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Issue 214   January 2009
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Government Tenders and Procurements in the Kingdom of Saudi Arabia
Part 1

In November 2008, the Group of Twenty Finance Ministers and Central Bank Governors (G20) met in Washington DC. At that meeting, His Royal Highness King Abdullah, Custodian of the Two Holy Mosques, confirmed that the Kingdom of Saudi Arabia (KSA) would boost its own economy by funding infrastructure projects. His Royal Highness expected infrastructure expenditure for the government and oil sectors to exceed US$400 billion over the next five years.

KSA clearly intends to be more than just a money shop for international development activity; it also intends to be at the forefront of the implementation of infrastructure projects of genuine significance.

These recent announcements have reinforced the need for all stakeholders to have a clear understanding of the procedures for the implementation of government infrastructure projects in KSA, particularly the regulatory regime and the prescribed procurement process.

As all KSA government authorities are empowered to procure works and services in the absence of a central government procurement authority, there are many stakeholders who need to be aware of these issues.

Regulatory regime

Three years before the G20 Summit, in December 2005, KSA acceded to the World Trade Organisation for the express purposes of giving Saudi products greater access to global markets and encouraging foreign investment.

In the KSA accession document, it was acknowledged that KSA should participate in the WTO’s Agreement on Government Procurement. The benefits of that participation were identified as lower procurement costs and greater transparency.

During the accession process, KSA representatives confirmed that the Kingdom’s procurement laws were being revised. The current regulatory regime for government procurement is no doubt driven in part by that review process as well as by the desire to regulate and facilitate the massive infrastructure expenditure in KSA and promote an efficient and competitive investment environment.

There are a number of laws relating to procurement contracts in KSA, however the principal regulatory controls are as follows:

• The Government Bids and Procurement Law, issued by the Royal Decree No. M/58 on 4/9/1427H, corresponding to 27/9/2006 (“Procurement Law”);

• The Executive Regulations of the Government Bid and Procurement Law issued by Royal Decree No. M/58, issued as The Ministry of Finance’s Resolution No. 362 dated 20/3/1428H corresponding to 10/3/2007 (“Regulations”);

• The Unified Rules of Granting Priority in Government Procurements to National Products and Products of National Origin in the GCC States, issued by The Council of Ministers’ Resolution No. 139 dated 25/6/1407H, corresponding to 24/2/1987 (“Priority Rules”);

• The Council of Ministers’ Resolution No 23 dated 17/1/1428H, corresponding to 5/2/2007, addressing barriers facing the construction works sector and the Saudization of projects;

• The Council of Ministers’ Resolution No 155 dated 5/6/1429H, corresponding to 9/6/2008, addressing compensation issues and the forming of a compensation committee; and

• The Rules and Procedures of Announcing Public Tenders (“Procedural Rules”). The Procurement Law and Regulations have the express objectives of:

• ensuring bids are not influenced by personal interest, in order to protect public funds;

• ensuring maximum economic efficiency and competition for government projects at fair competitive process;

• promoting honesty, competition and the fair treatment of all bids;

• guaranteeing transparency; and

• advancing the public interest by ensuring tenders are not tailored to fit the capacities of certain suppliers. The rationale for the Procurement Law is best summarised in Article 9, which acknowledges that:

• government procurements and works must be carried out at fair prices, which do not exceed the prevailing market prices; and

• bidding in accordance with the Procurement Law and Regulations is the practical means to achieve that goal. The benefits of selecting a tender process for the procurement regime as opposed to other forms of procurement are that a tender process can:

• be kept confidential, to the extent permitted by law;
 
• ensure a fair price by establishing a bid process with competitive tension;

• encourage the most cost effective and innovative result where the subject of the tender involves the development of purpose built facilities; and

• attract expertise to the project which may be beyond the capabilities of the relevant government authority.

Importantly, whilst all bidders are to be treated on an equal footing (Article 3, subject to the Foreign Investment Law), the Procurement Law and the other regulatory instruments expressly support the KSA economy and local industry by acknowledging that priority shall be give to nationally manufactured goods, products and services. The position in this regard must be stated in the bid. As a result, contractors should clearly give preference wherever possible to Saudi products and services when preparing bids in response to tenders.

Authorities affected by Procurement Law

Under Article 69, the Procurement Law and Regulations apply to all KSA government authorities, ministries, departments, public institutions and public bodies with independent corporate personalities (collectively “Government Authorities”). The application of the Procurement Law is expressed to be subject to:

• international agreements and treaties to which KSA is a party; and

• the enabling laws of particular Government Authorities.

Projects affected by Procurement Law

All government works and procurements must be put up for public tender, unless exempted by the Procurement Law (Article 6).

Further, the Procurement Law also applies to projects and works executed by Government Authorities outside the Kingdom (Article 70). Any proposed exemption to this requirement is to be reviewed by the Ministry of Finance which will have regard to the circumstances surrounding the project and the public interest, with the final decision resting with the President of the Council of Ministers.

Procurements exempted

The Procurement Law does not apply to certain works and procurements, which can be implemented by direct purchases in accordance with specified protocols. These include (Article 47):

• weapons and military equipment;

• consultancy;

• spare parts;

• goods and services available only through one supplier; and

• urgent medical supplies.

Goods and services effectively available through only one supplier may also be excluded (Article 72 of the Regulations).

Consideration of size of projects

Some projects are obviously bigger and more complex than others. This is recognised in the Procurement Law in that some provisions do not apply to various types of procurements. This approach injects a degree of flexibility and focus into the application of the tender procedures.

As a result, the following principles can be found in the Procurement Law in relation to less material projects:

• the responsible Minister or the head of an independent agency may delegate his power to decide on particular bids and the execution of works to a suitably authorised official where the amount involved does not exceed Three Million Riyals (Article 26);

• projects valued at Three Hundred Thousand Riyals or less may be documented by correspondence rather than formal agreement (Article 31);

• in urgent cases, procurements and works can be carried out by direct purchase (rather that the regulated bid process) where the value of the purchase does not exceed One Million Riyals (Article 44);

• the Minister of Finance is not required to review leases or investment contracts with an annual return of less than Fifty Thousand Riyals (Article 142 of the Regulations); and

• after notifying the Ministry of Finance, Government Authorities may dispose of unwanted movables not required by other Government Authorities by public auction (where the value is more than Two Hundred Thousand Riyals) or by public auction or other approved manner in the interests of the public treasury (where the value is less than Two Hundred Thousand Riyals) (Articles 55 and 56).

Procurements and works cannot be split to make them eligible for direct purchase or in order to fall within the powers of delegated officials (Article 46).

As one might expect, there is another layer of approval required in the case of major projects. Government Authorities must submit contracts whose execution period exceeds one year and whose value exceeds Five Million Riyals to the Ministry of Finance for review (Article 32). The Ministry has 14 days to respond.

Major projects in this category are likely to include those involving the well known concepts of build, own, operate and transfer, or BOOT schemes, where ownership of constructed facilities reverts to the relevant Government Authority at the end of the contract term. In this context, the Procurement Law expressly authorises Government Authorities to lease land in return for the construction of facilities (Article 62, see separate heading below).

Conduct of tender process

Generally, Government Authorities can be expected to conduct tender processes in one of a number of ways and the following are the most common:
 
Expressions of interest (EOI)

An EOI is a request for interested parties to submit an offer in circumstances where there is no present intention to be bound, or to even take the process further.

An EOI usually outlines a proposed project and requests potential bidders to register their interest and capability to deliver the project. A small number of those who lodge expressions of interest may then be invited to submit full bids or proposals.

An EOI is often used when:

• the scope or identity of the potential market is not known;

• the issuing party wants to test the market;

• the project is still being tested for feasibility;

• the principal does not yet want to put the market to the full cost of preparing a tender; and/or

• documentation has not been fully developed and market input is needed.

Requests for Proposals (RFP)

An RFP is a request for interested parties to submit proposals for the implementation of a project which has not as yet been clearly established.

RFP’s are often used when:

• documentation has been developed but not finalised;

• the scope of the market is known to a degree; and/or

• the principal is looking for innovative solutions to its particular project requirements.

An RFP will by its very nature contemplate further negotiation before a contract is signed.

Request for Tenders (RFT)

RFT’s usually comprise an invitation to potential bidders to submit an offer capable of acceptance in accordance with the issued request for tender document. The offer is generally made on the basis that a contract will come into force upon acceptance of the tender, without further negotiation.
 
An RFT is the most appropriate process when:

• the scope of the project is clear (such as the sale of a single property);

• price is the most important selection criteria; or

• final documentation is capable of being finalised (such as a land contract of sale).

Staged process

In some instances, a principal may first call for expressions of interest and/or issue a request for proposals. Responses are ‘short-listed’ and a request is made from those tenders still in the running for their ‘best and final offers’. The acceptance of the successful ‘best and final offer’ forms a binding contract.

Pre-bid agreements

Before looking at the key features of the prescribed bid process, it is worth noting one issue from the potential bidder’s perspective.

Tenders can often relate to major projects involving complex issues, such as regulatory aspects, construction, on going operations and financing. Obvious examples are the large and sophisticated BOOT schemes noted below.

In these cases, a proposed bid can often require, or be enhanced by, a number of experts in particulars fields combining their talents and resources into a consortium bid.

In such situations, it is advisable for the various consortium parties to enter into a pre-bid agreement under which the parties agree to jointly prepare, submit and progress the bid for the award of the project contract and, if the bid is accepted, to enter into a further agreement to jointly perform and complete the project contract.

Pre-bid agreements would usually deal with these aspects:

• whether the parties have associated exclusively or can they assist other bids (participation in more than one bid is generally not permitted, see Article 18 of the Regulations);

• the particular areas of responsibility of the parties;

• financial, technical and personnel contributions;

• future contractual arrangements should the bid be successful;

• meetings and the appointment of representatives for communication;

• intellectual property;

• termination and withdrawal; and

• confidentiality.

Importantly, whilst consortium bids by contractors are permitted (Article 18 of the Regulations), the joint relationship must exist before the bid is submitted and the agreement certified by an appropriate authority. Further, the agreement must require the relevant contractors to execute all tendered works jointly and severally.

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