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Issue No: 20 - January – April 2006
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After twelve long years, Saudi Arabia became a member of the World Trade Organization on November 11, 2005. Formal accession to the world body occurred on December 11th after the 148 WTO members unanimously voted in favor of Saudi membership. This is a momentous achievement for the Kingdom which has always based its national economy upon trade and private enterprise.
Second only to China which took 14 years to attain WTO membership, Saudi Arabia was the only Gulf Cooperation Council member outside the WTO. As the world’s 13th largest exporter, the 23rd largest importer of goods, and the 36th largest importer and exporter of services, the Kingdom concluded bilateral agreements with WTO member nations on a variety of trade issues.
During the past few years, the Kingdom has undertaken an ambitious program to reform and restructure the rules governing its economy. Within the past five years, nine regulatory agencies have been established and over 42 trade-related laws have been enacted to meet the challenges of an increasingly global economic system. The Saudi government has worked very hard to diversify the country’s economy in order to reduce its dependence on oil exports. With WTO membership, it is anticipated that many non-oil-related sectors of the Saudi economy will flourish.
During the accession process, Saudi negotiators answered more than 3,400 questions and produced over 7,000 pages of documents dealing with every aspect of the country’s economy. As the world’s most influential trade organization, the WTO accounts for over 97% of global trade. It was a matter of necessity, not choice, that made the Kingdom work so hard to attain WTO membership.
Had the Kingdom remained outside the WTO, its strategy for diversifying its oil-dependent economy would have been endangered. Without WTO membership, any nation could impose restrictions on Saudi exports or on Saudi investments. The Kingdom would have remained subject to the whims of other countries’ arbitrary customs rules and restrictions. Instead, as a WTO member, Saudi Arabia will be subject to the same rules as the other 148 member nations. Predictability and transparency of foreign trade and investment will encourage all parties to deal fairly with one another. Every major change in trade regulations must be announced in advance, and any aggrieved country can seek redress through the WTO appeal process.
Each WTO member must treat all other member countries in an unconditionally non-discriminatory manner under the Most Favored Nation rule. If one member reduces tariffs or trade barriers for another member, it must do the same for all other WTO nations. Additionally, WTO membership demands National Treatment, meaning that foreign goods are to be treated no less favorably than domestic goods. Finally, a WTO member can only use tariffs to restrict imports and must maintain a schedule of limited tariff rates which are clear to all other member nations.
Saudi Arabia committed itself to lower trade barriers and increase market access for foreign goods over the next ten years. The Kingdom also agreed not to maintain any export subsidies on agricultural products. Foreign companies may now own up to 60% in joint-venture insurance companies or banking institutions. Within three years, the Kingdom must open the country’s telecommunication sector to as much as 70% foreign equity ownership. However, despite WTO membership, certain sectors – such as Haj and Umrah and land transportation – will remain closed to foreign investment.
A good example of the benefits of WTO membership is in the area of intellectual property rights. The Kingdom agreed to a number of technical standards and rules that are designed to protect technological investments. As a result, Intel Corporation, the world’s largest manufacturer of computer chips, will establish a $100 million venture capital fund to invest in technology companies that are connected with the Gulf and Saudi markets.
Saudi negotiators made certain that certain religiously forbidden goods would not be allowed to enter the Kingdom after WTO accession. Specifically, alcohol, pork products, pornography, and other goods contrary to Islam are prohibited, notwithstanding the free trade objectives of the World Trade Organization.
Not all Saudi businesses welcome WTO membership, primarily due to fear of increased foreign competition. This is especially true in the services sector. However, the reduction or elimination of trade barriers is expected to provide more opportunities for local companies to offer their goods and services outside the Kingdom. Saudi corporations that fear these challenges will have to change their way of doing business if they are to remain competitive. However, most commentators believe that Saudi businesses generally will benefit as a result of more open markets among WTO member nations and will adapt their operations to become more efficient and cost-effective. As this occurs, Saudi citizens also will benefit in purchasing goods and services at lower prices. Local Saudi chambers of commerce are now gearing up to educate local companies on the opportunities inherent in WTO membership and to assist them in streamlining their operations to compete with foreign concerns.
WTO membership is expected to have a positive effect upon banking, insurance, and telecommunications in driving additional growth in each of these sectors. In the short term, local petrochemical producers and service companies may experience lower profits, and it remains to be seen how adept these companies will be in adjusting to these new market conditions. Overall, however, Saudi companies should thrive as a result of WTO membership and as local companies enter into joint ventures with foreign businesses. |
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In Rabigh north of Jeddah, work has begun on the largest single construction project ever in the Gulf region: the establishment of King Abdullah Economic City, which is expected to cost SR 100 billion ($26.6 billion). The ambitious mega project is being developed by UAE-based Emaar Properties, the world’s largest real estate company, in conjunction with Asser Trading, Tourism & Manufacturing Co. and the Binladin Group. The Saudi Arabian General Investment Authority will act as the prime facilitator of the project. The developers intend to set up a joint venture company and offer 30% of its equity to the public in an initial public offering.
The new city will be located along 35 kilometers of shoreline on the Red Sea and encompass six distinct components. Central to the project is a 2.6 million-square-meter seaport that will accommodate even the world’s largest vessels. The port will offer an integrated transport system from sea to rail, road, and air as well as a Haj terminal to receive pilgrims to the holy cities of Makkah and Madinah.
In addition to the port, the city will offer an industrial district to accommodate many commercial activities; an educational district consisting of universities and research and development centers; a financial island offering office space and a new exhibition and convention center with two 160-story towers; a waterside resort with 3,500 well-appointed hotel suites along with a world-class golf course and equestrian club; and a residential district to accommodate more than 500,000 new workers who are expected to take up residence within the next two or three years.
The project is excitedly awaited by most Jeddah businessmen who now envision more commercial development between Jeddah and Rabigh. As the second largest city in the Kingdom and a center of business and industry, Jeddah stands to benefit greatly from the realization of this ambitious undertaking.
King Abdullah Economic City is a primary component of Saudi Arabia’s plan to attract foreign investment and establish Saudi Arabia as the gateway to the Middle East. The Kingdom has experienced a 17-fold increase in foreign investments recently, and this new city will leave no doubt that Saudi Arabia wants further investments in order to diversify its economy and create employment opportunities for its citizens. |
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After an eight-month suspension of real estate investments in Saudi Arabia, the Ministry of Commerce and Industry in October approved new regulations to license real estate investments in the country. The regulations were necessary to prevent further scams such as the infamous Venice Island venture.
The new regulations require that a company seeking to offer investments in real estate obtain the approval of the Ministry of Commerce, which must verify a number of conditions prior to the issuance of a license. Specifically, the Ministry must confirm that the land for which the shares are sold are, in fact, owned by the company by a valid deed, and that the offeror owns at least a twenty percent interest in the property. The relevant municipality also must issue a valid license along with a study showing the construction costs, project duration, and provided services.
Once Ministry approval and municipality licensing have been obtained, the company seeking to sell shares in the real estate investment must apply to the Capital Market Authority to establish an investment fund in the name of the project and register the land in court to ensure that the land will not be affected by adverse claims during the period of investment. Only when this is accomplished may the offering company advertise the project to potential investors.
Saudi real estate developers are supportive of these new regulations because they hope fewer projects will leave the Kingdom and investors will become more confident that their capital contributions will be protected from fraud. A few real estate companies already have submitted proposals to the Ministry of Commerce to offer investments in Saudi construction projects.
It is hoped that the new regulations will stimulate additional construction projects in the Kingdom even as some experts are predicting a slowing of the rise in real estate values elsewhere in the Gulf region. Moderation in the recently rapid increase in real estate prices may actually help Saudi real estate projects by keeping buyers interested in purchasing properties for personal rather than for purely speculative reasons. |
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| Disclaimer |
| Material contained in this newsletter is for general information only and should not be interpreted as legal advice on any particular matter. Readers are advised to consult their legal advisor directly on any issues discussed herein. Transmission of this document does not create any attorney-client relationship. Although considerable care has been taken to ensure the accuracy of the material in Legal Update, the Law Firm of Dr. Khalid Alnowaiser is not responsible for any errors contained herein. |
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12/4/2009:Ministry steps up clampdown on copyright piracy 12/4/2009:Construction of New Office is near to completion 14/4/2009:JCCI preparing black list of car rental defaulters 7/4/2009:Justice Ministry warns ‘lawyers’ without permits
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