Foreign Direct Investment Laws and Arbitration in Saudi Arabia

Introduction

Today, the Kingdom of Saudi Arabia has an oil-based 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 that "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 80% of the country's budget revenues, almost 45% of its GDP, and an overwhelming 90% of Saudi Arabia's export earnings (Saudi Arabia 2011). Saudi leadership, however, is pursuing a more diversified economy in an effort to reduce the country's reliance on the petroleum sector and 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 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 "economic cities" throughout the kingdom in another effort to attract 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.

Foreign investors face daunting challenges when 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 of the decision-making process.

The purpose of this study was three-fold:

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 their requirements; and

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.

This study used a four-chapter format to achieve the above-stated purpose. Chapter one introduces the topics under consideration, including a discussion of the selection of topics, a statement of the problem, and the study's purpose. Chapter two provides a review of the relevant literature concerning current foreign direct investment issues in Saudi Arabia as well as controlling legislation implemented in recent years to facilitate new foreign direct investment in the Kingdom. Chapter three 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.

Background and the Saudi Investment Climate

Following Saudi Arabia's accession to the World Trade Organization in 2005, the kingdom emerged as a hub 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 expected to enter the workforce in the coming years (Investing in Saudi Arabia 2011).

For potential foreign direct investors, this is a particularly salient issue since it will likely affect what types of jobs are expected from newly established enterprises and how Saudi nationals may expect to be treated. As Idris (2007) points out, even Saudi leadership teams face similar challenges: "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 personal interviews with Saudi executives and 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 powerful cross-cultural issues that will inevitably affect any foreign direct investment initiative and 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 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 a way 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 emphasizes, "Unforeseen delays are unacceptable excuses in the Western world" (2007, p. 38). It should be noted that Idris serves as chief of the engineering division of the Yanbu oil refinery of Saudi Aramco and has more than 17 years of experience in refining engineering and planning, including project coordination, plant commissioning, and several executive leadership positions. Consequently, his observations concerning the significance of religion in the Saudi business climate can be considered highly credible. According to Idris, "It should be noted that the issue is not with the belief itself but rather with people's misguided interpretations of the belief and Islamic 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. 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 specifically designed to attract new foreign direct investment. Pursuant to these goals, the government established the Saudi Arabian General Investment Authority (SAGIA), 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).

SAGIA cites the following factors as among the more compelling for attracting foreign investors to the kingdom:

1. Saudi Arabia is ranked 4th in the world for "fiscal freedom" and has 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 ranks 23rd among the world's 25 largest economies and has the largest economy in the Middle East–North Africa (MENA) region;

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

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

6. Saudi Arabia's 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; and

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

In sum, SAGIA 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).

The administrative steps needed to form a business in Saudi Arabia have been simplified and can now be accomplished relatively quickly (Investing in Saudi Arabia 2011). The first step involves obtaining a foreign investment license and commercial registration. In cases where the new enterprise involves industrial projects, investors may obtain an interest-free loan from the Saudi government (subject to a feasibility analysis); alternatively, industrial projects may take advantage of Saudi government-leased land (subject to engineering drawings as a prerequisite) (Investing in Saudi Arabia 2011).