Saudi Arabia: Saudi Arabia Removes Barriers To Infrastructure Contracting

Last Updated: 3 November 2014
Article by Ben Cowling and Geoffrey White

With projects such as the USD 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.

Context

Saudi Arabia became a member of the Trade Organisation in 2005, thereby opening up its domestic market to foreign investment.  It is also one of the few MENA countries to allow 100% foreign ownership of local establishments.  That said, the Saudi trading environment remains regulated and includes requirements for a number of different licences and certificates.

In particular, pursuant to the Anti-Concealment Law, it is illegal for foreign investors to trade in Saudi Arabia without a licence.  The sanctions for contravening this Law include potential fines, blacklisting and even imprisonment for both the foreign investor and any Saudi nationals that facilitate the illegal fronting of foreign businesses.  As such, (subject to some variations and exceptions) all international businesses looking to enter the Saudi market need to acquire:

  • a foreign investment licence from the Saudi Arabian General Investment Authority ("SAGIA Licence"), and
  • a commercial registration certificate from the Ministry of Commerce & Industry ("Commercial Registration").

On the other hand, Saudi Arabia has an urgent need for foreign contractors come to the Kingdom and apply their knowledge and expertise to the country's significant infrastructure needs.  Saudi Arabia's prominence in the petroleum sector is long-standing and well-known; however in recent years, the Saudi government has announced and implemented major projects in other infrastructure sectors – for example:

  • Rail:  Riyadh Metro, Mecca Metro, Jeddah Metro, Medina Metro, Dammam Metro, North-South Railway, Saudi Landbridge, Haramain High Speed Rail;
  • Airports:  Jeddah Airport, Riyadh Airport, Medina Airport, Jazan Airport;
  • Power and Water:  PP12, Rabigh II IPP, Ras Al Zour, Shuqaiq, Jubail Desalination Plant;
  • Healthcare:  King Fahad Medical City, King Abdullah Medical City, King Khalid Medical City.

These are complex projects that require technology transfer from sophisticated assets that have already been successfully completed in developed economies in Europe, America and Asia. 

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. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Ben Cowling
 
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