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KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS

Public Disclosure Authorized STUDY Aminur Rahman, Giacomo De Giorgi, and Sara Abdullah Linjawi Public Disclosure Authorized Public Disclosure Authorized © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff and external authors of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work.

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Photo Credit: Shutterstock TABLE OF CONTENTS

ACKNOWLEDGMENTS...... V ACRONYMS AND ABBREVIATIONS...... VII EXECUTIVE SUMMARY...... IX 1. INTRODUCTION...... 1 2. THE KINGDOM OF SAUDI ARABIA PCI: DESIGN AND METHODOLOGY...... 3 2.1 The PCI: A Composite Index of 10 Subindices...... 3 2.2 Selection of the PCI Subindices...... 4 2.3 PCI Research Strategy...... 5 3. PROFILE OF THE PCI SAMPLE FIRMS...... 7 3.1 Distribution by Size...... 7 3.2 Distribution by Sector...... 7 3.3 Distribution by Age...... 10 3.4 Distribution by Legal Status...... 10 3.5 Distribution by Nationality of Employees...... 10 3.6 Distribution by Gender of Employees...... 12

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY I 3.7 Distribution by Market Orientation...... 12 3.8 Distribution by Investment Plans...... 12 3.9 Summary of Descriptive Statistics...... 14 4. OVERALL PCI RANKINGS...... 15 4.1 Overall PCI Rankings...... 15 4.2 Consistency of the PCI Rankings...... 16 4.3 Robustness of the PCI Rankings...... 17 5. PCI RANKINGS BY SUBINDEX...... 21 5.1 Entry Costs...... 21 5.2 Land Access and Security of Tenure...... 24 5.3 Transparency and Participation...... 27 5.4 Time Costs of Regulatory Compliance...... 30 5.5 Informal Charges...... 32 5.6 Legal Institutions and Dispute Resolution...... 33 5.7 Proactivity of Provincial Government and Attitude toward the Private Sector...... 37 5.8 Labor Training and Skills...... 39 5.9 Infrastructure and Business Services...... 41 5.10 Predictability and Risks...... 43 5.11 Summary...... 44 6. CONCLUDING REMARKS AND POLICY RECOMMENDATIONS...... 45 6.1 Local-Level Recommendations...... 45 6.2 National-Level Recommendations...... 48 APPENDICES...... 49 Appendix 1.A: Detailed PCI Measurement Methodology...... 49 Appendix 1.B: Sampling for the PCI Survey...... 55 Appendix 1.C: Strata Breakdown...... 58 Appendix 1.D: Definitions of Eligible Firm Size and Sectors...... 60 Appendix 2: List of Subindices and Component Indicators...... 60 Appendix 3: Consistency of PCI Rankings across Subindices...... 65 Appendix 4: Unweighted PCI Scores...... 66 Appendix 5: Weighted PCI Scores...... 67 REFERENCES...... 69

TABLE OF CONTENTS II BOXES Box 2.1: The 10 PCI Subindices...... 5 Box 4.1: Consistent High Performers...... 16 Box 4.2: Consistent Low Performers...... 17 Box 5.1: Experiences and Opinions on the Importance of Personal Connections...... 33 FIGURES Figure 3.1: Distribution of Firms by Number of Employees...... 7 Figure 3.2: Distribution of Firms by Sector Type...... 8 Figure 3.3: Distribution of Firms by Sector...... 8 Figure 3.4: Distribution of Firms by Age...... 9 Figure 3.5: Median Age by Province...... 9 Figure 3.6: Distribution of Firms by Legal Status...... 10 Figure 3.7: Distribution of Firms by Nationality of Employees...... 10 Figure 3.8: Percentage of Saudi Employees by Province...... 11 Figure 3.9: Distribution of Firms by Gender of Employees...... 11 Figure 3.10: Percentage of Female Employees by Province...... 11 Figure 3.11: Distribution of Firms by Market Orientation...... 12 Figure 3.12: Distribution of Firms by Investment Plans...... 12 Figure 3.13: Investment Plans by Province...... 13 Figure 4.1: PCI Rankings...... 16 Figure 4.2: Robustness of PCI Rankings...... 20 Figure 5.1: Entry Costs Subindex...... 24 Figure 5.2: Land Access and Security of Tenure Subindex...... 25 Figure 5.3: Transparency and Participation Subindex...... 28 Figure 5.4: Time Costs of Regulatory Compliance Subindex...... 30 Figure 5.5: Informal Charges Subindex...... 33 Figure 5.6: Legal Institutions and Dispute Resolution Subindex...... 35 Figure 5.7: Proactivity and Attitude towards Private Sector Subindex...... 37 Figure 5.8: Labor Training and Skills Subindex...... 41 Figure 5.9: Local Infrastructure and Business Services Subindex...... 43 Figure 5.10: Predictability and Risks Subindex...... 43 Figure 1. A 1: Firms’ Evaluation of Electricity vs. Number of Power Outages...... 52 Figure 1. A 2: Firms’ Evaluation of Roads vs. Road Coverage...... 52

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY III TABLES Table 3.1 Breakdown of Firms by Sector Type...... 8 Table 3.2. Profile of PCI Sample Firms...... 14 Table 4.2: Robustness Framework A...... 17 Table 4.3: Robustness Framework B...... 18 Table 5.1: Indicators and Dimensions Comprising the Entry Costs Subindex...... 23 Table 5.2: Benchmarking of Land Access and Security of Tenure Indicators ...... 24 Table 5.3: Indicators and Dimensions Compromising the Land Access and Security of Tenure Subindex...... 26 Table 5.4: Benchmarking of Transparency Indicators...... 28 Table 5.5: Indicators and Dimensions Comprising the Transparency and Participation Subindex...... 29 Table 5.6: Indicators and Dimensions Comprising the Time Costs of Regulatory Compliance Subindex...... 31 Table 5.7: Benchmarking of Informal Payments Indicators...... 32 Table 5.8: Indicators and Dimensions Comprising the Informal Charges Subindex...... 34 Table 5.9: Benchmarking of Legal Institutions and Dispute Resolution Indicators...... 35 Table 5.10: Indicators and Dimensions Comprising the Legal Institutions and Dispute Resolution Sub-Index...... 36 Table 5.11: Benchmarking of Proactivity and Attitude toward the Private Sector Indicators ...... 36 Table 5.12: Indicators and Dimensions Comprising the Proactivity and Attitude toward the Private Sector Subindex...... 38 Table 5.13: Indicators and Dimensions Comprising the Labor Training and Skills Subindex...... 40 Table 5.14: Indicators and Dimensions Comprising the Local Infrastructure and Business Services Subindex...... 42 Table 6.1: Provinces’ Strengths and Weaknesses ...... 46 Table 6.2: PCI Areas of Weakness and General Recommendations...... 48 Table 1.A.1: Selection of Firms for CATI Interviews Using a Sampling Interval...... 50 Table 1.A.2: Component Loadings and Intermediate Composites...... 54 Table 1.A.2: Subindex Weights for the Final PCI Index...... 55 Table 1.B.1: Disproportionate Sampling Strategy...... 57

TABLE OF CONTENTS IV ACKNOWLEDGMENTS

This report was produced for the Al-Madinah Al-Munawarah Governorate and in consultation with a number of public and private sector stakeholders in the Kingdom of Saudi Arabia. The report was prepared by a World Bank Group team person, Mohammed Alyousif, at various stages of this led by Aminur Rahman, Lead Economist, and comprised study. Any questions concerning the report should be of Giacomo De Giorgi (Professor of Economics, directed to Aminur Rahman ([email protected]). Also, University of Geneva and Consultant) and Ms. Sara we thank Susan Boulanger for editing this publication Abdullah Linjawi (Consultant and Project Coordinator). and Aichin Lim Jones and Amy Quach for overall design The report was developed under the overall supervision and production. of Nadir Mohammed, Country Director, Najy This report is based on firm survey data collected Benhassine, Director, and Andrei Mikhnev, Head. between January and April 2017 and on administrative Joshua Seth Wimpey (Private Sector Development data collected from publicly available sources. The Specialist) provided valuable guidance for survey fieldwork was completed by The Nielsen Company, implementation. Paul Moreno-Lopez (Program Leader), Saudi Arabia. Syed A. Mahmood (Lead Private Sector Specialist), This report is a product of the staff of the World Bank. and Joyce A. Ibrahim (Private Sector Development The findings, interpretations, and conclusions expressed Specialist) provided valuable peer review comments. in this work do not necessarily reflect the views of the The team gratefully acknowledge the support they World Bank, its Executive Directors, or the governments received from the Al Madinah Al-Munawarah they represent. Governorate, particularly from the Governorate’s point

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY V

ACRONYMS AND ABBREVIATIONS

CATI Computer-Assisted Telephonic Interview

CoC Chamber of Commerce

IDI In-Depth Interview

ISIC International Standard Industrial Classification

MSME Micro-, Small-, and Medium-sized Enterprise

OECD Organisation for Economic Co-operation and Development

OLS Ordinary Least Squares

PCA Principal Component Analysis

PCI Provincial Competitiveness Index

PPS Probability Proportional to Size

PSU Primary Sampling Unit

WBG World Bank Group

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY VII

EXECUTIVE SUMMARY

Prepared under the patronage of the Al-Madinah Al-Munawarah Governorate, this report presents the findings of the Kingdom of Saudi Arabia’s first Provincial Competitiveness Study, which employed the Provincial Competitiveness Index (PCI), a newly developed policy tool for promoting competitiveness at the subnational level. Following a verifiable, perception-centered methodology used to construct similar indices in other countries, the PCI fulfills its aims through benchmarking and comparing competitiveness levels across the Kingdom’s thirteen provinces. Combining hard and soft data, the PCI uses a composite province using a multistage sampling procedure; and index of 10 subindices to measure competitiveness (iv) collect hard data from administrative sources. across provinces, ranking each on a 100-point scale. The The PCI sample consisted of over 4,100 micro-, small-, subindices, representing specific aspects of local business and medium-sized enterprises (MSMEs). The sample environments that can be influenced by province-level was dominated by small and medium-sized enterprises implementation of national policies, are measured on a mainly operating in wholesale and retail trade activities. scale from 1 to 10, with 1 being lowest and 10 highest. The large majority of firms fit the profile of a relatively To convey the most policy-relevant information, well-established, sole proprietorship catering to the subindex weights are statistically determined and local market within its province. These firms principally applied in calculating final PCI scores, which are then employed male expatriate workers rather than Saudi tested for robustness using two alternative indexing workers; a near negligible proportion of firms employed methodologies. women. Of the sampled firms, only 15 percent affirmed A sophisticated, multifaceted research strategy was plans to make new investments in their businesses over employed to collect the hard and soft data used to the next two years, indicating these firms’ overwhelming construct the index. The steps were as follows: (i) adoption of a “wait-and-see” attitude in response to the design and pilot the PCI survey instrument; (ii) develop Kingdom’s current uncertain investment climate. a sampling frame of the provincial population of PCI results for the 13 provinces indicate that Riyadh firms using chamber of commerce listings; (iii) draw ranks highest in overall competitiveness, followed by a statistically representative sample of firms in each

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY IX Al Qassim, Makkah, and Hail. Northern Borders ranked the consistent worst performers are Northern Borders, Al lowest, preceded closely by Al Jouf and Assir. The Jouf, and Najran. Most provinces score well on the Entry PCI scores reflect large disparities in competitiveness Costs and Local Infrastructure and Business Services between provinces. The capital province of Riyadh, for subindices, while most provinces score poorly on the example, far outperforms the second-best-performing Land Access and Security of Tenure, Transparency and province of Al Qassim by more than 10 points. Similarly, Participation, and Labor Training and Skills subindices. the province of Al Jouf falls considerably behind the This reveals key areas of weakness in the Saudi business second-worst-performing province of Assir by more environment requiring regulatory interventions at than 10 points. The findings suggest that local authorities the national level and effective implementation at the in the more densely populated and commercial subnational level to promote environments that enable provinces are taking more pragmatic roles in promoting private sector development at the local level. business environments conducive to investment than The PCI thus provides a powerful tool to aid Saudi are authorities in the less densely and commercially Arabia’s policy makers in promoting competitiveness populated provinces, a difference attributable to several and diagnosing the key constraints to private sector possible circumstances, including lack of necessary development and growth at the subnational level. In skills, knowledge, or tools. particular, local officials, private sector representatives, The 10 subindices included in the aggregate PCI are and other stakeholders are encouraged to use the PCI Entry Costs, Land Access and Security of Tenure, results as a guide in identifying the relative strengths Transparency and Participation, Time Costs of and weaknesses of their respective provinces. Moreover, Regulatory Compliance, Informal Charges, Legal policy makers are encouraged to view the PCI as a Institutions and Dispute Resolution, Proactivity of practical tool for mapping actionable policy agendas Provincial Government and Attitude toward the Private that, combined with consultation and partnership with Sector, Labor Training and Skills, Local Infrastructure the private sector, can improve performance and foster and Business Services, and Predictability and Risks. The economic development. 1 first five subindices represent economic governance By conducting the PCI exercise at regular intervals, such challenges faced by the private sector at the subnational as every two years, provincial planners can determine level, as found in similar PCI exercises conducted whether their provinces have been advancing in terms of in other countries. The remaining five subindices absolute improvement (that is, over time regarding the represent further areas of economic governance during various indicators) as well as vis-à-vis other provinces. stakeholder consultations with Saudi Arabia’s private At the national level, the government can use the PCI sector revealed to be particularly significant. Across the to recognize and reward top-performing provinces, 10 subindices, the rankings demonstrate a significant helping to motivate other provinces to catch up. In this level of variation in province performance across the way, the PCI can act as a catalyst for instigating reform different competitiveness dimensions, even though all momentum at the local level and for fostering province- provinces are governed under the same national rules to-province learning and adoption of best practices. and regulations. Overall, the consistent best performers appear to be Riyadh, Al Madinah, and Al Qassim, while

1. The terms “economic governance” and “provincial competitiveness” are used interchangeably in this report. Both terms imply the interplay of rules and regulations and of the opportunities and risks created by local-level implementation of rules and regulations (which may have been formulated at the national level) that govern the creation and operation of businesses in a given location and that influence economic performance and outcomes.

EXECUTIVE SUMMARY X 1. INTRODUCTION

Economies around the world pursue private sector–led economic development agendas to promote growth, boost productivity, create jobs, and ensure shared prosperity. The recent experience of high-growth economies demonstrates that enhanced private sector competitiveness has the potential to spur unprecedented productivity improvements, efficiency gains, and high-value-added jobs. In recognition of this, in “Saudi Vision 2030” the Kingdom of Saudi Arabia specified private sector and MSME sector development as a vital strategic objective for transforming the Saudi economy, achieving long-term sustainable growth, and fostering shared prosperity. The private sector is an engine for local economic manner, they affect local business environments through development, but the environment in which it operates is their implementation at the local level, which often shaped by government policies. Government actions can varies significantly between provinces. Understanding promote a thriving business environment by pursuing the interactions between private sector businesses and business-friendly policies, removing cumbersome and government authorities at the provincial level is thus unnecessary regulations, creating a business-supportive crucial to understanding the potential for growth, as is infrastructure, and providing adequate, timely, quality understanding the extent to which local administration public services. Conversely, government actions creating of laws, rules, and regulations varies in quality across the institutional barriers and constraints limit private sector Kingdom’s provinces. growth and job generation. In light of these considerations, under the patronage of In Saudi Arabia, as in most countries, the decisions the Al-Madinah Al-Munawarah Governorate, the World and actions taken at the subnational level are of Bank Group (WBG) has developed the Kingdom’s particular importance in shaping the business climate First Provincial Competitiveness Index (PCI). The PCI and achieving high levels of local competitiveness. provides a powerful tool for promoting competitiveness Essentially, businesses conduct their operations and and identifying key constraints inhibiting private regularly interact with various public authorities sector development and growth at the subnational within their local environments. Although laws, rules, level. Following a verifiable methodology, largely and regulations are established in a highly centralized

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 1 based on business owners’ perceptions regarding their reform at the national level and which require more local business environments, the PCI benchmarks and effective action by the provincial government. ranks all 13 provinces in the Kingdom according to the This report presents the findings of this first PCI for the quality of their private sector enabling environments as Kingdom of Saudi Arabia with the goal of identifying measured by 10 key areas of competitiveness. and facilitating reform initiatives. It begins by discussing This assessment can play a critical role in initiating the research design and measurement methodology reform momentum at the local level by fostering peer- used to construct the PCI. It then outlines the key to-peer learning across provinces, which in turn can characteristics of the more than 4,100 firms interviewed facilitate adoption of best practices and subsequent for the PCI. Next, it presents the province rankings by improvements in lagging regions. Policy makers at the overall PCI score and by subindex scores. Finally, the national and provincial levels can utilize the PCI findings report concludes with a discussion on how the findings to pursue reforms focused on specific provinces’ areas of of this study could be utilized for policy reforms. underperformance, determining which processes require

1. INTRODUCTION 2 2. THE KINGDOM OF SAUDI ARABIA PCI: DESIGN AND METHODOLOGY

2.1 The PCI: A Composite Index of 10 Subindices The Provincial Competitiveness Index, an initiative in line with previous WBG and Asia Foundation efforts, measures the level of competitiveness at the provincial level.2 “Level of competitiveness” refers to the quality of the regulatory and institutional environment and the nature and practice of economic governance affecting private sector formation and growth. A composite index with 10 subindices reflecting key aspects of local business environments subject to the influence of provincial authorities, the PCI assesses the competitiveness of all 13 provinces and ranks them on a 100-point scale.

The PCI scores derive from a combination of soft data, To acknowledge the greater importance of some generated from a comprehensive survey of firm owners’ subindices relative to others and to ensure that the final perceptions regarding their local business environment, scores convey the information most relevant for the and hard data, collected from government sources provinces’ policy makers, weights were statistically and published materials that assemble a collection of determined for each subindex using a widely employed indicators. These indicators were compiled into 10 broad method based on principal component analysis (PCA).3 subindices using a 10-point scale. Added together, the Using these weights, the overall score was recalculated to 10 subindices provide a 100-point unweighted overall obtain the final weighted index. The weighted index and competitiveness score. subindices were used to analyze and rank the provinces’ competitiveness.

2. The Kingdom of Saudi Arabia PCI draws from similar indices conducted by the WBG and Asia Foundation in various countries, including Bangladesh, Cambodia, Sri Lanka, and Vietnam. 3. PCA is a statistical technique widely used to condense and summarize information contained in a large number of original variables into a smaller set of new composite dimensions with a minimum loss of information. For this report, this procedure enables construction of a few key dimensions of competitiveness on which to focus, even though each dimension is based on a wide range of competitiveness-related variables. In this way, the aggregate PCI measure and its submeasures remain relatively few and manageable for both policy making and tracking purposes, and due to the underlying construction process each measure is at the same time comprehensive.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 3 To check the robustness of the overall rankings obtained The final list of 10 subindices forming the PCI appears using this indexing methodology, two further indexing in Box 2.1. The first five represent the subnational approaches were adopted. The first involves regressing economic governance challenges faced by the private a binary variable, “Plans to make new investments,” sector as found in similar PCI exercises conducted in from the PCI survey on the standardized values of other countries. The remaining five subindices represent the indicators to compute their provincial scores. The further areas of economic governance revealed by second method used PCA on standardized indicator stakeholder consultations to be particularly important values for each subindex to determine the provincial to Saudi Arabia’s private sector. Appendix 2 provides scores. Once the scores were calculated under each a complete list of the subindices and the component approach, they were summed together by subindex and indicators under each. normalized through exponentiation. The weighted sum of the normalized subindex scores leads to the final PCI 2.3 PCI Research Strategy rankings and is then compared to those built using the The PCI is primarily based on firm-level survey data, main indexing methodology. collected between January and April 2017, across all 13 An important feature of the PCI is that province rankings provinces in the Kingdom. To ensure that the PCI survey are based on performance vis-à-vis other provinces, rather accurately represents the population of MSMEs in each than on some external, idealized measure. As such, the province, a multistage research strategy was followed, as PCI serves as a useful tool for local government officials, described below. the private sector, and other stakeholders to compare a province’s performance with those of the other provinces 2.3.1 PCI Survey Instrument and to identify the strengths and weaknesses of their A survey instrument was designed to capture information business environments. It is worth noting, however, that on firm owners’ perceptions of their local business this feature of the PCI means that even a province highly environment along the 10 key areas encompassed in the ranked in one subindex will almost certainly have room PCI subindices. Two key measures were taken to ensure for improvement in another subindex. the effectiveness of final survey questionnaire. First, Another important feature of the PCI is its ability to qualitative in-depth interviews (IDIs) were administered compare levels of competitiveness between provinces, prior to developing the questionnaire to better understand regardless of underlying conditions and factors such as how business owners and managers evaluated the natural and human capital endowments and proximity to subindex topics. Second, a two-phase pilot survey tested markets. In other words, the PCI scores clearly reflect the the survey questionnaire to identify potential survey differences in practice between provinces that determine design flaws. the effectiveness of their enabling environments. 2.3.2 Sampling Frame Development More detailed explanations of the measurement A representative sampling frame of the provincial methodology used to construct the PCI is provided in populations of micro-, small-, and medium-sized Appendices 1.A to 1.D of this report. enterprises was developed using chamber of commerce (CoC) data for registered businesses in each province. 2.2 Selection of the PCI Subindices Based on this data, computer-assisted telephonic Measuring the different dimensions of competitiveness interviews (CATI) were conducted to obtain information in a given location is at the core of the provincial on a sample of 8,500 firms. This information was then competitiveness exercise. Selecting the most relevant used to estimate the population of eligible live firms in subindices and indicators for measuring provincial each province. competitiveness is thus vital. To achieve this, private and public sector stakeholders were consulted and asked 2.3.3 PCI Survey Sampling to assess the relative importance of a list of proposed A multistage sampling procedure was used to draw a subindices and component indicators developed by statistically representative sample of businesses for each examining the theoretical and contextual evidence on of the 13 provinces using the probability proportional the key issues affecting the Saudi business environment. to size (PPS) method. Under this sampling procedure,

2. THE KINGDOM OF SAUDI ARABIA PCI: DESIGN AND METHODOLOGY 4 implicit stratification was used to select firms in three 2.3.4 Hard Data categories: province, sector, and size. Alongside the survey data collection, hard data was The original CoC data overrepresented firms in some assembled from administrative archives and several provinces and underrepresented firms in other provinces; published sources and materials. The data included therefore, a disproportionate sampling strategy was information on business creation, registration, employed at the province level to ensure a minimum infrastructures, and labor training. representation of firms based in smaller, less populated provinces. Once the survey data was collected, sampling weights were used to reweight the raw survey data back to its provincial sampling breakdowns.

Box 2.1: The 10 PCI Subindices 1. Entry Costs: A measure of the time required to register and receive all relevant licenses and permits to start a business, as well as the official and total costs to obtain business location licenses. 2. Land Access and Security of Tenure: A measure of the formal rights to business premises and the security of ten- ure once a business premise is properly acquired. 3. Transparency and Participation: A measure of the ease of obtaining the proper policy, planning, and legal docu- ments necessary to run a business, as well as the extent of private sector involvement in the decision making process relating to conduct of the business. 4. Time Costs of Regulatory Compliance: A measure of the amount of time firms spend on bureaucratic compliance and waiting periods and how often firms must undergo inspection by local agencies and the duration of those inspections. 5. Informal Charges: A measure of how much firms pay in informal charges for firm-level operations and to obtain public procurement contracts and whether paying those extra fees is predictable and leads to the expected re- sults or services. 6. Legal Institutions and Dispute Resolution: A measure of the confidence firms have in the fairness and equity of the legal system and whether they can appeal to a competent higher-level authority to resolve disputes over practices or misconduct of local government officials. 7. Proactivity of Provincial Government and Attitude toward the Private Sector: A measure of the province’s cre- ativity in implementing a central policy and designing initiatives for private sector development, in addition to a firm’s perceptions regarding the provincial government’s general attitude toward the private sector. 8. Labor Training and Skills: A measure of the availability of the skills required to conduct particular businesses. 9. Local Infrastructure and Business Services: A measure of the quantity and quality of local infrastructure and business services. 10. Predictability and Risks: A measure of the predictability of the local business environment and of the key risk factors experienced by businesses.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 5

3. PROFILE OF THE PCI SAMPLE FIRMS

The PCI survey instrument provided the key information needed to identify the 4,160 MSMEs that ultimately formed the PCI sample. This section describes those MSMEs in terms of size, sector, age, legal status, employee nationality, employee gender, market orientation, and investment plans. 3.1 Distribution by Size Figure 3.1: Distribution of Firms by Micro and small businesses dominated the PCI sample. Number of Employees As Figure 3.1 illustrates, almost 43 percent of firms interviewed had five or fewer employees and 50 percent of the firms had fewer than 50. In contrast, less 7.764% than 8 percent of firms are classified as medium-sized enterprises having 50 or more employees, the definition established by the recently formed Small and Medium Enterprise General Authority. 49.74% 42.5% 3.2 Distribution by Sector As shown in Table 3.1, approximately 46 percent of firms included in the PCI sample were concentrated in wholesale and retail trade activities. The remaining 54 percent were distributed between manufacturing and construction activities and service activities. Micro Medium Small

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 7 Table 3.1: Breakdown of Firms by Although firms in the trading sector were predominant Sector Type in the total of interviewed firms, as Figure 3.2 illustrates, breakdown by sector varied considerably between Sector Type No. of Firms % of Firms provinces. In the province of Najran, for example, 32 Manufacturing & 1,022 24.6 percent of firms operated in trade, 28 percent in services, Construction and 40 percent in manufacturing, whereas in the province Services 1,229 29.5 of Assir, 53 percent of firms operated in trade, 27 percent Trade 1,909 45.5 in services, and only 20 percent in manufacturing. The degree of variation is further illustrated in Figure 3.3, which presents the more detailed sector breakdown used in the sample’s stratification design.

Figure 3.2: Distribution of Firms by Sector Type

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Percent Manufacturing & Construction Services Trade

Figure 3.3: Distribution of Firms by Sector

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Percent Manufacturing & Construction Transportation & Storage Professional, Scientific & Technology Trade Services Wholesale & Retail Trade Manufacturing Information & Communication

3. PROFILE OF THE PCI SAMPLE FIRMS 8 3.3 Distribution by Age and innovation and the need to improve the business environment. On the other hand, low enterprise turnover MSMEs in the sample are relatively well-established may reflect a more developed business environment in firms, with the 47 percent ranging between 6 and 10 which firms have matured beyond the survival level and years of age, as shown in Figure 3.4. Just over 10 percent have a higher capacity for investment and productivity. of firms were under 3 years of age, and only 11 percent Taking simple rank correlation between the final PCI of firms were established more than 20 years ago. Figure score and the median age yields a value of 0.66. This 3.5 illustrates the median age of firms by province. In 7 suggests a strong positive association between median of the 13 provinces, interviewed firms had a median age age and final PCI score. In other words, provinces where of 7 years. firms were of higher median age tended to exhibit more This finding has important implications for firm competitive business environments, a finding consistent competitiveness. On the one hand, the low proportion with the second explanation. of new firms may indicate a lack of business dynamism

Figure 3.4: Distribution of Firms by Age

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Percent Less than 3 3 to 5 6 to 10 11 to 20 More than 20

Figure 3.5: Median Age by Province

Hail Eastern Province Riyadh Al Qassim Makkah Northern Borders Al Madinah Al Baha Tabuk Jizan Najran Assir Al Jouf

0 5 10 15 Median Age

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 9 3.4 Distribution by Legal Status 3.5 Distribution by Nationality of Sole proprietorship dominated the legal status of surveyed Employees firms, with less than 10 percent of firms operating under Figure 3.7 shows the distribution of firms by employee a different legal form. Limited liability company was nationality for each province as measured by the the second most reported legal form, and partnership mean percentage of Saudi and foreign labor. In all 13 was the third most reported. Figure 3.6 illustrates this provinces, expatriate workers accounted for the bulk distribution. of the workforce, with Saudi workers constituting the minority. Figure 3.8 showcases the variation in mean Figure 3.6: Distribution of Firms by Legal percentage of Saudi workers between provinces. For Status example, sampled firms in Al Madinah, the province 1.178% 1.32% with the highest mean percentage, reported 33 percent 6.779% Saudi employees, while sampled firms in Eastern Province, with the lowest mean percentage, reported only 19 percent Saudi workers. 3.6 Distribution by Gender of Employees As Figure 3.9 strikingly highlights, female employees accounted for less 1 percent of total employees on average in the entire PCI sample. Figure 3.10 shows the proportion of female employees hired by province. Across all 13 provinces, the mean percentage of female 90.6% employees was less than 2 percent; female employees were nonexistent in the surveyed firms in three provinces. Sole Proprietorship Limited Liability Company Joint Stock Company Limited Liability Company Affiliate of a Foreign Company Other

Figure 3.7: Distribution of Firms by Nationality of Employees

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Mean Percentage of Saudi Employees Mean Pecentage of Expatriate Employees

3. PROFILE OF THE PCI SAMPLE FIRMS 10 Figure 3.8: Percentage of Saudi Employees by Province

Al Madinah Jizan Najran Hail Makkah Riyadh Al Qassim Al Baha Northern Borders Al Jouf Assir Tabuk Eastern Province

0 10 20 30 40 Mean Percentage of Saudi Employees Figure 3.9: Distribution of Firms by Gender of Employees 0.82%

99.18%

Mean Percentage of Male Employees Mean Percentage of Female Employees

Figure 3.10: Percentage of Female Employees by Province

Riyadh Hail Makkah Tabuk Eastern Province Assir Al Jouf Al Madinah Al Qassim Al Baha Northern Borders Jizan Najran 0 .5 1 1.5 2 Mean Percentage of Female Employees

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 11 3.7 Distribution by Market Orientation shown in Figure 3.11. More than 95 percent of sales occurred within the same province and direct or indirect As expected for MSMEs, sales of surveyed firms were export accounted for less than half a percentage point of chiefly oriented toward the domestic Saudi market, as sales. Figure 3.11: Distribution of Firms by Market Orientation

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Mean % of Sales Sold within Province Mean % of Sales Exported Directly Mean % of Sales Sold in Other Provinces Mean % of Sales Exported Indirectly

3.8 Distribution by Investment Plans Figure 3.12: Distribution of Firms by As Figure 3.12 shows, when asked about their investments Investment Plans plans, almost 72 percent of sampled firms stated that they did not intend to make any new investments in new land, buildings, machinery, or equipment for their business in the next two years; 15 percent stated that they 12.72% 15.1% did plan to make new investments; and 13 percent were undecided. Figure 3.13 illustrates the marked differences across provinces in terms of investment plans. In Jizan, for example, 31 percent of firms surveyed expressed an intention to invest, whereas less than 2 percent of firms in Northern Borders expressed this intention.

These firms’ reluctance to make future investments is 72.19% not surprising, given the current low level of business confidence following a period of low oil prices and reduced government expenditures. These circumstances, Yes Don’t Know No combined with the reform momentum recently developing in the Kingdom, may explain these firms’ wait-and-see attitude toward investment.

3. PROFILE OF THE PCI SAMPLE FIRMS 12 Figure 3.13: Investment Plans by Province

Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail

0 20 40 60 80 100 Percent Yes No Don’t Know

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 13 3.9 Summary of Descriptive Statistics sample in which firms were oversampled in some provinces to ensure enough units were available to form Table 3.2 summarizes the statistics describing the valid inferences. The third column shows the reweighted, surveyed firms. The second column provides the original province-level sample used to construct the PCI. Table 3.2. Profile of PCI Sample Firms Original PCI Sample Reweighted Sample Observations 4,160 4,160 Size of Firm (No. of Employees) Micro (1–5) 42.5% 41.3% Small (6–49) 49.7% 51.1% Medium (50–99) 7.8% 7.6% Sector Type Manufacturing & Construction 24.6% 23.8% Services 29.5% 28.3% Trade 45.9% 47.9% Age Less than 3 10.1% 9% 3 to 5 10.7% 11.9% 6 to 10 46.7% 45.9% 11 to 20 21.5% 21.8% Legal Status Sole Proprietorship 90.6% 90.6% Limited Liability Company 6.8% 7.1% Joint Stock Company 1.2% 1% Partnership 1.3% 1.1% Affiliate of a Foreign Company 0% 0% Other 0.1% 0.1% Nationality of Employees Saudi Employees (Mean %) 24.7% 24.4% Expatriate Employees (Mean %) 75.3% 75.6% Gender of Employees Male Employees (Mean %) 99.2% 99% Female Employees (Mean %) 0.8% 1% Market Orientation Sold Domestically within Same Province 95.6% 95.8% Sold Domestically in Other Provinces 4.2% 4% Exported Directly 0.2% 0.2% Exported Indirectly 0% 0% New Investment Plans Yes 15.1% 14% No 72.2% 74.8% Don’t Know 12.7% 11.2%

3. PROFILE OF THE PCI SAMPLE FIRMS 14 4. OVERALL PCI RANKINGS

4.1 Overall PCI Rankings Results from Saudi Arabia’s first Provincial Competitiveness Study appear in Table 4.1, showing the ranking of each of the 13 provinces according to its final PCI score. This score is the sum of the 10 weighted subindices chosen to reflect the different dimensions of competitiveness. Because the subindex scores are normalized on a 10-point scale and the subindex weightings sum to 100, the PCI rankings are given on a 100-point scale. To achieve a perfect competitiveness score, a province must obtain the highest score in each subindex. Appendices 4 and 5 present the detailed weighted and unweighted PCI scores. As indicated in Table 4.1, overall PCI scores vary An important feature of the PCI is that its rankings significantly between the highest-ranking province, derive from comparison of the 13 provinces’ business Riyadh, with a PCI score of approximately 76, to environment performance relative to each other rather the lowest, Northern Borders, with a PCI score of than to some external, idealized measure. It thus provides approximately 41. Following Riyadh, the next highest- a means not only for interpreting rankings by final PCI ranking provinces are Al Qassim, Makkah, and Hail, scores, but also for constructing tiers of provinces with while the low-ranking provinces preceding Northern similar overall business environment conditions. Table Borders are Al Jouf and Assir. These rankings are largely 4.1 groups the provinces into four tiers on a 10-point consistent with a priori expectations, as provincial scale: high (70+), medium-high (70–60), medium-low authorities tend to be more progressive in the capital city (60–50), and low (50–40). Four provinces fall into the and in larger, more densely populated provinces. Eastern medium-high tier, for example: Overall PCI scores for Province presents a surprising case, however; despite Al Qassim, Makkah, Hail, and Al-Baha differ by less being among the Kingdom’s three major population and than 10 points. Approximately 77 percent of firms in the commerce centers, it scores relatively poorly in business PCI fall into the medium-high or medium-low tier. environment competitiveness.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 15 Table 4.1: PCI Rankings and Tiers Figure 4.1 illustrates the breakdown by subindex of the final PCI score for each province. Section 5 presents Province PCI Score Tier a detailed discussion of the rankings by subindex to Riyadh 75.99 High distinguish each province’s relative strengths and AI Qassim 65.68 Medium-High weaknesses. Makkah 64.40 Medium-High 4.2 Consistency of the PCI Rankings Hail 64.32 Medium-High Investigations to determine the consistency of the PCI AI Baha 60.73 Medium-High rankings are detailed in Appendix 3, which provides Tabuk 58.71 Medium-Low province rankings across each of the 10 subindices, AI Madinah 56.83 Medium-Low from highest to lowest, further divided into quartiles. Jizan 56.36 Medium-Low Appendix 3 reveals the consistently high- and low- performing provinces. The consistently high-performing Eastern Province 53.74 Medium-Low provinces—Riyadh, Al Qassim, and Madinah— Najran 52.32 Medium-Low jointly accounted for almost 50 percent of positions Assir 51.83 Medium-Low in the top quartile, but only 5 percent in the bottom quartile. Conversely, the consistently low-performing AI Jouf 41.53 Low provinces—Northern Borders, Al Jouf, and Najran— Northem Borders 41.26 Low together accounted for no positions in the top quartile, but 40 percent in the bottom quartile. Figure 4.1: PCI Rankings

Riyadh Al Qassim Hail Makkah Al Baha Tabuk Al Madinah Jizan Eastern Province Najran Assir Al Jouf Northern Borders

0 20 40 60 80 Entry Costs Land Access & Security of Tenure Transparency & Participation Time Costs of Regulatory Compliance Informal Payments Legal Institutions & Dispute Resolution Proactivity & Attitude toward Private Sector Labour Training & Skills Local Infrastructure & Business Services Predictability & Risks

Box 4.1: Consistent High Performers Province Positions in Q1 Positions in Q2 Positions in Q3 Positions in Q4 Riyadh 8 1 1 0 Al Madinah 3 3 2 2 Al Qassim 3 4 3 0

4. OVERALL PCI RANKINGS 16 Box 4.2: Consistent Low Performers Province Positions in Q1 Positions in Q2 Positions in Q3 Positions in Q4 Northern Borders 0 2 0 8 Al Jouf 0 1 4 5 Najran 0 3 4 3

4.3 Robustness of the PCI Rankings To obtain the scores for each indicator, these positive beta coefficients were multiplied by the provincial To test for the sensitivity and robustness of the overall mean for each respective standardized indicator. As an PCI rankings to changes in the indexing methodology example, the third column in Table 4.2 lists the mean and, in particular, to the weighting applied for hard data for Al Madinah Province for each of the standardized indicators, two statistically driven indexing frameworks indicators, and the fourth column provides the computed were used, as described below. scores. 4.3.1 Robustness Framework A The indicator scores, once calculated, were summated The first framework involves regressing a binary variable by subindex to obtain subindex scores and normalized “Plans to make new investments” from the PCI survey through exponentiation to scale between 0 and 1. That on standardized values of a subset of the indicators under is, the exponential value of each subindex score was each subindex with the least missing values, controlling taken and divided by the maximum subindex score to for firm and province-level characteristics. The second obtain normalized values ranging between 0 and 1. The column in Table 4.2 presents the positive beta coefficients final PCI was then calculated as the weighted sum of the obtained using ordinary least squares (OLS) regression. normalized subindex scores.

Table 4.2: Robustness Framework A Standardized Indicator Positive Beta Mean of Standardized Indicator Coefficient Indicator (for AI Madinah) Score Total number of procedures, registrations, and licenses 0.050 -0.721 -0.036 required to operate the business Percentage of total senior management time spend dealing 0.016 0.075 0.001 with government regulations per year Number of inspections from municipality department 0.0306 -0.535 -0.016 Number of inspections from Ministry of Labor 0.0246 -0.471 -0.012 Average duration of inspections from municipality 0.053 -0.420 -0.022 departments Perceived risk of changes in rent conditions 0.000517 0.054 0.000 Perceived ease of access to application for licenses and 0.0129 -0.010 0.000 registrations Frequency of government agencies soliciting comments on 0.00104 -0.043 0.000 implementation of new laws and regulations Confidence in the legal system 0.00371 0.144 0.001 Perceived attitude of provincial government toward private 0.0148 -0.456 -0.007 sector Ease of hiring Saudi labor with skills required 0.000421 -0.413 0.000 Ease of hiring foreign labor with skills required 0.016 -0.256 -0.004 Assessment of electricity 0.00773 -0.316 -0.002 Assessment of internet 0.060 -0.252 -0.015 Assessment of water 0.032 -0.158 -0.005

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 17 Assessment of drainage 0.022 -0.129 -0.003 Assessment of business services 0.0105 0.152 0.002 Assessment of consultancy services 0.00619 -0.937 -0.006 Perceived stability of regulatory environment 0.024 -0.405 -0.010 Perceived difficulty of securing land 0.00319 -0.061 0.000 Assessment of ease of working with government officials 0.00108 0.201 0.000 Perceived degree of obstacle presented by labor regulations 0.000391 0.627 0.000 Business density 0.041 0.479 0.020 Number of industrial cities 0.334 0.920 0.307 Number of committees per 10,000 registered firms 0.086 -0.613 -0.052 Number of universities 0.299 0.315 0.094 Paved roads per square kilometer 0.090 0.533 0.048 Number of inspections from civil defense 0.0196 0.501 0.010 Number of inspections from Ministry of Commerce 0.059 0.540 0.032 Number of inspections from Customs 0.0130 0.407 0.005 Duration of inspections from Civil Defense 0.00313 0.379 0.001 Duration of inspections from Ministry of Labor 0.0322 0.419 0.013 Duration of inspections from Ministry of Commerce 0.0164 0.412 0.007 Duration of inspections from Customs 0.00240 0.432 0.001 Days to obtain work visa 0.029 -0.431 -0.013 Days experiencing a power outage 0.00287 0.048 0.000 Perceived fairness of procedures for disputing changes in 0.021 -0.339 -0.007 rent conditions Perceived ease of access to information on required 0.00230 0.289 0.001 licenses and permits Perceived ease and clarity of information 0.014 -0.250 -0.004 Confidence in knowledge of existing rules and regulations 0.00554 -0.193 -0.001 Frequency of changes in local administration 0.017 -0.038 -0.001 Frequency of experiencing misconduct during inspections 0.024 -0.069 -0.002 Confidence in appealing for dispute resolution 0.023 -0.010 0.000 Assessment of roads 0.0157 0.38 0.006 Assessment of waste collection 0.036 0.11 0.004 Perceived difficulty of completing all procedures 0.028 -0.22 -0.006 Frequency of being informed in advance of changes in local 0.018 -0.01 0.000 administration Perceived degree of obstacle presented by visas 0.018 -0.48 -0.009 *Note: Standardized indicators with negative beta coefficients are multiplied by -1 to obtain positive beta coefficients.

4. OVERALL PCI RANKINGS 18 4.3.2 Robustness Framework B perceived fairness of the process for disputing changes in rent conditions from the PCI survey, and the number The second framework used to assess the robustness of industrial cities. of the PCI rankings employed principal component analysis on standardized values of the indicators under The same procedure was applied to each subindex to each subindex separately. As a first step, this allowed obtain the indicator scores. Once these scores were division of the subindices into uncorrelated components calculated, they were aggregated by subindex and or “baskets of variables,” as illustrated in Table 4.3 using normalized using the same approach as for Framework the Land Access and Security of Tenure subindex as an A. Finally, the PCI was computed by taking the weighted example. Following standard procedure, the number of sum of the normalized subindex scores. components was determined by those with associated Figure 4.2 illustrates the final PCI rankings, using Eigen values larger than 1. Under this condition, the Framework A and B in the first two panels and the final first two components, which cumulatively explained rankings obtained using the original indexing framework 57 percent of the overall variance of the subindex, were (Framework C) in the third panel. As shown by the last selected. two panels in the figure, province rankings overlap Next, the component loadings were obtained and rotated, considerably between Robustness Framework B and and those with observed values larger than 0.5 (in absolute the original indexing framework. The rank correlation value) were multiplied by the provincial means of the coefficient between these two indices was found to be standardized indicators to obtain the indicator scores. 0.63, further validating a strong positive association For Land Access and Security of Tenure, this includes between the rank order of the highest- and lowest- perceived transparency and fairness of land zoning rules, performing provinces under each framework.

Table 4.3: Robustness Framework B Eigen Values of Land Access and Security of Tenure Indicator Component Eigen value Difference Proportion Cumulative Comp. 1 1.84 0.81 0.37 0.37 Comp. 2 1.03 0.21 0.21 0.57 Comp. 3 0.83 0.08 0.17 0.74 Comp. 4 0.74 0.19 0.15 0.89 Comp. 5 0.56 0.11 1.00 Rotated Component Loadings of Land Access and Security of Tenure Indicator Standard Indicators Comp. 1 Comp. 2 Perceived difficulty of accessing land -0.45 0.34 Perceived transparency and fairness of land zoning rules 0.53 0.19 Perceived risk of changes in rent conditions 0.43 -0.44 Perceived fairness of process for disputing changes in rent conditions 0.54 0.15 Number of industrial cities 0.21 0.79

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 19 Figure 4.2: Robustness of PCI Rankings PCI Rankings: Indexing Framework A

Assir Tabuk Al Jouf Northern Borders Najran Jizan Al Madinah Al Baha Al Qassim Hail Eastern Province Makkah Riyadh

0 .2 .4 .6 .8 1 PCI Rankings: Indexing Framework B

Hail Riyadh Al Qassim Jizan Eastern Province Al Baha Assir Najran Makkah Al Madinah Tabuk Northern Borders Al Jouf

0 .2 .4 .6 PCI Rankings: Indexing Framework C

Riyadh Al Qassim Makkah Hail Al Baha Tabuk Al Madinah Jizan Eastern Province Najran Assir Al Jouf Northern Borders

0 20 40 60 80

4. OVERALL PCI RANKINGS 20 5. PCI RANKINGS BY SUBINDEX

5.1 Entry Costs Reducing the cost of business entry and streamlining time-consuming processes and regulations are crucial components of promoting competitiveness at the provincial level and of fostering environments conducive to investment. In recent years, Saudi Arabia has made significant improvements in the regulatory environment for business entry. A recent report by McKinsey and Company notes that the Kingdom’s formal process for starting a business has been simplified from 67 steps in 2006 to 21 steps in 2015 (McKinsey 2015). The commercial registration process has also been shortened, to 180 seconds, with the launch of a new online service by the Ministry of Commerce and Industry (Saudi Arabia, Ministry of Commerce and Industry 2014). At the same time, following elimination of minimum capital requirements in 2006, then the highest in the world at 1,057 percent of income per capita, official fees required to start business operations have declined from approximately 68 percent of income per capita in 2006 to 4 percent in 2017 (Al-Awwad 2007; World Bank 2006; World Bank 2017).

Notwithstanding these improvements, further reforms are to the many handovers involved in starting a business, needed as the Kingdom still lags behind other emerging through multiple ministries and municipal agencies; this countries in easing constraints on business formation. number varies among provinces, but handover levels According to the 2017 Doing Business Report, Saudi nevertheless make the process of starting a business both Arabia currently ranks 147 of 190 economies on the ease cumbersome and time-consuming. of starting a business, which falls below the rankings of The Entry Costs subindex has thus been formulated and both comparable economies and the regional average. Its divided into two dimensions: time costs and monetary distance to frontier score is approximately 77, indicating costs, which together reflect the true “opportunity cost” that the Kingdom remains 23 percentage points from the for firm entry in each province. The first dimension frontier constructed from the best performance achieved captures the time burden involved for a firm to register across all economies in the Doing Business sample since and obtain the key licenses and permits required to legally 2005. This lagging performance can largely be attributed

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 21 operate a business. This dimension consists of nine Nevertheless, the results for this dimension must be indicators, summarized in Table 5.1. The first indicator, interpreted with caution, as approximately 60 percent of business density, is a hard data indicator that measures new entrants reported hiring facilitators to assist with or the number of new business location licenses per 1,000 handle business entry procedures. Respondents’ reported of the working-age population. The next six indicators waiting periods may therefore not be fully accurate. measure the waiting periods involved in completing a The second dimension under the Entry Costs subindex number of necessary procedures and licenses, along measures the costs required for a firm to obtain a business with the perceived level of difficulty of completing location license, the key operating license granted by those procedures. For these indicators, to better capture local municipalities. As indicated in Table 5.1, this the time involved in business entry procedures under dimension consists of two indicators: the official fees and the current regulatory environment, only new entrants the total costs of obtaining a business location license, (defined as firms less than three years of age) were which are divided to reflect any costs involved in hiring invited to respond. For the final two indicators, all firms intermediaries and in fulfilling prerequisite procedures engaged in wholesale or retail trade and manufacturing, for obtaining the license. Taking the simple average regardless of firm age, were eligible to respond regarding of the scaled values of these indicators, the provincial the number of licenses and permits required to legally scores for this dimension show that Najran and Hail operate their businesses. offer the lowest-cost environments, with median official To obtain province scores for this dimension, indicators fees of SRl 900 and SRl 800, respectively, for a business were first rescaled so that provinces with the shortest location license, while Al Jouf and Al Madinah present wait time received a score of 10, and provinces with the highest-cost environments, with median reported the longest wait time received a score of 1.4 The official fees at SR 10,000 and SR 30,000, respectively. weighted average of these indicators was then taken In all provinces except the Northern Borders, firms to obtain the final province scores, with the hard data reported incurring total costs exceeding the official fees indicator accounting for 40 percent of this dimension. required to obtain business location licenses from a low The province scores for the time-costs dimension are of 25 percent in the Eastern Province to a high of 90 shown in Table 5.1. Hail and Al Qassim, with the highest percent in Al Qassim. On the one hand, this may reflect scores, are the best-performing provinces under this firms’ greater willingness to pay intermediaries to help dimension. In both provinces, less than 2 percent of obtain licenses due to lengthy or complicated processes firms rated as difficult or very difficult the process for involved. On the other hand, it may reflect the necessary completing the required licenses and procedures, and set-up costs for obtaining the license, including bank the median waiting period for completing the listed guarantees, building and land rental costs, employee procedures did not exceed 30 days. Overall, however, salaries, and equipment and materials, which firms the reported waiting periods did not vary significantly described during the IDIs as representing sunk costs across most provinces, and no more than 12 percent of preceding the start of operations; such costs tend to be firms in any province rated as difficult or very difficult higher in more densely populated provinces. the process for completing all procedures and licenses. The final scores and rankings of the Entry Costs subindex This may be attributed to increased use of electronic are illustrated in Figure 5.1. The final subindex scores portals to complete the necessary applications, which are simple averages of the two dimension scores. On the firms participating in qualitative interviews noted has whole, Hail and Al Qassim have the lowest entry costs, made the process much easier and faster. Yet, although with subindex scores of 9.06 and 8.19, respectively, firms perceived that the process for obtaining the whereas Al Baha and Al Madinah have the most necessary licenses and permits was becoming easier, burdensome procedures and costs, with subindex scores they also reported that the requirements for obtaining of 5.43 and 2.95, respectively. The experience across licenses and permits and legally starting a business were both dimensions suggests that, in relative terms, firms in becoming more stringent, especially with regard to labor Hail face the weakest barriers to entry, while firms in Al requirements. Madinah face the strongest. Povince – Minimum 4. 9* i +1 The indicators were scaled around a 10-point scale through a simple normalization process, using the following formula: ( Maximum-Minimum ) , where Province i is the individual province value, Minimum is the smallest provincial value, and Maximum is the largest provincial value among all of the provinces. For some indicators, a large number has a negative interpretation. In such cases, the index was reversed by subtracting the entire quantity from 11. An example of such a negative indicator would be the number of total inspections experienced by a firm. For such an Province – Minimum indicator, the following formula was used: 11- ( 9* ( i +1 . Maximum-Minimum ) )

5. PCI RANKINGS BY SUBINDEX 22

7 7 0 5 5 30 21 14 800 Hail 9.89 9.07 14.19 9.07 2,000 8.24 7 7 7 7 8 30 21 7.40 8.98 7.40 5.82 10.03 12.09 4,000 4,000 Borders Northern 7 7 6 7 44 14 14 6.28 6.10 7.67 6.10 4.53 11.87 6,000 10,000 Al Jouf 7 7 4 7 6 5 Al 30 1.6 800 9.32 8.19 9.57 8.19 6.81 4,000 Qassim 7 7 7 7 0 7 7 1 Al 30 4.6 2.95 2.95 4.91 25,000 30,000 Madinah 1 3 60 30 30 90 90 4.03 5.43 0.96 7.71 5.43 3.16 1,500 15,000 Al Baha 7 7 6 5 30 14 20 4.89 7.24 4.58 9.62 7.24 4.87 1,000 3,500 Tabuk 7 1 1 1 2 4 6 3.47 7.10 3.09 8.72 7.10 5.48 Jizan 2,000 8,000 4 3 3 7 3 6 37 4.7 900 7.69 3.62 9.95 7.69 5.43 1,500 Najran 7 5 4 6 30 21 10 630 4.8 5.44 7.30 9.48 9.79 7.30 Assir 2,800 5 8 18 20 12 10 15 4.17 6.14 3.85 7.98 6.14 4.29 6,000 8,000 Eastern Province 7 7 7 7 5 5 14 7.7 8.02 9.52 8.02 2.53 1,500 3,500 6.51 Riyadh 7 7 7 7 7 8 10 6.1 4.38 7.08 9.55 7.08 4.61 1,800 3,000 Makkah Province

Business density* Median days to obtain business location license Median days to register with the Ministry of Labor Median days to register with the General Organization for Social Insurance Median days to obtain a Zakat certificate Median days to obtain a Civil Defense license Firms rating completing all the licenses and procedures as difficult or very (%) Median number of licenses permits required for a trading firm Median number of licenses and permits required for a manufacturing firm Dimension 1 Score Median official fees to obtain business location license (SRl) Median total cost to obtain business location license (SRl) Dimension 2 Score Subindex Score Subindex Score

Monetary

Dimension 1: Time Costs Time 1: Dimension Dimension 2: 2: Dimension Table 5.1: Indicators and Dimensions Comprising the Entry Costs Subindex the Entry and Dimensions Comprising Indicators 5.1: Table Note: The Dimension 1score is the weighted average of the first nine indicators after rescaling onThe Dimension 2 score is the average of last two indicators after rescaling on a 10-point scale. a 10-point scale. Hard data indicators, denoted by an asterisk (*), account for 40 percent of this dimension.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 23 Figure 5.1: Entry Costs Subindex

Hail Al Qassim Riyadh Najran Northern Borders Assir Tabuk Jizan Makkah Eastern Province Al Jouf Al Baha Al Madinah

0 2 4 6 8 10 Time Costs Monetary Costs

5.2 Land Access and Security of Tenure through public notaries, who marked the title deeds held Entrepreneurs in Saudi Arabia face several challenges by landowners. Third, inconsistent application of land when attempting to acquire land for business purposes zoning rules is common, as shown by the Kingdom’s and expansion. First, although Saudi Arabia has one of poor performance in the Doing Business overall Quality the lowest population densities in the world, the price of Land Administration Index. of land in the Kingdom’s major cities has reached Regarding the security of the formal rights to land unprecedented levels in recent years (Dahlan 2015). and business premises once acquired, the 2017 Doing While the 2017 introduction of a so-called white land Business Land Dispute Resolution Index gives Saudi tax instigated a shift in supply-and-demand dynamics Arabia the low score of 4 from a maximum achievable that is likely to significantly reduce prices, for the score of 8. Thus, while the Kingdom has introduced large majority of MSMEs, the cost of purchasing land reforms to address the land and housing crisis, along with will remain extremely high. Second, little land-related a new computerized land registry system in 2015 (World information is available for entrepreneurs, with the Bank 2015a), further improving access to and security of country’s land administration system earning only1.5 land tenure is crucial to the health and development of the of a maximum score of 6 on the 2017 Doing Business Saudi business climate; theoretical constructions show Transparency of Information Index (World Bank 2017). that these improvements would increase access to capital Moreover, until recently, no central registration system and encourage investment in long-term productivity for land rights existed; property transfers occurred (De Soto 2000).

Table 5.2: Benchmarking of Land Access and Security of Tenure Indicators Comparable Indicator Kingdom of Saudi Arabia Cambodia Malaysia Bangladesh Firms rating rental risks as high 31.23* 0 8 1.71 or very high (%) (Al Qassim) Sources: The following indices, developed by the Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009), the Malaysia Business Environment Index (2012), and the Bangladesh Economic Governance Index (2010). Note: * Value for the best-performing province in Saudi Arabia, Al Qassim, was reversed for comparability.

5. PCI RANKINGS BY SUBINDEX 24 The Land Access and Security of Tenure subindex was percent of Riyadh firms perceived the application of land designed to capture these issues along two dimensions: zoning rules as consistent and efficient, whereas only 33 land access and security of tenure. The first measures percent of firms in Najran did so. Across all provinces, the ease of acquiring business premises, and the latter an average of 40 percent of firms reported difficulties measures the security of tenure once land or business securing ownership or leasing land. premises are properly acquired. The indicators As for the second dimension, 45 percent of Riyadh firms comprising each dimension are summarized in Table 5.3. rated risk of changes in rental contracts as low or very Given that the majority of interviewed MSMEs rent or low, and 57 percent saw the process of disputing such lease property for business purposes and that very few, if changes as frequently or always fair. In Najran, only any, reported owning land, these indicators mostly center 21 percent and 20 percent of firms, respectively, held on access and security of rent of premises for business these views. Moreover, changes in rental conditions purposes. were a major concern for firms across all provinces. The final scores and rankings of the Land Access and Examples cited during qualitative interviews included Security of Tenure subindex are presented in Figure rent increases and evacuation before the termination of 5.2, which displays a sharp contrast between the highest the contract period. It is worth noting that these concerns performing province, Riyadh, and the worst performing were raised in relation to private sector landlords rather province, Najran. In terms of the first dimension, only 8 than the public sector. Comparison to international percent of Riyadh firms perceived difficulties securing standards, illustrated in Table 5.2, indicates that even the ownership or leasing land as major or severe obstacles best-performing province, Al Qassim, lags behind the to business expansion; in comparison, almost 45 percent best-performing localities in other countries conducting of firms in Najran did see difficulties securing ownership similar indexing exercises. or leasing land as major obstacles. Similarly, nearly 63

Figure 5.2: Land Access and Security of Tenure Subindex

Riyadh Al Qassim Hail Al Baha Eastern Province Tabuk Makkah Al Jouf Jizan Assir Northern Borders Al Madinah Najran

0 2 4 6 8 10 Access to Land Security of Tenure

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 25 1 Hail 5.68 4.57 4.89 6.47 43.72 59.14 31.82 1 2.48 1.47 3.49 37.08 22.14 25.74 27.18 Borders Northern 1 3.3 3.57 3.83 18.12 32.21 28.72 28.26 Al Jouf 2 Al 0.68 6.64 5.33 7.95 37.62 68.77 38.55 Qassim 1 Al 2.42 2.59 2.25 26.72 29.44 24.66 16.95 Madinah 1 4.6 30.5 4.62 4.64 10.76 45.08 36.28 Al Baha 1 15.9 4.42 4.83 4.01 53.35 30.59 28.57 Tabuk 1 3.7 18.8 3.18 3.44 Jizan 35.29 46.33 33.55 1 1.7 1.99 2.27 44.78 32.78 20.88 19.58 Najran 1 2.72 7.66 2.61 2.82 Assir 33.64 36.13 33.04 6 37.3 4.61 6.05 3.18 46.22 12.19 33.22 Eastern Province 7 8.90 45.11 9.55 8.26 62.91 56.69 8.09 Riyadh 5 3.75 5.16 2.34 36.42 16.16 23.22 31.51 Makkah Province

Firms stating that the process of disputing changes in lease contracts is frequently or always fair (%) Number of industrial cities* Firms stating that difficulties in securing ownership or lease of land is a major or severe obstacle to business expansion (%) Firms stating that the application of land zoning rules is frequently or always efficient and consistent (%) Firms rating risk of changes in rental contracts as low or very low (%) Dimension 1 Score Dimension 2 Score Subindex Score

Security of Tenure of Security

Dimension 1: Land Access Land 1: Dimension

2: Dimension Note: Dimension 1 score is the weighted average of the first three indicators after rescaling on a 10-point scale. Hard data indicators account for 40 percent of this dimension. Dimension 2 score is the average the is score 2 Dimension dimension. this of percent 40 for account indicators data Hard scale. 10-point a on rescaling after indicators three first the of average weighted the is score 1 Dimension Note: of the last two indicators after rescaling on a 10-point scale. Table 5.3: Indicators and Dimensions Compromising the Land Access and Security of Tenure Subindex Tenure of and Security Access the Land and Dimensions Compromising 5.3: Indicators Table

5. PCI RANKINGS BY SUBINDEX 26 5.3 Transparency and Participation and legal documents necessary to run a business (under the first dimension, Transparency), and the extent Transparency and Participation are complementary and of private sector involvement in the decision making instrumental pillars for creating a business environment process related to running a business (under the second conducive to private sector development. As several dimension, Participation). The first dimension comprises studies show, increasing transparency by improving six indicators, shown in Table 5.5. The first two indicators the quality of legal, regulatory, and policy information measure the extent to which firm owners can easily available to business owners is essential in promoting access information necessary to run their businesses, as competitiveness because asymmetric information can well as the extent to which they can easily understand lead to market failures and distributive inefficiency and use this information. The third indicator measures (Kaufmann, Kraay, and Zoido-Lobatón 2002). Increasing the perceived equity of access to this information, dialogue between the business community and provincial and the final three indicators measure the level of the authorities during the policy-making process represents predictability of changes to laws, regulations, and an important channel for fostering a business-friendly policies firms must consider in forecasting and changing environment. their investment plans. In terms of Transparency in Saudi Arabia, basic Computing the simple average of the scaled values of information on the laws and regulations governing these indicators, Table 5.5 shows that Al Qassim achieved business activities is provided by the relevant the highest overall score of 7.88 under the dimension of municipality, increasingly through electronic means. Transparency, while Assir achieved the lowest score of This information, however, can at times be unclear and 2.98. Regarding ease of access to information, Riyadh difficult to access and understand. A study by the Riyadh performed best, with more than 80 percent of firms rating Chamber of Commerce and Industry in 2010 found that as easy or very easy their access to policy, regulatory, more than half of small business owners surveyed rated and planning documents or information necessary to ambiguity of governmental regulations and policies as run their businesses; the worst-performing province was their biggest obstacle in dealing with the government, Assir, with less than 20 percent of firms rating access easy and more than 65 percent indicated that they lacked or very easy. Provinces’ performance in providing access sufficient information to run their businesses (Riyadh to information was also correlated with performance in Chamber of Commerce and Industry 2010). achieving clarity of information, a factor firms highlighted As for Participation, during the formulation of as important during the qualitative interviews. As for the development plans the views and interests of private predictability of changes in local administrations’ rules sector businesses in Saudi Arabia are represented at the and policies, in the worst-performing province, Assir, 61 national level by the Saudi Council of Chambers, whereas percent of firms reported that such changes materially at the subnational level, province-level chambers of affect their businesses frequently or always. The best- commerce and industry and municipal subchambers performing province was Hail, where only 26 percent have responsibility for promoting and developing the of firms reported these difficulties. As indicated in Table local business environment. Firms’ engagement with 5.4, however, which benchmarks Hail’s performance these chambers is known to be higher in provinces with a against the best-performing localities in other countries, stronger business cultures, such as Riyadh and Makkah. great room for improvement remains. The Transparency and Participation subindex measures both the ease of obtaining the proper policy, planning,

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 27 Table 5.4: Benchmarking of Transparency Indicators Comparable Indicator Kingdom of Cambodia Malaysia Bangladesh Vietnam Saudi Arabia Firms believing that personal connections 14.34 40 NA 1.77 47.42 with local officials are frequently or always (Eastern Province) necessary to access documents (%) Firms stating that they are confident or very 92.22 46.2* NA 52.88 NA confident of their knowledge of existing (Al Qassim) laws and policies (%) Firms stating that changes in local 25.79 NA NA 0 1.08 administration rules and regulations are (Hail) always or frequently made (%) Firms stating that they are seldom or never 21.18 35 NA 63.26* NA informed of such changes (%) (Al Jouf) Sources: The following indices, developed by the Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009), the Malaysia Business Environment Index (2012), the Bangladesh Economic Governance Index (2010), and the Vietnam Provincial Competitiveness Index (2016). Note: * Value for the best-performing district in Bangladesh was reversed for comparability.

With regard to the second dimension, Participation, Table concerning those businesses, while in Assir, less than 5.5 summarizes the four indicators used to measure firm half of firms responded this way. participation in local chambers of commerce and during The final scores and rankings for the Transparency the formulation of new policies. Calculating the simple and Participation subindex appear in Figure 5.3. The average of the scaled values of these indicators shows province of Hail obtained the first clear overall ranking, that Hail achieved the highest score, 7.78, while Assir with a score of 6.68, followed by Tabuk in second place achieved the lowest score, 1.5. In Hail, 48.73 percent of and Riyadh in third place, with scores of 5.83 and 5.6, firms stated that local government authorities frequently respectively. In contrast, the province of Assir obtained or always solicited comments from affected firms on the marked lowest overall ranking, with a score of 2.24. the content and implementation of new laws or policies

Figure 5.3: Transparency and Participation Subindex

Hail Tabuk Riyadh Al Qassim Al Madinah Makkah Al Baha Eastern Province Al Jouf Najran Northern Borders Jizan Assir

0 2 4 6 8 Transparency Participation

5. PCI RANKINGS BY SUBINDEX 28 0 7.4 6.69 Hail 5.98 94.01 34.64 29.58 35.25 79.51 25.79 40.38 106.1 71.18 0 3.74 3.08 4.39 27.11 30.52 30.06 19.96 29.13 38.26 34.44 30.92 89.31 Borders Northern

Al 3.77 2.81 4.74 Jouf 38.56 29.88 17.03 36.36 42.77 26.62 21.18 13.44 27.53 66.98 Al 5.51 30.5 78.8 3.15 7.88 98.87 28.78 33.81 92.22 32.95 38.92 23.53 12.07 Qassim 0 Al 5.20 4.57 5.84 60.45 66.44 29.41 58.37 25.99 59.49 41.37 35.69 20.46 Madinah 0 Al 4.99 24.3 7.15 4.09 5.89 Baha 68.55 56.51 34.28 49.59 32.28 60.07 41.62 5.83 4.79 6.87 71.61 51.02 23.72 43.52 24.98 72.92 28.85 30.75 12.91 85.75 Tabuk 2.99 7.66 2.75 1.87 3.23 Jizan 57.42 44.52 25.25 20.25 37.92 57.65 51.67 47.57 2.7 3.74 49.8 5.82 9.72 4.79 79.99 53.67 18.85 29.67 24.35 71.55 57.66 Najran 1.5 2.24 5.34 0.58 2.98 Assir 70.09 34.72 17.82 18.97 30.36 56.69 61.38 60.03 78 4.62 5.43 3.32 0.28 5.92 67.59 20.67 46.19 14.34 82.67 56.75 52.58 Eastern Province 5.59 90.4 1.96 4.59 6.59 59.98 36.67 80.53 41.05 84.19 49.56 34.14 14.28 Riyadh 5.08 6.12 3.33 7.06 6.83 66.51 43.43 31.57 65.57 31.66 66.42 34.74 21.88 Makkah

Table 5.5: Indicators and Dimensions Comprising the Transparency and Participation Subindex 5.5: Indicators and Dimensions Comprising the Transparency Table Province

Dimension 1 Score Subindex Score Firms rating access to a list of policy, regulatory, regulatory, Firms rating access to a list of policy, and planning documents or information as easy very easy (%) Firms agreeing or strongly that the content of the list documents or information is clear and easy to understand use (%) Firms believing that personal connections with local government officials are frequently or always necessary for facilitating access to the documents (%) Firms believing that they are confident or very confident of their knowledge existing rules, laws, and regulations concerning the running of their businesses (%) 5.5: Indicators and Dimensions Comprising Table and Participation Subindex Transparency the Firms agreeing that changes to the local rules, laws, and regulations administration’s their businesses are frequently materially affecting or always made (%) Firms stating that they are seldom or never informed of such changes (%) Number of chamber committees or subcommittees per 10,000 registered firms in the province* Firms that are members of at least one chamber of commerce committee or subcommittee (%) Firms agreeing that memberships in chambers of commerce are useful or very (%) Firms stating that local government authorities frequently or always solicit comments from firms on new laws or policies (%) affected Dimension 2 Score

Dimension 2: Participation 2: Dimension Dimension 1: Transparency 1: Dimension Table 5.5: Indicators and Dimensions Comprising the Transparency and Participation Subindex and Participation Transparency the and Dimensions Comprising 5.5: Indicators Table Note: Dimension 1 score is the average of six indicators after rescaling on a10-point scale. 2 weigh ted four a 10-point Hard data indicators, denoted by an asterisk (*), account for 40 percent of this dimension.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 29 5.4 Time Costs of Regulatory opportunity costs of lost management time and human Compliance and financial resources that could be more productively employed. According to the World Economic Forum’s 2015 Global To capture the magnitude of this lost management time, Competitiveness Report, top business executives in Saudi the Time Costs of Regulatory Compliance subindex Arabia consider inefficient government bureaucracies to uses four indicators to measure time lost in pursuing be one of the most problematic factors for doing business bureaucratic compliance, the frequency with which in the Kingdom (World Economic Forum 2015). A firms must undergo inspections by local regulatory survey by the Riyadh Chamber of Commerce echoes this agencies, and the duration of those inspections. Table view among small business owners, with approximately 5.6 summarizes these indicators and the final subindex 65 percent of surveyed firms ranking compliance with scores for each province, and Figure 5.4 represents these governmental procedures and regulations as the biggest finding graphically. According to participating firms’ obstacle facing SME creation and development. The experiences, Makkah and Riyadh have the lowest time length of time required to complete procedures, and burden for regulatory compliance, achieving scores of the delays encountered, were singled out as the most 8.54 and 7.90, respectively, and Al Baha and Northern problematic aspects of complying with governmental Borders have the highest, with scores of 5.09 and 5, regulations. The 2017 Doing Business Report, for respectively. example, notes that it takes 228 hours in Saudi Arabia to comply with importing procedures for obtaining, Although most firms interviewed in the PCI survey preparing, and submitting documents during port or reported low frequency and short duration of inspections border handling, customs clearance, and inspections under this subindex, marked differences appear across procedures, whereas these procedures require an average provinces in the percentage of senior management of 121 hours across the Middle East and North Africa time spent dealing with bureaucratic procedures and and an average of only 9 hours across Organisation for paperwork. In Makkah, for example, the median Economic Co-operation and Development (OECD) percentage of senior management time spent per year countries. on regulatory compliance was 15 percent, compared to 85 percent in Al Baha. Drawing from the qualitative Time costs of regulatory compliance pose a major interviews, many firms attributed the time lost in constraint for business development in the Kingdom. completing bureaucratic procedures to lack of clarity in Although the efficiency of handling these bureaucratic the rules and regulations and weak coordination between proceedings likely varies with the effectiveness of government entities working in related areas of concern provincial authorities, the high bureaucratic transaction to business operations. costs Saudi business owners face in complying with complicated business regulations represent significant

Figure 5.4: Time Costs of Regulatory Compliance Subindex

Makkah Riyadh Al Madinah Najran Jizan Assir Al Jouf Al Qassim Hail Tabuk Eastern Province Al Baha Northern Borders

0 2 4 6 8

5. PCI RANKINGS BY SUBINDEX 30 5 1 2.4 Hail 6.12 1.72 5 1 5 2.2 12.75 Borders Northern 5 1.8 0.8 6.44 11.72 Al Jouf 5 Al 1.8 1.2 6.34 0.68 Qassim 2 Al 10 0.8 7.11 3.11 Madinah 85 1.6 0.8 5.09 6.86 Al Baha 10 2.4 0.8 6.75 6.09 Tabuk 1 50 6.96 Jizan 12.46 0.6 20 1.8 3.5 0.8 7.06 Najran 1 50 0.6 6.47 Assir 16.29 20 18.4 Eastern Province 1.2 0.8 6.02 30 7.9 0.8 0.8 5.74 Riyadh 1 15 8.54 7.74 Makkah 0.6 Province Median % of senior management time spent during the past year dealing with bureaucratic procedures and paperwork Median number of inspections or mandatory meetings, with local per firm year, government agencies Median duration of inspections or mandatory meetings, per firm with local government year, agencies Firms rating as difficult or very difficult working with government officials to comply with laws and regulations (%) Subindex Score Table 5.6: Indicators and Dimensions Comprising the Time Costs of Regulatory Compliance Subindex Regulatory Time Costs of the and Dimensions Comprising Indicators 5.6: Table Note: Subindex score is the average of four indicators after rescaling on a 10-point scale.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 31 5.5 Informal Charges charges are grouped under two dimensions: firm- level corruption and systematic corruption. The first Informal charges or, more generally, corruption, dimension, addressing firm-level corruption, uses the represents a critical problem for businesses in many three indicators summarized in Table 5.8 to measure the countries. Corruption not only restricts access to scope and predictability of informal firm-level charges markets or services, it also hinders competitiveness by to obtain required services. Under this dimension, Hail increasing the cost and uncertainty of doing business. is the worst-performing province, with a score of 1.43, In Saudi Arabia, corruption at the national level has and Al Madinah is the best-performing province, with declined over the last three years, as reflected by a score of 9.69. As the values for the first indicator consecutive improvements in international rankings reflect, many firms were initially reluctant to answer such as Transparency International’s 2015 Corruption questions pertaining to informal payments; across all Perceptions Index, The Heritage Foundation’s 2015 provinces, less than 16 percent of firms on average Freedom of Corruption Index, and the Worldwide reported these payments in their line of business. At Governance Indicator’s 2015 Control of Corruption the same time, however, on average 34 percent of firms Index (Transparency International 2015; Heritage across the provinces reported that additional payments Foundation 2015a; World Bank Group 2015b). Efforts frequently or always resulted in delivery of the desired to curb national-level corruption were enhanced by service. This may indicate that firms became more open the establishment of the National Anti-Corruption to answering these sensitive questions over the course Commission (Nazaha) in 2011 and by the increasing of the interviews. Table 5.7 compares results on these appearance in the Saudi press of articles and reports on indicators for the best-performing Saudi provinces with prosecutions for corrupt dealings. In comparison, little the best-performing localities in four other countries. information is disseminated about the prevalence and control of corruption at the subnational level. Measuring The second dimension, systematic corruption, measures the extent of corruption across provinces by gauging the the extent of macro-level corruption over ten indicators, frequency, type, and amount of informal charges levied as captured in Table 5.8, by gauging the predictability, is therefore essential to designing adequate policies to frequency, and type of corruption during a range of counter it. dealings with government entities, including specific measures relating to public procurement. Under this The Informal Charges subindex measures firms’ dimension, Al Baha is the worst-performing province, informal payments to secure firm-level operations, with a score of 4.16, and Tabuk is the best-performing as well as to obtain public procurement contracts; the province, with a score of 6.93, scores which signify subindex also provides information on the predictability much less variation than for the first dimension. In of extra fees and the frequency with which they lead to addition to capturing differences in firms’ perceptions on the desired results or services. Indicators of informal

Table 5.7: Benchmarking of Informal Payments Indicators Comparable Indicator Kingdom of Saudi Cambodia Malaysia Bangladesh Vietnam Arabia Firms reporting that informal payments occur in 0.69 2.5* 3 27.66 45.16 their line of business (Al Madinah) Firms reporting that with additional payment 9.87 10 NA 34 38.46 services are frequently or always delivered as (Tabuk) expected (%) Firms reporting that procurement contracts are 74.02 30.59 NA 72.32 NA frequently or always transparent (%) (Al Qassim) Firms reporting that personal connections are 31.13 39.62 NA 0 NA important or very important for winning public (Tabuk) procurement contracts (%) Sources: The following indices, developed by the Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009), the Malaysia Business Environment Index (2012), the Bangladesh Economic Governance Index (2010), and the Vietnam Provincial Competitiveness Index (2016). Note: * Value for best-performing province in Cambodia was reversed for comparability.

5. PCI RANKINGS BY SUBINDEX 32 the usefulness of informal payments when dealing with Box 5.1: Experiences and Opinions on the Importance of government officials, this dimension also encompasses Personal Connections firms’ perceptions of the relative importance of Medium-sized firm in Eastern Province: “Knowing someone in the nonmonetary forms of corruption, particularly the role ministry expedites the procedures.” of personal connections in dealing with government Medium-sized firm in Riyadh: “Some examinations are not done in entities. Table 5.8 shows that 60 percent of firms in some entities or centers because of the business owner’s relations Hail reported personal connections were essential or with individuals in higher positions .” very useful for expediting government services, and 93 percent of firms perceived these connects as important 5.6 Legal Institutions and Dispute or very important for winning public contracts. These Resolution views were also evident during the qualitative interviews with firms. The quotes in Box 5.1 illustrate some of Upholding property rights through well-functioning the experiences and opinions firms expressed about legal institutions and dispute resolution mechanisms this issue. is, as affirmed in a vast literature, integral to a dynamic business environment. Saudi Arabia ranks 70 on the 2015 The final scores and rankings of the Informal Charges Index of Economic Freedom on Property Rights Index, subindex appear in Figure 5.5. Tabuk scored the highest, a position that has remained largely unchanged since followed by Al Madinah and Eastern Province. The 2009 (Heritage Foundation 2015b). The Saudi Ministry performance of these provinces is driven fairly equally of Justice has taken steps to increase the number of by high scores in both dimensions. Under the first commercial courts across the provinces and to improve dimension, firm-level corruption, less than 10 percent information technology to link courts and standardize of firms in all three provinces believed that services court procedures. Despite these efforts, however, legal were frequently or always delivered as expected after proceedings in Saudi Arabia remain generally slow payment of informal charges. Similarly, under the paced. According to Doing Business Reports, the number second dimension, systematic corruption, no more than of days required to enforce contracts increased from 360 16 percent of firms in these three provinces believed that days in 2006 to 575 days in 2017. Such lengthy court making an informal payment is essential or very useful procedures negatively affect private sector incentives, in expediting government services. discourage lending, and increase risk and uncertainty in commercial and financial relationships.

Figure 5.5: Informal Charges Subindex

Tabuk Al Madinah Eastern Province Northern Borders Al Jouf Al Qassim Makkah Al Baha Riyadh Assir Najran Jizan Hail

0 2 4 6 8

Firm−level Corruption Systematic Corruption

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 33 9.4 Hail 52.4 3.24 5.04 1.43 5.07 39.83 60.87 99.06 50.64 52.18 92.59 21.99 48.67 38.04 22.74 6.82 9.77 51.4 5.87 6.41 7.77 9.49 2.27 16.83 94.66 48.24 29.98 17.55 46.74 38.67 16.63 Borders Northern

Al 6.25 Jouf 1.04 5.76 6.75 28.34 29.45 76.87 44.87 50.05 20.34 24.69 44.99 15.94 21.93 12.25 21.7 Al 1.61 1.32 6.13 6.17 11.65 6.21 4.33 47.93 39.87 74.02 79.97 59.49 13.98 74.26 25.61 Qassim 100 Al 7.41 8.49 5.12 2.67 9.69 2.17 0.69 16.23 22.54 87.66 30.74 31.69 14.92 69.08 19.53 13.86 Madinah

Al 5.65 Baha 4.16 7.57 7.15 5.52 53.01 49.04 26.63 92.61 50.35 55.19 29.22 52.56 24.44 37.56 18.69 6.8 9.1 7.87 6.93 9.02 6.42 8.81 9.87 7.15 32.51 91.32 60.02 57.03 31.13 10.47 Tabuk 34.5 23.4 4.13 4.94 3.32 Jizan 17.31 63.65 15.84 72.25 51.33 46.72 43.55 61.72 55.31 39.62 22.55 51.88 53 14.2 5.29 11.95 5.21 5.37 16.93 53.14 26.86 89.38 68.81 68.33 75.88 56.69 19.99 Najran 45.8 5.39 18.11 4.75 6.02 Assir 15.55 44.27 41.76 42.27 41.62 40.32 45.29 74.72 40.14 20.78 12.69 65.7 2.8 7.34 5.86 8.83 6.63 6.23 59.27 16.51 92.13 56.55 59.12 17.51 10.59 38.07 41.06 8.88 Eastern Province 4.98 5.43 23.11 5.87 8.83 23.21 46.34 64.64 72.74 72.08 21.56 42.79 44.26 74.65 34.14 16.42 Riyadh 5.88 17.11 5.68 9.74 6.07 33.35 69.35 39.62 44.85 19.36 19.25 34.18 29.55 55.77 24.84 Makkah 17.8

Subindex Score Dimension 2 Score Province Firms reporting that informal charges occur in their line of business (%) Firms reporting that firms in their line of business usually know in advance the amount of informal payment required (%) Firms believing that, with additional payment, services are frequently or always delivered as expected (%) Firms stating that making an informal payment is essential or very useful for expediting government services (%) Firms stating that personal connections (i.e., friends/family relations) with local government officials are essential or very useful for expediting government services (%) Firms stating that firms in their line of business are frequently or always expected requested to give informal payments/gifts during a range of dealings with government officials (%) Firms that have participated in public procurement contracts during the past three years (%) Firms agreeing that information concerning public procurement contracts in the province is frequently or always transparent (%) Firms agreeing that procedures for winning public procurement contracts in the province are frequently or always fair (%) Firms agreeing that personal connections are important or very for winning public procurement contracts (%) Firms reporting that firms in their line of business frequently or always experience misconduct by local government officials during inspections (%) Firms disagreeing or strongly that preferential treatment or favoritism by government officials does not exist Firms disagreeing or strongly that preferential treatment or favoritism by government officials is not harmful Dimension 1 Score

Firm-level Corruption Firm-level

Dimension 2: Systematic Corruption Systematic 2: Dimension

1: Dimension Table 5.8: Indicators and Dimensions Comprising the Informal Charges Subindex Charges the Informal and Dimensions Comprising 5.8: Indicators Table Note: Dimension 1 score is the average of first three indica tors after rescaling on a 10-point scale. 2 last 10 indicators 10-p oint

5. PCI RANKINGS BY SUBINDEX 34 The Legal Institutions and Dispute Resolution subindex, close scores of 9.75, 9.66, and 9.6, respectively. In all characterized by the indicators in Table 5.10, measures three provinces, no less than 96 percent of firms asserted firms’ confidence in the legal system’s fairness and their confidence that the legal system would uphold their equity and in their ability to appeal to competent persons contract and property rights. Table 5.9 shows that this at higher levels to resolve disputes over the conduct level is comparable to the best-performing localities of local government officials. Figure 5.6 presents final across a number of countries. In comparison, for the scores and rankings of the Legal Institutions and Dispute lowest-scoring provinces of Al Baha, Al Jouf, and Resolution subindex. As can be seen, the top three Northern Borders, no more than 66 percent of firms performers, Al Qassim, Hail, and Riyadh, achieved very expressed this confidence.

Table 5.9: Benchmarking of Legal Institutions and Dispute Resolution Indicators Comparable Indicator Kingdom of Saudi Arabia Cambodia Malaysia Bangladesh Vietnam Firms agreeing or strongly agreeing that the 99 42 98 84 90 legal system will uphold their contract and (Hail) property rights (%) Sources: The following indices, developed by the Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009), the Malaysia Business Environment Index (2012), the Bangladesh Economic Governance Index (2010), and the Vietnam Provincial Competitiveness Index (2016).

Figure 5.6: Legal Institutions and Dispute Resolution Subindex

Al Qassim Hail Riyadh Najran Assir Jizan Tabuk Al Madinah Eastern Province Makkah Al Baha Al Jouf Northern Borders

0 2 4 6 8 10

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 35 Hail 9.66 99.68 81.84 67 89 1.86 66.74 Vietnam Vietnam Borders Northern 51.2

Al Jouf 2.29 61.18 58.9

Al 9.75 97.49 84.25 Qassim 58 77 Al 4.94 73.41 68.44 Cambodia Madinah

Al 2.39 Baha 58.99 61.41 5.36 88.25 59.48 Tabuk 5.6

Jizan 73.55 73.23

92 88 (Al Qassim) (Al Madinah) 8.5 87.44 83.27 Najran Kingdom of Saudi Arabia Kingdom of Saudi 6.65 Assir 82.81 73.41 4.92 86.95 57.27 Eastern Province 9.6 96.06 84.33 Riyadh 3.14 67.16 60.32 Makkah Comparable Indicator Province Firms agreeing or strongly that the legal system will uphold their contract and property rights (%) Firms agreeing or strongly that they can appeal to competent persons at a higher level to resolve disputes over conduct by local government officials (%) Firms assessing as positive or very the attitude of go vernment officials toward the private sector (%) Firms agreeing or strongly that provincial officials ar e proactive in exploiting possible flexibility in the administration of nationa l regulations to minimize the regulatory burden on businesses (%) Subindex Score Table 5.10: Indicators and Dimensions Comprising the Legal Institutions and Dispute Resolution Sub-Index Resolution and Dispute Institutions the Legal and Dimensions Comprising Indicators 5.10: Table Note: Subindex score is the average of two indicators after rescaling on a10-point scale. Indicators Sector the Private toward Attitude and Proactivity Benchmarking of 5.11: Table Sources: The following indices, developed by the Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009) and the Vietnam Provincial Competitiveness Asia Foundation, were used in the international benchmarking: the Cambodia Provincial Environment Scorecard (2009) and the Vietnam The following indices, developed by the Sources: Index (2016).

5. PCI RANKINGS BY SUBINDEX 36 5.7 Proactivity of Provincial Eastern Province, and Al Baha, which achieved equal Government and Attitude toward the scores of around 7.5. Riyadh received the highest score on most indicators under this subindex, with 86 percent Private Sector of firms agreeing that provincial officials are proactive The development of the private sector generally and of in exploiting flexibility in the administration of national SMEs in particular is a stated core objective of “Saudi regulations to minimize the regulatory burden on Vision 2030,” and several programs have been initiated businesses; 83 percent of firms agreed that provincial to help realize it (Saudi Arabia, Ministry of Economy and officials were proactive in implementing initiatives to Planning 2016). Further assessment is needed, however, support private businesses. regarding the varying degree of these programs’ efficacy across provinces and of the extent to which private Overall, firms’ perceptions of government officials’ businesses see provincial authorities’ attitudes toward attitude toward the private sector differed markedly them as positive and supportive. Moreover, as Al Bakr across provinces, with less than 40 percent in Al Jouf and (2015) suggests, increased cooperation and coordination Northern Borders perceiving it as positive, as compared among concerned governmental bodies in each province to 92 percent of firms in Al Madinah, which, as Table 5.11 is necessary to unify efforts to create a thriving business demonstrates, exceeds the best-performing localities in environment. the benchmark countries. Similarly, firms’ assessment of the proactivity of local provincial governments in The Proactivity of Provincial Government and Attitude minimizing the regulatory burden within the confines of toward the Private Sector subindex is formulated using national laws and regulations also reflected significant nine indicators, listed in Table 5.12, to measure aspects differences between provinces, with the highest-scoring of the quality of local as compared to central governance, province of Al Qassim at par with the levels reported in including the creativity and ability of province authorities the other countries in Table 5.11. to implement central policy, design initiatives for private sector development, and actively participate in assisting During the qualitative interviews, several firms the private sector. highlighted officials’ lack of sufficient training and skills along their lack of commitment to working The final subindex scores by province appear in Figure hours as major constraints to completing governmental 5.7 and Table 5.12. The province of Riyadh achieved the proceedings. The poor performance of some provinces, highest score, 8.2, exceeding by less than one point the such as Jizan and Al Jouf, which also ranked lowest for second-, third-, and fourth-ranked provinces of Tabuk, this subindex, can be attributed to this problem.

Figure 5.7: Proactivity and Attitude towards Private Sector Subindex

Riyadh Tabuk Eastern Province Al Baha Makkah Al Madinah Al Qassim Hail Najran Assir Northern Borders Jizan Al Jouf

0 2 4 6 8

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 37 74 Hail 5.34 62.14 61.04 94.42 90.57 95.05 83.69 74.38 75.72 45.6 3.96 44.11 35.77 50.53 55.36 46.64 44.05 36.85 38.62 Borders Northern Al 56.6 3.55 Jouf 35.73 47.85 50.58 38.79 28.07 40.36 43.63 38.93 Al 71.2 5.74 98.46 94.91 94.45 88.09 79.62 79.36 61.63 79.21 Qassim Al 56.8 5.74 45.48 64.92 62.87 68.36 73.38 52.32 58.29 91.62 Madinah Al 42 63.2 7.54 Baha 63.35 42.66 42.79 63.25 65.09 65.24 86.55 65.1 7.59 64.03 38.35 38.04 39.36 70.28 69.33 64.16 66.21 Tabuk 3.71 Jizan 41.71 42.48 55.58 49.34 38.05 27.98 36.64 41.92 42.03 38.9 43.5 4.05 53.93 53.19 51.93 43.97 38.44 44.03 47.55 Najran 3.98 Assir 46.09 44.16 60.08 54.63 35.12 38.39 39.72 40.51 54.28 54.2 7.55 63.23 51.38 56.26 76.09 71.87 73.06 74.06 79.01 Eastern Province 8.21 87.39 71.47 72.13 69.72 86.73 85.97 83.32 85.26 87.79 Riyadh 78.5 7.15 62.04 52.01 49.34 52.62 67.54 62.21 67.45 71.42 Makkah Province Firms stating that the attitude of provincial government officials toward the private sector is positive or very (%) Firms agreeing or strongly that provincial officials are proactive in exploiting possible flexibility in the administration of national regulations to minimize the regulatory burden on businesses (%) Firms agreeing or strongly that provincial officials are more proactive in assisting the private sector than care entral government officials (%) Firms agreeing or strongly that local public officials have sufficient knowledge and skills to fulfil their duties (%) Firms agreeing or strongly that coordination between government agencies in their province is good (%) Subindex Score Firms agreeing or strongly that provincial officials are proactive in implementing initiatives that support private businesses (%) Firms agreeing or strongly that contracts, land, and other business resources mostly fall into the hands of enterprises having close relationship with provincial government officials (%) Firms agreeing or strongly that contracts, land, and other business resources mostly fall into the hands of larger enterprises or state-owned enterprises (SOEs) in their province (%) Firms agreeing or strongly that larger enterprises or SOEs receive more support from government officials than do smaller firms in their province (%) Note: Subindex score is the average of nine indicators after rescaling on a 10-point scale. Table 5.12: Indicators and Dimensions Comprising the Proactivity and Attitude toward the Private Sector Subindex Sector the Private toward Attitude and the Proactivity and Dimensions Comprising Indicators 5.12: Table

5. PCI RANKINGS BY SUBINDEX 38 5.8 Labor Training and Skills provincial authorities to promote education, vocational training, and skills development for local industries and Labor market conditions and regulations are often cited to assist in the placement of local labor. Scores under as key obstacles to doing business in Saudi Arabia. this dimension range from 9.49 for Riyadh to 2.1 for The 2015 Global Competiveness Report, for example, Najran. A similarly high level of variation is seen across noted that local business executives find restrictive labor the indicators, with 72 percent of Riyadh firms agreeing regulations and an inadequately educated workforce to that they can easily hire Saudi labor with the skills be the most problematic factors when doing business in required by their businesses, but less than 40 percent the Kingdom (World Economic Forum 2015). of firms in Najran agreeing. This, in turn, is mirrored Efforts to increase the employment of nationals inthe by the 78 percent of Riyadh firms asserting that higher private sector have focused on education and vocational education provides local labor with the skills required training programs to address the skills gap between by the market and by the 78 percent of firms believing the needs of private sector employers and potential that vocational training programs supply local labor with workers in the Kingdom. Other aspects of this effort, as the skills required by the market; in Najran, in contrast, underscored in a report by the International Monetary only 45 percent and 43 percent, respectively, find these Fund (IMF 2015), involve the implementation of a quota institutions prepare the workforce adequately. Firms scheme (Nitaqat) and an ongoing policy of localization participating in qualitative interviews echoed these (Saudization). A study by Baqadir et al. (2011), however, views, emphasizing the lack of necessary technical skills finds that the perception among private sector employers and training, along with reluctance to accept certain is that the nation’s technical education fails to equip occupations and lack of commitment to jobs, as the Saudi students with sufficient vocational training, skill leading difficulties with employing local labor. levels, and work attitudes. As the study pinpoints, it The second dimension under the Labor Training and is imperative to refine and tailor training programs to Skills subindex is the availability of skilled foreign rectify mismatches between national workers’ skills and labor. The fourth indicator, reflected in Table 5.13, the specific needs of local businesses in each province measures firms’ ability to obtain foreign labor with the by focusing on underlying factors, including work ethic, skills required for their business operations. Under this specialized knowledge, and general skills. dimension, provinces’ scores range from 9.79 for the Al The foreign labor supply, as reported by the Ministry of Madinah to 4.03 for the Eastern Province. In comparison Labor, has been growing: The total number of foreign to indicators under the first dimension, the majority of labor visas issued in 2014 was greater than 1.6 million, firms across most provinces agree that they can easily and the total number of work permits issued for the private hire foreign labor with the skills their businesses require. sector increased to approximately 7.5 million, growing While to varying degrees a minority of firms across by around 57 percent between 2010 and 2014 (Saudi provinces perceived visa issues as posing a major Arabia, Ministry of Labor 2014). More than 75 percent obstacle to their business operations, opinions among of the visas issued in 2014 were for businesses located firms varied widely regarding the extent to which labor in Riyadh, Makkah, and Eastern Province. As one study regulation policies, particularly Saudization, constitute by the Jeddah Chamber of Commerce highlights, this an obstacle. Only 3 percent of firms in Al Madinah, for indicates that the private sector continues to rely heavily example, perceived labor regulations to be a major or on foreign labor to conduct operations (Jeddah Chamber severe obstacle to running their businesses, compared to of Commerce Research Centre 2015). Thus, as the 67 percent of firms in Jizan. IMF’s 2015 report indicates, until the composition and Taking the average of the scores across each dimension, productivity of the national workforce can be improved, Figure 5.8 illustrates the overall province scores for the it is vital that provincial labor offices provide firms with Labor Training and Skills subindex. Riyadh, the top access to foreign labor with the skills required to prevent performer, has a score of 9, followed by Al Madinah declines in firm productivity and competitiveness. and Al Baha. Northern Borders, the worst performer has The labor training and skills subindex measures the a score of 3.14, followed closely by Najran and Assir. availability of skills needed by businesses. It is split Across all provinces, the subindex scores are mainly into two dimensions. The first covers the availability driven by performance in the availability of foreign labor of skilled local labor and encompasses six indicators, rather than local labor. as summarized in Table 5.13, that measure efforts by

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 39 1 2 30 Hail 8.5 5.97 3.44 6.47 15.45 56.40 66.24 50.50 47.99 93.92 1 2 80 3.15 4.94 1.36 18.18 31.52 38.97 35.66 51.06 44.63 2.21 Borders Northern

1 3 Al 60 3.75 5.35 9.04 Jouf 2.15 22.21 41.42 44.31 38.48 53.75 50.19

1 6 Al 30 7.00 8.91 5.10 2.01 12.05 72.96 68.71 61.83 52.13 96.26 Qassim

2 5 6 Al 7.81 3.01 9.79 5.83 1.19 78.31 51.48 64.89 82.14 91.53 Madinah

1 2 Al 20 Baha 7.61 3.69 9.46 5.75 2.45 70.49 70.32 70.32 87.65 96.03 1 5 40 4.38 5.38 3.39 56.07 50.68 46.08 55.32 66.31 37.61 26.72 Tabuk 1 2 45 2.60 3.62 4.63 34.95 54.93 47.63 57.76 76.88 68.92 Jizan 26.54 1 2 60 2.11 3.28 4.44 44.49 42.61 44.37 49.78 82.08 61.26 31.83 Najran 1 60 10 3.59 4.52 2.65 30.96 46.05 41.70 38.72 85.49 55.68 Assir 37.97 3 5 35 3.66 4.03 3.28 51.44 44.83 47.40 43.57 73.92 57.19 54.08 Eastern Province 8 14 30 9.01 8.53 9.49 3.95 75.54 77.36 75.72 72.16 89.83 12.46 Riyadh 3 6 7 6.57 6.92 7.28 73.14 71.77 71.76 70.77 84.51 27.95 32.66 Makkah Province

Subindex Score Dimension 2 Score Firms agreeing or strongly that higher education in their province supplies the local labor force with the skills required by market (%) Firms agreeing or strongly that vocational training programs in their province supply the local labor force with skills required by the market (%) Firms agreeing or strongly that educational and vocational training institutions equip the local Saudi labor force with soft skills and work ethics required by businesses in their province (%) Number of universities and institutions higher education Number of vocational and technical training institutes Firms agreeing or strongly that they can easily hire Saudi labor with the skills required by their business (%) Firms agreeing or strongly that they can easily hire foreign labor with the skills required by their business (%) Median number of days needed to obtain a foreign labor work visa Firms stating that visa-related issues pose a major or severe obstacle to current business operations (%) Firms stating that labor regulations pose a major or severe obstacle to current business operations (%) Dimension 1 Score

Availability of Skilled Local Labor Local Skilled of Availability of Skilled Foreign Labor Foreign Skilled of

1: Dimension Availability 2: Dimension Note: Dimension 1 score is the weighted average of six indicators after rescaling on a 10-point scale. Hard data , denoted by an asterisk (*), together account for 40 percent this dimension. 2 score is the average of four indicators after rescaling on a 10-point scale. Table 5.13: Indicators and Dimensions Comprising the Labor Training and Skills Subindex Training the Labor and Dimensions Comprising Indicators 5.13: Table

5. PCI RANKINGS BY SUBINDEX 40 Figure 5.8: Labor Training and Skills Subindex

Riyadh Al Madinah Al Baha Al Qassim Makkah Hail Tabuk Al Jouf Eastern Province Jizan Assir Najran Northern Borders

0 2 4 6 8 10 Availability of Skilled Local Labor Availability of Skilled Foreign Labor

5.9 Infrastructure and Business availability of business incubators and industry-specific Services training programs has increased since 2010, fostering the entrepreneurial business sector in the Kingdom The quantity and quality of infrastructure and business will require a better support infrastructure (Ernst services are vital elements in determining the success of and Young 2013). At the provincial level, this may all kinds of commercial activities. Essential infrastructure encompass technical advisory services and programs to for doing business in Saudi Arabia includes highways, educate prospective entrepreneurs on basic accounting, electricity, streetlights, and telephone lines, and necessary management, and financial planning skills. business services include garbage collection, water supply, technical advisory services, and information on The local infrastructure and business services subindex raw materials and business partners. measures the quantity and quality of local infrastructure using five indicators and the quantity and quality of Saudi Arabia ranks as 30 globally in terms of business services using one; details appear in Table 5.14. overall infrastructure, according to the 2015 Global Figure 5.9 compares the provincial subindex scores. The Competitiveness Report (World Economic Forum 2015). highest-ranking province, Jizan, is followed by Riyadh But although it ranks extremely high in some areas, such and Al Baha; the lowest ranking province is Northern as mobile telephone subscriptions per 100 people and the Borders, preceded by Al Jouf and Tabuk. Provincial quality of electricity supply, the Kingdom lags in areas scores vary little in terms of local infrastructure—the such as fixed telephone lines per 100 people and the highest province scores 4.81 and the lowest 1.7— quality of infrastructure for air transport and railroads. indicating generally good performance in this dimension. The quality of physical infrastructure also differs Provincial scores vary considerably in terms of provision considerably between and within provinces according to of business services; in this dimension, the highest population density and distance to the provincial capital. province scores 4.72 and the lowest 0.5, underscoring As for business services, the Ernst and Young G20 some provinces’ poor performance in this dimension, Entrepreneurship Barometer (2013) reports that, particularly Tabuk, Al Jouf, and Northern Borders. although 43 percent of entrepreneurs agree that the

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 41 0 6.2 Hail Hail 91.11 6.33 6.46 6.67 94.01 90.79 20.91 96.99 5.15 81 1 0 2.27 3.55 1.56 7.84 60.78 92.38 58.94 3.35 34.24 88.88 Borders Borders Northern Northern

0 Al Al 41.3 Jouf Jouf 3.17 2.69 11.88 3.65 3.23 82.71 51.71 69.14 95.67 2.29

0 Al Al 6.7 5.6 98.3 6.03 5.37 82.84 89.89 17.66 93.38 18.28 90.51 Qassim Qassim

0 Al Al 6.42 7.42 8.43 5.04 95.67 98.59 92.73 25.61 5.14 85.99 98.72 Madinah Madinah

0 Al Al 9.64 5.33 Baha 7.95 6.27 48.01 90.67 95.46 98.06 20.45 Baha 83.46 97.08 0 2.1 5.66 3.79 5.47 2.65 90.75 95.07 78.77 10.47 62.76 88.76 Tabuk Tabuk 0 8.57 9.57 7.14 7.57 Jizan 93.41 89.51 33.81 71.81 28.36 Jizan 54.73 79.88 0 5.03 47.34 86.25 5.14 4.56 1.22 5.72 66.55 89.72 85.15 19.14 Najran Najran 4.16 7.38 Assir 46.12 89.46 4.77 18.89 Assir 82.03 91.57 73.18 29.38 10 2 0 2.82 5.11 4.67 56.11 98.42 1.44 5.54 90.66 88.12 89.24 16.63 Eastern Eastern Province Province 0 96.8 4.48 5.23 81.41 7.97 6.48 9.46 98.19 95.18 28.08 Riyadh Riyadh 96 0 81.3 7.27 5.90 5.53 9.28 6.28 84.17 20.46 86.15 75.12 Makkah Makkah 84 Province Province

Sub-Index Score Dimension 1 Score Kilometers of paved roads per 100 square kilometers of the province Firms rating a range of infrastructure services provided by provincial agencies as good or very (%) Median number of days firms suffer from electrical power outages per year Firms rating services provided at their airports as adequate or very provinces’ adequate (if applicable) (%) Firms rating services provided at their seaports as adequate or provinces’ very adequate (if applicable) (%) business Firms rating their provinces’ support services as very good or excellent (%) Dimension 2 Score

Local Infrastructure Local Services

1: Dimension Local Business Business Local Dimension 2: 2: Dimension Firms agreeing or strongly that their business and regulatory environment provinces’ is stable and predictable (%) Firms rating a list of risk factors as important or very important for doing business in their province (%) Subindex Score Note: Dimension 1 score is the weighted average of the five indicators after rescaling on a 10-point scale. Hard data indicators, denoted by an asterisk (*), together account for 40 percent of this dimension. Dimension dimension. this of percent 40 for account together (*), asterisk an by denoted indicators, data Hard scale. 10-point a on rescaling after indicators five the of average weighted the is score 1 Dimension Note: 2 score is the only indicator under this dimension after rescaling on a 10-point scale. Subindex and Risks Predictability and Dimensions under Indicators 5.15: Table Note: Subindex score is the average of two indicators after rescaling on a 10-point scale. Table 5.14: Indicators and Dimensions Comprising the Local Infrastructure and Business Services Subindex Infrastructure the Local and Dimensions Comprising Indicators 5.14: Table

5. PCI RANKINGS BY SUBINDEX 42 Figure 5.9: Local Infrastructure and Business Services Subindex

Jizan Riyadh Al Baha Al Madinah Assir Hail Al Qassim Makkah Najran Eastern Province Tabuk Al Jouf Northern Borders

0 2 4 6 8 Local Infrastructure Business Services

5.10 Predictability and Risks and the key risk factors businesses’ experience, such as strategic risk, financial risk, and economic risk. Figure The Predictability and Risks subindex encompasses 5.10 presents the results for this subindex. The highest- two indicators, summarized in Table 5.15, to measure ranked province is Makkah, with a score of 7.27; the the predictability of the local business environment lowest ranked is Al Jouf, with a score of 2.29.

Figure 5.10: Predictability and Risks Subindex

Makkah Jizan Tabuk Al Qassim Al Baha Riyadh Hail Al Madinah Najran Assir Northern Borders Eastern Province Al Jouf

0 2 4 6 8

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 43 5.11 Summary Infrastructure and Business Services subindices, while most scored poorly on the Land Access and Security As the above discussion demonstrates, rankings of Tenure, Transparency and Participation, and Labor by subindex show significant variation in province Training and Skills subindices. These results reflect the performance across competitiveness dimensions. key areas of weakness in the Saudi business environment, Overall, the consistent best performers were Riyadh, where national-level interventions are needed to improve Al Madinah, and Al Qassim, while the consistent worst enabling environments for private sector development in performers were Northern Borders, Al Jouf, and Najran. all provinces. Most provinces scored well on the Entry Costs and Local

5. PCI RANKINGS BY SUBINDEX 44 6. CONCLUDING REMARKS AND POLICY RECOMMENDATIONS

The PCI provides Saudi Arabia with a powerful tool for promoting competitiveness and understanding key constraints on private sector development and growth at the subnational level. In particular, it offers local officials, the private sector, and other stakeholders a useful guide for identifying the provinces’ relative strengths and weaknesses and a practical aid to governments consulting with the private sector and working to develop actionable policy agendas for achieving a more enabling environment.

The PCI findings highlight several critical areas for policy final PCI score and their position within the tiers; taken makers at both the local and the national level seeking together, these rankings signify a province’s overall level to initiate targeted reforms to address shortcomings of “business-friendliness.” in economic governance. This section summarizes recommendations suggested by these findings. 6.1.2 Diagnosis of Strengths and Weaknesses 6.1 Local-Level Recommendations After a province’s ranking has been assessed at the The following subsections outline recommendations for overall PCI level, focus should shift to the subindex level. using the PCI as a key policy-analysis and planning tool Section 5 presented the system of province rankings that can aid policy makers in designing and implementing by subindex, dimension, and, in some cases, specific targeted reform interventions aimed at creating indicators of particular interest (within a subindex). environments more conducive for doing business. Policy makers can evaluate and use these subindex findings to diagnose their provinces’ relative strengths 6.1.1 Benchmarking Overall Performance and weaknesses. As an initial step, policy makers should use the overall Table 6.1 lists each province’s three major strengths PCI scores to determine how well their own provinces and weaknesses as indicated by their highest and lowest rank in relation to the others. In this regard, policy subindex scores. makers should consider both their provinces’ numerical

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 45 Table 6.1: Provinces’ Strengths and Weaknesses Province Strengths Weaknesses Makkah Time Costs of Regulatory Compliance Land Access and Security of Tenure Entry Costs Legal Institutions and Dispute Resolution Predictability and Risks Transparency and Participation Riyadh Legal Institutions and Dispute Resolution Transparency and Participation Land Access and Security of Tenure Informal Charges Labor Training and Skills Predictability and Risks Eastern Proactivity of Provincial Government and Attitude toward the Predictability and Risks Province Private Sector Informal Charges Labor Training and Skills Entry Costs Transparency and Participation Assir Entry Costs Transparency and Participation Local Infrastructure and Business Services Land Access and Security of Tenure Legal Institutions and Dispute Resolution Labor Training and Skills Najran Legal Institutions and Dispute Resolution Land Access and Security of Tenure Entry Costs Transparency and Participation Time Costs of Regulatory Compliance Proactivity of Provincial Government and Attitude toward the Private Sector Jizan Local Infrastructure and Business Services Transparency and Participation Entry Costs Land Access and Security of Tenure Predictability and Risks Labor Training and Skills Tabuk Informal Charges Local Infrastructure and Business Services Proactivity of Provincial Government and Attitude toward the Land Access and Security of Tenure Private Sector Entry Costs Labor Training and Skills Al Baha Local Infrastructure and Business Services Legal Institutions and Dispute Resolution Labor Training and Skills Land Access and Security of Tenure Proactivity of Provincial Government and Attitude toward the Time Costs of Regulatory Compliance Private Sector Al Madinah Labor Training and Skills Land Access and Security of Tenure Informal Charges Entry Costs Local Infrastructure and Business Services Legal Institutions and Dispute Resolution Al Qassim Legal Institutions and Dispute Resolution Transparency and Participation Entry Costs Proactivity of Provincial Government and Attitude toward the Private Sector Labor Training and Skills Informal Charges Al Jouf Time Costs of Regulatory Compliance Legal Institutions and Dispute Resolution Entry Costs Predictability and Risks Informal Charges Land Access and Security of Tenure Northern Legal Institutions and Dispute Resolution Entry Costs Borders Land Access and Security of Tenure Informal Charges Local Infrastructure and Business Services Time Costs of Regulatory Compliance Hail Entry Costs Predictability and Risks Transparency and Participation Informal Charges 6. CONCLUDING REMARKS AND POLICY RECOMMENDATIONS 46 6.1.3 Action Planning, Implementation, par with Riyadh, the top performer in this subindex; and Monitoring this improvement would significantly improve Eastern With knowledge of their provinces’ unique strengths Province’s position in the rankings. Table 5.13 shows and weaknesses, policy makers can determine local that only 43 percent of Eastern Province firms agreed priorities; set measurable, specific targets for improving or strongly agreed that they can easily hire Saudi labor areas of weak governance; and devise tailored action with the skills their businesses require, a markedly plans for realizing those targets. lower percentage than in other provinces. Improving this dimension would require investigating ways of A particularly beneficial approach is for a province to strengthening links between educational and vocational set targets for scaling up its performance on the lowest- institutions and the private sector so that the skills taught scored subindices to enter the first quarter of the best in the institutions more closely track those needed in the subindex value achieved. The specific component market. indicators under each subindex, as listed in Tables 5.1 to 5.12 above, can then be used to determine which Each province seeking to set policies to enhance measurable indicators to target. To take an example, Al competitiveness should therefore identify the highest- Madinah province was among the lowest-performing scoring province in the specific areas it plans to target for provinces on the Entry Costs subindex. Policy makers improvement. By ascertaining what policies and practices for the province might set a target for improving its the high-scoring provinces used to achieve their ranking, Entry Costs subindex score from 2.95 to the range of the the low-scoring province can learn the best practices to first quarter of the subindex value, that is, between 8 and deploy. These may include small, low-cost interventions, 9, as achieved by top performers. such as use of online platforms or improved methods of disseminating information that may nonetheless have the Once targets have been defined, action plans can be potential to yield big improvements in the rankings. devised and implemented in coordination with the concerned government entities and private sector Finally, by conducting the PCI exercise at regular stakeholders. Progress toward achieving these targets intervals (such as every two years), provinces can learn should be regularly monitored. Reducing entry costs whether they have been advancing, both in absolute terms for Al Madinah, for example, as shown in Table 5.1, (that is, their own improvements over time along the would require a significant reduction of monetary indicators) and vis-à-vis other provinces. At the national costs for obtaining business location licenses, which level, the government can reward and recognize top- surveyed firms reported were very high compared to performers on the Provincial Competitiveness Index to other provinces. This finding, in turn, opens up room for motivate other provinces. In this way, the PCI can act as peer-to-peer exchanges between provinces, allowing Al a catalyst, fostering reform momentum at the local level Madinah to learn about high-performing provinces’ best through province-to-province learning, which in turn can practices for keeping monetary costs low. facilitate adoption of best practices and improvements in lagging regions. One appealing feature of the PCI is that it compares practices within the same country, which both strengthens Numerous examples from international experience the case for implementing effective practices in a lagging testify to the power of indexing exercises and rankings region (such as entry costs in Al Madinah) and makes to trigger reform dynamics. In India, for example, a implementation rapid and easy: If another province in state-level regulatory reform program was driven by the same country can lower its monetary cost of entry, the central government, which prepared a list of reform why shouldn’t Al Madinah governorate be able to do the actions in different business regulatory areas and asked same? After all, its performance is not being compared state governments to implement them. States were then against that of Singapore or New Zealand, but against ranked, in 2015 and again in 2016, on their performance another Saudi province, such as Assir. in implementing the reforms. This approach generated considerable enthusiasm and healthy competition among Similarly, Eastern Province, which scored poorly under states. The resulting strong reform momentum helped the Labor Training and Skills subindex, can set a goal elevate states that had lagged in 2015 to reach places of achieving a higher score on the first dimension, among the leading reformers in 2016. availability of skilled labor, moving from 3 to 9 to reach

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 47 6.2 National-Level Recommendations implement reforms to promote overall competitiveness. Examples of possible national-level approaches appear By looking at areas of consistent weakness across the in Table 6.2. provinces, the national government can develop and

Table 6.2: PCI Areas of Weakness and General Recommendations Areas of Weakness General Recommendations Private Sector Partnerships Enhance communication and partnership with the private sector through routine local activities and planning, for example, through private sector involvement in using the PCI

Access to Land Adopt more demand-based or private sector–based approaches to land development, along with ongoing land reform

Ensure the private sector transparent and efficient land allocation processes

Labor Regulations, Skills, and Strengthen links between the supply of education and vocational training and market demand by Employment of Women consulting with the private sector to increase focus on subjects and skills needed to meet local needs

Provide vocational training and retraining according to the needs of labor demand

Legal Frameworks Further modernize the judicial environment and support the development of judicial and dispute resolution systems, especially commercial courts, to meet the specific needs of small enterprises

Local Coordination and Capacity Enhance coordination between local level agencies and strengthen linkages between local and national-level governance Provide training programs for local government officials to build capacity to meet business owners’ needs

6. CONCLUDING REMARKS AND POLICY RECOMMENDATIONS 48 APPENDICES

Appendix 1.A: Detailed PCI Measurement Methodology The PCI follows a verifiable and well-established indexing methodology used in previous World Bank Group and Asia Foundation economic growth initiatives. The methodology consisted of three main phases. First, survey and hard data were collected to assemble a collection of theoretically and contextually relevant indicators. Second, the indicators were standardized into a 10-point scale and compiled to construct the 10 subindices. Third, the subindices were used to calibrate the overall unweighted and weighted index.

1. Collection of Hard and Survey Data Several measures were taken to ensure the survey instrument was effective in measuring provincial 1.1 Survey Data Collection competitiveness in the Saudi context. First, qualitative The PCI is constructed principally using firm-level survey in-depth interviews (IDIs) were conducted with a data collected across all 13 provinces of the Kingdom. A sample of 36 businesses in different provinces. These multistage research strategy, described below, was used interviews helped further appraise the significance of the to ensure the accuracy of its representation of the MSME issues encompassed in the list of subindices previously population in each province. developed in consultation with public and private sector representatives, but it also helped determine the Stage 1: PCI Survey Instrument effectiveness of their descriptions and how they were A survey instrument collected general information about interpreted by business owners and managers. This firms and their performance and to capture firm owners’ information was used as a direct input in designing the perceptions of their local business environment along survey instrument. the 10 key areas represented by the PCI subindices. The Second, to test the survey questions and to identify questionnaire, first developed in English, was translated potential survey design flaws, a two-phase pilot survey into Arabic and checked to ensure that the questions’ was conducted on a sample of 112 firms of different sizes meanings remained intact.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 49 and in different activity sectors across six provinces. confirm whether the businesses remained operational in Once the pilot was completed, the data collected and the the province. qualitative feedback received from the field team were Firms were randomly selected for the telephone used to revise and finalize the survey instrument. interviews using a sampling interval technique. As Table Stage 2: Sampling Frame Development 1.A.1 illustrates, the sampling interval, s, was calculated by dividing the total number of firms listed under each While the survey instrument was being finalized, province by the required sample size for each province. a representative sampling frame of the provincial Every sth firm was contacted for interview. If the sth populations of micro-, small-, and medium-sized firm was unobtainable for interview, then every sth +1 enterprises was being developed using chamber of firm was contacted. Thereafter, the next firm selected commerce datasets of registered businesses in each for interview followed an interval of s. A contact sheet province. In comparison to other sources considered, was used throughout the telephonic interview process chamber of commerce datasets provide the most to record unobtainable firms (that is, those with no recent, comparable, and reliable listing of businesses in response, wrong numbers, interrupted interviews, and so each province, since all firm owners must register for on). membership with the relevant chamber of commerce to complete proceedings with various government The information obtained from the CATI listing exercise agencies. was then used to estimate the universe population of eligible live firms in each province by projecting the Using the chamber of commerce datasets, a computer- proportions of eligible and operating or “live” firms onto assisted telephonic interviews (CATI) listing exercise the original CoC population frame. This, in turn, was was conducted. The listing questionnaire solicited used as a basis for sampling for the PCI survey and was information on 8,500 firms, including sector, number of later reused to obtain post-sampling weights. full-time employees, and age of firm; it also served to

Table 1.A.1: Selection of Firms for CATI Interviews Using a Sampling Interval Province Total No. of Firms Sample Size Sampling Interval Assir 35,563 500 71 Hail 1,131 500 2 Jizan 14,368 500 28 Tabuk 11,615 500 23 Riyadh 153,433 1,000 153 Najran 20,617 500 41 Al Madinah 15,640 1,000 15 Al Baha 8,650 500 17 Makkah 107,911 1,000 108 Northern Borders 3,789 500 7 Eastern Province 46,000 1,000 46 Al Qassim 6,800 500 13 Al Jouf 3,719 500 7 Total 429,236 8,500 n.a. Note: The abbreviation “n.a.” stands for “not applicable.”

APPENDICES 50 Stage 3: Sampling for the PCI survey high rates of nonresponse to sensitive questions or by introducing new “treatment effects” through the use of A three-stage sampling approach was used to draw a enumerators (Fowler 2013). statistically representative sample of businesses for each of the thirteen provinces using a method known Three steps were taken to minimize possible sources of as probability proportional to size (PPS). Under this bias. First, at the beginning of each interview, respondents sampling procedure, each element of the population was were provided with a short introduction to the purpose of given a known, positive probability of being included in the study and the questionnaire and were reassured of the the sample. Primary sampling units (PSUs) were defined confidentiality of their responses. Second, enumerators as the districts in the major city of each province, and underwent interview training and were instructed to read secondary and tertiary units were defined by commercial opinion-based or sensitive questions without changing areas and firms, respectively. the wording or providing explanations using commonly used terms so as not to influence respondents. Third, The first stage of sampling used PPS, with size defined by whenever possible, questions in the survey instrument the size of the population, to select a specific number of were posed to elicit answers that would be directly PSUs from a sampling frame of all PSUs in the major city comparable among respondents. in each province. While sampling was done using PPS, implicit stratification was employed in selecting firms. Stage 5: Data Validity The stratification design had three levels: the provincial To ensure the reliability of firms’ responses, various level, the sectorial level, and the firm size level. (Size internal and external validity checks were undertaken. To was defined by number of full-time employees.) This verify internal validity, quality checks were implemented helped ensure that the PSU sample was spread across all to confirm the logical accuracy of the collected survey categories of eligible firms and thus accurately reflected data. In addition to checks for out-of-range values, the each city’s firm composition. quality checks included confirming that skip patterns In the second stage, commercial areas in which firms were respected when relevant and that responses were existed in each PSU or district were selected, using when tested for logical consistency. The total number of appropriate systematic equal probability sampling. Once inspections from individual agencies had to be less than the commercial areas were identified, the third stage or equal to the total number of inspections, for example. involved selecting a specific number of firms within each Similarly, the total cost of obtaining a business location of the selected PSUs, using a “random walk” approach license had to be less than or equal to the total cost. with a sample interval of N, derived from the estimated The internal validity of responses was further ascertained total number of firms in the commercial area. by examining the coherence of responses to related Thus, this sampling procedure provided a strict sampling questions. Figure 1.A.1 compares firms’ evaluation of the strategy that yielded the benefits of improved standard quality of electricity in their province with the number of errors when estimating aggregates, while at the same power outages experienced in the previous year. These time allowing fieldwork to proceed quickly and two measures correlated at -0.82, demonstrating that minimizing the discretion given to enumerators. A more firms’ responses were consistent on this point. comprehensive presentation of the sampling approach To check the external validity of firms’ responses, appears in Appendix 1.B. objective and easily verifiable hard data from published Stage 4: Face-to-Face Interviews sources was used. Figure 1.A.2 presents an example. It shows the results of measuring the rank ordering of Face-to-face interviews were conducted with the road coverage in each province, measured as kilometers sampled businesses to capture their perceptions about of paved road per 100 square kilometers, against firms’ and experiences doing business in their province. On evaluation of road quality in their province. These two the one hand, this survey distribution method yielded measures correlated at -0.15, perhaps reflecting that road high response rates and thus inspires more confidence regarding the precision of the results. On the other hand, quality is not the same as road coverage. it may also have induced bias in the results by generating

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 51 Figure 1. A 1: Firms’ Evaluation of Electricity vs. Number of Power Outages

5

Al Qassim • Hail Al Madinah • •Eastern Province 4.5 • Riyadh Makkah AI Baha • • Northern Borders • AI Jouf •Tabuk • • Najran 4 • • Jizan • Assir 3.5 Mean Firm Evaluation of Electricity

3 0 .5 1 1.5 2 Mean Number of Power Outages Experienced 95% CI Fitted values • Mean Firm Evaluation of Electricity (5−Point Scale) Figure 1. A 2: Firms’ Evaluation of Roads vs. Road Coverage

5

Eastern Province AI Qassim 4.5 • Riyadh • • Al Madinah • • Hail • AI Baha Makkah 4 Najran • • AI Jouf ••Tabuk 3.5 • Northern Borders Mean Firm Evaluation of Roads • Assir •Jizan 3 0 10 20 30 40 50 Kilometers of paved road per 100 square kilometer 95% CI Fitted values • Mean Firm Evaluation of Roads (5−Point Scale)

APPENDICES 52 1.2 Hard Data Collection 2.2 Constructing the Indicators Hard data indicators and sources were assembled After normalizing the indicators, subindex scores were simultaneously with the collection of the survey calculated as the simple average of the scaled indicators. data. These indicators serve several purposes. Most If a subindex has multiple dimensions, the average of importantly, they help ameliorate perception bias and the dimensions was used instead, so that the dimensions offset the “anchoring problem” in survey research.5 They receive equal weights. also provide measures of structural endowments (such As in previous studied using hard data in a subindex, the as infrastructure endowment, proximity to markets, general rule was followed that the indicator had to account and quality of human capital) used to obtain subindex for 40 percent of the total index. If hard data was used in weights. a subindex containing multiple dimensions, however, the 2. Construction of the Subindices rule was adapted so that hard indicators accounted for only 40 percent of that particular dimension to keep from Once the survey and hard data was collected and distorting the overall meaning of the index. subindices, dimensions, and indicators selected and finalized based on theoretical and contextual assessment, One main motivation for adopting a methodology the PCI subindices were constructed as baskets of combining hard and soft data was to help ameliorate standardized indicators reflecting the ten most important perception bias. The 40 percent weighting for hard issues faced by Saudi Arabia’s private sector. data indicators is adequate to correct for perception bias without dominating the opinions of respondents. 2.1 Normalizing the Indicators Nevertheless, to ensure that the overall PCI rankings were not sensitive to this weighting choice, two Once their provincial means and median were obtained, additional statistically driven indexing frameworks were the indicators were normalized around a 10-point scale used to check for robustness, as described in section 4 through a simple normalization process, using the above. following formula: Where Province is the individual province value, 3. Calibration of the Final PCI Index Minimum is the smallest provincial value, and Maximum Once all the subindices were constructed, the final is the largest provincial value among all of the provinces. unweighted index was calibrated by simply adding For some indicators, a large number has a negative the individual subindex scores. To ensure that the final interpretation. In such cases, the index was reversed scores offer the most policy relevant information to by subtracting the entire quantity from 11. An example provincial officials, however, a weighting scheme based of such a negative indicator would be the number of on principal component analysis (PCA) was employed to total inspections experienced by a firm. For these, the determine weights for each subindex statistically. Under following formula was used: this scheme, subindex weights signal local officials how

to prioritize their reform interventions for the biggest

( ( ( ( impact. Province _ i-Minimum 11 – 9* i +1 ( ( Maximum _ Minimum The weighting scheme followed a three-step approach based on a widely used method developed by Nicoletti, Indicators are normalized for three key reasons. Scarpetta, and Boylaud (2000). First, PCA was applied First, normalized indicators can be transformed to a on all the subindices to divide them into uncorrelated value based solely on each province’s score vis-à-vis “components” or baskets of subindices and to obtain the other provinces. Second, it allows data from different component “loadings,” which measure the correlation indicators, which are often in different units, to be between each individual subindex and the components. combined into one subindex. Third, by setting absolute Following standard practice, the number of components values, normalization facilitates comparison of PCI was determined according to three criteria: (i) they have scores over time. associated Eigen values larger than 1; (ii) they contribute

5. The anchoring problem encompasses biases that may result when respondents assess a situation based on personal experience without understanding how their experiences compare to those of other respondents in different provinces.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 53 individually to the explanation of the overall variance by Labor Training and Skills (weight of 0.19). The second more than 10 percent; (iii) they contribute cumulatively intermediate composite includes Entry Costs (weight to the explanation of the overall variance by more of 0.52) and Legal Institutions and Dispute Resolution than 60 percent. Under these conditions, the first four (weight of 0.26). The third intermediate composite components were selected. includes Informal Charges (weight of 0.20) and Local Second, varimax rotation of the components was used Infrastructure and Business Services (weight of 0.57). to minimize the number of individual subindices with The final intermediate composite includes the Time a high loading on the same component. Third, once the Costs of Regulatory Compliance (weight of 0.35) and rotated component loadings were obtained, the subindex Predictability and Risks (weight of 0.47). weights were constructed using the method outlined by Using these domain weights, the intermediate composites Nicoletti, Scarpetta, and Boylaud (2000). This method were then aggregated and weighted by the proportion exploits the fact that the square component loadings of variance explained by the respective component to represent the proportion of the total unit variance of the obtain the subindex weights. The results of this exercise subindex to group subindices with the highest loadings appear in Table 1.A.2. As a last step, the final weights into “intermediate composite” indicators. were rounded up and the subindices were grouped into As Table 1.A.2 shows, the first intermediate composite three categories, with corresponding weights, as follows: includes Land Access and Security of Tenure (with a high (15 percent), medium (10 percent), and low (5 weight of 0.18 given by the normalized square factor percent). Using these calibrated weights, the final PCI loadings), Transparency and Participation (weight was calculated as the weighted sum of all 10 subindices, of 0.26), Proactivity of Provincial Government and with the final subindex scores reflecting the relative Attitude toward the Private Sector (weight of 0.29), and importance of each subindex.

Table 1.A.2: Component Loadings and Intermediate Composites Rotated Component Loadings Squared Loadings (Scaled to Sum to 1) Comp. 1 Comp. 2 Comp. 3 Comp. 4 Comp. 1 Comp. 2 Comp. 3 Comp. 4 Entry Costs -0.05 0.72 -0.19 0.12 0.00 0.52 0.04 0.01 Land Access and Security of Tenure 0.42 0.28 0.18 -0.21 0.18 0.08 0.03 0.04 Transparency and Participation 0.51 0.04 -0.18 0.07 0.26 0.00 0.03 0.01 Time Costs of Regulatory Compliance 0.08 0.16 -0.06 0.59 0.01 0.03 0.00 0.35 Informal Charges 0.26 -0.27 -0.45 -0.17 0.07 0.07 0.20 0.03 Legal Institutions and Dispute Resolution 0.09 0.51 0.21 -0.26 0.01 0.26 0.04 0.07 Proactivity of Provincial Government and 0.54 -0.09 -0.05 0.04 0.29 0.01 0.00 0.00 Attitude toward the Private Sector Labor Training and Skills 0.44 -0.10 0.27 0.14 0.19 0.01 0.07 0.02 Local Infrastructure and Business 0.03 -0.13 0.75 -0.01 0.00 0.02 0.57 0.00 Services Predictability and Risks -0.01 -0.04 0.08 0.68 0.00 0.00 0.01 0.47 Explained Variance 0.31 0.20 0.19 0.18 n.a. n.a. n.a. n.a. Proportion of Explained Variance 0.36 0.23 0.21 0.20 n.a. n.a. n.a. n.a.

Notes: The abbreviation “n.a.” stands for “not applicable.” “Explained variance” is the variance explained by each component. “Proportion of variance” is the variance explained by each component divided by the total explained variance by the three components.

APPENDICES 54 Table 1.A.2: Subindex Weights for the Final PCI Index Domain Weight of the Weight Weights Final Importance Weights RespectiveComponent Score (w_i) (∑w_i=1) Weights

Entry Costs 0.52 0.23 0.12 14% 15% High Land Access and Security of Tenure 0.18 0.36 0.06 8% 5% Low Transparency and Participation 0.26 0.36 0.09 11% 10% Medium Time Costs of Regulatory Compliance 0.35 0.20 0.07 9% 10% Medium Informal Charges 0.20 0.21 0.04 5% 5% low Legal Institutions and Dispute 0.26 0.23 0.06 7% 5% low Resolution Proactivity of Provincial Government 0.29 0.36 0.10 12% 15% High and Attitude toward the Private Sector Labor Training and Skills 0.19 0.36 0.07 8% 10% Medium Local Infrastructure and Business 0.57 0.21 0.12 14% 15% Medium Services Predictability and Risks 0.47 0.20 0.09 11% 10% Medium Total n.a. n.a. 0.84 100% 100% n.a. Note: The abbreviation “n.a.” stands for “not applicable.”

To check the robustness of the overall rankings obtained The final PCI results obtained using both approaches using this indexing methodology, two further indexing were compared with results obtained using the indexing approaches were adopted. The first, a regression-based methodology described above to test the sensitivity of approach, involved regressing a binary variable “Plans province rankings. The results of this exercise appear to make new investments” from the PCI survey on above in section 4. standardized values of the indicators, controlling for firm and province-level characteristics. Using ordinary least Appendix 1.B: Sampling for the squares regression, the indicators’ scores were obtained PCI Survey by multiplying the coefficients on the standardized indicators by their respective provincial means. The 1. Multistage Sampling Procedure scores were then summated by subindex and normalized A three-stage sampling approach using a method known through exponentiation. The final PCI was calibrated as as probability proportional to size (PPS) was used to the weighted sum of the normalized subindex scores. draw the PCI survey’s province-level representative The second approach employed PCA on standardized sample of firms. PPS is a cluster probability sampling values of the indicators under each subindex separately. method that accounts for the size of the population in a This allowed dividing the subindices into uncorrelated given area, with areas of denser populations more likely components or “baskets of variables” and obtaining to be selected for the sample. For the PCI survey, it was component loadings for indicators with loadings of observed that firms constituting the eligible population greater than 0.5 in absolute value. These loadings of interest were distributed among both residential and were then multiplied by the provincial means of the commercial or industrial areas and that the concentration standardized indicators to obtain the indicators scores. of firms in residential areas was roughly proportional to The scores were then summated by subindex and the population of households. The expedient course was normalized through exponentiation. The PCI was thus to conduct sampling using the size of the population reached by taking the weighted sum of the normalized of households as an indicator of the size of the population subindex scores. of firms.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 55 Once a sample of areas for primary sampling units walk. Thus, this sampling procedure provided a strict (PSUs) was selected to reflect the composition of firms sampling strategy that yields the benefit of improved within each city, firms in residential areas were randomly standard errors when estimating aggregates, while at the selected for interview until 50 percent of the sample same time it allowed fieldwork to proceed quickly and had been achieved. Thus, after the achieved number of minimized the discretion given to enumerators. interviews under each stratum were reviewed, purposive sampling was used in commercial and industrial areas 2. Stratification Design until the required number of firms under each stratum Under the above described sampling procedure, implicit was achieved. The steps taken to implement the PPS stratification was maintained for the selection of firms, methodology under each stage of sampling is outlined which helped ensure that the sample of PSUs was spread below. across the categories of eligible firms and presented a more accurate reflection of the composition of firms 1.1 First Stage within each city. The stratification design was done at As a first step, the PSUs were defined as the districts three levels: province level, sector level, and firm size comprising the cities within each province. A sampling level. Size class, defined in terms of number of full-time frame of the PSUs was established using a recent and employees, was divided into three strata: micro, small, complete list of the population in each district of the major and medium. Any firms with more than 99 employees city in each province. For the three largest provinces of were ineligible for inclusion in the sample. Eligible Riyadh, Makkah, and the Eastern Province, a list of the sectors, defined as nonagricultural, nongovernment- districts in the second largest city was also used. The owned sectors, were divided into eight strata, allowing compiled list of PSUs was then sorted sequentially from a finer degree of stratification. Appendix 1.C provides smallest to largest according to population size. Using a complete breakdown of the strata, and Appendix 1.D the PPS sampling technique, with the population as a provides the detailed definitions of the eligible size and measure of each PSU’s size, the number of interviews to sector classifications included in the PCI. be achieved within each PSU was determined according to city size and the total number of districts per city. 3. Disproportionate Sampling Strategy The original CoC data yielded an overrepresentation 1.2 Second Stage of firms in some provinces and an underrepresentation For each of the selected PSUs, field visits were conducted of firms in other provinces. To ensure valid inferences, by enumerators to compile a list of all commercial areas therefore, a disproportionate strategy was employed at where firms exist. The commercial areas were then the province level to ensure minimum representation of selected using, when appropriate, systematic equal firms based in smaller, less populated provinces. Table probability sampling. 1.B.1 illustrates this process. 1.3 Third Stage 4. Postsampling Weights Once the commercial areas were identified, firms were Once the interviews were completed and the data randomly selected for interviews using a sample interval collected, it was necessary to reweigh the sample back to of N, derived from the estimated total number of firms in the estimated populations based on the CoC listing. The the commercial area. This was achieved under a “random postsampling weights were obtained by simply dividing walk” approach, which involved the enumerators the estimated population in each stratum by the number starting from a landmark and following a “left/right of interviews achieved in each sample. hand rule,” such that only one direction was used for the

APPENDICES 56 Table 1.B.1: Disproportionate Sampling Strategy Province Proportionate Proportionate Disproportionate Disproportionate Sample Sample (%) Sample Sample (%) Makkah 1,297 32% 860 22% Riyadh 970 24% 700 18% Eastern Province 430 11% 350 9% Assir 448 11% 350 9% Najran 198 5% 250 6% Jizan 171 4% 300 8% Tabuk 113 3% 240 6% Al Baha 101 3% 240 6% Al Madinah 99 2% 150 4% Al Qassim 88 2% 150 4% Al Jouf 39 1% 150 4% Northern Borders 37 1% 150 4% Hail 10 0% 110 3% Total 4,000 100% 4,000 100%

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 57 1 2 3 7 2 46 25 9 83 67 18 34 43 67 72 34 43 16 91 94 71 74 31 107 183 245 203 Vehicles Retail Trade, Retail Trade, Wholesale and Repair of Motor

2 0 0 6 2 0 1 1 0 1 2 2 0 9 7 1 3 3 3 8 5 3 2 1 15 10 15 and Storage Transportation Transportation 2 1 7 2 1 8 1 2 5 4 0 1 5 0 0 3 5 6 0 7 3 1 14 12 11 10 10 Activities Scientific, Professional, and Technical and Technical 5 1 2 4 1 7 0 5 3 8 6 2 6 4 5 4 18 4 17 24 13 17 57 21 16 35 10 Manufacturing

2 5 1 1 2 2 0 4 0 2 3 4 3 0 5 6 6 11 1 1 1 0 1 5 4 12 25 and Information Communication 5 4 8 11 2 8 5 3 13 15 8 9 26 49 23 37 21 46 29 34 26 12 12 10 38 41 70 Construction 8 1 4 5 1 1 7 1 7 1 3 5 4 2 4 5 1 7 3 1 1 12 19 10 15 20 17 Service Activities and Support Administrative 2 8 2 5 1 3 9 9 11 7 7 14 13 33 31 22 38 27 16 41 22 37 22 29 50 69 56 Service Activities and Food Accommodation Size Micro Micro Micro Micro Micro Micro Micro Micro Micro Small Small Small Small Small Small Small Small Small Medium Medium Medium Medium Medium Medium Medium Medium Medium Al Madinah Al Baha Tabuk Jizan Najran Assir Riyadh Eastern Province Makkah Appendix 1.C: Strata Breakdown Strata Appendix 1.C:

APPENDICES 58 1 3 8 1 28 33 23 18 38 28 27 38 0 1 0 0 2 2 2 1 2 2 2 1 0 1 1 0 1 1 1 0 5 1 2 2 7 0 1 2 3 1 2 3 3 3 8 2 0 1 0 1 0 3 0 1 0 5 1 1 2 3 1 4 7 11 10 27 15 17 13 14 1 2 2 0 0 1 2 2 1 5 3 3 0 6 1 9 3 8 2 9 7 10 16 21 Micro Micro Micro Micro Small Small Small Small Medium Medium Medium Medium Hail Northern Borders Al Jouf Al Qassim

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 59 Appendix 1.D: Definitions of Eligible Appendix 2: List of Subindices and Firm Size and Sectors Component Indicators6 Sector Classification Following is the complete list of subindices and component indicators used in the PCI study. In line with the United Nations’ International Standard Industrial Classification (ISIC) system used by the Saudi 1. Entry Costs7 Ministry of Commerce, eight sectors were considered eligible for the study. These can be grouped under three Dimension 1: Time Costs broad sector types, as follows: • Business density in the province.*8 (+ve)9 1. Industry, including manufacturing and construction • Median number of days it takes firms to obtain a 10 2. Wholesale and retail trade and repair of motor business location license from the municipality. (-ve) vehicles • Median numbers of days it takes firms to register with 3. Services, including accommodation and food service the Ministry of Labor. (-ve) activities; transportation and storage; information and • Median number of days it takes firms to register with communication; professional, scientific, and technical the General Organization for Social Insurance. (-ve) activities; and administrative and support service • Median number of days it takes firms to obtain a activities certificate of Zakat. (-ve) Sectors excluded from the study included agriculture, • Median number of days it takes firms to obtain a civil forestry, and fishing; mining and quarrying; electricity, defense license. (-ve) gas, and water supply; financial intermediation; real estate; education; and health. Any state-owned firms or • Median number of licenses and permits required for organizations were also ineligible. a firm engaging in wholesale or retail trade to legally operate the business.11 (-ve) Firm Size Definition • Median number of licenses and permits required for a Based on the definition of the Ministry of Commerce’s firm engaging in manufacturing to legally operate the recently established Small and Medium Enterprise business. (-ve) General Authority, the following classification of • Percentage of firms that rating as difficult or very MSMEs was used to design the PCI: difficult completion of all the licenses, permits, and • Micro (1 to 5 employees) procedures required to legally operate their businesses. • Small (10 to 49 employees) (-ve) • Medium (50 to 99 employees) Any firms over 100 employees were ineligible for the study.

6. Indicators denoted with an asterisk (*) are hard data indicators; all other indicators were collected from survey data. 7. For most indicators under this subindex, the sample was limited to new entrants only (i.e., firms under three years of age) to better capture the time and costs involved in the current state of regulatory processes governing business entry, which have undergone significant improvements in recent years. 8. Business density measures the number of new business registrations per 1,000 people aged 15 to 64. For the purpose of the PCS study, the number of new business registrations was measured by the total number of new business location licenses issued in each province in the past year (2015). 9. The interpretation of a high score for each indicator is given between brackets. 10. For indicators involving duration, to ensure comparability, waiting periods were measured starting from the time the application or request is submitted to the time the desired approval or service is received. 11. Firms were classified according to the United Nations’ ISIC 4 (International Standard Industrial Classification of All Economic Activities), adopted by the Saudi Ministry of Commerce for issuing certificates of commercial registrations.

APPENDICES 60 Dimension 2: Monetary Costs • Percentage of firms agreeing or strongly agreeing that the content of the above documents or information is • Median amount of official fee(s) required to obtain a clear and easy to understand and follow. (+ve) business location license from the municipality. (-ve) • Percentage of firms believing that personal • Median total costs to obtain a business location license connections (i.e., friends and family relations) with from the municipality. (-ve) local government officials are frequently or always 2. Land Access and Security of Tenure necessary to facilitate access to the above documents. (-ve) Dimension 1: Land Access • Percentage of firms believing they are confident or • Total number of industrial cities in the province.* (+ve) very confident of their knowledge of existing rules, • Percentage of firms stating that difficulties in securing laws, and regulations concerning the running of their ownership or lease of land are a major or severe businesses. (+ve) obstacle to business expansion. (-ve) • Percentage of firms agreeing that changes are • Percentage of firms agreeing that the application of land frequently or always made to the local administration’s zoning rules (i.e., allocation decisions for residential, rules, laws, and regulations materially affecting their commercial, or other types of land) in their province is businesses. (-ve) efficient and consistent. (+ve) • Percentage of firms stating that they are seldom or never informed of such changes. (-ve) Dimension 2: Security of Tenure • Percentage of firms rating as low or very low the risk Dimension 2: Participation of changes in rental contracts.12 (+ve) • Percentage of firm owners that are members of • Percentage of firms believing that the process of at least one chamber of commerce committee or 14 disputing changes in lease contracts is frequently or subcommittee. (+ve) always fair. (+ve) • Number of chamber committees or subcommittees per 10,000 registered firms in the province.* (+ve) 3. Transparency and Participation • Percentage of firms agreeing that memberships in Dimension 1: Transparency chambers of commerce or other business associations • Percentage of firms rating as easy or very easy access to are useful or very useful. (+ve) a list of the policy, regulatory, and planning documents • Percentage of firms stating that local government or information necessary to run their businesses.13 authorities frequently or always solicit comments (+ve) from affected firms on the content and implementation of new laws or policies concerning businesses. (+ve)

12. Changes in agreed rental agreements include rent increases, sales to new parties, or new contractual terms that limit business activity. 13 The list of documents and information includes information on acquiring the required licenses and permits; application and administrative forms for the required licenses and permits; national laws and regulations concerning businesses; provincial land use allocation plans and maps; national/provincial investment incentive policies and transformation plans; plans for new provincial infrastructure projects; etc. The average score across the different documents or information were taken to form a single indicator of business owners’ perception of access to information necessary for running their businesses, where in each case the answer ranges from very easy to impossible. 14. When setting up their businesses, all firm owners must register for membership with the relevant chamber of commerce to complete proceedings with governmental departments. As of 2014, memberships can be completed online along with the commercial registration process. Therefore, this indicator aims to measure the participation of firms by asking whether firms have any additional memberships in committees or subcommittees under the chambers, which represent the views of specific sectors and/or activities and communicate them through the chamber to the relevant government bodies.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 61 4. Time Costs of Regulatory Compliance • Percentage of firms stating that firms in their line of business are frequently or always expected or • Median percentage of senior management spent during requested to give informal payments or gifts during the past year on dealing with bureaucratic procedures a range of dealings with government officials (e.g., and paperwork required by government regulations. applying for public services, processing licenses and (-ve) permits, and obtaining the desired type or number of • Median number of inspections by or mandatory visas). (-ve) meetings with a list of local government agencies 15 • Percentage of firms participating in public procurement firms are subjected to per year. (-ve) contracts during the past three years. (+ve) • Median duration of inspections by or mandatory • Percentage of firms agreeing that information meetings with a list of local government agencies concerning public procurement contracts in the firms are subjected to per year. (-ve) province is frequently or always transparent. (+ve) • Percentage of firms rating as difficult or very difficult • Percentage of firms agreeing that procedures for working with government officials on complying with winning public procurement contracts in the province laws and regulations. (-ve) are frequently or always fair. (+ve) 5. Informal Charges16 • Percentage of firms agreeing that personal connections (i.e., friends or family relationships) are important Dimension 1: Firm-Level Corruption or very important for winning public procurement • Percentage of firms reporting that informal payments contracts. (-ve) occur in their line of business. (-ve) • Percentage of firms disagreeing or strongly disagreeing • Percentage of firms reporting that firms in their line that preferential treatment or favoritism (based on of business usually know in advance the amount of personal connections, nationality, etc.) by government informal payment required. (-ve) officials does not exist. (-ve) • Percentage of firms believing that, with additional • Percentage of firms disagreeing or strongly disagreeing payment, services are frequently or always delivered that preferential treatment or favoritism (based on as expected. (-ve) personal connections, nationality, etc.) by government officials is not harmful. (-ve) Dimension 2: Systematic Corruption • Percentage of firms reporting that firms in their line of • Percentage of firms stating that making an informal business frequently or always experience misconduct payment is essential or very useful to expedite by local government officials during inspections (i.e., government services. (-ve) overzealous inspections, requests for informal charges, • Percentage of firms stating that personal connections unfair treatment, discrimination, or harassment). (-ve) (i.e., friends or family relations) with local government officials are essential or very useful to expedite government services. (-ve)

15. The list of local government agencies includes municipality departments, Civil Defence, Ministry of Labor departments, Ministry of Commerce departments, Customs, etc. 16. One strand of the literature on corruption suggests that informal charges may be beneficial if they are predictable and expedite bureaucratic procedures (i.e., firms are able to factor bribe costs into their business plans and the bribes deliver expected results) (Kaufmann and Wei 1999; Campos, Lien, and Pradhan 1999; Méon and Weil 2010). While this “efficient grease” hypothesis lacks significant empirical support, it was echoed during the presurvey qualitative interviews in the context of the Saudi business environment. In particular, it was revealed that while most firm owners considered informal charges to be detrimental to doing business, they also acknowledged them as useful for expediting government procedures and ensuring their businesses’ smooth operation. At the same time, however, respondents frequently indicated that government officials, especially during inspections, would demand such payments even if businesses were in compliance with rules and regulations; that is, they would use compliance with local regulations to extract rent. Therefore, for the purpose of constructing the informal changes subindex, all indicators were negative scores, as corruption to grease the wheel of business cannot be justified.

APPENDICES 62 6. Legal Institutions and Dispute • Percentage of firms agreeing or strongly agreeing that Resolution contracts, land, and other business resources in their province mostly fall into the hands of larger enterprises • Percentage of firms agreeing or strongly agreeing or state-owned corporations. (-ve) that the legal system will uphold their contract and property rights. (+ve) 8. Labor Training and Skills • Percentage of firms agreeing or strongly agreeing that Dimension 1: Availability of Skilled Local Labor they can appeal to competent persons at higher levels to resolve disputes over misconduct by local government • Percentage of firms agreeing or strongly agreeing that officials (e.g., unfair treatment, harassment or higher education in their province supplies the local discrimination, asking for informal charges). (+ve) labor force with the skills required by the market. (+ve) 7. Proactivity of Provincial Government • Number of universities and higher education and Attitude toward the Private Sector institutions (both public and private) in each province.* • Percentage of firms stating that the attitude of (+ve) government officials in the province toward the private • Percentage of firms agreeing or strongly agreeing that sector is positive or very positive. (+ve) vocational training programs in their province supply • Percentage of firms agreeing or strongly agreeing the local labor force with the skills required by the that provincial officials are proactive in implementing market. (+ve) initiatives that support private businesses. (+ve) • Number of vocational and technical training institutes • Percentage of firms agreeing or strongly agreeing (both public and private) in each province.* (+ve) that provincial officials are proactive in exploiting • Percentage of firms agreeing or strongly agreeing that flexibility in the administration of national regulations they can easily hire Saudi labor with the skills required to minimize the regulatory burden on businesses. by their businesses. (+ve) (+ve) • Percentage of firms agreeing or strongly agreeing that • Percentage of firms agreeing or strongly agreeing that educational and vocational training institutions equip provincial officials are more proactive in assisting the the local Saudi labor force with the soft skills and private sector than are central government officials. work ethics required by businesses in their province.17 (+ve) (+ve) • Percentage of firms agreeing or strongly agreeing that local public officials have sufficient knowledge and Dimension 2: Availability of Skilled Foreign Labor skills to fulfil their duties. (+ve) • Percentage of firms agreeing or strongly agreeing • Percentage of firms agreeing or strongly agreeing that that they can easily hire foreign labor with the skills coordination is good between different government required by their businesses. (+ve) agencies in their province. (+ve) • Median number of days it takes firms to obtain a • Percentage of firms agreeing or strongly agreeing foreign labor work visa. (-ve) that larger enterprises or state-owned corporations • Percentage of firms stating that visa-related issues pose receive more support from government officials than a major or severe obstacle to the current operation of do smaller firms in their province. (-ve) their businesses. (-ve) • Percentage of firms agreeing or strongly agreeing that • Percentage of firms stating that labor regulations (i.e., contracts, land, and other business resources in their Saudization policies) pose a major or severe obstacle province mostly fall into the hands of enterprises with to the current operation of their businesses. (-ve) close relationships with government officials. (-ve)

17. As opposed to “hard” skills (i.e., specific, technical abilities such as writing and analytical skills), this indicator aims to capture business owners’ perceptions of the extent to which educational and vocational training in the province equips the local labor force with the “soft” skills and work ethics (i.e., reliability, commitment to working hours, etc.) required to meet the needs of businesses.

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 63 9. Local Infrastructure and Business Dimension 2: Business Services Services • Percentage of firms rating as very good or excellent the business support services in their province Dimension 1: Local Infrastructure (e.g., business information services, consultancy • Percentage of firms rating as good or very good a services, recruitment services, etc.). (+ve) range of infrastructure services provided by provincial agencies (e.g., road quality, water, electricity, etc.).18 10. Predictability and Risks (+ve) • Percentage of firms agreeing or strongly agreeing • Median number of days firms suffer from electrical that the business and regulatory environment in their power outages per year. (-ve) province is stable and predictable. (+ve) • Kilometers of paved roads per100 square kilometers • Percentage of firms rating a list of risk factors as in the province.* (+ve) important or very important for doing business in their province.19 (-ve) • Percentage of firms rating as adequate or very adequate services provided at airports in their province (if applicable). (+ve) • Percentage of firms rating as adequate or very adequate services provided at seaports in their province (if applicable). (+ve)

18. The average score across the different services was taken to form a single indicator of business owners’ rating of local infrastructure service, where in each case the answer ranges between “poor” and “excellent.” The same was applied to business owners’ rating of local business support services. 19. The risk factors include strategic risk, operational risk, regulatory risk, financial risk, labor risk, and economic risk. Definitions of these risk factors were provided to PCI respondents to ensure clarity and consistency.

APPENDICES 64

Hail and Assir Jizan Risks Tabuk Najran Al Jouf Riyadh Eastern Borders Al Baha Makkah Northern Province Al Qassim Al Madinah Predictability Hail Assir Jizan Local Tabuk Najran Al Jouf Riyadh Eastern Al Baha Makkah Borders Province Northern Services Al Qassim Al Madinah Infrastructure and Business Hail Assir Jizan Skills Tabuk Labor Najran Al Jouf Riyadh Eastern Al Baha Borders Makkah Province Northern Al Qassim Al Madinah Training and Training

Hail Assir Jizan Tabuk Najran Al Jouf Riyadh Eastern Al Baha Borders Makkah Province Northern Al Qassim Al Madinah Proactivity of Provincial Private Sector Government and Attitude toward the Hail Assir Jizan Legal Tabuk Najran Al Jouf Riyadh Eastern Al Baha Borders Makkah Province Northern Al Qassim Al Madinah Resolution Institutions and Dispute Hail Assir Jizan Tabuk Najran Al Jouf Riyadh Eastern Al Baha Borders Makkah Province Northern Informal Charges Al Qassim Al Madinah Hail Assir Time Time Jizan Tabuk Najran Al Jouf Riyadh Eastern Makkah Al Baha Borders Province Northern Costs of Al Qassim Al Madinah Regulatory Compliance Hail and Assir Jizan Tabuk Najran Al Jouf Riyadh Eastern Borders Al Baha Makkah Province Northern Al Qassim Al Madinah Participation Transparency Transparency Hail Assir Jizan Land Tabuk Najran Al Jouf Riyadh Tenure Eastern Al Baha Borders Makkah Province Northern Al Qassim Al Madinah Security of Access and

Al Hail Assir Jizan Entry Tabuk Costs Najran Al Jouf Riyadh Eastern Borders Makkah Al Baha Madinah Northern Province Al Qassim 1 9 3 5 2 8 4 6 7 11 10 12 13

Ranking

Quartile 1 Quartile 2 Quartile 3 Quartile 4 Quartile Appendix 3: Consistency of PCI Rankings Across Subindices Across PCI Rankings Appendix 3: Consistency of The above rankings are based on unweighted subindices. Note:

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 65 PCI 60.72 75.85 52.78 49.88 51.77 53.26 58.23 56.60 56.15 66.98 41.18 40.02 63.24 Unweighted 7.27 5.23 2.82 4.16 5.03 7.14 5.66 5.33 5.14 5.60 2.29 3.35 5.15 and Risks Predictability 5.11 5.90 7.97 7.38 5.14 8.57 3.79 7.95 7.42 6.03 3.17 2.27 6.33 Local Services Infrastructure and Business 6.92 9.01 3.66 3.59 3.28 3.62 4.38 7.61 7.81 7.00 3.75 3.15 5.97 Labor Training Training and Skills 7.15 8.21 7.55 3.98 4.05 3.71 7.59 7.54 5.74 5.74 3.55 3.96 5.34 Proactivity of Provincial Attitude toward Government and the Private Sector the and 3.14 9.60 4.92 6.65 8.50 5.60 5.36 2.39 4.94 9.75 2.29 1.86 9.66 Legal Dispute Resolution Institutions 5.88 5.43 7.34 5.39 5.29 4.13 7.87 5.65 7.41 6.17 6.25 6.82 3.24 Informal Charges Appendix 4: Unweighted PCI Scores 7.11 8.54 7.90 6.02 6.47 7.06 6.96 6.09 5.09 6.34 6.44 5.00 6.12 Time Time Costs of Regulatory Compliance and 5.08 5.59 4.62 2.24 3.74 2.99 5.83 4.99 5.20 5.51 3.77 3.74 6.69 Participation Transparency Transparency 3.75 8.90 4.61 2.72 1.99 3.44 4.42 4.62 2.42 6.64 3.57 2.48 5.68 of Tenure and Security Land Access 7.08 8.02 6.14 7.30 7.69 7.10 7.24 5.43 2.95 8.19 6.10 7.40 9.07 Entry Costs Makkah Jizan Tabuk Province Al Qassim Al Baha Riyadh Hail Al Madinah Najran Assir Northern Borders Eastern Province Al Jouf Appendix 4: Unweighted PCI Scores Appendix 4: Unweighted

APPENDICES 66 PCI n.a. 64.40 75.99 53.74 51.83 52.32 56.36 58.71 60.73 56.83 65.68 41.53 41.26 64.32 Weighted Weighted

7.27 5.23 2.82 4.16 5.03 7.14 5.66 5.33 5.14 5.60 2.29 3.35 5.15 and 10% Risks Predictability

8.85 and 7.66 7.71 5.68 9.05 4.75 3.41 9.50 15% Local 11.95 11.07 11.93 11.13 12.86 Services Business Infrastructure

and 6.92 9.01 3.66 3.59 3.28 3.62 4.38 7.61 7.81 7.00 3.75 3.15 5.97 10% Skills Labor Training Training 5.97 6.08 5.57 8.61 8.61 5.32 5.94 8.00 15% 11.33 11.38 11.30 10.73 12.31 Proactivity of Provincial Attitude toward Government and the Private Sector

5% and 1.57 4.80 2.46 3.33 4.25 2.80 2.68 1.19 2.47 4.87 1.14 0.93 4.83 Legal Dispute Resolution Institutions 5% 2.94 2.71 3.67 2.69 2.64 2.06 3.94 3.70 2.83 3.09 3.13 3.41 1.62 Appendix 5: Weighted PCI Scores Appendix 5: Weighted Informal Charges 7.11 8.54 7.90 6.02 6.47 7.06 6.96 6.09 5.09 6.34 6.44 5.00 6.12 Time Time 10% Costs of Regulatory Compliance and 5.08 5.59 4.62 2.24 3.74 2.99 5.83 4.99 5.20 5.51 3.77 3.74 6.69 10% Participation Transparency Transparency

5% and 1.87 4.45 2.31 1.36 0.99 1.72 2.21 2.31 1.21 3.32 1.78 1.24 2.84 Land Tenure Access Security of

9.20 8.15 4.43 9.15 11.53 11.10 15% 10.62 12.02 10.95 10.65 10.87 12.29 13.60 Entry Costs Subindex Subindex Weights Province Makkah Riyadh Eastern Province Assir Najran Jizan Tabuk Al Baha Al Madinah Al Qassim Al Jouf Northern Borders Hail Appendix 5: Weighted PCI Scores Weighted Appendix 5: Note: The abbreviation “n.a.” stands for “not applicable.” Note:

KINGDOM OF SAUDI ARABIA PROVINCIAL COMPETITIVENESS STUDY 67

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