Trade policy review report by the secretariat

4  TRADE POLICIES BY SECTOR

4.1  Overview

1.1.  This section covers the following sectors in some detail: agriculture; energy and mining; construction; financial services; transport; and tourism.

1.2.  There have not been any major changes to agricultural policy over the 2011-2015 period as the Eighth, Ninth, and Tenth Development Plans have maintained the general objectives improving the use of water and rationalizing production and export of water-intensive products. As a result, the Grain Silos and Flour Mills Organization (GSFMO), now the Saudi Grain Organization (SAGO), reduced its purchases of domestically produced wheat with the last purchases taking place in 2015. Saudi Arabia continues to provide subsidies for feedstuffs but the overall level of Amber Box support to agriculture is lower than its peak in 2008. Green Box support has declined since 2010 as spending on infrastructure services fell. In late-2015, the GSFMO was replaced by the SAGO. The Government's intention is to separate the flour milling operations from the SAGO into four corporate units.

1.3.  Saudi Arabia is a world leader in terms of oil reserves, production, export, and refining capacity. Apart from the Saudi Arabia-Kuwait Divided Zone, the state-owned Saudi Aramco is the sole extractor of crude while refineries and gas plants are operated as joint-ventures. Saudi Aramco has autonomy for all operating decisions while the Government sets limits for production of oil within the Kingdom. The Electricity and Cogeneration Regulatory Authority is regulator for the electricity and water desalination industry and the majority state-owned Saudi Electricity Company is the main operator engaged in generation, transmission, and distribution. The Government is currently implementing a plan for comprehensive market reform in five stages starting with unbundling of SEC into four generation companies, a transmission company, and a distribution company.

1.4.  The construction sector represents 5.4% of GDP and 3% of total employment, although the majority of construction workers are not Saudi nationals. In the 2010-2014 period, the construction sector expanded due to a large number of major investment projects, including the construction of a number of economic cities where development is being regulated by the Economic Cities Authority and supported by incentives.

1.5.  The banks and insurance sector are regulated by the Saudi Arabia Monetary Agency (SAMA) and capital markets are regulated by the Capital Markets Authority (CMA). There are 12 commercially licensed domestic banks and 12 licensed commercial bank branches of foreign banks operating in Saudi Arabia. To get a banking licence, a natural or legal person must be a Saudi national or a joint venture with a public Saudi joint-stock company and meet prudential criteria. In the 2010-2014 period the level of non-performing loans declined, and other prudential indicators suggest the banking sector is stable. Islamic banking is growing in importance with four banks completely Shariah compliant and others offering Shariah compliant products. Each bank assesses compliance with Shariah for its own products.

1.6.  The insurance sector continued to grow in the 2010-2014 period as gross written premiums more than doubled to SAR 30.5 billion as many businesses started or improved health insurance for employees and third-party insurance for motorists became compulsory. There are about 35 insurance companies operating. The sector is based on licensed public joint-stock insurance companies operating in a cooperative manner, and is Shariah compliant. Foreign insurance companies may establish a commercial presence, but it must be in the form of a locally incorporated cooperative insurance joint-stock company, or as an established direct branch of an international insurance company operating in Saudi Arabia as a cooperative insurance provider. Non-Saudi investment in such a joint-stock company in Saudi Arabia is permitted up to 60%.

1.7.  The Saudi stock exchange, Tadawal, is the largest in the GCC: in 2014 70 billion shares were traded; at end-2014 market capitalization reached SAR 1,813 billion; and in 2014 the value of Sukuk (deeds and financial certificates) and bonds traded was SAR 25.5 billion. Direct trading in shares is restricted to Saudi citizens, foreign residents, and GCC nationals, but there are no restrictions on investment by non-resident foreign investors in government bonds, treasury bills or Saudi investments funds, ETFs, and swap agreements. Non-GCC nationals that hold shares of public joint-stock companies traded in the equity share market must obtain permission from the CMA prior to buying or selling their shares. The CMA has also permitted the trading of Sukuk in order to promote a market in instruments less exposed to risk than ordinary equities. Furthermore, since 15 June 2015, qualified foreign investors were allowed to invest in listed shares.

1.8.  Saudi Arabia has signed 28 bilateral air services agreements, 12 of which cover fifth freedom rights. Domestic air transport and cabotage are not open to foreign companies. The regulator, the General Authority of Civil Aviation (GACA), is the owner and operator of all airports although GACA signed a public-private-partnership contract with an international consortium for the construction and operation of the New Prince Muhammad bin Abdulaziz International Airport. The state-owned Saudia is the flag carrier and the main operator for passenger and freight air transport, and holds one of the two licences for ground-handling services; the other is held by SwissPort.

1.9.  In 2014, the National Shipping Company of Saudi Arabia (Bahri) merged with Vela International Maritime Limited and, at end-2015, had a fleet of 69 vessels, including 32 VLCCs. Bahri is the exclusive supplier of VLCC shipping to Saudi Aramco. Bahri is a publically listed company, 20% owned by the Saudi Aramco Development Company and 22% by the Public Investment Fund. Except for the port in King Abdullah Economic City, all ports are owned by the Kingdom of Saudi Arabia Ports Authority (SEAPA) but managed and operated by the private sector. The port in King Abdullah Economic City is owned and being developed by the Port Development Company, a joint venture between a Saudi and UAE company and regulated by the Economic Cities Authority.

1.10.  Religious tourism is important to the Saudi economy; of nearly 14.5 million visitors in 2014, over 11 million were pilgrims who came to perform Hajj and Umrah. Including direct and indirect tourism-related contributions, the sector accounted for 4.5% of GDP and 11% of total employment. However, the authorities stated that the Government does not gain any income from pilgrims, rather it provides for them through infrastructure investments and services provisions. Foreign investment is prohibited for tourist orientation and guidance services related to Hajj and Umrah. Business-related tourism, such as exhibitions and conferences, are officially encouraged but Saudi Arabia does not provide for visas for tourism only, although it does have an Umrah Plus Programme to allow pilgrims an additional 30 days to travel in the country.

1.11.  Communications is not covered in this section of the review. Over the review period there have not been any major changes to the legislation, regulation, or the telecommunications market. However, the authorities indicated that revisions to the Telecommunications Act¹³⁰ were under consideration to take account of changes in technology. The regulator is the Communications and Information Technology Commission. Broadband penetration is one of the highest in the world, with 95% population penetration for mobile and 43% household penetration for fixed broadband (which is currently undergoing a switch in technology from ADSL to FTTH). Telecom services revenues were SAR 68.2 billion in 2014.¹³¹ There are three mobile network operators (STC, Mobily, and Zain) and two mobile virtual network operators (Virgin Mobile, and Lebara).

1.12.  Policies relating to manufacturing are set out in various other sections of the review, including Sections 2.5 and 3.1. The manufacturing sector contributed 10.9% to GDP (of which 2.5% was from petroleum refining) and accounted for 7.2% of total employment in 2014. The sector grew strongly in the 2011-2014 period, averaging over 8.5% per year, almost entirely due to growth outside petroleum refining. The growth in manufacturing is in line with government policies, through the Development Plans and the National Industrial Strategy Until 1441H (2020G)¹³² which emphasize diversification of the industrial and economic base to protect the national economy from fluctuations in oil prices and revenues to achieve balanced growth.¹³³ The Saudi Arabia General Investment Authority is responsible for policy on investment. The Saudi Industrial Development Fund (SIDF) contributes to the development of Saudi industry by providing loans for new industrial projects (Section 3.3.2). In addition, the Saudi Arabian Basic Industries Corporation (SABIC), Saudi Arabia Industrial Property Authority (MODON) and other entities are actively involved in the promotion of investment in Saudi Arabia. Private investment companies, such as the National Industrialization Company, Saudi Venture Capital Group, Saudi Industrial Development Company, Royal Commission for Jubail and Yanbu, and Arriyadh Development Authority, are also involved in investment promotion in industrial cities and other regions.