Understanding Saudi’s new tenders and procurement law: What are the main changes?

Saudi Arabia’s cabinet has now approved the new government tenders and procurement law.

The law consists of 99 articles and will replace the previous legislation on the subject, which was issued in 2006.

It aims to regulate procedures of tenders and procurements carried out by the government authorities to ensure they are not influenced by personal interest and result in achieving maximum degree of economic efficiency.

As customary in Saudi Arabia, much of the detail of the law will be in the implementing regulations to be issued later and so we await these to be able to better assess the full impact on the business, nonetheless, the approval of the law is a welcome development and falls in line with the Saudi Vision 2030 to diversify the economy and encourage more foreign investment.

Main changes

* The new law allows the government agencies to choose between the ‘RFP’ model and the ‘invitation to bid’ model.

The RFP model is a globally known “competitive negotiations method” of soliciting proposals. This method is used when the end-product is unique, the government agency knows what it wants, but the methods and specifications aren’t readily available. Thus, price isn’t the only deciding factor. Quality and experience will be heavily weighed. This allows prospective contractors to offer different methods, solutions, and price points for the government agency to evaluate.

This will not only improve the government’s fiscal position by minimising costs and improving the financial planning efficiency, but also allow for the introduction of innovative solutions by global service providers in Saudi Arabia.

Meanwhile, the law allows the government agency to choose the invitation to bid model when there is no substantial difference between the products or services that meet the specifications. The only real difference between the submissions is the price and a healthy competition on price through sealed bids. The law also allows the government agencies to shortlist long term suppliers and avoid repetitive bidding which often increases the chances of collusion.

* Numerous projects have been delayed in Saudi Arabia in the past due to infighting between the prime and sub contactors on account of payment delays since the payments have not flowed down to the sub-contractor.

The law brings a considerable change to this regime and allows the government agency to pay the sub-contractor directly.

* Local companies, SMEs and Saudi listed companies are given priority over foreign companies.

This is again significant as it would increase listings on the stock exchange – especially by family held Saudi entities traditionally associated with execution of a majority of construction contracts in Saudi Arabia.

This will bring a slew of benefits for the listed companies as well as the kingdom’s economy including enhanced access to capital, better governance structures, lower cost of capital and ability to attract better employees.

* Unlike the old law, the new legislation provides the government agency the right to terminate the contract and partially withdraw the works from a contractor, with the option of executing the same on the contractor’s expense if there have been incessant delays.

The withdrawal will however be without prejudice to the contractor’s rights and outstanding entitlements at the date of termination.

* The law also allows arbitration as a dispute resolution mechanism in government contracts. This was often a sticking point between the parties under the old law. This will be extremely useful for disputes relating to complex construction issues which can be resolved in a more efficient manner through experienced arbitrators who have a high degree of technical expertise.

Muhammad Anum Saleem is the principal associate of AlDhabaan & Partners in association with Eversheds Sutherland (International) in Saudi Arabia