US companies resent Saudi Arabia in a battle against the Crown Prince’s growth plans

RIYADH — Saudi Arabia courted the best companies in the world for modernizing its economy. Instead, the business environment has become more hostile, and investors are consuming the oil-rich kingdom.

Construction company Bechtel Corp. sent some contractors home while trying to raise more than $ 1 billion in unpaid bills.

Bristol-Myers Squibb Co.

BMY 0.51%

, Gilead Sciences Inc.

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and other drug manufacturers have for years unsuccessfully complained that their intellectual property was stolen.

As a result, foreign investment in Saudi Arabia has remained stubbornly low, with some companies shutting down their activities or delaying promised expansion plans.

It is a blow to Crown Prince Mohammed bin Salman, the country’s de facto leader. In 2016, he promised to build new industries unrelated to oil by improving the business climate and creating a global center for innovation. Since then, it has become increasingly urgent to reduce Saudi Arabia’s dependence on oil as the global economy moves away from fossil fuels.

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


Photo:

Bandar Al-Jaloud / Agence France-Presse / Getty Images

Foreign direct investment in Saudi Arabia was $ 5.4 billion by 2020, less than half the level a decade ago and well below the $ 19 billion the country had targeted. It was on track to peak at $ 6 billion in 2021 based on data through the third quarter. That precludes the sale of $ 12.4 billion of a stake in a Saudi pipeline company to foreign investors.

One of the reasons why the number has been kept low is planned projects that were not completed. Apple Inc.’s

Plans to open a flagship store in central Riyadh several years ago have disappeared. Triple Five Group, the developer of Mall of America, withdrew from building a multi-billion dollar complex. And cinema company AMC Entertainment Holdings is giving greater control to its Saudi government partner as it lags behind local rivals.

AMC says they are pleased with their progress in the kingdom. Apple and Triple Five did not respond to requests for comment.

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Businesses are attracted to Saudi Arabia’s potential, “but economic practicality is still being hammered out,” said Robert Mogielnicki, a resident researcher at the Arab Gulf States Institute think tank in Washington, DC

The Saudi Ministry of Investment said interest in the country remains high, pointing to a 250% annual increase in new investor licenses by 2021.

Saudi Arabia has long been a difficult place to do business, with a sluggish bureaucracy, outdated legal system and poor human rights status. Prince Mohammed sought to change that by promising major reforms, holding lavish investment conferences in Riyadh and hobbing with Silicon Valley leaders.

His efforts have borne fruit. The relaxation of strict social norms led to new tourism and entertainment industries and improved the quality of life of posted workers. The government rolled out a bankruptcy law, allowed full foreign ownership in certain sectors, and streamlined some business services.

The Ministry of Investment said it takes investors’ concerns seriously and constantly reviews and develops as needed. “Whether it was a small business or a large business, we continue to strive to create the best possible environment for doing business,” it said.

The prince’s agenda stumbled in 2018 when men working for him killed journalist Jamal Khashoggi. It ruined big deals, including with Amazon.com Inc.,

Richard Branson’s space tourism venture and Hollywood superagent Ari Emanuel.

A driver in 2018 in Riyadh, Saudi Arabia, with Careem ride-hailing service, now an Uber subsidiary.


Photo:

Nariman El-Mofty / Associated Press

Prince Mohammed failed to change many of the old deterrents for investment. Then Saudi Arabia added new ones.

The country tried to counter a cash squeeze by levying retroactive taxes on dozens of large foreign firms. For 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 were rejected.

The tax authorities offered the companies only few funds, prompting the Foreign Ministry at the end of last year to appeal unsuccessfully to the Saudi government for emergency aid.

General Electric, Uber and Careem declined to comment.

The Saudi tax authority said the kingdom strives for a fair and efficient tax policy in line with international standards. It said it maintains full communication with taxpayers undergoing audits and gives them ample time to comply with requests.

The tax change came on top of a tripling of the VAT rate from one day to the next in 2020. Such surprises have become common, with new policies often undercutting previously set targets.

The government rattled further foreign companies as it ordered them to relocate their regional headquarters to Riyadh from Dubai or lose government contracts. Companies were also forced to hire more Saudis. And a requirement to increase 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 repression of criticism or alleged corruption have been Saudis, some have been foreigners. A foreign businessman said he was detained and tortured after publicly saying some business laws were unfair.

Another, an American, recently authorized the State Department to pass on relevant information to the media should the person be detained in Saudi Arabia. Another American seeking to expand his Ohio-based nursing home operation was detained on arrival last year in a cramped airport cell for three days and deported without explanation.

The Ministry of Investment declined to comment on specific allegations of ill-treatment, but said most investors have had positive experiences.

Saudi Arabia’s long-running dispute with drug manufacturers over intellectual property rights has contributed to caution among the innovative companies the country is courting. Since 2016, Saudi regulators have authorized domestic companies to manufacture generic versions of nearly a dozen drugs that are still under patent or regulatory data protection.

The dispute is one of the reasons why Saudi Arabia remains on the U.S. Trade Representative’s priority observation list for intellectual property infringements along with well-known offenders, including China and Russia. Bristol-Myers Squibb and Gilead declined to comment.

As in the tax dispute, it has proved fruitless to contest the generic medicine despite protests from the State Department and the White House. The companies were informed that it is time consuming and uncertain to pursue claims in Saudi courts.

“There are ways to solve this, but the Saudis decided not to,” said one of the people close to these efforts. “Saudi wants the best, but their laws discourage pulling the best.”

The Ministry of Investment said it was studying the issue “to enable a workable balance between a thriving generic and an R & D-based innovation industry.”

Some companies that have been working in Saudi Arabia for decades have reduced their presence due to disputes over payment from government customers, a perpetual problem in the kingdom. Contractors on Riyadh’s new metro system, including Bechtel, sent some employees home last year amid a more than $ 1 billion payment dispute.

Northrop Grumman Corp.

, which has sold billions of dollars of military equipment to the kingdom, reduced its footprint about two years ago after the military failed to pay for products it supplied.

Bechtel and Northrop declined to comment.

The Saudi government said it had reformed public procurement laws to eliminate the problem and cleared the backlog of cases.

The situation is often worse for smaller companies and solo entrepreneurs, for whom minor problems can turn into painful trials.

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


Photo:

Suleiman al-Salhiya

Suleiman Salehiya, 67, owned a small business that built Saudi universities and royal palaces. After the government reversed an earlier round of widely proclaimed business reforms to favor local competitors, the Palestinian investor asked for investment officials and sued them accordingly. In court, he was given less than two minutes to reprimand his case before a judge convicted him, he said.

Excluded from working or leaving the country without paying hundreds of thousands of dollars in disputed fees, Mr. Salehiya stuck in bureaucracy and stranded in Riyadh with his wife and children who have not been able to complete their education or start their own. careers.

After Mr. Salehiya, who is already facing the consequences of the court ruling, spoke to a Wall Street Journal reporter in 2018, raided police in his home in the middle of the night, tied his hands and feet and covered his head with a bag. They stuffed him into an SUV and drove him to a small cell where he stayed for 18 days with the air conditioner running at full power and two spotlights keeping him awake. Interrogators asked about his business, the trials and his meeting with a foreign journalist.

“They yelled at me in the face, knocked on the table and gave me electric shocks,” he said. “My crime is that I respected the law and followed it.”

Write to Stephen Kalin at stephen.kalin@wsj.com and Justin Scheck at justin.scheck@wsj.com

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