Guidance

Overseas business risk: Saudi Arabia

Updated 12 March 2017

Read the latest political and economic updates on Saudi Arabia and GCC countries.

1. General Overview

The Kingdom of Saudi Arabia is one of the largest economies in the Middle East with a population of 28 million and GDP per capita around $25,000. Saudi Arabia is UK’s largest trading partner in the Middle East and there is strong demand for quality UK goods and services at the right price in a wide range of sectors.

Major opportunities for trade and investment in Saudi Arabia include traditional sectors such as oil and gas, but also transportation, including rail, metro and airport; health; water and wastewater projects; nuclear energy; education; and mining. The UK is the Kingdom’s second largest cumulative investor, with over 200 joint ventures worth an estimated £11.5 billion. More and more UK firms are actively seeking to establish a physical presence in the Kingdom in order to gain a foothold in this high-growth market.

The Kingdom’s capital is Riyadh, with an estimated population in Riyadh province of around 7 million. The two other major urban centres are Jeddah in the west, and the conglomeration of Dammam, Dhahran and Al Khobar in the east. Other urban centres are developing, and smaller cities across the country ranging from Tabuk in the north to Jazan in the south are also witnessing significant growth.

2. Politics

Saudi Arabia is named after the ruling Al Saud family. The Kingdom was established by King Abdul Aziz Bin Abdul Rahman Al Saud in 1932. Since his death in 1953, Saudi Arabia has been ruled by a succession of his sons. The King is formally responsible for making all major decisions, often based on consensus within a small circle of senior Princes, trusted advisors and the religious establishment.

The Kingdom is an absolute monarchy and is currently ruled by King Salman bin Abdul Aziz Al Saud, Custodian of the Two Holy Mosques. The King is head of government and Commander of the Armed Forces. Crown Prince Mohammed bin Naif is Deputy Prime Minister and Interior Minister. The King’s son, Prince Mohammed bin Salman, is Deputy Crown Prince, Second Deputy Prime Minister and Defence Minister.

Executive power rests with the Council of Ministers (Cabinet), whose members are appointed by the King. On 29 January 2015, King Salman issued a Royal Decree establishing two committees: one to oversee political and security matters, chaired by Crown Prince Mohammed bin Naif; the other on economic and development affairs, chaired by Deputy Crown Prince Mohammed bin Salman.

The 1 March 1992 Basic Rule of Governance established that the Holy Quran and Sunna are the constitution of the country as well as the basis of Islamic law (Sharia). A national Consultative Council, the Majlis al-Shura, was formed in 1993. The King appoints all 150 Shura members, who have an increasingly important advisory role and have powers to review and provide consultation on issues of public interest. In 2013, 30 women were appointed to the Shura. Local government is administered through general municipal councils, district councils and tribal and village councils. Two thirds of each council is elected and a third appointed. Political parties are banned by law. In municipal elections in December 2015, the first elections in which women could vote and stand as candidates, 21 women were elected and 17 appointed.

The country is divided into 13 provinces, each with a prince (who performs the role of governor) and deputy governor. Each province has its own council that advises the governor and deals with the development of the province. These councils deliberate on their constituency needs, work on development budgets, consider future development plans and monitor ongoing projects. The governor and deputy governor of each province serve as chairman and vice-chairman of their respective provincial councils.

3. Economics

The Saudi economy grew by 1.4% in 2016, although there is substantial impact following the major reduction in oil prices since mid-2014. In 2015, nominal GDP was c.$0.7trn, or $1.5trn at purchasing power parity. Growth in real terms declined in 2016. Long-term average growth is around 3%. In 2013, the Kingdom had the second highest fiscal balance (just over 8.3% of GDP in surplus) and lowest debt-to-GDP ratio in the G20; now debt is growing and the 2016 budget deficit was around 56%, owing to low oil revenues and cost of Saudi Arabia’s military campaign in Yemen. The Saudi Arabian Monetary Agency (Saudi Arabia’s central bank) holds the country’s reserves, which peaked at around $750 bn in 2014, but had declined to $610 bn by March 2016.

The Saudi economy remains dominated by hydrocarbons, primarily the extraction and export of crude oil. It has the second largest proven oil reserves in the world (over 264 billion barrels, equivalent to 18% of the global reserves), and in 2015 was the world’s second largest oil producer after the US (equivalent to around 11% of global output). Saudi Arabia has been the world’s largest oil exporter for over a decade. The Ghawar field (the world’s largest) has been producing since 1951. Hydrocarbons accounted for over 55% of GDP and 90% of export earnings in 2015, and their shares are recovering towards these levels following a fall in oil prices in 2016. Saudi Arabia also has gas reserves of 290.8tcf (4.4% of the global total), but its annual production of 4tcf is consumed domestically.

The Kingdom has ambitious plans to diversify its productive base and move towards private sector-led growth. Much government spending, accounting for over 30% of GDP in 2015, goes towards enhancing the human and physical capital of the Kingdom. Examples include new schools, universities, hospitals, transport networks and industrial sites. The government is also working to improve regulation and the performance of its financial markets, and opened its Stock Market to large institutional foreign investors in June 2015.

Saudi Arabia is also working to increase the number of its own nationals in the labour force. In 2012, it introduced Nitaqat, a system which defines minima for the number of Saudi employees required in different industries and business operations. This has been followed with a drive to remove illegal foreign workers from the Kingdom: non-Saudis represent just 32% total population, but 89% of the private sector labour force.

Separately, the Saudi government is looking to preserve its reserves of crude oil for export or higher value-added refining, by investing heavily in alternative forms of energy. Ambitious current targets would see 54GW of renewable generating capacity, and 18GW of nuclear generating capacity by 2040. As Saudi Arabia attempts to diversify its economy, there will be opportunities in construction, transport infrastructure, project management, financial services, health and education.

Saudi Arabia ranked 29th in the World Economic Forum’s Global Competitiveness’ report 2016-17 and 94th in the World Bank’s Ease of Doing Business report for 2017.

4. Business and Human Rights

In September 2013 the UK launched its action plan on business and human rights, becoming the first country to set out guidance to companies on integrating human rights into their operations. Separately, the FCDO’s annual human rights report lists Saudi Arabia as a country of concern. Whilst the use of the death penalty and Sharia practices such as corporal punishment remain a concern for the UK, it is important to recognise that significant social and political changes are taking place within the Kingdom. Many visitors to Saudi Arabia find the negative stereotypes that prevail in the West to be wide of the mark.

4.1 Child Labour

Saudi Arabia has signed the International Labour Organisation’s Minimum Age Convention. It has also enacted regulations in line with the Worst Forms of Child Labour Convention since 2001. Tightened immigration rules mean foreign companies are unlikely to encounter the risk of hiring underage employees.

4.2 Nationality and Migrant Workers

Saudi Arabia’s enormous oil reserves and historical development as a state mean Saudi nationals are underrepresented in the labour force (government data suggests 76% of workers in the Kingdom are foreign). This poses significant challenges for Saudi Arabia’s economic sustainability (see Economics section above on Nitaqat).

The most successful British companies operating in Saudi Arabia will be those that are able to transfer technology and upskilling of local people, manufacturing or assembly in the Kingdom, those that incorporate as much local content as possible (including direct employment of Saudis), and that are able to adapt to Saudi Arabia’s rapidly evolving (and generally improving) labour market and immigration regulation.

4.3 Gender

In keeping with local traditions and culture, Saudi Arabian society remains heavily segregated. Out of the 2.7 million Saudis in work in 2014, 32% were female. But this figure represents a one third increase in female participation over the last ten years, a trend which looks set to continue.

The (Nitaqat) system is tilted significantly towards women, and employers are rewarded for hiring Saudi females over Saudi males. Women still face more obstacles to participating in the labour force then men owing to the wali (guardian system), which can limit their ability to travel.

But attitudes are changing. More and more woman are receiving higher education (the majority of students in Saudi universities are female), more young people are being educated abroad (140,000 Saudis are in receipt of a government scholarship overseas at any one time), and an increasing number of work and public places are becoming non-segregated. 20% of the Majlis al-Shura are female, and women were elected and appointed in the 2015 municipal elections.

The most successful British companies will be those that can tap into this highly educated pool of Saudi females, whilst accepting that the forces of social conservatism mean Western styles of working, will remain exceptions rather than the norm in the short to medium term.

4.4 Lesbian, Gay, Bisexual and Transgender

Homosexual acts are illegal in Saudi Arabia and can be subject to severe sanctions – as can adultery.

4.5 Working Conditions and Occupational Safety

Saudi Arabia has a range of regulations and decrees specifying minimum standards of health and safety, and working conditions (covering everything from working hours to maximum temperatures). Saudi government data suggests that the number of workplace accidents fell by over 40% in the six years to 2014, to just under 56,500 a year. The improvement looks set to continue, but British companies should aim to import health and safety best practice from their European operations to Saudi Arabia.

4.6 Rights of Association (Trade Unions)

As with most forms of political association in Saudi Arabia, trade unions, industrial action and public protests by workers are illegal. Legal provisions for ‘workers’ committees’ in companies with over 100 employees have recently come into force. These are designed to be fora through which employers and employees can meet to discuss wages, conditions and health and safety. In practice, their effects remain to be felt on a large scale.

5. Bribery and Corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national nor resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

5.1 The UK Bribery Act

In addition to undermining democracy and the rule of law in Western countries, bribery poses serious threats to sustained economic progress in developing and emerging economies, and to the proper operation of free markets more generally. The United Kingdom Bribery Act 2010 was intended to respond to these threats and to the broad range of ways that bribery can be committed. The Bribery Act applies to non-UK companies operating in the United Kingdom and to UK companies working overseas. It created four prime offences:

• two general offences covering the offering, promising or giving of an advantage, and requesting, agreeing to receive or accepting of an advantage;

• an offence of bribery of a foreign public official; and

• a new offence of failure by a commercial organisation to prevent a bribe being paid to obtain or retain business or a business advantage (should an offence be committed, it will be a defence that the organisation has adequate procedures in place to prevent bribery).

The Act recognises that no bribery prevention regime will be capable of preventing bribery at all times. A company will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing. Companies must therefore make sure that they have strong, up-to-date and effective anti-bribery policies and systems in place to prevent bribery by persons associated with them.

5.2 Bribery and Corruption in Saudi Arabia

Bribery is illegal in Saudi Arabia, and is prosecuted with increasing vigour. In 2011, a National Anti Corruption Commission (Nazaha) was established, which seeks to tackle corruption in all its forms. Press articles on investigations and prosecutions on corrupt dealings are feature increasingly in the Saudi press. In June 2015, King Salman made a speech in the presence of Nazaha in which he made clear that no Saudi, including himself, was above the law.

Efforts to tackle corruption in Saudi Arabia are complicated by the culture of patronage and wasta that exists to varying degrees in all Arab states. The late King Abdullah had done much to tackle the market-distorting effects of patronage and wasta that exist in the Kingdom, and compel prominent individuals to play by the rules. Whilst Saudi partners with good social and family connections will remain important to most business dealings in the country for the foreseeable future, there is a growing tendency to see the quality of a product, and the terms under which it is offered as the primary drivers of a deal.

For more details please read:

• anti-corruption portal - Saudi Arabia.
• our bribery and corruption page.

6. Terrorism and security

Saudi Arabia continues to work very hard to tackle the threat from violent extremism. However, there remains a high threat of terrorism. Since 2015, Daesh has claimed responsibility for a number of attacks throughout the Kingdom. The Foreign, Commonwealth & Development Office warns about travel to the area along the Yemeni border. Crime levels are generally low. For the most up to date information please read the information provided on the terrorism page of the FCDO travel advice pages.

7. Cyber Security

Saudi Arabia’s national oil company, Saudi Aramco, suffered a serious cyber attack in 2012 resulting in over 30,000 of its work stations being compromised by a simple self-replicating virus. In May 2015, the Saudi Ministry of Foreign Affairs was also subject to a cyber attack, resulting in the release of classified documents. The Saudi Government inaugurated its National Cyber Security Centre (NCSC) in January 2016. British companies operating in Saudi Arabia, whatever their size, may be subject to similar attacks. In all parts of the world, we advise companies to get their cyber security right. Our 10 Steps to Cyber Security guidance provides Government advice on how to protect your business. Smaller firms might find the related ‘Cyber Security: what small businesses need to know’ guidance more useful, in addition to visiting the Government’s advisory website Cyber Streetwise.

Businesses wishing to implement the most important technical controls can apply to be assessed under the Cyber Essentials Scheme, leading to the Cyber Essentials or Cyber Essentials PLUS badge. Companies may also wish to consider joining the Cyber Information Sharing Partnership, which shares real-time cyber threat information on cyber threats.

8. Commercial Disputes

Sharia law as practised in Saudi Arabia lacks codification and the convention of precedent. It also tends to provide redress for actual damages suffered, rather than for speculative losses like loss of opportunity or of reputation. Notwithstanding this, and prohibitions against anything else deemed haram (forbidden) in Islam (e.g. financial speculation or gambling), Sharia law in Saudi Arabia allows considerable freedom for private individuals and entities to form contracts as they see fit.

Where possible, many non-Saudi investors and business partners prefer to agree contracts according to laws in foreign jurisdictions, or commit to international arbitration. Where enforcement of the rules of foreign judges or arbitration becomes necessary within Saudi Arabia, claimants must make a representation to the Saudi Board of Grievances (a group of Sharia trained judges separate from the Kingdom’s main Sharia court system). The Board of Grievances also oversees has jurisdiction over a series of administrative tribunals (referred to locally as ‘committees’) which can be used to settle disputes according to government administrative regulations.

There have been recent instances of invoices not being paid on time and delays in processing payments. We recommend that you take expert advice and appropriate measures to mitigate this potential risk. We suggest any British company wishing to do business in or with Saudi Arabia enlists the services of a law firm with experience of the country.

9. Intellectual Property

Saudi Arabia issued and has enforced a patent law since its accession to the World Trade Organisation in 2004. Strenuous efforts by the authorities to tackle intellectual property theft have reduced the amount of pirated material available, but more work remains.

General information on IP is provided on our intellectual property page. More detailed guidance on protecting IP overseas is available from the UK Intellectual Property Office.

10. Department for Business and Trade contact

RiyadhCommercialProtect@fcdo.gov.uk

11. Useful Links

The following links might be of interest to British companies looking to do business with Saudi Arabia. His Majesty’s government is not responsible for the content of outside the gov.uk domain:

1. Department for Business and Trade Saudi Arabia
2. E-portal where all governmental bids are announced
3. FCDO travel advice
4. HMG’s Action plan on business and human rights
5. FCDO’s annual human rights report
6. HMG’s 10 Steps to Cyber Security
7. HMG’s ‘Cyber Security: what small businesses need to know’
8. HMG’s Cyber Streetwise
9. HMG’s Cyber Essentials Scheme
10. HMG’s Cyber Information Sharing Partnership
11. Saudi Arabian General Investment Authority
12. Saudi Industrial Property Authority (MODON)
13. Saudi Industrial Development Fund
14. Saudi Arabian Monetary Agency (the Kingdom’s central Bank)
15. Saudi Ministry of Finance
16. Saudi Ministry of Commerce and Industry
17. Saudi Ministry of Economy and Planning
18. Saudi General Organisation for Social Insurance
19. Saudi National Anti Corruption Commission
20. Saudi Ministry of Foreign Affairs
21. Saudi Embassy in London
22. Saudi British Joint Business Council
23. World Bank’s global ranking on ease of doing business
24. IMF pages on Saudi Arabia