Saudi Arabia: A Popular Business Destination

Sunday, April 3, 2011 - 01:00

Editor: Would you tell our readers about your background?

Giansiracusa: I attended U.C. Berkeley as an undergraduate and Boalt Hall School of Law, with a detour through graduate school wedged in between. I first came to the region in 1980. Our children grew up in the Kingdom, and it has been home for the last 20 years. Jones Day and its antecedents have been in the Kingdom since 1974, with a hiatus during the last decade. Surrey & Morse, which was established by the legendary lawyers and internationalists Walter Surrey and David Morse, was affiliated with the Law Office of Ahmed Zaki Yamani, the Kingdom's Minister of Petroleum in the 1970s. When Surrey & Morse merged into Jones Day, we acquired a Riyadh office. Since coming to the Kingdom, I have been with Alsulaim Alawaji & Partners and, at the beginning of this year, rejoined Jones Day. Since working in the Washington office for several years, I have maintained close connections with my colleagues at Jones Day and am excited about rejoining the firm and working alongside the firm's new offices in Jeddah and Alkhobar.

Editor: How have the Saudi economy and the legal business evolved during your time in the Kingdom?

Giansiracusa: In the early years, there were perhaps four or five international firms, and much of the work consisted of defence-related procurement, commercial transactions and syndicated lending. The government dominated the economy, the legal environment was fairly stagnant and business opportunities were much more limited. Aramco, of course, has always been an economy unto itself. In those years, laws firms were involved in ship financing and oil/gas/petrochemical (OGP)-related infrastructure transactions. One of King Abdullah's initiatives has been to liberalise and broaden participation in the economy. Promoting public-private partnerships (PPPs) and expanding private sector involvement in the various sectors of the economy have been important objectives of the government, and it has been quite successful in realising those objectives. What might have been government contracting opportunities in years past are now private sector opportunities. The expansion of Prince Mohammed bin Abdulaziz International Airport in Madinah Al-Munawwarah is a good example of a significant project being undertaken on a PPP basis.

Editor: How much does Shari'ah law play a part in the practice?

Giansiracusa: Saudi Arabia is governed by the Shari'ah. Translated literally as "the way," Shari'ah is derived from the Holy Qur'an and the Sunnah, the latter of which are the sayings and deeds of the Prophet. The Basic Law, which was issued in 1992, confirms the Qur'an as the constitution of the Kingdom.

Editor: How do contracts work in this context?

Giansiracusa: A comprehensive answer would take longer than we have, but I can say that a fundamental principle of the Shari'ah, which is shared with civil and common law jurisdictions, is a respect for private contracts. Outside government contracts, for example, parties are free to choose both the law of their contract and the forum for dispute resolution. It is not uncommon to find commercial agreements, such as agencies, distributorships and so on, governed by foreign law. Similarly, project agreements are often governed by foreign law and technology transfer agreements, almost invariably so, because of the parties' IP concerns. Shari'ah also deviates from civil law and common law in some important ways, including the well-known prohibition on charging and payment of interest, but there are other important differences. For example, reservation of title is not generally enforceable, speculative damages are not recoverable, and limitations periods (taqadum) apply in only a handful of statutorily defined situations. The requirement for certainty in contracts means that certain contracts familiar in the West are not allowed under the Shari'ah, such as conventional insurance. The prohibition against gharar, or uncertainty, in insurance is addressed through a pooling or co-operative structure called "takaful." Halal- or Shari'ah-compliant investors will also avoid high risk financial products, such as derivatives, hedge funds and swaps.

Editor: Which foreign law is used most often?

Giansiracusa: English law predominates, although one sees Swiss law, French law and New York law frequently as well. Oliver Passavant, our Partner-in-Charge in Alkhobar, obtained his legal education in Germany, has practiced in our Paris office and is also admitted to the New York, Ohio and Georgia bars. Fluent in German and French and trained in the civil law tradition, he will be a great asset to us.

Editor: Are you allowed to go into court?

Giansiracusa: No, only Saudi lawyers may appear in court. What we have here at Jones Day - and at all of the international firms - is an association with a local firm. We are associated with Alsulaim Alawaji & Partners, with whom we have worked since 1990.

Editor: Please describe the judiciary.

Giansiracusa: There are several specialised tribunals for labour disputes, banking disputes and so on. There are also courts of first instance, and appellate review is not unlike what you would see in the West. There are some differences in judicial procedure and review that your readers might find surprising. Saudi courts are not bound by the principle of stare decisis nor do they recognise conflict of laws principles, so any matter before a Saudi court will be decided based on Shari'ah. Specific performance and injunctive remedies generally are not as available in Saudi proceedings. The enforceability of indemnities is also uncertain in Saudi Arabia. Some jurists believe that what we might call a "common law indemnity" is not enforceable under Shari'ah, which specifies where liability should lie. Other scholars argue, however, that the essence of an indemnity is not to transfer responsibility for a given liability but rather to establish that payment for that liability will be reimbursed by the indemnifying party.

Another important area often misunderstood or misconstrued by foreign clients and lawyers is the application of the prohibition against gharar in connection with remedies. Shari'ah does not recognise or award speculative damages, so lost profits, for example, are not recoverable. Damages are awarded only for actual direct provable damages. Many of my foreign clients over the years have expressed concern over potential liability for damages awards in the Saudi courts but in fact, this limitation makes the Saudi courts very defendant-friendly.

Editor: What is the size of your legal staff?

Giansiracusa: We will soon have offices in the Kingdom's three major business centres: Riyadh, which as I mentioned has a legacy reaching back to 1974, and new offices in Jeddah and Alkhobar. The Partner-in-Charge in Jeddah will be Fahad Habib, who has been in the DC office for the last ten years and who has a great deal of experience in regulatory matters, complex litigation and international arbitration. Fahad has for several years been centrally involved in defending clients in the 9/11 litigations. I should expect that over the coming years, we will grow to two or three partners and four or five associates in each office. Marwan Harara, our new corporate associate in Riyadh, is American trained, fluent in Arabic and English, has a master's degree from Stanford in Immunology and is admitted to the patent bar. He will be very helpful to us, as licensing is integral to petrochemical projects and other high-tech industrial ventures. We also have four Saudi partners and six Saudi associates here in Riyadh. During the past year, we have also instituted a training programme for women enrolled in law at Prince Sultan University. We had three trainees last year and we have two this year.

Editor: What practice areas and industries does Jones Day focus on?

Giansiracusa: Because Saudi Arabia is an active importer, commercial law is a major component of every practice, as is corporate law. Much of our practice in Riyadh is project work and construction (including engineering) on OGP, manufacturing, power, industrial and IT projects. Over the years, one of my practice emphases has been in the water sector, specifically desalinisation plants and pipeline work. Fahad will help us develop our international disputes and arbitration practice, for which we perceive a strong demand. He will also help us handle an increasing need for regulatory due diligence in the Kingdom and the region. Oliver Passavant in Alkhobar brings a varied background, including commercial and corporate law, and will focus on projects related to the OGP sector.

Editor: Would you tell us about Saudi Arabia's specialised cities? I understand they exist in other Gulf nations as well.

Giansiracusa: Saudi Arabia has led the way on this front. Two organisations are responsible for our specialised cities. The Saudi Arabian General Investment Authority (SAGIA) is tasked with attracting and processing foreign direct investment and has emerged as the key regulatory authority for the four economic cities, while MODON (plural for Madinah, meaning "cities") is the Industrial Cities authority. The economic cities are being developed with area specialisation. For example, Ha'il Economic City is being developed as a transportation and logistics hub. Knowledge Economic City in Madinah Al Munawwarah is oriented to knowledge industries and Jizan Economic City focuses on energy-intensive industries. The exception to specialisation is King Abdullah Economic City, which is a vast integrated project the size of Washington, D.C. Altogether, the economic cities represent an investment of USD60 billion. There are two general objectives in developing the economic cities; one is to spread opportunities throughout the Kingdom. Our land mass is four or five times the size of France, and the government wants to provide employment opportunities and economic development to areas of the Kingdom beyond the three major metropolitan areas. The other is to create islands of excellence where the Kingdom can attract foreign investment and create an environment that facilitates high-value ventures.

Editor: Are many Saudi students still sent to university in the U.S.? What is the state of education in the Kingdom?

Giansiracusa: There are about 45,000 Saudis studying in the United States. Fostering cross-cultural educational exchanges has been a positive thing for both countries. That said, there has also been a major push to expand existing educational institutions within the Kingdom and to develop new ones. King Saud University and King Fahd University of Petroleum & Minerals are respected institutions. King Abdullah University for Science & Technology (KAUST) is a newer post-graduate university on the west coast of the Kingdom. Endowed for US$10 billion, it is attracting top-flight academicians from around the world. KAUST is also the first university to be a genuinely mixed, co-educational institution. Its mission is to promote research and development in knowledge industries such as pharmaceuticals, information technology, engineering and so on. In addition, Princess Nura University, just outside of Riyadh, will consolidate all of the women's institutions. It's a massive project expected to cost some US$11.5 billion. It is also important to mention that the primary and secondary school curricula are undergoing a complete overhaul. Alongside the Saudi schools, international schools are now allowed to operate through 12th grade, a development which has made it possible for many expatriate families to remain in the Kingdom.

Editor: Can you describe the current role of American and other multinationals in the Saudi economy?

Giansiracusa: In short, it is evolving. The United States, of course, has a long history and a strong connection with the Kingdom. Saudi Aramco, which was originally owned by several American oil companies, is emblematic. Today Saudi Aramco is wholly Saudi owned.

TWA, one of the early American companies in the Kingdom, helped establish Saudi Arabian Airlines. Bechtel, of course, has been here for decades and played a large role in developing the infrastructure of the Kingdom. While the United States has slipped to number two behind Japan in terms of trading partner status (because more oil goes east than to North America), it's only slightly behind, and it is still well ahead of Japan on imports.

Editor: What opportunities do you see for foreign companies?

Giansiracusa: The steady trend for many years has been to value-added goods and services. There are opportunities in the engineering sector, project management and supply of sophisticated capital equipment, for example, turbines and aircraft. What we've been seeing in recent years is more of an eastward-looking Saudi Arabia. Of the top seven trading partners, all but the United States are in the east: Japan is the largest, the United States is second and China, South Korea, India, Taiwan and Singapore round out the field.

Editor: No EU nation?

Giansiracusa: The UK, Germany and France are in the top ten but their combined export/import volumes are only 75 percent of Taiwan and Singapore. Despite these shifts, United States companies still provide competitive high-quality, high-tech products and excel in the knowledge-based services.

Editor: What role do Saudi women play in the economy? Are they coming to the fore?

Giansiracusa: They are in the context of the Kingdom's social and religious traditions. Codified 1,400 years ago, Shari'ah inheritance law has always granted women inheritance and independent property ownership rights, unlike common law jurisdictions, where women have gained these rights comparatively recently. One consequence of this is that many women in the Kingdom have significant assets by virtue of inheritance. You'll find too that large numbers of Saudi women are very well-educated; many Saudi women are multilingual and have first-class educations.

That said, apart from the segregation of the sexes, one of the major impediments to more active participation in the economy is the guardianship system, which limits women's ability to travel (most people know of the restriction on driving), so it's a work in progress. There are women of means and some operate substantial business enterprises, but full participation in the public forum is still a ways away. Unemployment is higher among women, the official figures being about 25 percent for women and 10 percent for men.

Apart from being the right thing to do, the King recognises that women are an important economic resource and he is encouraging women's participation, but the Kingdom also has to adjust at its own pace and take into consideration its own culture and traditions.

Editor: Can you speak specifically to infrastructure and project finance activities in the Kingdom?

Giansiracusa: In recent years the population has grown significantly, and the demands on the Kingdom's infrastructure have increased proportionately. Riyadh, for example, was about one million people when I arrived here, and the population today is over seven million.

Overall, public transportation requires attention. The Saudi Railways Organisation (SRO) is expanding the railway network currently running between Riyadh and Dammam, both west to Jeddah and north to Ha'il Economic City and on to Haditha on the Jordanian border. The Haramain High Speed Railway will be a passenger line running from Makkah Al Mukarramah to Madinah Al Munawwarah.

One of the Kingdom's large industries is religious tourism. Every year, two to three million people come into the Kingdom for Hajj, and a regular stream of people come for Umrah. (Umrah is a minor Hajj that can be performed at any time during the year.) You can imagine that for a country with a population of about 24 million, accommodating two or three million people in a comparatively small area within the span of a few weeks is a major crowd control undertaking. The Haramain High Speed Railway will move pilgrims from the religious sites of Arafat and Mina to Makkah, Jeddah and on to Madinah.

At the same time, the Kingdom's population is demanding more power and water. Several independent water-and-power projects (IWPP) are under construction and Shoaiba III has already been commissioned. The IWPP projects entail desalinisation along with associated power generation. Of course when you have an IWPP, you need pipelines to carry the water over the vast distances in the Kingdom.

There are also rural areas with isolated power plants, and the Saudi Electricity Company is seeking private management of these isolated power networks. As off-the-grid power projects, these are good opportunities to meet the goal of having the private sector more involved.

In the telecommunications area, we have three mobile networks now. A fibre-optic data backbone is being installed throughout Saudi Arabia: in fact, the Kingdom is installing the last mile as we speak.

Editor: Do you have wind farms or solar power?

Giansiracusa: We have no wind farms yet but there is great interest in green energy generally and in solar especially. Of course, we are ideally placed for solar, with our large open spaces and days of sunshine. Aramco is well advanced in developing solar generation projects, and I have clients developing manufacturing projects for the solar industry.

Editor: Where do you see areas of opportunity for American companies?

Giansiracusa: Today, the greatest opportunities are in specialised services such as consulting, engineering, systems integration, high-tech manufacturing, such as pharmaceuticals and petrochemicals, and specialised products, such as turbines and aircraft. I think it will continue to be the case for the next several years that Americans will maintain an advantage in these areas. Information technology and telecoms are also fertile markets for Western firms. For instance, Motorola is supplying and installing a nationwide TETRA communications network for the Ministry of Interior.

Editor: What is the Kingdom's policy toward foreign direct investment (FDI)?

Giansiracusa: Very supportive. In 2004, the Kingdom launched the 10x10 Initiative, the goal of which was to number among the top ten most competitive economies by 2010. It only missed that ambitious goal by one place and in the process instituted dramatic changes in several areas, including legal and judicial reform.

Editor: Are there any areas where foreign direct investment is not allowed?

Giansiracusa: Yes, we do have a list known as the "negative list for foreign investment." Oil production is still restricted, and certain military-related industries are reserved to Saudi companies. In the services area, there are prohibitions on real estate investment and development in the holy cities. There are also limitations on land transport. The list is much shorter than it was ten years ago, however, and most areas of the economy are open to foreign investment. Furthermore, there is no minimum Saudi participation requirement in virtually all sectors; one notable exception, however, is professional companies. For professional firms, a 25 percent minimum Saudi participation is required. Commercial companies, including engineering, procurement and construction, can be wholly owned by foreign companies.

Editor: Do any U.S. universities have campuses there?

Giansiracusa: Not the way that Cornell and Georgetown, say, have campuses in Qatar. However, there are cooperation agreements between several of the universities and hospitals and their counterparts in the United States. We are just now finalising a cooperation and R&D agreement between a research university in the United States and one of the large petrochemical enterprises here, which will lead to the creation of an R&D facility in the Kingdom.

Editor: Is there anything further you'd like to say about doing business in Saudi Arabia?

Giansiracusa: The last two decades here have been a very interesting time. For the first ten of those years, I would say that it was business as usual, but since then there has been an explosion of change. New laws are coming along all the time. We have a new competition law, a new patent law, new data protection laws and new anti-money laundering laws. The Kingdom currently ranks 11th among countries for ease of doing business, which puts it ahead of Japan and France, and well ahead of the UAE and China, along with many other countries one thinks about in terms of destinations for foreign direct investment.

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