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U.S. Department of State
Saudi Arabia Country Commercial Guide
Office of the Coordinator for Business Affairs
SAUDI ARABIA COUNTRY COMMERCIAL GUIDE
FY 1996
This Country Commercial Guide (CCG) presents a comprehensive look at
Saudi Arabia's commercial environment through economic, political and
market analyses.
The CCGs were established by recommendation of the Trade Promotion
Coordinating Committee (TPCC), a multi-agency task force, to consolidate
various reporting documents prepared for the U.S. business community.
Country Commercial Guides are prepared annually at U.S. Embassies
through the combined efforts of several U.S. government agencies.
Table of Contents
I. EXECUTIVE SUMMARY
II. ECONOMIC TRENDS AND OUTLOOK
III. POLITICAL ENVIRONMENT
IV. MARKETING U.S. PRODUCTS AND SERVICES
V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT
VI. TRADE REGULATIONS AND STANDARDS
VII. INVESTMENT CLIMATE
VIII. TRADE AND PROJECT FINANCING
IX. BUSINESS TRAVEL
X. APPENDICES
A. Country Data
B. Domestic Economy
C. Trade
D. Investment Statistics
E. U.S. and Country Contacts
F. Market Research
G. Trade Event Schedule
I. EXECUTIVE SUMMARY
Although Saudi Gross Domestic Product (GDP) recorded near zero growth in
1994, the Saudi economy is the largest in the Near East/North Africa
region and one of the top among non-OECD countries, with output topping
$120 billion in 1994. In fact, Saudi per capita gross national product
surpasses every African and Latin American state, and is exceeded in
Southeast Asia only by Japan, Singapore and Hong Kong.
Despite declines in public sector expenditures, the Kingdom's private
sector grew an estimated four percent in 1994. The Saudi private sector
is assuming a larger role in the economy. Diversification of the Saudi
economy remains a strategic goal of the government to counter abrupt
fluctuations in world oil prices which, in turn, have dictated the
upturns and downturns in the economy. The private sector contribution
to GDP reached 37 percent in 1994 and is expected to increase further in
1995.
The United States remains Saudi Arabia's leading trading and joint-
venture partner. U.S. companies had the leading share of the Saudi
import market, accounting for more than 20 percent of total Saudi
imports in 1994. Price competitiveness, ongoing quality, and service
should maintain the United States' leading position in this competitive
market.
U.S. exports for 1995 are estimated to be $6.8 billion, up 13 percent
from 1994. During 1994 and 1995, three major projects in
telecommunications, commercial aircraft, and powerplants have been
awarded to U.S. manufacturers. Export opportunities for both goods and
services should improve as these projects move forward.
The United States has also topped the list of foreign countries
investing in the Kingdom. U.S. direct investment in both industrial and
non-industrial joint ventures was estimated at $4.9 billion in 1994,
more than 40 percent of total foreign investment in Saudi Arabia. New
joint ventures have been signed for pharmaceutical production, car
battery manufacture, building of electrical turbines and generators,
aircraft maintenance and electronics manufacturing.
Bearing on its strategic goal to diversify the Kingdom's industrial
base, the Saudi government is also studying privatization of some of its
operations and tasks. The government has proposed the privatization of
the national airline, the petrochemical industries, the
telecommunication sector, and the electricity organization, although no
firm plans have yet emerged.
U.S. exporters will find that the Saudi market is similar to that of
most intermediate developing nations. Saudi law requires a local
sponsor to conduct business in the Kingdom, and generally, the sponsor
is the agent, representative or distributor the U.S. company has
selected to promote and market its goods and services. Import tariffs
are generally 12 percent but can be, in selected cases, raised to 20
percent to protect Saudi infant industries. Staple foods and animal
feed are duty free. If the Kingdom moves towards accession to the World
Trade Organization (WTO) as seems likely, tariffs and tariff bindings
would be reviewed with Saudi Arabia's chief trading partners. There are
no taxes, fees, or controls on remissions of earnings abroad, and the
Saudi Riyal is freely convertible with other currencies. Most Saudi
standards are compatible to U.S. and ISO standards, and do not pose a
significant problem in conducting business in the Kingdom. Problems
still, however, exist in selected sectors including food and electrical
products.
There are over 250 U.S. companies resident in Saudi Arabia. U.S.
companies have done very well in conducting business in Saudi Arabia.
With economic reform, a move to join the international financial
community, and a trend to privatize, Saudi Arabia should continue to be
the most important market for U.S. companies in the North Africa/Near
East region.
II. ECONOMIC TRENDS AND OUTLOOK
The State of the Economy
The Saudi economy continued to record low growth in 1994. According to
official statistics, GDP rose 0.6 percent in nominal terms to $123.4
billion, slightly less than the one percent growth seen in 1993 and the
three percent increase reported in 1992. Taking inflation into account,
real growth likely was near zero last year, down from a 0.5-percent
growth in real terms realized in 1993. The private sector continued to
expand last year, growing about four percent, according to official
statistics, while output in both the oil and government sectors fell
last year. Saudi Arabia's per capita income was $6,800 for 1994, a
decline of 2.8 percent from 1993, an estimate based on official data
from the 1992 census and a population growth rate of 3.5 percent per
year.
Nominal GDP growth may be higher in Saudi Arabia in 1995, assuming
average world oil prices are above the level seen last year. The
Embassy estimates nominal GDP may grow at roughly two percent this year.
The private sector will continue to be the fastest growing segment of
the economy, with an increase near the rate seen in 1994. Export
industries, consumer services, and utility sectors have the best
prospects for growth this year. Meanwhile, the increase in world oil
prices, if sustained, will likely lead to growth in the oil sector's
contribution to GDP. The government segment of the economy may record a
small decline in output, however, if public sector spending is reduced
as budgeted. Although the projected growth would be the highest
recorded in Saudi Arabia since 1992, it is still less than the rate of
population growth. As a result, per capita income will again decline,
possibly to $6,700.
Principal Growth Sectors
Manufacturing
Manufacturing grew by an estimated 6 percent in 1994 and is expected to
sustain that same growth rate during 1995. The growth is mainly
attributed to impressive sales achieved by the petrochemical industries.
The national petrochemical company, Saudi Arabian Basic Industries
Corporation (SABIC), produced more than 20 million tons of various
petrochemical products in 1994 with sales reaching $5.2 billion. Loans
provided by the government reached $58 billion dispersed to 1,216
projects.
According to a report published by the Saudi Ministry of Industry and
Electricity, government incentives for the industrial sector have led to
the creation of over 2,312 manufacturing firms with a total investment
of $41.26 billion by the end of 1994. The Kingdom has presently eight
industrial complexes, the largest of which being the second phase of the
Riyadh Industrial City.
Consumer oriented industries will experience greater growth than export
oriented industries. Expansions at many petrochemical plants are
already well under way and the launch of several petrochemical projects
by the private sector will positively influence overall industrial
production during 1995 and 1996.
Under Saudi offset guidelines, several joint venture companies have been
established with foreign technology partners in more sophisticated
areas, particularly related to defense and aviation. These include
computer software, avionics, aircraft repair, aircraft engine repair,
radios for military use, and other electronic components. Although new
acquisitions of military equipment do not officially carry any offset
requirements, recent experience shows that there will be some form of
offset requirement associated with future major purchases, both in
military and civilian contracts.
Mining
The Saudi Ministry of Petroleum and Mineral Resources is spearheading
the initiative to develop new mines to produce iron, phosphates, bauxite
and other precious and non-precious metals. Studies conducted by the
Directorate General of Mineral Resources (DGMR) have revealed large
quantities of minerals in 42 fields spread throughout the Western and
Central regions of the Kingdom.
The government's policy is to prioritize the development of non-oil
resources. The Ministry of Petroleum and Mineral Resources is actively
seeking investors from the U.S., Canada and other countries to establish
mining joint ventures for a number of major projects. For this purpose,
the government has provided many incentives to attract foreign
investors, such as a tax exemption for five to ten years, and a 30 years
extraction concession.
Over the next few years, the best opportunities will be in the areas of
joint ventures, investment, consulting and technical know-how, as the
Saudis enlist foreign support in the development of new projects. The
DGMR is actively soliciting foreign investors and joint-venture partners
to participate in these opportunities. The Kingdom at the moment does
not have the know-how and funding necessary to develop these long-term
projects.
Utilities
Saudi Arabia has one of the world's highest per capita consumptions of
electricity, water and gas. The average annual growth rate of these
utilities reached more than 3.5 percent in 1994. In 1995, the Saudi
government raised the fees of electricity, water, and gas consumption.
The new fee structure is expected to reduce the growth in consumption
and boost revenues which will be channeled into new projects.
Over the next few years, additional power generation plants will be
built which will raise generation capacity by 9,450 MW. A consortium
led by General Electric has already been awarded a $1.8 billion contract
to build a 1,800 MW, combined-cycle power plant outside Riyadh referred
to as PP9. The contract contained an expansion option to increase its
capacity to 2,400 MW, and also involves expanding an existing plant, the
PP8, by 300 MW. Similarly, around 260 million gallons a day of
desalinated water will be added by the Saline water Conversion
Corporation (SWCC) to the Kingdom's desalinated capacity. These new
desalination schemes will cost about $2.1 billion when completed and
will bring total desalinated capacity to more than 800 million gallons
per day.
Transportation and Communication
The Saudi government has already committed to purchase 61 aircraft from
two U.S. firms, Boeing and McDonnell Douglas. The deal will involve
five Boeing 747-400, and 22 Boeing 777, as well as four MD-11F,
configured as cargo aircraft, and 29 MD-90. The number and type of
engines is yet to be decided.
The Presidency of Civil Aviation is also evaluating proposals to upgrade
two domestic airports at Jizan and Tabuk, and build a new airport at
Dawadmi. Another project which is also being actively pursued is a $400
million integrated maintenance hangars and warehouse facilities for the
national carrier, SAUDIA, at the three international airports in Riyadh,
Jeddah, and Dhahran.
In August 1994, the Saudi Ministry of Posts, Telephone and Telegraph
(MOPTT) awarded a $4 billion contract to the U.S. firm AT&T to expand
the Saudi telephone network. Known as the Telephone Expansion Project-6
(TEP-6), the project calls on AT&T to provide a fully digital
communications network including 1.5 million 5ESS switching lines,
200,000 GSM (cellular) lines, and thousands of associated network
components such as transmission, fiber optics, and network management
products.
Agriculture
Saudi agriculture has shown rapid growth in production over the last
several years, while food processing has only recently begun significant
expansion. The growth in agricultural output had been led until
recently by wheat, but also with notable increases in livestock,
vegetables and fruits. Much of the expansion has relied on imported
technology and production inputs. Wheat production is now declining,
but output continues upward for some crops and livestock. Thus, the
prospective demand for inputs is mixed, with a weak near term outlook
for large machinery and irrigation equipment, but likely growth in
demand for inputs related to the livestock and poultry or the fruit and
vegetable segments. Imports of most processed foods and bulk
agricultural products, other than a few items such as wheat, eggs, and
dates, are continuing at a strong pace.
Despite major strides in food production, recent cutbacks in government
subsidies coupled with delayed payments to farmers have alienated many
Saudi crop farmers and reduced prospects for growth in agricultural
output. Saudi Arabia, thus, remains a major food importer, with imports
estimated at around $4 to $5 billion annually. Since Saudi agricultural
importers are cash customers, the country is considered to be a very
good market for U.S. food suppliers.
Fiscal Policy and Public Debt
Saudi Arabia embarked on a major austerity program with the release of
its 1994 government budget, but nevertheless ran a deficit for the year,
its twelfth consecutive shortfall. The government planned to cut
expenditure 19 percent from the level budgeted for 1993, and reduced
allocations in all categories, with direct subsidies--primarily
agriculture--and infrastructure receiving the highest percentage cuts.
The Saudi Government has not published official data on its actual
fiscal accounts for 1994, but the Embassy estimates the shortfall to be
$9 billion, down 25 percent from the deficit the preceding year and
equal to seven percent of GDP. Total revenue last year fell five
percent to $36 billion, with on-budget oil income accounting for about
75 percent of the revenues. Spending on a cash basis fell to an
estimated $45 billion, meaning that the Saudi Government was successful
in reducing expenditures. Some of the reduction in expenditure was
achieved by postponing or scaling back work on projects, although some
of the cutback was achieved by delaying payments to contractors.
Estimates vary, but Saudi Government arrearages may have been over $5
billion at the end of 1994.
The Saudi Government borrowed from domestic sources to finance the vast
majority of the 1994 budget deficit, increasing total domestic and
foreign debt, excluding arrearages, to over $80 billion at the end of
1994--roughly two-thirds of GDP. The Kingdom's 12 commercial banks held
$13.3 billion in Saudi Government development bonds and Treasury bills
at year end 1994, up from the $11.7 billion at the end of 1993,
according to the banks' financial statements. Banks held additional
Saudi Government debt from direct loans to ministries or state-owned
entities, and we expect large corporations and some individuals also
hold Saudi debt instruments.
The government's remaining domestic debt, possibly $60 billion, is "soft
financing" provided by the autonomous government institutions--the
General Organization for Social Insurance, the Pension Fund, and the
Saudi Fund for Development--through the purchase of development bonds
and direct loans to the Ministry of Finance.
The Saudi Government reduced its outstanding foreign debt to $1.8
billion at the end of 1994 by beginning payments on schedule on its only
international loan, a $4.5 billion facility signed in May 1991.
Saudi Arabia introduced broad fiscal reform measures and continued to
reduce allocations to reduce its budget deficit for 1995. The Saudi
Government raised charges on energy, electricity, water, telephone,
worker and visa fees, and airfares at the start of the year. Income
from some of these rate hikes--energy and worker fees-- will go directly
to the Ministry of Finance, while money from the remaining areas will be
used to finance the expansion of infrastructure or reduce the losses of
state-owned utility companies. Concurrently, the Saudi Government cut
budgeted expenditures by six percent, reducing allocations for education
and defense and security but raising allocations for transportation and
communication, health and social services, and infrastructure.
The government budget accounts will move closer into balance in 1995, if
the government spends near the amount budgeted and the average oil price
for the year remains near the level reported for the first part of the
year. On-budget oil income may rise by 10 percent over 1994 levels, and
the funds collected from the hike in some fees could add over $2 billion
to non-oil income. The Saudi Government has also addressed some of its
payment arrears through issuing an estimated $1.4 billion in bonds in
March and paying small amounts owed to some contractors. Meanwhile, the
Kingdom continues to study privatization as a medium-term fiscal reform
measure, but most observers do not expect the sale of state-owned firms
to begin in 1995.
Balance of Payments and External Accounts
Saudi Arabia's current account deficit continued to decline in 1994 but
nevertheless the Kingdom recorded its twelfth consecutive balance of
payments shortfall. The Embassy estimates Saudi Arabia's current
account deficit fell nearly 30 percent to less than $10.0 billion, the
smallest shortfall since 1990. Based on figures released by the Saudi
Government, exports fell eight percent to $41.5 billion, with petroleum
accounting for 90 percent of the total. The Embassy estimates imports
fell 10 percent to $23.5 billion. The resulting $18 billion merchandise
trade surplus is slightly less than the surplus recorded in 1993. Net
service payments abroad continued to decline, and it is likely transfers
for government and private services fell because of the decline in
official spending and slower economic growth in the country. The
Embassy expects a large percentage of the 1994 current account deficit
was financed by an inflow of private capital and the reduction in the
net foreign position of the commercial banks.
The amount and availability of SAMA's foreign assets are difficult to
determine. The Embassy estimates SAMA managed $53 billion in its issue
and banking departments at the end of 1994. According to Article 6 of
the Kingdom's currency law that requires all riyals be covered fully by
gold or foreign exchange convertible to gold, roughly $20 billion of
this total is set aside in SAMA's issue department as backing for the
currency. SAMA lists its foreign assets in its banking department as
deposits with banks abroad, investment in foreign securities, and gold
and silver. Questions remain as to how much of the foreign assets in
the banking department are available for use to finance future current
account deficits as some of them are reportedly held against letters of
credit or commercial bank deposits or include claims against developing
countries.
The country's current account deficit is likely to continue to decline
in 1995. Total exports will rise because of higher receipts from oil
sales, leading to an increase in the merchandise trade balance.
Services payments may fall slightly with a decline in private and
government transfers, although private remittances are expected to
remain high. Meanwhile, the government paid the remaining $1.8 billion
on its international loan in two payments in February and may of 1995,
an outflow in the capital account for the year.
Domestic Financial Sector
The profits of Saudi Arabia's 12 commercial banks continued to rise in
1994. Collectively, the banks earned $1.28 billion in total net profits
last year, up four percent from the $1.24 billion earned in 1993. The
banks used about 35 percent of their 1994 profits to boost their
reserves, raising the aggregate capital-asset ratio of the banking
system to 10.47 percent. All but one of the Saudi banks have a simple
capital-adequacy ratio above the eight percent recommended by the Bank
of International Settlements.
The consolidated balance sheet of the commercial banks grew by 3.0
percent to $83.4 billion at the end of 1994, the lowest annual increase
since 1990. Consolidated bank assets fell the first two quarters of
1994, but recorded strong gains over the last half of the year.
According to statistics published by SAMA, claims on the private sector
rose 11 percent to $30.3 billion and accounted for much of the increase
in bank assets. Meanwhile, total deposits rose by only two percent--the
lowest growth since the Gulf War--to $50.0 billion, most of which came
from increases in time and savings deposits.
The net foreign assets of the commercial banking system fell $4.2
billion to $15.5 billion at the end of last year, the lowest end of year
close since 1983. The credit-to-total deposit ratio of the consolidated
banking system rose to 61 percent for the end of 1994 from 56 percent
for the end of 1993, reflecting a continuing reduction of liquidity in
the banking system.
Inflation and Monetary Policy
Inflation remained low in Saudi Arabia in 1994. According to Saudi
Government statistics, the all-cities cost of living index rose 0.6
percent last year, a slight decline from the 0.8-percent increase
reported for 1993. The housing and transportation and communication
sectors reported gains last year, while food costs fell slightly.
Between 1988 and 1994, Saudi Arabia's all-cities cost of living index
has increased at an average annual rate of 1.4 percent.
Movement of riyal interest rates in the Saudi banking system closely
follows U.S. Dollar interest rates, and over the past few years, there
has been a higher than historical premium charged on the riyal.
Comparing 1994 to 1993, the premium for riyal interest rates was higher
than most of the same-term dollar rates, with the greatest spreads being
recorded in the fourth quarter of last year. For example, there was a
49 basis point premium for three-month riyal deposits for 1994, up from
the 36 basis point premium in 1993 and 4 basis point premium in 1992.
The spread for one-month riyal deposits was 40 basis points in 1994,
down slightly from 44 basis point in 1993 but higher than the 2 basis
point premium in 1992.
Inflation is expected to rise in 1995 because of the hikes in utility
prices and higher costs of some imports following the decline in the
value of the riyal against some hard currencies. According to official
data, consumer prices rose 4.2 percent in January 1995, largely because
of the direct effect of the hike in utility prices; there will be other
indirect inflationary pressures felt throughout the year as some of the
higher production costs are passed along to consumers. Meanwhile, the
premium for riyal interest rates has declined throughout the first five
months of the year, with the premium near zero for May.
Infrastructure Situation Re: Goods/Service Distribution
Saudi Arabia possesses a good network of infrastructure to facilitate
the distribution of goods and services. The business centers of Riyadh,
Jeddah, and Dammam/Al Khobar/Dhahran each have an international airport
served by a variety of international airlines with passenger and cargo
capabilities.
Two domestic airports are undergoing upgrading and expansion works, and
the government is evaluating proposals to build a new airport at
Dawadmi. Air travel is preferred for inter-Kingdom passenger travel
with public service restricted to the sole national airline, Saudia.
Most inter-Kingdom freight is hauled by truck over a good highway system
linking the major business centers. One rail line carries passengers
and freight between Damman and Riyadh.
Another rail link is expected to be built between the industrial city of
Jubail and Damman. Jeddah and Damman are the main international
seaports for moving containerized and bulk cargo. Other ports are
specially configured for more specialized uses, e.g. Ras Tanura for oil
shipping, and Jubail and Yanbu for serving the petrochemical sector and
heavy industry. A new port was recently inaugurated in Dhuba', which
will facilitate both passenger and cargo movement between Saudi Arabia
and Egypt.
Modern communication facilities are available including telephone, fax,
telex, and courier services. U.S. database log-on is available through
a Ministry of Post, Telephone and Telegraph trunk line service, Al-
Waseet. Use of private satellite communication transponders is not
allowed. Facsimile machines are heavily utilized in the conduct of
business. There is currently no cellular phone system (due in 1996) and
radiophones are restricted. The government is embarking on a large-
scale telecommunications upgrade program but the shortage is expected to
worsen through 1995.
Major Infrastructure Projects Underway
A number of major infrastructure projects are underway in the areas of
power generation, water desalination, airport improvement,
communications, and public transport. These include:
Telecommunication: The Saudi PTT expansion (TEP 6) contract for
switching lines, estimated at $4 billion, has been awarded to AT&T.
The U.S. firm is expected to complete 1.5 million telephone lines,
200,000 cellular units, and a fiber-optic network across the Kingdom.
Power: The Saudi Consolidated Electric Company in the Eastern Region
intends to build a 2400 MW generation facility in Gazlan. The Saudi
Consolidated Electric Company in the South envisages a 1000 MW
generation facility for Asir/Jizan, phase two, another 1000 MW power
station in Shuqaiq, and a 100 MW generation facility in Tihama. The
Saudi Consolidated Electric Company in the Western region also plans a
1000-2500 MW thermal power plant in Shuaiba. The Saudi Consolidated
Electric Company in the Central region awarded a $1.8 billion contract
to the U.S. firm General Electric for a 2400 MW power station and
expansion of another, both of which are located in Riyadh.
Desalination: The Saline Water Conversion Company (SWCC) is
implementing the third phase of a $830 million reverse osmosis/power
plant in Al-Khobar on the East Coast of Saudi Arabia. SWCC is also
building a $1 billion desalination and power plant at Shuaiba.
Consisting of a flash evaporation unit, the plant will have a capacity
of 445,000 cubic meters per day. The Royal Commission for Jubail and
Yanbu is building a 2.5 million gallons per day desalination plant for a
contract valued at $170 million. Another project which might go ahead
during 1996 is the second phase of the Madinah-Yanbu desalination and
power generation plant. Estimated to cost $669 million, the new phase
will generate 150 MW of electricity and 227,280 cubic meters of water
per day.
III. POLITICAL ENVIRONMENT
Nature of Political Relationship with the United States
The United States and Saudi Arabia have enjoyed a strong, close
relationship since the establishment of diplomatic relations in November
1933. Saudi Arabia's huge oil reserves--one quarter of the world's
known supply--form one important basis for our close relationship. U.S.
geostrategic interests in Saudi Arabia are equally important. Located
between two of the world's most critical waterways--the Arabian/Persian
Gulf and the Red Sea--Saudi Arabia is key to controlling the movement of
a major part of the world oil trade and a large amount of commercial and
military traffic, both on the water and in the air. Saudi Arabia also
represents a growing market for U.S. goods and services. Saudi Arabia
was America's 16th largest trading partner in 1994, consuming $6.0
billion of non-military U.S. goods.
The Saudi Government has relied heavily on the U.S. Government and
private U.S. organizations for technical expertise and assistance in
developing its human and mineral resources. In addition to the U.S.
Embassy in Riyadh, the U.S. has Consulates General in Jeddah and
Dhahran.
The United States has a large Foreign Military Sales program in Saudi
Arabia, including the F-15, AWACS, missiles, air defense weaponry,
military vehicles, and other equipment. A U.S. Military Training
Mission provides training and support for these weapons and other
security-related services to the Saudi armed forces. A similar program
assists the Saudi Arabian National Guard.
The United States benefits in the promotion of its interests from the
leadership role Saudi Arabia plays in the Arab and Islamic communities.
The Saudi Government acts as a behind-the-scenes arbiter and partner in
encouraging negotiating parties to move forward in the Middle East Peace
Process. Saudi and American interests also coincide in support of
moderate regimes and disapproval of destabilizing elements.
Major Political Issues Affecting Business Climate
The United States and Saudi Arabia share a common concern about regional
security and stable development. Military cooperation during the 1991
Gulf War was extensive. While supporting the Middle East Peace Process,
the Saudi Government has chosen to let the parties negotiating bilateral
peace agreements with Israel take the lead in normalizing relations with
Israel.
Despite rapid economic development, Saudi society remains strongly
conservative and religious. The King supports modernization as long as
it does not undermine the country's stability and Islamic heritage.
Subsidies have been a burden as finances tightened over the past few
years. Health care is free, gasoline costs 60 cents a gallon, diesel 37
cents. The 1995 budget, with its increase in utility prices and a
further cut back in spending, suggests the Kingdom is tackling its
budget difficulties and moving in the direction of key reforms that will
improve the trade and investment climate. Even with the rate increases,
electricity and desalinated water are still provided below cost.
Synopsis of the Political System
Saudi Arabia is a traditional monarchy. It is ruled by descendants of
its founder, King Abdul Aziz Al Saud, who unified the country in the
early 1920's. The concept of separation of religion and state is
foreign to Saudi society. The legitimacy of the royal regime depends to
a large degree on its perceived adherence to Wahabism, a conservative
form of Islam.
Saudi Arabia's legal system, Shari'a law, is based on the body of
Islamic jurisprudence derived from the Koran and traditional sayings
(hadiths) of the Prophet Mohamed, and interpreted by the Ulema, a body
of religious experts. Shari'a law governs both civil and criminal law.
In cases not covered by Shari'a law, civil officials make administrative
decisions.
Judicial appeals are reviewed by the Justice Ministry, the Court of
Cassation, or the Supreme Judicial Council to ensure that court
procedures were correct and that judges applied the appropriate legal
principles and punishments. In capital cases, the King acts as the
highest court of appeal and has the power to pardon. There is no
written constitution. There are no elected assemblies and political
parties are not permitted.
In 1993, the King appointed a 60-member Consultative Council and 13
provincial councils. A 35-member Council of Ministers performs
executive and legislative functions. The Council of Ministers advises
and makes recommendations to the King, examines proposed royal decrees,
and directs the government bureaucracy. The King promulgates his
decisions by issuing royal decrees.
Political consensus is formed through traditional means of consultation
and petition on an individual basis. Every citizen has the right to
petition high officials and the King during public audiences. Political
expression unfavorable to the government is not allowed.
Saudi Arabia is divided into 13 administrative provinces. The governors
are appointed by the King, and are generally princes or close relatives
of the royal family. The governors report to the Minister of Interior
and often directly to the King.
Three independent bodies are charged with security duties. The Ministry
of Defense and Aviation uses four uniformed services to protect against
external military threats. The Saudi Arabian National Guard is
responsible for defending vital internal resources (oilfields and
refineries), internal security, and supporting the Ministry of Defense
and Aviation as required. The Ministry of Interior is charged with
internal security, police functions, and border protection.
IV. MARKETING U.S. PRODUCTS AND SERVICES
Distribution and Sales Channels
There are three major marketing regions in Saudi Arabia: the Western
Region with the commercial center of Jeddah; the Central Region where
the capital city Riyadh is located; and the Eastern Province where the
oil and gas industry is most heavily concentrated. Each has a distinct
business community and cultural flavor, and there are few truly
"national" companies dominant in more than one region.
Many companies import goods solely for their own use or for direct sale
to end-users, making the number and geographical pattern of retail
outlets a factor of potential significance. U.S. exporters may find it
advantageous to appoint different agents or distributors for each region
having significant market potential. Multiple agencies and
distributorships may also be appointed to handle diverse product lines
or services.
In considering the socio-cultural differences between Saudi Arabia and
the U.S., in particular, the relative segregation of men and women, it
should be not be overlooked that the number of Saudi businesses owned
and managed by women is significant, and growing rapidly. American
businesses, especially businesswomen, may want to focus on commercial
possibilities with the 4.3 percent of registered Saudi businesses that
are owned by women--i.e. over 15,000 companies. The majority of Saudi
businesswomen are in Riyadh; recent statistics indicate that over 2,400
members of the Riyadh Chamber of Commerce and Industry are female,
nearly quadruple that in 1987. Jeddah comes second in terms of women
members of the Chamber of Commerce.
Of businesses registered to women, 37 percent are in retail; 36 percent
contracting; 24 percent wholesale; eight percent industry and
manufacturing. Informal information available suggests that Saudi women
business-owners are most actively involved in retail of women's and
children's clothing, dressmaking, catering and party services, and early
childhood education (via privately-owned preschools).
While there is no requirement that distributorships be granted on an
exclusive basis, it is clearly the policy of the Saudi Ministry of
Commerce that all arrangements be exclusive with respect to either
product line or geographic region.
Many Saudi companies handle numerous product lines making it difficult
to promote all products effectively. Saudi agents typically expect the
foreign supplier to assume many of the market development costs, such as
hiring of dedicated sales staff.
Foreign suppliers often detail a sales person to the Saudi distributor
to provide marketing, training, and technical support. Absent such an
arrangement, U.S. firms should expect to make at least four visits per
year to support their Saudi distributor.
Use of Agents/Distributors; Finding a Partner
U.S. exporters are not required to appoint a local Saudi agent or
distributor to sell to Saudi companies, but commercial regulations
restrict importing and direct commercial marketing within the Kingdom to
Saudi nationals and wholly Saudi-owned companies. Agent/distributor
relations are governed by the Commercial Agencies Regulations of the
Kingdom of Saudi Arabia, administered by the Ministry of Commerce.
Obtaining a business visa for Saudi Arabia requires sponsorship by a
Saudi national, and Saudi nationals receive strong preference in sales
to government agencies and parastatal corporations.
Consequently, U.S. firms may find it advantageous to establish local
representation, especially for product lines requiring strong sales and
service efforts. Foreign contractors wishing to bid for government
contracts must appoint a local service agent, and consultants must be
represented by a Saudi consulting agency.
Terminating an agent/distributor agreement can be difficult even though
Saudi policy has changed to permit registration of a new agreement over
the objections of the existing distributor. Time is better spent in
making the proper initial selection than in attempting to end an
unsatisfactory relationship at a later date. The U.S. and Foreign
Commercial Service through its U.S. district offices and overseas posts
offers a variety of services to assist U.S. firms in selecting a
reputable and qualified representative. A complete "Guide to Agency
Distributor Regulations in Saudi Arabia" is available through the
National Trade Data Bank in CD-ROM format (Tel: (202) 482-1986 for
details).
Franchising
Franchising has become a popular and growing approach for local firms to
establish additional consumer-oriented business in Saudi Arabia.
Although the franchise market is small relative to the United States, it
is a market that is rapidly expanding in several business sectors.
Franchising opportunities exist in the following business categories:
fast-food, laundry and dry cleaning services, office temporary services,
automotive parts and servicing, mail and package service, printing, and
convenience stores.
In the case of fast-food, half of the Saudi population is under the age
of 15 and many will have traveled to the United States and have acquired
a taste for Western food. U.S. fast food franchises account for nearly
20 percent of the fast food franchise market.
Success in the Saudi market is often attributed to finding the
appropriate franchiser and location. Usually, fast food franchises are
situated near shopping centers or areas of high traffic flow. Non-food
franchises account for 55 percent to 65 percent of the franchise market.
Franchising is one of the fastest growing business sectors in Saudi
Arabia. This is in part due to a desire among Saudis to own their own
business, and an appreciation for western methods of conducting
business. Competition is particularly fierce between U.S. franchisors
and local and third country competitors in the following franchise
sectors: car rental agencies, laundry and dry cleaning services, and
auto maintenance.
Direct Marketing
Direct marketing is not widely used in Saudi Arabia. Personal relations
between vendors and customers play a more important role than in the
West; furthermore, many forms of direct marketing practiced in the
United States are unacceptable due to Islamic precepts regarding gender
segregation and privacy in the home. Limitations in the Saudi postal
system are also a constraint: No home delivery or postal insurance is
available; only post office boxes are used.
Direct marketing has been conducted on a very limited basis using
unsolicited mail campaigns and fax, catalog sales (with local pick-up or
delivery arranged), and commercials on satellite television providing
consumers in many nations (including Saudi Arabia) with a local
telephone number to arrange delivery.
Joint Venture/Licensing
Foreign investment is generally welcomed in Saudi Arabia if it promotes
economic development, transfers foreign expertise to the Kingdom, and
involves Saudis in the ownership and management. Foreign investment is
regulated under the Foreign Capital Investment Law administered by the
Ministry of Industry and Electricity, which must approve all
investments. Investments involving oil or mineral extraction are
handled by the Ministry of Petroleum and Mineral Resources.
Foreign investment is normally limited to joint ventures in which the
Saudi partner holds at least 25 percent up to a majority share. There
are no restrictions in the use of currency accounts or on the entry or
repatriation of capital, profits, dividends, or salaries, provided tax
requirements have been satisfied and clearance provided by the
Department of Zakat and Income Tax. Foreign ownership is not permitted
in a few sensitive areas or in well-developed sectors where it is
believed sufficient local investment and expertise already exist.
A variety of incentives are available to foreign investors upon approval
of the Ministry of Industry and Electricity. These include tax holidays
for five years (ten years for industrial and agricultural projects),
duty free importation of capital equipment, spare parts and raw
materials for the duration of the project, and access to low cost
financing, industrial land, and utilities.
Local products receive price preferences of 10-20 percent in government
tenders. Most incentives are only available to joint ventures with at
least 25 percent Saudi ownership.
Licensing is an appropriate method of doing business in the Kingdom
under some circumstances, but the tax implications should be considered.
Royalties, license fees, and certain management fees are deemed to be
100 percent profit, and the full amount will be taxed at the normal
corporate tax rate for non-Saudi companies.
The procedure for establishing a joint venture is as follows:
First, the Ministry of Industry and Electricity (MIE) and its
constituent parts must review and process all applications for
industrial projects. Within the MIE, the Industrial Licensing
Department (ILD) and Foreign Capital Investment Bureau (FCIB) are
responsible for evaluating and licensing industrial projects. Non-
industrial projects are handled unilaterally by the FCIB.
The MIE's Industrial Protection and Encouragement Department (IPED)
studies the project's potential impact on domestic industry and
determines any tariff protection that may apply. The MIE's Industrial
Cities Department (ICD) evaluates requests for sites in Saudi Arabia's
industrial cities.
In addition, an application must be made to the Foreign Capital
Investment Committee (FCIC) for a foreign investment license. The FCIC
is an inter-ministerial committee that receives recommendations
forwarded by the MIE/FCIB, and after study makes its recommendation for
final approval to the MIE. Following the issuance of the investment
license, an application for commercial registration is made to the
Ministry of Commerce (MOC).
In this process, the MOC will approve the joint venture's Articles of
Association, register the company under the MOC's Companies Regulations,
and assign a commercial registration number.
Depending on the nature of the foreign investment, the Saudi Arabian
Standards Organization (SASO) may be involved. SASO is the Saudi
authority for establishing product standards for imports and locally-
manufactured goods, and will examine products or processes to be used to
ensure they meet existing or planned Saudi standards.
The Saudi Industrial Development Fund (SIDF) may be engaged to provide
up to fifty percent financing for approved industrial joint venture
projects. Market intelligence also is available through the SIDF for
prospective investors.
Other Saudi Arabian government entities that may be involved in the
process include the Ministry of Foreign Affairs (for visas), the
Ministry of Interior (residence permits and industrial safety and
security approvals), the Ministry of Labor and Social Affairs (work
permits for foreigners), the Royal Commission for Jubail and Yanbu (if
the project is sited at the Saudi industrial cities of Jubail or Yanbu),
the Government Organization for Social Insurance (social insurance and
disability payments for Saudi employees), and the General Organization
for Technical Education and Vocational Training (training programs for
Saudis).
Foreign investors may structure their joint venture as a limited
liability company (the most commonly used approach), as a joint-stock
company, or as a joint venture. By law, limited liability companies
must not have less than two nor more than fifty shareholders and be
capitalized with at least Sr. 500,000. Limited liability companies are
forbidden to deal in insurance or financial enterprise. Joint stock
companies are a variety of the limited liability company that can be
held either privately or publicly. They resemble U.S. corporations in
structure and function.
Joint ventures are unincorporated associations in which each party to
the venture holds title to his mutually agreed contribution. They
resemble general partnerships. The Ministry of Commerce approves
formation of all joint ventures.
Applications must include the venture's objectives, rights and
liabilities, as well as the manner in which profits are to be divided.
A detailed "Guide to Establishing Joint Ventures in Saudi Arabia" is
available in CD-ROM format on the National Trade Data Bank (Tel: (202)
482-1986 for details). A few major U.S. accounting firms with Saudi
offices also publish very useful guides to the tax and legal aspects of
doing business in Saudi Arabia.
Steps to Establishing an Office
The procedures to follow in establishing an office in Saudi Arabia
differ according to the type of business undertaken. The most common
and direct method of establishing an office is simply to appoint an
agent/distributor, who can set up the office under their own commercial
registry and obtain residency visas for any necessary expatriate
personnel. The agent/distributor agreement should be registered with
the Ministry of Commerce as previously described.
A second method might be to establish a technical and scientific
services office, which requires a license from the Ministry of Commerce.
This approach preserves the independence and identity of the foreign
company's local office as a separate entity from the Saudi
agent/distributor.
Technical and scientific service offices are not allowed to engage
directly or indirectly in commercial activities, but they may provide
technical support to the Saudi distributor as well as conduct market
surveys and product research.
A third method is to establish a branch office. Branch offices are
normally permitted only for foreign defense contractors. The
establishment of branch offices is open to wholly foreign-owned
entities, and requires approval of the Ministry of Industry and
Electricity's Foreign Capital Investment Committee (FCIC).
An essential element in the FCIC's approval process is that the branch
office be conducive to the Kingdom's economic development. FCIC
approval also requires the foreign company submit a certified copy of
its charter and bylaws, accompanied by an Arabic translation, as well as
the company name, address, date of establishment, type of business and
amount of capital. The company's board of directors must also provide a
resolution authorizing the establishment of a Saudi branch office.
Following FCIC approval, the branch office must establish and register
with the Commercial Register of the Ministry of Commerce. The
registration process requires representation by a Saudi attorney.
A fourth method is to establish a representative (or liaison) office.
This is normally granted only for companies that have multiple contracts
with the government and require a local office to oversee contract
implementation. Representative offices are not allowed to engage in
direct or indirect commercial activity in the Kingdom. Establishment
requires a representative office license from the Ministry of Commerce.
Finally, foreign companies may establish an office by entering into a
joint venture with a Saudi firm, as described in the previous section.
Costs associated with setting up an office in Saudi Arabia can vary
considerably. As a general guide, the following are current costs of
housing and office rental, as well as costs for employee salaries,
taxes, and transportation. Typical rental for a one-bedroom furnished
apartment is $12,000, and $14,667 for a two-bedroom apartment.
A one-bedroom villa in a western-standard residential compound will rent
per year for $24,000 to 27,000, with furnishing costs of $2,667; two
bedrooms, $29,333 with furnishing costs of $2,667; three bedrooms,
$49,333 with furnishing costs of $4,000; four bedrooms, $52,000 with
furnishing costs of $4,000. Residential compounds in Saudi Arabia often
include a swimming pool, tennis courts, a club house, and not
infrequently, eating facilities.
Typical management, maintenance, and use charges are $1,600 quarterly,
and security deposits are in the range of $2,700. Rental terms are for
two years with the first year payable in advance. Office rental costs
are variable, and are governed largely by the city and business
location. Typical rental costs in a modern commercial center are
approximately $133 per square meter. A six month rental is the minimum,
and a fifteen percent maintenance and utility charge is levied monthly.
Saudi law requires that Saudi nationals make up 75 percent of a
company's work force and 51 percent of its payroll in all businesses.
However, due to a shortage of qualified Saudis, in practice much of the
work force is made up of non-Saudi Arabs, Europeans, Americans and
Asians.
An employee's nationality and level of experience, as well as the nature
and location of the business will create variations in pay, but a
typical manager's yearly salary (base) is approximately $30,000 to
40,000. Mid-level office workers are paid approximately $20,000 to
30,000 per year. A clerical worker's base yearly salary is in the range
of $8,000 to 10,000. A support worker (driver, caretaker) earns in the
range of $6,000 to 7,000 yearly. Local Saudi employee taxes are fifteen
percent of base or combined with benefits. From base salary and
housing, companies withhold five percent and pay ten percent.
It is customary to provide non-Saudi workers with furnished
accommodations or a housing allowance as well as round-trip air fare to
their country of origin on a yearly basis.
Regarding transportation, four-door sedans rent monthly for $1,360, and
yearly for $13,920. A new Chevrolet Caprice can be purchased for
approximately $22,000. It is important to note that, by law, females in
Saudi Arabia, regardless of nationality, are forbidden to drive motor
vehicles.
Additional monies, along the lines mentioned above, should be included
in an office budget to provide sufficient cars and drivers for
transportation of female family members and staff.
Business travelers coming to Saudi Arabia to explore business
opportunities are eligible for a visitor's visa, which is a single-entry
visa of up to three months' duration.
Currently, the visitor's visa application requires the U.S. company's
representative to submit to Saudi visa authorities a letter of
invitation issued by a Saudi company that has agreed to serve as his
sponsor. The letter, which must be in Arabic, must be on the Saudi
company's letterhead, in the original, and must bear an authenticating
stamp from the Saudi company's local chamber of commerce. The U.S.
company's representative must apply for the visa prior to departing the
U.S. at either the Saudi Embassy in Washington, D.C., or at one of the
Saudi Consulates in Houston, Los Angeles or New York City. These
requirements are very strictly enforced by Saudi visa authorities.
In recognition of the importance of faster and more efficient processing
of business visas, the Saudi government is in the process of reviewing
its business visa application and procedures. Under consideration are
changes that will allow business visas to be obtained more quickly and
with fewer bureaucratic requirements.
Once in place these changes will allow visa applicants whose business is
established in Saudi Arabia, and who must travel frequently outside the
Kingdom, to obtain from Saudi Embassies and Consulates multiple-entry
visas.
Selling Factors/Techniques
Expatriate managers have had a strong influence in introducing advanced
selling techniques into a market that relied heavily on word-of-mouth
and established buying patterns until a few years ago. Advertising and
public relation firms are multiplying in Saudi Arabia, and the Saudis
themselves have become a discerning, sophisticated clientele.
A large portion of upper and middle class Saudis were educated in the
U.S. or in Europe, and like to display their knowledge of world affairs
by discussing them at length as an introduction to a business
negotiation. On occasion, a Western executive may have to listen
through the presentation of the local point of view on the current
regional issues before business can be addressed.
Meetings are usually conducted at a leisurely pace, with much tea and
coffee consumed while the parties involved warm up to each other. It is
not appropriate to display urgency or to be brief. Appointments must be
scheduled taking into consideration the month-long religious holidays of
Ramadan and Hajj, and the daily prayer breaks. Although details of a
transaction can be handled by facsimile, now in widespread use, no
serious commitment is likely to be made without a face-to-face
introduction. Business cards are usually printed in English on one side
and Arabic on the other.
Saudis have an aversion to talking with outsiders about their family,
particularly the female members, or having to stare at the sole of a
visitor's shoe. Saudis are gracious hosts and will try to put a visitor
at ease, even during arduous business dealings.
The positive aspect of the Saudis' familiarity with the U.S. is that
most importers are very receptive to American products because of the
U.S. reputation for state-of-the-art technology, durability, and stable
prices. Of course, this goodwill can be used only as an introduction,
since a product must be competitively priced and readily available to
make a sale. Financing may also be offered as part of a sales proposal,
usually after a solid relationship has been established. Financing is
particularly important these days when dealing with government agencies.
Since the latter are delaying payment of contracts and other obligations
- delays of six to fifteen months are becoming the norm - exporters
should adjust pricing and financing accordingly, to cover the
considerable cost of carrying long-term account receivables.
Foreigners need to find a Saudi partner before they are allowed to
engage in trade within the Kingdom, but direct sales can be made to
Saudi private clients without having to use a local agency. Saudi
Ministries will purchase only from local agents or distributors, and
contracts for major projects are usually awarded to joint ventures
linking foreign and Saudi partners.
An irrevocable letter of credit (L/C) is the instrument normally used
for Saudi imports; open account, cash in advance and documentary
collection are also acceptable if both parties agree. Maximum or
minimum credit terms are not required. Export Credit Insurance for
political and commercial risk is available from the Foreign Credit
Insurance Association (F.C.I.A) of the U.S. Export-Import Bank in
Washington, D.C. (Tel: 202-566-8990, or 212-306-5084).
The government maintains a free trade approach to exchange transactions:
no exchange restrictions apply, exchange for payments abroad is obtained
freely, and there are no taxes or subsidies on foreign currency
transactions.
Since 1981, the Saudi Arabian Monetary Authority (SAMA) pegs the Riyal
to the dollar, to facilitate long term planning and minimize exchange
risk for the private sector. The rate has remained stable at $1 = SR
3.75 since 1986.
Advertising and Trade Promotion
Advertising, once a relatively secondary aspect of sales, has come into
its own, especially with the recent lifting of a ban on televised
commercials. Most companies' advertising budgets now cover the complete
array of media, such as TV, newspapers, trade magazines and billboards,
in addition to trade promotion events. Saudis receive preferential
rates.
Bright colors such as red, blue, green and black dominate the ads, since
most buying is still decided by men; pink, cream and other soft colors
are not as popular. With some modest exceptions, the female human form
is not culturally or religiously acceptable in the media. Landscapes
and other non-human images are commonly featured. Ads, packages,
literature, etc. are frequently in English and Arabic.
Advertising is critical in gaining retail sales and market share. Both
television, magazines, and point of sale advertising is common. Some
televised commercials are broadcast on the two Saudi channels (Secam
color system) during limited periods of the day. One TV channel is in
Arabic, the second is in English, with broadcasting covering the entire
Kingdom.
Cost of a time slot varies considerably, depending on timing, and is
usually less costly for Saudis than foreign firms. Contents are
thoroughly screened to conform with strict moral and religious
standards.
A new approach to presenting products is advertising through
international TV channels such as CNN and MBC (Middle East Broadcasting
Corp. in London). Most major Saudi companies place commercials on the
popular Middle East Broadcasting Company (MBC) channel on the Arabsat
satellite. Other Arabic satellite channels which have been recently
launched, such as Arab Radio and Television, are also attracting
numerous advertisers. These TV channels have succeeded in introducing
several new products to the market.
Print advertising is also important. In recent years, several magazines
have appeared on the local market. Popular magazines are: Al-Wasat, Al-
Majallah, Al-Yamamah, and Sayidati. Advertising rates for publications
vary greatly, however their level is well below the U.S. norm, in
keeping with the reduced readership.
Newspaper advertising is carried out in both the local English and
Arabic press, but its effectiveness is somewhat limited by the
relatively low readership rates.
The three local dailies published in English have circulation in the
20,000 to 50,000 copies range: Arab News (Jeddah); Saudi Gazette
(Jeddah); Riyadh Daily (Riyadh). The leading Arabic newspapers, with
nationwide distribution, have circulation in the 70,000 to 100,000
range: Al Hayat, Al-Shark Al-Awsat, Okaz. Other relevant newspapers
have lower circulation, and some have only regional distribution: Al
Bilad, Al Jazira, Al Madina, Al Nadwa, Al Riyadh, Al Youm, Um Al Qura,
Al-Riyadiya (sports only). A newcomer, the Al Iqtisadiah economic
daily, has rapidly earned a loyal readership of executives and
government officials.
Numerous trade promotion events take place from September through June,
with most of them held in the modern exhibit centers in the Kingdom's
three major cities:
Riyadh Exhibition Co. Ltd.
PO Box 56101
Riyadh 11554, Saudi Arabia
Tel: (01) 454-1448, Fax: (01) 454-4846
Tlx: 406359 EXHB SJ
Contact: Bechara Nacouzi, Sales Manager
Al-Harithy Co. for Exhibitions, Ltd.
PO Box 40740
Jeddah 21511, Saudi Arabia
Tel: (02) 654-6384, Fax: (02) 654-6853
Tlx: 602784 EXPO SJ
Contact: Saeed Haider, GM
Dhahran International Exhibition
PO Box 7519
Damman 31472, Saudi Arabia
Tel: (03) 857-9111, Fax: (03) 857-2285
Contact: Najeeb Abdul Rahman Al-Zamil, General Manager
Each exhibit center organizes five to ten events a year, and even though
the programs have varied over time, the recurrent themes cover most
industries of interest for U.S. exporters: agriculture, automotive,
computers, medical and lab equipment, construction, production
technology, electrical and A/C-heating, and communications. Smaller
exhibit facilities are also located in regional centers, and often
operate in cooperation with or under the sponsorship of the local
chamber of commerce.
Most chambers have a proactive approach to promotion and trade, organize
shows and presentations for individual companies or groups, and have
been eager to attract American and other Western suppliers.
The main Chambers are:
Council of Saudi Chambers of Commerce and Industry
PO Box 16683
Riyadh 11474, Saudi Arabia
Tel: (01) 405-3200, Fax: (01) 402-4747
Riyadh Chamber of Commerce and Industry
PO Box 596
Riyadh 11421, Saudi Arabia
Tel: (01) 404-0044, Fax: (01) 402-1103
Jeddah Chamber of Commerce and Industry
PO Box 1264
Jeddah 21431, Saudi Arabia
Tel: (02) 651-5111, Fax: (02) 651-7373
Damman Chamber of Commerce and Industry
PO Box 719
Damman 31421, Saudi Arabia
Tel: (03) 857-1111, Fax: (03) 857-0607
Makkah Chamber of Commerce and Industry
PO Box 1086
Makkah, Saudi Arabia
Tel: (02) 534-3838, Fax: (02) 534-2904
Medina Chamber of Commerce and Industry
PO Box 443
Medina, Saudi Arabia
Tel: (04) 822-5380, Fax: (04) 826-8965
Taif Chamber of Commerce and Industry
PO Box 1005
Taif, Saudi Arabia
Tel: (02) 736-6800, Fax: (02) 738-0040
NOTE: Add country code 966 if dialing from the U.S. and drop the zero
before the first digit of the telephone or fax numbers above.
Product Pricing
A rate of exchange of the dollar to the riyal has been set at 3.75 since
1986, a competitive dollar value compared to the Japanese and European
currencies, and reasonable interest rates have greatly facilitated
market penetration. Thanks to this, Saudi importers expect U.S.
producers to practice a more stable pricing policy than their foreign
competitors. Products are usually imported on a CIF basis, and mark-ups
depend almost entirely on what the vendor feels that the market will
bear relative to the competition. There is no standard formula to come
up with the mark-up rates for all product lines at different levels of
the relatively short distribution chain.
Stability of prices has been a policy of the Saudi Government for years,
however, the latest utility and gas rates hikes have had a multiplier
effect across the board. For the U.S. supplier, some give-and-take is
expected in preliminary negotiations. The asking price is usually
lowered a bit, to entice the client and to bow to the old-fashioned
Saudi penchant for bargaining and personal exchange.
Financing has become a leading consideration in purchasing, especially
for investment goods and repeat orders. As leveraged transactions
become the norm, Saudis have come to understand that an attractive
financial package can be even more interesting than an up-front low
price. The support and services provided by the U.S. Eximbank attract
the Saudis' keen interest, and are being considered for several major
projects.
Sales Service/Customer Support
Saudi Arabia is a relatively open market, which makes it highly
competitive. Brand loyalty and established preferences are less
developed than in other countries. Consequently, above average sales
service and customer support are indispensable to win and maintain new
clients.
As the Saudi market matures, this will become more and more the norm,
and the recent economic slowdown is adding to the competitive pressure;
the sell-and-forget techniques still common in the 1980s are definitely
out.
Saudis view a foreign firm's physical presence in the Kingdom as a
tangible sign of long-term commitment. Prompt delivery of goods from
available stock and the presence of qualified support technicians have
become more important, and they influence repeat business much more now
than ten or even five years ago. Government agencies usually require
equipment suppliers to commit to providing maintenance and spare parts
for an average period of three years.
Selling to the Government
Government spending accounts for approximately 35 percent of GDP, making
it an important albeit diminishing market for U.S. suppliers of goods
and services, particularly in the military, health care, data
processing, transportation, engineering, and security sectors. However,
payment delays remain an issue for foreign suppliers.
As the situation is fluid, U.S. firms considering sales to the
government should request a briefing from the Embassy concerning the
latest situation on payments and how U.S. firms can protect themselves.
As a practical matter, U.S companies seeking sales of goods and services
to the Saudi government should appoint a reputable agent or distributor
with experience in the field. Foreign contractors operating solely for
the government, if not already registered to do business in Saudi
Arabia, are required to obtain temporary registration from the Ministry
of Commerce within 30 days of contract signing and to select a Saudi
national as an officially registered agent (weapons sales are exempt
from this agency requirement). Compensation for agents is limited to a
maximum of 5 percent of contract value. Foreign companies also may be
allowed to establish a branch office by obtaining a foreign capital
investment license from the Ministry of Industry and Electricity.
Branch offices are usually approved only for foreign defense
contractors. For others, a liaison office may be established to
supervise work in the Kingdom and to facilitate coordination between the
government and home offices. This requires approval of the Ministry of
Commerce. Liaison offices are prohibited from conducting commercial
business in Saudi Arabia.
Foreign contractors involved in public works projects are required to
subcontract at least 30 percent of the contract value to 100 percent
Saudi-owned companies. This requirement also applies to limited
liability partnerships with less than 51 percent Saudi ownership.
The subcontractor must be qualified to perform the work and may not
further subcontract any portion of it. Purchases of Saudi products and
services and of imported products from Saudi distributors may count
toward the 30 percent requirement.
Protecting your Product from IPR Infringement
Saudi Arabia has a patent office, but has never issued a patent. The
Ministry of Information has made some limited progress on enforcing
copyrights on software and films. U.S. firms that wish to sell products
in Saudi Arabia should work through their local representative to
register their products with the Ministry of Information and work with
them on enforcement. The Saudi Government has taken actions to enforce
copyrights of U.S. firms, and pirated material has been seized or forced
off the shelves of a number of stores. Overall, however, piracy remains
a problem.
Need for a Local Attorney
Saudi law is based on the Islamic Shari'a and differs considerably from
U.S. practice. U.S. firms contemplating a joint venture, licensing, or
distribution agreement are advised to consult with a local attorney.
The American Embassy and Consulates can provide a list of attorneys.
V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENTS (US$ millions,
unless otherwise noted)
1. AIR CONDITIONING AND REFRIGERATION EQUIPMENT (ACR)
Air conditioning and refrigeration equipment including compressors
remains one of the most growth oriented markets in Saudi Arabia. Rapid
population growth and a harsh climate combine to keep Saudi Arabia a
lucrative market for HVAC equipment. After a downturn in 1995, the
market is expected to pick up again in 1996, growing by an estimated 6
percent, from $913 million in 1995 to $975 million in 1996. That growth
will be mainly attributed to a 7 percent increase in imports, expected
to reach $839 million in 1996. U.S. suppliers compete aggressively with
Japanese manufacturers, but have maintained an average 23 percent share
of the import market. Capacity at local factories will increase by
about four percent from $210 million in 1995 to $220 million in 1996,
while about 38 percent of the local output is being exported. In
particular, mini-split are gaining ground over wall units. In the
refrigeration sector, there is ample and continuous need for cold
storage facilities, both stationary and mobile. The latest recession
has negatively affected imports of HVAC equipment, and the downturn is
expected to subside in early 1996.
1994(E) 1995(E) 1996(E)
a. Total Market Size 972 913 975
b. Total Local Production 200 210 220
c. Total Exports 75 80 84
d. Total Imports 847 783 839
e. Imports from the U.S. 195 180 193
2. OIL & GAS EQUIPMENT AND SERVICES (OGM)
Saudi Arabia is the largest single producer of oil in the world, and
industry estimates put Saudi reserves at one quarter of the world total.
The OGM market is large, estimated at less than a $1 billion, but is
undergoing a rapid contraction which is expected to continue throughout
1995. The market was expected to have dropped by an astronomical 20
percent in 1995, from $1100 million in 1994 to $880 million in 1995.
Pending higher oil prices in 1996 and beyond, the Saudi market will be
expected to redress in 1996, growing by more than two percent. U.S.
suppliers still hold the lion share, accounting for an average 45
percent of the market. Warehouse stocks are high and will be drawn down
before new purchases are made. A few sizable projects will go forward,
however, and U.S. products are considered very competitive in high-
technology areas.
1994(E) 1995(E) 1996(E)
a. Total Market Size 1100 880 905
b. Total Local Production n.a. n.a. n.a.
c. Total Exports n.a. n.a. n.a.
d. Total Imports 1100 880 905
e. Imports from the U.S. 495 396 407
3 ..AUTOMOTIVE PARTS & SERVICE EQUIPMENT (APS)
Although Saudi Arabia is the fifth largest world market for U.S. auto
parts and equipment, and while Saudi per capita spending on automobiles
is among the highest in the world, sales of new automobiles have taken a
plunge in recent years.
The trend will likely persist till 1996 when, according to some
estimates, the Saudi economy is expected to recover following a slight
increase in world oil prices.
On average, the Saudi market for automotive parts continued to grow by 5
percent annually, reaching $2340 million by 1996. Imports which
represent 82 percent of the market, increased by an average 6 percent
annually, from $1730 million in 1994 to $1850 million in 1995, reaching
an estimated $1940 million in 1996. U.S. manufacturers/suppliers' share
of the market stood at 40 percent. Local production consists mainly of
fast-moving items, but is expected to become more varied as more
licensing arrangements are being formulated. Local production increased
more than two percent, from $411 million in 1994 to $420 million in
1995, and will continue at that level in 1996. By the same token,
exports from local facilities will also remain flat at $20 million
during 1995 and 1996, a slight increase from 1994.
1994(E) 1995(E) 1996(E)
a. Total Market Size 2125 2250 2340
b. Total Local Production 411 420 420
c. Total Exports 16 20 20
d. Total Imports 1730 1850 1940
e. Imports from the U.S. 690 740 775
4. PUMPS, VALVES & COMPRESSORS (PVC)
Imports of pumps, valves and compressors surged to record levels in the
early 1990s due to a Saudi Aramco capacity expansion program, and low
inventories in the aftermath of the Gulf War.
Continued expansions and upgrading at refineries, petrochemical plants,
power and desalination projects will keep the Saudi PVC market buoyant,
growing between 5-10 percent per annum over the next three to four
years. Imports, which represent more than 98 percent of the market, are
expected to grow 10 percent reaching a high of $392.5 million in 1996.
Local production is minimal and has remained almost unchanged over the
years at $5 million annually. This is expected to change as more PVC
factories are established. New-to-market U.S. manufacturers of pumps
and valves will find it hard to get pre-qualified by major purchasers
such as Saudi Aramco over the next three years unless they are extremely
competitive. The market for compressors is a little more open.
While new PVC equipment is of interest, replacement parts and upkeep of
equipment offer major opportunities to U.S. firms. American companies
already enjoy a 35 percent share of the market mainly competing with
Italian, British, German, and Japanese suppliers. In order to gain a
greater market share, U.S. firms need to focus on providing service and
upkeep, and use higher U.S. quality as a tool to outmaneuver European
rivals. Competitive pricing has become of major importance because of
the country's economic downturn.
1994(E) 1995(E) 1996(E)
a. Total Market Size 337.5 360.0 397.5
b. Total Local Production 5.0 5.0 5.0
c. Total Exports 0.0 0.0 0.0
d. Total Imports 332.5 355.0 392.5
e. Imports from the U.S. 118.1 126.0 139.1
6. COMPUTERS AND PERIPHERALS (CPT)
The Saudi market for computers and peripherals remains buoyant. Various
Saudi organizations, both public and private, are revamping their
systems, downsizing while upgrading their computer setup. The market
was worth approximately $220 million in 1994, increasing by an average
two percent annually, and expected to reach $229 million by 1996. IBM-
compatible manufacturers in the Far East supply about 40 percent of the
market, followed by U.S. suppliers at 36 percent.
Computer utilization is on the rise and the replacement market for
upgraded and higher capacity computers is also growing. Saudi
businesses and government agencies are shifting away from mainframes and
mid-range computers to more flexible, faster, and cheaper micro
computers or PC's in a networking environment. One industry study
estimated that there are more than 400,000 personal computers in the
Kingdom.
1994(E) 1995(E) 1996(E)
a. Total Market Size 220 225 229
b. Total Local Production 0 0 0
c. Total Exports 0 0 0
d. Total Imports 220 225 229
e. Imports from the U.S. 80.5 82.0 83.5
7. COMPUTER SOFTWARE (CSF)
Beginning in July 1994, the Saudi government started enforcing the
copyright law. Since then, sales of computer software have expanded at
the rate of 10 percent annually, and will be expected to keep the same
pace over the next three years despite prevailing recessionary
pressures.
The market is totally dependent on imports, except for some in-house and
other third-party custom-made software. In 1994, the market was
estimated at $300 million which increased to $330 million and $365
million in 1995 and 1996 respectively. U.S. software companies dominate
the market, accounting for more than 70 percent. Their share will grow
even further, especially for open architecture software packages. There
is also strong demand for Arabized software and tailored-made packages.
1994(E) 1995(E) 1996(E)
a. Total Market Size 300 330 365
b. Total Local Production 0 0 0
c. Total Exports 0 0 0
d. Total Imports 300 330 365
e. Imports from the U.S. 210 230 255
8. MINING INDUSTRY EQUIPMENT (MIN)
While petroleum is by far Saudi Arabia's most important resource, the
mining industry is becoming Saudi Arabia's second most valuable source
of export revenue. The Directorate General of Mineral Resources (DGMR)
is actively seeking international investors to establish mining joint
ventures, providing consulting, equity, and technical know-how for major
mining projects Kingdom-wide.
The DGMR has listed more than 64 mines throughout the Kingdom for
private sector investment. Three of these mines are already being
tendered out for private sector investment for a total cost of $2.3
billion. Investment in the mining sector will have a beneficial
influence on the market for machinery, engineering services, material
handling equipment, power generation, safety and security equipment
among others. Some of the benefits that foreign investors will receive
include: tax exemption for five years and a 30 year extraction
concession among other benefits.
No statistical data is available since any mining project will be
implemented on a turnkey basis, including, consulting, design and
engineering, machinery, extraction and shipping.
9. CHEMICAL PRODUCTION MACHINERY (CHM)
The private sector will be expected to take the lead in spearheading
further investments in the downstream petrochemical industries. Major
expansion work at the 15 plants belonging to the Saudi Arabian Basic
Industries Corporation (SABIC) is either complete or being implemented.
Potential for products and services in this sector will emanate from the
private sector's drive to implement a number of long standing
petrochemical industrial ventures. These ventures will involve capital
outlays in the range of $1-2 billion, 85-90 percent of which will be
spent on infrastructure, machinery and instrumentations.
At the peak of its expansion program, the petrochemical industry spent
about $1.3 billion in 1994 on related equipment, machinery and
instruments. That figure was expected to drop by almost four percent in
1995 and recorded zero growth in 1996. Local production accounted for
an average 16 percent of the market.
Since many of these plants are awarded on a Lump-Sum-TurnKey basis, many
U.S. firms will be expected to provide licensing and process engineering
technology. Currently, U.S. firms providing process engineering and
licensing arrangement represent more than 25 percent of this market.
1994(E) 1995(E) 1996(E)
a. Total Market Size 1300 1255 1255
b. Total Local Production 200 220 220
c. Total Exports n.a. n.a. n.a.
d. Total Imports 1100 1035 1035
e. Imports from the U.S. 275 265 265
10. FRANCHISING (FRA)
The Saudi franchise market still presents excellent potential for U.S.
companies and is virtually untapped in many sectors, especially non-
food. U.S. franchises in the fast food sector dominate the market
accounting for three-quarters of sales. Total sales stood at $238
million in 1994, increasing to $257 million in 1995 and expected to
reach $266 million by 1996. Sales by local outlets are also expanding
from $36 million in 1994 to $42 million in 1996, an average 8 percent
growth annually.
There is already a large number of U.S. based fast-food restaurants in
the country, but the rapid population growth and changing tastes and
cultural routines offer potential for additional franchises and
expansion of those already present. Non-food growth areas include the
following: quick printing, dry cleaning, office temporary services,
laundry, and retail and convenience stores.
1994(E) 1995(E) 1996(E)
a. Total Sales 238 257 266
b. Sales by Local Outlets 36 39 42
c. Total Exports 0 0 0
d. Sales by foreign outlets 202 218 224
e. Sales by U.S. outlets 167 180 190
11. OPERATIONS AND MAINTENANCE SERVICES (OMS)
Harsh climatic conditions, limited technical expertise, and industrial
expansion create a high demand for O&M services in the Kingdom. Every
capital project brings with it a maintenance component, especially for
electrical and mechanical engineering contracts. Demand for specialized
O&M services is especially high in sectors dependent on high tech
equipment and instruments.
Saudi Arabia has a well developed oil and petrochemical industry, and
preventive maintenance in those areas conform with world norms and
standards. The latest state of affairs, which has slowed down capital
investment in plants and equipment, has also boosted the need to
preserve and maintain existing infrastructural and capital projects
pending better business and economic climates. By 1996, the Saudi
market for O&M services would have reached $4.9 billion, approximately
80 percent of which will be handled by either foreign companies and/or
Saudi-foreign joint ventures. U.S. companies have the lead in this
market and their share is estimated at 64 percent. U.S. participation
in this sector is expected to grow by 4 percent annually over the next
couple years, one percentage point more than the growth for the whole
sector.
Local companies, however, will be expected to gain more expertise in
this sector and their share, currently estimated at 4.5 percent, will
grow at an increasing rate over the next three years. Until oil prices
surge again, many projects will be delayed and/or canceled; in turn,
expenditures on the maintenance of existing projects will escalate.
1994(E) 1995(E) 1996(E)
a. Total Sales 4600 4760 4905
b. Sales by Local firms 920 960 1005
c. Total Exports 0 0 0
d. Sales by foreign firms 3680 3800 3900
e. Sales by U.S. firms 2300 2400 2500
12. DRUGS/PHARMACEUTICALS (DRG)
Saudi Arabia is the 24th largest market in annual drugs consumption and
the market is growing by more than 12 percent annually. There are as
many as 11 government and parastatal agencies which offer health care
services in the Kingdom. These agencies and the private sector consume
approximately $1 billion worth of medicines and pharmaceutical per year.
Local production, growing by an average 30 percent annually, is
increasingly replacing imported items as more facilities will be
operational over the next 3-4 years. Nevertheless, about four percent
of the locally-produced drugs are being exported to neighboring
countries, and imported medicines and pharmaceuticals still represent
more than 80 percent of the market. U.S. pharmaceutical companies'
share stand at 11.5 percent of the import market.
Currently, there is only one pharmaceutical plant in Saudi Arabia which
has four licensing agreements with major European and U.S.
manufacturers. The Saudi company is also discussing licensing
agreements with three other companies. Five more pharmaceutical plants
are also being considered, two of those are expected to come on stream
by the end of 1995. Although local production is expected to assume a
larger share of this market, imports will still remain an important
aspect since many licensing pacts will only cover some medicines
including antibiotics, vitamins, cough syrups, analgesics, and skin
ointments.
1994(E) 1995(E) 1996(E)
a. Total Market Size 1002 1127 1275
b. Total Local Production 152 200 275
c. Total Exports 5 8 16
d. Total Imports 855 935 1015
e. Imports from the U.S. 103 107 117
13. FOOD PROCESSING/PACKAGING EQUIPMENT (FPP)
The Saudi food processing and packaging industry is the third largest
manufacturing sector, excluding petroleum. There are approximately 329
factories capitalized at $2.6 billion. Fifty new industrial licenses
are pending, 18 of which are looking for joint ventures with foreign
firms.
The Saudi market is almost totally dependent on imports, which account
for more than 97 percent of the market. Growing by an average 5 percent
annually, the Saudi market for food processing/packaging equipment is
expected to reach $134 million by 1996. Although German and Italian
manufacturers dominate the Saudi market for food processing and
packaging machinery, U.S. firms can still find a niche especially for
machinery aimed at the manufacture and processing of snack foods, baby
foods, ketchup, powder milk, and dairy products. U.S. suppliers' share
is almost 20 percent, and expected to reach a high of $28 million by
1996. A weak dollar against European currencies will even amplify the
share of U.S. firms in this market.
1994(E) 1995(E) 1996(E)
a. Total Market Size 122 129 134
b. Total Local Production 5 7 7
c. Total Exports 3 3 3
d. Total Imports 120 125 130
e. Imports from the U.S. 21 25 28
14. APPAREL (APP)
The Saudi apparel market remains lucrative. More than half the Saudi
population is under the age of 18, coupled with a continuous influx of
expatriates and pilgrims throughout the year make the market quite
promising.
During the two major Moslem holidays, demand for children clothing is
buoyant. On average, the market has grown by more than four percent per
year since 1994, and will be expected to reach $955 million by 1996.
More than 94 percent of the Saudi apparel market is imported. U.S.
apparel manufacturers have good potential to offer apparel made of
natural fabrics at more affordable prices than European suppliers that
command a lion share of the upper end of the market. U.S. sales were
estimated at $67 million in 1994, and are expected to expand by an
average 6 percent annually. While imports are growing by four percent
per year, local manufacturers are increasingly replacing a segment of
that market and their share is growing by an average 10 percent per
year. At the lower end of the market, consumers are preferring to spend
a little more for a better and long lasting product, especially for
children's and infants fashions. Far eastern suppliers dominate that
sector of the market.
1994(E) 1995(E) 1996(E)
a. Total Market Size 870 910 955
b. Total Local Production 52 60 63
c. Total Exports 12 10 11
d. Total Imports 830 860 903
e. Imports from the U.S. 67 70 76
15. AGRICULTURAL BEST PROSPECTS
1. RICE (0422110)
The market for rice in Saudi Arabia is large and growing. The country
relies on imports to cover all of its needs for this product. More than
80 percent of Saudis and the majority of expatriates in the Kingdom are
considered to eat rice in their daily diet. There are opportunities to
increase U.S. market share, but the market is very competitive. The
U.S. share declined in 1994 as a result of higher prices. However, it
appears that the U.S. is regaining market share and prospects for the
future are promising.
1994 1995(E) 1996(E)
a. Total Market Size 405 410 415
b. Total Local Production 0 0 0
c. Total Exports 0 0 0
d. Total Imports 405 410 415
e. Total Imports from U.S. 94 100 102
Note: This table shows CIF values.
2. CORN (0440000)
Livestock and poultry farming are growing steadily in the Kingdom.
Several of the Kingdom's poultry producers, by far the major consumers
of imported corn, have embarked on major expansion projects which are
expected to be completed by the end of 1997. Local production costs are
high relative to the price of imported corn, so most of current demand
and the market growth are anticipated to be filled by imports. The U.S.
is the dominant supplier and is expected to benefit the most from
increased demand for imports in the next few years.
1994 1995(E) 1996(E)
a. Total Market Size 175 178 180
b. Total Local Production 6 7 7
c. Total Exports 0 0 0
d. Total Imports 169 171 173
e. Total Imports from U.S. 124 126 128
Note: This table shows CIF values.
3. PROCESSED FRUITS AND VEGETABLES
The demand for processed fruits and vegetables in Saudi Arabia is
substantial. The growth of supermarket food sales is helping to broaden
the market, and good market growth is expected to continue. Local
production is just beginning and may provide a market for fruits and
vegetables to be processed, but the small amount of local fruit and
vegetable output and the high cost related to importing them for use in
local processing suggest that most of the demand will continue to be met
by imports. Competition is severe, with regular imports from a large
number of European and Asian countries.
1994 1995(E) 1996(E)
a. Total Market Size 128 131 135
b. Total Local Production 3 4 5
c. Total Exports 0 0 0
d. Total Imports 125 127 130
e. Total Imports from U.S. 35 37 39
4. SOYBEAN MEAL (0813100)
Soybean meal is used in both poultry and livestock rations. The largest
soybean meal users are the poultry producers who are expected to
increase soybean meal imports significantly by the end of 1997. The
major poultry producers prefer to import their soybean meal requirements
from the U.S. due to the superior quality of U.S. soybean meal.
However, competition from lower priced suppliers such as India appears
to have increased in the last few years.
1994 1995(E) 1996(E)
a. Total Market Size 106 108 110
b. Total Local Production 0 0 0
c. Total Exports 0 0 0
d. Total Imports 106 108 110
e. Total Imports from U.S. 53 57 60
Note: This table shows CIF values.
5. BEVERAGE BASES & SWEETENERS
Production of soft drinks and other beverages is probably the fastest
growing part of the Saudi food industry. Market growth is occurring
for both juice concentrates and beverage bases. The U.S. market share is
around 22%, and there are opportunities for improving the market share.
1994 1995(E) 1996(E)
a. Total Market Size 63 70 75
b. Total Local Production 0 0 0
c. Total Exports 0 0 0
d. Total Imports 63 70 75
e. Total Imports from U.S 18 20 25
6. SNACK FOODS (EXCLUDING NUTS)
The last official census indicated that more than 60 percent of the
Saudi population is in their teens, which as a group is a heavy user of
snack foods. Local production is expected to grow rapidly in the next
five years. The U.S. has a strong positive image in the market, since
U.S. products are associated with quality. However, U.S. products are
generally priced at a premium over other products. Products focusing on
Saudi trade preferences, which tend to favor sweeter items, generally
find better market reception.
1994 1995(E) 1996(E)
a. Total Market Sales 52 53 55
b. Total Local Production 8 9 10
c. Total Exports 0 0 0
d. Total Imports 44 44 45
e. Total Imports from U.S. 13 14 15
7. BREAKFAST CEREALS
The U.S. has been the market leader in this sector. However, breakfast
cereals from Europe are very competitive and are making inroads in the
market. Promotion and advertising efforts are particularly important to
acquaint potential consumers with these non-traditional products in
order to gain wider consumer acceptance.
1994 1995(E) 1996
a. Total Market Size 27 29 31
b. Total Local Production 2 2 2
c. Total Exports 0 0 0
d. Total Imports 26 27 29
e. Total Imports from U.S. 16 12 13
Major Investment Opportunities
The Saudi private sector is expanding and assuming a larger role in
boosting Saudi GDP. Whereas total GDP grew by a mere 0.6 percent in
1994, the Saudi private sector experienced a 4 percent growth. A major
indicator of the propensity of the private sector to assume a prominent
role in the growth of the Saudi economy is an increase in commercial
banks credit extended to finance various economic activities in the
industrial, utilities, mining, transport and communication, trade and
the government sectors. In addition, many quasi government
organizations, i.e. SABIC and SCECOs also benefited from this rise in
credit. More commercial bank credit will be sought in 1995 and the
first half of 1996.
The Saudi government is pursuing various policies to reduce budget
deficits and internal indebtedness. As such, government expenditures
are being cut, while some public projects are being put on hold. Among
other things, these measures are sending a clear message to the private
sector to assume some of the government's functions. The Saudi private
sector will take the initiative and a number of investments are likely
to take place in the following sectors:
Petrochemicals: The Saudi Basic Industries Corporation (SABIC) and a
number of private companies are moving forward with a number of projects
to build new plants and expand existing ones.
Total investment in these projects is expected to reach $5 billion and
some of them are already completed. A number of U.S. firms are
negotiating licensing, production processes, as well as equity
participation. Products range from an aromatics facility, MTBE plants,
and various other facilities producing plastic resins, petrochemical
feedstocks, fertilizers, and other industrial products.
Offset: Projects under the various offset programs are expected to
generate substantial new opportunities through the year 2000 and beyond.
The U.S. Peace Shield offset program, formerly run and managed by the
Boeing Company, already has led to five commercial projects: Al-Salam
Aircraft Co., the Aircraft Accessories & Components Company, the
Advanced Electronics Company Ltd., the International Systems Engineering
Company, and the Middle East Propulsion Center. Hughes Aircraft Systems
which is currently in charge of the Peace Shield Program also has an
offset commitment to invest into new ventures in the Kingdom.
General Dynamics Corporation also formalized a Memorandum of Agreement
which commits it to an Industrial Participation Program in the Kingdom,
and last, but not least, AT&T agreed to invest into viable industrial
joint ventures in the Kingdom.
Although moving slower than its American counterpart, the British Al-
Yamama offset program also requires reinvestment by the prime
contractor, British Aerospace, in viable Saudi projects. Various Saudi-
British joint ventures are already in the offing, including a sugar
refinery and a pharmaceutical plant. A French defense contractor
Thomson-CSF has already invested in one offset project, a gold refining
project with a total investment of $48 million. Other proposals are
still pending and being evaluated by the offset committee.
Defense: Although government expenditures have been negatively affected
by recent cut downs in government budgets, allocations to the defense
sector continue to be the largest. More than $13 billion was earmarked
for defense and security in the 1995 government budget. Already,
various military hardware is on order, entailing training and
construction of associated infrastructure.
Telecommunications: The Saudi PTT expansion (TEP 6) contract for 1.5
million lines, estimated at $4 billion, has been awarded to the U.S.
firm AT&T. A number of sub-contracts have already been signed with
U.S., foreign, and local companies to carry out different aspects of
that project. More contracts will be expected to be allotted in the
future.
Broadcasting: The Ministry of Information plans to purchase and install
four high-powered short and medium wave radio broadcasting transmitters
for a total project cost of $2-3 billion. The project is still been
reviewed.
Transport: The Saudi Public Transport Company (SAPTCO) plans to buy
between 800 and 1000 35-40 passengers city buses valued at $400 million
or more depending on quantity and specifications. Although no decision
will be forthcoming soon, the project is still under consideration. The
national airline, SAUDIA, has already confirmed an order for 61 aircraft
valued at $6 billion from Boeing and McDonnell Douglas.
Power: The diversification and growth of the economy, coupled with a
3.5-percent population growth necessitate that new power plants be built
to cater to the rising electricity needs. After a one-year delay, many
power projects have moved forward. Over the next few years, the Saudi
government is expected to spend between $4-5 billion on that sector.
Major among these projects is a recently signed $1.8 billion contract
with the U.S. General Electric for a power plant in Riyadh. Another
equally important project is a 2,400 MW expansion at Ghazlan for an
estimated cost of $2 billion. Two other major projects, valued at $800
million each, are also expected to be negotiated for two 1,000 MW
generation facilities at Asir and Shuqaiq.
Petroleum: The national oil company, Saudi Aramco, is expected to
promote a number of projects during 1995-96. Foremost among them are:
the $1.7 billion Ras Tanura refinery upgrade and the Shaybah oil field
development. In addition, Aramco plans expansion in gas processing
capacity and upgrade of the domestic product distribution network. A
number of projects are already being implemented, while others will
soon get the green light. Cost of these projects is estimated at $5-6
billion.
Desalination: The Saline Water Conversion Company is implementing a
number of projects to boost the Kingdom's desalinated capacity. Three
major projects are under construction or being completed, namely, the
third phase of a $830 million reverse osmosis/power plant in Al-Khobar,
a $1040 million desalination and power plant at Shuaiba, and a $140
million R/O plant in Jubail. Additional projects are on the drawing
board and will entail investments up to $1.2 billion.
Mining: Over the next few years, the Directorate General for Mineral
Resources (DGMR) will actively seek investors from the U.S., Canada and
other countries to establish mining joint ventures for a number of major
projects.
Saudis will enlist foreign support in the areas of joint ventures,
investment, consulting and technical know-how to develop these mines.
During 1994, the Directorate General of Mineral Resources (DGMR) invited
bids on three major deposits, namely, the exploration and manufacturing
of pellets from the iron ore deposits of Wadi Sawawin, the exploration
and production of phosphate from the deposits at Al-Jalamid, and
exploration and evaluation of the bauxite deposits at Az-Zabirah. Total
investments in these three projects are estimated at $2.5 billion.
Studies conducted by DGMR have revealed large quantities of minerals in
42 fields spread throughout the Western and Central regions of the
Kingdom. These minerals include copper, zinc, gold, silver, iron,
bauxite and phosphate, ornamental stones and industrial minerals.
The Government of the United States acknowledges the contribution that
outward foreign direct investment makes to the U.S. economy. U.S.
foreign direct investment is increasingly viewed as a complement or even
a necessary component of trade. For example, roughly 60 percent of U.S.
exports are sold by American firms that have operations abroad.
Recognizing the benefits that U.S. outward investment brings to the U.S.
economy, the Government of the United States undertakes initiatives,
such as Overseas Private Investment Corporation (OPIC) programs,
investment treaty negotiations and business facilitation programs that
support U.S. investors.
VI. TRADE REGULATIONS AND STANDARDS
Trade Barriers
Only Saudi nationals are permitted to engage in trading activities. All
industrial enterprises are open to non-Saudis, and they can also trade
in the products they manufacture. Non-Saudis are not permitted to
register as commercial agents.
The Saudi Arabian Monetary Agency (SAMA), the Saudi central bank,
regulates and controls the Saudi banking sector. Financing is available
to Saudi and non-Saudi businessmen and entities. Offshore banking and
trust operations do not exist in Saudi Arabia and there is no
legislation that permits the establishment of these operations.
The securities market is still not highly developed. Banks are the sole
entities that may act as stockbrokers for publicly traded shares or for
joint stock companies. Only Gulf Cooperation Council (GCC) nationals--
Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the United Arab
Emirates--are permitted to buy and trade shares in Saudi companies.
Saudi Arabia has a different set of trade barriers, mainly regulatory
and bureaucratic practices, which restrict the level of trade.
Among these are:
Commercial Disputes Settlements: Saudi Arabia has signed the New York
Convention on the Arbitration of Commercial Disputes. This is an
encouraging step, but arbitration has yet to be tested in practice.
Government agencies are not allowed to agree to international
arbitration without agreement from the Council of Ministers.
Business Visas: All visitors to Saudi Arabia must have a Saudi sponsor
in order to obtain a business visa to enter Saudi Arabia. The Saudi who
agrees to act as a sponsor accepts certain legal obligations including
personal liability for the actions of the visitor. Therefore, a Saudi
rarely assumes sponsorship unless he has a personal interest in the
proposed visit.
In practice, this makes it very difficult for an American business
person to come to Saudi Arabia to investigate the market or to select a
local representative without incurring some type of obligation to his
sponsor, i.e. right of first refusal on any business opportunity
developed. Although the process of obtaining a visa has been
streamlined, American citizens of Arab descent and women continue to
have difficulties in procuring business visas, even when they have a
sponsor.
Delayed Payments: This is the top issue for U.S. firms in the Kingdom.
In the current recession, some Saudi Government agencies have delayed
payments from 6 to 15 months. Lengthy payment delays, especially from
government ministries and agencies, have long been a disincentive to
doing business in the Kingdom. This issue stems partly from a
traditional Saudi reliance on slow payments in order to manage cash
flow, and partly from a bureaucratic reluctance to make final payments.
Companies should check with the U.S. Embassy or Consulates for the
current arrearage situation.
Due to accounting procedures used by the Saudi Government, the
Department of Zakat and Income Tax will impose taxes even on payments
which have not been received, arguing that the fact of non-payment is
essentially immaterial in the tax liability determination process.
Given the Saudi government's current fiscal position, this problem is
likely to continue during 1995.
Intellectual Property Protection: 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 began 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 for product and product-by-process. Product-by-process
protection is extended to pharmaceutical. 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's copyright law does not extend protection to works that
were first displayed outside of Saudi Arabia, unless the author is a
Saudi citizen. However, Saudi Arabia has acceded to the Universal
Copyright Convention (UCC), and the Saudi Government maintains that this
is sufficient to extend protection to foreign works. The Saudi
Government has taken actions to enforce copyrights of U.S. firms, and
pirated material has been seized or forced off the shelves of a number
of stores. Overall, however, piracy remains a problem.
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.
Arab League Boycott: The Gulf Cooperation Council, i.e. Saudi Arabia,
Kuwait, Bahrain, Oman, Qatar, and the United Arab Emirates, announced in
the Fall of 1994 that its members would no longer enforce the Secondary
and Tertiary aspects of the Arab League Boycott. The Primary Boycott
against Israeli companies and products still applies.
Advice on boycott and anti-boycott related matters is available from the
U.S. Embassy or from the Office of Anti-boycott Compliance in
Washington, D.C. at (202) 482-2381.
Protective Tariffs and Non-Tariff Trade Barriers: Saudi tariff
protection is generally moderate, but has increased over the years. A
number of Saudi "infant industries" now enjoy 20 percent tariff
protection as opposed to the general rate of 12 percent. Saudi non-
tariff barriers also are increasing.
Such barriers include preferences for national and GCC products in
government procurements; a 30 percent of contract value "set-aside" for
local contractors on major government projects; a requirement that
foreign contractors obtain their imported goods and services exclusively
through Saudi agents; some services are reserved for government-owned
companies, namely, insurance and air transport; and the economic offset
requirement mandating reinvestment of a portion of contract value in
indigenous industries for certain high value government contracts,
particularly in defense.
Customs Valuation
All merchandise moving through Saudi customs ports is appraised by the
Department of Customs of the Ministry of Finance. Import valuation is
primarily used for collection of import duties and often does not
reflect the actual transaction value. Saudi customs valuation
procedures are not GATT-consistent, nor are they based on invoice value.
Minimum prices are used, which is contrary to GATT. Customs agents rely
on their own experience and local prices, as well as some contact with
manufacturers, to assess import tariffs.
For statistical purposes, the valuation of imported merchandise is the
CIF value. The value of exported merchandise is based on free on board
valuation (FOB). The Saudi tariff nomenclature is consistent with the
Harmonized System. There does not seem to be a significant body of
rule-making or documentation available. Appeals are frequently done
orally, and an appeals committee, under the Deputy-Director General of
Customs, meets frequently.
Although Saudi Arabia is a member of the Customs Coordination Council,
Saudi Customs officers do not have the authority to do investigative
work on business premises nor do they have enforcement powers. These
powers are vested in the Ministry of Interior.
Import Licenses
The importation of certain articles is either prohibited or requires
special approval from competent authorities. In addition, import of the
following products requires special approval by Saudi authorities:
agricultural seeds; live animals and fresh and frozen meat; books,
periodicals, movies, and tapes; religious books and tapes; chemicals and
harmful materials; pharmaceutical products; wireless equipment; horses;
products containing alcohol, e.g. perfume; natural asphalt;
archaeological artifacts.
Export Controls
Saudi exporters need to submit a copy of their commercial registration
which indicates they are allowed to export. They are also required to
submit a certificate of origin of Saudi products (issued by the Ministry
of Commerce). Certain items such as antiques, Arabian horses,
livestock, or subsidized items need special approval to export. Exports
of oil, petroleum products, natural gas and wheat all require export
licenses.
Import/Export Documentation
The following documents are required for exporting goods into Saudi
Arabia: A notarized certificate of origin authenticated at a Saudi
diplomatic mission and local chamber of commerce or U.S. - Arab Chamber;
A similarly authenticated invoice (in triplicate) which must state the
country of origin, name of the carrier, brand and number of goods, and
description of the goods including weight and value; A clean bill of
lading; Documents indicating compliance with health regulations, if
applicable;
Insurance documents if shipments are sent C.I.F. The original documents
must be accompanied by an Arabic translation; Saudi Arabian Standards
Organization (SASO) certificate, if applicable; Radiation Certificate,
if applicable.
Temporary Entry
For temporary entry of goods for promotional purposes, imports need an
invoice with the value of the goods endorsed by the local chamber of
commerce, and a certificate of origin. The invoice should state that
the goods are being imported for exhibition purposes only and will be
re-exported.
Saudi customs requires a deposit for these goods (either 12 percent or
20 percent of the total value). This deposit is refundable when the
exhibition is over. Additionally, handling charges will be collected by
the customs authorities.
Labeling, Marking Requirements
Labeling and marking requirements are compulsory for any products to be
exported to Saudi Arabia. The Saudi Arabian Standards Organization
(SASO) is responsible for establishing labeling guidelines in the
Kingdom.
Labeling is particularly important for companies marketing food
products, personal care products, health care products, and
pharmaceutical. SASO has specific requirements for identifying marks
and labels for various imported items. Companies can request a copy of
the labeling requirements by contacting SASO at Tel: 01-456-9900 or Fax:
01-452-0086.
Quality control laboratories at ports of entry may reject the entry of
products that are in violation of existing laws. Products arriving at
port having less than one-half of the time remaining between production
and expiration date will be rejected and cannot be sold on the market.
U.S. manufacturers are urged to discuss labeling requirements with their
selected representative or distributor.
Prohibited Imports
Importation of the following products are also prohibited by law:
Weapons, alcohol, narcotics, pork, pornographic materials, distillery
equipment, and certain sculptures.
Special approval is required for the import of seeds, food, livestock,
books, periodicals, religious books, movies, chemicals, pharmaceutical,
wireless equipment, horses, perfumes, natural asphalt, and
archaeological pieces.
There are health and sanitation regulations on all imported foods. The
Ministry of Commerce has issued a number of directives aimed at
preventing outdated goods from entering the Kingdom and requiring Arabic
and point of origin labeling.
Standards (incl. ISO 9000 Usage)
The Saudi Arabian Standards Organization (SASO) is actively pursuing the
promulgation of over 1000 Kingdom draft standards including the GCC
countries. The development of product standards inconsistent with those
in the United States has in the past been a significant barrier to U.S.
exports to the Kingdom, blocking sales of an estimated $100 million to
$500 million in previous years.
Labeling and expiration date requirements are stringent and an export
impediment for U.S. fresh eggs and canned baby food products. Saudi
Arabia's residential electric power system of 127 volts, 60 Hertz is
unique, and has caused export problems for many American firms.
A Standards Program Director has been assigned to SASO from the U.S.
Department of Commerce's National Institute of Standards and Technology
(NIST) to advise the Saudi government in developing standards and work
to insure that new standards are not inconsistent with those in the
United States. New draft standards are forwarded to U.S. industry
associations for comments and recommendations, before finalization by
SASO. Other developed nations have similar programs. The U.S.
Standards advisor can be reached by fax at (9661) 488-3237.
SASO has decided to adopt ISO 9000 as approved standards for Saudi
Arabia, and act as an accreditation body through the Quality Assurance
Department. Compliance will be on a voluntary basis. However, it would
be prudent for U.S. industry and services to consider this matter as
serious.
There may be many cases where procurement agencies will insist on
purchasing and placing orders only with those companies that are in
compliance with ISO 9000, or the U.S. equivalent series. In Saudi
Arabia, SASO will set up their own certification organization for
locally manufactured products, as several SASO employees have been
certified to work as professional auditors in conformance to ISO 9000
series standards.
Currently, a new customs regulation for food commodities is in effect.
Effective April 1, 1995, the new regulation restricts the number of
varieties to not more than ten per container.
In the proposal stage, but expected to be effective within six months,
is an international conformity certification program. The new program
will require that all products shipped to Saudi Arabia be tested and
approved by a third party laboratory appointed by SASO in the country of
origin. Each product shipment will require the testing laboratory to
issue an assessment certificate. The names of the testing laboratories
have not been identified as yet.
Free Trade Zones/Warehouses
There are no free trade zones in Saudi Arabia.
Special Import Provisions
Other than those mentioned above, there are no special import
provisions. Unusual cases should be worked out on a case-by-case basis
with Saudi Customs.
Membership in Free Trade Arrangements
Other than the GCC, Saudi Arabia has no free trade arrangements.
VII. INVESTMENT CLIMATE
Openness to Foreign Investment
The Saudi Government generally encourages foreign direct investment.
This is particularly true of foreign investment in joint ventures with
Saudi partners, though Saudi Arabia allows wholly foreign-owned firms to
operate. The government and the private sector actively promote
investment opportunities in Saudi Arabia. The government hopes to
attract investment in infrastructure, but has yet to make such
investments financial attractive. 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 and other
regions. 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 uses its purchasing power to encourage foreign
investment. In 1985, the Saudi government reached an agreement with
American contractors under the Peace Shield defense procurement program
for "offset" joint venture investments equivalent to 35 percent of the
program's value. One Peace Shield offset program, the Al-Salam Advanced
Aviation Support Facility in Riyadh, received FAA certification in
September 1994. British and French defense firms also have offset
requirements. Offset requirements are likely to remain components of
major defense purchases.
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 Saudi law 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 cash or kind 100 percent of their contribution to authorized
capital. Industrial projects normally require 25 percent, although it
may be higher for some industries.
Additionally, 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.
The Ministry of Industry and Electricity licenses direct foreign
investment, except for mineral concessions, which are governed by
separate 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 only 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, the partnership agreement, plans to
train Saudi nationals for technical and managerial positions, and
procurement plans for machinery and other equipment. Applicants must
also submit permits to use specific patents, the foreign partner's
foreign certificate of registration, and authorization from the foreign
partner's board of directors.
Following the initial screening, the "Foreign Capital Investment
Committee" evaluates applications. 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 then seek the approval of the Minister of
Industry and Electricity.
Then 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 health care business.
The "Foreign Capital Investment Committee" evaluates projects using a
variety of factors. Foremost is the project's compatibility with Saudi
Arabia's basic economic goals:
(1) Economic diversification,
(2) Access to modern technology, and
(3) 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, preferring firms with experience in the
proposed field of investment. The committee evaluates royalty
arrangements and the price of equipment to be supplied by the foreign
partner. Additionally, 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. However, according to Riyadh business people, the
regulations have never fully been implemented. As a result, most
foreign consulting firms work as adjuncts to established Saudi firms.
Foreign investors are denied national treatment in the following
sectors: 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. Pronouncements
by King Fahd in 1994 indicate that privatization will be encouraged in
the 1996-2000 development plan, with Saudia and Saudi Telecom being
prime candidates.
Wholly foreign-owned firms are guaranteed the same protection accorded
Saudi nationals in the Foreign Capital Investment Code. 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 25 percent Saudi ownership are
eligible for tax holidays and 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. Only Saudi companies or citizens, or those
of the other Gulf Cooperation Council (GCC) (Kuwait, Bahrain, Qatar, UAE
and Oman) may own land or engage in internal trading and distribution
activities. 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. The
formerly common practice of Saudis illegally lending their names to a
foreign-owned and operated business, so-called "cover-ups," was
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, American and other foreign firms are able to
participate in Saudi government financed and/or subsidized research and
development programs on a national treatment basis, the Embassy is not
aware of any examples.
One of the leading obstacles for foreign investors are restrictive Saudi
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 a multiple-entry visa.
If a businessperson went to Saudi Arabia, then departed, to reenter
Saudi Arabia, he or she would need to reapply for a new visa, 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 Ministry of Interior-Passports Office, and apply for a residence
permit called an "igama". 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 g