Investment Treaty Planning: Protecting Your Projects In Saudi Arabia

Investment Treaty Planning

As part of the Saudi Government's "Vision 2030" plan to reduce the country's long-term reliance on oil, the Kingdom of Saudi Arabia ("KSA") intends to develop alternative domestic sectors including retail, manufacturing, construction, energy, finance, mining, hospitality and tourism.¹ To achieve this, the KSA is aiming for a twenty-fold increase in foreign direct investment to approximately $100 billion a year by 2030, reforming the foreign investment landscape by allowing 100% foreign ownership in specific sectors and streamlining the business approval procedure.

Companies investing overseas often structure, or restructure, their operations in a way that affords them protections under so-called bilateral, multilateral or regional investment protection treaties. These investment treaties govern a state's treatment of investments made by individuals or companies from another state. They not only oblige host countries to provide broad legal protections for foreign investments, often exceeding those available under local law, but also create powerful right of action and procedural remedies for investors against host governments that fall short of their obligations.

To take advantage of the benefits offered by the KSA's investment treaties, companies should consider how their projects should be (re-)structured as early as possible.

Saudi Investment Protection Treaties

Saudi Arabia is a party to a web of bilateral investment treaties (BITs), multilateral investment treaties (MITs) and regional investment treaties.

Saudi Arabia has entered BITs with the following states:

If your company is incorporated in one of the countries above and you are looking to either invest in Saudi Arabia or tender for work in the country as an international contractor, you should seek advice on how to maximise your legal protections, as further explained below.

In addition to the BITs above, the Saudi government has also signed treaties with Iraq, Jordan and the Philippines, but these are not yet in force.

While each BIT is individually negotiated and as such its specific terms may differ, substantive protections typically provide for:

• Protection against expropriation/nationalisation without compensation and observance of due process
• Fair and equitable treatment
• Full protection and security (i.e. physical protection of the investment)
• Non-discrimination
• National Treatment (i.e. same treatment as that given to nationals of the host state)
• Most Favoured Nation Treatment (i.e. treatment no less favourable than that given to nationals of any countries not party to the BIT)
• Guarantee of repatriation of investment and returns
• A commitment by the host state to observe all obligations it has in relation to that investor – whether under the treaty, a contract or otherwise

Importantly, BITs also afford procedural protection to foreign investors. In the event of a failure by the host state to satisfy their obligations, investors typically have the right to resolve disputes through international arbitration, rather than by relying on the host state's courts.

MITs and regional investment treaties operate in a similar manner to BITs but exist between multiple states. Saudi Arabia is a member of several MITs and regional investment treaties including:

• The Arab League Investment Agreement (1970)
• The GCC Economic Agreement (1981)
• The OIC Investment Agreement (1981)
• The EC-GCC Cooperation Agreement (1988)
• The GCC-Singapore FTA (2008)
• The GCC-EFTA FTA (2009)

How to Qualify for Investment Treaty Protection

Qualifying for protection under Saudi Arabia's investment treaties depends on the specific terms of each treaty, but investors must demonstrate that they are a qualifying "investor" with a qualifying "investment" made in Saudi.

The definition of an "investor" is usually broad and includes companies and individuals with the nationality of the home state. The nationality of a company is often based on the company's place of incorporation, although more restrictive treaties may require that companies carry out sufficient business activities in the home state in order to qualify.

Similarly, treaties generally define "investments" in broad terms, including any kind of asset that an investor owns or controls, directly or indirectly. For example, treaties may cover shares, moveable and immoveable property rights, intellectual property rights, debt instruments and claims to money.

Therefore, a careful and early assessment must be carried out in order to minimise potential jurisdictional challenges which the host State may formulate if a dispute arises.

Maximising Investment Treaty Protection in Saudi Arabia

To benefit from the full potential of Saudi Arabia's investment treaties, investors can structure their investments to take advantage of a BIT, MIT or regional investment treaty. This involves channelling investments through a company in an investment treaty-friendly jurisdiction, be it either through a group entity in that territory or through a special purpose vehicle.

The timing of a restructuring is very critical as investment tribunals generally consider that restructuring a project once a dispute has arisen – with the sole purpose of benefitting from investment treaty protection – is inadmissible.

We therefore recommend that investors consider investment treaty planning at the very outset of their projects and, failing this, review what treaty protection may be available at any time prior to a dispute arising.

Footnote

1. Kingdom of Saudi Arabia's Vision 2030, https://www.vision2030.gov.sa/media/ufuh40is/story-of-transformation-2023.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.