Rankings Report: KSA
Kingdom of Saudi Arabia looks to boost foreign investment with public investment fund vehicle
As peak oil price rapidly approaches, the Kingdom of Saudi Arabia (KSA) has been working hard to re-invent its economy. Its strategy has been to boost inward foreign investment and develop the SME community in a bid to decrease the economic dependency on oil-based exports. Unfortunately, some aspects of the Vision 2030 strategy have been more successful than others.
ince the launch of Vision 2030 in 2016, Saudi Arabia's SME community has grown significantly. The knock-on effect has led to a mini boom in new accountancy firms, a policy change to create more than 9000 jobs for local people in accountancy firms and a national drive to get more women working in the industry, particularly auditing. But SMEs cannot carry the economy on their own – inward foreign direct investment (FDI) is necessary to raise funds to aid the diversification, but the monies raised have fallen far short of the ambitious targets laid out in Vision 2030. The government is now relying on its own investment vehicles to make up the short fall.
Mamdouh Al Majed, partner at AL Majed & AL Enzi CPA, a Morison Global firm
"The accounting industry became very challenging, especially when the government introduced VAT then increased the VAT to 15% during the COVID pandemic on all items," says Mamdouh Al Majed, partner at AL Majed & AL Enzi CPA, a Morison Global firm. "No question the labour market is facing multiple factors, not least in the increased cost of hiring non-Saudi staff as the regulator is trying to make it unattractive to recruit them, to encourage the hiring of Saudi staff. On the other hand, business owners are given huge opportunities from the government if they achieve certain KPIs to maintain local staff."
The government recently announced it was to Saudise 30% of accounting professions in the private sector. The decision, which created more than 9,800 jobs for Saudis, is applicable to private sector firms where five or more of staffers with accounting professions are working and came into force in June 2021.
To aid businesses, the government provided a package of incentives and support to the private sector in employing Saudi accountants. These include supporting the recruitment process; searching for suitable employees; supporting training and rehabilitation necessary to ensure job stability for accountants and giving priority to benefit from all available Saudisation support programmes.
Penalties for non-compliance are harsh – any company that does not adhere to the required Saudisation percentage will have all electronic transactions for the accounting professions stopped. There are statutory penalties for employing any fraudulent means in the event that any worker is caught practicing any of the accounting professions targeted for Saudisation under another professional title, different from the name written in the work permit.
But while the government may be offering a lot of help to recruit local people, this does not mean KSA accountancy firms are escaping the recruitment problems their colleagues are facing in the rest of the world.
Hassan Masoud, partner at MGI Worldwide member firm, Al-Hamli & Partners Co
"Although the accountancy industry remains healthy in the Kingdom of Saudi Arabia, it is now tough to recruit new talent," says Hassan Masoud, partner at MGI Worldwide member firm, Al-Hamli & Partners Co. "A new salary scale has been introduced this year due to inflation overseas, and the turnover rate is still adequate. However, we are expecting a high turnover in the future."
There is also a strong push to get more women into the profession. Since Vision 2030's 2016 launch, women have been allowed to start their own businesses, travel abroad without a guardian's permission and drive. The result is an increase in Saudi female participation in the workforce, up from 19% in 2016 to 33% in 2020, according to the Labor Force Survey.
In 2021, the Saudi Organisation for Chartered and Professional Accountants (SOCPA) introduced a new accountancy programme to encourage women to join and develop careers in the profession. Under the initiative, SOCPA will collaborate with Saudi universities to help more female accounting students benefit from its programmes. The Future Women Society, established in October 2020 to raise awareness about the role of Saudi women in the society and economy, is also helping to promote this national accounting drive. It will work with the Saudi Financial Association (SFA), an independent body that advises government and business on developing the financial sector, to design training programmes for women interested in accounting and finance.
"Women are getting all kind of required support to lead the profession and other business as well," says Al Majed. "KSA has changed dramatically in the last few years and things are much more promising with clear vision from the leadership."
"The government employs motivation policies to increase the number of employed women," adds Masoud. "Among them is a discount rate for transportation applications and government aid to firms that hire a high number of women."
The SME sector has been a key part of the strategy to diversify the Kingdom's economy. The government sees SMEs as an important source for generating employment, creating economic opportunity for a low capital cost, while creating country-wide wealth and an equitable distribution of income. It is hoped that a larger SME community will drive the growth of non-oil exports.
In August 2021, the government announced it would exempt SMEs from commerce fees register for three years as the country plans to boost the number of start-ups in the economy. Fees will start in the fourth and fifth year, but at a reduced rate of SAR 500 (USD 133) for entrepreneurs and SAR 200 for entrepreneurs with a capital of less than SAR 375,000 and whose employees do not exceed five in number. This initiative was taken to reduce the start-up costs for SMEs.
Saudi Arabia’s Social Development Bank allocated SAR 9 billion (USD 2.4 billion) as aid to SMEs. The funds will be used to help 6,000 businesses with financing and a newly created portfolio will focus on companies in the healthcare sector. The Saudi Industrial Development Fund says it provided USD 4.5 billion in support in 2020, mostly to small businesses, as it shielded them from the negative effects of the pandemic.
The contribution of SMEs to the GDP has grown 45% since Vision 2030 was launched five years ago, according to official figures. During the period from 2016 until 2018, the SMEs’ contribution to the GDP increased from 20% to 29%. Saudi Arabia aims to raise the contribution to 35% of GDP by 2030. The number of SMEs under the Vision 2030 grew from 447,000 five years ago to 614,000 in 2020.
This creates an opportunity for new accountancy firms to be set up to meet demand from all these new businesses for tax and consultancy services and the government has been keen to make the process of setting up a new firm easier. "The Saudi Organisation for Chartered and Professional Accountants (SOCPA) offer an easy process for granting a license for accounting firms, accountants, and part-time professional accountants to provide full-time accounting services to the public," says Masoud. "In addition, Zakat and tax authority have launched a new accreditation programme for non-public accountants to provide VAT and Tax accounting services."
While there might be a rash of new firms looking to cash in, there has been very little churn amongst the established firms. "As a result of the pandemic and lockdown policies, marketing spend and merger activity were significantly limited in any business let alone the profession," says Masoud. "Most accounting firms in KSA are family businesses, and generally passed on to the next generation. "
In an effort to crack down on commercial fraud, which is still too prevalent in this evolving economy, the Kingdom has beefed up its Anti-Concealment Law. The Law makes it illegal for foreign companies to operate in the Kingdom through arrangements under which a company is wholly owned by Saudi nationals but the economic beneficiary of such business is a non-Saudi, so the true owner of the business is being concealed. As of August 2021, a 'concealment act' is now a criminal offence. Penalties include monetary fines of up to SAR 5 million (circa. US$1.3 million) and potential custodial sentences for individuals who are found to have been involved in such activities. In addition, the government has the power to prevent a foreign party infringer from entering the Saudi market in the future and for the entity that was used to breach the law being dissolved.
Of particular interest to accountancy firms is that the widened scope of the new Anti-Concealment Law also extends these penalties to third parties, whose involvement in an Concealment Act is indirect, such that those that have advised on the implementation of a structure that gives rise to a Concealment Act. Rewards of up to 30% of collected fines are being offered to whistle blowers and the government is regularly reminding citizens of their duty by sending out messages directly to mobile phones encouraging reporting.
While the new laws may seem draconian Morison Global believes it is vital to boost confidence in the economy. "Clearly the government is using all laws to fight all types of fraud on all levels," says Al Majed. "Everything now is run under reasonable transparency to ensure fraud is being controlled and hopefully eliminated in the near future."
Foreign investment is another important part of the strategy to diversify the economy but in this area Saudi Arabia is struggling.
Figures released in December 2021 from the Saudi Central Bank (Sama), reported inward foreign direct investment (FDI) into the country was USD 1.75 billion in the third quarter of 2021. That was a sharp fall from the record figure of USD 13.8 billion in the April-June quarter. Inward investment levels into Saudi Arabia collapsed in 2017 – when Vision 2030 was launched, the aim was for FDI to reach around USD 19 billion by 2020, but in fact it was just USD 5.4 billion that year.
In place of more foreign investors, the government has been turning to its own investment vehicles to support local projects and companies, in particular the Public Investment Fund (PIF). The government also wants local companies to do more. In March 2021, it launched the Shareek programme, which aims to encourage large private sector firms to invest more in the economy between now and 2030, encouraged by tax breaks, soft loans and other support.