Update: Saudi Arabia's Government Tenders and Procurement Law and Regulation
The Implementing Regulation of the Government Tenders and Procurement Law has been issued and contains the conditions, rules and procedures necessary to give effect to the Law.
This is an update to our previous article, which can be found here.
On 16 July 2019, following two years of public consultations, Saudi Arabia's Council of Ministers (CoM) approved the new Government Tenders and Procurement Law (the GTPL). The GTPL was published in the Umm Al-Qura Official Gazette on 2 August 2019 and came into force 120 days after its publication.
In force and applying to all Saudi government projects since the end of 2019, the GTPL has the broad objective of aligning the Saudi government's procurement system with its Vision 2030 initiative. Announced in April 2016, Vision 2030 aims to diversify and strengthen the Saudi economy and contains 96 specific and strategic objectives to achieve this goal. These include the reduction of Saudi's dependence on oil; promotion of investment activities; expansion of its infrastructure network; development of public service sectors; and increasing military spending. The GTPL is designed to aid the process by guiding government entities to make procurement decisions in a more transparent, unbiased manner that is free from conflicts of interest.
Additional operational specifics of the GTPL are contained in the supplementary Implementing Regulation (the Regulation) which came into force on 24 April 2020. Together, the GTPL and the Regulation provide an overview of the direction the Saudi government is taking in respect of its long-term procurement strategy and the broad framework it is now implementing.
Replacing an outdated regime
Both the GTPL and the previous version of the law introduced in 2006 (the Old Law) apply to all ministries, government agencies, authorities, departments, public institutions and agencies having an independent public legal personality (Government Entities).
The Old Law, however, was widely considered to be in need of updates that provide a better, more modernized environment for infrastructure projects. For example, the Old Law:
• required the use of a standard template contract prepared and approved by the CoM. Departures from the standard form were only allowed with specific exemptions granted by the Royal Court;
• did not designate any centralised governing body(ies);
• did not provide for a unified electronic filing or an information sharing system; and
• required disputes to be referred to the Board of Grievances in the Saudi court system.
The last point in particular caused concerns in the construction industry because pursuing a dispute through the Board of Grievances was a time consuming process with uncertain results. This process involved long, drawn-out procedures and had the potential for decisions to be made by persons without the level of technical expertise required to resolve complex infrastructure and construction disputes.
The much-anticipated updates in the GTPL and the Regulation have addressed such concerns and introduced new and innovative concepts for government tenders and procurement in Saudi Arabia. We highlight below some of these updates.
The new regime provides Government Entities with the types of contracts that may be used to carry out Government works and projects. These are:
1. public construction contracts;
2. continuing execution services contracts (operation and management, maintenance, cleaning, etc.);
3. supply contracts (of goods, medicines, etc.);
4. information technology contracts;
5. advisory services contracts (consultancy, etc.);
6. project management contracts;
7. design contracts;
8. manufacturing contracts;
9. agreements for lease of movable assets;
10. contracts for sale of movables; and
11. any other contracts to carry out activities for Government Entities.
As at the time of this writing, fifteen (15) approved templates for the above types of contracts are available in Arabic on the Portal (discussed further below). From these templates, seven (7) are available in English. There are also numerous templates for bid / qualification documents available to be used by Government Entities to solicit bids.
Government Entities are expected to commit to using these templates. However, deviations from the approved templates are permitted, provided that they do not violate the GTPL or the Regulation.
In the construction context, there is currently an approved template for a general construction contract, but there is no matching template for issuing bids /qualification documents. It remains to be seen whether the Ministry of Finance (MoF) would eventually develop and /or mandate the use of a collection of contract forms (similar to the FIDIC suite of contracts usually favoured by contracting parties) for all construction projects under Vision 2030.
The GTPL also allows the use of 'Framework Agreements' (a simple and brief form of agreement with particulars of contract to be provided at a later stage) under certain circumstances. The Centre for Expenditure Efficiency (discussed further below), together with the MoF, govern, define and monitor public procurement, including the development of Framework Agreements, in order to reduce duplication and costs in situations where multiple Government Entities require the procurement of identical works, services or products. Government Entities are also permitted to use Framework Agreements where the required timetable, quantities of items or volume of works and services are initially unknown . The Regulation provides the cases where a Government Entity may contract by means of a Framework Agreement, and those include dealing with emergency situations.
Centralised governing bodies
The new procurement regime has introduced two new entities - the Local Content and Government Procurement Authority (Local Content Authority) and the Centre for Expenditure Efficiency. Both of these entities work with the MoF to ensure that the objectives of the GTPL are met.
The MoF is tasked with setting policies; issuing guidelines and instructions; preparing the Regulation; providing financial allocations; and establishing, supervising and constantly developing a unified online procurement Portal (discussed further below). The MoF is also in charge of approving, among others, contract forms, purchase mechanisms and tender documentation (by way of approval by the Minister of Finance); applications for exceptions and extensions; and the determination of currencies.
The role of the Local Content Authority appears to be limited under the GTPL and the Regulation. Aside from coordinating with the MoF in establishing policies, guidelines and instructions for implementing the GTPL, the Local Content Authority also has the ability (albeit only with the prior approval of the MoF) to conclude contracts in relation to the localisation of industries and transfer of knowledge.
The main objective of the Centre for Expenditure Efficiency seems to be the optimization of procurement processes and minimization of costs. For example, it is tasked with identifying shared procurement needs between different Government Entities; concluding Framework Agreements on behalf of multiple Government Entities that have shared procurement needs; standardising technical specifications and tender documentation; issuing Pre-Qualification documents and tenders; evaluating and selecting bids and monitoring government procurement data and contracts.
This clear stipulation and distinction of the different roles and governing powers of the MoF, Local Content Authority and Centre for Expenditure Efficiency represent a welcome change that will bring more clarity to Saudi Arabia's procurement process and promote confidence in potential bidders for the new regime.
The GTPL states that the MoF is to establish, supervise and develop a unified online procurement portal (the Portal). The Portal is currently available online.
The Portal is to act as an information gateway providing transparent and fair sharing of information whilst ensuring privacy and secrecy where required, and 'without violating the national security requirement of confidentiality'.
For example, potential bidders will be able to access all information and data related to tenders on the Portal, as well as procedures for all government tenders and procurements . Exceptions will be made if any information cannot be uploaded onto the Portal due to technical errors or national security reasons. Actions required of Government Entities and/or bidders that are delayed by technical errors on the Portal will be granted extensions for periods similar to the duration of the errors. If any procedures are delayed for more than three (3) consecutive days due to technical errors on the Portal, such procedures will be completed in paper form.
More significantly, the Portal will eventually contain a register for each Government Entity which shows the historical data and adopted procedures on all of the said Government Entity's concluded contracts and previous tenders . Having access to the historical data and procedures will be beneficial to both the potential bidders and Government Entities. This should help potential bidders focus their bidding efforts on relevant tenders, which will result with Government Entities receiving more appropriate bids and, in turn, reduce the amount of time and money wasted by both sides on unsuitable bids.
Different forms of Dispute Resolution
The GTPL and the Regulation provide for three different forms of dispute resolution.
a) Specialist Committee & Administrative Court
A specialist committee, comprising of at least five (5) members and formed by the Minister of Finance, will hear and pass decisions on claims, violations and grievances in relation to tender awards, performance evaluations of contractors and changes in contract prices. Contract price changes caused by "unpredictable financial difficulties arising during the period of execution of the contract" are also considered by the committee. This particular provision could prove vital for contractors facing financial difficulties as a result of the ongoing COVID-19 pandemic.
It is worth noting that decisions of the aforementioned committee are binding on Government Entities. However, the amount of compensation that can be awarded is capped at 20% of the total value of the contract. Any contactor claiming more than 20% will need to submit its case to the Administrative Court.
b) Dispute Settlement Board
Disputes of a technical nature are to be resolved by a Dispute Settlement Board (DSB) comprising representatives of both Government Entities and contractors, with a chairperson appointed by the MoF. This method of dispute resolution is strictly limited to technical disputes – the DSB will not consider any ancillary claims that are not technical in nature. The disputes are to be resolved by the DSB within thirty (30) days of each party submitting a technical report to support its case. In the event a party objects to the DSB's decision, the specific objection will be returned to the DSB for further review with a final decision to be issued within fifteen (15) days. If both parties agree to the DSB's decision, then the decision becomes final and enforceable. However, Article 155(6) of the Regulation states that an aggrieved party still has the right to submit its objection to the DSB's decision to the "competent judicial authority". This suggests that decisions of the DSB may be appealed to the Administrative Court.
The GTPL and the Regulation do not expressly state whether the referral of a technical dispute to the DSB is a precondition to commencing claims before the Administrative Court or in arbitration. Article 92(3) of the GTPL simply states that the Regulation will provide other means for resolving disputes that arise during the execution of contracts – the DSB being one of those means.
The GTPL allows parties to agree on arbitration as the preferred method of dispute resolution, albeit only with the prior approval of the Minister of Finance . This change from the Old Law has been met with widespread approval from interested parties. The Chairman for the Saudi Centre for Commercial Arbitration heralded it as "a new chapter for the arbitration industry in its relationship with government institutions and state-owned companies in the Kingdom". The possibility of opting to resolve disputes by way of arbitration, especially in the context of government infrastructure and construction projects (which form a large portion of the Vision 2030 initiative), led to forecasts of increased bidder confidence in how potential disputes may now be handled and their likely costs and duration.
Notwithstanding, the Regulation imposed the following qualifications and restrictions (in addition to the requirement for prior approval from the Minister of Finance) on the use of arbitration :
• arbitration is only available as a means of dispute resolution for contracts with estimated values exceeding SAR 100 million (approximately USD 26.6 million);
• the arbitration agreement must be included in the contract documents;
• the substantive and procedural laws applicable to the arbitration / disputes must be the laws of Saudi Arabia; and
• the disputes are to be heard only before arbitral tribunals within Saudi Arabia, unless the underlying contract is entered into with foreign persons.
It is unclear what would happen if a dispute arises that is technical in nature or can be submitted to a specialist committee, but the contract between the parties provides only for arbitration as the applicable method of dispute resolution. Assuming that the aforementioned preconditions to arbitration are satisfied, would the parties be allowed to arbitrate, or would they be obligated to refer the dispute to the DSB or specialist committee? It remains to be seen how these provisions will be applied and interpreted by parties and judicial authorities.
We note that of the seven (7) template contracts currently available in English on the Portal, six (6) state that disputes are to be settled by the Board of Grievances, whilst one (1) states that disputes are to be finally settled by the Administrative Court. The reference to the Board of Grievances is likely an oversight (perhaps inherited from previous templates prepared under the Old Law), as the GTPL and Regulation make no mention of the Board of Grievances and instead provide the aforementioned three categories of dispute resolution as means to resolve contractual disputes. It is also worth noting that the template for general construction contracts (in English) further states "…unless the Parties have agreed to settle their disputes by arbitration...". In our view, the inclusion of the above wording in the template general construction contract is an indication of the Saudi government's recognition of the practical benefits and widespread use of arbitration in construction disputes.
The GTPL also introduces notable concepts not customarily seen in procurement regimes that apply universally to all government projects. These are summarized below.
Electronic Reverse Tender
Government Entities will have the option to use 'Electronic Reverse Tenders' (also known as 'online reverse auctions' or 'reverse eAuctions') whereby bidders will be given the opportunity to submit successively lower bids on the Portal during a specific time window.
Traditionally, reverse auctions have been used predominantly in renewable energy projects. However, over the past two decades, there has been a steady increase in the implementation of reverse auctions in public procurement worldwide. This trend has resulted in more dynamic and competitive bidding processes. That being said, the construction industry in general seems to oppose their use, arguing that reverse auctions:
• are not designed for construction procurement as they disregard longstanding industry practices for the traditional 'design-bid-build' model that advocate best practices aimed at increasing efficiency;
• lead to artificially-inflated initial pricing and/or unrealistically low pricing (and consequently unreasonable cutbacks and increased risk of compromising the quality of projects); and
• potentially expose bidders to breach other tendering laws, trade treaties and foreign laws.
These concerns may be less prevalent for construction projects to which the GTPL apply because Electronic Reverse Tenders are limited to "ready-made goods available on the market" and to tenders not exceeding SAR five (5) million (approximately USD 1.3 million). At the moment, however, it is unclear what could qualify as 'ready-made goods', and whether some construction materials could be included in such definition.
With the bulk of Vision 2030 funding concentrated on Saudi's ambitious infrastructure program, it will be interesting to see the extent to which Government Entities use reverse auctions and the reaction from the international construction community to their use. As the GTPL applies to all government projects, the use of reverse auctions will undoubtedly impact other industry sectors as well.
The GTPL allows Government Entities to hold competitions for "idea and design or any other copyright" and award contracts to the winners. The Regulation specifies that contracts to be won by way of competitions will be "for the purposes of preparing designs, plans, models, or other artistic and intellectual works".
This mechanism of awarding contracts is often used in architectural design projects (known as 'idea competitions' or 'design contests') and in product or business development (known as 'innovation competitions'). In the context of public procurement, its implementation has been limited and largely confined to service-oriented projects such as technical assistance projects. The inclusion of idea competitions in the GTPL is another indicator of the Saudi government's desire to update its procurement system into a modern, forward-thinking one.
Again, it will be interesting to see how idea competitions will impact the various industries that fall within the remit of the GTPL. Given the broad drafting of the relevant provisions on competition under the GTPL, Government Entities and bidders will have room for creativity as to how to use idea competitions in the future.