Kingdom paves the way for new contractors

13 November 2014

New contractors will be invited to work in the kingdom to take pressure off existing, overloaded players

In late July 2013, Arriyadh Development Authority awarded $22bn-worth of contracts on the Riyadh Metro project. The three deals accounted for 17 per cent of the construction and infrastructure deals inked in the region that year, and underlined the magnitude of the work being undertaken on major projects in Saudi Arabia.

The Riyadh Metro is just part of a state-led overhaul of the kingdom’s infrastructure. This year, contractors submitted bids for another metro network serving Mecca, the expansion of King Khaled airport in Riyadh, and 11 large sports stadiums for national oil company Saudi Aramco. More will come in 2015, when contractors will be invited to bid for the first phase of the 958 kilometre-long Saudi Landbridge railway and the Jeddah Metro.

Contractor crunch

These multibillion-dollar projects will add further strain to a market where the main local players are already overloaded and the international companies that have an established presence in the kingdom have healthy backlogs. With a contractor crunch looming, Riyadh is now looking to ease the strain and encourage new contractors to bid for and win work in Saudi Arabia.

There is a definite desire to open up the market contractor-wise to get new blood in

Sachin Kerur, Pinsent Masons

The move is part of a broader initiative in the kingdom to open up the economy to foreign investment and participation. An important step was taken in July, when Riyadh announced it was going to open up its stock market to foreign investors, as it continues to seek new ways of expanding the non-oil related economy. Previously, only domestic investors have been allowed access to the Saudi market, which is estimated to be worth more than $500bn.

Concerning the construction sector, there has been a realisation within government client bodies that new resources are needed to deal with the sheer volume of work that is planned and under way rather than the overload being a reflection of the capabilities of the firms currently operating in the kingdom.

“There is no doubt there is a definite desire to open up the market contractor-wise to get new blood in,” says Sachin Kerur, head of the Gulf region for UK-based law firm Pinsent Masons. “I don’t think that is necessarily a reflection on the old guard, it is just a sensible reaction to what they have on offer.”

The most significant development so far came in September, when a Council of Ministers’ ruling opened up the market to foreign contractors by removing many of the bureaucratic barriers they encounter when they come to the kingdom to bid for work.

Previously, as part of the Government Tenders & Procurement Law, foreign contractors bidding for work on public schemes had to have various registrations including a Saudi Arabia General Investment Authority (Sagia) licence, commercial registration, and contractor classification from the Ministry of Municipal & Rural Affairs (Momra), along with other registrations for tax, social insurance, and a certificate of compliance with Saudisation requirements.

“Companies go through those hurdles that take time or money with no guarantee they will get any work,” says Daniel Goodwin, senior associate at UAE law firm Al-Tamimi & Company. “It could take anywhere from four to 12 months.”

The new Council of Ministers’ decision says a temporary certificate may now be obtained from Sagia, allowing a foreign contractor to submit the documents within six months of a deal being signed.

Encouraging decision

The move is expected to make foreign contractors more willing to bid for work on major projects in the kingdom as it will remove many of the frustrations companies have experienced in the past, when entering the Saudi construction market.

“It is very frustrating to have to establish a whole series of paperwork and documentation and if you look at tender lists, you might be willing to bid if there are only three or four in the race, but some of these tenders have 15-20 names even after prequalification,” says Kerur. “So already the competition is fierce, even if you are a pretty strong candidate. You have to do all that work to find you are unsuccessful; it is definitely a sensible move.”

Even so, not all foreign contractors are eligible. The change only applies to well-known foreign contractors from countries Saudi Arabia wishes to have dealings with and have either the highest classification in their home market or have been nominated by their home country.

“Certain firms will be shortlisted in advance,” says Goodwin. “There will be five top contractors from each country from governments Sagia elects to deal with, and it is for many different areas, such as electrical, mechanical, power stations, desalination, computer technology, maintenance and operations, not just five from each country. So a list will be put together of all A-grade or tier one contractors. That list has not yet been compiled, although I believe it is in process. Once the list is formed, firms can get a special licence to tender without going through that 12-month process.”

At present, it is not clear which companies these will be and it is expected there will be some manoeuvring as different companies seek to benefit from the new ruling. “Most countries don’t have a classification system that looks like anything we see in the GCC, so they will probably have to fall into the top five nominated by home countries, and it is not clear how that will work,” says Ben Cowling, partner at UK law firm Clyde & Co.

“We have spoken to Sagia and Momra, and they have to set up some sort of committee to determine what the lists will be. There will be some degree of engagement with embassies or government-to-government contact as to whom those contractors should be for each country. Indeed, some embassies have already started writing letters to support particular contractors that are bidding for projects already, so the ball is certainly rolling.”

There are other regulatory changes recently adopted by Sagia that will make it even easier for foreign contractors looking to work in the kingdom for the first time. The first is a new fast-track registration system from Sagia for companies looking to establish themselves, which can be used by firms that may in the future have won work using the new temporary permit system.

The second is a new contractor classification from Sagia, with fees ranging from SR500,000 ($133,262) down to SR30,000 for companies that fall into the strategically important category. This change, rather like the temporary certificate for firms bidding on government projects, is aimed at attracting the biggest and best-qualified contractors to work in the kingdom.

“These are no doubt very complicated and there are several overlapping regimes if you take fast-track, the new law allowing you to bid and the Sagia classification system, but if you happen to be a contractor that meets all those criteria, then all of that is very positive,” says Cowling. “For the smaller companies that are perhaps not falling in those categories, which are not looking to bid on megaprojects or something smaller, it is less positive and looks like a lot of red tape.”

While the relaxing of the bureaucratic barriers to entry is a positive move, they will not resolve many of the logistical and contractual issues that contractors face when starting to work in the kingdom. Contract conditions can still be one-sided in favour of the client, and labour regulations and sourcing a workforce remains challenging, which means companies looking to win work will still need time to set up before they can actually start operating in the kingdom.

Upcoming projects

Like any legislation, how successful the temporary certificates are in practice will only be discovered once foreign contractors start using them when bidding for work. Cowling expects that may be soon, as there are several major projects due to be tendered next year.

“We have to see how quick the uptake is, no temporary certificates have been issued yet, nor bids submitted with temporary certificates in lieu of documents required,” he says. “Until then, we won’t know the impact. There are some very big projects coming up that would benefit from this law – the Landbridge and the Jeddah Metro, for example.”

With so much work available in the kingdom, the government can welcome foreign contractors without fearing a backlash from local firms.  “I wouldn’t think the likes of SBG [Saudi Binladin Group], [Saudi] Oger, and El-Seif [Engineering & Contracting] will be overly concerned because given the volume, they would not be able to cope in any case. I think it is a natural reaction or consequence of the programme they have for new infrastructure.”

Local firms will also continue to control most of the contracting resources in the kingdom and foreign firms will not be able to operate without engaging with their services on their schemes.

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