Saudi Arabia’s ‘Programme HQ’: Can Riyadh rival Dubai as a small business hub?

In the pre-pandemic times of globalisation, countries competing in rising markets had been typically engaged in a “race to the bottom” to appeal to multinational businesses, which normally associated featuring them incentives these types of as tax breaks and favourable labour rules.

More recently, governments with large ample economies have opted for the adhere-over-the-carrot method in making it possible for businesses to set up store, normally for political aims.

Last yr, for occasion, Turkey passed a legislation necessitating any social media platform dependent overseas with above a single million everyday Turkish customers to set up a consultant place of work in the state.

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Saudi Arabia is taking a leaf from the exact playbook as it grapples with the financial fallout of the Covid-19 pandemic and embarks on its bold Vision 2030 plans.

In mid-February, Minister of Investment Khalid al-Falih announced that any corporation trying to get contracts with the authorities, point out-owned corporations and the Community Financial commitment Fund (PIF, the sovereign wealth fund) will have to base its regional headquarters in the kingdom by 2024.

Saudi Arabia is hoping that the allure of being the Center East’s most significant economic climate, with hundreds of billions of pounds earmarked for mega-jobs above the coming decades, will pressure corporations to comply.

“There was shock at the announcement, and there are some service provider households that will not be satisfied,” said Theodore Karasik, a senior adviser to Gulf Condition Analytics, a Washington-based consultancy.

“But at the exact same time, other people will see the benefit of these types of a regulation, and in how the metropolis states of the Arabian peninsula interact with each other for recovery needs. Due to the fact of Covid-19, they are rebooting and restructuring their economies.”

The need, named “Programme HQ”, is nonetheless at the dialogue section, with “as a lot of questions as answers. It is a reminder of the rigorous competition for financial commitment inside of the Gulf Cooperation Council,” claimed Rachel Ziemba, a non-resident fellow at the Gulf Global Forum, a Washington-based institute.

‘The reality is they would put three folks in Saudi Arabia, but 95 {540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} are commuting from Dubai or Lebanon owing to the way of life, like remaining in a position to consume alcohol’

– Martin Tronquit, handling associate at infomineo

At present, the programme will give organizations that go their headquarters to Saudi Arabia a 50-yr tax vacation, and a 10-year waiver on quotas on the work of Saudi nationals.

Analysts take into consideration Programme HQ to be ambiguous in its definitions – does “regional” indicate within the Gulf Cooperation Council (GCC), the Center East and North Africa (MENA), or even Europe, Center East and Africa (EMEA)? And how is “headquarters” described – by the number of staff members?

“My read is it’s the Middle East,” said Ziemba, “but you can also elevate inquiries about EMEA offices, which may well be in the UAE or somewhere in Europe. It’s not truly apparent what occurs to a corporation that does not have a regional office, or made use of to be someplace else.”

The shift also neglects to choose into thought perhaps profound shifts in office function because of to the pandemic, these kinds of as distant working and the downsizing of places of work themselves, and developments to the automation of industry and the adoption of clever engineering – hailed by the Entire world Economic Forum as a “fourth industrial revolution” – which might have an affect on wherever organizations are registered.

“We are transferring toward a cloud-based mostly overall economy and society, so a regional HQ could be on a cloud and you do not require bodily room. It is dependent on the company and their objectives, and how it fits within just the Vision 2030 scope,” reported Karasik. Programme HQ “is an notion set in stone, but the mechanics nonetheless have to have to be worked out”.

Riyadh versus Dubai

Some analysts are decoding the move as immediate levels of competition with Dubai, which has experienced very first-mover edge to acquire as a worldwide small business hub.

“It is not seen as direct competitors throughout the GCC,”  stated Ziemba, “but sending a concept to companies that are likely to see Saudi Arabia as a far more crucial element of their sector, and performing a lot more business there.

“But I assume they [Saudi Arabia] will have an extremely difficult struggle in opposition to Dubai’s initially-mover and infrastructure advantage, and the lawful program and procedures.”

Dubai, which was pressured to diversify due to its small oil reserves compared with other Gulf states, is the regional headquarters of 45 Fortune 500 corporations, according to infomineo, a Dubai-primarily based research organization that has assessed why companies set up headquarters in specific cities all over the entire world.

Riyadh vs Dubai

Dubai has develop into well-liked not just as headquarters for the MENA location, but also Africa. “The business enterprise cash of Africa is not in Africa, but in Dubai,” stated Martin Tronquit, controlling spouse at infomineo.

The agency estimates there are no regional headquarters at this time in the kingdom. “A motive was that it was challenging to do company in Saudi Arabia, and that folks never want to reside there. It will change, but the question is if it will transform on paper or if a lot more senior executives actually go,” stated Tronquit.

It may perhaps be a tricky market to convince senior executives to make the change, as they are typically aged 40 to 60 and have children. “When you search at Saudi Arabia, it is putting in place infrastructure for business but from the personal component, though it has enhanced significantly, it will choose many years ahead of healthcare, instruction and leisure get to the identical degree as Dubai,” he claimed.

For a long time, organizations – from consultancies and engineering firms to regulation firms and stores – have utilised Dubai or Beirut as hubs for small business in Saudi Arabia.

Dubai skyline
The Burj Khalifa skyscraper dominates the Dubai skyline. Multinational companies have ordinarily utilised the emirate as a foundation for regional small business (Reuters)

“The simple fact is they would place a few men and women in Saudi Arabia, nonetheless 95 percent are commuting from Dubai or Lebanon thanks to the lifestyle, like being capable to drink liquor,” said Tronquit.

Salaries are also predicted to be larger in the kingdom. “When headhunters strategy folks to go to Saudi Arabia, giving salaries 30 to 40 percent increased than Dubai, they say no. You require to double salaries if they [recruits] are great, but if they’re in the 2nd tier, you can get them,” claimed Khaled Abdel Majeed, a MENA fund supervisor at London-based mostly SAM Cash Partners in Dubai.

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“It will not be quick. Saudi Arabia is working with a blend of carrots and sticks, but I’d desire they’d use extra carrots and significantly less sticks.”

Stability is a even further issue, with the Houthis obtaining not too long ago introduced rockets at Jeddah and Riyadh. In a even further escalation, the Houthis on Sunday claimed duty for rocket and drone attacks concentrating on oil facilities in the port of Ras Tanura and the jap town of Dhahran. 

“If Iran bombs any individual in the location it is almost certainly Saudi Arabia, not Dubai,” said Tronquit.

Riyadh will also have to get the job done on its international plan name, which has been sullied internationally by the six-12 months war in Yemen, the killing of Jamal Khashoggi, and the blockade of Qatar.

“The undertaking in Yemen and the embargo on Qatar were not good ideas, and the Ritz Carlton affair was also not a good thought, as the close consequence was a lot of money flight,” explained Majeed.

“In an ambiance the place the rule of law issues, how can they entice people to Saudi Arabia? If men and women get in dispute with the royal spouse and children there’s no way they can get.”

It also remains unclear as to no matter if Programme HQ will create “thousands of careers for citizens”, as the minister announced, due to the waiver on Saudisation – the choosing of locals – for regional headquarters.

‘In an ambiance wherever the rule of regulation issues, how can they bring in men and women to Saudi Arabia? If people today get in dispute with the royal family there is no way they can win’

– Khaled Abdel Majeed, SAM Money Companions

If corporations do make the transfer to the kingdom, it may perhaps be dependent on the sectors they operate in, with design a key area, specified the kingdom’s plans to build the likes of megacity Neom, and the lately introduced $200bn challenge, the Line.

Currently, just two of the 45 regional headquarters of corporations in Dubai are building primarily based, in accordance to infomineo figures. US construction huge Bechtel, however, has noticed the writing on the wall, saying the transfer of its regional headquarters to Riyadh in January, right before the prerequisite was announced.

Vision 2030

Saudi Arabia desires to bolster all pieces of its economy in line with Crown Prince Mohammed bin Salman’s Eyesight 2030 venture, a “countrywide transformation programme” that seeks to position the kingdom as an “investment powerhouse” and a “hub connecting three continents”.

The crown prince’s plans have been explained as an attempt to shape a “fourth Saudi condition“, replacing the existing oil-dependent modern day condition which was started in 1932, succeeding previously iterations of Saudi rule in the 18th and 19th generations.

“They are however making this fourth Saudi condition, that is highly developed in phrases of logistics, vitality, and business,” said Karasik.

Riyadh is predicted to catch the attention of most of the headquarters, as properly as the King Abdullah Economic Metropolis, in the vicinity of Jeddah – the only 1 of four proposed financial metropolitan areas announced in 2005 to have occur to fruition by 2020.

This aerial view shows a partial view of the ciry of Alula during the Stage 10 of the Dakar Rally 2021 between Neom and Alula in Saudi Arabia, on 13 January 2021 (AFP)
The town of Alula during the Dakar Rally 2021 between Neom and Alula in Saudi Arabia, on 13 January (AFP)

The Neom job is envisioned to be a further contender, but it has its have individual legal routine to the relaxation of the kingdom. Some 20 corporations have pledged to PIF that they will build regional headquarters at Neom if contracts are forthcoming.

“There will most likely be extra headquarters, but it is dependent on the sector, and the lawful challenges, which however have to have to be codified,” reported Karasik.

He sees the HQ plan as part of a broader one particular to thoroughly clean up corruption and have more transparency to entice traders, which the kingdom sorely desires, with web inflows of overseas financial investment just $4.2 billion in 2018, and $4.6 billion in 2019. The UAE by comparison captivated international expenditure of $10.4 billion in 2018, and $14 billion in 2019. 

If Programme HQ commences to backfire amid weak overseas investor sentiment, Riyadh could be compelled to negotiate with companies and buyers alternatively than use the adhere method.

“Saudi Arabia requires 6 {540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} or a lot more non-oil GDP expansion to maintain youth unemployment at what it is, which is a major selection [28.7{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} as of 2021]. And the financial system can no for a longer period be driven by government shelling out, so there desires to be a feeling of urgency,” claimed Majeed.