstacles and opportunities for foreign direct investment in Saudi Arabia today. A summary of the research and important findings are presented in the study's conclusion.

FOREIGN DIRECT INVESTMENT IN SAUDI ARABIA

Chapter One: Introduction

Today, the Kingdom of Saudi Arabia has an oil-based economy and an economy with strong government controls. With around 20% of the world's proven petroleum reserves, Saudi Arabia is also the largest exporter of petroleum and plays a prominent role in the Organization of Petroleum Exporting Countries (OPEC) (Saudi Arabia 2011). This point is also made by Aleisa and Dibooglu (2007) who report, "Saudi Arabia is one of the major players in the world oil market and has a significant role in the OPEC cartel. Its fiscal and monetary policy is endogenous with respect to the oil policy" (p. 101). Not surprisingly, the oil and gas industry provides the lion's share (80%) of the country's budget revenues, almost half (45%) of its GDP, and an overwhelming 90% of Saudi Arabia's export earnings (Saudi Arabia 2011). The Saudi leadership, though, is pursuing a more diversified economy in an effort to reduce the country's reliance on the petroleum sector as well as to provide new employment opportunities for Saudi nationals (Saudi Arabia 2011).

At present, the primary economic diversification initiatives underway in Saudi Arabia include power generation, telecommunications, natural gas exploration, and the petrochemical sectors (Saudi Arabia 2011). Pursuant to these goals, Saudi Arabia approved a new foreign investment code that provides foreign investors with the same incentives, benefits, and assurances that are offered to Saudi nationals and Saudi enterprises (Cordesman 2003). According to Cordesman, "The law allows foreigners to own property either independently or with a Saudi partner. It allows investors to remit funds abroad and reduce taxes by 15% for foreign companies with an annual profit in excess of $26,700" (p. 333).

More recently, Saudi Arabia joined the World Trade Organization in December 2005 in an effort to attract increased foreign investment (Saudi Arabia 2011). In this regard, Idris (2007) reports that, "In October 2005, Saudi Arabia successfully joined the World Trade Organization (WTO) after 12 years of negotiation. This will have a dramatic impact as it opens the kingdom's long protected economy" (p. 36). In addition, the Saudi government has established six so-called "economic cities" throughout the kingdom in another effort to attract additional foreign investment and there are plans to invest $373 billion during the period 2010 to 2014 for further economic development initiatives (Saudi Arabia 2011). According to the promotional literature provided by the Saudi Arabian General Investment Authority:

Each city will feature modern building design, world-class services and infrastructure and ubiquitous connectivity. These built-in advantages, combined with attractive investment incentives and a supportive regulatory environment will create significant competitive advantages for business. SAGIA is also working with leading environmental institutions to ensure that the Economic Cities are developed with minimum negative environmental impact and maximum energy efficiency and sustainability (Economic Cities 2011, p. 1)

In this environment, identifying current regulatory guidance and laws concerning foreign direct investment in Saudi Arabia represents a timely and valuable enterprise which is also the purpose of this study as set forth below.

Statement of the Problem

Foreign investors are faced with some daunting challenges when it comes to selecting a target country for investment. Among the most important of these challenges is the country's business climate which can reasonably be expected to have a profound effect on the success of such investments (Lee, Baimukhamedova & Akhmetova 2010). Therefore, identifying the current state of foreign direct investment in emerging economies such as Saudi Arabia is an essential element in the process, a need that directly relates to the study's purpose which is set forth below.

Statement of the Purpose

The purpose of this study was three-fold as follows:

1. To determine how the government of Saudi Arabia currently regulates foreign investment;

2. To identify the controlling laws that govern this type of investment; and, if so, what are the requirements?

3. To analyze Saudi foreign direct investment laws through a series of arbitral case studies to gain new insights into how the regulatory framework actually operates and affects foreign direct investment in Saudi Arabia today.

Overview of the Study

This study used a four-chapter format to achieve the above-stated purpose. Chapter one of the study was used to introduce the topics under consideration, including a discussion concerning the selection of the topics, a statement of the problem to be considered as well as a statement of the problem. Chapter two of the study provides a review of the relevant literature concerning current foreign direct investment issues in Saudi Arabia as well as controlling legislation that has been implemented in recent years to facilitate new foreign direct investment in the Kingdom. Chapter three of the study presents a series of case studies of arbitration of contracts in Saudi Arabia involving supranational parties, and the concluding chapter provides a summary of the research and conclusions.

Chapter Two: Review and Analysis

Background and Overview

Following the accession of Saudi Arabia to the World Trade Organization in 2005, the kingdom has emerged as a hot spot of foreign direct investment activity (Investing in Saudi Arabia 2011). Across the board, Saudi Arabia has taken steps to transition its harvest-based economic activities into value-added activities that provide new opportunities for growth and employment (Investing in Saudi Arabia 2011). The current Saudi five-year plan for economic development includes priorities for creating new employment opportunities for younger Saudi nationals who are expected to enter the workforce in the coming years (Investing in Saudi Arabia 2011).

For potential foreign direct investors, this may be a particular salient issue since it will likely affect what types of jobs that will be expected from newly established enterprises and how Saudi nationals may expect to be treated. For instance, Idris (2007) points out that even Saudi leadership teams are faced with similar challenges as they seek to provide new employment opportunities for Saudi up-and-comers: "Executives and managers in Saudi Arabia face great challenges in their endeavor to improve the performance of their organizations. The greatest challenges of all are cultural issues and work practices that limit employee performance levels compared with those in Western international companies" (p. 37). Based on his personal interviews with Saudi executives and his long-term empirical observations, Idris (2007) concludes that, "Keeping and raising a wide base of Saudi technical and skilled labor staff is a challenge because Saudis are more motivated by status and position. Many young Saudis have grown up in luxury, seeing their parents getting well-paid, high-status positions" (p. 37).

There are some powerful cross-cultural issues that will inevitably affect any foreign direct investment initiative that must therefore be taken into account when formulating plans for the Saudi market. In this regard, Idris reports that, "Studies of the culture in Saudi Arabia have indicated that it is fairly homogenous, like most Middle Eastern nations, due mainly to the profound effects of Islamic teachings on the society. Islam infiltrates in all aspects of life in Saudi Arabia, and there is a strong marriage of Islam and state" (p. 38). Western investors may be particularly perplexed by the effect these fundamentally different worldviews have on contractual obligations and performance, which can reasonably be expected to lead to contractual disputes. For instance, Idris points out that, "Islam influences all decisions for Arabs including business decisions. Fatalism is away of life in the Middle East, and Saudis believe that the ultimate control over the environment is in the hands of God. This contrasts sharply with the culture in the United States, which has a strong control orientation regarding the environment" (2007, p. 38).

The difference in perspective concerning performance and contractual obligations is exemplified in the Saudi proverb, "There is something good in every delay"; however, as Idris emphasize, "Unforeseen delays are unacceptable excuses in the Western world" (2007, p. 38). Before assuming that Dr. Idris bases his analysis on a warped ethnocentric view of Saudi Arabia, it should not pointed out that he is the chief of the engineering division of the Yanbu oil refinery of Saudi Aramco who has more than 17 years' experience in refining engineering and planning, including project coordination and plant commissioning including several executive leadership positions with Saudi Aramco. Consequently, his observations concerning the business climate in Saudi Arabia with respect to the significance of religion in the Kingdom can be considered authentic. According to Indris, with respect to the perception of performance and contractual obligations among Saudis, "It should be noted that the issue is not with the belief itself but rather with people's misguided interpretations of the belief and Islam teachings. While Islam teaches that ultimate control is in the hands of God, it also teaches that people should exert their utmost efforts to better their lives" (p. 38). These issues have special salience for foreign direct investors who may experience disputes based on such misinterpretations that cannot be predicted but must be expected. In this regard, Idris concludes that, "Misguided interpretations have a strong impact on the business environment and the commitment to setting and meeting goals and targets in the kingdom. Accountability in running businesses is weak, and it is not uncommon to attribute business mistakes to fate" (2007, p. 38).

Notwithstanding these fundamental differences in worldviews, the Saudi government has launched a number of initiatives that are specifically designed to attract new foreign direct investment. Pursuant to these goals, the Saudi government established the Saudi Arabian Investment Authority which has been tasked with:

1. Creating a pro-business environment;

2. Providing comprehensive services to investors; and,

3. Fostering investment opportunities in energy, transportation and knowledge-based industries (Investing in Saudi Arabia 2011).

The Saudi Arabian General Investment Authority (SAGIA) cites the following factors as being among the more compelling for attracting foreign investors to the kingdom today:

1. Saudi Arabia is ranked 4th in the world for "fiscal freedom" and it is the seventh most rewarding tax system in the world;

2. According to the World Economic Forum, Saudi Arabia is the seventh freest labor market in the world;

3. Saudi Arabia is 23 among the world's 25 largest economies and has the largest economy in the Middle East-North African (MENA) region;

4. Saudi Arabia is one of the world's fastest growing countries: per capita income is forecasted to rise from $20,700 in 2007 to $33,500 by 2020;

5. Saudi Arabia is the world's fastest reforming business climate and the largest free market in the MENA;

6. Saudi Arabia economy accounts for 25% of total Arab GDP;

7. Saudi Arabia ranks 13th out of 181 countries for the overall ease of doing business globally and seventh in terms of ease of paying taxes;

8. Saudi Arabia is ranked first for ease of registering property and it is the largest recipient of foreign direct investment in the Arab world (The Hard Facts 2011).

In sum, the SAIG emphasizes that, "As well as a progressive regulatory environment, generous financial incentives and one of the world's most stable currencies, the Kingdom offers an excellent standard of living -- thanks to our huge experience in hosting expatriate workers and professionals from around the world" (Investment Climate 2011, p. 1)

In addition, the administrative steps that are needed to form a business in Saudi Arabia have been simplified and the process is now fairly straightforward and can be accomplished relatively quickly (Investing in Saudi Arabia 2011). The first step in forming a company in Saudi Arabia involves simply obtaining a foreign investment license and commercial registration (Investing in Saudi Arabia 2011). In those cases where the new enterprise involves industrial projects, investors can opt to obtain an interest-free loan from the Saudi government, but this option requires a feasibility analysis; in the alternative, industrial projects can opt to take advantage of Saudi government-leased land but this option requires engineering drawings as a prerequisite (Investing in Saudi Arabia 2011).

Controlling Legislation for New Businesses in Saudi Arabia

The Saudi regulatory guidance for companies provides for the following types of organizations:

1. Joint-liability company;

2. Limited partnership;

3. Particular partnership;

4. Joint stock company;

5. Stock partnership company;

6. Limited liability company;

7. Company with changeable capital; and,

8. Cooperative company (Applications & Procedures 2011)

All of the foregoing legal entities, with the exception of the particular partnership, are regarded as being a legal person under Saudi law; however, the Saudi government emphasizes that, "This legal person does not invoke against third parties until declaration procedures are finalized (managers or members of board of directors announce company contracts and amendments thereto, according to the Regulations for Companies)" (Applications & Procedures 2011, p. 3).

The salient articles of the Saudi Foreign Investment Law (promulgated 10 April 2000) for the purposes of this study are set forth in Table 1 below.

Table 1

Salient Articles of the Saudi Foreign Investment Law (10 April 2000)

Section

Content

Article Two:

1. Without prejudice to the provisions of the laws and agreements, the authority shall issue a license for foreign capital investment in any investment activity in the Kingdom, whether permanent or temporary.

2. The authority shall act on the investment's application within thirty days of the submission of all the documents required by the regulations. If the specified period lapses without the authority acting on the application, it shall issue the required license to the investor.

3. If the authority rejects the application within the prescribed period, the decision must be justified, and the party whose application has been rejected shall have the right to appeal such decision according to laws.

Article Three:

The council shall have the authority to issue a list of activities excluded from foreign investment.

Article Four:

Subject to the provisions of Article 2, the foreign investor may obtain more than one license for different activities, and the regulations shall specify the necessary requirements.

Article Five:

Foreign investments licensed under the provisions of this Law may be in either of the following forms:

1. Firms jointly owned by a national and foreign investor.

2. Firms wholly owned by a foreign investor.

The legal form of the firm shall be determined in accordance with laws and directives.

Article Six:

A project licensed under this Law shall enjoy all the benefits, incentives and guarantees extended to a national project, according to laws and directives.

Article Seven:

A Foreign Investor may repatriate its share that is derived either from the sale of its equity, the liquidation surplus, or from profits generated by the firm, or to dispose of it in any other lawful manner. The foreign investor may also transfer the amounts required to settle any contractual obligations related to the project.

Article Eight:

A foreign firm licensed under this Law may acquire necessary real estate as needed for operating the licensed activity, or for housing all or some of its staff, subject to the provisions governing real estate ownership by non-Saudis.

Article Nine:

The foreign investor and its non-Saudi staff shall be sponsored by the licensed firm.

Article Ten:

The authority shall make available to all interested investors required information, clarifications and statistics as well as provide them with all services and carry out all procedures to facilitate and complete all investment related transactions.

Article Eleven:

The foreign investor's investments may not be confiscated, wholly or partially without a court judgment. Moreover, they may not be subject to expropriation, wholly or partially, except for public interest, against a fair compensation according to laws and directives.

Article Twelve:

1. The authority shall notify the foreign investor in writing of any violation of the provisions of this Law and its regulations, in order to rectify such violation within the period of time the authority deems appropriate for the rectification of the violation.

2. Without prejudice to any harsher penalty, the foreign investor shall be subject to any of the following penalties if the violation persists:

a. Withholding all or some of the incentives and benefits given to the Foreign Investor.

b. Imposing a fine not exceeding 500,000 (Five hundred thousand Saudi riyals).

c. Revoking the foreign investment license.

3. The penalties referred to in paragraph (2) above, shall be imposed pursuant to a resolution by the board of directors.

4. The resolution issued may be appealed before the Board of Grievances in accordance with its Law.

Article Thirteen:

Without prejudice to agreements to which the Kingdom of Saudi Arabia is party:

1. Disputes arising between the government and the foreign investor in relation to its investments licensed in accordance with this Law shall, as far as possible, be settled amicably. Failing such settlement, the dispute shall be settled according to the relevant laws.

2. Disputes arising between the foreign investor and its Saudi partners in relation to its investments licensed in accordance with this Law shall, as far as possible, be settled amicably. Failing such settlement, the dispute shall be settled according to relevant laws.

Article Fourteen:

All foreign investments licensed under this Law shall be treated in accordance with applicable tax provisions and amendments thereto in the Kingdom of Saudi Arabia.

Article Fifteen:

The foreign investor shall comply with all laws, regulations and directives in force in the Kingdom of Saudi Arabia, as well as international agreements to which the Kingdom is party.

Article Sixteen:

The implementation of this Law shall be without prejudice to acquired rights of the foreign investments, legally existing before this Law comes into force. However, such projects shall be governed by provisions of this Law, as far as conducting their activities, or increasing their capital is concerned.

Article Seventeen:

The authority shall issue the regulations and they shall be published in the Official Gazette and shall become effective as of the date of its publication.

Article Eighteen:

This Law shall be published in the Official Gazette and shall become effective thirty days after its publication. It shall supersede the Foreign Capital Investment Law, issued by Royal Decree No. (M/4), dated 2/2/1399 H, as well as any provisions inconsistent therewith.

The revised Saudi Finance and National Economy Ministry's Foreign Direct Investment Code set forth in Table 1 above contained the following significant changes for foreign investors:

1. The newly established Saudi Arabian General Investment Authority (SAGIA) must make decisions within 30 days after receiving applications from new companies;

2. A foreign direct investor can obtain more than one license for various activities, and licensed investments may be joint ventures or fully owned enterprises (a licensed project enjoys all of the benefits, incentives and guarantees enjoyed by a Saudi national project);

3. A foreign direct investor may freely transfer the proceeds of a sale of its shares, profits and benefits from liquidation.

4. A licensed enterprise may own the necessary premises and real estate;

5. Sponsorship of the foreign investor and non-Saudi personnel will be by the licensed enterprise;

6. No investment may be sequestered except by a legal award, and a foreign investor may appeal such an award to the Saudi Grievance Bureau;

7. Amendments to the country's tax rates on foreign business profits to not exceed 30%, a reduction from the previous ceiling of 45%;

8. Changes in legislation that allow foreign companies to own 100% of projects and property ownership, compared to the previous limit of 49% stake in joint ventures requiring a Saudi sponsor;

9. The Saudi Industry Development Fund has confirmed that foreign businesses qualify for soft loans even if the enterprise is completely foreign owned (Cordesman 2003, pp. 333-334)

The articles set forth in Table 1 above have been implemented pursuant to Saudi Arabia's Executive Rules of the Foreign Investment Act, salient articles for the purposes of this study of which are set forth in Table 2 below.

Table 2

Salient Articles of the Executive Rules of the Foreign Investment Act

Article

Content

Article One

Foreign Investor: A natural person who is not a Saudi national, or a corporate entity, partners thereof are not Saudi nationals.

Foreign Investment: Investment of Foreign Capital in an activity licensed under the Act and the rules

Foreign Capital: For purposes of the Act and the Rules, Foreign Capital shall mean, but is not limited to, the following assets and rights so long as they are held by a Foreign Investor:

1. Cash, securities and commercial papers.

2. Foreign Investment profits if reinvested to increase capital expand existing investment entities or establish new ones.

3. Machinery, equipment, fixtures, spare-parts, means of transportation and production requirements related to the investment.

4. Intangible rights such as licenses, intellectual property rights, technical know-how, administrative skills and production techniques.

Article 2:

The Authority is authorized to issue a license for foreign capital investment in the Kingdom for any investment activity whether permanent or temporary with the exception of the activities excluded under the third article of the Act.

Article 3:

The Board of Directors shall periodically review the list of activities excluded from foreign investment in order to shorten it and submit it to the Council to consider its approval.

Article 4:

Foreign Investments licensed under the provisions of The Act and The Rules may be in either of the following forms:

1. Entities jointly owned by a national and a foreign investor.

2. Entities wholly owned by a foreign investor.

Article 5:

Foreign Investment projects shall enjoy all the benefits, incentives and guarantees extended to national projects, including the following:

1. The incentives stipulated in the Protection and Promotion of National Industries Act issued by Royal Decree No. 50 dated 23.12.1381 H.

2. Ownership of real estate required to carry out the investor's licensed activity or for his residence and his staff housing according to the provisions of the Regulation of Ownership and Investment in Real Estate by Non-Saudis issued by Royal Decree No. M/15 dated 17.04.1421 H.

3. The benefits ensuing from agreements of avoiding double taxation and agreements of promotion and protection of Investment which are signed by the Kingdom.

4. Prohibition of any full or partial confiscation of investment without a court order or subjecting them to expropriation wholly or partly except for the public interest and against fair compensation.

5. Foreign investors are entitled to repatriate their share that is derived from the sale of his equity, from surplus of liquidation or the profits generated by the entity and to dispose of it by any legal obligations. He is also entitled to transfer required amounts to fulfill any contractual obligations in respect of the project.

6. Shares can be freely exchanged amongst partners and others.

7. The licensed entity is entitled to sponsor the foreign investor and his non-Saudi staff.

8. The licensed entity is entitled to obtain industrial loans in accordance with the regulations of The Saudi Industrial Development Fund.

9. The losses incurred by the entity may me carried forward to the following years and will not be calculated at tax settlement of the years during which the entity reaps profits.

Article 6:

The conditions for granting a Foreign Investment license by The Authority shall include the following:

1. The investment activity to be licensed should not be in the List of Excluded activities from Foreign Investment.

2. The intended Product should comply with the Kingdom's rules and regulations, or the laws of the European Union or the United States of America in the absence of those laws, in terms of standards and specifications, raw materials and production processes.

3. The amount of capital invested shall not be less than twenty five million Saudi Riyals for agricultural entities.

4. The amount of capital invested shall not be less than five million Saudi riyals for industrial entities.

5. The amount of capital invested shall not be less than two million Saudi riyals for other entities in accordance to detailed conditions and criteria laid down by Board of Directors.

6. The Board of Directors may reduce the minimum invested capital in projects established in areas specified by it or in projects which require high technical experiences or export projects.

7. The Foreign Investor should not have been convicted in the past for substantial violations of the provisions of The Act.

8. The Foreign Investor should not have been convicted in the past of financial or commercial violations whether in the Kingdom or in other countries.

9. The grant of a license shall not result in the breach of any international or regional agreement to which the Kingdom is a party.

Article 7:

The Foreign Investor may obtain more than one license to practice the same activity or a different activity(s) subject to the following conditions:

1. The conditions set forth under Article (6) of The Rules must be satisfied.

2. Licensing applications to practice the same activity submitted by natural or moral persons shall be considered as expansion of established projects applications.

3. The Board of Directors will reconsider these conditions periodically or when deemed necessary.

Article 8:

The Foreign Investor may purchase local or foreign investment entities or shares thereof subject to the conditions set forth in Article (5) and Article (6) of the rules.

Article 9:

The Authority shall prepare an investment guide containing a description of the procedures for obtaining both permanent and temporary licenses and their modifications, as well as the forms, required documents to obtain the licenses and any information needed by the investor. The guide shall also list the incentives, benefits and guarantees to be enjoyed by The Foreign Investor. In addition, the guide must contain substantial information about the following:

1. Foreign Investment Act, its rules and supplementary decisions.

2. The Statute of the General Investment Authority and the Executive Rules of the General Investment Authority.

3. The Regulation of Ownership and Investment in Real Estate by Non-Saudis.

4. Protection and Promotion of National Industries Act.

5. Labor and Workmen Act and Social Insurance Act.

6. Zakat, Tax and Customs Regulations.

7. Legal Shari'a Procedures Act.

8. Penal Procedures Act.

9. Legal Profession Act.

10. Companies Regulations (Commercial Register, Trade Fraud, Banks Monitoring).

11. Intellectual Property Protection Regulations (Trade Marks Act, Copyrights Protection Act, Patents Act).

11. Residence Act.

The guide shall also contain special sections on the customs and traditions observed in the Kingdom and shall be updated regularly.

Article 10:

Applications to obtain a foreign investment license shall be submitted to the Applications Reception Unit of the Center, using the designated form. The application must contain all the necessary information; satisfy all documentation requirements cited therein and be signed by the applicant or his duly authorized representative. The Center shall notify the license applicant by a written or electronic receipt note including the number of the application record and its date.

Article 11:

The Authority may accept complete licensing applications and the required attached documents that are delivered by post, e-mail or fax. The licensing decision may be issued accordingly; provided that it will be delivered to the applicant only after The Authority receives the original documents when deemed necessary.

Article 12:

Decisions on submitted applications are subject to the provisions of The Act, The Rules and the resolutions of The Board of Directors. The Governor, or his assigned delegate, shall sign the licensing decisions within thirty days. National holidays shall be excluded from the mentioned period.

Article 13:

The Center shall notify the investor, by hand delivery, registered mail, e-mail or any other means, of the final decision issued with respect to his application.

Article 14:

If the Authority rejects the application for a new license or the modification of an existing license, its rejection shall be justified. The foreign Investor may object to the rejection decision before the Board of Directors within thirty days effective from the date on which he is notified of the rejection decision.

Article 15:

The Board of Directors shall consider the objection and reach a decision on it within thirty days from the date of its submittal. If the objection was rejected, the license applicant shall have the right to challenge the rejection decision before the Board of Grievances.

Article 16:

The licensed investor shall start the practical steps required for setting up the entity in accordance with the time schedule submitted by him to The Authority. The Authority shall, if The Foreign Investor shows adequate reasons for delays in the implementation procedures, extend the period specified in the schedule, provided that the extensions shall not exceed one year in total. The extension shall not exceed one year unless a decision to that effect is made by The Board of Directors.

Article 17:

When The Authority does not approve the extension requests specified by the time table, and if The Foreign Investor is found not to be diligent after the extension, The Board of Directors may then revoke the license. A foreign investor whose license is revoked under this Article shall bear the consequences of revocation.

Article 18:

Licensed entities must abide by the conditions and primary objectives upon which the licenses are issued. No modifications shall be made unless approved by The Authority.

Article 19:

Owners of licensed entities shall adopt an accredited accounting system and a budget for their entities approved by an authorized accounting office. Upon request, owners of licensed entities shall provide the Authority with statistics or information in respect of their entities.

Article 20:

Authority officials, empowered by a written mandate by The Governor or his designated representative, shall have the right to monitor the implementation of the provisions of The Act and The Rules. For this purpose, they have the right to examine records and all documents relating to the investment activity and shall pinpoint violations and submit necessary reports to The Governor or his designated representative. The assigned officials shall maintain the confidentiality of the information and documents they examine.

Article 21:

The Board of Director shall issue a list of violations and penalties pertaining to the violation of the provisions of The Act, The Rules, the licensing conditions and the rules of their implementation and the implementation of the penalties therein.

Article 22:

The Authority shall notify the Foreign Investor in writing regarding any violation of the provisions of The Act, The Rules and the licensing conditions; and shall allow a suitable period of time, as specified by the list of violations and penalties, to correct them. If the Foreign Investor fails to implement the necessary corrections, he shall be subject to any of the penalties provided for in the list of violations and penalties.

Article 23:

The Board of Directors shall form a committee consisting of at least three members, one of whom shall be a legal counselor and shall develop rules and procedures for its functioning. The responsibilities of the committee shall be to review violations of the provisions of The Act provisions and The Rules and the licensing conditions .The committee shall hear the parties accused thereof, to consider their defenses and to suggest what it sees according to what specified by The Act and the list of violations and penalties. The Board of Directors shall render the penalty decision.

Article 24:

The Foreign Investor with to whom the penalty decision is issued according to Article 23 of The Rules may object to the rejection decision before the Board of Directors within thirty days effective from the date on which he is notified of the rejection decision.

Article 25:

The Board of Directors shall consider the objection and make a decision on it within thirty days from the date of its submittal. If The Board of Directors confirms the penalty the license applicant shall have the right to challenge the rejection decision before the Board of Grievances within 60 days effective from the date on which he was notified of the decision.

Article 26:

The Board of Directors shall form, subject to Article 13, paragraph 2 of The Act, a committee composed of at least a chairman and two members to be named The Investment Disputes Settlement Committee. This committee shall consider the disputes arising between the Foreign Investor and his Saudi partners in respect of a licensed investment under The Act. The committee shall work to settle the dispute amicably. In case an amicable settlement could not be reached, the dispute shall be settled through arbitration according to the Arbitration Act and its executive rules issued by Royal Decree No. (46) Dated 12.7.1403 H. This committee is the competent body to consider the dispute as stipulated in the Arbitration Act.

Chapter Three: Case Studies of Arbitration of Contracts in Saudi Arabia

This study employed a review of the relevant literature together with a series of case studies of several examples of foreign direct investment in Saudi Arabia to identify potential challenges and obstacles that can be reasonably expected to be encountered during the investment and administrative process. The use of a literature review to supplement qualitative case study findings is congruent with the guidance provided by Fraenkel and Wallen (2001) who report, "Researchers usually dig into the literature to find out what has already been written about the topic they are interested in investigating. Both the opinions of experts in the field and other research studies are of interest. Such reading is referred to as a review of the literature" (p. 48). In addition, Gratton and Jones (2003) emphasize the need to include a literature review component in virtually every type of social research project today. According to these authorities, "No matter how original you think the research question may be, it is almost certain that your work will be building on the work of others. It is here that the review of such existing work is important" (Gratton & Jones 2003, p. 51). A well-conducted literature review can also help identify gaps in the current body of knowledge in a given area of interest. In this regard, Gratton and Jones add that, "A literature review is the background to the research, where it is important to demonstrate a clear understanding of the relevant theories and concepts, the results of past research into the area, the types of methodologies and research designs employed in such research, and areas where the literature is deficient" (2003, p. 51). Likewise, Wood and Ellis (2003) also cite the fresh insights that can be discerned from a well-conducted literature review as part of the qualitative research process:

1. It helps describe a topic of interest and refine either research questions or directions in which to look;

2. It presents a clear description and evaluation of the theories and concepts that have informed research into the topic of interest;

3. It clarifies the relationship to previous research and highlights where new research may contribute by identifying research possibilities which have been overlooked so far in the literature;

4. It provides insights into the topic of interest that are both methodological and substantive;

5. It demonstrates powers of critical analysis by, for instance, exposing taken for granted assumptions underpinning previous research and identifying the possibilities of replacing them with alternative assumptions;

6. It justifies any new research through a coherent critique of what has gone before and demonstrates why new research is both timely and important (p. 51).

The selection of the case study methodology was based on its specific attributes that allow it to be used to achieve the study's guiding research purposes. In this regard, qualitative researchers have a number of different approaches available to them, including the historical methodology, ethnography, phenomenology, hermeneutics, grounded theory, action research and the case study (Burton & Steane, 2004). With respect to the latter approach, Zikmund (2000) advises that the case study methodology is "an exploratory research technique that intensively investigates one or a few situations similar to the researcher's problem situation" (p. 722). Likewise, Neuman (2003) reports that, "In case study research, researchers examine, in-depth, many features of a few cases over a duration of time. In a case study, a researcher may intensively investigate one or two cases or compare a limited set of cases, focusing on several factors" (p. 33). Taken together, these attributes indicate that a qualitative case study approach is best suited for the purposes of this study using the cases discussed further below which used arbitration as a conflict resolution device in a supranational legal environment. According to O'Looney (1998), there are three main ways that parties to a contract can resolve disputes in such environments, as described in Table 3 below.

Table 3

Common Conflict-Resolution Approaches in Supranational Environments

Approach

Description

Negotiation

This approach essentially involves the parties in dispute discussing the conflict with each other with an eye toward trying to find a mutually satisfactory resolution to the conflict. As a conflict resolution strategy, negotiation is most effective when all the parties in conflict have good communication skills, good intentions, and a general willingness to compromise.

Mediation

This approach resembles negotiation in that the outcome is one that is voluntary. What mediation adds is the expertise of a skilled mediator who helps the parties to identify their interests, generate multiple solutions, and discover the solution(s) that provides the best chance of mutual satisfaction and of avoiding further conflict, and insures that the parties' rights are respected and that the agreement is fair and "tight" in all respects. Mediation is typically successful with all the persons who could negotiate a solution on their own, but is additionally successful with a large proportion of people who could not come to a satisfactory resolution without some assistance. If all else is equal, mediation could be described as being a bit more expensive than negotiation because the services of a mediator must be purchased. Studies of the effectiveness of mediation suggest, however, that the expertise of a skilled mediator can often mean the difference between a "band-aid" resolution that quickly falls apart and a resolution that is effective for the long-term. This is the case because mediators are trained to (a) probe for and address hidden issues, including issues related to respect and psychological satisfaction, that if not addressed tend to generate additional conflict; and (b) identify and test for potential weaknesses in mediated agreements. That is, mediators work to insure that parties in conflict do not simply paper over the conflict or reach unrealistic or ineffective resolutions.

Arbitration

This method essentially involves the parties presenting their case to a neutral third party and having this third party, the arbitrator, judge the merits of each side's case. In binding arbitration, the parties agree to submit to the judgment and remedies specified by the arbitrator. Arbitration can resemble, and even mimic, the legal processes (e.g., rules of evidence for civil suits, etc.) that would be engaged if the conflict cannot be resolved, or it can be customized to meet the needs and styles of the parties. If arbitration is to be used as a conflict resolution mechanism, however, it is probably best that the form and procedures to be used in the arbitration are specified in the initial contract or at some time before a conflict actually occurs. Otherwise, it is quite possible that the parties will waste resources strategizing and arguing over the rules to be used in arbitration.

Source: O'Looney 1998, p. 152

According to Black's Law Dictionary, arbitration is "a process of dispute resolution in which a neutral third party (arbitrator) renders a decision after a hearing at which both parties have an opportunity to be heard" (p. 105). Foreign investors are increasingly relying on arbitration as the most efficient approach to resolving their supranational disputes as illustrated in the cases reviewed below.

Case Study No. 1: Case # 7063

In re:

Final award in case no. 7063 of 1993

Parties:

Claimant:

Contractor (Saudi Arabia)

Defendant:

Employer (Saudi Arabia [Italian owner, Swiss parent company])

Subject matters:

1. Doctrine of riba;

2. Prohibition of interests, and,

3. Costs of arbitration

In this case, the doctrine of riba which precludes the charging of interest under the provisions of Islam's shari'a law, was shown to be inapplicable to the award of interest by the Italian contractor defendant to the Saudi contractor claimant. The panel of arbitrators held that although riba prohibits the assessment of unnecessarily usurious charges, it does not preclude the charging of interest which is deemed just. According to Saeed (1999), this holding is congruent with recent trends in Islamic banking that have identified legitimate ways to developing alternative solutions that comply with the injunctions of Islamic law as codified in the riba. In this regard, Saeed reports that, "This has been accomplished by putting more emphasis on the legal definition of contracts and transactions, and by emphasizing the literal meaning of related shari'a texts of the issue of riba" (1999, p. 2).

In this case, the doctrine of riba falls within the larger set of Islamic laws that relate to relationships between Islamic countries and non-Muslims. For instance, according to Bsoul, "In international relations, known in Arabic as 'Mu'amalat,' or in Islamic law as Siyar (Islamic international law) evolved in the second half of the second century and became a branch of Islamic law. Siyar deals with the mutual relations between Muslims and non-Muslims. For example, Islam forbids riba (usury or unlawful interest proscribed by the Shari'a law)," (p. 71). In the instant case, the panel of arbitrators specifically held that, "We agree that anything in the nature of usury or unjust taking of interest, as well as compound interest, are barred by this doctrine under shari'a law. But we do not accept that it also bars all awards of compensation for financial loss" (p. 77).

The decision in this case was shown to be congruent with the same types of banking practices that are used in other countries, including those using Islamic law as a basis. In this regard, the court added that, "This conclusion is reflected in modern commercial life in Saudi Arabia in the same way as anywhere else. Thus, commercial banks take and charge interest for loans, and there is nothing in the Saudi banking code which prohibits this" (p. 77).

Interestingly, the panel did hold that the amount of interest to be charged to the defendant should be less than the rates charged by commercial banks as a way of complying with shari'a's riba prohibitions, but rather that the rate charged should only be based on "a rate which reflects the incidence of annual inflation over the period [at issue]" (p. 78). Finally, following a series of rationalizations based on current Saudi foreign direct investment laws, the panel in this case emphasized that, "In these circumstances, we consider that the claimant is clearly entitled to its costs of this arbitration" (p. 79). In sum, this case illustrates that arbitrators will go out of their way to be fair in adjudicating claims against foreign investors but they are adamant about satisfying legitimate contractual obligations irrespective of the nationality of the actors involved. This case also shows that the religious proscriptions of Islamic law do not necessarily always fully extend into the realm of commercial enterprise.