Quicksand: Navigating regulations during Saudi Arabia’s construction boom

Author: Nasser Alrubayyi

Managing Partner (KSA), Co-Head of the Middle East and North Africa Practice, Quinn Emanuel Urquhart & Sullivan LLP

As Saudi Arabia seeks to become a global center for commercial enterprises, the ability of companies to adapt to a rapidly changing environment often determines their success or failure. Giant projects such as NEOM, Diriyah, Qiddiya and Red Sea Development Project have captured the attention of global investors and industry leaders, signaling an era of unprecedented growth and opportunity. However, access to expert legal support can make or break your commercial ambitions in Saudi Arabia, especially in the construction sector.

Sharia law and regulatory framework

Saudi Arabia’s legal system is deeply rooted in Sharia law, which influences all trade regulations across the Kingdom, including the construction sector. International investors should be aware that contracts, business practices and dispute resolution may be subject to a Shariah legal framework that differs significantly from Western legal practices. As expected, each sovereign country has its own unique set of business rules and regulations tailored to its jurisdiction.

Language barriers also create significant compliance challenges. Because Arabic is the dominant business language, many legal documents and correspondence with government agencies must be conducted in Arabic. This requires international investors to hire translators and legal experts fluent in both the language and the nuances of Saudi law.

Anti-corruption measures

In recent years, the Kingdom has made significant progress in the fight against corruption, which is a serious problem for international businesses. Over the past three years, the public treasury has recovered 247 billion Saudi riyals from anti-corruption agreements, representing 20 percent of total non-oil revenues, according to a 2021 review by the Economic and Development Council.

The establishment of the National Oversight and Anti-Corruption Authority (Nazaha) underlines the commitment to transparency and financial accountability, which aims to ensure that public and private sector projects comply with legal guidelines. Moreover, the recently amended anti-corruption law criminalizes both active and passive bribery, prohibiting government officials from accepting gifts and payments.

International investors must comply with these anti-corruption laws by implementing comprehensive due diligence processes, establishing robust internal controls, and maintaining transparent documentation of transactions and contracts.

Evolving labor law

Saudi labor law has undergone significant reforms, especially changes to the controversial Kafala system. Recent reforms have also improved working conditions, including increasing health and safety standards and providing maternity leave and other benefits. The Ministry of Human Resources and Social Development (MHRSD) has launched hotlines and other mechanisms for workers to report labor law violations, demonstrating its commitment to enforcing labor laws and protecting workers’ rights.

The Nitaqat system, which aims to increase employment of Saudi citizens, requires construction companies to adhere to certain employment limits. Companies are divided into different zones depending on their compliance, with companies in the “red” zone facing fines.

Environmental regulations and sustainable development

Launched in 2021, the Saudi Green Initiative (SGI) aims to combat climate change and achieve net-zero emissions by 2060. Saudi Arabia has designated 18.1% of its land and 6.48% of its marine habitats as protected areas. Giant projects are at the forefront of sustainable development practices, with initiatives such as Red Sea Global and Zain KSA’s zero-emission 5G network winning the “Best Green Technology” award. The Diriyah masterplan has received LEED platinum certification for cities from the US Green Building Council (USGBC), a first in the Middle East. NEOM focuses primarily on renewable energy sources, including wind and solar power, and includes plans for green transportation and minimal waste, demonstrating a commitment to protecting the environment.

Once environmental regulations come into force, construction companies will need to familiarize themselves with the new regulations and demonstrate climate-conscious practices in material use and waste disposal, while completing environmental impact assessments (EIAs). Failure to comply may result in significant financial penalties or significant delays in project implementation.

The need for “local” legal support

As Saudi Arabia’s legal landscape evolves, understanding the nuances of local and international law becomes crucial. We have advised the most important entities in the region on construction and purchase contracts related to the largest infrastructure projects in the Kingdom, including: in sectors such as hotels, energy and transport. Proper legal support can be a determining factor in a company’s potential for success.

To fill this gap, global investors should seek out top law firms that have both excellent knowledge of the Saudi trade landscape and renowned international expertise in handling complex commercial disputes.