Saudi Arabia’s plan to lure international firms will help create jobs and transfer knowledge

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Saudi Arabia’s decision not to award government contracts to companies with regional hubs outside the kingdom is in line with a broader economic agenda of generating employment and developing a knowledge-based economy.

The measures will also help the Arab world’s largest economy achieve its goal of the turning the capital, Riyadh, into one of the top 10 city economies in the world, economists and market analysts said.

“It’s a way of … trying to boost employment as well as knowledge transfer,” Salah Shamma, head of investment for Mena equities at Franklin Templeton, said. “They are asking these corporates to come, relocate and set up their headquarters, and that obviously comes with additional employment.”

On Monday, the kingdom said it will stop awarding government contracts from January 2024 to companies whose regional headquarters are outside the country.

It’s a way of … trying to boost employment as well as knowledge transfer

Salah Shamma, Franklin Templeton

“The cessation [of contracts] will include agencies, institutions and funds owned by the government,” the state-run Saudi Press Agency said, citing an official source.

The move is being taken “to incentivise the localisation of businesses by foreign companies that deal with the kingdom’s government”, the SPA said.

In January, Crown Prince Mohammed Bin Salman told the Future Investment Initiative that the government aims to “make Riyadh one of the 10 largest city economies in the world”, doubling the size of its population from 7.5 million by 2030. Saudi Arabia is investing $220 billion on Riyadh’s transformation and expects to attract a similar amount of investment from the private sector, Fahd Al-Rasheed, president of the Royal Commission for Riyadh City told Reuters on January 28.

“We have seen local sourcing drives in Saudi Arabia before, but this seems different,” Scott Livermore, chief economist and managing director at Oxford Economics, said. “It appears less about Saudisation and more about accelerating [economic] growth, particularly in Riyadh, even if expat-driven.”

As part of its reform agenda, the kingdom has opened up several sectors of its economy. It is offering privatisation and co-investment opportunities with government entities in sectors including mining, industries, healthcare and education.

However, international companies that want to participate in government investment opportunities “will have to make a choice” as of 2024 or they will not win government contracts, finance minister Mohammed Al-Jadaan told Reuters in an interview on Monday.

“Saudi Arabia has the largest economy and population in the region, while our share of regional headquarters is negligible, less than 5 per cent currently,” he said.

The size of the kingdom’s economy and the volume of business on offer will ultimately lure more international companies, Hettish Karmani, head of research at Oman-based Ubhar Capital, said.

The kingdom is a “regional powerhouse for trade as well as finance, and in one way or another most companies extract their revenue out of Saudi Arabia”, Mr Karmani said. “Many might shift to the kingdom in the coming period as it has lately changed a lot of policies”, making it more investor-friendly, he added.

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The kingdom is competing with regional business and financial centres, such as the UAE and Bahrain. Both Gulf countries have housed regional bases for multinationals and financial institutions for decades.

The UAE, the second largest Arab economy, is currently the top financial hub within the Gulf. Its two international financial centres host regional offices for global banking giants, insurance companies, asset managers and many others.

The country also boasts more advanced physical and social infrastructure and is ranked as the most business-friendly location in the region. Saudi Arabia therefore faces an uphill battle in drawing businesses away from such established hubs, according to analysts.

“Its [Saudi Arabia’s] business environment and attractiveness to expats compared to the UAE and Bahrain is still relatively weak, despite significant recent improvements and this is likely to weigh on the pull of Riyadh,” Mr Livermore said.

Tax holidays may prove helpful in attracting companies to Riyadh, Mr Karmani said. However, to compete with established jurisdictions, Saudi Arabia will have to do more.

The intention of the government seems to be that most of the goods and services should be delivered from within Saudi Arabia.

Faisal Hasan, analyst

It will have to take steps to ensure “swift regulatory approvals, business incentives [and] a liberal visa regime” to draw multinational companies, M.R. Raghu, executive vice president at Kuwaiti asset management firm Markaz, said.

As yet, it is unclear what constitutes a regional headquarters and more information is needed to “make an informed decision”, an executive at a digital automation company said.

Many multinationals have different management structures, with some already carving out Saudi Arabia as a separate operation from other Gulf countries, he said.

For instance, global banking giant Standard Chartered has a large, regional centre in Dubai, but its Middle East chief executive is based in Riyadh, where it has held a full banking licence since 2019.

“We believe that this enables us to further unlock exciting opportunities in the kingdom and contribute to Saudi Vision 2030,” a spokesman for the lender told The National.

Some companies including US contracting group Bechtel, Big Four accountancy firms Deloitte and PwC, the world’s biggest oilfield services company Schlumberger, German engineering business Bosch and soft drinks giant PepsiCo are already moving their regional offices to Riyadh. In total, 24 companies have signed agreements with the Royal Commission for Riyadh City this month.

“Riyadh is undergoing a remarkable transformation to reinforce its position as one of the world’s major global centres for business, tourism and quality of life, ” a spokeswoman for Deloitte said.

“Deloitte has been operating in Saudi Arabia since 1950 and we are honoured to be a strategic partner for the city on its journey to achieve its ambition under Vision 2030.”

Others are currently keeping a watching brief.

“With further information on the new regulations planned to be issued this year, we will be monitoring this closely to evaluate our approach,” Franklin Templeton said in a statement.

“We need to see … rules related to the order and see how they further entice businesses who want to enter the region with Saudi as their base or who might be thinking of shifting [from within the region],” Faisal Hasan, a UAE-based independent market analyst, said.

“But the intention of the government seems to be that most of the goods and services should be delivered from within Saudi Arabia,” Mr Hasan, the former head of research at Kuwait’s Kamco, said.

Swiss lender Credit Suisse, which opened a branch in Riyadh last month to serve affluent clients, declined to comment. British lender HSBC, Deutsche Bank and JP Morgan also declined to comment on potential moves. BNP Paribas did not respond to The National’s request to comment.

Published: February 16, 2021 05:53 PM