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Changing Dynamics in the Public Tenders and Procurement Regime

Foreign investors eager to win bids pursuant to public tenders in the Kingdom of Saudi Arabia (“Kingdom”) must take heed of the ever-evolving landscape in the Kingdom impacting their ability to submit bids in light of the current restrictions in place as a result of the Kingdom’s desire to attract more regional headquarters (“RHQ”) to establish in or relocate to the Kingdom.

This Article aims to demystify the current restrictions in place pursuant to the Guidelines for Contracting between Government Agencies and Companies with no Regional Headquarters in the Kingdom and Related Parties issued by Council of Ministers Resolution No. (377) dated 03/06/1444 H (corresponding to 27/11/2022 G) (“Guidelines”), effective as of 01 January 2024, and the interplay between recent amendments to the Executive Regulations of the Government Tenders and Procurement Law, issued pursuant to Ministerial Resolution No. (1242) dated 21/03/1441 H (corresponding to 18/11/2019 G) and amended pursuant to Ministry of Finance Resolution No. (1090) dated 21/09/1445 H (corresponding to 31/03/2024 G) (“Regulations”), which came into effect as of 19 May 2024 G.

The Guidelines have restricted the window of opportunity for foreign investors operating in the Kingdom to qualify for public tenders. Prior to the enactment of the Guidelines, companies in the Kingdom could directly bid for public tenders. Now, with such enactment, one of the underlying and determining factors for any governmental tender is that a foreign entity must have a RHQ in the Kingdom. It should be clarified that while having an RHQ is a prerequisite to qualify in the bidding process, the foreign investor’s operational entity in KSA must execute the project, because RHQs cannot enter into any commercial agreements with third parties, as RHQs are non-revenue generating entities pursuant to the Ministry of Investment of Saudi Arabia’s rules. Despite such restrictions under the Guidelines, there are exemptions to the general rule. For instance, foreign companies with no RHQs may be eligible to participate in public tenders if: (a) the total value of the contract does not exceed one million Riyals, (b) after considering all proposals, it is the most standout proposal in terms of technical specifications, or (c) the contract is being executed abroad.  Under any of the scenarios, the burden is on the government entity in proving that such exemption is applicable to the particular project.

Naturally, and in light of the promulgation of the Guidelines, the Regulations required revisiting. Some of the key amendments to the Regulations are:

1. Adjusting the bid process under article 5 of the Regulations for works executed outside the Kingdom, notably, expanding on the exceptions to the requirements under the Government Tenders and Procurement Law, issued pursuant to Royal Decree No. (M/128) dated 13/11/1440 H (corresponding to 16/07/2019 G) (“Law”)

a. Permitting for framework agreements to being executed abroad;

b. Allowing government entities to accept bids through other means, and not limiting to electronic submission through the Ministry of Finance’s (“MOF”) Etimad portal, so long as the contracts are then uploaded and registered on the Etimad portal after execution;

c. Permitting government entities to disregard requirement of initial guarantee during the bid;

d. Allowing government entities to forgo requirement of the company from providing a final guarantee by taking into consideration alternative options to ensure quality assurance/guarantee of the works executed and in accordance with the specifications of the relevant jurisdiction’s quality assurance guarantee mechanisms. Should the government entity elect to require a final guarantee by the bidder, then it should specify the duration of such guarantee, and ensure it is disclosed in the tender, with such period of guarantee being subject to extension pursuant to the government entity’s discretion.

e. The government entity must comply with the suite of documents related to qualification of the participant such as approved forms of contracts, tender documents, pre-qualification documents, contractor performance assessment, and, to use such templates as a guidance but while taking into consideration the governing qualification documents in the respective jurisdiction of execution of the works. If the government entity was unable to use the same documents or similar documents, the reasons must be provided for the Qualification Committee’s assessment.

2. In regards to changes for contracting work with non-licensed entities for work in the Kingdom, the previous language under article 4 of the Regulations allowed for non-licensed entities to execute work in the Kingdom subject to MISA’s approval, now, such entities must obtain a license from MISA, which is in essence, obtaining a temporary certificate to submit proposals for government projects.

3. In respect to construction projects, article 96 of the amended Regulations mandates that the Government Entity must ensure that the site is ready for commencement of the work and is suitable for execution before opening up for bids. However, if an exigent circumstance exists, the government entity may open the project up for bidding before ensuring safety and suitability of the site, provided that it is disclosed in the bid and ensuring that the site has been evaluated in terms of safety and suitability prior to executing the necessary agreements with the winning bidder.

4. No longer making it a requirement on the company to furnish the Zakat, Tax, and Customs Authority certificate or a General Organization of Social Insurance certificate as a precondition to the final invoice amount

5. Lastly, the major change to the Regulations is article 154, which now mandates that any disputes arising from the project must now be resolved through arbitration by the Saudi Centre of Commercial Arbitration or any other arbitration centres in the Kingdom, which is now also extended to foreign companies. However, there is an exception to this rule when the contracts are being executed abroad, arbitration can be selected elsewhere subject to the MOF’s discretion. Irrespective of where arbitrator occurs, the relevant governmental entity must furnish the arbitral award for the MOF and the General Court of Audit’s records.

In essence, the options for foreign investors to participate in public tenders is now limited to: (a) execution of projects outside of KSA for foreign companies, (b) execution of projects within the KSA without a RHQ subject to the limited exceptions under the Guidelines and in observance of the procedures under article 5 of the Regulations, and (c) through its operational entities in KSA, where an RHQ must exists in parallel as a prerequisite.  Kingdom. It is important that should foreign investors wish to have more opportunities in the Kingdom for public tenders, it must consider, from commercial, legal, and tax standpoints, the option of incorporating an RHQ in the Kingdom.

The tug-and-pull between the Guidelines and the Regulations in practice creates a balance where it opens up the window of opportunity for foreign companies aiming to participate in public tenders, while also creating an incentive for foreign investors to establish their RHQ in the Kingdom.

With the advent of the Guidelines coupled with the ticking of the Vision 2030 clock’s approaching, the Kingdom is aiming to implement such projects with a clearer legal framework, as the Law is also due for a regulatory overhaul, as such proposed drafts were open for public consultation until 19 April 2023, but we have yet to see any indication of its implementation in the near future. Foreign investors should stay abreast of such changes by building repertoire with local counsel.