Archive for August, 2013

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business opportunities in Saudi Arabia

Thursday 8 August, 2013

I attended this event, Business Opportunities in Saudi Arabia (SA), http://export.gov/newyork/newyorkcityexportassistancecenter/te/le/index.asp sponsored & organized by our office, the New York US Export Assistance Center.  It featured Ed Burton, Pres.-CEO of the US-Saudi Arabian Business Council, & Amer Kayani, Minister Counselor for Commercial affairs @ the US embassy in Riyadh.  The event was co-sponsored by Anchin, Block, & Anchin LLP Accountants & Advisors (ABAAA), & The Business Council for International Understanding (BCIU).

Laurence Feibel of ABAAA opened with a thrilling discussion on international taxation.  He told of how an exporter can drop his tax rate from 39.6% paid on commissions to intermediaries to 20% which can be issued as dividends.  Feibel then moved on to the topic of the day, “Apple rules,” moving portable income offshore to avoid taxes.  The 1st question is what’s portable & what’s not, which is somewhat transitory.  The goal is to earn profits in low tax jurisdictions.  There are places you can go where you are eligible for tax deferrals, & to be taxed later as dividends rather than income.

Ed Burton provided an introduction to SA’s economy, which has a GDP of $781B with 6.8% growth, 4.6% inflation, & 3.6% debt/GDP, resulting in a disposable income of $24,859/person.  Looking closer @ foreign trade, SA has $747B in net foreign assets, exports $396B & imports $129B. SA has a population of 29B of which 59% is younger than 30.  To put SA in context, it’s rated 18th in terms of competitive economies by the World Economic Forum & #22 in terms of doing business by the World Bank.

Specifically to the US-SA relationship, SA is the 2nd biggest supplier of oil, 20th largest export destination,  7th largest importer, with $73.8B in bilateral trade with the US.  Big companies are making large injections of foreign direct investment in SA, such as Dow’s $20B joint venture with Aramco, & GE investing $1B.  35% of these investments are made via joint ventures.

When entering the SA market, it’s important to commit to the market, whether it be through direct exports, through a Saudi agent, or with a legal presence.  Build relationships over time, & get good legal & financial counsel.  To build fruitful partnerships, gather local knowledge through boots on the ground to get access to local decision-makers.  Locals feel most comfortable buying from other locals, but you don’t have to necessarily grant them exclusive rights to sell your products there.  Different partners have different needs.  When investing in SA, 100% ownership is OK, but hold real estate for 5 years to take advantage of corporate tax rates of 20%.  In trade, take advantage of GAFTA.

Amer Kayani took it from there to extrapolate on specific opportunities by industry in SA.  But before that he warned that it does take 18-24 months to build a business relationship in SA, so patience is required.  Governement spending is $1500B to create jobs for unemployed youth.  72K SA students study each year in the US & each spends $80K/year.  Here are specific industries where opportunities lie & a few comments for each:

  • Construction-285 civil projects with $260B open to bid in design
  • Religious tourism-for a transportation revamp & to build 53K rooms in Mecca & Medina
  • Defense-30% of the budget; Raytheon is working on a $600M command control communications computer, naval expansion & Royal Guard projects as well
  • Health care-increase beds/1000 population from 2.2 to 3.5 for 120 hospitals for $18B
  • ICT-13M internet subscribers, which is ~50% penetration & 1.8 cell phones/person.  The biggest security threat in the Middle East is cyber-terrorism.
  • Oil & gas-opportunities with Aramco downstream, & in petrochemicals too
  • Power-SA needs 30gW of power by 2020 which will require $80-100B investment, & $28B for 13 gW in 3 years.  The renewable energy goal is $.05/gW by 2032 & $.04/gW for solar.
  • Transportation-investing $24B for a national rail network & $110B for airport expansion
  • H2O-SA residents are the 3rd largest consumers of H2O per capita in the world, desalination is the strategy to build 30 plants for $14B in the next 15 years.

In sum, there are no more lump sum or cost + contracts, & no more working remotely in SA from Dubai or Bharain.  Find reputable partners over multiple visits.

Q&A

  • How long a project lasts or decision takes depends on the partner.
  • In procurement, it’s important to get involved in the process early to have input into the RFP.
  • Even getting lists of opportunities makes it too late-you need to find proactive partners who can guide you beforehand.
  • Financial services are well-regulated;  SA is opening the SA stock exchange to foreigners in the next 18 months.