Early next year, Singapore’s food and agri-business Olam Group will dual list one of two spun-off divisions, Olam Agri, in Singapore and Saudi Arabia. Olam Agri focuses on growing, processing, and trading commodities and the decision to list in Riyadh is part and parcel of the company’s strategic focus on the Middle East, none more so than its ambitions to tap Saudi’s 35-million domestic market.
It is the latest thread in a well-defined strategy. Olam has sold a 35.4% stake in the company to Saudi Agricultural and Livestock Investment Company, SALIC, the wholly owned subsidiary of Saudi Arabia’s Public Investment Fund (PIF) in 2022. And the company is already a key supplier of commodities into Saudi in line with the government’s commitment to build food security via long-term strategic investments around food production and processing enshrined in Vision 2030, its roadmap to diversify the economy away from oil.
“No international company has listed in Singapore and Riyadh before,” says Jayant Parande, Managing Director, Global Head – Treasury & TSF (Group Treasurer) at Olam where he has worked in treasury for over 25 years and was part of the team involved in Olam Group’s first Initial Public Offering (IPO) in Singapore in 2005. “What’s different this time is the scale and size of the transformation,” he says. In a sequential IPO, the company plans to list Olam Food Ingredients (ofi) in London and Singapore.
Olam Agri is one of many companies positioning to access the most favourable demographics in the region. Food, consumer, healthcare and entertainment groups – Saudi wants to be a global hub for the games and e-sports sector, targeting gaming companies, studios, and the creation of 39,000 jobs – are just some of the sectors developing Saudi strategies. They are following in the wake of infrastructure and construction groups already breaking ground on a series of vast ‘giga’ projects. Like the construction of a futuristic city called Neom that will also house a year-round ski-resort, Trojena, slated to host the 2029 Asian Winter Games, and Saudi’s giant tourist development, The Red Sea Project.
“People ask if these projects are real and they are absolutely real,” says Stuart D’Souza, Founder and Director of Arabian Enterprise Incubators (AEI Saudi) which supports foreign companies doing business in Saudi. “There is nowhere else like Saudi on the planet. The market is characterised by optimism and confidence underscored by the government’s flagship Vision 2030 policies.”
Getting started
Global companies are not just motivated by the carrot of opportunity. They are also developing Saudi strategies because of the stick of government regulation. Most businesses selling their wares into the country don’t operate out of Saudi Arabia. In a hub and spoke structure, many tend to register in countries like the UAE or Bahrain and fly executives into Saudi when needed. Now new rules that foreign entities must register, pay tax, and employ Saudi nationals in a quid pro quo for accessing the market are changing this approach.
In another development, if a company doesn’t have a regional headquarters in Saudi by 2024, it won’t be eligible to bid for government contracts or those issued by state-owned companies like oil giant Aramco. The strategy is already bringing results explains D’Souza, who says AEI Saudi supported 55 foreign businesses register in the country in 2022 compared to just one in 2019.
“You must set up an office in Saudi if you want to operate there,” adds Stefanie Hausheer Ali, Director, Rice, Hadley, Gates & Manuel, RHGM, a Middle East specialist who worked at the Atlantic Council from 2013 to 2023 before joining the consultancy from its Washington DC offices. “Saudi is the biggest market in the region, but people have always commuted to do business. Now the government wants all the money and human resources that sit in the UAE and neighbouring countries to relocate to Saudi.”
Chinese groups with construction expertise are amongst the cohort setting up local treasury operations, confirms Aditya Gahlaut, Managing Director and Co-Head Asia Pacific, Global Trade and Receivables Finance at HSBC in Hong Kong. A good window into the amount of business construction groups are pitching for, comes in the demand for bid bonds, continues Gahlaut. These bank guarantees, used to provide project developers with reassurance that bidding companies will complete the work if selected, are in high demand. “Bid bonds are a good indicator of the types of projects companies are going after and a precursor of increased economic activity in the future. Around a quarter of the cross-border guarantees that we are issuing on behalf of our Chinese customers are for projects in Saudi.”
Legislative uncertainty
For all the cheerleading, service providers warn it’s not easy setting up in the Kingdom of Saudi Arabia (KSA) and payback only comes after prolonged periods of planning, patience and presence. Legislative risk is one of the key uncertainties, particularly because new laws are still being written. Positively, D’Souza insists the climate is improving and the government is mindful that sudden swings in policy will chill investment.
For example, new legislation now helps navigate commercial disputes and there is an insolvency framework around bankruptcy. A Civil Transactions Law will codify personal and commercial contracting providing businesses with rules, and legislation is being written around health and safety, IT and insurance. “Like so much in Saudi, the process to transform is a journey. Before Vision 2030 the regulatory environment was less codified and less certain,” he says.
“They are trying to create laws around commercial arbitration and consumer protection as well as new banking laws to cover supervision of banks,” adds Hausheer Ali who says despite progress, more still needs to be done to reassure executives that in disputes the law clearly signposts how to proceed and signals fair treatment for companies. “New guidelines are helping but they are not complete,” she says.
Take loopholes around taxation. In 2021 Uber and its Dubai-based subsidiary Careem reportedly faced a combined tax liability worth US$100m imposed by the Saudi authorities which issued bills dating back several years and which included cumulative penalties. Tax rules can also change rapidly. Like the sudden tripling in VAT from 5% to 15% in 2020 as the government sought revenue in response to Covid and the fall in the oil price.
Companies based in the West will also have to be compliant with their own anti-bribery legislation, drawing up policies in line with values absent in the Saudi market. And Hausheer Ali adds that anti-corruption laws also need stronger guardrails with whistleblower protections in place. “New laws are pending approval and companies are watching to see if they are fair. The risk for many businesses is that the laws are still being written,” she says.
Commentators counsel that businesses navigating the risk, particularly around rules or duty on goods suddenly changing without notice or prior consultation, should keep close ties with their embassy and trade teams. “The best way to mitigate regulatory uncertainty is to have access to people directly involved in those sectors,” says D’Souza. “It’s about seeking advice from reliable, informed sources on the ground.”
Reputational risk
Companies working in Saudi also face greater scrutiny from stakeholders and reputational risk, especially in the wake of the global outrage following the death of journalist Jamal Khashoggi, killed inside the Saudi consulate in Istanbul in 2018. The consultancy McKinsey came under fire in 2018 when it looked like its analysis was being used by Saudi authorities to target critics of the kingdom. Last May, Human Rights Watch called on Microsoft to stop its planned new cloud data centre in KSA “until it can demonstrate how it will mitigate potential rights abuses.”
Hausheer Ali says reputational risk ratchets up depending on the sector. Companies in hospitality, tourism, or healthcare, for example, are unlikely to incur reputational risk. In contrast, consulting projects for the government should be evaluated on a case-by-case basis to ensure the task aligns with the MNC’s values and standards. “A company will have to consider what it is doing to ensure it is not touching these types of [human rights] issues. These issues exist, so each company will have to figure out a strategy and how to mitigate it.”
The paper burden
As well as an unclear regulatory landscape, companies must navigate complex bureaucracy. Setting up and selling into Saudi involves burdensome processes around registering a business, leading to correspondence with multiple government departments from tax to local councils and, perhaps most importantly, the Ministry of Labour which oversees strict rules around the employment of Saudi nationals.
Once companies are drawing revenue, they are tied to a flow of liabilities with these departments and authorities around renewals and payments. “It’s a question of getting your head around it,” says D’Souza whose team of 90 based in Riyadh provide corporates with tiered solutions from practical advice to wrap around care that includes finding employee accommodation and procurement. After a few years handholding, most clients graduate to run government relationships on their own, he says. “Once clients have their own HR teams, government relations and finance teams, they know what their monthly returns will be to various authorities, and licence renewals.”
“It is onerous, yes. But define onerous. There are more onerous jurisdictions and markets in other parts of the world. Once companies know how the back office jigsaw falls into place, our clients graduate. We show them the path and before long they are managing their own portals, filing their returns and managing their own compliance,” adds Mickey Stewart, Deputy CEO, AEI Saudi.
Saudization
Recruiting Saudi nationals into foreign owned businesses is perhaps the most important part of that jigsaw. Such is the government’s priority around building Saudi representation in the labour market, MNC success really depends on understanding and aligning with its sweeping goals around upskilling Saudis and creating jobs. That means tech transfer, nurturing skills in the local population and manufacturing or assembling goods in-country as well as the incorporation of as much local content as possible.
In the government’s bid to create employment and increase female participation in the workforce it has introduced percentage quotas around hiring Saudi nationals, applying a traffic light system where platinum is bestin class, followed by green, then red. Depending upon a business’s declared and registered activity, foreign companies shown the red light employ too few Saudis and may find they can’t file their tax return, or maintain a local bank account. “The traffic light system applies to all businesses,” says Stewart.
Employees contracts (with a few variables, the same template is used for most jobs from CEO to a junior) are digitised and sit with the Ministry of Labour. This way the government can track people are paid the salary stated in their contract and declare their national insurance – as well as ensure companies meet quotas around local employment. “It’s one way they audit foreign businesses to make sure there are Saudis in the business, and you are inside your percentages,” he continues.
Still, the rules vary according to the type of business and operating licence. Saudis are not expected to do menial jobs: a foreign-owned cleaning business would not have a high target to employ Saudis, for example. In another caveat, companies setting up a regional headquarters can be exempt from Saudization for periods of up to ten years. “Corporations exempt from quotas still need to go in with a plan about how they will upskill and train Saudis. Otherwise, they will set up and invest in the country, but when their quotas end, they won’t be prepared,” warns Hausheer Ali.
Saudization also extends to professions within a business and is referred to locally as enhanced Saudization. For example, all HR executives should be Saudi, and Saudi nationals are increasingly dominating positions in engineering, finance, marketing and accounting roles. It leaves companies with challenges to navigate, for example knowledge transfer to new Saudi employees and how to nurture new skills from scratch. “Many people don’t have the right kind of education for the jobs these companies have around data and energy tech. The country is getting there but it will take time,” says Hausheer Ali.
She is most encouraged by the jump in the number of women in the workplace, and says it highlights what is possible. Vision 2030 targets 30% female participation in the workforce by 2030 but this has already hit 33% compared to just 19% 2018. “Women are joining the workforce, participating in ways they weren’t in a really exciting trend.”
Another issue for foreign companies is retention. “Retention is a big issue, as you would expect in any global market, young competent Saudis are very ambitious in a jobs sector full of opportunity,” says Stewart. And it’s not only retention of Saudi’s that can be challenging. Commentators also flag issues for MNCs persuading their own staff to relocate, particularly those with families given concerns about autocracy and human rights, and negative associations with the country amongst women. Others say the kingdom’s infrastructure and lifestyle benefits don’t compare to rival business hubs, namely Dubai. A narrative that’s difficult to change, despite progress on the ground.
The government has responded by making it easier for spouses to have work permits and dependents can now live in-country up to the age of 25, an issue in the past. The lifestyle will also grow more enjoyable with tourist developments in new parts of the country. D’Souza adds new infrastructure is going in to support families like western schools, and he believes expats will increasingly become comfortable living in Saudi.
Perhaps the most important first step for MNC’s exploring a Saudi strategy is to visit the Kingdom. Executives and board members arriving in Riyadh are invariablly shocked by the pace of change and the difference between the reality on the ground and stereotypes and assumptions. “The best way to introduce confidence is familiarity. There is no substitute for coming to Saudi and everyone always says this is not what they were expecting,” concludes D’Souza.
