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  • 1. 39 Offices in 19 Countries Entering & Operating Successfully in the Saudi Projects Market September 18, 2013
  • 2. 2 Key Themes Establishing a presence - finding the right local partner Navigating legal & regulatory challenges in Saudi Arabia Procurement & development strategies for entering & operating successfully in the Saudi projects market
  • 3. 3 Cultural Awareness & Business Etiquette Trust - establishing trust an essential part of business culture Relationships - cultivate solid business relationships before entering into business dealings Comfort - business executives like to feel comfortable with business partners before agreements or contracts are signed
  • 4. 4 Doing business is mostly personal Middle East business people unlikely to finalize serious negotiations without face-to-face meetings Patience often necessary negotiations & communications occur at a slower pace in the Middle East Shariah Law a basic understanding helpful to conducting business in GCC countries - especially Saudi Arabia Negotiating Style & Tactics
  • 5. 5 Islamic Law Bribery Law • 1930s Abuse of Position • Royal Decree No. M/36 (1992) • Definition of Bribery • Definition of Public Employee • Penalties • Enforcement Investigation Authority Gift Giving • Internal Controls E-Governance Public Procurement Local Anti-Bribery Laws - Saudi Arabia
  • 6. 6 Introduction to Islamic (Shariah) Law Saudi Arabian law based on Islamic Shariah Basic understanding of Shariah Law useful in conducting business Statutes may be issued to supplement Islamic Law (Royal Decrees - Rules & Regulations issued by the Monarchy/Government) No binding judicial precedent or case law Regulators may have powers to issue sector specific statutory implementing regulations International Treaty/Organization/Conventions
  • 7. 7 Saudi courts divided into Shariah courts & specialized statutory tribunals Shariah Courts have general & residual jurisdiction Board of Grievances the most important statutory tribunal for commercial disputes Numerous other quasi-judicial committees Court System
  • 8. 8 Contract Law Generally, Islamic Law governs contracts • No all-embracing theory of contract law • Contracts may be subject to particular statutory provisions in addition to general Islamic Law principles No established theory of Contract Law • Parties to a contract free to use terms of their choosing provided not inconsistent with Islamic Law principles or statutory provisions Freedom of Contract is Fundamental Rule • No element of uncertainty (Gharar), speculation or gambling • Provisions including payment of interest not enforceable • Only direct and actual damages recoverable • Injunctive relief not available as remedy for breach of contract Established Principles
  • 9. 9 Choice of Law & Enforceability of Foreign Judgments • Courts and judicial committees may not recognize choice of foreign law as governing law of an agreement or submission by the parties to the jurisdiction of courts other than local courts and judicial committees Choice of Foreign Law • a judgment obtained in a foreign country may be submitted for enforcement before the Board of Grievances provided not inconsistent with Islamic Law and/or regulatory/statutory provisions Board of Grievances • Saudi Arabia adheres to the NY convention but invoked a "reciprocity reservation" to limit its recognition of awards made in foreign jurisdictions Convention on Recognition & Enforcement of Foreign Arbitral Awards
  • 10. 10 Foreign Investment Foreign Investment Act issued (2000) Regulated by Saudi Arabian General Investment Authority (SAGIA) Accession to WTO has led to market liberalization Ease of doing business
  • 11. 11 Foreign Investment Legislation Regulations & Restrictions • Foreign investors granted certain benefits and incentives available to national investors • Foreign investment permissible in most sectors • Some sectors fully or partially restricted to Saudi nationals • Foreign investors subject to income tax (20%) and withholding tax (5% - 20%)
  • 12. 12 Foreign Investment Legislation Fully Open activities include • General Services (e.g., contracting, IT, food and beverage, etc.) • Industrial and manufacturing • Agriculture • Real estate investment and development - provided not in Mecca and Medina and total project value at least SAR 30 million Partially Open activities include • Distribution: 25% minimum local participation and minimum foreign investment of SAR 20 million required • Professional services: (engineering, legal, audit, etc.) 25% minimum local participation required • Healthcare: restricted to hospitals and subject to licensing requirements by the Ministry of Health
  • 13. 13 Structure & Funding of EPC Arrangements • Typically fixed fee, lump sum turnkey agreement • Public & private projects • Any type of project (power plants, roads, etc.) including PPP Engineering, procurement & construction (EPC) agreement • Single entity provides all services to meet project owner objectives • Significant project risk taken on by EPC contractor EPC system integrates design, engineering, procurement & construction in a single agreement
  • 14. 14 Structure of EPC Arrangements Historically, foreign companies not allowed to combine EPC services under one single entity • Engineering services must be offered by a Professional Company • Foreign companies wishing to perform the three services under an EPC contract, would obtain a license for construction (procurement allowed and as a complementary activity) and outsource the engineering services to a local engineering company • The foreign company may establish two companies – (i) to provide construction/procurement services and (ii) a professional company, to provide engineering services - under the professional company, the foreign company would partner with a Saudi licensed engineer (holding at least 25% of the company's capital) Recent demand has led SAGIA in coordination with MoCI to issue specific licenses for EPC services
  • 15. 15 Public Procurement Government Tenders & Procurement Law (GTP Law) • Governs all public infrastructure projects Public Works Contract • GTP Law requires government entities to use a Public Works Contract for public infrastructure projects • Contractor must inspect the site and notify any latent adverse physical conditions within 10 days of discovery • 30% of the work must be subcontracted Saudi contractors • Calculation for delay penalty on Contractor is by reference to the average daily cost of the project • Variations to be approved in writing, but not increase contract value >10% or decrease by >20% • Payment applications and certifications to be issued monthly and paid within 30 days
  • 16. 16 Public Procurement • Rectification works - during “maintenance period” (from provisional to final acceptance) – contractor to execute works according to written demands from Engineer or Employer – failure to do so allows Employer to engage 3rd party contractors and set off costs • Claims for damages - Contractor must submit claims within 30 days of breach – otherwise will have waived right to compensation • Termination - Employer may terminate Contractor and engage 3rd party contractor to complete at the Contractor’s expense if Contractor: – Bribes an employee of the Employer – Delays progress or breaches the contract without remedying within 15 days – Assigns the contract or improperly subcontracts its execution – Becomes insolvent – Dies (or ceases to exist) • Disputes referred to Board of Grievances – no reference to arbitration
  • 17. 17 Forms of Corporate Vehicles/Permitting Limited Liability Companies • Minimum capital of SAR 0.5 million (SAR 1 million for industrial activities and SAR 10 thousand if fully owned by Saudi nationals) • Minimum two shareholders liable to the extent of their contribution • Negotiability of shares subject to preemptive rights • Not allowed to undertake financial, insurance and other activities • Most common for foreign investment Joint Stock Companies • Minimum capital of SAR 2 million (closed) • Minimum five shareholders liable to the extent of their contribution • Freely negotiable shares • May be publically traded • No restriction over type of activities (but positive restrictions exist) Branch office • Not a separate legal entity, liability extends to mother company • Minimum capital of SAR 0.5 million
  • 18. 18 Commercial Agency Governed by Commercial Agency Law Restricted to Saudi nationals & Saudi entities fully owned by Saudi nationals Required to be registered at the MoCI Generally favorable to Saudi agents / distributors Termination or non-renewal could subject foreign principal to payment of compensation
  • 19. 19 Worldwide Locations • Cincinnati • Cleveland • Columbus • Houston • Los Angeles • Miami • New York • Northern Virginia • Palo Alto • Phoenix • San Francisco • Tampa • Washington DC • West Palm Beach • Bogotá+ • Buenos Aires+ • Caracas+ • La Paz+ • Lima+ • Panamá+ • Santiago+ • Santo Domingo • Beirut+ • Berlin • Birmingham • Bratislava • Brussels • Bucharest+ • Budapest • Frankfurt • Kyiv • Leeds • London • Madrid • Manchester • Moscow • Paris • Prague • Riyadh • Warsaw • Beijing • Hong Kong • Perth • Seoul • Shanghai • Singapore • Sydney • Tokyo North America Latin America Europe & Middle East Asia Pacific + Independent Network Firm
  • 20. 39 Offices in 19 Countries Thank You Q&A Kevin Connor kevin.connor@squiresanders.com Wissam Hachem wissam.hachem@squiresanders.com Mohammed Alkhliwi mohammed.alkhliwi@squiresanders.com Al-Enezee in association with Squire Sanders