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Scores of multinationals have heeded Riyadh’s ultimatum to establish regional headquarters in Saudi Arabia or face losing out on lucrative government contracts, but leading banks have been conspicuous by their absence.
PepsiCo, Boeing, PwC and Unilever are among the 350 global companies that complied with the edict and obtained regional headquarters licenses, according to Saudi Arabia’s investment ministry, while others such as Boeing have applied for them. But the likes of Citibank, Deutsche Bank, Goldman Sachs and HSBC are big names that have yet to announce they are doing so.
Large financial services companies often operate their Middle East businesses under a broader geographical area that includes Europe and Africa, and bankers have told the Financial Times that several lenders are uncomfortable with the regulatory implications of setting up a regional headquarters in the Gulf kingdom.
“It’s not only about whether you want to put people in Saudi Arabia, it’s what the regulatory framework is going to be,” said one senior financier at an international bank. Saudi Arabia was “not a financial centre set-up”, the financier added.
The Saudi edict, dubbed Programme HQ, came into force this year as Riyadh continued to pour money into its ambitious development plans under Crown Prince Mohammed bin Salman. The spending spree has made the Saudi capital a magnet for those keen to tap into the deals.
The kingdom has warned companies they would not be eligible for new government business if they failed to open a Saudi regional headquarters with at least 15 employees, including executives overseeing other countries.
But issues remain. Unlike Dubai’s International Finance Centre, an offshore banking hub with its own regulatory framework, Riyadh’s King Abdullah Financial District does not have its own regulator. The Saudi central bank and its capital markets authority instead regulate different elements of the banking sector.
Saudi Arabia’s investment ministry said the kingdom was working to harmonise and strengthen its framework, and that banks including Northern Trust had begun work to open regional headquarters. The ministry also said it was “in final discussions with numerous other financial entities” to do the same.
Prince Mohammed, the kingdom’s day-to-day leader, wants Saudi Arabia to become a regional finance and trading hub, a status enjoyed by Dubai, and ensure businesses profiting in Saudi Arabia are based there.
Dozens of multinationals manufacturers such as PepsiCo and Eli Lilly have complied with the Programme HQ edict. Consulting and audit firms that do business with the Saudi government have also made the move. “We‘ve taken it very seriously,” said an executive of a global consultancy. “It’s life or death for us.”
But as well as big banks, professional services specialists such as law firms and public relations companies have also been slower, citing concerns such as the tax implications of moving partners into a regional entity that is not intended to generate revenue.
The regional headquarter rules “were drafted more with the mindset of companies that sell products rather than those who sell services”, said Michael Bessey, a director at consultancy Albright Stonebridge Group’s Middle East and north Africa practice, who advises clients on regional headquarter issues.
“For many services firms, whoever you put under the regional headquarters [is] going to generate passive revenue . . . that would seem to be a violation of the RHQ rules, which say it must be a non-revenue-generating entity,” he said.
The investment ministry said it had “been in continuous discussions with firms in the sector to develop fit-for-purpose solutions”. “This is less about compliance and more about incentivising companies to grow and develop and draw value” from Saudi Arabia’s investment opportunities, the ministry said.
A senior UAE-based lawyer said Saudi agencies had told them “they’re happy for it to be a nameplate type of thing, to comply with the spirit of regulation”.
Regional headquarter licences were being issued at a rate of 10 per week, the ministry said, although no public list would be issued.
Riyadh has considered a naming and shaming approach, with one official memo stating that a list of non-complying companies would be “published” on a government website. That was later moderated to say the names of the laggards would be “circulated” among government ministries instead.
The powerful Public Investment Fund, which is leading the development push, and state-run energy giant Saudi Aramco were also not counted as government bodies, meaning they can follow their own procurement rules, the investment ministry said.
Executives said that, if the PIF or Saudi Aramco were included, they would be more likely to start the regional headquarters process. “If you look at other local-content requirements as a precedent, RHQ requirements will probably be expanded to state-owned enterprises,” Bessey said.
Others noted growing acceptance among global businesses that complying with Programme HQ would become inevitable as long as the Saudi spending spree continued. “There’s no doubt,” said the UAE-based lawyer. “The rush to Riyadh is on.”
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