Saudi Arabia says that government bodies will stop awarding contracts to foreign companies with regional headquarters outside the kingdom by 2024 in an aggressive move intended to boost foreign investment into the kingdom.
State news agency SPA says the “cessation will include agencies, institutions and funds owned by the government and will take effect 1 January 2024.” It would therefore cover not just energy giants Saudi Aramco and Sabic, but also the PIF sovereign wealth fund which is increasingly investing in giant domestic projects aimed at diversifying the economy in line with Vision 2030.
PIF is to invest $40bn annually in domestic projects under its new 2021-2025 plan and is tasked with delivering the kingdom’s four “giga projects” – Neom, Qiddiya, the Red Sea Project and Amaala.
If the new regulations are fully enforced, then companies with regional headquarters outside of Saudi Arabia would be shut out from the kingdom’s most lucrative projects.
Shortly after the 15 February SPA report, Minister of Investment Khalid al-Falih – whose key remit is to attract FID – tweeted that “the decision to limit government agencies’ contracting to international companies with a regional headquarter in the kingdom, which was announced today, will create thousands of jobs for citizens, transfer expertise, and localize knowledge, and it will also contribute to developing local content and attracting more investments to the kingdom.”
There is little doubt that this initiative comes straight from Crown Prince Muhammad Bin Salman, known as MbS. The crown prince directly called on international firms to relocate to the Saudi capital Riyadh during last month’s Future Investment Initiative (FII) conference. During the event he lauded Riyadh, where his father King Salman served as governor for decades, saying that “the infrastructure in Riyadh is already quite outstanding because of the work done by King Salman over the past fifty-five years.”
The FII saw oilfield services giant Schlumberger and US engineering firm Bechtel announce plans to relocate their regional HQs to the Saudi capital, as did other major brands such as Pepsi.
SLOW GAINS, MOUNTING FRUSTRATION
Crown Prince Muhammad’s domestic strategy has placed a strong emphasis on securing foreign investment – something the first FII back in 2017 was designed to facilitate (MEES, 27 October 2017). Yet while the biggest corporate names have often flocked to FII, many have merely paid lip service to future investments in the kingdom, while instead seeking to themselves secure investments from Riyadh.
Many of those firms which do actively seek business in Saudi Arabia base the bulk of their regional operations in neighboring Dubai or Abu Dhabi. This is a great source of frustration for the Saudi government, which sees private sector expansion as a key priority.
Finance Minister Muhammad al-Jadaan told Reuters that “Saudi Arabia has the largest economy and population in the region, while our share of regional headquarters is negligible, less than 5% currently.” At $793bn in 2019, Saudi Arabia's GDP dwarfs the UAE's $421bn.
Rachna Uppal, Research Director at the Azure Strategy consultancy, says that the move is in line with the kingdom’s policy direction. “Recent events and announcements from Saudi Arabia were all building up towards a more assertive move to attract and retain foreign companies in the Kingdom. The crown prince himself is more actively engaged in the economic and social development of the country, and this latest announcement is very apparently a part of that top-down approach.”
While Saudi Arabia’s frustration is understandable, so too is the preference for international firms to base themselves in more established, more transparent and more business-friendly hubs such as Abu Dhabi and Dubai. The World Bank’s ‘Ease of Doing Business’ rankings peg the UAE 16th globally, with Saudi Arabia way back at 62nd.
Ms Uppal adds that while companies operating in some sectors “such as construction, infrastructure development, transportation or real estate” will favor Saudi Arabia, “the regulatory and legal frameworks in place in the UAE for example, as well as the expatriate-friendly lifestyle have been years in the making.”
Although Saudi Arabia is working to improve its business environment and upgrade its infrastructure, there are no quick-fixes and companies which have established presences elsewhere will not simply uproot at the drop of a hat. For the notoriously fast-paced crown prince, this is an immense source of frustration. He wants change now.
The risk for Saudi Arabia is that even with a population of 34 million, it is not a huge market, and the world’s largest firms do not typically respond well to ultimatums. Tech giants Google, Microsoft, Apple and Amazon, who all have their regional headquarters in Dubai, are more used to being courted than coerced. Such a policy may ultimately backfire and deter firms from investing in Saudi Arabia.
Karen Young, Resident Scholar at the American Enterprise Institute (AEI) tells MEES that “this is the kind of punitive policy that is detrimental to the goal of attracting new business and highly-skilled, wealthy expatriates – both essential to the Vision 2030 objectives. The messaging of the announcement is aggressive rather than offering incentives.”
FULL IMPLEMENTATION, OR DILUTION?
On the surface, this appears a very aggressive pitch to draw business away from the UAE. But in reality, the ambiguity over the term “regional headquarters” means that it might not ultimately lead to much. Ms Young says “I do think there will be plenty of work-arounds and dilution of the criteria before we arrive at the January 2024 deadline.”
As it stands, there would appear to be little preventing a firm from opening a small office in Riyadh and naming it the regional headquarters while keeping the bulk of their operations elsewhere. For now, that could prove a convenient option, but as Ms Uppal says, “the risk for global companies assessing their options in the region is what happens if the UAE or Qatar announce a similar policy in the near future?”
A key question is whether or not the UAE will see this as an aggressive move. While the two remain close allies, there are growing policy divergences between them when it comes to issues such as the Yemen conflict and Opec+ production cuts.
Nevertheless, Mr Jadaan sought to play down such notions, saying that Saudi Arabia’s growth as a business hub needn’t squeeze out Dubai. “We will continue to complement each other and have a healthy competition,” the Saudi minister says.
Ms Uppal agrees, saying that “the move is more about fair competition than anything else; however, there can be little doubt that MbS would feel a little twinge of delight at outmaneuvering the Abu Dhabi project, especially as MbZ [Abu Dhabi Crown Prince Muhammad Bin Zayed] has outshone him in recent years.”