From the Saudi Press Agency:
An official source stated that the Kingdom of Saudi of Arabia intends to cease contracting with companies and commercial institutions with regional headquarters not located in the Kingdom. The cessation will include agencies, institutions and funds owned by the government and will take effect January 1st, 2024.
The source stated that the decision aims to incentivize the localization of businesses by foreign companies that deal with the Kingdom’s government or any of its agencies, institutions and funds, in addition to creating more jobs, limit economic leakage, increase spending efficiency, and guarantee that the main goods and services purchased by the different government agencies are made in the Kingdom with appropriate local content.
This comes after the Financial Times first reported last month that Crown Prince Mohammed bin Salman was spearheading an initiative called “Programme HQ” to convince multinationals to relocate their headquarters from Dubai to Riyadh. When the Public Investment Fund hosted its annual conference in late January, the government said 24 companies, including PepsiCo and Bechtel, intend to open regional offices in the kingdom as part of a major development plan for the Saudi capital.
“In the past, the kingdom used to look the other when companies and commercial establishments whose the kingdom is their largest markets open their regional headquarters in other countries in the region,” Khalid al-Suhail wrote in Saudi financial daily al-Eqtisadiah. “Some of these [companies] linked this to regulatory and legislative hurdles in the kingdom, including visas and other issues. But these things no longer exist in the age of Vision 2030, as the picture has changed and the investment and legislative environment have developed.”
As I noted in a previous dispatch of this newsletter:
Saudi officials have long argued that the kingdom, as the region’s largest economy and its main consumer market, should be the home base for international companies that operate in the Middle East. Many Dubai-based senior executives and bankers travel to Saudi Arabia almost weekly for business but remain averse to moving permanently to the kingdom due to social restrictions, with their families preferring the emirate’s more liberal lifestyle and better access to international schools for their children.
It has always been obvious that Saudi Arabia’s plan to diversify its economy away from oil would inevitably lead to growing competition with neighbours. The latest move suggests that officials may have had much higher hopes for “Programme HQ” than the number they managed to sign up. “There was an offer on the table. Not many [companies] took it. Now they got this”, a local businessman said as he described the sequence of events. The offer included incentives such as: a 50-year tax break, waiving quotas on the employment of Saudis for up to ten years and guarantees of protection against future regulations.
The Saudi business community has welcomed the decision (someone called it “one of the most important turning points in the contemporary history of the national economy”), which is to be expected considering they are likely to benefit directly or indirectly, even though the shift from offering incentives to implicit threats might not seem like the most business-friendly approach to attract foreign investment. Criticism, as is the case with much of the government policies in recent years, was rare and muted.
“The decision to establish regional headquarters for foreign companies and institutions contracting with Saudi Arabia reflects positively on improving local content and enhancing competitiveness for local products and services to reach a high level of quality through the localisation of existing jobs and the creation of others that fit the rapid economic developments in the kingdom”, said Ajlan al-Ajlan, head of the Council of Saudi Chambers.
Ahmed al-Rajhi, the Minister of Human Resources, said in brief comments to the state news agency that the decision would result in “limiting economic leakage, raising the efficiency of spending, and providing more work opportunities for the nation’s sons and daughters.” The minister did not elaborate on the job creation angle if the foreign companies would be given exceptions from nationalisation quotas that currently apply to local businesses. Latest government data show that Saudi unemployment rate was around 15% in the third quarter of last year.
Attracting foreign investors is a cornerstone of the crown prince’s economic diversification plan, but Saudi Arabia has struggled to convince enough of them to come and put their money in the kingdom amid sluggish economic growth. The killing of journalist Jamal Khashoggi and several waves of arrests have also affected the kingdom’s reputation and complicated efforts to persuade business people to invest in the country.
Finance minister Mohammed al-Jadaan has appeared eager to downplay the new decision's impact by saying some sectors would be excluded and that international companies without a regional headquarters in the kingdom by 2024 can still work with the private sector. “If a company refused to move their headquarters to Saudi Arabia it is absolutely their right and they will continue to have the freedom to work with the private sector in Saudi Arabia, but as long as it is related to the government contracts, they will have to have their regional headquarters here,” he said.
It is too early to gauge the impact without knowing how authorities will define what is a “regional headquarter”. More details about that will be released later this year, the government says. “Hard to see the decision being fully implemented. Expect a lot of slippage and exemptions,” Ziad Daoud, Chief Emerging Markets Economist at Bloomberg, said on Twitter. One banker told Reuters that some financial institutions with offices in Saudi Arabia could rename them as regional headquarters while maintaining a presence in Dubai. “The amount of business that’s generated from the government needs to be justified,” he said. “For an investment bank, there’s no revenue to justify the move.”
Khalid Al-Falih, the Minister of Investment, told Bloomberg that the ruling only applies to government bodies that go through a Ministry of Finance procurement process, and won’t impact private sector firms or publicly traded companies even if they have state ownership. That seems to suggest that the decision won’t apply to oil giant Saudi Aramco (which already has its own local content requirements for its contractors), but unclear if it would be the same for the PIF. The minister also denied that Saudi Arabia is taking aim at Dubai’s dominance by trying to use the kingdom’s weight and market size to gain an advantage over the neighbours. “There is no specific city or country that we are targeting, we’re really just targeting the companies themselves,” he said.
“Despite officials’ remarks to the contrary, the move is clearly an attempt to undermine Dubai’s position as the region’s financial and business hub. More generally, officials hope that this will boost foreign investment in the Kingdom to help support the government’s Vision 2030 reform plans,” James Swanston, MENA Economist at Capital Economics, wrote in a note to clients. “The threat of losing access to Saudi government contracts may prove too much for some firms. But there are reasons to think that the plan will be difficult to implement.”
Our friends in the UAE, for their part, don’t sound too worried.
“I don’t think Saudi Arabia needs a decision like this because it goes against the principle of the Common Gulf Market, especially that [the kingdom] by default would be a major regional player attracting companies and individuals thanks to its huge development plan,” Nasser al-Shaikh, former Director General of Dubai’s Department of Finance, said on Twitter. “International experience and history have proved that forced attraction is unsustainable. Improving the environment is more effective as the kingdom has announced, and it will impress us.”
Saudis were not too impressed with his comments.
“With all due respect, I believe that some have gone too far with incentives and exemptions to the point of economic warfare against other Gulf states, including targeting the comparative advantages of the Saudi economy,” Sulaiman al-Oqeliy, a Saudi political analyst, said in response. “The decision is an economic sovereign decision about giving government contracts to those who invest in the kingdom to provide a comparative advantage, and it does not infringe on the free market and its mechanisms.”
“We are proud of our nation’s vision, which restores matters to normalcy and gives priority to the interests of the homeland and citizens over all other considerations, and removes the unfair and illogical reality in which international companies benefit from the huge projects of the Kingdom of Saudi Arabia only for them to open their regional headquarters in countries where they don’t engage in activities worth mentioning,” Faisal al-Khereiji wrote in the Dammam-based daily al-Yaum.
Sheikh, who was credited with helping Dubai navigate the 2008 credit crisis, complained that people were making too much of his tweet. He acknowledged that this is a sovereign decision and he seemed careful not to be perceived as directly criticising the policy of a major ally. “It is an eternal question between the stick and the carrot,” he said in a follow-up. “I personally prefer that others come to you out of desire and not being forced.” But other Emiratis appeared to be downright trolling. “A million welcome to the competition,” one of them said. “Dubai will open a regional office in Riyadh,” said another.
Bringing foreign investment to Saudi Arabia remains an uphill battle and many observers see the latest ultimatum as a result of “frustration” and “desperation”, not exactly a demonstration of confidence by the Middle East’s largest economy. The coronavirus has temporarily stopped the phenomenon of planeloads of Dubai-based business executives and consultants travelling to Riyadh, spending Sunday-Thursday in the kingdom’s capital before flying back home for the weekend. The year 2024 seems way too soon for that dark-suited army to stop their regular journeys and switch base.
Thank you Ahmad, always precise and concise. Ciao kk
Thank you, very interesting. So the GCC stalemate due to the Qatar boycott is partially solved, but another issue might be on the rise? The tandem MBS and MBZ slows down? Have a nice Friday, best regards Karin