Saudi Arabia’s reforms offer hope for cautious investors

Saudi Arabia’s first comprehensive bankruptcy law went into effect last month, one of many reforms to the legal system that economists say may be more important in the long run than high-profile privatisations.

Crown Prince Mohammed bin Salman’s Vision 2030 push to diversify the economy away from oil has grabbed attention for its big-ticket initiatives, such as a $500bn business zone and a plan, now shelved, to sell part of the state oil firm.

The legal reforms have attracted less media coverage because they are highly technical, but they are extensive, ranging from new laws to the creation of courts and training of judges, and they have accelerated over the past couple of years.

The new bankruptcy law creates a clear way for struggling companies to obtain relief from creditors while they restructure – or for firms to be liquidated – and may free up billions of dollars now frozen in debt disputes.

Read: Saudi cabinet approves bankruptcy law

There are still concerns about the legal system, highlighted by the detentions of top Saudi businessmen and officials in a corruption crackdown last year, but the reforms are changing the playing field for companies.

“While the headline setting Vision 2030 continues to be the face of change in Saudi Arabia, the driving force behind it remains the tangible and impactful modifications done to local laws and regulations that drive investment,” said Bruce McAlister, a general counsel for industrial conglomerate GE, a top foreign investor.

He cited the bankruptcy law, new laws on government-private sector partnerships, and rules allowing 100 per cent foreign ownership of trading firms.

“The legal reform process is progressing. It’s a work in progress and it will take more time, but the environment is clearly changing,” said Grahame Nelson, head of the Riyadh office of Al Tamimi & Co.

New foreign direct investment in Saudi Arabia totalled just $1.4bn in 2017, below smaller countries in the region such as Oman. Privately, businessmen have said that in addition to low oil prices, the unpredictable legal system swayed their decisions.

SHARIA COMPLIANT

For decades, Saudi Arabia did little to develop its commercial law because it depended heavily on state-led investment in the oil industry.

Also, the legal system is based on sharia, a set of Islamic principles that stresses the idea of fairness and gives little weight to legal precedent; many foreign firms come from a common law tradition where precedent is important.

The reforms don’t change the religious basis of the system, but they aim to make commercial matters smoother and more predictable with new institutions and procedures.

For example, a committee of experts will oversee bankruptcy cases. This could eventually speed the resolution of long-running disputes such as a $22bn, nine-year-old impasse over debts left by collapsed Saad Group and Ahmad Hamad al-Gosaibi & Bros Co, bankers say.

Read: Saudi to auction detained billionaire Maan al-Sanea’s real estate assets

Tim Callen, International Monetary Fund mission chief to Saudi Arabia, said its forecast for non-oil economic growth to accelerate from 1.1 percent last year to over 3 percent early next decade was based partly on the legal reforms.

Specialised commercial courts and appeal chambers were established last year, with judges trained to handle specific types of business dispute.

In 2016 the Saudi Center for Commercial Arbitration (SCCA) opened, offering the services of about 125 arbitrators working in 11 languages.

Hamed Hasan Merah, the centre’s chief executive, said it was meeting the biggest Saudi and foreign companies to persuade them to include recourse to SCCA arbitration in their contracts.

ENFORCEMENT

Such efforts aim to improve commercial judgements within Saudi Arabia. Other reforms seek to reassure foreign firms by connecting the country more closely to the legal system abroad.

In the past, Saudi courts rarely enforced the judgements of foreign courts and arbitration centres against Saudi companies. This has been changing; the country received 163 applications to enforce foreign judgements worth $667m last year.

Among several successful applications in recent months, a Riyadh court enforced a US ruling for a Saudi tourism firm to pay $3.8m, and a Jeddah court ordered a Saudi miner to pay a Chinese firm $10.1m, the Justice Ministry said without naming the firms.

Authorities have also started to use a 2013 enforcement law that gives judges less room to use their discretion, so foreign firms seeking restitution may now get a result in a few months, said Glenn Lovell, partner in Riyadh for lawyers Clyde & Co.

Concern over the Saudi legal system has not disappeared. Much depends on how quickly and consistently courts can implement new laws; the bankruptcy legislation has not yet been tested in practice, for example.

Many remaining worries for foreign investors are linked to the government’s drive to push Saudi citizens into jobs held by foreigners, via quotas and fees for residency permits. Companies find it hard to obtain permits and visas for foreign workers and their dependents, and hope authorities will operate the system more smoothly and transparently.

Last year’s crackdown on businessmen and officials raised serious questions. Details of the accusations and the “financial settlements” that detainees paid before being released were never publicised.

This alarmed some Saudi businessmen, but Lovell said the crackdown may ultimately have reassured foreign investors, as it has made all parties in business deals more scrupulous about avoiding any appearance of conflict of interest.

Read: Saudi prince seeks to reassure investors after corruption crackdown