Saudi Arabia's policies aim to improve business environment

In the World Bank’s 2015 “Doing Business” rankings, Saudi Arabia placed 49th, second among GCC states (behind the UAE at 22nd) and ahead of other key emerging markets such as Turkey, China and Brazil. Despite having slipped five places since 2014, the Kingdom is still comparatively much stronger than other countries in the Middle East and North Africa region.

Starting Up

Saudi Arabia has strived to facilitate business start-ups by progressively cutting the number of days it takes to start a business from over 70 days in 2004 to 20.5 days in 2015, an improvement that is topped only by Indonesia and India over the same period. Additionally, business start-up costs as a percentage of income per capita have been brought down from 60% to 4%, while the number of procedures needed to register a business has fallen from 14 to nine over the course of the past decade.

In May 2013 a new online company application process was introduced, paving the way for both the number of transactions and days to complete the business registration process to be further reduced. In other critical processes too Saudi Arabia is competitive at both the regional and global levels, ranking 20th, 21st and 22nd in registering property, dealing with construction permits and getting electricity, respectively.

Credit Access

When it comes to businesses getting credit, the Kingdom ranked 71st in the world, ahead of all its GCC peers in this regard; the UAE comes second to Saudi Arabia in the GCC with a global ranking of 89th. The World Bank has recognised that Saudi Arabia is making progress in this area. For instance, the Kingdom introduced an amendment to the commercial lien law in 2011 designed to enhance access to credit by making secured lending more flexible and allowing out-of-court enforcements in the case of default.

Insolvency Law

The IMF has highlighted contract enforcement and resolving insolvencies as two particular areas for improvement in the Kingdom. Enforcement of contracts takes 635 days and 40 procedures in Saudi Arabia, compared to 150 days and 21 procedures in Singapore, the best-performing country in this category. Meanwhile, insolvency resolution, in which Saudi Arabia is ranked 163rd globally, on average takes 2.8 years compared to 0.4 years in Ireland. John Mercer, advisor to the King Abdulaziz City for Science and Technology Badir Programme for Technology Incubators, told OBG that the government is developing new bankruptcy laws to address the insolvency challenge, which he sees as critical to supporting innovation in the private sector. “Such laws provide a safety net to entrepreneurs and small business owners, freeing them to innovate and experiment, but, more critically, they enable ideas and ventures to survive through bankruptcy rather than be dismembered,” Mercer said.

Besides preparing the new insolvency law, the government is working to shorten the time taken to enforce judgments by recruiting more judges and by establishing commercial courts to oversee the resolution of business disputes, according to the IMF. These measures come in addition to planned improvements to consumer protection, stronger enforcement of competition policy and revisions to company law.

Private Sector Rebalancing

While most of the above can be viewed as relatively quick wins, the IMF has questioned “how far further improvements in the business environment and infrastructure will go in encouraging diversification without a change in the underlying incentive structure of the economy”.

More precisely, the relatively higher wages available in the public sector thanks to oil revenues have meant that this is often a more attractive employment choice than the private sector. Consequently, producing or importing goods and services to meet the consumption needs of the domestic market and relying on low-wage foreign labour to do this is more profitable than devising business plans that require more skilled labour to fulfil export-oriented activities. However, the Kingdom’s policymakers are already grappling with how to address such complex challenges, which should support enhanced competitiveness going forward.