The new Government Tenders & Procurement Law (New GTPL) was published in the Official Gazette of Saudi Arabia on 1 August 2019, applicable to Saudi government projects from 1 December 2019.
The New GTPL anticipates that a set of implementing regulations shall come into force on the same date as the New GTPL. At the time of writing, these implementing regulations are still to be circulated. The implementing regulations will contain further details which shall guide the practical application of the New GTPL. The New GTPL certainly anticipates a more flexible approach to government procurement. It provides for certain circumstances where the usual public tender process will not need to be followed.
The first exception concerns limited tender contracts, in scenarios such as services and purchases worth less than SR500,000 ($US133,333); services and purchases available from a limited number of specialist contractors and suppliers; urgent cases; and consulting services.
The second exception concerns direct procurement arrangements, in scenarios including the purchase of military arms, equipment and spare parts through the General Authority for Military Industries; cases where direct procurement is required to protect national security interests; works and purchases worth less than SR100,000; cases where the services and purchases required are only available through a sole supplier, non-governmental institution, society or non-profit organisation; or in case of emergencies.
The New GTPL also anticipates two-stage tenders, framework agreements, electronic reverse auctions and competitions. The implementing regulations will provide further guidance around how, and in what circumstances, these alternative approaches to procurement are intended to apply.
It is nevertheless apparent that the Finance Ministry intends that greater flexibility should apply to government procurement. In pursuit of this objective, the existing legislation has been updated to accommodate popular international procurement models.
We expect that this will be welcomed by contractors and consultants bidding for government projects. In particular, those engaged in the provision of specialist works and services, low-value works and consulting services will likely welcome the ability to engage more directly with the government entity without having to go through the full public tender process.
Increased delay penalties
The New GTPL anticipates that delay penalties of up to 20 per cent of the contract value may apply. However, it remains to be seen how government entities will implement this power in practice.
In our experience, it is typical for construction contracts in Saudi Arabia to specify that liquidated delay damages are capped at 10 per cent of the value of the contract. As such, an increase in delay damages under government contracts to 20 per cent would constitute a significant departure from standard industry practice and one which, we expect, will be resisted by bidding contractors and subject to negotiation.
In terms of the impact on timely project delivery, contractors will certainly be motivated to avoid any additional penalties imposed under the New GTPL. That said, increased delay penalties may also result in unintended consequences. These may include higher bid prices to factor in this risk and a change in claim culture, with contractors electing to aggressively pursue extension of time claims in an effort to avoid these additional penalties.
While arbitration is the most common form of dispute resolution adopted in privately developed construction projects in the kingdom, the New GTPL does not expressly provide for arbitration in government contracts.
This could change, however, based on provisions contained in the New GTPL which contemplate that arbitration may be agreed in certain circumstances. That said, the default position under the New GTPL anticipates the formation of special committees to hear grievances arising under contracts that are subject to the law. This approach is broadly consistent with dispute resolution under the existing GTPL.
We expect that further details around the operation of the dispute resolution processes in the New GTPL and the operation of these special committees will be set out in the implementing regulations.
Finally, the New GTPL contemplates that priority “in dealing” will be given to small and medium enterprises, “local content”, and companies listed in the financial market. Article 96 of the New GTPL indicates that the Ministry of Finance intends to issue certain supplementary regulations concerning, among other things, the creation of a mechanism for giving preference to the above categories of local company.
These regulations have not yet been published so it is not clear exactly how they will operate and what requirements they will impose on contractors to engage local content providers. That said, Article 96 indicates that fines will be imposed on contractors that fail to comply with these local content requirements.
This initiative is consistent with the government’s broader Saudisation objectives and its attempts to provide opportunities for the nascent private construction sector in Saudi Arabia.
Local content requirements contained in the New GTPL will act to facilitate employment and knowledge transfer within the Saudi construction industry and hopefully facilitate further growth in this sector of the economy – an ambition which is in line with the transformative objectives of the Vision 2030 plan.