August 6, 2019

New Government Tender and Procurement Law in Saudi Arabia

On 1 August 2019, a new Government Tenders & Procurement Law ("New GTPL") was published in the Official Gazette of Saudi Arabia, which law will apply to all Saudi government projects from 29 November 2019.

Historically, the degree of risk and its allocation under contracts concerning Saudi government projects has been heavily influenced by the mandatory requirements of Saudi public procurement regulation.  Accordingly, the New GTPL has a direct impact on the economic attractiveness of the Saudi infrastructure market to international contractors and consultants, coinciding of course with implementation of the Saudi government's multi-billion dollar "Vision 2030" infrastructure program.

We have set out below our initial views on the significance of the New GTPL.

Background – the Current GTPL

Before discussing the New GTPL, it is useful to consider the current Government Tenders & Procurement Law ("Current GTPL"), which has applied to Saudi government projects since 2006.  The Current GTPL imposes a strict regime on public tendering and procurement and has a direct impact on the rights and obligations of contractors and consultants appointed to government projects.

Key features of the Current GTPL include:

  1. Applies to all appointments by government authorities, ministries, departments, public institutions and public bodies with independent corporate personality ("Government Entities").
  2. Overrides any inconsistent contract terms on government projects – for example:
    1. restricting variations that increase the contract price by 10%, and
    2. imposing a delay penalty regime of 10%.
  3. Requires that standard-form contracts prepared by the Ministry of Finance and approved by the Council of Ministers be used on government projects – for example, the Public Works Contract.
  4. Only allows Government Entities to depart from the requirements Current GTPL if they have been granted a specific exemption by the Royal Court.
  5. Requires that disputes be referred to the Board of Grievances within the Saudi court system.

The New GTPL

On our reading, key features of the New GTPL include:

  1. Applies to the same category of Government Entities, as above.
  2. Provides for more centralised tendering – for example:
    1. An "entity in charge of unified strategic procurement" (the identity of which is to be confirmed by a subsequent resolution) ("Central Entity") may request tenders for works that it designates are required by more than one government entity ("Centralised Works").
    2. Government Entities may also conduct "electronic reverse auctions" through a centralised electronic portal or "competitions" for particular works or services.
  3. Provides for more centralised contracting – for example:
    1. The Central Entity may engage contractors and / or consultants on the basis of framework agreements and/or prepare its own contract forms.
    2. Government Entities are not permitted to procure Centralised Works other than through the processes and contract forms determined by the Central Entity.
    3. In respect of other works, Government Entities are also permitted to use framework agreements where quantities or the volume of work is not certain.
  4. Removes the need for a full public tender for particular works and services or in particular circumstances:
    1. For example, all procurement of consulting services may now be undertaken on the basis of limited tender.
  5. Requires a standstill period (of between 5 and 10 days) after a tender decision is made to allow unsuccessful bidders to raise any objections to the tender process.No notice of award may be issued or contract signed by the Government Entity during this period.
  6. Sets out various requirements for contract forms – for example:
    1. All contracts must be drafted either in Arabic or dual-language, provided that Arabic is used for interpreting and implementing the contract.
    2. The Implementing Regulation to the New GTPL (not yet released) shall specify the types of contracts that may be used by Government Entities.
    3. Government Entities only need to submit their contracts for approval by the Ministry of Finance if the contract relates to an allocation in the General Budget of the State.If not (e.g. there is a separate budget), Ministry of Finance approval is not required.
  7. Restrictions on variations remain the same (e.g. maximum increase of 10%).
  8. Maximum delay penalties have increased to 20% for works and services contracts (i.e. 10% under the Current GTPL).
  9. New provisions concerning mandatory or discretionary termination of contracts by the Government Entity.
  10. Government Entities may agree to arbitration, provided that approval has been granted by the Minister of Finance.Otherwise, parties may seek compensation from Government Entities in the Board of Grievances in respect of any alleged failure to perform a contract.

In addition, the New GTPL states that Implementing Regulations shall be prepared and shall come into effect on the same date as the New GTPL (i.e. 29 November 2019).  Among other things, we would expect these Implementing Regulations to confirm that the New GTPL overrides all inconsistent contract terms (as do the Implementing Regulations of the Current GTPL).

Concluding remarks

The enactment of a New GTPL is a positive development for the Saudi infrastructure market.  In our view, the Current GTPL was no longer "fit for purpose" in the context of the scale and complexity of Saudi Arabia's current infrastructure needs. 

While significant detail remains to be set out in the Implementing Regulations of the New GTPL, the increased focus on centralised processes will promote greater transparency, predictability and efficiency in tendering.  Likewise, giving Government Entities greater flexibility to tailor contract conditions (e.g. beyond the Public Works Contract) to particular project requirements will also lead to better infrastructure outcomes. 

On the whole, the New GTPL heralds a more favourable market environment for international contractors and consultants seeking to be appointed on government projects, which can only benefit Saudi Arabia's ambitious infrastructure program over the coming years.