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Legislating Saudi Arabia's Vision 2030 transformation

If only a portion of Saudi Arabia’s National Transformation Programme is implemented, there will be dramatic change, one of the kingdom’s most influential lawyers assures.

“If we can cover 50 percent of what is the aspiration in the Vision 2030, the kingdom will be doing much better,” the Saudi country director of international law firm White & Case, Doug Peel, says. “My view is that it’s a comprehensive plan, and the devil is in the detail and execution.”

Peel and his team are heavily involved in that execution, both directly, through advising government organisations, and indirectly, by hiring more Saudis (including women).

Vision 2030 is the largest transformation ever undertaken in the conservative kingdom, which is attempting to transition to a post-oil era.

New York-based White & Case is well positioned to partake in the transformation, having operated in Saudi Arabia since the 1950s when it started working with state oil giant Saudi Aramco. During the next half-century it witnessed the kingdom’s shift from an economy that relied on merchant families to one driven by the oil-fuelled coffers of the government. In doing so, it moved its offices in Jeddah to Riyadh in 2000. “Everyone who wanted to participate in Saudi economic life basically had to be in Riyadh, starting in the late 1990s,” Peel, who has worked in the Gulf for nearly 20 years, recalls.

White & Case operates in the kingdom through association with local law firm  AlSalloum and AlToaimi. It now employs 80 lawyers in five offices across the Middle East and many of their clients are government and high-ranking people in industry.

Saudi Aramco is one of the biggest, and while Peel declines to discuss anything related to the world’s largest energy company, White & Case is expected to advise the government on the upcoming sale of a 5 percent stake in an initial public offering (IPO) planned for 2018.

The International Monetary Fund (IMF) estimates Saudi Arabia’s non-oil GDP will expand by 2.6 percent in 2017.

The IPO is part of Vision 2030, which was announced in April 2016, by Deputy Crown Prince Mohammed Bin Salman, the 31-year-old who was handpicked to fix the kingdom’s burgeoning deficit and bring its economy and society into the 21st century.

White & Case is playing a key role in advising on the implementation of the vision, a task that Peel describes as mammoth but long acknowledged as necessary.

Efforts to re-balance the budget for the long-term could see $200bn raised through the privatisation of state assets over the next 20 years, according to economic development and strategy expert Dr Khalid Al Yahya.

While some in the kingdom have expressed concern that the country is giving away its ‘crown jewels’, Peel disagrees.

“I don’t [see that]. Obviously you have commentators from both ends of the spectrum and every point in between, some critical, some sympathetic,” he says.

“There’s a lot of enthusiasm for restructure because they look back at the track record and say, as Dr Khalid was saying on the panel, ‘we have known for 30 or 40 years, more or less, what we have to do and we’ve had these plans, but we haven’t executed them in the past, and now we are executing them’.

“I think there’s a lot of support and, sure, some people will say the state should not privatise and that the state is the best guarantor that these enterprises will be run for the benefit of the people. Others will say you have to privatise because that’s how you get efficiency and how you diversify your sources of revenue for the state.”

Privatisation of government assets is a central part of Vision 2030 as the government looks to increase private participation in what are traditionally government endeavours, including housing, social affairs, education and healthcare.

The sale of even 5 percent of Saudi Aramco would make its IPO the biggest ever.

“There was a list mooted of 146 state enterprises that are going to be privatised one way or another,” Peel confirms. “I see IPOs, trade sales, PPPs [public-private partnerships] in healthcare, education, transportation, other social infrastructure. Whether that proceeds at exactly the pace that’s contemplated in the National Transformation Programme, or at a slower pace, we’re going to be swamped with work.”

Peel says there are two significant challenges in the NTP: consensus and coordination at the government level, and an educated and talented workforce.

“I personally have worked on projects in the past for years that in the end fell at the final barrier because the government wasn’t coordinated. The ministries we were working with wanted to do something but the ministry of finance didn’t and at the end of the process, after three years’ work, that was it,” he laments.

“I don’t think that’s going to happen anymore with the National Transformation Programme in place. That’s half the challenge solved.”

The issue of having an able, talented workforce will take longer in the long-term, he says.

“At the top level of industries and government you really only have a small number of highly talented, qualified, motivated individuals driving change. The international scholarship programme — 100,000 to 150,000 students abroad at any given time — has the potential to change that over the medium term. We’re starting to see those [students] coming back. That’s going to be a massive increase in the amount of talent available,” Peel says.

“It’s just being able to continue to work through the NTP before that wave of people is available to the government.

“The challenge is, what do you do until you can staff all of your ministries and enterprises with that highly qualified and educated, hardworking demographic. It’s starting to come, but it’s going to be another five or ten years before that surge of people has really ramified all the way through government and industry. When it does, Saudi Arabia is going to be transformed.”

White & Case is ahead of the curve, with two-thirds of lawyers in the Saudi firm nationals, including four Saudi women. A fifth Saudi female lawyer is due to start in April. While the level of Saudi lawyers is largely due to customer demand, Peel says the increasing number of women is one of the biggest transformations he has seen at White & Case’s Saudi practice.

Saudi Depty Crown Prince Mohammed is spearheading the kingdom’s diversification plans.

“We had not really tapped into the female Saudi lawyer talent pool until [2015] and it is just extraordinary how talented, well-educated and capable Saudi women lawyers are,” Peel says.

“They are phenomenal at execution. It might surprise people who have preconceptions about what Saudi social constraints are, but we have Saudi women lawyers who are happy to start at 8 in the morning and work right through until midnight, two or four in the morning, because that’s what it takes to get the job done. It’s really impressive to see.”

While the law firm poses as a case study for the broader economy, achieving such scales is more difficult in larger firms and government organisations.

“For us it’s easy; we have 20 people. If we want to add 50 percent, we only have to go and hire ten people. If you are the Ministry of Energy or Ministry of Mineral Resources, you need 100 people, or a 1,000 people. If you’re PWC or one of the foreign accounting firms, there’s a much larger scale and it’s harder to replicate what we’re able to do because the talent pool just isn’t as big,” Peel says.

He says that Saudis are seen as the future of the firm in Riyadh, where there is a predominantly local client base who are more comfortable working with Saudi lawyers.

“There’s a huge business opportunity in presenting clients with a more Saudi firm that operates to international standards, rather than a bunch of New York and English lawyers. They respond well to it,” he says. “There’s a perfect cultural fit. Our clients are often going through the process of transforming their organisations to become more Saudi and so they look at us, see us doing the same thing and they like that.”

As Al Tamimi & Company law firm assists the UAE’s legislature plans, Peel says White & Case is frequently requested to help with law reform in the kingdom.

“We’re paid for our expertise in a particular area and we work with a ministry or a government body to understand best practices and how that could be reflected in Saudi Arabia in draft laws and regulations,” he says.

A comprehensive building plan is needed over the next five years to meet KSA’s rising demand.

“The other way we do it is, now the government often puts draft laws out for consultation prior to adopting and when that happens, if it’s in an area that is of interest and relevance to us or our clients, we will comment.”

There will be plenty of legal work required to achieve Vision 2030. A new companies law is already in place, and other changes are expected to govern bankruptcy, enforcement, mortgages and mining.

“If you go through it [Vision 2030], there’s an extraordinary level of granularity — ministry by ministry, agency by agency,” Peel says.

“Every single agency is going to have to do something about the legislative or regulatory environment in its sphere of responsibility to give effect to the National Transformation Plan. Some of that will be tweaking and some will be wholesale legislative reform.”

Peel says the agility and commitment of the ministerial teams he is working alongside is “unbelievable”.

“For me it’s a revelation to see very high-powered, well-informed, high level Saudi people driving change through,” he says. “[When change happens] there will be greater foreign investment, greater transparency, greater efficiency in each sector, and I believe that’s going to be the same process in all of these different areas of endeavour in government. In our day-to-day work — we’re at the coalface with these guys — you can really see it happening. People and resources are being devoted to making the change happen.”

Peel picks out the mortgage law as being one of the most important pieces of legislation that will be passed, which will allow for greater private sector involvement in the provision of much-needed housing.

“If you have the private sector involved, you have to have private sources of finance, you have to get banks lending money to people for houses and banks lending developers huge sums of money to build 15,000 or 100,000 units at a time,” he says.

“The mortgage law should enable that but because we haven’t yet seen full implementation of the change in the land registry, from a notarial system to a cadastral system that has a central digital registry of all titles.”

However, Peel says there is some resistance in the kingdom to allowing traditional mortgages, viewed as anti-sharia law. Currently, real estate projects are typically financed through special purpose vehicles (SPVs) with a licence to own real estate. The funding bank receives a security interest in the ownership of that SPV.

Saudi Arabia is seeking to raise more than $100bn in non-oil revenue a year by 2020.

Peel says the lack of a mortgage law is throttling the ability of private sector participants to tap sources of finance for major real estate developments.

“As a result of that, you have a continued housing crisis,” he says. “There’s a good mortgage law in the books. [But] making the real estate title system work with it requires structural reform, and once you have that done, you can liberate private sector developers to tap private sources of finance.

“If you need to provide a million houses to your citizens in the next ten years, you really have to find a way to de-bottleneck the system.”

While less than 5 percent of White & Case’s global headcount is in the Middle East, Peel say the region’s profit outweighs its staff numbers, a feat he attributes to the ability to build trusted adviser relationships, particularly in Saudi Arabia.

“That means that you’re not having to compete on price with another law firm that a client thinks it just like you,” he says.

“Elsewhere, in some parts of the world, [legal] relationships have become a little commoditised, where they have a panel and go to several law firms because that’s their procurement process.”

He adds that White & Case’s business is “counter-cyclical”. “For example, we have a disputes practice that is very focussed on construction,” he says. “When it’s boom times, we’re doing front-end construction work — putting together projects and executing them. In hard times, we’re doing financing or restructuring.”

Peel sees plenty of opportunity for growth, particularly in Saudi Arabia.

“The opportunity for growth for us is there, whether we’re in a boom cycle or down cycle,” he says.

“For me, Saudi Arabia is a phenomenal opportunity. We have such a powerful brand there and such good people and amazing clients, that I think we could double in size there over the next three to five years.

“The objective is to grow in a profitable way. What I would like to see is a doubling of headcount, leading to a trebling of profit. That’s the sort of aspiration we have. The great thing about being in Saudi Arabia is that you can actually achieve that.”

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