Saudi Arabia’s decision not to award government contracts to companies with regional headquarters outside the kingdom is in line with its broader economic agenda of creating employment and developing a knowledge-based economy.
The measures will also help the Arab world’s largest economy achieve its goal of turning the capital, Riyadh, into one of the top 10 city-economies in the world, economists and market analysts said.
“It is a way of ... trying to boost employment as well as knowledge transfer,” said Salah Shamma, head of investment for Mena equities at Franklin Templeton.
“They are asking these corporates to come, relocate and set up their headquarters, and that obviously comes with additional employment.”
The kingdom said on Monday that the move would be effective from January 2024.
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,” state-run Saudi Press Agency reported, quoting an official source.
“The cessation [of contracts] will include agencies, institutions and funds owned by the government,” state-run Saudi Press Agency reported, quoting an official source.
The move is being taken “to incentivise the localisation of businesses by foreign companies that deal with the kingdom’s government”, SPA said.
Saudi Crown Prince Mohammed Bin Salman told the Future Investment Initiative last month that the government intends to “make Riyadh one of the 10 largest city-economies in the world” and double the size of its population from 7.5 million by 2030.
The kingdom is investing $220 billion in Riyadh’s transformation and expects to attract a similar investment from the private sector, Fahd Al-Rasheed, president of the Royal Commission for Riyadh City, told Reuters on January 28.
Earlier this month, 24 international businesses signed agreements with the Royal Commission for Riyadh City to move their regional headquarters to Saudi Arabia’s capital. Reuters
Saudi Arabia: Government contracts to stop for firms without regional HQ in kingdom
Bechtel to move regional headquarters to Riyadh
“We have seen local sourcing drives in Saudi Arabia before, but this seems different,” said Scott Livermore, chief economist and managing director at Oxford Economics.
“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 investment opportunities with government entities in sectors such as mining, industry, health care and education.
However, international companies that want to participate “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, said Hettish Karmani, head of research at Oman-based Ubhar Capital.
The kingdom is a “regional powerhouse for trade and finance and, in one way or another, most companies extract their revenue out of Saudi Arabia”, said Mr Karmani.
“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 said.
Earlier this month, 24 international businesses signed agreements with the Royal Commission for Riyadh City to move their regional headquarters to Saudi Arabia’s capital. Reuters
The kingdom is competing with regional business and financial centres such as the UAE and Bahrain. Both Gulf countries have housed the regional headquarters of many multinational companies and financial institutions for decades.
The UAE, the second-largest Arab economy, is currently the top financial centre within the Gulf. Its two international financial centres host the regional offices of international banks, insurance companies, asset managers and many others.
The country also has a more advanced physical and social infrastructure and is ranked as the most business-friendly locations in the region.
Saudi Arabia faces an uphill battle in drawing businesses away from such established jurisdictions, analysts said.
“Its [Saudi Arabia’s] business environment and attractiveness to expats, compared with the UAE and Bahrain, is still relatively weak despite significant recent improvements, and this is likely to weigh on the pull of Riyadh,” said Mr Livermore.
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
The kingdom will have to take steps to ensure “swift regulatory approvals, business incentives [and] a liberal visa regime” to draw multinational companies, said M R Raghu, executive vice president at Kuwaiti asset management company Markaz.
It remains unclear what constitutes regional headquarters, and more information is needed to “make an informed decision”, an executive at a digital automation company said.
Many international companies have different management structures, with some already classifying Saudi Arabia as a separate operation from other Gulf countries, he said.
For instance, UK lender Standard Chartered has a 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 contractor Bechtel, Big Four accountancy firms Deloitte and PwC, the world’s biggest oilfield services company Schlumberger, German engineering business Bosch and soft drinks company PepsiCo are already moving their regional offices to Riyadh. In total, 24 companies 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 Deloitte spokeswoman 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.
“We need to see ... rules related to the order and see how they further entice businesses who want to enter the region with Saudi Arabia as their base or who might be thinking of shifting [from within the region],” said Faisal Hasan, a UAE-based independent market analyst and former head of research at Kuwait’s Kamco Invest.
“But the intention of the government seems to be that most goods and services should be delivered from within Saudi Arabia.”
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 for a comment.
Sourced from N Business - written By Samard Khan and Mary Sophia