Saudi Arabia Country Profile
General Information
Political Climate
Saudi Arabia has been governed by the al-Saud monarchy since the country was unified by King Abdul Aziz Ibn Saud in 1932. The country is currently governed by Abdullah bin Abdul Aziz al-Saud, who formally became the sixth ruler of the dynasty when King Fahd died in August 2005. Oil income has played a major role in the formation of the Saudi Arabian state. Saudi Arabia has the largest oil reserves in the world, and its oil resources and subsequent importance to the global economy are key factors in its external relations. Saudi Arabia has gradually liberalised trade in recent years in pursuit of attracting foreign investment, and joined the WTO in late 2005. The country offers attractive opportunities for investors, including the largest market in the Persian Gulf with a very young population of more than 28 million, economic and political stability, and a well-regulated business climate.
The al-Saud family, consisting of more than 5,000 princes and princesses, uses its immense oil-wealth to shape and control domestic politics, and there are no institutional checks on royal authority. The king is formally constrained by Islamic law (Sharia), but there is little accountability and he has wide-ranging arbitrary powers in practice. According to Freedom House 2011, the monarchy has a tradition of consulting and consensus-seeking with high-ranking members of Saudi society, but this process is not equally open to all citizens. Criticism against the political system and the royal family is prohibited, and activists who protest for political change risk facing punishments, including imprisonment and restrictions on travel. While traditionally being very conservative, the Saudi royal family has been increasingly open to the discussion of political and social reforms since the mid-1990s. However, while the transfer of power from King Fahd to King Abdullah led to increased expectations of new reforms, Abdullah has enacted few significant changes. Although Saudi society has generally supported the idea of reform, it has not been widely embraced within the royal family, which is still reluctant to share their political power. However, Saudi Arabia organised elections for municipal councils in 2005, giving Saudi men their first opportunity ever to elect leaders at the local level. Unfortunately, it has become clear that the elections have not resulted in greater public participation in governance. Although the concepts of transparency and anti-bribery have long been included in Saudi Arabian legislation, anti-corruption has only recently become part of the political agenda. This happened after King Abdullah publicly admitted that corruption was a problem in the country, and culminated with the Council of Ministers' approval of a National Strategy to Protect Integrity and Combat Corruption in 2007, which aims at enhancing and organising the fight against corruption. The Consultative Council (Majlis al-Shura), which reviews legislation and proposes amendments, has on several occasions called for the establishment of an Anti-Corruption Commission that should oversee the implementation of the anti-corruption strategy.
Since the fight against corruption has made its way to the political agenda, an increasing number of public officials have been sentenced to fines and prison sentences for accepting bribes. Nonetheless, various sources, including the US Department of State 2010 and Freedom House 2010 report that the public perception of corruption within the royal family and the executive branch of government is still widespread. This perception is encouraged by the lack of transparency in decision-making and government budgets. Public officials are not subject to financial disclosure laws and there is no law to provide public access to government information, including ministerial budgets, according to the US Department of State 2010. According to the Bertelsmann Foundation 2010, mechanisms to hold accountable and investigate political elites formally exist, but are often not utilised in practice. However, investigations of corruption committed by public officials happen and have recently been made known publicly to a larger extent than previously. In 2008, the Court of Grievances, which hears cases involving the government, delivered over 2,690 verdicts and more than 1,320 disciplinary cases against public officials and agencies. Nevertheless, as emphasised by Freedom House 2010, punishment of individuals involved in corruption is selective and usually includes lower-level figures indicted for relatively minor offences. Furthermore, Saudi politics is generally based on patronage systems, with most princes in government having built up large clienteles and attachment to princely networks can give individuals privileges in business or administration. Moreover, no laws regulate conflicts of interest and most leading royals have large business interests, just as many non-royal ministers are involved in business beside their political carrier. The Bertelsmann Foundation 2010 reports that the royal family is perceived to abuse government funds, property rights and contracts, as well as civil and criminal justice procedures. Members of the royal family are seen as interfering in or profiting from contract awards, the allocation of money from oil sales, the profits from state-financed companies and contracts for the delivery of arms imports and military services. Especially the latter type of corruption has been highly exposed in the media in recent years, as a corruption probe revealed corrupt dealings between Britain's biggest and most influential arms company, BAE Systems, and Saudi princes. The probe revealed the existence of a USD multi-million slush fund, allegedly kept by the company to bribe Saudi officials in order to secure highly rewarding contracts as part of an arms deal in the mid-1980s. For more information on the BAE-Saudi Arabia corruption case, see 'Public Procurement and Contracting' in the 'Corruption Levels' section.
Business and Corruption
Saudi Arabia has long been open to foreign investment, especially if it promotes economic development, transfers foreign expertise to Saudi Arabia, creates jobs for Saudis or boosts exports. Despite the Saudi economy being bolstered by a strong performance in the oil sector in 2010, it also witnessed increasing inflation. Improvement of the business climate continues to be an important part of the Saudi government's broader programme to liberalise the country's trade and investment regime, and diversify an economy overly dependent on oil and petrochemicals, according to the US Department of State 2011. The two aforementioned sectors are strongly influenced by the interests of members of the royal family and social elite. Saudi officials, however, have given assurances that the so-called Economic Cities, a USD 60 billion project of industrial and commercial zones currently under construction, will be free from interference from the royal family. Although Saudi institutions are generally perceived to be stable, and sudden changes in basic economic rules seldom occur, it may still not be an easy environment to operate in for foreign investors for reasons such as a conservative cultural environment, according to the US Department of State 2011.
Information on corruption and demands for bribes between foreign investors and Saudi companies or public officials is relatively scarce, and views on the pervasiveness of the problem are fairly mixed. For example, according to the US Department of State 2011, foreign companies identify corruption as an obstacle to investment in Saudi Arabia. Public procurement and general protection of companies are cited as areas in which senior officials or social elite often have a stake and where bribes are solicited - frequently disguised as commissions. This is supported by Freedom House 2009, which states that companies often have to pay bribes to middlemen and government officials to secure business deals. On the other hand, however, the World Economic Forum Global Competitiveness Report 2010-2011 reports that companies do not identify corruption as a very problematic factor for doing business in Saudi Arabia. Other factors, such as inefficient government bureaucracy and access to financing, are cited as more problematic business constraints. Nevertheless, according to the report, companies consider the occurrence of irregular payments and bribes in Saudi Arabia as fairly common. In sum, it seems as if most sources mainly base their perception of corruption on proven high-scale corruption scandals, such as the BAE scandal, thus falling short of providing any accurate picture of the pervasiveness of corruption and the use of facilitation payments in business dealings.
Research conducted by Arab News and published in October 2009 reveals a culture of pervasive petty corruption in dealings between government officials and companies in Saudi Arabia. For example, as estimated by an anonymous Saudi businessman, 95% of governmental procedures involve bribery in the form of expensive gifts, such as plane tickets or other reciprocal favours. In addition, such bribery is typically justified as compensation for government employees who work for low wages, or simply as a 'tip' for the service being rendered. The cost of such bribes reportedly increases proportionally with the value of the service provided. In addition, public officials typically get 10% of the value of the fines issued to companies due to small violations. Businesspeople complain that this practice works as an incentive system for public officials to issue undue or inflated fines. An example of this could be the case reported by Gulf News in an August 2008 article, according to which, a company specialised in medical equipment received a fine amounting to SAR 3 million for failing to honour a contract signed with the Ministry of Health. The company tried to offer a ministerial employee a bribe worth SAR 150,000 to avoid paying the fine, but the attempt was discovered, and the company had the fine doubled and was blacklisted from bidding on future contracts. Based on the above, companies are generally advised to consult with experienced attorneys, to develop, implement and strengthen integrity systems, and to carry out extensive due diligence before committing funds or when already doing business in Saudi Arabia. In addition, Freedom House 2010 reports that rent-seeking and corruption are not uncommon in government procurement processes. In order to mitigate the corruption risks associated with public procurement in Saudi Arabia, investors are advised to exert caution when bidding on public tenders, and are therefore recommended to use a specialised public procurement due diligence tool.
Regulatory Environment
The Foreign Direct Investment Law 2000 governs the Saudi Arabian investment regime and permits foreigners to invest in all sectors of the economy, except for specific activities in some strategic sectors. Yet, the list of sectors in which foreign investment is prohibited continues to shrink due to efforts to liberalise trade. The Saudi private sector has matured considerably in recent decades and has more sophisticated managerial structures than most other Middle Eastern and North African (MENA) countries. In addition, Saudi Arabia has embarked on a process of market reforms and was ranked as the world's Top Reformer by the World Bank and IFC in 2006, which also ranked it as the 11th easiest place to do business in the world in 2011. However, according to Freedom House 2010, these impressive figures are also a result of the Saudi Arabian General Investment Authority's efforts to change specific rules and procedures that are measured by the World Bank and IFC's indicators. The procedures of starting up a business have been simplified by the creation of a one-stop office at the Ministry of Commerce and Industry, and, according to the World Bank & IFC Doing Business 2011, it now only takes an average of 5 days and 4 procedural steps at a cost of 7% of GNI per capita to start a company and only 2 days and 2 procedural steps at no cost to register property. In general, Saudi Arabia now performs just as well or better than most OECD countries in relation to access to credit, paying taxes and importing and exporting goods. Business executives surveyed in the World Economic Forum Global Competitiveness Report 2010-2011 give complying with administrative requirements (permits, regulations, reporting) a score of 4 on a 7-point scale (1 'extremely burdensome' and 7 'not burdensome at all'). Moreover, business executives give the transparency of government policy-making, based on how easy it is for companies to obtain information about changes in government policies and regulations, a score of 4.8 on a 7-point scale (1 'impossible' and 7 'extremely easy'). However, companies identify inefficient government bureaucracy as one of the four most problematic factors for doing business in Saudi Arabia.
Although the regulatory framework for private business has improved in recent years, the Bertelsmann Foundation 2008 reports that it is applied inconsistently in practice and principles of good governance have not yet been applied to the bureaucracy. On the contrary, it has remained opaque, over-centralised and unaccountable, and no informal regulatory services are managed by NGOs or private sector associations. Freedom House 2010 also states that, while certain regulations and procedures have been simplified, the Saudi bureaucracy continues to be slow-moving, lacking transparency, and makes extensive documentation demands. While this environment has not automatically led to corruption, it has, nevertheless, facilitated its occurrence. This is supported by the US Department of State 2011, according to which, there are few aspects of the Saudi regulatory system that are transparent. Still, however, although bureaucratic procedures may be cumbersome, red tape can reportedly be overcome with persistence. All foreign investment projects in Saudi Arabia must initially obtain a licence from the Saudi Arabian General Investment Authority (SAGIA), which was established by the Council of Ministers in April 2000. Investors will find a large compilation of relevant information on the SAGIA website concerning, among other things, investment opportunities, the cost of doing business and laws and regulations.
According to the US Department of State 2011, other disincentives to investment include a lack of transparency in intellectual property rights enforcement, requirements that companies employ Saudi nationals, slow payment of government contracts, a restrictive work visa policy, a highly conservative cultural environment, and enforced segregation of the sexes in most business and social settings. Furthermore, although the Saudi government is making progress towards establishing a commercial court system, there is not yet a transparent, comprehensive legal framework in place for resolving commercial disputes. It is also reported that Saudi litigants typically have an advantage over foreign parties in investment disputes due to their first-hand knowledge of Saudi law and culture. For that reason, foreign investors involved in a dispute are advised to contact local attorneys with knowledge of Saudi legal procedures. Saudi Arabia has ratified the New York Convention of 1958 and is a member of the International Centre for the Settlement of Investment Disputes (ICSID). Access the Lexadin World Law Guide for a collection of legislation in Saudi Arabia.
