With projects such as the US$20 billion Riyadh Metro, the Saudi Arabian government is implementing one of the most ambitious infrastructure programmes in the world. Notwithstanding this, some international contractors have not entered the market due to perceived barriers and costs associated with bidding for government projects. A recently announced Council of Ministers’ Decision has removed many of these barriers, further opening up the market to the world’s best infrastructure providers.
The new law
It is a legal requirement that all Saudi government departments and agencies procuring public works comply with the Government Tenders & Procurement Law and its Implementing Regulations (GTPL). The GTPL sets out a prescriptive regime for the release of invitations to tender, the receipt and evaluation of tenders, the negotiation of contracts, the management of construction projects and the resolution of claims.
Among other things, the GTPL requires that any foreign contractor bidding for a government project have in place the following:
• SAGIA License;
• Commercial Registration;
• Contractor Classification from the Ministry of Municipal & Rural Affairs (MOMRA);
• Certificate from the Department of Zakat & Income Tax;
• Certificate from the General Organization of Social Insurance;
• Certificate from the relevant Chamber of Commerce; and
• Certificate showing compliance with Saudisation requirements from the Ministry of Labour.
The above documents are required to be submitted at the time of the foreign contractor’s bid for the government project. As such, the foreign contractor is required to have already spent significant time and money setting up its local operations and obtaining the above documents before it has won its first project and earned its first riyal. Understandably, not all foreign contractors have been prepared to make this up-front investment.
Fortunately, Council of Ministers’ Decision No. 405 dated 22/10/1435H published in September 2014 has removed these requirements at the bid stage (the Decision). In particular, the Decision provides that a temporary certificate may be obtained from SAGIA which can be submitted to the relevant government entity in lieu of the above documents. Instead, if the foreign contractor’s bid is successful and it is awarded the project, it may submit such documents later, namely:
• the SAGIA License and Commercial Registration at any time before the project contract is signed, and
• all other documents within 6 months of the project contract being signed.
This regime is obviously of huge benefit to new entrants to the Saudi construction market.
Interestingly, not all foreign contractors will be able to obtain the temporary certificate from SAGIA. The Decision says that a list of “well known” foreign contractors will be created by MOMRA and SAGIA, subject to the following criteria:
• the contractors must reside in countries with whom Saudi Arabia has or wishes to have dealings, and
• the contractors must either have:
– the highest classification grade in their home country, or
– if their home country does not have a contractor classification system, be in the top 5 companies nominated by their home country in terms of financial, technical, executive and administrative capability
Commentary
It is unclear at this stage which countries are being referred to above (albeit that we would expect that all major developed economies would be included) and the extent to which the “well-known contractors list” has been compiled by MOMRA and SAGIA to date. We are undertaking further enquiries in this regard and would welcome enquiries from any foreign contractors seeking specific details. Furthermore, even if a particular foreign contractor is on the “well-known contractors list”, it appears that only one temporary certificate can be obtained for use on a single project at a time. In particular, the Decision says that if the foreign contractor’s bid is not successful, the temporary certificate will be returned to be able to be used on a bid for another government project. That said, the evaluation process on many major projects is lengthy and may mean that the temporary certificate is tied up for many months. Accordingly, foreign contractors need to think carefully about their bid strategy to avoid missing out on the opportunity to bid for other projects with overlapping tender processes.
In summary, the new Decision represents a progressive step by the Kingdom in reducing initial barriers to foreign contractors bidding for government projects. Whereas previously foreign contractors had to speculatively commit resources at the initial stage of a project to ensure bid compliance, the required documents can now be obtained incrementally and with the certainty that they have been successful.
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