Saudi Arabian Red Tape

It may be a long and roundabout route, but it gets the job done and clients are happy. That’s the operating policy of shipping companies operating in Saudi Arabia, where customs bureaucracy is a thicket best avoided when possible.

Transport and logistics firms with experience in the region know that importing goods into Saudi Arabia often requires unorthodox measures. An executive at one international courier company describes the route he often uses for shipments destined for the kingdom’s capital, Riyadh: First, the cargo lands at Dubai airport, where they are unloaded and packed onto trucks destined for the Saudi border. As Dubai is a major logistics hub for the region, it makes sense that kingdom-bound merchandise would make its first touchdown on the Arabian Peninsula here, rather than Riyadh, for instance.

Then, at the UAE-Saudi border crossing at Gweifat, east of Abu Dhabi, the truck is sealed. But instead of heading toward Riyadh, the truck’s final destination, the driver takes it through Saudi Arabia up the coast to Bahrain, where it crosses into the island kingdom and does an immediate U-turn. The truck then enters Saudi Arabia again, going through customs clearance at the causeway on Saudi-Bahraini border – where clearance takes a couple of hours – before finally driving to Riyadh.

Why such a circuitous path? Those with less experience in the Saudi transport sector might well be inclined to make the direct trip from Dubai and clear the goods upon arrival at Riyadh’s dry port. They are likely to wait an extra two days or more while the goods wait to clear customs. The simple reason, according to both company executives and government officials, is that customs officials in Riyadh are notoriously slow.

“If it’s coming into Riyadh, it requires a completely different set of documents than if it comes in through Bahrain, and the same for Jeddah,” says one of the managers at the company, who spoke only on condition of anonymity. “So basically, there is no standard for clearance throughout the country. They have the same rules, in general, but it also depends on the customs manager who is available in that port. This is why we have decided to bring 95 per cent of our goods into the country through Bahrain. They are so strict on the documents here in Riyadh, while at the causeway, things are going much easier. I find it strange, to be honest. They have the same rules all over. If you are going to be strict, be strict all over.”

For goods that require clearance from the Ministry of Information, such as books, it gets even worse. At the causeway, there is an official from the ministry who is able to give approvals on the spot. “He gives you an approval directly – yes, this book is allowed, you can go ahead and enter,” says the manager. Not so at the port in the country’s capital – which, ironically, is physically closer to the Ministry of Information – where officials can sometimes keep the books at the airport for up to two weeks pending approval.

It might sound like a plotline from a novel by Franz Kafka, but executives say that is simply the nature of doing business in the kingdom. With a population of up to 28 million, and a relatively affluent one at that, Saudi Arabia is the region’s largest and most important economy. As tales such as these demonstrate, it is also the most difficult one to break into, and a lack of familiarity to the way things work here can lead to a brick wall of bureaucratic delays.

We’re working on it Due to the sensitivity of the subject, none of the company officials interviewed for this article were willing to talk openly about the inconsistent application of Saudi customs laws. Even one government official, who admitted that the relevant authorities are aware of the problem and are working toward a solution, was reluctant to speak publicly about what might be seen as a laudable effort to streamline the customs regime.

Reform-minded officials in Saudi Arabia aim not only to improve the clearance process, but to build the country into a logistics hub for the region. To do so, it has brought in many Saudis who used to work in the private sector to promote investment in the kingdom’s transport and logistics industry. “I’m a logistics background guy, and to bring products into Saudi I used to do that myself,” says one government official when confronted with the story of the roundabout route to Riyadh.

Inconsistency is a hurdle that needs to be overcome, the official admitted, and both the customs bureau and the Ministry of Finance recognise the problem. These agencies are working in conjunction with the Saudi Arabian General Investment Authority (SAGIA) to study the problem and come up with solutions in an attempt to “modernise the process,” the official says.

As though to emphasise the point, he described an even unlikelier route for goods entering the country: the official, when he worked in the private sector, would often bring Jeddahbound goods into Jeddah, but rather than clearing the goods at the port, he would haul them overland Riyadh – over 600 kilometres – to clear them in the capital and send them back to Jeddah.

Accounts from the private sector concur that slow as things may be at Riyadh dry port, they are even slower in Jeddah. “You can see that there is a complete difference in the approach to implementing the same body of law from one location to another,” says the government official. “Is it the same product? Yes. Is it the same country? Yes. Are you going through the same law? Yes. Different execution.”

The government plans to tackle the problem by using King Abdullah Economic City(KAEC), a mega-development that will begin its initial phase operations next year on the Red Sea coast in Rabigh, as a pilot for a streamlined customs process. Under the kingdom’s scheme for transport and logistics development, authorities will then roll out an improved regime to the rest of the country, starting with the other economic cities in the pipeline. The hope is that this will demonstrate to the rest of the customs community that greater efficiency can result in higher volumes – and therefore more revenue for the state.

The port at KAEC is now scheduled to go online in 2011, and crucially, the port will be supervised by SAGIA, which is spearheading the drive to make the country’s bureaucratic framework friendlier to private investors. “Customs are going to be under the supervision of SAGIA, which will ensure that we are top class, efficient and serving the private sector,” says Abdullah M. Hameedadin, Deputy Governor for Economic Cities at the authority.

KAEC will ideally be a model of efficiency, he adds. With a total of six economic cities planned, officials are envisioning an expansion of the improved customs regime. “It is going to the strongest argument,” says Hameedadin. “Because you know what’s going to happen? Everybody will move to the economic cities after that. People will say, ‘Why should I stay using Jeddah port, or wherever?’”

This approach doesn’t impress everybody, however. “There has to be an improvement, but you don’t necessarily create islands of excellence when you need to make the whole country perform better in the area of customs clearance,” says John Sfakianakis, Chief Economist at Riyadh-based SABB bank, formerly Saudi British Bank. “The rest of the country might be left out.”

Geography lessons Going on geography alone, few can doubt that Saudi Arabia should be the transport hub for the Arabian Peninsula. It has the central location, the largest land mass and the longest coastline. Why, then has it been overtaken by Dubai and Bahrain? “I know that Doha Airport and Dubai Airport are handling a greater volume of cargo than all the airports of Saudi Arabia combined – all 33 of them,” says the operations director for another logistics company based in Riyadh. “And most of the shipments landing in these airports are actually bound for Saudi Arabia."

There are several reasons for this. First, as even government officials are now ready to admit, airport development has lagged in the kingdom. With their greater capacity, it is simply easier to fly into and out of the airports in Dubai and Doha. At King Khalid International Airport in Riyadh, a project financed by the oil boom of the 1970s, one entire terminal has never been fully fitted out since the airport opened in 1983.

With help from the private sector, the government in Riyadh is now embarking on a major effort to upgrade the airports, starting with the Hajj Terminal at King Abdulaziz International Airport in Jeddah. In a US$250 million (about SAR937 million) public private partnership, the government selecteda joint venture between local Binladin Group construction and France’s Aéroports de Paris Management to refurbish the terminal, using a 20-year BOT (build, operate, transfer) funding agreement whereby the private sector investment is recouped by managing the airport for a set period. The government expects to pursue similar upgrades to the other main airports in the country.

Doha and Dubai are also major centres for bonded shipping. Cargo facilities at these ports include secure zones where goods for re-export can be unloaded and reloaded, be it from plane to plane or from plane to lorry, without undergoing customs checks. Bonded areas also exist in all three major ports in Saudi Arabia – Damman, Jeddah, and Riyadh dry port – but service is limited and suffers from the same inconsistent execution that plagues the customs law. Moreover, the service suffers from poor marketing. One Riyadh-based transport company executive says he found about it from a client. The government official admitted this was the case, and says that as with the customs law, the government plans to roll out the bonded shipping services to their fullest extent in the new economic cities.

Saudi transport firms also have the eyes set on Electronic Data Interchange (EDI), a system allowing for pre-clearance of goods. In effect, EDI will plug the IT systems of private transportation companies directly into the government’s customs clearance system. An electronic manifest would be sent before the shipment even arrives, and officials would, ideally, pre-clear those shipments that are not suspect. After the plane lands or the ship docks, the goods then sail through customs with minimal hassle. Such a system has been under discussion for over a year now, and many say it could be up to one more year before it gets off the ground. “I would say only the groundwork has been done,” says one executive.

These projects, all of which are designed to bring Saudi customs clearance out of the bureaucratic boon docks and into the 21st century, are part and parcel with the kingdom’s overall plan to shape up the transport and logistics sector. This includes ongoing improvement to the road networks, which private operators say has been impressive; airport upgrades; the development of the economic cities, including the development of the northern city of Hail as a logistics hub; and, significantly, the country’s massive investment in railways. The railway is seen as key to internal movement, as thousands of kilometres of tracks are laid around the kingdom, criss crossing the desert in a network that will ease road congestion and reduce transit time by two to three days.

With all these projects, the Riyadh government aims to bring the transport and logistics business closer to the end users. “We recognise that if we fix ourselves internally, the businessmen will recognise that it will be cheaper for him to take (the logistics business) to where his consumers sit,” says the government official.

Private operators agree the Saudi logistics sector has huge potential, if only the government is able to cut down on the reams of paperwork often required to move cargo into the kingdom. “Saudi Arabia could end up playing the role of leader,” says one manager. The government has shown a willingness to change. The focus is now on the execution.