The tension of American business over Saudi Arabia in a blow to the growth plans of the Crown Prince

The tension of American business over Saudi Arabia in a blow to the growth plans of the Crown Prince

RIYADH – The Kingdom of Saudi Arabia has summoned the world’s largest companies to modernize its economy. Instead, the business environment has become more hostile and investors are irritating the oil-rich kingdom.

The construction company Bechtel Corp. Sending some contractors home while trying to collect more than $1 billion in unpaid bills.

Bristol-Myers Squibb company

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, Gilead Sciences company

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Other drug makers have complained for years that their intellectual property was stolen in vain.

The result is that foreign investment in Saudi Arabia has remained significantly low, and some companies are reducing operations or delaying promised expansion plans.

This is a blow to Crown Prince Mohammed bin Salman, the de facto leader of the country. He pledged in 2016 to build new industries unrelated to oil by improving the business climate and creating a global innovation hub. Since then, reducing Saudi Arabia’s dependence on oil has become more urgent as the global economy moves away from fossil fuels.

Saudi Crown Prince Mohammed bin Salman pursued his investment program at the Future Investment Initiative conference in Riyadh in October.


Photo:

Leather Bandar/AFP/Getty Images

Foreign direct investment in Saudi Arabia reached $5.4 billion in 2020, less than half the level it was a decade ago and well below the $19 billion the country was targeting. It was on track to reach the top $6 billion in 2021 based on data through the third quarter. This does not include selling a $12.4 billion stake in a Saudi pipeline company to foreign investors.

One of the reasons the number remains low is the planned projects that didn’t happen. An apple company

Plans to open a flagship store in downtown Riyadh faded several years ago. Triple Five Group, the developer of the Mall of America, has pulled back from building a multi-billion dollar complex. AMC Entertainment Holdings is ceding more control to its partner in the Saudi government because it lags behind its local competitors.

AMC says it is pleased with the progress it has made in the kingdom. Apple and Triple Five did not respond to requests for comment.

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Companies are drawn to Saudi Arabia’s potential, said Robert Mogilnicki, a resident scholar at the Arab Gulf States Institute in Washington, D.C., “but practical economic measures are still being developed.”

The Saudi Ministry of Investment said interest in the country remains high, noting a 250% annual increase in licenses for new investors in 2021.

Saudi Arabia has long been a difficult place to do business, with a slow bureaucracy, an outdated legal system, and a poor human rights record. Prince Mohammed has sought to change that, promising major reforms, holding lavish investment conferences in Riyadh, and hiring executives in Silicon Valley.

His efforts paid off somewhat. The relaxation of strict social norms led to the emergence of new tourism and leisure industries, and the improvement of the quality of life of migrant workers. The government passed a bankruptcy law, allowed full foreign ownership in certain sectors and simplified some business services.

The Ministry of Investment said it takes investor concerns seriously, reviews them and constantly develops as needed. “Whether it is a small business or a large corporation, we continue to strive towards creating the best possible environment for doing business,” she said.

The prince’s agenda faltered in 2018 when men working with him murdered journalist Jamal Khashoggi. This led to the failure of big deals including with Amazon.com company ,

Richard Branson’s Space Tourism Project and Hollywood Senior Agent Ari Emanuel.

Driver in 2018 in Riyadh, Saudi Arabia, with Careem, now a subsidiary of Uber.


Photo:

Nariman Al-Mufti/The Associated Press

Prince Mohammed has failed to change many old barriers to investment. Then Saudi Arabia added a new one.

The state has tried to tackle the liquidity crisis by imposing retroactive taxes on dozens of large foreign companies. In the past year and a half, companies including Uber, its regional subsidiary Careem, and GE have faced huge tax liabilities and sometimes additional fines when their appeals have been rejected.

The corporate tax authorities offered few remedies, prompting the State Department late last year to appeal to the Saudi government for relief, to no avail.

General Electric, Uber and Careem declined to comment.

The Saudi Tax Authority said that the kingdom aspires to a fair and efficient tax policy in line with international standards. She said it maintains full contact with taxpayers who are subject to audits and gives them plenty of time to comply with the requests.

The tax change came on top of the triple overnight value-added tax rate in 2020. Such surprises are becoming commonplace, with new policies often undercutting the previously mentioned goals.

The government also annoyed foreign companies when it ordered them to move their regional headquarters to Riyadh from Dubai or lose government contracts. Companies have also had to hire more Saudis. The requirement to promote local content in their products made some goods uncompetitive compared to imports.

Investors are also increasingly concerned about their physical safety. While most of the people arrested in Prince Mohammed’s crackdowns on criticism or alleged corruption were Saudis, some were foreigners. A foreign businessman said he was detained and tortured after he said publicly that some labor laws were unfair.

Another, an American, recently allowed the State Department to disclose relevant information to the media in the event the person was arrested in Saudi Arabia. A second American, seeking to expand his nursing home operations in Ohio, was detained on arrival last year in a cramped airport holding cell for three days and deported without explanation.

The Investment Ministry declined to comment on specific allegations of abuse but said most investors had positive experiences.

The long-running spat between Saudi Arabia and drugmakers over intellectual property has fueled caution among the innovative companies the country is courting. Since 2016, Saudi regulators have allowed local companies to manufacture generic versions of nearly a dozen drugs that are still subject to patents or regulatory data protection.

The dispute is one reason Saudi Arabia remains on the US Trade Representative’s watch list for intellectual property violations along with known criminals including China and Russia. Bristol-Myers Squibb and Gilead declined to comment.

As in the tax dispute, the challenge to the generic drug policy has proven fruitless despite protests from the State Department and the White House. The companies have been informed that pursuing cases in Saudi courts is time-consuming and uncertain.

“There are ways to solve this problem, but the Saudis decided not to,” said one close to those efforts. “Saudi Arabia wants the best, but its laws are a deterrent to drawing the best.”

The Ministry of Investment said it was studying the issue “to strike a workable balance between the burgeoning generic drug industry and the innovation industry based on research and development.”

Some companies that have operated in Saudi Arabia for decades have scaled back their presence amid disputes over payments from government clients, a perennial problem in the kingdom. Contractors working on the new Riyadh metro system, including Bechtel, sent some employees home last year amid a payment dispute of more than $1 billion.

Northrop Grumman corp.

The company, which has sold billions of dollars in military equipment to the kingdom, sold its presence nearly two years ago after the military failed to pay for the products it provided.

Bechtel and Northrop declined to comment.

The Saudi government said it has reformed public procurement laws to eliminate the problem and end the backlog.

The situation is often even worse for small businesses and individual entrepreneurs, for whom minor issues can turn into a painful ordeal.

Palestinian investor Suleiman Al-Salhiya is not allowed to work or leave Saudi Arabia without paying disputed fees.


Photo:

Suleiman Al-Salhiya

Suleiman Al-Salhiya, 67, owns a small business that beautifies Saudi universities and royal palaces. After the government rolled back an earlier round of widely promoted trade reforms in favor of local rivals, the Palestinian investor petitioned the investment officials and then sued them. He said that in court he was given less than two minutes to argue his case, before a judge ruled against him.

Banned from working or leaving the country without paying hundreds of thousands of dollars in disputed fees, Mr. Salhiya remains mired in red tape and stranded in Riyadh with his wife and children, who have been unable to complete their education or start theirs. Careers.

Al-Salhiya, having already faced the consequences of the court ruling, spoke with a Wall Street Journal reporter in 2018, police raided his home in the middle of the night, tying his hands and feet and covering his head with a bag. They put him in an SUV and drove him to a small cell where he stayed for 18 days with the air conditioner blown out and two flashing lights keeping him awake. Investigators asked about his work, lawsuits, and meeting with a foreign journalist.

“They shouted at me, hit me on the table and electrocuted me,” he said. “My crime is that I respected and followed the law.”

write to Stephen Kalin at stephen.kalin@wsj.com and Justin Schick at justin.scheck@wsj.com

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