Government procurement in the Arabian Gulf region

Legal and Practical Aspects of Government Procurement in the Arabian Gulf Region

17 September 2014

Today's seminar

• Introductions & Themes• Discussion of each theme by country

• Saudi Arabia, UAE, Oman, Qatar

• Government Procurement / Tender Laws

• Country peculiarities

• Oversight & compliance

• Anti-Bribery & Corruption

• Local Content

• Tips & Traps - practical advice

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The purpose of government procurement

• Government (including GovCos) is the steward of the nation's funds.

• Duty to spend money wisely, for the benefit of the country.

• Ensure best value for that spend, which includes:• Competitive pricing;

• Goods & services are correct / appropriate for needs.

• Public policy tool for governments.

• Minimise / avoid corruption.

• Deploy best practice across all government departments.

• Private sector seeking efficient use of resources.

• GovCos may have a mix of both public & private type goals.

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Saudi Arabia - Tender & Procurement Law

• In Saudi Arabia, government procurement can be somewhat tricky because different rules apply to different sectors.

• For example, Saudi Arabia has a Government Tenders and Procurement Law (PL) applicable to all government works and procurement, which must be put up for public tender (Art. 6 PL), but certain bodies and types of procurement are excluded from the PL. For example:• Direct purchase from manufacturers of military equipment. The procurement of

military equipment is to be undertaken by a Ministerial Committee, consisting of a Chairman and least another three members formed by a royal decree and reporting directly to the Prime Minister (the King).

• Contracting consultancy and technical works and the services of accountants and lawyers. Such procurement is to be made by inviting five licensed offices licensed to submit their bids to the governmental authority.

• Purchasing goods, construction or services available only through one supplier, contractor or producer with no acceptable alternatives is procured by direct purchase subject to the approval of the competent minister or authority.


Saudi Arabia - Tender & Procurement Law

• Moreover, a company may contract with the Saudi government through direct purchase without competing in a public tender when the value of a purchase does not exceed SAR 1,000,000 (USD 266,667) (Art. 44 PL).

• Product procurement• The PL grants priority to products of Saudi Arabian origin over foreign products.

• A government contractor is generally required to utilize Saudi-origin products when their price does not exceed the price of foreign products by more than ten percent.

• Delay and default penalties imposed on contractor• A contractor must pay penalties to the contracting ministry for delays or defaults

associated with a project.

• If a contractor delays the execution of the contract beyond the specified time, he is subject to a delay penalty of up to 6% of the value of supply contracts and 10% of the value of other contracts (Art. 48 PL).

• However, a competent minister or the head of a governmental agency may extend the term of the contract in certain cases.


Saudi Arabia - Compliance & Anti-Corruption

• Compliance• Violations Committee

• Under the Procurement Law, the Minister of Finance is to form a Violations Committee to review compensation claims submitted by contractors and suppliers as well as reports of deceit, fraud and manipulation (Art. 78 PL).

• The Committee also reviews claims of fraud, deceit and manipulation and claims submitted by government authorities to the Minister of Finance.

• If a contractor is found in default, the Committee is to issue a decision to boycott him for a period of up to five years and the contractor is to be publicly named in two local newspapers and all government agencies are to be prohibited from contracting with the contractor (Art. 78(e) PL).

• Anti-Corruption Commission• An Anti-Corruption Commission has been established by Royal Order to review reports and

statistics from entities falling under its jurisdiction and identify areas where corruption could take place and then implement preventative measures in such areas.

• Another objective is to receive complaints of corruption from citizens, supervise investigations and advise the Saudi authorities to take precautionary measures against persons guilty of engaging in corruption.


Saudi Arabia - Compliance & Anti-Corruption

• Saudi Combating Bribery Law• The Combating Bribery Law, enacted by Royal Decree no. M/36 in 1992 G. (CBL) seeks to counter

both the offer and receipt of bribes among public officials in Saudi Arabia.

• Under the CBL, a public official is deemed as having received a bribe if he has solicited for himself or a third party, or accepted or received a promise or gift in exchange for: the performance of any of his duties; abstaining from carrying out his duties; violating the functions of his duties; performing or abstaining from his duties as a result of a request, recommendation or mediation; exercising influence in order to obtain from any public authority any act, decision or contract; or lobbying a governmental authority on the basis of his position (Art. 6 CBL).

• A person who has offered a bribe can be punished even if the bribe is not accepted with imprisonment for a period of up to ten years and/or a fine of up to one million Saudi riyals (Art. 9 CBL).

• Foreign laws• Many multinational companies will find themselves under the jurisdiction of foreign laws, including

the FCPA and the Bribery Act.

• These laws often go further than the Saudi Combating Bribery Act in sanctioning behavior, since they hold companies liable not only for their own illicit payments to foreign public officials, but also for payments made to public officials by the company’s agents.

• United States companies should thus obtain specific advice with respect to the FCPA and, if they has a close connection with the United Kingdom (e.g., carrying on business in the United Kingdom), with respect to the UK Bribery Act as well.


Saudi Arabia - Agents & Intermediaries

• Intermediaries in government procurement• Contracts with the Saudi Arabian government must be directly concluded with

the companies and persons licensed to carry out the work set forth in the contracts.

• The PL prohibits the use of “intermediaries” when concluding contracts, but this is understood not to prohibit the use of agents from assisting in the procurement of government contracts, but rather, to prohibit the signing and execution of contracts with the Saudi Arabian government by any party other than the party that will carry out the contract. The purpose of this restriction is to keep the main contractor fully liable for the performance of the duties set forth in the contract.

• In practice, many foreign companies employ agents to assist in procuring contracts. Countless Saudi Arabian companies provide agency services, using their knowledge of the local economy and the requirements of ministries and public companies to help foreign companies to win contracts.

• Many of these agents function on a commission basis, with commissions of up to 20%, but sometimes less than 1% of the value of the contracts they procure.


Saudi Arabia - tips & traps in tendering

• Traps to watch out for:• Don't go too low in your bid! The government may prohibit a bid solely on the

grounds of its low price if it is 35% or more below prevailing prices (Art. 22 PL). This is to combat the potential existence of fraud, corruption or price controlling by dominant establishments.

• Contractors should be aware that Saudi government ministries may unilaterally increase the contractor's obligations (scope of work) by a maximum value of 10% of the contract value or decrease the contractor’s obligations by a maximum value of 20% of the total contract price.

• Government contracts usually allow the government to terminate the contract for cause, and further allows the government to complete the work or procure such completion through another contractor if the contract is terminated. (This rarely happens absent substantial default or breach).

• A governmental authority may rescind a contract, execute it at its expense and then claim compensation for damage sustained as a result if the contractor attempts to bribe an employee of an authority, delays commencement of the work or procrastinates in its execution, subcontracts without the prior written permission of the governmental authority or goes bankrupt.


Saudi Arabia - tips & traps in tendering

• There are exceptions to the exceptions in the Saudi procurement laws. • For example, companies normally may contract with the Saudi government

through procurement, with an exception being when the value of a purchase does not exceed SAR 1,000,000 (USD 26,667), in which case direct purchase is permitted (Art. 44 PL).

• However, as an exception to the exception, some ministries further restrict the ability of their agencies to procure goods by direct purchase. For example, the Ministry of Health restricts the ability of public hospitals from procuring goods by direct purchase according to several factors, including the hospitals' sizes and locations.

• Moreover, specialised laws apply for certain sectors. • For example, companies may generally pay commissions to local agents that

assist them in procuring government contracts, but under Council of Ministers Resolution no. 1275, such commissions may not be paid to agents who assist in procuring contracts for the sale of armaments and other military equipment.

• Obtaining specific legal advice for a company's sector is therefore key.


United Arab Emirates - Tendering & Procurement Law

• UAE is a Federation of seven Emirates.

• Policy of 'decentralization' of the procurement function.

• Federal public procurement law (UAE law 16 of 1975).

• UAE armed forces public procurement law (UAE Decree 12 of 1986).

• Emirate level public procurement laws:• Abu Dhabi (Abu Dhabi law 6 of 2008);

• Dubai (Dubai law 6 of 1997).


United Arab Emirates - Tendering & Procurement Law

• Some laws are very hard to understand in isolation:• Translation issues from Arabic;

• Generally, UAE laws are a fraction of the length of Western counterparts;

• Strong influence of custom and practice (Article 46(1) UAE law 5 of 1985).

• Emphasis is on internal departmental processes:• A lot of detail on the organization and function of government committees and

departments.

• Laws designed around construction / purchase and storage of goods:• Lengthy sections on the operation of warehouses.


United Arab Emirates - Methods of Procurement

• Each procurement law sets out a similar list of methods of procurement

• Public tender: Notification via the public press.

• Bid: Where the scope of bid parameters is likely to be different for each bidder.

• Competition: For example, for unique architectural design.

• Limited tender: For specialized providers. No public notification.

• Direct agreement: No requirement to tender.


United Arab Emirates - tips & traps in tendering

• Some requirements may seem unusual to international bidders.

• Retentions, defects warranty periods and delay damages for consultants.

• Performance bond with a local bank.

• Lowest compliant bid preferred, but not mandatory:• e.g.: Article 30(1) Dubai law 6 of 1997.

• Tender submissions in wax sealed envelopes in some jurisdictions:• e.g.: Article 22(1) Dubai law 6 of 1997 - "sealed envelopes".


Dubai - tips & traps in tendering

• Restrictions on dispute resolution venue / seat:• Ruler's consent required;

• Articles 36 and 83, Dubai law 6 of 1997.

• Restrictions on incorporation of international standard contract terms:• Ruler's consent required;

• Articles 37, Dubai law 6 of 1997.

• Problems for PPP /PFI projects:• Additional laws / amendments required for investor protection.


Abu Dhabi - tips & traps in tendering

• Uncertainty over which organizations are required to follow the procurement laws: • Article 1 law 6 of 2008: "budget is part of, or attached to, the general

government budget, and has no independent financial system".

• Government standard form contracts for construction:• AD law 21 of 2006: FIDIC based. Extent of permitted amendment uncertain.

• Direct purchase can be used for any project provided approval is given at a high enough level: Article 25(4), Manual to AD law 6 of 2008.

• Procedures for electronic tendering: Part 6, Manual to AD law 6 of 2008.


Oman - Tendering & Procurement Law

• Evolution of approach to Government spending:• Government Tender Law (Sultani Decree 60/2013);

• In-Country Value (no legislation);

• State Audit Institution (Sultani Decree 11/2011).

• Currently at one extreme of the pendulum swing…• Decision making extremely cautious.

• 5 year plan (2011-2015) - $6-8bn Government spend on capital projects per year.


Oman - Government Tender Law

• Tender Law promulgated by SD 36/2008 as amended (GTL).

• Does not apply to military procurement:• Each service has its own - undisclosed - rules which appear to be different;

• A focus on avoiding intermediaries;

• Offset conditions apply: "Partnership for Development".

• Base case: all Government spend is governed by the GTL.

• < OMR 3 million (~$7.5M): Internal Tender Committees.

• > OMR 3 million: Government Tender Board responsible for the process:• overwhelmed, under-resourced & inexperienced.


Oman - Government Tender LawSD 60/2013: a significant change

• Wholly government-owned companies (GovCo) are no longer obliged to refer procurement decisions to the Government Tender Board.

• GovCo's Internal Tender Committee (ITC) now carry out the role of the Tender Board.

• However, GovCos are required to:• continue to apply the Tender Law and its regulations; until

• internal procurement rules & regulations are approved by the "competent authorities".

• The Tender Law & Tender Board remit continues to apply to government administrative bodies & public authorities.


Oman - In Country Value initiative (ICV)

• Oil & gas sector international standard:• local content, 10% price preference.

• 2011 MOG focus on ICV - studied Norway, Brazil, Nigeria.

• 2012 introduced to oil & gas sector:• 7 areas; standardised approach & documents; roll up to quarterly $$ reporting.

• No legal basis. Overt, strong political support.

• Upstream operators voluntarily supportive.

• Centralised supplier management; aggregated upstream procurement.


ICV: the documents

• ICV committee drafting standardised documents for procurement of oil & gas goods and services:

• definition of ICV;

• central registration of suppliers;

• ICV terms and conditions;

• bidders tables to be completed on each of the ICV elements;

• bid evaluations referring to ICV guidelines;

• model key performance indicators (KPIs).

• Contractual obligation to meet your ICV targets.


ICV: the challenges

• Labour market.

• Bid evaluation.

• Accessibility of information.

• Pricing.

• Consequences of Contractor non-performance of ICV commitments:

• may not be possible to claim damages;

• a penalty regime could be applied;

• appropriate relief mechanisms needed (time or cure periods).


Oman - State Audit & Anti-Corruption

• Pre-2011: State Audit Institution (SAI) remit was on financial outcomes of Government entities.

• 4Q 2011: SAI scope & powers were significantly expanded:• assess compliance with applicable procedures;

• penalties increased, including personal liability for government officials.

• 2012: increased auditing activity across GoSO entities.

• Major focus on corruption by Government officials:• investigations & prosecutions

• several very senior officials jailed for taking bribes: 3-23 years.

• Adding to the general atmosphere of extreme caution in decision making & especially in Government contracting & procurement.


Oman - tips & traps in tendering

• Understand who is purchasing & what kind of government entity is it?• different rules apply, different attitudes & practices exist.

• Operating in Oman upstream sector? Appoint an ICV manager.

• How much of this is very different? But it is the current focus.

• US - Oman Free Trade Agreement, 1 Jan 2009:• Reduced barriers to business for American companies in Oman.

• Be patient.

• Omanis decide: in their way and at their pace.

• Know the right people; personal relationships are essential.

• Understand the law and appreciate that practice may be different.


Qatar - Tendering & Procurement Law• Public procurement is regulated by Law Regulating Tenders and

Auctions Law No. 26 of 2005, the Public Tender Law (PTL).

• PTL applies to all Ministries and other Government organs excluding: • Armed Forces;

• Police;

• Qatar Petroleum;

• Certain Public Institutions and Corporations that are exempted under their constitutive documents.

• Governing body for tenders:• Local Tenders Committee for tenders up to QAR 5 million (participation is

confined to local suppliers registered at the Commercial Register at the Ministry of Economy and Commerce);

• Central Tenders Committee for tenders over QAR 5 million.

• Types of procurement:• Construction; goods; services; technical services


Qatar - Methods of Procurement

Tenders

•Limited Tenders:• applies where there are two specific suppliers with technical and financial

competence and good reputation.

•Practice Basis Contracting:• may be authorised by Minister in cases where call for tenders is not achievable.

•Direct Agreement Contracting:• may be authorised by Minister in cases where required due to the nature and

specificity of this item or work or service.


Qatar - tips & traps in tendering

• A tender bond should be submitted with every tender in accordance with the tender advertisement. The tender bond shall: • be provided by a payable bank cheque or a letter of bank guarantee by a local

bank;

• have no reservations or conditions;

• be valid for payment in whole with a validity period not less than 30 days after the expiry of the tender validity.

• The committee may discard any tender that is not accompanied by the required bond.

• The tender bond shall be returned to unsuccessful tenderers (immediately upon expiry or earlier if the performance bond has been obtained from the successful tenderer).

• For the successful bidder, the tender bond should be replaced by the performance bond (to be maintained until performance under the contract is completed, including the warranty period).


Qatar - tips & traps in tendering

• Agreement to settle disputes by arbitration is only allowed following approval of the Minister of Economy and Finance.

• The contractor cannot assign the whole contract or the whole amount due to him or any part of it to another party without employer's approval.

• If the prices of the lowest tender are so unreasonably low as to question confidence in the supply, the committee may recommend award to the next lowest.

• Tenders are normally open for foreign investors, successful tenderer will be able to establish a local "branch" for the purpose of carrying out the contract.


Government Procurement in the Arabian Gulf Region Conclusions

• Recognise that the Arabian Gulf / Middle East is not one place:• many different countries

• many different stages of economic development

• many different rules & policy goals

• Take local advice on the law - but on local practice too.

• Growing focus on governance, compliance and anti-bribery & corruption.

• Identify key relationships as well as procedures.

• Be patient.


Thank You

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Government procurement in the Arabian Gulf region

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